As filed with the Securities and Exchange Commission on July 17, 2001.
Registration No. 333-64492
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
________________________
DETOUR MEDIA GROUP, INC.
(Name of Small Business Issuer in its Charter)
COLORADO 2721 84-1156459
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
(Address, including zip code, and telephone number, including area code, of registrant's
principal executive offices)
ANDREW LEFT
PRESIDENT AND CHIEF EXECUTIVE OFFICER
7060 HOLLYWOOD BLVD., SUITE 1150
LOS ANGELES, CALIFORNIA 90038
(323) 469-9444
(Name, address, including zip code, and telephone number, including area code, of agent for
service)
Copies of communications to:
CHRISTOPHER S. AUGUSTE, ESQ.
JENKENS & GILCHRIST PARKER CHAPIN LLP
THE CHRYSLER BUILDING
405 LEXINGTON AVE.
NEW YORK, NEW YORK 10174
TELEPHONE NO.: (212) 704-6000
FACSIMILE NO.: (212) 704-6288
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
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Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Amount to be Offering Price Aggregate Registration
Securities to be Registered Registered (1) Per Share (2) Offering Price Fee (2)
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Common Stock, par value 8,593,750(2)(3) $0.14 $1,203,125 $ 301.00
$.001 per share (4)
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Common Stock, par value 2,652,250(2)(3) $0.11 $291,748 73.00
$.001 per share (5)
------------------------------------------------------------------------------------------
Common Stock, par value 1,259,260 $0.29216 $367,906 92.00
$.0001 per share (6)
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Common Stock, par value 250,000 $0.5313 $132,825 34.00
$.0001 per share (7)
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Common Stock, par value 250,000 $0.6641 $166,025 42.00
$.0001 per share (8)
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Common Stock, par value 1,000,000 $0.11 $110,000 28.00
$.0001 per share (9)
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Common Stock, par value 500,000 $0.11 $55,000 14.00
$.0001 per share (10)
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Total 14,505,260(2)(3) $1,123,504 $283.00
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(1) Because the number of shares of common stock issuable upon the conversion of
the notes issued depends on the market price of our common stock, the actual
number of shares to be sold under this registration statement cannot be
determined at this time. The number of shares registered for resale is not
intended to be a prediction as to the future market price of our common stock
upon conversion of the notes. Under the terms of subscription agreements entered
into between Detour and the investors referred to therein we are required to
file a registration statement registering for resale not less than 200% of the
number of shares of our common stock into which the notes issued may be
converted as of the date hereof. In the event that the market price of our
common stock declines, and the conversion price of the securities that we are
registering for resale changes, we may not have registered for resale a
sufficient number of shares of common stock issuable upon the conversion of the
notes issued, and we may have to file a new registration statement registering
for resale such additional shares of our common stock.
(2) Estimated pursuant to Rule 457(c) under the Securities Act of 1933 solely
for the purpose of computing the amount of the registration fee. The fee was
based on (i) the average of the high ($.12) and low ($.10) price of the common
stock quoted in the OTC Bulletin Board on June 29, 2001 for the shares issuable
upon conversion of the notes and the shares issued as consideration for a waiver
of cash penalties accrued under the subscription agreements; and (ii) the price
at which the warrants may be exercised.
(3) Because the number of shares of common stock issuable upon conversion of the
notes into stock depends on the market price of our common stock, the actual
number of shares into which the notes will be converted and the number to be
sold under this registration statement cannot be determined at this time. Under
the terms of subscription agreements entered into between Detour and the
investors referred to therein, dated as of June 19, 2000 and as of December 28,
2000, as amended, we agreed to register 200% of the number of shares of our
common stock into which the notes issued may be converted as of the date hereof.
The number of shares registered is not intended to be a prediction as to the
future market price of our common stock upon conversion of the notes.
(4) Represents shares of common stock issuable upon conversion of a debenture
issued to the selling stockholders on June 19, 2000.
(5) Represents shares of common stock issuable upon conversion of a debenture
issued to the selling stockholders on December 31, 2000.
(6) Represents shares of common stock issuable upon exercise of a warrant issued
to the selling stockholders on December 31, 2000.
(7) Represents shares of common stock issuable upon exercise of a warrant issued
to a selling stockholder on June 19, 2000.
(8) Represents shares of common stock issuable upon exercise of a warrant issued
to the selling stockholders on June 19, 2000.
(9) Represents shares of common stock issued to the selling stockholders on
April 11, 2001.
(10) Represents shares of common stock issued to a selling stockholder in
consideration for professional services rendered.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
THE INFORMATION IN THIS PROSPECTUS IS INCOMPLETE AND MAY BE CHANGED. WE HAVE NOT
AUTHORIZED ANY DEALER, SALESPERSON OR ANY OTHER PERSON TO GIVE INFORMATION OR TO
REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. THESE SECURITIES MAY NOT BE
SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES AND IS NOT SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY STATE
WHERE THE OFFER OR SALE IS NOT PERMITTED.
---------------------
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION,
DATED JULY __, 2001
DETOUR MEDIA GROUP, INC.
14,505,260 SHARES OF COMMON STOCK
---------------------
This prospectus relates to the resale from time to time by the selling
stockholders of up to 14,505,260 shares of common stock of Detour Media Group,
Inc., consisting of:
o 1,759,260 shares of common stock issuable by us upon the exercise of
warrants held by the selling stockholders;
o 11,246,000 shares of common stock issuable by us upon the conversion
of debentures held by the selling stockholders; and
o 1,500,000 shares of common stock issued by us to the selling
stockholders.
We will not receive any proceeds from the sale of the shares by the selling
stockholders. We will, however, receive the exercise price of the warrants
issued to the selling stockholders, when exercised. We will pay the costs of
registering the shares under this prospectus, including legal fees.
Our stock is traded in the over-the-counter market and quoted on the OTC
Bulletin Board under the symbol DTRM. On June 29, 2001 the average of the high
and low price of our common stock as reported on the OTC Bulletin Board was
$0.11 per share.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY
CONSIDER THE FACTORS DESCRIBED UNDER THE CAPTION "RISK FACTORS" BEGINNING ON
PAGE 5 OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
The Date of this prospectus is ____________ __, 2001
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TABLE OF CONTENTS
Prospectus Summary....................................................3
Risk Factors...........................................................4
Information About Forward-Looking Statements...........................9
The Offering..........................................................10
Use of Proceeds.......................................................10
Selling Stockholders..................................................10
Plan of Distribution..................................................11
Legal Proceedings.....................................................12
Directors, Executive Officers, Promoters and Control Persons..........13
Executive Compensation................................................14
Security Ownership or Certain Beneficial Owners and Management........15
Market for Our Common Stock and Dividend Policy.......................16
Management's Discussion and Analysis of Financial Condition and Results
of Operations.........................................................16
Description of Business ..............................................19
Description of Property...............................................25
Certain Relationships and Related Transactions........................26
Description of Securities.............................................26
Legal Matters.........................................................27
Experts...............................................................27
Where You Can Find More Information...................................28
Consolidated Financial Statements of Detour Media Group, Inc.........F-1
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in this prospectus. This summary does not contain all of the
information you should consider before investing in our common stock. You should
read the entire prospectus carefully, including the "Risk Factors" section.
DETOUR MEDIA GROUP, INC.
Detour Media Group, Inc. is engaged principally in the publication and
distribution of Detour, an internationally distributed magazine best known for
its presentation of cutting-edge trends and strong editorial focus on fashion,
entertainment, lifestyle and contemporary social issues. Our mission is to be a
premier urban avant-garde publication devoted to those topics which we believe
will attract a readership consisting primarily of affluent, style conscious men
and women in the 18 to 35 age group. We derive revenues primarily from
advertising in Detour and, to a lesser extent, from subscription and newsstand
sales.
THE OFFERING
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Shares offered by the selling 14,505,260
stockholders
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Offering Price Determined at the time of sale by the
selling stockholder.
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Common stock outstanding as of May 21, 28,611,633
2001
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Use of Proceeds We will not receive any proceeds from
the shares offered by the selling
stockholders
Any proceeds we receive from exercise
of warrants will be used primarily for
general corporate purposes.
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Dividend Policy We currently intend to retain any
future earnings to fund the
development and growth of the
business. Therefore, we do not
currently anticipate paying cash
dividends.
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OTC Bulletin Board Symbol DTRM
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RISK FACTORS
An investment in shares of our common stock involves a high degree of risk.
You should carefully consider the risks described below before deciding to
invest in shares of our common stock. Our business, operating results and
financial condition could be seriously harmed due to any of the following risks.
The trading price of our common stock could decline as a result of any of these
risks and you could lose all or part of your investment. You should also refer
to the other information in this prospectus including our financial statements
and the related notes.
RISKS RELATED TO THIS OFFERING
------------------------------
WE HAVE 13,005,260 SHARES OF COMMON STOCK RESERVED FOR FURTHER ISSUANCES WHICH
CAN SUBSTANTIALLY DILUTE THE VALUE OF YOUR DETOUR COMMON STOCK
The issuance of reserved shares would dilute the equity interest of existing
stockholders and could have a significant adverse effect on the market price of
our common stock. As of June 15, 2001, we had 13,005,260 shares of common stock
reserved for possible future issuances upon conversion of warrants and notes.
RESTRICTIONS IN OUR CURRENT FINANCING ARRANGEMENTS NEGATIVELY AFFECT RAISING
ADDITIONAL FUNDS
The subscription agreements signed in connection with the June 2000 and December
2000 offerings contain restrictions on future financing, which could have a
materially adverse effect on our ability to raise the needed additional funds.
For 180 days after the effective date of this registration statement, if we
intend to sell shares in a financing, we are generally required to give certain
investors a right of first refusal to purchase a number of shares, on the same
terms, and in the same proportion as the investor purchased our notes, except
for the December 2000 offering.
THE DILUTION EFFECT OF THE SHARES ISSUABLE PURSUANT TO THE JUNE 2000 AND
DECEMBER 2000 OFFERINGS (SEE "DILUTION")
As of June 25, 2001, assuming full conversion or exercise of the securities
issued in connection with the June 2000 and December 2000 offerings, 13,005,260
shares of our common stock would be issuable, representing 45.5% of our
currently outstanding common stock. These issuances, if made in their entirety,
would result in your common stock being diluted by approximately 32.2%.
The conversion rates of the June 2000 notes and the December 2000 note are based
on a floating rate at a discount to the market price of our common stock at the
time that such notes are converted. Accordingly, we cannot determine the
ultimate number of shares of common stock that we will issue upon conversion of
the notes issued in connection with the June 2000 or December 2000 offerings and
upon exercise of the June 2000 warrants or the December 2000 warrants.
CONVERSION AND SALES OF SHARES COULD DEPRESS THE PRICE OR OUR COMMON STOCK
Because of the conversion features in the notes issued in relation to the June
2000 and December 2000 offerings, the note holders will receive a greater number
of shares of common stock upon conversion if our common stock price decreases.
If the note holders convert their notes or exercise their warrants and then sell
our common stock, the common stock price may decrease due to the additional
shares in the market. This could allow the note holders to convert their
remaining notes into greater amounts of common stock, the sales of which would
further depress the stock price.
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The significant downward pressure on the price of the common stock could
encourage short sales, if short sales of our stock were permitted, and
consequently place further downward pressure on the price of our common stock.
THE LOWER THE PRICE OF OUR COMMON STOCK, THE MORE SHARES OF COMMON STOCK WILL BE
ISSUABLE IN THE FORM OF INTEREST PAYMENTS
The notes issued in connection with the June 2000 offering bear interest at
an annual rate of 10% and the notes issued in connection with the December 2000
offering bear interest at an annual rate of 6% and the interest is payable in
cash or in shares of our common stock. Consequently, the lower the price of our
common stock, the more shares will be issuable in the form of interest payments.
As of June 25, 2001, the notes issued in the amount of $1,309,000 in connection
with the June 2000 and December 2000 financings have accrued $118,270 in
interest.
OUR DEFAULT ON THE PAYMENT OF NOTES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS, OPERATING RESULTS, OR FINANCIAL CONDITION
On June 19, 2000 we issued $1,000,000 worth of convertible notes to certain
investors. All principal and interest due on the outstanding notes becomes
immediately due and payable three years from the date of issuance of each note
issued in connection with the June 2000 offering, or earlier in the event of a
default.
On December 31 2000 we issued $309,000 worth of convertible notes to
certain investors. All principal and interest due on such note becomes
immediately due and payable December 31, 2001, or earlier in the event of a
default.
Events of default under the June 2000 and December 2000 offerings include:
o a breach by us of any material covenant or term or condition of the
notes issued in connection with the offerings;
o a breach by us of any material representation or warranty made in the
subscription agreements signed in the offerings, or in any agreements
made in connection therewith;
o if we make an assignment for the benefit of our creditors, or a
receiver or trustee is appointed for us;
o any form of bankruptcy or insolvency proceeding is instituted by or
against us;
o if we do not comply with the conditions for listing on a principal
market; and
o the delising of our common stock from a principal market.
If we default on the notes issued in connection with the June 2000 or
December 2000 offerings, we will be required to pay the principal of the notes
and any interest accrued. The cash required to pay such amounts will most likely
come out of our working capital. Since we rely on our working capital for our
day to day operations, such a default on the notes could have a material adverse
effect on our business, operating results, or financial condition to such extent
that we are forced to restructure, file for bankruptcy, sell assets or cease
operations, any of which could put your investment dollars at significant risk.
See "Management's Discussion and Analysis or Plan of Operations".
IF WE DO NOT ISSUE TO THE INVESTORS THE SHARES OF COMMON STOCK UPON CONVERSION
OF THE NOTES WITHIN A LIMITED AMOUNT OF TIME, WE WILL BE REQUIRED TO PAY A
PENALTY
In the event that we are unable to issue the shares of common stock within
five business days of when a note, issued pursuant to the June 2000 or December
2000 offerings, is convertible, then at the note holder's election, we must pay
to the note holder a sum of money determined by multiplying the principal
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of the note not convertible by 130%, together with accrued but unpaid interest
on the note; for example, if we do not issue shares of common stock, in a timely
manner, upon conversion of $1,309,000 in notes, we will be required to pay a
penalty of up to $392,700, in the aggregate.
OUR CURRENT FINANCING ARRANGEMENTS COULD PREVENT OUR COMMON STOCK FROM BEING
LISTED ON NASDAQ OR OTHER PRINCIPAL MARKETS
Nasdaq and other principal markets require that, to be eligible for inclusion in
the stock market, a company's common stock have a minimum bid price per share of
common stock. The characteristic of our financing is to exert downward pressure
on the bid price of our common stock which may prevent our common stock from
being listed on Nasdaq or other principal markets; for example:
o the conversion feature of the notes issued and in our current
financing arrangements will result in the note holders receiving a
greater number of shares of common stock upon conversion if our common
stock price decreases;
o if the selling stockholders or the investors in the June 2000 and
December 2000 financings convert their notes or exercise their
warrants and then sell our common stock, the common stock price may
decrease due to the additional shares in the market. This could allow
the selling stockholder or the investor in the June 2000 or December
2000 financing to convert their remaining notes into greater amounts
of common stock, the sales of which would further depress the stock
price.
Additionally, Nasdaq and other principal markets require companies to
re-apply for initial inclusion and satisfy all initial inclusion requirements if
there is a change in control which may be deemed a merger and consolidation. The
conversion of the notes issued, and the related warrants, may trigger this
provision as the conversion feature of the notes and the exercise of the
warrants may be deemed to result in a change of control. See "Dilution."
Consequently, assuming that we meet the other listing requirements, and our
common stock were to be listed on Nasdaq, or another principal market, if the
conversion of the notes and the exercise of the warrants results in a change of
control, we may be required to re-apply for initial inclusion and satisfy all
initial inclusion requirements.
RISKS RELATED TO OUR BUSINESS
-----------------------------
IF THE COST OF PAPER OR POSTAGE WERE TO INCREASE, IT COULD HAVE A SIGNIFICANT
EFFECT ON OUR OPERATING EXPENSES
Paper is the principal material used in the publishing of our magazine and is a
significant expense for us. The cost of paper is volatile and may rise,
increasing the cost of publishing our magazine. Additionally, because we deliver
our product to subscribers using the U.S. Postal Service, an increase in the
postage rate would increase our expenses. If there were an increase in paper
costs or postage rates, there is no guarantee that we would be able to pass the
increased cost on to advertisers or readers, nor is there any guarantee that we
would be able to obtain financing to meet the increased costs of publishing the
magazine. Therefore, an increase in the cost of paper or postage could
significantly increase our expenses, thereby increasing our operating loss.
OUR REVENUES WOULD BE SIGNIFICANTLY REDUCED IF ADVERTISING IN OUR MAGAZINE WERE
TO DECREASE
Advertising makes up the vast majority of our total revenues (approximately
91.8% in 2000). If a major advertiser were to stop advertising in our
publication, or if there were a general decrease in the level of
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advertising in our magazine, our revenues would be greatly reduced.
Additionally, if circulation of our magazine were to significantly decrease,
advertisers might pay less for advertisements in our magazine, or no longer
advertise in our magazine altogether. The fact that we may be in an economic
recession could result in a decrease in the circulation of our magazine and a
general decrease in the amount of advertising revenue that we receive, since
both individuals and businesses generally spend less money in financially
difficult times. If our advertising revenue decreases for any reason, our total
revenues could be significantly reduced, greatly increasing our operating losses
OUR COMPETITION HAS GREATER RESOURCES THAN WE DO WHICH ALLOWS THEM TO ADVERTISE
AND MARKET THEIR PUBLICATIONS MORE EXTENSIVELY THAN WE DO
We face significant competition from publicly and privately held companies in
the publishing business. Many of our competitors, such as Interview and Surface
Magazine, have greater resources, both financial and otherwise, than the
resources currently available to us, which allows them to advertise and market
their magazine more extensively than we do. We compete with these magazines for
advertisers and readers. If we are unable to compete successfully for
advertisers and readers, our circulation and the number of advertisers in our
magazine would decrease, adversely affecting our revenues.
Contributing to the disparity in resources between our competition and us is the
fact that we are currently experiencing cash shortages. These shortages could
inhibit our ability to effectively compete with other magazines by forcing us to
spend less on advertising and marketing. For example, if we continue to
experience cash shortages we may be unable to retain the services of the
consultants that have assisted us with various aspects of the magazine,
including media kits, business cards and the layout of the magazine. Such action
would only increase the disparity between our competitors and us.
OUR EXECUTIVE OFFICERS AND CERTAIN HIGHLY SKILLED PERSONNEL MAY LEAVE
Our success depends largely on the skills, experience and performance of some
key members of our management, including our President and Chief Executive
Officer, our Acting Editor in Chief and our Acting Publisher. If we lose one or
more of these key employees, our ability to implement our new business strategy
or maintain or provide effective leadership for our magazine might be hampered,
adversely affecting our business, operating results and financial condition. We
have not been successful in retaining our key employees in the past.
Our future success also depends on our ability to continue attracting and
retaining highly skilled personnel such as writers and photographers. Like other
magazines, we face intense competition for qualified personnel. Many of our
competitors have greater resources than we have, and are therefore able to spend
more money to obtain the services of highly skilled personnel. Therefore, we
cannot be certain that we will be successful in attracting new personnel or
adequately compensating our current personnel in the future. If we are unable to
retain or attract highly skilled personnel in the future, the quality of our
magazine might decrease resulting in a loss of circulation and revenue.
A CHANGE IN OUR DISTRIBUTOR COULD LEAD TO INFERIOR DISTRIBUTION OF OUR MAGAZINE
LEADING TO POORER CIRCULATION AND LOWER REVENUES
Our current distributor is a leading international distributor, allowing for
broad distribution of our magazine. If our distributor were to change for any
reason, there is no guarantee that the new distributor would be as effective in
distributing our magazine, that as well known a distributor would accept us as a
client, or that we could afford such a distributor if the distributor would
accept us as a client. Therefore, if any change in our distributor were to
occur, our magazine might be more poorly distributed, leading to a decrease in
circulation, which would decrease advertising in our magazine, significantly
reducing
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revenue. Based on our current financial situation, if the cost of our current
distributor were to increase we might no longer be able to afford the
distributor, perhaps forcing us to employ a less qualified company.
OUR NEW BUSINESS STRATEGY RELATING TO THE INTERNET AND CUSTOM PUBLISHING COULD
FAIL WHICH MIGHT RESULT IN THE FAILURE OF OUR CURRENT BUSINESS
We are currently planning to implement a new business strategy involving the use
of the internet and custom publishing. If our new business strategy to become a
full service media company fails, our publishing business might also fail. Our
new business strategy requires a significant monetary investment (estimated to
be approximately $1.5 million), which, if obtained from our current operations,
would then not be available for use in our publishing business. An alternate
method for funding the new business strategy would be to obtain a loan or sell
debt instruments. If the new business strategy failed, however, the level of
debt might be too great for our publishing business to support, causing that
portion of our business to also fail.
THE PEOPLE FEATURED IN OUR MAGAZINE MIGHT INITIATE SUITS AGAINST THAT MIGHT LEAD
TO AN INCREASE IN OUR EXPENSES
Because of our magazine's focus on entertainment and celebrities, we often
interview people for the magazine. If we were to publish something about an
interviewee that was inaccurate or untrue, or which the interviewee claimed was
inaccurate or untrue, the interviewee might initiate a suit against us claiming
that they were harmed in some way by the publication of the material. If an
interviewee did initiate such a suit, regardless of its merits, our expenses
could greatly increase due to the legal costs associated with the defense of
such a claim.
RISKS RELATED TO OUR COMMON STOCK
---------------------------------
OUR STOCK IS THINLY TRADED AND MAY EXPERIENCE PRICE VOLATILITY
Our common stock currently is quoted on the OTC Bulletin Board. The trading
volume of our common stock historically has been limited, and there can be no
assurance that an active public market for our common stock will be developed or
sustained. As a result, once you purchase our common stock it may be difficult
to sell the stock. In addition, trading in our securities is subject to the
"penny stock" rules (See "Penny stock rules may make buying or selling our
common stock difficult"). The trading price of our common stock in the past has
been, and in the future could be, subject to wide fluctuations. These
fluctuations may be caused by a variety of factors, including the following:
o Quarterly variations in our operating results
o Actual or anticipated announcements of new products or services by us
or our competitors
o Changes in analysts' estimates of our financial performance.
The stock market in general also has experienced extreme price and volume
fluctuations that have particularly affected the market prices for many rapidly
expanding companies and often have been unrelated to the operating performance
of such companies. These broad market fluctuations and other factors may
adversely affect the market price of our common stock.
"PENNY STOCK" RULES MAY MAKE BUYING OR SELLING OUR COMMON STOCK DIFFICULT
Trading in our securities is subject to the "penny stock" rules. The Securities
and Exchange Commission has adopted regulations that generally define a penny
stock to be any equity security that has a market
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price of less than $5.00 per share, subject to certain exceptions. These rules
require that any broker-dealer who recommends our securities to persons other
than prior customers and accredited investors, must, prior to the sale, make a
special written suitability determination for the purchaser and receive the
purchaser's written agreement to execute the transaction. Unless an exception is
available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny stock
market and the risks associated with trading in the penny stock market. In
addition, broker-dealers must disclose commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities they offer. The additional burdens imposed upon broker-dealers by
such requirements may discourage broker-dealers from effecting transactions in
our securities, which could severely limit their market price and liquidity.
FUTURE SALES OF SHARES BY EDWARD T. STEIN, OUR CHAIRMAN, COULD ADVERSELY AFFECT
THE MARKET PRICE OF OUR COMMON STOCK
There are 28,611,633 shares of our common stock outstanding, of which
approximately 7,316,829 shares are held beneficially by Mr. Stein. Mr. Stein
will be able to sell these shares in the public markets from time to time,
subject to certain limitations on the timing, amount and method of such sales
imposed by Securities and Exchange Commission regulations. If Mr. Stein were to
sell a large number of shares, the market price of our common stock could
decline significantly. Moreover, the perception in the public markets that such
sales by Mr. Stein might occur could also adversely affect the market price of
our common stock.
CONTROL BY EDWARD T. STEIN COULD PREVENT A CHANGE OF CONTROL OF OUR COMPANY AND
MAY AFFECT THE MARKET PRICE OF OUR COMMON STOCK
Edward T. Stein owns approximately 25.1% of our common stock. Accordingly, for
as long as Mr. Stein continues to beneficially own a controlling interest in our
common stock, he will be able to exercise a significant amount of influence over
our management and operations. This concentration of ownership could have the
effect of preventing us from undergoing a change of control in the future and
might affect the market price of our common stock.
WE DO NOT EXPECT TO PAY DIVIDENDS AND INVESTORS SHOULD NOT BUY OUR COMMON STOCK
EXPECTING TO RECEIVE DIVIDENDS
We have not paid any dividends on our common stock in the past, and do not
anticipate that we will declare or pay any dividends in the foreseeable future.
Consequently, you will only realize an economic gain on your investment in our
common stock if the price appreciates. You should not purchase our common stock
expecting to receive cash dividends.
CERTAIN PROVISIONS OF COLORADO LAW WHICH COULD MAKE A TAKEOVER MORE DIFFICULT
COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK OR DEPRIVE YOU OF A
PREMIUM OVER THE MARKET PRICE
The laws of Colorado (the state in which we are incorporated) contain provisions
that would make it more difficult for someone to acquire control of us in a
transaction not approved by our board of directors. These provisions could also
discourage proxy contests and make it more difficult for you and other
stockholders to elect directors other than the candidates nominated by our board
of directors. The existence of these provisions could adversely affect the
market price of our common stock.
-9-
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
Some of the information in this prospectus and in the documents we have
incorporated by reference may contain forward-looking statements. Such
statements can be generally identified by the use of forward-looking words such
as "may," "will," "expect," "anticipate," "intend," "estimate," "continue,"
"believe," or other similar words. These statements discuss future expectations,
or state other "forward-looking" information. When considering such statements,
you should keep in mind the risk factors and other cautionary statements in this
prospectus. The risk factors noted in the previous section and other factors
noted in this prospectus could cause our actual results to differ materially
from those contained in any forward-looking statements.
THE OFFERING
6% CONVERTIBLE DEBENTURES
Of the shares being registered for resale by the selling stockholders,
2,652,250 shares are being registered for resale upon conversion of our
outstanding 6% convertible debentures.
On December 29, 2000, we entered into a Convertible Debentures and Warrants
Purchase Agreement with Amro International, S.A., Markham Holdings,Ltd., Esquire
Tade & Finance Inc. and Celeste Trust Reg. Pursuant to this agreement, we sold
to each of the purchasers convertible promissory notes in the aggregate
principal amount of $309,000 bearing interest at the rate of six percent (6%)
per annum, due December 31, 2001, each convertible into shares of our common
stock. Interest shall be payable, at the option of the purchasers, in cash or
shares of our common stock. At any time after the issuance of the notes, each
note is convertible into such number of shares of our common stock as is
determined by dividing (a) that portion of the outstanding principal balance of
the note as of the date of conversion by (b) the conversion price. The
conversion price means the lesser of (x) $0.27 and (y) an amount equal to
seventy-five percent (75%) of the average closing bid prices for the three (3)
trading days having the lowest closing bid prices during the thirty (22) trading
days prior to the conversion date.
Additionally, we issued a warrant to each of the purchasers to purchase an
aggregate of 1,259,260 shares of our common stock at an exercise price equal to
$.29216 per share. The purchasers may exercise the warrants through December 31,
2005. Shares issuable upon exercise of any of the warrants by the purchasers may
also be resold to the public through this prospectus.
Amro International, S.A., Markham Holdings, Ltd., Esquire Trade & Finance
Inc. and Celeste Trust Reg. are "underwriters" within the meaning of the
Securities Act in connection with their resale of shares of our common stock
under this prospectus.
10% CONVERTIBLE DEBENTURES
Of the shares being registered for resale by the selling stockholders,
8,593,750 shares are being registered for resale upon conversion of our
outstanding 10% convertible debentures.
On June 12, 2000, we entered into a Convertible Debentures and Warrants
Purchase Agreement with Amro International, S.A., Markham Holdings,Ltd., Esquire
Tade & Finance Inc., Celeste Trust Reg. and Solomon Eisenberg. Pursuant to this
agreement, we sold to each of the purchasers convertible promissory notes in the
aggregate principal amount of $1,000,000 bearing interest at the rate of ten
percent (10%) per annum, due December 31, 2001, each convertible into shares of
our common stock. Interest shall be payable, at the option of the purchasers, in
cash or shares of our common stock. At any
-10-
time after the issuance of the notes, each note is convertible into such number
of shares of our common stock as is determined by dividing (a) that portion of
the outstanding principal balance of the note as of the date of conversion by
(b) the conversion price. The conversion price means the lesser of (x) $0.90 and
(y) an amount equal to eighty percent (80%) of the average closing bid prices
for the three (3) trading days having the lowest closing bid prices during the
thirty (22) trading days prior to the conversion date.
Additionally, we issued a warrant to each of the purchasers to purchase an
aggregate of 250,000 shares of our common stock at an exercise price equal to
$.6641 per share. The purchasers may exercise the warrants through December 31,
2005. Shares issuable upon exercise of any of the warrants by the purchasers may
also be resold to the public through this prospectus.
SECURITIES OFFERED BY SELLING SECURITY HOLDERS
COMMON STOCK(1) 13,496,000
EQUITY SECURITIES OURSTANDING(2)
COMMON STOCK 28,611,633 (3)
-------------------
PREFERRED STOCK 0
-------------------
WARRANTS 1,509,260 (4)
-------------------
OPTIONS 0 (4)
-------------------
(1) According to the terms of the 6% and 10% Convertible Notes between certain
investors and us, the amount of common stock being registered and included
in this prospectus is 200% of the number of shares of common stock that
would be required to be issued under the respective notes and warrants if
the notes were converted and the warrants were exercised on the day before
the filing of the registration statement.
(2) The total number of equity shares outstanding as of May 21, 2001.
(3) The total number of shares of common stock does not include shares of
common stock issuable upon the exercise of warrants associated with 6%
Convertible Debentures and 10% Convertible Debentures.
(4) The warrants were issued to private placement investors. The exercise price
of the warrants is $0.29216.
USE OF PROCEEDS
We will not receive any proceeds from the resale of the shares of common
stock by the selling stockholders. We will receive proceeds upon any exercise of
warrants issued to the selling stockholders. We intend to use the proceeds from
the exercise of warrants for working capital and general corporate purposes.
We have agreed to bear the expenses relating to the registration of the
shares, other than brokerage commissions and expenses, if any, which will be
paid by the selling stockholders.
SELLING STOCKHOLDERS
The shares being offered by the selling stockholders consist of shares of
common stock issuable upon exercise of warrants as well as upon the conversion
of debentures issued in June and December of
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2000. The selling stockholders do not hold, and within the past three years have
not held, any position, office or other material relationship with us or any of
our predecessors or affiliates.
The following table sets forth the names of the selling stockholders, the
number of shares beneficially owned by each of the selling stockholders as of
June 18, 2001 and the number of shares of common stock being offered by the
selling stockholders under this prospectus. The shares being offered hereby are
being registered to permit secondary trading, and the selling stockholders may
offer all or part of the shares for resale from time to time. However, the
selling stockholders are under no obligation to sell all or any portion of such
shares, nor are the selling stockholders obligated to sell any shares
immediately upon effectiveness of this prospectus.
-----------------------------------------------------------------------------------------
Name of Selling Shares of Shares of Shares of common stock
Stockholder common stock common stock owned after offering (2)
owned prior to to be sold (1)
offering (1)
-----------------------------------------------------------------------------------------
Number Percent
-----------------------------------------------------------------------------------------
Amro International, 3,547,438 3,547,438 0 0
S.A(3)
-----------------------------------------------------------------------------------------
Markham Holdings Ltd. 2,128,571 2,128,571 0 0
-----------------------------------------------------------------------------------------
Esquire Trade & Finance 3,547,438 3,547,438 0 0
Inc.
-----------------------------------------------------------------------------------------
Celeste Trust Reg 3,547,438 3,547,438 0 0
-----------------------------------------------------------------------------------------
HAA, Inc. 884,375 884,375 0 0
-----------------------------------------------------------------------------------------
Andrew I. Telsey 500,000 500,000 0 0
-----------------------------------------------------------------------------------------
Union Atlantic 250,000 250,000 0 0
-----------------------------------------------------------------------------------------
Solomon Eisenberg 100,000 100,000 0 0
-----------------------------------------------------------------------------------------
TOTAL 14,505,260 14,505,260 0 0
-----------------------------------------------------------------------------------------
PLAN OF DISTRIBUTION
The selling stockholders and their pledgees, donees, transferees and other
subsequent owners, may offer their shares of our common stock at various times
in one or more of the following transactions:
o on any U.S. securities exchange on which our common stock may be
listed at the time of such sale;
o in the over-the-counter market;
o in privately negotiated transactions;
o in connection with short sales;
o in a combination of any of the above transactions.
The selling stockholders may offer their shares of common stock at
prevailing market prices at the time of sale, at prices related to such
prevailing market prices, at negotiated prices or at fixed prices.
The selling stockholders may also sell the shares under Rule 144 instead of
under this prospectus, if Rule 144 is available for those sales.
The transactions in the shares covered by this prospectus may be effected
by one or more of the following methods:
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
o purchases by a broker or dealer as principal, and the resale by that
broker or dealer for its account under this prospectus, including
resale to another broker or dealer;
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o block trades in which the broker or dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal in order to facilitate the transaction; or
o negotiated transactions between selling stockholders and purchasers
without a broker or dealer.
The selling stockholders and any broker-dealers or other persons acting on
the behalf of parties that participate in the distribution of the shares may be
deemed to be underwriters. Any commissions or profits they receive on the resale
of the shares may be deemed to be underwriting discounts and commissions under
the Securities Act.
As of the date of this prospectus, we are not aware of any agreement,
arrangement or understanding between any broker or dealer and any of the selling
stockholders with respect to the offer or sale of the shares under this
prospectus.
We have advised the selling stockholders that during the time each is
engaged in distributing shares covered by this prospectus, each must comply with
the requirements of the Securities Act and Rule 10b-5 and Regulation M under the
Exchange Act. Under those rules and regulations, they:
o may not engage in any stabilization activity in connection with our
securities;
o must furnish each broker which offers common stock covered by this
prospectus with the number of copies of this prospectus which are
required by each broker; and
o may not bid for or purchase any of our securities or attempt to induce
any person to purchase any of our securities other than as permitted
under the Exchange Act.
To the extent required under the Securities Act, a supplemental prospectus
will be filed, disclosing the name of any broker-dealers, the number of shares
of common stock involved, the price at which the common stock is to be sold, the
commissions paid or discounts or concessions allowed to such broker-dealers,
where applicable, that such broker-dealers did not conduct any investigation to
verify the information set out or incorporated by referece in this prospectus,
as supplemented, and other facts material to the transaction.
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
-13-
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 Commission issued 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.
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. [Update re: Interbank]
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
DIRECTORS AND EXECUTIVE OFFICERS
The following table contains information concerning each of our directors
and executive officers:
-------------------------------------------------------------------------------
NAME AGE POSITION
-------------------------------------------------------------------------------
Edward T. Stein 50 Chairman
-------------------------------------------------------------------------------
Andrew Left 31 President, Chief
Executive Officer and
Director
-------------------------------------------------------------------------------
Kevin Nesis 32 Director
-------------------------------------------------------------------------------
BUSINESS EXPERIENCE
Edward T. Stein, Chairman. Edward T. Stein has been Chairman of the Board
and a director of Detour and its predecessor since January 1995. From November
1998 through April 1999, Mr. Stein served as president of Detour. Since 1986,
Mr. Stein has also been president of Edward T. Stein Associates, Ltd., a
privately held financial services firm engaged in money management, insurance
and financial planning located in Melville, New York, and Prima Capital
Management Corp., an affiliated company. Mr. Stein obtained a Bachelor of
Science degree from Rider University, where he majored in finance.
Andrew Left, President, Chief Executive Officer and Director. Andrew Left
has served as president and chief executive officer Detour since April 1999, and
has served as a director since November 1999. From June 1993 through April 1999
Mr. Left managed his family's stock portfolio and
-14-
developed an expertise in Internet companies. Mr. Left received his Bachelor of
Arts degree in political science from Northeastern University in 1993.
Kevin Nesis, Secretary and Director. Kevin Nesis has served as Secretary
and as a director of Detour since November 1999. In addition to his positions at
Detour, since January 2000 Mr. Nesis has been employed by Time Capital
Securities Corp., a privately held financial services company, where his duties
include financial services and estate and tax planning. From April 1997 through
January 2000, Mr. Nesis was employed by Edward T. Stein Associates, Ltd. where
his duties included financial services and estate and tax planning. Mr. Nesis
was unemployed from June 1996 through March 1997. Mr. Nesis received his Juris
Doctor degree from New York Law School in 1996 and his Bachelor of Arts degree
from Boston University in 1993. He holds Series 7 and Series 63 licenses with
the National Association of Securities Dealers, Inc. He devotes approximately
30% of his time to Detour's business.
COMPENSATION OF DIRECTORS
Our directors do not currently receive any compensation. Directors are
reimbursed for out of pocket expenses incurred by each of them in the
performance of their duties. We reimbursed Mr. Stein, our chairman, in the
amounts of $84,074 and $53,096 for expenses incurred respectively during the
fiscal years ended December 31, 1999 and 2000.
EXECUTIVE COMPENSATION
The summary compensation table below specifies the components of the
compensation packages of our chief executive officer and our other executive
officers who received compensation in excess of $100,000 per year, or our named
executive officers, for the fiscal years ended December 31, 1998, 1999 and 2000.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- ----------------------
AWARDS PAYOUTS
------ -------
All
Other Securities Other
Annual RestricteUnderlying Compen-
Name and Salary Bonus Compen-sStock Options / LTIP sation
Position Year ($) ($) ($) Awards($) SARs (#) Payouts ($) ($)
-------- ---- --- --- --- ------------------ ---------------
Edward T. 1998 0 - - - - - -
Stein, 1999 0 - - - - - -
President 2000 $105,417 - - - - - -
& Chairman
(1)
Andrew 1999 0 - - - - - -
Left, 2000 $68,750 - - - - - -
President
(1)
Barbara 1999 $60,000 - $247,166(2)- - - -
Zawlocki, 2000 $60,000 - $157,000(2)- - - -
Publisher
(1) Mr. Stein resigned his position as President in April 1999 and was replaced
by Mr. Left at that time.
(2) This compensation was in the form of commissions, which were paid to BZI
Media Services, Inc., Ms. Zawlocki's company.
No member of management serves pursuant to an employment agreement.
-15-
We reimburse officers and directors for out of pocket expenses incurred in
the performance of their relevant duties. We reimbursed Mr. Stein, our chairman,
in the amounts of $84,074 and $53,096 for such expenses during the fiscal years
ended December 31, 1999 and 2000, respectively, and we reimbursed Ms. Zawlocki
in the amount of $37,944 and $29,205 during the fiscal years ended December 31,
1999 and 2000, respectively.
Recently, two of our key employees resigned. In the first quarter of 2001,
Juan Morales, our former Editor in Chief, resigned in order to assume a position
with another company. We do not intend to retain a new person in this capacity
in the near future, but rather, will handle these responsiblities with our
current staff. In May, 2001, Ms. Zawlocki resigned as our publisher as a result
of our cash shortage. We owed money to her which we were unable to pay when the
same became due. We intend to utilize outside, independent contractors to handle
those responsiblities formerly undertaken by Ms. Zawlocki.
Detour has no stock plan for employees, but may adopt one in the future. To
date, Detour has not granted stock options to its executives or employees.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents information on the beneficial ownership of our
common stock as of May 8, 2001 by:
o each person who beneficially owns more than 5% of our common stock;
o each of our directors and named executive officers; and
o all named executive officers and directors as a group.
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission.
The percent ownership for each stockholder is based on 29,161,629 shares of
common stock outstanding as of May 8, 2001. Except as community property laws
may apply, each stockholder named in the table has sole voting and investment
power to the shares opposite that stockholder's name. Unless otherwise stated,
the address for each person below is 7060 Hollywood Blvd., Suite 1150, Los
Angeles, California 90038.
Amount and Nature of
Name and Address of Beneficial Owner Beneficial Ownership Percent of Class
-------------------------------------- -------------------- ----------------
Edward T. Stein 7,316,829 25.1%
201 N. Service Rd.
Suite 100
Melville, NY 11747
Andrew Left 400,000 1.4%
7060 Hollywood Boulevard, Suite 1150
Los Angeles, CA 90038
Kevin Nesis 11,500 *
201 N. Service Rd., Suite 100
Melville, NY 11747
Koyah Leverage Partners L.P. 1,440,000 6.2%
601 W. Main Avenue
Spokane, WA 99201
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All Officers and Directors 7,728,329 26.5%
as a Group (3 persons)
---------------------------
* Less than 1%
MARKET FOR OUR COMMON STOCK AND DIVIDEND POLICY
Our common stock trades on the OTC Bulletin Board under the symbol "DTRM."
The following table lists quarterly price information based on the high and low
closing prices for our common stock as reported by the OTC Bulletin Board for
the periods indicated below. The prices do not include retail markups, markdwns
or commissions.
QUARTER ENDED COMMON STOCK
HIGH LOW
March 31, 2001 $0.3281 $0.1719
December 31, 2000 0.75 $0.25
September 30, 2000 1.03125 0.65625
June 30, 2000 1.125 0.96875
March 31, 2000 1.015625 0.78125
December 31, 1999 0.25 0.171875
September 30, 1999 0.515625 0.21875
June 30, 1999 0.53125 0.3125
March 31, 1999 0.50 0.375
As of June 25, 2001, the closing bid and asked price of our common stock
was $0.11 bid, $0.14 asked. As of June 15, 2001, there were 100 holders of
record of our common stock, not including those persons who hold their shares in
"street name."
DIVIDEND POLICY
We have not declared or paid dividends on our common stock during the two
fiscal years ended December 31, 1999 and December 31, 2000. Pursuant to the laws
of the state of Colorado, a corporation may not issue a distribution if, after
giving its effect, the corporation would not be able to pay its debts as they
became due in the usual course of business, or if the corporation's total assets
would be less than the sum of their total liabilities plus the amount that would
be needed, if the corporation were to be dissolved at the time of distribution,
to satisfy the preferential rights of those whose preferential rights are
superior to those receiveing the distribution. As a result, management does not
foresee Detour Magazine being able to pay a dividend on its common stock in the
fiscal year ended December 31, 2001. We currently intend to retain additional
future earnings for use in the operation and expansion of our business. We do
not intend to pay cash dividends on our common stock in the foreseeable future.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and the notes appearing elsewhere in this prospectus. The following
discussion contains forward-looking
-17-
statements. Our actual results may differ materially from those projected in the
forward-looking statements. Factors that might cause future results to
materially differ from those projected in forward-looking statements include,
but are not limited to, those discussed in "Risk Factors" and elsewhere in this
prospectus.
OVERVIEW
Detour Media Group, 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. 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 the results of operations of Detour, to identify key
trends affecting the our businesses and to identify other factors affecting the
our results of operations for the fiscal years ended December 31, 2000 and 1999.
RESULTS OF OPERATIONS
Fiscal year ended December 31, 2000 compared to fiscal year ended December 31,
1999
Total revenues increased from $3,335,912 in 1999 to $3,995,820 in 2000, an
increase of $659,908 (20%). This increase was attributable to increased
advertising revenues, as well as revenues derived from our custom publishing
operation.
Costs of sales were $2,467,872 in 1999, compared to $2,864,395 in 2000, an
increase of $336,523 (14%). This was due primarily to the publication of one
additional issue and the increased costs caused by our need to use alternative
and higher priced sources attributable to our lack of working capital and
impaired credit.
Selling, general and administrative expenses were $1,870,152 in 1999, compared
to $5,353,852 in 2000, an increase of $3,483,700 (186%). This increase was
attributable to excessive costs and expenses in outside services ($2,058,104),
settlement expenses ($453,600), legal and accounting fees ($396,734) and
financial marketing expenses ($672,509), all caused as a result of our impaired
financial condition and need to incur these expenses in order to attempt to
procure new financing, as well as related to costs associated with attempts to
modify existing financing obligations. These costs also include the value of our
common stock and warrants which we issued in lieu of cash fees due to third
parties.
Our interest expense increased from $683,616 during 1999, to $1,474,124 during
2000, as a result of additional borrowings during 2000.
As a result, we incurred a net loss of $(5,636,551) in 2000 ($0.28 per share),
as compared to our net loss of $(1,297,958) ($.12 per share) in 1999.
LIQUIDITY AND CAPITAL RESOURCES
-18-
At December 31, 2000, we had $71,598 in cash and cash equivalents. Accounts
receivable increased to $397,447 from $193,012 for the similar period in 1999,
an increase of $204,435 (106%), which management attributes to recording
advertising income and corresponding accounts receivable in 2000 for the
December/January holiday issue of our magazine, published and distributed in
December 2000.
In December 2000, we entered into a new factoring arrangement with
Receivable Financing Corp., Boca Raton, Florida ("RFI"). The majority of
factoring provided by RFI is on a non-recourse basis. On average, we pay a fee
to RFI of approximately 4.5% per month. We estimate that we will factor
approximately $2.5 million per annum in accounts receivable with RFI. RFI'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, RFI is only factoring 89%
of our total eligible domestic advertising receivables.
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. In December 1998, we repaid $27,500 of the principal balance. While we
have paid all interest which had accrued through June 30, 2000, the loan remains
in default, and management 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 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. Upon information and
belief, management believes that this lender has begun foreclosing on the shares
of our common stock held as security for the loan. Management believes that, as
of the date of this registration statement, no shares have been sold to satisfy
this obligation.
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 this lender, nor otherwise been
advised of any further action being brought.
At December 2000, we had 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 was due February 10,
2001, but has been paid in full subsequent to December 31, 2000.
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 December 31,
-19-
2000 totaled $497,407. Interest expense for this note was $83,907 for the fiscal
year ended December 31, 2000.
Advances from stockholder represent advances made 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 to modify the repayment terms of the note. 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 we receive 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 December 31, 2000, $2,585,721 of principal
was outstanding and classified as short-term. Accrued interest payable to our
majority stockholder at December 31, 2000 totaled $798,627. Interest expense on
the advances was $326,293 for the year ended December 31, 2000.
TRENDS
In order to implement the new business strategy described in this
registration statement, we will have to raise at least an additional $2 million
in capital. Without additional capital, it will be necessary to abandon our
plans for Detour Music and Detour Europe. In addition, we will be required to
continue to substantially reduce costs for the magazine and will not be able to
sustain our existing advertising revenue or grow the magazine's circulation
base. In the event all current discussions terminate without additional capital
being acquired, we will have to enter a joint publishing arrangement with
another magazine publisher or liquidate.
With an additional two million of capital, we will begin to implement our
business strategy and, while we can make no assurance that our business strategy
will succeed, management believes that we will be profitable within 18 months
after receipt of such funding.
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 fiscal year ended December 31, 2000.
DESCRIPTION OF BUSINESS
OVERVIEW
Detour Media Group, Inc. is engaged principally in the publication and
distribution of Detour, an internationally distributed magazine best known for
its presentation of cutting-edge trends and strong editorial focus on fashion,
entertainment, lifestyle and contemporary social issues. Our mission is to be a
premeir urban avant-garde publication devoted to those topics which we believe
will attract a readership consisting primarily of affluent, style conscious men
and women in the 18 to 35 age group. We derive revenues primarily from
advertising in Detour and, to a lesser extent, from subscription and newsstand
sales.
In addition to the continuation of publication of Detour, management is
attempting to implement a new business strategy in areas related to the Internet
and custom publishing, subject to our ability to raise funds in order to allow
us to undertake this new strategy. This new business strategy is described in
detail below.
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DETOUR MAGAZINE
We publish ten issues of the magazine each year, including two double
issues. The magazine has been published since 1987.
To distinguish itself from other entertainment publications, Detour
Magazine attempts to identify and feature entertainers and media personalities
well before they reach widespread recognition and the level of conventional
acceptance which typifies its competition. This in part accounts for Detour
Magazines's image as a "cutting-edge" magazine featuring tomorrow's
personalities and today's trends.
Editorials follow the same focus, providing insight into and publicity for
entertainers and media personalities who have not yet received widespread
recognition. Detour Magazine prides itself on some of the most talked about and
respected photo journalism and editorials in the industry. In this regard, we
have published our Annual Young Hollywood issue since 1996.
Five years ago, in our first Hollywood issue, our "30 Under 30" round-up
introduced our readers to such future stars as Matt Damon, Renee Zellweger,
Tobey Maquire, Emily Watson, Joaquin Phoenix and Lucy Liu. In the years since
our "12 to Watch" feature has given readers cover subjects including Katie
Holmes, Denise Richards, Freddie Prinze Jr., Ryan Phillippe, Leelee Sobieski,
Chris Klein, Amanda Peet and Kate Hudson--all well before they earned starring
roles and landed on glossy magazine covers.
This years "12 to Watch" are: Ethan Suplee (Boy's Meets World, Road Trip,
Blow, John Q); Amy Smart (Varsity Blues, Road Trip, The Seventies, It's A Mad,
Mad, Mad, Mad World); Peter Sarsgaard (Dead Man Walking, Boys Don't Cry,
Unconditional Love, The Salton Sea); Mark Weber (American Buffalo); Monet Mazur
(Austin Powers, The Mod Squad, Mystery Men, Blow); Sean Patrick Thomas (Dracula
2000, Cruel Intentions, The District); Leonor Varela (Cleopatra, The Tailor of
Panama); Sanna Lathan (Love & Basketball, Disappearing Acts); Patrick Fugit
(Almost Famous); Angela Bettis (Sparrow, Girl Interrupted, Bless the Child,
Flamingo Rising); D.J. Qualls (Road Trip, Big Trouble, New Guy); and Mia Maestro
(Tango, Picking Up the Pieces, Timecode, For Love or Country, In the Time of the
Butterflies).
During 2000, each issue (other than double issues) of Detour Magazine was
approximately 150 pages in length, with approximately 50 pages of advertising.
The 10 covers featured Meg Ryan (February 2000), Lucy Liu (March 2000), Sean
Penn (May 2000), Penelope Cruz (June/July 2000), Hugh Jackman (August 2000),
Chris Rock (September 2000), James King (October 2000), Katie Holmes (November
2000) and Benicio Del Toro (December 2000/January 2001).
Management does not expect to change the content or format of Detour
Magazine materially beyond editorial changes necessary to broaden the magazine's
appeal within our target readership, including making the magazine more visual
by continuing to seek out both established and rising photographers.
In the beginning of 2000, we commenced plans to begin publishing two
special issues each year under the name "Detour Space". However, we cancelled
our plans to publish these two special issues due to lack of available capital.
We hope to adopt these special issues in the near future, if sufficient capital
becomes available to us.
"Detour Space" will take it's name from one of the magazine's most popular
and appealing features, a "sneak peek" into the private lives of favorite
celebrities and media personalities. Each section will include photos of the
celebrity in a place of special significance to the celebrity, accompanied by a
quote explaining why he or she chose that particular location for the photo and
why it means so much to them. "Detour Space" will expand upon the theme of place
to feature longer pictorials and excursions involving
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personalities and their homes, their work spaces and other elements of the
culture of the celebrity, in an effort to achieve a casual intimacy with those
whom are typically seen only in highly mediated, artificial circumstances.
We now plan to develop a "Coffee Table" book based on this popular feature.
We are currently in negotiations with several book publishers to work a joint
venture with our company providing the content and the book publisher providing
the ancillary costs and distribution. We intend to publish "Detour Space" to
generate additional revenue. However, there is no guarantee that a publishing
partner will be signed and the book successfully marketed.
Advertising. Management believes that Detour has established a strong national
advertising base. During 2000, our advertising customers included, among others,
Bacardi, Bottega Veneta, Bombay Sapphire, Calvin Klein, Candies, Camel, Cartier,
Charles David, Concord, Diesel Jeans, Evian, Prada, Polo, Playboy, Emporio
Armani, Guess Jeans, Hugo Boss, Kahlua, Levi's, Louis-Boston, L'Oreal, Mossimo,
Marlboro, Polygram Films, Sky Vodka, Sony Music, MGM/United Artists, Universal,
Varda, Versace, Phillips Electronics, Lexus Automobiles, Apple Computer,
Altoids, Beefeater Gin, Virginia Slims and Winston.
Since inception, Detour Magazine has had well over 100 advertisers.
Advertising revenues accounted for approximately 91.8% of our total revenues
during 2000. Marlboro accounted for approximately 5.6% ($206,185) of our
revenues during 2000. No other advertiser accounted for 5% or more of our
advertising revenues.
Circulation and Distribution. During 1999, and until April 2000, Detour Magazine
was distributed by Rider Circulation Services, Inc. Commencing with the May 2000
issue, the magazine has been distributed by Curtis Circulation Company. Curtis
is a leading international distributor, allowing for broader distribution of the
magazine.
Curtis has been performing various distribution assignments under the
direction of our newstand consultants, MCC, in attempts to increase circulation
and sales efficiency of the magazine. Management remains optimistic that the
assignments should result in matching its major competitors in the number of
locations of Detour Magazine, as well as place more copies of the magazine in
higher traffic potential retailers. Management is currently focusing on Los
Angeles and New York to ensure the highest degree of sell-throughs.
In 2000, we continued to implement a program to create higher visibility in
key transportation community outlets. Our newsstand consultant coordinates this
plan between the publisher and our distributor. Point of sales programs in
airports, bus and train terminals and metro newsstands have beed curtailed only
due to lack of funds. During 2001 it is our hope that a program will be
available to bring new retail display opportunities to Detour Magazine, but
there can be no assurances that this will occur without additional funds.
Readership Profile. Detour Magazine's reputation as a cutting-edge fashion and
entertainment magazine has translated into a readership profile comprised of an
attractive audience for advertisers. Detour's average reader is a 29 year old
professional, with an average income in excess of $75,000 per year. Over 60% of
the readers are single, and 74% percent have obtained college degrees. The
average reader of Detour spends over $15,000 per year on clothing and dines out
2.6 times per week.
Editorials. Detour Magazine remains committed to its long-standing editorial
mission: to be the premier urban avant-garde publication devoted to
entertainment, fashion lifestyle and contemporary social issues. It's targeted
audience of affluent, educated and creative professionals thrives on new
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information about the latest cultural trends. Long before assimilating into the
mainstream, styles and trends being on the margins, which is where Detour, as
its name implies, derives its sensibility - off the beaten path, miles from the
safe, familiar, well-paved roads of the pop-culture highway.
Over the past year, in a dual effort to reinforce its image as an essential
fashion resource and to attract coveted fashion advertisers, Detour has featured
30-60 pages of fashion pictorials in each issue and it is expected that we will
continue to do so in the future. In addition, Detour has expanded its style
coverage to include service pages devoted to health and beauty, as well as
profiles of new stores, restaurants, products and accessories, all of which
provide enhanced opportunities for advertisers.
During 2000, we continued the editorial changes made in 1999 to include a
sex column, an Internet column and articles emanating from NY to LA. In
addition, the magazine published an illustrated column called the Matador. As
part of our commitment to springboard our content for ancillary media
properties, in February, 2000, we entered into a partnership with Fly Paper
Press, Inc. to receive up to 10% of the profits generated by a sale or
syndication of "the Matador".
To fine-tune the Magazine's visual appeal, in late 1999 we hired two design
consultants who assist with everything from image materials such as media kits
and business cards, to the magazine's layouts, typefaces, photography and
fashion editorials. The senior consultant, Mark Balet, is a designer with more
than 20 years experience, including lengthy tenure at Interview Magazine under
Andy Warhol, as well as creative supervision of numerous major books and
advertising campaigns for Ralph Lauren and other major fashion companies. The
other consultant, Tony Moxham, was art director of Interview Magazine, and
recently lent his expertise to ad campaigns for such clients as Versace and Gap.
As of the date of this registration statement, we are continuing to
experience severe cash shortages. As a result, unless we are able to raise
additional capital, we anticipate that we may no longer be able to engage the
services of the consultants referenced above. There can be no assurance that we
will be able to raise the additional capital necessary to continue paying for
our consultants' services.
NEW BUSINESS STRATEGY
During 2000, management continued to develop a broad operational and financial
strategic plans to transform Detour from a magazine publisher into an
integrated, full service media company. Detour's intention is to create a media
company by leveraging our brand in digital and traditional channels. Indicative
of our intentions, our name was changed from Detour Magazine Inc. to Detour
Media Group, Inc. in March 2001.
Our strategy calls for us to:
o Utilize our core competence---print publishing---into custom
publishing, the Internet and media consulting.
o Provide key marketing solutions for Internet companies seeking to
expand their platform by providing services ranging from advertising
to production, printing and circulation.
o Provide clients with immediate expertise allowing them to achieve
rapid market penetration.
o An integrated cross-media partnership of traditional brand and
technology.
o Acquisitions of profitable media companies as a primary strategy.
o Develop joint Internet ventures that will increase revenues, without
significant expenditures.
This strategy also calls for our operations to be broken into five
divisions:
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o Detour Custom Publishing
o Detour Music
o Detour Events
o Detour Online
o Detour Magazine
It is anticipated that only Detour Music will require the infusion of
additional capital. However, management estimates that approximately $1.5
million in capital will be required to implement this aspect of our new business
strategy. As of the date of this report, we do not have any capital readily
available to allow us to implement this aspect of our new strategy. We are
currently negotiating with several major independent music companies in order to
establish a joint venture relationship or other strategic alliance in order to
assist us in developing this plan. In addition, we are currently negotiating
with two highly experienced and visible music entertainment executives to create
the Detour Music division. As of the date of this Report, no definitive
agreement has been reached in either regard and there can be no assurances that
such relationships will be established in the future.
During 2000, Detour Online completed and launched two Internet web sites:
www.DetourTV.com and www.DetourMag.com (f/k/a www.iDetour.com). We terminated
our relationships with OpenSpace.com and LoadTV.com and entered a partnership
with Kick Media in April 2000, to provide our front-end and technical support.
The plan for operating the two Internet domains requires no current payments by
Detour to Kick Media, but establishes a revenue sharing arrangement.
Furthermore, during 2001, we entered into a partnership with WindowsMed.com
(http://WindowsMed.com), a comprehensive and popular online guide for
high-quality audio and video content to the Microsoft site. The coupling of our
content, Kick Media's network and the traffic of Microsoft's Windows Media
should provide traffic for the Detour brand. Popular features include red carpet
footage from Hollywood events, clips from the catwalk, behind the scenes of
Detour Magazine photo shoots and hotspots such as hotels, bars and restaurants.
While no assurances can be so provided, we plan to generate additional ad
revenue through sponsorship on Detour Online. In addition, we are providing an
extra value to our current print advertisers buy including them on our site.
Detour Custom Publishing. Detour Custom Publishing is being formed to capitalize
on our core publishing competency and to leverage our existing editorial,
creative and technical publishing skills. Detour Custom Publishing is expected
to specialize in providing turnkey custom publishing solutions to
small-to-medium size online companies. Detour Custom Publishing is also expected
to help companies build their brand, generate revenues and develop cross-media
marketing solutions for successful dot-com companies. The alliances are being
structured to pay us all hard costs attendant to the publication and to share
revenue on a percentage basis. Through Detour Custom Publishing, we also plan to
enter into joint ventures or other strategic alliances with existing companies
that intend to extend their brand into print media, in order to generate revenue
and extend our core competency within a business model that creates no direct
financial risk to us.
We initially hoped to commence this aspect of our business during 2000.
However, as a result of poor market conditions for many Internet companies
during 2000, we redirected our plans to market custom publishing to other
industries. As a result, the decline in the Internet space did not allow us to
properly attain our goal for 2000.
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During 2000, we published the Football Preview Edition for the Vegas
Insider. There were approximately 80,000 copies distributed by Curtis and we are
currently in discussions to renew a contract for 2001. In addition, Zentropy
Partners engaged us to provide a digital "Young Hollywood" supplement to Detour.
Approximately 80,000 copies were distributed. For 2001, we are beginning to see
greater interest in potential clients. We are represented by Creative Artist
Agency, one of the world's most premier talent agencies. To date, we have a
pending contract to publish Damez Magazine which caters to young female readers.
We would like to develop a sales force to sell custom publishing but lack of
funds has not made that possible. Therefore, we are continuing to use our
relationship with Creative Artists Agency and our existing staff.
Detour Events. Detour events are a well known Hollywood community product.
Detour's demographic appeal, upwardly mobile, urban 18-35 year old "opinion
makers" is an ideal target for certain advertisers. We plan to create events in
collaboration with our advertisers interested in creating visibility with
Detour's target audience. These events include movie premieres, parties, fashion
shows and other social promotional activities.
We anticipate producing these events on a cost plus markup, to be billed
directly to the relevant advertisers. In addition, we will utilize our available
trade-outs and barter arrangements to offset out of pocket costs relating to
some of the anticipated services to be provided.
We also plan to launch Detour Europe in a joint venture with Das Werk,
A.G., one of our shareholders and a leading European-based post-production and
media company. The Detour Europe Magazine will have 80% content from Detour U.S.
and 20% local content.
All of the above described plans are contingent upon our ability to raise
additional capital. Failure to infuse this capital will cause us to abandon
these project, or otherwise limit the resources which are required to implement
our plans.
EMPLOYEES
At May 8, 2001, we had 15 full time employees, including 7 persons in our
editorial department, 4 in sales, 2 in administration and 2 in our production
department. We engage additional persons on an "as needed" basis, depending upon
the number of projects in which we are involved, on a part time employee or
independent contractor basis. Management believes that our relationship with our
employees is satisfactory. No employee is a member of any union.
COMPETITION
We compete with publicly and privately held companies in the publishing
business. Specifically, management views Interview (circulation 150,000), Paper
(circulation 75,000) and Surface Magazine (circulation 50,000) as the principal
competitors to our magazine, each of whom are believed to have greater
resources, both financial and otherwise, than the resources presently available
to Detour.
While there are numerous competitors in the print magazines, such as
Wallpaper, Details & Paper, the online efforts of most competitors are minimal.
We believe that the major competition for our site will be from the mass market
portals Excite, Yahoo, et al., and to a lesser extent, from the affinity portals
that appeal to segments of the Detour audience, e.g. TimeOut and iVillage.
Current competitors to Detour Magazine has not established a strong
Internet presence beyond providing an online version of their print content.
They include Details, Paper and Wallpaper.
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Other major fashion and entertainment print titles with on-line offerings
include Elle (ElleShop), Glamour, GQ, In Style (Instylenetwork), Mademoiselle,
People, Playboy, Rolling Stone and Spin. However, unlike these competitors,
Detour Online will be offering a comprehensive community site which extends its
existing print brand to leverage its strength in both cutting edge fashion and
entertainment.
Portal/community/city guide sites. The major players in this area include
America Online/Digital City, Disney/Go Network, Excite, Lycos,
Microsoft/Sidewalk, Ticketmaster- City Search, TimeOut and Yahoo. To date, each
of these companies has been positioned to focus on capturing the mass market
on-line audience. Other more specialized sites within this segment that are
focused around gender or lifestyle include PlanetOut, iVillage, and Women.com.
In contrast to these competitors, Detour Online offers specialized content
appealing across genders to a "hipper" and less mass market oriented
demographic.
Online and traditional entertainment and media companies. Online media companies
include CNet, EOnline, UltimateTV, and ZDNet. Traditional media company
competitors include NewsCorp (Fox), Sony (SonyOnline), Time-Warner (Pathfinder
and Warner Online), and Viacom (Nickelodeon, MTV, etc.).
We believe that building a strong Detour brand based on proprietary
content, combined with our ability to deliver targeted audiences to advertisers
and the overall cost-effectiveness of the advertising medium it offers are
principal competitive advantages. However, many of our competitors, current and
potential, may have greater financial or technical resources, and we could face
additional competitive pressures that would have a material and adverse effect
on our business, results of operations and financial conditions.
TRADEMARKS
We have been issued a federal registration of the trademark Detour with the
United States Patent and Trademark Office, Washington, D.C. and the application
has been assigned a filing date of September 2, 1997, Serial No. 75-350798.
GOVERNMENT REGULATION
We are not subject to any extraordinary governmental regulations relating
to our business.
DESCRIPTION OF PROPERTY
Our principal place of business consists of approximately 4,180 square feet
of advertising and executive office space at 7060 Hollywood Blvd., Suite 1150,
Los Angeles, California, for which we pay rent of $6,270 per month. This space
is subject to a three year lease which expires November 30, 2001. This lease
contains cost of living increases. As of the date of this Report, we are
reviewing our space requirements and are beginning to seek out other locations.
However, no definitive decision has been made concerning this matter. In
addition, we presently lease approximately 2,200 square feet of executive office
space at 34 West 22nd. St., 3rd Floor, New York, New York, at a rental fee of
$3,140 per month. The primary term of this lease expired on January 31, 2000.
Since that time we have maintained this location on a month to month basis. We
are continuing discussions with the landlord of this property about a long term
lease, but as of the date of this Report, no definitive agreement has been
reached. It is anticipated that our present premises will be adequate to meet
our needs for the foreseeable future.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We owe Edward T. Stein, our chairman and principal shareholder, the
principal amount of $2,693,200, which Mr. Stein advanced to us for working
capital purposes. This obligation originally accrued interest at the rate of 12%
per annum and was due upon demand. In March 2000, Mr. Stein agreed to reduce the
annual interest rate to 8% and modified 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 net
proceeds of any financing received by us to repay these advances. Further, all
of the advances are due and payable in full at such time as we have received
equity financing of at least $10,000,000. At December 31, 2000, $2,556,021 of
principal was outstanding, which has been classified as short-term on our
financial statements. Accrued interest payable on this obligation at December
31, 2000 totaled $798,627. Interest expense on the advances from stockholder was
approximately $326,293 and $280,000 for the years ended December 31, 2000 and
1999, respectively.
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 December 31, 2000 totaled $497,407.
Interest expense for this note was $83,907 for the fiscal year ended December
31, 2000.
In addition, we have a note payable to a minority stockholder, which
represents advances of $932,313 made to us in 1995. The note bears interest at
12% per year, is payable on demand, and is collateralized by substantially all
of our assets. At December 31, 2000, the full amount of principal remained
outstanding. Accrued interest payable to this stockholder at December 31, 2000
totaled $525,500. Interest expense for this note was $112,000 for each of the
years ended December 31, 2000 and 1999.
DESCRIPTION OF SECURITIES
COMMON STOCK
Holders of the common stock are entitled to one vote for each share held in
the election of directors and in all other matters to be voted on by
shareholders. Stockholders have cumulative voting rights in the election of
directors. Holders of common stock are entitled to receive dividends as may be
declared from time to time by our board of directors out of funds legally
available. In the event of liquidation, dissolution or winding up, holders of
common stock are to share in all assets remaining after the payment of
liabilities. The holders of common stock have no preemptive or conversion rights
and are not subject to further calls or assessments. There are no redemption or
sinking fund provisions applicable to the common stock. The rights of the
holders of the common stock are subject to any rights that may be fixed for
holders of preferred stock. All of the outstanding shares of common stock are
fully paid and non-assessable.
LIABILITY OF DIRECTORS; INDEMNIFICATION
Our certificate of incorporation contains provisions permitted under the
Colorado Business Corporations Act relating to the liability of directors. These
provisions eliminate a director's personal
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liability for monetary damages resulting from a breach of fiduciary duty, except
for specified wrongful acts, including:
o for any breach of the director's duty of loyalty to us or our stockholders;
o for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
o under Section 7-108-403 of the Colorado Business Corporations Act relating
to unlawful stock repurchases or dividends; or
o for any transaction from which the director derives an improper personal
benefit.
These provisions do not limit or eliminate our rights or those of any
stockholder to seek non-monetary relief, such as an injunction or rescission, in
the event of a breach of a director's fiduciary duty. These provisions will not
alter a director's liability under federal securities laws.
Our bylaws also contain provisions indemnifying our directors and officers
to the fullest extent permitted by the Colorado Business Corporations Act. We
have entered into separate indemnification agreements with our directors and
officers that, in some cases, may be broader than the specific indemnification
provisions contained in our certificate of incorporation, bylaws or the Colorado
Business Corporations Act. The indemnification agreements may require us, among
other things, to indemnify the officers and directors against liabilities, other
than liabilities arising from willful misconduct, that may arise by reason of
their status or service as directors or officers. These agreements also may
require us to advance the expenses incurred by the officers and directors as a
result of any proceeding against them as to which they could be identified. We
believe that these indemnification arrangements are necessary to attract and
retain qualified individuals to serve as directors and officers.
TRANSFER AGENT AND REGISTRAR
Liberty Transfer, Huntington, New York is the transfer agent for our common
stock.
LEGAL MATTERS
The validity of the shares of common stock offered by selling stockholders
will be passed upon by the law firm of Jenkens & Gilchrist Parker Chapin LLP,
New York, New York.
EXPERTS
The consolidated balance sheets as of December 31, 1999 and 2000 and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the years then ended, included in this prospectus, have been
included herein in reliance on the report, which includes an explanatory
paragraph relating to our ability to continue as a going concern, as described
in Note 1 to the financial statements, of Grant Thornton LLP, independent
accountants, given the authority of that firm, as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference room in Washington,
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D.C. Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. Our SEC filings are also available to the public over the
Internet at the SEC's Website at "http://www.sec.gov."
We have filed with the SEC a registration statement on Form SB-2 to
register the shares being offered. This prospectus is part of that registration
statement and, although we believe that the information contained in this
prospectus is materially complete, as permitted by the SEC's rules, this
prospectus does not contain all the information included in the registration
statement. For further information with respect to us and our common stock, you
should refer to the registration statement and to the exhibits and schedules
filed as part of that registration statement, as well as the documents we have
incorporated by reference which are discussed below. You can review and copy the
registration statement, its exhibits and schedules, as well as the documents we
have incorporated by reference, at the public reference facilities maintained by
the SEC as described above. The registration statement, including its exhibits
and schedules, are also available on the SEC's web site.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
The following financial statements pertaining to us are filed as part of this
prospectus:
Report of Independent Accountants .............................................. F-2
Consolidated Balance Sheets as of March 31, 2001 (unaudited) and December
31, 2000 ....................................................................... F-3
Consolidated Statements of Operations for the three months ended March 31, 2001
and 2000 (unaudited) and for the years ended December 31, 2000 and 1999 ........ F-5
Consolidated Statements of Stockholders' Equity for the three months ended
March 31, 2001 and years ended December 31, 2000 and 1999 ...................... F-7
Consolidated Statements of Cash Flows for the nine months ended March 31, 2001
(unaudited) and for the years ended December 31, 2000 and 1999 ................. F-10
Notes to Consolidated Financial Statements ..................................... F-13
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Detour Media Group, Inc.
We have audited the accompanying balance sheet of Detour Media Group, Inc
(formerly known as Detour Magazine, Inc.) as of December 31, 2000, and the
related statements of operations, deficit in stockholders' equity and cash flows
for the years ended December 31, 2000 and 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Detour Media Group, Inc. as of
December 31, 2000, and the results of its operations and its cash flows for the
years ended December 31, 2000 and 1999, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note C to the financial
statements, the Company has sustained losses from operations in recent years,
its total liabilities exceed its total assets and it has a net working capital
deficiency; these factors, among others, raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note C. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Grant Thornton L.L.P.
Los Angeles, California
April 16, 2001
F-2
DETOUR MEDIA GROUP
(formerly known as Detour Magazine, Inc.)
CONSOLIDATED BALANCE SHEET
Unaudited Audited
ASSETS March 31, 2001 December 31, 2000
-------------- -----------------
CURRENT ASSETS
Cash $ - $ 71,598
Accounts receivable, net 302,120 397,447
Stock subscription receivable 500,000 -
Prepaid expenses 60,783 11,599
-------------- -----------------
Total current assets 862,903 480,644
FURNITURE AND EQUIPMENT, net 36,153 42,753
DEPOSITS AND OTHER ASSETS 35,525 16,125
-------------- ------------------
$ 934,581 $ 539,522
============== =================
LIABILITIES AND DEFICIT IN
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank Overdrafts $ 7,916 $ -
Accounts payable and accrued expenses 1,989,282 1,957,614
Current maturities of notes payable 2,895,287 2,559,921
Accrued interest payable 237,204 145,204
Advances from stockholder 2,382,509 2,556,021
Note payable to stockholder 932,313 932,313
Accrued interest payable to stockholders 1,398,534 1,296,037
-------------- -----------------
Total current liabilities 9,843,045 9,447,110
NOTES PAYABLE, less current maturities 160,000 160,000
COMMITMENTS AND CONTINGENCIES - -
DEFICIT IN STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value 10,000,000
shares authorized, none issued and
outstanding - -
Common stock, $0.001 par value, 100,000,000
shares authorized, 22,914,769 shares
issued and outstanding at December 31,
2000; 27,278,292 shares issued and
outstanding at March 31, 2001 27,281 22,915
Additional paid-in capital 9,893,508 9,008,872
Unamortized debt issuance costs (113,408) (123,708)
Accumulated deficit (18,875,845) (17,975,667)
-------------- -----------------
Total deficit in stockholders' equity (9,068,464) (9,067,588)
-------------- -----------------
$ 934,581 $ 539,522
============== =================
F-3
Detour Media Group, Inc.
(formerly known as Detour Magazine, Inc.)
BALANCE SHEET
December 31, 2000
ASSETS
CURRENT ASSETS
Cash $ 71,598
Accounts receivable, less allowance
for doubtful accounts of $246,962 397,447
Prepaid expenses 11,599
------------
Total current assets 480,644
FURNITURE AND EQUIPMENT, net 42,753
DEPOSITS AND OTHER ASSETS 16,125
------------
$ 539,522
============
LIABILITIES AND DEFICIT IN STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,957,614
Current maturities of notes payable 2,559,921
Accrued interest payable 145,204
Advances from stockholder 2,556,021
Note payable to stockholder 932,313
Accrued interest payable to stockholders 1,296,037
------------
Total current liabilities 9,447,110
NOTES PAYABLE, less current maturities 160,000
COMMITMENTS AND CONTINGENCIES -
DEFICIT IN STOCKHOLDERS' EQUITY
Preferred sotck, $.01 par value
10,000,000 shares authorized,
none issued and outstanding -
Common stock, $0.001 par value,
100,000,000 shares authorized,
22,914,769 shares issued and outstanding 22,915
Additional paid-in capital 9,008,872
Unamortized debt issuance costs (123,708)
Accumulated deficit (17,975,667)
------------
Total deficit in stockholders' equity (9,067,588)
------------
$ 539,522
============
The accompanying notes are an intregral part of this statement.
F-4
DETOUR MEDIA GROUP, INC.
(formerly known as Detour Magazine, Inc.)
UNAUDITED CONDENSED STATEMENT OF OPERATIONS
For the three months
Ended March 31,
2001 2000
----------- ----------
Revenue
Advertising $ 381,747 $ 954,971
Newsstand and subscription, net of returns 17,486 123,571
----------- ----------
Total revenue 399,233 1,078,542
----------- ----------
Cost and expenses
Cost of sales and other direct expenses 256,381 777,338
Selling, general and administrative expenses 688,230 599,844
----------- ----------
944,611 1,377,182
----------- ----------
Loss from operations (545,378) (298,640)
----------- ----------
Other expenses
Interest expense, net 354,800 201,749
Asset impairment charge - -
Loss on disposal of assets - -
----------- ----------
Total other expenses 354,800 201,749
----------- ----------
Net loss before extraordinary item (900,178) (500,389)
Extraordinary gain on extinguishments of debt - 51,942
---------- -----------
Net loss $ (900,178) $ (448,447)
========== ===========
Net loss per share (basic and diluted) $ (.04) $ (.03)
========== ===========
Weighted average number of shares outstanding 25,021,000 17,580,000
========== ===========
F-5
Detour Media Group, Inc.
(formerly known as Detour Magazine, Inc.)
STATEMENTS OF OPERATIONS
Years ended December 31,
2000 1999
----------- -------------
Revenue
Advertising $ 3,670,035 $ 2,863,125
Newsstand and subscription, net of returns 325,785 472,787
----------- -------------
Total revenue 3,995,820 3,335,912
----------- -------------
Cost and expenses
Cost of sales and other direct expenses 2,804,395 2,467,872
Selling, general and administrative expenses 6,141,071 1,870,152
----------- -------------
8,945,466 4,338,024
----------- -------------
Loss from operations (4,949,646) (1,002,112)
----------- -------------
Other expenses
Interest expense, net (1,150,790) (683,616)
Asset impairment charge - (198,581)
Loss on disposal of assets - (9,048)
----------- -------------
Total other expenses (1,150,790) (891,245)
----------- -------------
Net loss before extraordinary item (6,100,436) (1,893,357)
Extraordinary gain on extinguishment of debt - 595,399
----------- -------------
Net loss $(6,100,436) $ (1,297,958)
=========== =============
Loss per share of common stock (basic and diluted)
Net loss before extraordinary item $ (0.30) $ (0.12)
Extraordinary gain on extinguishment of debt - 0.04
----------- -------------
Net loss per share (0.30) (0.08)
=========== =============
The accompanying notes are an intregral part of this statement.
F-6
DETOUR MEDIA GROUP, INC
(formerly known as Detour Magazine, Inc.)
STATEMENT OF DEFICIT IN STOCKHOLDER'S EQUITY
For the quarter ended March 31, 2001
Unamortized
Common Stock Common Debt Accumulated
Shares Amount APIC Issuance Costs Deficit Total
---------- ------ --------- -------------- ----------- ----------
Balance, December 31, 2000 22,914,769 22,915 9,008,872 (123,708) (17,975,667) (9,067,588)
Misc difference between client
closing
Sale of restricted common stock,
net of issuance cost 3,028,523 3,029 735,971 - - 739,000
Issuance of restricted common stock
in connection with borrowing 260,000 260 (260) - - -
Issuance of restricted common stock
in connection with borrowing 75,000 75 (75) - - -
Issuance of restricted common stock
to cure violation of warranties
under stock purchase agreement 1,000,000 1,000 149,000 - - 150,000
Amortization of debt discount - - - 10,300 - -
1st quarter net loss - - - - (900,178) (900,178)
---------- ------ --------- -------------- ----------- ----------
Balance, March 31 2001 27,278,292 27,279 9,893,508 (113,408) (18,875,845) (9,068,466)
========== ====== ========= ============== =========== ==========
F-7
Detour Media Group, Inc.
(formerly known as Detour Magazine, Inc.)
STATEMENT OF DEFICIT IN STOCKHOLDERS' EQUITY Years ended
December 31, 2000 and 1999
Common Stock Additional Unamortized
------------------- Paid-in Debt Accumulated
Share Amount Capital Issuance Costs Deficit Total
---------- ------- ---------- -------------- ------------ ------------
Balance at January 1, 1999 15,362,669 $15,362 $4,850,066 $ - $(10,577,273) $(5,711,845)
Sale of restricted common stock 200,000 200 49,800 - - 50,000
Issuance of restricted common stock
to employees for compensation 440,000 440 120,560 - - 121,000
Net loss for the year - - - - (1,297,958) (1,297,958)
---------- ------- ---------- -------------- ------------ -----------
Balance at December 31, 1999 16,002,669 16,002 5,020,426 - (11,875,231) (6,838,803)
Sale of restricted common stock, net of
costs of $317,312 4,000,000 4,000 1,178,688 - - 1,182,688
Issuance of restricted common stock in connection
with short-term borrowings 150,000 150 58,350 - - 58,500
Issuance of restricted stock in connection
with convertible debentures 500,000 500 147,950 (123,708) - 24,742
Beneficial conversion feature of convertible debentures - - 212,687 - - 212,687
F-8
Common Stock Additional Unamortized
------------------- Paid-in Debt Accumulated
Share Amount Capital Issuance Costs Deficit Total
---------- ------- ---------- -------------- ------------ ------------
Issuance of restricted common stock in exchange
for release from consulting agreement 600,000 600 393,000 - - 393,600
Issuance of restricted common stock for services 1,412,100 1,413 728,137 - - 729,550
Conversion of note payable to common stock 250,000 250 209,750 - - 210,000
Fair value of warrants issued for services - - 1,059,884 - - 1,059,884
Net loss for the year - - - - (6,100,436) (6,100,436)
---------- ------- ---------- -------------- ------------ ------------
22,914,769 $22,915 $9,008,872 $ (123,708) $(17,975,667) $(9,067,588)
========== ======= ========== ============== ============ ===========
The accompanying notes are an integral part of this statement.
F-9
DETOUR MEDIA GROUP, INC.
(formerly known as Detour Magazine, Inc.)
UNAUDITED CONDENSED STATEMENT OF CASH FLOWS
MARCH 31,
2001
--------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) (900,178)
Adjustments
Depreciation and amortization 6,600
Amortization of debt issuance cost 10,300
Common stock issued to pay for interest -
Common stock issued for debt conversion -
Common stock issued for debt issuance cost -
Settlement of litigation using common stock -
Common stock issued to pay for service -
Stock warrants issued for service -
Interest expense on beneficial conversion feature -
of the convertible debenture -
Decrease (increase) in accounts receivable 95,327
Decrease (increase) in stock subscription receivable (500,000)
Decrease (increase) in employee advances 816
Decrease (increase) in prepaids and other current assets (50,000)
Decrease (increase) in other noncurrent assets (19,400)
Decrease (increase) in deferred revenue -
Increase (decrease) in interest payable 194,497
Increase (decrease) in accounts payable and accrueds 31,668
----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,130,370)
----------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchase of property and equipment -
Proceeds from sale of property and equipment -
----------
NET CASH (USED BY) INVESTING ACTIVITIES -
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease (increase) in due from affiliates -
Issuance of common stock 889,002
Principal borrowings on long-term notes 255,366
Principal borrowings on short-term borrowings 80,000
Principal (payments) on short-term borrowings (173,512)
Principal payments on long-term debt -
Capital contributions -
Increase in preferred and common stock -
---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,050,856
---------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH -
---------
(INCR.) DECR. IN CASH EQUIV (79,514)
Cash and Cash Equivalent at Beg. of Year 71,598
Cash and Cash Equivalent at End of Year (7,916)
---------
TOTALS -
=========
F-10
Detour Media Group, Inc.
(formerly known as Detour Magazine, Inc.)
STATEMENTS OF CASH FLOWS
Years ended December 31,
2000 1999
----------- -----------
Cash flows from operating activities:
Net loss $(6,100,436) $(1,297,958)
Adjustments to reconcile net loss to net cash
used in operating activities:
Extraordinary gain on extinguishment of debt - (595,399)
Amortization of debt issuance costs 24,742 -
Amortization of intangibles - 62,709
Asset impairment charge - 198,581
Depreciation of furniture and equipment 22,049 39,547
Loss on disposal of property and equipment - 9,048
Issuance of restricted common stock for:
Services 729,550 121,000
Release from consulting agreement 393,600 -
Issuance of restricted common stock in connection
with short-term borrowings 58,500 -
Issuance of restricted common stock in connection
with debt conversion 60,000 -
Warrants issued for services 1,059,884 -
Expense of beneficial conversion feature of the
convertible debentures 212,687 -
Increase in accounts receivable (204,435) (116,216)
Decrease in prepaid expenses 87,588 48,197
Decrease (increase) in employee advances 46,500 (46,500)
Increase in other assets (615) -
Increase (decrease) in accounts payable
and accrued expenses 960,125 (203,698)
Decrease in unexpired subscriptions (83,515) (55,317)
Increase in accrued interest payable 513,666 425,289
------------ -----------
Net cash used in operating activities (2,220,110) (1,410,717)
------------ -----------
F-11
The accompanying notes are an integral part of these statements.
Detour Media Group, Inc.
(formerly known as Detour Magazine, Inc.)
STATEMENTS OF CASH FLOWS - CONTINUED
Years ended December 31,
2000 1999
----------- -----------
Cash flows from investing activities:
Purchases of furniture and equipment $ (15,656) $ (6,939)
----------- -----------
Cash flows from financing activities:
Proceeds from short term borrowings - 873,568
Principal repayments of short term borrowings, net (731,626) (96,978)
Proceeds from long term borrowings 1,160,000 -
Advances from stockholder 765,754 382,155
Proceeds from issuance of common stock, net 1,182,688 50,000
----------- -----------
Net cash provided by financing activities 2,376,816 1,208,745
----------- -----------
Net increase (decrease) in cash 141,050 (208,911)
Cash (overdraft) at beginning of year (69,452) 139,459
----------- -----------
Cash (overdraft) at end of year $ 71,598 $ (69,452)
=========== ===========
Supplemental disclosures of cash flow information
Cash paid during the years for:
Interest $ 105,148 $ 128,831
=========== ===========
Income taxes $ - $ 800
=========== ===========
Noncash investing and financing activities:
One creditor converted its debt into common stock. The principal balance of
the debt was $150,000 at the time of conversion. In connection with the
debt conversion, the Company issued an additional 72,000 shares of common
stock to the creditor resulting in a noncash financing charge (included in
interest expense) of $60,000.
The accompany notes are an integral part of these statements.
F-12
DETOUR MEDIA GROUP, I
f/k/a DETOUR MAGAZINE, 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
F-13
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 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.
F-14
Detour Media Group, Inc.
(formerly known as Detour Magazine, Inc.)
NOTES TO FINANCIAL STATEMENTS
December 31, 2000 and 1999
NOTE A - DESCRIPTION OF BUSINESS
Detour Media Group, Inc. formerly known as Detour Magazine, Inc., (the
"Company"), was incorporated under the laws of the State of Colorado on May
18, 1990. The Company is in the business of publishing an international
fashion and entertainment magazine. The Company derives its revenue
primarily from advertising, with the balance from circulation. The magazine
is published ten times a year with two double issues per year.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
-------------------
Periodicals published and distributed are sold on a fully returnable basis.
Revenue and related costs are recognized at the on-sale date and an
allowance for returns is established based upon historical experience,
current events and assumptions about future events. Management reviews and
revises the estimate for returns periodically. Adjustments to income
resulting from such revisions are recorded in the year in which the
revisions are made.
Revenue from the sale of magazine subscriptions, net of certain costs
related to their procurement, are deferred and recognized as income over
the term of the subscriptions.
Advertising revenue is recorded net of agency commissions and is recognized
at the on-sale date of related issues.
Prepaid Publishing Expenses
---------------------------
Certain production expenses and other prepaid expenses related to future
periodicals are incurred prior to sale. These costs are recorded as prepaid
expenses and charged to cost of sales and other direct expenses at the time
the related revenues are recognized.
Furniture and Equipment
-----------------------
Furniture and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization are provided for in amounts
sufficient to relate the cost of depreciable assets to operations over
their estimated service lives. Leased improvements are amortized over the
shorter of the lives of the respective leases or over the service lives of
the assets. The straight-line method of depreciation is followed for
substantially all assets for financial reporting and income tax purposes.
The estimated lives used in determining depreciation are five to seven
years.
F-15
Detour Media Group, Inc.
(formerly known as Detour Magazine, Inc.)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000 and 1999
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Income Taxes
------------
Income taxes are accounted for using the liability method, under which
deferred tax assets and liabilities are determined based on the differences
between the financial accounting and tax bases of assets and liabilities.
Deferred tax assets or liabilities at the end of each period are determined
using the currently enacted tax rate expected to apply to taxable income in
the periods in which the deferred tax asset or liability is expected to be
settled or realized.
At December 31, 2000, the Company has approximately $13,085,000 and
$9,013,000 of federal and state net operating loss carryforwards available
to offset future taxable income. The losses expire at various years through
2025 for federal purposes and 2015 for state purposes. The deferred tax
asset related to these net operating loss carryforwards is $5,103,000 at
December 31, 2000. There are no other significant deferred tax asset or
liability amounts at December 31, 2000. In the opinion of management, it is
more likely than not that these deferred tax assets will not be realized
and therefore a valuation allowance has been recorded for 100% of the
deferred tax asset.
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory rate due to the
increase in the valuation allowance.
Concentration of Credit Risk
----------------------------
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of accounts receivable. The
Company has no significant off-balance sheet concentrations of credit risk,
such as foreign exchange contracts, option contracts or hedging
arrangements. Accounts receivable are typically unsecured and are derived
from transactions with and from customers primarily located in the United
States. The Company performs ongoing credit evaluations of its customers
and maintains reserves for potential credit losses. The Company maintains
an allowance for doubtful accounts based on the expected collectibility of
accounts receivable.
Fair Value of Financial Instruments
-----------------------------------
The Company's financial instruments consist of cash, short-term trade
receivables and payables, short-term and long-term borrowings and amounts
due to stockholders. The carrying values of cash and short-term trade
receivables and payables approximate their fair values. Based on borrowing
rates currently charged to the Company for financing, the carrying values
of the short-term and long-term borrowings and amounts due to stockholders
approximate their estimated fair values.
F-16
Detour Media Group, Inc.
(formerly known as Detour Magazine, Inc.)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000 and 1999
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Using Estimates
---------------
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Advertising Costs
-----------------
Advertising costs are expensed as incurred and included in selling, general
and administrative expenses. Advertising expenses amounted to $597,259 and
$318,477 for the year ended December 31, 2000 and 1999, respectively.
Segment Reporting
-----------------
The Company is centrally managed and operates in one business segment:
publishing.
Loss per Share
--------------
Basic income (loss) per share excludes dilution and is computed by dividing
net loss by the weighted average number of common shares outstanding for
the period. Diluted income per share reflects the potential dilution that
could occur if options to acquire common stock were exercised. The weighted
average number of shares used in the basic and diluted loss per share
calculation was 20,009,185 and 15,610,169 for the year ended December 31,
2000 and 1999, respectively. All potential common shares from the exercise
of stock options and warrants have been excluded from the denominator of
the diluted per-share computation as a result of the net loss incurred by
the Company in 2000 and 1999.
Warrants to purchase 4,635,000 and 2,100,000 shares of common stock were
not included in the computation of diluted loss per share for the year
ended December 31, 2000 and 1999 because to do so would have been
antidilutive for the periods presented.
F-17
Detour Media Group, Inc.
(formerly known as Detour Magazine, Inc.)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000 and 1999
NOTE C - GOING CONCERN MATTERS
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. The Company has incurred net losses of
$6,100,436 and $1,297,958 during the years ended December 31, 2000 and
1999. At December 31, 2000, the Company's total liabilities exceeded its
total assets by $9,067,588 and the Company had a net working capital
deficiency of $8,966,466. The Company is also in default of certain notes
payable. These factors, among others, indicate that the Company may be
unable to continue as a going concern.
Management has developed a business plan that they believe will improve the
operating results of the Company. The primary concept of the plan is to
create strategic alliances in order to expand upon the Company's publishing
base, accelerate the custom publishing activities which commenced in the
year 2000, and to exploit the "Detour" brand outside the publishing arena.
The plan also encompasses consolidating overhead and decreasing debt
through these alliances.
Management is currently engaged in two separate negotiations, which could
result in a stronger advertising and operational base for publishing and
distribution in North America and also launch Detour Magazine in Europe.
Also, utilizing the Company's existing agreement with Creative Artists
Agency and relationships with various Internet driven and conventional
companies seeking to place their content in magazine format, management
believes it is positioned to expand upon its custom publishing revenue at
relatively low cost.
As a result of current negotiations with a European production company
already invested in the Company, management seeks to exploit the value of
the "Detour" brand to create a joint venture of Detour TV properties in
Europe without the burden of production or overhead costs.
Finally, management has been in discussions with certain parties from the
music industry in order to form a Detour music group alliance encompassing
music production, publishing and management.
Going forward, significant amounts of additional cash will be needed to pay
the costs to implement the new business plan and to fund losses until the
Company is profitable. While there is no assurance that funding will be
available to execute the plan, the Company is continuing to seek financing
to support its business plan and is exploring a number of alternatives in
this regard. As discussed in Note L to the financial statements, the
Company has raised $739,000 (net of issuance costs of $50,000) through the
issuance of its common stock subsequent to December 31, 2000.
To implement the proposed business plan and to fund associated
restructuring costs and operating losses, the Company also will be required
to restructure certain of its outstanding debt and other financing
arrangements. Several alternatives are being considered.
F-18
Detour Media Group, Inc.
(formerly known as Detour Magazine, Inc.)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000 and 1999
NOTE C - GOING CONCERN MATTERS - Continued
Management believes that, despite the financial hurdles and funding
uncertainties going forward, it has developed a business plan that, if
successfully funded and executed, can significantly improve operating
results. The support of the Company's vendors, customers, lenders,
stockholders and employees will continue to be key to the Company's future
success.
In view of the matters described above, recoverability of a major portion
of the recorded asset amounts shown in the accompanying balance sheet is
dependent upon continued operations of the Company, which in turn is
dependent upon the Company's ability to meet its financing requirements on
a continuing basis, to maintain present financing, and to succeed in its
future operations. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts
or amounts and classification of liabilities that might be necessary should
the Company be unable to continue in existence.
NOTE D - ACCOUNTS RECEIVABLE
During 1999, the Company sold a majority of its advertising accounts
receivable to a finance company without recourse. The receivables were sold
at a discount ranging from 3.99% to 10.64% on a pre-approved basis (average
discount rate of 5% per month for 2000 and 1999), with a "hold-back" of 12%
on each invoice until payment of the receivables. Therefore, the finance
company was only factoring 88% of the Company's eligible advertising
receivables. The finance company provided certain credit services for the
Company, such as obtaining credit reports on customers and collections. In
December 1999, the Company discontinued selling its accounts receivable and
the remaining amount due from the finance company at December 31, 1999 was
not significant. In January 2001, the Company began selling its accounts
receivable to a different finance company at terms similar to the previous
financing arrangement. Finance fees for the year ended December 31, 1999
totaled $117,524, and is included in interest expense on the statement of
operations. Proceeds received from the sales of accounts receivable in 1999
are included in cash flows from operating activities in the statements of
cash flows.
NOTE E - FURNITURE AND EQUIPMENT
Furniture and equipment at December 31, 2000 consist of the following:
Office equipment $ 171,055
Furniture and fixtures 63,666
---------
Less accumulated depreciation (191,968)
---------
$ 42,753
=========
F-19
Detour Media Group, Inc.
(formerly known as Detour Magazine, Inc.)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000 and 1999
NOTE F - NOTES PAYABLE
Notes payable at December 31, 2000 consist of the following:
Note payable to a financial institution, principal and
unpaid interest was due in December 1998. The note bore
interest at 18% through its maturity date and currently
bears interest at 28%. The Company is in default of
this note, which is personally guaranteed by the
Company's majority stockholder. $ 522,500
Note payable, principal and unpaid interest was due on
March 8, 2000. The note bears interest at 6%. The note
was not repaid on the due date and the Company is
currently in default of this note. 100,000
Notes payable, principal and unpaid interest was due on
July 15, 1999. The note bore interest at 12% through
maturity and currently bears interest at 14%. The note
was not repaid on the due date and the Company is
currently in default of this note. 77,972
Convertible debentures maturing on June 19, 2003.
The debentures are issued to five creditors and bear
interest at 10%. The debentures require quarterly
interest only payments. 1,000,000
Convertible debentures maturing in December, 2005.
The debentures are issued to eight creditors and
bear interest at 6%. Principal and interest are due at
maturity. 160,000
Eight notes payable, bearing interest at rates ranging
from 10% to 12% and requiring monthly or quarterly
interest payments. All eight notes are payable on demand. 859,44
----------
2,719,921
Less current maturities 2,559,921
----------
Long-term portion $ 160,000
==========
F-20
Detour Media Group, Inc.
(formerly known as Detour Magazine, Inc.)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000 and 1999
NOTE F - NOTES PAYABLE - Continued
In connection with the issuance of convertible debentures, the Company paid
issuance costs to financial advisors totaling $141,032. The debt issuance
costs are included in interest expense in fiscal 2000. The Company also
issued 500,000 shares of its common stock to the same financial advisors
(see Note K). The convertible debentures can be converted into common stock
at an amount equal to 80% of the average three lowest closing bid prices
from the 20 days immediately preceding the conversion date. This beneficial
conversion feature resulted in a noncash charge of $212,687 included in
interest expense in fiscal 2000.
As of December 31, 2000, the Company did not make the quarterly interest
payments on the convertible debentures maturing in 2003. This is an event
of default under these agreements and the Company has not obtained a waiver
of the violations. In accordance with accounting principles generally
accepted in the United States of America, the debt is classified as current
as of December 31, 2000.
Interest expense on notes payable (excluding interest expense on amount due
to stockholders and debt issuance costs) totaled $209,000 and $175,000 for
the year ended December 31, 2000 and 1999, respectively.
Future maturities of notes payable as of December 31, 2000 are as follows:
Year ending December 31.
---------------------------------
2001 $2,559,921
2002 -
2003 -
2004 -
2005 160,000
----------
$2,719,921
==========
NOTE G - AMOUNTS DUE TO STOCKHOLDERS
Note payable to stockholder represents advances of $932,313 made to the
Company in 1995. The note bears interest at 12% per year, is payable on
demand, and is collateralized by substantially all the assets of the
Company. At December 31, 2000, the full amount of principal is outstanding.
Accrued interest payable to this minority stockholder at December 31, 2000
totaled $525,500. Interest expense for this note was $112,000 for each of
the years ended December 31, 2000 and 1999.
F-21
Detour Media Group, Inc.
(formerly known as Detour Magazine, Inc.)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000 and 1999
NOTE G - AMOUNTS DUE TO STOCKHOLDERS - Continued
Advances from stockholder represent advances made by the majority
stockholder of the Company for working capital purposes. At December 31,
1999, the advances bore interest at 12% per annum and were payable on
demand. In March 2000, the majority stockholder agreed to reduce the annual
interest rate to 8% and modified 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 $10,000,000. At December 31, 2000, $2,556,021 of principal is
outstanding and classified as short-term. Accrued interest payable to the
majority stockholder at December 31, 2000 totaled $770,537. Interest
expense on the advances from stockholder was approximately $298,000 and
$280,000 for the year ended December 31, 2000 and 1999, respectively.
NOTE H - ASSET IMPAIRMENT CHARGE
In February 1998, the Company entered into an agreement to purchase certain
intangible assets from and assumed certain liabilities of Berle-Moll
Enterprises, Inc. ("Berle") for a total purchase price of $295,842. The
Company paid $85,706 in cash (including acquisition costs of $17,706),
issued a note payable to Berle in the amount of $107,164 and assumed
certain liabilities in the amount of $120,678. Under the agreement, the
Company agreed that if it ceased to publish the acquired magazine acquired
under the trademark purchased, promptly upon demand by Berle, the Company
would transfer the magazine trademarks to Berle. The acquired intangible
assets were being amortized on a straight-line method over five years.
Amortization expense for the years ended December 31, 1999 was $62,709.
As a result of the Company's inability to publish the magazine under the
acquired trademark, the Company recorded an asset impairment charge of
$198,581 in December 1999, representing the unamortized carrying value of
the acquired intangible assets.
NOTE I - EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT
In 1999, the Company recorded an extraordinary gain of $595,399 in
connection with the settlement of two liabilities aggregating $693,399 by
payment of a total of $98,000.
F-22
Detour Media Group, Inc.
(formerly known as Detour Magazine, Inc.)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000 and 1999
NOTE J - COMMITMENTS AND CONTINGENCIES
1. Operating Leases
----------------
The Company conducts its operations from two facilities that are leased
under separate three year non-cancelable operating leases expiring in
January 2001 and November 2001. The Company is required to pay its
proportionate share of utilities and real estate taxes at one of its
locations.
Rent expense for the years ended December 31, 2000 and 1999 was $119,807
and $119,862, respectively. Minimum future rental payments under
non-cancelable operating leases as of December 31, 2000 total $72,000,
payable in 2001.
2. Cease-and-Desist Proceeding by the Securities and Exchange Commission
---------------------------------------------------------------------------
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 that it was recommending
to the SEC that an enforcement action be filed against both the Company and
its Chairman relating to accuracy of certain of the Company's 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 the Company has 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.
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 second issue
related 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 $21,991, based on the exercise price of
the options of $.005 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 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.
F-23
Detour Media Group, Inc.
(formerly known as Detour Magazine, Inc.)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000 and 1999
NOTE J - COMMITMENTS AND CONTINGENCIES - Continued
In 2000, the Company advised the staff that it wished to cooperate fully
and reach an agreement on an appropriate remedy to resolve this matter. The
Company had determined to restate its financial statements to address the
concerns raised by the staff.
On November 22, 2000, the Commission issued 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 the Company to
amend its filings with the Commission to properly reflect its 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
the assets of the Company. The Commission further ordered the Company 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. The Company has
advised the Commission of its intention to amend its filing with the
Commission.
3. Litigation
----------
The Company is 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.
NOTE K - EQUITY
In June 1997, the Company adopted the Detour Magazine, Inc. 1997
Non-Qualified Stock Option Plan (the "Plan"), which reserved an aggregate
of 4,400,000 shares of the Company's common stock for issuance thereunder.
In 1997, the Company authorized the issuance of 4,400,000 options under the
Plan to five entities, granting each entity options at an exercise price of
$.005. All of the issued options were exercised in 1998 and resulted in net
proceeds of $21,991. None of the options to purchase shares of the
Company's common stock under the Plan were issued to any member of
management. At December 31, 2000, there are no further options reserved for
issuance under the Plan and there are no outstanding options.
In 1999, the Company issued 440,000 shares of its common stock to employees
as compensation for services rendered. The stock was valued at the closing
stock price on the day of issuance and expensed in the 1999 statement of
operations. The Company also issued 200,000 shares of its common stock for
cash proceeds totaling $50,000.
F-24
Detour Media Group, Inc.
(formerly known as Detour Magazine, Inc.)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000 and 1999
NOTE K - EQUITY - Continued
In December 1999, the Company and its majority stockholder entered into an
agreement with two financial advisors to assist the Company in obtaining
equity and debt financing and to provide other consulting services,
including identifying potential acquisitions and strategic partners,
analyzing potential acquisitions and other business arrangements, assisting
in strategic planning and business development, market support and
assisting in developing e-business plans. In connection with this
agreement, the Company issued to each advisor warrants to purchase 800,000
shares of its common stock at an exercise price of $.10 a share. The
vesting of such warrants was subject to certain conditions during a service
period that extended through September 30, 2000, as follows: (i) 25,000
warrants vest per month throughout the service period; (ii) in addition, at
such time that the Company receives at least $1,000,000 of financing
arranged by the financial advisors, additional warrants shall vest in a
ratio equal to the aggregate funds raised divided by $5,000,000; and (iii)
in the event of a sale of the Company during the service period, additional
warrants vest in an amount equal to the number of vested warrants
immediately prior to the sale (effectively doubling the number of vested
warrants). In no event shall the number of vested warrants exceed the
initial number of warrants of 1,600,000.
Management believed the agreement did not contain a performance commitment
because the financial advisors had no disincentive for nonperformance other
than the loss of the cash, options and warrants attributable to the work
performed. Accordingly, the options and warrants issued under this
agreement were measured at the fair value on the dates the advisors were
successful in obtaining financing for the Company. At December 31, 1999,
the Company had not received any financing arranged by the financial
advisors. Between January 1, 2000 and March 31, 2000, the Company received
$1,800,000 of financing (debt and equity) resulting in the vesting of
warrants to purchase 416,000 shares of the Company's common stock. The
agreement was amended in fiscal 2000 resulting in the vesting of the
remaining warrants to purchase an additional 1,184,000 shares of the
company's common stock. The vesting of the remaining warrants to purchase
1,184,000 resulted in a noncash charge of $663,040 included in general and
administrative expense in fiscal 2000.
The agreement also provided the financial advisors an option to purchase
3,000,000 shares of common stock of the Company at an exercise price of
$.10. The options were exercisable if and only if the Company received at
least $5,000,000 in financing arranged by the financial advisors. The
agreement also provided for a cash financing fee of 10% of the funds
raised. In addition, the financial advisors may have been entitled to cash
consulting fees up to $10,000 per month, depending on the amount of funds
raised on behalf of the Company.
F-25
Detour Media Group, Inc.
(formerly known as Detour Magazine, Inc.)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000 and 1999
NOTE K - EQUITY - Continued
In September 2000, the Company terminated this agreement with the two
financial advisors. In addition to the 800,000 of stock warrants issued to
each advisor, the Company issued an additional 300,000 shares of its
restricted common stock to each advisor in order to terminate the
agreement. The issuance of these additional 600,000 shares resulted in a
noncash charge of $393,600 involved in general and administrative expense
in fiscal 2000. In connection with this termination agreement, the option
to provide 3,000,000 shares of the Company's stock was cancelled.
In January 2000, the Company issued 20 units for $5,000 per unit, or a
total of $100,000. Each unit consists of promissory note of the Company in
a principal amount of $5,000, bearing interest at 10% per year due and
payable on April 25, 2000, and 5,000 warrants, each warrant entitling the
holder to purchase one share of common stock for $.10 per share at any time
through December 31, 2002. The notes were repaid in April 2000.
In February 2000, the Company issued two units for $100,000 per unit, or a
total of $200,000. Each unit consists of a promissory note of the Company
in a principal amount of $100,000, bearing interest at 10% per year due and
payable on January 31, 2001, and 75,000 warrants, each warrant entitling
the holder to purchase one share of common stock for $.10 per share, at any
time through December 31, 2004.
In March 2000, the Company issued 3,000,000 shares of common stock for $.33
1/3 per share, or a total of $1,000,000 (less stock issuance costs). The
purchasers received demand registration rights exercisable after September
14, 2000. The Company was in violation of certain representations and
warranties made in the stock purchase agreements and has not received
waivers of these violations. These violations could subject the Company to
damages, including the potential rescission of the shares, if waivers
cannot be obtained. In the opinion of management, the damages, if any,
resulting from the violations would not be material to the Company's
financial position or results of operations.
In April 2000, the Company issued 1,000,000 shares of common stock for $.50
per share, for a total of $500,000 (less stock issuance costs). The
purchaser received demand registration rights exercisable after April 30,
2001.
F-26
Detour Media Group, Inc.
(formerly known as Detour Magazine, Inc.)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2000 and 1999
NOTE K - EQUITY - Continued
Between June 2000 and December 2000, the Company issued 1,412,100 shares of
common stock in exchange for various professional services, including
legal, marketing, promotional and financial services. The issuance of these
shares resulted in a noncash charge included in general and administrative
expenses of $729,550 in fiscal 2000.
The Company also issued warrants to acquire approximately 2,120,000 shares
of the Company's common stock in exchange for various professional services
including the 1,184,000 shares issued to the two financial advisors
described above. The fair value of the warrants issued in fiscal 2000
totaled $1,259,884 and is included in selling, general and administrative
expense.
In February 2000, the Company issued 150,000 shares of its common stock in
connection with short-term borrowings. The issuance of the shares resulted
in a noncash financing charge (included in interest expense) of $58,500 in
fiscal 2000.
In November 2000, the Company issued 500,000 shares of its common stock to
financial advisors in connection with the issuance of certain convertible
debentures (Note F). The issuance of the shares has been reflected as a
debt issuance cost in the statement of deficit in stockholder's equity and
being amortized over the lives of subordinated debentures (3 years).
NOTE L - SUBSEQUENT EVENTS
On April 9, 2001, the Company's former financial advisors exercised
warrants to acquire 1,333,333 shares of the Company's common stock. On
April 11, 2000, the company issued 1,000,000 shares to various shareholders
resulting from the Company's noncompliance with the shareholders' request
to register previously issued restricted shares. The shareholders
previously received demand registration rights.
F-27
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The articles of incorporation of the Registrant provide for the
indemnification of the Registrant's directors and officers to the fullest extent
permitted by law. Insofar as indemnification for liabilities under the
Securities Act of 1933 may be permitted to directors, officers or controlling
persons of the Registrant pursuant to the articles of incorporation and the
corporation law of the State of Colorado, the Registrant has been informed that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in such Act and is therefore unenforceable.
As permitted by the Colorado Business Corporation Act, the Articles of
Incorporation provide that directors and officers of the Registrant will not be
personally liable to the Registrant or its shareholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for breach of a
director's duty of loyalty to the Registrant or its shareholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under section 7-108-403 of the Colorado statute
relating to unlawful distributions or (iv) for any transaction from which the
director derived an improper personal benefit. The Articles of Incorporation
also provide (subject to certain exceptions) that the Registrant shall, to the
maximum extent permitted form time to time under the law of the State of
Colorado, indemnify, and upon request shall advance expenses to, any director or
officer to the extent permitted under such law as it may from time to time be in
effect. The Registrant's bylaws require the Registrant to indemnify, to the full
extent permitted by law, any director, officer, employee or agent of the
Registrant for acts which such person reasonably believes are not in violation
of the Registrant's corporate purposes as set forth in the Articles of
Incorporation. As a result of these provisions, shareholders may be unable to
recover damages against the directors and officers of the Registrant for actions
taken by them which constitute negligence, gross negligence, or a violation of
their fiduciary duties, which may reduce the likelihood of shareholders
instituting derivative litigation against directors and officers and may
discourage or deter shareholders from suing directors, officers, employees and
agents of the Registrant for breaches of their duty of care, even though such an
action, if successful, might otherwise benefit the Registrant and its
shareholders.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection with
the issuance and distribution of the securities being registered hereby. All
such expenses will be borne by the registrant; none shall be borne by any
selling stockholders.
Securities and Exchange Commission Registration Fee$ 283.00
Legal Fees and Expenses............................$ 30,000.00
Accounting Fees and Expenses.......................$ 10,000.00
Miscellaneous......................................$ 2,000.00
Total..............................................$ 42,283.00
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
II-1
In 1999, the Company issued 440,000 shares of its common stock to employees
as compensation for services rendered. The Company also issued 200,000 shares of
its common stock for cash proceeds totaling $50,000. No sales commissions were
paid in connection with such transactions. The shares were issued in reliance
upon the exemption from registration afforded by Section 4(2) of the Securities
Act.
In December 1999, the Company issued warrants to purchase 800,000 shares of
its common stock at an exercise price of $.10 a share to two financial advisors
of the Company. No sales commissions were paid in connection with this
transaction. In September 2000, the Company terminated this agreement with the
two financial advisors. In addition to the 800,000 of stock warrants issued to
each advisor, the Company issued an additional 300,000 shares of its restricted
common stock to each advisor in order to terminate the agreement. No sales
commissions were paid in connection with such transactions. The warrants and
shares were issued in reliance upon the exemption from registration afforded by
Section 4(2) of the Securities Act.
In January 2000, the Company issued 20 units for $5,000 per unit to an
investor for a total of $100,000. Each unit consists of promissory note of the
Company in a principal amount of $5,000, bearing interest at 10% per year due
and payable on April 25, 2000, and 5,000 warrants, each warrant entitling the
holder to purchase one share of common stock for $.10 per share at any time
through December 31, 2002. The notes were repaid in April 2000. No sales
commissions were paid in connection with such transactions. The shares were
issued in reliance upon the exemption from registration afforded by Section 4(2)
of the Securities Act.
In February 2000, the Company issued two units for $100,000 per unit to an
investor for a total of $200,000. Each unit consists of a promissory note of the
Company in a principal amount of $100,000, bearing interest at 10% per year due
and payable on January 31, 2001, and 75,000 warrants, each warrant entitling the
holder to purchase one share of common stock for $.10 per share, at any time
through December 31, 2004. No sales commissions were paid in connection with
such transactions. The shares were issued in reliance upon the exemption from
registration afforded by Section 4(2) of the Securities Act.
In February 2000, the Company issued 150,000 shares of its common stock in
connection with short-term borrowings. In November 2000, the Company issued
500,000 shares of its common stock to financial advisors in connection with the
issuance of certain convertible debentures. No sales commissions were paid in
connection with such transactions. The shares were issued in reliance upon the
exemption from registration afforded by Section 4(2) of the Securities Act.
In March 2000, the Company issued 3,000,000 shares of common stock for $.33
1/3 per share, or a total of $1,000,000 (less stock issuance costs) to an
investor. No sales commissions were paid in connection with such transactions.
The shares were issued in reliance upon the exemption from registration afforded
by Section 4(2) of the Securities Act.
In April 2000, the Company issued 1,000,000 shares of common stock for $.50
per share to an investor, for a total of $500,000 (less stock issuance costs).
The purchaser received demand registration rights exercisable after April 30,
2001. No sales commissions were paid in connection with such transactions. The
shares were issued in reliance upon the exemption from registration afforded by
Section 4(2) of the Securities Act.
II-2
Between June 2000 and December 2000, the Company issued 1,412,100 shares of
common stock in exchange for various professional services, including legal,
marketing, promotional and financial services. No sales commissions were paid in
connection with such transactions. The shares were issued in reliance upon the
exemption from registration afforded by Section 4(2) of the Securities Act.
In December 2000, we issued 6% convertible debentures in the aggregate
principal amount of $309,000 to four investors, and received total gross
proceeds of $1,236,000. The debentures have a maturity date of December 31,
2001. The debentures are convertible into the number of shares of our common
stock determined by dividing (a) that portion of the outstanding principal
balance of the note as of the date of conversion by (b) the conversion price.
The conversion price means the lesser of (x) $0.27 and (y) an amount equal to
seventy-five percent (75%) of the average closing bid prices for the three (3)
trading days having the lowest closing bid prices during the thirty (22) trading
days prior to the conversion date. Additionally, we issued a warrant to each of
the purchasers to purchase an aggregate of 1,259,260 shares of our common stock
at an exercise price equal to $.29216 per share. The purchasers may exercise the
warrants through December 31, 2005. The debentures and warrants were issued in
reliance upon the exemption from registration afforded by Section 4(2) of the
Securities Act.
In December 2000, we issued 10% convertible debentures in the aggregate
principal amount of $1,000,000 to four investor, and received total gross
proceeds of $4,000,000. The debentures have a maturity date of December 31,
2001. The debentures are convertible into the number of shares of our common
stock determined by dividing (a) that portion of the outstanding principal
balance of the note as of the date of conversion by (b) the conversion price.
The conversion price means the lesser of (x) $0.90 and (y) an amount equal to
eighty percent (80%) of the average closing bid prices for the three (3) trading
days having the lowest closing bid prices during the thirty (22) trading days
prior to the conversion date. Additionally, we issued a warrant to each of the
purchasers to purchase an aggregate of 250,000 shares of our common stock at an
exercise price equal to $.6641 per share. The purchasers may exercise the
warrants through December 31, 2005. The debentures and warrants were issued in
reliance upon the exemption from registration afforded by Section 4(2) of the
Securities Act.
ITEM 27. EXHIBITS
EXHIBIT INDEX
Exhibit
Number Description of Document
------ -----------------------
3.1* Certificate and Articles of Incorporation
3.2* Bylaws
3.3** Articles of Merger
3.4*** Certificate of Correction dated March 6, 2000
II-3
4.1 Form of Warrant to Purchase Shares of Common Stock of Detour Media
Group, Inc.
4.2 Form of 6% Debenture Convertible into Shares of Common Stock of
Detour Media Group, Inc. issued in December 2000 private placements
4.3 Registration Rights Agreement dated December 28, 2000 by and among
Detour Media Group, Inc. and Certain Investors.
4.4 Convertible Debentures and Warrants Purchse Agreement dated December
28, 2000 between Detour Media Group, Inc. and Certain Investors.
4.5 Form of 10% Debenture Convertible into Shares of Common Stock of
Detour Media Group, Inc. issued in June 2000 private placements
4.6 Registration Rights Agreement dated June 12, 2000 by and amoung
Detour Media Group, Inc. and Certain Investors.
4.7 Convertible Debentures and Warrants Purchase Agreement dated June
12, 2000 between Detour Media Group, Inc. and Certain Investors.
5.1 Opinion of Jenkens & Gilchrist Parker Chapin LLP
23.1 Consent of Grant Thornton LLP
23.2 Consent of Jenkens & Gilchrist Parker Chapin LLP (included in
Exhibit 5.1)
------------------------------
* Filed with the Securities and Exchange Commission in the Exhibits to Form
10-SB, filed in January 1995 and are incorporated by reference herein.
** Filed with the Securities and Exchange Commission in the Exhibits to Form
10-KSB filed in April 1998 and is incorporated by reference herein.
*** Filed with the Securities and Exchange Commission in the Exhibits to Form
10-KSB, filed in May 2000 and is incorporated by reference herein.
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement to include any material
information with respect to the plan of distribution not previously disclosed in
this Registration Statement or any material change to such information in this
Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-4
The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the Prospectus, to each person to whom the Prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the Prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the Prospectus, to deliver, or
cause to be delivered to each person to whom the Prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the Prospectus to provide such interim financial information.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, Delaware General Corporation
Law or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefor, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit, or proceeding) is asserted by such director, officer, or controlling
person in connection with the securities being registered hereunder, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this registration statement
to be signed on its behalf by the undersigned, in the city of Los Angeles, State
of California, on July 17, 2001.
DETOUR MAGAZINE, INC.,
a Colorado corporation
/s/ Edward T. Stein
------------------------------
Edward T. Stein
Chairman