UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended March 31, 1998
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the transition period from
__________ to ___________
Commission File Number 333-18967
AMERICAN CHAMPION ENTERTAINMENT, INC.
-------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 94-3261987
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(State or Other Jurisdiction or (IRS Employer
Incorporation or Organization) Identification Number)
26203 Production Avenue, Suite 5
Hayward, California 94545
-------------------------
(Address of Principal Executive Offices)
(510) 782-8168
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(Registrant's Telephone Number, Including Area Code)
(No Change)
-------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ..X.. No .....
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes ..... No ..... Not Applicable ..X..
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
Class Outstanding at March 31, 1998
- --------------------- --------------------------------
Common Stock, $.0001 3,832,345 shares
par value
Transitional Small Business Disclosure Format (check one)
Yes ..... No ..X..
Exhibit Index on Page 27
AMERICAN CHAMPION ENTERTAINMENT, INC.
Form 10-QSB
March 31, 1998
TABLE OF CONTENTS
PART I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet
as of March 31, 1998
Consolidated Statements of Operations for
the three months ended March 31, 1998 and 1997
Consolidated Statements of Cash Flows for the
three month periods ended March 31, 1998 and 1997
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and analysis of
Financial Condition and Results of Operations
PART II - Other Information
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
Exhibit
PART I -FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
AMERICAN CHAMPION ENTERTAINMENT, INC.
Condensed Consolidated Balance Sheets
March 31, December 31,
1998 1997
------------ ------------
Assets (unaudited)
Current assets:
Cash....................................... $554,169 $1,795,657
Account receivable......................... 220,817 220,817
Loans receivable, related parties.......... 114,723 114,773
Current portion of note receivable 6,401 0
Current portion of film costs.............. 1,200,000 655,500
Prepaid expenses and other................. 80,119 96,556
------------ ------------
Total current assets....................... 2,176,229 2,883,303
Property and equipment, net.................. 253,176 255,423
Other Assets
Film costs, net.............................. 2,359,574 1,789,917
Note receivable 46,458 0
Other assets................................. 31,552 35,152
------------ ------------
$4,866,989 $4,963,795
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses...... $381,047 $199,344
Deferred revenues, current portion......... 244,912 282,056
Loans payable, related parties............. 35,503 37,255
Long-term debt, current portion............ 5,183 5,856
Obligations under capital leases,
current portion.......................... 10,464 10,157
Other...................................... 4,216 4,216
------------ ------------
Total current liabilities.................. 681,325 538,884
------------ ------------
Long-term liabilities:
Deferred revenues.......................... 163,215 261,464
Long-term Debt............................. 57,078 58,343
Obligations under capital leases........... 3,830 6,565
Other...................................... 2,108 4,216
------------ ------------
Total long-term liabilities................ 226,231 330,588
------------ ------------
Stockholders' Equity:
Common stock, $.0001 par value, 3,832,345 o.t. 5,529,419 5,529,419
Common stock warrants...................... 149,500 149,500
Accumulated deficit........................ (1,719,486) (1,584,596)
------------ ------------
Total stockholders' equity ................ 3,959,433 4,094,323
------------ ------------
$4,866,989 $4,963,795
============ ============
See accompanying notes.
AMERICAN CHAMPION ENTERTAINMENT, INC.
Condensed Consolidated Statements of Operations
(unaudited)
Three Months Ended
March 31,
---------------------
1998 1997
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REVENUE:
Tuition and related fees......... $126,905 $255,950
Accessories and video sales...... 13,401 22,238
Film income...................... 215,000 --
Interest income.................. 26,692 --
---------- ----------
Total revenue.................... 381,998 278,188
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COSTS AND EXPENSES:
Cost of sales.................... 8,711 14,572
Amortization of film costs....... 73,332 --
Salaries and payroll taxes....... 215,634 193,028
Rent............................. 84,616 124,299
Selling, general and
administrative................. 236,117 55,878
Interest......................... 8,901 50,385
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Total costs and expenses......... 627,311 438,162
---------- ----------
Net Loss From Operations............($245,313) ($159,974)
Gain On Sale Of Studio 115,473 0
Net Loss Before Income Tax (129,840) (159,974)
Income Tax 5,050 0
Net Loss (134,890) (159,974)
Accumulated Deficit (1,719,486) (1,584,596)
Weighted average number of shares
outstanding...................... 3,832,345 2,515,700
========== ==========
Net loss per share................. ($0.04) ($0.06)
========== ==========
See accompanying notes.
AMERICAN CHAMPION ENTERTAINMENT, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended
March 31,
-----------------------
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ ($134,890) ($159,974)
Adjustments to reconcile net loss to
net cash used for operating activities:
Gain on sale of studio...................... ($115,473) $0
Depreciation and amortization............... 88,805 12,782
Interest amortization, debt issue costs..... 0 20,998
Rent concession amortization................ (2,108) (1,054)
Decrease in:
Prepaid expenses and other.................... 20,087 4,053
Increase in:
Accounts payable and accrued expenses......... 181,703 (12,761)
Deferred revenues............................. (72,779) (65,358)
----------- -----------
Net cash used for operating activities..... (34,655) (201,314)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.............. (13,226) --
Payments for film costs......................... (1,187,489) (33,189)
Advances to stockholders........................ 0 (21,278)
Deposits........................................ 0 4,694
----------- -----------
Net cash used for investing activities..... (1,200,715) (49,773)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stocks......... 0 248,020
Deferred Offering costs......................... 0 (91,418)
Proceeds of short-term debts.................... 0 (4,430)
Payments of loans from related parties (1,752) 103,142
Payments on long-term debt...................... (1,938) (11,921)
Principal payments on capital leases............ (2,428) (5,494)
----------- -----------
Net cash provided by financing activities.. (6,118) 237,899
----------- -----------
NET INCREASE IN CASH............................ (1,241,488) (13,188)
CASH, beginning of period....................... 1,795,657 28,763
----------- -----------
CASH, end of period............................. $554,169 $15,575
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................... $8,901 $25,552
State income taxes.......................... $5,050 $800
NON-CASH TRANSACTIONS
During the three months ended March 31, 1998, the Company sold a karate
studio in which the Company received a note receivable with a net
present value of $52,859 and wrote off deferred revenue of $62,614.
See accompanying notes.
PART I - FINANCIAL INFORMATION
Notes to Consolidated Financial Statements
Note 1 - Nature of Operations and Summary of Significant Accounting
Policies
Nature of Operations and Consolidation - The consolidated financial
statements include the accounts of American Champion Entertainment, Inc.
(the "Company") and its wholly owned subsidiary, America's Best Karate
("ABK") which owns 100% of American Champion Media, Inc. ("AC Media"). The
Company and AC Media were formed during 1997. Pursuant to an Agreement and
Plan of Merger, dated as of July 14, 1997, the Company entered into a
reorganization transaction pursuant to which the Company acquired all of
the issued and outstanding shares of ABK (the "Reorganization"). The
financial statements included herein give effect to the Reorganization in
which the Company became the successor to ABK. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
AC Media focuses on operating and managing all media-related programs for
the Company. These programs consist of fitness information video tapes,
books and audio tapes and production of educational television programs
for children which emphasize martial arts values and fun. ABK focuses
solely on operating and managing the Company's karate studios which are
located in the San Francisco Bay Area.
Significant accounting policies of the Company are set forth in the
Company's financial statements for the year ended December 31, 1997
included in the Company's Form 10-KSB as filed with the Securities and
Exchange Commission ("SEC") on March 30, 1998.
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 March 31, 1998 and the results of its operations and its
cash flows for the three months periods ended March 31, 1998 and 1997.
The accompanying unaudited financial statements should be read in
conjunction with the financial statements and notes for the year ended
December 31, 1997 included in the Company's Form 10-KSB as filed with the
SEC on March 30, 1998.
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.
Note 4 - Film Costs
Film costs consist of the capitalized costs related to the production of
videos and program for television as follows:
Television program
Adventures With Kanga Roddy $3,529,610
Videos
Montana Exercise Video 148,253
Strong Mind Fit Body 18,042
--------
3,695,905
--------
Less accumulated depreciation 136,331
--------
3,559,574
Less current portion of film costs 1,200,000
--------
Long-term portion of film costs $2,359,574
==========
Production of the first seven episodes of The Adventures of Kanga Roddy was
completed during 1997. Six additional episodes were completed during the three
months ended March 31, 1998. Both videos were completed in 1996, but only the
Strong Mind Fit Body video has been released.
Note 5 - Related Party Transactions
Advances to stockholders were $114,723 at March 31, 1998.
In November 1996, the Company agreed to pay to two participants
of the Montana Exercise Video the sum of $50,000 from the
proceeds of the intended initial public offering and another
$50,000 will be paid 30 days prior to the release date. These two
participants are stockholders of the Company.
Note 6 - Sale of Karate Studio
During the three months ended March 31, 1998, the Company sold a
karate studio to the general manager. The Company received a note
receivable of $52,859 due in 70 monthly payments of $1,000
including interest imputed at 10%. The Company has guaranteed
payments of the studio lease which are $4,673 per month through
March 2000. The Company retained all advance payments of
enrollment fees which were $156,536 at March 31, 1998; however,
the Company is liable for any future refunds to students enrolled
prior to March 31, 1998. The Company reduced the liability for
advance payments of enrollment fees to $94,000 which is included
in deferred revenue. Management will evaluate this liability
quarterly in light of cancellations to date and expected future
cancellations.
Note 7 - Subsequent Events
Subsequent to the end of the quarter, the Company entered into an
Engagement Agreement with a finder for equity financing. Terms
are yet to be determined.
PART I - FINANCIAL INFORMATION
ITEM 2 - Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
Forward Looking Information
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
from liability for forward-looking statements. Certain information included in
this Form 10-QSB and other materials filed or to be filed by the Company with
the Securities and Exchange Commission (as well as information included in
oral statements or other written statements made or to be made by or on behalf
of the Company) are forward-looking, such as statements relating to
operational and financing plans, capital uses and resources, competition, and
demands for the Company's products and services. Such forward-looking
statements involve important risks and uncertainties, many of which will be
beyond the control of the Company. These risks and uncertainties could
significantly affect anticipated results in the future, both short-term and
long-term, and accordingly, such results may differ from those expressed in
forward-looking statements made by or on behalf of the Company. These risks
and uncertainties include, but are not limited to, the acceptance by the
television viewer and public television stations of the television series -
ADVENTURES WITH KANGA RODDY, production delays and/or cost overruns with
respect to such series, changes in external competitive market factors or in
the Company's internal budgeting process which might impact trends in the
Company's results of operations, unanticipated working capital or other cash
requirements, changes in the Company's business strategy or an inability to
execute its strategy due to unanticipated change in the industries in which it
operates; and various competitive factors that may prevent the Company from
competing successfully in the marketplace.
The following section discusses the significant operating changes,
business trends, financial condition, earnings and liquidity that have
occurred in the three-month period ended March 31, 1998. This
discussion should be read in conjunction with the Company's
consolidated financial statements and notes appearing elsewhere in this
report.
Results of Operations
Revenues. For the three months ended March 31, 1998, the Company's
total revenue increased to $381,998, an increase of $103,810 or 37% as
compared to total revenue for the three months ended March 31, 1997 of
$278,188.
The Company's revenues from the operation of its karate studios for
the three months ended March 31, 1998 was $126,905, a decrease of 50% from
revenues of $255,950, for the three months ended March 31, 1997. The decrease
is attributable to the reduction in the number of karate studios. In 1997,
the Company closed five schools, two in Nevada and three in California which
were not operating profitably. On March 31, 1998, the Company sold a studio
to a former employee of the Company for $52,859 which was paid in the form of
a promissory note which provides for 70 monthly payments of $1,000 including
interest.
For the three months ended March 31, 1998, the Company recognized
$215,000 in film income. Film income was derived from the delivery
of six episodes of the television show "Adventures with Kanga Roddy"
to KTEH pursuant to the Distribution Agreement with KTEH dated May 6, 1997
The Company's interest income of $26,692 was earned from investment of
the proceeds from the Company's initial public offering.
Costs and Expenses. The Company's revenue from its karate studios and
film business were offset by amortization of film costs of $73,332, calculated
in proportion to the revenue generated by the television show in this first
quarter to total expected revenues from the television show.
The Company's expenses for salaries and payroll taxes increased by
$22,606 or 12% for the three months ended March 31, 1998 from $193,028 for the
comparable period in 1997. The increase was mainly the result of increases in
administrative, film production and marketing personnel. Total selling,
general and administrative expenses increased by $180,239 for the three months
ended March 31, 1998 from $55,878 for the comparable period in 1997. This
increase is primarily due to promotional expenses related to the television
show, depreciation of production equipment and legal and accounting fees.
Interest expense decreased $41,484 or 82% for the three months ended
March 31, 1998 from $50,385 for the comparable period in 1997. This decrease
in expense is attributable to the payoff of loans in 1997 with proceeds from
the Company's IPO. Rent expense also decreased to $84,616 for the three month
period ended March 31, 1998 from $124,299 for the comparable period in 1997, a
decrease of 32%. The decrease in rent expense is primarily attributable to
the closure of karate studios.
As a result of the foregoing factors, the Company's net loss decreased
by $25,084 or 16% from $159,974 for the three months ended March 31, 1997 to
$134,890 for the three months ended March 31, 1998. Net loss per share
decreased from $0.06 for the three months ended March 31, 1997 to $0.04 for
the comparable period in 1998. Weighted average number of shares outstanding
increased from 2,515,700 for the three months ended March 31, 1997 to
3,832,345 for the comparable period in 1998 due to the Company's initial public
offering in August 1997.
Liquidity And Capital Resources
Cash decreased for the three months ended March 31, 1998 by $1,241,488
of which $1,200,715 was for investing activities related to the production of
the Adventures With Kanga Roddy show. Net operating cash loss was $34,655 and
the balance of $6,118 was used in financing activities.
As of March 31, 1998, total long-term debt was $62,261 and loans
payable to related parties was $35,503. In addition, deferred revenues were
$244,912 (current portion) and $163,215 (long-term liabilities) at March 31,
1998. Deferred revenues are primarily pre-paid tuition for the karate studios
which cannot be immediately recognized. In connection with the sale of the
studio discussed above, the Company retained all advance payments of tuition
which were $156,536 at March 31, 1998 but adjusted this for future estimated
refunds to students enrolled prior to March 31, 1998 to $94,000. This amount
is included in deferred revenue.
Recent Developments
On April 20, 1998, the Company entered into a Continuing Distribution
Agreement with KTEH for the distribution of 26 more half- hour Kanga Roddy
shows and two one-hour specials. Under the Continuing Distribution Agreement,
KTEH receives the exclusive domestic broadcast rights to the new episodes for
two years and agrees to pay the Company $30,000 for each half-hour program and
$60,000 for each of the two one- half hour shows. In anticipation of its need
for additional working capital to produce the additional 28 episodes of the
Kanga Roddy series, the Company engaged JW Charles Securities, Inc. on April
24, 1998 to assist the Company in identifying sources of financing. There
can be no assurance that such financing will be available, or, if available,
will be on terms satisfactory to the Company or not dilutive of existing
shareholders.
On April 29, 1998, the Company executed a sponsorship agreement with
Sara Lee Corporation, the parent company of Hanes, which provides for Hanes'
corporate sponsorship of the Adventures With Kanga Roddy show. It is
anticipated that basketball legend Michael Jordon will star in the Hanes
campaigns.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On April 24,1998, the Company filed a Complaint for Declaratory Relief in the
U.S. District Court, Northern District of California, against William Charles
Jeffreys, requesting a judicial determination of the Company's rights in
certain intellectual property associated with the Adventures with Kanga Roddy
show, and that Mr. Jeffreys has no such rights. The Company disputes all
claims of Mr. Jeffreys to an interest in certain of the Company's
intellectual property and intends to vigorously protect its ownership and
rights to such intellectual property.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. See the Exhibit Index beginning on page 15.
(b) Reports on Form 8-K. No reports on Form 8-K were filed
during the quarter for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN CHAMPION ENTERTAINMENT, INC.
(Registrant)
Dated: May 15, 1998 By: /s/ Anthony K. Chan
Anthony K. Chan, Chief Executive Officer
and Chief Financial Officer
INDEX TO EXHIBITS
Exhibit No. Exhibit
1.1* Form of Underwriting Agreement
3.1* Amended and Restated Certificate of Incorporation
3.2* Bylaws
4.1* Specimen stock certificate
4.2* Warrant Agreement with form of Warrant
4.3* Form of Underwriters' Warrant
5* Opinion of Sheppard, Mullin, Richter & Hampton LLP
10.1* 1997 Stock Plan
10.2* Form of Stock Option Agreement for 1997 Stock Plan
10.3* 1997 Non-Employee Directors Stock Option Plan
10.4* Form of Non-Employee Directors Stock Option Agreement
10.8* Promissory Note dated December 15, 1994 made payable by Messrs.
Chung and Chan and their wives in favor of Michael Triantos M.D.
Inc. Money Purchase and Profit Sharing Pension Plans Trust
10.9* Employment Agreement between the Company and George Chung dated
March 4, 1997, effective upon the closing date of the Offering
10.10* Employment Agreement between the Company and Anthony Chan dated
March 4, 1997, effective upon the closing date of the Offering
10.11* Employment Agreement between the Company and Don Berryessa dated
March 4, 1997, effective upon the closing date of the Offering
10.12* Employment Agreement between the Company, AC Media and Jan
Hutchins dated March 4, 1997, effective upon the closing date of
the Offering
10.13* Convertible Loan Agreement dated as of May 5, 1995, between ABK
and David Y. Lei
10.15* Amended Deal Memo between ABK and Rick Fichter dated February
23, 1997, with respect to payments related to the Kanga Roddy
Series
10.17* Form of Indemnification Agreement
10.19* Letter dated October 29, 1996 from the Company to Tim Pettitt
regarding certain payments to the Montanas
10.20* Distribution Agreement dated June 18, 1996 by and between
America's Best Karate and InteliQuest
10.21* Distribution Agreement, dated May 6, 1997, by and between KTEH,
San Jose Public Television and American Champion Media, Inc.
10.22* Letter Agreement, dated June 1997, between AC Media, Inc. and
Sega of America, Inc.
10.23* Business Loan Agreement between America's Best Karate and Karen
Shen
10.24* Business Loan Agreement between America's Best Karate and Thomas
J. Woo
10.25** Licensing Agent Agreement, dated July 25, 1997, between American
Champion Media, Inc. and Sega of America, Inc.
10.26 Continuous Distribution Agreement dated April 20, 1998 between
KTEH, San Jose and American Champion Media, Inc.
10.27 Sponsorship Agreement dated April 29, 1998 between Sara Lee
Corporation and American Champion Media, Inc.
10.28 Engagement Agreement dated April 24, 1998 between JW Charles
and American Champion Entertainment, Inc.
21.1* Subsidiaries of the Registrant
23.1** Consent of Moss Adams, LLP
27.1 Financial Data Schedule
* Filed as an exhibit with the registrant's Form SB-2 filed with
SEC on March 21, 1997 or Form SB-2/A filed March 3 and
June 20, 1997 and incorporated by reference herein.
** Filed as an exhibit with the registrant's Form 10-KSB filed with
SEC on March 30, 1998 and incorporated by reference herein.