By Erin Sherbert
By Erin Sherbert
By Leif Haven
By Erin Sherbert
By Chris Roberts
By Kate Conger
By Brian Rinker
By Rachel Swan
The Venetian blinds are tightly closed in Anthony Chan's corner office, blocking out the afternoon sun and views of the yellow and purple petunias that decorate a nicely manicured lawn outside. The shades are drawn down the hall, too, in the room where George Chung works. The business partners are ensconced in their offices, desperately crunching numbers and calculating ways to keep their start-up company alive. With its stocks worth just $1.20 a share, American Champion Entertainment Inc. (ACEI) is dangerously close to flatlining. That's when the price goes under a dollar and the company is kicked off the NASDAQ list -- a familiar predicament for American Champion, which was already resuscitated by a reverse split in January. Investors were left with just one share of stock for every four they owned, and everyone knows the stockholders won't tolerate going through that ordeal again.
American Champion produces the children's television series Adventures With Kanga Roddy, which has aired on PBS stations in San Francisco, San Jose, and 60 other cities across the country. In the show, kids facing dilemmas from peer pressure to prejudice are beamed through the screen of a magical computer to the land of Hiyah where a friendly martial arts master -- a 7-foot-tall kangaroo -- plays games and dispenses advice.
In the first Kanga Roddy episode, "Try, Try Again," written by George Chung and Anthony Chan, young Billy is upset that he keeps striking out in baseball, and Kanga Roddy teaches him how to learn from his failures.
"What's the matter, Billy?" asks one of the adult cast members, Karen.
"I guess I'm in a slump. I can't seem to get anything right these days."
So Billy pays a visit to the land of Hiyah.
"I can't get a hit," Billy tells Kanga Roddy.
"Billy, even the best players in the world strike out sometimes," the giant kangaroo says, breaking into the song "When the Going Gets Tough, the Tough Get Going."
Kanga Roddy and the Hiyah gang sing and dance to the Billy Ocean hit. They also perform Starship's "Nothing's Gonna Stop Us Now" to inspire the defeated baseball player.
"How was your adventure?" another adult asks Billy upon his return home.
"Kanga Roddy showed me when you can't get something exactly right, it's best not to get uptight," he answers.
Chung and Chan -- martial arts masters themselves, once archrivals, and now business partners -- are doing their best not to get uptight. During their karate careers, they each won many championship titles and were both inducted into the Black Belt Hall of Fame. But their television production careers haven't gone so well. Last year, American Champion lost more than $6 million and auditors have expressed concern that the company may not exist in 12 months. Despite good ratings and even a regional Emmy award for best direction, Kanga Roddy hasn't made any money. Lucrative merchandising deals never materialized, and a lawsuit over who should get credit for the creation of the show's characters also slowed any early momentum. Now Kanga Roddy is out of production and only seen in reruns.
Chung and Chan sought to create a program with moral and educational content that would still be considered cool by computer game-weaned kids, who want their entertainment flashy and action-packed. The result is a bizarre confluence, at best. For one thing, Kanga Roddy is a martial arts master who isn't permitted to hit anything. PBS wouldn't allow it. "The only karate Kanga Roddy does is in his song and dance," Chan says. "We wanted a show that taught all the good values intrinsic with the martial arts, minus the punching and kicking."
Kanga Roddy prefers to solve problems through his lessons of courage, perseverance, honor, and respect, but the result is often saccharine and heavy-handed. A review in Entertainment Weekly couldn't get past the premise, bestowing the title "Weirdest kids' show," and going so far to call Kanga Roddy a "kiddie acid trip."
Why the combination of kids and karate? "We're passionate about children, because we have our own," Chung says. "And we're passionate about karate, because that's what we do."
When American Champion went public three years ago with an initial share price of $5, the company was able to raise $6 million. But the stock has lost 80 percent of its value since then. Investors once wooed by dreams of a golden kangaroo are getting restless -- and angry. They vent their frustrations on the Internet, where Yahoo! lists American Champion on its stock bulletin board. The often vitriolic postings number in the thousands, which is why Chan keeps his office blinds closed. "I won't sit in front of an open window anymore," he says.
In fact, the FBI is investigating death threats against Chung and Chan. "People like that should die," someone wrote in February, using the screen name "lightenupfrancis." Another message suggested that Chung and Chan seek protection: "Make sure you're wearing your bullet proof vest ... Chan will be killed shortly."
American Champion¹s troubled history might actually be a parable about the dangers of -- well, a lot of stuff. For instance, investing in a completely unproven stock. Or going public with a media company with a negative cash flow. Or starting a business producing and syndicating a television show, when you have no experience doing so. Or trying to market a karate-expert kangaroo who doesn¹t actually do karate. Or promoting boxing matches in China, where there is, apparently, little interest in boxing -- but that¹s sort of another story, although not completely. Actually, it¹s hard to say what anyone can learn from Chung and Chan, except that it would be a good idea not to do what they¹ve done.
Chung, 38, and Chan, 45 -- hard-working fathers of young children, believers in the values of their cute, furry TV character, and Hall of Fame karate masters -- met as competitors in a national tae kwon do tournament in Long Beach. "It was the one to win," Chung says of the 1977 contest that was a turning point for both young men. Fifteen-year-old Chung placed well enough to receive his black belt and Chan, then 22, took top prize. "He was simply amazing," says Chung, who was so enamored of Chan's skill that he asked the champion if they could train together. They both lived in the Bay Area, so Chung became Chan's student -- but soon, he was competing against his teacher. Ultimately, Chung and Chan became fierce opponents and went on to dominate the martial arts field of the time.
Chan, who was born in Hong Kong, moved to Beijing after retiring from competition in the mid-1980s. He had earned a business degree from UC Berkeley, which he used in China to manage investments for an international trading company. In Beijing, Chan still practiced marital arts and fell in love with one of the top members of the national women¹s team. He married her, but first had to receive permission from the Chinese government to do so.
Chung, a Bay Area native whose parents are from Japan and Korea, stayed in San Jose when he stopped competing professionally a few years after Chan. He opened a karate studio and got married, too.
Chan returned to California with his new wife after five years in China, and visited Chung¹s shop. As a business, it was a mess, with receipts stuffed in drawers and papers stacked on the floor. But Chung was a popular instructor, having more clients than he knew what to do with. Outgoing, attractive, and downright inspiring, he made people feel good. Everyone liked him. While martial arts instruction had mostly been directed to young men hoping to become serious competitors, Chung was one of the first to market karate to young kids and older adults as a way to enrich their lives. Parents trusted him to instill in their children the values and discipline martial arts are based upon. Middle-aged clients walked away from Chung¹s workouts invigorated, feeling mentally and physically renewed.
"You're sitting on a gold mine," Chan told Chung. "But you're the most disorganized person I know." They decided to join forces, and their company, America's Best Karate, quickly grew to a chain of 11 studios. Chan used his business sense to run the operation, and Chung used his charisma to sell it.
"We're total opposites," Chung says. "Anthony got his master's degree at 22; I spent two weeks in college. Anthony is fluent in Mandarin and Cantonese; I have an Asian exterior, but am more comfortable in a locker room full of African-American football players. Anthony is fastidious and detail-driven; I'm extremely conceptual and visual. We even look different."
Chan, in his suit, tie, and glasses, fits the image of a CEO. Chung, with his broad smile, boyish dimples, and thick mane of black hair, looks like he should be on TV -- selling motivational tapes for an infomercial. "He is the Asian Tony Robbins," says Don Berryessa, a former business partner. "He can light up a room more than anyone I've seen. You go in and talk to him and you feel like there's nothing but possibility and hope. He believes, and he makes you a believer."
Despite outward differences, Berryessa says the pair shares the same values. "There's a very simple code they live by," he says. "The core essence is related to the martial arts philo-sophy of pride, respect, and honor."
Chung calls it bushido. "The reason Anthony and I get along so well is because we work hard and we respect each other," he says. "And when it comes to our company, we believe it will take us to the Promised Land. We will create projects that will make a difference and be very profitable. We know we will win."
But a chain of karate studios wasn't enough to satisfy Chung and Chan's drive for success. Both dabbled in Hollywood, attaching themselves to martial arts projects. Because of their numerous championship titles, Chung and Chan had cachet within the karate world and could use it to their advantage. Chan line-produced some of Jet Li's early movies. Chung actually had a few on-screen roles, starring in films like Kindergarten Ninja and Paper Dragon. "You've heard of low-budget B-movies? Well these were like X, Y, and Z," he says.
Walking through the locker room of the San Francisco 49ers, Chung is greeted by high-fives from the players. For almost 10 years, he has been the football team's popular karate instructor. He's on the field at the 49ers' training facility in Santa Clara every morning, where he straps blocking pads to his hands and lets 300-pound defensive linemen punch and kick a man less than half their size. But the karate drills are more about movement and technique than simple brute force, and leave Chung out of harm's way and the hulking players exhausted. "It's a real workout, and that's why we're out there," says line guard Phil Ostrowski. "We respect what he does and what he teaches."
Chung finally made the A-list in the early 1990s when he met 49ers star Ronnie Lott, who was interested in applying martial arts skills to the gridiron. Lott trained with Chung, and was so impressed with the results he talked teammate Joe Montana into trying karate. Chung ended up giving private lessons to the football stars and their families, and eventually was invited by the Niners' coaches to start teaching everyone on the team.
Anyone who wanted to train with Chung was welcome, but coaches made his classes mandatory for defensive linemen. Chung's exercises proved helpful for hand and foot coordination and balance. "George has been one of the great things to happen to the 49ers over the years," says team director Bill McPherson, who as assistant coach helped see the 49ers to five Super Bowl wins. "You can see a player's progress after they get into his program. George is a great inspiration; players get confidence after spending time with him. We swear by this guy."
Chung was appreciated enough to be awarded the Super Bowl ring after the 49ers' 1994 victory, a testament to how much he is liked.
Most important for Chung, the team's biggest stars proved their allegiance. Joe Montana continued training with Chung even after he moved to the Kansas City Chiefs, and saw to it that Chung got a mention and a two-page picture spread of karate poses in his book, Montana. And, along with Ronnie Lott, Joe Montana also helped Chung move into the next phase of his career.
Chung and Chan wanted to get into the entertainment business, but they needed to come up with a product. All they had known and loved was karate. They were also beginning to start families. So they decided to create a children's TV show starring a karate master kangaroo. Montana and Lott signed up as executive producers, while their wives agreed to play on-screen roles in the song and dance series. With the football stars' backing, Chung and Chan raised enough money to produce a pilot episode of Kanga Roddy and take their new company public.
"Putting that program together and getting it distributed was quite a feat, and shows that these guys can definitely follow through on a project and create content of value," says Lott, who is, for the record, a major shareholder in American Champion. "I believe in George's determination and ability to get the best out of people; Anthony, too. Both have the characteristics to succeed, and that's why I jumped on board."
But Chung and Chan were unprepared for the difficulties they faced bringing Kanga Roddy to life while managing a public company. In addition to learning about television production and how expensive, cumbersome, and painstakingly slow it can be, they had to navigate the bureaucratic and highly politicized world of PBS to get their show on the air. They had to spend what time was left trying to land merchandising deals in order to have any hope of actually earning some money. And there was still the chain of 11 karate studios to run.
"We were two karate guys who had become millionaires, but we were naive," reflects Chung. "Going public was only part one, and no amount of study can make up for experience. It was the beginning of an emotional roller coaster, filled with happiness, sadness, drama, and deceit. We found out who our allies and enemies were."
The first casualty was the friendship between Chung and Chuck Jeffreys, a martial arts expert and co-star in some of the karate movies in which Chung acted. (Jeffreys also works as a Hollywood stuntman.) Chung asked Jeffreys for input while creating the concept of Kanga Roddy, which later resulted in a lawsuit over just what Jeffreys had contributed and how he should be billed in the credits. The case was eventually settled out of court for an undisclosed sum, with Jeffreys deemed a creative consultant.
"He was a very good buddy of mine. We shared a lot of good times and won't be able to anymore, and that hurts," Chung says. "But what drives things like this is greed. If not, why would he sue me for an enormous amount of money? If it is about principle, he should have just sued for an apology."
"George Chung was one of my best friends in the world, who for a reason larger than a 7-foot-tall kangaroo turned into somebody I didn't know anymore," Jeffreys says. "I think that reason is Anthony Chan -- even though he's only like 5'2" -- and whether that be good or bad, it's something that George is going to have to live with for the rest of his life."
The karate studios were the next to go. To keep up with the $240,000 price tag for every half-hour Kanga Roddy episode (there were orders for 39; 29 were ultimately made) Chung and Chan had to begin selling off their original business piece by piece. The enormous production costs, plus the expense of staffing the company (Chung and Chan paid themselves each about $140,000 a year), and incidentals like office rent ($10,000 a month), quickly wiped out the $6 million they'd raised with the IPO. But the proceeds of the sale of the karate studios weren't enough, and American Champion's stock price continued to drop.
The short-term answer was convertible debentures, in which loans are secured by offering large amounts of discounted stock to lenders. Obviously, this is a very risky way to finance a company. "They call it a 'death spiral,'" Chan says. "Debentures are absolutely dilutive. But we had no other choice to fund the company. With the stock under pressure for so long, it was hard to find people to invest."
Don Berryessa had been with Chung and Chan from the start. At 17, he took karate lessons from Chung, and then began working for him, managing some of the studios to pay his way through business school at San Jose State University. For more than 10 years, Berryessa worked for Chung and Chan, eventually becoming a third business partner. He was the chief operating officer of American Champion, and the third casualty of the company going public.
Both Chung and Chan will only say of Berryessa's departure that he wanted to move on to other things. Berryessa says the pressure and never-ending workload of keeping a troubled company alive got to him. The goal of achieving a healthy stock price, he says, was not worth missing his wife and two young daughters. "There wasn't any fallout between us; I have nothing but respect for them, but we have different ideas about what work means," Berryessa says. "There's the 60-hour week, and the 80-hour week, and then there's an entire life devotion to making something happen. I put my heart in it, but George and Anthony put their heart and soul into it."
Chan, especially. It wasn't uncommon for him to take a red-eye flight to New York, spend the day meeting with investors, and be back working in the San Jose office that same night. Chung would often be on the road a week or two at a time, away from his 9-year-old daughter and 5-year-old son. "It's hard to work in that environment, always at that level," Berryessa says. "It wears on you."
Losing the karate studios didn't help morale, either. Everyone agreed that it was necessary to get rid of them to better focus the company, "but it was sad to see them go," Berryessa says.
"I know people won't understand," says Chan. "They'll say, 'Those guys couldn't even run karate schools, so how are they going to run a public company?' But we were a success. We got rich from those studios. That's how we bought our houses and fancy cars, certainly not from the IPO."
In fact, it was becoming evident the kangaroo wasn't going to pay off anytime soon. If Chung and Chan's dream were ever to be realized, they needed to -- well, diversify. "The idea of waiting five years to become profitable is not acceptable to shareholders," says Berryessa. "So George and Anthony are doing anything they can to make the company work."
Which, naturally, is where bringing cable Internet access to China comes in.
Chan's background, he says, gives him government and business connections in Beijing, and when the idea of wiring China was publicized last November, American Champion's stock price spiked sharply and then fell. Unfortunately, the company has a habit of cranking out press releases that announce intentions of deals, but not much of anything else. Many investors -- enticed by the low price and profit potential -- have bitten, but are now left wondering when all the deals will become a reality.
In April, American Champion did go to China -- to stage the country's first boxing match, in which Muhammad Ali's daughter, Laila, won in the fourth round of a fight against former prison guard Kristina King. The show also featured heavyweight Andrew Golota's knockout of Marcus Rhode. The matches were broadcast on Showtime, but the sight of half-empty stands in the Guangzhou province arena raised questions as to whether the event was a bust. American Champion had announced a sellout in advance ticket sales, so Chung and Chan attributed the weak showing to a rainstorm. Financial statements have yet to be released, though angry investors are clamoring for details. The fight wasn't even popular among the participants.
"There was no need to be in China. No one was interested in boxing there," says Johnny McClain, Ali's agent. "It was terrible. The food was bad, and the whole thing was not fun. I'm not ever doing it again."
On Chung: "He's a nice guy, but very inexperienced," McClain says. "I don't foresee him being a great promoter."
Chan, who says it was a logistical and bureaucratic nightmare to set up and execute a televised boxing match in mainland China, maintains American Champion has a future in boxing. "It is a tremendous boost to us now that we have become players in the boxing industry," Chan says. "We are hopeful the next event will be very financially rewarding now that we have the experience of the first one." Besides, he adds, he and Chung can bring higher standards to the sport. "One thing I'm proud of, is that if all the boxing promoters are crooks," Chan says, "then at least we can bring in a breath of fresh air."
"People groan about boxing," Chung says. "But there is a lot of money in boxing, and we can take advantage of that."
Many longtime stockholders who bought into the idea of Kanga Roddy are disillusioned with the company's foray into boxing at all. Others are baffled by what appears to be an unfocused business plan filled with seemingly haphazard and even contradictory projects. When they first went public, Chung and Chan eagerly checked American Champion's stock chat page on Yahoo! every day. They thought it was neat to see what stockholders were saying about the company. Now, almost 8,000 postings later, the Yahoo! bulletin board is only a bitter reminder of how unforgiving the market -- and investor -- is.
It has become popular among bulletin board users -- upset with what seem to be the bumbling, dazed, and confused business practices of the company's founders -- to refer to the pair as "Cheech and Chung," despite the epithet's racist undertone. "What a scam, what a circus, what a bunch of clowns. Their hype is nothing short of comical and embarrassing. This thing is going nowhere fast," one person writes.
"I hope you people can sleep at night!!! Go to hell!!!" rants another message directed at Chung and Chan.
And then, of course, there are the death threats.
"I never told my wife about that; she'd never let me come to the office. There are a lot of loonies out there," says Chan, who now ignores what investors say on the postings. "When you get crap like that, you don't want to lower yourself to that dialogue. It's just barroom talk."
Chung isn't fazed by the criticisms either. "Joe Montana doesn't care what people say about him in the sports pages," he reasons.
Death threats aside, public pressure from the bulletin board doesn't help, and American Champion's mishaps highlight a new phenomenon in the stock market. "It is clear that people are greedy and very ill-informed," says Brett Trueman, a professor at UC Berkeley's Haas School of Business. "When they lose money, they want heads to roll. What they fail to realize is that it all happened because they took a big chance in an uneducated way. It is sad."
The message boards, he says, represent a new breed of investors who once lacked access to the stock market because of limited means or know-how. Now they can trade freely via the Internet, and with so many IPOs and start-ups, there are plenty of affordable stocks available. Today, the percentage of individual stock ownership is the highest ever, with the number of shares traded by individuals outnumbering those traded by institutions. "It is a pervasive phenomenon," he says. "Now everyone can play the market. Anyone from garage mechanics to waiters, who have a little spare cash and a desire to gamble."
And, when things don't go right, the chat rooms foster the equivalent of an electronic lynch mob.
"Can people say we made a preschool show and lost money? Sure," Chung says. "But we are not a dot-com, promising overnight success. We are a real company with a real product. We're not like a biotech company hoping for a cure. We're not just patiently waiting for the Kanga Roddy ship to come in. We are doing as much as we can to diversify the company and keep it going forward."
However, investors have legitimate reasons to complain about the company's record. Stockpatrol.com, a watchdog group that alerts investors to questionable companies, red-flagged American Champion in its recent Stock or Schlock? column, noting that the company's frequent use of convertible debentures was troubling. Offshore entities with addresses in Switzerland and Israel were the most willing sources to repeatedly lend money to American Champion, and then sell the discounted stock for a profit.
"I'm not so inclined to think fishy stuff is going on. It's just a very risky way to raise capital," says David Kathman, a stock analyst with Morningstar, who reviewed American Champion's filings with the U.S. Securities and Exchange Commission. "They're issuing debt in order to get cash to stay in business. Apparently, they've got these offshores willing to buy convertibles. But cozy deals like that can't last forever. This company is skating on thin ice."
In American Champion's most recent SEC filing, auditors from Moss Adams noted there is "substantial doubt" about the company's ability to continue as a going concern. "A 'going concern' letter is one of the worst things you can get," Kathman says. "So when you see one, you know it's a bad sign."
Chung offers no apologies.
"I'm trying to make this company profitable. I haven't done that yet, but I will. If it seems on the surface this could be a con, let me tell you this is real. If I just talked about Kanga Roddy, that's one thing. But you can see that it's happened," he says. "People say, 'You're just a salesman.' Of course I am. That's how things get done. If Columbus didn't convince a bunch of sailors to get on a boat, there wouldn't be a New World."
Ronnie Lott, who has given his famous name and his finances to American Champion, realizes things don't look good. "I'll be the first to say we have a long way to go," he says. "There have been questions and concerns, of course. But I think George and Anthony are addressing those concerns and taking the appropriate steps."
Understandably, Lott boils the situation down to a football analogy: "The game is probably in the first quarter, and we're continuing to block and tackle. We're not going for long bombs yet; just a couple first downs. We're showing we can improve."
Former business partner Berryessa, who got out when he could, selling the bulk of his shares before losing his life's investment, says Chung and Chan will continue trying no matter how bleak or ridiculous the circumstances might get.
"You're seeing two men with a dream taking it as far as they can," he says. "But some people just don't know when to say quit."
Back in the office, the blinds are still closed as Chan makes preparations for a trip to Virginia, where he hopes to strike a new deal -- though he says he hasn't given up on acquiring a cable company in China. "Once we get their audited financials, which I believe will be next week, and it is reviewed by the SEC, then people will know this is damn real," he claims. But he wants to cover his bets, so he's booked a flight to Virginia, where someone is supposed to be able to get him into the business of producing infomercials. As his fingers quickly tap on his desktop calculator, he is consoled by the hypothetical totals that appear.
"If we can cause these acquisitions to take place by the end of the year, then the company's finances will look much more healthy and the stock price should act accordingly," he says, still punching in an endless procession of meaningless numbers.
"If all goes well."