<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
[ ] 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.
(Exact name of small business issuer as specified 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)
(818) 461-1757
(Issuer's telephone number, including area code)
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 [ ]
---- -----
The number of shares outstanding of the issuer's common stock as of August
1, 2000, was 12,581,048.
<PAGE> 2
INDEX
STAN LEE MEDIA, INC.
(a development stage company)
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. Financial Information
-----------------------------
Item 1. Financial Statements
Consolidated Balance sheets -
June 30, 2000 (unaudited) and December 31, 1999;
3
Consolidated Statements of operations (unaudited) - Six months ended June
30, 2000 and 1999 and the period from
inception (October 13, 1998 to June 30, 2000); 4
Consolidated Statements of operations (unaudited) - Three months ended June
30, 2000 and 1999; 5
Consolidated Statements of cash flows (unaudited) - Six months ended June
30, 2000 and 1999 and the period from inception(October 13, 1998 to
June 30, 2000);
6
Notes to financial statements
7
Item 2. Management's Discussion and Analysis or Plan of operations 15
PART II. Other Information 17
---------------------------
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
F-2
<PAGE> 3
STAN LEE MEDIA, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 ,
2000 December 31,
(unaudited) 1999
------------- -----------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 149,109 $ 2,020,162
Accounts receivable, net of $32,922 allowance 260,986 --
Inventory 11,883 11,883
Prepaid expenses and other current assets 116,140 10,450
-------------------------------
Total current assets 538,118 2,042,495
Property and equipment, net of accumulated depreciation (Note 3) 1,735,168 602,009
Other assets
Production costs 1,086,186 --
Debt offering costs -- 17,756
Licensing rights (net of $25,650 and $5,989
of accumulated amortization) 155,718 173,686
Trademarks 189,921 103,636
Deposits 132,131 47,464
-------------------------------
Total other assets 1,563,956 342,542
-------------------------------
$ 3,837,242 $ 2,987,046
===============================
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 976,128 $ 172,267
Obligations under capital leases, current portion (Note 5) 103,585 45,864
Notes payable (Note 4) 2,555,000 500,000
-------------------------------
Total current liabilities 3,634,713 718,131
-------------------------------
Convertible Promissory Note (Note 4) 2,500,000 --
Obligations under capital leases, long-term portion (Note 5) 317,698 80,979
Commitments (Note 5)
Shareholders' equity (Notes 1 and 6)
Series A Convertible Preferred stock, par value $0.001, authorized 1,500,000
issued and outstanding 714,286 and none;
liquidation preference of $7 per share 5,000,002 5,000,002
Common stock, par value $0.001, authorized 100,000,000 issued and outstanding
11,971,694 and 8,500,000 11,972 11,433
Additional paid-in capital 12,864,359 5,137,787
Deficit accumulated during the development stage (20,491,502) (7,961,286)
-------------------------------
Total shareholders' equity (2,615,169) 2,187,936
-------------------------------
$ 3,837,242 $ 2,987,046
===============================
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 4
STAN LEE MEDIA, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
June 30,
2000 1999
(unaudited) (unaudited)
------------------------------
<S> <C> <C>
Revenue
Comic book sales $ 51,556 $ --
Webisode licenses 390,799 --
Other sales 7,845 --
-----------------------------
450,200 --
-----------------------------
Operating expenses:
Cost of comic books -- --
Cost of webisodes 742,295 --
Cost of other sales -- --
Development costs 1,905,305 --
General and administrative 4,717,960 572,706
-----------------------------
Total operating expenses 7,365,559 572,706
-----------------------------
Operating loss (6,915,360) (572,706)
Net interest expense (200,278) (535)
-----------------------------
Net loss $(7,115,638) $(573,241)
=============================
Basic and diluted net loss per share $ (0.60) $ (0.07)
=============================
Weighted average number of shares used in
computing basic and diluted net loss per share 11,916,974 8,199,726
=============================
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 5
STAN LEE MEDIA, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended Period from Inception
June 30, (October 13, 1998) to
2000 1999 June 30, 2000
(unaudited) (unaudited) (unaudited)
----------------------------------------------------
<S> <C> <C> <C>
Revenue
Comic book sales $ 256,121 $ -- $ 256,121
Webisode licenses 463,360 -- 463,360
Other sales 26,878 -- 57,483
-----------------------------------------------------
746,359 -- 776,964
-----------------------------------------------------
Operating expenses:
Cost of comic books 58,904 -- 58,904
Cost of webisodes 814,856 -- 814,856
Cost of other sales 59,790 -- 61,065
Development costs 2,735,804 -- 3,878,182
General and administrative 9,405,729 794,634 16,172,226
-----------------------------------------------------
Total operating expenses 13,075,083 794,634 20,985,233
-----------------------------------------------------
Operating loss (12,328,724) (794,634) (20,208,269)
Net interest expense (201,493) (637) (283,234)
=----------------------------------------------------
Net loss $(12,530,217) $ (795,271) $(20,491,503)
=====================================================
Basic and diluted net loss per share $ (1.06) $ (0.09)
================================
Weighted average number of shares used in
computing basic and diluted net loss per share 11,801,147 8,691,781
================================
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 6
STAN LEE MEDIA, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended Period from Inception
June 30, (October 13, 1998) to
2000 1999 June 30, 2000
(unaudited) (unaudited) (unaudited)
------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(12,530,217) $ (795,271) $(20,491,503)
Adjustments to reconcile net loss to net cash and cash
equivalents provided by (used in) operating activities:
Non-cash items resulting from issuance of common stock,
stock options and warrants 3,235,998 400 3,236,006
Depreciation and amortization 230,157 12,290 230,150
Allowance for accounts receivable 16,833 -- 16,833
Changes in:
Inventory -- -- (11,883)
Accounts receivable (277,818) -- (277,818)
Production costs (1,086,186) -- (1,086,186)
Prepaid expenses and other current assets (105,690) (2,500) (116,140)
Deposits (84,668) -- (132,132)
Debt offering costs -- -- --
Accounts payable 803,862 75,464 976,129
--------------------------------------------------
Net cash used in operating activities (9,797,729) (709,617) (17,656,544)
--------------------------------------------------
Cash flows from investing activities
Purchase of property and equipment (1,022,111) (122,613) (1,624,121)
Licensing rights -- -- (173,686)
Application for trademarks (86,285) (6,638) (189,921)
--------------------------------------------------
Net cash used in investing activities (1,108,396) (129,251) (1,987,728)
--------------------------------------------------
Cash flows from financing activities
Debt offering costs 245,030 -- 227,274
Proceeds from notes and loans payable 3,230,000 30,000 3,730,000
Repayment of notes and loans payable (1,175,000) -- (1,175,000)
Proceeds from convertible note 2,500,000 -- --
Payments under capital lease obligations (28,789) 71,815 98,054
Receipt of subscriptions -- 564,000 2,500,000
Issuance of preferred stock -- -- 5,000,002
Proceeds from issuance of common stock 4,263,831 275,000 9,413,051
--------------------------------------------------
Net cash provided by financing activities: 9,035,072 940,815 19,793,381
--------------------------------------------------
Increase (decrease) in cash and cash equivalents (1,871,053) 101,947 149,109
Cash and cash equivalents, beginning of period 2,020,162 21,276 --
--------------------------------------------------
Cash and cash equivalents, end of period $ 149,109 $ 123,223 $ 149,109
==================================================
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 7
STAN LEE MEDIA, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
Stan Lee Media, Inc. ("SLM" or the "Company") is an Internet-based, globally
branded digital entertainment company founded by comic book Icon Stan Lee to
conceive, create, co-create and produce characters and story franchises for
entertainment, merchandising and promotional exploitation worldwide.
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, SLM Delaware engaged
in a share exchange with Boulder Capital Opportunities, Inc. ("Boulder") a
public company, incorporated in the State of Colorado. This share exchange was
accounted for as a reverse acquisition in which SLM Delaware is considered the
predecessor of the Company because it had operations at the time of the share
exchange. The new name of the company after the share exchange is Stan Lee
Media, Inc. ("SLM" or the "Company"). In this share exchange, the shareholders
of SLM Delaware received 8,500,000 shares of common stock of Boulder in exchange
for all of the issued and outstanding shares of SLM Delaware common stock. The
number of shares outstanding after this transaction was 11,025,000.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts of
Stan Lee Media, Inc., and its wholly owned subsidiary. All significant
intercompany balances and transactions have been eliminated.
BASIS OF PRESENTATION
The financial statements for the six months ended June 30, 2000 and 1999 include
all adjustments, consisting of normal recurring adjustments, which management
considers necessary for a fair presentation of the results of these periods.
These financial statements have been prepared consistently with the accounting
policies described in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1999, as filed with the Securities and Exchange Commission,
and should be read in conjunction with this Quarterly Report on Form 10-QSB.
F-7
<PAGE> 8
STAN LEE MEDIA, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIC and DILUTED EARNINGS (LOSS) PER SHARE
Basic Earnings (loss) per share is calculated by dividing net income (loss) by
the weighted average number of common shares outstanding during the period.
Diluted income per share is calculated by dividing net income by the basic
shares outstanding and all dilutive securities, including stock options,
warrants, convertible notes and preferred stock, but does not include the impact
of potential common shares that would be anti-dilutive.
For all periods presented, potential dilutive securities were not included in
the earnings per share calculation since their effect would be anti-dilutive.
Basic and diluted earnings per share are the same for all periods presented.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
June 30, December 31, Estimated
2000 1999 Useful Life
(unaudited)
----------------------------------------------
<S> <C> <C> <C>
Automobile $ 15,000 $ 15,000 5 years
Computer equipment 615,615 103,249 3 years
Computer software 336,666 18,011 3 years
Accounting software 92,756 -- 3 years
Furniture and fixtures 239,649 187,960 5 years
Leasehold improvements 213,044 166,349 5 years
Equipment under capital leases 486,403 190,036
----------------------------------------------
1,999,133 680,605
Less accumulated depreciation and amortization 263,965 78,596
----------------------------------------------
$1,735,168 $602,009
==============================================
</TABLE>
At June 30, 2000, accumulated depreciation and amortization included $92,721
related to assets under capital leases.
NOTE 4 - DEBT
SHORT-TERM FINANCING
During April 2000, SLM executed $200,000 of unsecured promissory notes (of which
$100,000 was with an existing SLM shareholder). The loans are due and payable in
sixty days with interest at the rate of 8% per annum, with the exception that no
interest will be due and payable for the first thirty days after the notes were
issued. Pursuant to the promissory notes, warrants for 8,000 shares of SLM's
common stock exercisable at $12.00 per share and expiring three years from the
date of the notes were granted to the Note holders. Of the $200,000 of notes
$73,000 was offset by the exercise of warrants by certain noteholders, and the
balance due of $127,000 was extended and subsequently paid off.
F-8
<PAGE> 9
STAN LEE MEDIA, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - DEBT (CONTINUED)
CONVERTIBLE PROMISSORY NOTE
On April 14, 2000 the company entered into an unsecured convertible promissory
note in the amount of $2,500,000 with a third party. The terms of the note call
for SLM to pay interest at 6% per annum with interest payable in cash or SLM
common stock at the option of SLM. Interest is payable quarterly with the first
payment due on September 30, 2000. The note matures on April 30, 2002 and is not
redeemable by the holder prior to maturity. The note can be prepaid by SLM prior
to maturity but only with the consent of the holder of the note. The holder of
the note was also issued five-year warrants to purchase 50,000 shares of common
stock at an exercise price of $14.33 per share. The fair value of $351,234 of
warrants issued in conjunction with this note was expensed as debt offering
costs.
The notes are convertible into SLM common stock at a price equal to the lower of
$13.13 or at a price based on a 20% discount to the market at time of
conversion. Any portion of the note remaining unconverted at the maturity date
shall automatically be converted on such date.
Certain registration rights were granted under the terms of the note. Finder's
fees and expenses totaling $232,500 were paid in conjunction with this
financing. Five-year warrants to purchase 20,000 shares of common stock at an
exercise price of $14.36 per share were also issued to the finder and
underwriter. The fair value of $140,452 of warrants issued in conjunction with
this note was expensed as debt offering costs.
REVOLVING CREDIT AGREEMENTS
During May and June, 2000 the company borrowed $1,950,000 under two revolving
credit agreements. These credit lines bear interest at LIBOR, plus two percent
(2%) per annum. This amount has subsequently been repaid.
RELATED PARTY TRANSACTIONS
SLM received loans from related parties of $480,000 at June 30, 2000 as working
capital. The balances are due on demand with no specific payment provisions.
This amount has subsequently been repaid.
F-9
<PAGE> 10
STAN LEE MEDIA, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - COMMITMENTS and CONTINGENCIES
EQUIPMENT LEASES
SLM entered into various capital leases for computers and related equipment. The
leases range from 24 to 60 month terms. Minimum future lease payments under
capital leases as of June 30, 2000 for each of the next five years and in
aggregate are:
<TABLE>
<CAPTION>
Year ended Amount
--------
<S> <C>
2000 $142,885
2001 201,388
2002 159,965
2003 23,570
2004 1,443
--------
Total minimum payments $529,251
Less: Amount representing interest (107,968)
--------
Present value of net minimum lease payments $421,283
========
</TABLE>
CONTINGENCIES
The company is in dispute over approximately $270,000 in invoices in connection
with a provider of promotional services.
SLM is also in negotiations with a former employee regarding a wrongful
termination claim. The cost to the company cannot be accurately determined at
this time.
No provision for either of the above contingencies has been made in these
financial statements
F-10
<PAGE> 11
STAN LEE MEDIA, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - SHAREHOLDERS' EQUITY
SLM has 100,000,000 authorized shares of $0.001 par value common stock and
10,000,000 shares of $0.001 par value preferred stock. Of the total preferred
stock, 1,500,000 shares were designated as Series A and 4,000 shares were
designated as Series B.
COMMON STOCK
During the quarter ended June 30, 2000 warrants for 105,332 shares of common
stock were exercised for total consideration of $554,660 of which $139,995 was
for cash and $414,665 represented exercises by conversion of promissory notes.
On April 14, 2000 SLM issued 10,000 shares of common stock at $0.001 per share
to an employee of the company at fair value on the date of issuance.
STOCK OPTIONS AND WARRANTS
During April and June 2000, SLM entered into five-year warrant agreements with
certain consultants to purchase 250,000 shares of common stock at $11.00 per
share, the fair market value at the dates of grant. The warrants are subject to
various vesting terms ranging from immediate to vesting within six months
subject to a performance clause. The fair value of $1,868,782 of these warrants
was charged to operations during this quarter.
F-11
<PAGE> 12
STAN LEE MEDIA, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - SIGNIFICANT BUSINESS AGREEMENTS
PARAMOUNT PARKS
On May 5, 2000 Paramount Parks (a unit of Viacom) and SLM in association with
Blur studio, partnered to create, produce and distribute a large format, 3-D
simulator film incorporating The 7th Portal concept and characters. The project
will debut in the spring of 2001 at all U.S-based Paramount Parks. Under the
agreement Paramount will sell branded merchandise and provide links between its
own websites and those of SLM. The attraction will also be distributed to a
worldwide network of simulation theaters.
Paramount Parks and SLM are committed to invest $500,000 each to cover
production costs and the parties to the agreement will share in net revenues
derived from gross receipts and merchandise sales derived from the project.
MARK CANTON
On June 2, 2000 SLM and Mark Canton, a film producer and former studio head
involved in such films as "Batman" and "Men in Black", entered into an agreement
to develop the 7th Portal for a theatrical motion picture.
FOX LATIN AMERICA
On June 14, 2000 FOX Latin America and FOX Kids Latin America formed a strategic
alliance with SLM to repurpose SLM's content and to create original branded
content for distribution on the Internet and television outlets throughout the
Latin American Region. FOX will work with SLM in two specific areas of
development, localizing existing SLM content for Latin American audiences and
co-creating new properties for the region. Revenues derived from this venture
shall be split 50/50 between the parties after deduction of distribution fees.
F-12
<PAGE> 13
STAN LEE MEDIA, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - SUBSEQUENT EVENTS
COMMON STOCK
On July 31, 2000 SLM issued 505,051 shares of its restricted common stock to a
strategic investor at $9.90 per share for a total purchase price of $5,000,000.
With this private placement, SLM issued five-year warrants to purchase an
additional 100,000 shares of common stock at an exercise price of $11.25 per
share. Certain registration rights were granted under the terms of this private
placement. Fees totaling $300,000 were paid to a finder regarding this
transaction.
CONVERTIBLE PREFERRED STOCK
On August 2, 2000, SLM issued 4,000 shares of its Series B 4% Cumulative
Convertible Preferred Stock for gross proceeds of $4 million in a private
placement transaction. With this private placement, SLM issued five year
warrants to purchase 75,000 shares of its common stock at an exercise price of
$13.75 per share. Registration rights were granted under the terms of the
private placement for both the shares of common stock issuable upon conversion
of the Series B Cumulative Convertible Preferred Stock and upon exercise of the
warrants.
The Series B 4% Cumulative Convertible Preferred Stock converts into SLM's
common stock at the option of the holder at a price equal to the lower of $11.00
(subject to adjustment in certain events) and up to a 17% discount to the lowest
bid price for SLM's common stock on the Nasdaq SmallCap Market during the
previous 5 trading days. The number of shares which may be converted at any time
is subject to certain limitations, including (i) that the holders may not hold
more than 9.9% of the total outstanding shares immediately following a
conversion, (ii) under certain circumstances, no more than 400 shares of
preferred stock may be converted in any one month, and (iii) in no event can the
preferred stock result in the issuance of greater than 20% of SLM's total
outstanding common stock. The preferred stock has a liquidation preference of
$1,000 per share and accrues dividends at a rate of 4% of the liquidation
preference per year, payable quarterly in cash or, at the option of SLM, by
adding such amount to the liquidation preference of the preferred stock.
Finder's fees of $290,000 were paid in connection with this financing.
7,273 shares of commons stock and warrants to purchase 13,636 shares of common
stock at an exercise price of $13.75 per share were also issued to finders.
UNSECURED PROMISSORY NOTE
On July 12, 2000 the company executed a $500,000 unsecured promissory note with
an unrelated party. The loan bears interest at the rate of 8% per annum and is
due within ten days of an equity or convertible debt financing in excess of
$1,000,000. Accordingly, such loan was repaid on August 1, 2000.
Warrants to purchase 50,000 shares of common stock at an exercise price of
$11.06 per share were issued to the noteholder.
F-13
<PAGE> 14
STAN LEE MEDIA, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY
During the first two quarters, the Company purchased $323,231 of equipment under
capital leases.
During the period ended June 30, 2000 promissory notes of $414,665 were repaid
through the exercise of warrants for 77,333 shares of common stock.
F-14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
Certain of the matters and subject areas discussed in this Quarterly Report
on Form 10-QSB contain "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. All statements other than
statements of historical information provided herein are forward-looking
statements and may contain information about financial results, economic
conditions, trends and known uncertainties based on the Company's current
expectations, assumptions, estimates and projections about its business and the
Company's industry. These forward-looking statements involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of several factors,
including the availability of sufficient financing to implement the Company's
new characters and story franchises and distribution via the Internet, ability
to generate revenues through Internet and off line distribution, increased
levels of competition, new products and technological changes, and regulatory
factors. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis, judgment,
belief or expectation only as of the date hereof. The forward-looking statements
made in this Quarterly Report on Form 10-QSB relate only to events as of the
date on which the statements are made. The Company undertakes no obligation to
publicly update any forward-looking statements for any reason, even if new
information becomes available or other events occur in the future.
OVERVIEW
Stan Lee Media, Inc. (http://www.stanlee.net) is an Internet-based,
global branded digital entertainment 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. Stan Lee is the co-creator of such classic characters as Spider-Man,
The Incredible Hulk, and The X-Men, and more than two billion copies of books
featuring characters Lee co-created have been published in 100 countries and 27
languages. Stan Lee Media seeks to become the premier creator of episodic
entertainment which will initially be exploited over the Internet and
subsequently through off line media.
The Company expects to incur losses for the foreseeable future as a result
of the significant operating and capital expenditures required to achieve its
objectives. In order to achieve and maintain profitability, the Company will
need to generate revenues significantly above historical levels. In addition, in
order to maintain its operations, it will be necessary for the Company to raise
additional equity and debt financing from financial or strategic investors. The
Company's prospects for achieving profitability must be considered in light of
the risks, uncertainties, expenses, and difficulties encountered by companies in
the rapidly evolving market of online commerce.
F-15
<PAGE> 16
RESULTS OF OPERATIONS
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 June 30, 2000, our company was considered to be a development stage
company as it had not recognized substantial revenue from planned principal
operations.
Total revenues were $746,359 for the six month period ended June 30, 2000,
comprised of license fees for the delivery of webisodes to Macromedia, Inc.
sales of The Backstreet Project comic books at concerts and on the Internet, and
sales of certain comic book related memorabilia. 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 more than 150 employees and consultants. Operating expenses for the six
month period ended June 30, 2000 were $13,075,083. 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.
PLAN OF OPERATIONS
Our plan of operations for the next 12 months is to carry out our business
plan as described in this Quarterly 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 two franchises, The 7th Portal and The Accuser, on
Macromedia's shockwave.com animation portal, on February 29, 2000 and May 2,
2000, respectively. By contracting with premier online content distribution
partners, we intend to build the Stan Lee brand and community without incurring
all of the substantial resource commitments to generate traffic that Internet
companies historically incur in order to aggregate audiences.
In this regard, on August 27, 2000 we will launch a Super Hero franchise
based on Super Hero alter-egos of The Backstreet Boys thereby extending our
reach over the Internet to a dedicated international fan base of girls and women
aged 8 to 25. This launch will be accompanied by our production and distribution
of additional comic books featuring this Super Hero franchise, and a Burger King
back to school promotion featuring action figures and other materials featuring
our characters and the Backstreet Project Website. In addition, effective June
9, 2000, SLM signed an agreement with Mary J. Blige to create and launch an
animated global franchise portraying Ms. Blige as an original Stan Lee Hip Hop
Super Heroine. The franchise, which opens Blige's current concerts, will launch
this fall as an internet based series of animated webisodes.
We are in the process of launching localized versions of our website in
strategic locations throughout the world. Accordingly, we 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. On June 14, 2000,
FOX Latin America and FOX Kids Latin America formed a strategic alliance with
SLM to repurpose SLM's content and to create original branded content for
distribution on the Internet and television outlets throughout the Latin
American region. FOX will work with SLM in two specific areas of development -
localizing existing SLM content for Latin American.
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audiences and co-creating new properties for the region. Revenues derived from
this venture shall be split 50/50 between the parties after deduction of
distribution fees. We intend to leverage our domestic production facility to
maintain economies of scale as we focus on these 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 a strategic alliance with WhatsHotNow.com to
manage fulfillment of our e-commerce. 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.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity and capital resources have been private
placements of Note 4 to the Financial Statements (Debt), common stock and
borrowings from related and non-related parties. We refer you to Note 6 to the
Financial Statements (Shareholders' Equity) and Note 8 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. If we are unable to raise additional capital when needed, or if
the terms of any such financing restricts or inhibits our ability to locate
financing in the future, our business would be materially, adversely affected.
There can be no assurance, however that we will be able to raise additional
capital on advantageous terms, or at all. 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.
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At June 30, 2000, the Company had cash and cash equivalents of $149,109,
compared to cash and cash equivalents of $2,020,162 as of December 31, 1999. Net
cash used in operating activities of $9,797,729 for the six month period ended
June 30, 2000, was primarily attributable to net losses, reduced by noncash
charges resulting from the issuance of common stock, stock options and warrants
and depreciation and amortization, and working capital changes comprised
primarily of increases in accounts payable and accrued expenses (including
production costs). Included in such operating expense increase are non-recurring
marketing and promotional expenses associated with the Company's launch on
February 29, 2000 in the amount of $1,408,511, non-cash charges of $3,063,250
related to the Company's issuance of options for services and the Company's
grant of warrants in connection with financing transactions.
Net cash used in investing activities was $1,108,396 for the six month
periods ended June 30, 2000, compared to $24,179 for the fiscal year ended
December 31, 1999, and consisted primarily of capital expenditures related to
the purchase of property and equipment, and trademark applications.
Net cash provided by financing activities was $9,035,072 for the six month
periods ended June 30, 2000, compared to $215,150 for the fiscal year ended
December 31, 1999, resulting from the net proceeds from the issuance of common
stock in two private placements in February 2000 of $3,642,500, from short-term
financing evidenced by unsecured promissory notes in March and April, 2000 of
$800,000, less the payment of fees associated with such financings. In April
2000, net cash of $2,367,500 resulted from the issuance by the Company of Series
A 6% Convertible Notes in the aggregate amount of $2,500,000, maturing April 30,
2002, less the payment of finder's fees associated with such financings. In May
and June, 2000, net proceeds of $1,950,000 was obtained by the utilization of
available revolving credit agreements and $480,000 resulted from short term
borrowings from a related party.
The Company intends to continue to invest heavily to support its growth
strategy and expand its Internet production and online distribution activities.
These investments include continued advertising and marketing programs designed
to enhance the Company's brand name recognition with customers, expansion of its
product lines, and the further development of its Website operating
infrastructure. The sale of additional equity or convertible debt securities
could result in additional dilution to the Company's stockholders. In addition,
the Company will, from time to time, consider the acquisition of or investment
in complementary businesses, products, services and technologies, which might
impact the Company's liquidity requirements or cause the Company to issue
additional equity or debt securities. There can be no assurance that financing
will be available in amounts or on terms acceptable to the Company, if at all.
PURCHASE OF EQUIPMENT
Although we have no material commitments for capital expenditures, we
anticipate an increase in our capital expenditures and lease commitments
consistent with anticipated growth in operations and infrastructure.
CHANGES IN NUMBER OF EMPLOYEES
As of August 10, 2000, there are 142 full-time employees, 90 of whom were
in content creation and production, and product development, 13 of whom were in
marketing and sales, and 39 of whom were in general and administrative
functions. While we believe that we have substantially completed our necessary
hiring for the remainder of this year, we may need to retain some additional
employees to meet targeted needs of the company.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no matters during this reporting period that require
disclosure under this item.
ITEM 2. CHANGES IN SECURITIES
COMMON STOCK
On July 31, 2000 SLM issued 505,051 shares of its restricted common stock
to a strategic investor at $9.90 per share for a total purchase price of
$5,000,000. With this private placement, SLM issued five-year warrants to
purchase an additional 100,000 shares of common stock at an exercise price of
$11.25 per share. Certain registration rights were granted under the terms of
this private placement. Fees totaling $300,000 were paid to a finder regarding
this transaction.
CONVERTIBLE PREFERRED STOCK
On August 2, 2000, SLM issued 4,000 shares of its Series B 4% Cumulative
Convertible Preferred Stock for gross proceeds of $4 million in a private
placement transaction. With this private placement, SLM issued five year
warrants to purchase 75,000 shares of its common stock for a price of $13.75 per
share. Registration rights were granted under the terms of the private placement
for both the shares of common stock issuable upon conversion of the Series B
Cumulative Convertible Preferred Stock and upon exercise of the warrants.
The Series B 4% Cumulative Convertible Preferred Stock converts into SLM's
common stock at the option of the holder at a price equal to the lower of $11.00
(subject to adjustment in certain events) and a 17% discount to the lowest bid
price for SLM's common stock on the Nasdaq SmallCap Market during the previous 5
trading days. The number of shares which may be converted at any time is subject
to certain limitations, including (i) that the holders may not hold more than
9.9% of the total outstanding shares immediately following a conversion, (ii)
following the time that SLM's convertible promissory notes are no longer
outstanding, no more than 400 shares of preferred stock may be converted in any
one month for less than $11.00 (with certain exceptions), and (iii) in no event
can the preferred stock result in the issuance of greater than 20% of SLM's
total outstanding common stock. The preferred stock has a liquidation preference
of $1,000 per share and accrues dividends at a rate of 4% of the liquidation
preference per year, payable quarterly in cash or, at the option of SLM, by
adding such amount to the liquidation preference of the preferred stock.
Finder's fees of $290,000 were paid in connection with this financing, in
addition to 7,273 shares of SLM common stock and warrants to purchase 13,636
shares of common stock at an exercise price of $13.75 per share.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There have been no matters during this reporting period that require
disclosure under this item.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
There have been no matters submitted to a vote of security holders during
this reporting period.
ITEM 5. OTHER INFORMATION
There have been no matters during this reporting period that require
disclosure under this item.
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<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
Exhibit 27 - Financial Data Schedule.
3.1 Articles of Incorporation. (1)
3.2 Articles of Amendment to Articles of Incorporation Filed August 12,
1999. (1)
3.3 Articles of Amendment to Articles of Incorporation Filed November 5,
1999. (1)
3.4 Articles of Amendment to Articles of Incorporation Filed August 2, 2000.
3.5 By-Laws. (1)
10.1 Agreement dated as of April 20, 2000, between Paramount Parks, Blur
Studio, and the Company.
10.2 Agreement dated as of June 2, 2000, between The Canton Company, and the
Company.
10.3 Agreement dated as of June 14, 2000, between Fox Latin American Channel,
Inc., and the Company.
10.4 Securities Purchase Agreement dated as of August 1, 2000, between
Elliott Associates, L.P., Westgate International, L.P., and the Company.
10.5 Registration Rights Agreement dated as of August 1, 2000, between
Elliott Associates, L.P., Westgate International, L.P., and the Company.
10.6 Securities Purchase Agreement dated as of July 31, 2000, between Venture
Soft Co., Ltd. and the Company. (2)
10.7 Warrant dated as of July 31, 2000, between Venture Soft Co., Ltd. and
the Company. (2)
27 Financial Data Schedule
------------------
(1) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1999.
(2) Incorporated by reference from the Company's Current Report on Form 8-K
dated July 31, 2000.
Reports on Form 8-K relating to the quarter ended June 30, 2000. Form 8-K, dated
July 31, 2000, relating to the issuance of 505,051 shares of the Company's
Common Stock.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
Undersigned, thereunto duly authorized.
Stan Lee Media, Inc.
/s/ Robert M. Schultz
-------------------------
Robert M. Schultz
Principal Accounting Officer
Date: August 14, 2000.
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