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: March 31, 2001
Commission File Number: 0-25388
DETOUR MEDIA GROUP, 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)
(323) 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 May 21, 2001, was 28,611,633 shares.
PART I
ITEM 1. FINANCIAL STATEMENTS.
The unaudited financial statements for the three month period ended March
31, 2001, 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 our audited
financial statements and notes thereto included herein. In connection with, and
because we desire to take advantage of, the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, we caution readers regarding
certain forward looking statements in the following discussion and elsewhere in
this report and in any other statement made by, or on our behalf, 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 our 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 our behalf. We disclaim any obligation to update forward
looking statements.
OVERVIEW
We are 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. We derive approximately 80% of our revenues from
advertising, with the balance from circulation. We maintain 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 our
operations to present our results of operations, to identify key trends
affecting our business and to
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identify other factors affecting our results of operations for the three month
periods ended March 31, 2001 and 2000.
RESULTS OF OPERATIONS
Comparison of Results of Operations for the Three Month Periods Ended March
31, 2001 and 2000
During the three month period ended March 31, 2001, our revenues decreased
from the same period in 2000, as we generated revenues of $399,569, compared to
revenues of $1,084,007 for the similar period in 2000, a decrease of $684,438
(63%). This was attributable to only one double issue of our Magazine being
published during this period, compared to three single issues being published
during the three month period ended March 31, 2000, resulting in a decrease in
advertising revenues. We published only one issue during this period because of
our lack of working capital. Our March 2001 issue was published and released in
April 2001, subsequent to the end of the three month period. As a result, we
anticipate that our revenues and costs of sales will increase in the three month
period to end June 30, 2001, which should include four issues of our Magazine.
In the three month period ended March 31, 2001, costs of sales also
decreased 67%, to $237,316, compared to $712,947 for the similar period in 2000,
a decrease of $475,631, which was also due to the publication of only one issue
of our Magazine during the applicable period, compared to three issues in 2000.
Selling, general and administrative expenses were $528,644 for the three
months ended March 31, 2001, compared to $665,502 for the similar period in
2000, a decrease of $136,858 (21%). This decrease was due primarily to a
reduction of staff and cost cutting necessitated by our financial condition.
However, we continued to incur significant fees and expenses in connection with
our funding efforts and new business plan activities.
Financing fees in the amount of $150,000 were incurred during the three
month period ended March 31, 2001, which represented the value of our common
stock issued to a lender as a default penalty regarding our non-performance on
one of the conditions contained in the loan documents.
Interest expense decreased from $201,749 in the three months ended March
31, 2000, to $194,500 for the three months ended March 31, 2001, a decrease of
$7,249 (4%) as a result of a small decrease in the principal balance due to a
major shareholder. See "Liquidity and Capital Resources" below. As a result, we
generated a net loss of $(710,891) for the three month period ended March 31,
2001, ($.03 per share) compared to a net loss of $(444,239) for the three month
period ended March 31, 2000 ($.02 per share).
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LIQUIDITY AND CAPITAL RESOURCES
At the end of the three month period ended March 31, 2001, we had $8,451 in
cash and cash equivalents. Accounts receivable decreased to $288,401 from
$397,447 for the similar period in 2000, a decrease of $109,046 (27%), which
management attributes to the fact that we published only one magazine issue
during the applicable period, as well as the fact that we commenced a new
factoring arrangement with Receivable Financing Corp. during 2001.
During the three month period ended March 31, 2001, we received $300,000
from Union Atlantic as a subsequent contribution to the 10% Convertible
Debentures previously issued in June 2000. These Debentures are for a 5 year
term and also contain warrants to purchase 75,000 shares of our common stock at
exercise prices of $.515 per warrant for 37,500 of the warrants and $.5859 per
warrant for the remaining 37,500 warrants. The Debentures may be converted at
any time during a three year term at a conversion price equal to the lesser of
$.90 per share, or 80% of the average three lowest closing bid prices of our
common stock during the 22 day trading period prior to conversion.
We have numerous outstanding notes payable, including the following:
In August 1998, we 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. The loan provides for an exit fee equal to 3% of the original principal
amount of the loan ($16,500) and is secured by 1,000,000 shares of our 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. In December 1998, we repaid $27,500 of the principal balance.
We also paid all interest which had accrued through June 30, 2000. In April
2001, we tendered a payment of $170,000 on this obligation and entered into a
Forebearance Agrement which provides, among other things, for us to pay this
lender $25,000 per month until the entire balance is paid in full. Upon payment
in full, the lender will return all of the stock provided as security. Interest
continues to accrue at the default rate.
In December 1999, we 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. We paid $100,000 on this obligation. In March 2001, an action was filed
against us by an officer of Sigmapath to collect the balance of $100,000
remaining due. However, this action was dismissed by the court because the
plaintiff who brought the action was not the proper party in interest. Since its
dismissal, we have not heard anything from
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this lender, nor otherwise been advised of any further action being brought.
In February 2001, we received a loan from an individual in the principal
amount of $80,000, which we repaid in full in March 2001. We issued 75,000
shares of our "restricted" common stock as full consideration for this loan.
At March 31, 2001, we had nine other notes payable in the aggregate
principal amount of $936,791, 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. These notes are due on demand or past due.
In 1995, our majority stockholder loaned us $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 our assets, except for accounts receivable. Accrued
interest payable to this stockholder at March 31, 2001 totaled $553,000.
Interest expense for this note was $28,000 during the three month period ended
March 31, 2001.
Advances from stockholder represent advances made by our majority
stockholder for working capital purposes. At September 30, 2000, the advances
bore interest at 8% per annum and were payable on demand. In March 2000, our
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, we must use at least 25% of the net
proceeds of any financing received by us to repay the advances. Further, all of
the advances are due and payable in full at such time as we have received equity
financing of at least $10 million. At March 31, 2001, $2,585,721 of principal
was outstanding and classified as short-term. Accrued interest payable to the
majority stockholder at March 31, 2001 totaled $845,537. Interest expense on the
advances was $75,000 for the three month period ended March 31, 2001.
TRENDS
In order to implement our new business strategy described in our Form
10-KSB for the fiscal year ended December 31, 2000, we need to raise a minimum
of $2 million of additional capital, over and above what we have recently
raised. The capital which we received recently was utilized to pay outstanding
obligations which had accrued and we were unable to utilize these funds for
implementation of our new business plan. Without the additional capital, it will
be necessary to abandon our plans for Detour Music
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and Detour Europe. In addition, we will be required to continue to substantially
reduce costs for the magazine and not able to sustain our existing advertising
revenue or grow the circulation base. In the event all current discussions
terminate without additional capital, we will have to enter a joint publishing
arrangement with other magazine publishers or liquidate.
With an additional two million of capital, we will begin to implement our
business strategy and, while no assurances can be provided, we should be
profitable within 18 months after receipt of applicable funding.
INFLATION
Although our operations are influenced by general economic conditions, we
do not believe that inflation had a material affect on our results of operations
during the three month period ended March 31, 2001.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 us and our Chairman that it was recommending to the SEC that an
enforcement action be filed against both us and our Chairman relating to
accuracy of certain of our financial statements in 1997 and 1998. The
recommended enforcement action was 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 to consultants in 1997 of options to
purchase 4,400,000 shares of common stock. According to the notice from the
Commission, the SEC anticipates alleging that we had violated Section 17(a) of
the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of
1934, Rule 10b-5, Section 13(a) of the Exchange Act and various rules
promulgated thereunder.
We believed that the issue regarding improper presentation of quarterly
financial information relates to our 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, we would be
required to determine the actual costs and expenses for the affected quarters.
The second issue related to whether we recorded the proper amount of
compensation expense in connection with the issuance of the options to the
consultants. We recorded an expense of $21,991, based on the exercise price of
the options of $.005 per share. We understand that the staff believes that the
expense should be the fair market value of the options at the time the options
were
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issued. Under generally accepted accounting principles, any such additional
compensation expense in connection with the options would result in a
corresponding increase in our paid-in capital. Thus, while the expense would
increase our net loss for 1997, the paid-in capital would be similarly increased
and there would be no change to our total deficit in stockholders' equity as of
the end of 1997.
In 2000, we advised the staff that we wished to cooperate fully and reach
an agreement on an appropriate remedy to resolve this matter. We had determined
to restate our financial statements to address the concerns raised by the staff.
On November 22, 2000, the matter was resolved by the Commission issuing a
cease-and-desist proceeding pursuant to Section 8A of the Securities Act of 1933
and Section 21C of the Securities Exchange Act of 1934. The Commission ordered
us to amend our filings with the Commission to properly reflect our financial
condition and operating results, and as required by Section 13(b)(2) of the
Exchange Act, make and keep books, record and accounts which, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of our
assets. The Commission further ordered us to devise and maintain a system of
internal accounting controls sufficient to provide reasonable assurances that,
among other things, transactions are recorded as necessary to permit the
preparation of financial statements in conformity with generally accepted
accounting principles. We have advised the Commission of our intention to amend
our filing with the Commission. No civil penalties were assessed against us
relevant to the settlement of this matter.
We have been named as a defendant in several other lawsuits in the normal
course of our business. With the exception of one prospective matter, 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 our
financial statements.
ITEM 2. CHANGES IN SECURITIES
In January 2001, 260,000 shares of our common stock were issued relating to
Union Atlantic as compensation for financing fees relating to the $300,000
investment made in January 2001.
In February 2001, we issued 75,000 shares of our common stock to one person
as a financing fee for an $80,000 loan made to us in February 2001 and repaid in
March 2001.
Beginning in January through March 2001, we issued 3,028,523 shares of our
common stock to 13 persons at a price of $0.26 per share. From this offering we
received $739,000 in net proceeds.
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Each of the investors was an "accredited investor" as that term is defined under
the Securities Act of 1933, as amended.
Also, in March 2001, we issued 1,000,000 shares of our common stock as
compensation and financing fees to cure a default relevant to the June 2000
financing previously undertaken. In June, 2000, we issued a 5 year, 10%
Convertible Debenture to five investors for aggregate proceeds of $1,000,000.
These Debentures also contained warrants to purchase 250,000 shares of our
common stock at exercise prices of $.515 per warrant for 125,000 of the warrants
and $.5859 per warrant for the remaining 125,000 warrants. The Debentures may be
converted at any time during a three year term at a conversion price equal to
the lesser of $.90 per share, or 80% of the average three lowest closing bid
prices of our common stock during the 22 day trading period prior to conversion.
In addition, we did undertake to file a registration statement registering all
of the shares of common stock underlying the warrants with the Securities and
Exchange Commission within 120 days following the issuance date. Alternatively,
we had the right to repurchase all or any portion of these Debentures at a
purchase price of 135% of the issuance price. We were unable to repurchase these
Debentures and also failed to file the applicable registration statement.
Subsequent Event
In April 2001, 1,333,333 shares of our common stock were issued pursuant to
the exercise of outstanding warrants previously issued in favor of Trilogy
Capital and Lexington Capital, which warrants were issued in connection with a
prior financing to our company in 2000. The exercise price of these warrants
were $.01 per share.
In each instance cited above, we relied upon the exemption from
registration provided by Regulation D and/or Section 4(2), promulgated under the
Securities Act of 1933, as amended, to issue the relevant shares.
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 - NONE
(b) Reports on Form 8-K - NONE.
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DETOUR MAGAZINE, INC.
CONDENSED BALANCE SHEET
(unaudited) (audited)
March 31 December 31
2001 2000
------------ ------------
ASSETS:
Current Assets
Cash $ 8,451 $ 71,598
Accounts receivable 288,401 397,447
Stock subscriptions receivable 500,000 0
Prepaid expenses & other current assets 189,436 11,599
------------ ------------
Total Current Assets 986,288 480,644
Property And Equipment, Net 36,153 42,753
Debt issuance costs 121,860 121,860
Security deposits and other assets 34,709 16,125
------------ ------------
TOTAL ASSETS $ 1,179,010 $ 661,382
============ ============
LIABILITIES:
Current Liabilities
Accounts payable & accrued expenses $ 1,889,208 $ 1,957,614
Notes payable 1,559,921 1,559,921
Accrued interest payable 237,204 145,204
Due to stockholder 2,462,509 2,556,021
Note payable stockholders 932,313 932,313
Interest payable, stockholders 1,398,534 1,296,037
------------ ------------
Total Current Liabilities 8,479,689 8,447,110
Notes Payable, less current maturities 1,460,000 1,160,000
EQUITY:
Common stock 27,280 22,915
Additional paid-in capital 9,433,142 8,543,139
Accumulated deficit (18,221,101) (17,511,782)
------------ ------------
Total deficit in stockholders' equity (8,760,679) (8,945,728)
------------ ------------
Total Liabilities & Equity $ 1,179,010 $ 661,382
============ ============
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DETOUR MAGAZINE INC
UNAUDITED CONDENSED STATEMENT OF OPERATIONS
For the Three Months
Ended March 31,
-------------------------------
2001 2000
------------ -----------
SALES $ 399,569 $ 1,084,007
COST OF SALES 237,316 712,947
------------ -----------
GROSS PROFIT 162,253 371,060
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 528,644 665,502
------------ -----------
OPERATING LOSS (366,391) (294,442)
Financing fees (150,000) -
forgiveness of debt - 51,952
Interest expense (194,500) (201,749)
------------ -----------
NET INCOME (LOSS) $ (710,891) $ (444,239)
============ ===========
Loss per share of
common stock $ (0.03) $ (0.02)
============ ===========
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DETOUR MAGAZINE, INC
UNAUDITED CONDENSED STATEMENT OF CASH FLOW
For the Three Months
Ending March 31
2001 2000
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (710,891) $ (444,239)
----------- ----------
Depreciation and Amortization 6,600 4,763
Forgiveness of debt 0 51,952
Decrease (increase) in accounts receivable 109,046 (268,130)
Decrease (increase) in prepaid expenses
and other current assets (177,837) 40,361
Decrease (increase) in stock subscriptions receivable (500,000) 0
Decrease (increase) in other assets (18,584) 0
Increase (decrease) in accounts payable
and accrued expenses (68,406) (382,162)
Increase (decrease) in accrued interest payable 92,000 (30,144)
Increase in interest payable, stockholder 102,497 109,544
----------- ----------
Total Adjustments (454,684) (473,816)
----------- ----------
NET CASH USED IN
OPERATING ACTIVITIES (1,165,575) (918,055)
----------- ----------
CASH FLOW USED IN INVESTING ACTIVITIES
Purchase of fixed assets 1,572 (2,550)
----------- ----------
NET CASH USED IN INVESTING ACTIVITIES 1,572 (2,550)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in bank overdraft 0 (69,452)
Net proceeds from (payments on) notes payable 300,000 57,813
Net proceeds from (payments to ) stockholders (93,512) 51,920
Proceeds from issuance of stock 289,000 1,000,000
Common stock issued for services 605,368 0
Fair value of warrants issued to
non-employees for services 0 0
----------- ----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 1,100,856 1,040,281
----------- ----------
NET DECREASE IN CASH (63,147)
CASH - beginning 71,598
-----------
CASH - ending $ 8,451 $ 26,824
=========== ==========
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DETOUR MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Month Period Ended March 31, 2001
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, 1997, 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.
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Earnings per share
Earnings per share have been computed based on the weighted average number
of common shares outstanding. For the three 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).
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.
In March, 2001, our shareholders approved amendments to our Articles of
Incorporation, which amendments included changing our name to "Detour Media
Group, Inc." and increasing the number of authorized common shares to
100,000,000 shares.
4. Review of Report by Independent Auditor
Effective March 15, 2000, the Securities and Exchange Commission adopted a
rule requiring that interim auditor reviews must be undertaken by all
companies subject to the Section 12(g) reporting requirements promulgated
under the Securities Exchange Act of 1934, as amended. The Company's
independent auditor, Grant Thornton LLP, has not reviewed the interim
financial statements included in this Report, but it is anticipated that
they will do so in the near future and in the event of any requirement that
revisions be undertaken by the Company to this Report, the Company will
file an amendment accordingly.
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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 MEDIA GROUP, INC.
(Registrant)
Dated: May 21, 2001
By: s/ Andrew Left
------------------------------------
Andrew Left, President
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