U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Under
the Securities Exchange Act of 1934
For Quarter Ended: September 30, 2000
Commission File Number: 0-25388
DETOUR MAGAZINE, INC.
(Exact name of small business issuer as specified in its charter)
Colorado
(State or other jurisdiction of incorporation or organization)
84-1156459
(IRS Employer Identification No.)
7060 Hollywood Blvd., Suite 1150
Los Angeles, California
(Address of principal executive offices)
90028
(Zip Code)
(213) 469-9444
(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 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 of the registrant's only class of common stock issued and
outstanding, as of October 18, 2000, was 21,314,765 shares.
PART I
ITEM 1. FINANCIAL STATEMENTS.
The unaudited financial statements for the nine month period ended
September 30, 2000, are attached hereto.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
unaudited financial statements and notes thereto included herein. In connection
with, and because it desires to take advantage of, the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995, the Company cautions
readers regarding certain forward looking statements in the following discussion
and elsewhere in this report and in any other statement made by, or on the
behalf of the Company, whether or not in future filings with the Securities and
Exchange Commission. Forward looking statements are statements not based on
historical information and which relate to future operations, strategies,
financial results or other developments. Forward looking statements are
necessarily based upon estimates and assumptions that are inherently subject to
significant business, economic and competitive uncertainties and contingencies,
many of which are beyond the Company's control and many of which, with respect
to future business decisions, are subject to change. These uncertainties and
contingencies can affect actual results and could cause actual results to differ
materially from those expressed in any forward looking statements made by, or on
behalf of, the Company. The Company disclaims any obligation to update forward
looking statements.
OVERVIEW
Detour Magazine, Inc. is engaged in publishing of a monthly magazine
entitled Detour, which includes advertisements and articles relating to fashion,
contemporary music and entertainment and social issues. Management describes the
magazine as an "urban, avant-garde" publication. It derives approximately 80% of
its revenues from advertising, with the balance from circulation. The Company
maintains offices in both Los Angeles and New York City.
The Magazine is been published monthly, with the exception of the issues
for December/January and June/July, for which one issue is published. The
Magazine has been, in general, approximately 150 pages in length, comprised of
about 50 to 60 pages of advertising, with the balance in editorial pages.
The following information is intended to highlight developments in the
Company's operations to present the results of
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operations of the Company, to identify key trends affecting the Company's
businesses and to identify other factors affecting the Company's results of
operations for the nine month periods ended September 30, 2000 and 1999.
RESULTS OF OPERATIONS
Comparison of Results of Operations for the Nine Month Periods Ended
September 30, 2000 and 1999
During the nine month period ended September 30, 2000, the Company's
revenues increased from the same period in 1999, as it generated revenues of
$3,286,486, compared to revenues of $2,560,479 for the similar period in 1999,
an increase of $726,007 (28%). This was attributable to an increase in
advertising revenues. In the nine month period ended September 30, 2000, costs
of sales also increased 28%, to $2,237,673, compared to $1,753,470 for the
similar period in 1999, an increase of $484,203, which was due primarily to the
Company recategorizing certain editorial costs from general and administrative
expense to cost of sales, including salaries for the editorial staff and direct
editorial costs such as photographers, writers and expenses related to
photographic shoots. Selling, general and administrative expenses were
$3,323,268 for the nine months ended September 30, 2000, compared to $1,340,493
for the similar period in 1999, an increase of $1,982,775 (148%). This increase
was due primarily to an increase in legal and accounting fees applicable to (i)
the Company's fund raising activities during this period; and (ii) the SEC
investigation described elsewhere herein. In addition, the Company also incurred
significant consulting fees relating to the aforesaid funding activities, as
well as the implementation of the new business plan more fully described in the
Company's Form 10-KSB for the fiscal year ended December 31, 1999. These costs
would have increased more significantly had the Company not recategorized
certain costs referenced in the cost of sale discussion described above.
Interest expense rose as a result of the Company's need to borrow
additional working capital, including the fund raising activities referenced
above, from $394,889 in the nine month period ended September 30, 1999, to
$537,191 for the nine month period ended September 30, 2000, an increase of
$142,302 (36%). See "Liquidity and Capital Resources" below. As a result, the
Company generated a net loss of $(2,759,338) for the nine month period ended
September 30, 2000, ($.12 per share) compared to a net loss of $(917,054) for
the nine month period ended September 30, 1999 ($.06 per share).
LIQUIDITY AND CAPITAL RESOURCES
At the end of the nine month period ended September 30, 2000, the Company
had $4,874 in cash and cash equivalents. Accounts receivable increased to
$808,685 from $145,687 for the similar
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period in 1999, an increase of $662,998 (455%), which management attributes to
the fact that (i) the Company terminated the accounts receivable factoring
arrangement which existed with Riviera Financial, Inc., Los Angeles, California
("Riviera"), which provided for the factoring of monthly domestic accounts
receivable. This arrangement was terminated by the Company in the fourth quarter
of 1999. The services performed by Riviera are now handled on an in-house basis;
and (ii) advertising billings were higher for the current period. Relevant to
factoring arrangements, as of the date of this Report, the Company is
negotiating a new factoring arrangement with Receivable Financing Corp., Boca
Raton, Florida. The Company is considering which accounts it intends to factor
as part of this arrangement and upon reaching a decision in this regard, it is
expected that a definitive agreement will be executed.
The Company has numerous outstanding notes payable, including the
following:
In August 1998, the Company obtained a loan in the principal amount of
$550,000 from IBF Special Purpose Corporation II, to be used for general working
capital. This loan currently bears interest at the default rate of 28% per annum
and was due December 19, 1998, including a one-time extension fee paid to this
lender of $5,500. In December 1998, the Company repaid $27,500 of the principal
balance. While the Company has paid all interest which had accrued through June,
30, 2000, the loan remains in default, and the Company is continuing
negotiations with the lender to work out a proposed repayment plan. As of the
date of this report, no definitive agreement has been reached. The loan provides
for an exit fee equal to 3% of the original principal amount of the loan
($16,500). Management is currently reviewing its options regarding this
obligation, including seeking out other long-term lenders. However, no
assurances can be provided that such other arrangement will be made to satisfy
this obligation. This loan is secured by 1,000,000 shares of the Company's
common stock, which were provided by 7 shareholders, including Mr. Stein, who
tendered 190,000 shares as part of the security. Mr. Stein has also personally
guaranteed this obligation. Upon information and belief, the Company believes
that this lender has begun foreclosing on the shares of Company common stock
held as security for the loan. Management believes that, as of the date of this
Report, no shares have been sold to satisfy this obligation.
In December 1999, the Company obtained a $200,000 loan from Sigmapath
Corporation, which accrues interest at the rate of 6% per annum and became due
on March 8, 2000. The Company paid $100,000 on this obligation. While the
Company has not received any further correspondence from this lender, there can
be no assurances that this note holder will agree to an extension.
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The Company has eight other notes payable in the aggregate principal amount
of $819,540, bearing interest at rates ranging from 8% to 12% per annum, all of
which require a monthly or quarterly payment of principal and/or interest.
Except for one note in the principal amount of $77,972, these notes are due on
demand. The one note not due on demand is due February 10, 2001, with the
Company obligated to tender monthly payments beginning September 15, 2000. This
payment has not been tendered by the Company, but no further communication has
been received by the Company in relation to this obligation.
In 1995, the majority stockholder of the Company loaned the Company
$932,313. In 1996, this note was converted to a demand note, bearing interest at
the rate of 12% per annum. In 1996, this stockholder subsequently assigned this
Note to JCM Capital Corp., a minority stockholder, who, upon information and
belief, has assigned portions of this note to other unaffiliated parties. This
note is secured by substantially all of the assets of the Company, except for
accounts receivable. Accrued interest payable to this stockholder at September
30, 2000 totaled $497,407. Interest expense for this note was $83,907 for the
nine month period ended September 30, 2000.
Advances from stockholder represent advances made by the majority
stockholder of the Company for working capital purposes. At September 30, 2000,
the advances bore interest at 8% per annum and were payable on demand. In March
2000, the majority stockholder agreed to reduce the annual interest rate to 8%
from 12%, effective January 1, 2000 and modify the repayment terms. Under the
new repayment terms, the advances are repayable in monthly principal
installments of $42,000 commencing January 1, 2001. However, the Company must
use at least 25% of the net proceeds of any financing received by the Company to
repay the advances. Further, all of the advances are due and payable in full at
such time as the Company has received equity financing of at least $10 million.
At September 30, 2000, $2,585,721 of principal was outstanding and classified as
short-term. Accrued interest payable to the majority stockholder at September
30, 2000 totaled $711,744. Interest expense on the advances was $239,410 for the
nine months ended September 30, 2000.
Management recognizes that, in order to allow the Company to implement the
new Strategic Plan described in the Company's Form 10-KSB, it will be necessary
for the Company to raise additional equity capital of at least $2 million over
the amounts raised by the Company through the date of this Report, not including
any additional capital required for any acquisitions. In this regard, management
has had numerous discussions with potential investors, but as of the date of
this Report, while management believes that some form of financing will be
undertaken in the near future, no definitive arrangement has been reached with
any party who has agreed to inject such capital into the business. Failure to
obtain
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this additional equity capital into the Company will force management to reduce
editorial expense, which may affect the quality of the magazine. Alternatively,
management may also reduce the number of copies printed, which will result in a
reduction in newsstand and advertising revenue. If these methods are not
successful, it is doubtful that the Company will be able to survive and the
Company will be forced to liquidate.
SUBSEQUENT EVENT
In regard to possible acquisitions, in October 2000, the Company has
executed a non-binding letter of intent to acquire all of the assets of Pacific
Event Productions, Inc., a privately held California corporation ("PEP") engaged
in the business of producing social and business events and functions. These
assets include contract rights (except those assets which are unrelated to the
business of the Company or which the Company elects not to acquire). If
consummated, the Company will also assume certain liabilities related to the
assets to be acquired, and will retain certain members of PEP's management to
render service to the Company. The proposed purchase price for the assets will
be determined as part of the definitive agreement to purchase the assets and
will relate to an agreed upon reconstructed income and expense statement, to
include only recurring expenses, with the purchase price to be five times PEP's
EBITDA. The purchase price will be paid 60% in cash, 20% in Convertible
Preferred Stock and the balance of 20% to be paid as part of a covenant not to
compete, payable pursuant to a note payable over a five year term, consistent
with the term of the covenant. There can be no assurances that this proposed
asset acquisition will occur.
TRENDS
As part of the Company's new business strategy, the Company has formed a
custom publishing unit to capitalize on the Company's core publishing competency
and to leverage its existing editorial, creative and technical publishing
skills. In this regard, in July, 20000, the Company signed its initial custom
publishing contract with The Vegas Inside.com, which contract has an approximate
value of $175,000. Two additional contracts with a combined value of
approximately $400,000 are in the process of being negotiated and, while no
assurances can be provided, management believes that these contracts will be
signed in the next 30 days. The custom publishing contracts have been structured
whereby the contracted companies advance hard costs attendant to the publication
and share revenue on a percentage basis.
Management also believes that, while no assurances can be provided, the
business of the Company's Magazine will continue to improve advertising and
circulation revenues during the balance of the fiscal year ending December 31,
2000.
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INFLATION
Although the operations of the Company are influenced by general economic
conditions, the Company does not believe that inflation had a material affect on
the results of operations during the nine month period ended September 30, 2000.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported by the Company, by notice dated March 30, 2000, the
staff of the Salt Lake City District Office of the Securities and Exchange
Commission ("SEC" or "the Commission") notified the Company and its Chairman,
Edward T. Stein, that it recommended to the SEC that an enforcement action be
filed against both the Company and Mr. Stein relating to accuracy of certain of
the Company's financial statements in 1997 and 1998. Based on discussions
between the staff and the Company's counsel, the Company believed that the
enforcement action would be based on: (i) the improper presentation of certain
quarterly financial information; and (ii) the failure to record in accordance
with generally accepted accounting principles the proper compensation expense
resulting from the issuance in 1997 of options to purchase 2,200,000 shares of
Common Stock in 1997 to consultants. According to the notice from the
Commission, the SEC anticipates alleging that the Company violated Section 17 A
of the Securities Act of 1933 and Section 10B of the Securities Exchange Act of
1934 and various rules promulgated thereunder.
The Company believes that the issue regarding improper presentation of
quarterly financial information relates to the Company's averaging of certain
costs and expenses in certain quarterly periods in 1997 and 1998 instead of
calculating these costs and expenses precisely. To comply with the staff's
requirement, the Company would be required to determine the actual costs and
expenses for the affected quarters. The Company is uncertain of what, if any,
actual adjustments would be made or the magnitude of such adjustments. No
allegation has been made as to the accuracy of these costs and expenses in the
related annual financial statements, and the Company does not believe that any
of these quarterly adjustments would result in any change in the Company's
reported net income for 1997 and 1998.
The second issue relates to whether the Company recorded the proper amount
of compensation expense in connection with the issuance of the options to the
consultants. The Company recorded an expense of $22,000, based on the exercise
price of the options of $0.01 per share. The Company understands that the staff
believes that the expense should be the fair market value of the options at the
time the options were issued. Under generally accepted accounting principles,
any such additional compensation
7
expense in connection with the options would result in a corresponding increase
in the paid-in capital of the Company. Thus, while the expense would increase
the Company's net loss for 1997, the paid-in capital would be similarly
increased and there would be no change to the Company's total deficit in
stockholders' equity as of the end of 1997.
After discussions between the SEC staff and counsel to Detour and Mr.
Stein, the Company submitted an offer of settlement of this matter and it is
anticipated that the offer will be accepted by the SEC in the near future. The
offer of settlement will result in the entry of a definitive Order Instituting
Cease and Desist Proceedings pursuant to Section 8A of the Securities Act of
1933 and Section 21C of the Securities Exchange Act of 1934. The terms of this
Order will provide that the Company will cease and desist from violating
securities laws, will amend its Exchange Act filings to accurately reflect the
financial condition of the Company, keep its books and records in proper form
and maintain a system of internal accounting to insure that future financial
statements are prepared in accordance with generally accepted accounting
principles. The the Order will also drop all matters relating to Mr. Stein.
The Company has been named as a defendant in several other lawsuits in the
normal course of its business. In the opinion of management, after consulting
with legal counsel, the liabilities, if any, resulting from these matters will
not have a material effect on the Company's financial statements.
ITEM 2. CHANGES IN SECURITIES
During the three month period ended September 30, 2000, the Company issued
an aggregate of 414,760 shares of its common stock in favor of five unaffiliated
entities in exchange for consulting services. These shares were valued at the
market price of the Company's common stock on the date the shares were issued.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -
(a) Exhibits
EX-27 Financial Data Schedule
8
(b) Reports on Form 8-K
None.
9
DETOUR MAGAZINE, INC.
CONDENSED BALANCE SHEET
(unaudited) (audited)
September 30, December 31,
2000 1999
---------- ----------
ASSETS:
CURRENT ASSETS
Cash $ 4,874 $ 0
Accounts receivable 808,685 193,012
Prepaid expenses and
other current assets 325,934 145,687
---------- ----------
Total Current Assets 1,139,494 338,699
---------- ----------
PROPERTY AND EQUIPMENT, Net 49,351 49,145
---------- ----------
OTHER ASSETS
Intangibles, net 0 0
Security deposits 15,510 15,510
---------- ----------
Total Other Assets 15,510 15,510
---------- ----------
TOTAL ASSETS $1,204,354 $ 403,354
========== ==========
LIABILITIES AND EQUITY:
- ----------------------
CURRENT LIABILITIES
Bank overdraft $ 124,334 $ 69,452
Accounts payable and
accrued expenses 1,257,750 997,064
Deferred revenue 72,762 83,515
Due to employees 39,529 0
Notes payable 1,367,351 1,539,041
Accrued interest payable 79,014 41,738
Due to stockholder 2,622,221 2,693,200
Note payable stockholders 932,313 932,313
Interest payable stockholders 1,209,151 885,834
Convertible debenture 0 0
---------- ----------
Total Current Liabilities 8,704,425 7,242,157
---------- ----------
EQUITY:
Common stock 21,166 16,002
Additional paid-in capital 7,113,330 5,020,426
Accumulated deficit (14,634,567) (11,875,231)
---------- ----------
Total Equity (7,500,071) (6,838,803)
---------- ----------
TOTAL LIABILITIES
AND EQUITY $1,204,354 $ 403,354
========== ==========
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DETOUR MAGAZINE, INC.
UNAUDITED CONDENSED STATEMENT OF OPERATIONS
For the Nine Months Ended June 30,
-----------------------------------------
2000 1999
------------------- -------------------
SALES $ 3,286,486 $ 2,560,479
COST OF SALES 2,237,673 1,753,470
------------------- -------------------
GROSS PROFIT 1,048,812 807,009
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 3,323,268 1,340,493
------------------- -------------------
OPERATING LOSS (2,274,456) (533,484)
Disposal of assets 0 (9,048)
Factoring fees 0 115,558
Forgiveness of debt 52,309 135,925
Interest expense 537,191 (394,889)
------------------- -------------------
NET INCOME (LOSS) $ (2,759,338) $ (917,054)
=================== ===================
LOSS PER SHARE OF
COMMON STOCK $ (0.13) $ (0.06)
=================== ===================
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DETOUR MAGAZINE, INC.
UNAUDITED CONDENSED STATEMENT OF CASH FLOWS
For the Nine Months
Ended September 30,
-------------------------
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $(2,759,338) $ (917,054)
----------- -----------
Depreciation and amortization 16,016 77,032
Bad debt expense 0 36,611
Loss on disposal of fixed asset 0 9,048
Forgiveness of debt 52,309 0
Decrease (increase) in
accounts receivable (615,673) (216,727)
Decrease (increase) in prepaid
expenses and other current assets (226,747) 50,074
Increase (decrease) in accounts
payable and accrued expenses 180,274 (145,938)
Increase (decrease) in
deferred revenue (10,753) (54,521)
Due employees 39,529 0
Increase in accrued interest payable 37,276 0
Increase in interest payable,
stockholder 323,317 79,396
----------- -----------
TOTAL ADJUSTMENTS (204,479) (165,025)
----------- -----------
NET CASH (USED IN)
OPERATING ACTIVITIES (2,963,817) (1,082,079)
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchase of fixed assets (15,655) (7,392)
----------- -----------
NET CASH USED IN
INVESTING ACTIVITIES (15,655) (7,392)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in bank overdraft 54,882 1,006
Net proceeds from (payments on)
notes payable 828,310 150,000
Net proceeds from (payments to)
stockholder (70,979) 702,006
Proceeds from issuance of stock 1,500,000 97,000
Common stock issued for services 342,450 0
Fair value of warrants issued to
non-employees for services 205,349 0
----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 2,860,012 950,012
----------- -----------
NET DECREASE IN CASH (119,460) (139,459)
CASH - beginning 0 139,459
----------- -----------
CASH - ending $ (119,460) $ 0
=========== ===========
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DETOUR MAGAZINE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Month Period Ended September 30, 2000
1. Unaudited Interim Financial Statements
The accompanying unaudited financial statements have been prepared in
accordance with the instructions for Form 10-QSB and do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments considered
necessary for a fair presentation, have been included. Operating results
for any quarter are not necessarily indicative of the results for any other
quarter or for the full year.
2. Basis of Presentation
Business combination
On June 6, 1998, pursuant to the terms of an Agreement and Plan of
Reorganization, Ichi-Bon Investment Corporation ("IBI") acquired all of the
outstanding common stock of Detour, Inc. ("Old Detour") in exchange for
4,500,000 unregistered shares of IBI's common stock. As a result of the
transaction, the former shareholders of Old Detour received shares
representing an aggregate of 90% of IBI's outstanding common stock,
resulting in a change in control of IBI. As a result of the merger, IBI was
the surviving entity and Old Detour ceased to exist. Simultaneously
therewith, IBI amended its articles of incorporation to reflect a change in
IBI's name to "Detour Magazine, Inc." References to the "Company" or
"Detour" refer to Detour Magazine, Inc. together with the predecessor
company, Old Detour.
The acquisition of Old Detour has been accounted for as a reverse
acquisition. Under the accounting rules for a reverse acquisition, Old
Detour is considered the acquiring entity. As a result, historical
financial information for periods prior to the date of the transaction are
those of Old Detour. Under purchase method accounting, balances and results
of operations of Old Detour will be included in the accompanying financial
statements from the date of the transaction, June 6, 1998. The Company
recorded the assets and liabilities (excluding intangibles) at their
historical cost basis which was deemed to be approximate fair market value.
The reverse acquisition is treated as a non-cash transaction except to the
extent of cash acquired, since all consideration given was in the form of
stock.
Earnings per share
Earnings per share have been computed based on the weighted average number
of common shares outstanding. For the nine month period prior to the
reverse acquisition discussed in the business combination section of Note 2
above, the number of common shares outstanding used in computing earnings
per share is the number of common shares outstanding as a result of such
reverse acquisition (5,000,000 shares).
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3. History and Business Activity
Detour was originally incorporated as Ichi-Bon Investment Corporation on
May 18, 1990, under the laws of the State of Colorado. The name was changed
to Detour Magazine, Inc. concurrent with the business combination described
in Note 2. Prior to such business combination, Detour had not engaged in
any operations or generated any revenue.
Old Detour was a publisher of a nationally distributed magazine entitled
"Detour" which is published monthly and contains articles and pictorial
displays on fashion, music and social commentary.
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DETOUR MAGAZINE, INC.
(Registrant)
Dated: November 20, 2000
By:s/ Andrew Left
---------------------------------
Andrew Left, President
15
DETOUR MAGAZINE, INC.
EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
EXHIBITS Page No.
EX-27 Financial Data Schedule..............................................17
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