AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 20, 2000
REGISTRATION NO. 333-39206
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
AMERICAN CHAMPION ENTERTAINMENT, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 7812 94-3261987
(State of other (Primary standard industrial (I.R.S. Employer
jurisdiction of classification code number) Identification No.)
incorporation or
organization)
-------------------------------------------
22320 Foothill Blvd, Suite 260
Hayward, California 94541
(510)728-0200
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
-------------------------------------------
Anthony K. Chan
Chief Executive Officer
22320 Foothill Blvd, Suite 260
Hayward, California 94541
(510)728-0200
(Name and address, including zip code, and telephone number, including area code
of agent for service)
------------------------------------------
Copies to:
Gregory Sichenzia, Esq.
Thomas A. Rose, Esq.
Sichenzia, Ross & Friedman, LLP
135 West 50th Street, 20th Floor
New York, New York 10020
(212)664-1200
------------------------------------------
Approximate date of proposed sale to public:
As soon as practicable after this registration statement becomes effective.
------------------------------------------
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended (the "Securities Act"), check the following
box. [X]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. [ ]
--------------------------
CALCULATION OF REGISTRATION FEE
TITLE OF EACH AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
CLASS OF REGISTERED OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO PER SECURITY(1) OFFERING PRICE(1) FEE
REGISTERED
Common Stock, 6,271,429 $1.75 $10,975,000 $2,897.40
$.0001 par
value(2)
TOTAL
(1) Estimated solely for the purpose of determining the registration fee.
(2) Includes 5,000,000 shares of common stock, $0.0001 par value per
share, subject to sale upon an equity drawdown facility of a stock
purchase agreement, 621,429 shares of common stock subject to sale upon
the conversion of debentures and interests at $1.75 per share and 650,000
shares subject to sale upon the exercise of common stock puchase warrants.
--------------------------
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
AMERICAN CHAMPION ENTERTAINMENT, INC.
6,271,429 Shares of Common Stock
American Champion
Entertainment, Inc.:
* Nasdaq SmallCap Market Symbol: ACEI
The Offering:
* All of the shares of common stock being sold are offered by selling
stockholders. We will not receive any proceeds from the sale of the shares by
the selling stockholders. However, we will receive the sale price of any common
stock that we sell to Sibson under the common stock purchase agreement
described in this prospectus or upon the exercise for cash of the stock
purchase warrants held by other selling stockholders, including warrants we
issued to Sibson and Union Atlantic, LC.
* The shares may be offered by the selling stockholders from time to time in
regular brokerage transactions in transactions directly with market makers or
in privately negotiated transactions.
Your investment in our common stock involves a high degree of risk.
Before investing in our common stock, you should consider carefully the risks
described under "Risk Factors" beginning on page 6.
__________________
Neither the Securities and Exchange Commission nor any State
Securities Commission has approved or disapproved of these securities or
determined if this prospectus is complete or accurate. Any representation to
the contrary is a criminal offense.
The date of this prospectus is October , 2000
PROSPECTUS SUMMARY
American Champion Entertainment, Inc.
American Champion Entertainment, Inc. is a holding company, for our
wholly-owned subsidiary, America's Best Karate and its wholly-owned
subsidiary, American Champion Media, Inc. and its wholly-owned subsidiary
American Champion Marketing Group, Inc.
American Champion Media is a media production and marketing company.
Through American Champion Media and American Champion Marketing Group, American
Champion:
* develops, produces and markets "Adventures with Kanga Roddy," a
television program for pre-school and primary school children;
* licenses merchandising rights related to the Kanga Roddy Series and
other intellectual properties through acquisitions.
* develops, produces and markets various audio tapes, video tapes and
workbooks that specialize in fitness information.
America's Best Karate owned, managed and operated one karate studio in
the San Francisco Bay Area under the name "ABK," until January 31, 2000, that
provided karate instruction to students of all ages and skill levels. The
karate studio was closed when the lease for the premise expired on January 31,
2000.
American Champion was incorporated on February 5, 1997 under the laws
of Delaware. Our executive offices are located at 22320 Foothill blvd., Suite
260, Hayward, California 94541, and our telephone number is (510) 728-0200.
The Offering
Sibson Holdings, Ltd. and we signed a common stock purchase
agreement dated May 9, 2000, for the future issuance and purchase of shares
of our common stock. The stock purchase agreement establishes what is
sometimes termed an equity line of credit or an equity drawdown facility. In
general, the drawdown facility operates like this: the investor, Sibson, has
committed up to $5,000,000 to purchase shares of our common stock over period
of up to 30 months. We may request a draw of that money, subject to a formula
based on the volume-weighted average common stock price and average trading
volume. At the end of a trading period following the draw down request, we
and Sibson will calculate the amount of money that Sibson will provide to us
and the number of shares we will issue to Sibson in return for that money,
based on the formula in the stock purchase agreement.
Sibson will receive a 15% discount to the average of the lowest
three bid prices for the common stock for the 21 trading-day period beginning
15 trading days prior to and ending 5 trading days after the sale to Sibson
and we will receive the amount of the draw down less an escrow agent fee of
$1,500 and a 7% cash placement fee payable to the placement agent, Union
Atlantic, LC, which introduced Sibson to us. Union Atlantic, LC is not
obligated to purchase any of our shares, but as an additional placement fee,
we have issued to them warrants to purchase 50,000 shares of our common stock
at an exercise price of $1.7325 per share. We also have issued to Sibson
warrants to purchase 175,000 shares of our common stock at an exercise price
of $1.7325 per share. We will issue warrants to purchase an additional 6,500
shares of common stock, exercisable at the bid price on the put date, to
Sibson for each $100,000 of the equity line that it funds. The put date is
defined as the trading day that a notice to sell common stock to the investor
is delivered to the investor. The common stock issuable upon exercise of all
of the above mentioned warrants is included in the registration statement of
which this prospectus is a part. The shares being registered may be offered
for sale from time to time during the period the registration statement
remains effective, by or for the accounts of the selling stockholders
identified in this prospectus.
On April 10, 2000, we sold $1,000,000 of 8% debentures, due December 20,
2000, convertible into common stock at the price of $1.75 per share. We issued
to the debenture investors warrants to purchase 50,000 shares of our common
stock at an exercise price of $2.0125 per share and also warrants to the
placement agent, Union Atlantic, LC, to purchase 50,000 shares of our common
stock at an exercise price of $2.0125 per share. The debentures were sold to:
Name of investor: Amount of debentures:
1) AMRO International S.A. $333,334
2) Endeavour Capital Investment Fund, S.A. $333,333
3) Celeste Trust Reg. $166,667
4) Balmore, S.A. $166,666
Shares Outstanding.................. We have 8,505,391 shares of common stock
outstanding prior to this offering, not including 6,271,429 shares which may be
sold pursuant to this prospectus.
Use of Proceeds..................... We will not receive any proceeds from the
sale of the common stock offered by the prospectus. We will receive the
proceeds from the sale of the common stock to Sibson and will use such proceeds
for general working capital purposes.
Trading Symbol...................... Our common stock and common stock purchase
warrants are listed on the Nasdaq SmallCap Market under the symbols "ACEI" and
"ACEIW", respectively.
Forward-Looking Statements.......... This prospectus contains forward-looking
statements that address, among other things, our expansion and acquisition
strategy, business development, use of proceeds, projected capital
expenditures, liquidity, and our development of additional revenue sources. The
forward-looking statements are based on our current expectations and are
subject to risks, uncertainties and assumptions. We base these forward-looking
statements on information currently available to us, and we assume no
obligation to update them. Our actual results may differ materially from the
results anticipated in these forward-looking statements, due to various factors.
Summary Selected Financial Data
For the years ended December 31, 1999 and 1998, and
for the six month periods ended June 30, 2000 and 1999
The summary financial data set forth below have been derived from our
audited financial statements included in this prospectus beginning on page F-1
The summary financial data for the six months ended June 30, 2000 and 1999
is unaudited.
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,(unaudited)
1999 1998 2000 1999
<S> <C> <C> <C> <C>
Statements of Operations Data:
Revenues ....................... $665,632 $736,701 $542,742 $520,452
Amortization of film costs *.... 450,100 177,732 31,057 369,821
Total costs and expenses....... 7,062,417 2,960,180 5,754,933 2,861,744
Income (loss) from operations..(6,396,785) (2,223,479) (5,212,191) (2,341,292)
Gain on sale of karate studio... - 307,429 - -
Income (loss) before income taxes.......
(6,396,785) (1,916,050) (5,212,191) (2,341,292)
Income taxes.................. 1,543 7,466 - 4,281
Net income (loss) .............(6,398,328) (1,923,516) (5,212,191) (2,345,573)
Basic income (loss) per share **....(2.68) (1.91) (0.80) (1.19)
Basic weighted average
number of common shares
outstanding **................2,385,622 1,008,405 6,555,737 1,964,081
</TABLE>
* Film costs are amortized in proportion to revenues generated from the
video and television programs within the period.
** Adjusted for 1:4 reverse split of our common stock on January 4, 2000.
As of
June 30, 2000
Balance Sheets Data:
Cash and cash equivalents........................ $ 211,842
Working capital (deficit)........................ $ (261,128)
Total assets..................................... $9,921,137
Long-term obligations, less current portion...... $1,154,562
Shareholders' (deficit).......................... $8,048,697
RISK FACTORS
An investment in our common stock involves a high degree of risk.
Before deciding whether to invest, you should read and consider carefully the
following risk factors. This prospectus also contains forward-looking
statements that involve risks and uncertainties. Our actual results could
differ materially from those anticipated in the forward-looking statements as
a result of certain factors, including the risks described below and
elsewhere in this prospectus.
We have a history of losses and expect to incur future losses. We
sustained operating losses of $801,416 in the year ended December 31, 1997,
$1,923,516 in the year ended December 31, 1998 and $6,398,328 in the year ended
December 31, 1999. We expect to incur significant additional operating losses
for the foreseeable future as we continue to develop, produce and market our
media projects, including the Kanga Roddy Series. The development and
production costs (exclusive of marketing costs) for the remaining 12 episodes
of the Kanga Roddy Series we are obligated to deliver is estimated to be $2.6
million. We incurred net operating losses of $5,212,191 for the six months
ending June 30, 2000 bringing the total accumulated losses to $15,118,631 as of
June 30, 2000.
The common stock contemplated to be sold according to this prospectus
represents significant dilution to existing share holders. As of August 18,
2000, we have 8,167,358 shares of common stock outstanding. If all the
underlying common stock described in this prospectus is sold or issued
pursuant to the exercise of common stock purchase warrants, another 6,271,429
shares of common stock will be added to the total outstanding shares
representing a 77% dilution to existing shareholders.
If Sibson does not honor its funding commitment for any reason and we
are unable to obtain other financing, we will be unable to continue with future
production of the Kanga Roddy series. Our development and production of the
Kanga Roddy series requires substantial amounts of capital. We have entered
into a distribution agreement and a continuing distribution agreement with
KTEH, the public broadcasting station serving the San Jose, California area,
which obligate us to deliver a total of 41 episodes of the Kanga Roddy series.
To date, we have completed 29 episodes of the Kanga Roddy series. Based on
production of 29 episodes completed to date, we now estimate that the average
cost of developing and producing each episode of the Kanga Roddy series is
$220,000 and that it will require an additional $2.6 million of additional
financing to complete the remaining 12 episodes of the Kanga Roddy series. On
September 24, 1999 and January 5, 2000, we sold 7% convertible debentures in
the principal amounts of $1,000,000 and $1,250,000 respectively.
We are dependent on the success of the Kanga Roddy series, and we
cannot be certain that the initial television viewership of the Kanga Roddy
series will be maintained. We are dependent on the success of the Kanga Roddy
series, which in turn is dependent upon unpredictable and volatile factors
beyond our control, such as children's preferences. The Kanga Roddy series is
currently shown on public television stations which reach approximately 40
million households. Although the Kanga Roddy series has received positive
acclaim and positive Nielsen ratings on its estimated audience, the show must
attract a significant television audience over a long period of time before we
realize significant revenue and profitability. We cannot be certain that the
initial television viewership of the Kanga Roddy series will be maintained.
Furthermore, to attract a significant television audience for the Kanga Roddy
Series over a long period of time, we need to complete additional episodes of
the Kanga Roddy Series.
If we are unable to attract a significant television audience for the
Kanga Roddy series, it is doubtful that any significant licensing or
merchandising opportunities will arise. Our strategy in producing the Kanga
Roddy series includes the licensing of its characters to others for the
merchandising of a variety of products ranging from toys to apparel. Our
ability to successfully exploit the merchandising opportunities afforded by the
Kanga Roddy series is dependent on the popularity of the Kanga Roddy series and
the ability of our characters to provide attractive merchandising features to
its customers. If we are unable to attract a significant television audience
for the Kanga Roddy series, it is doubtful that any significant licensing or
merchandising opportunities will arise. Even if the Kanga Roddy series is
popular with television audiences, we cannot be certain that licensing
opportunities will materialize as we must compete with hundreds of owners of
creative content who seek to license their characters and properties to a
limited number of manufacturers and distributors.
Our lack of significant experience with television programming or
licensing and merchandising could adversely affect our business. Prior to our
involvement with the Kanga Roddy Series, our business was primarily the
operation of its karate studios and the production of fitness video tapes and
we had no experience with the development and production of television
programming or with the licensing and merchandising of products. To date, we
have completed 29 half-hour episodes. However, the television and licensing
and merchandising businesses are complicated and the absence of experience in
such businesses could adversely affect our business.
We are dependent on the efforts and abilities of Anthony Chan and
George Chung, our founders and principal executive officers, and Jan D.
Hutchins, President of American Champion Media. We have entered into
employment agreements, effective as of August 5, 1997, with such individuals.
We are also dependent on the efforts and abilities of Joy Tashjian, President
and CEO of American Champion Marketing Group, a wholly owned subsidiary; with
whom we have entered into an employment agreement effective on June 3, 1999.
None of such employment agreements contains non-competition provisions. The
loss of the services of any of the above individuals, or of other key
personnel, could adversely affect our business. We have obtained "key-man"
life insurance with $1,000,000 coverage for each of Messrs. Chung and Chan.
The failure of Joe Montana, Ronnie Lott, or their wives, or the San
Francisco 49ers, to continue to actively support the Kanga Roddy Series could
have an adverse impact on our ability to market the Kanga Roddy Series. The
success of the Kanga Roddy Series depends in part on our continued association
with former 49ers Joe Montana and Ronnie Lott, and their wives, and the San
Francisco 49ers. Messrs. Montana and Lott have endorsed the Kanga Roddy Series
in news and television interviews and their wives are principal actors in the
Kanga Roddy Series. The failure of Joe Montana, Ronnie Lott, or their wives,
or the San Francisco 49ers, to continue to actively support the Kanga Roddy
Series could have an adverse impact on our ability to market the Kanga Roddy
Series. None of Joe Montana, Ronnie Lott, or their wives, or the San Francisco
49ers are obligated to engage in any business transactions or jointly
participate in any opportunities with us, and the possibility exists that the
current relationships between the parties could materially change in the future.
Each of the industries in which we compete is highly competitive and
most of the companies with which we compete have greater financial and other
resources than us. With respect to our television production activities, we
compete on the basis of relationships and pricing for access to a limited
supply of facilities and talented creative personnel to produce its programs.
Our Kanga Roddy Series competes for time slots, ratings and related advertising
revenues and for the licensing and merchandising of products related to the
Kanga Roddy Series. Our fitness products compete with many other products
aimed at the fitness and weight loss markets, including other video tapes,
audio tapes and workbooks, and various types of exercise machinery. Many of
these competing products are sponsored or endorsed by celebrities and sports
figures, and are marketed by companies having significantly greater resources
than ours. The martial arts industry is also highly competitive.
Messrs. Chan and Chung are in a position to strongly influence the
election of directors as well as affairs of American Champion. As of the date
of this prospectus, Anthony Chan and George Chung, our founders and principal
executive officers, collectively beneficially own 745,070 shares of American
Champion's outstanding common stock, representing approximately 10.62% of the
outstanding shares prior to this offering and approximately 5.61% of the
outstanding shares of common stock after this offering (assuming no exercise of
any outstanding options or any warrants). Since holders of common stock do not
have any cumulative voting rights and directors are elected by a majority vote,
Messrs. Chan and Chung are in a position to strongly influence the election of
directors as well as the affairs of American Champion.
This prospectus contains forward looking statements and their
associated risks. This prospectus contains certain forward-looking statements,
including among others:
* anticipated trends in our financial condition and results of operations;
and
* our business strategy for developing, producing, distributing, licensing
and merchandising the Kanga Roddy Series.
These forward-looking statements are based largely on our current
expectations and are subject to a number of risks and uncertainties. Actual
results could differ materially from these forward-looking statements. In
addition to the other risks described elsewhere in this "Risk Factors"
discussion, important factors to consider in evaluating such forward-looking
statements include:
* changes in external competitive market factors or in American Champion's
internal budgeting process which might impact trends operations;
* unanticipated working capital or other cash requirements;
* changes in our business strategy or an inability to execute our strategy
due to unanticipated change in the industries in which we operate; and
* vaious competitive factors that may prevent us from competing
successfully in the marketplace.
In light of these risks and uncertainties, many of which are described in
greater detail elsewhere in this "Risk Factors" discussion, we cannot be
certain that the events predicted in forward-looking statements contained in
this prospectus will in fact occur.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of shares by
Sibson that it has obtained under the common stock purchase agreement. We also
will not receive any of the proceeds from the sale of shares by any other
selling stockholder. However, we will receive the sale price of any common
stock we sell to Sibson under the common stock purchase agreement described in
this prospectus and upon the exercise of warrants held by selling stockholders
that pay the exercise price in cash. We expect to use the proceeds of any such
sales for general working capital purposes.
DIVIDEND POLICY
We have not paid any cash dividends on our common stock and we
currently intend to retain any future earnings to fund the development and
growth of our business. Any future determination to pay dividends on our
common stock will depend upon our results of operations, financial condition
and capital requirements, applicable restrictions under any credit facilities
or other contractual arrangements and such other factors deemed relevant by
our Board of Directors.
SELECTED FINANCIAL DATA
The selected statement of operations data for the years ended December
31, 1998 and 1999, and the following selected balance sheet data as of December
31, 1998 and 1999 are derived from our audited financial statements included
elsewhere in this prospectus and have been audited by Moss Adams LLP. The
following selected statements of operations data for the six month periods
ended June 30, 1999 and 2000, and the following selected balance sheet data as
of June 30, 1999 and 2000, are derived from our unaudited financial statements
that, in the opinion of our management, contain all adjustments necessary for a
fair presentation of such data. The following selected financial data have
been prepared in accordance with generally accepted accounting principles. The
financial data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto appearing elsewhere in the
prospectus. The selected interim financial data presented below do not
necessarily indicate our operating results or our performance for the full year.
Year Ended Six Months Ended
December 31, June 30
1999 1998 2000 1999
(Unaudited) (Unaudited)
Statements of Operations Data:
Revenues ......................$ 665,632 $ 736,701 $ 542,742 $ 520,452
Amortization of film cost*..... 450,100 177,732 31,057 369,821
Total costs and expenses.......7,062,417 2,960,180 5,754,933 2,861,744
Income (loss) from operations.(6,396,785) (2,223,479) (5,212,191) (2,341,292)
Gain on sale of karate studio.. - 307,429 - -
Income (loss) before income taxes.............................................
..............................(6,396,785) (1,916,050) (5,212,191) (2,341,292)
Income taxes ................ 1,543 7,466 - 4,281
Net income (loss) ...........$(6,398,328) $(1,923,516) $(5,212,191) $(2,345,573)
Basic income (loss) per share**$ (2.68) $ (1.91) $ (0.80) $ (1.19)
Basic and diluted weighted
average number of common
shares outstanding** 2,385,622 1,008,405 6,555,737 1,964,081
* Film costs are amortized in
proportion to revenues
generated from the video and
television programs within the
period.
** Adjusted for 1:4 reverse
split of our common stock on
January 4, 2000
As of December 31, As of June 30,
1999 1998 2000
(Unaudited)
Balance Sheets Data:
Cash and cash equivalents.....$ 32,514 $ 2,763 $ 211,842
Total assets..................$9,286,450 $6,080,398 $9,921,137
Long-term debt................$ 450,183 $ 831,266 $1,154,562
Shareholder's equity..........$7,688,425 $3,905,203 $8,048,697
Market for Securities
Our common stock and common stock purchase warrants commenced
quotation on the Nasdaq Small Cap 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
for the previous two fiscal years of trading were as follow:
Common Stock:
High Low
(adjusted for 1:4 reverse
split on January 4, 2000)
1998
First Quarter $38.500 $31.000
Second Quarter $38.250 $26.250
Third Quarter $28.000 $14.000
Fourth Quarter $14.500 $3.876
1999
First Quarter $12.000 $4.252
Second Quarter $9.752 $3.124
Third Quarter $6.624 $2.064
Fourth Quarter $5.624 $1.252
1998
First Quarter $6.031 $2.125
Second Quarter $3.313 $0.875
Third Quarter $1.438 $0.625
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 1999 and for the three months ended
June 30, 2000. This discussion should be read in conjunction with our
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. We undertake no obligation to publicly revise these forward-
looking statements to reflect subsequence events or circumstances. Readers
are also encouraged to review our publicly available filings with the
Securities and Exchange Commission.
Results of Operations
Years Ended December 31, 1999 and 1998
We were formed in February 1997. American Champion Entertainment,
Inc. is a holding company, for our wholly-owned subsidiary, America's Best
Karate and its wholly-owned subsidiary, American Champion Media, Inc. and its
wholly-owned subsidiary American Champion Marketing Group, Inc.
Revenues
During the year ended December 31, 1999, our total revenue decreased to
$665,632, a decrease of $71,069 or 9.6% as compared to total revenue for the
year ended December 31, 1998 of $736,701.
Our revenues from the operation of our karate studio for the year ended
December 31, 1999 was $73,180, a decrease of 77.5% from revenues of $324,730
for the year ended December 31, 1998. The decrease was attributable to the
planned closure of karate studios. We closed the one remaining studio when the
lease for that location expired on January 31, 2000.
For the year ended December 31, 1999, we recognized $517,995 in film
income, an increase of $174,118 or 50.6% from film income of $343,877 for the
year ended December 31, 1998. Film income was derived from the delivery of
the nine episodes of the television show "Adventures with Kanga Roddy" to
KTEH pursuant to its Distribution Agreement with KTEH, and also from licensees
of the intellectual property of the Kanga Roddy series.
Revenues from the sale of accessories was $10,515 for the year ended
December 31, 1999 as compared to $37,956 for the year ended December 31, 1998.
The decrease was due to the planned closure of the remaining karate school.
Our interest income of $63, 942 was earned from investment activities.
Costs and Expenses
We recognized $450,100 in amortization of film cost, which was
capitalized production costs for the television show "Adventures With Kanga
Roddy", for the year ended December 31, 1999 as compared to $177,732 for 1998.
Our expenses for salaries and payroll taxes were $465,532 for 1999, a
decrease of $381,615 or 45% from $847,147 in 1998. Total selling, general and
administrative expenses was $3,712,595 for 1999, an increase of $2,787,855 or
301% from $924,740 in 1998. This increase was primarily due to marketing and
promotion expenses.
Selling, general and administrative expense was $3,712,595 for the year
ended December 31, 1999 compared to $924,740 for 1998. Included in the amount
for the year ended December 31, 1999 was a non-cash consultant expense of
1,550,894 for investment banking and financial services, a non-cash expense of
$216,250 for investor relations, an expense of $240,516 for legal services, an
expense of $741,210 for redemption of debt and a non-cash expense of $600,000
for web design.
Interest expense (net of beneficial conversion expense) was $208,069
for 1999, an increase of $131,662 or 172.2% from $76,447 in 1998. Interest
expense for 1999 was primarily attributed to interest bearing convertible
debentures we sold within the year. The Beneficial Conversion Feature of
Debentures is a non-cash charge of $1,233,684 related to the beneficial
conversion feature of the convertible debentures issued within 1999. The
debentures are convertible to common stock with the shares to be issued upon
conversion based on either 75% or 77.5% of the fair market value of the stock
at the time of conversion, the value of the discount as of the issuance date
has been recorded as an expense with a corresponding increase to additional
paid in capital. Rent expense was $243,053 for 1999, a decrease of $64,954 or
21.1% from $308,007 in 1998.
For the year ended December 31, 1999, debenture conversion expense was
741,210. This expense is the amortization of accrued fees and expenses related
to the issuance of debentures, including the valuation of warrants issued in
relation to the debentures.
As a result of foregoing factors, our net loss increased by $4,474,812
or 323.6% from ($1,923,516) for the year ended December 31, 1998 to
($6,398,328) for the year ended December 31, 1999. Net loss per share
increased from ($0.48) in 1998 to ($0.67) in 1999, while the weighted average
number of shares outstanding increased from 4,033,619 shares in 1998 to
9,542,487 in 1999.
We have 1,078,042 outstanding options on December 31, 1999, exercisable
as various prices to purchase the same amount of shares of common stock, which
are not included in the calculation in the basic loss per share because the
result of which would have been anti-dilutive.
Three Months ended June 30, 2000 and 1999
The following section discusses the significant operating changes, business
trends, financial condition, earnings and liquidity that have occurred in the
three-month period ended June 30, 1999. This discussion should be read
in conjunction with our consolidated financial statements and notes
appearing elsewhere in this report.
Revenues
For the three months ended June 30, 2000, our total revenue
increased to $491,895, an increase of $258,433 or 110.7% as compared to
$233,462 for the comparable period in 1999. This increase is primarily due to
the sponsorship revenue for the Company 's boxing event in April 2000.
There were no Kanga Roddy episodes delivered in the three month period
ended June 30, 2000, nor in the three month period ended March 31, 2000,
because we have decided to temporarily halt production while we are actively
seeking alternative broadcasters or cable networks for the distribution of the
series.
There was no activity within the quarter ended June 30, 2000 from the
operation of karate studios as the last studio was closed in Juanuary 2000.
We do not intend to resume such operation in the future.
Costs and Expenses.
Within the three months ended June 30, 2000, we had an amortized
expense of film cost in the amount of $31,057 for its television show. Such
amortization, is calculated based upon the proportion to the revenue generated
by the television show in this period compared to total expected revenues from
the television show.
Our expenses for salaries and payroll taxes increased to $261,438, an
increase of $250,785 for the three months ended June 30, 2000 from $10,653
for the comparable period in 1999. The increase was the combined result of
an increase in marketing personnel and all salaries and payroll taxes charged
to expense instead of capitalizing to production because there was no
production of the Kanga Roddy series during this period.
Rent expense decreased to $33,900 for the three months ended June 30,
2000, a decrease of $38,349 or 53.1% from $72,249 for the comparable period in
1999. The decrease in rents is due to the closure of karate studios.
Total selling, general and administrative expenses increased to
$1,662,196, an increase of $1,329,061 for the three months ended June 30,
2000 from $333,135 for the comparable period in 1999. This increase is
primarily due to cost of producing the boxing event in China in the amount of
$744,764. There was a non-cash expense in the amount of $94,465 related to the
issuance of securities for services our company received during this period.
Such services included financial consultation, investor relation activities and
consultants for the boxing event we produced in April 2000 in China.
Within the quarter ended March 31, 2000, there was a non-cash expense in
the amount of $2,365,747 related to the issuance of securities for services.
Such non-cash expense included $1,984,804 paid to our management and $358,265
paid to financial consultants.
Interest expense, excluding beneficial conversion, decreased to
$11,681, a decrease of $595,902 for the three months ended June 30, 2000 from
$607,583 for the comparable period in 1999. The benficial conversion feature
of debenture expense for the quarter ended June 30, 2000 is a non-cash charge
of $107,429 related to the convertible debentures we issued earlier in the
year, and there were no such charge for the comparable period in 1999. The
debentures are convertible to common stock of ACEI based on 17.5% of the fair
value of the stock at the time of conversion. The value of the discount has
been charged to interest expense with a corresponding increase to additional
paid in capital. The balance of the increase is attributable to the interest
accrued on convertible debentures and certain private loans of ACEI. The
debenture conversion expense is the amortization of accrued debenture related
fees, expenses, and value of warrants issued with the debentures.
As a result of the foregoing factors, the ACEI's net loss decreased to
$1,682,331 during the three months ended June 30, 2000 from $1,762,938 for
the comparable period in 1999. Net loss per share decreased to ($0.26) for
the three months ended June 30, 2000 from ($0.90) for the comparable period
in 1999. Weighted average number of shares outstanding increased to 6,555,737
for the three months ended June 30, 2000 from 1,964,081 for the comparable
period in 1999 primarily due to the conversion of debentures into ACEI's
common stock. The outstanding number of shares and net loss per share figures
are adjusted for the 1:4 reverse split of ACEI's common stock on January 4,
2000.
We have 1,760,042 outstanding options and 1,285,627 warrants on June
30, 2000, exercisable at various prices to purchase the same amount of shares
of common stock, which are not included in the calculation in the basic loss
per share because the result of which would have been anti-dilutive.
Liquidity And Capital Resources
Cash decreased for the three months ended June 30, 2000 by $261,128 of
which $1,171,217 was net operating cash loss and $36,088 was used in the
production of the Adventures With Kanga Roddy show, while financing
activities resulted in an inflow of $946,177.
On a comparative basis, net cash from operating activities for the year
1998 and 1999 and for the three and six months ended June 30, 2000 were
($413,956), ($1,635,429), ($1,171,217) and ($2,399,690) respectively. Cash
uses were higher in 1999 than 1998 mainly due to promotional expenses on the
Kanga Roddy program, interests paid and cash expenses related to the sale of
securities. Cash uses were higher in the interim periods of 2000 due to:
a) payroll expenses incurred in 2000 where similar expenses were
charged to capitalized film costs during 1999 and 1998 when the Kanga Roddy
program was in production, and
b) increase in selling and general administrative expenses, and
c) costs of the boxing event ACEI promoted in April 2000.
On a comparative basis, net cash from investing activities for the year
1998 and 1999 and for the three and six months ended June 30, 2000 were
($3,345,060), ($3,122,723), ($36,088) and ($50,727) respectively. The decrease
in the interim period in 2000 is due to the fact that no Kanga Roddy production
had taken place.
On a comparative basis, net cash from financing activities for the year
1998 and 1999 and for the three and six months ended June 30, 2000 were
$1,966,122, $4,787,903, $946,177 and $2,629,745 respectively. The figures
reflect the sales of the ACEI's securities within these periods.
Deferred consulting fees of $93,300 relate to common stock and warrants
issued to consultants and are being amortized over the term of the consulting
agreements which range from 12 to 24 months.
As of June 30, 2000, total liabilities were $1,872,439 and there is no
loan payable to related parties. In addition, deferred revenues were $16,920
at June 30, 2000. Deferred revenues are pre-paid tuition for the karate
studios and booked revenue from sponsorship activities which cannot be
immediately recognized. The last karate studio was closed during the quarter
ended March 31, 2000. There has not been significant request for refund of
pre-paid tuition and we may elect to claim the remaining deferred revenues
later this year.
To address our uncertainties as a going concern, we have been
successful so far with two rounds of capital raising since the beginning of the
year 2000:
Date Amount raised
January 5, 2000 $1,250,000 in convertible debentures
April 17, 2000 $1,000,000 in debentures fixed at $1.75 per share
These two financing transactions and the $5 million equity line of
credit for which we are registering shares on this form SB-2 should be able to
sustain our working capital, and other cash needs including payments for our
intended acquisitions, through December 31, 2001. The $5 million equity
provides better flexibility and timing control by us in the sense that it is up
to us to initiate drawing down on the equity line at times that we deem
appropriate. We have 29 half-hour episodes of our TV program completed which
we feel are adequate for broadcast for the remainder of the year 2000, and
there will not be a need for heavy capital spending on additional episodes
this year.
Other expense reduction measures in place include relocation to office
space in Hayward, California, costing about half of the previous location in
San Jose; management and staff expenses have been reduced by 15% and
compensation to consultants is made in securities rather than cash.
We continue to believe that the unamortized cost of the Kanga Roddy
program is recoverable due to the fact that management is actively pursuing
other broadcast avenues for the program. The current exclusive distribution
agreement with public television through KTEH, the affiliate station in San
Jose, is expiring in April 2001. We are optimistic that a commercial
broadcaster or cable network would distribute the Kanga Roddy series, thereby
generating distribution revenue and creating a larger audience and demand for
ancillary products.
The distributor for the Montana exercise video is planning on an
Internet marketing plan within the third quarter of 2000. With correct pricing
and an aggressive outreach strategy, we maintain that the unamortized costs of
this program is recoverable. The costs of the Strong Mind Fit Body program had
already been written off within the year ended December 31, 1997.
We maintain a credit line with Wells Fargo Bank pursuant to which we
have borrowed $26,000 as of August 18, 2000 with an available additional credit
of $14,000. Repayment of this amount is made at a monthly rate of 2% of the
outstanding balance of the borrowing. The credit line is available for a total
of $40,000 at an interest rate of 19.25%. Other than such loan, we do not
presently maintain any other borrowing facility or have any indebtedness to
financial institutions.
Amortized deferred consulting fees of $186,599 were incurred for the six
months ended June 30, 2000. This is the value of common stock and warrants
issued to consultants amortized over the term of the consulting agreements
which range from 12 to 24 months.
Stockholder's Equity
Stockholder's Equity at June 30, 2000 was $8,048,697 as compared to
$7,688,425 at December 31, 1999. The change was due to an incease in common
stock to $23,167,328 from $17,594,865 while offset by an increase in
accumulated deficit to ($15,118,631) from ($9,906,440) for these two periods
in time. The increase in common stock was primarily due to debentures
converted into common stock and securities that we have issued for services.
Acquistion
We have signed a Stock Exchange Agreement, dated March 27, 2000, with
the Beijing Wisdom Network Technology Company, Ltd. ("BA Network"), for the
acquistion of 80% of BA Network.
The Agreement provides for the following:
* The payment by us is to BA Network of $300,00 at the closing of the
acquisition;
* We will make additional estimated payments to BA Network in the
amount of $1,184,097 in 2000, $1,457,349 in 2001 and $1,730,603 in 2002;
* BA Network will issue stock to us constituting 80% of its outstanding
stock
Pursuant to the Agreement at the closing of the transaction, we will
pay BA Network $300,000, in either our common stock or in cash, at the election
of BA Network to be made at closing of the transaction. Our stockholders
approved the acquisition at our Annual Meeting of Stockholders on September 27,
2000 and the transaction was closed on Ocotber 2, 2000. BA Network elected to
be paid in cash for $300,000 and the payment was made on October 2, 2000. For
the years 2000, 2001 and 2002, we have agreed to pay BA Network $1,184,097,
$1,457,349 and $1,730,603, respectively. Such amounts assume BA Network meets
projections previously provided to us and will be adjusted accordingly if such
projections are incorrect. The amount for the year 2000 may be paid in either
cash or shares of our common stock, at the election of BA Network at the time
such payments are due. The amount for the years 2001 and 2002 are payable in
shares of our common stock. In the event that BA Network elects to receive the
payment for the year 2000 (estimated at $1,184,097) in cash, there is no
assurance that we will be able to make such cash payments or secure financing
for payment of such amount at favorable or acceptable terms. Grants of either
stock or cash are subject to delivery schedules, and in case of stock grants,
certain time restrictions shall also apply. Audited financial statements of BA
Network for the year ended December 31, 1999 and interim financial statements
for the three months ended June 30, 2000, together with proforma statements
reflecting purchase accounting, are included in our definitive proxy filed with
the SEC on August 24, 2000 and incorporated herein by reference.
BUSINESS
Through AC Media and AC Marketing, we are involved in:
* the development, production and marketing of Adventures with Kanga
Roddy, a television program aimed at pre-school and primary school children,
* the licensing of merchandising rights related to the Kanga Roddy
series,
* the development, production and marketing of various audio tapes,
video tapes and workbooks that specialize in fitness information, and
* acquire the licensing rights to other intellectual properties.
Adventures with Kanga Roddy
We have developed and produced 29 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 with 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 open mindedness. 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 episodes 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
transports 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 proper solutions 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, we and KTEH, the public broadcasting station serving in
San Jose, California area, entered into a distribution agreement which
granted 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
KTEH cleared the broadcast of 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). We delivered 13
half-hour episodes to KTEH for broadcast and received $430,000 from KTEH for
exclusive broadcast rights for the series for a period of two years. Under
the distribution agreement, we also committed to sharing with KTEH 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 5% of our gross profits (less fees and commissions) from
the sale and licensing of toys and clothing. We 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, we 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 us $30,000 for each half-hour program and $60,000 for each of
the two one-hour shows. As of December 31, 1999, we had completed and
delivered 29 half-hour episodes to KTEH (including the 13 episodes delivered
under the initial agreement).
In August 1998, we signed an exclusive contract with Portfolio
Entertainment of Toronto, Ontario, for the international TV distribution of
the Kanga Roddy series for a period of three years. Portfolio Entertainment
is paid a distribution fee that is derived out of revenues from sales to
overseas broadcasters.
In December 1998, we signed a non-exclusive agreement with Timeless
Toys of Foster City, California, for licensing of the Kanga Roddy and all
related characters for premium plush toys for a period of three years.
Pursuant to terms of the agreement, Timeless Toys pays a royalty to us from
sales of products related to the Kanga Roddy program.
In January 1999, American Public Television, 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 April 1999, we signed an exclusive contract with Fast Forward
Marketing, Inc. of Marina Del Ray, California, for the video distribution of
the Kanga Roddy series for a period of two years. Pursuant to terms of the
contract, Fast Forward Marketing buys video tapes from us at a pre-determined
discount from the suggest retail price.
In September 1999, we signed an exclusive licensing agreement with
Brighter Child of Westerville, Ohio, for the licensing of the Kanga Roddy story
and all related characters for use in interactive CD-Rom games for a period of
three and one-half years where Brighter Child pays us a royalty from sales of
such products.
In October 1999, we signed a licensing agreement with Prestige Toys of
New York, New York, for the licensing of the Kanga Roddy series and all related
characters for use and manufacturing of plush toy items in all sizes.
We have not produced any additional episodes of the Kanga Roddy program
within the six months ended June 30, 2000, nor additional licensing contracts
on Kanga Roddy has been signed in this period.
Our strategy includes pursuing licensing agreements 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. We plan to retain worldwide rights to the
characters and images developed in the Kanga Roddy series, to protect our
rights to such characters and images through appropriate registration, and to
license their use to manufactures for specific products. There is no
assurance that we 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.
However, due to the efforts of our marketing division in product
licensing and development relating to the Kanga Roddy project, we have engaged
with other companies' properties with us acting as agent to these companies.
In February 2000, we signed a licensing agent agreement with
Funschool.com of Mountain View, California, for us to act as Funschool.com's
exclusive agent in representation of their various properties for a period of
six months. Pursuant to the terms of this agreement, we are paid a monthly
retainer and a commission of gross revenues Funschool.com generates from
licensing activities brought forth by us.
In March 2000, we signed a licensing agent agreement with Mainframe
Entertainment, Inc. of Vancouver, Canada, for ACEI to act as Mainframe's
exclusive agent in representation of their various properties for a period of
three years. Pursuant to the terms of this agreement, we are paid a
commission of gross revenues Mainframe generates from licensing activities
brought forth by us.
In May 2000, we signed an agreement with Irwin Toy Limited of Toronto,
Canada, for the licensing of characters from Mainframe Entertainment's
property "ReBoot" for use in Irwin Toy's products for a period of two years.
Pursuant to the terms of this agreement, Mainframe Entertainment will be paid
a royalty on the sales from such products.
Fitness Products
We develop, produce and market various video tapes, audio tapes and
workbooks that specialize in fitness information and education. Our 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 our karate schools.
In August 1999, we signed an exclusive contract with Diamond
Entertainment Corporation of Cerritos California, for the domestic distribution
the Montana Exercise Video. Diamond Entertainment is anticipating the release
of the Montana Exercise Video through marketing on the Internet within the 3rd
quarter of 2000. availability of the exercise video during the football season.
Capitalized costs of the "Strong Mind Fit Body" program has been written off
in the year 1998.
Competition
Each of the industries in which we compete is highly competitive and
most of the companies with which we compete have greater financial and other
resources than we do. With respect to our media activities, we compete with
major production companies, and competition for access to a limited supply of
facilities and talented creative personnel to produce programs is often based
on relationships and pricing. Our programs compete for time slots, ratings,
distribution channels and financing, and related advertising revenues with
other programming products. Our competitors include motion picture studios,
television networks, and independent television production companies, which
have become increasingly active in children's programming. We compete 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 we attempt to expand into other areas, including commercial
television, we will face more intense competition from other, larger entities,
which have substantially greater financial and other resources than us, 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/family audiences segment 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 us to obtain favorable production financing and distribution terms.
Our 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 us.
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 May 31, 2000, we employed 16 employees on a full-time basis, 6 of
which are management and 10 of which are clerical. We also contract with
additional employees for the production of the Kanga Roddy series through the
American Federation of Television and Radio Artists.
Property
We lease approximately 3,000 square feet of space for our Hayward
headquarters pursuant to a four-year lease expiring in August 2004 at
approximately $6,500 per month.
Legal Proceedings
On April 24, 1998, we filed a Complaint for Declaratory Relief in the
U.S, District Court, Northern District of California, against William Charles
Jeffreys, requesting judicial determination of our 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 our
complaint on June 15, 1998 along with a counterclaim. We dispute all claims
of Mr. Jeffreys to an interest in certain of our intellectual property and
intend to vigorously protect our ownership and right to such intellectual
property. In February 1999, Mr. Jeffreys and we agreed to settle the lawsuit
and counterclaim for a total of $36,000 which ACEI are to be paid to Mr.
Jeffreys in twelve monthly payments of $3,000 each beginning March 1999. The
final payment was made in February 2000. With the exception of the foregoing,
no lawsuits or proceedings are currently pending which involve us or our
rights.
MANAGEMENT
Executive Officers, Directors, Director Nominees And Key Employees
Our executive officers, directors and key employees and their ages
and positions with us as of August 18, 2000 are as follows:
Name Position with Company Age
Anthony K. Chan President, Chief Executive 45
Officer and Director
George Chung Chairman and Director 38
William T. Duffy Director 44
Alan Elkes Director 54
E. David Gable Director 50
Jan D. Hutchins Director 51
Mae Lyn Woo Chief Financial Officer 42
The following information with respect to the principal occupation or
employment of each nominee for director, the principal business of the
corporation or other organization in which such occupation or employment is
carried on, and such nominee's business experience during the past five
years, has been furnished to us by the respective director nominees.
Anthony K. Chan. Mr. Chan has served as our President, Chief Executive
Officer, and a Director since February 1997, and as Chief Executive Officer and
Chief Financial Officer of America's Best Karate since 1991. From 1985 to 1990,
Mr. Chan served as the Director of Chinese Affairs for the Eisenberg Company,
a diversified business enterprise, where Mr. Chan's principal duty was to
negotiate contracts in the People's Republic of China. Prior to 1985, Mr. Chan
was employed by the Bank of America NT & SA as an economic forecaster. Mr.
Chan received his MBA from the University of California at Berkeley. Mr.
Chan's martial arts training began in 1968 in Hong Kong. He was the first
American allowed to train as a professional in the People's Republic of China.
He is a published author and has been featured in newspapers, magazine covers,
television and motion pictures. He was inducted into the Black Belt Hall of
Fame in 1981.
George Chung. Mr. Chung has served as our Chairman of the Board and a
Director since February 1997, and as President of America'a Best Karate since
1991. From 1981 to 1991, Mr. Chung owned and operated a karate studio in Los
Gatos, California. Mr. Chung was inducted into the Black Belt Hall of Fame in
1983. He is regarded in the martial arts industry as a pioneer in the
modernization of what is known as contemporary martial arts training, which
includes the use of music in both training and performance. He has been featured
in magazines, books, television and motion pictures. He is a published author
and wrote "Defend Yourself," a worldwide published self-defense system for
Sybervision Systems. In 1995, he was awarded a "Superbowl Ring" from the San
Francisco 49ers in recognition for his outstanding martial arts work with their
championship football team.
William T. Duffy. Mr Duffy served as the Executive Vice President for
the Buffalo Bills in 1999, and had served as Vice-President of Business
Operations and Chief Financial Officer for the San Francisco 49ers from 1996
to 1998. He was responsibe for all non-football related business and
provides financial guidance and support for all the team's football related
activities. Mr. Duffy's previous experience has included serving as Director
of Compliance for the National Football League from October 1993 to May 1996,
Treasurer of Robbie Stadium Corporation from June 1990 to September 1993 and
Director of Finance of the Miami Dolphins from March 1988 to May 1990. Mr.
Duffy, a CPA, is a graduate of Princeton University and received his Masters
of Accounting from New York University.
Alan Elkes. Mr Elkes has served as Chief Executive Officer of Dalton
Kent Securities Group, Inc., an investment banking and brokerage firm, since
June 1996. From September 1994 to June 1996, Mr Elkes served as Financial
and Operations Manager at a branch office of Corporate Securities Group Inc.,
an investment banking and brokerage company. From February 1991 to September
1994, Mr. Elkes owned and operated Minuteman Press, a printing company. Mr.
Elkes began his career in the stock brokerage industry in 1968. He has an
MBA in accounting from St. Johns University in New York and is also a
licensed CPA in the State of New York.
E. David Gable. Mr Gable, veteran business leader and entrepreneur,
is Chairman, and a member of the Board of Directors of Carnegie International
Corporation (OTC BB:CAGI) since September 1996 and Chief Operating Officer
from May 1997 to March 1999. From 1988 to 1993 he served as a principal and
president of the All-Star Motor Group, where he helped to grow it to $400
million in sales and more than 600 employees. Carnegie is a holding company
specializing in internet, telephony and telecommunications products, services
and distribution, including electronic commerce and electronic digital
interchange. Under Mr. Gable's leadership, Carnegie reported total income of
$8.9 million for the first 6 months of fiscal 1998 ended June 30, 1998, versus
$7 million total income for the 12 months ended December 31, 1997.
Jan D. Hutchins. Mr Hutchins has served as President of AC Media, since
February 1997. From July 1994 to November 1995, Mr. Hutchins was one of a four
person management team for GolfPro International, an emerging company designing
and marketing a terrain-based, personal service robot. From 1993 to 1994, Mr.
Hutchins was community services director for the San Francisco Giants
professional baseball team. From 1991 to 1993, Mr. Hutchins developed, produced
and hosted the HOOKED ON GOLF radio program for KNBR 68 in San Francisco. From
1972 to 1991, Mr. Hutchins served in various capacities in the television field,
including news anchor, sports director, sports anchor/reporter and television
host.
Mae Lyn Woo. Ms. Woo was named Chief Operations Officer (COO) of
American Champion Entertainment in July 1999, in addition to serving as our
Vice President and Chief Financial Officer since January 1998. Woo brings a
wealth of experience built over the past 18 years at Fortune 500 companies.
She began her career at Charles Schwab & Co. as a Senior Tax Accountant, then
she moved to Bank of America, where she held a similar position and increased
her duties to include leading tax project teams. In 1988, she joined Levi
Strauss & Co., where she would remain for ten years, ending her position there
as Controller in 1990. Ms. Woo graduated with Honors from the University of
Las Vegas, Nevada, with a Bachelor of Science in Finance/Accounting.
Committees of the Board of Directors
The Board of Directors has appointed an Audit Committee and a
Compensation Committee.
The members of the Audit Committee are Messrs. Chan, Duffy and
Elkes. Duties of the Committee are:
a. approves the selection and termination of independent public
accountants,
b. approves the scope of external audit services,
c. reviews adjustments recommended by the independent public
accountants and address disagreements between the independent public
accountants and management,
d. reviews the adequacy of internal controls and management's
handling of identified material inadequacies and reportable conditions in the
internal controls over financial reporting and compliance with laws and
regulations, and
e. supervises the internal audit function, which may include
approving the selection, compensation and termination of internal auditors.
The members of the Compensation Committee are Messrs. Chan, Chung,
Duffy and Elkes. The purpose of the committee is to ensure that our directors
and employees receive adequate and fair compensation, including salaries and
bonuses, and that such compensation is competitive within the industry. The
committee also administers our stock option plans.
Directors' Compensation
Our director's do not currently receive any cash compensation for
service on the Board of Directors or any committee thereof, but directors may
be reimbursed for certain expenses incurred in connection with attendance at
Board of Directors and committee meetings. Directors may also receive stock
options under our stock option plans.
Pursuant to Section 145 of the Delaware General Corporation Law,
our Certificate of Incorporation provides that we shall, to the fullest
extent permitted by law, indemnify all of our directors, officers,
incorporators, employees and agents against liability for certain of their
acts and we intend to enter into separate indemnification agreements with each
of our directors and officers to effectuate these provisions. Our Certificate
of Incorporation also provides that, with certain exceptions, no director will
be liable to us for monetary damages as a result of certain breaches of
fiduciary duties as a director. Exceptions to this include a breach of the
director's duty of loyalty, acts or omissions not in good faith or which
involve intentional misconduct or knowing violation of law, improper
declaration of dividends and transactions from which the director derived an
improper personal benefit.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to our directors, officers and
controlling persons pursuant to any arrangement, provisions or otherwise, we
have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain summary information with
respect to the compensation paid to the Company's our Chief Executive Officer
and President and our Chairman of the Board, for services rendered in all
capacities to ACEI for the period through December 31, 1999. Other than as
listed below, we had no executive officers whose total annual salary and bonus
exceeded $100,000 for that fiscal year:
<TABLE>
Long-Term Compensation
Awards Payouts
Restricted Securities LTIP All Other
Name Position Year Salary Other Stock Underlying Payouts Compen-
Compen- Award(s) Options/ ($) sation
sation Bonus ($) SARs ($)
(#)(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Anthony K. President, Chief 1999 $127,262 -- -- -- 275,000 -- --
Chan Executive Officer 1998 $130,828 -- -- -- 20,000 -- --
1997 $101,704 -- -- -- 21,875 -- --
--------
316,875
========
George Chairman of the 1999 $127,262 -- -- -- 275,000 -- --
Chung Board 1998 $138,739 -- -- -- 20,000 -- --
1997 $107,284 -- -- -- 21,875 -- --
--------
316,875
========
</TABLE>
(1) Options were granted under our 1997 Stock Plan and adjusted for the 1:4
reverse split of our common stock on January 4, 2000.
STOCK OPTIONS GRANTS AND EXCERCISES
Option/SAR Grants within 1999
Individual Grants
Number of
Securities %of Total Exercise or Base
Underlying Option Options Granted Price ($/Sh)
Granted (#) to all persons in Adjusted for 1:4
Name Adjusted for 1:4 Fiscal Year reverse split Expiration Date
reverse split
Anthony 25,000 2.3% $4.125 5/18/09
K. Chan 250,000 23.5% $3.750 6/06/09
275,000 25.8%
George 25,000 2.3% $4.125 5/18/09
Chung 250,000 23.5% $3.750 6/06/09
275,000 25.8%
The following table shows the value at May 31, 2000 of unexercised options held
by the named executive officers:
Aggregated Options in Last Fiscal Year and Fiscal Year-to-Date Option Values
Aggregated Options in Last Fiscal Year and Fiscal Year-end Option Values
Adjusted for 1:4 reverse split of our common stock on January 4, 2000.
Number of Value of
underlying unexercised in-the-
unexercised money options at
options at fiscal
year-end year-end
(#) ($)
Name Shares Value
acquired on Realized Exercisable/ Exercisable/
exercise (#) ($) unexercisable unexercisable*
Anthony 0 0 266,875/50,000 $0/$0
K. Chan
President
and Chief
Executive
Officer
George 0 0 266,875/50,000 $0/$0
Chung
Chairman
of the
Board
* Assumes a fair market value of $0.9375 per share at the close of June 30,
2000.
The compensation for our key management will be evaluated from time
to time by the Board. The Board may, in its discretion, award these individuals
cash bonuses, options to purchase shares of the Common Stock under our Equity
Incentive Plan and such other compensation, including equity-based
compensation, as the Board, or a committee thereof, shall approve from time
to time.
EMPLOYMENT CONTRACTS
In March 1997, ACEI entered into employment agreements, effective as
of August 5, 1997, the closing date of our initial public offering, with each
of Messrs. Chung and Chan pursuant to which Mr. Chung continues to serve as
our Chairman of the Board, and Mr. Chan continues to serve as our President,
Chief Executive Officer and Chief Financial Officer. Each agreement has a term
of five years. Pursuant to the agreements, in 1997 we paid Messrs. Chung and
Chan a base salary of $100,000 and $100,000 per year, respectively. Each
agreement also provides for the following bonuses:
a. Options to purchase 21,875 and 21,875 shares of common stock,
respectively, exercisable at $28.80 per share, which options were granted on
July 30, 1997.
b. 200,000, each if all of the warrants issued in our initial
public offering are exercised by the holders thereof within the five-year
exercise period of such warrants.
In addition, the executives are also entitled to certain fringe
benefits. If either of Messrs. Chung or Chan is terminated other than for
cause, death or disability, we are obligated to pay such executive an amount
equal to his base salary then in effect for the remaining term of the agreement.
In March 1997, we and AC Media, entered into a two-year employment
agreement with Jan D. Hutchins effective as of August 5, 1997, the closing date
of our initial public offering, pursuant to which Mr. Hutchins serves as
President of AC Media and is responsible for supervising the production and
marketing of the AC Media's media projects. Pursuant to the agreement Mr.
Hutchins received an annual base salary of $39,600 in 1997. also provided for
the following bonuses:
a. 1,000 shares of common stock on January 4, 2000
b. Options to purchase 5,000 shares of common stock at $28.80 per
share, which options were granted on July 30,1997
c. $100,000 in cash if all of the warrants issued to our
initial public offering are exercised by the holders thereof within two years
of the consummation of the offering.
The employment agreement also provided for certain fringe benefits.
If Mr. Hutchins is terminated for reasons other than for cause, death or
disability, we are obligated to pay Mr. Hutchins an amount equal to his base
salary then in effect or the remaining term of the agreement. None of the
above- referenced employment agreements contain non-competition provisions.
In July 1998, the we amended employment agreements with certain of our
management as follows: The agreements with Messrs. Anthony Chan and George
Chung were amended to provide for annual salaries of $150,000 and for the
granting of 5,000 options per year pursuant to our 1997 stock option plan;
the agreement with Jan D. Hutchins was amended to provide for an annual salary
of $75,000 and for the granting of 2,500 options per year pursuant to our
1997 stock option plan.
In June 1999, we entered into an employment agreement with Joy M.
Tashjian to serve as the President and CEO of our wholly owned subsidiary
American Champion Marketing Group. The term of employment is through
December 31, 2001 and the annual salary is $150,000. Ms. Tashjian was
granted 87,500 options from our 1997 stock option plan at the execution
of the agreement and another 37,500 options to be granted in June 2000.
1997 Employee Stock Option Plan
Our 1997 employee stock option plan provides for the grant of stock
options (including incentive stock options as defined in Section 422 of the
Internal Revenue Code and non-qualified stock options), stock appreciation
rights and other stock awards (including restricted stock awards and stock
bonuses) to our employees or affiliates or any consultant or advisor engaged
by us who renders bona fide services to us or our affiliates in connection
with our business; provided, that such services are not in connection with the
offer or sale of securities in a capital raising transaction. The 1997
employee stock option plan is authorized to issue options or other awards
exercisable to purchase up to 1,750,000 shares of our common stock.
The 1997 employee stock option plan is administered by the Compensation
Committee of the Board of Directors which will be comprised of "disinterested
persons" within the meaning of Rule 16b-3 of the Securities Exchange Act of
1934. Stock Options may be granted by the Compensation Committee on such terms,
including vesting and payment forms, as it deems appropriate in its direction;
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.
Stock appreciation rights may be granted by the Compensation Committee
on such terms, including payment forms, as the Compensation Committee deems
appropriate, provided that a stock appreciation right granted in connection
with a stock option shall become exercisable and lapse according to the same
vesting schedule and lapse rules established for the stock option (which shall
not exceed ten years from the date of grant). A stock appreciation right shall
not be exercisable during the first six months of its term and only when the
fair market value of the underlying common stock exceeds the stock appreciation
right's exercise price and is exercisable subject to any other conditions on
exercise imposed by the Compensation Committee. In the event of a change in
control of us, the Compensation Committee retains the discretion to accelerate
the vesting of stock options and stock appreciation rights and to remove
restrictions on transfer of restricted stock awards. Unless terminated by the
Board of Directors, the 1997 employee stock option plan will continue until
December 2007. Upon the occurrence of an event constituting a change of
control, in the sole discretion of the Compensation Committee, all options and
stock appreciation rights will become immediately exercisable in full for the
remainder of their terms and restrictions on stock granted pursuant to a
restricted stock award will lapse.
1997 Non-Employee Directors Stock Option Plan
Our 1997 non-employee directors stock option plan was adopted by our
of Directors and stockholders in March 1997 and became effective upon the
closing of our initial public offering. Options to purchase a maximum of
200,000 shares of common stock may be granted under the plan. The plan
provides for the automatic grant to each of our non-employee directors of
a. An option to purchase 1,250 shares of common stock on the date
of such director's initial election or appointment to the Board of Directors,
and
b. An option to purchase 500 shares of common stock on each
anniversary thereof on which the director remains on the Board of Directors.
The options will have an exercise price of 100% of the fair market
value of the common stock on the date of grant and have a 10-year term. Initial
grants become exercisable in two equal annual installments commencing on the
first anniversary of date of grant thereof and subsequent grants become fully
exercisable beginning on the first anniversary of the date of grant. Both
grants are subject to acceleration in the event of certain corporate
transactions. Any options which are vested at the time the optionee ceases to
be a director shall be exercisable for one year thereafter. Options which are
not vested automatically terminate in the event the optionee ceases to be a
member of the Board of Directors. Options which are vested on the date the
optionee ceased to be a Director due to death or disability generally remain
exercisable for five years thereafter. If we are a party to a transaction
involving a sale of substantially all our assets, a merger or consolidation,
all then outstanding options under the plan may be canceled. However, during
the 30 day period preceding the effective date of such transaction, all partly
or wholly unexercised options will be exercisable, including those not yet
exercisable pursuant to the vesting schedule.
TRANSACTIONS INVOLVING OFFICERS, DIRECTORS
AND PRINCIPAL SHAREHOLDERS
Messrs. Chung and Chan are the guarantors of two loans from Karen T.I.
Shen and Thomas Jung Woo originally totaling $27,000 and bearing interest at
14% per annum which are due and payable in 1999 and 2000, and are the direct
obligors on a loan in the original principal amount of $100,000 from the
Michael Triantos M.D. Inc. Money Purchase and Profit Sharing Pension Plans
Trust which is being treated as a debt of us which loan bears interest at the
rate of 12% per annum.
None of the transactions with officers or shareholders or their
affiliates were made on terms less favorable to us than those available from
unaffiliated parties. In future transactions of this nature, we will ensure
that more favorable terms are not available to it from unaffiliated third
parties before engaging our officers or shareholders or their affiliates.
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of June 30, 2000, certain
information with respect to stock ownership of
a. all persons known by us to be beneficial owners of 5% or more of
our outstanding shares of common stock;
b. each director; and
c. all directors and officers as a group, together with their
respective percentage ownership of such shares. Unless otherwise indicated, the
beneficial owners have sole voting and investment power over the shares of
common stock listed below.
For purposes of calculating the number of shares of common stock
beneficially owned after the offering, we have assumed the sale of all shares
covered by the registration statement of which this prospectus is a part. For
purposes of calculating the percentage beneficially owned after the offering,
the total number of shares of common stock deemed outstanding includes (1) the
shares of common stock covered by the registration statement of which this
prospectus is a part that are registered on behalf of Sibson Holding and (2)
shares of common stock covered by the registration statement of which this
prospectus is a part that are issuable upon the exercise of warrants.
Name & address of Number of Percentage Percentage
Beneficial Owner(1) Shares of Ownership of Ownership
Before Offering After Offering
Anthony Chan 678,360 (2) 9.67% 5.11%
George Chung 670,460 (3) 9.56% 5.05%
William T. Duffy 43,875 (4) *** ***
Alan Elkes 86,375 (5) 1.23% ***
E. David Gable 51,111 (6) *** ***
Jan D. Hutchins 125,000 (7) 1.78% ***
Ronald M. Lott 7,000 (8) *** ***
Mae Lyn Woo 61,250 (9) *** ***
All officers and
directors as a
group 1,723,431(10) 24.57% 12.97%
Adjusted for 1:4 reverse split of our common stock on January 4, 2000.
*** Represents less than one percent
(1) The addresses for the directors and executive officer is c/o American
Champion Entertainment, Inc., 22320 Foothill Blvd., Suite 260, Hayward
California 94541.
(2) Includes 301,875 shares subject to presently exercisable options
granted under our 1997 stock option plan. Does not include 50,000 subject to
options which are not presently exercisable or exercisable within 60 days.
(3) Includes (i) 301,875 shares sunject to presently exercisable options
granted under our 1997 stock option plan and (ii) 1,100 shares owned by Mr.
Chung's wife. Does not include 50,000 subject to options which are not
presently exercisable or exercisable within 60 days.
(4) Includes 31,875 shares subject to presently exercisable options granted
under our 1997 stock option plan. Does not include 750 subject to options
which are not presently exercisable or exercisable within 60 days.
(5) Includes (i) 56,875 shares subject to presently exercisable options
granted under our 1997 stock option plan, and (ii) 5,000 shares subject to
presently exercisable warrants. Does not include 750 subject to options which
are not presently exercisable or exercisable within 60 days.
(6) Includes 28,000 shares subject to presently exercisable options granted
under our 1997 stock option plan.
(7) Includes 115,000 shares subject to presently exercisable options
granted under our 1997 stock option plan. Does not include 17,500 subject to
options which are not presently exercisable or exercisable within 60 days.
(8) Includes 7,000 shares subject to presently exercisable options granted
under our 1997 stock option plan. Does not include 750 subject to options
which are not presently exercisable or exercisable within 60 days.
(9) Includes 36,250 shares subject to presently exercisable options granted
under our 1997 stock option plan. Does not include 5,000 subject to options
which are not presently exercisable or exercisable within 60 days.
(10) Includes an aggregate of 883,750 shares subject to presently
exercisable warrants and options granted under our 1997 stock option plan.
Does not include 124,750 subject to options which are not presently
exercisable or exercisable within 60 days.
DESCRIPTION OF CAPITAL STOCK
General
We have an authorized capital of 40,000,000 shares of common
stock, $.0001 par value, and 6,000,000 shares of preferred stock, $.0001 par
value, of which 8,505,391 shares of common stock and no shares of preferred
stock are currently outstanding. The issued and outstanding shares of common
stock are fully paid and non-assessable.
Common Stock
Holders of shares of common stock are entitled to one vote per
share on all matters submitted to a vote of the stockholders and do not have
cumulative voting rights in the election of directors. Such holders are
entitled to share pro rata in such dividends as may be declared by the board
of directors out of funds legally available. On any dissolution, liquidation
or winding-up of our business, the holders of common stock will be entitled
to share pro rata in all distributions made after payment of or provision for
the payment of all debts and prior claims. There are no preemptive rights or
conversion privileges applicable to the common stock.
Preferred Stock
The preferred stock may be issued in one or more series, the terms of
which may be determined at the time of issuance by the Board of Directors,
without further action by stockholders, and may include voting rights
(including the right to vote as a series on particular matters), preferences
as to dividends and liquidation, conversion rights, redemption rights and
sinking fund provisions. The issuance of any such preferred stock could
adversely affect the rights of the holders of common stock and, therefore,
reduce the value of the common stock. The ability of the Board of Directors
to issue preferred stock could discourage, delay or prevent a takeover of us.
We do not have any current plans to issue any Preferred Stock.
Warrants
Our warrants were issued pursuant to a Warrant Agreement between
us and Continental Stock Transfer & Trust Company and are in registered form.
These warrants allow the holders to purchase an aggregate of 373,750 shares
of common stock (exclusive of 32,500 warrants underlying warrants issued to
the underwriter of our initial public offering). Each four warrants entitles
its holder to purchase, at any time through the April 2002, one share of
common stock at an exercise price of $26.00 per share, subject to adjustment
in accordance with the anti-dilution and other provisions referred to below.
The warrants may be redeemed by us at any time commencing July
30, 1998 and prior to their expiration, at a redemption price of $.10 per
Warrant, on not less than 30 days' prior written notice to the holders of
such warrants, provided that the last sales price of the common stock on
Nasdaq is at least $31.20 per share, subject to adjustment, for a period of
20 consecustive trading days ending on the third day prior to the date the
notice of redemption is given. Holders of warrants shall have exercise rights
until the close of the business day preceding the date fixed for redemption.
The exercise price and the number of shares of common stock
purchasable upon the exercise of the warrants are subject to adjustment upon
the occurrence of certain events, including stock dividends, stock splits,
combinations or reclassification of the common stock. The warrants do not
confer upon holders any voting or any other rights as stockholders.
Warrants issued to Sibson and Union Atlantic for the $5 million equity line
of credit
We have issued the follwoing common stock purchase warrants to
Sibson as the investor of the equity line, and to Union Atlantic as the
placement agent.
Issued to Quantity Exercise Price Expiration
Sibson Holdings Ltd 175,000 $1.7325 May 9, 2003
Union Atlantic, LC 50,000 $1.7325 May 9, 2003
We will also issue an additional 6,500 warrants to Sibson,
exercise at the bid price on the day of issuance and with an expiration after
three years, to Sibson for each $100,000 of the equity line that it funds.
Warrants issued to investors of debentures we sold in April 2000 and Union
Atlantic
We have issued the following common stock purchase warrants to the four
investors of the debentures we sold in April 2000, and to Union Atlantic as the
placement agent.
Issued to Quantity Exercise Price Expiration
Amro International S.A. 16,667 $2.0125 April 20, 2003
Endeavour Capital
Investement Fund S.A. 16,666 $2.0125 April 20, 2003
Celeste Trust Reg. 8,334 $2.0125 April 20, 2003
Balmore, S.A. 8,333 $2.0125 April 20, 2003
Union Atlantic, LC 50,000 $2.0125 April 20, 2003
Certain Anti-takeover Devices
We are subject to Section 203 of the Delaware General Corporation
Law, which restricts certain transactions and business combinations between a
corporation and an "Interested Stockholder" owning 15% or more of the
corporation's outstanding voting stock for a period of three years from the
date the stockholder becomes an Interested Stockholder. Subject to certain
exceptions, unless the transaction is approved by the Board of Directors and
the holders of at least 66-2/3% of the outstanding voting stock of the
corporation (excluding shares held by the Interested Stockholder), Section
203 prohibits signigicant business transactions such as a merger with,
disposition of assets to, or receipt of disproportionate financial benefits
by the Interested Stockholder, or any other transaction that would increase
the Interested Stockholder's proportionate ownership of any class or series
of the corporation's stock. The statutory ban does not apply if, upon
consummation of the transaction in which any person becomes an Interested
Stockholder, the Interested Stockholder owns at least 85% of the outstanding
voting stock of the corporation (excluding shares held by persons who are
both directors and officers or by certain stock plans).
Transfer Agent and Registrar
Continental Stock Transfer & Trust Company has been appointed as
the transfer agent and registrar for our common stock. Its telephone number
is (212) 509-4000.
COMMON STOCK PURCHASE AGREEMENT
Overview
Sibson Holdings Limited, a British Virgin Islands corporation, and
we signed a common stock purchase agreement dated April 12, 2000, for the
future issuance and purchase of shares of our common stock. Pursuant to terms
in the agreement, we were to pay a legal, administrative and escrow fee of
$15,000 to the investor's counsel, plus the issuance of warrants to Sibson
and Union Atlantic. This cash payment was made and the warrants were issued
on May 9, 2000 and thus the agreement is deemed effective as of that date.
The stock purchase agreement establishes what is sometimes termed an equity
line of credit or an equity drawdown facility. In general, the drawdown
facility operates like this: the investor, Sibson, has committed up to
$5,000,000 to purchase shares of our common stock over a 30 month period. We
may request a draw of that money, subject to a formula based on the average
common stock price and average trading volume. Each draw down must be for at
least $100,000. At the end of a five dat trading period following the draw
down request, we and Sibson will calculate the amount of money that Sibson
will provide to us and the number of shares we will issue to Sibson in return
for that money, based on the formula in the stock purchase agreement.
Sibson will receive a 15% discount to the average of the lowest
three bid prices for the common stock for the 21 day period beginning 15
trading days prior to and ending 5 trading days after the sale to Sibson and
we will receive the amount of the draw down less an escrow agent fee of
$1,500 and a 7% cash placement fee payable to the placement agent, Union
Atlantic, LC, which introduced Sibson to us. Union Atlantic, LC is not
obligated to purchase any of our shares, but as an additional placement fee,
we have issued to them warrants to purchase 50,000 shares of our common stock
at an exercise price of $1.7325 per share. We also have issued to Sibson
warrants to purchase 175,000 shares of our common stock at an exercise price
of $1.7325 per share. We will issue warrants to purchase an additional 6,500
shares of common stock exercisable at the bid price on the date of the put
notice, to Sibson for each $100,000 of the equity line that it funds.
Based on a review of our trading volume and stock price history and
the number of drawdowns we estimate making, we are registering 5,000,000
shares of common stock for possible issuance under the stock purchase
agreement and 550,000 shares underlying the warrants for common shares
delivered to Sibson and Union Atlantic, LC. The listing requirements of The
Nasdaq SmallCap Market prohibit us from issuing 20% or more of our issued and
outstanding common shares in a single transaction if the shares may be issued
for less than the greater of market value or book value. Based on shares of
common stock issued and outstanding on May 9, 2000, the date of closing of
the common stock purchase agreement, we may not issue more than 1,402,726
shares under the common stock purchase agreement, the Sibson warrant and the
Union Atlantic warrant, without the approval of our shareholders. Because
225,000 of these shares are committed to the Sibson warrant and the Union
Atlantic warrant, if we wish to draw amounts under the common stock purchase
agreement which would cause an issuance of more than 1,177,726 shares under
the common stock purchase agreement, we must receive shareholder approval
prior to any such drawdown.
The Drawdown Procedure and the Stock Purchases
We may request a drawdown by faxing a drawdown notice to Sibson,
stating the amount of the drawdown we wish to exercise. The 15 trading days
before the notice and the five days after the notice are used to determine
the actual number of shares we will issue in return. The 22nd trading day is
the drawdown exercise date when the amount of the draw and the number of
shares to be issued are calculated and delivered. Sibson has the right to
purchase up to 50% more than we state we actually want. To determine the
number of shares of common stock we must issue in connection with a drawdown,
take the drawdown amount and divide it by 85% of the three lowest trading
prices for the common stock on each of the 21 trading days as described
above.
Necessary Conditions Before Sibson is Obliged to Purchase our Shares
The following conditions must be satisfied before Sibson is
obligated to purchase the common shares that we wish to sell from time to
time:
o A registration statement for the shares we will be issuing must
be declared effective by the Securities and Exchange Commission and must
remain effective and available as of the draw down settlement date for making
resales of the common shares purchased by Sibson;
o There can be no material adverse change in our business,
operations, properties, prospects or financial condition;
o We must not have merged or consolidated with or into another
company or transferred all or substantially all of our assets to another
company, unless the acquiring company has agreed to honor the common stock
purchase agreement;
o No statute, rule, regulation, executive order, decree, ruling
or injunction may be in effect which prohibits consummation of the
transactions contemplated by the stock purchase agreement;
o No litigation or proceeding adverse to us, Sibson or their
affiliates, can be pending, nor any investigation by any governmental
authority threatened against us or them seeking to restrain, prevent or
change the transactions contemplated by the stock purchase agreement or
seeking damages in connection with such transactions; and
o Trading in our common shares must not have been suspended by
the Securities and Exchange Commission or The Nasdaq SmallCap Market, nor
shall minimum prices have been established on securities whose trades are
reported by The Nasdaq SmallCap Market.
On each drawdown settlement date for the sale of common shares, we
must deliver an opinion from our counsel about these matters.
A further condition is that Sibson may not purchase more than 19.9%
of our common shares issued and outstanding on May 9, 2000, the closing date
under the stock purchase agreement, without obtaining approval from our
shareholders for such excess issuance.
In addition, the common stock purchase agreement does not permit us
to draw down funds if the issuance of shares of common stock to Sibson
pursuant to the drawdown if it would result in Sibson owning more than 9.9% of
our outstanding common stock on the drawdown exercise date. Pursuant to terms
in the agreement, we can only draw to a certain maximum amount for each
drawdown (4.125% of the weighted average price for the three prior months
multiplied by the total trading volume for the three prior months). There is
also a minimum of twenty trading days (known as the "trading cushion") between
drawndowns. Sibson intends to sell shares that we issue to them upon drawdowns
during the trading cushion. We will coordinate with Sibson to ensure that if
there is unsold stock left from the trading cushion that the additional new
shares to be issued from subsequent drawdowns will not cause Sibson to own
more than 9.9% of the then outstanding shares.
Costs of Closing the Transaction
At the closing of the transaction on May 9, 2000, we delivered the
requisite opinion of counsel to Sibson and paid the escrow agent, Epstein
Becker & Green P.C., $15,000 for Sibson's legal, administrative and escrow
costs and for the ordinary services of the escrow agent for the closing of
the draw downs. Sibson and Union Atlantic also received warrants for 175,000
and 50,000 shares respectively of our common stock with an exercise price of
$1.7325. Sibson and Union Atlantic are not obligated to purchase any of our
shares pursuant to the warrant.
Termination of the Stock Purchase Agreement
Sibson may terminate the equity draw down facility under the stock
purchase agreement if any of the following events occur:
o Our common shares are delisted from The Nasdaq SmallCap Market
unless such delisting is in connection with the listing of such shares on a
comparable stock exchange in the United States;
o Our common stock is no longer registered under the Securities
Exchange Act of 1934;
o We do not maintain our corporate existence.
Indemnification of Sibson
Sibson is entitled to customary indemnification from us for any
losses or liabilities suffered by it based upon material misstatements or
omissions from the registration statement and the prospectus, except as they
relate to information supplied by Sibson to us for inclusion in the
registration statement and prospectus.
SELLING STOCKHOLDERS
Overview
Common shares registered for resale under this prospectus would
constitute an increase of 74% of our issued and outstanding common shares as
of September 6, 2000.
Sibson Holdings, Ltd.
Sibson Holdings, Ltd. is engaged in the business of investing in
publicly traded equity securities for its own account. Sibson's principal
offices are located at Aeulestrasse 74, FL-9490 Vaduz, Liechtenstein.
Investment decisions for Sibson are made by its board of directors. Other
than the warrants we issued to Sibson in connection with closing the common
stock purchase agreement, Sibson does not currently own any of our securities
as of the date of this prospectus. Other than its obligation to purchase
common shares under the common stock purchase agreement, it has no other
commitments or arrangements to purchase or sell any of our securities. There
are no business relationships between Sibson and us other than the common
stock purchase agreement.
Union Atlantic, LC
Union Atlantic, LC, a broker-dealer, acted as a finder in connection
with the common stock purchase agreement. This prospectus covers 100,000
shares of common stock issuable upon exercise of warrants we have issued to
Union Atlantic as a finder's fee for introducing us to Sibson. Out of the
total of 100,000 warrants, 50,000 are exercisable at $2.0125 per share and
expire April 20, 2003 and 50,000 are exercisable at $1.7325 per share and
expire May 9, 2003. The decision to exercise any warrants issued, and the
decision to sell the common stock issued pursuant to the warrants, will be
made by Union Atlantic's officers and board of directors. Other than the
warrants, Union Atlantic does not currently own any of our securities as of
the date of this prospectus.
AMRO International S.A.,
Endeavour Capital Investment Fund S.A.,
Celeste Trust Reg., and
Balmore, S.A.
The above four parties are investors of the $1,000,000 debentures which may
convert into 621,429 shares of our common stock. In addition, this prospectus
covers 50,000 shares that these four parties may sell upon the exercise of
common stock purchase warrants.
PLAN OF DISTRIBUTION
General
Sibson is offering the common shares for its account as statutory
underwriter, and not for our account. We will not receive any proceeds from
the sale of common shares by Sibson. Sibson may be offering for sale up to
5,000,000 common shares acquired by its pursuant to the terms of the stock
purchase agreement more fully described under the section above entitled "The
Common Stock Purchase Agreement" and the warrants we issued to it in
connection with the transaction. Sibson has agreed to be named as a statutory
underwriter within the meaning of the Securities Act of 1933 in connection
with such sales of common shares and will be acting as an underwriter in its
resales of the common shares under this prospectus. Sibson has, prior to any
sales, agreed not to effect any offers or sales of the common shares in any
manner other than as specified in the prospectus and not to purchase or
induce others to purchase common shares in violation of any applicable state
and federal securities laws, rules and regulations and the rules and
regulations of The Nasdaq SmallCap Market.
To permit Sibson to resell the common shares issued to it under the
stock purchase agreement, we agreed to register those shares and to maintain
that registration. To that end, we have agreed with Sibson that we will
prepare and file such amendments and supplements to the registration
statement and the prospectus as may be necessary in accordance with the
Securities Act and the rules and regulations promulgated thereunder, in order
to keep it effective until the earliest of any of the following dates:
o the date after which all of the common shares held by Sibson or
its transferees that are covered by the registration statement of which this
prospectus is a part have been sold under the provisions of Rule 144 under the
Securities Act of 1933;
o the date after which all of the common shares held by Sibson or
its transferees that are covered by the registration statement have been
transferred to persons who may trade such shares without restriction under
the Securities Act of 1933 and we have delivered new certificates or other
evidences of ownership of such common shares without any restrictive legend;
o the date after which all of the common shares held by Sibson or
its transferees that are covered by the registration statement have been sold
by Sibson or its transferees pursuant to such registration statement;
o the date after which all of the common shares held by Sibson or
its transferees that are covered by the registration statement may be sold,
in the opinion of our counsel, under Rule 144 under the Securities Act of
1933 irrespective of applicable volume limitations;
o the date after which all of the common shares held by Sibson or
its transferees that are covered by the registration statement may be sold,
in the opinion of our counsel, without any time, volume or manner limitations
under Rule 144(k) or similar provision then in effect under the Securities
Act of 1933; or
o the date after which all of the common shares held by Sibson or
that are covered by the registration statement are or may become issued and
outstanding.
Shares of common stock offered through this prospectus may be sold
from time to time by Sibson, the other selling stockholders, who may be
considered statutory underwriters and they are AMRO International S.A.,
Endeavour Capital Investment Fund S.A., Celeste Trust Reg. and Balmore, S.A.
or by pledgees, donees, transferees or other successors in interest. Such
sales may be made on The Nasdaq SmallCap Market, on the over-the-counter
market or otherwise at prices and at terms then prevailing or at prices
related to the then current market price, or in negotiated private
transactions, or in a combination of these methods. The selling stockholders
will act independently of us in making decisions with respect to the form,
timing, manner and size of each sale. We are not aware of any existing
arrangement between any selling stockholder, any other stockholder, broker,
dealer, underwriter or agent relating to the sale or distribution of shares
of common stock which may be sold by selling stockholders through this
prospectus.
The common shares may be sold in one or more of the following
manners:
o a block trade in which the broker or dealer so engaged will
attempt to sell the shares as agent, but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker or dealer for its account under this
prospectus; or
o ordinary brokerage transactions and transactions in which the
broker solicits purchases.
In effecting sales, brokers or dealers engaged by the selling
stockholders may arrange for other brokers or dealers to participate. Except
as disclosed in a supplement to this prospectus, no broker-dealer will be
paid more than a customary brokerage commission in connection with any sale
of the common shares by the selling stockholders. Brokers or dealers may
receive commissions, discounts or other concessions from the selling
stockholders in amounts to be negotiated immediately prior to the sale. The
compensation to a particular broker-dealer may be in excess of customary
commissions. Profits on any resale of the common shares as a principal by
such broker-dealers and any commissions received by such broker-dealers may
be deemed to be underwriting discounts and commissions under the Securities
Act of 1933. Any broker-dealer participating in such transactions as agent
may receive commissions from the selling stockholders (and, if they act as
agent for the purchaser of such common shares, from such purchaser).
Broker-dealers may agree with the selling stockholders to sell a
specified number of common shares at a stipulated price per share, and, to
the extent such a broker dealer is unable to do so acting as agent for the
selling stockholders, to purchase as principal any unsold common shares at
price required to fulfill the broker-dealer commitment to the selling
stockholders. Broker-dealers who acquire common shares as principal may
thereafter resell such common shares from time to time in transactions (which
may involve crosses and block transactions and which may involve sales to and
through other broker-dealers, including transactions of the nature described
above) in the over-the-counter market, in negotiated transactions or
otherwise at market prices prevailing at the time of sale or at negotiated
prices, and in connection with such resales may pay to or receive from the
purchasers of such common shares commissions computed as described above.
Such brokers or dealers and any other participating brokers or dealers may be
deemed to be underwriters in connection with such sales.
In addition, any common shares covered by this prospectus which
qualify for sale pursuant to Rule 144 may be sold under Rule 144 rather than
pursuant to this prospectus. We will not receive any of the proceeds from the
sale of these common shares, although we have paid the expenses of preparing
this prospectus and the related registration statement of which it is a part,
and have reimbursed Sibson $15,000 for its legal, administrative and escrow
costs.
Sibson is subject to the applicable provisions of the Securities
Exchange Act of 1934, including without limitation, Rule 10b-5 thereunder.
Under applicable rules and regulations under the Exchange Act, any person
engaged in a distribution of the common shares may not simultaneously engage
in market making activities with respect to such securities for a period
beginning when such person becomes a distribution participant and ending upon
such person's completion of participation in a distribution, including
stabilization activities in the common shares to effect covering
transactions, to impose penalty bids or to effect passive market making bids.
In addition, in connection with the transactions in the common shares, Sibson
and we will be subject to applicable provisions of the Securities Exchange
Act of 1934 and the rules and regulations under that Act, including, without
limitation, the rules set forth above. These restrictions may affect the
marketability of the common shares.
The selling stockholders will pay all commissions and certain other
expenses associated with the sale of the common shares.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, assuming Sibson funds the full
$5,000,000 equity drawdown facility and all warrants issued in connection
therewith are exercised, we will have 14,776,820 shares of common stock
outstanding. All of the 6,271,429 shares of common stock sold in this offering
will be freely transferable by persons other than "affiliates" of us (as that
term is defined under the Securities Act of 1933).
LEGAL MATTERS
The legality of the issuance of the shares of common stock offered
hereby will be passed upon for us by Sichenzia, Ross & Friedman LLP, New York,
New York.
EXPERTS
Our Financial statements as December 31, 1999 and 1998, and for the
two years then ended have been included herein and in the registration
statement in reliance upon the reports of Moss Adams LLP, independent
certified public accountants, appearing elsewhere herein, and upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934, and in accordance therewith file reports, proxy or
information statements and other information with the Securities and Exchange
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, as well as at the following regional offices: Seven World Trade
Center, New York, New York 10048, and Citicorp Center, 500 W. Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such materials can be obtained
from the Public Reference Section of the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C.20549, at prescribed rates. In addition,
the Commission maintains a web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission's web site
is http://www.sec.gov. Information on the operation of the Public Reference
Room can be obtained by calling the SEC at 1-800-SEC-0330.
We have filed with the Commission, a registration statement on Form
SB-2 under the Securities Act of 1933 with respect to the common stock being
offered bereby. As permitted by the rules and regulations of the Commission,
this prospectus does not contain all the information set forth in the
registration statement and the exhibits and schedules thereto. For further
information with respect to us and the common stock offered hereby, reference
is made to the registration statement, and such exhibits and schedules. A copy
of the registration statement, and the exhibits and schedules thereto, may be
inspected without charge at the public reference facilities maintained by the
Commission at the addresses set forth above, and copies of all or any part of
the registration statement may be obtained from such offices upon payment of
the fees prescribed by the Commission. In addition, the registration statement
may be accessed at the Commission's web site. Statements contained in this
prospectus as to the contents of any contract or other document are not
necessarily complete and, in each instance, reference is made to the copy of
such contract or document filed as an exhibit to the registration statement,
each such statement being qualified in all respects by such reference. We
can be contacted at the following Internet addresses:
[email protected] or [email protected]
<PAGE>
Interim Financial Statements for American Champion Entertainment, Inc.
Condensed Consolidated Balance Sheets at June 30, 2000 and Dec 31, 1999
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
(unaudited)
------------ ------------
<S> <C> <C>
Assets
Cash...................................... $211,842 $32,514
Account receivable........................ 1,099,349 481,449
Loans receivable, related parties......... 114,937 114,937
Prepaid expenses ......................... 22,164 7,460
Property and equipment, net............... 271,168 312,949
Investments............................... -- 203,110
Film costs, net........................... 7,561,834 7,553,133
Note receivable........................... 354,814 354,814
Other assets.............................. 285,029 226,084
------------ ------------
Total assets.............................. $9,921,137 $9,286,450
============ ============
Liabilities
Accounts payable and accrued expenses..... $700,957 $1,042,577
Note payable, related parties............. -- 4,100
Other..................................... -- 4,245
Deferred revenues......................... 16,920 16,920
Notes payable............................. 1,154,562 450,183
------------ ------------
Total long-term liabilities............... 1,872,439 1,598,025
Stockholders' Equity:
Preferred stock -- --
Common stock.............................. 23,167,328 17,594,865
Accumulated deficit........................ (15,118,631) (9,906,440)
------------- -------------
Total stockholders' equity ................ 8,048,697 7,688,425
------------- -------------
Total Liabilities and Stockholders Equity.. $9,921,137 $9,286,450
============= =============
</TABLE>
See accompanying notes.
<PAGE>
Interim Financial Statements for American Champion Entertainment, Inc.
-continue
Condensed Statement of Operations
For the three and six month periods ended June 30, 2000 and 1999
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2000 1999 2000 1999
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUE:
Tuition and related fees......... $8,415 $19,256 $50,601 $80,610
Accessories and video sales...... 40 0 145 0
License fee and sponsorship fee.. 465,050 0 465,050 0
Film income...................... 15,290 214,206 17,268 439,842
Interest income.................. 3,100 0 9,678 0
----------- ---------- ----------- ----------
Total revenue.................... 491,895 233,462 542,742 520,452
----------- ---------- ----------- ----------
COSTS AND EXPENSES:
Cost of sales.................... 842 0 1,617 1,722
Amortization of film costs....... 31,057 231,569 31,057 369,821
Salaries and payroll taxes....... 261,438 10,653 561,911 20,672
Rent............................. 33,900 72,249 62,807 114,578
Selling, general and
administrative................. 1,662,196 333,135 4,608,036 647,244
Financing expense*............... -- 741,210 -- 741,210
Debenture conversion expense..... 65,683 -- 83,817 --
Beneficial conversion feature
of debentures.................. 107,429 -- 372,393 --
Interest......................... 11,681 607,583 33,295 966,497
------------------------------------------------
Total costs and expenses......... 2,174,226 1,996,400 5,754,933 2,861,744
------------------------------------------------
Net Loss From Operations............(1,682,331)(1,762,938) (5,212,191)(2,341,292)
Gain On Sale Of Studio 0 0 0 0
Net Loss Before Income Tax..........(1,682,331)(1,762,938) (5,212,191)(2,341,292)
Income Tax 0 4,240 0 4,281
Net Loss (1,682,331)(1,767,178) (5,212,191)(2,345,573)
Accumulated Deficit (15,118,631)(5,853,684) (15,118,631)(5,853,684)
Weighted average number of shares
outstanding**.................... 6,555,737 1,964,081 6,555,737 1,964,081
======================= =======================
Basic loss per share............... (0.26) (0.90) (0.80) (1.19)
======================= =======================
</TABLE>
* Financing expense of $741,210 consists of $114,500 in cash and a
non-cash portion of $626,710 in valuation of common stock and warrants
granted pursuant to the redemption of debt.
** Adjusted for 1:4 reverse split of the Company's common stock on
January 4, 2000.
See accompanying notes.
<PAGE>
Interim Financial Statements for American Champion Entertainment, Inc.
-continue
Condensed Consolidated Statement of Cash Flows
For the three and six months periods ended June 30, 2000
(unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
------------------------
2000 2000
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ $(1,682,331) $(5,212,191)
Adjustments to reconcile net loss to
net cash used for operating activities:
Non-cash charge related to beneficial
conversion feature of debentures.......... 107,429 372,393
Depreciation and amortization............... 53,750 83,807
Conversion of debenture interest to common stock 9,171 20,356
Amortization of original issue discount
On long-term debt........................ 65,683 83,817
Amortization of loan fees................... 22,322 22,322
Securities issued for services.............. 94,465 2,460,212
Options granted for services................ 356,378 356,378
Amortization of deferred consulting expenses 93,300 186,599
(Increase) Decrease in:
Accounts receivable........................... (406,057) (414,790)
Prepaid expenses and other.................... 6,235 (14,703)
Increase (Decrease) in:
Accounts payable and accrued expenses......... 108,438 (343,890)
Deferred revenues............................. -- --
-----------------------
Net cash used for operating activities..... (1,171,217) (2,399,690)
-----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase or (sale) of property and equipment.... -- (3,606)
Payments for film costs......................... (36,088) (47,121)
-----------------------
Net cash used for investing activities..... (36,088) (50,727)
-----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of common stock options.. 100,000 435,690
Payments on redemption of common stock.......... (63,072) (63,072)
Payments of loans from related parties.......... -- (85,611)
Proceeds from exercise of warrants.............. -- 459,750
Proceeds on notes payable....................... 1,000,000 2,250,000
Payments on notes payable....................... -- (275,405)
Payments of OID on notes payable................ (88,873) (88,873)
Principal payments on capital leases............ (1,878) (2,734)
-----------------------
Net cash provided by financing activities.. 946,177 2,629,745
-----------------------
NET INCREASE (DECREASE) IN CASH................. (261,128) 179,328
CASH, beginning of period....................... 472,970 32,514
----------- -----------
CASH, end of period............................. 211,842 211,842
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.................................... $--- $---
State income taxes.......................... $--- $---
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Long-term debt converted to equity.......... $346,000 $1,071,000
Beneficial conversion feature of debentures. $107,429 $372,393
Common stock and warrants issued related
to services............................... $94,465 $2,101,947
Common stock warrants issued with debts..... $83,962 $367,438
Stock options granted to consultants........ $356,378 $356,378
Stock warrants issued to consultants........ $--- $358,265
Common stock warrants issued related to
loan fees................................. 351,828 351,828
</TABLE>
See accompanying notes.
<PAGE>
Notes to Interim Financial Statements for the three months ended June 30, 2000
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 elimiated 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. ABL 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.
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 required advanced
payments from students and thus, no student fees receivable is recorded.
Film Costs - Film costs consist of the capitalized costs related to the
production of original film masters for videos and television programs. The
net film costs are presented on the balance sheet at the net realizable value
for each master.
Fair Values of Financial Instruments - The carrying value of cash,
receivables, accounts payable and short-term borrowings approximates fair
value due to the short maturity of these instruments. The carrying value of
long-term obligations approximates fair value since the interest rates either
fluctuate with the lending banks' prime rates or approximate market rate.
None of the financial instruments are held for trading purposes.
Basic Loss Per Share - Net loss per share is based on the weighted average
outstanding shares issued. Because the Company has a net loss, the common
stock equivalents of 3,045,669 shares 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,
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 1999
amounts to conform to the current presentation.
Note 2 - Basis of Reporting
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and disclosures required by
generally accepted accounting principles for completed financial statements.
In the opinion of management, such statements include all adjustments
(consisting only of normal recurring items) which are considered necessary
for a fair presentation of the financial position of the Company at June 30,
2000 and the results of its operations and its cash flows for the three
months periods ended June 30, 2000 and 1999. The accompanying unaudited
financial statements should be read in conjunction with the financial
statements and notes for the year ended December 31, 1999 included in the
Company's Form 10-KSB as filed with the SEC on March 30, 2000.
Note 3 - Uses of Estimates, Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant estimates used
in these financial statements include the recovery of film costs which has a
direct relationship to the net realizable value of the related asset. It is
at least reasonably possible that management's estimate of revenue from films
could change in the near term which could have a material adverse effect on
the Company's financial condition and results of operations.
Note 4 - Film Costs
Film costs consist of the capitalized costs related to the production of
videos and programs for television as follows:
June 30, 2000 1999
------------- -------------
Television program
The Adventures with Kanga Roddy....... $8,117,427 $8,077,669
Videos
Montana Exercise Video................ 148,253 148,253
Strong Mind Fit Body.................. 18,042 18,042
------------- --------------
8,283,722 8,243,964
Less accumulated amortization..... 721,888 690,831
------------- --------------
$ 7,561,834 $ 7,553,133
============= ==============
Production of the first seven episodes of The Adventures with Kanga Roddy was
completed during 1997. The Company completed 9 and 13 additional episodes
during the years ended December 31, 1999 and 1998, respectively. Both
exercise videos were completed in 1996, but only the Strong Mind Fit Body
video has been released.
Note 5 -Beneficial Conversion Feature of Debentures
The Company accounts for the beneficial conversion feature of its 7%
convertible debentures issued during the quarter in accordance with EITF 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion." These debentures are convertible to
common stock based on a discount on the then current market price of the stock
at the time of conversion. The application on EITF 98-5 resulted in the
recognition of a non-cash charge to interest expense of $107,429 for the
quarter ended June 30, 2000 and a corresponding increase to additional paid
in capital. These amounts represent interest expense.
Note 6 - Acquisition of the Beijing Wisdom Network Technology Company, Ltd.
We have signed a Stock Exchange Agreement, dated March 27, 2000, with
the Beijing Wisdom Network Technology Company, Ltd. ("BA Network"), for the
acquisition of 80% of BA Network.
The Agreement provides for the following:
The payment by us to BA Network of $300,000 at the closing of the
acquisition;
We will make additional estimated payments to BA Network in the
amount of $1,184,097 in 2000, $1,457,349 in 2001 and $1,730,603 in 2002;
BA Network will issue stock to us constituting 80% of its
outstanding stock
Pursuant to the Agreement, at the closing of the transaction, we will
pay BA Network $300,000, in either ACEI common stock or in cash, at the
election of BA Network to be made at closing of the transaction. If BA
Network elects to receive stock, such shares shall have registration rights,
and the grant will be made based on the average of the daily closing sales
prices from the date of the letter of intent for the transaction to the date
of effectiveness of the Agreement. For the years 2000, 2001 and 2002, we have
agreed to pay BA Network $1,184,097, $1,457,349 and $1,730,603, respectively.
Such amounts assume BA Network meets projections previously provided to us
and will be adjusted accordingly if such projections are incorrect. The
amount for the year may be paid in either cash or shares of ACEI common
stock, at the election of BA Network at the time such payments are due. The
amounts for the years 2001 and 2002 are payable in shares of ACEI common
stock. In the event that BA Network elects to receive the initial amount of
$300,000 and the payment for the year 2000 (estimated at $1,184,097) in cash,
there is no assurance that we will be able to make sure cash payments or
secure financing for payment of such amounts at favorable or acceptable
terms. Grants of either stock or cash are subject to delivery schedules, and
in the case of stock grants, certain time restrictions shall also apply.
Audited and interim financial statements on BA Network, and also pro
forma information reflecting purchase accounting, are available within the
Definitive Proxy Statement filed with the SEC on August 24, 2000. A
shareholders meeting is scheduled for September 27, 2000 for the approval of
the acquisition of BA Network.
Note 7 - Investments and Note Receivable
The investment amount of $203,110 was actually accrued within the
quarter ended December 31, 1999 and was already stated in the audited
financials for the year end 1999. This amount was our investment into the
Greatwall International Sports Media Company as an advance partial payment to
Greatwall for the acquisition of their company. In July 2000, we have
decided to halt further acquisition discussions with Greatwall due to their
inability to produce GAAP audited financials. We remain hopeful that
Greatwall will repay us this amount in full before the end of this year.
Notes receivable of $354,814 includes $250,000 in a loan we have made
to the Carnegie International Corporation in the year 1999. Within the
quarter ending September 30, 2000, Carnegie repaid us $70,000 in Carnegie
common stock.
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, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years then ended.
These financial statements are the responsibility of ACEI'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, 1999 and 1998, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted
accounting principles.
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, 1999 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
January 27, 2000
AMERICAN CHAMPION ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Assets
Cash....................................... $32,514 $2,763
Account receivable......................... 481,449 37,675
Loans receivable, related parties.......... 114,937 114,937
Prepaid expenses........................... 7,460 56,267
Property and equipment..................... 312,949 395,330
Investments................................ 203,110 --
Film costs, net............................ 7,553,133 5,381,329
Note receivable............................ 354,814 80,424
Other Assets............................... 226,084 11,673
----------- -----------
Total assets............................... 9,286,450 6,080,398
=========== ===========
Liabilities
Accounts payable and accrued expenses...... $1,042,577 $1,122,307
Note payable, related parties.............. 84,100 137,037
Other...................................... 4,245 --
Deferred revenues.......................... 16,920 78,020
Notes payable.............................. 450,183 831,266
Obligations under capital leases........... -- 6,565
----------- -----------
Total liabilities.................. 1,598,025 2,175,195
----------- -----------
Stockholders' Equity
Preferred stock, $.001 per share,
6,000,000 shares authorized, none
issued or outstanding.................... -- --
Common stock, $0.0001 par value;
40,000,000 shares authorized............. 17,594,865 7,413,315
Accumulated deficit........................ (8,210,173) (2,908,157)
----------- -----------
Total stockholders' equity................. 7,688,425 3,905,203
----------- -----------
$9,286,450 $6,080,398
=========== ===========
</TABLE>
See accompanying notes.
AMERICAN CHAMPION ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
REVENUE:
Film income........................... $517,995 $343,877
Tuition and related fees.............. 73,180 324,730
Accessories........................... 10,515 37,956
Interest income....................... 63,942 30,138
------------ ------------
Total revenue......................... 665,632 736,701
------------ ------------
COSTS AND EXPENSES (GAINS):
Cost of sales......................... 8,174 26,152
Amortization of film costs............ 450,100 177,732
Salaries and payroll taxes............ 465,532 847,147
Rent.................................. 243,053 308,007
Selling, general and administrative... 3,712,595 924,740
Interest.............................. 208,069 76,447
Beneficial conversion feature of debenture 1,233,684 599,955
Debenture conversion expense.......... 741,210 --
Gain on sale of karate studio......... -- (307,429)
------------ ------------
Total costs and expenses.............. 7,062,417 2,652,751
------------ ------------
Loss before provision for income taxes.. ($6,396,785) ($1,916,050)
Provision for income taxes.............. 1,543 7,466
------------ ------------
Net Loss................................ (6,398,328) (1,923,516)
============ ============
============ ============
Weighted average number of shares
outstanding........................... 2,385,622 1,008,405
============ ============
============ ============
Basic loss per share.................... ($2.68) ($1.91)
============ ============
</TABLE>
See accompanying notes.
<PAGE>
AMERICAN CHAMPION ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
--------------------------------------- Total
Number Number Stockholders
of of Common Accumulated Equity
Shares Warrants Stock Deficit (Deficit)
--------------------------------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997............. $ 958,086 406,250 $5,678,919 ($1,584,596) $4,094,323
Common stock warrants issued in
connection with debentures......... -- 63,625 $124,501 -- $124,501
Conversion of debentures
to common stock.................... 355,476 -- 993,040 -- 993,040
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............. 1,313,562 469,875 $7,413,315 ($3,508,112) $3,905,203
Common stock warrants issued in
connection with debentures......... 37,500 163,246 349,680 -- 349,680
Conversion of debentures
to common stock.................... 2,557,614 3,731,110 -- 3,731,110
Exercise warrants to purchase
common stock ...................... 346,250 (346,250) 1,092,139 -- 1,092,139
Exercise options to purchase
common stock ...................... 221,500 -- 365,625 -- 365,625
Common Stock issued for services..... 393,860 -- 1,216,703 -- 1,216,703
Warrants issued for Services......... -- 593,542 1,329,593 -- 1,329,590
Options to purchase common
stock issued for services.......... -- -- 393,520 -- 393,520
Common Stock and Warrants issued
for Redemption of Debentures....... 66,982 43,750 469,496 -- 469,496
Beneficial conversion feature
of Debentures...................... -- -- 1,233,684 -- 1,233,684
Net loss -- -- -- (6,398,328) (6,398,328)
------------ ----------- ------------ ------------- ------------
Balance, December 31, 1999............. $4,937,268 $924,163 $17,594,865 ($9,906,440) $7,688,425
============ =========== ============ ============= ============
</TABLE>
See accompanying notes.
<PAGE>
AMERICAN CHAMPION ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ ($6,398,328) ($1,923,516)
Adjustments to reconcile net loss to
net cash used for operating activities:
Non-cash charge for beneficial conversion
feature of debentures..................... 1,233,684 599,955
Gain on sale of karate studio............... -- (307,429)
Depreciation and amortization............... 540,724 253,405
Rent concession amortization................ -- (4,216)
Redemption of debenture..................... 638,202 --
Amortization of original issue discount
on long term debt......................... 52,530 15,560
Conversion of debenture interest to --
common stock ............................. 88,828 9,452
Securities issued for services.............. 2,939,816 --
Bad debts................................... 15,075 --
Decrease (Increase) in:
Accounts receivable........................... (443,774) 183,142
Prepaid expenses and other.................... (165,604) 30,986
Increase (Decrease) in:
Accounts payable and accrued expenses......... (75,482) 918,746
Deferred revenues............................. (61,100) (190,041)
------------- -------------
Net cash used for operating activities..... (1,635,429) (413,956)
------------- -------------
Advances to stockholders........................ -- (164)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.............. (8,243) (237,402)
Payments for film costs......................... (2,621,904) (3,113,644)
Deposit related to acquistion................... (203,110) --
Advances to stockholders........................ -- (164)
Increase in notes receivable.................... (300,000) --
Payments received on notes receivable........... 10,534 6,150
------------- -------------
Net cash used for investing activities..... (3,122,723) (3,345,060)
------------- -------------
Payments on loans from related parties.......... -- (37,218)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of common stock options.. 365,625 --
Proceeds from exercise of warrants.............. 1,092,139 16,900
Proceeds on loans from related parties ......... 120,400 137,000
Payments on loans from related parties.......... (173,337) (37,218)
Proceeds on notes payable....................... 5,114,089 2,010,963
Payments on notes payable....................... (1,724,448) (151,366)
Principal payments on capital leases............ (6,565) (10,157)
------------- -------------
Net cash provided by financing activities.. 4,787,903 1,966,122
------------- -------------
============= =============
NET (DECREASE) INCREASE IN CASH................. 29,751 (1,792,894)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH, beginning of year......................... 2,763 1,795,657
------------- -------------
CASH, end of year............................... $32,514 $2,763
============= =============
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................... $66,711 $60,887
============= =============
State income taxes.......................... $1,543 $7,466
============= =============
Long-term debt converted to equity............ -- $993,040
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
related to film costs...................... -- --
Long-term debt converted to equity............ $3,731,110 $993,040
Beneficial conversion feature of debentures... 1,233,684 599,955
Common stock warrants issued with debt........ 349,680 124,501
Common stock and warrants issued
related to services........................ 2,939,816 --
Common stock and warrants issued
related to redemption of debentures........ 469,496 --
============= =============
</TABLE>
<PAGE>
Note 1 -
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"). During 1999
the Company organized American Champion Marketing ("AC Marketing"), which is
a wholly owned subsidiary of ACM. There was no activity in AC Marketing
during 1999. 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 production of educational television
programs for children, which emphasize martial arts values and fun. The
Company also produces fitness information video tapes, books and audio tapes.
ABK focuses solely on operating and managing the Company's karate studios,
which are located in the San Francisco Bay Area. During 1999 the Company
closed its last karate studio.
Revenue Recognition - AC Media - Revenue from films is recognized on delivery
of each master. 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 - The Company has collected advance fees from student enrolled in its
karate studios. The Company may be required to refund these fees to
students. Fee payments subject to refund are included 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.
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.
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.
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 of 1,465,358
shares 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 not 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 1998
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
1999 1998
----------- -----------
Furniture and fixtures...................... $60,448 $53,705
Equipment................................... 70,429 70,429
Production equipment........................ 404,387 402,887
----------- -----------
535,264 527,021
Less accumulated depreciation and
amortization............................. 222,315 131,691
----------- -----------
$312,949 $395,330
=========== ===========
Depreciation expense was $90,624 and $75,673 for the years ended December 31,
1999 and 1998, respectively.
Note 4 - Film Costs
Film costs consist of the capitalized costs related to the production of
videos and program for television as follows:
1999 1998
----------- -----------
Television program
The Adventures of Kanga Roddy............... $8,077,669 $5,455,764
Videos
Montana Exercise Video...................... 148,253 148,253
Strong Mind Fit Body........................ 18,042 18,042
----------- -----------
8,243,964 5,622,059
Less accumulated amortization............... 690,831 240,730
----------- -----------
7,553,133 5,381,329
=========== ===========
Production of the first seven episodes of The Adventures of Kanga Roddy was
completed during 1997. The Company completed 9 and 13 additional episodes
during the years ended December 31, 1999 and 1998, respectively. Both exercise
videos were completed in 1996, but only the Strong Mind Fit video has been
released.
Note 5 - Notes Payable, Related Parties
The notes payable to related parties bear interest at -0- to 12% and are
unsecured. Substantially all amounts due have been repaid subsequent to
year-end.
Note 6 - Notes Payable
1999 1998
Debentures, interest at 7% due
quarterly, unsecured and due
September 30, 2002, net of original
issue discount of $23,741.
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. $226,259 $ --
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. 170,000 230,000
Drawings from a $40,000 bank business
credit card line with interest at
the banks prime rate plus 6.5%. 36,253 40,000
Other 17,671 24,370
---------- ----------
$ 450,183 $ 831,266
========== ==========
The debentures are due in 2000. However, these debentures, together with
accrued interest, were converted to 561,244 shares of common stock (140,311
shares split adjusted) subsequent to year-end. The remaining notes payable are
substantially all due in 2000.
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:
1999 1998
------------ -----------
Federal tax benefit at statutory rates...... ($2,150,000) ($450,000)
State tax benefit at statutory rates........ (550,000) (117,000)
Other....................................... 1,301,543 7,466
Increase in valuation allowance............. 1,400,000 567,000
------------ -----------
$1,543 $7,466
============ ===========
The Company has net operating loss (NOL) carryforwards for federal and state
income tax purposes of approximately $6,300,000, the benefit of which expire in
2011 through 2014 for federal purposes and through 2004 for state purposes. The
NOLs created by the Company's subsidiaries prior to their 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 NOLs 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:
1999 1998
------------ -----------
DEFERRED TAX ASSETS
NOL carryford............................... $2,600,000 $1,175,000
Deferred revenue............................ 5,000 25,000
Valuation allowance......................... (2,575,000) (1,175,000)
------------ -----------
30,000 25,000
============ ===========
DEFERRED TAX LIABILITIES
Depreciation................................ 30,000 25,000
------------ -----------
30,000 25,000
------------ -----------
NET DEFFERED TAXES $ -- $ --
============ ===========
Generally accepted accounting principles require 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, 1999 and 1998.
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
operating leases due in 2000 are approximately $80,000.
Note 9 - Commitments and Contingencies
In September 1996, the Company entered into an agreement with the director of
The Adventures With Kanga Roddy television program, whereby the director would
receive 2% in the distribution of net profits from the TV broadcasting,
syndication, and video sales of the first 13 episodes of that program.
The Company has entered into a distribution agreement with KTEH, the public
broadcasting system ("PBS") station serving the San Jose, California area, for
the exclusive right to distribute the "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. This amount was recognized in revenue
in prior years. 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. The Company recognized revenue
of $433,000 during 1999 under this agreement.
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
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, 1999, will be paid 30 days prior to the release date. These two
participants are stockholders of the Company.
During 1999 and 1998, the Company paid $2,500 and $67,500, 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
There are no new authoritative pronouncements that are expected to have a
material effect on the Company's financial statements.
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:
1999 1998
----------- -----------
Net sales (1):
Tuition and related fees.................... $83,695 $362,686
Video and television........................ 517,995 343,877
Corporate (interest income)................. 63,942 30,138
----------- -----------
Net sales................................... $665,632 $736,701
=========== ===========
Depreciation and amortization:
Tuition and related fees.................... $1,552 $8,616
Video and television........................ 539,172 244,789
----------- -----------
Depreciation and amortization............... $540,724 $253,405
=========== ===========
Capital expenditures:
Tuition and related fees.................... -- $2,778
Video and television........................ 8,243 3,348,268
----------- -----------
Capital expenditures ....................... $8,243 $3,351,046
=========== ===========
Income (loss) from operations:
Tuition and related fees.................... ($181,705) ($598,226)
Video and television........................ (1,367,878) (77,378)
Corporate................................... (4,848,745) (1,247,912)
----------- -----------
Net loss.................................... ($6,398,328) ($1,923,516)
=========== ===========
Identifiable assets (2):
Tuition and related fees.................... $202,404 $218,048
Video and television........................ 8,329,256 5,800,159
----------- -----------
Totals...................................... 8,531,660 6,018,207
Add: Corporate............................... 754,790 62,191
----------- -----------
Assets...................................... $9,286,450 $6,080,398
=========== ===========
[1] There were no sales between industry segments.
[2] Corporate and other assets are principally notes receiveable, deposits and
consulting fees.
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 21,785, 21,875, 6,250 and
5,000 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 ($24 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-year for Mr. Hutchins) exercise period of such Warrants. Additional
options to purchase 5,000, 5,000, 3,750 and 2,500 shares of the Company's
Common Stock will be granted at the end of each twelve-month period beginning
July 1, 1998 at $26.25 per share. The executives are also entitled to certain
fringe benefits. If any of these individuals is terminated other than for cause,
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. During 1999, the shares available under the plan were
increased from 200,000 to 1,950,000. 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.
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 1,250 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 500
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 325,000 shares of
its common stock at $20.00 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.
These warrants are exercisable at four warrants to one share of common stock
at the price of $26. During 1999, the Company issued 393,860 shares of common
stock in consideration for services provided to the Company and 37,500 shares
of common stock in connection with debentures. During 1999, the Company also
issued 66,982 shares of common stock to redeem debentures.
During 1998, the Company issued 32,500 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 163,246 and 31,125 warrants in connection with the
debentures issued during 1999 and 1998, respectively. The Company received no
proceeds related to these warrants. The value of these warrants has been
accounted for as original issue discount (OID). The OID is being amortized
against the related debt. The Company has also issued 593,542 warrants
during 1999 as consideration for services provided to the Company. These
warrants were valued at $1,329,593 using the Black-Scholes option pricing
model. At December 31, 1999, included in other assets is $215,000 related to
unamortized costs of consulting agreements that expire in 2000. During 1999,
the Company also issued 43,750 warrants to redeem debentures.
Note 16 - Stock Options
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 and non-employee directors. 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.
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." The Company accounted for
277,458 and -0- options under this method with a value of $393,050 and -0-
during 1999 and 1998, respectively.
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 1999 and 1998, respectively:
risk free interest rate of 5.00% and 4.65%; dividend yield of 0%; expected
option life of 7 years; and volatility of 140% and 78%.
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, 1999
and 1998, respectively, was $(8,000,000) and $(2,480,000) and pro forma net
loss per per share was $(3.35) and $(2.46).
Shares of Common Stock
-----------------------------------
Available
for
Exercise of Options
Options/ Under
Award Plan Warrants
----------- ----------- -----------
Balance, December 31, 1997...... 1,750 98,250 406,250
Authorized.................... 100,000 -- --
Granted....................... (101,750) 101,750 63,625
----------- ----------- -----------
Balance, December 31, 1998...... -- 200,000 469,875
Authorized.................... 1,750,000 -- --
Granted....................... (1,224,583) 1,224,583 800,538
Exercised..................... -- (241,917) (346,250)
----------- ----------- -----------
Balance, December 31, 1999...... 525,417 1,182,667 924,163
=========== =========== ===========
=========== =========== ===========
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>
1998
Options.... 200,000 8.2 16.28 97,250 22.36
Warrants... 469,875 3.6 26.28 469,875 26.28
1999
Options.... 1,182,667 8.5 5.80 734,604 7.04
Warrants... 924,163 2.6 16.60 899,163 16.96
</TABLE>
Note 17 - Year 2000
Because of the unprecedented nature of the Year 2000 Issue, its effects, if
any, may not be identified until a future date. Management cannot assure that
the Company has identified all Year 2000 Issues, that the Company's remediation
efforts has been successful in whole or in part, or that parties with whom the
Company does business will not be significantly impacted by Year 2000 Issues.
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 Reverse Split - Subsequent to year-end, the Company, with the
consent of the stockholders, effected a 4 for 1 reverse split of its common
stock. All holders of the Company stock received one share of stock for every
four shares held on the effective date of the reverse split. All outstanding
shares of stock and options and warrants to purchase common stock have been
restated to reflect this reverse split.
Financing - Subsequent to year-end the Company issued convertible debentures
totaling $1,250,000. 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 December 31, 2002 and may be converted to shares of Common Stock. The
Company also issued 125,000 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 $3.08592 per share and expire
January 31, 2003. Holders of these debentures converted principal of $475,000
and interest of $5,891 to 194,791 shares of the Company's common stock
subsequent to year-end.
Acquisition - Subsequent to year-end the Company entered into an agreement to
acquire 80% of Great Wall Marketing Corporation. This Company is located in
The Peoples Republic of China. This acquisition will require the approval of
the stockholders of the Company. The Company will issue common stock in
exchange for an 80% interest in the Company. Prior to year0end the Company
issued 125,000 shares with a market value of $200,000 to Great Wall as a
deposit. This amount has been included under investment in the accompanying
balance sheet. If the Company is unable to compplete the acquisition, this
amount will be charged to expense.
Stock Incentive Plan - Subsequent to year-end the Company adopted the 2000
Stock Incentive Plan. The plan provides for the issuance of 1,500,000 shares
of common stock to be issued to key employees, non-employee directors and
consultants. Subsequent to the year-end the Company granted 633,000 shares of
common sotkc to certain employees and Board of Directors member. The stock
grant will be accounted for as compensation to the employees and will be
charged against fiscal 2000 operations.
Note 20 -Going Concern
The Company plans to produce additional episodes of the television series "The
Adventures of Kanga Roddy" as well as pursue other production, licensing and
other business opportunities. Managements plans and the ongoing operations of
the Company are 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 will be required to obtain
additional capital to fund obligations incurred during the production of these
episodes and other working capital requirements during the remainder of 2000.
Subsequent to the end of the year 1999, in January 2000, the Company sold
$1,250,000 of convertible debentures to finance its cash needs. The Company
intends to secure an equity line of credit of up to $5,000,000 within the
second quarter of the year 2000.
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 operations. The
continuation of the Company as a going concern is dependent upon the success
of obtaining additional capital 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 - Fourth Quarter Adjustment
During the fourth quarter certain adjustment were made to account for
non-cash transactions related to common stock warrants and common stock
options issued for services provided to the Company. The effect of these
adjustment on each of the quarters during 1999 are as follows:
(Quarterly Information Unaudited)
Q1 Q2 Q3
==========================================
General and administrative expense
As reported $ 315,831 $ 333,135 $ 393,850
Restated $ 315,831 $1,385,781 $ 806,615
Net loss
As reported $ (578,394) $(1,767,178) $(1,061,930)
Restated $ (578,394) $(2,819,824) $(1,474,695)
6,271,429 SHARES
COMMON STOCK
AMERICAN CHAMPION ENTERTAINMENT, INC.
-----------------
PROSPECTUS
-----------------
THE DATE OF THIS PROSPECTUS IS
OCTOBER , 2000
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
ACEI's Certificate of Incorporation limits, to the maximum extent
permitted by Delaware law, the personal liability of directors for monetary
damages for breach of their fiduciary duties as a director. ACEI's Bylaws
provided that ACEI shall indemnify its officers and directors and may indemnify
its employees and other agents to the fullest extent permitted by Delaware law.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify a director, officer, employee or agent made a party
to an action by reason of that fact that he or she was a director, officer
employee or agent of the corporation or was serving at the request of the
corporation against expenses actually and reasonably incurred by him or her in
connection with such action if he or she acted in good faith and in a manner he
or she reasonably believed to be in, or not opposed to, the best interests of
the corporation and with respect to any criminal action, had no reasonable
cause to believe his or her conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, or persons controlling ACEI
pursuant to the foregoing provisions, ACEI has been advised that in the opinion
of the Commission, such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection
with the issuance and distribution of the securities offered hereby.
SEC registration fee....................... $ 2,897.40
Printing and engraving..................... 1,000.00
Accountant's fees and expenses............. 3,000.00
Legal fees................................. 30,000.00
Blue sky fees and expenses................. 5,000.00
Miscellaneous.............................. 0.00
Total $41,897.40
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Each of the following transactions were exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant to Section
4(2) thereunder, as each was a private sale by the Issuer, not involving any
public offering.
In July 1998, the Issuer sold $1,800,000 of 7% convertible debentures,
due July 1, 2000 to four investors. The debentures were converted into shares
of common stock at rates between $3.076 to $18.076 per share. In connection
therewith, the Issuer also granted the purchasers warrants to purchase 12,375
shares of common stock at a price of $30.245 per share for a period of three
years. The placement agent for the offering received a 7% commission and also
warrants to purchase 18,750 shares of common stock on the same terms.
In January 1999, the Issuer sold $950,000 of 7% convertible
debentures, due January 1, 2002 to four investors. The debentures were
converted into shares of common stock at rates between $3.028 to $3.692 per
share. In connection therewith, the Issuer also granted the purchasers
warrants to purchase 6,531 shares of common stock at a price of $9.7624 per
share for a period of three years. The placement agent for the offering
received a 7% commission and also warrants to purchase 8,750 shares of common
stock on the same terms.
In June 1999, the Issuer sold $1,750,000 of 7% convertible debentures,
due June 17, 2002 to twelve investors. The debentures were converted into
shares of common stock at rates between $1.084 to $2.964 per share. In
connection therewith, the Issuer also granted the purchasers warrants to
purchase 43,750 shares of common stock at a price of $7.5625 per share for
a period of three years. The placement agent for the offering received a 7%
commission.
In September 1999, the Issuer sold $1,000,000 of 7% convertible
debentures, due September 30, 2002 to four investors. The debentures were
converted into shares of common stock at rates between $1.052 to $7.368 per
share. In connection therewith, the Issuer also granted the purchasers
warrants to purchase 25,000 shares of common stock at a price of $3.1875
per share for a period of three years. The placement agent for the offering
received a 7% commission.
In January 2000, the Issuer sold $1,250,000 of 7% convertible
debentures, due December 31, 2002 to four investors. The debentures are
convertible into shares of common stock at 82.5% of the market price of the
Issuer's common stock. In connection therewith, the Issuer also granted the
purchasers warrants to purchase 125,000 shares of common stock at a price of
$3.085938 per share for a period of three years. The placement agent for the
offering received a 7.5% commission.
In April 2000, the Issuer sold $1,000,000 of 8% convertible debentures,
due December 20, 2000 to four investors. The debentures are convertible into
shares of common stock at the rate of $1.75 per share. In connection therewith,
the Issuer also granted the purchasers warrants to purchase 100,000 shares of
common stock at a price of $2.0125 per share for a period of three years. The
placement agent for the offering received a 7% commission and also warrants to
purchase 50,000 shares of common stock on the same terms.
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Exhibit
1.1(1) Form of Underwriting Agreement
3.1(1) Amended and Restated Certificate of Incorporation dated April 24, 1997
3.11(5) Amended and Restated Certificate of Incorporation dated June 4, 1998
3.2(1) Bylaws
4.1(1) Specimen stock certificate
4.2(1) Warrant Agreement with form of Warrant
4.3(1) Form of Underwriters' Warrant
4.41(4) Securities Purchase Agreement dated July 2, 1998
4.42(4) Form of Debenture dated July 2, 1998
4.43(4) Joint Escrow Instructions
4.44(4) Registration Rights Agreement dated July 2, 1998
4.45(4) Form of Warrant dated July 2, 1998
4.461(7) Securities Purchase Agreement dated January 19, 1999
4.462(7) Form of Debenture dated January 19, 1999
4.463(7) Joint Escrow Instructions dated January 19, 1999
4.464(7) Registration Rights Agreement dated January 19, 1999
4.465(7) Form of Warrant dated January 19, 1999
4.471(9) Securities Purchase Agreement dated June 17, 1999
4.472(9) Form of Debenture dated June 17, 1999
4.473(9) Joint Escrow Instructions dated June 17, 1999
4.474(9) Registration Rights Agreement dated June 17, 1999
4.475(9) Form of Warrants dated June 17, 1999
4.481(10) Securities Purchase Agreement dated September 24, 1999
4.482(10) Form of Debenture dated September 24, 1999
4.483(10) Joint Escrow Instructions dated September 24, 1999
4.484(10) Registration Rights Agreement dated September 24, 1999
4.485(10) Form of Warrants dated September 24, 1999
4.491 Private Equity Line of Credit Agreement between Sibson Holdings, Ltd.
and American Champion Entertainment, Inc.
4.492 Loan Agreement between American Champion Entertainment, Inc. and the
Lenders Signatory Hereto
5.1 Opinion of Sheppard, Mullin, Richter & Hampton LLP
10.1(1) 1997 Stock Plan
10.2(1) Form of Stock Option Agreement for 1997 Stock Plan
10.3(1) 1997 Non-Employee Directors Stock Option Plan
10.4(1) Form of Non-Employee Directors Stock Option Agreement
10.8(1) 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(1) Employment Agreement between the Company and George Chung dated
March 4, 1997, effective upon the closing date of the Offering
10.10(1) Employment Agreement between the Company and Anthony Chan dated
March 4, 1997, effective upon the closing date of the Offering
10.11(1) Employment Agreement between the Company and Don Berryessa dated
March 4, 1997, effective upon the closing date of the Offering
10.12(1) Employment Agreement between the Company, AC Media and Jan
Hutchins dated March 4, 1997, effective upon the closing date of
the Offering
10.13(1) Convertible Loan Agreement dated as of May 5, 1995, between ABK
and David Y. Lei
10.15(1) Amended Deal Memo between ABK and Rick Fichter dated February
23, 1997, with respect to payments related to the Kanga Roddy
Series
10.17(1) Form of Indemnification Agreement
10.19(1) Letter dated October 29, 1996 from the Company to Tim Pettitt
regarding certain payments to the Montanas
10.20(1) Distribution Agreement dated June 18, 1996 by and between
America's Best Karate and InteliQuest
10.21(1) Distribution Agreement, dated May 6, 1997, by and between KTEH,
San Jose Public Television and American Champion Media, Inc.
10.22(1) Letter Agreement, dated June 1997, between AC Media, Inc. and
Sega of America, Inc.
10.23(1) Business Loan Agreement between America's Best Karate and Karen
Shen
10.24(1) Business Loan Agreement between America's Best Karate and Thomas
J. Woo
10.25(2) Licensing Agent Agreement, dated July 25, 1997, between American
Champion Media, Inc. and Sega of America, Inc.
10.26(3) Continuous Distribution Agreement dated April 20, 1998 between
KTEH, San Jose and American Champion Media, Inc.
10.27(3) Sponsorship Agreement dated April 29, 1998 between Sara Lee
Corporation and American Champion Media, Inc.
10.28(3) Engagement Agreement dated April 24, 1998 between JW Charles
and American Champion Entertainment, Inc.
10.29(5) Amendment to Employment Agreement with George Chung, dated July 1,
1998
10.30(5) Amendment to Employment Agreement with Anthony Chan, dated July 1,
1998
10.31(5) Amendment to Employment Agreement with Don Berryessa, dated July 1,
1998
10.32(5) Amendment to Employment Agreement with Jan Hutchins, dated July 1,
1998
10.33(5) Amendment to Employment Agreement with Mae Lyn Woo, dated July 1,
1998
10.34(5) Amendment to Employment Agreement with Kristen Simpson, dated July 1,
1998
10.35(6) International Distribution Agreement with Portfolio Entertainment
dated August 19, 1998
10.36(6) Video Distribution Agreement for the Kanga Roddy Series with Kreative
Video Products dated August 19, 1998
10.37(6) Video Distribution Agreement for the Montana Exercise Video with
Kreative Video Products dated August 21, 1998
10.38(8) Consultant Agreement between Olympia Partners, LLC, Dalton Kent
Securities Group, Inc. and American Champion Entertainment, Inc.
10.39(8) Merchant Licensing Agreement between Timeless Toys and American
Champion Media, Inc.
10.40(8) Loan Agreement between Olympia Partners and American Champion
Entertainment, Inc.
10.41(8) SEGA Agreement termination letter.
10.42(8) Consultant Agreement between American Champion Entertainment, Inc.
and Trademark Management
10.43(11) Termination of Kreative Video Products, Inc.
10.44(11) Video Products distribution agreement between Fast Forward
Marketing, Inc. and American Champion Entertainment. Inc.
10.45(11) Consultant Agreement between Chris Scoggin, LTD. And American
Champion Entertainment, Inc.
10.46(12) Consulting Services Agreement between Consor, Inc., and American
Champion Marketing Group, Inc.
10.47(12) Licensing Agreement between Brighter Child Interactive, LLC and
American Champion Media, Inc.
10.48(13) Licensing Agreement between Prestige Toys and American Champion
Marketing Group, Inc.
10.49(13) Stock Exchange Agreement between Great Wall International Sports
Media Company and American Champion Entertainment, Inc.
10.50(14) Licensing Agent Agreement between Funschool.com Corporation and
American Champion Marketing Group, Inc. (portions deleted pursuant
to request for confidential treatment)
10.51(14) Licensing Agent Agreement between Mainframe Entertainment, Inc. and
American Champion Marketing Group, Inc. (portions deleted pursuant
to request for confidential treatment)
10.52(14) Stock Exchange Agreement between Beijing Wisdom Network Technology
Company, Ltd. and American Champion Entertainment, Inc.
10.53(15) Sponsorship Agreement between Shun Li De Commerce and Trading Ltd.
and American Champion Media, Inc. for sponsorship of boxing event
10.54(15) Deal Memorandum between Irwin Toys Limited and American Champion
Marketing Group, Inc. for the licensing of characters from the TV
program "Reboot" produced by Mainframe Entertainment, Inc. (portion
deleted pursuant to request for confidential treatment)
21.1(1) Subsidiaries of the Registrant
23.1 Consent of Certified Public Accountants
(1) Filed as an exhibit with the registrant's Form SB-2 filed with the
SEC on March 21, 1997 or Form SB-2/A filed March 3 and June 20, 1997
And incorporated by reference herein.
(2) Filed as an exhibit with the registrant's Form 10-KSB filed with the
SEC on March 30, 1998 and incorporated by reference herein.
(3) Filed as an exhibit with the registrant's Form 10-QSB filed with the
SEC on May 15, 1998 and incorporated by reference herein.
(4) Filed as an exhibit with the registrant's Form S-3 filed with the SEC
On August 3, 1998 and incorporated by reference herein.
(5) Filed as an exhibit with the registrant's Form 10-QSB filed with the
SEC on August 7, 1998 and incorporated by reference herein.
(6) Filed as an exhibit with the registrant's Form 10-QSB filed with the
SEC on November 16, 1998 and incorporated by reference herein.
(7) Filed as an exhibit with the registrant's Form S-3 filed with the SEC
On Feburary 12, 1999 and incorporated by reference herein.
(8) Filed as an exhibit with the registrant's Form 10-KSB filed with the
SEC on March 31, 1999 and incorporated by reference herein.
(9) Filed as an exhibit with the registrant's Form S-3 filed with
the SEC on July 16, 1999 and incorporated by reference herein.
(10) Filed as an exhibit with the registrant's Form S-3 filed with
the SEC on November 5, 1999 and incorporated by reference herein.
(11) Filed as an exhibit with the registrant's Form 10-QSB filed with the
SEC on August 16, 1999 and incorporated by reference herein.
(12) Filed as an exhibit with the registrant's Form 10-QSB filed with the
SEC on November 17, 1999 and incorporated by reference herein.
(13) Filed as an exhibit with the registrant's Form 10-KSB filed with the
SEC on March 30, 2000 and incorporated by reference herein
(14) Filed as an exhibit with the registrant's Form 10-QSB filed with the
SEC on May 15, 2000 and incorporated by reference herein
(15) Filed as an exhibit with the registrant's Form 10-QSB filed with the
SEC on August 14, 2000 and incorporated by reference herein.
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file a post-effective amendment to this Registration Statement during
any period in which offers or sales are being made:
(i) to include any Prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-
effective amendment thereof) which, individually, or in the aggregate,
represent a fundamental change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) ((S)230.424(b) of this
Chapter) if, in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective Registration
Statement; and
(iii) to include any material informaton with respect to the plan of
distribution not previously disclosed in the Registration Statement of any
material change to such information in the Registration Statement.
(2) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of this
offering.
(3) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and this
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(4) That, insofar as indemnification for liabilities arising from the
Securities Act may be permitted to directors, officers, and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Act, American Champion
Entertainment, Inc. certifies that it has reasonable grounds to believe that it
meets all of the requirement for filing on Form SB-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the State of California, on October 20, 2000.
AMERICAN CHAMPION ENTERTAINMENT, INC.
By:/s/ ANTHONY K. CHAN
Anthony K. Chan
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933,
this Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
NAME TITLE DATE
/s/ ANTHONY K. CHAN President, Chief Executive October 20, 2000
Anthony K. Chan Officer(principal executive
officer), and Director
/s/ ANTHONY K. CHAN Chairman of the Board and October 20, 2000
Anthony K. Chan (Attorney-in- Director
fact)
for George Chung
/s/ ANTHONY K. CHAN Director October 20, 2000
Anthony K. Chan (Attorney-in-
fact)
for William T. Duffy
/s/ ANTHONY K. CHAN Director October 20, 2000
Anthony K. Chan (Attorney-in-
fact)
for Alan Elkes
/s/ ANTHONY K. CHAN Director October 20, 2000
Anthony K. Chan (Attorney-in-
fact)
for E. David Gable
/s/ ANTHONY K. CHAN Director October 20, 2000
Anthony K. Chan (Attorney-in-
fact)
For Jan D. Hutchins
/s/ ANTHONY K. CHAN Chief Financial Officer October 20, 2000
Anthony K. Chan (Attorney-in- (Principal Accounting Officer)
fact)
for Mae Lyn Woo
Chief Financial Officer
(Principal Accounting
Officer)
