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Stan Lee Media Inc · 10KSB · For 12/31/99

Filed On 3/20/00   ·   SEC File 0-28530   ·   Accession Number 950148-0-447

  in   Show  and 
  As Of               Filer                 Filing     As/For/On Docs:Pgs              Issuer               Agent

 3/20/00  Stan Lee Media Inc                10KSB      12/31/99   62:665                                    Bowne of Century City/FA

Annual Report -- Small Business   ·   Form 10-KSB
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10KSB       Annual Report -- Small Business                       69    282K 
 2: EX-2.1      Plan of Reorganization                                 8     68K 
 3: EX-3.1      Articles of Incorporation                              4     51K 
 4: EX-3.2      Articles of Incorporation                              1     34K 
 5: EX-3.3      Articles of Incorporation                             16     94K 
 6: EX-3.4      By-Laws                                               18    116K 
 7: EX-10.1     Material Contracts                                    58    242K 
 8: EX-10.2     Material Contracts                                    13     76K 
 9: EX-10.3     Material Contracts                                    30    135K 
10: EX-10.4     Material Contracts                                    30    134K 
11: EX-10.5     Material Contracts                                    10     57K 
12: EX-10.6     Material Contracts                                    10     57K 
13: EX-10.7     Material Contracts                                     8     58K 
14: EX-10.8     Material Contracts                                     7     54K 
15: EX-10.9     Material Contracts                                    12     75K 
16: EX-10.10    Material Contracts                                    18     95K 
17: EX-10.11    Material Contracts                                     4     48K 
18: EX-10.12    Material Contracts                                     4     46K 
19: EX-10.13    Material Contracts                                     4     46K 
20: EX-10.14    Material Contracts                                     4     46K 
21: EX-10.15    Material Contracts                                     4     46K 
22: EX-10.16    Material Contracts                                     4     47K 
23: EX-10.17    Material Contracts                                     4     46K 
24: EX-10.18    Material Contracts                                    17     85K 
25: EX-10.19    Material Contracts                                     4     46K 
26: EX-10.20    Material Contracts                                     4     46K 
27: EX-10.21    Material Contracts                                     4     46K 
28: EX-10.22    Material Contracts                                     4     46K 
29: EX-10.23    Material Contracts                                     4     46K 
30: EX-10.24    Material Contracts                                     4     46K 
31: EX-10.25    Material Contracts                                     4     46K 
32: EX-10.26    Material Contracts                                     3     42K 
33: EX-10.27    Material Contracts                                     3     43K 
34: EX-10.28    Material Contracts                                     4     46K 
35: EX-10.29    Material Contracts                                     4     46K 
36: EX-10.30    Material Contracts                                     4     46K 
37: EX-10.31    Material Contracts                                     4     46K 
38: EX-10.32    Material Contracts                                     4     46K 
39: EX-10.33    Material Contracts                                     4     46K 
40: EX-10.34    Material Contracts                                     4     46K 
41: EX-10.35    Material Contracts                                     4     47K 
42: EX-10.36    Material Contracts                                     4     47K 
43: EX-10.37    Material Contracts                                     4     47K 
44: EX-10.38    Material Contracts                                     2     39K 
45: EX-10.39    Material Contracts                                     3     42K 
46: EX-10.40    Material Contracts                                     3     42K 
47: EX-10.41    Material Contracts                                     3     42K 
48: EX-10.42    Material Contracts                                     1     35K 
49: EX-10.43    Material Contracts                                    18     92K 
50: EX-10.44    Material Contracts                                    16     90K 
51: EX-10.45    Material Contracts                                    13     74K 
52: EX-10.46    Material Contracts                                     8     56K 
53: EX-10.47    Material Contracts                                    30    123K 
54: EX-10.48    Material Contracts                                    17     97K 
55: EX-10.49    Material Contracts                                    17     98K 
56: EX-10.50    Material Contracts                                     3     41K 
57: EX-10.51    Material Contracts                                     6     50K 
58: EX-10.52    Material Contracts                                     3     42K 
59: EX-10.53    Material Contracts                                    80±   343K 
60: EX-10.54    Material Contracts                                     9     65K 
61: EX-21.1     Subsidiaries                                           1     33K 
62: EX-27       Financial Data Schedule                                1     34K 


10KSB   ·   Annual Report -- Small Business
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page
2Forward Looking Statements
4Item 1. Description of Business
14Item 2. Description of Property
"Item 3. Legal Proceedings
"Item 4. Submission of Matters to A Vote of Security Holders
15Item 5. Market for Common Equity and Related Stockholder Matters
18Item 6. Management's Discussion and Analysis or Plan of Operation
21Item 7. Financial Statements
"Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
22Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
28Item 10. Executive Compensation
34Item 11. Security Ownership of Certain Beneficial Owners and Management
35Item 12. Certain Relationships and Related Transactions
36Item 13. Exhibits, Financial Statements and Schedules and Reports on Form 8-K
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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to __________________ Commission file number 0-28530 STAN LEE MEDIA, INC. (Name of small business issuer in its charter) COLORADO 84-1341980 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 15821 VENTURA BOULEVARD, SUITE 675, ENCINO, CALIFORNIA, 91436 (Address of principal executive offices) (Zip Code) Issuer's telephone number: (818) 461-1757 Securities registered under Section 12(b) of the Exchange Act: NONE Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK, NO PAR VALUE (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ----- ----- Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will 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. [ ] The issuer's revenues for its most recent fiscal year were $30,605. The aggregate market value of the voting and non-voting common equity held by non-affiliates, based upon the average bid and asked prices of the issuer's common stock on March 6, 2000 was $88,404,941. Shares of common stock held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares outstanding of the issuer's common stock, as of March 6, 2000, was 11,856,362.
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STAN LEE MEDIA, INC. FORM 10-KSB TABLE OF CONTENTS [Download Table] ITEM NO. PAGE -------- ---- PART I ITEM 1. DESCRIPTION OF BUSINESS 1 ITEM 2. DESCRIPTION OF PROPERTY 11 ITEM 3. LEGAL PROCEEDINGS 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 11 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 12 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 15 ITEM 7. FINANCIAL STATEMENTS 18 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 18 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT 19 ITEM 10. EXECUTIVE COMPENSATION 25 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 31 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 32 PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 33 FORWARD LOOKING STATEMENTS When used in this Form 10-KSB or future filings by the Company with the Securities and Exchange Commission, in the Company's press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases "would be", "will be", "will allow", "intends to", "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project", or similar expressions are intended to identify "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that these statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from those anticipated. Such factors include the availability of sufficient financing to implement the Company's plan of operation, acceptance in the marketplace of the Company's new characters and story franchises and distribution via the Internet, ability to generate revenues through Internet distribution, increased levels of competition, new products and technological
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changes, and regulatory factors. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.
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STAN LEE MEDIA, INC. PART I ITEM 1. DESCRIPTION OF BUSINESS OUR BUSINESS We are an Internet-based, global branded content creation, production and marketing company founded by comic book icon Stan Lee to conceive, create, co-create and produce marketable characters and story franchises for entertainment, merchandising and promotional exploitation worldwide. Built on Stan Lee's signature style, our "hub" website, stanlee.net, will be a leading online entertainment destination targeting a global community of 6 to 20 year olds. Our website also is designed to attract the three generations of fans in 100 countries and 27 languages assembled by Stan Lee during his 60-year career as founder and creative head of Marvel Comics and co-creator of the Spider-Man, X-Men, and The Incredible Hulk franchises. Through our no cost, percentage of gross relationships entered into with a leading e-commerce retail comic book company, NPO Online (NextPlanetOver.com), a leading online storefront, WhatsHotNow.com, our digital production studio strategic partner, IBM, and our entertainment community hosting company, Warner/Acme City, we have achieved the requisites of content, commerce and community defining a robust Internet company. Our relationship with Macromedia, Inc., pursuant to which it invested $5 million in our company, and our distribution relationship with Macromedia's subsidiary, shockwave.com (the largest online animation portal for original content), offers the aggregation and delivery of 11 million registered shockwave.com subscribers to our original, high concept episodic animation and to our "sticky content" stanlee.net website. We will demonstrate that the Internet is now a viable, independent entertainment medium with the delivery of a uniquely compelling entertainment experience for a global audience of more than 230,000,000 Flash enabled Internet users with 28.8Kbs or faster modems. Flash is the industry standard for high-impact, vector-based websites that deliver motion, sound, interactivity and graphics. Our strategy of co-creating Super Hero franchises as brand extensions of globally recognized leaders in niche markets along with harnessing offline strategic publishing/media partners worldwide will diversify our product and audience demographics and provide continued visibility and support for building the Stan Lee brand and community. By executing this strategy, we intend to significantly mitigate the traditional huge resource commitments made by Internet companies to build their brand and generate traffic. For example, we have entered into an agreement with The Backstreet Boys, the most popular boys music group in the world, having generated more than $1 billion in sales during the last four years, to produce and co-own, under Stan Lee's direction, a Super Hero franchise based on their personae having Internet-based Super Hero alter-egos. This co-owned franchise, The Backstreet Project, extends our reach over the Internet to the international young female audience which has historically been uninvolved with the Super Hero genre. In addition to providing our company with a licensing franchise based on fantasy animated Super Hero extensions of popular musicians, this relationship provides us with access to the sought after youth market and a dedicated international fan base of girls and women aged 8 to 25. We also have entered into an agreement with Viacom Productions to reinvent and produce Internet-based animated webisodes reviving Viacom's world famous Mighty Mouse franchise, while retaining an equity interest in the exploitation of the Stan Lee revised character. Through licensed distribution with Macromedia's shockwave.com animation portal, our content will be exposed to a global audience of millions of registered users who will be encouraged to visit the stanlee.net hub site for community chat, games and related "sticky" experiences. Using this model, we plan to leverage on the audiences of our distribution partners to deliver a dedicated global audience to stanlee.net expeditiously. Our site also will 1
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feature content generated by our users, thereby creating a platform for users to interact and tools that allow our members to personalize their user experience. We have designed stanlee.net to facilitate communication among our users, to empower them to express their opinions, creativity and ideas as a community, and to shop online. We believe that we will be able to grow our business in a rapid and cost efficient manner based on global demographics and the desire for users to actively participate in creating user-generated content. CORPORATE HISTORY AND REORGANIZATION Stan Lee Entertainment, Inc. ("Entertainment") was incorporated in the State of Delaware on October 13, 1998. Stan Lee Media, Inc. ("SLM Delaware") was originally incorporated in the State of Delaware on January 14, 1999. Entertainment was merged with SLM Delaware on April 14, 1999 with SLM Delaware being the surviving corporation. Effective July 23, 1999, the surviving Delaware corporation engaged in a share exchange with Boulder Capital Opportunities, Inc., a public company, incorporated in the State of Colorado, which previously had no operating history. This share exchange was accounted for as a reverse acquisition in which SLM Delaware is considered our predecessor because it had operations at the time of the share exchange. The new name of our company after the share exchange is Stan Lee Media, Inc. ("SLM" or the "Company"). INDUSTRY BACKGROUND Growth of the Internet, E-Commerce and Online Advertising. The Internet has emerged as a significant global communications medium, enabling millions of people to share information, communicate and conduct business electronically. Both the number of Internet users and the amount of time they spend online are growing. This growth is the result of a number of factors, including: increase in the number of computers in the home, schools and workplace; improvements in computer network infrastructure; more convenient, faster and less expensive Internet access; advances in computer and modem technology; an increase in public awareness of the benefits of using the Internet; and the development of easy-to-use interfaces. The rapid adoption of the Internet represents a significant opportunity for businesses to market and sell products and services online and for advertisers and businesses to capitalize on the Internet's interactive nature by marketing their products to highly targeted audiences. The success of Internet advertising can be attributed to the following factors: Internet advertising offers advertisers a flexible way to target their messages and measure their results; Internet advertisers can tailor their messages to specific groups of consumers; Internet advertisers can change advertising content frequently in response to market factors, current events and consumer feedback; and advertisers can more accurately track the effectiveness of their advertising messages based on the rate at which consumers directly respond to their advertisements through "click-throughs" that their advertisements receive. Growth of Targeted Online Content and Community Sites. As the Internet has grown, users and advertisers have started seeking more targeted and compelling content, information, expression and interaction. Just as cable television channels, such as MTV and ESPN, have become more popular by aggregating content targeted towards a specific audience, online content and community sites that provide a demographically targeted environment have emerged. Like the major television networks that provide programming across many demographic segments, the major online portals typically provide a broad range of content and services without a specific demographic focus. Targeted online communities provide users with the ability to access relevant content and to interact directly with other people with similar interests. Registered users, or members, are often eligible for additional services from a site, such as customization options or access to premium content. As a site learns more about its members as they register and spend more time online, it can tailor its features to meet the needs and preferences of 2
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its users and members. This information also provides advertisers and merchants with more focused demographic and psychographic information that can be used to maximize direct marketing opportunities. Children and Teens are Becoming an Increasingly Important Audience to Online Advertisers and Merchants. Significant advertising opportunities exist on a child and teen-focused website. Children and teens are more difficult than adults to reach with targeted advertising because they generally do not subscribe to magazines in large numbers, and they tend to watch less television and lead more active lifestyles than adults. While children and teens are flooded with literally thousands of broad-based marketing messages every day from other traditional sources, such as billboard and radio advertising, we believe they are largely unreceptive to advertising messages that are not personally relevant. We believe that marketing products and services to children and teens online through a site with contextual information focused on them is more effective than using traditional marketing methods. The United States Census Bureau projects that the number of individuals between the ages of 10 and 24 will grow to 63.1 million in 2010. This growth rate is estimated to outpace growth of the general population by nearly 10%. In addition, children, but teenagers especially, possess substantial disposable income. eMarketer, a market research firm, estimates that over $109 billion is spent annually by teenagers in the United States alone. Teenagers are often early adopters of new technologies and are significantly involved with the Internet. According to eMarketer, about 57% of 13 to 17 year olds use the Internet regularly, as compared to about 36% of 18-34 year olds, 31% of 35-54 year olds and 17% of individuals over the age of 55. eMarketer also estimates that the number of 13 to 17 year olds who regularly access the Internet will rise to 12.4 million by 2000 from 9.1 million in 1998, an increase of over 36%. eMarketer estimates that 13 to 17 year olds currently spend an average of 8.5 hours online per week as compared to 6.7 hours for individuals over the age of 18. This creates a significant opportunity to both sell products and advertise to children and teens online. eMarketer also estimates that online commerce sales to 13 to 17 year olds will increase to $1.4 billion in 2002 from $161 million in 1999. UNIQUE COMPANY ASSETS Our primary assets consist of all the intellectual property currently owned by our founder Stan Lee, including ownership in perpetuity to Stan's name, likeness, brand and signature slogans, "Stan Lee Presents," "Excelsior!" and "Stan's Soap Box," along with rights to all intellectual property that will hereafter be created by Stan Lee. Known to millions as the man whose Super Heroes propelled Marvel Comics to its preeminent position in the comic book industry, Stan Lee's co-creations include Spider-Man, The Incredible Hulk, X-Men, The Fantastic Four, Iron Man, Daredevil, Silver Surfer and Dr. Strange. Now, in the 21st Century, Stan Lee is broadening his horizons once more, this time, into cyberspace. His Marvel creations have inspired thousands of Super Hero fan sites throughout the web, representing millions of web page references. Now his fans and admirers may meet the newest cutting-edge Stan Lee characters in The 7th Portal, which has been launched on shockwave.com and will later be featured on our stanlee.net website. In addition, Stan's fans can visit stanlee.net to read a regularly updated Stanzine with games, goofs and features from Stan and his staff. We believe our competitive advantages include the following: (1) Stan Lee having a proven historic ability to create internationally popular, engaging content; (2) a talented, experienced creative and production team assembled from leading Internet and entertainment companies, including Disney, 20th Century Fox and NBC Interactive; and (3) goodwill with global media and creative 3
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leaders around the world desirous of supporting and collaborating with pop-culture icon Stan Lee. These attributes will provide exponential resource strength and growth through association of the "best of breed" strategic partners providing financial, production, marketing and distribution capabilities utilizing all venues of media and product dissemination. Stan Lee now personifies the genre at large, and we believe our company has the ability and resources to consolidate his brand recognition in more than 100 countries around the world to firmly establish a lifestyle brand for "tweens" between ages 6 to 20 in addition to the three generation of fans already assembled. After the exclusive lifetime contract with founder Stan Lee, our greatest assets are the creative power represented by our assembled team for original Internet content creation, production, research and development and marketing. This team integrates experience in online publishing and technical innovations and community building for a global youth audience with seasoned comic book writers and artists, digital artists and technicians, and senior producers all under the direction of award winning television writers and animation storyboard supervisors. This team currently is producing seven original Stan Lee Super Hero franchises while it prepares for production of additional co-owned global branded content which will harness the audiences of other recognized brands not currently being produced on the Internet. Under Stan Lee's active stewardship, this team will focus on institutionalizing Stan Lee's signature style and developing a global lifestyle brand. THE STANLEE.NET SOLUTION stanlee.net is positioned as a branded content gateway targeting children and teens on the Internet to join with the three generations of fans assembled by Stan Lee during his 60-year career as founder and creative head of Marvel Comics and co-creator of the Spider-Man, X-Men and The Incredible Hulk franchises. We provide a site where children and teens can congregate in an environment that caters to their interests and promotes their participation and recognition. We plan to generate online revenues from advertising and sponsorship sales and e-commerce transactions, and offline revenues by exploiting such online branded content in television animation, features, location-based entertainment, theme park attractions, comic book publishing, merchandising and licensing. Visitors will congregate at stanlee.net because we empower our members and provide a dynamic, interactive and fun Internet environment. In addition to viewing webisodes and playing games on our site, our members will create their own content for our site using personalized animation tools we create and provide for them. We enable our members to continually contribute "user created" content, and which may extend itself to news reports, music and movie reviews, product reviews and survey questions and answers. Through our member program, we will gather a significant amount of data concerning the preferences and dislikes of our members, which should allow our site to be continually relevant to them. This data can be used to target content as well as advertising information toward particular members, while maintaining the confidentiality of our members (stanlee.net does not give out information about members without a member's consent). We believe our registered member base creates member loyalty and leads to repeat site visits, referrals and higher quality member-generated content. THE STANLEE.NET STRATEGY Our objective is to be the leading Internet destination for content, community and commerce relating to the Super Hero and comic book genre. We intend to develop consumer loyalty, attract new users/members, and promote commerce by implementing the following strategies: Continue to Build Brand Awareness. Stan Lee is a leader and a visionary in the world of Super Hero characters. Millions of young people have transited adolescence to adulthood using his almost mythic - but also very human - characters as role models and moral compasses. His influence goes beyond 4
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that of mere comics - before "community" became a buzz word associated with the Internet, Lee's creations were a common touchstone in the lives of boys all over the world. Though separated by geography and language barriers, Lee's fans are bound together by their affinity for his powerful storytelling style and creative genius in making the Super Heroes come to life. We believe that continuing to build brand awareness for our site is critical to attracting and expanding our global member base and customer loyalty. Our strategy is to enhance the recognition of the Stan Lee brand through traditional and Internet advertising, and nontraditional events. We will continue to use traditional advertising, which may include print, television and radio, not only to continue to reach more advertising customers but also to publicize our brand to potential users. With respect to non-traditional events, we will continue to promote our brand at events such as The Backstreet Boys concerts and other venues where children and teens gather. We also have initiated a campaign through advertising supported insert entertainment (via our majority-owned subsidiary Eat-Time Media, Inc.), including without limitation, the placement of card strips, promotional material and collectible items into suitable prepackaged pastry products and other snack foods throughout the country, which will cross-promote our brand. Continue to Build Premier Content and Community. We will initially focus on creating new proprietary Super Hero characters along with related content developed specifically for the Internet with subsequent distribution through traditional merchandising and licensing. Leveraging the global medium of the Internet to brand new Super Heroes and Super Villains, we intend to subsequently partner with leading companies to extend these brands off-line -- through location based entertainment, 3-D animated features, television, film, comics and merchandise. This process will be applied to other niche audiences as well. The Company's initial project is Stan Lee's first team of Super Heroes for the 21st century -- The 7th Portal - the first global team ever created consisting of 14 original Super Heroes and Super Villains, which launched on February 29, 2000. Because of the technological advances offered by the Internet, the bonds between Super Hero enthusiasts and Super Hero characters will become even stronger. The term "connectivity" will have new meaning: stanlee.net will be their central meeting place - an online home where they can immediately interact with each other, and with Stan Lee himself. The Internet has revolutionized the way that The 7th Portal characters were introduced and presented - as fully realized animated figures with a comic book edge. In addition to The 7th Portal, we currently are producing six other original Stan Lee Super Hero franchises and producing additional co-owned global branded content which will harness the audiences of other recognized brands not currently being produced on the Internet, including The Backstreet Project and Mighty Mouse. We will continue to develop our content and community product offerings to drive children and teen traffic to our website. We are always looking for innovative and exciting interactive tools and new technologies to enhance our users' experience. For example, we have entered into agreements with Cyberworld International Corporation to enable our members to create their own 3-D environments, which can be populated with characters and objects, including the intelligent agent morphing software we have licensed from Haptek, Inc. Further, we are developing and integrating our own online music content strategy into these environments. Develop and Grow Multiple Revenue Streams: Content Syndication. We intend to license elements of our original content to third-parties for exploitation in publishing, television and feature motion picture productions, which opportunities will include licensing and merchandising fees. In December 1999, we and Stan Lee were engaged by DC Comics to reinvent DC's principal Super Heroes through the publishing of 12 issues of approximately 48 story pages each tentatively entitled "The Staniverse" or "If Stan Lee Had Created the DC Universe," to enrich the DC Comic book characters such as Superman, Batman and Wonder Woman with the 5
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sensibilities and style of Stan Lee. Also, in November 1999, Simon & Schuster, Inc. entered into an agreement with Stan Lee to publish a Stan Lee official biography entitled Stan Lee: Master of Imagination. We are pursuing publishing, television and feature productions to further broaden the reach of our branded content creations. Advertising Sales. In addition to the traditional online banner ads and sponsorships, we have initiated a campaign through advertising supported insert entertainment (via our majority-owned subsidiary, Eat-Time Media, Inc.), including without limitation, the placement of card strips, promotional material and collectible items into suitable prepackaged pastry products and other snack foods throughout the country, which will cross-promote our branded content. E-Commerce Offerings. We have established strategic alliances with leading companies engaging in Internet e-commerce (NextPlanetOver.com and WhatsHotNow.com). We intend to continue to make e-commerce an integrated and valuable part of our website. The Stan store, operated by WhatsHotNow.com, currently offers over 100 products, and we intend to significantly increase the number of products we offer over the next year. In addition, we plan to integrate global shopping opportunities into the store for our users outside of the United States who seek access to American products. Location-Based Entertainment. We intend to license elements of our original content to third parties for exploitation as theme-park rides and simulation rides, and as wait-time entertainment at movie theaters and shopping malls. We have entered into a working relationship with Iwerks to further this initiative. Utilize Technology to Improve the Experience. We have implemented a wide range of secure, scalable services and systems for the stanleemedia.com corporate and stanlee.net "hub" websites. These services and systems include: website management, advanced searching tools, transaction processing, community message boards, payment services and a variety of marketing applications. We have developed proprietary technologies to augment those that we have licensed from vendors, such as Macromedia, Microsoft and IBM. Our software platform and architecture are integrated with relational database servers. The employment of multiple web servers, application servers and database servers, allows our systems to be resilient and redundant. Our systems utilize communication infrastructure from multiple providers and provide 24 hour monitoring and engineering support. Wireless and Telecommunications Applications. We intend to develop the ability to access many of the features and functionality found on stanlee.net by as many electronic means as possible, including wireless phones, personal digital assistants and pagers. Develop a Co-Branded Debit Card. We are planning to develop, with a strategic partner, the stanlee card, a co-branded financial resource for children and teens that will not only provide them with a non-credit based means of conducting transactions at the Stan store but will also allow them to make purchases throughout the Internet. Expand our International Presence. We plan to launch localized versions of our website in strategic locations throughout the world. The Super Heroes of The 7th Portal are situated in the following countries outside the United States: Japan, India, Germany, Brazil and South Africa. Accordingly, we have entered into a relationship in Japan and are pursuing the establishment of strategic partnerships with local operators who will contribute assets, operating infrastructure and capital to build, maintain, market and promote our Company's global branded content in their local market, and who will host and webcast local language versions of Super Hero series produced by us, 6
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repurpose such webisodes for exploitation in the local language, and jointly develop original Super Hero and comic character properties. We intend to leverage our domestic production facility to maintain economies of scale as we focus on additional countries. ADVERTISING SALES We intend to derive substantial revenues from advertising sales. We intend to offer advertisers the following advertising options: Banner advertisements. An advertiser may purchase banners, which are graphical advertisements with the advertiser's logo, for placement throughout our site or in a specific area within our site. Integrated content sponsorships. Advertisers may also sponsor a specific area or feature of our site. Pop-up advertisements. Advertisers may choose to have an advertising window "pop-up" following certain actions by members on stanlee.net. Section sponsorships. Advertisers may also pay to own a premiere position within a particular section or sections of stanlee.net. A rotating "viewer window." Our front page contains a rotating viewer window that displays advertisements and promotes new content on the site. Because this window is constantly changing and is always visible to members, it provides our advertisers with an excellent way to catch the attention of our members. HTML-based and text-based advertisements in targeted email. We intend to send targeted HTML-based emails every week. We provide advertisers the opportunity to place a graphic advertisement within these emails. In addition, we intend to send text-based targeted emails every week. Advertisers can choose to include a textual advertisement in these messages. Because of our ability to target these emails, the advertisements tend to be more relevant to the recipient. Opt-in registration boxes. When new members register, they will have the opportunity to "opt-in" or request information about products or services from certain advertisers. These advertisers will pay a fee for each new member that opts-in for information about their products or services during registration. E-COMMERCE AND THE STAN STORE In March 1999, we entered into an agreement with NextPlanetOver.com to provide fulfillment and distribution in connection with online sales of retail comic books. NextPlanetOver.com manages all fulfillment and distribution requirements, including product ordering and return processing, thereby resulting in our having little, if any, inventory. In August 1999, we entered into an agreement with WhatsHotNow.com to design and host the Stan store, which houses one of the largest collections of comic genre-focused product offerings on the Internet. In creating the Stan store, we have utilized our relationships with our members by asking them, through surveys, polls and other interactive tools which products they would like to buy through our website. The Stan store contains over 100 products. WhatsHotNow manages all fulfillment and distribution requirements, including product ordering and return processing. This results in our having little, if any, inventory. Our customers are given a 7
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number of shipping options, all of which are handled by standard shipping franchises such as UPS and Federal Express. We also intend to generate e-commerce revenues by charging transaction fees to retailers and e-commerce companies that wish to use our site to promote their products and services as well as to purchase premium positioning on our site. CUSTOMER CARE Users who are unfamiliar with our site can click on the "help" button on stanlee.net. This feature describes all of our stanlee.net features and services and explains to the user how to use them. In addition, our members can post messages on our help boards and our staff will respond. Finally, users can also send emails to support, and our staff generally responds within one day. COMPETITION The market for Internet traffic, registered users and Internet advertising is new and rapidly evolving, and competition is intense. With no substantial barriers to entry, we expect that competition will continue to intensify. We believe that the primary competitive factors in creating community on the Internet and attracting advertisers are: user receptiveness to branded content; functionality; brand recognition; user affinity and loyalty; the ability to target a specific demographic; variety of value-added services; ease-of-use; quality of service; reliability and critical mass; and the overall cost-effectiveness of the advertising medium. We compete with sites, and sites with areas, that are primarily focused on targeting teens online. These sites include MTV Online and the Yahoo! Teen Chat area. We also compete with retailers that have moved to the Web such as Delia's. We will likely also face online competition in the future from: search engine providers; content sites; commercial online services; sites maintained by Internet service providers; traditional media companies such as MTV, Disney and NBC, many of which have recently made significant acquisitions or investments in Internet companies; and other entities that will attempt to establish communities on the Internet by developing their own or purchasing one of our competitors. We also compete with traditional forms of media, such as newspapers, magazines, radio and television, for advertisers and advertising revenues. TECHNOLOGY AND SYSTEMS We rely almost exclusively on a variety of third-party products for our hardware and software. We operate our network to ensure maximum uptime, to obtain, preserve and analyze customer data, and to enhance our members' experience. Our goal is to maintain the technological infrastructure required to handle heavy traffic, e-commerce and complex graphics on our site. We currently house our servers at Exodus Communications in California. Exodus maintains an environmentally controlled data center with multiple communication lines and uninterrupted power. We believe that our infrastructure conforms to the latest industry standards. We are also in the process of installing additional servers. If a server fails, we believe that we have enough back-up servers to ensure that our service interruption would be minimized. Our infrastructure is scalable in that as additional capacity is needed, additional servers can be easily added. We are also planning to expand our server system to multiple data centers. We also run weekly full backups of all of our servers, as well as daily incremental backups of these same machines. These tape backups are stored off of the premises. TRADEMARKS AND INTELLECTUAL PROPERTY We use the following trademarks for which applications in the United States Patent and Trademark Office are pending: our logo, "Stanzine," "Stan Lee Presents," "The 7th Portal," and "Excelsior," as well as the marks for the various heroes and villains of The 7th Portal. We also have 8
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trademark and domain name applications pending in other countries. Any claims or confusion related to such marks, or our failure to obtain trademark registration, might materially adversely affect our business. We rely on a combination of copyright, trademark and trade secret laws and our contractual obligations with employees and third parties to protect our proprietary rights. Protection of our intellectual property is limited. Despite our efforts to protect our proprietary rights, it may be possible for a third party to copy or obtain and use our intellectual property without our authorization. In addition, other parties may breach confidentiality agreements or other protective contracts we have entered into, and we may not be able to enforce our rights in the event of these breaches. We have entered into confidentiality and invention assignment agreements with our employees and consultants, and nondisclosure agreements with our vendors and strategic partners to limit access to and disclosure of our proprietary information. We cannot be certain that these contractual arrangements or the other steps taken by us to protect our intellectual property will prevent misappropriation of our technology. We have licensed in the past, and expect that we will license in the future, some of our proprietary rights, such as trademarks or copyrighted material, to third parties. While we attempt to ensure that the quality of the stanlee products and brand is maintained by these licensees, we cannot assure that these licensees will not take actions that might hurt the value of our proprietary rights and reputation. GOVERNMENT REGULATION We are subject to various laws and governmental regulations relating to our business. Although there are currently few laws or regulations directly applicable to online services or the Internet, the increasing popularity and use of the Internet might cause additional laws and regulations to be adopted. These laws and regulations currently cover or may cover in the future issues including the following: Internet Privacy. The Children's Online Privacy Protection Act of 1998, which was enacted by the United States Congress on October 21, 1998 and for which the Federal Trade Commission issued its final regulations on October 20, 1999, regulates the collection, use, and/or disclosure of personal information obtained from children under the age of 13. Under the provisions of this Act, which becomes effective on April 21, 2000, websites catering to children will be required to: provide notice on their website and to parents of children under the age of 13 with notice of what information is being collected, how the site uses the information, and the website's practices regarding disclosures of information; obtain verifiable parental consent for the collection, use and/or disclosure of their children's information, and allow parents to terminate their consent at any time; provide parents an opportunity to review the information collected from their children; and refrain from conditioning a child's participation in a game on the child revealing more information than reasonably necessary to participate. If we discover that a member about whom we have collected information has misrepresented his or her age and is in fact under age 13, or that a child under 13 has disclosed personal information on our bulletin boards or in any other public forum on our site, we will have to either (1) remove that person as a member, or (2) comply with the Federal Trade Commission regulations under the Act. It is important to our members that we protect their privacy. We use password protection and member IDs to ensure anonymity among our members. In addition, we do not sell or distribute information about the identities, preferences or page views of individual members without their permission. We do disclose certain information to third parties, with our members' permission, in connection with product promotions and special programs in which members elect to participate. Market research data that we may sell to third parties consists of trend information about various segments of our members; for example, what certain types of users like to do in their spare time or which of two products our members prefer. While we believe that we 9
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currently adequately provide for our members' privacy, our current programs may not conform to legislation or regulations adopted in the future by the Federal Trade Commission or other governmental entities. In addition, if unauthorized persons were able to penetrate our security and gain access to, or otherwise misappropriate, our members' personal information, we could be subject to liability. Such liability could include claims for misuses of personal information, such as for unauthorized marketing purposes or unauthorized use of credit cards. These claims could result in litigation which could require us to expend significant financial resources and divert management's attention from operations. The European Union adopted a Directive which became effective in October 1998 that imposes restrictions on the collection and use of personal data. Under the Directive, European Union citizens are guaranteed the right of access to their data, the right to know where the data originated, the right to have inaccurate data corrected, the right to recourse in the event of unlawful processing of information and the right to withhold permission to use their data for direct marketing. The Directive could affect U.S. companies that collect information over the Internet from individuals in European Union member countries and may impose restrictions that are more stringent than current Internet privacy standards in the United States or our own privacy policies. The Directive does not, however, define what standards of privacy are adequate. As a result, the Directive might adversely affect the activities of entities, including us, that engage in data collection from members in European Union member countries. Internet Taxation. A number of legislative proposals have been made by federal, state, local and foreign governments that would impose additional taxes on the sale of goods and services over the Internet, and some states have taken measures to tax Internet-related activities. Although in October 1998 Congress placed a three-year moratorium on state and local taxes on Internet access or on discriminatory taxes on electronic commerce, existing state or local laws were excluded from this moratorium. Further, once this moratorium is lifted, some type of federal or state taxes may be imposed upon Internet commerce. Such legislation or other attempts at regulating commerce over the Internet may cause sales at the Stan Store to decrease which might adversely affect advertising revenues as well since Internet sales generally may decline. Domain Names. Our domain names are our Internet "addresses." Domain names have been the subject of significant trademark litigation in the United States. We have applied for registration of certain domain names in the United States and foreign countries. Third parties might bring claims for infringement against us for the use of these domain names. Moreover, because domain names derive value from the individual's ability to remember such names, it is possible that our domain names could lose their value if, for example, members begin to rely on mechanisms other than domain names to access online resources. The current system for registering, allocating and managing domain names has been the subject of litigation and of proposed regulatory reform. Our domain names might lose their value, and we might have to obtain entirely new domain names in addition to or instead of our current domain names if such litigation or reform efforts result in a restructuring of the current system. Jurisdiction. Due to the global reach of the Internet, it is possible that the governments of other states and foreign countries might attempt to regulate our activities or prosecute us for violations of their laws. This could seriously affect our business. In addition, because our products and services are available over the Internet anywhere in the world, multiple jurisdictions may claim that we are required to qualify to do business as a foreign corporation in each of those jurisdictions. Our failure to qualify as a foreign corporation in a jurisdiction where we are required to do so could subject us to taxes and penalties for the failure to qualify. It is possible that state and foreign governments might also attempt to regulate our transmissions of content on our Websites or prosecute us for violations of their laws. State or foreign governments might allege or charge us with violations of local laws, we might unintentionally violate these laws, and these laws might be modified, or new laws might be enacted, in 10
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the future. EMPLOYEES As of March 1, 2000, we employed a total of 85 full-time employees, 56 of whom were in content creation and product development; 6 in technology; 12 in sales, marketing, business development and e-commerce; 1 in market research; and 11 in finance and administration. In addition, about 18 persons provide services to us pursuant to consulting and/or freelance agreements. To support our anticipated future growth, we expect to hire additional employees, particularly in the areas of content creation and product development. None of our employees is represented by unions, and we believe our relations with our employees are good. ITEM 2. DESCRIPTION OF PROPERTY Our principal executive offices are located in Encino, California, where we sublease approximately 7,000 square feet that expires in April 2002. In November 1999, we entered into two separate leases expiring in October 2004 for an additional approximate 7,000 and 6,500 feet of ground floor space, respectively, in the same building for our studio production facilities, and a sublease expiring in April 2000 for an additional approximate 3,500 feet of office space for our technology infrastructure requirements. We have initiated negotiations to extend the sublease and anticipate that it will be extended for an additional period as desired by the Company, but no assurance can be made that such extension will be granted. As we expand, we anticipate that additional space will be available on commercially reasonable terms, but no assurance can be made in this regard. We intend to rent additional space in the same building in which our principal executive offices are situated, aggregating an additional approximate 18,000 square feet pursuant to two separate leases, and that terms of these leases will vary as to duration and rent escalation provisions tied to either increases in the landlord's operating expenses or fluctuations in the consumer price index in the relevant geographical area. ITEM 3. LEGAL PROCEEDINGS We are not currently involved in any material legal proceedings, nor, to our knowledge, are any threatened. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There have been no matters submitted to a vote of security holders during the quarter ended December 31, 1999. 11
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PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is traded on the over-the-counter bulletin board under the symbol "SLEE." The following table sets forth the range of reported closing bid prices of Stan Lee Media, Inc.'s common stock during the periods indicated. Such prices reflect prices between dealers in securities and do not include any retail markup, markdown or commission and may not necessarily represent actual transactions. The information set forth below was obtained from America Online. [Download Table] Fiscal Year Ended December 31, 1999 High Low Three Months Ended - September 30, 1999 $ 9.00 $2.50 December 31, 1999 $ 7.50 $4.06 For the period January 1, 2000 through March 6, 2000 $30.00 $5.88 As of February 25, 2000, we had 438 shareholders of record of Stan Lee Media, Inc.'s common stock, excluding shares held in street name by brokerage firms and other nominees who hold shares for multiple investors, and one shareholder of record of Stan Lee Media, Inc.'s Series A Preferred Stock. Holders of common stock are entitled to receive dividends if, as and when declared by the Board of Directors out of funds legally available therefor, subject to the dividend and liquidation rights of any preferred stock that may be issued and outstanding. We have never declared or paid any dividends on our common stock. We intend to retain any future earnings for use in the operation and expansion of our business. Consequently, we do not anticipate paying any cash dividends on our common stock to our shareholders for the foreseeable future. The holders of Series A Preferred Stock are not entitled to dividends unless dividends are paid on the common stock, in which case the Series A Preferred Stock will receive dividends at the same rate payable on the common stock on the basis of the number of shares of common stock into which the Series A Preferred Stock is convertible. The holders of Series A Preferred Stock vote together with the holders of common stock, on the basis of the number of shares of common stock into which the Series A Preferred Stock is convertible, on all matters presented to the stockholders to vote. The Series A Preferred Stock will vote separately as a class on matters which affect its rights and preferences. RECENT SALES OF UNREGISTERED SECURITIES Sales of Common Stock Prior to January 1, 2000. Between January 1, 1999 and June 30, 1999, 400,000 shares of common stock were issued for services before any stock was issued for cash. Each issuance was valued at $0.001 per share at that time. Effective July 23, 1999, SLM Delaware engaged in a share exchange with Boulder Capital Opportunities, Inc. ("Boulder"), a public company, incorporated in the State of Colorado, which previously had no operating history. This share exchange was accounted for as a reverse acquisition in which SLM Delaware is considered our predecessor because it had operations at the time of the share exchange. In this share exchange, the shareholders of SLM Delaware received 8,500,000 shares of 12
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common stock of Boulder in exchange for all of the issued and outstanding shares of common stock of SLM Delaware. The number of shares of common stock outstanding after this transaction was 11,025,000. On July 23, 1999, the Company issued 60,000 shares of common stock at $2.50 per share, the fair value on the date of issuance, to employees for services rendered. The fair value of these shares, $150,000, was charged to operations during 1999. On December 9, 1999, 50,000 of these shares were cancelled in conjunction with the termination of an employee and the corresponding $125,000 fair value originally expensed at the date of the grant was reversed upon cancellation. As settlement of amounts due under the terminated employment contract, the Company issued 7,000 shares of common stock. The fair value of these shares, $38,500, was charged to operations. On July 30, 1999, 37,500 shares of common stock were issued at $4.00 per share as part of a private placement, resulting in gross proceeds of $150,000. Through July 1999, a total of $738,100 in cash was received for subscription stock. The subscription stock consisted of 246,029 shares of common stock that were issued on July 23, 1999 in consideration for $3.00 per share. In addition, the subscription stock investors were granted warrants to purchase another 246,029 shares at an exercise price of $5.00 per share. During August 1999, 62,500 shares of common stock were issued at $4.00 per share in private placements, resulting in gross proceeds of $250,000. On October 12, 1999, the Company issued 10,000 shares of common stock in connection with a bridge loan from VMR Luxembourg S.A. The fair value of these shares, $61,800, was recorded as debt offering costs at December 31, 1999 and is being amortized into interest expense over the six-month term of the loan. As of December 31, 1999, $30,900 has been amortized to interest expense. On November 8, 1999, the Company issued 25,000 shares of common stock at $7.19 per share in exchange for rights to use software developed by Cyberworld International Corporation, a third party. The fair value of these shares, $179,675, on the date of issuance was recorded as a licensing right asset. On November 8, 1999, the Company issued 10,000 shares of common stock at $7.19 per share to VMR Luxembourg S.A. for services rendered relating to the Company's listing on the Frankfurt stock exchange. The fair value of these shares, $71,870, was charged to operations during 1999. Series A Preferred Stock Issuance. On November 3, 1999, the Company entered into an agreement with Macromedia, Inc. ("Macromedia") to issue 714,286 shares of the Company preferred stock at $7.00 per preferred share for a total of $5,000,002 in cash. The Company entered into a five-year distribution agreement with Macromedia to distribute flash-animated episodes of series produced by the Company. During the first year of the term, the Company must make 10 submissions of series at an average rate of at least one submission every two months. Macromedia will reimburse the Company for production costs plus profit and overhead in addition to a license fee after delivery of the last episode in each accepted series. The Company is required to pay $178,000 of the advertising costs to launch the first series. Stock Option Issuances. From July 23, 1999 through October 5, 1999, the Company entered 13
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into stock option agreements with certain executives, employees, consultants and directors to purchase 2,435,000 common shares at $2.50 to $5.50 per share, the fair market values at the date of grant. Of said amount, options to purchase 1,110,000 common shares have a term of five years, and are subject to various vesting periods ranging up to two years. Options to purchase the remaining 1,325,000 common shares were issued to consultants, have a term of 10 years and are fully vested at December 31, 1999. The fair value of these options, $3,258,979, was charged to operations during 1999. 1999 Stock Incentive Plan. The company adopted the 1999 Stock Incentive Plan (the "1999 Plan"), effective on October 11, 1999. Each director, officer, employee or consultant of the Company or any of its subsidiaries is eligible to be considered for the grant of awards under the 1999 Plan. The maximum number of shares of Common Stock that may be issued pursuant to awards granted under the 1999 Plan is 3,000,000 pursuant to an amendment by the board of directors in March 2000 to increase the total number of shares reserved for issuance thereunder. Any shares of Common Stock subject to an award which for any reason expires or terminates unexercised are again available for issuance under the 1999 Plan. Options granted generally have a term of five years and usually vest over two years beginning on the anniversary date of the grant. Under the 1999 Plan, the Company issued 355,000 options to officers and employees during 1999. In addition, under the 1999 Plan, the Company issued 202,500 options to consultants. The fair value of these options, $611,425, was charged to operations during 1999. Warrant Issuances. On September 15, 1999, the Company issued warrants to purchase 5,000 common shares in conjunction with debt financing. The warrants have a $5.00 per share exercise price and a term of three years. Since the note was repaid by December 31, 1999, the fair value of these warrants, $7,486, was charged to interest expense during the year. On September 21, 1999, the Company issued warrants to purchase 5,000 common shares in conjunction with debt financing. The warrants have a $5.00 per share exercise price and a term of three years. Since the note was repaid by December 31, 1999, the fair value of these warrants, $7,486, was charged to interest expense during the year. On October 12, 1999, the Company issued warrants to purchase 25,000 shares of common stock in connection with a bridge loan from VMR Luxembourg S.A. The warrants have a $6.18 per share exercise price and a term of three years. The fair value of these warrants, $35,572, was recorded as debt offering costs at December 31, 1999 and is being amortized into interest expense over the six-month term of the loan. As of December 31, 1999, $17,756 remained capitalized in deferred offering costs. On November 1, 1999, the Company issued warrants to purchase 2,500 common shares in conjunction with debt financing. The warrants have a $6.00 per share exercise price and a term of three years. Since the note was repaid by December 31, 1999, the fair value of these warrants, $3,351, was charged to interest expense during the year. Sales of Common Stock Post December 31, 1999. On February 1, 2000, the Company sold, in a private placement, 200,000 shares of common stock at $8.00 per share for a total purchase price of $1,600,000, and issued five-year warrants to purchase an additional 100,000 shares of common stock at an exercise price of $10.00 per share. On February 4, 2000, the Company sold, in a private placement, 200,000 shares of common stock at $11.00 per share for a total purchase price of $2,200,000, and issued five-year warrants to purchase an additional 100,000 shares of common stock at an exercise price of $11.00 per 14
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share. Under the terms of these two separate February 2000 private placements, the Company is required to file a registration statement registering such securities for sale to the general public within 180 days following their respective closings, and to have such registration statement be ordered effective by the Securities and Exchange Commission within 225 days following their respective closings. Failure to comply with such registration requirements will result in the Company being subjected to certain penalty provisions, including the issuance and delivery of additional warrants in an amount equal to 3% of the number of shares issued in each offering. Finder's fees totaling $150,000 were paid in conjunction with these financings and five-year warrants to purchase 5,000 shares of common stock at an exercise price of $10.00 per share were granted. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION This discussion contains forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by this forward-looking information. This discussion should be read in conjunction with our financial statements and the related notes thereto set forth elsewhere in this Report. Our predecessor company conducted only organizational activities. Accordingly, there were no material operations for the comparable periods for the prior year, and therefore, there is no discussion of comparable historical periods. As of December 31, 1999, our company was considered to be a development stage company as it had not recognized revenue from planned principal operations. PLAN OF OPERATIONS Our plan of operations for the next 12 months is to carry out our business plan as described in this Annual Report; namely, to create premier branded content focused on the Super Hero genre, and develop and grow multiple revenue streams through entertainment, merchandising (e.g., toys, video games and apparel licenses) and promotional exploitation initially via the Internet, and thereafter, by harnessing our offline strategic publishing/media partners worldwide. We launched our initial franchise, The 7th Portal, on Macromedia's shockwave.com animation portal, thereby exposing our content to a global audience of millions of registered users who will be encouraged to visit the stanlee.net website. By contracting with best of breed online content distribution partners, we intend to build the Stan Lee brand and community without incurring traditional huge resource commitments to generate traffic that Internet companies historically incur in order to aggregate eyeballs. In this regard, we have entered into an agreement with The Backstreet Boys to produce and co-own a Super Hero franchise based on their personae having Internet-based Super Hero alter-egos, thereby extending our reach over the Internet to a dedicated international fan base of girls and women aged 8 to 25. In February 2000, we commenced selling The Backstreet Project comic book in furtherance of this strategic partnership over the Internet and at the venue locations for The Backstreet Boys current concert tour. We also have entered into an agreement with Viacom Productions to reinvent and produce Internet-based animated webisodes reviving Viacom's world famous Mighty Mouse franchise. Our site also will feature content generated by our users, thereby creating a platform for users to interact and tools that allow our members to personalize their user experience. 15
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We plan to launch localized versions of our website in strategic locations throughout the world. The Super Heroes of The 7th Portal are situated in the following countries outside the United States: Japan, India, Germany, Brazil and South Africa. Accordingly, we have entered into a relationship in Japan and are pursuing the establishment of strategic partnerships with local operators who will contribute assets, operating infrastructure and capital to build, maintain, market and promote our Company's global branded content in their local market, and who will host and webcast local language versions of Super Hero series produced by us, repurpose such webisodes for exploitation in the local language, and jointly develop original Super Hero and comic character properties. We intend to leverage our domestic production facility to maintain economies of scale as we focus on additional countries. We intend to license elements of our original content to third-parties for exploitation in publishing, television and feature motion picture productions, which opportunities will include licensing and merchandising fees. In December 1999, we and Stan Lee were engaged by DC Comics to reinvent DC's principal Super Heroes through the publishing of 12 issues of approximately 48 story pages each tentatively entitled "The Staniverse" or "If Stan Lee Had Created the DC Universe," to enrich the DC Comic book characters such as Superman, Batman and Wonder Woman with the sensibilities and style of Stan Lee. Also, in November 1999, Simon & Schuster, Inc. entered into an agreement with Stan Lee to publish a Stan Lee official biography entitled Stan Lee: Master of Imagination. We are pursuing publishing, television and feature productions to further broaden the reach of our branded content creations. In addition to the traditional online banner ads and sponsorships, we have initiated a campaign through advertising supported insert entertainment (via our majority-owned subsidiary, Eat-Time Media, Inc.), including without limitation, the placement of card strips, promotional material and collectible items into suitable prepackaged pastry products and other snack foods throughout the country, which will cross-promote our branded content. We also have established strategic alliances with leading companies engaging in Internet e-commerce (NPO Online (NextPlanetOver.com) and WhatsHotNow.com). We intend to continue to make e-commerce an integrated and valuable part of our website. The Stan store, operated by WhatsHotNow.com, currently offers over 100 products, and we intend to significantly increase the number of products we offer over the next year. In addition, we plan to integrate global shopping opportunities into the store for our users outside of the United States who seek access to American products. We have entered into a working relationship with Iwerks to license elements of our original branded content for exploitation as simulation rides and as wait-time entertainment at movie theaters and shopping malls. We also have initiated a campaign to license elements of our branded content for exploitation as theme-park attractions. We intend to develop the ability to access many of the features and functionality found on stanlee.net by as many electronic means as possible, including wireless phones, personal digital assistants and pagers. We are planning to develop, with a strategic partner, the stanlee card, a co-branded financial resource for children and teens that will not only provide them with a non-credit based means of conducting transactions at the Stan store but will also allow them to make purchases throughout the Internet. Since our formation in October 1998, we have incurred substantial operating expenses to produce our branded content, establish our Internet infrastructure, and expand our operations to include 16
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more than 100 employees and consultants. Operating expenses for the year ended December 31, 1999 and for the period from October 13, 1998 (date of inception) to December 31, 1999 were $7,877,830 and $7,910,180, respectively. Operating expenses have increased as we engaged additional personnel and incurred other expenses in producing original characters and content for delivery on the Internet and other media pursuant to existing and anticipated contractual arrangements. We expect to incur operating losses at least through 2000. LIQUIDITY AND CAPITAL RESOURCES Our primary sources of liquidity and capital resources have been private placements of common stock and borrowings from related and non-related parties. We refer you to Note 7 to the Financial Statements (Shareholders' Equity) and Note 9 to the Financial Statements (Subsequent Events) for further descriptions of these activities. We will require additional capital financing to continue the development of our business plan consistent with anticipated growth in operations, infrastructure and personnel. We anticipate that the cash on hand coupled with the cash to be raised from additional private placements and public offerings, assuming they will be successful, will be sufficient to satisfy our operating expenses and capital until such time as revenues are sufficient to meet operating requirements. INCOME TAXES Net operating losses generated a deferred tax asset of approximately $1,000,000 at December 31, 1999. The deferred tax asset has not been recognized since management is unable to determine whether it is more likely than not that it will be realized. Accordingly, a 100% valuation allowance has been provided. ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "According for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires companies to recognize all derivative contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedge risk or (ii) the earnings effect of the hedged forecasted transaction for a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Historically, the Company has not entered into derivative contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of the new standard on January 1, 2000 to affect its financial statements. In June 1998, the Accounting Standards Executive Committee of the AICPA issued SOP 98-5, Reporting on the Costs of Start-up Activities. SOP 98-5 requires all start-up and organizational costs to be expensed as incurred. It also requires all remaining historically capitalized amounts of these costs existing at the date of adoption to be expensed and reported as the cumulative effect of a change in accounting principles. SOP 98-5 is effective for all fiscal years beginning after December 31, 1998. The adoption of SOP 98-5 on January 1, 1999 had no effect on the financial statements. 17
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ITEM 7. FINANCIAL STATEMENTS The consolidated financial statements are listed at the "Index to Financial Statements" elsewhere in this Report. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Effective August 16, 1999, we engaged BDO Seidman, LLP as the registrant's independent public accountants, subsequent to the July 1999 reorganization transaction with our predecessor and concurrent with the resignation of the registrant's previously engaged independent accountant. The engagement of BDO Seidman, LLP was approved by our board of directors. The financial statements for the past two years contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. There were no accounting or auditing disagreements between the Company, the registrant's previously engaged independent accountant, and BDO Seidman, LLP. Prior to its engagement by the registrant, BDO Seidman, LLP represented each of Stan Lee Entertainment, Inc. and Stan Lee Media, Inc. (SLM Delaware). 18
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PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Our Board of Directors consists of only one class. All of the directors will serve until the next annual meeting of shareholders and until their successors are elected and qualified, or until their earlier death, retirement, resignation or removal. There are no family relationships among directors and executive officers. We also have provided a brief description of the business experience of each director and executive officer during the past five years and an indication of directorships held by each director in other companies subject to the reporting requirements under the Federal securities laws. Our predecessor company conducted only organizational activities and, accordingly, no information is included for the period prior to July 23, 1999. Effective July 24, 1999, the number of directors of the company was increased to fiv