1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to __________________ Commission file number 0-28530 STAN LEE MEDIA, INC. (Exact name of small business issuer as specified in its charter) Colorado 84-1341980 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 15821 Ventura Boulevard, Suite 675, Encino, California, 91436 (Address of principal executive offices) (818) 461-1757 (Issuer's telephone number, including area code) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] ---- ----- The number of shares outstanding of the issuer's common stock as of August 1, 2000, was 12,581,048.

2 INDEX STAN LEE MEDIA, INC. (a development stage company) <TABLE> <CAPTION> Page ---- <S> <C> PART I. Financial Information ----------------------------- Item 1. Financial Statements Consolidated Balance sheets - June 30, 2000 (unaudited) and December 31, 1999; 3 Consolidated Statements of operations (unaudited) - Six months ended June 30, 2000 and 1999 and the period from inception (October 13, 1998 to June 30, 2000); 4 Consolidated Statements of operations (unaudited) - Three months ended June 30, 2000 and 1999; 5 Consolidated Statements of cash flows (unaudited) - Six months ended June 30, 2000 and 1999 and the period from inception(October 13, 1998 to June 30, 2000); 6 Notes to financial statements 7 Item 2. Management's Discussion and Analysis or Plan of operations 15 PART II. Other Information 17 --------------------------- Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K </TABLE> F-2

3 STAN LEE MEDIA, INC. AND SUBSIDIARY (a development stage company) CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> June 30 , 2000 December 31, (unaudited) 1999 ------------- ----------- <S> <C> <C> Assets Current assets Cash and cash equivalents $ 149,109 $ 2,020,162 Accounts receivable, net of $32,922 allowance 260,986 -- Inventory 11,883 11,883 Prepaid expenses and other current assets 116,140 10,450 ------------------------------- Total current assets 538,118 2,042,495 Property and equipment, net of accumulated depreciation (Note 3) 1,735,168 602,009 Other assets Production costs 1,086,186 -- Debt offering costs -- 17,756 Licensing rights (net of $25,650 and $5,989 of accumulated amortization) 155,718 173,686 Trademarks 189,921 103,636 Deposits 132,131 47,464 ------------------------------- Total other assets 1,563,956 342,542 ------------------------------- $ 3,837,242 $ 2,987,046 =============================== Liabilities and Shareholders' Equity Current liabilities Accounts payable and accrued liabilities $ 976,128 $ 172,267 Obligations under capital leases, current portion (Note 5) 103,585 45,864 Notes payable (Note 4) 2,555,000 500,000 ------------------------------- Total current liabilities 3,634,713 718,131 ------------------------------- Convertible Promissory Note (Note 4) 2,500,000 -- Obligations under capital leases, long-term portion (Note 5) 317,698 80,979 Commitments (Note 5) Shareholders' equity (Notes 1 and 6) Series A Convertible Preferred stock, par value $0.001, authorized 1,500,000 issued and outstanding 714,286 and none; liquidation preference of $7 per share 5,000,002 5,000,002 Common stock, par value $0.001, authorized 100,000,000 issued and outstanding 11,971,694 and 8,500,000 11,972 11,433 Additional paid-in capital 12,864,359 5,137,787 Deficit accumulated during the development stage (20,491,502) (7,961,286) ------------------------------- Total shareholders' equity (2,615,169) 2,187,936 ------------------------------- $ 3,837,242 $ 2,987,046 =============================== </TABLE> See accompanying notes to financial statements. F-3

4 STAN LEE MEDIA, INC. AND SUBSIDIARY (a development stage company) CONSOLIDATED STATEMENTS OF OPERATIONS <TABLE> <CAPTION> Three Months Ended June 30, 2000 1999 (unaudited) (unaudited) ------------------------------ <S> <C> <C> Revenue Comic book sales $ 51,556 $ -- Webisode licenses 390,799 -- Other sales 7,845 -- ----------------------------- 450,200 -- ----------------------------- Operating expenses: Cost of comic books -- -- Cost of webisodes 742,295 -- Cost of other sales -- -- Development costs 1,905,305 -- General and administrative 4,717,960 572,706 ----------------------------- Total operating expenses 7,365,559 572,706 ----------------------------- Operating loss (6,915,360) (572,706) Net interest expense (200,278) (535) ----------------------------- Net loss $(7,115,638) $(573,241) ============================= Basic and diluted net loss per share $ (0.60) $ (0.07) ============================= Weighted average number of shares used in computing basic and diluted net loss per share 11,916,974 8,199,726 ============================= </TABLE> See accompanying notes to financial statements. F-4

5 STAN LEE MEDIA, INC. AND SUBSIDIARY (a development stage company) CONSOLIDATED STATEMENTS OF OPERATIONS <TABLE> <CAPTION> Six Months Ended Period from Inception June 30, (October 13, 1998) to 2000 1999 June 30, 2000 (unaudited) (unaudited) (unaudited) ---------------------------------------------------- <S> <C> <C> <C> Revenue Comic book sales $ 256,121 $ -- $ 256,121 Webisode licenses 463,360 -- 463,360 Other sales 26,878 -- 57,483 ----------------------------------------------------- 746,359 -- 776,964 ----------------------------------------------------- Operating expenses: Cost of comic books 58,904 -- 58,904 Cost of webisodes 814,856 -- 814,856 Cost of other sales 59,790 -- 61,065 Development costs 2,735,804 -- 3,878,182 General and administrative 9,405,729 794,634 16,172,226 ----------------------------------------------------- Total operating expenses 13,075,083 794,634 20,985,233 ----------------------------------------------------- Operating loss (12,328,724) (794,634) (20,208,269) Net interest expense (201,493) (637) (283,234) =---------------------------------------------------- Net loss $(12,530,217) $ (795,271) $(20,491,503) ===================================================== Basic and diluted net loss per share $ (1.06) $ (0.09) ================================ Weighted average number of shares used in computing basic and diluted net loss per share 11,801,147 8,691,781 ================================ </TABLE> See accompanying notes to financial statements. F-5

6 STAN LEE MEDIA, INC. AND SUBSIDIARY (a development stage company) CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Six Months Ended Period from Inception June 30, (October 13, 1998) to 2000 1999 June 30, 2000 (unaudited) (unaudited) (unaudited) ------------------------------------------------------ <S> <C> <C> <C> Cash flows from operating activities Net loss $(12,530,217) $ (795,271) $(20,491,503) Adjustments to reconcile net loss to net cash and cash equivalents provided by (used in) operating activities: Non-cash items resulting from issuance of common stock, stock options and warrants 3,235,998 400 3,236,006 Depreciation and amortization 230,157 12,290 230,150 Allowance for accounts receivable 16,833 -- 16,833 Changes in: Inventory -- -- (11,883) Accounts receivable (277,818) -- (277,818) Production costs (1,086,186) -- (1,086,186) Prepaid expenses and other current assets (105,690) (2,500) (116,140) Deposits (84,668) -- (132,132) Debt offering costs -- -- -- Accounts payable 803,862 75,464 976,129 -------------------------------------------------- Net cash used in operating activities (9,797,729) (709,617) (17,656,544) -------------------------------------------------- Cash flows from investing activities Purchase of property and equipment (1,022,111) (122,613) (1,624,121) Licensing rights -- -- (173,686) Application for trademarks (86,285) (6,638) (189,921) -------------------------------------------------- Net cash used in investing activities (1,108,396) (129,251) (1,987,728) -------------------------------------------------- Cash flows from financing activities Debt offering costs 245,030 -- 227,274 Proceeds from notes and loans payable 3,230,000 30,000 3,730,000 Repayment of notes and loans payable (1,175,000) -- (1,175,000) Proceeds from convertible note 2,500,000 -- -- Payments under capital lease obligations (28,789) 71,815 98,054 Receipt of subscriptions -- 564,000 2,500,000 Issuance of preferred stock -- -- 5,000,002 Proceeds from issuance of common stock 4,263,831 275,000 9,413,051 -------------------------------------------------- Net cash provided by financing activities: 9,035,072 940,815 19,793,381 -------------------------------------------------- Increase (decrease) in cash and cash equivalents (1,871,053) 101,947 149,109 Cash and cash equivalents, beginning of period 2,020,162 21,276 -- -------------------------------------------------- Cash and cash equivalents, end of period $ 149,109 $ 123,223 $ 149,109 ================================================== </TABLE> See accompanying notes to financial statements. F-6

7 STAN LEE MEDIA, INC. AND SUBSIDIARY (a development stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF BUSINESS Stan Lee Media, Inc. ("SLM" or the "Company") is an Internet-based, globally branded digital entertainment company founded by comic book Icon Stan Lee to conceive, create, co-create and produce characters and story franchises for entertainment, merchandising and promotional exploitation worldwide. Stan Lee Entertainment, Inc. ("Entertainment") was incorporated in the State of Delaware on October 13, 1998. Stan Lee Media, Inc. ("SLM Delaware") was originally incorporated in the State of Delaware on January 14, 1999. Entertainment was merged with SLM Delaware on April 14, 1999 with SLM Delaware being the surviving corporation. Effective July 23, 1999, SLM Delaware engaged in a share exchange with Boulder Capital Opportunities, Inc. ("Boulder") a public company, incorporated in the State of Colorado. This share exchange was accounted for as a reverse acquisition in which SLM Delaware is considered the predecessor of the Company because it had operations at the time of the share exchange. The new name of the company after the share exchange is Stan Lee Media, Inc. ("SLM" or the "Company"). In this share exchange, the shareholders of SLM Delaware received 8,500,000 shares of common stock of Boulder in exchange for all of the issued and outstanding shares of SLM Delaware common stock. The number of shares outstanding after this transaction was 11,025,000. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements of the Company include the accounts of Stan Lee Media, Inc., and its wholly owned subsidiary. All significant intercompany balances and transactions have been eliminated. BASIS OF PRESENTATION The financial statements for the six months ended June 30, 2000 and 1999 include all adjustments, consisting of normal recurring adjustments, which management considers necessary for a fair presentation of the results of these periods. These financial statements have been prepared consistently with the accounting policies described in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999, as filed with the Securities and Exchange Commission, and should be read in conjunction with this Quarterly Report on Form 10-QSB. F-7

8 STAN LEE MEDIA, INC. AND SUBSIDIARY (a development stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) BASIC and DILUTED EARNINGS (LOSS) PER SHARE Basic Earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted income per share is calculated by dividing net income by the basic shares outstanding and all dilutive securities, including stock options, warrants, convertible notes and preferred stock, but does not include the impact of potential common shares that would be anti-dilutive. For all periods presented, potential dilutive securities were not included in the earnings per share calculation since their effect would be anti-dilutive. Basic and diluted earnings per share are the same for all periods presented. NOTE 3 - PROPERTY AND EQUIPMENT Property and equipment consists of the following: <TABLE> <CAPTION> June 30, December 31, Estimated 2000 1999 Useful Life (unaudited) ---------------------------------------------- <S> <C> <C> <C> Automobile $ 15,000 $ 15,000 5 years Computer equipment 615,615 103,249 3 years Computer software 336,666 18,011 3 years Accounting software 92,756 -- 3 years Furniture and fixtures 239,649 187,960 5 years Leasehold improvements 213,044 166,349 5 years Equipment under capital leases 486,403 190,036 ---------------------------------------------- 1,999,133 680,605 Less accumulated depreciation and amortization 263,965 78,596 ---------------------------------------------- $1,735,168 $602,009 ============================================== </TABLE> At June 30, 2000, accumulated depreciation and amortization included $92,721 related to assets under capital leases. NOTE 4 - DEBT SHORT-TERM FINANCING During April 2000, SLM executed $200,000 of unsecured promissory notes (of which $100,000 was with an existing SLM shareholder). The loans are due and payable in sixty days with interest at the rate of 8% per annum, with the exception that no interest will be due and payable for the first thirty days after the notes were issued. Pursuant to the promissory notes, warrants for 8,000 shares of SLM's common stock exercisable at $12.00 per share and expiring three years from the date of the notes were granted to the Note holders. Of the $200,000 of notes $73,000 was offset by the exercise of warrants by certain noteholders, and the balance due of $127,000 was extended and subsequently paid off. F-8

9 STAN LEE MEDIA, INC. AND SUBSIDIARY (a development stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - DEBT (CONTINUED) CONVERTIBLE PROMISSORY NOTE On April 14, 2000 the company entered into an unsecured convertible promissory note in the amount of $2,500,000 with a third party. The terms of the note call for SLM to pay interest at 6% per annum with interest payable in cash or SLM common stock at the option of SLM. Interest is payable quarterly with the first payment due on September 30, 2000. The note matures on April 30, 2002 and is not redeemable by the holder prior to maturity. The note can be prepaid by SLM prior to maturity but only with the consent of the holder of the note. The holder of the note was also issued five-year warrants to purchase 50,000 shares of common stock at an exercise price of $14.33 per share. The fair value of $351,234 of warrants issued in conjunction with this note was expensed as debt offering costs. The notes are convertible into SLM common stock at a price equal to the lower of $13.13 or at a price based on a 20% discount to the market at time of conversion. Any portion of the note remaining unconverted at the maturity date shall automatically be converted on such date. Certain registration rights were granted under the terms of the note. Finder's fees and expenses totaling $232,500 were paid in conjunction with this financing. Five-year warrants to purchase 20,000 shares of common stock at an exercise price of $14.36 per share were also issued to the finder and underwriter. The fair value of $140,452 of warrants issued in conjunction with this note was expensed as debt offering costs. REVOLVING CREDIT AGREEMENTS During May and June, 2000 the company borrowed $1,950,000 under two revolving credit agreements. These credit lines bear interest at LIBOR, plus two percent (2%) per annum. This amount has subsequently been repaid. RELATED PARTY TRANSACTIONS SLM received loans from related parties of $480,000 at June 30, 2000 as working capital. The balances are due on demand with no specific payment provisions. This amount has subsequently been repaid. F-9

10 STAN LEE MEDIA, INC. AND SUBSIDIARY (a development stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 - COMMITMENTS and CONTINGENCIES EQUIPMENT LEASES SLM entered into various capital leases for computers and related equipment. The leases range from 24 to 60 month terms. Minimum future lease payments under capital leases as of June 30, 2000 for each of the next five years and in aggregate are: <TABLE> <CAPTION> Year ended Amount -------- <S> <C> 2000 $142,885 2001 201,388 2002 159,965 2003 23,570 2004 1,443 -------- Total minimum payments $529,251 Less: Amount representing interest (107,968) -------- Present value of net minimum lease payments $421,283 ======== </TABLE> CONTINGENCIES The company is in dispute over approximately $270,000 in invoices in connection with a provider of promotional services. SLM is also in negotiations with a former employee regarding a wrongful termination claim. The cost to the company cannot be accurately determined at this time. No provision for either of the above contingencies has been made in these financial statements F-10

11 STAN LEE MEDIA, INC. AND SUBSIDIARY (a development stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - SHAREHOLDERS' EQUITY SLM has 100,000,000 authorized shares of $0.001 par value common stock and 10,000,000 shares of $0.001 par value preferred stock. Of the total preferred stock, 1,500,000 shares were designated as Series A and 4,000 shares were designated as Series B. COMMON STOCK During the quarter ended June 30, 2000 warrants for 105,332 shares of common stock were exercised for total consideration of $554,660 of which $139,995 was for cash and $414,665 represented exercises by conversion of promissory notes. On April 14, 2000 SLM issued 10,000 shares of common stock at $0.001 per share to an employee of the company at fair value on the date of issuance. STOCK OPTIONS AND WARRANTS During April and June 2000, SLM entered into five-year warrant agreements with certain consultants to purchase 250,000 shares of common stock at $11.00 per share, the fair market value at the dates of grant. The warrants are subject to various vesting terms ranging from immediate to vesting within six months subject to a performance clause. The fair value of $1,868,782 of these warrants was charged to operations during this quarter. F-11

12 STAN LEE MEDIA, INC. AND SUBSIDIARY (a development stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 - SIGNIFICANT BUSINESS AGREEMENTS PARAMOUNT PARKS On May 5, 2000 Paramount Parks (a unit of Viacom) and SLM in association with Blur studio, partnered to create, produce and distribute a large format, 3-D simulator film incorporating The 7th Portal concept and characters. The project will debut in the spring of 2001 at all U.S-based Paramount Parks. Under the agreement Paramount will sell branded merchandise and provide links between its own websites and those of SLM. The attraction will also be distributed to a worldwide network of simulation theaters. Paramount Parks and SLM are committed to invest $500,000 each to cover production costs and the parties to the agreement will share in net revenues derived from gross receipts and merchandise sales derived from the project. MARK CANTON On June 2, 2000 SLM and Mark Canton, a film producer and former studio head involved in such films as "Batman" and "Men in Black", entered into an agreement to develop the 7th Portal for a theatrical motion picture. FOX LATIN AMERICA On June 14, 2000 FOX Latin America and FOX Kids Latin America formed a strategic alliance with SLM to repurpose SLM's content and to create original branded content for distribution on the Internet and television outlets throughout the Latin American Region. FOX will work with SLM in two specific areas of development, localizing existing SLM content for Latin American audiences and co-creating new properties for the region. Revenues derived from this venture shall be split 50/50 between the parties after deduction of distribution fees. F-12

13 STAN LEE MEDIA, INC. AND SUBSIDIARY (a development stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - SUBSEQUENT EVENTS COMMON STOCK On July 31, 2000 SLM issued 505,051 shares of its restricted common stock to a strategic investor at $9.90 per share for a total purchase price of $5,000,000. With this private placement, SLM issued five-year warrants to purchase an additional 100,000 shares of common stock at an exercise price of $11.25 per share. Certain registration rights were granted under the terms of this private placement. Fees totaling $300,000 were paid to a finder regarding this transaction. CONVERTIBLE PREFERRED STOCK On August 2, 2000, SLM issued 4,000 shares of its Series B 4% Cumulative Convertible Preferred Stock for gross proceeds of $4 million in a private placement transaction. With this private placement, SLM issued five year warrants to purchase 75,000 shares of its common stock at an exercise price of $13.75 per share. Registration rights were granted under the terms of the private placement for both the shares of common stock issuable upon conversion of the Series B Cumulative Convertible Preferred Stock and upon exercise of the warrants. The Series B 4% Cumulative Convertible Preferred Stock converts into SLM's common stock at the option of the holder at a price equal to the lower of $11.00 (subject to adjustment in certain events) and up to a 17% discount to the lowest bid price for SLM's common stock on the Nasdaq SmallCap Market during the previous 5 trading days. The number of shares which may be converted at any time is subject to certain limitations, including (i) that the holders may not hold more than 9.9% of the total outstanding shares immediately following a conversion, (ii) under certain circumstances, no more than 400 shares of preferred stock may be converted in any one month, and (iii) in no event can the preferred stock result in the issuance of greater than 20% of SLM's total outstanding common stock. The preferred stock has a liquidation preference of $1,000 per share and accrues dividends at a rate of 4% of the liquidation preference per year, payable quarterly in cash or, at the option of SLM, by adding such amount to the liquidation preference of the preferred stock. Finder's fees of $290,000 were paid in connection with this financing. 7,273 shares of commons stock and warrants to purchase 13,636 shares of common stock at an exercise price of $13.75 per share were also issued to finders. UNSECURED PROMISSORY NOTE On July 12, 2000 the company executed a $500,000 unsecured promissory note with an unrelated party. The loan bears interest at the rate of 8% per annum and is due within ten days of an equity or convertible debt financing in excess of $1,000,000. Accordingly, such loan was repaid on August 1, 2000. Warrants to purchase 50,000 shares of common stock at an exercise price of $11.06 per share were issued to the noteholder. F-13

14 STAN LEE MEDIA, INC. AND SUBSIDIARY (a development stage company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY During the first two quarters, the Company purchased $323,231 of equipment under capital leases. During the period ended June 30, 2000 promissory notes of $414,665 were repaid through the exercise of warrants for 77,333 shares of common stock. F-14

15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS. FORWARD-LOOKING STATEMENTS Certain of the matters and subject areas discussed in this Quarterly Report on Form 10-QSB contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical information provided herein are forward-looking statements and may contain information about financial results, economic conditions, trends and known uncertainties based on the Company's current expectations, assumptions, estimates and projections about its business and the Company's industry. These forward-looking statements involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of several factors, including the availability of sufficient financing to implement the Company's new characters and story franchises and distribution via the Internet, ability to generate revenues through Internet and off line distribution, increased levels of competition, new products and technological changes, and regulatory factors. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis, judgment, belief or expectation only as of the date hereof. The forward-looking statements made in this Quarterly Report on Form 10-QSB relate only to events as of the date on which the statements are made. The Company undertakes no obligation to publicly update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. OVERVIEW Stan Lee Media, Inc. (http://www.stanlee.net) is an Internet-based, global branded digital entertainment company founded by comic book icon Stan Lee to conceive, create, co-create and produce marketable characters and story franchises for entertainment, merchandising and promotional exploitation worldwide. Stan Lee is the co-creator of such classic characters as Spider-Man, The Incredible Hulk, and The X-Men, and more than two billion copies of books featuring characters Lee co-created have been published in 100 countries and 27 languages. Stan Lee Media seeks to become the premier creator of episodic entertainment which will initially be exploited over the Internet and subsequently through off line media. The Company expects to incur losses for the foreseeable future as a result of the significant operating and capital expenditures required to achieve its objectives. In order to achieve and maintain profitability, the Company will need to generate revenues significantly above historical levels. In addition, in order to maintain its operations, it will be necessary for the Company to raise additional equity and debt financing from financial or strategic investors. The Company's prospects for achieving profitability must be considered in light of the risks, uncertainties, expenses, and difficulties encountered by companies in the rapidly evolving market of online commerce. F-15

16 RESULTS OF OPERATIONS Our predecessor company conducted only organizational activities. Accordingly, there were no material operations for the comparable periods for the prior year, and therefore, there is no discussion of comparable historical periods. As of June 30, 2000, our company was considered to be a development stage company as it had not recognized substantial revenue from planned principal operations. Total revenues were $746,359 for the six month period ended June 30, 2000, comprised of license fees for the delivery of webisodes to Macromedia, Inc. sales of The Backstreet Project comic books at concerts and on the Internet, and sales of certain comic book related memorabilia. Since our formation in October 1998, we have incurred substantial operating expenses to produce our branded content, establish our Internet infrastructure, and expand our operations to include more than 150 employees and consultants. Operating expenses for the six month period ended June 30, 2000 were $13,075,083. Operating expenses have increased as we engaged additional personnel and incurred other expenses in producing original characters and content for delivery on the Internet and other media pursuant to existing and anticipated contractual arrangements. We expect to incur operating losses at least through 2000. PLAN OF OPERATIONS Our plan of operations for the next 12 months is to carry out our business plan as described in this Quarterly Report; namely, to create premier branded content focused on the Super Hero genre, and develop and grow multiple revenue streams through entertainment, merchandising (e.g., toys, video games and apparel licenses) and promotional exploitation initially via the Internet, and thereafter, by harnessing our offline strategic publishing/media partners worldwide. We launched our initial two franchises, The 7th Portal and The Accuser, on Macromedia's shockwave.com animation portal, on February 29, 2000 and May 2, 2000, respectively. By contracting with premier online content distribution partners, we intend to build the Stan Lee brand and community without incurring all of the substantial resource commitments to generate traffic that Internet companies historically incur in order to aggregate audiences. In this regard, on August 27, 2000 we will launch a Super Hero franchise based on Super Hero alter-egos of The Backstreet Boys thereby extending our reach over the Internet to a dedicated international fan base of girls and women aged 8 to 25. This launch will be accompanied by our production and distribution of additional comic books featuring this Super Hero franchise, and a Burger King back to school promotion featuring action figures and other materials featuring our characters and the Backstreet Project Website. In addition, effective June 9, 2000, SLM signed an agreement with Mary J. Blige to create and launch an animated global franchise portraying Ms. Blige as an original Stan Lee Hip Hop Super Heroine. The franchise, which opens Blige's current concerts, will launch this fall as an internet based series of animated webisodes. We are in the process of launching localized versions of our website in strategic locations throughout the world. Accordingly, we are pursuing the establishment of strategic partnerships with local operators who will contribute assets, operating infrastructure and capital to build, maintain, market and promote our Company's global branded content in their local market, and who will host and webcast local language versions of Super Hero series produced by us, repurpose such webisodes for exploitation in the local language, and jointly develop original Super Hero and comic character properties. On June 14, 2000, FOX Latin America and FOX Kids Latin America formed a strategic alliance with SLM to repurpose SLM's content and to create original branded content for distribution on the Internet and television outlets throughout the Latin American region. FOX will work with SLM in two specific areas of development - localizing existing SLM content for Latin American. F-16

17 audiences and co-creating new properties for the region. Revenues derived from this venture shall be split 50/50 between the parties after deduction of distribution fees. We intend to leverage our domestic production facility to maintain economies of scale as we focus on these countries. We intend to license elements of our original content to third-parties for exploitation in publishing, television and feature motion picture productions, which opportunities will include licensing and merchandising fees. In December 1999, we and Stan Lee were engaged by DC Comics to reinvent DC's principal Super Heroes through the publishing of 12 issues of approximately 48 story pages each tentatively entitled "The Staniverse" or "If Stan Lee Had Created the DC Universe," to enrich the DC Comic book characters such as Superman, Batman and Wonder Woman with the sensibilities and style of Stan Lee. Also, in November 1999, Simon & Schuster, Inc. entered into an agreement with Stan Lee to publish a Stan Lee official biography entitled Stan Lee: Master of Imagination. We are pursuing publishing, television and feature productions to further broaden the reach of our branded content creations. In addition to the traditional online banner ads and sponsorships, we have initiated a campaign through advertising supported insert entertainment (via our majority-owned subsidiary, Eat-Time Media, Inc.), including without limitation, the placement of card strips, promotional material and collectible items into suitable prepackaged pastry products and other snack foods throughout the country, which will cross-promote our branded content. We also have established a strategic alliance with WhatsHotNow.com to manage fulfillment of our e-commerce. We intend to continue to make e-commerce an integrated and valuable part of our website. The Stan store, operated by WhatsHotNow.com, currently offers over 100 products, and we intend to significantly increase the number of products we offer over the next year. In addition, we plan to integrate global shopping opportunities into the store for our users outside of the United States who seek access to American products. We have entered into a working relationship with Iwerks to license elements of our original branded content for exploitation as simulation rides and as wait-time entertainment at movie theaters and shopping malls. We also have initiated a campaign to license elements of our branded content for exploitation as theme-park attractions. We intend to develop the ability to access many of the features and functionality found on stanlee.net by as many electronic means as possible, including wireless phones, personal digital assistants and pagers. We are planning to develop, with a strategic partner, the Stanlee card, a co-branded financial resource for children and teens that will not only provide them with a non-credit based means of conducting transactions at the Stan store but will also allow them to make purchases throughout the Internet. LIQUIDITY AND CAPITAL RESOURCES Our primary sources of liquidity and capital resources have been private placements of Note 4 to the Financial Statements (Debt), common stock and borrowings from related and non-related parties. We refer you to Note 6 to the Financial Statements (Shareholders' Equity) and Note 8 to the Financial Statements (Subsequent Events) for further descriptions of these activities. We will require additional capital financing to continue the development of our business plan consistent with anticipated growth in operations, infrastructure and personnel. If we are unable to raise additional capital when needed, or if the terms of any such financing restricts or inhibits our ability to locate financing in the future, our business would be materially, adversely affected. There can be no assurance, however that we will be able to raise additional capital on advantageous terms, or at all. We anticipate that the cash on hand coupled with the cash to be raised from additional private placements and public offerings, assuming they will be successful, will be sufficient to satisfy our operating expenses and capital until such time as revenues are sufficient to meet operating requirements. F-17

18 At June 30, 2000, the Company had cash and cash equivalents of $149,109, compared to cash and cash equivalents of $2,020,162 as of December 31, 1999. Net cash used in operating activities of $9,797,729 for the six month period ended June 30, 2000, was primarily attributable to net losses, reduced by noncash charges resulting from the issuance of common stock, stock options and warrants and depreciation and amortization, and working capital changes comprised primarily of increases in accounts payable and accrued expenses (including production costs). Included in such operating expense increase are non-recurring marketing and promotional expenses associated with the Company's launch on February 29, 2000 in the amount of $1,408,511, non-cash charges of $3,063,250 related to the Company's issuance of options for services and the Company's grant of warrants in connection with financing transactions. Net cash used in investing activities was $1,108,396 for the six month periods ended June 30, 2000, compared to $24,179 for the fiscal year ended December 31, 1999, and consisted primarily of capital expenditures related to the purchase of property and equipment, and trademark applications. Net cash provided by financing activities was $9,035,072 for the six month periods ended June 30, 2000, compared to $215,150 for the fiscal year ended December 31, 1999, resulting from the net proceeds from the issuance of common stock in two private placements in February 2000 of $3,642,500, from short-term financing evidenced by unsecured promissory notes in March and April, 2000 of $800,000, less the payment of fees associated with such financings. In April 2000, net cash of $2,367,500 resulted from the issuance by the Company of Series A 6% Convertible Notes in the aggregate amount of $2,500,000, maturing April 30, 2002, less the payment of finder's fees associated with such financings. In May and June, 2000, net proceeds of $1,950,000 was obtained by the utilization of available revolving credit agreements and $480,000 resulted from short term borrowings from a related party. The Company intends to continue to invest heavily to support its growth strategy and expand its Internet production and online distribution activities. These investments include continued advertising and marketing programs designed to enhance the Company's brand name recognition with customers, expansion of its product lines, and the further development of its Website operating infrastructure. The sale of additional equity or convertible debt securities could result in additional dilution to the Company's stockholders. In addition, the Company will, from time to time, consider the acquisition of or investment in complementary businesses, products, services and technologies, which might impact the Company's liquidity requirements or cause the Company to issue additional equity or debt securities. There can be no assurance that financing will be available in amounts or on terms acceptable to the Company, if at all. PURCHASE OF EQUIPMENT Although we have no material commitments for capital expenditures, we anticipate an increase in our capital expenditures and lease commitments consistent with anticipated growth in operations and infrastructure. CHANGES IN NUMBER OF EMPLOYEES As of August 10, 2000, there are 142 full-time employees, 90 of whom were in content creation and production, and product development, 13 of whom were in marketing and sales, and 39 of whom were in general and administrative functions. While we believe that we have substantially completed our necessary hiring for the remainder of this year, we may need to retain some additional employees to meet targeted needs of the company. F-18

19 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There have been no matters during this reporting period that require disclosure under this item. ITEM 2. CHANGES IN SECURITIES COMMON STOCK On July 31, 2000 SLM issued 505,051 shares of its restricted common stock to a strategic investor at $9.90 per share for a total purchase price of $5,000,000. With this private placement, SLM issued five-year warrants to purchase an additional 100,000 shares of common stock at an exercise price of $11.25 per share. Certain registration rights were granted under the terms of this private placement. Fees totaling $300,000 were paid to a finder regarding this transaction. CONVERTIBLE PREFERRED STOCK On August 2, 2000, SLM issued 4,000 shares of its Series B 4% Cumulative Convertible Preferred Stock for gross proceeds of $4 million in a private placement transaction. With this private placement, SLM issued five year warrants to purchase 75,000 shares of its common stock for a price of $13.75 per share. Registration rights were granted under the terms of the private placement for both the shares of common stock issuable upon conversion of the Series B Cumulative Convertible Preferred Stock and upon exercise of the warrants. The Series B 4% Cumulative Convertible Preferred Stock converts into SLM's common stock at the option of the holder at a price equal to the lower of $11.00 (subject to adjustment in certain events) and a 17% discount to the lowest bid price for SLM's common stock on the Nasdaq SmallCap Market during the previous 5 trading days. The number of shares which may be converted at any time is subject to certain limitations, including (i) that the holders may not hold more than 9.9% of the total outstanding shares immediately following a conversion, (ii) following the time that SLM's convertible promissory notes are no longer outstanding, no more than 400 shares of preferred stock may be converted in any one month for less than $11.00 (with certain exceptions), and (iii) in no event can the preferred stock result in the issuance of greater than 20% of SLM's total outstanding common stock. The preferred stock has a liquidation preference of $1,000 per share and accrues dividends at a rate of 4% of the liquidation preference per year, payable quarterly in cash or, at the option of SLM, by adding such amount to the liquidation preference of the preferred stock. Finder's fees of $290,000 were paid in connection with this financing, in addition to 7,273 shares of SLM common stock and warrants to purchase 13,636 shares of common stock at an exercise price of $13.75 per share. ITEM 3. DEFAULTS UPON SENIOR SECURITIES There have been no matters during this reporting period that require disclosure under this item. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS There have been no matters submitted to a vote of security holders during this reporting period. ITEM 5. OTHER INFORMATION There have been no matters during this reporting period that require disclosure under this item. F-19

20 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are included herein: Exhibit 27 - Financial Data Schedule. 3.1 Articles of Incorporation. (1) 3.2 Articles of Amendment to Articles of Incorporation Filed August 12, 1999. (1) 3.3 Articles of Amendment to Articles of Incorporation Filed November 5, 1999. (1) 3.4 Articles of Amendment to Articles of Incorporation Filed August 2, 2000. 3.5 By-Laws. (1) 10.1 Agreement dated as of April 20, 2000, between Paramount Parks, Blur Studio, and the Company. 10.2 Agreement dated as of June 2, 2000, between The Canton Company, and the Company. 10.3 Agreement dated as of June 14, 2000, between Fox Latin American Channel, Inc., and the Company. 10.4 Securities Purchase Agreement dated as of August 1, 2000, between Elliott Associates, L.P., Westgate International, L.P., and the Company. 10.5 Registration Rights Agreement dated as of August 1, 2000, between Elliott Associates, L.P., Westgate International, L.P., and the Company. 10.6 Securities Purchase Agreement dated as of July 31, 2000, between Venture Soft Co., Ltd. and the Company. (2) 10.7 Warrant dated as of July 31, 2000, between Venture Soft Co., Ltd. and the Company. (2) 27 Financial Data Schedule ------------------ (1) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999. (2) Incorporated by reference from the Company's Current Report on Form 8-K dated July 31, 2000. Reports on Form 8-K relating to the quarter ended June 30, 2000. Form 8-K, dated July 31, 2000, relating to the issuance of 505,051 shares of the Company's Common Stock. F-20

21 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the Undersigned, thereunto duly authorized. Stan Lee Media, Inc. /s/ Robert M. Schultz ------------------------- Robert M. Schultz Principal Accounting Officer Date: August 14, 2000. F-21

1 EXHIBIT 3.4 ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION FOR STAN LEE MEDIA, INC. STAN LEE MEDIA, INC., a Colorado corporation (the "Corporation"), pursuant to the provisions of Section 7-106-102 of the Business Corporation Act of the State of Colorado, does hereby amend its Articles of Incorporation ("Articles of Incorporation"), and for that purpose, submits the following statements: A. The name of the corporation is STAN LEE MEDIA, INC. B. The Articles of Incorporation are hereby amended to add a new paragraph E to Article THIRD of the Articles of Incorporation to fix the designation and preferences and relative, participating, optional and other special rights, and qualifications, limitations and restrictions, of a series of preferred stock of the Corporation consisting of 4,000 shares of preferred stock, no par value, to be designated "Series B 4% Cumulative Convertible Preferred Stock", which such new paragraph E shall read in its entirety as follows: 1. DESIGNATION AND ISSUANCE. The Corporation designates 4,000 shares (the "Preferred Shares") of preferred stock as "Series B 4% Cumulative Convertible Preferred Stock" (the "Preferred Stock"), which shares shall have the preferences and relative, participating, optional and other special rights, and qualifications, limitations and restrictions set forth below. Each of such Preferred Shares shall rank equally in all respects. The Preferred Shares shall be issued by the Corporation pursuant to a Preferred Stock Investment Agreement, dated on or about the date hereof ("Investment Agreement") between the Corporation and the initial subscriber or subscribers for the Preferred Shares thereunder (collectively, the "Subscriber"). Capitalized terms used herein and not otherwise defined shall have the meanings ascribed thereto in the Investment Agreement. 2. DIVIDENDS. (a) Cumulative. The holders of the Preferred Shares shall be entitled to receive cumulative dividends at the per share rate of four percent (4%) of the Liquidation Preference (as defined below) of each Preferred Share, per annum accruing daily and compounded quarterly on March 31, June 30, September 30 and December 31 of each year (each a "Dividend Payment Date") commencing with the first Dividend Payment Date occurring after the original issuance date of such share, in preference and priority to any payment of any dividend on the Common Stock (as defined below) or any other class or series of equity security of the Corporation. Such dividends shall accrue on any given share from the most recent date on which a dividend has been paid with respect to such share, or if no dividends have been paid, from the date of the original issuance of such share, and such dividends shall accrue from day to day whether or not declared, based on the actual number of days elapsed. If at any time dividends on the

2 Stan Lee Media, Inc. Page 2 outstanding Preferred Shares at the rate set forth above shall not have been paid or declared and set apart for payment with respect to all preceding periods, the amount of the deficiency shall be fully paid or declared and set apart for payment, but without interest, before any distribution, whether by way of dividend or otherwise, shall be declared or paid upon or set apart for the shares of any other class or series of equity security of the Corporation. For so long as any Preferred Shares are outstanding, the Corporation shall not pay any dividends on any shares of Common Stock or any shares of any other capital stock, or repurchase any shares of Common Stock or capital stock, without having received the written consent of two-thirds in interest of the holders of Preferred Shares, except as otherwise provided herein or in the Investment Agreement or Registration Rights Agreement (as defined below). (b) PIK Payment or Cash Payment. Any dividend payable on the outstanding Preferred Shares shall be paid by adding the amount thereof to the Liquidation Preference (as defined below) of such Preferred Shares. Upon the payment of dividends as required by the immediately preceding sentence, such dividends will be deemed paid in full. Notwithstanding the foregoing, the Corporation may pay dividends in cash if on twenty (20) Trading Days' (as defined below) prior written notice (which such notice may not be revoked during such 20-Trading Day period), it informs the holders of the Preferred Shares of its election to pay cash dividends. Following notice of payment of cash dividends by the Corporation, all dividends on the Preferred Shares shall be paid in cash, until such time as the Corporation provides twenty (20) Trading Days' written notice (which such notice may not be revoked during such 20-Trading Day period) to the holders of Preferred Shares of its election to pay dividends in-kind. 3. LIQUIDATION PREFERENCE. In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, the holders of the Preferred Shares shall be entitled to receive, out of the assets of the Corporation available for distribution to stockholders, prior and in preference to any distribution of any assets of the Corporation to the holders of any other class or series of equity securities, the amount of $1,000 per share plus (i) dividends added to the Liquidation Preference in accordance with Section 2(b) above; (ii) all accrued but unpaid dividends; and (iii) all "Monthly Delay Payments" payable under the Registration Rights Agreement (the "Liquidation Preference"). The foregoing shall not affect any rights which holders of Preferred Shares may have with respect to any requirement that the Corporation repurchase the Preferred Shares or for any right to monetary damages. 4. [INTENTIONALLY OMITTED]. 5. CONVERSION. Each holder of the Preferred Shares shall have the right at any time and from time to time, at the option of such holder, to convert any or all Preferred Shares held by such holder for such number of fully paid, validly issued and nonassessable shares ("Common Shares") of common stock, no par value, of the Corporation ("Common Stock"), free and clear of any liens, claims or encumbrances, as is determined by dividing (i) the Liquidation Preference times the number of Preferred Shares being converted (the "Conversion Amount"), by (ii) the applicable Conversion Price determined as hereinafter provided in effect on the Conversion Date (subject to the limitations set forth in this Section 5). Immediately following such conversion,

3 Stan Lee Media, Inc. Page 3 the rights of the holders of converted Preferred Shares shall cease and the persons entitled to receive the Common Shares upon the conversion of Preferred Shares shall be treated for all purposes as having become the owners of such Common Shares, subject to the rights provided herein to holders. (a) Mechanics of Conversion. To convert Preferred Shares into Common Shares, the holder shall give written notice ("Conversion Notice") to the Corporation in the form of page 1 of Exhibit A hereto (which Conversion Notice may be given by facsimile transmission) no later than the Conversion Date stating that such holder elects to convert the same and shall state therein the number of Preferred Shares to be converted and the name or names in which such holder wishes the certificate or certificates for Common Shares to be issued (the conversion date specified in such Conversion Notice shall be referred to herein as the "Conversion Date"). Either simultaneously with the delivery of the Conversion Notice, or within one (1) Trading Day (as defined below) thereafter, the holder shall deliver (which also may be delivered by facsimile transmission) page 2 to Exhibit A hereto indicating the computation of the number of Common Shares to be received. As soon as possible after delivery of the Conversion Notice, such holder shall surrender the certificate or certificates representing the Preferred Shares being converted, duly endorsed, at the office of the Corporation or, if identified in writing to all the holders by the Corporation, at the offices of any transfer agent for such shares. The Corporation shall, within three (3) Trading Days of receipt of such Conversion Notice, issue and deliver to or upon the order of such holder, against delivery of the certificates representing the Preferred Shares which have been converted, a certificate or certificates for the number of Common Shares to which such holder shall be entitled (with the number of and denomination of such certificates designated by such holder), and the Corporation shall immediately issue and deliver to such holder a certificate or certificates for the number of Preferred Shares (including any fractional shares) which such holder has not yet elected to convert hereunder but which are evidenced in part by the certificate(s) delivered to the Corporation in connection with such Conversion Notice. The Corporation shall effect such issuance of Common Shares (and certificates for unconverted Preferred Shares) within three (3) Trading Days of the Conversion Date and shall transmit the certificates by messenger or overnight delivery service to reach the address designated by such holder within three (3) Trading Days after the receipt of such Conversion Notice ("T+3"). If certificates evidencing the Common Shares are not received by the holder within five (5) Trading Days of the Conversion Notice, then the holder will be entitled to revoke and withdraw its Conversion Notice, in whole or in part, at any time prior to its receipt of those certificates. In lieu of delivering physical certificates representing the Common Shares issuable upon conversion of Preferred Shares, provided the Corporation's transfer agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer ("FAST") program, upon request of the holder, the Corporation shall use its best efforts to cause its transfer agent to electronically transmit the Common Shares issuable upon conversion or exercise to the holder, by crediting the account of the holder's prime broker with DTC through its Deposit Withdrawal Agent Commission ("DWAC") system. The time periods for delivery described above shall apply to the electronic transmittals through the DWAC system. The parties agree to coordinate with DTC to accomplish this objective. The conversion pursuant to this Section 5 shall be deemed to have been made immediately prior to the close of business on the Conversion Date. The person or persons entitled to receive the Common Shares issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Common Shares at the close of business on the Conversion Date.

4 Stan Lee Media, Inc. Page 4 The Corporation's obligation to issue Common Shares upon conversion of Preferred Shares shall be absolute, is independent of any covenant of any holder of Preferred Shares, and shall not be subject to: (i) any offset or defense; or (ii) any claims against the holders of Preferred Shares whether pursuant to this Certificate, the Investment Agreement, the Registration Rights Agreement, the Warrants (as defined in the Investment Agreement) or otherwise. (b) Determination of Conversion Price and Certain Conversion Restrictions. (i) Definitions. "Closing Date" shall have the meaning ascribed thereto in the Investment Agreement. "Conversion Price" shall mean either the Fixed Price or the Variable Price, as applicable, at which Preferred Shares are converted hereunder as of a certain date. "Effective Date" shall mean the date on which the Registration Statement is declared effective by the SEC (as such terms are defined in the Registration Rights Agreement). "Fixed Price" shall mean 101% of the Market Price on the Closing Date (as may be adjusted for any stock splits, stock dividends, combinations and certain stock issuances and other circumstances as provided in Section 5(c) below). "Floor Price" shall mean $11.00 (as may be adjusted for any stock splits, stock dividends, combinations and certain stock issuances and other circumstances as provided in Section 5(c) below). "Market Price" shall mean the lowest closing bid price of the Common Stock recorded on the Principal Market for the five (5) Trading Days immediately preceding the date as of which the Market Price is being determined (such 5-day period hereinafter referred to as the "Purchase Price Period"). "Principal Market" shall mean the Nasdaq Small-Cap Market or such other market or exchange on which the Common Stock is then principally traded. "Set Price Date" shall mean the date which is eighteen (18) months following the Effective Date, provided that such date shall be extended by 1.5 days for each day that there is no Effective Registration after the 90th day (120th day in the event of full SEC review of the Registration Statement) following the Closing Date. "Trading Day" shall mean a day on which there is trading on the Principal Market. "Variable Price" shall mean 83% of the Market Price, provided, however, that if for the thirty (30) consecutive Trading Day period immediately preceding the first

5 Stan Lee Media, Inc. Page 5 day of any calendar month the actual average daily trading volume of shares of Common Stock traded publicly on the Principal Market exceeds 40,000 shares (excluding block trades equal to or greater than 10,000 shares) ("Trading Minimum"), then such 83% figure shall be increased, for the duration of such calendar month only, by two percentage points (2%) for each full 10,000 shares by which such actual average daily trading volume exceeds the Trading Minimum, and provided, further, that notwithstanding the previous proviso, in no event shall such 83% figure be increased above 89%. (ii) Determination of Conversion Price. The Conversion Price applicable with respect to the Preferred Shares shall be as follows: (A) Beginning on the Closing Date and up until but not including the Set Price Date, the Conversion Price shall be the lesser of the Fixed Price or the Variable Price; and (B) Beginning on the Set Price Date and at all times thereafter, the Conversion Price shall be the Conversion Price determined as of the Set Price Date (as may be adjusted for any stock splits, stock dividends, combinations and certain stock issuances and other circumstances as provided in Section 5(c) below, the "Set Price"); provided, however, that in the event that the conditions contained in clauses (A) through (D) of Section 5(i)(4) below are not satisfied or existing at any time on or after the Set Price Date, the Conversion Price shall be the lesser of the Fixed Price or the Variable Price. (iii) Conversion Restriction. Subject to the provisions of this paragraph (iii), in the event that any Preferred Shares may be converted hereunder at a Conversion Price which is less than the Fixed Price, the Corporation may limit the number of Preferred Shares each of Elliott and Westgate may convert in the future to 200 Preferred Shares each for each calendar month (or a pro rata portion thereof for any transferees of Preferred Shares from such Subscriber) (the "Restriction Amount"), by delivering a written notice ("Restriction Notice") to all holders of Preferred Shares stating that such restriction is in effect, provided that notwithstanding the Conversion Price determination set forth in subsection (ii) above, any holder shall have the right to convert at the Fixed Price any amount of Preferred Shares held by such holder without regard to the Restriction Amount contained herein. Notwithstanding anything contained herein, the restriction contained in this paragraph shall not apply (a) for any month if the closing sale price of the Common Stock (as reported on the Principal Market) on any Trading Day occurring in such month is 120% greater than the applicable Conversion Price on such day, (b) for any conversions occurring after any announcement, as pending or planned, of a transaction or event referred to in Section 5(m) below until such time as such transaction or event is abandoned or no longer expected to occur, (c) for any conversions occurring after any of the conditions contained in clauses (A) through (D) of Section 5(i)(4) below are not satisfied or existing, (d) for any conversions occurring after the Fixed Price again becomes the applicable

6 Stan Lee Media, Inc. Page 6 Conversion Price (provided that this paragraph shall again apply if the applicable Conversion Price is the Variable Price), or (e) at any time at which any of the Corporation's Series A Six Percent (6%) Convertible Notes are outstanding or any of the Corporation's securities which were or are issued in an MFN Transaction or Variable Rate Transaction (as such terms are defined in the Investment Agreement), or any other transaction in which shares of Common Stock have been or may be issued at (i) a 20% or greater effective discount to market to a Strategic Investor or (ii) a 5% or greater effective discount to market to any other investor, are outstanding. Notwithstanding anything contained herein or any previous conversions of Preferred Shares, in the event the Company at any time or from time to time delivers a Forced Redemption Notice pursuant to Section 5(i)(3) below, each holder of Preferred Shares may in the aggregate convert at least up to the number of shares subject to redemption specified in the Forced Redemption Notice at any time and from time to time from delivery of such notice until such holder's receipt of the Forced Redemption Price for such Preferred Shares being redeemed, if any remaining. Any holder of Preferred Shares, by written notice to the Corporation, may reduce the Restriction Amount applicable to it for any month or months and apply the amount of such reduction to another holder or holders of Preferred Shares for such month(s) such that such other holder's or holders' Restriction Amount for such month(s) shall be increased by the amount so applied. (iv) Cash Conversion Option. Subject to the provisions of this paragraph (iv), in the event that on any Trading Day the applicable Conversion Price on such day is less than the Floor Price, the Corporation may honor future conversions of Preferred Shares by redeeming some or all of such Preferred Shares submitted for conversion in cash at the Cash Redemption Price (as defined below) by delivering a written notice ("Cash Conversion Notice") to all holders of Preferred Shares stating the Corporation's election to honor future conversions by redemption pursuant to the terms of this Section 5(b)(iv) and specifying the percentage of such Preferred Shares submitted for conversion which will be redeemed upon each conversion; provided, however, that (a) such Cash Conversion Notice may only be delivered within five (5) Trading Days following a Trading Day on which the applicable Conversion Price is less than the Floor Price, and (b) such election shall take effect exactly five (5) Trading Days after receipt of the Cash Conversion Notice and shall continue thereafter until five (5) Trading Days after the Corporation delivers a written notice ("Withdrawal Notice") to all holders of Preferred Shares stating that the Corporation will no longer honor conversion of Preferred Shares through cash redemption in whole or in part, as the case may be (such period of cash redemptions being hereinafter referred to as the "Cash Redemption Period"). Upon any conversion of Preferred Shares during the Cash Redemption Period, the Corporation shall (i) redeem the portion of Preferred Shares submitted for conversion subject to redemption (as specified in the Cash Conversion Notice) by paying the holder thereof the Cash Redemption Price within two (2) Trading Days following the date which would have been the Conversion Date pursuant to the applicable Conversion Notice and (ii) convert the remaining portion of the Preferred Shares submitted for

7 Stan Lee Media, Inc. Page 7 conversion into Common Shares on the Conversion Date pursuant to the provisions of Section 5(a) above. In the event that any such holder does not receive such Cash Redemption Price within such two (2) Trading Days, then the amount so due shall accrue interest daily at a rate of 20% per annum. In addition to and not in lieu of such interest accrual, if such holder does not receive such Cash Redemption Price within five (5) Trading Days following such Conversion Date, then such holder shall have the right at any time thereafter, at the holder's option, to either (1) sell to the Corporation any or all of its Preferred Shares then held by such holder at the Mandatory Repurchase Price (as defined in the Registration Rights Agreement), or (2) force the Corporation to convert the Preferred Shares submitted for conversion into Common Shares pursuant to the provisions of Section 5(a) above. If at any time during the Cash Redemption Period, the Conversion Price in effect (or which would be in effect but for this paragraph) exceeds the Floor Price, any holder may, at the option of such holder, terminate the Cash Redemption Period, with respect to such holder only, upon five (5) Trading Days' written notice to the Corporation, and the Corporation shall again be obligated to convert the Preferred Shares submitted for conversion by such holder into Common Shares pursuant to the provisions of Section 5(a) above at any time after such fifth (5th) Trading Day. For clarification purposes, any Preferred Shares submitted for conversion during the five (5) Trading Day period immediately following delivery of a Cash Conversion Notice shall be converted into Common Shares as provided in Section 5(a) hereof, and any Preferred Shares submitted for conversion during the five (5) Trading Day period immediately following delivery of a Withdrawal Notice shall be redeemed for cash as and to the extent provided in this paragraph. The "Cash Redemption Price" shall mean the amount equal to (x) the value of one share of Common Stock (based on the closing price of the Common Stock on the Principal Market on the date which would have been the Conversion Date had the conversion occurred in the normal course pursuant to Section 5(a) hereof), times (y) the number of shares of Common Stock that the holder would have received had the conversion occurred in the normal course pursuant to Section 5(a) hereof but are being redeemed instead. (c) Stock Splits; Dividends; Adjustments. (i) If the Corporation or any subsidiary of the Corporation, at any time while the Preferred Shares are outstanding (A) shall pay a stock dividend or otherwise make a distribution or distributions on any equity securities (including instruments or securities convertible into or exchangeable for such equity securities) in shares of Common Stock, (B) subdivide outstanding Common Stock into a larger number of shares, or (C) combine outstanding Common Stock into a smaller number of shares, then each Affected Conversion Price (as defined below) shall be multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding before such event and the denominator of which shall be the number of shares of Common Stock outstanding after such event. Any adjustment made pursuant to this Section 5(c)(i) shall become effective immediately after the record date for the determination of stockholders

8 Stan Lee Media, Inc. Page 8 entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination. As used herein, the Affected Conversion Prices (each an "Affected Conversion Price") shall refer to: (i) the Fixed Price; (ii) the Floor Price; (iii) the Set Price; and (iv) each reported closing bid price for the Common Stock on the Principal Market occurring on any Trading Day included in the Purchase Price Period, which Trading Day occurred before the record date in the case of events referred to in clause (A) of this subparagraph 5(c)(i) and before the effective date in the case of the events referred to in clauses (B) and (C) of this subparagraph 5(c)(i). (ii) In the event that the Corporation or any subsidiary of the Corporation issues or sells any Common Stock or securities which are convertible into or exchangeable for its Common Stock (other than Preferred Shares), or any warrants or other rights to subscribe for or to purchase or any options for the purchase of its Common Stock (other than shares or options issued or which may be issued pursuant to (i) the Corporation's current or future employee or director stock option plans or shares issued upon exercise of options, warrants or rights outstanding on the date of the Investment Agreement and listed in the Corporation's most recent periodic report filed under the Securities Exchange Act of 1934, as amended, or (ii) arrangements with all the holders of Preferred Shares) at an effective purchase price per share which is less than the greater of (1) the closing sale price per share of the Common Stock on the Principal Market on the Trading Day next preceding such issue or sale or, in the case of issuances to holders of its Common Stock, the date fixed for the determination of stockholders entitled to receive such warrants, rights, or options ("Fair Market Price") or (2) the Fixed Price (or the Set Price if the Set Price is the applicable Conversion Price at such time), then in each such case, the Fixed Price (or the Set Price if the Set Price is the applicable Conversion Price at such time) and the Floor Price in effect immediately prior to such issue or sale or record date, as applicable, shall be reduced effective concurrently with such issue or sale to an amount determined by multiplying the Fixed Price, Set Price or Floor Price (as applicable) then in effect by a fraction, (x) the numerator of which shall be the sum of (1) the number of shares of Common Stock and Convertible Securities (as defined below) outstanding immediately prior to such issue or sale, plus (2) the number of shares of Common Stock which the aggregate consideration received by the Corporation for such additional shares would purchase at such Fixed Price, Set Price or Fair Market Price, as the case may be; and (y) the denominator of which shall be the number of shares of Common Stock and Convertible Securities (as defined below) of the Corporation outstanding immediately after such issue or sale. For purposes of the preceding paragraph, in the event that the effective purchase price is less than both the Fair Market Price and the Fixed Price (or the Set Price if the Set Price is the applicable Conversion Price at such time), then the calculation method which yields the greatest downward adjustment in the Conversion Price shall be used.

9 Stan Lee Media, Inc. Page 9 For the purposes of the foregoing adjustment, in the case of the issuance of any convertible securities, warrants, options or other rights to subscribe for or to purchase or exchange for, shares of Common Stock ("Convertible Securities"), the maximum number of shares of Common Stock issuable upon exercise, exchange or conversion of such Convertible Securities shall be deemed to be outstanding, and the aggregate consideration received by the Corporation for the issuance or sale of such Convertible Securities shall be deemed to include any consideration that would be received by the Corporation in connection with the exercise, exchange or conversion of such Convertible Securities, provided that no further adjustment shall be made upon the actual issuance of Common Stock upon exercise, exchange or conversion of such Convertible Securities. (iii) If the Corporation or any subsidiary of the Corporation, at any time while the Preferred Shares are outstanding, shall distribute to all holders of Common Stock evidences of its indebtedness or assets or cash or rights or warrants to subscribe for or purchase any security of the Corporation or any of its subsidiaries (excluding those referred to in Sections 5(c)(i) or 5(c)(ii) above), then concurrently with such distributions to holders of Common Stock, the Corporation shall distribute to holders of the Preferred Shares the amount of such indebtedness, assets, cash or rights or warrants which the holders of Preferred Shares would have received had they converted all their Preferred Shares into Common Shares immediately prior to the record date for such distribution. (iv) Whenever the Conversion Price is adjusted pursuant to Section 5(c)(i), (ii) or (iii), the Corporation shall promptly mail to each holder of the Preferred Shares a notice setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. (v) All calculations under this Section 5(c) shall be made to the nearest cent or to the nearest 1/100 of a share, as the case may be. (vi) No adjustment in the Conversion Price shall reduce the Conversion Price below the then par value of the Common Stock. (vii) The Corporation from time to time may reduce the Conversion Price by any amount for any period of time if the period is at least 20 Trading Days and if the reduction is irrevocable during the period. Whenever the Conversion Price is reduced, the Corporation shall facsimile and mail to the holders of Preferred Shares a notice of the reduction. The Corporation shall facsimile and mail, first class, postage prepaid, the notice at least 15 days before the date the reduced Conversion Price takes effect. The notice shall state the reduced Conversion Price and the period it will be in effect. A reduction of the Conversion Price does not change or adjust the Conversion Price otherwise in effect for purposes of Section 5(c)(i), (ii), or (iii).

10 Stan Lee Media, Inc. Page 10 (d) Notice of Record Date. In the event of any taking by the Corporation of a record date of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, any security or right convertible into or entitling the holder thereof to receive additional Common Shares, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall deliver to each holder of Preferred Shares at least 20 days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution, security or right and the amount and character of such dividend, distribution, security or right. (e) Issue Taxes. The Corporation shall pay any and all issue, documentary, stamp and other taxes, excluding any income, franchise or similar taxes, that may be payable in respect of any issue or delivery of Common Shares on conversion of Preferred Shares pursuant hereto. However, the holder of any Preferred Shares shall pay any tax that is due because the Common Shares issuable upon conversion thereof are issued in a name other than such holder's name. (f) Reservation of Stock Issuable upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued Common Stock, solely for the purposes of effecting the conversion of the Preferred Shares, an amount of Common Shares equal to 200% of the number of shares issuable upon conversion of the Preferred Shares at the then applicable Conversion Price (regardless of any limitations or restrictions set forth herein). The Corporation promptly will take such corporate action as may, in the opinion of its outside counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose, including without limitation engaging in best efforts to obtain the requisite stockholder approval. (g) Fractional Shares. No fractional shares shall be issued upon the conversion of any Preferred Shares. All Common Shares (including fractions thereof) issuable upon conversion of more than one Preferred Share by a holder thereof and all Preferred Shares issuable upon the purchase thereof shall be aggregated for purposes of determining whether the conversion and/or purchase would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion and/or purchase would result in the issuance of a fraction of a share of Common Stock, the Corporation shall, in lieu of issuing any fractional share, either round up the number of shares to the next highest whole number or, at the Corporation's option, pay the holder otherwise entitled to such fraction a sum in cash equal to the fair market value of such fraction on the Conversion Date (as determined in good faith by the Board of Directors of the Corporation). (h) Reorganization, Merger or Going Private. In case of any reorganization or any reclassification of the capital stock of the Corporation or any consolidation or merger of the Corporation with or into any other corporation or corporations or a sale or transfer of all or substantially all of the assets of the Corporation to any other person or a "going private" transaction under Rule 13e-3 promulgated pursuant to the Exchange Act, then, as part of such reorganization, consolidation, merger, or transfer if the holders of shares of Common Stock receive any publicly traded securities as part or all of the consideration for such reorganization, consolidation, merger or sale, then it shall be a condition precedent of any such event or transaction that provision shall be made such that each Preferred Share shall thereafter be

11 Stan Lee Media, Inc. Page 11 convertible into such new securities at a conversion price and pricing formula which places the holders of Preferred Shares in an economically equivalent position as they would have been if not for such event. In addition to the foregoing, if the holders of shares of Common Stock receive any non-publicly traded securities or other property or cash as part or all of the consideration for such reorganization, consolidation, merger or sale, then such distribution shall be treated to the extent thereof as a distribution under Section 5(c) above and such Section shall also apply to such distribution. (i) Automatic Conversion, Forced Conversion and Forced Redemption. (1) Automatic Conversion. Subject to Subsections 5(i)(4) and 5(i)(5) below, on the third (3rd) anniversary of the Closing Date (the "Automatic Conversion Date"), all the Preferred Shares shall be automatically converted into Common Shares as of the Automatic Conversion Date at the Conversion Price in effect on such date; provided, however, that such Automatic Conversion Date shall be deferred, at the sole option of a holder of Preferred Shares, for up to such number of days as is equal to 1.5 times the number of days (A) there is a lack of Effective Registration (as defined in the Investment Agreement) after the 90th day (120th day in the event of full SEC review of the Registration Statement) following the Closing Date; (B) there is not a sufficient amount of Common Stock available for conversion of all outstanding Preferred Shares and exercise of all outstanding Warrants, (C) for any other reason the Corporation refuses or announces its refusal to honor conversion of Preferred Shares or exercise of outstanding Warrants, or (D) for any other reason there is a suspension, restriction or limitation in the ability of holders of Preferred Shares to sell Common Shares received upon conversion of Preferred Shares or exercise of the Warrants pursuant to the prospectus included in the Registration Statement (as defined in the Registration Rights Agreement). (2) Forced Conversion. Subject to Subsections 5(i)(4) and 5(i)(5) below, in the event that (A) the Market Price equals or exceeds 182% times the closing sale price of the Common Stock (as reported by Nasdaq) on the Trading Day next preceding the Closing Date ("Closing Price") for any ten (10) consecutive Trading Days after the Effective Date of the Registration Statement, and (B) the actual average daily trading volume for such 10-Trading Day period (as reported by Nasdaq excluding block trades) exceeds the Trading Minimum, the Corporation shall have the right to compel holders of Preferred Shares (on a pro rata basis) to convert all or a portion of their Preferred Shares at the Conversion Price in effect on the conversion date selected by the Corporation; provided, however, that (1) the Corporation shall provide at least thirty (30) Trading Days prior written notice to all holders of Preferred Shares of its election hereunder, specifying the conversion date ("Forced Conversion Date") and the number of Preferred Shares to be converted, (2) there shall be Effective Registration at the time of such election notice and all times thereafter through and including the Forced Conversion Date, and (3) holders of Preferred Shares may continue to convert any or all of their Preferred Shares after receiving the Corporation's election notice under this Section 5(i)(2). Such forced conversion shall be subject to and governed by all the provisions relating to voluntary conversion of the Preferred Shares contained herein.

12 Stan Lee Media, Inc. Page 12 (3) Forced Redemption. Subject to Subsection 5(i)(4) below, after the Effective Date of the Registration Statement, the Corporation shall have the right to redeem all or a portion of the outstanding Preferred Shares (on a pro rata basis) at a redemption price ("Forced Redemption Price") equal to the greater of (A) 135% of the Liquidation Preference of the Preferred Shares being redeemed or (B) the Liquidation Preference for the Preferred Shares being redeemed divided by the then applicable Conversion Price multiplied by the closing sale price of the Common Stock (as reported by Nasdaq) on the Trading Day next preceding the Forced Redemption Date (as defined below); provided, however, that (1) the Corporation shall provide at least thirty (30) Trading Days prior written notice ("Forced Redemption Notice") to all holders of its election hereunder, specifying the redemption date ("Forced Redemption Date") and the number of shares to be redeemed, (2) there shall be Effective Registration at all times at least thirty (30) Trading Days prior to such election notice and all times thereafter through and including the Forced Redemption Date, and (3) holders of Preferred Shares may continue to convert any or all of their Preferred Shares after receiving the Corporation's redemption election notice under this Section 5(i)(3) up until the Forced Redemption Date. If any holder does not receive the Forced Redemption Price on the Forced Redemption Date, then such holder shall have the right at any time and from time to time thereafter, at the holder's option, to either (1) sell to the Corporation any or all of its Preferred Shares then held by such holder at the Forced Redemption Price plus accrued interest thereon from the Forced Redemption Date until such holder's receipt of the Forced Redemption Price at a rate of 20% per annum, or (2) force the Corporation to convert any or all of the Preferred Shares held by such holder into Common Shares pursuant to the provisions of Section 5(a) above. (4) Notwithstanding the preceding subsections (1), (2) and (3), no holder of Preferred Shares shall be obligated to convert or redeem any Preferred Shares held by such holder on the applicable Automatic Conversion Date, Forced Conversion Date or Forced Redemption Date, as the case may be, unless and until each of the following conditions has been satisfied or exists, each of which shall be a condition precedent to any such automatic conversion, forced conversion or forced redemption (waivable by any holder with respect to such holder's Preferred Shares): (A) no material default or breach exists which has not been cured, and no event shall have occurred which constitutes (or would constitute with notice or the passage of time or both) a material default or breach of the Investment Agreement, the Registration Rights Agreement, or these Articles of Amendment, which has not been cured; (B) none of the events described in clauses (i) through (iv) of Section 2(b) of the Registration Rights Agreement shall have occurred and be continuing; (C) the Registration Statement pursuant to the Registration Rights Agreement is effective and holders have received unlegended certificates representing Common Shares with

13 Stan Lee Media, Inc. Page 13 respect to all conversions for which Conversion Notices have been given; and (D) the Corporation and its subsidiaries on a consolidated basis has assets with a net realizable fair market value exceeding its liabilities and is able to pay all its debts as they become due in the ordinary course of business, and the Corporation is not subject to any liquidation, dissolution or winding up of its affairs. (5) Notwithstanding anything contained in subsections (1) or (2) above, no holder's Preferred Shares shall be subject to automatic conversion or forced conversion to the extent such conversion would result in the holder of Preferred Shares exceeding the limitation contained in Section 5(j) below. In such event, the Preferred Shares of such holder would be converted in such amount until such limitation is reached. (j) Limitations on Holder's Right to Convert. (A) Notwithstanding anything to the contrary contained herein, the number of shares of Common Stock that may be acquired by the holder upon conversion pursuant to the terms hereof shall not exceed a number that, when added to the total number of shares of Common Stock deemed beneficially owned by such holder (other than by virtue of the ownership of securities or rights to acquire securities (including the Preferred Shares) that have limitations on the holder's right to convert, exercise or purchase similar to the limitation set forth herein), together with all shares of Common Stock deemed beneficially owned (other than by virtue of the ownership of securities or rights to acquire securities that have limitations on the right to convert, exercise or purchase similar to the limitation set forth herein) by the holder's "AFFILIATES" (as defined in Rule 144 of the Securities Act of 1933, as amended (the "Securities Act")) ("AGGREGATION PARTIES") that would be aggregated for purposes of determining whether a group under Section 13(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), exists, would exceed 9.99% of the total issued and outstanding shares of the Common Stock (the "RESTRICTED OWNERSHIP PERCENTAGE"). Each holder shall have the right (w) at any time and from time to time to reduce its Restricted Ownership Percentage immediately upon notice to the Corporation and (x) (subject to waiver) at any time and from time to time, to increase its Restricted Ownership Percentage immediately in the event of the announcement as pending or planned, of a transaction or event referred to in Section 5(m) below. (B) The holder covenants at all times on each day (each such day being referred to as a "Covenant Day") as follows: During the balance of such Covenant Day and the succeeding sixty-one (61) days (the balance of such Covenant Day and the succeeding 61 days being referred to as the "Covenant Period") such holder will not acquire shares of Common Stock pursuant to any right (including conversion of Preferred Shares) existing at the commencement of the Covenant Period to the extent the number of shares so acquired by such holder and its Aggregation Parties (ignoring all dispositions) would exceed:

14 Stan Lee Media, Inc. Page 14 (x) the Restricted Ownership Percentage of the total number of shares of Common Stock outstanding at the commencement of the Covenant Period, minus (y) the number of shares of Common Stock actually owned by such holder and its Aggregation Parties at the commencement of the Covenant Period. A new and independent covenant will be deemed to be given by the holder as of each moment of each Covenant Day. No covenant will terminate, diminish or modify any other covenant. The holder agrees to comply with each such covenant. This Section 5(j)(B) controls in the case of any conflict with any other provision of the Investment Agreement or any agreement entered into in connection therewith. The Corporation's obligation to issue Common Shares which would exceed such limits referred to in this Section 5(j) shall be suspended to the extent necessary until such time, if any, as shares of Common Stock may be issued in compliance with such restrictions. (k) Certificate for Conversion Price Adjustment. The Corporation shall promptly furnish or cause to be furnished to each holder of Preferred Shares a certificate prepared by the Corporation setting forth any adjustments or readjustments of the Conversion Price pursuant to this Section 5. (l) Specific Enforcement. The Corporation agrees that irreparable damage would occur in the event that any of the provisions of these Articles of Amendment were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the holders of Preferred Shares shall be entitled to specific performance, injunctive relief or other equitable remedies to prevent or cure breaches of the provisions of these Articles of Amendment and to enforce specifically the terms and provisions hereof, this being in addition to any other remedy to which any of them may be entitled under agreement, at law or in equity. (m) Mandatory Repurchase. Each holder shall have the unilateral option and right to compel the Corporation to repurchase any or all of such holder's Preferred Shares within 3 days of a written notice requiring such repurchase, at a price per Preferred Share equal to 120% of the Liquidation Preference then in effect if any of the following events involving the Corporation shall have occurred: (i) A Change in Control Transaction (as defined below); (ii) A "going private" transaction under Rule 13e-3 promulgated pursuant to the Exchange Act; or (iii) A tender offer by the Corporation under Rule 13e-4 promulgated pursuant to the Exchange Act for 20% or more of the Corporation's Common Stock. A "Change in Control Transaction" will be deemed to exist if (i) there occurs any consolidation or merger of the Corporation with or into any other corporation or other

15 Stan Lee Media, Inc. Page 15 entity or person (whether or not the Corporation is the surviving corporation), or any other corporate reorganization or transaction or series of related transactions in which in excess of 50% of the Corporation's voting power is transferred through a merger, consolidation, tender offer or similar transaction, (ii) any person (as defined in Section 13(d) of the Exchange Act), together with its affiliates and associates (as such terms are defined in Rule 405 under the Securities Act), beneficially owns or is deemed to beneficially own (as described in Rule 13d-3 under the Exchange Act without regard to the 60-day exercise period) in excess of 50% of the Corporation's voting power, (iii) there is a replacement of more than one-half of the members of the Corporation's Board of Directors which is not approved by those individuals who are members of the Corporation's Board of Directors on the date thereof, or (iv) in one or a series of related transactions, there is a sale or transfer of all or substantially all of the assets of the Corporation, determined on a consolidated basis. 6. VOTING RIGHTS. In addition to all other requirements imposed by Colorado law, and all other voting rights granted under the Corporation's Articles of Incorporation, the affirmative vote of a majority of the Corporation's outstanding Preferred Shares and of the Subscriber (provided the Subscriber collectively owns at least 25% of the outstanding Preferred Shares) shall be necessary for (i) any amendment, modification or repeal of these Articles of Amendment (whether by merger, consolidation or otherwise) or for any merger, reclassification, consolidation or reorganization or a sale, lease or transfer of all or substantially all of the assets of the Corporation, or (ii) any amendment to the Articles of Incorporation or by-laws of the Corporation (whether by merger, consolidation or otherwise) that may amend or change or adversely affect any of the rights, preferences, obligations or privileges of the Preferred Shares, provided, however, that (a) holders of Preferred Shares (other than the Subscriber under the Investment Agreement and their affiliates) who are affiliates of the Corporation (and the Corporation itself) shall not participate in such vote and the Preferred Shares of such holders shall be disregarded and deemed not to be outstanding for purposes of such vote, and (b) no vote shall be required in connection with a merger, the sole purpose of which is to effect a change of the Corporation's state of incorporation and/or increase the number of members of the Board of Directors of the Corporation, so long as such merger or change does not in any way amend or change or adversely affect any of the rights, preferences, obligations or privileges of the Preferred Shares. 7. NOTICES. The Corporation shall distribute to the holders of Preferred Shares copies of all notices, materials, annual and quarterly reports, proxy statements, information statements and any other documents distributed generally to the holders of shares of Common Stock of the Corporation, at such times and by such method as such documents are distributed to such holders of such Common Stock. 8. REPLACEMENT CERTIFICATES. The certificate(s) representing the Preferred Shares held by any holder of Preferred Shares may be exchanged by such holder at any time and from time to time for certificates with different denominations representing an equal aggregate number of Preferred Shares, as reasonably requested by such holder, upon surrendering the same. No service charge will be made for such registration or transfer or exchange. In the event that any

16 Stan Lee Media, Inc. Page 16 holder of Preferred Shares notifies the Corporation that its certificate(s) therefor have been lost, stolen or destroyed, the Corporation shall promptly and without charge deliver replacement certificate(s) to such holder, provided that such holder executes and delivers to the Corporation an agreement reasonably satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such lost, stolen or destroyed certificate(s). 9. ATTORNEYS' FEES. In connection with enforcement by a holder of Preferred Shares of any obligation of the Corporation hereunder, the prevailing party shall be entitled to recovery of reasonable attorneys' fees and expenses incurred. 10. NO REISSUANCE. No Preferred Shares acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be reissued. 11. SEVERABILITY OF PROVISIONS. If any right, preference or limitation of the Preferred Shares set forth in these Articles of Amendment (as these Articles of Amendment may be amended from time to time) is invalid, unlawful or incapable of being enforced by reason of any rule or law or public policy, all other rights, preferences and limitations set forth in these Articles of Amendment, which can be given effect without the invalid, unlawful or unenforceable right, preference or limitation shall nevertheless remain in full force and effect, and no right, preference or limitation herein set forth be deemed dependent upon any such other right, preference or limitation unless so expressed herein. 12. LIMITATIONS. Except as may otherwise be required by law and as are set forth in the Investment Agreement and the Registration Rights Agreement, the Preferred Shares shall not have any powers, preference or relative participating, optional or other special rights other than those specifically set forth in this Articles of Amendment (as may be amended from time to time) or otherwise in the Articles of Incorporation of the Corporation. [Continued on Following Page]

17 C. The date of adoption of these Articles of Amendment is August 1, 2000. D. These Articles of Amendment were duly adopted by the Board of Directors of the Corporation without shareholder action, and shareholder action was not required pursuant to authority expressly vested in the Board of Directors of the Corporation by paragraph B of Article THIRD of the Articles of Incorporation of the Corporation. Signed on August 1, 2000 STAN LEE MEDIA, INC. By: ------------------------------ Name: Title: President By: ------------------------------ Name: Title: 17

18 EXHIBIT A (To be Executed by Holder in order to Convert Preferred Shares) CONVERSION NOTICE FOR SERIES B 4% CUMULATIVE CONVERTIBLE PREFERRED STOCK The undersigned, as a holder ("Holder") of shares of Series B 4% Cumulative Convertible Preferred Stock ("Preferred Shares") of Stan Lee Media, Inc. (the "Corporation"), hereby irrevocably elects to convert _____________ Preferred Shares for shares ("Common Shares") of common stock, par value $0.001 per share (the "Common Stock"), of the Corporation according to the terms and conditions of the Articles of Amendment for the Preferred Shares as of the date written below. The undersigned hereby requests that share certificates for the Common Shares to be issued to the undersigned pursuant to this Conversion Notice be issued in the name of, and delivered to, the undersigned or its designee as indicated below. No fee will be charged to the Holder of Preferred Shares for any conversion. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed thereto in the Articles of Amendment. Conversion Date: __________________________ Conversion Information: NAME OF HOLDER: By:_________________________________ Print Name:_________________________ Print Title:________________________ Print Address of Holder: _______________________________________________________ _______________________________________________________ Issue Common Stock to:_________________________________ at:____________________________________________________ _______________________________________________________ If Common Shares are to be issued to a person other than Holder, Holder's signature must be guaranteed below: SIGNATURE GUARANTEED BY: THE COMPUTATION OF NUMBER OF COMMON SHARES TO BE RECEIVED IS SET FORTH ON PAGE 2 OF THE CONVERSION NOTICE. PAGE 1 OF CONVERSION NOTICE

19 PAGE 2 TO CONVERSION NOTICE DATED ______________________ FOR: _________________ (CONVERSION DATE) (NAME OF HOLDER) COMPUTATION OF NUMBER OF COMMON SHARES TO BE RECEIVED Number of Preferred Shares converted: _____________ shares <TABLE> <S> <C> Number of Preferred Shares converted x Liquidation Preference $ TOTAL DOLLAR AMOUNT CONVERTED $ ========== CONVERSION PRICE $ </TABLE> Total dollar amount converted Number of Common Shares = ----------------------------- = __________ Conversion Price NUMBER OF COMMON SHARES = If the conversion is not being settled by DTC, please issue and deliver _____ certificate(s) for Common Shares in the following amount(s): ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ If the Holder is receiving certificate(s) for Preferred Shares upon the conversion, please issue and deliver _____ certificate(s) for Preferred Shares in the following amounts: ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ 19

1 EXHIBIT 10.1 [PARAMOUNT PARKS LETTERHEAD] April 20, 2000 Jon Corfino President Theme and Leisure Development Stan Lee Media 15821 Ventura Boulevard Encino, California 91436 Tim Miller President Blur Studio 1130 Abbot Kinney Boulevard Venice, California 90291 RE: 7TH PORTAL SIMULATOR FILM MEMORANDUM OF UNDERSTANDING Gentlemen: This document shall serve as a Memorandum of Understanding ("MOU") between Paramount Parks, Stan Lee Media, and Blur Studio pursuant to the creation, production, and distribution of the large format, 3-D simulator film incorporating The 7th Portal concept and characters. This MOU, attached to Article I. Term Sheet, Rev.2.0 April 20, 2000 and Exhibit "C" constitute an Interim Agreement to begin development of the film, pending final draft and negotiations of the Film Production and Distribution Agreement. Each Party shall keep detailed financial records of its expenditures under this Interim Agreement, such expenditures to be booked against the total budget, when finalized. I trust that the foregoing, and the attachments hereto, represent a fair and reasonable representation of our understanding. If you agree, please so indicate by signing in the space provided below, initialing the Exhibits in the lower right hand corner, and returning one original to me. Thank you. Sincerely, /s/ DEAN SHARITS Dean Sharits Vice President, Design + Entertainment Paramount Parks Agreed to and Accepted Agreed to and Accepted /s/ /s/ ----------------------------- ----------------------------- Jon Corfino Tim Miller Stan Lee Media Blur Studio

2 7TH PORTAL SIMULATOR FILM TERM SHEET March 30, 2000 Rev.2.0 April 20, 2000 PARTIES TO THE AGREEMENT: Stan Lee Media, Inc. (SLP), Paramount Parks Inc. (PPI), and Blur Studio (Blur) (hereinafter collectively referred to as "the Parties"). DEFINITIONS: A. "Film" means a 3.75 to 4.25 minute long simulator film, ideally 4.00 minutes. B. "Video Pre-Show" means a 3.75 to 4.25 minute piece (identical in length and synchronous to the Film) to be utilized in the cue process for viewer engagement. C. "NewCo" means a new entity, in the form of a Limited Liability Corporation, to oversee the production of the Film from conception to completion, including development, funding, creative approval, production, and Film distribution. Newco will have three (3) members -- PPI, SLP, and Blur. PPI will act as Newco's Managing Member. The administrative duties and responsibilities of the Managing Member shall include, but not be limited to: (a) administering any and all banking functions (understanding that any check disbursements will require two signatures); (b) reviewing, maintaining, and auditing all Newco records; (c) overseeing, and engaging professional services where necessary, for all business and legal matters; and (d) managing all matters with respect to protecting the Film and Video Pre-Show. SLP and PPI will jointly be responsible for the Film's creative, production, and distribution-related decisions. Blur will be responsible for producing the Film, Sound Track, and Video Pre-Show. D. "PPI Park" or "Parks" means those theme parks currently owned by PPI in Cincinnati, OH; Richmond, VA; Santa Clara, CA; Toronto, Canada; and Charlotte, NC. E. "Distributor" means one or more distributors of the Film in commercial markets outside PPI Parks. F. "Production Budget" means the total costs for the production of the Film, said costs not to exceed US$1.5 Million. G. "Financing" means US$500,000 cash or cash equivalent each from SLP and PPI, for a total of US$1.0 Million. Blur will contribute an additional US$500,000 in production services, said services to be deferred mark-up, overhead, and amortization based on labor, materials, equipment, and facilities. Blur's contribution shall be guaranteed in the form of a Promissory Note to Newco. H. "Executive Producers" means Jon Corfino of SLP and Dean Sharits of PPI. I. "Producer" means Blur Studio. J. "Line Producer" means Tim Miller. K. "Film Director" means Yaz Takata.

3 THE DELIVERABLES: No later than March 1, 2001, Newco shall receive the following complete film package: the Film in the 5-70 format, a digitally-mastered Soundtrack on laser disc, and a Video Pre-Show on laser disc ("the Deliverables"). The Film will be rendered in High Resolution Computer Generated Images, 8-70 format, action saved for 5-70 reduction, in both 2D and 3D at 30 frames per second. Animation will be rendered in High Resolution 3-D rather than flat cell, and will use state-of-the-art motion capture techniques where appropriate. The Soundtrack, at a minimum, will be 6-tracks digitally mastered, prepped for solid-state digital playback, and suitable for on-site mixing. In addition, a Video Pre-Show will be shot and edited on video and transferred to laser disc. The quality of the Film, Soundtrack, and Video Pre-Show will be equal to or greater than the highest theme park industry standard and will be suitable for exhibition in motion simulation theaters and outside commercial simulator attractions. UNDERLYING INTELLECTUAL PROPERTY RIGHTS: SLP owns the underlying "7th Portal" intellectual property rights. SLP shall grant to Newco a non-revocable, exclusive license for a period of six (6) years from the date the Film is completed to use 7th Portal characters in its effort to produce, distribute, and exploit the Deliverables, said rights shall include music and print publishing, sound recording, merchandising, and theme park walk-around character use. SLP shall not be entitled to any remuneration in the form of license fees or royalties for the above-delineated rights. TERM -- NEWCO: Newco shall come into existence May 1, 2000 and be dissolved April 30, 2007 ("Term"). At the end of the Term, and upon dissolution of Newco, the Parties' rights shall be as follows with respect to the Deliverables: (a) Newco will assign a one-third (1/3) interest in the Deliverables to each of PPI, Blur, and SLP. (b) With respect to the Film, its negative/master will be stored through a reputable post-production house in an appropriate vault in Los Angeles. Any Party seeking a reproduction of the Film may do so by contacting the production house and making appropriate arrangements (at that Party's cost). Notice of reproduction by any Party must be given to the other former Parties. (c) The Parties may further exploit the Deliverables, without any obligation to share the proceeds with the other then-former Parties, subject to any existing distribution-related contractual obligations that were agreed and entered into prior to Newco's dissolution.

4 FUNDING: 1. The breakdown for the US$1.5 Million budget is attached hereto as Exhibit "A" along with cash requirements from the contributors attached as Exhibit "B". Blue shall submit a budget breakdown listing each phase and element of development and production, and delineate that portion of each element that will be paid from Newco's funding and the remainder to be treated as Blur's deferral, provided said remainder does not exceed US$0.5 Million. Any expenses or costs incurred by the Parties during the completion of the Film (except those approved production costs included by Blur) are not reimbursable by Newco. 2. PPI and SLP will each deposit US$500,000 in a Newco account. Each of the Parties understand that, there will be no obligation to repay another Party, until such time that US$1.0 Million has been deposited into a Newco account in cash or cash equivalents. Disbursements will be credited equally to each contributor. 3. PPI agrees to act as the completion guarantor for this project. In the event the costs exceed US$1.0 Million prior to the completion of the project, PPI will request additional cash contributions from the other Parties. In the event any Party chooses not to contribute additional cash, that Party understands that its interest (originally at 1/3) will be reduced to reflect the adjusted interest in the project, while any Party that chooses to contribute the additional cash, will receive an increased percentage interest. 4. Blur shall submit monthly cost reports to Newco, and the Managing Member will be responsible to verify progress on the Film prior to payment disbursements. Payments will be made only to the extent that actual work has been completed. 5. Upon completion of the Film and for a period of one (1) year thereafter, Newco's Managing Member shall have the right to audit Blur's books with respect to the Film, at Newco's cost. In the event that discrepancies of more than five percent (5%) are discovered, Blur will be required to pay for the audit and reimburse Newco for any funds owed it. 6. In the event that either SLM or PPI identifies a third-party to assume all or a portion of their respective interest in the Film, the Party seeking to assign its interest must obtain prior approval from the other Parties and must give the other Parties the Right of First Refusal to acquire the interest at a level and in an amount equal to that being offered to the third-party.

5 PPI LICENSE: 7. PPI shall be granted a non-revocable, royalty and license-free license for its five existing parks, in perpetuity, commencing upon completion of the Film, subject to the following: (a) PPI shall have exclusivity within a 250-mile radius of each of its parks for the first two (2) years: (b) In the event that PPI shall acquire an additional park or attraction by way of ownership, joint venture, or management contract within the first two (2) years, and the Film has not been distributed within a 250-mile radius of such park or attraction, PPI's Licence shall extend to such park or attraction for immediate exhibition. If beyond the first two (2) years, such License shall extend to the park or attraction regardless of proximate exhibition. For purposes of this Agreement, however, PPI shall be limited to two (2) acquisitions in addition to its five existing theme parks; and (c) PPI reserves the right to approve the license of the Film to any other theme park in North America, said approval not to be unreasonably withheld. 8. SLP agrees to the following non-revocable rights with respect to PPI: (a) SLP shall give PPI the Right of First Refusal in the event that a sequel or series of simulator films is contemplated using the 7th Portal concept or characters, said right involving an opportunity to match any third-party offer to produce another Film -- even if previously rejected by PPI; (b) SLP shall grant PPI the right to use "Walk-a-Rounds" based on the characters and concept in its parks, and the right to promote the 7th Portal through special events and touring shows; (c) SLP shall grant PPI a license to sell merchandise based on the 7th Portal concept and characters in its parks, events, and touring shows subject to a 5% royalty on the wholesale cost of goods sold. Such merchandise licensing agreement shall be negotiated separately, and is not a part of this Agreement; and (d) SLP shall grant PPI the right to use the 7th Portal brand or concept in association with the naming of any ride or attraction in a PPI Park. PROMOTION & MATERIALS: 1. SLP shall make available reproducible art, printed material, and marketing collateral to PPI with respect to the 7th Portal concept and characters for the purpose of promoting the film. SLP will not charge PPI for the use of the material, understanding that PPI would incur the costs of mass-producing said material. 2. SLP shall promote the Film, its association with PPI, and PPI Park locations on its website. PPI shall promote the Film and its association with SLP on its websites.

6 3. SLP agrees to provide the in-person services of Mr. Stan Lee for public appearances and press releases associated with the grand opening of the Film in at least one (1) of the PPI Parks. Such services shall be rendered at no cost, and upon PPI's reasonable notice of such requirement. PPI will reimburse SLP for actual, reasonable, and documented expenses associated with Mr. Lee's personal appearances at the PPI Parks. INDEMNIFICATION: The Parties will indemnify each other with respect to any and all injuries (or intellectual property disputes) that may arise out of this project. The actual agreement will contain extensive indemnification terms and provisions. DISTRIBUTION: 1. The Managing Member shall arrange a distribution agreement with one or more distributors ("Distributor") for the world-wide exploitation of the Film. As a condition of such agreement, Newco shall use its best efforts to cause Distributor to comply with the following stipulations: (a) During the year commencing March 15, 2001 (the "Initial Year"), distributor shall not distribute the Film to a theme park in the United States and Canada or to a stand-alone simulation theater (i.e., outside a theme park) within a 250 mile radius of any Park or Additional Park without the approval of PPI (it being agreed that any such distribution is pre-approved for theme parks or stand-alones in the following cities: Orlando, New York, Los Angeles, Seattle, San Diego, Chicago, and Dallas); (b) PPI reserves the right to approve the license of the Film to any other theme park in North America, said approval not to be unreasonably withheld; (c) After the second year, Distributor may distribute the Film to any stand-alone simulation theater, regardless of location, and to theme parks in the aforementioned cities as well as any theme park outside the 250-mile radius of the Parks/Additional Parks; and (d) PPI shall be entitled to a "Paramount Parks" and individual credits (the form of which shall be approved by Newco prior to such use) on one-sheets and other marketing materials and approved merchandise items in connection with the exhibition of the Film at the Parks.

7 REVENUE PARTICIPATION: 1. The Parties agree to the following distribution of gross receipts derived from the exhibition of the Film: a) Gross receipts received by or credited to the account of Distributor in connection with its exploitation of the Film ("Gross Receipts") shall be disbursed as follows on a continuing and cumulative basis: i) First, Distributor shall retain 30% as a distribution fee which distribution fee shall be inclusive of all distribution expenses; ii) Second, Distributor shall distribute the remaining Gross Receipts, quarterly, to Newco; and iii) Third, the Parties' Gross Receipts shall be distributed quarterly by Newco to SLP, PPI, and Blur on a first-dollar-out basis, in accordance with the schedule attached hereto as Exhibit "C"; 2. In connection with the Film's distribution, Distributor shall submit financial reporting statements showing all revenue from the distribution of the Film on a quarterly basis throughout the Term of distribution. Newco shall have the right to audit Distributor's books and records in connection with the distribution of the Film, the cost of which shall be borne by Newco. In the event that any audit shall subsequently reveal a discrepancy of greater than 5% of the information reported in the financial statements, then Distributor shall bear the full costs of such audit as well as any funds owed.

1 EXHIBIT 10.2 THE CANTON COMPANY 4000 Warner Boulevard Building 81, Room 200 Burbank, CA 91522 June 2, 2000 Peter F. Paul DRAFT Stan Lee Media 15821 Ventura Boulevard Encino, CA 91436 Re: MARK CANTON / "THE SEVENTH PORTAL" ("PICTURE") ---------------------------------------------- Dear Peter: This letter will confirm our understanding that in consideration for both my and The Canton Company's (collectively, "Canton") continuing efforts to secure financing and set up the Picture for development, financing and/or production with a third party financier ("Third Party"), Canton shall have the exclusive right commencing on the date hereof and continuing for a period of 6 months hereafter, to exclusively pitch and submit the Picture to Third Parties for development, financing and/or production. It is understood that if the Picture is set up with a Third Party, Canton will be the producer thereof and shall be entitled to Canton's then current standard producing deal (e.g., currently the Warner Bros. deal). Please note we are in the process of making an arrangement with Peter Dunne as it relates to this relationship. In addition, we would like to discuss a more comprehensive arrangement between Stan Lee Media and Canton in connection with other Stan Lee properties including, for example, the Back Street Boys movie. Please sign on the space indicated below to confirm your agreement to the foregoing and return a copy of same to me for my files. Very truly yours, DRAFT /s/ MARK CANTON ---------------------------------------- Mark Canton MC: cc: Jacob A. Bloom, Esq. Steven L. Brookman, Esq. /s/ STAN LEE ----------------------------------- Stan Lee Stan Lee Media

1 EXHIBIT 10.3 MEMORANDUM OF UNDERSTANDING This Memorandum of Understanding (the "Agreement"), entered into as of June 14, 2000 (the "Effective Date"), will confirm the basic terms of the agreement between FOX LATIN AMERICAN CHANNEL, INC. a Delaware corporation ("Fox"), on the one hand, and STAN LEE MEDIA, INC., a Colorado corporation ("SLM"), on the other hand, concerning the subject matter hereof. 1. SLM Web Site. (a) Fox agrees, at its own expense, to "localize" the existing Stan Lee Web Sites (i.e., stanlee.net and scuzzle.com), all significant modifications thereto, and all similar web sites, or other internet-based delivery systems for all manner of access devices, including, without limitation, if applicable under Section 2(a) hereunder, wireless devices such as Wireless Application Protocol compliant devices, acquired, created, or controlled by SLM during the "Operational Term" (as defined in Paragraph 8 below) (collectively the "SLM Web Sites"). "Localization" shall mean the ongoing dubbing, subtitling and/or translating into the relevant languages in the "Territory" (as defined in Paragraph 9 below), and consulting on the modification of the Web Site to suit the taste of the local audiences. Notwithstanding anything contained herein to the contrary, Fox shall use good faith, reasonable efforts to Localize content contained on the SLM Web Sites during the Operational Term, but may decide, in its reasonable business judgment, not to Localize specific content. Upon the decision of Fox not to Localize any such content, all rights to such content will revert to SLM. (b) It is the intention of Fox to co-brand the localized Web Site by delivering same through its web sites and other internet-based delivery systems in the Territory, subject to the Wireless Rights as set forth in Paragraph 2(a) below. Fox shall support (e.g., through vehicles such as magazines, contests, and events) the co-branded content in a manner not less favorable than other similar properties promoted by Fox. SLM and Fox agree to create links in both directions between the Web Site and Fox's web sites in the Territory and to all relevant sites controlled by the parties supporting such co-branded activities. The localized Web Site shall contain the co-branding credit, "Fox and Stan Lee Media Present ___________," or such other credit as to which the parties mutually agree. The localized Web Site shall be accessible by entering URLs which begin with the Fox brand, shall be located in the Fox web site environment, and shall be directly accessible through unique URL's such as stanlee.com.br. (c) Fox shall promote the various properties which are subject of the Agreement during the Operational Term in a manner not less favorable than other similar properties promoted by Fox. (d) Fox shall use reasonable efforts to promptly perform the Localization and promotional activities of Fox described above, and the co-branding activities (including the delivery of the localized Web Site) during the Operational Term. 2. Animated Properties. (a) SLM hereby grants to Fox the exclusive right throughout the Territory during the "Distribution Term" (as defined in Paragraph 2(b) below) to distribute, transmit, exhibit, license,

2 advertise, duplicate, promote, perform and otherwise exploit any and all animated (i.e., other than substantially completely live action) "Properties" (as defined below) and all elements thereof at present wholly-owned and/or controlled by, or hereafter created by, or a controlling interest of which is hereafter acquired by SLM or any affiliate during the Operational Term (collectively the "Animated Properties") by any means of audio and/or visual technology whether at present existing or hereafter developed, including, without limitation, by free over-the-air television, cable television and online (including Internet, www, cable modem and all other forms of online or other electronic distribution now known or, with the reasonable approval of SLM, hereafter developed), narrow and broadband services. The foregoing shall include all print, electronic, and music publishing and merchandising rights to the Animated Properties and all elements thereof in the Territory during the Distribution Term. The term "Property" or "Properties" shall mean all intellectual property of any nature, including, without limitation, audio and/or visual productions (including webisodes and other computer mediated games and other experiences), products, characters, literary and/or musical materials, including, without limitation, books, screenplays, treatments, ideas, themes, etc., and any derivative works based on any of the foregoing. Notwithstanding the foregoing, with regard to distribution rights for the display and other exploitation of Animated Properties for wireless devices such as Wireless Application Protocol compliant devices ("Wireless Rights"), Fox shall have a right of first negotiation to acquire the exclusive distribution and other exploitation rights for the Wireless Rights during the Distribution Term in the Territory. Fox's right of first negotiation shall mean that SLM shall not negotiate with any third party with respect to the rights in question or itself exploit such rights in the Territory until SLM has negotiated with Fox in good faith in respect of such rights in the Territory for at least a period of 45 days (or shorter if Fox declines to enter into such negotiations). If Fox declines to enter into such negotiations or an agreement in principle is not concluded within such 45 day period, SLM shall be entitled to negotiate as to the applicable rights with any third party. (b) The "Distribution Term" shall mean that period of time commencing upon the Effective Date and continuing until one year after the termination or expiration of the Operational Term. (c) SLM shall be fully responsible for the creation, production, and delivery of the Animated Properties, including all costs associated therewith. Fox shall be solely responsible for the costs (which shall be treated as Production Costs) necessary to edit (which Fox shall have the right to do) the Animated Properties as desirable for exploitation in the Territory in the applicable medium or media (including, without limitation, for use as interstitial programming in connection with programing created or exploited by Fox or any licensee of Fox in the Territory), provided that any such editing shall be subject to the reasonable consent of SLM. (d) Notwithstanding anything to the contrary contained herein, SLM shall have the right to exclusively license the Animated Properties for worldwide theatrical release, provided that the definitive documentation further memorializing this Agreement shall provide for equitable compensation to Fox in connection with any such theatrical release in the Territory. 3. Live Action and Third Party Properties. Fox shall have a right of first negotiation to acquire the distribution and other exploitation rights (including any and all ancillary rights) in any and all media (whether or not now known or recognized) exclusively in the Territory in any and all live action. Properties now owned or controlled or hereafter created, licensed or acquired by SLM or any

3 affiliate during the Operational Term (the "Live Action Properties") and any and all distribution and other exploitation rights (including any and all ancillary rights) in any and all Properties acquired by SLM from any third party during the Operational Term (the "Third Party Properties"). Fox's right of first negotiation shall mean that SLM shall not negotiate with any third party with respect to the rights in question or itself exploit such rights in the Territory until SLM has negotiated with Fox in good faith in respect of such rights in the Territory for at least a period of 45 days (or shorter if Fox declines to enter into such negotiations). If Fox declines to enter into such negotiations or an agreement in principle is not concluded within such 45 day period, SLM shall be entitled to negotiate as to the applicable rights with any third party. 4. Jointly Created Properties. The parties shall use best efforts to jointly create and/or develop during the Operational Term original animated and other Properties of which the property currently entitled "Kids Cup 2000" is one (the "Jointly Created Properties"). SLM and Fox shall each own an undivided 50% interest in the copyright (and all renewals and extensions of the copyright) and all other rights in and to the Jointly Created Properties, and neither party shall have the right to exploit or otherwise dispose of any such rights without the prior written consent of the other, which consent shall not be unreasonably withheld; provided, however, that Fox shall own exclusively and perpetually all distribution and other exploitation rights (including any and all ancillary rights) in the Territory in the Jointly Created Properties and all elements thereof, with SLM having a consultation right, but not an approval right with regard to exploitation of the Jointly Created Properties in the Territory. Notwithstanding the grant to Fox of the exclusive rights referenced in the previous sentence, Fox shall not exploit the Jointly Created Properties in any manner that would be offensive to good taste, inconsistent with or would injure the reputation of SLM and/or of the Jointly Created Properties. 5. Allocation of Revenues. "Gross Receipts" shall mean all revenues actually received and earned by Fox or SLM, as the case may be, freely convertible to U.S. dollars from the exploitation of all the rights granted to Fox pursuant to this Agreement (including, without limitation, any and all revenues payable by any third party pursuant to any agreement entered into by Fox during the Operational Term, whether or not such monies are payable during or after the Operational Term). Revenues received hereunder in foreign accounts which cannot be lawfully removed from that country ("Blocked Funds") shall not constitute Gross Receipts unless and until disbursement to Fox or SLM, as the case may be, takes place pursuant to Paragraph 5(d) below, at which time such revenues shall be included in Gross Receipts. Gross Receipts shall be allocated as follows, on a continuing and cumulative basis and in the following order of priority: (a) First, from the Gross Receipts remaining, if any, Fox or SLM, as the case may be, shall deduct and retain an amount equal to any payments made or incurred to any third party as contingent compensation in connection with the exploitation of the rights granted to Fox hereunder (howsoever denominated, whether as net profits, net receipts, adjusted gross receipts, first dollar gross receipts, fixed or contingent deferments, bonuses, etc.); (b) Next, Fox or SLM, as the case may be, shall deduct and retain a distribution fee equal to 20% of the Gross Receipts generated from revenues received by such party; (c) Next, the Gross Receipts remaining, if any, shall be divided 50% to Fox and 50% to SLM, and

4 (d) Notwithstanding the foregoing, in the event that any Blocked Funds are held in a foreign account of either party, the other party may designate a recipient bank account in the same Blocked Funds country; the party holding such Blocked Funds shall, no more than once per year, transfer to the other party's designated bank account its share of these Blocked Funds pursuant to the revenue allocation formula contained in this Paragraph 5, and such revenues shall then be included in Gross Receipts hereunder. The party disbursing Blocked Funds makes no warranties or representations that any part of any such foreign currencies may be converted into U.S. dollars in the United States. 6. Representations; Warranties; Indemnification. SLM warrants and represents that (a) SLM owns and/or controls, or has obtained clearances for, all rights necessary to use the assets it provides to Fox for inclusion in the localized Web Site for the purposes contemplated hereunder, (b) the use, as contemplated by this Agreement, of the material supplied by SLM hereunder shall not infringe any copyright, trademark, trade secret or other third party proprietary right; including, but not limited to, guild obligations or reuse fees, and (c) there is no impediment to SLM's performance of its obligations hereunder. SLM agrees to defend, indemnify and hold harmless Fox, its affiliates, officers, directors and employees for any claims, liabilities, suits or proceedings (including attorneys fees) alleging a breach of these warranties. 7. Accounting/Auditing. The definitive documentation further memorializing this Agreement shall provide for customary accounting and audit rights on behalf of the paries. 8. Operational Term. The "Operational Term" shall mean that period of time commencing upon the Effective Date and continuing for the following two (2) years. 9. Territory. The "Territory" shall mean Latin America and all ships and aircraft flying the flag of any Latin American country. Additional territories shall be subject to good faith negotiation between the parties. For the purpose of this Agreement, Latin America shall mean Mexico, Central America, South America, and all nations in the Caribbean Sea, excluding Puerto Rico. 10. Confidentiality. The parties shall not, without the prior consent of the other party, disclose the terms or existence of this Agreement to any third party except their respective advisers who shall also treat the terms and existence of this Agreement as confidential, and except as required by law. The parties agree to in good faith develop a press release relating to their having entered into this Agreement, the content and timing of which shall be subject to their mutual and reasonable approval. 11. Delivery Requirements. All materials to be delivered hereunder by SLM to Fox shall be provided in internet-ready format; upon Fox's request, any such material(s) shall also be delivered in television-ready format. 12. Definitive Agreements. The parties will work in good faith and shall use best efforts to finalize definitive documentation further memorializing the Agreement not later than 90 days following execution of this Memorandum of Understanding. 13. Miscellaneous. This Agreement constitutes the entire agreement between the parties with respect to its subject matter, cannot be amended except by in writing signed by both parties.

5 supersedes any and all prior or contemporaneous agreements relating to its subject matter, and is subject to the laws of the United States and the State of California. Paragraph heading used herein are for convenience only and shall not be used to interpret this Agreement. Promptly following execution of this Agreement, the parties agree to enter into a more formal agreement containing the terms hereof and such other terms and conditions customarily contained in an agreement of this nature (including, without limitation, applicable representations, warranties, indemnifications, and provisions relating to the specific credit to be accorded the parties, force majeure, death, disability, and protection of the respective parties' intellectual property rights, waivers by SLM of injunctive and other equitable relief, etc.), which other terms and conditions shall be subject to good faith negotiation within Fox's customary business parameters. Until such time as such more formal agreement is entered into, this Agreement shall constitute a binding agreement between the parties. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. FOX LATIN AMERICAN CHANNEL, INC. STAN LEE MEDIA, INC. By: /s/ [SIGNATURE ILLEGIBLE] By: /s/ [SIGNATURE ILLEGIBLE] ---------------------------- -------------------------- Its: V.P. General Manager Its: EVP --------------------------- -------------------------

1 EXHIBIT 10.4 PREFERRED STOCK INVESTMENT AGREEMENT PREFERRED STOCK INVESTMENT AGREEMENT ("AGREEMENT") dated as of August 1, 2000 among Stan Lee Media, Inc., a Colorado corporation (the "COMPANY"), Elliott Associates, L.P. ("ELLIOTT") and Westgate International, L.P. ("WESTGATE"; Elliott and Westgate shall be hereinafter referred to individually and collectively as the "INVESTOR"). W I T N E S S E T H: WHEREAS, the Company desires to sell and issue to the Investor, and the Investor wishes to purchase from the Company (1) an aggregate of 4,000 shares of the Company's Series B 4% Cumulative Convertible Preferred Stock, liquidation preference $1,000 per share (all of such shares being the "PREFERRED SHARES"), having the rights, designations and preferences set forth in the Articles of Amendment to the Articles of Incorporation of the Company (the "CERTIFICATE") in the form of Exhibit 1.1A attached hereto, and (2) warrants (the "WARRANTS") to purchase an aggregate of 75,000 shares ("COMMON SHARES") of common stock, no par value, of the Company ("COMMON STOCK") pursuant to a warrant agreement in the form of Exhibit 1.1B attached hereto, each on the terms and conditions set forth herein; and WHEREAS, the Preferred Shares will be convertible into Common Shares pursuant to the terms of the Certificate, and the Investor will have registration rights with respect to such Common Shares issued upon conversion of the Preferred Shares on exercise of the Warrants, pursuant to the terms of that certain Registration Rights Agreement to be entered into between the Company and the Investor substantially in the form of Exhibit 5.2(f) hereto ("REGISTRATION RIGHTS AGREEMENT"); NOW, THEREFORE, in consideration of the foregoing premises and the covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I PURCHASE AND SALE OF PREFERRED SHARES Section 1.1 Issuance of Preferred Shares and Warrants. Upon the following terms and conditions, the Company shall issue and sell to the Investor, and the Investor shall purchase from the Company, the number of Preferred Shares and Warrants indicated next to the Investor's name on Schedule I attached hereto. Section 1.2 Purchase Price. The purchase price for the Preferred Shares and Warrants to be acquired by the Investor (the "PURCHASE PRICE") shall be the Purchase Price set forth next to the Investor's name on Schedule I.

2 Section 1.3 The Closing. (a) Timing. Subject to the fulfillment or waiver of the conditions set forth in Article V hereof, the purchase and sale of the Preferred Shares and Warrants shall take place at a closing (the "CLOSING"), on or about the date hereof or such other date as the Investor and the Company may agree upon (the "CLOSING DATE"). (b) Form of Payment. Each Investor shall pay their respective Purchase Price for the Preferred Shares and Warrants by wire transfer to the account or accounts designated by the Company upon delivery by the Company to the Investors' counsel of the applicable Preferred Shares and Warrants and upon satisfaction of the other conditions to the Closing. The delivery of payment to such designated account(s) shall constitute a payment delivered to the Company in satisfaction of such Investor's obligation to pay the Purchase Price hereunder. The Company shall pay the cash fees due Trinity Capital Advisors, Inc. ("Trinity") in connection with the transactions contemplated hereby out of the gross proceeds of the Purchase Price hereunder, and the Company may direct the Investor to pay such cash fee on account of the Company to Trinity from the Purchaser Price hereunder. In addition, each party shall deliver all documents, instruments and writings required to be delivered by such party pursuant to this Agreement at or prior to the Closing. ARTICLE II REPRESENTATIONS AND WARRANTIES Section 2.1 Representations and Warranties of the Company. The Company hereby makes the following representations and warranties to the Investor as of the date hereof and on the Closing Date: (a) Organization and Qualification; Material Adverse Effect. The Company is a corporation duly incorporated and existing in good standing under the laws of the State of Colorado and has the requisite corporate power to own its properties and to carry on its business as now being conducted. The Company does not have any subsidiaries other than the subsidiaries listed on Schedule 2.1(a) attached hereto ("SUBSIDIARIES"). Except where specifically indicated to the contrary, all references in this Agreement to subsidiaries shall be deemed to refer to all direct and indirect subsidiaries of the Company. 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 or property owned by it makes such qualification necessary other than those in which the failure so to qualify would not have a Material Adverse Effect. "MATERIAL ADVERSE EFFECT" means any adverse effect on the business, operations, properties, prospects or financial condition of the Company and its subsidiaries, if any, and which is (either alone or together with all other adverse effects) material to the Company and its Subsidiaries, if any, taken as a whole, and any material adverse effect on the transactions contemplated under this Agreement, the Certificate, the Warrants and the Registration Rights Agreement, or any other agreement or document contemplated hereby or thereby. (b) Authorization; Enforcement. (i) The Company has all requisite corporate power and authority to enter into and perform this Agreement, the Certificate, the Warrants and 2

3 the Registration Rights Agreement ("TRANSACTION DOCUMENTS") and to issue the Preferred Shares and Warrants in accordance with the terms hereof, (ii) the execution and delivery of this Agreement, the Warrants and the Registration Rights Agreement by the Company and the consummation by it of the transactions contemplated hereby and thereby, including the issuance of the Preferred Shares and Warrants and the resolutions contained in the Certificate, have been duly authorized by all necessary corporate action, and no further consent or authorization of the Company or its Board of Directors (or any committee or subcommittee thereof) or stockholders is required, (iii) this Agreement, the Warrants and the Registration Rights Agreement have been duly executed and delivered by the Company, (iv) this Agreement, the Warrants, the Certificate and the Registration Rights Agreement constitute valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except (A) 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, and (B) to the extent the indemnification provisions contained in this Agreement and the Registration Rights Agreement may be limited by applicable federal or state securities laws and (v) the Preferred Shares and Warrants have been duly authorized and, upon issuance thereof and payment therefor in accordance with the terms of this Agreement, the Preferred Shares and Warrants will be validly issued, fully paid and non-assessable, free and clear of any and all liens, claims and encumbrances. (c) Capitalization. As of the date hereof, the authorized capital stock of the Company consists of (i) 100,000,000 shares of Common Stock, of which as of the date hereof, 12,031,502 shares are issued and outstanding, 3,764,936 shares are issuable and reserved for issuance pursuant to the Company's stock option and purchase plans and 2,856,864 shares are issuable and reserved for issuance pursuant to securities exercisable or exchangeable for, or convertible into, shares of Common Stock, (ii) _________ shares of Common Stock are currently issuable and 500,000 shares of Common Stock are reserved for issuance upon conversion of the Company's Series A Six Percent (6%) Convertible Notes, and (iii) 10,000,000 shares of preferred stock, of which as of the date hereof, none of such shares have any designations and none of such shares have been issued, except for 1,500,000 shares designated as Series A Cumulative Convertible Preferred Stock, of which 714,286 shares are issued and outstanding, and 4,000 shares designated as Series B 4% Cumulative Convertible Preferred Stock, all of which have been reserved for issuance hereunder as Preferred Shares. All of such outstanding shares have been, and upon issuance authorized but not outstanding shares will be, validly issued, fully paid and nonassessable. As of the date hereof, except as disclosed in Schedule 2.1(c), (i) no shares of the Company's capital stock are subject to preemptive rights or any other similar rights or any liens or encumbrances suffered or permitted by the Company, (ii) there are no outstanding debt securities which are not set forth in the Form 10-Q filed by the Company with the SEC for the period ending March 31, 2000 (except for such debt securities which do not exceed $5 million in principal amount in the aggregate), (iii) 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 contracts, commitments, understandings 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 or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities 3

4 or rights convertible into, any shares of capital stock of the Company or any of its Subsidiaries, (iv) there are no agreements or arrangements under which the Company or any of its Subsidiaries is obligated to register the sale of any of their securities under the Securities Act of 1933, as amended ("SECURITIES ACT" or "1933 ACT") (except the Registration Rights Agreement), (v) there are no outstanding securities of the Company or any of its Subsidiaries which contain any redemption or similar provisions, and there are no contracts, commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or may become bound to redeem a security of the Company or any of its Subsidiaries, (vi) there are no securities or instruments containing anti-dilution or similar provisions that will be triggered by the issuance of the Preferred Shares or Warrants as described in this Agreement or the issuance of Common Shares upon conversion or exercise thereof, and (vii) the Company does not have any stock appreciation rights or "phantom stock" plans or agreements or any similar plan or agreement. The Company has furnished to the Investor true and correct copies of the Company's Articles of Incorporation, as amended and as in effect on the date hereof (the "CERTIFICATE OF INCORPORATION"), and the Company's By-laws, as amended and as in effect on the date hereof (the "BY-LAWS"), and the terms of all securities convertible or exchangeable into or exercisable for Common Stock and the material rights of the holders thereof in respect thereto. (d) Issuance of Shares. Upon issuance in accordance with this Agreement, the Warrants and the Certificate, the Preferred Shares and Warrants and the Common Shares issuable upon conversion or exchange thereof will be validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof. (e) No Conflicts. Except as disclosed in Schedule 2.1(e), the execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby, and the issuance of the Preferred Shares and Warrants hereunder and the Common Shares upon conversion or exercise thereof, will not (i) result in a violation of the Certificate of Incorporation, any certificate of designations, preferences and rights of any outstanding series of preferred stock of the Company or the By-laws; (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 (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including United States federal and state securities laws and regulations and the rules and regulations of the NASD and the Nasdaq Small-Cap Market ("PRINCIPAL MARKET") and any other principal securities exchange or trading market on which the Common Stock is traded or listed) 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 as disclosed in Schedule 2.1(e), neither the Company nor its Subsidiaries is in violation of any term of, or in default under, (x) its certificate of incorporation, any certificate of designations, preferences and rights of any outstanding series of preferred stock or by-laws or their organizational charter or by-laws, respectively, (y) any material contract, agreement, mortgage, indebtedness, indenture, instrument, or (z) any judgment, decree or order or any statute, rule or regulation applicable to the Company or its Subsidiaries, the non-compliance with which (in the case of clause (z) only) would be material to the Company or its subsidiaries or interfere with the performance of its obligations under the Transaction Documents. Except as specifically contemplated by this Agreement and as required under the 1933 Act, the Company is 4

5 not required to obtain any consent, authorization or order of, or make any filing or registration with, any court, governmental agency or any regulatory or self-regulatory agency in order for it to execute, deliver or perform any of its obligations under, or contemplated by, the Transaction Documents, or issue the Preferred Shares, Warrants or Common Shares, in accordance with the terms hereof or thereof. Except as disclosed in Schedule 2.1(e), all consents, authorizations, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof. The Company complies with and is not in violation of the listing requirements of the Principal Market as in effect on the date hereof and on the Closing Date and is not aware of any facts which would reasonably lead to delisting or suspension of the Common Stock by the Principal Market in the foreseeable future. (f) SEC Documents; Financial Statements. Since December 31, 1998, the Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Securities Exchange Act of 1934 Act, as amended ("1934 ACT" or "EXCHANGE ACT") (all of the foregoing filed prior to the date hereof and all exhibits included therein and financial statements and schedules thereto and documents incorporated by reference therein being hereinafter referred to as the "SEC DOCUMENTS"). The Company has delivered to the Investor or its representatives true and complete copies of any SEC Documents that were filed by the Company with the SEC but not filed electronically via EDGAR. 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 written information provided by or on behalf of the Company to the Investor which is not included in the SEC Documents, including, without limitation, information referred to in Section 2.2(b) 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. (g) Absence of Certain Changes. Except as disclosed in Schedule 2.1(g) or the SEC Documents filed at least seven (7) days prior to the date hereof, since December 31, 1999 there has been no adverse change or adverse development in the business, properties, assets, operations, financial condition, prospects, liabilities or results of operations of the Company or its Subsidiaries which has had or, to the knowledge of the Company or its 5

6 Subsidiaries, is reasonably likely to have a Material Adverse Effect. The Company has not taken any steps, and does not currently expect to take any steps, to seek protection pursuant to any bankruptcy law nor does the Company or its Subsidiaries have any knowledge or reason to believe that its creditors intend to initiate involuntary bankruptcy proceedings. Schedule 2.1(g) lists all material events, transactions and agreements which have occurred or been entered into affecting the Company since March 31, 2000. (h) Absence of Litigation. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the Company or any of its Subsidiaries, threatened against or affecting the Company, the Common Stock or any of the Company's Subsidiaries or any of the Company's or the Company's Subsidiaries' officers or directors in their capacities as such, (i) except as set forth in Schedule 2.1(h) and (ii) except which individually and in the aggregate, respectively, would be reasonably likely to result in liability to the Company in excess of $50,000. (i) Acknowledgment Regarding Investor's Purchase of Shares. The Company acknowledges and agrees that the Investor is acting solely in the capacity of arm's length purchaser with respect to the Transaction Documents and the transactions contemplated hereby and thereby. The Company further acknowledges that the Investor is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated hereby and thereby, and any advice given by the Investor or any of its respective representatives or agents in connection with the Transaction Documents and the transactions contemplated hereby and thereby is merely incidental to the Investor's purchase of the Preferred Shares. The Company further represents to the Investor that the Company's decision to enter into the Transaction Documents has been based solely on the independent evaluation by the Company and its representatives. (j) No Undisclosed Events, Liabilities, Developments or Circumstances. No event, liability, development or circumstance has occurred or exists with respect to the Company or its Subsidiaries or their respective business, properties, prospects, operations or financial condition, that would be required to be disclosed by the Company on or prior to the date hereof under applicable securities laws on a registration statement filed with the SEC relating to an issuance and sale by the Company of its Common Stock and which has not been publicly disclosed. (k) No Inside Information. Neither the Company nor any of its Subsidiaries or any of their officers, directors, employees or agents have provided the Investor with any material, nonpublic information which was not publicly disclosed prior to the date hereof, and the Company shall not provide any Investor with any non-public information. (l) 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 that would cause this offering of Preferred Shares and Warrants to the Investor to be integrated with prior offerings by the Company for purposes of the 1933 Act or any applicable shareholder approval provisions, including, without limitation, under the rules and regulations of the Principal Market or other 6

7 Approved Market (defined below) or the NASD, nor will the Company or any of its Subsidiaries take any action or steps that would cause the offering of the Preferred Shares and Warrants to be integrated with other offerings. (m) Employee Relations. Neither the Company nor any of its Subsidiaries is involved in any labor dispute nor, to the knowledge of the Company or any of its Subsidiaries, is any such dispute threatened, the effect of which would be reasonably likely to result in a Material Adverse Effect. Neither the Company nor any of its Subsidiaries is a party to a collective bargaining agreement. The Company and its Subsidiaries believe that relations between the Company and its Subsidiaries and their respective employees are good. No executive officer (as defined in Rule 501(f) of the 1933 Act) whose departure would be adverse to the Company has notified the Company that such officer intends to leave the Company or otherwise terminate such officer's employment with the Company. (n) Intellectual Property Rights. The Company and its Subsidiaries own or possess adequate rights or licenses to use all trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, governmental authorizations, trade secrets and rights necessary to conduct their respective businesses as now conducted. Except as set forth on Schedule 2.1(n), none of the Company's trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, government authorizations, trade secrets or other intellectual property rights have expired or terminated, or are expected to expire or terminate within two (2) years from the date of this Agreement. The Company and its Subsidiaries do not have any knowledge of any infringement by the Company or its Subsidiaries of trademark, trade name rights, patents, patent rights, copyrights, inventions, licenses, service names, service marks, service mark registrations, trade secret or other similar rights of others, or of any such development of similar or identical trade secrets or technical information by others and, except as set forth on Schedule 2.1(n), there is no claim, action or proceeding being made or brought against, or to the Company's knowledge, being threatened against, the Company or its Subsidiaries regarding trademarks, trade name rights, patents, patent rights, inventions, copyrights, licenses, service names, service marks, service mark registrations, trade secrets or other infringement. The Company and its Subsidiaries have taken reasonable security measures to protect the value of all of their intellectual properties. (o) Environmental Laws. The Company and its Subsidiaries (i) are in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses, and (iii) are in compliance with all terms and conditions of any such permit, license or approval where such noncompliance or failure to receive permits, licenses or approvals referred to in clauses (i), (ii) or (iii) above could have, individually or in the aggregate, a Material Adverse Effect. (p) Title. The Company and its Subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the business of the Company and its Subsidiaries, in each case free and 7

8 clear of all liens, encumbrances and defects except such as are described in Schedule 2.1(p) or such as do not materially and adversely affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or any of its Subsidiaries. Any real property and facilities held under lease by the Company or any of its Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its Subsidiaries. (q) Insurance. The Company and each of its Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as reasonably prudent and customary in the businesses in which the Company and its Subsidiaries are engaged. Neither the Company nor any such Subsidiary has been refused any insurance coverage sought or applied for and neither the Company nor any such Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition, financial or otherwise, or the earnings, business or operations of the Company and its Subsidiaries taken as a whole. (r) Regulatory Permits. The Company and its Subsidiaries possess all material certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities, necessary to conduct their respective businesses, and neither the Company nor any such Subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit. (s) Internal Accounting Controls. The Company and each of its Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (t) Foreign Corrupt Practices Act. Neither the Company, nor any director, officer, agent, employee or other person acting on behalf of the Company or any Subsidiary has, in the course of acting for, or on behalf of, the Company, directly or indirectly (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; (ii) made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; (iii) violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended, or any similar treaties of the United States; or (iv) made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government or party official or employee. (u) Tax Status. The Company and each of its Subsidiaries has made or filed all United States federal and state income and all material other tax returns, reports and declarations required by any jurisdiction to which it is subject and has paid all material taxes and 8

9 other governmental assessments and charges shown or determined to be due on such returns, reports and declarations, except those being contested in good faith, and has set aside on its books provisions reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. To the Company's knowledge, there are no unpaid taxes claimed to be due by the taxing authority of any jurisdiction, and the Company is not aware of any basis for any such claim. (v) Certain Transactions. Except as set forth on Schedule 2.1(v) and in the SEC Documents filed on EDGAR at least seven (7) days prior to the date hereof and except for arm's length transactions pursuant to which the Company makes payments in the ordinary course of business upon terms no less favorable than the Company could obtain from third parties and other than the grant of stock options disclosed on Schedule 2.1(c), none of the officers, directors or employees of the Company is presently a party to any transaction with the Company or any of its Subsidiaries (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer, director or any such employee has a substantial interest or is an officer, director, trustee or partner. (w) Dilutive Effect. The Company understands and acknowledges that the number of Common Shares issuable upon conversion of Preferred Shares and exercise of the Warrants purchased pursuant to this Agreement will increase in certain circumstances. The Company further acknowledges that, subject to such limitations as are expressly set forth in the Transaction Documents, its obligation (x) to issue Common Shares upon exercise of the Warrants, and (y) to issue Common Shares upon conversion of Preferred Shares, purchased pursuant to this Agreement, is absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other shareholders of the Company. (x) Application of Takeover Protections. The Company and its board of directors have taken all necessary action, if any, in order to render inapplicable any anti-takeover provisions contained in the Company's Certificate of Incorporation or pursuant to Colorado law or otherwise which are or could become applicable to the Investor as a result of the transactions contemplated by this Agreement, including, without limitation, the Company's issuance of the Common Shares and the Investor's ownership of the Common Shares upon conversion or exercise of the Preferred Shares or Warrants. (y) Rights Plan. Neither the Company nor any of its Subsidiaries has adopted a shareholder rights plan or similar arrangement relating to accumulations of beneficial ownership of Common Stock or a change in control of the Company. The Company confirms that no provision of such plan will, under any present or future circumstances, delay, prevent or interfere with the performance of any of the Company's obligations under the Transaction Documents and such plan will not be "triggered" by such performance. (z) Market Capitalization. As of the date hereof, the aggregate market value of the voting common equity of the Company held by non-affiliates of the Company is greater 9

10 than $40 million, and on the date of the filing of the Registration Statement, such aggregate market value shall be greater than $40 million as of a date within 60 days prior to such filing. (aa) Obligations Absolute. Each of the Company and the Investor agrees that, subject only to the conditions, qualifications and exceptions (if any) specifically set forth in the Transaction Documents, its obligations under the Transaction Documents are unconditional and absolute. Except to the extent (if any) specifically set forth in the Transaction Documents, each party's obligations thereunder are not subject to any right of set off, counterclaim, delay or reduction. (bb) Issuance of Common Shares. The Common Shares are duly authorized and reserved for issuance and, upon conversion of Preferred Shares or exercise of the Warrants, such Common Shares will be validly issued, fully paid and non-assessable, free and clear of any and all liens, claims and encumbrances, and entitled to be traded on the Principal Market or the New York Stock Exchange or the American Stock Exchange, or the Nasdaq National Market (collectively with the Principal Market, the "APPROVED MARKETS"), and the holders of such Common Shares shall be entitled to all rights and preferences accorded to a holder of Common Stock. As of the date of this Agreement, the outstanding shares of Common Stock are currently listed on the Principal Market. (cc) Form S-3. The Company is eligible to file the Registration Statement (as defined in the Registration Rights Agreement) for secondary offerings on Form S-3 (as in effect on the date of this Agreement) under the 1933 Act and rules promulgated thereunder, and Form S-3 (as in effect on the date of this Agreement) is permitted to be used for the transactions contemplated hereby under the 1933 Act and rules promulgated thereunder. (dd) Brokers. The Company has taken no action which would give rise to any claim by any person for brokerage commissions, finder's fees or similar payments by the Company or any Investor relating to this Agreement or the transactions contemplated hereby, except for those to certain entities or individuals which are set forth on Schedule 2.1(dd) hereof, all of which fees will be paid by the Company. Section 2.2 Representations and Warranties of the Investor. Each Investor, severally (as to itself only) and not jointly, hereby makes the following representations and warranties to the Company as of the date hereof and on the Closing Date: (a) Accredited Investor Status; Sophisticated Investor. The Investor is an "accredited investor" as that term is defined in Rule 501(a) of Regulation D under the 1933 Act. The Investor has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of investment in the Preferred Shares and Warrants and the Common Shares issuable thereunder. (b) Information. The Investor and its advisors, if any, have been furnished with all materials relating to the business, finances and operations of the Company which have been requested and materials relating to the offer and sale of the Preferred Shares and the Warrants and the Common Shares issuable thereunder which have been requested by the Investor. Neither such inquiries nor any other due diligence investigations conducted by the 10

11 Investor or its advisors, if any, or its representatives shall modify, amend or affect the Investor's right to rely on the Company's representations and warranties contained in Section 2.1 above. The Investor understands that its investment in the Preferred Shares and Warrants and the Common Shares issuable thereunder involves a high degree of risk. The Investor has sought such accounting, legal and tax advice as it has considered necessary to make an informed investment decision with respect to its acquisition of the Preferred Shares and Warrants and the Common Shares issuable thereunder. (c) No Governmental Review. The Investor understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Preferred Shares, Warrants and Common Shares or the fairness or suitability of the investment in the Preferred Shares, Warrants and Common Shares nor have such authorities passed upon or endorsed the merits of the offering of the Preferred Shares, Warrants and Common Shares. (d) Legends. The Company shall issue the Warrants and the certificates for the Preferred Shares and Common Shares to the Investor without any legend except as described in Article VI below. The Investor covenants that, in connection with any transfer of Common Shares by the Investor pursuant to the registration statement contemplated by the Registration Rights Agreement, it will comply with the applicable prospectus delivery requirements of the 1933 Act, provided that copies of a current prospectus relating to such effective registration statement are or have been supplied to the Investor. (e) Authorization; Enforcement. This Agreement and the Registration Rights Agreement have been duly and validly authorized, executed and delivered on behalf of the Investor and are valid and binding agreements of the Investor enforceable against the Investor in accordance with their terms, except (A) 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, and (B) to the extent the indemnification provisions contained in this Agreement and the Registration Rights Agreement may be limited by applicable federal or state securities laws. The Investor has the requisite corporate power and authority to enter into and perform its obligations under this Agreement and the Registration Rights Agreement. (f) Residency. The Investor is organized in the jurisdiction indicated on Schedule 1. (g) No Conflicts. The execution, delivery and performance of this Agreement and the Registration Rights Agreement by the Investor and the consummation by the Investor of the transactions contemplated hereby and thereby will not result in a violation of the limited partnership agreement, certificate of incorporation, by-laws or other documents of organization of the Investor. (h) Investment Representation. The Investor is purchasing the Preferred Shares and Warrants for its own account and not with a view to distribution in violation of any securities laws. The Investor has been advised and understands that neither the Preferred Shares, Warrants nor shares of Common Stock issuable upon conversion or exercise thereof have been 11

12 registered under the 1933 Act or under the "blue sky" laws of any jurisdiction and may be resold only if registered pursuant to the provisions of the 1933 Act or if an exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law. The Investor has been advised and understands that the Company in issuing the Preferred Shares and Warrants is relying upon, among other things, the representations and warranties of the Investor contained in this Section 2.2 in concluding that such issuance is a "private offering" and is exempt from the registration provisions of the 1933 Act. (i) Rule 144. The Investor understands that there is no public trading market for the Preferred Shares and Warrants, that none is expected to develop, and that the Preferred Shares and Warrants must be held indefinitely unless and until such Preferred Shares, Warrants or Common Shares received upon conversion or exercise thereof are registered under the 1933 Act or an exemption from registration is available. The Investor has been advised or is aware of the provisions of Rule 144 promulgated under the 1933 Act. (j) Brokers. The Investor has taken no action which would give rise to any claim by any person for brokerage commissions, finder's fees or similar payments by the Company or the Investor relating to this Agreement or the transactions contemplated hereby, except with Trinity, whose fees will be paid by the Company. (k) Reliance by the Company. The Investor understands that the Preferred Shares and Warrants are being offered and sold in reliance on a transactional exemption from the registration requirements of Federal and state securities laws and that the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of the Investor set forth herein in order to determine the applicability of such exemptions and the suitability of the Investor to acquire the Preferred Shares and Warrants. ARTICLE III COVENANTS Section 3.1 Registration and Listing; Effective Registration. Until such time as no Preferred Shares or Warrants are outstanding, the Company will cause the Common Stock to continue at all times to be registered under Sections 12(b) or (g) of the Exchange Act, will comply in all material respects with its reporting and filing obligations under Exchange Act, and will not take any action or file any document (whether or not permitted by the Exchange Act or the rules thereunder) to terminate or suspend such reporting and filing obligations. Until such time as no Preferred Shares or Warrants are outstanding, the Company shall continue the listing or trading of the Common Stock on the Principal Market or one of the other Approved Markets and comply in all material respects with the Company's reporting, filing and other obligations under the bylaws or rules of the Approved Market on which the Common Stock is listed. The Company shall cause the Common Shares to be listed on the Principal Market or one of the other Approved Markets no later than the effectiveness of the registration of the Common Shares under the Act, and shall continue such listing(s) on one of the Approved Markets, for so long as any Preferred Shares or Warrants are outstanding. For purposes of this paragraph (and elsewhere in this Agreement where applicable), the term "Company" shall include any successor to the 12

13 Company and the term "Common Stock" shall include any common stock of such successor into which the Preferred Shares or Warrants may be convertible or exercisable. As used herein and in the Registration Rights Agreement and the Certificate, the term "Effective Registration" shall mean that all registration obligations of the Company pursuant to the Registration Rights Agreement and this Agreement have been satisfied in all material respects, such registration is not subject to any suspension or stop order (other than suspensions or stop orders limited to a Suspension Grace Period (as defined in the Registration Rights Agreement)), the prospectus for the Common Shares issuable upon conversion of the Preferred Shares and exercise of the Warrants is current and deliverable and such Common Shares are listed for trading on one of the Approved Markets and such trading has not been suspended for any reason, and none of the Company or any direct or indirect subsidiary of the Company is subject to any bankruptcy, insolvency or similar proceeding. Section 3.2 Certificates on Conversion/Exercise. Upon any conversion by the Investor (or then holder of Preferred Shares) of the Preferred Shares pursuant to the Certificate or any exercise by the Investor (or then holder) of Warrants, the Company shall issue and deliver to the Investor (or such holder) within three (3) trading days of the conversion or exercise date a new certificate or certificates for the number of Preferred Shares or Warrants which the Investor (or holder) has not yet elected to convert or exercise but which are evidenced in part by the certificate(s) or Warrants submitted to the Company in connection with such conversion or exercise (with the denominations of such new certificate(s) or Warrants designated by the Investor or holder). Section 3.3 Replacement Certificates. The certificate(s) representing the Preferred Shares and the Warrants held by any Investor (or then holder) may be exchanged by the Investor (or such holder) at any time and from time to time for certificates or Warrants with different denominations representing an equal aggregate number of Preferred Shares or Warrants, respectively, as requested by the Investor (or such holder) upon surrendering the same. No service charge will be made for such registration or transfer or exchange. Section 3.4 Securities Compliance. The Company shall notify the SEC and the Principal Market, in accordance with their requirements, of the transactions contemplated by this Agreement, the Certificate, the Warrants and the Registration Rights Agreement, and shall take all other necessary action and proceedings as may be required and permitted by applicable law, rule and regulation, for the legal and valid issuance of the Preferred Shares and Warrants hereunder and the Common Shares issuable upon conversion or exercise thereof. Section 3.5 Notices. The Company agrees to provide all holders of Preferred Shares and Warrants with copies of all notices and information, including without limitation notices and proxy statements in connection with any meetings, that are provided to the holders of shares of Common Stock, contemporaneously with the delivery of such notices or information to such Common Stock holders. Section 3.6 Use of Proceeds. The Company agrees that the net proceeds received by the Company from the sale of the Preferred Shares and Warrants hereunder shall be used only for working capital and other legally permitted general corporate purposes (including without limitation bona-fide strategic acquisitions of or mergers with unrelated third parties). 13

14 Section 3.7 Reservation of Preferred Shares; Stock Issuable upon Conversion or Exercise. (a) The Company shall reserve all authorized but unissued Series B 4% Cumulative Convertible Preferred Stock for issuance to the Investor pursuant to the terms of this Agreement and the Certificate. (b) The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the Preferred Shares and exercise of the Warrants, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all Preferred Shares and the exercise of all the Warrants, and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all the then outstanding Preferred Shares and the exercise of the Warrants, the Company shall use its best efforts to take such corporate action as necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose, including without limitation engaging in best efforts to obtain the requisite shareholder approval. Without in any way limiting the foregoing, the Company agrees to reserve and at all times keep available solely for purposes of conversion of Preferred Shares and exercise of Warrants, such number of authorized but unissued shares of Common Stock that is at least equal to 200% of the number of Common Shares issuable upon conversion of all Preferred Shares and exercise of all Warrants. If at any time the number of authorized but unissued shares of Common Stock is not sufficient to effect such conversion and exercise, up to the Maximum Common Stock Issuance (as defined in Section 3.15 below), of all the then outstanding Preferred Shares and Warrants, the Investor shall be entitled to, inter alia, the redemption rights provided in the Registration Rights Agreement. Section 3.8 Best Efforts. The parties shall use their best efforts to satisfy timely each of the conditions described in Article V of this Agreement. Section 3.9 Form D; Blue Sky Laws. The Company agrees to file a Form D with respect to the Preferred Shares, Warrants and Common Shares, as required under Regulation D and to provide a copy thereof to the Investor promptly after such filing. The Company shall, on or before the Closing Date, take such action as the Company shall have reasonably determined is necessary to qualify the Preferred Shares, Warrants and Common Shares for sale to the Investor under applicable securities or "blue sky" laws of the states of the United States (or to obtain an exemption from such qualification), and shall provide evidence of any such action so taken to the Investor on or prior to the Closing Date; provided, however, that the Company shall not be required in connection therewith to register or qualify as a foreign corporation in any jurisdiction where it is not now so qualified or to take any action that would subject it to service of process in suits or taxation, in each case, in any jurisdiction where it is not now so subject. Section 3.10 Press Release. Immediately upon Closing, the Company shall issue a press release, in accordance with Principal Market rules (or the rules of such other Approved Market on which the Common Stock is traded) and the Securities Act, with respect to the transactions contemplated hereby, in the form of a press release attached as Exhibit 3.10 hereto. No press release shall name the investors except as shall be required by law or permitted by Investors. If the Company fails to issue a press release upon Closing, the Investors may issue a 14

15 press release covering the Closing and complying with any legal requirement applicable to the Investors. Section 3.11 Shareholder Rights Plan. None of the acquisitions of Preferred Shares, Warrants or Common Shares nor the deemed beneficial ownership of shares of Common Stock prior to, or the acquisition of such shares pursuant to, the conversion of Preferred Shares or exercise of Warrants will in any event under any circumstances trigger the poison pill provisions of any stockholders' rights or similar agreements, or a substantially similar occurrence under any successor or similar plan. Section 3.12 Future Issuances of Securities. (a) Right of First Refusal. The Company agrees that for a period of one year immediately following the Closing Date and subject to the Company's compliance with any similar rights previously granted to the purchasers of the Company's Series A Six Percent (6%) Convertible Notes pursuant to that certain Securities Purchase Agreement dated April 14, 2000 between the Company and Augustine Fund, L.P. (the "AUGUSTINE AGREEMENT"), the Investors shall have a right of first refusal with respect to any MFN Transaction (as defined below), any Variable Rate Transaction (as defined below), and any sale or issuance of any Common Stock or any rights, options or warrants to purchase any shares of its Common Stock or any of the Company's preferred stock or any other securities convertible, exercisable or exchangeable into shares of Common Stock at an effective per share selling price per share of Common Stock ("Per Share Selling Price") lower than the closing sale price on the date of issuance thereof (other than shares or options issued pursuant to (i) the Company's duly adopted employee or director stock option plans, (ii) the exercise of options, warrants or rights outstanding on the date of this Agreement and listed in the Company's most recent periodic report filed under the 1934 Act or Schedule 2.1(c) hereto, (iii) arrangements with all the holders of Preferred Shares or (iv) a bona fide strategic investment in the Company by an individual or entity ("STRATEGIC INVESTOR") who is engaged in a business related or complementary to that of the Company and which is not a public or private investment company or other financial institution or an investment advisor or manager) (collectively, "Financing Transactions"). The Company shall give advance written notice to the Investors prior to any proposed Financing Transaction. The Investors shall have ten (10) business days from receipt of such notice to deliver a written notice to the Company that one or more of such Investors elects to exercise its right of first refusal with respect to the entire issuance or a part thereof. If, subsequent to the Company giving notice to the Investors hereunder, the terms and conditions of the proposed Financing Transaction are changed in any material way (for purposes hereof, any change in the effective purchase price of such Financing Transaction shall be deemed a material change), the Company shall be required to provide a new notice to the Investors hereunder and the Investors shall have the right of refusal again to purchase all or a portion of the securities in the offering on such changed terms and conditions as provided hereunder. In such event, if such other Financing Transaction provides for non-cash consideration, in whole or in part, from such other potential investor(s), the Investors shall still have the right to participate in the Financing Transaction as provided herein, provided that cash or cash equivalents may be substituted by the Investors for such non-cash consideration. This right of first refusal shall continue even if the Investors elect not to participate in one or more Financing Transactions. 15

16 (b) Definitions. The term "MFN Transaction" shall mean a transaction in which the Company issues or sells any securities in a capital raising transaction or series of related transactions (the "MFN Offering") which grants to an investor (the "MFN Investor") the right to receive additional shares (including without limitation as a result of a lower conversion, exchange or exercise price but excluding customary antidilution protections) based upon subsequent transactions of the Company on terms more favorable than those granted to such MFN Investor in such MFN Offering. The term "Variable Rate Transaction" shall mean a transaction in which the Company issues or sells (a) any debt or equity securities that are convertible into, exchangeable or exercisable for, or include the right to receive additional shares of, Common Stock either (x) at a conversion, exercise or exchange rate or other price that is based upon and/or varies with the trading prices of or quotations for the Common Stock at any time after the initial issuance of such debt or equity securities, or (y) with a fixed conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of such debt or equity security or upon the occurrence of specified or contingent events directly or indirectly related to the business of the Company or the market for the Common Stock (but excluding standard stock split anti-dilution provisions), or (b) any securities of the Company pursuant to an "equity line" structure which provides for the sale, from time to time, of securities of the Company which are registered for resale pursuant to the 1933 Act. For purposes hereof, the term "Per Share Selling Price" shall include the amount actually paid by third parties for each share of Common Stock; in the event a fee is paid by the Company in connection with the transaction, any such fee shall be deducted from the selling price pro rata to all shares sold in the transaction to arrive at the Per Share Selling Price. A sale of shares of Common Stock shall include the sale or issuance of rights, options, warrants or convertible securities ("derivative securities") under which the Company is or may become obligated to issue shares of Common Stock (but shall exclude any derivative securities issued by the Company in exchange for services rendered to the Company or purchases by the Company of intellectual property rights), and in such circumstances the sale of Common Stock shall be deemed to have occurred at the time of the issuance of the derivative securities, with such derivative securities being deemed converted or exercised in full without regard to any limitations or restrictions contained therein. Section 3.13 Financial Information. The Company agrees to send the following to the Investor for so long as any Preferred Shares or Warrants are outstanding: (i) on the same day as the release thereof, facsimile or e-mail copies of all press releases issued by the Company or any of its Subsidiaries; and (ii) copies of any notices and other information made available or given to the shareholders of the Company generally, contemporaneously with the making available or giving thereof to the shareholders. Section 3.14 Transactions with Affiliates. The Company agrees that any transaction or arrangement between it or any of its Subsidiaries and any affiliate or employee of the Company shall be effected on an arms' length basis in accordance with customary commercial practice and, except with respect to grants of options and stock to service providers, including employees, shall be approved by a majority of the Company's outside directors. Section 3.15 Overall Limit on Common Stock Issuable. Notwithstanding anything contained herein or in the Certificate or Warrants to the contrary, the number of Common Shares issuable by the Company and acquirable by the Investor hereunder and pursuant to conversion of the Preferred Shares and exercise of the Warrants shall not exceed 19.9% of the shares of 16

17 Common Stock outstanding as of the date hereof, subject to appropriate adjustment for stock splits, stock dividends, combinations or other similar recapitalization affecting the Common Stock (the "MAXIMUM COMMON STOCK ISSUANCE"), unless the issuance of shares hereunder in excess of the Maximum Common Stock Issuance shall first be approved by the Company's shareholders in accordance with applicable law and the By-laws and Certificate of Incorporation of the Company. Without limiting the generality of the foregoing, such shareholders' approval must duly authorize the issuance by the Company of an indeterminate number shares of Common Stock in excess of such Maximum Common Stock Issuance. The parties understand and agree that the Company's failure to seek or obtain such shareholder approval shall in no way adversely affect the validity and due authorization of the issuance and sale of Preferred Shares or Warrants hereunder, and that such approval pertains only to the applicability of the Maximum Common Stock Issuance limitation provided in this Section. The Company agrees that if at any point in time (the "Trigger Date") the number of Common Shares issued pursuant to conversion of the Preferred Shares and exercise of the Warrants, together with the number of Common Shares that would then be issuable by the Company in the event of conversion of all the Preferred Shares and exercise of all the Warrants then outstanding, would exceed the Maximum Common Stock Issuance but for this Section 3.15, then the Company shall promptly call a shareholders meeting to obtain shareholder approval for the issuance of Common Shares hereunder in excess of the Maximum Common Stock Issuance. If such shareholder approval is not obtained within 60 days of the Trigger Date, then each holder of Preferred Shares and Warrants shall have the right to sell to the Company such number of Preferred Shares and/or Warrants which cannot be converted or exercised due to such Maximum Common Stock Issuance limitation at a redemption price equal to (I) for the Preferred Shares, the greater of (x) 125% of the Liquidation Preference (as defined in the Certificate) of all such Preferred Shares being sold to the Company, or (y) the Liquidation Preference for the Preferred Shares being sold to the Company divided by the then applicable Conversion Price (as defined in the Certificate) multiplied by the greater of the last closing price of the Common Stock on (i) the redemption date or (ii) the Trigger Date, in each case payable in cash, and (II) for the Warrants, the difference between the greater of clauses (i) or (ii) above and the exercise price of the Warrants, multiplied by the number of Warrants being sold to the Company, payable in cash. Section 3.16 Fulfillment of Obligations. The Company's obligation to issue Common Shares upon conversion of Preferred Shares and exercise of the Warrants shall be absolute and unconditional, is independent of any covenant of any holder of Preferred Shares or Warrants, and shall not be subject to: (i) any offset or defense; or (ii) any claims against the holders of Preferred Shares or Warrants whether pursuant to this Agreement, the Certificate, the Registration Rights Agreement, the Warrants or otherwise. Section 3.17 Expenses. Regardless of whether the Closing occurs, the Company shall promptly reimburse the Investor for any and all actual out-of-pocket fees, costs, disbursements and expenses of the Investor (including without limitation reasonable travel and reasonable legal fees and disbursements) in connection with the preparation and negotiation of the Transactions Documents and the transactions contemplated hereby and thereby. On the Closing Date, the Company shall either pay the amount estimated to be due for such fees and expenses (which may with the consent of the Company include fees and expenses estimated to be incurred for completion of the transaction including post-closing matters) or direct the Investor to offset such amount from the Purchase Price paid hereunder. In the event such amount is ultimately less than 17

18 the actual fees and expenses, the Company shall promptly pay such deficiency upon demand therefor. In the event such amount is ultimately greater than the actual fees and expenses, such excess shall be returned promptly to the Company. Section 3.18 Augustine Agreement. The Company represents and warrants that it has delivered to the Investor true, correct and complete copies of the Augustine Agreement and all agreements and documents entered into in connection therewith or related thereto, as amended up until and including the date hereof (the "AUGUSTINE TRANSACTION DOCUMENTS"), and the Company agrees that it shall not in any way amend, modify, extend or terminate any of the Augustine Transaction Documents or any provision thereof, including without limitation Sections 4(j) or 4(l) of the Augustine Agreement, nor enter into any new agreement or arrangement with the Augustine Fund, L.P. which would have the direct or indirect effect of altering any of the terms or provisions of the Augustine Transaction Documents (including without limitation Sections 4(j) and 4(l) of the Augustine Agreement), without the prior written consent of the Investor which may be withheld in its sole discretion. ARTICLE IV TRANSFER AGENT INSTRUCTIONS The Company shall issue irrevocable instructions to its transfer agent, and any subsequent transfer agent, to issue certificates, registered in the name of the Investor or its respective nominee(s), for the Common Shares in such amounts as specified from time to time by the Investor to the Company upon delivery of a conversion notice pursuant to the Certificate or a notice of election to purchase pursuant to the Warrants (the "IRREVOCABLE TRANSFER AGENT INSTRUCTIONS"). The Company warrants that no instruction relating to the Common Shares other than the Irrevocable Transfer Agent Instructions referred to in this Article IV will be given by the Company to its transfer agent and that the Common Shares shall be freely transferable on the books and records of the Company as contemplated by Article VI below when the legend referred to therein may be removed. Nothing in this Article IV shall affect in any way the Investor's obligations and agreements to comply with all applicable prospectus delivery requirements, if any, upon resale of the Common Shares. The Company shall instruct its transfer agent to issue one or more certificates in such name and in such denominations as specified by the Investor and without any restrictive legends. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Investor by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Section will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Section, that the Investor shall be entitled, in addition to all other available remedies, 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. 18

19 ARTICLE V CONDITIONS TO CLOSINGS Section 5.1 Conditions Precedent to the Obligation of the Company to Sell the Preferred Shares and Warrants. The obligation hereunder of the Company to issue and/or sell the Preferred Shares and Warrants to the Investor at the Closing is subject to the satisfaction, at or before the Closing, of each of the applicable conditions set forth below. These conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion. (a) Accuracy of the Investor's Representations and Warranties. The representations and warranties of the Investor will be true and correct in all material respects as of the date hereof and as of the Closing Date, as though made at that time. (b) Performance by the Investor. The Investor shall have performed all agreements and satisfied all conditions required to be performed or satisfied by the Investor at or prior to the Closing, including payment of the purchase price set forth on Schedule I hereto. (c) No Injunction. 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 which prohibits the consummation of any of the transactions contemplated by this Agreement, the Registration Rights Agreement, the Warrants or the Certificate. Section 5.2 Conditions Precedent to the Obligation of the Investor to Purchase the Preferred Shares and Warrants. The obligation hereunder of the Investor to acquire and pay for the Preferred Shares and Warrants at the Closing is subject to the satisfaction, at or before the Closing, of each of the applicable conditions set forth below. These conditions are for the Investor's benefit and may be waived by the Investor at any time in its sole discretion. (a) Accuracy of the Company's Representations and Warranties. The representations and warranties of the Company shall be true and correct in all material respects as of the date hereof and as of the Closing Date as though made at that time (except for representations and warranties as of an earlier date, which shall be true and correct in all material respects as of such date). (b) Performance by the Company. The Company shall have performed all agreements and satisfied all conditions required to be performed or satisfied by the Company at or prior to the Closing, including, without limitation, delivery of the Warrants and certificates representing the Preferred Shares issued to Investor. (c) Nasdaq Trading. From the date hereof to the Closing Date, trading in the Company's Common Stock shall not have been suspended by the SEC and trading in securities generally as reported by the Principal Market (or other Approved Market) shall not have been suspended or limited, and the Common Stock shall be listed on the Principal Market or another Approved Market. 19

20 (d) No Injunction. 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 which prohibits the consummation of any of the transactions contemplated by this Agreement, the Warrants, the Registration Rights Agreement or the Certificate. Neither the NASD nor the Principal Market shall have objected or indicated that it may object to the consummation of any of the transactions contemplated by this Agreement. (e) Opinion of Counsel. At the Closing, the Investor shall have received an opinion of counsel to the Company in the form attached hereto as Exhibit 5.2(e) and such other opinions, certificates and documents as the Investor or their counsel shall reasonably require incident to the Closing. (f) Registration Rights Agreement. The Company and the Investor shall have executed and delivered the Registration Rights Agreement in the form and substance of Exhibit 5.2(f) attached hereto. (g) Officer's Certificate. The Company shall have delivered to the Investor a certificate in form and substance satisfactory to the Investor and the Investor's counsel, executed by an officer of the Company, certifying as to satisfaction of closing conditions, incumbency of signing officers, and the true, correct and complete nature of the Certificate of Incorporation, By-Laws, good standing and authorizing resolutions of the Company. (h) Certificate. The Certificate shall have been accepted for filing by the Secretary of State of the State of Colorado and a stamped copy thereof shall have been provided to the Investor's counsel. (i) Miscellaneous. The Company shall have delivered to the Investor such other documents relating to the transactions contemplated by this Agreement or the Investor or its counsel may reasonable request. Section 5.3 Closing Deliveries. (a) On the Closing Date, the Company shall deliver to the Investor: (i) Certificates representing the Preferred Shares issued to Investors; (ii) A stamped copy of the filed Certificate; (iii) The certificate referred to in Section 5.2(g) above; (iv) The Warrants issued to Investors. (v) The executed Registration Rights Agreement; and (vi) The opinion of counsel referred to in Section 5.2(e) above. 20

21 (b) On the Closing Date, the Investor shall deliver to the Company: (i) The Purchase Price set forth on Schedule I hereto; and (ii) The executed Registration Rights Agreement; ARTICLE VI LEGEND AND STOCK Upon payment therefor as provided in this Agreement, the Company will issue one or more Warrants and certificates representing the Preferred Shares in the name the Investor and in such denominations to be specified by the Investor prior to (or from time to time subsequent to) Closing. Each of the Warrants and certificates representing the Preferred Shares, and any Common Shares issued upon conversion or exercise thereof prior to such Common Shares being registered under the 1933 Act for resale or available for resale under Rule 144 under the 1933 Act, shall be stamped or otherwise imprinted with a legend substantially in the following form: THESE SECURITIES HAVE NOT BEEN REGISTERED FOR OFFER OR SALE UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAW OR AN APPLICABLE EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS. The Company agrees to reissue certificates for Preferred Shares and/or Warrants without the legend set forth above at such time as (i) the holder thereof is permitted to dispose of such Preferred Shares and/or Warrants pursuant to Rule 144 under the Act, or (ii) such Preferred Shares or Warrants are sold to a purchaser or purchasers who (in the opinion of counsel to the seller or such purchaser(s), in form and substance reasonably satisfactory to the Company and its counsel) are able to dispose of such securities publicly without registration under the Act. Prior to the Registration Statement (as defined in the Registration Rights Agreement) being declared effective, any Common Shares issued pursuant to conversion of Preferred Shares or exercise of Warrants shall bear a legend in the same form as the legend indicated above; provided that such legend shall be removed from such Common Shares and the Company shall issue new certificates without such legend if (i) the holder thereof is permitted to dispose of such Common Shares pursuant to Rule 144 under the 1933 Act, (ii) such Common Shares are registered for resale under the 1933 Act and the Investors covenant to comply with the prospectus delivery requirements under the Securities Act, or (iii) such Common Shares are sold to a purchaser or purchasers who (in the opinion of counsel to the seller or such purchaser(s), in form and substance reasonably satisfactory to the Company and it counsel) are able to dispose of such shares publicly without registration under the 1933 Act. Upon such Registration Statement becoming effective, the Company agrees to promptly, but no later than three (3) business days 21

22 thereafter, issue new certificates representing such Common Shares without such legend, and any Common Shares issued after the Registration Statement has become effective shall be free and clear of any legends, transfer restrictions and stop orders, provided in each case that the Investors covenant to comply with the prospectus delivery requirements under the Securities Act. Notwithstanding the removal of such legend, the Investor agrees to sell the Common Shares represented by the new certificates in accordance with the applicable prospectus delivery requirements (if copies of a current prospectus are provided to the Investor by the Company) or in accordance with an exemption from the registration requirements of the 1933 Act. Nothing herein shall limit the right of any holder to pledge these securities pursuant to a bona fide margin account or lending arrangement entered into in compliance with law, including applicable securities laws. ARTICLE VII TERMINATION Section 7.1 Termination by Mutual Consent. This Agreement may be terminated at any time prior to the Closing by the mutual written consent of the Company and the Investor. Section 7.2 Other Termination. This Agreement may be terminated by action of the Board of Directors of the Company or by the Investor at any time if the Closing shall not have been consummated by the fifth business day following the date of this Agreement; provided, however, that the party (or parties) prepared to close shall retain its (or their) right to sue for any breach by the other party (or parties). ARTICLE VIII INDEMNIFICATION Section 8.1 Company Indemnity. In consideration of the Investor's execution and delivery of this Agreement and the Registration Rights Agreement and acquiring the Preferred Shares and Warrants hereunder and in addition to all of the Company's other obligations under the Transaction Documents, the Company shall defend, protect, indemnify and hold harmless the Investor and all of its partners, officers, directors, employees, members and direct or indirect investors and any of the foregoing person's agents or other representatives (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "INDEMNITEES") from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective of whether any such Indemnitee is a party to the action for which indemnification hereunder is sought), and including all reasonable attorneys' fees and disbursements of one law firm (and local counsel where necessary) (the "INDEMNIFIED LIABILITIES"), incurred by any Indemnitee as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Company in the Transaction Documents or any other certificate or document contemplated hereby or thereby, (b) 22

23 any breach of any covenant, agreement or obligation of the Company contained in the Transaction Documents or any other certificate or document contemplated hereby or thereby, (c) any cause of action, suit or claim brought or made against such Indemnitee by a third party and arising out of or resulting from (i) the execution, delivery, performance or breach by the Company or enforcement of the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby, (ii) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of the issuance of the Preferred Shares or (iii) solely due to the status of the Investor as holder of the Preferred Shares or Warrants, and (d) the enforcement of this Section. Notwithstanding the foregoing, Indemnified Liabilities shall not include any liability of any Indemnitee arising solely out of such Indemnitee's willful misconduct or fraudulent action(s). To the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. Except as otherwise set forth herein, the mechanics and procedures with respect to the rights and obligations under this Article VIII shall be the same as those set forth in Section 6 (other than Section 6(b)) of the Registration Rights Agreement, including, without limitation, those procedures with respect to the settlement of claims and Company's right to assume the defense of claims. ARTICLE IX GOVERNING LAW, MISCELLANEOUS Section 9.1 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS. EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS SITTING IN THE CITY OF NEW YORK, BOROUGH OF MANHATTAN, FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR WITH ANY TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED HEREIN, AND HEREBY IRREVOCABLY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT, THAT SUCH SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE OF SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER. EACH PARTY HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF TO SUCH PARTY AT THE ADDRESS FOR SUCH NOTICES TO IT UNDER THIS AGREEMENT AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING CONTAINED HEREIN SHALL LIMIT IN ANY WAY ANY RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW. 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 23

24 OR ENFORCEABILITY OF ANY PROVISION OF THIS AGREEMENT IN ANY OTHER JURISDICTION. EACH PARTY HERETO IRREVOCABLY WAIVES ANY RIGHT TO TRIAL BY JURY. Section 9.2 Counterparts. This Agreement may be executed in two or more 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 delivered to the other party; provided that a facsimile signature shall be considered due execution and shall be binding upon the signatory thereto with the same force and effect as if the signature were an original, not a facsimile signature. Section 9.3 Headings. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. Section 9.4 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. Section 9.5 Entire Agreement; Amendments; Waivers. (a) This Agreement supersedes all other prior oral or written agreements between the Investor, the Company, their affiliates and persons acting on their behalf with respect to the matters discussed herein, and this Agreement and the instruments referenced herein (including the other Transaction Documents) 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 Investor makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be amended other than by an instrument in writing signed by the Company and the Investor, and no provision hereof may be waived other than by an instrument in writing signed by the party against whom enforcement is sought. (b) The Investor may at any time elect, by notice to the Company, to waive (whether permanently or temporarily, and subject to such conditions, if any, as the Investor may specify in such notice) any of its rights under any of the Transaction Documents to acquire shares of Common Stock from the Company, in which event such waiver shall be binding against the Investor in accordance with its terms. Section 9.6 Notices. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing, must be delivered by (i) courier, mail or hand delivery or (ii) facsimile, and will be deemed to have been delivered upon receipt. The addresses and facsimile numbers for such communications shall be: 24

25 If to the Company: Stan Lee Media, Inc. 15821 Ventura Boulevard Suite 675 Encino, CA 91436 Telephone: (818) 461-1757 Facsimile: (818) 728-9336 Attention: General Counsel If to the Transfer Agent: Securities Transfer Corporation 2591 Dallas Parkway Suite 102 Frisco, TX 75034 Telephone: (469) 633-0101 If to the Investor: Elliott Associates, L.P. c/o Elliott Management Corporation 712 Fifth Avenue, 36th Floor New York, New York 10019 Telephone: 212-506-2999 Facsimile: 212-974-2092 and (212) 489-8321 Attention: Daniel Gropper and Westgate International, L.P. c/o Elliott Management Corporation 712 Fifth Avenue, 36th Floor New York, New York 10019 Telephone: 212-506-2999 Facsimile: 212-974-2092 and (212) 489-8321 Attention: Daniel Gropper With a copy to: Kleinberg, Kaplan, Wolff & Cohen, P.C. 551 Fifth Avenue, 18th Floor New York, New York 10176 Telephone: 212-986-6000 Facsimile: 212-986-8866 Attention: Stephen M. Schultz Each party shall provide five (5) days prior written notice to the other party of any change in address, telephone number or facsimile number. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or 25

26 electronically generated by the sender's facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission or (C) provided by a nationally recognized overnight delivery service, shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (A), (B) or (C) above, respectively. Section 9.7 Successors and Assigns. Except as otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns, including any Permitted Assignee (as defined below). The Company shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Investor, including by merger or consolidation; provided that the Company may assign this Agreement by operation of law in connection with any merger, the sole purpose of which is to effect a change of the Company's state of incorporation and/or an increase of the number of members of the Board of Directors of the Company. Each Investor may assign some or all of its rights hereunder to any person or entity to which such Investor transfers Preferred Shares or Warrants, without the consent of the Company (a "PERMITTED ASSIGNEE"); provided, however, that any such assignment shall not release the Investor from its obligations hereunder unless such obligations are assumed by such assignee and the Company has consented to such assignment and assumption (which may not be unreasonably withheld). Notwithstanding anything to the contrary contained in the Transaction Documents, the Investor shall be entitled to pledge the Preferred Shares, Warrants or Common Shares in connection with a bona fide margin account. Section 9.8 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. Section 9.9 Survival. The representations, warranties and agreements of the Company and the Investor contained in the Agreement shall survive the Closing. Section 9.10 Publicity. Subject to Section 3.10, the Company and the Investor shall have the right to approve before issuance any press releases or any other public statements with respect to the transactions contemplated hereby. Section 9.11 Further Assurances. 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. Section 9.12 No Strict 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 rules of strict construction will be applied against any party. Section 9.13 Remedies. The Investor and each Permitted Assignee shall have all rights and remedies set forth in this Agreement and the Registration Rights Agreement and all rights and remedies which such holders have been granted at any time under any other agreement or 26

27 contract and all of the rights which such holders have under any law. Any person having any rights under any provision of this Agreement or the Registration Rights Agreement shall be entitled to enforce such rights specifically (without posting a bond or other security), to recover damages by reason of any breach of any provision of this Agreement or the Registration Rights Agreement and to exercise all other rights granted by law. The Investor and each Permitted Assignee without prejudice may withdraw, revoke or suspend its pursuit of any remedy at any time prior to its complete recovery as a result of such remedy. Section 9.14 Payment Set Aside. To the extent that the Company makes a payment or payments to the Investor hereunder or under the Registration Rights Agreement or the Investor enforces or exercises its rights hereunder or thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the Company, a trustee, receiver or any other person under any law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred. Section 9.15 Days. Unless the context refers to "business days" or "trading days", all references herein to "days" shall mean calendar days. Section 9.16 Rescission and Withdrawal Right. Notwithstanding anything to the contrary contained in (and without limiting any similar provisions of) the Transaction Documents, wherever the Investor exercises a right, election, demand or option under a Transaction Document and the Company does not fully perform its related obligations within the periods therein provided, then the Investor in its sole discretion may rescind or withdraw from time to time any relevant notice, demand or election in whole or in part without prejudice to its future actions and rights. * * * * * [Signature Page Follows] 27

28 IN WITNESS WHEREOF, the parties hereto have caused this Preferred Stock Investment Agreement to be duly executed as of the date and year first above written. COMPANY: INVESTOR: STAN LEE MEDIA, INC. WESTGATE INTERNATIONAL, L.P. By: Elliott International Capital Advisors, Inc., as Attorney-in-Fact By: By: ------------------------------ --------------------------- Name: Name: Title: Title: ELLIOTT ASSOCIATES, L.P. By: --------------------------- Name: Title: 28

29 LIST OF SCHEDULES Schedule 2.1(a) Organization and Qualification Schedule 2.1(c) Capitalization Schedule 2.1(e) No Conflicts Schedule 2.1(g) Absence of Certain Changes Schedule 2.1(h) Absence of Litigation Schedule 2.1(n) Intellectual Property Rights Schedule 2.1(p) Title Schedule 2.1(v) Certain Transactions Schedule 2.1(dd) Brokers LIST OF EXHIBITS EXHIBIT 1.1A Certificate of Designation EXHIBIT 1.1B Warrant EXHIBIT 3.10 Press Release EXHIBIT 5.2(f) Registration Rights Agreement EXHIBIT 5.2(e) Opinion of Counsel

30 SCHEDULE I <TABLE> <CAPTION> JURISDICTION OF NUMBER OF NUMBER OF PURCHASE INVESTOR ORGANIZATION PREFERRED SHARES WARRANTS PRICE ---------------------------- ---------------------- ---------------- --------- ---------- <S> <C> <C> <C> <C> Elliott Associates, L.P. Delaware, U.S.A. 2,000 37,500 $2,000,000 Westgate International, L.P. Cayman Islands, B.W.I. 2,000 37,500 $2,000,000 </TABLE>

1 EXHIBIT 10.5 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement ("Agreement") is entered into as of August 1, 2000, among Stan Lee Media, Inc., a Colorado corporation with offices at 15821 Ventura Boulevard, Suite 675, Encino, California 91436 (the "Company"), and Elliott Associates, L.P., a Delaware limited partnership ("Elliott"), and Westgate International, L.P., a Cayman Islands limited partnership ("Westgate"), each with an office at c/o Elliott Management Corporation, 712 Fifth Avenue, 36th Floor, New York, New York 10019 (Elliott and Westgate shall hereinafter be referred to individually and collectively as the "Investor"). W I T N E S S E T H: WHEREAS, pursuant to that certain Preferred Stock Investment Agreement, dated on or about the date hereof, by and between the Company and the Investor (the "Purchase Agreement"), the Company has agreed to sell and issue to the Investor, and the Investor has agreed to purchase from the Company (1) an aggregate of 4,000 shares, Liquidation Preference $1,000 each, of the Company's Series B 4% Cumulative Convertible Preferred Stock (the "Preferred Shares") and (2) warrants to purchase an aggregate of 75,000 shares (the "Common Shares") of common stock, no par value, of the Company ("Common Stock") pursuant to the terms of such warrants ("Warrants"), in each case subject to terms and conditions contained in the Purchase Agreement; and WHEREAS, the Purchase Agreement contemplates that the Preferred Shares will be convertible into Common Shares pursuant to the terms and conditions set forth in the Certificate of Designations for the Preferred Shares (the "Certificate"); NOW, THEREFORE, in consideration of the mutual promises, representations, warranties, covenants and conditions set forth in the Purchase Agreement and this Agreement, the Company and the Investor agree as follows: 1. Certain Definitions. Capitalized terms used herein and not otherwise defined shall have the meaning ascribed thereto in the Purchase Agreement or the Certificate. As used in this Agreement, the following terms shall have the following respective meanings: "Closing" and "Closing Date" shall have the meanings ascribed to such terms in the Purchase Agreement. "Commission" or "SEC" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act.

2 "Holder" and "Holders" shall include the Investor and any transferee or transferees of the Preferred Shares, Warrants, Common Shares or Registrable Securities which have not been sold to the public to whom the registration rights conferred by this Agreement have been transferred in compliance with this Agreement and the Purchase Agreement. The terms "register", "registered" and "registration" shall refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act and applicable rules and regulations thereunder, and the declaration or ordering of the effectiveness of such registration statement. "Registrable Securities" shall mean: (i) the Common Shares or other securities issued or issuable to each Holder or its permitted transferee or designee upon conversion of the Preferred Shares and/or upon exercise of the Warrants; (ii) securities issued or issuable upon any stock split, stock dividend, recapitalization or similar event with respect to such Common Shares; and (iii) any other security issued as a dividend or other distribution with respect to, in exchange for or in replacement of the securities referred to in the preceding clauses. "Registration Expenses" shall mean all expenses to be incurred by the Company in connection with each Holder's registration rights under this Agreement, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company, blue sky fees and expenses, reasonable fees and disbursements of counsel to Holders (using a single counsel selected by a majority in interest of the Holders) for a "due diligence" examination of the Company and review of the Registration Statement and related documents, and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company, which shall be paid in any event by the Company). "Registration Statement" shall have the meaning set forth in Section 2(a) herein. "Regulation D" shall mean Regulation D as promulgated pursuant to the Securities Act, and as subsequently amended. "Securities Act" or "Act" shall mean the Securities Act of 1933, as amended. "Selling Expenses" shall mean all underwriting discounts and selling commissions applicable to the sale of Registrable Securities and all fees and disbursements of counsel for Holders not included within "Registration Expenses". 2. Registration Requirements. The Company shall use its best efforts to effect the registration of the Registrable Securities (including, without limitation, the execution of an undertaking to file post-effective amendments, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act) as would permit or facilitate the sale or distribution of all the Registrable Securities in the manner (including manner of 2

3 sale) and in all states reasonably requested by the Holder. Such best efforts by the Company shall include, without limitation, the following: (a) The Company shall, as expeditiously as possible after the Closing Date: i) But in any event with 35 days after the Closing Date, prepare and file a registration statement with the Commission pursuant to Rule 415 under the Securities Act on Form S-3 under the Securities Act (or in the event that the Company is ineligible to use such form, such other form as the Company is eligible to use under the Securities Act) covering resales by the Holders of the Registrable Securities ("Registration Statement"), which Registration Statement, to the extent allowable under the Securities Act and the rules promulgated thereunder (including Rule 416), shall state that such Registration Statement also covers such indeterminate number of additional shares of Common Stock as may become issuable upon conversion of the Preferred Shares and/or exercise of the Warrants. Such Registration Statement shall be, and the Registrable Securities shall be included in, the registration statement being filed on the date hereof pursuant to that certain registration rights agreement dated as of April 14, 2000 between the Company and Augustine Fund, L.P. covering the securities issuable upon conversion of the Company's Series A 6% Convertible Notes, among other securities (the "Augustine Registration Statement"). The number of shares of Common Stock included in such Registration Statement for the Holders shall be no less than the sum of two times the number of Common Shares that are then issuable upon conversion of the Preferred Shares and exercise of the Warrants, provided that for purposes hereof it shall be assumed that all the Preferred Shares and Warrants are then convertible and exercisable (assuming full conversion or exercise, respectively, at the applicable Conversion Price or Exercise Price (as defined in the Warrant) without regard to restrictions or limitations contained in the Certificate or Warrants). Nothing in the preceding sentence will limit the Company's obligations to reserve shares of Common Stock pursuant to Section 3.7 of the Purchase Agreement. Thereafter the Company shall cause such Registration Statement and other filings to be declared effective within 90 days following the Closing Date (or 120 days following the Closing Date if such Registration Statement is subject to full SEC review). Without limiting the foregoing, the Company will promptly respond to all SEC comments, inquiries and requests, and shall request acceleration of effectiveness at the earliest possible date. The Company shall provide the Holders reasonable opportunity to review any such Registration Statement or amendment or supplement thereto prior to filing (provided that, with respect to the Registration Statement being filed on the date hereof, the Company may provide less than 24 hours for such review). 3

4 ii) Prepare and file with the SEC such amendments and supplements to such Registration Statement and the prospectus used in connection with such Registration Statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such Registration Statement and notify the Holders of the filing and effectiveness of such Registration Statement and any amendments or supplements. In addition, in the event that the Augustine Registration Statement as filed fails to cover resales of the Registrable Securities, then the Company shall promptly file an amendment to such registration statement filing in order to cover resales of the Registrable Securities as provided herein. iii) Furnish to each Holder such numbers of copies of a current prospectus conforming with the requirements of the Act, copies of the Registration Statement, any amendment or supplement thereto and any documents incorporated by reference therein and such other documents as such Holder may reasonably require or request in order to facilitate the disposition of Registrable Securities owned by such Holder. iv) Register and qualify the securities covered by such Registration Statement under the securities or "Blue Sky" laws of all domestic jurisdictions; provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. v) Notify each Holder immediately of the happening of any event (but not the substance or details of any such events unless specifically requested by a Holder) as a result of which the prospectus (including any supplements thereto or thereof) included in such Registration Statement, as then in effect, includes an untrue statement of material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and use its best efforts to promptly update and/or correct such prospectus. vi) Notify each Holder immediately of the issuance by the Commission or any state securities commission or agency of any stop order suspending the effectiveness of the Registration Statement or the threat or initiation of any proceedings for that purpose. The Company shall use its best efforts to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible time. vii) Subject to Section 2(a)(i), permit counsel to the Holders to review the Registration Statement and all amendments and supplements 4

5 thereto within a reasonable period of time (but not less than 5 full Trading Days (as defined in the Certificate)) prior to each filing, and shall not file any document in a form to which such counsel reasonably objects and will not request accelerated effectiveness of the Registration Statement without prior notice to such counsel. viii) List the Registrable Securities covered by such Registration Statement with all securities exchange(s) and/or markets on which the Common Stock is then listed and prepare and file any required filings with the Principal Market or any exchange or market where the Common Shares are traded. ix) Take all steps necessary to enable Holders to avail themselves of the prospectus delivery mechanism set forth in Rule 153 (or successor thereto) under the Act. (b) Set forth below in this Section 2(b) are (I) events that may arise that the Investors consider will interfere with the full enjoyment of their rights under this Agreement, the Purchase Agreement, the Warrants and the Certificate (the "Interfering Events"), and (II) certain remedies applicable in each of these events. Paragraphs (i) through (iv) of this Section 2(b) describe the Interfering Events, provide a remedy to the Investors if an Interfering Event occurs and provide that the Investors may require that the Company repurchase outstanding Preferred Shares and/or Warrants at a specified price if certain Interfering Events are not timely cured. Paragraph (v) provides, inter alia, that if default adjustments required as the remedy in the case of certain of the Interfering Events are not provided when due, the Company may be required by the Investors to redeem outstanding Preferred Shares and/or Warrants at a specified price. Paragraph (vi) provides, inter alia, that the Investors have the right to specific performance. The preceding paragraphs in this Section 2(b) are meant to serve only as an introduction to this Section 2(b), are for convenience only, and are not to be considered in applying, construing or interpreting this Section 2(b). i) Delay in Effectiveness of Registration Statement. (A) In the event that (1) such Registration Statement has not been filed with the SEC by the 35th day following the Closing Date, (2) such Registration Statement has not been declared effective by the 90th day following the Closing Date (or 120th day 5

6 following the Closing Date in the event such Registration Statement is subject to full SEC review), (3) the Company fails to include the Registrable Securities on the Augustine Registration Statement or (4) the Company at any time fails to issue unlegended Registrable Securities as required by Article VI of the Purchase Agreement, then in each case the Company shall pay each Holder a Monthly Delay Payment (as defined below) for each 30 day period (or portion thereof) that (a) such filing or effectiveness (as the case may be) of the Registration Statement is delayed, (b) the Registrable Securities are not included in the Augustine Registration Statement, or (c) failure to issue such unlegended Registrable Securities persists. In addition to the foregoing, if the Registration Statement has not been declared effective within six (6) months after the Closing Date, then each Holder shall have the right to sell, at any time after the sixth (6th) month following the Closing Date, any or all of its Preferred Shares and Warrants to the Company for consideration (the "Mandatory Repurchase Price") equal to (I) for the Preferred Shares, the greater of (x) 120% of the Liquidation Preference of all such Preferred Shares being sold to the Company, or (y) the Liquidation Preference for the Preferred Shares being sold to the Company divided by the then applicable Conversion Price multiplied by the greater of the last closing price of the Common Stock on (i) the date a Holder exercises its option pursuant to this Section 2(b) to require repurchase of Preferred Shares or (ii) the date on which the event triggering Holder's remedies under this Section 2(b) first occurred, in each case payable in cash, and (II) for the Warrants, 120% of the product of (a) the difference between the greater of clauses (i) or (ii) above and the exercise price of the Warrants, multiplied by (b) the number of Warrants being sold to the Company, payable in cash. (B) As used in this Agreement, a "Monthly Delay Payment" shall be a cash payment equal to 1% of the Liquidation Preference of the Preferred Shares held by a Holder for the first 30 day period (or portion thereof) that the specified condition in this Section 2(b) has not been fulfilled or the specified deficiency has not been remedied and 2% of such Liquidation Preference thereafter for each subsequent 30 day period (or portion thereof) that the specified condition in this Section 2(b) has not been fulfilled or the specified deficiency has not been remedied. Payment of the Monthly Delay Payments and Mandatory Repurchase Price shall be due and payable from the Company to such Holder within 5 days of demand therefor. Without limiting the foregoing, if cash payment of the Mandatory Repurchase Price is not made within such 5 day period, the Holder may revoke and withdraw its election to cause the Company to make such 6

7 mandatory purchase at any time prior to its receipt of such cash. At the option of the Holder, Monthly Delay Payments, in lieu of receiving any such cash payment, may be added to the Liquidation Preference of the Preferred Shares held by it. ii) No Listing; Premium Price Redemption for Delisting of Class of Shares. (A) In the event that the Company fails, refuses or for any other reason is unable to cause the Registrable Securities covered by the Registration Statement to be listed with the Principal Market or one of the other Approved Markets (as defined in the Purchase Agreement) by the earlier of the effectiveness of the Registration Statement or the 120th day following the Closing Date, and at all times thereafter during the registration period specified in Section 5, then the Company shall provide to each Holder a Monthly Delay Payment, for each 30 day period or portion thereof during which such listing is not in effect. In addition to the foregoing, following the 10th day that such listing is not in effect, each Holder shall have the right to sell to the Company any or all of its Preferred Shares and/or Warrants at the Mandatory Repurchase Price. The provisions of Section 2(b)(i)(B) shall apply to this Section 2(b)(ii)(A). (B) In the event that Company's shares of Common Stock are not listed on the Principal Market or any of the Approved Markets on the earlier of the effectiveness of the Registration Statement or the 120th day following the Closing Date, and at all times thereafter during the registration period specified in Section 5, then the Company shall provide to each Holder a Monthly Delay Payment for each 30 day period or portion thereof during which such listing is not in effect. In addition to the foregoing, following any three (3) consecutive trading day period in which such listing is not in effect, each Holder shall have the right to sell to the Company any or all of its Preferred Shares and/or Warrants at the Mandatory Repurchase Price. The provisions of Section 2(b)(i)(B) shall apply to this Section 2(b)(ii)(B). iii) Blackout Periods. In the event any Holder's ability to sell Registrable Securities under the Registration Statement is suspended for more than (i) five (5) consecutive days or (ii) ten (10) days in the aggregate in any calendar year ("Suspension Grace Period"), including without limitation by reason of any suspension or stop order with respect to the Registration Statement or the fact that an event has occurred as a result of which the prospectus (including any supplements thereto) included in such Registration Statement then in effect includes an untrue 7

8 statement of material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing (a "Blackout"), then the Company shall provide to each Holder a Monthly Delay Payment for each 30 day period or portion thereof from and after the expiration of the Suspension Grace Period, on the terms set forth in Section 2(b)(i)(B) above. In addition, at any time following the expiration of the Suspension Grace Period if the Blackout continues for more than five (5) additional consecutive days, a Holder shall have the right to sell to the Company its Preferred Shares and/or Warrants in whole or in part for the Mandatory Repurchase Price on the terms set forth in Section 2(b)(i)(B) above. iv) Redemption for Conversion/Exercise Deficiency. In the event that the Company does not have a sufficient number of Common Shares available to satisfy the Company's obligations to any Holder upon receipt of a Conversion Notice (as defined in the Certificate) or receipt of a Form of Election to Purchase (pursuant to the Warrants) or is otherwise unable or unwilling for any reason to issue such Common Shares (other than solely due to the failure of the Holder to comply with the conversion or exercise requirements of the Certificate or Warrants) (each, a "Conversion/Exercise Deficiency") in accordance with the terms of the Certificate or Warrants for any reason after receipt of a Conversion Notice or Notice of Exercise (as defined in the Warrants) from any Holder, then: (A) The Company shall provide to each Holder a Monthly Delay Payment for each 30 day period or portion thereof following the Conversion/Exercise Deficiency, on the terms set forth in Section 2(b)(i)(B) above. (B) At any time five days after the commencement of the running of the first 30-day period described above in clause (A) of this paragraph (iv), at the request of any Holder, the Company promptly shall purchase from such Holder, for the Mandatory Repurchase Price and on the terms set forth in Section 2(b)(i)(B) above, the outstanding Preferred Shares and/or Warrants equal to such Holder's pro rata share of the Conversion/Exercise Deficiency, provided that the Holder may revoke such request at any time prior to receipt of the Mandatory Repurchase Price (such mandatory repurchase right to be in addition to and not in lieu of the Monthly Delay Payment right set forth in the preceding clause (A)). v) Mandatory Purchase Price for Defaults. (A) The Company acknowledges that any failure, refusal or inability by the Company to perform the obligations 8

9 described in the foregoing paragraphs (i) through (iv) will cause the Holders to suffer damages in an amount that will be difficult to ascertain, including without limitation damages resulting from the loss of liquidity in the Registrable Securities and the additional investment risk in holding the Preferred Shares, Warrants and Registrable Securities. Accordingly, the parties agree, after consulting with counsel, that it is appropriate to include in this Agreement the foregoing provisions for Monthly Delay Payments and mandatory redemptions in order to compensate the Holders for such damages. The parties acknowledge and agree that the Monthly Delay Payments and mandatory redemptions set forth above represent the parties' good faith effort to quantify such damages and, as such, agree that the form and amount of such payments and mandatory redemptions are reasonable and will not constitute a penalty. (B) In the event that the Company fails to pay any Monthly Delay Payment within 5 business days of demand therefor, each Holder shall have the right to sell to the Company any or all of its Preferred Shares and/or Warrants at the Mandatory Repurchase Price on the terms set forth in Section 2(b)(i)(B) above. (C) The Holder shall have the right to withdraw any request for redemption hereunder at any time prior to its receipt of the Mandatory Repurchase Price. vi) Cumulative Remedies. The Monthly Delay Payments and mandatory purchases provided for above are in addition to and not in lieu or limitation of any other rights the Holders may have at law, in equity or under the terms of the Certificate, the Purchase Agreement, the Warrants and this Agreement, including without limitation the right to monetary contract damages and specific performance. Each Holder shall be entitled to specific performance of any and all obligations of the Company in connection with the registration rights of the Holders hereunder. vii) Remedies for Registrable Securities. In any case in which a Holder of Preferred Shares or Warrants has the right to cause the purchase of its Preferred Shares or Warrants under this Section 2(b), it shall also have the right to cause the purchase of the Registrable Securities that it owns at a price equal to the Mandatory Repurchase Price of the Preferred Shares and/or Warrants which were converted into or exercised for Common Shares. In the case in which a Holder of Preferred Shares or Warrants would have the right to receive Monthly Delay Payments with respect to Preferred Shares or Warrants under this Section 2(b), it shall also have the right to receive payments with respect to Registrable 9

10 Securities owned by it in an amount at the rate of the Monthly Delay Payments that would have applied to the Preferred Shares or Warrants converted into or exercised for Common Shares had such Preferred Shares and/or Warrants not been so converted or exercised. (c) If the Holder(s) intend to distribute the Registrable Securities by means of an underwriting, the Holder(s) shall so advise the Company. Any such underwriting may only be administered by nationally or regionally recognized investment bankers reasonably satisfactory to the Company. (d) The Company shall enter into such customary agreements for secondary offerings (including a customary underwriting agreement with the underwriter or underwriters, if any) and take all such other reasonable actions reasonably requested by the Holders in connection therewith in order to expedite or facilitate the disposition of such Registrable Securities and in such connection, whether or not an underwriting agreement is entered into and whether or not the Registrable Securities are to be sold in an underwritten offering: i) make such representations and warranties to the Holders and the underwriter or underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in secondary offerings; ii) cause to be delivered to the sellers of Registrable Securities and the underwriter or underwriters, if any, opinions of independent counsel to the Company, on and dated as of the effective day (or in the case of an underwritten offering, dated the date of delivery of any Registrable Securities sold pursuant thereto) of the Registration Statement, and within ninety (90) days following the end of each fiscal year thereafter, which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the Holders and the underwriter(s), if any, and their counsel and covering, without limitation, such matters as the due authorization and issuance of the securities being registered and compliance with securities laws by the Company in connection with the authorization, issuance and registration thereof and other matters that are customarily given to underwriters in underwritten secondary offerings, addressed to the Holders and each underwriter, if any; iii) cause to be delivered, immediately prior to the effectiveness of the Registration Statement (and, in the case of an underwritten offering, at the time of delivery of any Registrable Securities sold pursuant thereto), and at the beginning of each fiscal year following a year during which the Company's independent certified public accountants shall have reviewed any of the Company's books or records, a "comfort" letter from the Company's independent certified public accountants addressed to the Holders and each underwriter, if any, stating that such accountants are independent public accountants within the meaning of the 10

11 Securities Act and the applicable published rules and regulations thereunder, and otherwise in customary form and covering such financial and accounting matters as are customarily covered by letters of the independent certified public accountants delivered in connection with secondary offerings; such accountants shall have undertaken in each such letter to update the same during each such fiscal year in which such books or records are being reviewed so that each such letter shall remain current, correct and complete throughout such fiscal year; and each such letter and update thereof, if any, shall be reasonably satisfactory to the Holders; iv) if an underwriting agreement is entered into, the same shall include customary indemnification and contribution provisions to and from the underwriters and procedures for secondary underwritten offerings; and v) deliver such documents and certificates as may be reasonably requested by the Holders of the Registrable Securities being sold or the managing underwriter or underwriters, if any, to evidence compliance with clause (i) above and with any customary conditions contained in the underwriting agreement, if any. (e) The Company shall make available for inspection by the Holders, representative(s) of all the Holders together, any underwriter participating in any disposition pursuant to a Registration Statement, and any attorney or accountant retained by any Holder or underwriter, all financial and other records customary for purposes of the Holders' due diligence examination of the Company and review of any Registration Statement, all SEC Documents (as defined in the Purchase Agreement) filed subsequent to the Closing, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such representative, underwriter, attorney or accountant in connection with such Registration Statement, provided that such parties agree to keep such information confidential. (f) Subject to Section 2(b) above, the Company may suspend the use of any prospectus used in connection with the Registration Statement only in the event, and for such period of time as, such a suspension is required by the rules and regulations of the Commission. The Company will use its best efforts to cause such suspension to terminate at the earliest possible date. (g) The Company shall file a Registration Statement with respect to any newly authorized and/or reserved Registrable Securities consisting of Common Shares described in clause (i) of the definition of Registrable Securities within five (5) business days of any stockholders meeting authorizing same and shall use its best efforts to cause such Registration Statement to become effective within sixty (60) days of such stockholders meeting. If the Holders become entitled, pursuant to an event described in clause (ii) and (iii) of the definition of Registrable Securities, to receive any 11

12 securities in respect of Registrable Securities that were already included in a Registration Statement, subsequent to the date such Registration Statement is declared effective, and the Company is unable under the securities laws to add such securities to the then effective Registration Statement, the Company shall promptly file, in accordance with the procedures set forth herein, an additional Registration Statement with respect to such newly Registrable Securities. The Company shall use its best efforts to (i) cause any such additional Registration Statement, when filed, to become effective under the Securities Act, and (ii) keep such additional Registration Statement effective during the period described in Section 5 below and cause such Registration Statement to become effective within 30 days of that date that the need to file the Registration Statement arose. All of the registration rights and remedies under this Agreement shall apply to the registration of such newly reserved shares and such new Registrable Securities, including without limitation the provisions providing for default payments and mandatory redemptions contained herein. 3. Expenses of Registration. All Registration Expenses in connection with any registration, qualification or compliance with registration pursuant to this Agreement shall be borne by the Company, and all Selling Expenses of a Holder shall be borne by such Holder. 4. Registration on Form S-3. The Company shall use its best efforts to remain qualified for registration on Form S-3 or any comparable or successor form or forms, or in the event that the Company is ineligible to use such form, such form as the Company is eligible to use under the Securities Act. 5. Registration Period. In the case of the registration effected by the Company pursuant to this Agreement, the Company shall keep such registration effective until the later of (a) the date on which all the Holders have completed the sales or distribution described in the Registration Statement relating thereto or, if earlier, until such Registrable Securities may be sold by the Holders under Rule 144(k) (provided that the Company's transfer agent has accepted an instruction from the Company to such effect), and (b) the fifth (5th) anniversary of the Closing Date. 6. Indemnification. (a) Company Indemnity. The Company will indemnify each Holder, each of its officers, directors, agents and partners, and each person controlling each of the foregoing, within the meaning of Section 15 of the Securities Act and the rules and regulations thereunder with respect to which registration, qualification or compliance has been effected pursuant to this Agreement, and each underwriter, if any, and each person who controls, within the meaning of Section 15 of the Securities Act and the rules and regulations thereunder, any underwriter, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or 12

13 based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made, or any violation by the Company of the Securities Act or any state securities law or in either case, any rule or regulation thereunder applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse each Holder, each of its officers, directors, agents and partners, and each person controlling each of the foregoing, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating and defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to a Holder to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by such Holder or the underwriter (if any) therefor and stated to be specifically for use therein. The indemnity agreement contained in this Section 6(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent will not be unreasonably withheld). (b) Holder Indemnity. Each Holder will, severally and not jointly, if Registrable Securities held by it are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors, officers, agents and partners, and each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act and the rules and regulations thereunder, each other Holder (if any), and each of their officers, directors, agents and partners, and each person controlling such other Holder(s) against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading in light of the circumstances under which they were made, and will reimburse the Company and such other Holder(s) and their directors, officers, agents and partners, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating and defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by such Holder and stated to be specifically for use therein, and provided that the maximum amount for which such Holder shall be liable under this indemnity shall not exceed the net proceeds received by such Holder from the sale of the Registrable Securities pursuant to the registration statement in question. The indemnity agreement contained in this Section 6(b) shall not apply to amounts paid in settlement of any such claims, losses, damages or liabilities if 13

14 such settlement is effected without the consent of such Holder (which consent shall not be unreasonably withheld). (c) Procedure. Each party entitled to indemnification under this Section 6 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim in any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the Indemnified Party may participate in such defense at its own expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 6 except to the extent that the Indemnifying Party is materially and adversely affected by such failure to provide notice. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall furnish such non-privileged information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with the defense of such claim and litigation resulting therefrom. 7. Contribution. If the indemnification provided for in Section 6 herein is unavailable to the Indemnified Parties in respect of any losses, claims, damages or liabilities referred to herein (other than by reason of the exceptions provided therein), then each such Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages or liabilities as between the Company on the one hand and any Holder on the other, in such proportion as is appropriate to reflect the relative fault of the Company and of such Holder in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of any Holder on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or by such Holder. In no event shall the obligation of any Indemnifying Party to contribute under this Section 7 exceed the amount that such Indemnifying Party would have been obligated to pay by way of indemnification if the indemnification provided for under Section 6(a) or 6(b) hereof had been available under the circumstances. The Company and the Holders agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the Holders or the underwriters were treated as one entity for such purpose) or by 14

15 any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraphs. The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraphs shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this section, no Holder or underwriter shall be required to contribute any amount in excess of the amount by which (i) in the case of any Holder, the net proceeds received by such Holder from the sale of Registrable Securities pursuant to the registration statement in question or (ii) in the case of an underwriter, the total price at which the Registrable Securities purchased by it and distributed to the public were offered to the public exceeds, in any such case, the amount of any damages that such Holder or underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 8. Survival. The indemnity and contribution agreements contained in Sections 6 and 7 and the representations and warranties of the Company referred to in Section 2(d)(i) shall remain operative and in full force and effect regardless of (i) any termination of this Agreement or the Purchase Agreement or any underwriting agreement, (ii) any investigation made by or on behalf of any Indemnified Party or by or on behalf of the Company, and (iii) the consummation of the sale or successive resales of the Registrable Securities. 9. Information by Holders. Each Holder shall furnish to the Company such information regarding such Holder and the distribution and/or sale proposed by such Holder as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Agreement. The intended method or methods of disposition and/or sale (Plan of Distribution) of such securities as so provided by such Investor shall be included without alteration in the Registration Statement covering the Registrable Securities and shall not be changed without written consent of such Holder. 10. Replacement Certificates. The certificate(s) representing the Common Shares held by any Investor (or then Holder) may be exchanged by such Investor (or such Holder) at any time and from time to time for certificates with different denominations representing an equal aggregate number of Common Shares, as reasonably requested by such Investor (or such Holder) upon surrendering the same. No service charge will be made for such registration or transfer or exchange. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any certificate representing the Preferred Shares or the Warrants, or the underlying Common Shares of any of the foregoing, and, in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it, or upon surrender and cancellation of such certificate if 15

16 mutilated, the Company will make and deliver a new certificate of like tenor at no charge to the holder. 11. Transfer or Assignment. Except as otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. The rights granted to the Investors by the Company under this Agreement to cause the Company to register Registrable Securities may be transferred or assigned (in whole or in part) to a transferee or assignee of Preferred Shares, Warrants or Registrable Securities, and all other rights granted to the Investors by the Company hereunder may be transferred or assigned to any transferee or assignee of any Preferred Shares, Warrants or Registrable Securities; provided in each case that the Company must be given written notice by the such Investor at the time of or within a reasonable time after said transfer or assignment, stating the name and address of said transferee or assignee and identifying the securities with respect to which such registration rights are being transferred or assigned; and provided further that the transferee or assignee of such rights agrees in writing to be bound by the registration provisions of this Agreement. 12. Miscellaneous. (a) Remedies. The Company and the Investor acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent or cure breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof, this being in addition to any other remedy to which any of them may be entitled by law or equity. (b) Jurisdiction. Each of the Company and the Investor (i) hereby irrevocably submits to the exclusive jurisdiction of the United States District Court, the New York State courts and other courts of the United States sitting in New York County, New York for the purposes of any suit, action or proceeding arising out of or relating to this Agreement and (ii) hereby waives, and agrees not to assert in any such suit action or proceeding, any claim that it is not personally subject to the jurisdiction of such court, that the suit, action or proceeding is brought in an inconvenient forum or that the venue of the suit, action or proceeding is improper. The Company and the Investor consent to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing in this paragraph shall affect or limit any right to serve process in any other manner permitted by law. (c) Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing by facsimile, mail or personal delivery and shall be effective upon actual receipt of such notice. The addresses for such communications shall be: 16

17 to the Company: Stan Lee Media, Inc. 15821 Ventura Boulevard Suite 675 Encino, California 91436 Telephone: (818) 461-1757 Facsimile: (818) 728-9336 Attention: General Counsel to either Investor: c/o Elliott Management Corporation 712 Fifth Avenue, 36th Floor New York, New York 10019 Telephone: (212) 506-2999 Facsimile: (212) 489-8321 Attention: Mr. Daniel Gropper with copies to: Kleinberg, Kaplan, Wolff & Cohen, P.C. 551 Fifth Avenue New York, New York 10176 Telephone: (212) 986-6000 Facsimile: (212) 986-8866 Attention: Stephen M. Schultz, Esq. Any party hereto may from time to time change its address for notices by giving at least five days' written notice of such changed address to the other parties hereto. (d) Indemnity. Each party shall indemnify each other party against any loss, cost or damages (including reasonable attorney's fees) incurred as a result of such parties' breach of any representation, warranty, covenant or agreement in this Agreement, including any enforcement of this indemnity. (e) Waivers. No waiver by any party of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter. The representations and warranties and the agreements and covenants of the Company and each Investor contained herein shall survive the Closing. 17

18 (f) Execution in Counterparts. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement, it being understood that all parties need not sign the same counterpart. A facsimile signature shall be considered due execution and binding upon such signatory with that same force and effect as if the signature were an original. (g) Publicity. The Company agrees that it will not disclose, and will not include in any public announcement, the name of the Investor without its consent, unless and until such disclosure is required by law or applicable regulation, and then only to the extent of such requirement. The Company agrees to deliver to the Investor a copy of any public announcement regarding the matters covered by this Agreement or any agreement or document executed herewith or any other public announcement including the name of the Investor, prior to the publication of such announcements. (h) Entire Agreement; Amendment. This Agreement, together with the Purchase Agreement, the Certificate, the Warrants and the agreements and documents contemplated hereby and thereby, contains the entire understanding and agreement of the parties, and may not be amended, modified or terminated except by a written agreement signed by the Company plus the Holders of 50% of the Preferred Shares issued under the Purchase Agreement to that date and by Elliott and Westgate (provided that Elliott and Westgate hold collectively 25% of the outstanding Preferred Shares or underlying shares); provided that for the purposes of this Section 12(h) the Holders of Common Shares (including Elliott and Westgate) still entitled to registration rights under this Agreement will be deemed to still be Holders of that number of Preferred Shares which were converted into such number of Common Shares issued upon conversion which are still held by them. (i) Governing Law. This Agreement and the validity and performance of the terms hereof shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts executed and to be performed entirely within such state, except to the extent that the law of the State of Delaware regulates the Company's issuance of securities. (j) Jury Trial. EACH PARTY HERETO WAIVES THE RIGHT TO A TRIAL BY JURY. (k) Titles. The titles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. (l) No Strict 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 will be applied against any party. [Signature Page Follows] 18

19 In Witness Whereof, the parties hereto have caused this Agreement to be duly executed as of the date first above written. STAN LEE MEDIA, INC. By: --------------------------------------- Name: Title: WESTGATE INTERNATIONAL, L.P. By: Elliott International Capital Advisors Inc., as Attorney-in-Fact By: ------------------------------ Name: Title: ELLIOTT ASSOCIATES, L.P. By: --------------------------------------- Name: Title: 19

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