SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB /A1
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
[ ] Transitional Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
Commission File No. 0-25388
DETOUR MAGAZINE, INC.
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(Name of small business issuer in its charter)
Colorado 84-1156459
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number
7060 Hollywood Blvd., Suite 1150
Los Angeles, California 90038
(213) 469-9444
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(Address, including zip code and telephone number, including area
code, of registrant's executive offices)
Securities registered under Section 12(b) of the Exchange Act:
none
Securities registered under to Section 12(g) of the
Exchange Act:
Common Stock
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(Title of class)
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 preceding 12
months (or for such shorter period that the Company was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
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Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. x
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(Continued on Following Page)
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Issuer's revenues for its most recent fiscal year: $4,177,833
State the aggregate market value of the voting stock held by non-affiliates,
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: As of April 14, 1999: $3,068,206. .
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of April 14, 1999 there were
15,586,669 shares of the Company's common stock issued and outstanding.
Documents Incorporated by Reference: None
This Form 10-KSB consists of Forty-Three Pages.
Exhibit Index is located at Page Forty-Two.
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TABLE OF CONTENTS
FORM 10-KSB ANNUAL REPORT
DETOUR MAGAZINE, INC.
PAGE
Facing Page
Index
PART I
Item 1. Description of Business..................... 4
Item 2. Description of Property..................... 9
Item 3. Legal Proceedings........................... 10
Item 4. Submission of Matters to a Vote of
Security Holders........................ 10
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters......... 11
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 11
Item 7 Financial Statements........................ 16
Item 8. Changes in and Disagreements on Accounting
and Financial Disclosure................ 35
PART III
Item 9. Directors, Executive Officers, Promoters
and Control Persons, Compliance with
Section 16(a) of the Exchange Act....... 35
Item 10. Executive Compensation...................... 37
Item 11. Security Ownership of Certain Beneficial
Owners and Management................... 38
Item 12. Certain Relationships and Related
Transactions............................ 39
PART IV
Item 13. Exhibits and Reports on Form 8-K........... 40
SIGNATURES............................................. 41
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
History
Detour Magazine, Inc. (f/k/a Ichi-Bon Investment Corporation) (the
"Company" or "Registrant") was incorporated under the laws of the State of
Colorado on May 18, 1990, for the purpose of investments in business and real
estate projects. Other than issuing shares to its original shareholders, the
Company never commenced activities relating to its original business purpose. In
August 1994, the Board of Directors of the Company elected to change the
Company's principal business purpose to a "shell" corporation engaged in seeking
out and acquiring another business entity or opportunity. Applicable thereto,
the Company filed a registration statement on Form 10-SB with the Securities and
Exchange Commission on or about January 1995, which registration statement
became effective in March 1995. The purpose of the registration statement was
management's belief that the primary attraction of the Company as a merger
partner or acquisition vehicle will be its status as a public company.
Relevant thereto, on or about June 6, 1997, the Company successfully
consummated a merger with Detour, Inc. ("Old Detour"), a California corporation.
The terms of the transaction involved the Company issuing an aggregate of
4,500,000 shares of its "restricted" common stock to the former shareholders of
Old Detour in exchange for all of the issued and outstanding stock of Old
Detour. Old Detour did not survive the transaction. The Company also changed its
name to its present name. At the closing of the aforesaid transaction,
management did elect to change the Company's fiscal year from October 31 to
December 31, in order to establish continuity between Old Detour and the
Company's financial reporting requirements.
From November 1997 through May 1998, the Company undertook a private
offering of its common stock, wherein it sold 1,186,669 shares of common stock
at a price of $.75 per share (post forward split), and received net proceeds of
$875,694 therefrom. The Company is attempting to raise additional equity or debt
capital as of the date of this report. See "Part II, Item 6, Management's
Discussion - Liquidity and Capital Resources."
During the fiscal year ended December 31, 1998, the Company continued to
experience a change in management. Messrs. John Evans, Jim Turner and Luis
Barajas all resigned their respective positions of President, editor-in chief
and publisher, respectively. Current management does believe, however, that the
Company's current management is sufficient to allow the Company to grow in the
future. See "Part III, Item 9, Directors, Executive Officers."
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Business
Detour Magazine, Inc. is a public reporting company, with offices in
Los Angeles, California and New York City. Its principal business is the
publication of Detour Magazine (the "Magazine"), which was founded in 1987. The
Magazine focuses on fashion, entertainment, and related personalities and is
oriented toward an affluent readership ranging in age from 20 to 35. Management
believes that the Magazine has gained industrywide recognition and critical
acclaim as a high quality, cutting-edge fashion and entertainment magazine with
an unusually strong editorial content.
As part of an acquisition campaign which commenced during the fiscal
year ended December 31, 1998, effective February 24, 1998, the Company acquired
assets, properties, rights and the business of Milton Magazine, a magazine which
has been published by the family of Milton Berle, for a purchase price of
$295,842. At closing, the Company paid $68,000 in cash, assumed an obligation
and issued a note payable to World Color, Inc., a creditor of the seller, in the
amount of $107,164 and assumed certain other liabilities totalling $120,678. As
of the date of this report, the Company is not current in its obligations owed
to the seller, in that the applicable agreement provided for an affirmative
covenant for the Company to commence publication of Milton Magazine and in the
event that the Company ceases to publish the acquired magazine, upon receipt of
a demand by the seller the acquired trademarks revert back to the seller. The
magazine has not been published because management believed that a number of new
men's magazines commenced operations and diluted the prospective market. The
Company and the seller are in the process of reformulating the magazine as of
the date of this report due primarily to the significant dilution of the market.
As a result, management now is contemplating commencing publication of Milton
Magazine in the year 2000, provided that the seller does not elect to retake the
trademarks, of which there can be no assurance. The seller and the Company are
working closely in attempting to commence publication of this magazine.
Milton Magazine is primarily an "irreverent" social magazine launched
in May 1997, whose motto has been "We smoke, we drink, we gamble." Prior to
acquisition, there were two issues of Milton Magazine published and released.
Total circulation was approximately 15,000 copies. Its limited revenues were
generated primarily from advertising, which is consistent with the revenues
generated by Detour Magazine. Once it commences publication, management intends
to expand the editorial content of Milton to include additional social themes
which appeal to the target market of men, ages 25 through 49, including fashion,
gaming and automobiles, as well as those subjects previously included in the
magazine.
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Detour Online
As a result of the significant increase in use of the internet during
the past year, as well as the anticipated increase in internet usage in the
foreseeable future, management plans to implement an internet strategy in the
1999 fiscal year, subject to the Company's ability to raise additional capital.
The Company intends to attempt to capitalize on what management views as the
Company's market niche and create an online community destination with portal
functions. As a vertical niche portal, the Company intends to provide an easy
use comprehensive destination web site that caters to its niche demographic
market. Detour online will be the first step taken by the Company to achieve the
goal of establishing a brand synonymous with the "hip" and trendsetting
population. The revenue model for the web site will be a combination of
advertising, e-commerce and direct marketing. Management believes that its
existing current relationship with the Magazine's advertisers provides the
Company with an advantage over other start-up web companies.
In order to successfully implement this strategy and accomplish its
goal, management believes that it will be necessary for the Company to raise up
to $2.1 million in additional capital. These funds are expected to be utilized
for the web site development, marketing and operating costs and for additional
personnel.
THE MAGAZINE
Detour is an internationally distributed magazine which focuses on
fashion and entertainment. Detour is mostly known for its strong editorial focus
and its presentation of cutting-edge trends in fashion and entertainment. It is
published ten times a year, with two double issues per year.
The Magazine has been approximately 164 pages in length, comprised of
approximately 60 to 70 pages of advertising. The balance of the Magazine focuses
on pictorials, interviews and editorials. The proportion has been weighted in
favor of editorial content, which management believes has been responsible in
great part for the critical acclaim that the Magazine has received.
During the fiscal year ended December 31, 1998, the cover page of the
Magazine had various media personalities including Drew Barrymore, Nev Campell,
Milla Joyovich, Vince Vaughn, Anne Hecht, Salma Hayek, Renee Zellwiger,
Elizabeth Hurley, Keri Russell and Kate Hudson. Detour often features a media
personality well before they reach the level of conventional acceptance which
typifies its competition. This in part accounts for Detour's image as a
"cutting-edge" Magazine featuring tomorrow's personalities and today's trends.
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Editorial articles follow the same focus, often providing insight into
and publicity for personalities of film, television, theater, music, books, and
art, who have not yet received deserved recognition by other magazines and
media. The Magazine prides itself on some of the most talked about and respected
photo journalism and editorials in the industry.
Management expects that the Magazine will continue to be published 10
times a year during fiscal year 1999 and the content of its highly acclaimed
format will not change drastically beyond editorial changes necessary to broaden
the Magazine's appeal within the target readership.
In December 1998, Barbara Zawlocki was named Publisher of Detour. Based
upon her prior service record and sales expertise, management expects
advertising sales to increase. See "Part III, Item 9, Directors, Executive
Officers, Promoters and Control Persons - Key Employees."
Advertising
Management believes that Detour has established a strong national
advertising base. During the fiscal year ended December 31, 1998, these
advertising customers have included and presently include advertisers such as
Absolute Vodka, Bottega Veneta, Bombay Sapphire, Calvin Klein, Kamel, Camel,
Cartier, Diesel Jeans, Donna Karan, Gucci, Prada, Polo, Dolce & Gabbana, Emporio
Armani, GAP, Guess Jeans, Levi's, Louis-Boston, L'Oreal, Mossimo, Marlboro,
Polygram Films, Sky Vodka, Sony Music, Stussy, MGM/United Artists, Universal,
Varda Versace, Winston and dozens of other major advertisers.
The Magazine has had well over 85 advertisers. Advertising revenues
accounted for approximately 80% of the total revenue of the Magazine. In the
fiscal year ended December 31, 1998, Detour's largest advertiser accounted for
approximately 7% of the Magazine's total advertising revenues and the top six
accounts represented approximately 28% of total advertising revenues. Detour has
been successful in obtaining major new advertisers and in increasing the number
of ad pages from key clients.
Circulation
The Magazine has been distributed by Rider Circulation Services, Inc.
("RCS"). Under its contract with RCS, Detour also uses the international
distributing services of the Curtis Circulation Company ("Curtis"). Curtis is a
leading international distributor, allowing for large scale distribution of
Detour.
In January 1998, the new management team added a prominent newsstand
consultant to expand the Magazine's newsstand sales. The consultant coordinates
a marketing plan between the publisher and
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the national distributor. It is hoped and expected that this will bring new
retail display opportunities to Detour, but there can be no assurances that this
will occur. While no assurances can be provided, continued investment in point
of sales programs in airports, bus and train terminals and metro newsstands
should not only increase newsstand sales, but should give the advertisers more
visibility.
In addition, the national distributor will perform major distribution
assignments in attempts to increase circulation and sales efficiency of the
Magazine. The assignments should result in matching its major competitors in the
number of copies and locations of Detour as well as put more copies of Detour in
higher potential retailers.
During the fiscal year ended December 31, 1998, management continued
its attempts to make subscriptions profitable. It eliminated agency
subscriptions, no bill me options and increased the annual subscription price to
$18.99.
Readership Profile
The Magazine's reputation as a cutting-edge fashion and entertainment
magazine has translated into a readership profile comprised of the most
attractive audience for advertisers. Detour's readers average 29 years of age,
with average incomes of $75,000+ per year, most are professional, over 60% are
single, and 74% percent have obtained college or postgraduate degrees. The
average reader of Detour spends over $15,000 per year on clothing and dines out
2.6 times per week.
Editorial
Editorial changes will not involve a major digression from the
Magazine's current content. Management believes and in-house studies have
indicated that the Magazine has found a strong following among a young,
affluent, professional audience. Instead, management intends to broaden the
Magazine's appeal within this target group. This will be accomplished through
several carefully designed format and content changes, including the following:
o The Magazine will contain more pictorials, be a faster read.
The aim is to attract a wider audience in terms of fashion,
entertainment, and widening the focus of the Magazine by
putting in features and stories that will have a broader
appeal to the target group.
o The front of the Magazine will be redesigned to improve the
readability of the Magazine. Information will be made more
easily accessible. In addition, advertising franchise
positions will be created for the advertisers. This will aid
in the advertising sales effort by
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providing advertisers with value added to their normal
advertising.
Employees
The Company presently has sixteen (16) full time employees, including
its President, Edward T. Stein, its Corporate Secretary, Barry Ross, its Vice
President, Lorraine Rasmussen, its Editor-in- Chief, Steven Garbarino, and its
Publisher, Barbara Zawlocki. See "Part III, Item 9," below. The Company employs
two accounting persons, two administrative personnel, three persons in the
advertising department and nine in the editorial department. The number of
employees decreased from 24 employees in fiscal 1997 as a result of cost cutting
measures undertaken by management. Further, the Company employs additional
persons on an "as needed" basis, depending upon the number of projects in which
the Company is involved. Many of these persons are retained on a contractor
basis. Management believes that its relationship with its employees is
satisfactory. No employee is a member of any union.
Competition
The Company competes with publicly and privately held companies in the
publishing business. Specifically, management view Vanity Fair (circulation 1
million), Details (circulation 485,000) and Interview (circulation 150,000) as
the principal competitors to the Company's Magazine, each of whom are believed
to have greater resources, both financial and otherwise, than the resources
presently available to the Company.
Trademarks
The Company has 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 Regulations
The Company is not subject to any extraordinary governmental
regulations relating to its business.
ITEM 2. DESCRIPTION OF PROPERTY
Facilities. The Company's 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 it pays
rent of $6,270 per month, which space is subject to a three year lease which
commenced December 1, 1998. This lease contains cost of living increases. In
addition, the Company presently leases approximately 2,200 square feet of
executive office space at 34 West 22nd. St., 3rd
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Floor, New York, New York, at a rental fee of $2,993 per month through January
31, 2001 and escalating to $3,140 per month from February 1, 2000 through
January 31, 2001, the termination date of the lease. It is anticipated that the
Company's present premises will be adequate to meet the Company's needs for the
foreseeable future.
The Company's telephone number is (213) 469-9444 and facsimile number
is (213) 469-5941.
Other Property. The Company has no properties and at this time has no other
agreements to acquire any properties.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to certain legal proceedings which have arisen in
the normal course of operating the Company's business. However, there are no
material legal proceedings to which the Company (or any of its officers and
directors in their capacities as such) is a party or to which the property of
the Company is subject and no such material proceedings is known by management
of the Company to be contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were presented to the Company's shareholders during the last
three months of the fiscal year ended December 31, 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
(a) Market Information. The Company's common stock was approved for
trading on the OTC Bulletin Board operated by the National Association of
Securities Dealers on December 9, 1997. Prior to that date none of the Company's
securities were traded. The initial price of the Company's common stock was
$1.00 bid, $1.50 asked. Below are the reported high and low bid prices for the
Company's common stock since trading commenced. The bid prices shown reflect
quotations between dealers, without adjustment for markups, markdowns or
commissions, and may not represent actual transactions in the Company's
securities.
Bid Price
Date High Low
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December 31, 1997 $1.00 $1.50
March 31, 1998 $5.13 $2.50
June 30, 1998 $3.69 $1.13
September 30, 1998 $1.25 $0.31
December 31, 1998 $0.63 $0.19
The Company's market makers for its securities are Paragon Securities,
Knight Securities and Hill Thompson Securities. As of April 15, 1999, the
Company's common stock was trading at $0.35 bid, $0.38 asked.
(b) Holders. There are seventy-three (73) holders of the Company's
Common Stock, not including those holders who hold their shares in "street
name."
(c) Dividends. In December 1997 the Company's Board of Directors
authorized a forward split of the Company's issued and outstanding common stock,
whereby one additional share was issued in exchange for every share of common
stock then issued and outstanding. The Company has not paid any other dividends
on its Common Stock. The Company does not foresee that the Company will have the
ability to pay a dividend on its Common Stock in the fiscal year ended December
31, 1999.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Company's audited 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
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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 (pre forward split). 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, avant-garde" publication. It derives approximately 80% of
its revenues from advertising, with the balance from circulation. The Company
maintains 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 164 pages in length, comprised of
about 60 to 70 pages of advertising, with the balance in editorial pages.
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 fiscal years ended
December 31, 1998 and 1997.
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RESULTS OF OPERATIONS
Comparison of Results of Operations for the fiscal years ended December
31, 1998 and 1997.
In the fiscal year ended December 31, 1997, the Company's revenues were
$3,938,828, compared to revenues of $4,177,833, an increase of $239,005 (6.1%).
Management believes that this increase was attributable to increased
subscriptions and miscellaneous revenues. Costs of sales were $2,834,621 in
1998, compared to $2,063,615 for the similar period in 1997, an increase of
$771,006 (37.4%). 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. Management anticipated these costs in the
Company's budget, as the Company was engaged in a program to increase
circulation and visibility of the Magazine in order to attempt to increase
future revenues and profits. It was then current management's belief that the
increased costs associated with various promotions would result in greater
circulation, visibility and market share in the future, provided that the
Company was able to obtain additional financing in the future. However, during
the fiscal year ended December 31, 1998, this campaign was abandoned by
management as a result of the Company's inability to generate additional equity
capital, as well as a perceived belief by current management that the campaign
was not working. Management has decided that its attempt to increase circulation
of the Magazine by printing additional copies will not continue in the future.
Rather, as a result of management's attempt to stem losses, the Magazine's print
orders and book size are expected to decrease in the immediate future, by
reducing the amount of editorial content while attempting to maintain the
increased revenues derived by the Company from its current advertising.
Selling, general and administrative expenses were $3,187,932 for the
fiscal year ended December 31, 1997, compared to $4,229,529 for the similar
period in 1998, an increase of $1,041,597 (32.7%). This increase was
attributable to numerous factors, including the retention of a new President,
John Evans, who assumed his duties on August 1, 1997 and subsequently resigned
his positions as President and a director in December 1998, the execution of a
consulting agreement and fees payable thereon, also which took place on August
1, 1997, increased newsstand and subscription promotional costs and increase
commissions payable due to the increase advertising revenues. The Company's
sales advertising staff is paid on a commission basis. The Company also incurred
interest expense of $335,498 during the fiscal year ended December 31, 1998,
compared to interest expense of $181,549 during the fiscal year ended December
31, 1997, as a result of increased debt taken on by the
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Company during the 1998 fiscal year during the Company's unsuccessful attempt to
increase circulation of the Magazine.
As a result, the Company generated a net loss of $(3,240,204) for the
fiscal year ended December 31, 1998 ($.21 per share), compared to a net loss of
$(1,494,268) ($.15 per share) for the fiscal year ended December 31, 1997, an
increase of $(1,745,936) (116.8%).
LIQUIDITY AND CAPITAL RESOURCES
At the fiscal year ended December 31, 1998, the Company had $139,459 in
cash. Accounts receivable decreased to $81,796 from $399,580 for the similar
period in 1997, a decrease of $317,784 (79.5%), which management attributes to
the elimination of subscription promotional programs, higher advertiser
collections and lower amounts due from the newsstand national distributor due to
renegotiated terms of the applicable contract.
In August 1998, the Company obtained a new loan in the principal amount
of $550,000 from IBF Special Purpose Corporation II, Washington, D.C.. to be
used for general working capital. This loan bears interest at the rate of 18%
per annum and was due December 19, 1998, including a one time extension fee paid
to this lender of $5,500. In December 1998, the Company repaid $27,500 of the
principal balance. As of the date of this report, this loan is in default but
the Company is in communication with this lender and they are working 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 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 arrangements will be made to insure
that the Company does not enter into a default of this obligation.
The Company has two other outstanding notes payable to non-affiliates,
including one note with an outstanding balance of $100,500, which accrues
interest at the prime rate, plus 2% per annum and is due on demand and which is
currently in default. This obligation is part of the liabilities assumed by the
Company in the Milton Magazine acquisition. See "Part I, Item 1, Description of
Business." As of the date of this report, management is in discussions with the
note holder to resolve this obligation, but no definitive arrangement has been
reached and there can be no assurances that an agreement will be reached in the
future. The second note in the amount of $139,951 is due July 15, 1999 and
accrues interest at the rate of 12% per annum.
In 1995, the majority stockholder of the Company 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
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assets of the Company. The note holder agreed to subordinate this security
position relevant to the Company's accounts receivable. In 1996, this
stockholder subsequently assigned this Note to JCM Capital Corp., a minority
stockholder. This note is secured by substantially all of the assets of the
Company, but is subordinated to the Company's factoring arrangement. See below
for a description of this factoring agreement. As of December 31, 1998, the
outstanding balance owed on this obligation totalled $932,313.
The Company also owes Edward T. Stein, principal shareholder and an
officer and director of the Company, the principal amount of $1,987,823, which
accrues interest at the rate of 12% per annum and is due upon demand. It is not
anticipated that Mr. Stein will tender demand for repayment of this obligation
in the foreseeable future.
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 $2.5 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 the capacity of
credit manager for the Magazine by performing credit checks, mailing invoices,
making collection calls and posting receivables.
Management recognizes that, in order to allow the Company to commence
profitable operations, it will be necessary for the Company to raise additional
equity capital of between $2-3 million. In this regard, management has had
numerous discussions with potential investors, but as of the date of this
report, no definitive arrangement has been reached with any party who has agreed
to inject such capital into the business. Failure to obtain additional equity
capital into the Company will force management to reduce editorial expense,
which may affect the quality of the Magazine. Alternatively, management may also
reduce the number of copies printed, which will result in a reduction in
newsstand and advertising revenue. If these methods are not successful, it is
doubtful that the Company will be able to survive and the Company will be forced
to liquidate.
TRENDS
Management believes that the Company will continue to operate the Company's
business at a loss for the next year or two, but is cautiously optimistic that
the Company will begin generating profits from its operations beginning in the
2000 fiscal year, provided that additional capital is invested in the Company.
This
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will occur as a result of cost cutting measures which have been adopted by
management and anticipation of increased circulation of and advertising in the
Company's magazine and corresponding revenues therefrom. Management has reduced
its staff and moved to smaller offices. In addition, all operating expenses are
being reduced. Relevant thereto, a new printing contract with R.R. Donnelly &
Sons, Inc. was signed in November 1998, further reducing costs of sales.
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 nine month period ended September
30, 1998.
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.
ITEM 7. FINANCIAL STATEMENTS
16
<PAGE>
DETOUR MAGAZINE, INC.
FINANCIAL STATEMENTS
For the Years Ended December 31, 1998 and 1997
17
<PAGE>
DETOUR MAGAZINE, INC.
CONTENTS
Page
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
Balance Sheet 2-3
Statements of Operations 4
Statements of Changes in Accumulated Deficit 5
Statements of Cash Flows 6-7
NOTES TO FINANCIAL STATEMENTS 8-16
18
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To the Board of Directors of
Detour Magazine, Inc.
We have audited the accompanying balance sheet of Detour Magazine, Inc. as of
December 31, 1998, and the related statements of operations, accumulated deficit
and cash flows for the years ended December 31, 1998 and 1997. 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 generally accepted auditing
standards. 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 Magazine, Inc. as of
December 31, 1998 and the results of its operations and its cash flows for the
years ended December 31, 1998 and 1997 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As shown in Note 11 to the financial
statements, the Company incurred a net loss of $3,240,204 for the year ended
December 31, 1998 and, as of that date, had a working capital deficiency of
$5,634,296 and a stockholders' deficiency of $5,266,695. Those conditions
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Woodbury, New York
March 19, 1999, except for Note 12, which is dated April 14, 1999
-1-
19
<PAGE>
<TABLE>
DETOUR MAGAZINE, INC
BALANCE SHEET
December 31, 1998
<CAPTION>
ASSETS
------
<S> <C>
CURRENT ASSETS
Cash $139,459
Accounts receivable, less allowance for
doubtful accounts of $58,500 81,796
Prepaid expenses and other current
assets 147,384
--------
Total Current Assets $368,639
--------
PROPERTY AND EQUIPMENT, net 90,801
--------
OTHER ASSETS
Intangible assets 261,290
Security deposits 15,510
--------
Total Other Assets 276,800
--------
TOTAL ASSETS $736,240
========
The accompanying notes are an integral part of these financial
statements.
-2-
20
<PAGE>
DETOUR MAGAZINE, INC.
BALANCE SHEET
December 31, 1998
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
<S> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $1,684,567
Unexpired subscriptions 138,831
Notes payable 762,951
Due to stockholder 1,987,823
Note payable, stockholder 932,313
Interest payable 496,450
----------
Total Current Liabilities 6,002,935
----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Preferred stock, $.01 par value,
10,000,000 shares authorized, none
issued and outstanding -0-
Common stock, $.001 par value, 25,000,000
shares authorized, 15,586,669 shares
issued and outstanding 15,587
Additional paid-in capital 1,664,841
Accumulated deficit (6,947,123)
----------
TOTAL STOCKHOLDERS' DEFICIENCY (5,266,695)
----------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIENCY $ 736,240
==========
The accompanying notes are an integral part of these financial
statements.
</TABLE>
-3-
21
<PAGE>
<TABLE>
DETOUR MAGAZINE, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1998 and 1997
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
SALES $ 4,177,833 $ 3,938,828
COSTS OF SALES 2,834,621 2,063,615
----------- -----------
GROSS PROFIT 1,343,212 1,875,213
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 4,229,529 3,187,932
----------- -----------
OPERATING LOSS (2,886,317) (1,312,719)
----------- -----------
OTHER EXPENSES
Interest expense (335,498) (181,549)
Loss on disposal of assets (18,389) 0
----------- -----------
TOTAL OTHER EXPENSES (353,887) (181,549)
----------- -----------
NET LOSS $(3,240,204) $(1,494,268)
=========== ===========
LOSS PER SHARE OF COMMON STOCK
Basic and Diluted $(0.21) $(0.15)
=========== ===========
WEIGHTED AVERAGE COMMON STOCK
OUTSTANDING 15,133,057 10,015,389
=========== ===========
The accompanying notes are an integral part of these financial
statements.
</TABLE>
-4-
22
<PAGE>
<TABLE>
DETOUR MAGAZINE, INC.
STATEMENTS OF CHANGES OF ACCUMULATED DEFICIT
For the Years Ended December 31, 1998 and 1997
<CAPTION>
Additional
Common Stock Paid-in Accumulated
Share Amount Capital Deficit Total
---------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1997 9,330,760 $ 9,331 $ 777,696 $(2,212,651) $(1,425,624)
Recapitalization resulting
from merger (4,330,760) (4,331) 47 - (4,284)
Stock split 5,000,000 5,000 (5,000) - 0
Issuance of common stock 369,336 369 262,325 - 262,694
Net Loss - - - (1,494,268) (1,494,268)
---------- ------- ---------- ----------- -----------
Balance - December 31, 1997 10,369,336 10,369 1,035,068 (3,706,919) (2,661,482)
Issuance of common stock 817,333 818 612,182 613,000
Options exercised 4,400,000 4,400 17,591 21,991
Net Loss - - - (3,240,204) (3,240,204)
---------- ------- ---------- ----------- -----------
Balance - December 31, 1998 15,586,669 $15,587 $1,664,841 $(6,947,123) $(5,266,695)
========== ======= ========== =========== ===========
The accompanying notes are an integral part of these financial
statements.
</TABLE>
-5-
23
<PAGE>
<TABLE>
DETOUR MAGAZINE, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998 and 1997
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,240,204) $(1,494,268)
Adjustments to reconcile net loss to
Net cash used in operating activities:
Depreciation and amortization 92,536 35,640
Loss on disposal of property and equipment 18,389 0
Changes in allowance for doubtful
accounts (48,730) 77,230
(Decrease) increase in accounts
receivable 366,514 (302,731)
Increase in prepaid expenses
and other current assets (86,305) (24,301)
(Increase) decrease in security deposits (1,760) 5,770
Increase in accounts payable and
accrued expenses 774,446 484,359
(Decrease) increase in unexpired
subscriptions (53,226) 166,393
Increase in interest payable 252,619 164,584
----------- -----------
TOTAL ADJUSTMENTS 1,314,483 606,944
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,925,721) (887,324)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (25,708) (19,346)
Purchases of intangible assets (85,706) 0
Collection from officer, net 0 52,241
----------- -----------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES (111,414) 32,895
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 550,000 122,000
Principal repayments of note payable,
stockholder (406,164) 0
Advances from stockholder, net 1,386,678 503,886
Net proceeds from issuance of common
stock 634,991 262,694
----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES $ 2,165,505 $ 888,580
----------- -----------
The accompanying notes are an integral part of these financial
statements.
-6-
24
<PAGE>
DETOUR MAGAZINE, INC.
STATEMENTS OF CASH FLOWS, Continued
For the Years Ended December 31, 1998 and 1997
1998 1997
<CAPTION>
----------- -----------
<S> <C> <C>
NET INCREASE IN CASH $ 128,370 $ 34,151
CASH (OVERDRAFT) - Beginning 11,089 (23,062)
----------- -----------
CASH - Ending $ 139,459 $ 11,089
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the years for:
Interest $ 82,879 $ 16,965
Taxes $ 800 $ 1,100
Non cash investing and financing activities:
During 1998, the Company purchased certain intangible assets by assuming
debt in the amount of $227,842.
During 1998, the Company disposed of certain assets in which the book value
of the assets were credited against due to stockholder in the amount of
$8,831.
During 1998, the Company converted accounts payable in the amount of
$139,951 to a promissory note.
During 1997, the Company converted accounts payable in the amount of
$105,000 to a promissory note.
The accompanying notes are an integral part of these financial
statements.
</TABLE>
-7-
25
<PAGE>
DETOUR MAGAZINE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies
Nature of Business
Detour Magazine, Inc., formerly known as Ichi-Bon Investment Corporation
(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
Company maintains office locations in Los Angeles and New York City.
Business Combination
On June 6, 1997, pursuant to 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. This transaction was accounted for as a
reverse acquisition whereby Detour, Inc. was the acquirer for accounting
purposes. The historical financial statements prior to June 6, 1997 are
those of Detour, Inc. As part of the terms of this transaction, the Company
amended its Articles of Incorporation, changing its name to Detour
Magazine, Inc.
Property and Equipment
Property and equipment is stated at cost. Maintenance and repairs are
charged to expense as incurred; costs of major additions and betterments
are capitalized. When property and equipment is sold or otherwise disposed
of, the cost and related accumulated depreciation are eliminated from the
accounts and any resulting gain or loss is reflected in income.
Depreciation and Amortization
Depreciation is provided for on the straight-line and accelerated methods
over the estimated useful lives of the related assets. The cost of the
leasehold improvements is amortized over the lesser of the estimated useful
lives of the assets or the length of the related leases.
-8-
26
<PAGE>
DETOUR MAGAZINE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies, continued
Comprehensive Income
during the year ended December 31, 1998, the Company adopted FASB Statement
no. 130 ("SFAS") "Reporting Comprehensive Income." SFAS 130 requires the
reporting of comprehensive income in addition to net income from
operations. Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of certain financial information that
historically has not been recognized in the calculation of net income. The
adoption of SFAS 130 and related required disclosures were not considered
material to the financial statements and no separate disclosures have been
presented.
Advertising Costs
Advertising costs are expensed as incurred.
Revenue Recognition
Advertising revenue is recognized upon the issuance of the magazine.
Subscription revenue is recognized on a monthly basis over the life of the
individual subscriptions. Unexpired subscriptions represent unearned
subscription revenue.
Cash
The Company has cash balances in banks in excess of the maximum amount
insured by the FDIC as of December 31, 1998.
Income Taxes
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax basis of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the payable or refundable
for the period plus or minus the change during the period in deferred tax
assets and liabilities.
-9-
27
<PAGE>
DETOUR MAGAZINE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies, continued
Net Earnings per Share
During the year ended December 31, 1997, the Company adopted the provision
of statements of accounting standards No. 128 Earnings per Share ("SFAS No.
128"). SFAS No. 128 eliminates the presentation of primary and fully
diluted earnings per share ("EPS") and requires presentation of basic and
diluted EPS. Basic EPS is computed by dividing income (loss) available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS is based on the weighted-average
number of shares of common stock and common stock equivalents outstanding
at year end. Common stock equivalents have been excluded from the
weighted-average shares for 1998 and 1997, as inclusion is anti-dilutive.
Stock-Based Compensation
In October 1995, Financial Accounting Standards Board issued Statements of
Financial Accounting Standards. No. 123 "Accounting for Stock Based
Compensation" ("SFAS No. 123"). SFAS No. 123 requires compensation expense
to be recorded (i) using the new fair value method or (ii) using existing
accounting rules prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations with pro forma disclosure of what net income and earnings
per share would have been had the Company adopted the new fair value
method. The Company intends to continue to account for its employee stock
options in accordance with the provision of APB 25. Had the Company elected
to recognize compensation costs based on the fair value of the options at
the date of grant as prescribed by SFAS No. 123, there would be no material
effect from that recognized under APB 25 for the year ended December 31,
1998.
Reclassifications
Certain accounts in the prior year financial statements have been
reclassified for comparative purposes to conform with the presentation in
the current year financial statements. These reclassifications have no
effect on previously reported income.
-10-
28
<PAGE>
DETOUR MAGAZINE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies, continued
Use of Estimates in the Financial Statements The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company's financial instruments include cash, accounts receivable and
accounts payable and amounts due to stockholders. Due to the short-term
nature of these instruments, the fair value of these instruments
approximate their recorded value.
NOTE 2 - Accounts Receivable
In October 1997, the Company amended its factoring agreement for the
majority of the Company's accounts receivable with a finance company. The
receivables are purchased at a discount between 2.5% and 9% on a
preapproved basis. The majority of the factoring provided by the finance
company is on a non-recourse basis. The Company's obligation to the finance
company is secured by substantially all of the Company's assets. At
December 31, 1998, there was no amounts due from the finance company.
NOTE 3- Property and Equipment
Property and equipment at December 31, 1998 consists of the following:
Estimated
Amount Useful Lives
-------- ------------
Office equipment $148,008 5-7 years
Furniture and fixtures 63,666 5-7 years
Automobiles 9,500 5 years
--------
221,174
--------
Less: Accumulated
Depreciation
and amortization 130,373
--------
Property and
Equipment, net $ 90,801
========
Depreciation and amortization expense for the years then ended December 31,
1998 and 1997 $40,278 and $35,640, respectively.
-11-
29
<PAGE>
DETOUR MAGAZINE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - Intangible Assets
In February 1998, the Company entered into an agreement to purchase certain
intangible assets and assumed certain liabilities from Berle-Moll
Enterprises, Inc. ("Berle") for a purchase price of $295,842. The Company
paid $68,000 in cash, issued a note payable on behalf of Berle in the
amount of $107,164 and assumed certain liabilities in the amount of
$120,678. At December 31, 1998, the Company was in default of the note
payable (see Note 5). The acquisition was accounted for using the purchase
method and the purchase price was allocated to assets acquired and
liabilities assumed based on the fair value of the net assets on the date
of the acquisition. The acquisition carries a contingent clause whereby in
the event that the Company ceases to publish the acquired magazine,
promptly upon demand by Berle, the Company shall take all action necessary
to transfer the acquired magazine trademarks to Berle. The acquired
intangible assets are being amortized on a straight-line method over five
years. Amortization expense for the years ended December 31, 1998 and 1997
was $52,258 and $-0-, respectively.
NOTE 5 - Notes Payable
Notes payable at December 31, 1998 consists of the following:
Note payable due in March 1999, bears
interest at 18% payable monthly. The
note is personally guaranteed by the
Company's majority stockholder. (See
Note 12.) $522,500
Note payable, principal and unpaid
interest is due on July 15, 1999, bears
interest at 12%. 139,951
Note payable, principal and unpaid
interest is due in Twenty-four equal
monthly installments which bears
interest at prime rate , plus 2%. The
Company is currently in default 100,500
--------
Total Notes Payable $762,951
========
NOTE 6 - Due to Stockholder
This balance represents advances from Mr. Stein, (the "majority
stockholder") of the Company, which bears interest at 12% per annum
calculated on the average monthly outstanding balance and is payable on
demand.
-12-
30
<PAGE>
DETOUR MAGAZINE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - Note Payable, Stockholder
The majority stockholder of the Company advanced funds in the amount of
$932,313 to the Company during 1995. This amount was converted to a demand
note (the "Note") subsequently, bearing interest at 12% per annum
calculated on the average monthly outstanding balance. On August 14, 1996,
this Note was assigned by the majority stockholder to another stockholder,
JCM Capital Corp. The Note is secured by substantially all the assets of
the Company and is subordinated to the Company's factoring agreement with a
finance company (see Note 2). At December 31, 1998 $932,313 is outstanding
under this Note.
NOTE 8 - Income Taxes
The Company recognizes deferred tax assets for the future tax effect of net
operating loss carryforwards. A valuation allowance is provided if it is
unlikely that some portion or all of the deferred tax assets will not be
realized. Management concluded a valuation allowance was appropriate at
December 31, 1998 due to operating losses incurred. The need for a
valuation allowance is evaluated periodically by management.
The components of deferred tax assets at December 31, 1998 are as follows:
Federal $2,101,430
State 826,576
----------
Total Deferred Tax Assets 2,928,006
Less: Valuation Allowances 2,928,006
----------
Deferred Tax Asset, Net of
Valuation Allowances $ 0
==========
Operating loss carryforwards, which may provide future tax benefits
approximate $6,926,922 at December 31, 1998. The operating loss
carryforwards expire through 2018.
-13-
31
<PAGE>
DETOUR MAGAZINE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - Commitments and Contingencies
Leasing Arrangements
The Company conducts its operations from two facilities that are leased
under two separate three year noncancelable operating leases expiring in
November 2001 and January 2001, respectively. The Company is required to
pay its proportionate share of utilities and real estate taxes at one of
its locations.
Certain operating leases provide renewable options at their fair rental
value at the time of renewal. In the normal course of business, operating
leases are generally renewed or replaced by other leases.
Rent expense for the years ended December 31, 1998 and 1997 was $134,884
and $105,837, respectively.
Minimum future rental payments under noncancelable operating leases as of
December 31, 1998 in the aggregate are as follows:
Year Ending
December 31, Amount
------------ --------
1999 $111,008
2000 112,796
2001 72,112
--------
Total $295,916
========
Employment Agreement
On August 19, 1997, the Company entered into two year employment agreement
with the president of the Company. The agreement was terminated upon the
resignation of the president in December 1998. The amount paid under this
employment agreement for the year ended December 31, 1998 was $105,000.
Consulting Agreement
On August 19, 1997, the Company entered into a two year noncancelable
consulting agreement with an entity owned by the president and an officer
of the Company. The agreement was terminated upon the resignation of the
president in December 1998. The amount paid under this consulting agreement
for the year ended December 31, 1998 was $105,078.
Litigation
The Company is party to litigation in the normal course of business, which
in the opinion of management the outcome of such litigation will not have a
material impact on the Company's financial statements.
-14-
32
<PAGE>
DETOUR MAGAZINE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - Common Stock
Stock Split
In December 1997, the Company undertook a forward stock split, whereby each
share of common stock then issued and outstanding was provided with a one
share stock dividend.
Stock Raise
In November 1997, the Company commenced a private offering of its common
stock, wherein it proposed to sell up to 4,700,000 shares of common stock
at a price of $0.75 per share post stock split (See above). As of December
31, 1998, in the aggregate, the net proceeds received from the private
offering in connection with the sale of 1,186,669 shares of common stock
was $875,694, which was net of expenses of $14,308.
Exercise of Options
In December 1997, the Company adopted a nonqualified stock option plan
which reserved 2,200,000 shares of common stock that may be granted to key
employees, consultants, representatives, officers and directors. The option
price per share will be determined by the Board of Directors at the time
any option is granted.
In December 1997, the Company granted options to purchase 2,200,000 common
stock shares at $0.01 per share prior to the stock split (See above).
In 1998, options to purchase 4,400,000 shares of common stock were
exercised resulting in net proceeds to the Company in the amount of
$21,991.
NOTE 11 - Going Concern Uncertainty
As shown in the accompanying financial statements, the Company incurred a
net loss of $3,240,204 during the year ended December 31, 1998. As of
December 31, 1998, the Company's current liabilities exceeded its current
assets by $5,634,296 and its total liabilities exceeded its total assets by
$5,266,695. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The Company plans to decrease
publishing operations and reduce selling, general and administrative
expenses. The Company also plans to raise additional capital through a
private placement offering. These financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
-15-
33
<PAGE>
DETOUR MAGAZINE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 12 - Subsequent Event
In March 1999, the Company was unable to meet its obligation and defaulted
on the note payable which is personally guaranteed by the Company's
majority stockholder. At December 31, 1998, the amount of the note payable
was $522,500. (See Note 5) The Company is currently in negotiations to
refinance this obligation.
-16-
34
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Directors are elected for one-year terms or until the next annual
meeting of shareholders and until their successors are duly elected and
qualified. Officers continue in office at the pleasure of the Board of
Directors.
The Directors and Officers of the Company as of the date of this report
are as follows:
Name Age Position
- ---------------- --- -------------------------
Edward T. Stein 47 Chairman of Board,
President & Director
Barry Ross 46 Chief Financial Officer,
Corporate Secretary and
Director
All Directors of the Company will hold office until the next annual
meeting of the shareholders and until successors have been elected and
qualified. Officers of the Company are elected by the Board of Directors and
hold office until their death or until they resign or are removed from office.
There are no family relationships among the officers and directors.
There is no arrangement or understanding between the Company (or any of its
directors or officers) and any other person pursuant to which such person was or
is to be selected as a director or officer.
(b) Resumes:
Edward T. Stein is presently Chairman of the Board and a Director of
Detour, a position he has held since January 1995. In addition, in November
1998, Mr. Stein assumed the position of President of the Company. Since 1986, he
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
35
<PAGE>
in finance. He devotes approximately 80 hours per month to the
business of Detour.
Barry Ross is Chief Financial Officer, Corporate Secretary and a
Director of the Company, positions he assumed in August 1997. Mr. Ross has over
two decades of experience with some of the world's largest publishers and has
served in key positions for Charter Publishing, General Media, Kaching
Publications and the New York Times Women's Group. From May through October
1997, Mr. Ross was a Vice President and Controller for Sullivan Media Corp., New
York City, a company engaged as direct response subscription agents. From July
1993 through May , Mr. Ross was the Manager of Newstand Operations of NYT
Women's Group, G&J Publishing, New York, New York, a national publishing
company. From March 1993 through July 1993, he was unemployed. From August 1991
through March 1993, he was the Controller of Kachina Publications, New York
City, a publishing company. Mr. Ross received a Bachelor of Science degree in
accounting from SUNY at Plattsburgh in 1974. He devotes substantially all of his
time to the business of the Company.
KEY EMPLOYEES
Steven Garbarino is currently the Editor-in-Chief of Detour Magazine, a
position he assumed in September, 1998. Prior, from April 1996 through September
1998, Mr. Garbarino was the Sunday features editor and book editor at The New
York Post. From February 1994 through April 1996, Mr. Garbarino was
Editor-in-Chief at Manhattan File Magazine, New York City. Mr. Garbarino
obtained a Bachelor of Arts degree in english and creative writing from the
University of South Florida, Tampa, Florida in 1982. He devotes substantially
all of his time to the business of the Company.
Barbara Zawlocki was appointed as Publisher of Detour Magazine in
December 1998. Prior, since 1993 Ms. Zawlocki was employed by the Company,
including positions of Group Advertising Director, Associate Publisher and
Advertising Director. Prior to joining the Company, Ms. Zawlocki had
approximately 13 years experience in the magazine publishing industry. Ms.
Zawlocki received a Bachelor of Arts degree in marketing from New York
University in 1980. She devotes substantially all of her time to the business of
the Company.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers, directors and person who own more than 10% of the Company's
Common Stock to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. All of the aforesaid persons are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
There were no changes in the securities holdings of any officer,
director or principal shareholder.
36
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
Remuneration
The following table reflects all forms of compensation for services to
the Company for the years ended December 31, 1998 and 1997 of the then chief
executive officer of the Company.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long Term Compensation
----------------------------
Annual Compensation Awards Payouts
--------------------- -------------------- -------
Securities
Other Under- All
Name Annual Restricted lying Other
and Compen- Stock Options/ LTIP Compen-
Principal Salary Bonus sation Award(s) SARs Payouts sation
Position Year ($) ($) ($) ($) (#) ($) ($)
- ---------- ---- ------- ----- ------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John Evans,
President & 1997 $ 60,000 0 0 0 0 0 0
Director(1) 1998 105,000 0 105,078 0 0 0 7,300
Edward T.
Stein,
President &
Director 1998 $ 0 0 0 0 0 0 0
- -------------------------
<FN>
(1) Mr. Evans resigned his position as President of the Company effective
December 1998. On that date, Mr. Stein assumed the position as
President. The information provided herein discloses the compensation
received by Mr. Evans for the periods indicated.
</FN>
</TABLE>
It is anticipated that Messrs. Ross and Steven Garbarino will be the only
employees of the Company who may receive compensation exceeding $100,000 during
the fiscal year ending December 31, 1999. See "Resumes," above.
The Company maintains a policy whereby the officers and directors of
the Company may be compensated for out of pocket expenses incurred by each of
them in the performance of their relevant duties. The Company reimbursed Messrs.
Evans, Ross and Stein, each of whom is or was a director of the Company, in the
amounts of $54,936, $30,661 and $113,884, respectively, for such expenses during
the fiscal year ended December 31, 1998.
37
<PAGE>
In August 1997, the Company entered into a two (2) year employment
agreement with John Evans, former President of the Company. Annual compensation
under this contract provided for the Company to pay Mr. Evans an annual salary
of $120,000. In addition, the Company provided Mr. Evans a leased automobile.
The agreement also provided for a performance bonus to be paid to Mr. Evans once
the Company generates profits from operations. However, Mr. Evans resigned his
position with the Company in December 1998. At that time, the Company and Mr.
Evans executed a mutual release wherein the applicable parties waived any and
all claims each may have against the other.
Also in August 1997, the Company entered into a two (2) year consulting
agreement with Canterbury Consulting, Inc., of which Mr. Evans is that company's
principal. Pursuant to the terms of the agreement, the Company agreed to pay to
Canterbury $5,000 per month for the initial six month term, increasing to
$11,667 in the second six months and further increasing to annual consideration
of $100,000 in the last year of the agreement. However, this agreement was also
terminated and mutual releases signed in December 1998.
STOCK PLANS
In June 1997, the Company adopted the Detour Magazine, Inc. 1997
Non-Qualified Stock Option Plan (the "Plan"), which reserved an aggregate of
2,200,000 shares of the Company's Common Stock (pre forward split) for issuance
thereunder. Subsequently, the Company authorized the issuance of 2,200,000
options under the Plan to five entities, granting each entity options at an
exercise price of $.01 per share, based upon the per share book value of the
Company on the date of issuance in accordance with the terms of the Plan, as the
Company's common stock had not yet begun to trade. As of the date of this
report, all of the issued options have been exercised. None of the options to
purchase shares of the Company's Common Stock under the Plan were issued in
favor of any member of management.
There are no other bonus or incentive plans in effect, nor are there
any understandings in place concerning additional compensation to the Company's
officers.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
(a) and (b) Security Ownership of Certain Beneficial Owners
and Management.
The table below lists the beneficial ownership of the Company's voting
securities by each person known by the Company to be the beneficial owner of
more than 5% of such securities, as well as by all directors and officers of the
issuer, as of April 15,
38
<PAGE>
1998, the date of this report. Unless otherwise indicated, the shareholders
listed possess sole voting and investment power with respect to the shares
shown.
Name and Amount and
Address of Nature of
Title of Beneficial Beneficial Percent of
Class Owner(1) Ownership Class
----- -------- --------- -----
Common Edward T. Stein(2) 7,512,442 48.2%
201 N. Service Rd.
Suite 100
Melville, NY 11747
Common All Officers and Directors
as a Group (2 persons) 7,512,442 48.2%
(1) The information relating to beneficial ownership of the Company's
Common Stock by its nominees and other directors is based on
information furnished by them using the definition of "beneficial
ownership" set forth in rules promulgated by the Securities and
Exchange Commission under Section 13(d) of the Securities Exchange Act
of 1934. Except where there may be special relationships with other
persons, including shares voting or investment power (as indicated in
other footnotes to this table), the directors and nominees possess sole
voting and investment power with respect to the shares set forth beside
their names.
(2) Officer and/or director of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Edward T. Stein, principal shareholder and an officer and director of
the Company, has loaned the Company the principal amount of $1,987,823, which
accrues interest at the rate of 12% per annum and is due upon demand. It is not
anticipated that Mr. Stein will tender demand for this obligation in the
foreseeable future.
Also, 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. Mr. Stein subordinated this
security position relevant to the Company's accounts receivable. In 1996, Mr.
Stein assigned this Note to JCM Capital Corp., a minority stockholder. As of
December 31, 1998, the outstanding balance owed on this obligation totalled
$932,313.
There have been no other related party transactions, or any other
transactions or relationships required to be disclosed pursuant to Item 404 of
Regulation S-B.
39
<PAGE>
PART IV
Item 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1* Certificate and Articles of Incorporation
3.2* Bylaws
3.3** Articles of Merger
EX-27 Financial Data Schedule
* 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.
(b) Reports on Form 8-K
In the last fiscal quarter of the fiscal year ended December 31, 1997,
the Company did not file any reports on Form 8-K.
40
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Company caused this amendment to its report to be signed on
its behalf by the undersigned, thereunto duly authorized, on April 26 ,
1999.
DETOUR MAGAZINE, INC.
(Registrant)
By:/s/ Edward T. Stein
----------------------------------
Edward T. Stein, President
By:/s/ Barry Ross
---------------------------------
Barry Ross, Chief Financial
Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities
indicated on April 26 , 1999.
/s/ Edward T. Stein
-----------------------------------
Edward T. Stein, Director
/s/ Barry Ross
-----------------------------------
Barry Ross, Director
41
<PAGE>
Detour Magazine, Inc.
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-KSB /A1
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
EXHIBITS Page No.
Financial Data Schedule......................................................43
42
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 139,459
<SECURITIES> 0
<RECEIVABLES> 140,296
<ALLOWANCES> 58,500
<INVENTORY> 0
<CURRENT-ASSETS> 368,639
<PP&E> 90,801
<DEPRECIATION> 0
<TOTAL-ASSETS> 736,240
<CURRENT-LIABILITIES> 6,002,935
<BONDS> 0
0
0
<COMMON> 15,587
<OTHER-SE> (5,282,282)
<TOTAL-LIABILITY-AND-EQUITY> 736,240
<SALES> 4,177,833
<TOTAL-REVENUES> 4,177,833
<CGS> 2,834,621
<TOTAL-COSTS> 2,834,621
<OTHER-EXPENSES> 4,229,529
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (335,498)
<INCOME-PRETAX> (3,240,204)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,240,204)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,240,204)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
