U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-QSB Quarterly Report Under the Securities Exchange Act of 1934 For Quarter Ended: June 30, 1998 Commission File Number: 0-25388 DETOUR MAGAZINE, INC. (Exact name of small business issuer as specified in its charter) Colorado (State or other jurisdiction of incorporation or organization) 84-1156459 (IRS Employer Identification No.) 6855 Santa Monica Boulevard Suite 400 Los Angeles, California (Address of principal executive offices) 90038 (Zip Code) (213) 469-9444 (Issuer's Telephone Number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes __X__ No ____. The number of shares of the registrant's only class of common stock issued and outstanding, as of June 30, 1998, was 15,202,665 shares. PART I ITEM 1. FINANCIAL STATEMENTS. The unaudited financial statements for the six month period ended June 30, 1998, are attached hereto. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's unaudited financial statements and notes thereto included herein. In connection with, and because it desires to take advantage of, the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions readers regarding certain forward looking statements in the following discussion and elsewhere in this report and in any other statement made by, or on the behalf of the Company, whether or not in future filings with the Securities and Exchange Commission. Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company's control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward looking statements made by, or on behalf of, the Company. The Company disclaims any obligation to update forward looking statements. Overview Detour Magazine, Inc., f/k/a Ichi-Bon Investment Corporation (the "Company"), was incorporated under the laws of the State of Colorado on May 18, 1990. On June 6, 1997, pursuant to the terms of an Agreement and Plan of Reorganization, the Company acquired all of the issued and outstanding securities of Detour, Inc., a California corporation, in exchange for 4,500,000 "restricted" common shares of the Company. As a result, the Company was the surviving entity. As part of the terms of the aforesaid transaction, the Company amended its Articles of Incorporation, changing its name to its present name. Detour Magazine, Inc. is engaged in publishing of a monthly magazine entitled Detour, which includes advertisements and articles relating to fashion, contemporary music and entertainment and social issues. Management describes the magazine as an "urban, 2 avant-garde" publication. The Company maintains offices in both Los Angeles, California and New York City. The magazine is being published monthly, with the exception of the issues for January/February and July/August, for which one issue is published. The magazine has been, in general, approximately 172 pages in length, comprised of about 44 to 73 pages of advertising, with the balance in editorial pages. This reflects the limited, but growing, advertising base which typifies new publications. The following information is intended to highlight developments in the Company's operations to present the results of operations of the Company, to identify key trends affecting the Company's businesses and to identify other factors affecting the Company's results of operations for the six month periods ended June 30, 1998 and 1997. Results of Operations Comparison of Results of Operations for the Six Month Periods Ended June 30, 1998 and 1997 During the six month period ended June 30, 1998, the Company's revenues remained relatively constant as compared to the similar period in 1997, as the Company generated revenues of $2,039,390, as compared to revenues of $2,019,568 for the six months ended June 30, 1997, an increase of $19,822 (approximately 1%). However, in the six month period ended June 30, 1998, costs of sales rose significantly to $1,566,455 from $1,062,318 in the six months ended June 30, 1997, an increase of $504,137 (47.5%). In this regard, printing costs escalated to $1,183,408 from $872,531, distribution costs rose from $39,815 to $170,700 and editorial and photo expenses increased from $149,972 to $212,347. This was due primarily to the increase in print orders of the Company's magazine (number of copies printed), caused by management's efforts to expand circulation, which resulted in increased printing, paper and distribution costs as a factor of such expansion. Further, while these figures indicate an increase in costs during the six month period ended June 30, 1998, during the six month period ended June 30, 1997 five issues of the Company's magazine were on-sale in the applicable period in 1997, as opposed to six magazines during the applicable period in 1998. Additional costs were incurred as a result of additional newsstand and subscription copies printed. Management anticipated these costs in the Company's budget, as the Company is engaged in a program to increase visibility of the Magazine, in order to increase revenues in the future. It is management's belief that the increased costs associated with various promotions will result in greater visibility and market share in the future, with the Company incurring significant losses during the promotional period. However, there can be no assurances 3 that the Company will generate greater revenues in the future as a result of these additional marketing efforts. Selling, general and administrative expenses also increased significantly during the six month period ended June 30, 1998 to $1,971,196, as compared to $1,241,835 for the six month period ended June 30, 1997, as a result of numerous factors including (i) in late 1997, the Company's new management assumed their respective positions with the Company, which increased salaries by approximately $236,000 during this period; (ii) the Company incurred significant professional fees of approximately $273,000 over similar costs incurred in prior periods as a result of the Company becoming a reporting company under the Securities Exchange Act of 1934, as well as the Company's private placement offering which commenced in November 1997; and (iii) increased newsstand expense as a result of the Company's point of sale promotion, wherein the Company attempted to increase recognition and circulation of the Magazine. These costs were approximately $144,000. Management believes that its efforts to increase circulation of the Company's magazine is beginning to show signs of success, based upon numerous factors, including the fact that prior to the six month period ended June 30, 1998, approximately 90% of the Company's revenues were generated from advertising. In the six month period ended June 30, 1998, revenues continued to increase, but advertising accounted for only 81% of such revenue. While there can be no assurances, management believes that the Company's revenues should continue to increase over the foreseeable future as a result of these efforts. During the six month period ended June 30, 1998, interest expense also rose in comparison to the similar period in 1997, as a result of the Company's need to borrow additional working capital from affiliates, from $73,333 in the six month period ended June 30, 1997, to $125,319 for the six month period ended June 30, 1998, an increase of $51,986 (70.9%). See "Liquidity and Capital Resources" below. As a result, the Company generated a net loss of $(1,623,580) for the six month period ended June 30, 1998, compared to a net loss of $(357,919) for the six month period ended June 30, 1997. It is anticipated that the Company will continue to incur operating losses in the foreseeable future, until such time as the Company is able to put new magazine acquisitions in place. There can be no assurances that the Company will successfully consummate new acquisitions, or, if so accomplished, that the new magazines will allow the Company to generate profits from operations in the future. See "Trends," below. 4 Comparison of Results of Operations for the Three Month Periods Ended June 30, 1998 and 1997 During the three month period ended June 30, 1998, the Company's revenues decreased significantly, as it generated revenues of $628,523, compared to revenues of $1,009,784 for the similar period in 1997, a decrease of $381,261 (37.8%). This was due to the fact that only two issues of the Company's Magazine were published during the three month period ended June 30, 1998, as opposed to three issues published in the applicable period in 1997. In the three month period ended June 30, 1998, costs of sales increased from $577,251 in 1997, to $768,217 for the three month period ended June 30, 1998, an increase of $190,966 (24.8%). This was due primarily to the reasons cited above in the discussion of the comparison of the six month period applicable hereto. General and administrative expenses were $869,525 for the three months ended June 30, 1998, compared to $574,825 for the similar period in 1997, an increase of $294,700 (51.3%), also due to those reasons described hereinabove. As a result, the Company generated a net loss of $(1,089,151) for the three month period ended June 30, 1998, compared to a net loss of $(178,959) for the three month period ended June 30, 1997. Liquidity and Capital Resources At the end of the three month period ended June 30, 1998, the Company had $382 in cash and cash equivalents. It also decreased its accounts receivable to $543,990 from $948,310 during the three months beginning April 1, 1998, a decrease of $404,320 (42.6%), which management attributes to subscription promotions not completed. As a result in this latter change, the Company's anticipated receipt of a significant refund from the US Postal Service as a result of its conversion from 4th class postage to 2nd class postage in the first quarter of 1998 is in question. The funds to complete the subscription promotions were not available due to the inability of the Company to raise all of the capital necessary in its private offering described below. The Company has outstanding notes payable to non-affiliates in the aggregate amount of $325,336, including the following: (i) A note in the principal amount of $90,000, which is due upon demand and bears interest at the rate of 18%, payable quarterly. This note is personally guaranteed by Ed Stein, an officer, director and principal shareholder of the Company. (ii) A note in the principal amount of $122,000, which bears interest at the rate of 8% per annum. All principal and interest on this note was due January 22, 1998, but the due date was extended by mutual agreement until September 30, 1998. This note is also personally guaranteed by Mr. Stein. 5 (iii) Two notes which arose as part of the acquisition consummated by the Company during the three month period ended March 31, 1998 of Milton Magazine, including one note with an outstanding principal balance of $98,336, which accrues interest at prime rate plus 2% and which is to be repaid over a two year period, with principal and interest payments escalating over the life of the note, beginning with monthly payments of $3,164 and escalating to $6,125, and a second note in the principal amount of $15,000, which accrues no interest and is payable in monthly payments of $5,000, which commenced in May 1998. The remaining outstanding note payable to an unaffiliated party in the principal amount of $932,313 arose out of a loan originally due to an affiliated party. Relevant thereto, in 1995, Mr. Stein loaned the Company $932,313 which bears interest at the rate of 12% per annum and is due upon demand. The obligation is secured by all of the assets of the Company. The note holder agreed to subordinate this security position relevant to the Company's accounts receivable factoring arrangement. This stockholder subsequently assigned this Note to JCM Capital Corp. As of the date of this report, the Company is making interest payments on this obligation and is in discussions with this creditor relating to repayment terms. Mr. Stein has also loaned the Company the principal sum of $1,414,442, which loan bears interest at the rate of 12% per annum, calculated on the average monthly outstanding balance and which is due upon demand. Applicable thereto, Mr. Stein has provided the Company with a letter advising that he will abstain from demanding any repayment on this obligation at least through December 31, 1998. The Company presently factors its monthly domestic accounts receivable with Riviera Financial, Inc., Los Angeles, California ("Riviera"). The majority of factoring provided by Riviera is on a non-recourse basis. On average, the Company pays a fee to Riviera of approximately 4.5% per month. Historically, the Company factors approximately $3 million per annum in accounts receivable with Riviera. Riviera's maximum fee for factoring the Company's receivables is 9% per month, with a hold back of 11% on each invoice until receipt of funds. Therefore, Riviera is only factoring 89% of the Company's total eligible domestic advertising receivables. In addition, Riviera also acts in the capacity of credit manager for the Magazine by performing credit checks, mailing invoices, making collection calls and posting receivables. It is anticipated that, provided the Company successfully raises additional capital in the near future, of which there can be no assurance, the factoring relationship with Riviera will be terminated, as management believes that it will no longer be necessary due to sufficient cash then available to the Company. 6 Management has undertaken a plan of expansion and in order to effectuate the same, has recognized the Company's need for additional operating capital. In response thereto, in November 1997 the Company commenced a private offering of its common stock wherein it is offered up to 4,700,000 shares of the Company's common stock (post forward split) at a price of $.75 per share, for aggregate gross proceeds of up to $3,525,000. In April 1998, this offering closed with the Company receiving gross proceeds of $765,000 from the sale of 1,020,000 common shares. In management's view, the funds generated from this offering have not been sufficient to meet the Company's needs for additional working capital in order to allow the Company to fully implement its expanded business plan. Numerous scenarios are presently being explored by management, including discussions with investment banking firms who have expressed an interest in working with the Company to raise additional equity capital. However, as of the date of this report, no definitive arrangements have been made between the Company and any third party wherein such third party has agreed to raise additional capital for the Company and, while management is optimistic that it will be successful in this regard, there are no assurances that any additional funds will be raised. Failure of the Company to raise additional funds, either debt or equity, will have a significant negative impact on the Company's ability to generate profitable operations. Trends Management believes that the Company will continue to operate the Company's business at a loss for the foreseeable future, but is optimistic that the Company will begin generating profits from its operations beginning in the year 2000, and possibly earlier if sufficient working capital discussed in Liquidity and Capital Resources, above, is raised. This will occur as a result of increased circulation of Detour Magazine and new acquisitions of existing unaffiliated magazines, of which there can be no assurance. The new magazine acquisitions will allow the current management team to spread its cost over the new titles. The current back office structure can add two to six additional magazines without adding any additional personnel. However, there can be no assurances that the Company will become profitable within the time parameters described herein, or at all. Inflation Although the operations of the Company are influenced by general economic conditions, the Company does not believe that inflation had a material affect on the results of operations during the six month period ended June 30, 1998. 7 Year 2000 Disclosure Many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the Year 2000. As a result, many companies will be required to undertake major projects to address the Year 2000 issue. The Company presently owns approximately $80,000 worth of computers. It utilizes outside contractors for the bulk of its computer work. These consultants have advised the Company that they have made all necessary revisions to their software to avoid any potential problems arising in the year 2000. Relevant to the Company's computers, management is in the process of retaining outside computer consultants to assist the Company in insuring that its computers will not fail in 2000. However, as of the date of this report, the Company does not have available a definitive cost applicable to any service to be undertaken on its computer software to avoid any problems in this regard. While no assurances can be provided, management believes that such cost will not be material to the Company. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - NONE ITEM 2. CHANGES IN SECURITIES - NONE ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NONE ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION - None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - (a) Exhibits EX-27 Financial Data Schedule (b) Reports on Form 8-K None. 8 DETOUR MAGAZINE, INC. CONDENSED BALANCE SHEET (unaudited) (unaudited) (audited) For the Six For the Six For the Month Period Month Period Fiscal Year Ended Ended Ended June 30, June 30, December 31, 1998 1997 1997 ---------- ---------- ---------- ASSETS: CURRENT ASSETS Cash $ 382 $ 97,089 $ 11,089 Accounts receivable 543,990 292,542 399,580 Loan receivable-officers 0 0 0 Prepaid expenses and other current assets 280,072 21,395 61,079 ---------- ---------- ---------- Total Current Assets 824,444 411,026 471,748 ---------- ---------- ---------- PROPERTY AND EQUIPMENT, Net 131,385 139,296 132,591 ---------- ---------- ---------- OTHER ASSETS Other 100,000 0 0 Security Deposits 13,750 20,750 13,750 ---------- ---------- ---------- Total Other Assets 113,750 20,750 13,750 ---------- ---------- ---------- TOTAL ASSETS $1,069,579 $ 571,072 $ 618,089 ========== ========== ========== LIABILITIES AND EQUITY: CURRENT LIABILITIES Accounts payable and accrued expenses $1,212,066 $ 939,723 $ 929,394 Unexpired subscriptions 497,693 25,664 192,057 Note payable 325,336 176,700 372,000 Note payable stockholders 932,313 982,448 932,313 Interest payable stockholders 252,929 152,580 208,960 ---------- ---------- ---------- Total Current Liabilities 3,220,337 2,277,115 2,634,724 ---------- ---------- ---------- OTHER LIABILITIES Due to stockholder 1,414,442 0 609,976 Interest payable 84,871 0 34,871 ---------- ---------- ---------- Total Other Liabilities 1,499,313 0 644,847 ---------- ---------- ---------- Total Liabilities 4,719,650 2,277,115 3,279,571 ---------- ---------- ---------- 9 (unaudited) (unaudited) (audited) For the Six For the Six For the Month Period Month Period Fiscal Year Ended Ended Ended June 30, June 30, December 31, 1998 1997 1997 ---------- ---------- ---------- EQUITY Common stock 11,216 9,366 10,369 Additional paid-in capital 1,669,212 855,161 1,035,068 Accumulated deficit (5,330,499) (2,570,570) (3,706,919) ---------- ---------- ---------- TOTAL EQUITY (3,650,071) (1,706,043) (2,661,482) ---------- ---------- ---------- TOTAL LIABILITIES AND EQUITY $1,069,579 $ 571,072 $ 618,089 ========== ========== ========== 10 DETOUR MAGAZINE, INC. UNAUDITED CONDENSED STATEMENT OF OPERATIONS For the Six Months For the Three Months Ended June 30, Ended June 30, ------------------------- ------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- SALES $ 2,039,390 $ 2,019,568 $ 628,523 $ 1,009,784 COST OF SALES 1,566,455 1,062,318 768,217 577,251 ----------- ----------- ----------- ----------- GROSS PROFIT 472,935 957,250 (139,694) 432,533 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,971,196 1,241,835 869,525 574,825 ----------- ----------- ----------- ----------- OPERATING LOSS (1,498,261) (284,585) (1,009,219) (142,292) Interest expense (125,319) (73,333) (79,932) (36,667) ----------- ----------- ----------- ----------- NET LOSS $(1,623,580) $ (357,919) $(1,089,151) $ (178,959) =========== =========== =========== =========== LOSS PER SHARE OF COMMON STOCK $ (0.02) ======================================================= 11 DETOUR MAGAZINE, INC. UNAUDITED CONDENSED STATEMENT OF CASH FLOWS For the Six Months Ended June 30, ------------------------- 1998 1997 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) $(1,623,580) $ (357,919) ----------- ----------- Depreciation 17,820 19,123 Increase in accounts receivable (144,410) (118,463) Decrease (increase) in prepaid expenses and other current assets (107,657) 14,153 Increase in accounts payable and accrued expenses 282,672 438,972 Increase in deferred revenue 305,636 0 Increase in interest payable, stockholder 93,969 73,333 ----------- ----------- TOTAL ADJUSTMENTS (448,030) 427,118 ----------- ----------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (1,175,550) 69,199 ----------- ----------- CASH FLOWS USED IN INVESTING ACTIVITIES Purchase of fixed assets (16,614) (9,534) Loan to officer 0 52,241 Purchase of of assets (198,000) 0 ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (214,614) 42,707 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in note payable (60,000) (13,300) Proceeds from stockholder 804,466 21,545 Proceeds from issuance of stock 634,991 0 ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 1,379,457 8,245 ----------- ----------- NET INCREASE IN CASH (10,707) 120,151 CASH - beginning 11,089 (23,062) ----------- ----------- CASH - ending $ 382 $ 97,089 =========== =========== 12 DETOUR MAGAZINE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Six Month Period Ended June 30, 1998 1. Unaudited Interim Financial Statements The accompanying unaudited financial statements have been prepared in accordance with the instructions for Form 10-QSB and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments considered necessary for a fair presentation, have been included. Operating results for any quarter are not necessarily indicative of the results for any other quarter or for the full year. 2. Basis of Presentation Business combination On June 6, 1997, pursuant to the terms of an Agreement and Plan of Reorganization, Ichi-Bon Investment Corporation ("IBI") acquired all of the outstanding common stock of Detour, Inc. ("Old Detour") in exchange for 4,500,000 unregistered shares of IBI's common stock. As a result of the transaction, the former shareholders of Old Detour received shares representing an aggregate of 90% of IBI's outstanding common stock, resulting in a change in control of IBI. As a result of the merger, IBI was the surviving entity and Old Detour ceased to exist. Simultaneously therewith, IBI amended its articles of incorporation to reflect a change in IBI's name to "Detour Magazine, Inc." References to the "Company" or "Detour" refer to Detour Magazine, Inc. together with the predecessor company, Old Detour. The acquisition of Old Detour has been accounted for as a reverse acquisition. Under the accounting rules for a reverse acquisition, Old Detour is considered the acquiring entity. As a result, historical financial information for periods prior to the date of the transaction are those of Old Detour. Under purchase method accounting, balances and results of operations of Old Detour will be included in the accompanying financial statements from the date of the transaction, June 6, 1997. The Company recorded the assets and liabilities (excluding intangibles) at their historical cost basis which was deemed to be approximate fair market value. The reverse acquisition is treated as a non-cash transaction except to the extent of cash acquired, since all consideration given was in the form of stock. Earnings per share Earnings per share have been computed based on the weighted average number of common shares outstanding. For the nine month period prior to the reverse acquisition discussed in the business combination section of Note 2 above, the number of common shares outstanding used in computing earnings per share is the number of common shares outstanding as a result of such reverse acquisition (5,000,000 shares). 13 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. 14 SIGNATURES Pursuant to the requirements of Section 12 of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DETOUR MAGAZINE, INC. (Registrant) Dated: August 19, 1998 By: s/Barry Ross -------------------------------- Barry Ross, Secretary 15 DETOUR MAGAZINE, INC. Exhibit Index to Quarterly Report on Form 10-QSB For the Quarter Ended June 30, 1998 EXHIBITS Page No. EX-27 Financial Data Schedule . . . . . . . . . . . . . 17 16