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, 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 November 23, 2001, was 35,239,035 shares.
PART I
ITEM 1. FINANCIAL STATEMENTS.
The unaudited financial statements for the nine month period ended
September 30, 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 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
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 an office in Los
Angeles.
The Magazine has normally 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.
However, due to our impaired financial condition, one issue was published during
the first quarter of 2001, one issue was published in the second quarter of
2001, and one issue was published during the third quarter of 2001. As of the
date of this Report, we have published a fourth and last issue for the year
2001, and plan to
2
publish our next issue in the Spring of 2002. However, our plans are contingent
upon our having sufficient working capital to fund future publications.
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 identify other factors affecting our results of
operations for the nine month periods ended September 30, 2001 and 2000.
RESULTS OF OPERATIONS
Comparison of Results of Operations for the Nine Month Periods Ended
September 30, 2001 and 2000
During the nine month period ended September 30, 2001, our revenues
decreased from the same period in 2000, as we generated revenues of $944,331,
compared to revenues of $3,286,486 for the similar period in 2000, a decrease of
$2,342,155 (71%). This was attributable to only three issues of our Magazine
being published during this period, compared to one double issue and seven
single issues being published during the nine month period ended September 30,
2000, resulting in a decrease in advertising revenues. We published only three
issues during this period and advertising revenue per issue decreased because of
our lack of working capital. Although we have reduced the number of issues
published per year, the same advertisers have continued to place advertisements
in our Magazine, and we anticipate that such advertisers will continue to place
advertisements in our Magazine and we will be able to attract additional
advertisers if and when we obtain sufficient funding to increase the number of
issues published per year, of which there is no assurance.
In the nine month period ended September 30, 2001, costs of sales also
decreased 72%, to $631,493, compared to $2,237,673 for the similar period in
2000, a decrease of $1,606,180, which was also due to the publication of only
three issues of our Magazine during the applicable period, compared to eight
issues in 2000.
Selling, general and administrative expenses were $2,203,390 for the nine
months ended September 30, 2001, compared to $3,323,268 for the similar period
in 2000, a decrease of $1,119,878 (34%). This decrease was due to reduced salary
costs, closing of the New York office and significant reduction in financial
marketing expenses, which included payments to financial consultants with regard
to equity and debt financing, and related costs.
Interest expense increased from $537,191 in the nine months ended September
30, 2000, to $604,112 for the nine months ended September 30, 2001, an increase
of $66,921 (12%) as a result of continuing interest accruing on prior
borrowings. See "Liquidity
3
and Capital Resources" below. As a result, we generated a net loss of
$(2,651,734) for the nine month period ended September 30, 2001, ($0.08 per
share) compared to a net loss of $(2,863,955) for the nine month period ended
September 30, 2000 ($.07 per share).
LIQUIDITY AND CAPITAL RESOURCES
At the end of the nine month period ended September 30, 2001, we had
$45,954 in cash and cash equivalents. Accounts receivable decreased to $89,339
from $639,971 at September 30, 2000, a decrease of $550,632 (86%), which
management attributes to the fact that we published only three magazine issues
during the applicable period with considerably lower advertising revenue and
related accounts receivable per issue.
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 September 30, 2000. In April
2001, we tendered a payment of $170,000 on this obligation and entered into a
Forbearance Agreement 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. As at September 30, 2001, interest was
paid on a current basis and the principal balance was $511,485.
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.
Subsequently, we were served with another copy of a complaint in November 2001.
See "Part II, Item 1, Legal Proceedings" below.
At September 30, 2001, we had eleven other notes payable, including two
convertible debentures, in the aggregate principal
4
amount of $2,311,590, 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. In July 2001, the holders of these
various notes agreed to convert this obligation, including all principal and
accrued interest, into shares of our common stock at a conversion price of
approximately $.46 per shares. They received 3,237,468 shares of our common
stock, in aggregate. These notes were secured by substantially all of our
assets, except for accounts receivable. Upon converson of the notes, the
security interest was released.
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 September 30, 2001, $2,785,604 of
principal was outstanding and classified as short- term. Accrued interest
payable to the majority stockholder at September 30, 2001 totaled $1,041,703.
Interest expense on the advances was $85,369 for the nine month period ended
September 30, 2001.
TRENDS
Management is completing a comprehensive business plan including a new
business strategy and reorganization of our debt, capital structure and plan for
capital formation required to implement the new business strategy. In October
and November of 2001, we entered into finders fee and consulting agreements to
assist in the formation and implementation of the business plan and capital
formation activities. The business strategy will focus initially on
strengthening Detour Magazine's distribution and brand in North America,
attracting new management and laying the groundwork for licensing the Detour
brand on an expanded product and geographical basis.
5
In October 2001, we published our most recent issue and we currently plan
to publish our next issue in the second quarter of 2002, which will be dependent
upon the receipt of loan proceeds in the approximate amount of $500,000 required
to fund our interim overhead and publication of that next issue. On or before
January 31, 2002, we anticipate the completion of our business plan, and on or
before March 31, 2002, we further anticipate the reorganization of our debt
pursuant to such plan, the funding of equity capital required to implement such
plan and the hiring of new management.
There is no assurance that we will be able to raise the interim $500,000 or
the equity financing required pursuant to the business plan, in which case we
would have no additional funds, other than collection of current accounts
receivable, with which to continue in business and may be forced to enter into a
joint publishing arrangement or sell or liquidate.
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 nine month period ended September 30, 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
6
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 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, we have been instructed to 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. As of the date of this
Report, we have filed with the Commission applicable amendments to our Form
10-QSB filings for the quarters ended March 31, June 30 and September 30 of 1997
and for the quarters ended March 31, June 30 and September 30 of 1998,
reflecting restated financial statements for those quarters. 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 described
in "Subsequent Events" below, 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.
Subsequent Event
On November 26, 2001, we were served with an amended notice of motion for
summary judgement in lieu of complaint by Doc. J. Thurston, III and Sigmapath
Corporation, who named both our company
7
and Edward Stein, our President, as defendants. The action, which has been filed
in the Supreme Court of the State of New York, County of Nassau, Index No.
1313/01, prays for judgment in the amount of $100,000, plus appropriate
interest, relating to the Sigmapath note described above under "Liquidity and
Capital Resources." As this matter has recently been served upon us, we are in
the process of reviewing this matter and cannot state our position regarding any
defenses we may have as of the date of this report.
ITEM 2. CHANGES IN SECURITIES
During the three month period ended September 30, 2001, we issued an
aggregate of 700,000 warrants as follows: two to employees (100,000 warrants
apiece) and one to a consultant (500,000 warrants), each warrant exercisable to
purchase one share of our common stock at an exercise price of $.20 per share.
The warrants have a term of 3 years from the date of issuance. We have granted
the holders of these warrants "piggyback" registration rights for the shares
underlying the warrants.
In July 2001, two holders of our outstanding convertible debentures elected
to convert. They converted an aggregate of $50,000 in principal and $5,514 in
accrued interest, into an aggregate of 1,119,231 shares of our common stock
pursuant to the terms of the applicable debenture.
In July 2001, as discussed above under "Liquidity and Capital Resources,"
the holders of notes in the principal amount of $932,313 agreed to convert this
obligation, including all principal and accrued interest, into shares of our
common stock at a conversion price of approximately $.46 per share. They
received 3,237,468 shares of our common stock, in aggregate.
Subsequent Event
In October 2001, the Company issued 350,000 warrants plus such additional
number of warrants as shall equal 1% of the amount by which the fully diluted
number of common shares outstanding on January 8, 2002, exceeds 35,000,000. The
issuance represents compensation to a consultant under the terms of a consulting
agreement to provide and promote relationships with the Company to include
potential strategic partners, merger or acquisition candidates, customers,
business contacts, employees, agents and consultants. Each warrant is
exercisable to purchase one share of our Common Stock at an exercise price of
$0.04 per share. The warrants have a term of 5 years from the date of issuance.
We have granted the holder of these warrants "piggyback" registration rights for
the shares underlying the warrants.
In each instance cited above, we relied upon the exemption from
registration provided by Section 4(2), promulgated under the
8
Securities Act of 1933, as amended, to issue the relevant securities.
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.
9
DETOUR MEDIA GROUP, INC.
f/k/a Detour Magazine, Inc.
CONDENSED BALANCE SHEET
(unaudited) (audited)
September 30, December 31,
2001 2000
-------------- ---------------
ASSETS:
Current Assets
Cash $ 45,954 $ 71,598
Accounts Receivable 89,339 397,447
Prepaid expenses & other current assets 21,611 11,598
-------------- ---------------
Total Current Assets 156,905 480,643
Property And Equipment, Net 28,566 42,753
-------------- ---------------
Other Assets
Intangibles, net 19,400 -
Security deposits 16,125 16,125
-------------- ---------------
Total Other Assets 35,525 16,125
-------------- ---------------
TOTAL ASSETS $ 220,996 $ 539,521
============== ===============
LIABILITIES:
Current Liabilities
Accounts payable & accrued expenses $ 1,835,638 $ 1,957,614
Due to employees 42,828 -
Notes payable 1,563,076 1,559,921
Accrued interest payable 294,160 145,204
Due to stockholder 2,805,604 2,556,021
Note payable stockholders - 932,313
Interest payable, stockholders 1,041,703 1,296,034
Convertible debentures 1,360,000 1,160,000
-------------- ---------------
Total Current Liabilities 8,943,008 9,607,107
EQUITY:
Common stock 35,240 22,916
Additional paid-in capital 11,868,577 8,885,165
Accumulated deficit (20,625,829) (17,975,667)
-------------- ---------------
Total Equity (8,722,012) (9,067,586)
-------------- ---------------
Total Liabilities & Equity $ 220,996 $ 539,521
============== ===============
10
DETOUR MEDIA GROUP, INC.
f/k/a Detour Magazine, Inc.
UNAUDITED CONDENSED STATEMENT OF OPERATIONS
For the Nine Months For Three Months
Ended September 30, July 1 to September 30
------------------------ ------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
SALES $ 944,331 $ 3,286,486 $ 340,335 $ 1,246,663
COST OF SALES 631,493 2,237,673 57,686 969,252
----------- ----------- ----------- -----------
GROSS PROFIT 312,837 1,048,813 282,649 277,411
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,203,390 3,323,268 1,845,565 1,465,512
----------- ----------- ----------- -----------
OPERATING LOSS (1,890,553) (2,274,455) (1,562,916) (1,188,101)
Factoring fees 7,069 - - -
Financing Fees 150,000 - - -
Forgiveness of Debt - 52,309 - -
Interest expense 604,112 537,191 96,121 167,610
----------- ----------- ----------- -----------
NET INCOME (LOSS) $(2,651,734) $(2,863,955) $(1,659,037) $(1,355,711)
=========== =========== =========== ===========
Loss per share of
common stock (0.08) (0.07)
=========== ===========
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DETOUR MEDIA GROUP, INC.
f/k/a Detour Magazine, Inc.
UNAUDITED CONDENSED STATEMENT OF CASH FLOW
Nine Months
September 30,
2001
-------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (2,651,734)
-------------
Depreciation and Amortization 14,187
Decrease (increase) in accounts receivable 308,108
Decrease (increase) in prepaid expenses
and other current assets (29,413)
Increase (decrease) in accounts payable
and accrued expenses 28,629
Increase (decrease) in accrued interest payable 148,956
Increase (decrease) in interest payable, stockholder (254,334)
-------------
Total Adjustments 216,133
-------------
NET CASH USED IN
OPERATING ACTIVITIES (2,435,601)
-------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net proceeds from (payments on) notes payable 3,155
Net proceeds from (payments to ) stockholders (682,730)
Proceeds from issuance of stock 789,000
Common stock issued for services 506,396
Common stock issued for debt conversion 1,596,436
Fair value of warrants issued to non-employees
for services 187,700
Fair value of warrants issued to employees for services 10,000
-------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 2,409,957
-------------
NET INCREASE (DECREASE) IN CASH (25,644)
CASH - beginning 71,598
-------------
CASH - ending $ 45,954
=============
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DETOUR MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Month Period Ended September 30, 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, 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
13
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).
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 February 2001, pursuant to the affirmative vote of the holders of a
majority of our common stock, we amended our articles of incorporation,
changing our name to "Detour Media Group, Inc."
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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: December 3, 2001
By: s/Edward T. Stein
---------------------------------
Edward T. Stein, President
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