<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 September 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
November 1, 2000, was 13,527,792.
<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 -
September 30, 2000 (unaudited) and December 31, 1999; 3
Consolidated Statements of operations (unaudited) - Three months ended
September 30, 2000 and 1999; 4
Consolidated Statements of operations (unaudited) - Nine months ended
September 30, 2000 and 1999 and the period from
inception (October 13, 1998 to September 30, 2000); 5
Consolidated Statements of cash flows (unaudited) - Nine months ended
September 30, 2000 and 1999 and the period from inception (October 13,
1998 to September 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>
September 30,
2000 December 31,
(unaudited) 1999
------------- -----------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 215,440 $ 2,020,162
Accounts receivable, net of $8,499 allowance 351,697 --
Accounts receivable - related party (Note 2) 100,000 --
Loans receivable (Note 2) 870,000 --
Inventory 12,543 11,883
Prepaid expenses and other current assets 196,000 10,450
-------------------------------
Total current assets 1,745,680 2,042,495
-------------------------------
2,012,175
Property and equipment, net of accumulated depreciation (Note 3) 602,009
Other assets
Production costs (Note 2) 1,534,315 --
Debt offering costs 278,059 17,756
Licensing rights (net of $35,935 and $5,989
of accumulated amortization) (Note 2) 3,934,886 173,686
Trademarks 242,783 103,636
Deposits 147,214 47,464
-------------------------------
Total other assets 8,149,432 342,542
-------------------------------
$ 9,895,112 $ 2,987,046
===============================
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 1,846,789 $ 172,267
Obligations under capital leases, current portion (Note 5) 51,155 45,864
Notes payable (Note 4) 500,000
-------------------------------
Total current liabilities 1,897,944 718,131
-------------------------------
Convertible Promissory Note (Note 4) 2,500,000 --
Obligations under capital leases, long-term portion (Note 5) 561,054 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
Series B Cumulative Convertible Preferred Stocks liquidation reference of
$1,000 pending, 1,904 shares authorized issued and outstanding 1,904,000 --
Common stock, par value $0.001, authorized 100,000,000 issued and outstanding
13,355,928 and 8,500,000 13,356 11,433
Additional paid-in capital 25,125,640 5,478,907
Deficit accumulated during the development stage (27,106,884) (8,302,406)
-------------------------------
Total shareholders' equity 7,890,350 2,187,936
-------------------------------
$ 9,895,112 $ 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
September 30,
2000 1999
(unaudited) (unaudited)
------------------------------
<S> <C> <C>
Revenue
Comic book sales $ 1,000 $ --
Webisode licenses 413,978 --
Other sales -- 20,605
-----------------------------
414,978 20,605
-----------------------------
Operating expenses:
Cost of comic books -- --
Cost of webisodes 830,884 --
Cost of other sales (4,000) 450
Development costs 1,561,506 --
General and administrative 3,014,825 1,891,440
-----------------------------
Total operating expenses 5,403,215 1,891,890
-----------------------------
(4,988,237) (1,871,285)
Operating loss
Net interest expense (Note 2) (1,286,024) (131)
Costs incurred on merger (120,000)
-----------------------------
Net loss $ (6,274,261) (1,991,415)
=============================
Basic and diluted net loss per share $ (0.52) $ (0.24)
=============================
Weighted average number of shares used in
computing basic and diluted net loss per share 11,975,644 8,200,822
=============================
</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>
Nine Months Ended Period from Inception
September 30, (October 13, 1998) to
2000 1999 September 30,2000
(unaudited) (unaudited) (unaudited)
----------------------------------------------------
<S> <C> <C> <C>
Revenue
Comic book sales $ 257,121 $ 20,605 $ 257,121
Webisode licenses 877,338 -- 877,338
Other sales 26,878 -- 57,483
-----------------------------------------------------
1,161,337 20,605 1,191,942
-----------------------------------------------------
Operating expenses:
Cost of comic books 58,904 450 58,904
Cost of webisodes 1,645,740 -- 1,645,740
Cost of other sales 55,790 -- 57,065
Development costs 4,297,310 -- 5,439,688
General and administrative 12,420,554 2,760,974 19,293,869
-----------------------------------------------------
Total operating expenses 18,478,298 2,761,424 26,495,266
-----------------------------------------------------
Operating loss (17,316,961) (2,740,819) (25,303,324)
Net interest expense 1,487,517 (768) 1,569,258
Costs incurred on merger (120,000)
-----------------------------------------------------
Net loss $ (18,804,478) $ (2,861,587) $(26,872,582)
=====================================================
Basic and diluted net loss per share $ (1.59) $ (0.31)
=====================================
Weighted average number of shares used in
computing basic and diluted net loss per share 11,859,952 9,228,801
=====================================
</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>
Nine Months Ended Period from Inception
September 30, (October 13, 1998) to
2000 1999 September 30, 2000
(unaudited) (unaudited) (unaudited)
------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(18,804,478) $ (2,861,587) $(27,106,884)
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:
Interest expense relating to financings 1,397,813 -- 1,442,604
Issuances for services 3,150,256 444,697 3,627,566
Depreciation and amortization 407,679 24,229 544,045
Allowance for accounts receivable 8,499 -- 49,755
Changes in:
Inventory (660) -- (12,543)
Accounts receivable (360,196) (3,250) (401,452)
Accounts receivable - related party (100,000) -- (100,000)
Production costs (1,534,315) (17,996) (1,534,315)
Prepaid expenses and other current assets (185,550) -- (196,000)
Deposits (99,750) -- (147,214)
Accounts payable 1,674,522 567,431 1,846,789
--------------------------------------------------
Net cash used in operating activities (14,446,180) 1,846,474 (21,987,649)
--------------------------------------------------
Cash flows from investing activities
Purchase of property and equipment (1,198,927) (167,843) (1,911,071)
Application for trademarks (139,147) (57,303) (242,783)
--------------------------------------------------
Net cash used in investing activities (1,338,074) (225,146) (2,153,854)
--------------------------------------------------
Cash flows from financing activities
Debt offering costs (284,240) -- (230,972)
Proceeds from notes and loans payable 5,747,835 410,000 7,164,835
Repayment of notes and loans payable (4,617,835) -- (5,534,835)
Payments under capital lease obligations (106,601) 88,000 --
Receipt of subscriptions -- 275,000 --
Issuance of preferred stock 1,904,000 -- 6,904,002
Proceeds from issuance of common stock 11,336,373 1,270,978 16,053,913
--------------------------------------------------
Net cash provided by financing activities: 13,979,532 2,044,866 24,356,943
--------------------------------------------------
Increase (decrease) in cash and cash equivalents (1,804,722) (26,754) 215,440
Cash and cash equivalents, beginning of period 2,020,162 21,276 --
--------------------------------------------------
Cash and cash equivalents, end of period $ 215,440 $ 5,478 $ 215,440
==================================================
</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
We are a digital entertainment studio that uses the Internet
(www.stanlee.net) to launch branded content, build global communities around
it, and commercialize it globally through traditional media. After launching
these characters on the Internet, we immediately seek to exploit the characters
in traditional media, such as animated and live action television programs,
feature films, theme park simulation films, video cassettes, DVDs and
publishing. We also seek to exploit these entertainment properties through
traditional licensing and merchandising markets, such as video games, toys and
apparel.
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 nine months ended September 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.
ACCOUNTS RECEIVABLE FROM RELATED PARTY
On July 28, 2000 the company extended a $100,000 short-term interest free loan
to Stan Lee, the Chairman of the Board and Chief Creative Officer of SLM. Such
loan was repaid on November 6, 2000.
LOANS RECEIVABLE
The loans receivable of $870,000 represents the excess paid over amounts
borrowed under revolving credit agreements. Interest under such loans is being
accrued at the rate of 8% per annum. $565,000 of such amount has been repaid to
date.
PRODUCTION COSTS
Production costs are capitalized in accordance with Statement of Financial
Accounting Standards No. 53. The costs capitalized include work in progress of
unfinished webisodes for series that are currently under negotiations to be
purchased. The production costs capitalized include only costs associated with
actual production of the webisode series. Any development costs incurred,
relating to a particular series, is expensed as development costs if the costs
were not incurred for production.
Production costs are amortized using the film forecast method as defined by
FASB No. 53.
LICENSING RIGHTS
Licensing rights includes the allocation of the purchase price of Conan
Properties, Inc. (See Note 6) and consists primarily of the valuation of the
common stock and warrants issued on such acquisition. These rights are being
amortized over a 10 year period.
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)
NET INTEREST EXPENSE
Net interest expense is comprised mostly of non-cash expenses relating to the
issuance of stock and warrants relating to financings.
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>
September 30, December 31, Estimated
2000 1999 Useful Life
(unaudited)
----------------------------------------------
<S> <C> <C> <C>
Automobile $ 15,000 $ 15,000 5 years
Computer equipment 663,436 103,249 3 years
Computer software 344,579 18,011 3 years
Accounting software 92,156 -- 3 years
Furniture and fixtures 326,245 187,960 5 years
Leasehold improvements 247,588 166,349 5 years
Equipment under capital leases 755,139 190,036
----------------------------------------------
2,444,683 680,605
Less accumulated depreciation and amortization 432,509 78,596
----------------------------------------------
$ 2,012,174 $602,009
==============================================
</TABLE>
At September 30, 2000, accumulated depreciation and amortization included
$147,987 related to assets under capital leases.
NOTE 4 - DEBT
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-8
<PAGE> 9
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 September 30, 2000 for each of the next five years and in
aggregate are:
<TABLE>
<CAPTION>
Year ended Amount
--------
<S> <C>
2000 $ 187,782
2001 311,702
2002 270,280
2003 108,102
2004 43,343
2005 10,684
---------
Total minimum payments $ 931,893
Less: Amount representing interest (319,684)
---------
Present value of net minimum lease payments $ 612,209
=========
</TABLE>
CONTINGENCIES
In September 2000, a lawsuit was brought against the Company regarding certain
disputed payments due in connection with the Company's launch party. The
complaint seeks damages of $271,700 and unspecified punitive damages. The
Company believes that it has significant defenses against this claim, and has
filed a counterclaim against plaintiff. No provision for this contingency has
been made in their financial statements. See Part II Item 1 -- Legal Proceedings
F-10
<PAGE> 10
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
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.
During the quarter ended September 30, 2000 options for 39,608 shares of
common stock were exercised for total cash consideration of $87,500.
On September 11,2000, Stan Lee Media, Inc. (the "Company") acquired all of the
rights to the intellectual property known as Conan the Barbarian through its
acquisition of all of the outstanding stock of Conan Properties, Inc. in
exchange for 409,037 shares of the Company's common stock, no par value,
calculated by dividing an aggregate purchase price of $4.3 million by $10.5125,
the average of the Company's closing stock price on the Nasdaq Stock market for
the 30-day period preceding August 30, 2000. The Company also issued five-year
warrants to purchase an additional 20,000 shares of common stock at $10.5125
per share.
For financial statement purposes, the acquisition was valued at $3,788,151,
which was determined by using the closing SLM stock price at the date of
acquisition of $9 per share and valuing the warrants at $106,818 in accordance
with FAS 123. The total purchase price has been allocated to Licensing Rights.
Pursuant to the terms of the agreement, the sellers are entitled to certain
price protection and volume protection provisions during the first 21 months
following the acquisition. In addition, the sellers have certain registration
rights relating to the shares of the Company's common stock acquired hereunder.
The Company believes that at the time of such transaction, the transaction was
exempt from the registration requirements of the Securities Act of 1933, as
amended, by virtue of Section 4(2) thereof and Rule 506 of Regulation D
promulgated thereunder. The recipients in such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof, and appropriate legends
were affixed to the share certificates and instruments, as applicable, issued in
such transaction. All recipients represented that they were accredited investors
as defined under Rule 501(a) of Regulation D, had such knowledge and experience
in financial and business matters that they were capable of evaluating the
merits and risks of the investment.
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.
On August 25, 2000 the holders of the Series B Preferred Stock converted 2,096
of the 4,000 Series B shares into 266,530 of the common stock of SLM at $7.885
per share pursuant to the conversion provisions in effect under the terms of the
Preferred Stock Investment Agreement and related documents.
STOCK OPTIONS AND WARRANTS
On August 15, 2000, the Company entered into an agreement with MBR Productions,
Inc. and John Semper, whereby the Company acquired the right to develop and
exploit a property created by Gene Roddenberry known as Starship. In connection
with this transaction, the Company issued options to purchase 30,000 shares of
its common stock at a purchase price of $11.125 per share to John Semper and
Majel Barrett Roddenberry, the price of the Company's stock on the date that the
parties entered into an agreement in principal with respect to the acquisition.
F-11
<PAGE> 11
STAN LEE MEDIA, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - SIGNIFICANT BUSINESS AGREEMENTS
Acquisition of Conan Properties, Inc.
See Note 6 -- SHAREHOLDERS' EQUITY FOR A DESCRIPTION OF THIS TRANSACTION
Hollywood Christmas Parade
On August 4, 2000, the Company entered into a Comprehensive Brand
Management Agreement with the Hollywood Chamber of Commerce whereby the Company
acquired the exclusive right to manage and merchandise certain aspects of the
Hollywood Christmas Parade. Pursuant to this agreement, the Company has agreed
to pay the Hollywood Chamber of Commerce an amount equal to $250,000 by November
1, 2000 each year, plus a specified share of revenues generated from the parade.
F-12
<PAGE> 12
STAN LEE MEDIA, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - SUBSEQUENT EVENTS
MACROMEDIA AMENDMENT
On October 26, 2000, the company amended its agreement with Macromedia, Inc.
Under the amendment agreement, (i) the company wold no longer be obligated to
present its animated Webisodes to Macromedia on a "first look" basis, (ii)
Macromedia has reduced its participation rights in offline exploitation of
these properties, and (iii) no longer has the obligation to acquire full 22
episode seasons of 7th Portal and The Accuser.
COMMON STOCK
During October and November 2000, 143,864 warrants and 37,608 stock options were
exercised for a total cash consideration of $856,820.
UNSECURED PROMISSORY NOTE
On October 17, 2000 SLM executed a $150,000 sixty-day unsecured promissory note
with a shareholder of the company. The note carries interest at the rate of 10%
per annum and three year warrants to purchase 1,500 shares of common stock at an
exercise price of $10.00 per share.
STOCK DIVIDEND
On November 1, 2000 SLM declared a 10% stock dividend on its common stock. The
dividend will be payable to stockholders of record on November 13, 2000 and will
be distributed on January 12, 2001.
F-13
<PAGE> 13
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 three quarters, the Company purchased $591,967 of equipment
under capital leases.
F-14
<PAGE> 14
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
We are a digital entertainment studio that uses the Internet
(www.stanlee.net) to launch branded content, build global communities around
it, and commercialize it globally through traditional media. After launching
these characters on the Internet, we immediately seek to exploit the characters
in traditional media, such as animated and live action television programs,
feature films, theme park simulation films, video cassettes, DVDs and
publishing. We also seek to exploit these entertainment properties through
traditional licensing and merchandising markets, such as video games, toys and
apparel.
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.
1
<PAGE> 15
RESULTS OF OPERATIONS
As of September 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 $1,161,337 for the nine month period ended September
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 and expand our operations. Operating expenses for
the nine month period ended September 30, 2000 were $18,478,298. 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.
Three Months Ended September 30, 2000 Compared to Three Months Ended
September 30, 1999
Total revenues were $414,978 for the three months ended September 30, 2000
and were 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. There were no
revenues for the comparable period in 1999 as the Company was in its early
stages of development.
Total operating expenses for the three months ended September 30, 2000 were
$5,403,215 and were comprised of cost of revenue production of $830,884,
development costs of $1,561,506 and general and administrative expenses of
$3,014,825. Included in general and administrative expenses was $661,596 related
to stock and stock option inventives pursuant to the employment agreement of our
President and CEO. Operating expenses for the three months ended September 30,
1999 were $1,891,890. This increase was the product of the Company expanding
operations to include more than 133 employees and consultants to produce our
branded content and expand our operations.
Operating loss for the three months ended September 30, 2000 was $6,274,261 as
compared to a loss of $573,241 for the three months ended September 30, 1999.
Nine Months Ended September 30, 2000 Compared to nine Months Ended
September 30, 1999.
Total revenues for the nine months ended September 30, 2000 were $1,161,337 and
consisted 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. There were no revenues for
the comparable period in 1999 as the Company was still in its early stages of
development.
Total operating expenses for the nine months ended September 30, 2000 were
$18,804,478 and were comprised of cost of revenue production of $1,760,434,
development costs of $4,297,310 and general and administrative expenses of
$12,420,554. Operating expenses for the nine months ended September 30, 1999
were $2,761,424 and consisted entirely of general and administrative expenses.
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.
The operating loss for the nine months ended September 30, 2000 was
$(18,804,478) as compared to an operating loss of $(2,861,587) for the nine
months ended September 30, 1999. We expect to incur operating losses at least
through calendar year 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.
We are in the process of launching localized versions of our website in
strategic locations throughout the world. On November 1, 2000, our localized
website in Mexico and Latin America was launched by FOX Kids Latin America, our
partner in this region. In connection with this launch FOX Kids will be
featuring our characters as televised interstitials on their cable network. 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.
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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.
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.
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. 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,
the cash generated from operating revenues, including option payments due under
a Conan movie license and advances on pending merchandise licenses, 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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<PAGE> 17
At September 30, 2000, the Company had cash and cash equivalents of
$215,440, compared to cash and cash equivalents of $2,020,162 as of December 31,
1999. Net cash used in operating activities of $14,446,180 for the nine month
period ended September 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 $3,150,256 related to the Company's issuance of options for services
and the Company's grant of warrants of $1,397,813 in connection with financing
transactions.
Net cash used in investing activities was $5,126,224 for the nine month
period ended September 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 $17,767,683 for the nine
month period ended September 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, both of which have been repaid.
In August 2000 the company netted $4,700,000 from a private placement of common
stock from a strategic investor and $3,700,000 from the sale of Series B
Cumulative Convertible Preferred Stock
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 November 10, 2000, there are 129 full-time employees, 83 of whom were
in content creation and production, and product development, 14 of whom were in
marketing and sales, and 32 of whom were in general and administrative
functions. We believe that we have substantially completed our necessary hiring
for the remainder of this year.
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<PAGE> 18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In September 2000, a lawsuit was brought against the Company by Cohen PR &
Productions regarding certain disputed payments due in connection with the
Company's launch party. The complaint seeks damages of $271,700 and unspecified
punitive damages. The Company believes that it has significant defenses against
this claim, and has filed a counterclaim against plaintiff.
ITEM 2. CHANGES IN SECURITIES
On August 25, 2000, Elliott Capital Advisors, L.P. and Westgate
International, L.P. each elected to convert 1,048 shares of our Series B 4%
Cumulative Convertible Preferred Stock into 133,265 shares of our common stock.
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> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
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, 1999(2)
3.5 By-Laws(1)
10.1 Securities Purchase Agreement dated as of August 1, 2000,
between Elliott Associates, L.P., Westgate International, L.P.,
and the Company.(2)
10.2 Registration Rights Agreement dated as of August 1, 2000,
between Elliott Associates, L.P., Westgate International, L.P.,
and the Company.(2)
10.3 Securities Purchase Agreement dated as of July 31, 2000,
between Venture Soft Co., Ltd. and the Company.(4)
10.4 Warrant dated as of July 31, 200, between Venture Soft Co., Ltd.
and the Company.(3)
10.5. Memorandum of Understanding, dated August 13, 2000, between the
Company and Venture Soft, Co., Ltd.(4)
10.6 Stock Purchase Agreement, dated as of August 31, 2000, among the
Company and the sellers listed on the signature pages thereto.(5)
10.7 Amendment No. 1 to Agreement, dated as of October 23, 2000, by
and among Stan Lee Media, Inc., Shockwave.com, Inc. and
Macromedia, Inc.(6)
27 Financial Data Schedule
(b) The following Current Reports on Form 8-K were filed during the
quarter:
(i) Current Report on Form 8-K, dated July 31, 2000, relating to
the Company's sale of common stock to Venture Soft, Ltd.
(ii) Current Report on Form 8-K, dated August 13, 2000, relating to
the Company's execution of a binding memorandum of
understanding with Venture Soft Ltd. relating to the formation
of an Asian joint venture.
(iii) Current Report on Form 8-K, dated September 12, 2000, related
to the Company's acquisition of Conan Properties, Inc.
------------------
(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 quarterly report on Form
10-QSB for the quarterly period ended June 30, 2000.
(3) Incorporated by reference from the Company's current report on Form
8-K dated July 31, 2000.
(4) Incorporated by reference from the Company's current report on Form
8-K dated August 13, 2000.
(5) Incorporated by reference from the Company's current report on Form
8-K dated September 12, 2000.
(6) Incorporated by reference from the Company's current report on Form
8-K dated October 23.
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: November 14, 2000.
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