STAN LEE MEDIA INC
10QSB, 2000-05-15
BLANK CHECKS
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<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 March 31, 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
May 1, 2000, was 11,856,362.


<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 -
          March 31, 2000 (unaudited) and December 31, 1999;                         3

     Consolidated Statements of operations (unaudited) - Three months ended
          March 31, 2000 and 1999 and the period from
               inception (October 13, 1998 to March 31, 2000);                      4

     Consolidated Statements of cash flows (unaudited) - Three months ended
          March 31, 2000 and 1999 and the period from inception (October 13, 1998
          to March 31, 2000);                                                       5

     Notes to financial statements                                                  6

Item 2.  Management's Discussion and Analysis or Plan of
         operations                                                                13


PART II. Other Information

Item 1.  Legal Proceedings                                                         17

Item 2.  Changes in Securities                                                     17

Item 3.  Defaults Upon Senior Securities                                           17

Item 4.  Submission of Matters to Vote of Security Holders                         17

Item 5.  Other Information                                                         17

Item 6.  Exhibits and Reports on Form 8-K                                          18
</TABLE>


<PAGE>   3
                       STAN LEE MEDIA, INC. AND SUBSIDIARY
                          (a development stage company)

                           CONSOLIDATED BALANCE SHEETS



<TABLE>
<CAPTION>
                                                                                        March 31,
                                                                                          2000              December 31,
                                                                                       (unaudited)             1999
                                                                                       ------------        ------------
<S>                                                                                    <C>                 <C>
Assets

Current assets
   Cash and cash equivalents                                                           $    184,036        $  2,020,162
   Accounts receivable, net of $32,922 allowance                                            267,282                  --
   Inventory                                                                                 11,883              11,883
   Prepaid expenses and other current assets                                                 22,279              10,450
                                                                                       --------------------------------
Total current assets                                                                        485,480           2,042,495

Property and equipment, net of accumulated depreciation (Note 3)                          1,291,274             602,009

Other assets
   Production costs                                                                         770,208                  --
   Debt offering costs (net of $0 and $36,257 of accumulated
   amortization) (Note 4)                                                                   245,030              17,756
   Licensing rights (net of $14,973 and $5,989
   of accumulated amortization)                                                             164,702             173,686
   Trademarks                                                                               161,692             103,636
   Deposits                                                                                 119,270              47,464
                                                                                       --------------------------------
Total other assets                                                                        1,460,902             342,542
                                                                                       --------------------------------
                                                                                       $  3,237,656        $  2,987,046
                                                                                       ================================

Liabilities and Shareholders' Equity

Current liabilities
   Accounts payable and accrued liabilities                                            $    612,877        $    172,267
   Obligations under capital leases, current portion (Note 5)                                91,017              45,864
   Notes payable (Note 4)                                                                   600,000             500,000
                                                                                       --------------------------------
Total current liabilities                                                                 1,303,894             718,131
                                                                                       --------------------------------

Obligations under capital leases, long-term portion (Note 5)                                262,375              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
   11,856,362 and 8,500,000                                                                  11,856              11,433
   Additional paid-in capital                                                            10,035,402           5,137,787
   Deficit accumulated during the development stage                                     (13,375,873)         (7,961,286)
                                                                                       --------------------------------
Total shareholders' equity                                                                1,671,388           2,187,936
                                                                                       --------------------------------
                                                                                       $  3,237,656        $  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           Period from Inception
                                                                  March 31,              (October 13, 1998) to
                                                          2000               1999           March 31, 2000
                                                      (unaudited)         (unaudited)        (unaudited)
                                                     ----------------------------------------------------
<S>                                                  <C>                 <C>             <C>
Revenue
    Comic book sales                                 $    204,565        $         --        $    204,565
    Webisode licenses                                      72,561                  --              72,561
    Other sales                                            19,033                  --              49,638
                                                     ----------------------------------------------------
                                                          296,159                                 326,764
                                                     ----------------------------------------------------
Operating expenses:
    Cost of comic books                                    58,904                  --              58,904
    Cost of webisodes                                      72,561                  --              72,561
    Cost of other sales                                    59,790                  --              61,065
    Development costs                                     830,499                  --           1,972,877
    General and administrative                          4,687,769             221,928          11,454,274
                                                     ----------------------------------------------------
Total operating expenses                                5,709,523             221,928          13,619,681
                                                     ----------------------------------------------------

Operating loss                                         (5,413,364)           (221,928)        (13,292,917)

Net interest expense                                       (1,215)               (102)            (82,956)
                                                     ----------------------------------------------------
Net loss                                             $ (5,414,579)       $   (222,030)       $(13,375,873)
                                                     ====================================================

Basic and diluted net loss per share                 $      (0.46)       $      (0.03)
                                                     ================================

Weighted average number of shares used in
computing basic and diluted net loss per share         11,684,032           8,190,959
                                                     ================================
</TABLE>



                 See accompanying notes to financial statements.



                                       F-4
<PAGE>   5
                       STAN LEE MEDIA, INC. AND SUBSIDIARY

                          (a development stage company)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                          Three Months Ended          Period from Inception
                                                                                March 31,             (October 13, 1998) to
                                                                        2000                1999          March 31, 2000
                                                                     (unaudited)        (unaudited)         (unaudited)
                                                                    ----------------------------------------------------
<S>                                                                 <C>                 <C>           <C>
Cash flows from operating activities
   Net loss                                                         $ (5,414,579)       $   (222,030)       $(13,375,873)
   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                                      961,591                 250           4,454,826
      Depreciation and amortization                                       87,556               2,044             172,141
      Allowance for accounts receivable                                   32,922                  --              32,922
      Changes in:
         Accounts receivable                                            (300,204)                 --            (300,204)
         Production costs                                               (770,208)                 --            (770,208)
         Prepaid expenses and other current assets                       (11,829)            (17,000)            (34,162)
         Deposits                                                        (71,806)                 --            (119,270)
         Accounts payable                                                440,610              40,271             602,340
                                                                    ----------------------------------------------------
Net cash used in operating activities                                 (5,045,947)           (196,465)         (9,337,488)
                                                                    ----------------------------------------------------

Cash flows from investing activities
   Purchase of property and equipment                                   (519,822)            (24,179)         (1,010,392)
   Application for trademarks                                            (58,056)                 --            (161,692)
                                                                    ----------------------------------------------------
Net cash used in investing activities                                   (577,878)            (24,179)         (1,172,083)
                                                                    ----------------------------------------------------

Cash flows from financing activities
   Proceeds from notes and loans payable                                 600,000              10,000           2,017,000
   Repayment of notes and loans payable                                 (500,000)                 --          (1,417,000)
   Payments under capital lease obligations                              (21,466)                 --             (84,660)
  Receipt of subscriptions                                                    --                  --             275,000
   Issuance of preferred stock                                                --                  --           5,000,002
   Issuance of common stock                                            3,709,165                  --           4,843,165
   Capital contribution                                                       --             205,150              60,000
                                                                    ----------------------------------------------------
Net cash provided by financing activities:                             3,787,699             215,150          10,693,607
                                                                    ----------------------------------------------------
Increase (decrease) in cash and cash equivalents                      (1,836,126)             (5,494)            184,036

Cash and cash equivalents, beginning of period                         2,020,162              21,276                  --
                                                                    ----------------------------------------------------
Cash and cash equivalents, end of period                            $    184,036        $     15,782        $    184,036
                                                                    ====================================================
</TABLE>



                 See accompanying notes to financial statements.



                                       F-5

<PAGE>   6
                       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, 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.

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 three months ended March 31, 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-6

<PAGE>   7
                       STAN LEE MEDIA, INC. AND SUBSIDIARY
                          (a development stage company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

NET LOSS PER SHARE

For the period ended March 31, 2000, potential dilutive securities representing
4,150,500 outstanding stock options, 512,529 outstanding warrants, and 714,286
shares of convertible preferred stock are not included in the earnings per share
calculation since their effect would be antidilutive.

NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following:


<TABLE>
<CAPTION>
                                                           March 31,
                                                             2000          December 31,     Estimated
                                                          (unaudited)         1999         Useful Life
                                                         ---------------------------------------------
<S>                                                        <C>             <C>             <C>
Automobile                                                 $ 15,000         $ 15,000         5 years
Computer equipment                                          453,437          103,249         3 years
Computer software                                            57,838           18,011         3 years
Accounting software                                          92,756               --         3 years
Furniture and fixtures                                      200,070          187,960         5 years
Leasehold improvements                                      191,289          166,349         5 years
Equipment under capital leases                              411,187          190,036
                                                         --------------------------------------------
                                                          1,421,577          680,605
Less accumulated depreciation and amortization              130,303           78,596
                                                         --------------------------------------------

                                                         $1,291,274         $602,009
                                                         ============================================
</TABLE>


At March 31, 2000, accumulated depreciation and amortization included $28,411
related to assets under capital leases.

NOTE 4 - DEBT

SHORT-TERM FINANCING

On October 11, 1999, SLM executed an unsecured promissory note (the "Note") in
the amount of $500,000. The terms of the note call for SLM to pay interest at 8%
per annum. The principal and accrued and unpaid interest shall be payable in one
lump sum by April 11, 2000. Pursuant to the promissory note, warrants for 25,000
shares of SLM's common stock exercisable at $6.18 per share expiring October 11,
2002 were granted to the Note holder. The fair value of $35,512 of these
warrants was capitalized as debt offering costs and amortized over the term of
the loan. The note and all accrued interest were paid in January 2000.

On March 30 and 31, 2000, SLM executed $600,000 of unsecured promissory notes
(of which $550,000 were with existing shareholders of SLM). 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 terms of the promissory notes,
warrants for 32,000 shares of SLM's common stock were issued, exercisable at
$12.00 per share and expiring three years from the date of the notes. The fair
value of $245,030 of these warrants was capitalized as debt offering costs and
will be amortized over the term of the notes.



                                       F-7
<PAGE>   8
                       STAN LEE MEDIA, INC. AND SUBSIDIARY
                          (a development stage company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 5 - COMMITMENTS

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 March 31, 2000 for each of the next five years and in
aggregate are:



<TABLE>
<CAPTION>
Year ended                                                      Amount
                                                               --------
<S>                                                            <C>
     2000                                                      $158,365
     2001                                                       161,973
     2002                                                       127,647
     2003                                                        14,753
     2004                                                           527
                                                               --------

Total minimum payments                                         $463,265

Less: Amount representing interest                             (109,873)
                                                               --------

Present value of net minimum lease payments                    $353,392
                                                               ========
</TABLE>



                                       F-8

<PAGE>   9
                       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. The Series A preferred
stock is convertible into common stock, has a liquidation preference of $7 per
share, and bears dividends equal to any dividends declared on the common shares.

The Series A preferred stock converts into common at the rate of one share of
common stock for one share of preferred stock (subject to adjustment). The
preferred stock shares may be converted any time at the option of the holder.
The preferred shares automatically convert to common shares upon the earlier of
a public offering priced at a minimum of $15 per share and raising proceeds of
$25 million or an affirmative vote of two-thirds of the preferred shareholders.

COMMON STOCK

On January 10, 2000, SLM issued 10,000 shares of restricted common stock at
$6.00 per share, for services to a consultant at fair value on the date of
issuance.

During February 2000, warrants for 13,333 shares of common stock were exercised
at a per share price of $5.00 for a cash consideration of $66,665.

On February 1, 2000, the Company issued 200,000 shares of SLM's restricted
common stock at $8.00 per share for a total purchase price of $1,600,000. With
this private placement, SLM issued five-year warrants to purchase an additional
100,000 shares of common stock at an exercise price of $10.00 per share. Certain
registration rights were granted under the terms of this private placement. Fees
totaling $50,000 were paid and warrants for 5,000 shares of common stock at an
exercise price of $10.00 per share were issued to finders in conjunction with
this private placement.

On February 4, 2000, the Company issued 200,000 shares of SLM's restricted
common stock at $11.00 per share for a total purchase price of $2,200,000. With
this private placement, SLM issued five-year warrants to purchase an additional
100,000 shares of common stock at an exercise price of $11.00 per share. Certain
registration rights were granted under the terms of this private placement.
Finder's fees and legal fees totaling $107,500 were paid in conjunction with
this private placement.

STOCK OPTIONS

During January and February 2000, SLM entered into stock option agreements with
certain consultants to purchase 500,000 common shares at $5.44 to $7.00 per
share, the fair market values at the date of grant. The options have terms
ranging up to five years. The options are subject to various vesting terms
ranging from immediate vesting to vesting in three years. The fair value of
$883,843 of these options was charged to operations during this quarter.



                                       F-9
<PAGE>   10
                       STAN LEE MEDIA, INC. AND SUBSIDIARY
                          (a development stage company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 7 - SIGNIFICANT BUSINESS AGREEMENTS

MACROMEDIA, INC.

On November 5, 1999 SLM entered into a five-year distribution/license agreement
under which Macromedia will have the right to distribute and exploit no more
than five flash - animated episodic super-hero series produced by the Company
for initial exploitation over the Internet on Macromedia's shockwave.com site.
As of May 2, 2000, the Company has launched its first two series, The 7th Portal
and The Accuser, on shockwave and according to information provided by
Macromedia, it has recorded approximately 2.8 million downloads since the first
7th portal episode was launched on February 29, 2000. In addition to the
reimbursement by Macromedia for production costs (plus profit and overhead
allocations) the agreement provides for revenue sharing between the parties for
syndication, merchandising and licensing opportunities.

BACKSTREET BOYS

On February 2, 2000, SLM entered into an agreement with KBNHA Enterprises, Inc.
f/s/o Nicholas Carter, Alexander J. McLean, Howard Dorough, Kevin Richardson and
Brian Thomas Littrell, professionally collectively known as "The Backstreet
Boys" to produce and co-own a superhero franchise based on their personae,
having superhero alter-egos. The superhero franchise entitled "The Backstreet
Project," co-created by Stan Lee, is co-owned by the Company, and will be
exploited in all media and all major merchandising avenues

As partial consideration for entering into the agreement, KBNHA or its assignees
received options to purchase 300,000 shares of SLM's common stock at an exercise
price of $7.00 per share. The options will vest as follows: (i) 75,000 upon
execution of the agreement, 25,000 upon the initial webcast of the first
Webisode, 50,000 as of February 1, 2001, 50,000 as of August 1, 2001, 50,000 as
of February 1, 2002, and 50,000 as of February 1, 2003.

VIACOM

On January 25, 2000 SLM signed an agreement with Viacom Productions to produce
two new Webisodes utilizing Mighty Mouse and other Terry Toons characters.
Viacom owns all rights to these characters. SLM shall prepare and produce the
two new five-minute webisodes after approval from Viacom. Once approved, Viacom
will finance the production of the webisodes and SLM shall receive a production
fee equal to 12.5% of the approved production budget. SLM shall be entitled to
25% of net merchandising revenues derived from all exploitation of merchandising
rights for the characters for a period of two years. Viacom shall have an option
to have SLM produce additional Webisodes after the initial contract term. Each
subsequent series will consist of six webisodes with SLM having the same rights
as the previous contract.

Viacom will have another option to cause SLM to produce a television
broadcast-quality thirty-minute animated series. SLM will be reimbursed for
actual out-of-pocket production costs plus an overhead fee of $12,500 per
episode as well as 25% of Adjusted Gross Receipts, or 50% of Net Profits derived
from the exploitation of the animated series, whichever is greater. SLM will
also be entitled to 25% of net merchandising revenues.



                                      F-10

<PAGE>   11
                       STAN LEE MEDIA, INC. AND SUBSIDIARY
                          (a development stage company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8 - SUBSEQUENT EVENTS

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.

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 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.



                                      F-11

<PAGE>   12
                       STAN LEE MEDIA, INC. AND SUBSIDIARY
                          (a development stage company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - SUBSEQUENT EVENTS (CONTINUED)

TOON BOOM

In April 2000, SLM entered into a Software Development and License Agreement
with Toon Boom Technologies Inc. for the development of Web-based animation
software, which SLM will utilize in producing its episodic Web comics. Toon
Boom's flagship software, the USAnimation V5 system, which permits animators to
create programming for direct export to television, film and the Internet
utilizing Macromedia Flash(TM) Player, will be the framework used in creating
the new software.

Under the terms of the agreement, SLM paid Toon Boom $250,000 for USAnimation
and other software licenses and will contribute engineering, promotional and
marketing services valued at $500,000. SLM will receive up to 1,044,888 Class A
Shares of Toon Boom (2.96% of its current outstanding shares) based on the
achievement of certain milestones. As of April 2000, SLM had satisfied the
milestone related to the issuance of 348,296 shares of Class A shares of Toon
Boom. SLM also was issued five-year warrants to purchase 150,000 shares of Toon
Boom stock at an exercise price of Canadian $0.70 per share. Toon Boom was
granted five-year options to purchase 30,000 shares of SLM common stock at an
exercise price of US$14.00 per share. The Agreement also provides for certain
royalty payments between the parties based upon product sales and software
bundling opportunities.

NOTE 9 - SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY

During the first quarter, the Company purchased $248,015 of equipment under
capital leases.

From September through November, 1999, the Company issued warrants in
conjunction with debt offerings. The warrants had a fair value of $54,013, of
which $36,257 was charged to expense during 1999 and the balance of $17,756 was
charged to expense during the first quarter as of March 31, 2000.

On March 30 and 31, 2000, the Company executed $600,000 of unsecured promissory
notes and issued 32,000 warrants with a fair value of $245,030 in conjunction
with the debt financing.



                                      F-12

<PAGE>   13
       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 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.stanleemedia.com) is 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. 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. Launching a new
generation of super-heroes and super-villains online, Stan Lee Media seeks to
become the premier creator of episodic entertainment on the Internet. The
Company has partnered with a range of talent and content creators to establish
the largest independent animation content creation, production and distribution
brand on the Internet.

           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. 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-13
<PAGE>   14
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 March 31, 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 $296,159 for the three months ended March 31, 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 125 employees and consultants. Operating expenses for the
three-month period ended March 31, 2000 were $5,709,523. 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, 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 audiences. 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.

        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.



                                      F-14
<PAGE>   15
         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.

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 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. 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.  However, we cannot be certain that additional
financing will be available to us on acceptable terms, or at all.



                                      F-15

<PAGE>   16
              At March 31, 2000, the Company had cash and cash equivalents of
$184,036, compared to cash and cash equivalents of $2,020,162 as of December 31,
1999. Net cash used in operating activities of $5,045,947 for the three months
ended March 31, 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
$883,843 related to the Company's issuance of options for services, and non-cash
charges of $245,030 related to the Company's grant of warrants in connection
with financing transactions.

           Net cash used in investing activities was $577,878 for the three
months ended March 31, 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 $3,787,699 for the three
months ended March 31, 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 2000 of $600,000,
less the payment of fees associated with such financings. In April 2000, net
cash provided by financing activities was $2,467,500, resulting from the net
proceeds from short-term financing evidenced by unsecured promissory notes of
$200,000, and 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.

         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, infrastructure and personnel.

CHANGES IN NUMBER OF EMPLOYEES

           As of May 5, 2000, there are 128 full-time employees, 94 of whom were
in content creation and production, and product development, 12 of whom were in
marketing and sales, and 22 of whom were in general and administrative
functions. We anticipate hiring additional staff in all areas consistent with
anticipated growth in operations.



                                      F-16

<PAGE>   17
                           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

           On February 1, 2000, the Company issued 200,000 shares of
unregistered common stock at $8.00 per share for a total purchase price of
$1,600,000. With this private placement, the Company issued five-year warrants
to purchase an additional 100,000 shares of common stock at an exercise price of
$10.00 per share. Certain registration rights were granted under the terms of
this private placement. Fees totaling $50,000 were paid and warrants for 5,000
shares of common stock at an exercise price of $10.00 per share were issued to
finders in conjunction with this private placement.

           On February 4, 2000, the Company issued 200,000 shares of
unregistered common stock at $11.00 per share for a total purchase price of
$2,200,000. With this private placement, the Company issued five-year warrants
to purchase an additional 100,000 shares of common stock at an exercise price of
$11.00 per share. Certain registration rights were granted under the terms of
this private placement. Finder's fees and legal fees totaling $107,500 were paid
in conjunction with this private placement.

           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 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.

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.



                                      F-17
<PAGE>   18
ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

           (a)  The following exhibits are included herein:

                     Exhibit 10.1         Securities Purchase Agreement
                                          dated as of April 14, 2000, between
                                          the Registrant and Augustine Fund,
                                          L.P.

                     Exhibit 10.2         Software Development and License
                                          Agreement dated as of April 19, 2000,
                                          between the Registrant and Toon Boom
                                          Technologies Inc.

                     Exhibit 27 -         Financial Data Schedule.

           (b)  Reports on Form 8-K relating to the quarter ended March 31,
                2000.

                The Company did not file any reports on Form 8-K during the
                quarter ended March 31, 2000.



     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: May 12, 2000.

<PAGE>   19
                              STAN LEE MEDIA, INC.
                                   FORM 10-QSB
                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibits                                                                           Page
                                                                                   ----
<S>        <C>                                                                     <C>
10.1       Securities Purchase Agreement dated as of April 14, 2000, Between the
           Registrant and Augustine Fund, L.P.

10.2       Software Development and License Agreement dated as of April 19,
           2000, between the Registrant and Toon Boom Technologies Inc.

27         Financial Data Schedule
</TABLE>



<PAGE>   1
                                                                    Exhibit 10.1

                          SECURITIES PURCHASE AGREEMENT

           THIS SECURITIES PURCHASE AGREEMENT (this "Agreement"), is made as of
April 14, 2000, by and between Stan Lee Media, Inc., a corporation organized
under the laws of the State of Colorado, U.S.A., with headquarters located at
15821 Ventura Boulevard, Suite 675, Encino, California 91436 (the "Company") and
the purchaser named on the signature page to this Agreement (the "Buyer").

                                    RECITALS

           A. The Company and the Buyer are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by the provisions of Regulation D ("Regulation D") as promulgated by the United
States Securities and Exchange Commission (the "SEC") under the Securities Act
of 1933, as amended (the "1933 Act") and Section 4(2) under the 1933 Act;

           B. The Buyer desires to purchase from the Company, and the Company
desires to sell to the Buyer, for the amounts and upon the terms and conditions
stated in this Agreement, in a closing (the "Closing") as herein described,
certain of the Company's convertible notes as listed and described in Recital
B(i) immediately below, and certain warrants as listed and described in Recital
B(ii) below.

                     (i)       The Company's Series A Six Percent (6%)
                               Convertible Note, the form of which is attached
                               hereto as Exhibit A (the "Notes"), which may be
                               converted into common stock of the Company, no
                               par value per share ("Common Stock"), upon the
                               terms and conditions hereof and upon the terms
                               and conditions of the Notes. The purchase price
                               for the Notes sold pursuant to this Agreement
                               shall be as stated in Section 1(a) below. The
                               total aggregate face amount of the Notes to be
                               issued and sold by the Company at the Closing is
                               Two Million Five Hundred Thousand and no/100
                               United States Dollars ($2,500,000.00), all in
                               accordance with the terms of this Agreement and
                               of the Notes.

                     (ii)      A warrant (the "Warrants") to purchase 50,000
                               shares of Common Stock at a purchase price per
                               share equal to one hundred twenty percent (120%)
                               of the lowest of the closing bid prices for the
                               Common Stock during the five (5) trading days
                               prior to the Closing Date (defined below), which
                               Warrants must be exercised, if at all, on or
                               before April 30, 2005. The Warrants shall be
                               substantially in the form attached hereto as
                               Exhibit B.

           The Common Stock into which the Notes may (in accordance with their
terms) be convertible shall be collectively referred to herein as the
"Conversion Shares." Certain shares of Common Stock may (at the Company's option
as described in the Notes) be issued to the Buyer in payment of interest (the
"Interest Shares"). The Common Stock received upon exercise of the Warrants
shall be referred to as the "Warrant Shares." The Notes, the Conversion Shares,
the Interest Shares (if any), the Warrants and the Warrant Shares may be
collectively referred to herein as the "Securities."

           C. Contemporaneously with the execution and delivery of this
Agreement, the parties hereto are executing and delivering a Registration Rights
Agreement (the "Registration Rights Agreement") substantially in the form of
Exhibit C attached hereto pursuant to which the Company has agreed to provide
certain registration rights under the 1933 Act and the rules and regulations
promulgated thereunder, and applicable state securities laws.

                                   AGREEMENTS

           NOW THEREFORE, in consideration of their respective promises
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties, the Company and the
Buyer hereby agree as follows:


<PAGE>   2
           1. PURCHASE AND SALE OF SECURITIES.

           a. Purchase. The Buyer hereby agrees to purchase from the Company,
and the Company agrees to sell to the Buyer, $2,500,000.00 in aggregate
principal amount of Notes at the Closing. The purchase price (the "Purchase
Price") for the Notes purchased at the Closing shall be $2,500,000.00.

           b. The Closing. The date of the Closing (the "Closing Date") shall be
April 14, 2000. The Purchase Price for the Notes being purchased at the Closing
shall be delivered to the Escrow Agent (as defined in the Escrow Agreement
substantially in the form of Exhibit D attached hereto (the "Escrow Agreement"))
on behalf of the Company on or before the Closing Date. On or before the Closing
Date, the Company shall deliver the original Notes and Warrants (or a facsimile
of the signature pages thereof, with the originals to follow via express courier
within one (1) business day) being purchased at the Closing, duly issued,
authorized and executed by the authorized officers on behalf of the Company, to
the Escrow Agent (as defined in the Escrow Agreement) on behalf of the Buyer.

           c. Form of Payment. The Buyer shall pay the Purchase Price for the
Securities purchased at the Closing by wire transfer of immediately available
funds in United States Dollars, to be deposited into the Escrow Account as
defined in the Escrow Agreement, against delivery to the Escrow Agent of duly
executed Notes and Warrants being purchased by the Buyer hereunder at such
Closing. The Escrow Agent shall be responsible for delivery of the Purchase
Price to the Company and the Notes and Warrants to the Buyer in accordance with
the terms of the Escrow Agreement and with the instructions of the said parties.

           2. BUYER'S REPRESENTATIONS AND WARRANTIES.

           The Buyer understands, agrees with, and represents and warrants to
the Company with respect to its purchase hereunder, that:

           a. Investment Purposes; Compliance With 1933 Act. The Buyer is
purchasing the Securities for its own account for investment only and not with a
view towards, or in connection with, the public sale or distribution thereof,
except pursuant to sales registered under or exempt from the 1933 Act and
applicable state securities laws. The Buyer is not purchasing the Securities for
the purpose of covering short sale positions in the Common Stock established on
or prior to the Closing Date. The Buyer agrees to offer, sell or otherwise
transfer the Securities only (i) in accordance with the terms of this Agreement,
the Notes and the Warrants, as applicable, and (ii) pursuant to registration
under the 1933 Act or to an exemption from registration under the 1933 Act and
any other applicable securities laws. The Buyer does not by its representations
contained in this Section 2(a) agree to hold the Securities for any minimum or
other specific term and reserves the right to dispose of the Securities at any
time pursuant to a registration statement or in accordance with an exemption
from registration under the 1933 Act, in all cases in accordance with applicable
state and federal securities laws. The Buyer understands that it shall be a
condition to the issuance of the Conversion Shares, the Warrant Shares and the
Interest Shares (if any) that the Conversion Shares, the Warrant Shares and the
Interest Shares (if any) be and are subject to the representations set forth in
this Section 2(a).

           b. Accredited Investor Status. The Buyer is an "accredited investor"
as that term is defined in Rule 501 (a) of Regulation D. The Buyer has such
knowledge and experience in financial and business matters that it is capable of
evaluating the merits and risks of an investment made pursuant to this
Agreement. The Buyer is aware that it may be required to bear the economic risk
of an investment made pursuant to this Agreement for an indefinite period of
time, and is able to bear such risk for an indefinite period.

           c. Reliance on Exemptions. The Buyer understands the Securities are
being offered and sold to it in reliance on specific exemptions from the
registration requirements of the applicable United States federal and state
securities laws and that the Company is relying upon the truth and accuracy of,
and the Buyer's compliance with, the representations, warranties,
acknowledgments, understandings, agreements and covenants of the Buyer set forth
herein in order to determine the availability of such exemptions and the
eligibility of the Buyer to acquire the Securities.


<PAGE>   3
           d. Information. The Buyer and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Securities
that have been requested by the Buyer. The Buyer and its advisors, if any, have
been afforded the opportunity to ask all such questions of the Company as they
have in their discretion deemed advisable. The Buyer understands that its
investment in the Securities involves a high degree of risk. The Buyer has
sought such accounting, legal and tax advice as it has considered necessary to
make an informed investment decision with respect to the investment made
pursuant to this Agreement.

           e. No Government Review. The Buyer understands that no United States
federal or state agency or any other government or governmental agency has
approved or made any recommendation or endorsement of the Securities or the
fairness or suitability of the investment in the Securities, nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.

           f. Transfer or Resale. The Buyer understands that: (i) except as
provided in the Registration Rights Agreement, the Securities have not been and
are not being registered under the 1933 Act or any state securities laws, and
may not be offered for sale, sold, assigned or transferred unless either (a)
subsequently registered thereunder or (b) the Buyer shall have delivered to the
Company an opinion by counsel reasonably satisfactory to the Company, in form,
scope and substance reasonably satisfactory to the Company, to the effect that
the securities to be sold, assigned or transferred may be sold, assigned or
transferred pursuant to an exemption from such registration, (ii) any sale of
such securities made in reliance on Rule 144 as amended (or any applicable rule
which operates to replace said Rule), promulgated under the 1933 Act ("Rule
144") may be made only in accordance with the terms of Rule 144 and further, if
Rule 144 is not applicable, any resale of such securities under circumstances in
which the seller (or the person though whom the sale is made) may be deemed to
be an underwriter (as that term is defined in the 1933 Act) may require
compliance with some other exemption under the 1933 Act or the rules and
regulations of the SEC thereunder and applicable state securities laws, and
(iii) neither the Company nor any other person is under any obligation to
register such securities under the 1933 Act or any state securities laws or to
comply with the terms and conditions of any exemption thereunder (in each case,
other than pursuant to this Agreement or the Registration Rights Agreement).

           g. Legend. The Buyer understands that the Notes, the Warrants, and
until such time as the Conversion Shares, the Warrant Shares and the Interest
Shares (if any) (collectively, the "Registrable Securities"), have been
registered under the 1933 Act as contemplated by the Registration Rights
Agreement, the stock certificates representing the Registrable Securities will
bear a restrictive legend (the "Legend") in substantially the following form:

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS
(COLLECTIVELY, THE "LAWS"). THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND
MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF
EITHER (I) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
LAWS, OR (II) AN OPINION OF COUNSEL PROVIDED TO THE ISSUER IN FORM, SUBSTANCE
AND SCOPE REASONABLY ACCEPTABLE TO THE ISSUER TO THE EFFECT THAT REGISTRATION IS
NOT REQUIRED UNDER THE LAWS DUE TO AN AVAILABLE EXCEPTION TO OR EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THE LAWS.

           The Legend shall be removed and the Company will issue certificates
without the Legend to the holder of the applicable Notes or any Registrable
Securities upon which the Legend is stamped, in accordance with Section 5(b).

           h. Authorization; Enforcement. This Agreement, the Registration
Rights Agreement and the Escrow Agreement have been duly and validly authorized,
executed and delivered by the Buyer and are each and collectively valid and
binding agreements of the Buyer enforceable in accordance with their terms,
subject as to enforceability to general principles of equity and to bankruptcy,
insolvency, moratorium, and other similar laws affecting the enforcement of
creditors' rights generally.

<PAGE>   4
           3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

           The Company understands, agrees with, and represents and warrants to
the Buyer that:

           a. Organization and Qualification. The Company is a corporation duly
organized and existing, in good standing under the laws of the jurisdiction in
which it is incorporated, except as would not have a Material Adverse Effect (as
defined below), and has the requisite corporate power to own its properties and
to carry on its business as now being conducted. The Company is duly qualified
as a foreign corporation to do business and is in good standing in every
jurisdiction in which the nature of the business conducted by it makes such
qualification necessary and where the failure so to qualify would have a
Material Adverse Effect. "Material Adverse Effect" means any material adverse
effect on the operations, properties or financial condition of the Company taken
as a whole. The Common Stock is eligible to trade and is listed for trading on
the OTC Bulletin Board Market. The Company has received no notice, either
written or oral, with respect to the continued eligibility of the Common Stock
for such listing, and the Company has maintained all requirements for the
continuation of such listing, and the Company does not reasonably anticipate
that the Common Stock will be delisted from the OTC Bulletin Board Market in the
foreseeable future. The Company has complied or will timely comply with all
requirements of the National Association of Securities Dealers and the OTC
Bulletin Board Market with respect to the issuance of the Securities.

           b. Authorization; Enforcement. (i) The Company has the requisite
corporate power and authority to enter into and perform this Agreement, the
Registration Rights Agreement and the Escrow Agreement, to issue and sell the
Notes and the Registrable Securities in accordance with the terms hereof, and to
perform its obligations under the Notes in accordance with the requirements of
the same, (ii) the execution, delivery and performance of this Agreement, the
Notes, the Warrants, the Registration Rights Agreement and the Escrow Agreement
by the Company and the consummation by it of the transactions contemplated
hereby and thereby have been duly authorized by the Company's Board of Directors
and no further consent or authorization of the Company, its Board of Directors,
or its stockholders is required, (iii) this Agreement, the Registration Rights
Agreement, the Escrow Agreement and, on the Closing Date, the Notes and Warrants
sold at the Closing, have been duly and validly authorized, executed and
delivered by the Company, and (iv) this Agreement, the Notes (when issued), the
Warrants (when issued), the Registration Rights Agreement and the Escrow
Agreement constitute the valid and binding obligations of the Company
enforceable against the Company in accordance with their respective terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating to,
or affecting, generally, the enforcement of creditors' rights and remedies or by
other equitable principles of general application. The Company (and its legal
counsel) has examined this Agreement and is satisfied in its sole discretion
that this Agreement and the accompanying Exhibits, Schedules and the Addenda, if
any, are in accordance with Regulation D and the 1933 Act and are effective to
accomplish the purposes set forth herein and therein.

           c. Capitalization. As of April 1, 2000, the authorized Common Stock
consisted of 100,000,000 shares of Common Stock of which 11,856,362 shares were
issued and outstanding; in addition there are 10,000,000 shares of preferred
stock authorized, of which 714,286 shares of Series A Preferred Stock were
issued and outstanding. All of such outstanding shares have been validly issued
and are fully paid and nonassessable. No shares of Common Stock are subject to
preemptive rights or any other similar rights or any liens or encumbrances.
Except for the above-referenced preferred stock and as disclosed in Schedule
3(c) (attached if applicable), as of the effective date of this Agreement, (i)
there are no outstanding options, warrants, scrip, rights to subscribe to, calls
or commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the Company or any of its
subsidiaries, or arrangements by which the Company or any of its subsidiaries is
or may become bound to issue additional shares of capital stock of the Company
or any of its subsidiaries, (ii) there are no outstanding debt securities, and
(iii) there are no agreements or arrangements under which the Company or any of
its subsidiaries is obligated to register the sale of any of its or their
securities under the 1933 Act (except as provided herein, in Schedule 3(g) or in
the Registration Rights Agreement). If requested by the Buyer, the Company has
furnished to the Buyer, and the Buyer acknowledges receipt of same by its
signature hereafter, true and correct copies of the Company's Articles of
Incorporation, as amended, as in effect on the date hereof ("Articles of
Incorporation"), and the Company's Bylaws, as in effect on the date hereof (the
"Bylaws").


<PAGE>   5
           d. Issuance of Securities. The Registrable Securities are all duly
authorized and reserved for issuance, and in all cases upon issuance shall be
validly issued, fully paid and non-assessable, free from all taxes, liens and
charges with respect to the issue thereof, and will not be subject to preemptive
rights or other similar rights of stockholders of the Company.

           e. Acknowledgment Regarding Buyer's Purchase of the Securities. The
Company acknowledges and agrees that the Buyer is not acting as financial
advisor to or fiduciary of the Company (or in any similar capacity with respect
to this Agreement or the transactions contemplated hereby), that this Agreement
and the transactions contemplated hereby, and the relationship between the Buyer
and the Company, are and will be considered "arms-length" notwithstanding any
other or prior agreements or nexus between the Buyer and the Company, whether or
not disclosed, and that any statement made by the Buyer, or any of its
representatives or agents, in connection with this Agreement and the
transactions contemplated hereby is not advice or a recommendation, is merely
incidental to the Buyer's purchase of the Securities and has not been relied
upon in any way by the Company, its officers or directors. The Company further
represents to the Buyer that the Company's decision to enter into this Agreement
and the transactions contemplated hereby have been based solely upon an
independent evaluation by the Company, its officers and directors.

           f. No Integrated Offering. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances which would prevent the parties hereto from
consummating the transactions contemplated hereby pursuant to an exemption from
registration under the 1933 Act and specifically in accordance with the
provisions of Regulation D. The transactions contemplated hereby are exempt from
the registration requirements of the 1933 Act, assuming the accuracy of the
representations and warranties contained herein of the Buyer.

           g. No Conflicts. The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby will not (i) result in a violation of the Articles of
Incorporation or Bylaws or (ii) conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture or instrument to which the Company or
any of its subsidiaries is a party, or result in a violation of any law, rule,
regulation, order, judgment or decree (including federal and state securities
laws and regulations) applicable to the Company or any of its subsidiaries or by
which any property or asset of the Company or any of its subsidiaries is bound
or affected (except for such conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations as would not, individually or in the
aggregate, have a Material Adverse Effect). Except as set forth in Schedule 3(g)
(attached if applicable), neither the Company nor any of its subsidiaries is in
violation of its Articles of Incorporation or other organizational documents,
and neither the Company nor any of its/subsidiaries is in default (and no event
has occurred which, with notice or lapse of time or both, would put the Company
or any of its subsidiaries in default) under, nor has there occurred any event
giving others (with notice or lapse of time or both) any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Company or any of its subsidiaries is a party, except
for possible defaults or rights as would not, in the aggregate or individually,
have a Material Adverse Effect. The business of the Company and its subsidiaries
is not being conducted, and shall not be conducted so long as the Buyer owns any
of the Securities, in violation of any law, ordinance or regulation of any
governmental entity, except for possible violations which neither singly or in
the aggregate would have a Material Adverse Effect. Except as specifically
contemplated by this Agreement and as required under the 1933 Act and any
applicable state securities laws (any of which exceptions are set forth in
Schedule 3(g)), the Company is not required to obtain any consent, authorization
or order of, or make any filing or registration with, any court or governmental
agency in order for it to execute, deliver or perform any of its obligations
under this Agreement, the Notes, the Warrants, the Registration Rights Agreement
or the Escrow Agreement in accordance with the terms hereof and thereof, or to
perform its obligations with respect to the Notes exactly as described in the
Notes (once issued), and with respect to the Warrants exactly as described in
the Warrants (once issued).

           h. SEC Documents; Financial Statements. Except as disclosed on
Schedule 3(h) hereof, since at least September 30, 1999, the Company has timely
filed all reports, schedules, forms, statements and other

<PAGE>   6
documents required to be filed by it with the SEC pursuant to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "1934 Act")
(all of the foregoing filed prior to the date hereof and all exhibits included
therein and financial statements and schedules thereto and documents (other than
exhibits) incorporated by reference therein, being hereinafter referred to as
the "SEC Documents"). The Company has delivered to the Buyer as requested by the
Buyer true and complete copies of the SEC Documents, except for such exhibits,
schedules and incorporated documents. As of their respective dates, the SEC
Documents complied in all material respects with the requirements of the 1934
Act and the rules and regulations of the SEC promulgated thereunder applicable
to the SEC Documents, and none of the SEC Documents, at the time they were filed
with the SEC, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading. As of their respective dates, the financial statements of
the Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto. Such financial statements have been
prepared in accordance with generally accepted accounting principles,
consistently applied, during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto, or (ii)
in the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments). No other information provided by or on behalf of the Company to
the Buyer (including the information referred to in Section 2(d) of this
Agreement) contains any untrue statement of a material fact or omits to state
any material fact necessary in order to make the statements therein, in the
light of the circumstance under which they are or were made, not misleading.
Except as set forth in the financial statements of the Company included in the
SEC Documents, the Company has no liabilities, contingent or otherwise, other
than (i) liabilities incurred in the ordinary course of business subsequent to
the date of such financial statements and (ii) obligations under contracts and
commitments incurred in the ordinary course of business and not required under
generally accepted accounting principles to be reflected in such financial
statements, in each case of clause (i) and (ii) next above which, individually
or in the aggregate, are not material to the financial condition, business,
operations, properties, operating results or prospects of the Company. The SEC
Documents contain a complete and accurate list of all written and oral
contracts, agreements, leases or other instruments to which the Company or any
subsidiary is a party or by which the Company or any subsidiary is subject which
are required by the rules and regulations promulgated by the SEC to be so listed
(each a "Contract"). None of the Company, its subsidiaries or, to the best of
the Company's knowledge, any of the other parties thereto, is in breach or
violation of any Contract, which breach or violation would, or with the lapse of
time, the giving of notice, or both, have a Material Adverse Effect.

           i. Absence of Certain Changes. Except as disclosed in the SEC
Documents, since at least April 1, 1999, there has been no material adverse
change and no material adverse development in the business, properties,
operation, financial condition, results of operations or prospects of the
Company. The Company has not taken any steps, and does not currently have any
reasonable expectation of taking any steps, to seek protection pursuant to any
bankruptcy law nor does the Company have any knowledge that its creditors intend
to initiate involuntary bankruptcy proceedings. The Company shall, at least
until Buyer no longer holds any of the Securities, maintain its corporate
existence in good standing and shall pay all taxes when due except for taxes it
reasonably disputes.

           j. Absence of Litigation. Except as set forth in Schedule 3(j)
(attached if applicable), there is no action, suit, proceeding, inquiry or
investigation before or by any court, public board or body pending or, to the
knowledge of the Company, threatened against or affecting the Company, wherein
an unfavorable decision, ruling or finding would have a Material Adverse Effect
or which would adversely affect the validity or enforceability of, or the
authority or ability of the Company to perform its obligations under, this
Agreement or any of the documents contemplated herein.

           k. Foreign Corrupt Practices. Neither the Company nor any of its
subsidiaries, nor any officer, director or other person acting on behalf of the
Company or any subsidiary has, in the course of his actions for or on behalf of
the Company, used any corporate funds for any unlawful contribution, gift,
entertainment or other unlawful expense relating to political activity, made any
direct or indirect unlawful payment to any foreign or domestic government
official or employee from corporate funds; violated or is in violation of any
provision of the

<PAGE>   7
U.S. Foreign Corrupt Practices Act of 1977, as amended; or made any bribe,
rebate, payoff, influence payment, kickback or other unlawful payment to any
foreign or domestic government official or employee.

           l. Brokers; No General Solicitation. The Company has taken no action
that would give rise to any claim by any person for brokerage commissions,
finder's fees or similar payments relating to this Agreement and the
transactions contemplated hereby, other than to Delano Group Securities. The
Company and the Buyer both acknowledge that no other broker or finder was
involved with respect to the transactions contemplated hereby, other than Delano
Group Securities. Neither the Company nor any distributor participating on the
Company's behalf in the transactions contemplated hereby nor any person acting
for the Company, or any such distributor, has conducted any "general
solicitation," as described in Rule 502(c) under Regulation D, with respect to
the Securities being offered hereby. The Company has agreed to compensate Delano
Group Securities in accordance with their separate written agreement; the Escrow
Agent shall pay to Delano Group Securities the agreed upon compensation out of
Escrow from the Purchase Price at the Closing.

           m. Acknowledgment of Dilution. The number of Conversion Shares
issuable upon conversion of the Notes may increase substantially in certain
circumstances, including the circumstance wherein the trading price of the
Common Stock declines. The Company's executive officers and directors have
studied and fully understand the nature of the securities being sold hereunder
and recognize they have a potential dilutive effect. The board of directors of
the Company has concluded in its good faith business judgment that such issuance
is in the best interests of the Company. The Company acknowledges that its
obligation to issue Conversion Shares upon conversion of the Notes is binding
upon it and enforceable regardless of the dilution that such issuance may have
on the ownership interests of other stockholders.

           n. (Intentionally Omitted.)

           o. (Intentionally Omitted.)

           p. Non-Disclosure of Non-Public Information. The Company shall in no
event disclose non-public information to the Buyer, advisors to or
representatives of the Buyer unless prior to such disclosure of information the
Company marks such information as "non-public information - confidential" and
provides the Buyer, such advisors and representatives with the opportunity to
accept or refuse to accept such non-public information for review. The Company
may, as a condition to disclosing any non-public information hereunder, require
the Buyer, its advisors and representatives to enter into a confidentiality
agreement in form reasonably satisfactory to the Company and the Buyer.

           4. COVENANTS.

           a. Best Efforts. Each party shall use its best efforts timely to
satisfy each of the conditions to be satisfied by it as provided in Sections 6
and 7 of this Agreement.

           b. Securities Laws. The Company agrees to timely file a Form D (or
equivalent form required by applicable state law) with respect to the Securities
if and as required under Regulation D and applicable state securities laws and
to provide a copy thereof to the Buyer promptly after such filing. The Company
shall, in a timely fashion, take such action as is necessary to sell the
Securities being sold to the Buyer under applicable securities laws of the
United States and the relevant state(s), and shall if specifically so requested
provide evidence of any such action so taken to the Buyer.

           c. Reporting Status. So long as the Buyer beneficially owns any of
the Securities, the Company shall file all reports required to be filed with the
SEC pursuant to the 1934 Act, and the Company shall not terminate its status as
an issuer required to file reports under the 1934 Act even if the 1934 Act or
the rules and regulations hereunder would permit such termination.

           d. Use of Proceeds. The Company will use the proceeds from the sale
of the Securities for project development and production, working capital and
general corporate purposes.



<PAGE>   8
           e. Financial Information. Until such time as the Buyer no longer
beneficially owns Notes, Warrants, Conversion Shares or Warrant Shares, the
Company agrees to send the following reports to the Buyer: (i) after filing with
the SEC, a copy of each of its Annual Reports, its quarterly Reports, and any
reports filed on Form 8-K; and (ii) as soon as practicable after release
thereof, copies of all press releases issued by the Company or any of its
subsidiaries.

           f. Reservation of Shares. The Company shall at all times have
authorized, and reserved for the purpose of issuance, a sufficient number of
shares of Common Stock to provide for the issuance of all of the Conversion
Shares, the Warrant Shares and the Interest Shares (if any). Prior to complete
conversion of the Notes and exercise of the Warrants, the Company shall not
reduce the number of shares of Common Stock reserved for issuance hereunder
without the written consent of the Buyer except for a reduction proportionate to
a reverse stock split effected for a business purpose other than affecting the
requirements of this Section, which reverse stock split affects all shares of
Common Stock equally.

           g. Listing. Upon the Closing, the Company shall promptly secure the
listing of the Common Stock underlying the Notes and the Warrants upon each
national securities exchange or automated quotation system, if any, upon which
shares of Common Stock are then listed (subject to official notice of issuance)
and shall maintain, so long as any other shares of Common Stock shall be so
listed, such listing of shares of Registrable Securities from time to time
issued under the terms of this Agreement and the Registration Rights Agreement.
The Company shall at all times comply in all respects with the Company's
reporting, filing and other obligations under the by-laws or rules of the
National Association of Securities Dealers and the OTC Bulletin Board Market (or
such other national securities exchange or market on which the Common Stock may
then be listed, as applicable).

           h. Prospectus Delivery Requirement; Escrow of Common Stock. The Buyer
understands that the 1933 Act requires delivery of a prospectus relating to the
Common Stock in connection with any sale thereof pursuant to a registration
statement under the 1933 Act covering any resale by the Buyer of the Common
Stock being sold, and the Buyer shall comply with any applicable prospectus
delivery requirements of the 1933 Act in connection with any such sale. The
Company shall have the unequivocal right to rely upon the Buyer's representation
and covenant to deliver a prospectus as required by applicable law or regulation
contained in this Section 4(h), and thus, with respect to any resales by the
Buyer pursuant to a registration statement of Conversion Shares, Interest Shares
or Warrant Shares, such Common Stock shall contain a restrictive legend only if
and to the extent required by law. The Buyer will indemnify and hold harmless
the Company and its transfer agent for any loss, cost or expense (including
reasonable attorney's fees) incurred by such parties as a result of improper
actions taken by the Buyer in response to the Company's and the transfer agent's
compliance with the provisions of this Section 4(h), including without
limitation the sales of such Common Stock without delivery of a prospectus as
required by applicable law or regulation. The Company agrees that, upon the
earlier of (x) the effective date of the Registration Statement or (y) the date
which is twelve (12) months after the Closing Date, and from time to time
thereafter as reasonably requested by the Buyer, the Company shall deliver or
cause the Company's transfer agent to deliver to the Escrow Agent one or more
stock certificates representing the number of shares of registered Common Stock
into which the Notes and the Warrants might then reasonably be convertible or
exercisable (as applicable) (collectively, the "Escrow Shares"). Such
certificate(s) shall not contain a restrictive legend of any kind. The Escrow
Agent shall hold the Escrow Shares in trust, in certificate form or in a
brokerage account as deemed appropriate by the Escrow Agent. Upon a full or
partial conversion of Notes or exercise of the Warrants, the Buyer shall deliver
a copy of its conversion notice to the Escrow Agent, and to the extent that the
Escrow Agent has sufficient Escrow Shares, the Escrow Agent shall release Escrow
Shares to the Buyer to satisfy such conversion or exercise. The Escrow Agreement
describes in detail the duties of the Escrow Agent with respect to the
provisions of this Section 4(h).

           i. Intentional Acts or Omissions. Neither party shall intentionally
perform any act that if performed, or omit to perform any act that if omitted to
be performed, would prevent or excuse the performance of this Agreement or any
of the transactions contemplated hereby.

           j. No Shorting. As a material inducement for the Company to enter
into this Agreement, the Buyer represents that it has not as of the date hereof,
and covenants on behalf of itself and its affiliates that neither Buyer nor any
affiliate of Buyer will at any time in which the Buyer or any affiliate of the
Buyer beneficially owns any of the Securities, engage in any short sales of, or
hedging or arbitrage transactions with respect to, the Common Stock,

<PAGE>   9
or buy "put" options or similar instruments with respect to the Common Stock.
The Company acknowledges that a sale of Conversion Shares or Warrant Shares on
the date a conversion of the Notes or exercise of the Warrants, as applicable,
is made, even if such sale is made prior to delivery of the notice of conversion
with respect to such Conversion Shares (or exercise notice with respect to such
Warrant Shares), is not a "short sale" for purposes of this Section 4(j).

           k. [Intentionally Omitted.]

           l. Restriction on Below Market Issuance of Securities.Until the date
that is twelve (12) months from the Closing Date or the date that all of the
Notes have been paid or converted in full, whichever is earlier, if the Company
proposes to issue or agree to issue any equity securities of the Company (or any
security convertible into or exercisable or exchangeable, directly or
indirectly, for equity securities of the Company) or debt securities of the
Company at a price (or provide for a conversion, exercise or exchange price)
which may be less than the current market price for the Common Stock on the date
of issuance (in the case of Common Stock) or the date of conversion, exercise or
exchange (in the case of securities convertible into or exercisable or
exchangeable, directly or indirectly, for Common Stock), the Company shall first
offer to the Buyer to purchase such securities on the same terms and conditions
as proposed by the Company (the "First Offer"). The Buyer shall have ten (10)
days to advise the Company in writing that it accepts the First Offer. If the
Buyer does not so advise the Company, the Company shall be free, for a period of
sixty (60) days, to issue such securities as proposed to such other party, after
which sixty (60) day period the restrictions contained in this Section 4(l)
shall apply as if the First Offer had not been made to the Buyer. The preceding
sentence shall not apply to any securities issued by the Company (i) to the
Buyer pursuant to the transactions contemplated in this Agreement, (ii) pursuant
to any employee stock option plan or employee stock purchase plan of the Company
established during the term of this restriction for a legitimate business
purpose and not to avoid the restrictions imposed in this Section 4(l), (iii) as
all or a portion of the compensation paid or to be paid to any current or future
officer, director, employee or agent of the Company (iv) pursuant to any
existing security, option, warrant, scrip, call or commitment or right in each
case as disclosed on Schedule 3(c) hereof; (v) for the purposes of effecting an
acquisition or merger that the Company's Board of Directors has in good faith
determined is in the best interests of the Company, or (vi) with the consent of
the Buyer, not to be unreasonably withheld (collectively, the "Exceptions").

           5. LEGEND AND TRANSFER INSTRUCTIONS.

           a. Transfer Agent Instructions. The Company shall instruct its
transfer agent to issue certificates, registered in the name of the Buyer or its
permitted nominee, for the Conversion Shares, the Warrant Shares and the
Interest Shares (if any) in accordance with the terms of the applicable Notes
and Warrants and in such amounts as specified from time to time by the Buyer to
the Company, upon conversion of the Notes or exercise of the Warrants (as
applicable). All such certificates shall bear the restrictive legend specified
in Section 2(g) of this Agreement only to the extent required by applicable law
and as specified in this Agreement and the Exhibits and Addenda hereto. The
Company warrants that no instruction other than such instructions referred to in
this Section 5, and stop transfer instructions to give effect to Section 2(f)
hereof in the case of the Conversion Shares, the Warrant Shares and the Interest
Shares (if any) prior to the registration of same under the 1933 Act, will be
given by the Company to its transfer agent and that the Conversion Shares, the
Warrant Shares and the Interest Shares (if any) shall otherwise be freely
transferable on the books and records of the Company as and to the extent
permitted by applicable law and provided by this Agreement, the Warrants and the
Registration Rights Agreement. Nothing in this Section shall affect in any way
the Buyer's obligations and agreement to comply with all applicable securities
laws upon resale of the Conversion Shares, the Warrant Shares and/or the
Interest Shares (if any). If the Buyer complies with Section 2(f) and Section
4(k) of this Agreement with respect to any transfer of Securities, the Company
shall permit the said transfer, and if applicable promptly (and in all events
within two (2) trading days) instruct its transfer agent to issue one or more
certificates in such name and in such denominations as specified by the Buyer.

           b. Removal of Legends. The Legend shall be removed and the Company
shall issue a certificate without such Legend to the holder of any Security upon
which it is stamped, and a certificate for a security shall be originally issued
without the Legend, if, unless otherwise required by state securities laws, (x)
the sale of such Security is registered under the 1933 Act, or (y) such holder
provides the Company with an opinion by counsel reasonably satisfactory to the
Company, that is in form, substance and scope reasonably satisfactory to the

<PAGE>   10
Company, to the effect that a public sale or transfer of such Security may be
made without registration under the 1933 Act. The Buyer agrees that its sale of
all Securities, including those represented by a certificate(s) from which the
Legend has been removed, or which were originally issued without the Legend,
shall be made only pursuant to an effective registration statement (and to
deliver a prospectus in connection with such sale) or in compliance with an
exemption from the registration requirements of the 1933 Act. In the event the
Legend is removed from any Security or any Security is issued without the Legend
and thereafter the effectiveness of a registration statement covering the sales
of such Security is suspended or the Company determines that a supplement or
amendment thereto is required by applicable securities laws, then upon
reasonable advance notice to the holder of such Security, the Company shall be
entitled to require that the Legend be placed upon any such Security which
cannot then be sold pursuant to an effective registration statement or an
available exemption from registration or with respect to which the opinion
referred to in clause (y) next above has not been rendered, which Legend shall
be removed when such Security may be sold pursuant to an effective registration
statement or an available exemption from registration (or such holder provides
the opinion with respect thereto described in clause (y) next above.

           c. Conversion of Notes. Except as provided in Section 5 of the Notes,
the Buyer shall have the right to convert the Notes sold hereunder by delivering
via facsimile an executed and completed Notice of Conversion (as defined in the
Notes) to the Company and delivering within two (2) business days thereafter the
original Notice of Conversion and the original Note being converted (but only at
such time as it is converted in full into Common Stock) by express courier to
the Company. Each date on which a Notice of Conversion is faxed to the Company
in accordance with the provisions hereof shall be deemed a "Conversion Date."
Unless the Escrow Agent is in possession of a sufficient number of Conversion
Shares to effect the conversion, the Company will transmit the certificates
representing the shares of Common Stock issuable upon conversion of any Notes
(along with a replacement Note representing the amount of principal of said Note
not so converted, if applicable) to the Buyer via express courier, within five
(5) business days after the relevant Conversion Date (with respect to each
conversion, the "Deadline"). Time is of the essence with respect to the
requirements of the immediately preceding sentence.

           d. Injunctive Relief for Breach. The Company acknowledges that a
breach of its obligations under Sections 5(a), 5(b) and 5(c) above will cause
irreparable harm to the Buyer by vitiating the intent and purpose of the
transactions contemplated hereby. Accordingly the Company agrees that the remedy
at law for a breach of its obligations under such Sections would be inadequate
and agrees, in the event of a breach or threatened breach by the Company of the
provisions of such Sections, the Buyer shall be entitled, in addition to all
other remedies at law or in equity, to an injunction restraining any breach and
requiring immediate issuance and transfer, without the necessity of showing
economic loss and without any bond or other security being required.

           e. Liquidated Damages for Non-Delivery of Certificates. In addition
to the provisions of Section 5(d) above, the Company understands and agrees that
a delay in the issuance of the Certificates beyond the Deadline will result in
substantial economic loss and other damages to the Buyer. As partial
compensation to the Buyer for such loss, the Company agrees to pay liquidated
damages (and which the Company acknowledges is not a penalty) to the Buyer for
issuance and delivery of the Certificates after the Deadline, in accordance with
the following schedule (where "No. Business Days Late" is defined as the number
of business days beyond five (5) business days from the date of delivery by the
Buyer to the Company of a facsimile Notice of Conversion (or, if later, from the
date on which all other necessary documentation duly executed and in proper form
required for conversion of Notes as described in this Agreement, including the
original Notice of Conversion, all in accordance with this Agreement only if
such necessary documentation has not been delivered to the Company within the
two (2) business day period after the facsimile delivery to the Company of the
Notice of Conversion required in this Agreement)):

<TABLE>
<CAPTION>
           No. Business Days Late                 Liquidated Damages
           ----------------------                 ------------------
                                                       (in US$)
<S>                                               <C>
                     1                                  $900
                     2                                  $1,200
                     3                                  $1,500
                     4                                  $1,800
                     5                                  $2,100
                     6                                  $2,400
</TABLE>


<PAGE>   11
<TABLE>
<S>                                               <C>
                     7                                  $2,700
                     8                                  $3,000
                     9                                  $3,000
                     10                                 $4,500
                     11+                                $4,500 + $1,000 for
                                                        each Business Day Late
                                                        beyond 11 days
</TABLE>

           The Company shall pay the Buyer any liquidated damages incurred as
called for under this Section 5(e) by certified or cashier's check upon the
earlier of (i) issuance of the relevant Certificate(s) to the Buyer or (ii) each
monthly anniversary of the receipt by the Company of the Buyer's Notice of
Conversion. Nothing herein shall limit the Buyer's right to pursue actual
damages for the Company's failure to issue and deliver all Certificates to the
Buyer in accordance with the terms of this Agreement or for breach by the
Company of this Agreement. Notwithstanding anything in this Section 5(e) to the
contrary, the Company shall not be responsible for liquidated damages as
described in this Section 5(e) if a delay past a Deadline in delivery of Common
Stock to the Buyer upon a conversion or exercise is solely due to the action (or
omission to act) of the Escrow Agent (that is, if the Escrow Agent has in its
possession a sufficient number of non-legended Escrow Shares to effect a
conversion of Notes, and there is no Company-caused delay involved in delivery
by the Escrow Agent of the requisite number of Escrow Shares upon such
conversion or exercise).

           6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.

           The obligation of the Company hereunder to sell Notes and Warrants at
the Closing is subject to the satisfaction, on or before the Closing Date, of
each of the following conditions, provided that these conditions are for the
Company's sole benefit and may be waived by the Company at any time in its sole
discretion:

           a. The parties shall have executed this Agreement, the Registration
Rights Agreement and the Escrow Agreement, and the parties shall have delivered
the respective documents or signature pages thereof (via facsimile or otherwise
as permitted in the Escrow Agreement) to the Escrow Agent.

           b. The Buyer shall have delivered to the Escrow Agent on behalf of
the Company the Purchase Price for the Notes and Warrants purchased at the
Closing, by wire transfer of immediately available funds pursuant to the wiring
instructions provided by the Escrow Agent.

           c. The representations and warranties of the Buyer shall be true and
correct in all material respects as of the date made and as of the Closing Date
as though made at that time (except for representations and warranties that
speak as of a specific date), and the Buyer shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Buyer at or prior to the Closing Date.

           d. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction or any self regulatory
organization having authority over the matters contemplated hereby which
restricts or prohibits the consummation of any of the transactions contemplated
herein.

           e. The Company's Board of Directors shall have approved this
Agreement and the related documentation referred to herein, and the transactions
contemplated hereby and thereby.

           7. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.

           The obligation of the Buyer to purchase Notes and Warrants is subject
to the satisfaction, on or before the Closing Date, of each of the following
conditions, provided that these conditions are for the sole benefit of the Buyer
and may be waived by the Buyer at any time in its sole discretion:



<PAGE>   12
           a. The parties shall have executed this Agreement, the Registration
Rights Agreement and the Escrow Agreement, the parties shall have delivered the
respective documents or signature pages thereof (via facsimile or otherwise as
permitted in the Escrow Agreement) to the Escrow Agent on behalf of each other.

           b. The representations and warranties of the Company shall be true
and correct in all material respects as of the date made and as of Closing Date
as though made at that time (except for representations and warranties that
speak as of a specific date) and the Company shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Company at or prior to the Closing Date. The Buyer may require a certificate,
executed by the Vice President-Finance of the Company, dated as of the Closing
Date, to the foregoing effect and as to such other matters as may be reasonably
requested by the Buyer.

           c. With respect to the Closing, the Company shall have issued and
have duly executed by the authorized officers of the Company, and delivered to
the Escrow Agent on behalf of the Buyer, the Note and Warrant being sold at the
Closing (via facsimile or otherwise as required by the Escrow Agreement,
provided that any permitted facsimile of such documents shall be followed with
physical delivery to the Escrow Agent of the original instrument or security
within one (1) business day after facsimile of same to the Escrow Agent).

           d. The Common Stock shall be authorized for quotation on the OTC
Bulletin Board Market (or another national securities exchange or market) and
trading in the Common Stock on such market shall not have been suspended by the
SEC or other relevant regulatory agency.

           e. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction or any self regulatory
organization having authority over the matters contemplated hereby which
restricts or prohibits the consummation of any of the transactions contemplated
herein.

           f. The Escrow Agent shall have received on behalf of the Buyer the
opinion of Company counsel, dated as of the Closing Date, substantially in the
form attached hereto as Exhibit E.

           8. GOVERNING LAW; MISCELLANEOUS.

           a. Governing Law. This Agreement shall be governed by and interpreted
in accordance with the laws of the State of California without regard to the
principles of conflict of laws. In the event of any litigation regarding the
interpretation or application of this Agreement, the parties irrevocably consent
to jurisdiction in any of the state or federal courts located in the City of
Chicago, State of Illinois and waive their rights to object to venue in any such
court, regardless of the convenience or inconvenience thereof to any party.
Service of process in any civil action relating to or arising out of this
Agreement (including also all Exhibits or Addenda hereto) or the transaction(s)
contemplated herein may be accomplished in any manner provided by law. The
parties hereto agree that a final, non-appealable judgment in any such suit or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on such judgment or in any other lawful manner.

           b. Counterparts. This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and signature pages from such counterparts have been delivered to the
Escrow Agent on behalf of the other party. In the event any signature page is
delivered by facsimile transmission (which the parties agree is an acceptable
form of delivery), the party using such means of delivery shall cause three (3)
additional originally executed signature pages to be physically delivered to the
Escrow Agent on behalf of the other party within one (1) business day of the
execution and delivery hereof.

           c. Headings; Gender, Etc. The headings of this Agreement are for
convenience of reference and shall not form a part of, or affect the
interpretation of this Agreement. As used herein, the masculine shall refer to
the feminine and neuter, the feminine to the masculine and neuter, and the
neuter to the masculine and feminine, as the context may require. As used
herein, unless the context clearly requires otherwise, the words "herein,"
"hereunder" and "hereby," shall refer to this entire Agreement and not only to
the Section or paragraph in which

<PAGE>   13
such word appears. If any date specified herein falls upon a Saturday, Sunday or
public or legal holidays, the date shall be construed to mean the next business
day following such Saturday, Sunday or public or legal holiday. For purposes of
this Agreement, a "business day" is any day other than a Saturday, Sunday or
public or legal holiday.

           d. Severability. If any provision of this Agreement shall be invalid
or unenforceable in any jurisdiction, such invalidity or unenforceability shall
not affect the validity or enforceability of the remainder of this Agreement in
that jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.

           e. Entire Agreement; Amendments. This Agreement and the instruments
referenced herein contain the entire understanding of the parties with respect
to the matters covered herein and therein and, except as specifically set forth
herein or therein, neither the Company nor the Buyer makes any representation,
warranty, covenant or undertaking with respect to such matters. No provision of
this Agreement may be waived or amended other than by an instrument in writing
signed by the party to be charged with enforcement.

           f. Notices. Any notices required or permitted to be given under the
terms of this Agreement shall be sent by U. S. Mail or delivered personally or
by courier or via facsimile (if via facsimile, to be followed within three (3)
business days by an original of the notice document via U.S. Mail or courier)
and shall be effective five (5) days after being placed in the mail, if mailed,
certified or registered, return receipt requested, or upon receipt, if delivered
personally or by courier or by facsimile, in each case properly addressed to the
party to receive the same. The addresses for such communications shall be:

If to the Company:             Stan Lee Media, Inc.
                               15821 Ventura Boulevard, Suite 675
                               Encino, California 91436
                               Telephone: (818) 461-1757
                               Facsimile: (818) 461-1760
                               Attention: Vice President - Finance

If to the Buyer, at the address on the signature page of this Agreement. Each
party shall provide written notice to the other party of any change in address.

           g. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and assigns.
Neither the Company nor the Buyer shall assign this Agreement or any rights or
obligations hereunder without the prior written consent of the other (which
consent shall not be unreasonably withheld), and in any event any assignee of
the Buyer shall be an accredited investor (as defined in Regulation D), in the
written opinion of counsel who is reasonably satisfactory to the Company and in
form, substance and scope reasonably satisfactory to the Company.
Notwithstanding the foregoing, if applicable, any of the entities constituting
the Buyer (if greater than one (1) entity) may assign its rights hereunder to
any of its "affiliates," as that term is defined under the 1934 Act, without the
consent of the Company; provided, however, that any such assignment shall not
release such assigning entity from its obligations hereunder unless such
obligations are assumed by such affiliate and the Company has prior to such
assignment and assumption consented in writing to the same; and no such
assignment shall be made unless it is made in accordance with any applicable
securities laws of any applicable jurisdiction. Any request for an assignment
made hereunder by the Buyer shall be accompanied by a legal opinion in form,
substance and scope reasonably satisfactory to the Company, that such assignment
is proper under applicable law. Notwithstanding anything herein to the contrary,
Buyer may pledge the Securities as collateral for a bona fide loan pursuant to a
security agreement with a third party lender, and such pledge shall not be
considered an assignment in violation of this Agreement so long as it is made in
compliance with all applicable law.

           h. No Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.

<PAGE>   14
           i. Survival. Unless this Agreement is terminated under Section 8(1),
the representations and warranties of the Company and the Buyer contained in
Sections 2 and 3 and the agreements and covenants set forth in Sections 4, 5 and
8 shall survive the Closing of the purchase and sale of Securities purchased and
sold hereby.

           j. Publicity. The Company and the Buyer shall have the right to
review before issuance by the other, any press releases or any other public
statements with respect to the transactions contemplated hereby; provided,
however, that the Company shall be entitled, without prior consultation with or
approval of the Buyer, to make any press release or other public disclosure with
respect to such transactions as is required by applicable law and regulations.

           k. Further Assurance. Each party shall do and perform, or cause to be
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.

           l. Termination. In the event that the Closing shall not have occurred
on or before ten (10) business days from the date hereof, this Agreement shall
terminate at the close of business on such date. Neither party may unilaterally
terminate this Agreement after the Closing for any reason other than a material
breach of this Agreement by the non- breaching party. Such termination shall not
be the sole remedy for a breach of this Agreement by the non-breaching party,
and each party shall retain all of its rights hereunder at law or in equity.
Notwithstanding anything herein to the contrary, a party whose breach of a
covenant or representation and warranty or failure to satisfy a condition
prevented the Closing shall not be entitled to terminate this Agreement.

           m. Remedies. No provision of this Agreement providing for any
specific remedy to a party shall be construed to limit such party to the
specific remedy described, and any other remedy that would otherwise be
available to such party at law or in equity shall be so available. Nothing in
this Agreement shall limit any rights a party may have with any applicable
federal or state securities laws with respect to the transactions contemplated
hereby.


           IN WITNESS WHEREOF, the Buyer and the Company have caused this
Securities Purchase Agreement to be duly executed as of the date first written
above.



                            [SIGNATURE PAGE FOLLOWS]


List of Exhibits

Exhibit A  Form of Note
Exhibit B  Warrant to Purchase Common Stock
Exhibit C  Registration Rights Agreement
Exhibit D  Escrow Agreement
Exhibit E  Opinion of Counsel for the Company


<PAGE>   15
             [SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT DATED
                              AS OF APRIL 14, 2000]



                               COMPANY:


                                  STAN LEE MEDIA, INC.

                                  By:  /s/ Robert M. Schultz
                                       -----------------------------------------
                                       Robert M. Schultz, Vice President -
                                       Finance



                               BUYER:

                                  AUGUSTINE FUND, L.P.

                                  By:  Augustine Capital Management, L.L.C.,
                                       its General Partner

                                  By: /s/ Thomas F. Duszynski
                                      ------------------------------------------
                                      Mr. Thomas F. Duszynski, Member


                               BUYER'S ADDRESS:

                                                   141 West Jackson Blvd.
                                                   Suite 2182
                                                   Chicago, Illinois 60604
                                                   Telephone: 312.427.5457
                                                   Telecopier: 312.427.5396


<PAGE>   1
                                                                    Exhibit 10.2


                   SOFTWARE DEVELOPMENT AND LICENSE AGREEMENT


                      AGREEMENT dated as of April 19, 2000, between TOON BOOM
           TECHNOLOGIES INC., a corporation formed under the laws of Canada (the
           "Licensor"), and STAN LEE MEDIA, INC., a Colorado corporation (the
           "Licensee").

         Licensor is a software development company dedicated to providing
state-of-the-art, high performance tools to the cartoon animation industry.
Licensor's products historically have been positioned at the high-end segment of
the market, and are commonly known as "TicTacToon" and "USAnimation." Licensor
intends to expand its product line by adding two versions of a product dedicated
to the creation of cartoons on the World Wide Web, commonly known as "WEBtoon
products," one dedicated to the prosumer market and one with a subset of the
functionalities of the prosumer product and dedicated to the consumer market,
thereby enabling Licensor to broaden its user demographics to include the
prosumer and consumer mass market in addition to its high-end professional base.

         Licensee is an Internet-based, multimedia company founded by comic book
icon Stan Lee to produce exciting original branded characters and content for
exploitation in all media. Licensee wishes to create and develop in conjunction
with Licensor user interfaces for the WEBtoon products to enhance such products
acceptance by the prosumer and consumer mass markets.

         Licensor desires to grant to Licensee a non-exclusive license to market
and sell, or sublicense the consumer version of the WEBtoon products bundled
with value added original content of Licensee worldwide, and the Licensee
desires to accept such appointment, subject to the terms and conditions of this
Agreement.

         Accordingly, Licensor and Licensee hereby agree as follows:

I. PRODUCTS

           The WEBtoon products will consist of: (i) a new product aimed at the
prosumer market (including in particular low end creators of Web sites) which is
in the development stage and the initial description of which is contained in
Schedule 1, and (ii) a consumer mass market product consisting of a subset of
the prosumer product with more limited functionalities and the initial
description of which is contained in Schedule 1 and both offering animation
templates such as pre-sets and libraries of already made sequences of characters
which are in the development stage. The consumer mass market product hereinafter
shall be referred to as the "Consumer Product" and the prosumer product
hereinafter shall be referred to as the "Prosumer Product" and both the Consumer
Product and the Prosumer Product, with contributions by Licensee as contemplated
in Sections 3.02 and 4.01(a), shall be known as the "WEBtoon System," all
intellectual property and trade secret rights in which shall be owned by
Licensor from their creation (except for such Licensee content as described in
Article V hereof). All intellectual property and trade secret rights in
modifications, changes, enhancements, conversions, upgrades, or additions made
to the WEBtoon System, whether made by Licensor, Licensee, or a third party,
shall be the property of Licensor (except for such Licensee content as described
in Article V hereof), shall be considered a part of the WEBtoon System, and the
Licensee shall receive a license to the Consumer Product in accordance with
Article III of this Agreement. Licensee shall not be entitled to receive any
portion of the source code of the WEBtoon system, except as otherwise provided
for in the Software Escrow Agreement attached as Schedule 3.04 hereto. Licensee
hereby undertakes not to decompile or reverse engineer the WEBtoon system or
otherwise attempt to recreate its source code or gain access to it. Both parties
acknowledge that the expression "Webtoon" as used in this Agreement, is used
only for reference purposes and the actual products name will not contain the
expression Webtoon which is not available for use by the parties.

II. LICENSED TERRITORY

         Except where otherwise explicitly noted, the licenses granted by this
Agreement are worldwide (collectively, the "Licensed Territory").


<PAGE>   2
III. DEVELOPMENT AND LICENSE TO LICENSEE

           SECTION 3.01. WEBtoon System Development. Subject to the terms and
conditions of this Agreement, Licensor agrees to develop the WEBtoon System,
starting first with the Prosumer Product and continuing with the Consumer
Product at no cost to Licensee other than as expressly set forth herein.

           SECTION 3.02. Software Development and Implementation. Licensor and
Licensee agree to consult each other without any charge to the other party
regarding the specifications which are the features, the functionalities and the
user interfaces of the Prosumer Product and of the Consumer Product. However,
the final decision, including on which functionalities of the Prosumer Product
shall be retained in the Consumer Product shall remain with Licensor. Licensee
shall have the right to terminate this Agreement if Licensee disagrees with the
specifications finally retained by Licensor for any of the Prosumer Product or
Consumer Product by written notice given to Licensee and taking effect at least
thirty (30) days after receipt of such notice by Licensor unless in the meantime
the parties shall have agreed in writing on the original or revised
specifications. Licensor will install a prototype of both the Prosumer Product
and the Consumer Product in its offices or another location, provided that the
prototypes are accessible by Licensee. Licensor will present a prototype review
of the Prosumer Product to Licensee, which the parties agree shall occur by
August 1, 2000. At the time of prototype review, Licensee will communicate any
suggested changes, modifications and enhancements to Licensor. Licensor will
make its best efforts in order to incorporate changes resulting from prototype
review and accepted by Licensor and install and implement the completed Prosumer
Product, according to the proposed specifications, in final form as promptly as
practicable in the circumstances following completion of the prototype review.
Immediately thereafter, Licensor and Licensee will conduct beta testing of the
Prosumer Product in accordance with the terms of the Beta Testing Agreement, a
copy of which is annexed hereto as Schedule 3.02, until the completion of a
release version. Immediately after completion of the final prototype version of
the Prosumer Product, Licensor will present a prototype review of the Consumer
Product to Licensee, which the parties agree is targeted to occur during the
third quarter of the year 2000 and the above process shall be repeated with the
Consumer Product. Licensee agrees to make available to Licensor, at no cost to
it, for purposes of beta testing the Prosumer Product and the Consumer Product
substantially the same persons having tested Licensee's website,
www.stanlee.net.

           SECTION 3.03. License Grant from Licensor to Licensee. In
consideration of the payment of the royalties provided in Section 6.03 hereof,
Licensor hereby grants to Licensee, with the right to grant sublicenses to its
Affiliates and to third parties approved in writing by Licensor, such approval
not to be unreasonably withheld, a personal, non-assignable, non-exclusive
license (the "Licensee License"), in the Licensed Territory, to offer for sale
or to license the Consumer Product but only bundled with significant original
Licensee value added content such as its new fourteen Super Heroes and Super
Villains as Licensee shall so desire, for an initial term of five (5) years from
the date of first commercial release of the Consumer Product by Licensor or
Licensee whichever occurs first, such initial term being renewable with the
consent of both parties and according to terms and conditions to be agreed upon
by the parties, which Licensee License the Licensee hereby accepts. The Licensee
License also shall include any enhancements to the Consumer Product provided by
Licensor pursuant to any other agreement during the term of the Licensee
License. The Licensee License shall not include reproduction or modification
rights. All reproductions of the Consumer Product shall be performed by Licensor
either electronically by download by the end-user from a site controlled by
Licensor (but the command to download may be given by the end-user from a site
controlled by Licensee in a mode transparent to the end-user) or physically in
case physical products are needed subject, in this latter case, to agreement
between the parties on the reproduction, packaging and shipping costs as
contemplated in Section 6.03(a) hereof.

           SECTION 3.04. Escrow of WEBtoon System Software. Concurrently with
execution of this Agreement, the parties shall execute a Software Source Code
Escrow Agreement with the firm of Boivin, O'Neil, General Partnership, at 2000
Mansfield Street, Suite 705, Montreal, Quebec, H3A 2Z4, or such other mutually
agreed upon escrow agent (collectively, the "escrow agent") substantially in the
form of Schedule 3.04 and shall use their best efforts to have such agreement
executed by escrow agent promptly.

<PAGE>   3
IV. OBLIGATIONS

           SECTION 4.01. By Licensee.

           (a) Engineering Services. Licensee, shall contribute to the
development of the WEBtoon System engineering services through developers from
Pentafour Media, Inc. of India ("Pentafour") providing to Licensor at the site
of Licensor in the Montreal area, Canada the services of qualified developers
valued by the parties in the amount of Two Hundred Fifty Thousand U.S. Dollars
(US$250,000), which contribution shall be based upon mutually agreeable
developers, deliverables and milestones as well as daily rates and out of pocket
expenses to be assumed by Licensee to Pentafour or to such developers as more
particularly described in Schedule 4.01(a). All intellectual property and trade
secret rights in the result of the work performed by such developers shall be
owned by Licensor. Such developers shall enter into such agreements pertaining
to intellectual property assignment, waiver of moral rights and confidentiality
as Licensor in its discretion shall require. Licensor shall have the right to
require Licensee to replace any developer for cause upon notice to Licensee in
which case Licensee shall arrange to have such developer replaced promptly by a
developer of the same or superior expertise and experience as the other
developers made available by Licensee to Licensor and continuing to perform
services for Licensor. In such case, Licensee shall pay all transportation
expenses of the replacement developer to Montreal and from Montreal to India at
the end of the project, such amounts being in addition to the above amount of
Two Hundred Fifty Thousand U.S. Dollars (US$250,000).


           (b) Promotional and Marketing Services. Licensee shall contribute
promotional and marketing services to the development of the WEBtoon System
valued by the parties in the amount of Two Hundred Fifty Thousand U.S. Dollars
(US$250,000), which contribution shall be based upon the attainment of
milestones and deliverables to be mutually agreed upon by Licensee and Licensor.
Licensee undertakes that Mr. Stan Lee, on behalf of Licensee, shall be required
to assist in marketing and promoting the WEBtoon Products worldwide but
physically only from Los Angeles, California, on terms to be mutually agreed
upon by Licensee and Licensor. Attached as Schedule 4.01(b) hereto is a detailed
plan describing the minimum Licensee promotional and marketing services plan of
the WEBtoon Products for such value. Licensor shall assume all out-of-pocket
pre-approved promotional, advertising, travel, lodging and meal expenses
incurred by Licensee's personnel and/or consultants in providing such
promotional and marketing services described in this Section which expenses
shall all be deducted by the Licensee from the amount of $250,000 provided in
this Section.

           SECTION 4.02. By Licensor. During the term of the Licensee License,
Licensor hereby grants Licensee a royalty-free, limited exclusive license to use
and right of access at Licensee's principal development location in California,
U.S.A., for a six (6) week period prior to the scheduled commercial release of
each of the Prosumer Product and Consumer Product, as they then exist, and as
the same may be modified or enhanced for general commercial release from time to
time. Licensor acknowledges and agrees that Licensee also shall have the
non-exclusive right to use during the term of the Licensee License certain
mutually identified enhancements and features of the technology underlying the
WEBtoon Products solely for Licensee's own content programming, which
enhancements and features shall be negotiated by the parties in good faith.

V. PROPRIETARY RIGHTS AND LICENSE TO LICENSOR

           SECTION 5.01. Licensee Content. All Licensee content shall remain the
sole and exclusive property of Licensee, including without limitation, all
copyrights, trademarks, patents, trade secrets and any other proprietary rights.
Nothing in this Agreement shall be construed to grant Licensor any ownership
right in, or license to, such content, except as expressly set forth in Section
5.04 of this Agreement. To the extent that Licensor updates, modifies, combines
or otherwise creates any derivative work from intellectual property contributed
by Licensee other than as contemplated in Sections 4.01 (a) and (b), such shall
be conclusively deemed to be owned solely by Licensee.

           SECTION 5.02. Proprietary Rights. Except as otherwise provided in
Section 5.01 hereof, all intellectual property and trade secret rights in all
materials included in or pertaining to the WEBtoon System and all other
deliverables hereunder, any updates or modifications thereto or derivative works
thereof, whether made by Licensor, Licensee or a third party and all ideas,
designs, and formats embodied therein, including but not limited to any computer

<PAGE>   4
software (in object code and source code form) and such other licenses and
middleware required, script, the end user interface, programming code, applets,
data, information or HTML or other scripts developed or provided by any party or
its suppliers under this Agreement, audiovisual displays created hereunder
(collectively, the "Work Product") are and shall remain the property of Licensor
from their creation, and all rights, title and interest therein shall vest in
Licensor and shall be deemed to be a "work made for hire" for Licensor including
the services rendered by or on behalf of Licensee hereunder. To the extent that
title to the Work Product does not, by operation of law, vest in Licensor or is
not considered works made for hire, then all right, title and interest therein
are hereby irrevocably assigned to Licensor effective from the moment of their
creation. The Work Product, all copyright, trademark, trade dress, trade secret,
patent and other proprietary rights therein shall belong exclusively to Licensor
with Licensor having the right to obtain and to hold in its own name copyright
and trademark registrations and such other protections as may be appropriate to
the subject matter, and any extensions and renewals thereof. In addition, any
and all data and information about, or provided by, end users and related to the
Consumer Product at any time whether or not included in a database and/or any
report in the possession of Licensor or Licensee during the term of the Licensee
License ("User Information"), shall be the joint property of Licensor and
Licensee, and shall be, to the extent permitted by applicable laws, communicated
to the other party to be used by such party for any purpose except (i) for a
purpose for which any necessary consent was not obtained from the end user or
(ii) for competing with the other party. Each party agrees to give the other
party any reasonable assistance and to execute any further documents required to
perfect the rights defined in this Section and in other Sections of this
Agreement.

           SECTION 5.03. Confidentiality.

           (a) During the course of this Agreement and the negotiation between
the parties which led to the execution of this Agreement, information that is
confidential or proprietary to one party ("Disclosing Party") may be or may have
been disclosed to the other party ("Receiving Party"), including, but not
limited to software, technical processes and formulas, source codes, product
designs, sales, cost and other unpublished financial information, product and
business plans, advertising revenues, usage rates, advertising relationships,
projections, and marketing data and other information which according to the
circumstances surrounding their disclosure ought in good faith to be treated as
confidential ("Confidential Information"). Confidential Information shall not
include information that the Receiving Party can demonstrate (i) is, as of the
time of its disclosure, or thereafter becomes part of the public domain through
a source other than the Receiving Party, (ii) was known to the Receiving Party
as of the time of its disclosure, (iii) is independently developed by the
Receiving Party, or (iv) is subsequently learned from a third party not under a
confidentiality obligation to the Disclosing Party. Except as provided for in
this Agreement, each party shall not make any disclosure of the Confidential
Information to anyone other than its employees or advisors who have a need to
know in connection with this Agreement. Each party shall notify its employees
and advisors of their confidentiality obligations with respect to the
Confidential Information and shall require its employees and advisors to comply
with these obligations. The confidentiality obligations of each party and its
employees and advisors shall survive the expiration or termination of this
Agreement.

           (b) The parties hereto agree that the transactions that are the
subject of this Agreement, are of a confidential nature and shall not be
disclosed except to the parties shareholders, directors, employees and advisors
on a "need to know" basis or as required by law and that, following the
execution of this Agreement, a joint press release shall be issued in order to
summarize these transactions and, following the publication of said press
release, each party undertakes not to make any public announcement without
having obtained the prior written consent of the other party to that effect,
except as otherwise may be required to comply with a party's legal disclosure
obligations.

           SECTION 5.04. Grant of Licenses to Licensor.

           (a) Licensee hereby grants to Licensor and its Affiliates a personal,
non-assignable, non-exclusive, royalty-free license (the "Licensor Limited
License") in the Licensed Territory to reproduce, edit, modify, adapt,
translate, exhibit, publish, transmit, participate in the transfer of,
reproduce, create derivative works from, distribute, perform, display, and
otherwise use Licensee content to create and distribute tutorials, help
messages, documentation and packaging for the Prosumer Product and the Consumer
Product and, to the extent agreed upon from time to time by Licensee, for any
other purposes without the right to sublicense for an initial term commencing on
the date of first commercial release of either the Prosumer Product or Consumer
Product, whichever occurs first, and terminating five (5) years from the date of
first commercial release of the Consumer Product, such initial term being

<PAGE>   5
renewable with the consent of both parties and according to terms and conditions
to be agreed upon by the parties, which Licensor Limited License Licensor hereby
accepts.

           (b) In consideration of the payment of the royalties provided in
Section 6.04 hereof, Licensee hereby grants to Licensor, with the right to grant
sublicenses to its Affiliates and to third parties approved in writing by
Licensee, such approval not to be unreasonably withheld, a personal,
non-assignable, non-exclusive license (the "Licensor General License"), in the
Licensed Territory, to reproduce and offer for sale or to license the same
Licensee content as Licensee distributes with the Consumer Product under the
Licensee License, but only bundled with the Consumer Product, for an initial
term of five (5) years from the date of first commercial release of the Consumer
Product, with Licensee content, by Licensee, such initial term being renewable
with the consent of both parties and according to terms and conditions to be
agreed upon by the parties, which Licensor General License the Licensor hereby
accepts. The Licensor General License also shall include any enhancements to the
Licensee content bundled with the Consumer Product as Licensee may from time to
time make, during the term of the Licensor General License. The Licensor General
License shall not include modification rights. All reproductions of the Licensee
content shall be performed by Licensor at its cost.

VI. OTHER CONSIDERATION; ROYALTY PAYMENTS

           SECTION 6.01. By Licensee.

           (a) Warrants. Licensee shall, simultaneously with the execution of
this Agreement, issue warrants to Licensor to purchase thirty thousand (30,000)
shares of Licensee's Common Stock, at the lower of the closing bid price on the
close of the transactions contemplated by this Agreement or the closing bid
price on April 10, 2000, to be exercised on a five year period, as per the terms
of the Purchase Warrants attached as Schedule 6.01 (a) hereto.


           (b) Software Purchase Agreement. Licensee hereby confirms the license
software purchase obligations set forth in that certain letter agreement dated
January 4, 2000 between the parties, and attached as Schedule 6.01(b) hereto
which licenses shall be governed by Licensor standard terms and conditions of
license applicable to such products. Payment for such licenses shall occur upon
execution of this Agreement by both parties.

           SECTION 6.02. By Licensor.

           (a) Restricted Securities. Licensor shall, simultaneously with the
execution of this Agreement, issue such number of warrants to Licensee entitling
Licensee to an equivalent number of its share capital representing approximately
two point ninety-six percent (2.96%) of the issued and outstanding capital stock
of Licensor at the time of the execution of this Agreement but after the
issuance to financial investors of the shares described in this section of which
one-third (1/3) shall be issued in consideration for Licensee's consulting
services previously rendered to Licensor and upon payment by Licensee to
Licensor of the licenses described in Section 6.01(b) hereto, one-third (1/3)
shall be issued in consideration for Licensee's engineering services in tranches
upon attainment of the milestones specified in Schedule 4.01(a) and in the
Warrant Agreement attached as Schedule 6.02(a), and one-third (1/3) shall be
issued in consideration for Licensee's promotional and marketing services in
tranches upon attainment of the milestones specified in Schedule 4.01(b) and in
the Purchase Warrants attached as Schedule 6.02(a). Said shares shall be
identical shares (in all respects, including without limitation, rights,
preferences, powers, privileges, restrictions, etc.) to the shares to be issued
to the financial investors contributing not less than One Million U.S. Dollars
(US$1,000,000) specifically allocated and to be applied to assist in the
development and launch of the WEBtoon Products (collectively, the "Securities").

           (b) Warrants. Licensor shall, simultaneously with the execution of
this Agreement, issue warrants to Licensee to purchase one hundred fifty
thousand (150,000) shares of Licensor's Securities, at a purchase price per
share of CDN$0.70, to be exercised on a five year period, as per the terms of
the Purchase Warrants

<PAGE>   6
attached as Schedule 6.02 (b) hereto. Said shares shall be identical shares (in
all respects, including without limitation, rights, preferences, powers,
privileges, restrictions, etc.) to the Securities.

           SECTION 6.03. Royalty Payments by Licensee.

           (a) Consumer Product Sales. In consideration of the Licensee License,
Licensee shall pay Licensor a royalty related solely to the revenues generated
from the sale or license of the Consumer Product bundled with the Licensee
content, in an amount equal to thirty percent (30%) of Licensee's net revenues
of the sale or license of the Consumer Product and of such Licensee content
after the recoupment by Licensee of all of its costs, and the allocation of an
off-the-top service/distribution fee of twenty percent (20%) of gross revenue.
When a sale or license is granted by Licensee to one of its Affiliates for
resale, re-licensing or sub-licensing, Licensee's net revenues shall be
calculated by taking the Affiliates' net revenues and not including the net
revenues earned by Licensee from such sale or license to its Affiliates. The
minimum royalty payable to Licensor on the sales or licenses of the Consumer
Product bundled with Licensee content packages shall be not less than Eight U.S.
Dollars (US$8.00) per unit; provided, however, that if the Eight U.S. Dollars
(US$8.00) per unit is not financially practicable due to marketplace factors,
Licensor and Licensee agree to negotiate in good faith an alternative mutually
acceptable royalty structure. Further, if any physical product needs to be
reproduced by Licensor, in case the Consumer Product is not downloaded from the
Licensor's site, the amount of Eight U.S. Dollars (US$8.00) shall be increased
to take into account the costs of reproduction, packaging and shipping of the
physical products including documentation. If such Consumer Product bundled with
Licensee content is bundled by an OEM, then (i) each such OEM shall be subject
to approval by Licensor; (ii) if the per unit royalty payable to Licensor in
such case is below Eight U.S. Dollars (US$8.00), the Consumer Product shall be
modified by Licensor for such purposes to only allow use of "skins" of Licensee
and of Licensee's animation templates but not of those of others and (iii)
Licensee and Licensor shall share equally all license fees, royalties,
commissions, or other payments made by such OEM (in this section, the "OEM
Payments").

           Licensee shall within thirty (30) days of the beginning of each
quarter of each calendar year, submit to Licensor a report indicating the number
of the Consumer Products sold or otherwise licensed by Licensee and the OEM
Payments received during the preceding quarter during the term of the Licensee
License, the amounts necessary to calculate the royalty and the OEM Payments and
the total amount due to Licensor as payment of the royalty and share of the OEM
Payments. Licensee shall at the same time as submitting the report remit to
Licensor any amount of royalty and OEM Payments due and payable, in US Currency.
Furthermore, Licensee shall remit to Licensor the sum due and payable under this
Section within thirty (30) days after the termination date of the Licensee
License accompanied with a report showing the above details.

           Any amount due but unpaid by Licensee to Licensor shall bear interest
at a rate equal to the yearly rate of interest which Royal Bank of Canada
announces publicly from time to time in Canada as its prime and lending rate
which is its reference rate for determining rates of interest applicable to
loans made by it in Canada in Canadian dollars, plus two percent (2%); such
interest shall be calculated from the date the report is due until the date the
full amount of the amount due is paid to Licensor.

           Licensee shall keep true and accurate records and books of account
containing all data reasonably required for the computing of and verification of
the royalty to be paid in accordance with this Section during the term of the
Licensee License and for a period of one (1) year thereafter. Licensee will at
all reasonable times during the term of the Licensee License and for a period of
one (1) year thereafter, but not more frequently than once in any twelve month
period, upon Licensor's request, produce the records and books for periodic
inspection by Licensor. Should the reported royalty differ from that actually
paid by Licensee then Licensor will immediately notify Licensee of the
difference and request clarification of same.

           The cost of any inspection referred to above shall be borne by
Licensor unless the royalty provided to Licensor was understated by more than
five percent (5%), in which case the cost of the inspection shall be paid by
Licensee.

           In the event that the said inspection reveals any underpayment of
royalty due to Licensor, Licensee will promptly pay Licensor the full amount of
that underpayment together with interest thereon at a rate equal to the yearly
rate of interest which Royal Bank of Canada announces publicly from time to time
in Canada as its prime and

<PAGE>   7
lending rate which is its reference rate for determining rates of interest
applicable to loans made by it in Canada in Canadian dollars, plus two percent
(2%); such interest shall be calculated from the date the report is due until
the date the full amount of that underpayment of royalty is paid to Licensor.

           SECTION 6.04 Royalty Payments by Licensor.

           (a) Consumer Product Sales. In consideration of the Licensor General
License, Licensor shall pay Licensee a royalty related solely to the revenues
generated from the sale or license of the Consumer Product bundled with the
Licensee content, in an amount equal to thirty percent (30%) of Licensor's net
revenues of the sale or license of the Consumer Product and of such Licensee
content after the recoupment by Licensor of all of its costs, and the allocation
of an off-the-top service/distribution fee of twenty percent (20%) of gross
revenue. When a sale or license is granted by Licensor to one of its Affiliates
for resale, re-licensing or sub-licensing, Licensor's net revenues shall be
calculated by taking the Affiliates' net revenues and not including the net
revenues earned by Licensor from such sale or license to its Affiliates. The
minimum royalty payable to Licensee on the sales or licenses of the Consumer
product bundled with Licensee content packages shall be not less than Eight U.S.
Dollars (US$8.00) per unit; provided, however, that if the Eight U.S. Dollars
(US$8.00) per unit is not financially practicable due to marketplace factors,
Licensor and Licensee agree to negotiate in good faith an alternative mutually
acceptable royalty structure. If such Consumer Product bundled with Licensee
content is bundled by an OEM, then (i) each such OEM shall be subject to
approval by Licensee; (ii) if the per unit royalty payable to Licensee in such
case is below Eight U.S. Dollars (US$8.00), the Consumer Product shall be
modified by Licensor for such purposes to only allow use of "skins" of Licensee
and of Licensee's animation templates but not of those of others and (iii)
Licensor and Licensee shall share equally all license fees, royalties,
commissions or other payments made by such OEM (in this section, the "OEM
Payments").

           Licensor shall within thirty (30) days of the beginning of each
quarter of each calendar year, submit to Licensee a report indicating the number
of the Consumer Products bundled with Licensee content sold or otherwise
licensed by Licensor and the OEM Payments received during the preceding quarter
during the term of the Licensor General License, the amounts necessary to
calculate the royalty and the OEM Payments and the total amount due to Licensee
as payment of the royalty and share of the OEM Payments. Licensor shall at the
same time as submitting the report remit to Licensee any amount of royalty and
OEM Payments due and payable, in US Currency. Furthermore, Licensor shall remit
to Licensee the sum due and payable under this Section within thirty (30) days
after the termination date of the Licensor General License accompanied with a
report showing the above details.

           Any amount due but unpaid by Licensor to Licensee shall bear interest
at a rate equal to the yearly rate of interest which Royal Bank of Canada
announces publicly from time to time in Canada as its prime and lending rate
which is its reference rate for determining rates of interest applicable to
loans made by it in Canada in Canadian dollars, plus two percent (2%); such
interest shall be calculated from the date the report is due until the date the
full amount of the amount due is paid to Licensee.

           Licensor shall keep true and accurate records and books of account
containing all data reasonably required for the computing of and verification of
the royalty to be paid in accordance with this Section during the term of the
Licensor General License and for a period of one (1) year thereafter. Licensor
will at all reasonable times during the term of the Licensor General License and
for a period of one (1) year thereafter, but not more frequently than once in
any twelve month period, upon Licensee's request, produce the records and books
for periodic inspection by Licensee. Should the reported royalty differ from
that actually paid by Licensor then Licensee will immediately notify Licensor of
the difference and request clarification of same.

           The cost of any inspection referred to above shall be borne by
Licensee unless the royalty provided to Licensee was understated by more than
five percent (5 %), in which case the cost of the inspection shall be paid by
Licensor.

           In the event that the said inspection reveals any underpayment of
royalty due to Licensee, Licensor will promptly pay Licensee the full amount of
that underpayment together with interest thereon at a rate equal to the yearly
rate of interest which Royal Bank of Canada announces publicly from time to time
in Canada as its prime and lending rate which is its reference rate for
determining rates of interest applicable to loans made by it in Canada in

<PAGE>   8
Canadian dollars, plus two percent (2%); such interest shall be calculated from
the date the report is due until the date the full amount of that underpayment
of royalty is paid to Licensee.

VII. REPRESENTATIONS AND WARRANTIES

           SECTION 7.01. Licensor Representations and Warranties . Licensor
hereby represents and warrants to Licensee:

           (a) it will be the sole and beneficial owner of the WEBtoon System
except for portions of it which may be licensed from third parties and it has
the right to grant the Licensee License;

           (b) the WEBtoon System will include only information that Licensor is
authorized to use and to authorize Licensee to use;

           (c) the WEBtoon System will not constitute a libel or defamation, or
conflict with or infringe upon or violate any copyrights, trademark rights,
trade secret rights, rights of publicity or privacy or other third-party rights
except patent rights;

           (d) the WEBtoon System will not give rise to any claims against
Licensee for any guild or other royalty fees or payments of any kind;

           (e) except with respect to the Licensee content, all obligations owed
to third parties with respect to the activities contemplated to be undertaken by
Licensor under this Agreement with respect to the WEBtoon System or by Licensee
under the Licensee License, including but not limited to all third-party
licensing fees, will be fully paid up by Licensor so that Licensee will not have
any obligations with respect thereto;

           (f) the WEBtoon System will be free from any pre-programmed devices,
such as "viruses" or other such devices, that will cause any component thereof
to be erased or become inoperable or incapable of processing or affect
operations of other systems; at the time of delivery to Licensee or an end-user
as is detectable by use of a commercially released up to date virus detection
software as used by Licensor;

           (g) it has the power and authority to enter into and perform its
obligations under this Agreement without the consent of any third party or that
it has obtained any required consent;

           (h) this Agreement has been duly executed and delivered and
constitutes (or will constitute, as the case may be) the legal, valid and
binding obligation of the Licensor, enforceable against it in accordance with
its terms; and

           (i) the execution and performance of this Agreement by Licensor will
not violate any agreement to which Licensor is a party.

           SECTION 7.02. Licensee Representations and Warranties. Licensee
hereby represents and warrants to Licensor:

           (a) it will be the sole and beneficial owner of the Licensee content
except for portions of it which may be licensed from third parties and it has
the right to grant the Licensor Limited License and the Licensor General
License;

           (b) the Licensee content will include only information that Licensee
is authorized to use and to authorize Licensor to use;

<PAGE>   9
           (c) the Licensee content will not constitute a libel or defamation,
or conflict with or infringe upon or violate any copyrights, trademark rights,
trade secret rights, rights of publicity or privacy or other third-party rights
except patent rights;


           (d) the Licensee content will not give rise to any claims against
Licensor for any guild or other royalty fees or payments of any kind;

           (e) except with respect to the WEBtoon System, all obligations owed
to third parties with respect to the activities contemplated to be undertaken by
Licensee under this Agreement with respect to the Licensee content or by
Licensor under the Licensor Limited License or Licensor General License,
including but not limited to all third-party licensing fees, will be fully paid
up by Licensee so that Licensor will not have any obligations with respect
thereto;

           (f) the Licensee content will be free from any pre-programmed
devices, such as "viruses" or other such devices, that will cause any component
thereof to be erased or become inoperable or incapable of processing or affect
operations of other systems; at the time of delivery to Licensor or an end-user
as is detectable by use of a commercially released up to date virus detection
software as used by Licensee;

           (g) it has the power and authority to enter into and perform its
obligations under this Agreement without the consent of any third party or that
it has obtained any required consent;

           (h) this Agreement has been duly executed and delivered and
constitutes (or will constitute, as the case may be) the legal, valid and
binding obligation of the Licensee, enforceable against it in accordance with
its terms;

           (i) the execution and performance of this Agreement by Licensee will
not violate any agreement to which Licensee is a party; and

           (j) it is acquiring the Securities and Warrants for its own account
for investment purposes, and not with a view to selling or otherwise
distributing the Warrants (or underlying shares).

           SECTION 7.04. Disclaimer of Warranty. THE WARRANTIES SET FORTH IN
THIS AGREEMENT ARE LIMITED WARRANTIES AND ARE THE ONLY WARRANTIES MADE BY THE
RESPECTIVE PARTIES. THE PARTIES EXPRESSLY DISCLAIM, AND HEREBY EXPRESSLY WAIVE,
ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION,
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.

           SECTION 7.05 Survival of Representations and Warranties. All
representations and warranties of the parties shall survive for a period of one
(1) year after the termination of this Agreement or the expiration of all
licenses granted under this Agreement whichever occurs first.

VIIA. CONDITIONS PRECEDENT TO CLOSING

           The closing (the "Closing") of the transactions contemplated by this
Agreement shall take place at the offices of the Licensor, on the day on which
the last of the conditions set forth in this Article VIIA is fulfilled or
waived, but not later than April 26, 2000 (the "Closing Date"), or at such other
place, date or time as the parties hereto may otherwise mutually agree. The
Closing shall be effective as of the close of business on the day of the Closing
Date.

           The obligations of the Licensee under this Agreement are, at the
option of the Licensee, subject to the satisfaction, at or prior to the Closing
Date of the condition that the Licensor shall have received equity financing
from Canadian institutional investors in an amount not less than One Million
Five Hundred Thousand Canadian Dollars (CAN$1,500,000) specifically allocated
and to be applied to the development and launch of the WEBtoon System and

<PAGE>   10
that Licensee shall have obtained any necessary exemption from the Quebec
Securities Commission for the issue of the Licensor Purchase Warrants.

           The obligations of the Licensor under this Agreement are, at the
option of the Licensor, subject to the satisfaction, at or prior to the Closing
Date, of the condition that the Licensor shall have obtained any necessary
exemption from the Quebec Securities Commission for the issue of the Licensee
Purchase Warrants.

VIII. INDEMNIFICATION

           SECTION 8.01. Indemnification by Licensee. Licensee agrees to
indemnify, defend, and hold harmless Licensor, its directors, officers,
employees and agents, and defend any action brought against same with respect to
any third party claim, demand, cause of action, debt or liability, including
reasonable attorneys' fees, to the extent that such action is based upon (i) a
claim that any of the Licensee content as provided by Licensee hereunder or the
exercise of any rights granted by Licensee to the Licensee content hereunder
(provided that Licensor has followed Licensee's instructions included with such
Licensee content) infringes or violates any rights of third parties, excluding
patent rights but including, without limitation, rights of publicity, rights of
privacy, copyrights, trademarks or trade secrets , (ii) Licensee's breach of any
covenants, warranties or representations made herein, (iii) the negligence or
willful misconduct of Licensee, and/or (iv) any breach of this Agreement by
Licensee or any act or omission or alleged act or alleged omission by Licensee
in connection with this Agreement.

           SECTION 8.02. Indemnification by Licensor. Licensor agrees to
indemnify, defend, and hold harmless Licensee, its directors, officers,
employees and agents, and defend any action brought against same with respect to
any claim, demand, cause of action, debt or liability, including reasonable
attorneys' fees, to the extent that such action arises out of or in connection
with (i) a claim that any of the WEBtoon System or the exercise of any rights
granted by Licensor to the Consumer Product hereunder (provided that Licensor
has followed Licensee's instructions included with such Consumer Product)
infringes or violates any rights of third parties, excluding patent rights but
including, without limitation, rights of publicity, rights of privacy,
copyrights, trademarks or trade secrets, (ii) Licensor's breach of any
covenants, warranties or representations made herein, (iii) the negligence or
willful misconduct of Licensor; and/or (iv) any breach of this Agreement by
Licensor or any act or omission or alleged act or alleged omission by Licensor
in connection with this Agreement.

           SECTION 8.03. Notice. In claiming any indemnification hereunder, an
indemnified party shall promptly provide the indemnifying party with written
notice of any claim which the indemnified party believes falls within the scope
of the foregoing Sections. An indemnified party may, at its own expense, assist
in the defense if it so chooses, provided that the indemnifying party shall
control such defense and all negotiations relative to the settlement of any such
claim and further provided that any settlement intended to bind an indemnified
party shall not be final without the indemnified party's written consent, which
shall not be unreasonably withheld.

           SECTION 8.04. Limitation of Liability. NEITHER PARTY SHALL HAVE
LIABILITY UNDER ANY CIRCUMSTANCES FOR CONSEQUENTIAL, EXEMPLARY, SPECIAL,
INCIDENTAL, OR PUNITIVE DAMAGES. THIS LIMIT OF LIABILITY IS A MATERIAL TERM OF
THIS AGREEMENT AND THE PARTIES' EXECUTION OF THIS AGREEMENT WAS DEPENDENT UPON
ITS INCLUSION. THE LIABILITY OF EACH PARTY HEREUNDER, INCLUDING UNDER ARTICLE
VII AND SECTIONS 8.01 AND 8.02 SHALL NOT EXCEED IN THE AGGREGATE THE ROYALTIES
PAID BY LICENSEE TO LICENSOR FOR THE LICENSEE LICENSE GRANTED HEREUNDER.

IX. TERMINATION

           SECTION 9.01. Termination of Agreement. In addition to the provisions
of Section 3.02, either party may terminate this Agreement in the event of the
occurrence of any of the following events:

           (a) effective upon delivery of thirty (30) days' written notice of
termination, upon the occurrence of the breach by the other party of any of its
obligations hereunder, if such breach continues for thirty (30) days after
receipt by the other party of notice defining such breach in reasonable detail,
unless such breach

<PAGE>   11
cannot with due diligence be cured within such 30-day period, in which case such
failure shall not be deemed to continue if the other party proceeds promptly and
with due diligence to cure the failure and diligently completes the curing
thereof; and

           (b) effective upon delivery of one (1) day written notice of
termination, upon the occurrence of the filing of a voluntary petition in
bankruptcy by other party or an involuntary petition in bankruptcy is filed
against other party and is not dismissed within sixty (60) days thereafter, or,
if a receiver or trustee of any of other party's property is appointed and not
vacated within sixty (60) days thereafter, or if other party shall be adjudged
insolvent by final judgment, or if an assignment shall be made of other party's
property for the benefit of creditors, or in the event of any other
circumstances which prevent effective performance by other party under this
Agreement.

           SECTION 9.02. Effect of Termination.

           (a) Termination of this Agreement shall not release or discharge
either party hereto from any obligation, debt or liability which may previously
have occurred and remains to be performed upon the date of termination.
Termination of this Agreement shall not affect any end-user license to use the
Consumer Product granted prior to the date of termination of this Agreement.

           (b) Effective on the termination of this Agreement, Licensee shall
return to Licensor any and all papers, material and property including but not
limited to, the price lists of the products, the advertising material,
catalogues, technical and promotional material obtained from Licensor or used by
Licensee during the term of this Agreement, without making or retaining copies
thereof.

           (c) Effective on the termination of this Agreement, all warrants or
options granted by either party which have not vested shall be automatically
cancelled.

X. GENERAL PROVISIONS

           SECTION 10.01. Entire Agreement; Amendments. This Agreement
(including the exhibits, schedules and other documents referred to herein)
contains the entire agreement among the parties hereto with respect to the
subject matter hereof. This Agreement may be changed only by an instrument in
writing signed by the party against whom enforcement of any waiver, change,
modification or discharge is sought.

           SECTION 10.02. Notice. All notices, requests, demands and other
communications shall be in writing and deemed to have been duly given when
delivered personally, by facsimile transmission upon receipt of a "clear" or
"ok" transmission notice, or three days following deposit in the United States
mail, first class, postage prepaid, duly addressed:

         If to Licensee:                  Stan Lee Media, Inc.
                                          15821 Ventura Boulevard, Suite 675
                                          Encino, CA   91436
                                          Attention: Chief Operating Officer
                                          Fax: (818) 461-1760

         If to Licensor:                  Toon Boom Technologies, Inc.
                                          7, Laurier Street
                                          Montreal (Quebec)
                                          CANADA H2T 1E4
                                          Attention: Chief Executive Officer
                                          Fax: (514) 278-2666

Any party may, pursuant to written notice in compliance with this Section, alter
or change the address, facsimile number or the identity of the person to whom
any notice is to be sent.



<PAGE>   12
           SECTION 10.03. Further Assurances. Each party hereto shall do such
further acts, including executing any and all documents which may be necessary
or expedient in order to further the purposes of this Agreement.

           SECTION 10.04. Governing Law; Venue. This Agreement shall be governed
by, and interpreted in accordance with, the laws of the State of Illinois. All
disputes or controversies arising out of or in connection with this Agreement or
the transactions contemplated herein shall be finally settled to the exclusion
of the courts under the Rules of Arbitration of International Chamber of
Commerce by one or more arbitrators appointed in accordance with said Rules and
all arbitration proceedings shall take place in Chicago, Illinois.

           SECTION 10.05. Severability. In case any one or more of the
provisions or any portion of any provision contained in this Agreement should be
found to be invalid, illegal or unenforceable in any respect, such provision or
portion thereof shall be modified or deleted in such manner so as to afford the
parties the fullest protection commensurate with making this Agreement, as
modified, legal and enforceable under applicable laws, and the validity,
legality and enforceability of any such provision shall not in any way be
affected or impaired thereby, such remaining provisions or portion of any such
provision construed as severable and independent thereof.

           SECTION 10.06. Article and Section Headings. The headings of Articles
and Sections of this Agreement are for convenient reference only, and shall not
in any manner govern, limit, modify or construe this Agreement or any part or
provisions hereof or otherwise be given any legal effect.

           SECTION 10.07. Pronouns; Gender; Number. When the context so requires
in this Agreement, the masculine gender includes the feminine and/or the neuter,
and the singular number includes the plural.

           SECTION 10.08. No Waiver. No term or condition of this Agreement
shall be deemed to have been waived, nor shall any party hereto be estopped from
enforcing any provision of this Agreement, except by written instrument of the
party charged with such waiver or estoppel. Any written waiver shall not be
deemed a continuing waiver unless specifically stated, shall operate only as to
the specific term or condition waived and shall not constitute a waiver of such
term or condition for the future or as to any act other than that specifically
waived.

           SECTION 10.09. Limited Assignment. This Agreement shall be binding
upon and inure to the benefit of the parties named herein. No party may assign
either this Agreement or any of its rights, interests, or obligations hereunder
without the prior written approval of the other party; provided, however, that
either party may assign any or all of its rights and interests hereunder to one
or more of its Affiliates.

           SECTION 10.10. Affiliates. The term "Affiliate" as used in this
Agreement with respect to any party means any corporation, joint venture,
partnership, trust, or other business entity directly or indirectly,
controlling, controlled by, or under common control with, such party, control
meaning owning a majority of the common stock of such corporation, joint
venture, partnership, trust, or other business entity or otherwise being in a
position to direct its affairs.

           SECTION 10.11. Attorneys' Fees. If either party brings an action for
judicial review or enforcement of this Agreement, the prevailing party in any
such action, trial or appeal shall be entitled to its reasonable attorneys' fees
to be paid by the nonprevailing party as fixed by the court.

           SECTION 10.12. No Third-Party Beneficiaries. This Agreement shall not
confer any rights or remedies upon any person other than the parties.

           SECTION 10.13. Expenses. Each party shall bear its own costs and
expenses (including legal fees and expenses) incurred in connection with this
Agreement and the transactions contemplated hereby.

           SECTION 10.14. Construction. The language used in this Agreement will
be deemed to be the language chosen by the parties to express their mutual
intent, and no rule of strict construction shall be applied against any party.
Each party has been represented by independent counsel who have carefully
negotiated the provisions of this

<PAGE>   13
Agreement, or has had an opportunity to be represented by independent counsel
and has knowingly, voluntarily and willingly waived the right to such
independent counsel. Any reference to any federal, state, local, or foreign
statute or law shall be deemed also to refer to all rules and regulations
promulgated thereunder, unless the context requires otherwise. The parties
intend that each representation, warranty, and covenant contained herein shall
have independent significance. If any party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
party has not breached shall not detract from or mitigate the fact that the
party is in breach of the first representation, warranty, or covenant.

           SECTION 10.15. Incorporation of Exhibits and Schedules. The exhibits
and schedules identified in this Agreement are incorporated herein by reference
and made a part hereof.

           SECTION 10.16. Specific Performance. Each party acknowledges and
agrees that the other party would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their specific
terms or otherwise are breached. Accordingly, each party agrees that the other
party shall be entitled to an injunction or injunctions to prevent breaches of
the provisions of this Agreement and to enforce specifically this Agreement and
the terms and provisions hereof in any action instituted in any court of the
United States or Canada or any state or province thereof having jurisdiction
over the parties and the matter, in addition to any other remedy to which they
may be entitled, at law or in equity.

           SECTION 10.17. Independent Contractors. Each party and its personnel,
in performance of this Agreement, are acting as independent contractors and not
as employees or agents of the other party. No personnel of either party shall
have the authority to bind the other party or otherwise to create legal
obligations on behalf of the other party .

           SECTION 10.18. Force Majeure. If the performance of any part of this
Agreement by either party is prevented, hindered, delayed or otherwise made
impracticable by reason of any flood, riot, fire, judicial or governmental
action, labor disputes, act of God or any other causes beyond the reasonable
control of either party, that party shall be excused from such to the extent
that it is prevented, hindered or delayed by such causes, provided that the
party claiming force majeure has taken all reasonable measures to avoid such
cause.

           SECTION 10.19. Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument. Each party hereto, and its
respective successors and assigns, shall be authorized to rely upon the
signatures of all of the parties hereto which are delivered by facsimile as
constituting a duly authorized, irrevocable, actual, current delivery of this
Agreement with original ink signatures of each person and entity; provided,
however, that each party hereto that delivers such facsimile signatures to
another party hereto, covenants and agrees that it shall deliver an executed
original of the same to the party so receiving the previous facsimile signatures
within five (5) days after delivery of such facsimile signatures.



<PAGE>   14
         IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement, by their duly authorized representatives, all as of the date first
above written.



                         LICENSEE:     STAN LEE MEDIA, INC.

                                   BY  /s/ GILL CHAMPION
                                       -----------------------------------------
                                       Gill Champion,
                                       Chief Operating Officer


                     LICENSOR:     TOON BOOM TECHNOLOGIES, INC.,

                                   BY: /s/ JACQUES BILODEAU
                                   ---------------------------------------------
                                   Jacques Bilodeau,
                                   President and Chief Executive Officer

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