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Friday, December 12, 1997

American Champion Entertainment, Inc.
(Nasdaq: ACEI)
Phone: 510-782-8168
Price (12/11/97): $7 3/16


HOW DID IT DOUBLE?

What do football legend Joe Montana, karate black belts, and children's television have in common? They're all involved in this Double.

For several years now, black belt hall-of-famer and American Champion CEO/CFO Anthony Chan has been instructing members of the San Francisco 49ers in karate and getting them psyched for games. Someone thought Chan's nearly bankrupt karate studio business was a natural for producing a new children's TV series that would promote family friendly, non-violent martial arts values such as humility, discipline, and respect.

The company went public at $5 in late August, immediately got chopped to $3 1/2, but has since doubled. In the past six months, the company has closed half of its karate studios because they were unprofitable. More important, it's made progress on producing and selling its Adventures With Kanga Roddy series.

Six episodes are in the can with the final seven to be completed early next year. Last May, San Jose PBS affiliate KTEH agreed to distribute the series, which will premier in April. In June, Sega of America began acting as a non-exclusive agent for American Champion, with the aim of signing up merchandising licensees.

Major shareholder Joe Montana and board member/former 49er Ronnie Lott have now signed on as executive producers, meaning they will help promote the show. Their wives star in it.

BUSINESS DESCRIPTION

Based in Hayward, California, American Champion now owns and operates five America's Best Karate schools. The company's future, though, depends on the success of the Kanga Roddy series and associated merchandising opportunities.

Roddy is aimed at preschool and primary school children. It features a six-foot tall kangaroo character who is a martial arts expert. Each episode focuses on children at a community center who encounter an ethical or social problem. Their teachers, played by Jennifer Montana and Karen Lott, will direct them to Uncle Pat, the owner of a rare books store played by Karate Kid's Pat Morita.

Pat and his bookworm Shakespeare then transport the kids to the land of Hi-Yah, home to Kanga Roddy. While teaching the children some physical activity (balancing, kicking, jumping), Roddy helps them solve the problem, providing examples through songs.

KTEH has an exclusive right to distribute Kanga Roddy in the U.S. for two years. The company thinks that PBS stations in up to 40% of the U.S. could air the show.

American Champion also markets other videos, including the Joe Montana Exercise Video, a 50-minute cardio kickboxing video that stars Montana and his wife.

Insiders own 35% of the stock, while the Montana family owns 4%.

FINANCIAL FACTS

Income Statement
12-month sales: $0.99 million
12-month income: ($0.74 million)
12-month EPS: ($.0.26)
Profit Margin: N/A
Market Cap: $23.7 million

Balance Sheet
Cash: $3.3 million
Current Assets: $3.5 million
Current Liabilities: $0.7 million
Long-term Debt: $0.04 million

Ratios
Price-to-earnings: N/A
Price-to-sales: 23.9

HOW COULD YOU HAVE FOUND THIS DOUBLE?

An inexperienced underwriter (Dalton Kent Securities) brings a karate school slash TV production company public on the cusp of penny-stockdom, and the stock quickly gets whacked 30%. An investor couldn't martial much confidence from that scenario. American Champion didn't look like a contender for the title of most likely to double.

WHERE TO FROM HERE?

Even after closing half of its supposedly less profitable karate studios, it's not clear whether American Champion can expect profits from that segment of the business. And that's the only one currently producing revenue. So the question is, can the Roddy series be worth $24 million?

The prospectus says the company has "no significant experience" developing or producing TV programs or in licensing and merchandising products. Both are businesses in which even old pros can drop the ball. Plus, the company anticipates "significant additional operating losses for the foreseeable future" as it continues to produce and market Roddy and other media projects.

The good news is that KTEH will pay the company $430,000 as an advance on royalties as the episodes are delivered. The production is on schedule and on budget. The series has a minor star (Morita), a concept that combines action without all the usual violence, and a couple of high-profile producers with the cachet to get some attention for the show.

A hit could help create a mini media empire. Yet, Roddy is an unproven commodity. If this kangaroo flops, this Champion could be kicked down under in a hurry.

-- Louis Corrigan
(TMFSeymor@aol.com)


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