In our first installment on American Champion Entertainment, Inc. we reported on the Company’s plan to expand into the fiber optic cable business in China. We also looked at one recent Registration Statement filed for the benefit of some of the Company’s directors, officers and attorney.
But what business has American Champion been engaged in up until now, and what other plans does it have on the table? In this installment, we explore the business of American Champion, and take a look at the Company’s financial condition.
American Champion Entertainment was founded in 1997, and conducted an
IPO in July of that year. At the time of its public offering, the Company operated a chain of karate studios. Today, American Champion has curtailed those operations – it operates one karate school in the San Francisco Bay area, having closed or sold all of its other studios.
The Company also produces and markets a television program for children called "Adventures of Kanga Roddy" and seeks to exploit ancillary rights from the Kanga Roddy series. Although the Company says that Kanga Roddy has been broadcast on as many as 65 public television stations throughout the United States (and has announced plans to air episodes in Japan and the Middle East as well), revenues from the series have not been sufficient to offset the costs of production or meet the Company’s expenses.
The Kanga Roddy series centers around a ten-foot tall kangaroo named, what else, Kanga Roddy. Although Kanga Roddy is schooled in martial arts, he never fights because he believes conflicts can be resolved through reason and non-violent means. The Executive Producers of the series are former San Francisco 49er football stars Joe Montana and Ronnie Lott, whose wives are featured on the program. Mr. Lott is also a director of American Champion.
According to the Company, American Champion entered into an agreement with KTEH, the public television station for San Jose, California in 1997. That agreement granted KTEH the exclusive rights to distribute the Kanga Roddy series for a two year period. KTEH paid the Company $430, 000 as an advance against the Company’s share of royalties from the series. The Company later extended the relationship with KTEH by agreeing to deliver an additional twenty-six one-half hour shows and two one hour specials to the station in exchange for payment to American Champion of $30,000 for each half hour show and $60,000 for each hour special. The Company has also agreed to share a portion of its revenues from the sale and licensing of Kanga Roddy-related items (such as music, clothing and toys) with KTEH.
As of October 1998, American Champion had produced thirteen one-half hour episodes. By February 2000, about sixteen months later, the Company was reporting that it had now completed 29 episodes, or 16 new shows in the last 16 months. The Company does not say how often it expects the Kanga Roddy series to air, but with such a limited inventory of episodes, daily, or even weekly, programming of new episodes would not appear to be on the immediate horizon.
It is unclear whether American Champion has received any additional royalties from broadcasts of the shows beyond the initial $430,000 payment. One thing is evident, however - the cost of developing and producing the programs is significant. The Company projects that it would cost approximately $2.6 million to produce the remaining 12 episodes due under its commitment to KTEH - $210,000 per episode. That presents a problem. According to American Champion’s public filings, the Company lacks the funds to complete filming, and doesn’t know where that financing will come from. Without additional funding, the Company will be unable to deliver the programming as required under its agreement with KTEH.
Even assuming that American Champion can muster the resources to complete the initial 41 episodes, how does the Company expect to generate revenues? The Company provides investors with little information on that score. With the cost of producing a one-half hour episode projected at $210,000, and the prospect of receiving only an initial $30,000 payment for that episode, how does the Company anticipate making up the shortfall?
MAY I SEE YOUR LICENSE PLEASE
American Champion has declared other plans to generate income related to the Kanga Roddy characters. Those announcements, however, leave many questions unanswered.For example, American Champion issued a press release in September 1999 announcing a "major licensing agreement with Prestige Toys of New York" to develop a line of plush toys based upon the Kanga Roddy characters. Earlier in 1999, the Company had announced what would appear to be a similar agreement with another toy manufacturer, Timeless Toys of Foster City, California. According to the Company’s January 6, 1999 press release, Timeless Toys was planning "a major launch of a specialty market, high quality plush line based on characters in "Adventures With Kanga Roddy." At that time the Company stated that "the full Kanga Roddy line" would be on display at a New York City Toy Show in February 1999.
What were the terms of the licensing agreements with Prestige and Timeless Toys? What are the licensing fees, and when are they payable to the Company? The Company’s press releases do not address those questions, or reveal any of the material terms of the licensing agreements.
Have Timeless Toys or Prestige produced, and sold, any Kanga Roddy items? If so, has American Champion received any fees? How are they calculated?
American Champion has periodically revealed other plans for Kanga Roddy products. The Company operates an e-commerce site that sells several Kanga Roddy toys, videotapes of past episodes and Kanga Roddy logo apparel. In July 1999, the Company issued a press release announcing an agreement to distribute CD-ROMS based on the Kanga Roddy characters. But has the Company seen any income from any of these enterprises?
For that matter, how have the Company’s fitness products fared? American Champion says that it develops and markets video tapes, audio tapes and workbooks that specialize in fitness information, including a cardio kick-boxing video starring Joe Montana and his wife. The Company issued a press release in September 1999 saying it had granted a license to market the video, but what are the terms of that agreement? More important, what are the licensing fees? And how are sales going?
Investors may be seeking more details as they attempt to assess the prospects for American Champion. Has the Company actually enjoyed any revenues from these licensing agreements (aside from one apparent upfront licensing fee of $10,000)? Are any revenues expected in the near future? Are the Kanga Roddy CD-ROMS available? How about proceeds from the e-commerce site? The most recent financial statements filed by American Champion do not identify revenues from these ventures. Can investors anticipate cash flow from these projects? American Champion does not say.
BUT WHAT WOULD KANGA RODDY SAY?
Over the two plus years since its IPO, American Champion has declared plans for a number of other business initiatives that are not related to its karate studios, Kanga Roddy products or fitness materials. In our first installment of this series we reported on American Champion’s recently announced Letter of Intent to acquire a Company called Beijing Wisdom. This is not the only other venture announced by the Company. It is not even the only Letter of Intent.In fact, American Champion’s flirtation with China didn’t begin in February 2000. In October 1999, the Company announced that it intended to acquire 80% of the Great Wall International Sports Media Company of Beijing, China through an exchange of stock between the two companies. According to that release, Great Wall would receive $6 million in American Champion stock. While American Champion stated that this would take place over a period of three years, the Company did not say how, or when the stock would be valued.
According to the Company, Great Wall is engaged in the promotion of sports and cultural events, having performed services in connection with the Beijing Marathon and World Cup Soccer. American Champion’s President and CEO, Anthony Chan, described the acquisition as an opportunity to add "major international athletic competition to [the Company’s] list of family entertainment products…"
The American Champion press release notes that Great Wall has net tangible assets of $4.1 million and gross revenues for the first nine months of 1999 of $7.7 million. It points out, however, that those figures are unaudited (as are those contained in the recent press release announcing the Company’s Letter of Intent to acquire Beijing Wisdom).
Since its initial announcement of the Great Wall acquisition, the Company has made repeated references to the transaction, assuring the public that the transaction is moving forward, and promising that audited financial statements will soon be forthcoming. Still, the Company has not filed any documents with the SEC reflecting this transaction, or detailing its terms, and no reference to the venture is contained in any of the Company’s subsequent public filings (including the Registration Statements filed for various Selling Shareholders of American Champion).
Just how does the Company intend to expand its "list of family entertainment products" through its association with Great Wall? American Champion says it plans to stage "the first ever professional boxing match to take place in China" in April 2000. Matches would reportedly feature Hector "Macho" Camacho and Laila Ali, the daughter of Muhammed Ali.
Is a professional boxing tournament consistent with the Company’s family entertainment products? Or with Kanga Roddy’s non-violent philosophy? Perhaps even more important to most investors, how does the Company intend to make money from the event? Who is financing the bouts? How will the fighters be paid? What are the arena fees? Will the fights be broadcast? Where and when? Thusfar, the American Champion press releases have offered none of this information.
Other ventures? American Champion shares surged on the day the Company disclosed the Letter of Intent to acquire Beijing Wisdom. Investors should always be aware, however, that a Letter of Intent is only a first step, and does not mean that an agreement will ever be finalized, or that a transaction will ultimately be concluded. There are many hurdles to be crossed before an acquisition becomes reality – due diligence, shareholders’ approval, acceptable audited financial statements - to name a few.
In July 1999, American Champion issued a press release stating that it had signed a Letter of Intent to acquire something called Pulse Entertainment Network. According to that press release Pulse, which intended to acquire and market entertainment properties via the Internet, would operate as a wholly-owned subsidiary of American Champion. The Company also stated that Pulse would bring assets to the enterprise that included $4.5 million in cash, and that several representatives from Pulse would be named to American Champion’s Board of Directors.
Was a contract ever signed? If so, what were its terms? Has that transaction ever been concluded? If not, is it still expected to proceed? That information does not appear to be available in the Company’s public filings.
BUT WHERE’S THE REVENOODY?
With all of these activities, what is the financial picture at American Champion? The Company’s most recent 10 Q showed revenues of $578,000 for the first nine months of 1999. It also revealed costs and expenses of almost $4 million, including interest payments of more than $1.3 million. Net losses were over $3.4 million.The Company’s auditors had previously voiced their concerns about American Champion’s financial state. In the Company’s Form 10-K for the year ended December 31, 1998, the auditors noted that the lack of financial resources raised substantial doubts about American Champion’s ability to continue as a going concern. Has the Company taken steps to alleviate those concerns? American Champion’s latest Registration Statements continue to note the Company’s need for additional financing.
Recently, the Company was forced to address yet another issue. Shares of American Champion stock, which had traded as high as $10 in February 1998, had drifted below $1.00 per share during the latter part of 1999. In order to maintain listing on the NASDAQ Small Cap market, a company’s share prices must remain above $1.00. Companies sometimes accomplish this by means of a reverse stock split. In a traditional stock split, investors are rewarded with additional shares. With a reverse stock split the opposite occurs – the number of shares held by each stockholder is reduced.
On January 4, 2000, American Champion did just that. The Company effected a four-for-one reverse split of its shares in order to comply with the minimum price requirements imposed by NASDAQ.
So how is the Company managing to finance its operations? We look at that subject in our next installment on American Champion. Be sure to tune in for Episode III.
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