-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LmwydNcGaX0aJ3Rn5GXUx0LhyVXjyyOsv9onKo9JNuBn7M2mzm3BXdjfmH9hU7DK uwv6duFj6IGnGJ3SDBROaA== 0001034840-99-000030.txt : 19991117 0001034840-99-000030.hdr.sgml : 19991117 ACCESSION NUMBER: 0001034840-99-000030 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN CHAMPION ENTERTAINMENT INC CENTRAL INDEX KEY: 0001034840 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 943261987 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB/A SEC ACT: SEC FILE NUMBER: 000-22833 FILM NUMBER: 99752832 BUSINESS ADDRESS: STREET 1: 26203 PRODUCTION AVENUE STREET 2: SUITE 5 CITY: HAYWARD STATE: CA ZIP: 94545 BUSINESS PHONE: 5107858750 MAIL ADDRESS: STREET 1: 26203 PRODUCTION AVENUE STREET 2: SUITE 5 CITY: HAYWARD STATE: CA ZIP: 94545 10KSB/A 1 FORM 10KSB/A FOR THE YEAR ENDED DECEMBER 31, 1998 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-KSB/A [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended: December 31, 1998 [ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number: 333-18967 AMERICAN CHAMPION ENTERTAINMENT, INC. (Name of small business issuer in its charter) Delaware 94-3261987 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1694 The Alameda, Suite 100, San Jose, California 95126 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (408) 288-8199 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of each class Name of each exchange on which registered Common Stock, $.0001 par value The Nasdaq SmallCap Market Warrants to Purchase Common Stock --------------------------------- The Registrant hereby amends and restates in their entirety the following items, financial statements, exhibits or other portions of its Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998 as set forth in the pages attached hereto: Part II, Item 6 and 7 Exhibit 23.1 and 27.1 ----------------------------------- American Champion Entertainment, Inc. (the "Company"), by this Form 10-KSB/A, Amendment No.1 to Form 10-KSB, hereby: (1) amends and restates in its entirety Item 6 of Part II of the 1998 Annual Report; (2) amends and restates in its entirety Item 7 of the 1998 Annual Report; (3) amends and restates in their entirety Exhibit 23.1; and (4) amends and restates in their entirety Exhibit 27.1. Each such amended Item of, and Exhibit to, the 1998 Annual Report is attached to this Amendment No.1. EXPLANATORY NOTE TO AMENDMENT NO. 1 TO 1998 ANNUAL REPORT ON FORM 10-KSB This Form 10-KSB/A, Amendment No. 1 to Form 10-KSB (the "Amendment"), which amends the 1998 Annual Report, includes the following changes: (i) Item 6, "Management's Disscussion and Analysis or Plan of Operation" of Part II has been amended with respect to the analysis of interest expense and results of operations to discuss the effects of the non-cash charge to interest expense and corresponding increase to paid in capital related to the beneficial conversion feature of the convertible debentures, (ii) Item 7, "Financial Statements", of Part II have been restated to reflect the non-cash charge to interest expense and corresponding increase to paid in capital to account for the beneficial conversion feature of the convertible debentures, (iii) a new Exhibit 23.1, "Consent of Independent Accounts,"; and (iv) a new Exhibit 27.1, "Financial Data Schedule". Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB [ X ] Revenues for its most recent fiscal year: $736,701 Aggregate market value of common stock held by nonaffiliates at March 18, 1999: $8,856,880 Number of shares of common stock outstanding at March 18, 1999: 7,269,050 Documents Incorporated by Reference: Location in Form 10-K Portions of the Proxy Statement for Part III 1999 Annual Meeting of Shareholders Transitional Small Business Disclosure Format (check one): Yes _____ No ___x___ TABLE OF CONTENTS Part I Item 1 Description of Business Item 2 Description of Property Item 3 Legal Proceedings Item 4 Submission of Matters to a Vote of Security Holders Part II Item 5 Market for Common Equity and Related Stockholder Matters Item 6 Management's Discussion and Analysis or Plan of Operation Item 7 Financial Statements Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Part III Item 9 Directors and Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act. Item 10 Executive Compensation Item 11 Security Ownership of Certain Beneficial Owners and Management Item 12 Certain Relationships and Related Transactions Item 13 Exhibits and Reports on Form 8-K PART I Item 1. Description of Business General American Champion Entertainment, Inc. is a Delaware corporation headquartered in San Jose, California and incorporated on February 5, 1997. The company was formed as a holding company for its wholly-owned subsidiary, America's Best Karate, a California corporation ("ABK"), formed in June 1991. ABK wholly owns American Champion Media, Inc., a Delaware corporation ("AC Media"), formed in February 1997. Unless indicated otherwise, references to the "Company" herein shall include ABK and AC Media. AC Media is a media production and marketing company. Through AC Media, the Company is involved in (i) the development, production and marketing of "ADVENTURES WITH KANGA RODDY," a television program aimed at pre-school and primary school children (the "Kanga Roddy Series"), (ii) the licensing of merchandising rights related to the Kanga Roddy Series, and (iii) the development, production and marketing of various audio tapes, video tapes and workbooks that specialize in fitness information. ABK owns, manages and operates a karate school located in the San Francisco Bay Area which provides karate instruction to students of all ages and skill levels. "Adventures With Kanga Roddy" The Company has developed and produced twenty (20) one half-hour episodes of the Kanga Roddy Series. The Kanga Roddy Series features a six-foot tall kangaroo character named Kanga Roddy who is a martial arts expert. Unlike other martial arts programs which feature violence, Kanga Roddy never fights because he understands that conflict can always be resolved through traditional martial arts values such as knowledge, compassion, humility, discipline, respect and an open mind. The show merges these values, with contemporary music, dance, vibrant colors and exciting movements designed to capture the attention of its target audience consisting primarily of pre-school and primary school children. Each episode of the Kanga Roddy Series focuses on a group of children at a community center and their teachers (played by Jennifer Montana and Karen Lott, wives of former San Francisco 49ers football players, Joe Montana and Ronnie Lott) working on activities such as reading, physical fitness and arts and crafts. During these activities, the children encounter an ethical or social problem which causes uneasiness or unhappiness among some of the children. The teachers sense the problem and suggest that the children seek help from their friend, Uncle Pat, the proprietor of a rare bookstore played by actor Pat Morita, who was previously featured in "The Karate Kid" movies. Uncle Pat, with the assistance of his pet bookworm, Shakespeare, magically transport the children to the land of Hi-Yah where Kanga Roddy lives. Once in the land of Hi-Yah, Kanga Roddy and his friends Bantu - a female African snake, Tackle Bear - his workout partner, Cimbop and Kimbop - a pair of feline sisters, and Zatochi - a wise old snow monkey, help the children solve their problem by giving examples presented through songs. Kanga Roddy gets inspiration for the proper solution to the problem through flashbacks to lessons learned from his martial arts teacher Zatochi or parallels drawn from encounters with his buddy Tackle Bear. The children and the costumed cast present the answers in song and dance routines. When the children return to the community center, they review what they have learned with their teachers. In May 1997, the Company and KTEH, the public broadcasting station serving the San Jose, California area, entered into a Distribution Agreement (the "Distribution Agreement") which grants KTEH the exclusive right to distribute, advertise, market or otherwise exploit the Kanga Roddy Series on public broadcast affiliated stations throughout the United States for a two-year period ending May 1999. KTEH cleared the broadcast of the Kanga Roddy Series with 40 other public broadcast stations which broadcast to approximately 50% of the households in the United States (approximately 40 million households). The Company delivered 13 half-hour episodes to KTEH for broadcast and received $430,000 from KTEH for the exclusive broadcast rights for the series for a period of two years. Under the Distribution Agreement, the Company has also committed to sharing with KTEH (i) 8% of revenues from the sale (less fees and commissions) and licensing of non-broadcast ancillary rights of educational products such as video tapes, books and music tapes and (ii) 5% of gross profits (less fees and commissions) of the Company from the sale and licensing of toys and clothing. The Company has also granted KTEH a right of first refusal with respect to broadcast rights to the Kanga Roddy Series not granted to KTEH in the Distribution Agreement. On April 20, 1998, the Company entered into a Continuing Distribution Agreement with KTEH for the distribution of 26 more half-hour Kanga Roddy shows and two one-hour specials. Under the Continuing Distribution Agreement, KTEH receives the exclusive domestic broadcast rights to the new episodes for two years and agrees to pay the Company $30,000 for each half-hour program and $60,000 for each of the two one-hour shows. As of February 1999, the Company has completed and delivered 7 half-hour episodes to KTEH. In January 1999, American Public Television ("APT"), a major national distributor for PBS programming, agreed to distribute 26 new episodes of the Kanga Roddy Series. As a result, the Kanga Roddy Series will now be available for airing on over 300 PBS stations nationwide commencing April 4, 1999. In August 1998, the Company signed an exclusive contract with Portfolio Entertainment of Toronto, Ontario, for the international TV distribution of the Kanga Roddy Series. The Company's strategy includes pursuing licensing and merchandising opportunities related to the Kanga Roddy Series. Characters developed in a popular series, and often the series itself, achieve a high level of recognition and popularity, making them valuable licensing and merchandising assets. Among the most popular licensed items are toys, clothing, food, dinnerware/lunch boxes, watches and soft vinyl goods such as boots, backpacks and raincoats. The Company plans to retain worldwide rights to the characters and images developed in the Kanga Roddy Series, to protect its rights to such characters and images through appropriate registration, and to license their use to manufacturers for specific products. There is no assurance, however, that the Company will be able to successfully retain or protect its rights through registration, or to license its properties. The Company also hopes to realize revenues through the distribution of the Kanga Roddy Series in the home video market, although there is no assurance that the Company will be able to do so. If the Kanga Roddy Series does not attain and maintain widespread television distribution, or widespread popularity, it is unlikely that any significant licensing or merchandising opportunities or revenue will arise or be maintained. In July 1997, the Company and SEGA of America, Inc. ("SEGA") entered into a Licensing Agent Agreement appointing SEGA as the Company's non-exclusive agent for purposes of licensing and merchandising the "Kanga Roddy" trademark brand name characters and logo and home video distribution of the Kanga Roddy Series. The agreement was subsequently canceled by the Company in November 1998. The Company exercised its rights under a clause in the agreement which allowed the Company to terminate the agreement in the event that key SEGA licensing personnel left the employ of SEGA. Subsequently, the Company engaged Joy Tashjian of Trademark Management as the licensing consultant on a monthly retainer of $4,000 plus 10% commission basis. To date, the Company has signed one licensing contract with Timeless Toys for the manufacturing and marketing of premium plush toys based on the characters from the Company's Kanga Roddy Series. Fitness Products The Company develops, produces and markets various video tapes, audio tapes and workbooks that specialize in fitness information and education ("Fitness Products"). The Company's Fitness Product, entitled the "MONTANA EXERCISE VIDEO," is a cardio kick-boxing video starring former superstar quarterback Joe Montana and his wife Jennifer, both of whom have trained at the Company's karate schools. In August 1998, the Company signed non-exclusive contracts with Kreative Video Products, Inc. of Chatsworth, California, for the domestic distribution of the Kanga Roddy series and the Montana Exercise Video. The Kanga Roddy Series was released in the fourth quarter of 1998 while the Montana Exercise Video is slated for release in Spring 1999. Karate Studio The Company used to manage and operate a chain of company-owned karate studios in the San Francisco Bay Area under the name "America's Best Karate" which, as of December 31, 1998, has been reduced from as many as ten locations to only one remaining location. The Company plans to cease the operation of the remaining location once the lease for the location expires in January 2000. Competition Each of the industries in which the Company competes is highly competitive and most of the companies with which the Company competes have greater financial and other resources than the Company. With respect to the Company's media activities, the Company competes with major production companies, and competition for access to a limited supply of facilities and talented creative personnel to produce its programs is often based on relationships and pricing. The Company's programs compete for time slots, ratings, distribution channels and financing, and related advertising revenues with other programming products. The Company's competitors include motion picture studios, television networks, and independent television production companies, which have become increasingly active in children's programming, and many of which have substantially greater financial and other resources than the Company. The Company competes for broadcast commitments and production funding for public television projects with Children's Television Workshop, other independent production companies, and projects produced by local public television stations. If the Company attempts to expand into other areas, including commercial television, it will face more intense competition from other, larger entities, which have substantially greater financial and other resources than the Company, such as The Walt Disney Company, Fox, Nickelodeon, Jim Henson Productions, Scholastic Productions, Cinar, Lancit Media Entertainment, and certain television syndicators, production companies, and networks which also seek to attract the children's/family audience segments with their programming. In addition, there is a strong trend toward vertical integration in the business, with more networks owning productions, making it more difficult for smaller, independent companies such as the Company to obtain favorable production financing and distribution terms. The Company's Fitness Products compete with many other products aimed at the fitness and weight loss markets, including other video tapes, audio tapes and workbooks, and various types of exercise machinery. Many of these competing products are sponsored or endorsed by celebrities and sports figures, and many are marketed by companies having significantly greater resources than the Company. In the licensing industry, there is strong competition from other independent licensing agencies and from the in-house licensing divisions of other production companies and television studios. Employees As of February 18, 1999, the Company employed a total of 20 employees on a full-time basis, 10 of which are management and 10 of which are clerical, and 4 employees on a part-time basis. The Company also contracts with additional employees for the production of the Kanga Roddy Series through the American Federation of Television and Radio Artists. Item 2. Description of Property The Company leases approximately 3,000 square feet of space for its San Jose headquarters pursuant to a two year lease expiring July 2000 at approximately $10,000 per month. The Company also leases approximately 3,000 square feet of space for its one karate studio in San Leandro pursuant to a lease expiring in January 2000 at approximately $5,000 per month. The Company believes that its facilities are adequate for its present purposes. Item 3. Legal Proceedings On April 24,1998, the Company filed a Complaint for Declaratory Relief in the U.S. District Court, Northern District of California, against William Charles Jeffreys, requesting a judicial determination of the Company's rights in certain intellectual property associated with the Adventures with Kanga Roddy show, and that Mr. Jeffreys has no such rights. Mr. Jeffreys filed an answer to the Company's complaint on June 15, 1998 along with a counterclaim. The Company disputes all claims of Mr. Jeffreys to an interest in certain of the Company's intellectual property and intends to vigorously protect its ownership and rights to such intellectual property. In February 1999, Mr. Jeffreys and the Company have agreed to settle the lawsuit and counterclaim for $36,000 which the Company will pay Mr. Jeffreys in twelve monthly payments of $3,000 each beginning in March of 1999. With the exception of the foregoing, no lawsuits or proceedings are currently pending against the Company. Item 4. Submission of Matters to a Vote of Security Holders A Special Meeting of Stockholders was held on September 23, 1998. The purpose of the meeting was to ratify the Securities Purchase Agreement dated as of July 2, 1998 by and among the Company, The Endeavour Capital fund S.A. and Amro International S.A. and the transactions contemplated thereby, including but not limited to, the possible issuance of shares of the Company's Common Stock equal to 20% or more of the total outstanding shares of the Company's Common Stock. The result of voting was as follows: For % Against Abstain Not Voted 2,057,668 53.69 9,500 10,600 1,754,577 PART II Item 5. Market for Common Equity and Related Stockholder Matters Market For Securities Our Common Stock and Common Stock Purchase Warrants commenced quotation on the Nasdaq SmallCap Market System under the symbols "ACEI" and "ACEIW," respectively, on August 1, 1997. The range of high and low reported closing sales prices for the Common Stock as reported by Nasdaq SmallCap Market since the commencement of trading were as follows: Common Stock: High Low 1997 Third Quarter $5.50 $4.13 Fourth Quarter $8.00 $4.81 1998 First Quarter $9.63 $7.75 Second Quarter $9.56 $6.56 Third Quarter $7.00 $3.50 Fourth Quarter $3.63 $0.97 1999 First Quarter (through March 18, 1999) $3.00 $1.06 The prices set forth above reflect inter dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. As of March 25, 1999, shares of Common Stock were held by approximately 1400 stockholders of record, as reported by ADP Proxy Services. Item 6. Management's Discussion and Analysis or Plan of Operation The following section discusses the significant operating changes, business trends, financial condition, earnings and liquidity that have occurred in the two-year period ended December 31, 1998. This discussion should be read in conjunction with the Company's consolidated financial statements and notes appearing elsewhere in this report. The following discussion may contain forward-looking statements that are subject to risks and uncertainties. Such risks and uncertainties could cause actual results to differ materially from those indicated. For a discussion of factors that could cause actual results to differ, please see the discussion contained herein. Readers should not place undue reliance on the forward-looking statements, which reflect management's view only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances. Readers are also encouraged to review the Company's publicly available filings with the Securities and Exchange Commission. Results of Operations The Company was formed in February 1997 and has a wholly owned subsidiary, ABK which owns and operates karate studios. ABK wholly owns AC Media which is a media production and marketing company. Revenues. During the year ended December 31, 1998, the Company's total revenue decreased to $736,701, a decrease of $442,852 or 37.5% as compared to total revenue for the year ended December 31, 1997 of $1,179,553. The Company's revenues from the operation of its karate studios for the year ended December 31, 1998 was $324,730, a decrease of 61.9% from revenues of $853,335 for the year ended December 31, 1997. The decrease is attributable to the reduction in the number of karate studios from five to one at the end of 1998. The Company plans to either close or sell the remaining studio when the lease for that location expires in January 2000. For the year ended December 31, 1998 the Company recognized $343,877 in film income, an increase of $128,877 or 59.9% from film income of $215,000 for the year ended December 31, 1997. Film income was derived from the delivery of the six episodes of the television show "Adventures with Kanga Roddy" to KTEH pursuant to its Distribution Agreement with KTEH, and also from the Sara Lee Corporation which was a sponsor of the show. See "Business." Revenues from sale of accessories was $37,956 for the year ended December 31, 1998 as compared to $67,823 for the year ended December 31, 1997. The decrease was due to the reduction of karate studios from five to one by the end of 1998. The Company's interest income of $30,138 was earned from investment activities. Costs and Expenses. The Company recognized $177,732 in amortization of film cost, which was capitalized production costs for the television show "Adventures With Kanga Roddy", for the year ended December 31, 1998 as compared to $58,000 for 1997. The Company's expenses for salaries and payroll taxes were $847,147 for 1998, an increase of $53,661 or 6.8% from $793,486 in 1997. Total selling, general and administrative expenses was $924,740 for 1998, an increase of $551,967 or 148% from $372,773 in 1997. This increase was primarily due to marketing and promotion expenses related to the Company and its television show. Interest expense was $679,402 for 1998, a increase of $568,718 or 513.8% from $110,684 in 1997. Included in intrest expense for 1998 is a non-cash charge of $599,955 related to the beneficial conversion feature of the convertible debentures issued within 1998. The debentures are convertible to common stock of the Company with the shares to be issued upon conversion based on 75% of the fair value of the stock at the time of conversion. Since the debt can be converted at any time, the value of the discount as of the issuance date has been charged to interest expense with a corresponding increase to additional paid in capital. The balance of interest expense for 1998 was primarily attributed to interest bearing convertible debentures the Company sold within 1998. Rent expense was $308,007 for 1998, a decrease of $74,921 or 19.6% from $382,928 in 1997. The decrease in rent expense was primarily attributable to the closure of karate studios within 1998 but partially offset by increased rental expense for the Company's administrative headquarters. As a result of foregoing factors, the Company's net loss increased by $1,122,100 or 140.0% from ($801,416) for the year ended December 31, 1997 to ($1,923,516) for the year ended December 31, 1998. Net loss per share increased from ($0.25) in 1997 to ($0.48) in 1998, while weighted average number of shares outstanding increased from 3,155,257 shares in 1997 to 4,033,619 shares in 1998. Liquidity and Capital Resources Stockholders' equity decreased slightly to $3,905,203 at the end of 1998, representing a 4.6% decrease from 1997. Cash decreased for the twelve months ended December 31, 1998 by $1,792,894. Cash utilized for operations for the twelve months ended December 31, 1998 was ($413,956). Cash used for investing activities for the twelve months ended December 31, 1998 was ($3,345,060) and was primarily attributable to the cost of producing thirteen episodes of the Kanga Roddy Series. Cash from financing activities for the twelve months ended December 31, 1998 was an increase of $1,966,122 which resulted primarily from sales of convertible debentures. The Company has historically financed its operating and capital outlays primarily through sales of common stock, loans from stockholders and other third parties and bank financing. Total long-term debt as of December 31, 1998 was $831,266 as compared to $64,199 at December 31, 1997. The increase in long-term debt was attributable to outstanding unconverted convertible debentures at the end of 1998. Loans payable to related parties as of December 31, 1998 was $137,037 as compared to $37,255 as of December 31, 1997. In addition, deferred revenues decreased $465,500 or 85.6% from $543,520 at December 31, 1997 to $78,020 at December 31, 1998. Deferred revenues are primarily pre-paid tuition for the karate studios which cannot be immediately recognized and the decrease is the result of the conversion of such deferred revenues into recognized revenues from elimination of deferred revenues on studios sold and the refund of pre-paid tuition for students who terminate their karate instruction prior to completing their subscribed program. The Company maintains a credit line with Wells Fargo Bank pursuant to which the Company has borrowed approximately $32,000 as of December 31, 1998 and repayment of this amount is made at the monthly rate of 2% of the outstanding balance of the borrowing. Other than such loan, the Company does not presently maintain any other borrowing facility or have any indebtedness to financial institutions. On January 19, 1999 the Company sold another $950,000 of convertible debentures, and on March 5, 1999 the Company reset the exercise price of certain warrants for the purchase of common stock granted to consultants of the Company in January 1999 and received $540,000 from the exercise of such warrants. This total of $1,490,000 is for funding of working capital and further production of episodes of the Kanga Roddy series. On February 19, 1999, the Company entered into a letter of intent with JWGenesis Capital Markets LLC ("JWGenesis") pursuant to which JWGenesis will act as the Company's exclusive placement agent in connection with a proposed private offering (the "Proposed Offering") of a minimum of $700,000 and a maximum of $4,500,000 of Units of the Company's securities, each Unit consisting of 50 Shares of Series C Redeemable Convertible Preferred Stock, $.0001 Par Value, 25,000 Class A Common Stock Warrants, and 25,000 Class B Common Stock Warrants. In consideration for its services, JWGenesis will receive a placement fee equal to 10% of the gross proceeds of the Proposed Offering, plus a non-accountable expense allowance equal to 3% percent of the aggregate purchase price of the securities sold, and a five (5) year warrant to purchase at the Proposed Offering price additional Units equal to 10% of the aggregate number of Units sold in the Proposed Offering. Additionally, upon the first closing of the Proposed Offering, the Company is to enter into an agreement whereby JWGenesis shall have the right to (i) purchase for its account or to sell for the account of the Company or any of its stockholders owning at least five percent (5%) of the Company's securities (the "Principal Stockholders"), any securities with respect to which the Company or any of its Principal Stockholders may seek a private or public offering pursuant to a registration statement or otherwise, and (ii) nominate a designee to the Company's Board of Directors. Further, upon completion of the Proposed Offering, the Company is to enter into an agreement whereby JW Genesis shall (i) have a two (2) year right of first refusal to act as the managing underwriter, or as a member of the underwriting syndicate and/or selling group with respect to any offering of the Company's securities, (ii) have a two (2) year right to act as the Company's exclusive investment banker for a fee of 150,000 shares of Common Stock which shall be payable at the Closing, and (iii) have a five (5) year right to receive a fee based upon a percentage of the value of any business combination or financing arrangement, including but not limited to mergers, acquisitions, sales, joint ventures, and any other business or business combinations involving the Company, where such arrangement is introduced to the Company by the JWGenesis or contacted by JWGenesis or the Company from the signing date of the engagement letter or within 24 months after the final closing of the Proposed Offering; and that any such transaction fee due to JWGenesis will be paid in cash at the closing of the particular transaction for which the finder's fee is due. We now estimate that the average cost of developing and producing each episode of the Kanga Roddy Series is $240,000 and that we will require approximately $2.88 million of additional financing to complete the remaining 12 episodes of the Kanga Roddy Series. Except for the Proposed Offering described above, we have no other current arrangements with respect to additional financing and there can be no assurances that additional financing will be available on acceptable terms, if at all. The net proceeds from the Proposed Offering may not be sufficient to fund production of all of the remaining 12 episodes of the Kanga Roddy series. To the extent that the Company's available working capital is insufficient to finance the Company's working capital requirements, the Company will be required to raise additional funds through public or private equity or debt financing or by exercising its rights to redeem the outstanding warrants to purchase common stock. There can be no assurance that such additional financing will be available, or, if available, will be on terms satisfactory to the Company or not dilutive of existing shareholders. Item 7. Financial Statements The consolidated financial statements of the Company and subsidiaries and independent auditors' report are filed herewith on pages 14 through 37 of this report. Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. Not applicable. PART III Item 9. Directors, Executive Officers, Promoters and Control Person; Compliance With Section 16(a) of the Exchange Act See information under the caption "Election of Directors" and "Compliance with Section 16(a) of the Exchange Act" of the Company's proxy statement for the 1999 Annual Meeting of Shareholders (the "1999 Proxy Statement") which information is incorporated by reference herein. Item 10. Executive Compensation See information under the caption "Executive Compensation" of the 1999 Proxy Statement which information is incorporated by reference herein. Item 11. Security Ownership of Certain Beneficial Owners and Management See information under the caption "Principal Shareholders" and "Stock ownership of Management" of the 1999 Proxy Statement which information is incorporated by reference herein. Item 12. Certain Relationships and Related Transactions. See information under the caption "Certain Relationships and Related Transactions" of the 1999 Proxy Statement which information is incorporated by reference herein. Item 13. Exhibits and Reports on Form 8-K. (a) Exhibits. See Index to Exhibits at pages 38 to 39 of this Form 10-KSB. (b) Reports on Form 8-K. None. SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 31, 1999 AMERICAN CHAMPION ENTERTAINMENT, INC. By: /s/ ANTHONY K. CHAN ----------------------------------- Anthony K. Chan, President (Principal Executive Officer) In accordance with the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - -------------------------- ------------------------------- ---------------- /s/ ANTHONY K. CHAN President, Chief Executive March 31, 1999 - ------------------------- Officer, and Director Anthony K. Chan (Principal Executive Officer) /s/ GEORGE CHUNG Chairman of the Board and March 31, 1999 - ------------------------- Director George Chung /s/ DON BERRYESSA Senior Vice President, Chief March 31, 1999 - ------------------------- Operations Officer and Director Don Berryessa /s/ MAE LYN WOO Vice President and Chief March 31, 1999 - ------------------------- Financial Officer (Principal Mae Lyn Woo Financial Officer) /s/ JAN D. HUTCHINS Director March 31, 1999 - ------------------------- Jan D. Hutchins /s/ WILLIAM T. DUFFY Director March 31, 1999 - ------------------------- Willian T. Duffy /s/ ALAN ELKES Director March 31, 1999 - ------------------------- Alan Elkes /s/ RONALD M. LOTT Director March 31, 1999 - ------------------------- Ronald M. Lott
AMERICAN CHAMPION ENTERTAINMENT, INC. AND SUBSIDIARIES INDEPENDENT AUDITOR'S REPORT AND CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 CONTENTS PAGE INDEPENDENT AUDITOR'S REPORT CONSOLIDATED FINANCIAL STATEMENTS Balance sheet Statement of operations and accumulated deficit Statement of cash flows Notes to financial statements INDEPENDENT AUDITOR'S REPORT To the Board of Directors American Champion Entertainment, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheet of American Champion Entertainment, Inc., and Subsidiaries (the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. As disclosed in note 21, the accompanying financial statements have been restated to account for the effect of EITF D-60, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion" on the debentures issued during 1998. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 20 to the financial statements, the Company had limited cash reserves at December 31, 1998 and based on management's current cash flow estimates, will not have sufficient cash to meet obligations over the next twelve months without additional sources of capital. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plan in this regard is discussed in Note 20. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Moss Adams LLP San Francisco, California March 11, 1999 Except for note 21, as to which the date is November 11, 1999 AMERICAN CHAMPION ENTERTAINMENT, INC. CONSOLIDATED BALANCE SHEET
December 31, ------------------------- 1998 1997 ----------- ----------- Assets Cash....................................... $2,763 $1,795,657 Account receivable......................... 37,675 220,817 Loans receivable, related parties.......... 114,937 114,773 Prepaid expenses........................... 56,267 96,556 Property and equipment..................... 395,330 255,423 Film costs, net............................ 5,381,329 2,445,417 Note receivable............................ 80,424 -- Other Assets............................... 11,673 35,152 ----------- ----------- Total assets............................... 6,080,398 4,963,795 =========== =========== Liabilities Accounts payable and accrued expenses...... $1,122,307 $199,344 Note payable, related parties.............. 137,037 37,255 Other...................................... -- 8,432 Deferred revenues.......................... 78,020 543,520 Notes payable.............................. 831,266 64199 Obligations under capital leases........... 6,565 16,722 ----------- ----------- Total liabilities.................. 2,175,195 869,472 ----------- ----------- Stockholders' Equity Preferred stock, $.0001 per share, 3,000,000 shares authorized, none issued or outstanding.................... -- -- Common stock, $0.0001 par value; 20,000,000 shares authorized; paid-in capital.......................... 7,122,414 5,529,419 Common stock warrants...................... 290,901 149,500 Accumulated deficit........................ (3,508,112) (1,584,596) ----------- ----------- Total stockholders' equity................. 3,905,203 4,094,323 $6,080,398 $4,963,795 =========== ===========
AMERICAN CHAMPION ENTERTAINMENT, INC. CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, --------------------------- 1998 1997 ------------ ------------ REVENUE: Film income........................... $343,877 $215,000 Tuition and related fees.............. 324,730 853,335 Accessories........................... 37,956 67,823 Interest income....................... 30,138 43,395 ------------ ------------ Total revenue......................... 736,701 1,179,553 ------------ ------------ COSTS AND EXPENSES: Cost of sales......................... 26,152 36,098 Amortization of film costs............ 177,732 58,000 Salaries and payroll taxes............ 847,147 793,486 Rent.................................. 308,007 382,928 Selling, general and administrative... 924,740 372,773 Interest.............................. 679,402 110,684 Write off of film costs............... -- 105,000 Write off of loan fees................ -- 65,000 Facilities closure costs.............. -- 57,000 ------------ ------------ Total costs and expenses.............. 2,960,180 1,980,969 ------------ ------------ Loss from operations ................... ($2,223,479) ($801,416) ============ ============ Gain on sale of karate studio........... 307,429 -- ------------ ------------ Loss before provision for income taxes.. (1,916,050) (801,416) Provision for income taxes.............. 7,466 -- ------------ ------------ Net Loss................................ (1,923,516) (801,416) ============ ============ Weighted average number of shares outstanding........................... 4,033,619 3,155,257 ============ ============ Basic loss per share.................... ($0.48) ($0.25) ============ ============
See accompanying notes. AMERICAN CHAMPION ENTERTAINMENT, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock ----------------------- Total Number Paid-in Common Stockholders of Capital Stock Accumulated Equity Shares (Deficit) Warrants Deficit (Deficit) ---------- ----------- ------------ ------------- ------------ Balance, December 31, 1996............. $92,030 ($1,155,318) -- ($783,180) ($1,938,498) Conversion of ABK shares to ACE shares...................... 2,494,018 -- -- -- -- Issuance of common stock, net of offering costs of $1,474,508....... 1,437,519 5,463,737 -- -- 5,463,737 Issuance of warrants................. -- -- 149,500 -- 149,500 Debt converted to equity............. 53,400 133,500 -- -- 133,500 Cancellation of founders' shares..... (228,622) -- -- -- -- Common stock subject to rescission... -- (248,020) -- -- (248,020) Rescission of common stock........... (16,000) (40,000) -- -- (40,000) Expiration of rescission agreement... -- 1,175,520 -- -- 1,175,520 Stock options issued in connection with film costs.................... -- 200,000 -- -- 200,000 Net loss............................. -- -- -- (801,416) (801,416) ---------- ----------- ------------ ------------- ------------ Balance, December 31, 1997............. 3,832,345 $5,529,419 $149,500 ($1,584,596) $4,094,323 Common stock warrants issued in connection with debentures......... -- -- 124,501 -- 124,501 Conversion of debentures to common stock.................... 1,421,901 1,176,442 -- -- 1,176,442 Exercise warrants to purchase common stock warrants.............. -- -- 16,900 -- 16,900 -- Beneficial conversion feature of debentures -- 599,955 -- -- 599,955 Net loss -- -- -- (1,923,516) (1,923,516) ---------- ----------- ------------ ------------- ------------ Balance, December 31, 1998............. 5,254,246 $7,122,414 $290,901 ($3,508,112) $3,905,203 ========== =========== ============ ============= ============
See accompanying notes. AMERICAN CHAMPION ENTERTAINMENT, INC. CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31, ---------------------------- 1998 1997 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss........................................ ($1,323,561) ($801,416) Adjustments to reconcile net loss to net cash used for operating activities: Non-cash charge for beneficial conversion feature of debentures.......... 599,955 -- Gain on sale of karate studio............... (307,429) -- Depreciation and amortization............... 253,405 101,407 Write off of film costs..................... -- 105,000 Rent concession amortization................ (4,216) (4,216) Amortization of original issue discount on long term debt......................... 15,560 -- Common stock issued related to salary....... -- 72,225 Common stock issued related to loan fees.... -- 65,000 Decrease in: Accounts receivable........................... 183,142 (215,000) Prepaid expenses and other.................... 30,986 (66,289) Increase in: Accounts payable and accrued expenses......... 928,198 (117,300) Deferred revenues............................. (190,041) (375,156) ------------- ------------- Net cash used for operating activities..... (413,956) (1,235,745) ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment.............. (237,402) (247,970) Payments for film costs......................... (3,113,644) (1,722,413) Advances to stockholders........................ (164) (22,690) Payments received 6,150 -- ------------- ------------- Net cash used for investing activities..... (3,345,060) (1,993,073) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stocks......... -- 6,748,020 Proceeds from issuance of warrants.............. 16,900 149,500 Offering costs.................................. -- (1,407,964) Rescission of common stock...................... -- (40,000) Proceeds on loans from related parties ......... 137,000 -- Payments on loans from related parties.......... (37,218) (314,920) Proceeds on long-term debt...................... 2,010,963 -- Payments on long-term debt...................... (151,366) (108,546) Principal payments on capital leases............ (10,157) (30,378) ------------- ------------- Net cash provided by financing activities.. 1,966,122 4,995,712 ------------- ------------- NET (DECREASE) INCREASE IN CASH................. (1,792,894) 1,766,894 CASH, beginning of year......................... 1,795,657 28,763 ------------- ------------- CASH, end of year............................... $2,763 $1,795,657 ============= ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest.................................... $60,887 $116,132 ============= ============= State income taxes.......................... $7,466 $ -- ============= ============= SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Common stock issued for short-term debt...... $ -- $27,000 ============= ============= Long-term debt converted to equity............ $993,040 $133,500 ============= ============= Options and common stock issued related to film costs...................... $ -- $226,000 ============= ============= Common stock warrants issued with debt $124,501 $ -- ============= ============= Beneficial conversion feature of debentures $599,955 $ -- ============= =============
See accompanying notes. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 Note 1 - Nature of Operations and Summary of Significant Accounting Policies Nature of Operations and Consolidation - The consolidated financial statements include the accounts of American Champion Entertainment, Inc. (the "Company") and its wholly owned subsidiary, America's Best Karate ("ABK") which owns 100% of American Champion Media, Inc. ("AC Media"). The Company and AC Media were formed during 1997. Pursuant to an Agreement and Plan of Merger, dated as of July 14, 1997, the Company entered into a reorganization transaction pursuant to which the Company acquired all of the issued and outstanding shares of ABK (the "Reorganization"). The financial statements included herein give effect to the Reorganization in which the Company became the successor to ABK. All significant intercompany accounts and transactions have been eliminated in consolidation. AC Media focuses on operating and managing all media-related programs for the Company. These programs consist of fitness information video tapes, books and audio tapes and production of educational television programs for children which emphasize martial arts values and fun. ABK focuses solely on operating and managing the Company's karate studios, which are located in the San Francisco Bay Area. Revenue Recognition - AC Media - Revenue from films is recognized on the accrual method. Film costs are amortized using the individual-film-forecast-computation method, which amortizes costs in the ratio that current gross revenues bear to anticipated total gross revenues from all sources. The management of AC Media periodically reviews its estimates of future revenues for each master and if necessary a revision is made to amortization rates and a write down to net realizable value may occur. ABK - Substantially all ABK's students are required to sign a student enrollment agreement (the "Enrollment Agreement") covering a period from 36 to 48 months to complete a black belt course or a 2nd degree black belt course, respectively. The students have the option to (a) make an initial fee payment equal to 2-5 months of instruction with the remaining amount payable monthly over the remaining term of the agreement, (starting with the month following enrollment), or (b) make one or more lump sum payments for the entire course at a significant discount. Revenues are recognized over the term of the Enrollment Agreement. Note 1 - Nature of Operations and Summary of Significant Accounting Policies (continued) A student may cancel an Enrollment Agreement at any time. A refund, if any, is made if the student's advanced payments exceed the elapsed portion of the course, prorated at $75 per month (additional family members prorated at $45 per person per month). The elapsed portion of the course is the number of months between the course starting date and the cancellation date. Fee payments subject to refund are shown in the financial statements as deferred revenue, which will be recognized as revenue in the future years if there is no cancellation by the student. See Note 18 related to sales of studios. Concentration of Credit Risk - Financial instruments which potentially subject the Company to concentrations of credit risk are cash and accounts receivable arising from its normal business activities. The Company places its cash with high credit quality financial institutions. The amount on deposit in any one institution that exceeds federally insured limits is subject to credit risk. To reduce credit risk, the Company requires advanced payments from students and thus, no student fees receivable is recorded. Cash and Cash Equivalents - The Company considers certain highly liquid instruments purchased with original maturities of year or less to be cash equivalents. The Company had cash equivalents of $ -0- and $1,496,000 at December 31, 1998 and 1997, respectively. Property and Equipment - Property and equipment is stated at cost. Depreciation for furniture and fixtures and certain equipment is computed using the straight-line method over an estimated useful life of five years. Leasehold improvements are amortized using the straight-line method over the term of the respective leases. Leased assets under capital lease agreements are amortized using the straight-line method over the shorter of the estimated useful lives or the length of the lease terms, ranging from two to five years. Film Costs - Film costs consist of the capitalized costs related to the production of original film masters for videos and television programs. The net film costs are presented on the balance sheet at the net realizable value for each master. Fair Values of Financial Instruments - The carrying value of cash, receivables, accounts payable and short-term borrowings approximate fair value due to the short maturity of these instruments. The carrying value of long-term obligations approximate fair value since the interest rates either fluctuate with the lending banks' prime rates or approximate market rate. None of the financial instruments are held for trading purposes. Note 1 - Nature of Operations and Summary of Significant Accounting Policies (continued) Basic Loss Per Share - Statement of Financial Accounting Standards (SFAS) No. 128 was adopted by the Company during the year ended December 31, 1997. Basic loss per share is based on the weighted average outstanding shares issued. Because the Company has a net loss, the common stock equivalents would have an anti-dilutive effect on earnings per share. Accordingly, basic earnings per share and diluted earnings per share are the same. Income Taxes - Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. The Company and its Subsidiaries file a consolidated tax return. Presentation - Because of the Company's reduced activity in its karate instruction segment, management believes utilizing a classified balance sheet presentation is no longer appropriate, as the operating cycle of the media-related segment of the Company is expected exceed 12 months. Accordingly, an unclassified presentation is utilized for the accompanying balance sheet, which is an acceptable method under SFAS No. 53, "Financial Reporting by Producers and Distributors of Motion Picture Films". Reclassifications - Certain reclassifications have been made to the 1997 amounts to conform to the current presentation. Note 2 - Uses of Estimates, Risks and Uncertainties The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Significant estimates used in these financial statements include the recovery of film costs, which has a direct relationship to the net realizable value of the related asset. It is at least reasonably possible that management's estimate of revenue from films could change in the near term, which could have a material adverse effect on the Company's financial condition and results of operations. Note 3 - Property and Equipment 1998 1997 ----------- ----------- Furniture and fixtures...................... $53,705 $95,322 Equipment................................... 70,429 51,251 Leasehold improvements...................... -- 11,938 Leased assets............................... -- 119,899 Production equipment........................ 402,887 230,526 ----------- ----------- 527,021 508,936 Less accumulated depreciation and amortization............................. 131,691 253,513 ----------- ----------- $395,330 $255,423 =========== =========== Depreciation expense was $75,673 and $43,407 for the years ended December 31, 1998 and 1997, respectively. The accumulated depreciation related to the leased assets at December 31, 1998 and 1997 was $-0- and $119,899, respectively. Note 4 - Film Costs Film costs consist of the capitalized costs related to the production of videos and programs for television as follows: 1998 1997 ----------- ----------- Television program The Adventures of Kanga Roddy............... $5,455,764 $2,342,120 Videos Montana Exercise Video...................... 148,253 148,253 Strong Mind Fit Body........................ 18,042 18,042 ----------- ----------- 5,622,059 2,508,415 Less accumulated amortization............... 240,730 62,998 ----------- ----------- 5,381,329 2,445,417 =========== =========== Production of the first seven episodes of The Adventures of Kanga Roddy was completed during 1997. Thirteen additional episodes were completed during the year ended December 31, 1998. Both videos were completed in 1996, but only the Strong Mind Fit Body video has been released. During 1997, management wrote down the capitalized costs for this video by $105,000. Note 5 - Notes Payable, Related Parties The notes payable to related parties bear interest at -0- to 12% and are unsecured. Amounts due after 1999 are not material. Note 6 - Notes Payable Debentures, interest at 7% due quarterly, unsecured and due July 1, 2000, net of original issue discount of $86,662. Convertible to common stock at 75% of the then current market price of the common stock or 117.5% of the market price of the stock at the date of issue. $ 536,896 $ - Notes payable to individuals, interest at -0- to 12%, unsecured and due at various dates during 1999. 230,000 - Drawings from a $40,000 bank business credit card line with interest at the banks prime rate plus 6.5%. 40,000 34,001 Other 24,370 30,198 ---------- ---------- $ 831,266 $ 64,199 ========== ========== The debentures are due in 2000. However, these debentures, together with accrued interest, were converted to 495,335 shares of common stock subsequent to year-end. The remaining notes payable are substantially all due in 1999. Note 7 - Income Taxes Reconciliation of the Federal statutory tax rate of 34% and state tax rate of 8.8% to the recorded amounts are as follows: 1998 1997 ----------- ----------- Federal tax benefit at statutory rates...... ($450,000) ($274,000) State tax benefit at statutory rates........ (117,000) (75,000) Other....................................... 7,466 (13,000) Increase in valuation allowance............. 567,000 362,000 ----------- ----------- $7,466 $ -- =========== =========== The Company has net operating loss (NOL) carryforwards for federal income tax purposes of approximately $3,000,000, the benefits of which expire in 2011 through 2013 for federal purposes and through 2003 for state purposes. The NOLs created by the Company's subsidiaries prior to the reorganization and the NOLs created as a consolidated group subsequent to the reorganization described in Note 1, may have limitations related to the amount of usage by each subsidiary or the consolidated group as described in the Internal Revenue Code. In addition because of changes in ownership of the Company, the utilization of NOL's in any one year will be limited by section 382 of the Internal Revenue Code. Significant components of the Company's deferred tax assets and liabilities are as follows: 1998 1997 ----------- ----------- DEFERRED TAX ASSETS NOL carryford............................... $1,175,000 $500,000 Deferred revenue............................ 25,000 217,000 Other....................................... -- 36,000 Valuation allowance......................... (1,175,000) (608,000) ----------- ----------- 25,000 145,000 ----------- ----------- DEFERRED TAX LIABILITIES Accounts receivable......................... -- 127,000 Depreciation................................ 25,000 18,000 ----------- ----------- 25,000 145,000 ----------- ----------- $ -- $ -- =========== =========== Note 7 - Income Taxes (continued) SFAS No. 109 requires the Company to record a valuation allowance when it is "more likely than not that some portion of the deferred tax asset will not be realized." Management believes that some of the excess NOL carryforwards over temporary differences may be utilized in future periods. However, due to the uncertainty of future taxable income, a valuation allowance for the net amount of the deferred tax assets and liabilities has been recorded at December 31, 1998 and 1997. Note 8 - Lease Commitments The Company leases facilities under operating leases and gym equipment under capital leases that range from two to six years and expire at various dates through 2000. Some leases have options to renew for additional terms and some require additional increases as defined. Future minimum lease payments under these leases are: Capital Operating ----------- ----------- 1999........................................ $6,565 $228,000 2000........................................ -- 85,000 ----------- ----------- Total minimum lease payments................ 6,565 $313,000 =========== =========== Management of the Company has developed a plan to close certain studios related to its karate studio segment. As of December 31, 1998 and 1997, the Company has accrued $57,000 to account for the estimated costs to be incurred in future periods related to studios which have been closed. The accrual is included in accounts payable and accrued expenses in the accompanying consolidated balance sheet. Note 9 - Commitments and Contingencies In September 1996, the Company entered into an agreement with the director of The Adventures With Kanga Roddy television program, whereby the director would receive 2% in the distribution of net profits from the TV broadcasting, syndication, and video sales of the first 13 episodes of that program. Note 9 - Commitments and Contingencies (continued) The Company has entered into a distribution agreement with KTEH, the public broadcasting system ("PBS") station serving the San Jose, California area, for the exclusive right to distribute the "The Adventures with Kanga Roddy" series throughout the United States for a two-year period. Under the terms of the Distribution Agreement, the Company will receive $430,000, which is based on delivery of 13 episodes to KTEH. For the periods ended December 31, 1998 and 1997, the Company had recognized revenue of $215,000 in each year. In addition, the Company is entitled to 85% of any distribution fees collected by KTEH in excess of $505,000. Under the Distribution Agreement, the Company has also committed to sharing with KTEH (i) 8% of all revenues from the sale and licensing of products such as video tapes, books and music tapes and (ii) 5% of gross profits of the Company from the sale and licensing of toys and clothing. The Company has also granted KTEH a right of first refusal with respect to rights to the Kanga Roddy Series not granted to KTEH in the Distribution Agreement. In April 1998, KTEH agreed to purchase an additional 26 episodes and 2 one-hour specials for approximately $900,000. No revenue has been recognized from this transaction as of December 31, 1998. During 1998, the Company canceled the licensing agreements with SEGA. The Company exercised a "key man" clause to terminate the contracts. Management of the Company does not believe SEGA has any remaining rights under the agreements. During 1998, the Company entered into a non-exclusive toy licensing agreement with Timeless Toys with respect to the "The Adventures with Kanga Roddy" television program. Under the agreement, the Company is entitled to an 8% royalty. The agreement expires in January 2001. The Company has entered into an agreement with the two participants of the Montana Exercise Video in which a royalty fee of $1 will be paid for each tape sold. Note 10 - Related Party Transactions Loans to stockholders were $114,937 and $114,773 at December 31, 1998 and 1997, respectively. In November 1996, the Company agreed to pay to two participants of the Montana Exercise Video the sum of $50,000 from the proceeds of the initial public offering and another $50,000, which is included in accounts payable at December 31, 1998, will be paid 30 days prior to the release date. These two participants are stockholders of the Company. Note 10 - Related Party Transactions (Continued) During 1998 and 1997, the Company paid $67,500 and $60,000, respectively, to two shareholders for story lines and scripts for the production of the television series "The Adventures with Kanga Roddy". Note 11 - New Authoritative Pronouncements In February 1998 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 132, "Employers' Disclosures about Pensions and Other Post-retirement Benefits", in June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", and in October 1998, SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise". Management believes the provisions of SFAS Nos. 132, 133 and 134 will not have a material effect on the financial condition or reported results of operations and cash flows. Note 12 - Industry Segments The Company is involved in the development of educational television programs and fitness videos and operated one karate studio at December 31, 1998, which are segmented into two categories for reporting purposes. Television and videos reflect the activities related to the development and production of educational television programs and fitness videos. Tuition and related fees includes activities related to operations of karate studios. The relative contributions to net sales, income from operations and identifiable assets of the Company's two industry segments for the years ended December 31, 1998 and 1997 are as follows: Note 12 - Industry Segments (continued) 1998 1997 ----------- ----------- Net sales (1): Tuition and related fees.................... $362,686 $921,158 Video and television........................ 343,877 215,000 Corporate................................... 30,138 43,395 ----------- ----------- Net sales................................... $736,701 $1,179,553 =========== =========== Depreciation and amortization: Tuition and related fees.................... $8,616 $32,810 Video and television........................ 244,789 68,597 ----------- ----------- Depreciation and amortization............... $253,405 $101,407 =========== =========== Capital expenditures: Tuition and related fees.................... $2,778 $12,080 Video and television........................ 3,348,268 2,184,303 ----------- ----------- Capital expenditures ....................... $3,351,046 $2,196,383 =========== =========== Income (loss) from operations: Tuition and related fees.................... ($383,191) ($643,345) Video and television........................ (592,376) 43,642 Corporate................................... (647,957) (201,713) ----------- ----------- Net loss.................................... ($1,623,524) ($801,416) =========== =========== Identifiable assets (2): Tuition and related fees.................... $218,048 $216,241 Video and television........................ 5,800,159 2,884,565 ----------- ----------- Totals...................................... 6,018,207 3,100,806 Add: Corporate............................... 62,191 1,862,989 ----------- ----------- Assets...................................... $6,080,398 $4,963,795 =========== =========== [1] There were no sales between industry segments. [2] Corporate and other assets are principally cash and prepaid expenses. Note 13 - Employment Agreements During 1997, the Company entered into employment agreements with each of Mr. Chung, Mr. Chan, Mr. Berryessa, and Mr. Hutchins. Each agreement has a term of five years except Mr. Hutchins which is two years. Pursuant to the agreements, the Company will pay to these individuals a base salary of $150,000, $150,000, $105,000 and $75,000 per year, respectively. Each agreement also provides for the following bonuses: (i) options to purchase 87,500, 87,500, 25,000 and 20,000 shares of Common Stock of the Company, respectively, exercisable at 120% of the public Offering price of the Common Stock of the Company upon consummation of the Offering ($6 per share) and (ii) $200,000, $200,000, $100,000 and $100,000, respectively, if all of the Warrants issued to the public in the Offering are exercised by the holders thereof within the five-year (two years for Mr. Hutchins) exercise period of such Warrants. Additional options to purchase 20,000, 20,000, 15,000 and 10,000 shares of the Company's Common Stock will be granted at the end of each twelve-month period beginning July 1, 1998 at $6.5625 per share. The executives are also entitled to certain fringe benefits. If any of these individuals is terminated other than for cause, death or disability, the Company is obligated to pay such executive an amount equal to his base salary then in effect for the remaining term of the agreement. Note 14 - Stock Plans The Stock Plan was adopted by the Board of Directors and stockholders of the Company during 1997. The total number of shares of Common Stock subject to issuance under the Stock Plan is 400,000, subject to adjustments as provided in the Plan. During 1998, the shares available under the plan were increased to 800,000. The Plan provides for the grant of stock options, stock appreciation rights ("SARs") and other stock awards to employees of the Company or any consultant or advisor engaged by the Company who renders bona fide services to the Company; provided, that such services are not in connection with the offer or sale of securities in a capital raising transaction. The Plan is administered by the Compensation Committee of the Board of Directors (the "Committee"). Stock options may be granted by the Committee on such terms, including vesting and payment forms, as it deems appropriate in its discretion; provided, that no option may be exercised later than ten years after its grant, and the purchase price for incentive stock options and non-qualified stock options shall not be less than 100% and 85% of the fair market value of the Common Stock at the time of grant, respectively. Note 14 - Stock Plans (Continued) Unless terminated by the Board of Directors, the Plan continues until December 2007. The Plan provides for the automatic grant to each of the Company's non-employee directors of (i) an option to purchase 5,000 shares of Common Stock on the date of such director's initial election or appointment to the Board of Directors (the "Initial Grant") and (ii) an option to purchase 2,000 shares of Common Stock on each anniversary thereof on which the director remains on the Board of Directors (the "Annual Grant"). The options will have an exercise price of 100% of the fair market value of the Common Stock on the date of grant and have a 10-year term. Note 15 - Common Stock During the year ended December 31, 1997, the Company sold 1,300,000 shares of its common stock at $5 per share and 1,495,000 warrants to purchase the Company's common stock at $.10 per warrant, in a public offering. In addition, 130,000 warrants were issued to the underwriters for nominal consideration. Each warrant entitles the registered holder to purchase one share of common stock at $6.50 per share at any time through August 2002. During 1998, the Company issued 130,000 warrants upon exercise of underwriter's warrants to purchase warrants to purchase the Company's common stock. The Company received proceeds of $16,900 related to these warrants. The Company also issued 124,501 warrants in connection with the debentures issued during 1998. The Company received no proceeds related to these warrants. These warrants entitle the registered holder to purchase one share of common stock at $7.56125 per share at any time through July 2003. These warrants were valued by the Company at $1 each and were accounted as original issue discount (OID). The OID is being amortized against the related debt. At the time of the public offering the Company offered to certain stockholders of the Company who previously purchased common stock of ABK, the right to rescind their previous purchase and receive the return of their purchase price paid plus interest. The total number of shares subject to rescission was 684,619 (ACE shares). One stockholder rescinded 16,000 shares at $40,000. The rescission offer expired October 1, 1997. During 1997 certain "founding" stockholders of the Company canceled 228,622 shares of common stock. These stockholders received no proceeds related to cancellation of these shares. Note 16 - Stock Options At December 31, 1997, there were 400,000 options authorized and 393,000 options outstanding under the Company's Stock Plan. At December 31, 1998, there were 800,000 options authorized and 800,000 options outstanding under the Company's Stock Plan. No options were exercised or canceled during the year ended December 31, 1998. The Company applies the intrinsic value based method prescribed by Accounting Principals Board Opinion No. 25 "Accounting for Stock Issued to Employees," in accounting for employee stock options. Accordingly, compensation expense is recognized only when options are granted with a discounted exercise price. Any such compensation expense is recognized ratably over the associated service period, which is generally the vesting term. At December 31, 1998, the Company accounted for 700,000 options under this method. Stock options granted to non-employees for services provided to the Company are accounted for under Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock- Based Compensation." At December 31, 1998 and 1997, the Company accounted for 100,000 options, which were issued in connection with the production of "The Adventures With Kanga Roddy" under this method. These options were valued at $200,000 and are included in film costs and additional paid in capital in the accompanying balance sheet. The value of options issued to non- employee directors were not material and have been accounted for under the intrinsic value method. Pro forma net earnings and earnings per share information, as required by SFAS 123, has been determined as if the Company had accounted for employee stock options under SFAS 123's fair value method. The fair value of these options was estimated at grant date using a Black-Scholes option pricing model with the following weighted average assumptions for fiscal 1998 and 1997, respectively: risk free interest rate of 4.65 and 6.25 percent; dividend yield of 0 percent; expected option life of 7 years; and volatility of 78 and 42 percent. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the one-year average vesting period of the options. The Company's pro forma net loss for the year ended December 31, 1998 and 1997, respectively, was $(1,881,000) and $(1,049,000) and pro forma net loss per share was $(.47) and $(.33). Note 16 - Stock Options (Continued) Shares of Common Stock ----------------------------------- Available for Exercise of Options Options/ Under Award Plan Warrants ----------- ----------- ----------- Balance, December 31, 1996...... -- -- -- Authorized.................... 400,000 -- -- Granted....................... (393,000) 393,000 1,625,000 ----------- ----------- ----------- Balance, December 31, 1997...... 7,000 393,000 1,625,000 Authorized.................... 400,000 -- -- Granted....................... (407,000) 407,000 254,501 ----------- ----------- ----------- Balance, December 31, 1998...... -- 800,000 1,879,501 =========== =========== =========== No options were exercised or lapsed during the year ended December 31, 1998.
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 ------------ ----------- ----------- ------------ ----------- 1997 Options.... 393,000 7.6 $5.61 368,000 $5.61 Warrants... 1,495,000 4.6 6.50 1,495,000 6.50 1998 Options.... 800,000 8.2 4.07 389,000 5.59 Warrants... 1,879,501 3.6 6.57 1,879,501 6.57
Note 17 - Year 2000 In the opinion of management, no material adverse effect on either results of operations, cash flows or financial position is anticipated due to the modifications or replacement of existing information systems in order to accommodate year 2000 implications. Note 18 - Sale of Karate Studios During the year ended December 31, 1998, the Company sold four karate studios to the locations' general managers. The Company received notes receivable totaling $86,500 due in monthly payments of $333 to $1,000 including interest imputed at 10%. The Company has guaranteed payments of a studio lease, which are $4,673 per month through March 2000. The Company retained all advance payments of enrollment fees, which were approximately $310,000 as of the closing dates; however, the Company is liable for any future refunds to students enrolled prior to the closing dates. The Company reduced the liability for advance payments of enrollment fees related to these studios to $35,000, which is included in deferred revenue. Management will evaluate this liability quarterly in light of cancellations to date and expected future cancellations. Note 19 -Subsequent Events Common Stock Purchase Warrants - Subsequent to year-end the Company issued 600,000 warrants to purchase the Company's common stock. These warrants were issued to consultants for services provided to the Company. The Company received no proceeds upon issuance of the warrants. All holders exercised their rights to convert the warrants to common stock subsequent to year-end. The Company received total proceeds of $540,000 and issued one share of common stock for each warrant exercised. Financing - Subsequent to year-end the Company issued convertible debentures totaling $950,000. The interest rate on the Debentures is 7% per annum, payable in cash or in shares of the Company's Common Stock. The Debentures mature January 1, 2002 and may be converted to shares of Common Stock. The Company also issued 61,125 warrants in connection with these debentures. The Company received no proceeds from these warrants. The warrants are convertible to shares of the Company's common stock at $2.1406 per share and expire January 31, 2002. Holders of these debentures converted principal of $530,000 and interest of $5,017 to 871,719 shares of the Company's common stock subsequent to year-end. Subsequent to year-end the Company's Board of Directors approved a plan to sell 100,000 shares of convertible preferred stock in a private placement. Management expects to receive proceeds of approximately $4,050,000 (which is net of approximately $450,000 of transaction fees) related to these securities. Final settlement of this transaction will require shareholder approval. The preferred shares are convertible to the Company's common stock using a formula based on the five day average closing price of the Company's publicly traded common stock at the date the shares are sold. Any shares converted to common stock will be restricted stock for a period of twelve months from shareholder approval of the transaction. There is no guarantee that the Company will be able to sell the planned amount of securities or that the shareholders of the Company will approve the transaction. Note 19 -Subsequent Events (Continued) Issuance of Common Stock - Subsequent to year-end the Company issued 47,730 shares of common stock to consultants for no consideration. Note 20 -Going Concern The Company is planning to complete the production of an additional nineteen episodes of the television series "The Adventures of Kanga Roddy". Management expects to deliver these episodes during 1999. Production of these episodes is expected to require working capital in excess of the proceeds from the debentures and warrants (Note 19), which were closed subsequent to year-end. In addition the Company has experienced continuing losses from operations. These factors cause substantial doubt about the ability of the Company to continue as a going concern. Management is planning to use the proceeds from the sale of the convertible preferred stock (Note 19) to fund obligations incurred during the production of these episodes as well as the production of additional episodes and other working capital requirements during the remainder of 1999. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. The continuation of the Company as a going concern is dependent upon the success of the sale of preferred stock to qualified investors, approval of the transaction by the Company's shareholders and, thereafter, on attaining profitability. There can be no assurance that management will be successful in the implementation of its plan. The financial statements do not include any adjustments in the event the Company is unable to continue as a going concern. Note 21 -Beneficial Conversion Feature of Debentures The Company has restated its financial statements for the year ended December 31, 1998 (along with the effect on each quarter) to account for the beneficial conversion feature of its 7% convertible debentures in accordance with EITF D-60, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion." The application of EITF D-60 resulted in the recognition of a non-cash charge to interest expense of $599,955 ($0.15 per share) for the year ended December 31, 1998 with a corresponding increase to additional paid in capital. There was no effect on the balance sheet except for the reclassification of the interest expense from additional paid in capital to retained earnings. The impact of the application of EITF D-60 on the quarterly reports for 1998 was as follows:
1998 -------------------------------------------------------------- Quarterly information unaudited.) -------------------------------------------------------------- Q1 Q2 Q3 Q4 Total ------------ ----------- ----------- ------------ ----------- Interest Expense As reported $ 8,901 $ 8,761 $ 46,575 $ 12,210 $ 76,447 ============ ========== =========== =========== =========== Restated $ 8,901 $ 8,761 $ 463,196 $ 195,544 $ 676,402 ============ ========== =========== =========== =========== Net Loss As reported $ (134,890) $ (202,397) $ (448,787) $ (537,487) $ (1,323,561) ============ ========== =========== =========== =========== Restated $ (134,890) $ (202,397) $ (865,408) $ (720,821) $ (1,923,516) ============ ========== =========== =========== =========== Loss Per Share As reported $ (0.04) $ (0.05) $ (0.12) $ (0.13) $ (0.33) ============ ========== =========== =========== =========== Restated $ (0.04) $ (0.05) $ (0.23) $ (0.18) $ (0.48) ============ ========== =========== =========== ===========
INDEX TO EXHIBITS Exhibit No. Exhibit 1.1* Form of Underwriting Agreement 3.1* Amended and Restated Certificate of Incorporation 3.2* Bylaws 4.1* Specimen stock certificate 4.2* Warrant Agreement with form of Warrant 4.3* Form of Underwriters' Warrant 5* Opinion of Sheppard, Mullin, Richter & Hampton LLP 10.1* 1997 Stock Plan 10.2* Form of Stock Option Agreement for 1997 Stock Plan 10.3* 1997 Non-Employee Directors Stock Option Plan 10.4* Form of Non-Employee Directors Stock Option Agreement 10.8* Promissory Note dated December 15, 1994 made payable by Messrs. Chung and Chan and their wives in favor of Michael Triantos M.D. Inc. Money Purchase and Profit Sharing Pension Plans Trust 10.9* Employment Agreement between the Company and George Chung dated March 4, 1997, effective upon the closing date of the Offering 10.10* Employment Agreement between the Company and Anthony Chan dated March 4, 1997, effective upon the closing date of the Offering 10.11* Employment Agreement between the Company and Don Berryessa dated March 4, 1997, effective upon the closing date of the Offering 10.12* Employment Agreement between the Company, AC Media and Jan Hutchins dated March 4, 1997, effective upon the closing date of the Offering 10.13* Convertible Loan Agreement dated as of May 5, 1995, between ABK and David Y. Lei 10.15* Amended Deal Memo between ABK and Rick Fichter dated February 23, 1997, with respect to payments related to the Kanga Roddy Series 10.17* Form of Indemnification Agreement 10.19* Letter dated October 29, 1996 from the Company to Tim Pettitt regarding certain payments to the Montanas 10.20* Distribution Agreement dated June 18, 1996 by and between America's Best Karate and InteliQuest 10.21* Distribution Agreement, dated May 6, 1997, by and between KTEH, San Jose Public Television and American Champion Media, Inc. 10.22* Letter Agreement, dated June 1997, between AC Media, Inc. and Sega of America, Inc. 10.23* Business Loan Agreement between America's Best Karate and Karen Shen 10.24* Business Loan Agreement between America's Best Karate and Thomas J. Woo 10.25** Licensing Agent Agreement, dated July 25, 1997, between American Champion Media, Inc. and Sega of America, Inc. 10.26 Consultant Agreement between Olympia Partners, LLC, Dalton Kent Securities Group, Inc. and American Champion Entertainment, Inc. 10.27 Merchant Licensing Agreement between Timeless Toys and American Champion Media, Inc. 10.28 Loan Agreement between Olympia Partners and American Champion Entertainment, Inc. 10.29 SEGA Agreement termination letter. 10.30 Consultant Agreement between American Champion Entertainment, Inc. and Trademark Managment 21.1* Subsidiaries of the Registrant 23.1 Consent of Moss Adams, LLP 27.1 Financial Data Schedule - ------------------------- * Filed as an exhibit with the registrant's Form SB-2 filed with SEC on March 21, 1997 or Form SB-2/A filed March 3 and June 20, 1997 and incorporated by reference herein. ** Filed as an exhibit with the registrant's Form 10-KSB filed with SEC on March 24, 1998 and incorporated by reference herein. EX-10.26 2 CONSULTING AGREEMENT Exhibit 10.26 Consulting Agreement Mr. Seth Fireman Mr. Alan Elkes Mr. Fred Rudy Chief Executive Officer Managing Partners Dalton Kent Securities Group, Inc. Olympia Partners, LLC 711 Fifth Avenue, 15th Floor 660 Madison Avenue, 15th Floor New York, NY 10022 New York, NY 10021 American Champion Entertainment, Inc. ("ACEI") hereby appoints Olympia Partners, LLC and Dalton Kent Securities Group, Inc. as financial consultants ("Consultants") to ACEI with specific services as following: * Assist in seeking financing for ACEI's production needs for the TV program * Provide and set up promotional activities for ACEI, which includes but not limited to retail support of ACEI's shares as traded on Nasdaq * Term: 24 months beginning November 25, 1998 ACEI will compensate Consultants as follows, to be equally divided between Olympia Partners, LLC, and Dalton Kent Securities Group, Inc.: 1) On the first business day of January 1999, ACEI will pay consultants for services rendered in December 1998. This compensation will, at the option of ACEI, equal to an aggregate of $100,000 or 100,000 warrants exercisable at $1.25 per share. And, 2) Thereafter the following compensation shall be paid in aggregate to the Consultants: Eligible from Effectiveness Amount Strike Price of S-3 Registration Expires 100,000 shares $1.50 per share 45 days 30 months 100,000 shares $2.00 per share 90 days 30 months 100,000 shares $2.50 per share 135 days 30 months 100,000 shares $2.75 per share 180 days 30 months 100,000 shares $4.00 per share 360 days 30 months For Accepted: American Champion Entertainment, Inc. Olympia Partners, LLC By: /s/ Anthony K. Chan By: /s/ Seth Fireman Anthony K. Chan Name: Seth Fireman President & CEO Title: Managing Partner Date: November 25, 1998 Dalton Kent Securities Group, Inc. By: /s/ Alan Elkes Name: Alan Elkes Title: Chief Executive Officer EX-10.27 3 MERCHANDISE LICENSE AGREEMENT Exhibit 10.27 Merchandise License Agreement "Licensor": American Champion Media, Inc. 1694 The Alameda, Suite 100 San Jose, CA 95126 Contact: Anthony Chan Phone: (408) 288-8199 Fax: (408) 288-8098 "Licensee": Timeless Toys 1165 Chess Drive, Suite C Foster City, CA 94404 Contact: Harold Nizamian Phone: (650) 574-5480 Fax: (650) 574-3890 "Effective Date" of the Agreement is upon signing. "Properties" are the following Characters or other trademarks: Kanga Roddy and all related characters seen in the Adventures with Kanga Roddy television program. "Products" that Licensee is authorized to produce are non-articulated plush sizes 4.5" - 36", plush backpacks, plush fanny packs, plush hand puppets and plush key chains which bear the Properties. "Trademarks" being licensed to Licensee are Kanga Roddy and all related characters. "Territory" where Licensee can sell Products is United States and Canada. "Distribution" is limited to department stores and specialty chains, (Discovery Channel, Learning Express, Nordstroms and Macy's). Mass market is excluded as well as FAO Schwartz and JC Penney. "Advance Royalty" is $5,000 due upon contract execution. "Earned Royalty" is 8% for Products shipped from a location inside the Territory and 10% for Products shipped FOB rate. "Guaranteed Royalty" is $20,000. "Initial Sale Date" is February 1, 1999. "Term" of this agreement is from the Effective Date until January 31, 2001. "Renewal": Option to renew for an additional two year period provided Licensee has generated in excess of $500,000 in royalties. All Products and Advertising Materials will bear this notice: In complete form: Kanga Roddy is registered in the U.S. Patent and Trademark Office. Kanga Roddy and all related characters and indicia are trademarks of American Champion Media, Inc. Copyright 1998 American Champion Media, Inc. 1694 The Alameda, Suite 100, San Jose, CA 95126, U. S. A. All Rights Reserved. Or in short form if space is limited: Copyright 1998 American Champion Media The parties have agreed to the terms of this Merchandise License Agreement contained above and on the following pages. American Champion Media, Inc. Timeless Toys By: /s/ Anthony K. Chan By: /s/ Harold A. Nizamian (signature) (signature) Anthony K. Chan Harold A. Nizamian (name) (name) Chief Executive Officer President & CEO (title) (title) December 23, 1998 December 31, 1998 (date) (date) EX-10.28 4 BUSINESS LOAN AGREEMENT Exhibit 10.28 BUSINESS LOAN AGREEMENT Borrower: American Champion Lender: Olympia Partners, LLC Entertainment, Inc. 660 Madison Ave, 1694 The Alameda, Suite 100 15th Floor San Jose, CA 95126 New York, NY 10021 Principal Loan Date Interest Rate Interest Maturity Amount (simple, yr) Payment Date $100,000.00 11-25-1998 7.00% 45/365 days = 863.01 01-08-1999 Total Principal & Interest Payment $100,863.01 THIS BUSINESS LOAN AGREEMENT between American Champion Entertainment, Inc. ("Borrower") and Olympia Partners, LLC ("Lender") is made and executed on the following terms and conditions. TERM. This Agreement shall be effective as of November 25, 1998, and shall continue for a time period defined per above schedule. USE OF LOAN PROCEEDS. It is represented to Lender that Borrower intends to use the borrowed funds for the production of the Borrower's TV program "Adventures With Kanga Roddy" and for general working capital. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender as of the date of this Agreement: Organization. Borrower is a Delaware corporation which is duly organized, validly existing, and in good standing to conduct business in the State of California. Borrower has the full power and authority to own its properties and to transact the businesses in which it is presently engaged or presently proposes to engage. Authorization. The execution, delivery, and performance of this Agreement and all related documents by Borrower, to the extent to be executed and performed by Borrower, have been duly authorized by all necessary action by Borrower; and do not conflict with any provision of its articles of incorporation or organization or bylaws. Legal Effect. This Agreement constitutes, and any instrument or agreement require hereunder to be given by Borrower when delivered will constitute, legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. Survival of Representation and Warranties. Borrower understands and agrees that Lender is relying upon the above representations and warranties in making the above referenced Loan to Borrower. Borrower further agrees that the foregoing representations and warranties shall be continuing in nature and shall remain in full force and effect until such time as Borrower's Loan shall be paid in full, or until this Agreement shall be terminated in a manner satisfactory to both Lender and Borrower. Inspection. Lender or agents of Lender may at any reasonable time, inspect Borrower's properties and examine or audit Borrower's books, accounts, and records. Default. In the event that Borrower fails to make payment to Lender when due on the Loan, or if an alternative method of payment acceptable to the Lender is not made, Lender may immediately request Anthony K. Chan and George Chung ("Chan" & "Chung"), who together act as personal guarantors for Borrower, to cause Continental Stock Transfer & Trust Company to issue 75,000 shares each from Chan & Chung's personal holdings of ACEI (total 150,000 shares) in favor of Lender. Chan & Chung have executed Lock Up Agreements with Dalton Kent Securities dated July 15, 1997 which prohibits Chan & Chung from selling personal shares for 24 months from the date of such agreements. In the event that the 150,000 shares from Chan & Chung are issued to Lender under this Default provision, Dalton Kent Securities, by applying signature below, acknowledges that it will release such shares from lock up provisions to allow Lender to sell such shares. Borrower agrees to pay upon demand all of Lender's out-of-pocket expenses, including attorney's fees, incurred in connection with Borrower's Default on this Agreement. Borrower also will pay any court costs, in addition to all other sums provided by law. Lender may submit to the jurisdiction of the courts of Santa Clara County, the State of California. BORROWER AND LENDER acknowledge having read all the provisions of this Business Loan Agreement, and agree to its items. This agreement is dated as of November 25, 1998. BORROWER: LENDER: American Champion Entertainment, Inc. By: /s/ Anthony K. Chan By: /s/ Seth Fireman Anthony K. Chan Name: Seth Fireman President & Chief Executive Officer Title: Managing Partner GUARANTORS: ACKNOWLEDGED: Dalton Kent Securities By: /s/ George Chung By: /s/ Alan Elkes George Chung Alan Elkes Chief Executive Officer By: /s/ Anthony K. Chan Anthony K. Chan EX-10.29 5 SEGA AGREEMENT TERMINATION LETTER Exhibit 10.29 October 28, 1998 Anne Jordon General Counsel SEGA of America 255 Shoreline Drive, 2nd Floor Redwood City, CA 94065 Re: Licensing Agent Agreement - Resignation of Cynthia Wilkes Dear Anne: We have received verbal notice from Cynthia Wilkes yesterday that she will be leaving Sega of America, effective November 14, 1998. Pursuant to Clause 13 of the Licensing Agent Agreement dated July 25, 1997 executed by our two companies: "If Cynthia Wilkes ("Wilkes") shall leave the employ of Sega during the Term, American may terminate this Agreement by giving written notice to Sega within thirty (30) days after American receives notice from Sega that Wilkes will be leaving the employ of Sega." We hereby are giving notice to Sega, that due to Cynthia Wilkes' departure from Sega, that we elect to terminate, effective immediately, the above mentioned Licensing Agent Agreement in its entirety. If you have any questions, please feel free to call me at 408-288-8199, ext-8888. Regards, /s/ Anthony K. Chan Anthony K. Chan Chief Executive Officer American Champion Media, Inc. a subsidiary of American Champion Entertainment, Inc. cc: Cynthia Wilkes EX-10.30 6 CONSULTING AGREEMENT FOR JOY TASHJIAN Exhibit 10.30 Mr. Anthony Chan Mr. Don Berryessa American Champion Entertainment. 1694 The Alameda, Suite 100 San Jose, CA 95126 CONTRACT FOR CONSULTING SERVICES This contract is made as of November 24, 1998 between AMERICAN CHAMPION ENTERTAINMENT, mailing address is 1694 The Alameda, Suite 100, San Jose, California, 95126, hereinafter referred to as "Client", and TRADEMARK MANAGEMENT (Joy M. Tashjian), mailing address is 4 Julianna Court, Moraga, CA 94556, hereinafter referred to as "Consultant". 1. DESCRIPTION OF WORK Consultant agrees to provide International Agent Management, Executive Licensing Services, License development and Licensee Consulting Services to Client. 2. COMPENSATION TO CONSULTANT Client shall pay Consultant as consideration for aforementioned services the sum of $3500.00 per month (payable to Joy M. Tashjian) for the term of one year through November 30, 1999. Both Client and Consultant may cancel this agreement provided either party give a sixty day written notice. Client will remain obligated to compensate Consultant for their full commission for any agreements initiated and executed during the term. Any expenses related to travel, client entertainment, telephone, faxing, in accordance with services being performed in this agreement, shall be discussed with Client in advance, and payable by Client upon receipt of invoice from Consultant. 3. COMMISSION In addition to Consultant's monthly retainer described in paragraph 2, Client agrees to compensate Consultant with a Ten Percent (10%) gross domestic commission and net international agents fees for all agreements executed. This percentage shall be paid to the Consultant throughout the term and any extensions of these licensee agreements. Payment is due to consultant fifteen days after receipt by client of the quarterly royalty reports from manufacturers and agents. Client shall provide Trademark Management with copies of the quarterly reports from licensees and agents along with a detailed statement. Payments for consultation services are due upon receipt of the monthly billing at the beginning of each calendar month. If the Client fails to pay Consultant according to the payment schedule set forth above, Consultant may, upon five days written notice to Client, suspend performance of services under this contract. Unless Consultant receives payment in full within ten days of the date of the notice, Consultant may stop all further services without further notice. In such, Consultant shall not be liable for any canceled agreements or damages caused to Client. Unpaid balances to Consultant shall accrue interest at 18% per month. 4. ARBITRATION Any controversy or claim arising out of, or relating to, this contract or the making, performance, or interpretation of this Contract, the amount of which exceeds the jurisdictional limits for small claims action under California law, shall be settled by arbitration. 5. MISCELLANEOUS PROVISIONS (A) This document represents the entire and integrated agreement between Client and Consultant and supersedes all prior negotiations, representations or agreements, either in writing or oral. This contract may be amended only through written agreement by both parties. (B) This Contract shall be governed by the laws of the State of California. This shall lie for any litigation arising out of the Contract. (C) This Contract is binding on Client and Consultant as well as their partners, successors, and assigns. However, this contract may not be assigned by either party without prior written consent of the other party. (D) Consultant is not responsible for any actions taken by associates, agents or manufacturers Consultant may introduce to Client and Client may engage agreements with. Consultant has provided Client with projections and objectives, these are not guaranteed by Consultant and are solely dependent on what the industry will bear. (E) In the event the services of this agreement are terminated by Client prior to completion of the term of this agreement, Client shall be responsible to compensate Consultant for services through the term of this agreement. (F) All documents provided to Client and Consultant are confidential and legally privileged only for the use of the individual or entity named on the document. Any dissemination, distribution or copying of these documents is strictly prohibited. (G) If any lawsuit or arbitration is brought to enforce or interpret the provisions of this agreement, the prevailing party will be entitled to reasonable attorney's fees, in addition to any other relief to which that party may be entitled. Client Date: 11-25-98 /s/ Anthony K. Chan Anthony K. Chan / CEO American Champion Entertainment, Inc. Consultant Date: 11-25-98 /s/ Joy Tashjian Joy Tashjian / Principal Trademark Management ADDENDUM This will serve as an addendum to the agreement between American Champion Entertainment ("Client") and Trademark Management ("Consultant") dated November 24, 1998. All other terms and conditions will remain the same. 2. COMPENSATION Client agrees to review Consultant compensation for an increase of the monthly retainer to $4000.00 per month after the initial ninety day period from date of execution of the aforementioned November 24, 1998 agreement. 3. COMMISSIONS (A) Consultant shall receive a 5% gross commission rate for the Toy Island and Timeless Toys agreements. (B) In the event either party elects to terminate the agreement the consultant is entitled to the following commission Schedule: Full commission of 10% gross for the months 1-12 after termination of agreement for all contracts other than the Timeless Toys and Toy Island contracts which the commission is 5%. Half commission of 5% gross for months 13-24 for all agreements other than the Timeless Toys and Toy Island agreements which the commission shall be 2.5%. Date: 11-25-98 /s/ Anthony K. Chan Anthony K. Chan / CEO American Champion Entertainment, Inc. Date: 11-25-98 /s/ Joy Tashjian Joy Tashjian / Principal Trademark Management EX-23.1 7 WRITTEN CONSENT FROM INDEPENDENT AUDITORS Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS American Champion Entertainment, Inc.: We consent to the incorporation by reference in Registration Statement Numbers 333-60511, 333-67879, 333-72253, 333-82963 and333-90459 on Forms S-3 and Registration Statement Numbers 333-43161, 333-60107 and 333-80269 (American Champion Entertainment, Inc. 1997 Stock Plan and 1997 Non-Employee Directors Stock Option Plan of American Champion Entertainment, Inc.) on Forms S-8 of our report dated March 19, 1999, except as to Note 21, which is dated November 11, 1999, appearing in and incorporated by reference in this 10-KSB/A, Amendment No. 1 to Annual Report on Form 10-KSB of American Champion Entertainment, Inc. for the year ended December 31, 1998. /s/ Moss Adams LLP Moss Adams LLP San Francisco, California November 11, 1999 EX-27.1 8 ARTICLE 5 FIN. DATA SCHEDULE FOR 10-K
5 This schedule contains summary financial information extracted from the Balance Sheet and Statement of Operations included in the Company's Form 10-K for the year ended December 31, 1998 and is qualified in its entirety by reference to such Financial Statements. 1 Dec-31-1998 Jan-01-1998 Dec-31-1998 12-MOS 2,763 0 37,675 0 0 6,080,398 527,021 131,691 6,080,398 2,175,195 0 0 0 7,122,414 (3,217,211) 6,080,398 37,956 736,701 26,152 26,152 2,257,626 0 679,402 (1,916,050) 0 (1,916,050) 0 0 0 (1,923,516) ($0.48) ($0.48)
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