U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A 1
Quarterly Report Under
the Securities Exchange Act of 1934
For Quarter Ended: June 30, 1998
Commission File Number: 0-25388
DETOUR MEDIA GROUP, INC.
(Exact name of small business issuer as specified in its charter)
DETOUR MAGAZINE, INC.
(Former Name)
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)
90038
(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 October 10, 2001, was 36,572,364 shares.
PART I
ITEM 1. FINANCIAL STATEMENTS.
Our unaudited financial statements for the six month period ended June 30,
1998, 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 unaudited
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 on our behalf. We disclaim any obligation to update
forward looking statements.
OVERVIEW
Detour Media Group, Inc., f/k/a Detour Magazine, Inc., f/k/a Ichi-Bon
Investment Corporation ("we," "us," "our" or our "company"), was incorporated
under the laws of the State of Colorado on May 18, 1990. On June 6, 1997,
pursuant to the terms of an Agreement and Plan of Reorganization, we acquired
all of the issued and outstanding securities of Detour, Inc., a California
corporation, in exchange for 4,500,000 shares of our "restricted" common stock.
As a result, we were the surviving entity.
We are engaged in the 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.
2
Our magazine is published monthly, with the exception of the issues for
January/February and July/August, 1997, for which one issue was published. The
magazine has been, in general, approximately 192 pages in length, comprised of
about 60 to 70 pages of advertising, with the balance in editorial pages. This
reflects the limited, but growing, advertising base which typifies new
publications.
This amendment is being filed in order to provide investors with revised
financial statements for the six month period ended June 30, 1998 in accordance
with a consent order entered between us and the Securities and Exchange
Commission. See "Part II, Item 1" below, for an explanation of this consent
order. For a better understanding of our current operations and business plan,
readers are advised to review our annual report on Form 10-KSB/A1 for the fiscal
year ended December 31, 2000, as well as our Form 10-QSB for the six month
period ended June 30, 2001.
The following information is intended to highlight developments in our
operations, to present our results of operations, to identify key trends
affecting our businesses and to identify other factors affecting our results of
operations for the six month periods ended June 30, 1998 and 1997.
RESULTS OF OPERATIONS
Comparison of Results of Operations for the Six Month Periods Ended June
30, 1998 and 1997
During the six month period ended June 30, 1998, our revenues increased
compared to the similar period in 1997, as we generated revenues of $2,369,886,
as compared to revenues of $1,761,398 for the six months ended June 30, 1997, an
increase of $608,488 (34.5%). This increase was attributable to increased
circulation and advertising. In the six month period ended June 30, 1998, costs
of sales rose to $1,605,448 from $932,556 in the six months ended June 30, 1997,
an increase of $672,892 (72%). In this regard, printing costs, distribution
costs and editorial and photo expenses increased significantly. This was due
primarily to the increase in print orders of our magazine (number of copies
printed), caused by our management's efforts to expand circulation, which
resulted in increased printing, paper and distribution costs as a factor of such
expansion. Further, while these figures indicate an increase in costs during the
six month period ended June 30, 1998, during the six month period ended June 30,
1997 five issues of our magazine were on-sale in the applicable period in 1997,
as opposed to six magazines during the applicable period in 1998. Additional
costs were incurred as a result of additional newsstand and subscription copies
printed. Management anticipated these costs in our budget, as we are engaged in
a program to increase visibility of the magazine, in order to increase revenues
in the future. It is management's belief that the increased costs
3
associated with various promotions will result in greater visibility and market
share in the future, with our incurring significant losses during the
promotional period. However, there can be no assurances that we will generate
greater revenues in the future as a result of these additional marketing
efforts.
Selling, general and administrative expenses also decreased significantly
during the six month period ended June 30, 1998 to $1,939,199, as compared to
$4,296,459 for the six month period ended June 30, 1997, a decrease of
$2,357,260 (54.8%), as a primary result of $3,278,000 in consulting fees which
arose from recording the value of options issued as compensation for consulting
fees during the six month period ended June 30, 1997. See "Part II, Item 1,
Legal Proceedings" below.
During the six month period ended June 30, 1998, interest expense also rose
in comparison to the similar period in 1997, as a result of our need to borrow
additional working capital from affiliates, from $86,518 in the six month period
ended June 30, 1997, to $130,319 for the six month period ended June 30, 1998,
an increase of $43,801 (51%). See "Liquidity and Capital Resources" below.
As a result, we generated a net loss of $(1,305,080) for the six month
period ended June 30, 1998, compared to a net loss of $(3,554,135) for the six
month period ended June 30, 1997. It is anticipated that we will continue to
incur operating losses in the foreseeable future, until such time as we are able
to implement our new business plan more fully described in our Form 10-KSB for
the fiscal year ended December 31, 2000, as well as obtain the capital necessary
to allow us to implement such plan. There can be no assurances that we will
successfully implement our new business plan, or that we will obtain the
necessary capital to allow us to undertake the same.
LIQUIDITY AND CAPITAL RESOURCES
At the end of the six month period ended June 30, 1998, we had a bank
overdraft of $24,937. Accounts receivable increased to $538,596 from $281,889
during the six month period ended June 30, 1997, an increase of $256,707 (91%),
which management attributes to increased sales of our Magazine.
At June 30, 1998, we had outstanding notes payable to non-affiliates in the
aggregate amount of $633,744, including the following:
(i) A note in the principal amount of $90,000, which is due upon demand and
bears interest at the rate of 18%, payable quarterly. This note is personally
guaranteed by Ed Stein, an officer, director and principal shareholder of our
company.
4
(ii) A note in the principal amount of $122,000, which bears interest at
the rate of 8% per annum. All principal and interest on this note was due
January 22, 1998, but the due date was extended by mutual agreement until
September 30, 1998. This note is also personally guaranteed by Mr. Stein.
(iii) Two notes which arose as part of the acquisition consummated by us
during the three month period ended March 31, 1998 of Milton Magazine, including
one note with an outstanding principal balance of $98,336, which accrues
interest at prime rate plus 2% and which is to be repaid over a two year period,
with principal and interest payments escalating over the life of the note,
beginning with monthly payments of $3,164 and escalating to $6,125, and a second
note in the principal amount of $15,000, which accrues no interest and is
payable in monthly payments of $5,000, which commenced in May 1998.
The remaining outstanding note payable to an unaffiliated party in the
principal amount of $932,313 arose out of a loan originally due to an affiliated
party. Relevant thereto, in 1995, Mr. Stein loaned us $932,313 which bears
interest at the rate of 12% per annum and is due upon demand. The obligation is
secured by all of our assets. The note holder agreed to subordinate this
security position relevant to our accounts receivable factoring arrangement.
This stockholder subsequently assigned this Note to JCM Capital Corp. As of the
date of this report, we are making interest payments on this obligation and are
in discussions with this creditor relating to repayment terms.
Mr. Stein has also loaned us the principal sum of $1,314,442, which loan
bears interest at the rate of 12% per annum, calculated on the average monthly
outstanding balance and which is due upon demand. Applicable thereto, Mr. Stein
has provided us with a letter advising that he will abstain from demanding any
repayment on this obligation at least through December 31, 1998.
We presently factor our monthly domestic accounts receivable with Riviera
Financial, Inc., Los Angeles, California ("Riviera"). The majority of factoring
provided by Riviera is on a non-recourse basis. On average, we pay a fee to
Riviera of approximately 4.5% per month. Historically, we factor approximately
$3 million per annum in accounts receivable with Riviera. Riviera's maximum fee
for factoring our receivables is 9% per month, with a hold back of 11% on each
invoice until receipt of funds. Therefore, Riviera is only factoring 89% of our
total eligible domestic advertising receivables. In addition, Riviera also acts
in the capacity of credit manager for the Magazine by performing credit checks,
mailing invoices, making collection calls and posting receivables. It is
anticipated that, provided we successfully raise additional capital in the near
future, of which there can be no assurance, the factoring relationship with
Riviera will be terminated, as
5
management believes that it will no longer be necessary due to sufficient cash
then available to us.
Management has undertaken a plan of expansion and in order to effectuate
the same, has recognized our need for additional operating capital. In response
thereto, in November 1997, we commenced a private offering of our common stock
wherein we offered up to 4,700,000 shares of our common stock (post forward
split) at a price of $.75 per share, for aggregate gross proceeds of up to
$3,525,000. In April 1998, this offering closed with our receiving gross
proceeds of $765,000 from the sale of 1,020,000 common shares. In management's
view, the funds generated from this offering have not been sufficient to meet
our needs for additional working capital in order to allow us to fully implement
our expanded business plan. Numerous scenarios are presently being explored by
management, including discussions with investment banking firms who have
expressed an interest in working with us to raise additional equity capital.
However, as of the date of this report, no definitive arrangements have been
made between us and any third party wherein such third party has agreed to raise
additional capital for us and, while management is optimistic that it will be
successful in this regard, there are no assurances that any additional funds
will be raised. Our failure to raise additional funds, either debt or equity,
will have a significant negative impact on our ability to generate profitable
operations.
TRENDS
Management believes that we will continue to operate our business at a loss
for the foreseeable future, but is optimistic that we will begin generating
profits from our operations beginning in the year 2000, and possibly earlier if
sufficient working capital discussed in "Liquidity and Capital Resources,"
above, is raised. This will occur as a result of increased circulation of Detour
Magazine and new acquisitions of existing unaffiliated magazines, of which there
can be no assurance. The new magazine acquisitions will allow the current
management team to spread its cost over the new titles. The current back office
structure can add two to six additional magazines without adding any additional
personnel. However, there can be no assurances that we will become profitable
within the time parameters described herein, or at all.
INFLATION
Although our operations are influenced by general economic conditions, we
do not believe that inflation had a material affect on the results of operations
during the six month period ended June 30, 1998.
6
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. Based upon our restated financial statements, we
actually incurred consulting fees of $3,278,000 arising from revised valuations
of stock options issued by us in 1997. This new valuation takes into account the
market value of our common stock following issuance of the options ($1.50 per
share) as opposed to the option exercise price per share ($0.01) and the term of
the options granted (2 years). The SEC staff believes that the expense should be
the fair market value of the options at the time the options were issued.
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
7
accounts which, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of our assets. This amendment is being filed as a
result of the aforesaid order.
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 November 1997, we commenced a private offering of our common stock
wherein we offered up to 4,700,000 shares of our common stock (post forward
split) at a price of $.75 per share, for aggregate gross proceeds of up to
$3,525,000. In April 1998, this offering closed with our receiving gross
proceeds of $765,000 from the sale of 1,020,000 common 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.
8
DETOUR MEDIA GROUP, INC.
f/k/a Detour Magazine, Inc.
CONDENSED BALANCE SHEET
(unaudited) (audited)
For the For the
Six Months Fiscal Year
Ended Ended
June 30 December 31
1998 1997
------------ ------------
ASSETS:
CURRENT ASSETS
Cash $ 0 $ 11,089
Accounts receivable 538,596 281,889
Prepaid expenses and other current assets 379,832 61,079
------------ ------------
Total current assets 918,428 354,057
------------ ------------
PROPERTY AND EQUIPMENT, Net 130,979 132,591
------------ ------------
OTHER ASSETS
Security deposits 15,700 13,750
------------ ------------
Total other assets 15,700 13,750
------------ ------------
TOTAL ASSETS $ 1,065,107 $ 500,398
============ ============
LIABILITIES:
CURRENT LIABILITIES
Bank overdraft $ 24,937 $ 0
Accounts payable and accrued expenses 1,008,824 870,714
Deferred revenue 556,373 192,057
Notes payable 633,744 372,000
Accrued interest payable 18,185 19,216
Due to stockholder 1,314,442 932,313
Note payable stockholders 932,313 609,976
Interest payable, stockholders 134,871 224,615
------------ ------------
Total Current Liabilities 4,623,689 3,220,891
------------ ------------
EQUITY:
Common stock 15,362 10,369
Additional paid-in capital 4,775,066 4,313,068
Accumulated deficit (8,349,010) (7,043,930)
------------ ------------
TOTAL EQUITY (3,558,582) (2,720,493)
------------ ------------
TOTAL LIABILITIES
AND EQUITY $ 1,065,107 $ 500,398
============ ============
9
DETOUR MEDIA GROUP, INC.
f/k/a Detour Magazine, Inc.
UNAUDITED CONDENSED STATEMENT OF OPERATIONS
For the Six Months For the Three Months
Ended June 30, Ended June 30,
------------------------ --------------------------
1998 1997 1998 1997
----------- ----------- ----------- ------------
SALES $ 2,369,886 $ 1,761,398 $ 829,292 $ 680,422
COST OF SALES 1,605,448 932,556 779,878 464,358
----------- ----------- ----------- -----------
GROSS PROFIT 764,438 828,842 49,414 216,064
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,883,965 1,005,781 879,486 385,923
----------- ----------- ----------- -----------
OPERATING LOSS (1,119,527) (176,939) (830,072) (169,859)
Factoring fees (55,234) (12,678) (9,578) 3,341
Consulting fees 0 (3,278,000) 0 (3,278,000)
Interest expense (130,319) (86,518) (84,932) (50,000)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $(1,305,080) $(3,554,135) $ (924,582) $(3,494,518)
=========== =========== ============ ===========
Loss per share of
common stock $ (0.08) $ (0.71) $ (0.06) $ (0.70)
=========== =========== ============ ===========
Weighted average
shares outstanding 15,362,669 5,000,000 15,362,669 5,000,000
=========== =========== ============ ============
10
DETOUR MEDIA GROUP, INC.
f/k/a Detour Magazine, Inc.
UNAUDITED CONDENSED STATEMENT OF CASH FLOW
For the Six Months
Ended June 30,
--------------------------
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (1,305,080) $ (3,554,135)
------------ ------------
Depreciation and amortization 17,820 19,123
Value of warrants issued as consulting fees 0 3,278,000
Increase in accounts receivable (256,707) (118,463)
Decrease (increase) in prepaid expenses
and other current assets (320,703) 14,153
Increase in accounts payable and accrued expenses 138,110 438,972
Increase in deferred revenue 364,316 0
Decrease in accrued interest payable (1,031) 0
Increase (decrease) in interest payable, stockholder (89,744) 73,333
------------ ------------
TOTAL ADJUSTMENTS (147,939) 3,705,118
------------ ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (1,453,019) 150,983
------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchase of fixed assets (16,208) (9,534)
Net proceeds from officer 0 52,241
------------ ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (16,208) 42,707
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in bank overdraft 24,937 (23,062)
Net proceeds from (disbursements on) notes payable 261,744 (13,300)
Net proceeds from stockholder 704,466 21,545
Proceeds from issuance of stock 466,991 0
Disbursements upon merger and recapitalization 0 (81,784)
------------ ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 1,458,138 (96,601)
------------ ------------
NET DECREASE IN CASH (11,089) 97,089
CASH - beginning 11,089 0
------------ ------------
CASH - ending $ 0 $ 97,089
============ ============
11
DETOUR MEDIA GROUP, INC., f/k/a DETOUR MAGAZINE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Month Period Ended June 30, 1998
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, 1997. 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.
12
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).
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.
13
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities and Exchange
Act of 1934, the Registrant has duly caused this amendment to its report to be
signed on its behalf by the undersigned, thereunto duly authorized.
DETOUR MEDIA GROUP, INC.
(Registrant)
Dated: October 16, 2001
By: s/Edward T. Stein
---------------------------
Edward T. Stein, President
14