10QSB 1 d52388_10-qsb.txt FORM 10QSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2002 Commission File Number 000-25991 DAG MEDIA, INC. (Exact name of small business issuer as specified in its charter) New York 13-3474831 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 125-10 Queens Boulevard Kew Gardens, NY 11415 (Address of principal executive offices) (Zip Code) (718) 520-1000 (Issuer's telephone number, including area code) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 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 |_| As of November 6, 2002 there were outstanding 2,996,190 shares of the issuer's common shares, $.001 par value. DAG MEDIA, INC. QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002 TABLE OF CONTENTS Part I - CONSOLIDATED FINANCIAL INFORMATION Page Number ----------- Consolidated Financial Statements (unaudited) Consolidated Balance Sheet at September 30, 2002 ............. 2 Consolidated Statements of Operations for the Three and Nine Month Periods Ended September 30, 2002 and 2001............... 3 Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 2002 and 2001............... 4 Item 1. Notes to Consolidated Financial Statements.................... 5 Item 2. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations.... 8 Item 3. Control and procedures........................................ 15 Part II - OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds..................... 16 Item 6. Exhibits...................................................... 18 SIGNATURES............................................................. 18 CERTIFICATIONS......................................................... 19 DAG MEDIA, INC. CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 2002 (unaudited) Assets Current assets: Cash and cash equivalents $ 1,762,762 Preferred stocks and other marketable securities 5,384,970 ------------ Total cash and cash equivalents, preferred stocks and other marketable securities 7,147,732 ------------ Trade accounts receivable, net of allowance for doubtful accounts of $ 867,148 2,644,431 Directories in progress 1,755,120 Other current assets 191,954 ------------ Total current assets 11,739,237 ------------ Fixed assets, net of accumulated depreciation of $ 158,901 288,542 Deferred tax asset 472,606 Trademarks, net of accumulated amortization of $ 47,385 303,596 Intangibles in connection with Blackbook acquisition 333,422 Other assets 27,823 ------------ Total assets $ 13,165,226 ============ Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued expenses $ 1,007,403 Accrued commissions and commissions payable 808,794 Income tax payable 188,257 Advanced billing for unpublished directories 3,959,334 ------------ Total current liabilities 5,963,788 ------------ Shareholders' equity: Preferred shares - $ .01 par value; 5,000,000 shares authorized; no shares issued -- Common shares - $ .001 par value; 25,000,000 authorized; 2,996,190 issued and 2,927,460 outstanding 2,996 Additional paid-in capital 8,033,066 Treasury stock, at cost- 68,730 shares (231,113) Deferred compensation (154,098) Unrealized gains on preferred stocks 22,470 Retained earnings (471,883) ------------ Total shareholders' equity 7,201,438 ------------ Total liabilities and shareholders' equity $ 13,165,226 ============
The accompanying notes are an integral part of this balance sheet. 2 DAG MEDIA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended September 30, Nine Months Ended September 30, 2002 2001 2002 2001 ---- ---- ---- ---- Advertising revenues $ 1,849,750 $ 1,464,425 $ 4,805,025 $ 4,399,257 Publications costs 294,933 212,922 1,024,299 1,001,873 ----------- ----------- ----------- ----------- Gross profit 1,554,817 1,251,503 3,780,726 3,397,384 Operating costs and expenses: Selling expenses 862,339 624,000 1,861,337 1,700,054 Administrative and general 912,989 479,407 2,072,480 1,667,598 ----------- ----------- ----------- ----------- Total operating costs and expenses 1,775,328 1,103,407 3,933,817 3,367,652 (Loss) income from operation (220,511) 148,096 (153,091) 29,732 Interest income, dividend income and realized gains from preferred stocks 46,462 74,018 169,250 320,324 ----------- ----------- ----------- ----------- (Loss) income before provision for income taxes and cumulative effect of change in accounting principle (174,049) 222,114 16,159 350,056 Benefit (provision) for income taxes 86,753 (98,490) (7,397) (167,490) ----------- ----------- ----------- ----------- (Loss) income before cumulative effect of change in accounting principle (87,296) 123,624 8,762 182,566 Cumulative effect of change in accounting principle -- -- (895,000) -- ----------- ----------- ----------- ----------- Net loss (income) $ (87,296) $ 123,624 $ (886,238) $ 182,566 =========== =========== =========== =========== Net (loss) income per common share --Basic (Loss) income before cumulative effect of change in accounting principle $ (0.03) $ 0.04 $ 0.00 $ 0.07 Cumulative effect of change in accounting principle -- -- (0.31) -- ----------- ----------- ----------- ----------- Net loss (income) per common share $ (0.03) $ 0.04 $ (0.31) $ 0.07 =========== =========== =========== =========== --Diluted (Loss) income before cumulative effect of change in accounting principle $ ( 0.03) $ 0.04 $ 0.00 $ 0.07 Cumulative effect of change in accounting principle -- -- (0.31) -- ----------- ----------- ----------- ----------- Net loss (income) per common share $ (0.03) $ 0.04 $ (0.31) $ 0.07 =========== =========== =========== =========== Weighted average number of common shares outstanding --Basic 2,927,460 2,907,460 2,921,516 2,907,460 =========== =========== =========== =========== --Diluted 2,927,460 2,908,744 2,931,330 2,914,438 =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. 3 DAG MEDIA, INC. COSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended Nine Months Ended September 30, 2002 September 30, 2001 ------------------ ------------------ Cash flows from operating activities: Net income (loss) $ (886,238) $ 182,566 Adjustment to reconcile net income to net cash provided by operating activities-- Cumulative effect of change in accounting principle 895,000 -- Depreciation and amortization 66,605 74,073 Amortization of deferred compensation 10,513 13,011 Bad debt expense 830,359 454,115 Realized gain on preferred stocks and marketable securities 2,035 -- Deferred taxes -- 187,057 Changes in operating assets and liabilities-- Accounts receivable (752,293) (718,116) Directories in progress (253,161) 124,701 Other current and noncurrent assets (68,417) (208,075) Accounts payable and accrued expenses (28,137) 59,692 Accrued commissions and commissions payable 163,837 106,883 Advance billing for unpublished directories 409,393 (396,573) Income taxes payable (78,094) (19,567) ----------- ----------- Net cash provided by (used in) operating activities 311,402 (140,233) ----------- ----------- Cash flows from investing activities: Investment in Preferred stocks and other marketable Securities (4,995,927) -- Proceeds from sale of marketable securities and preferred stocks, net 3,327,925 -- Cash paid for acquisition of subsidiary (70,537) Purchase of fixed assets (60,480) (43,671) ----------- ----------- Net cash used in investing activities (1,799,019) (43,671) ----------- ----------- Cash flows from financing activities: Proceeds from exercise of stock option 21,200 -- ----------- ----------- Net cash provided by financing activities 21,200 -- ----------- ----------- Net decrease in cash $(1,466,417) $ (183,904) ----------- ----------- Cash and cash equivalents, beginning of period 3,229,179 7,148,664 ----------- ----------- Cash and cash equivalents, end of period $ 1,762,762 $ 6,964,760 =========== ===========
The accompanying notes are an integral part of these financial statements. 4 DAG MEDIA, INC. Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 1. THE COMPANY The accompanying unaudited financial statements of DAG Media, Inc. ("DAG" or the "Company") included herein have been prepared by the Company in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The accompanying unaudited financial statements should be read in conjunction with the Company's audited financial statements for the years ended December 31, 2001 and the notes thereto included in the Company's 10KSB and Registration Statement on Form SB-2, respectively. Results of operations for the interim period are not necessarily indicative of the operating results to be attained in the entire fiscal year. 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 amount of revenues and expenses during the reporting period. Actual amounts could differ from those estimates. 2. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB approved SFAS Nos. 141 and 142 entitled "Business Combinations" and "Goodwill and Other Intangible Assets," respectively. SFAS No. 141, among other things, eliminates the pooling of interests method of accounting for business acquisitions entered into after June 30, 2001. SFAS No. 142 requires companies to use a fair-value approach to determine whether there is an impairment of existing and future goodwill. These statements are effective beginning January 1, 2002. In connection with a reorganization at the consumption of our initial public offering ("IPO") in 1999, the Company acquired the 50% interest of an affiliate, which resulted in the recognition of approximately $1 million in goodwill based on the IPO price. This goodwill was being amortized over 25 years. The Company adopted SFAS 142 effective January 1, 2002, which requires the determination of whether there has been impairment in the carting value of goodwill based on fair value. As a result of the decline in the market value of the Company's shares, and considering that this is considered entity level goodwill the Company determined that, as of January 1, 2002 the goodwill has been fully impaired. Accordingly the goodwill has been written off as the cumulative effect of an accounting change in the accompanying Financial Statements. The Company is continuing to amortize its trademarks over 25 year-estimated life as it believes that they do not have unlimited future life. 5 Comparative information is as follows:
---------------------------------------------------------------------------------------------------------------------- Nine months ended September 30, Three months ended September 30, ------------------------------- -------------------------------- ---------------------------------------------------------------------------------------------------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- ---------------------------------------------------------------------------------------------------------------------- Reported Net (Loss) Income $ (886,238) $ 182,566 (87,296) 123,624 ---------------------------------------------------------------------------------------------------------------------- Add back cumulative effect of 895,000 -- -- -- change in accounting principle ---------------------------------------------------------------------------------------------------------------------- Add back goodwill amortization -- 30,000 -- 10,000 ---------------------------------------------------------------------------------------------------------------------- Adjusted Net Income $ 8,762 $ 212,566 (87,296) 133,624 ---------------------------------------------------------------------------------------------------------------------- Basic earning per share ---------------------------------------------------------------------------------------------------------------------- Reported Net (Loss) Income $ (0.31) $ 0.06 $ (0.03) $ 0.04 ---------------------------------------------------------------------------------------------------------------------- Goodwill amortization -- 0.01 -- -- ---------------------------------------------------------------------------------------------------------------------- Cumulative effect of change in 0.31 -- -- -- accounting principle ---------------------------------------------------------------------------------------------------------------------- Adjusted Net Income $ (0.00) $ 0.07 $ (0.03) $ 0.04 ---------------------------------------------------------------------------------------------------------------------- Diluted earning per share ---------------------------------------------------------------------------------------------------------------------- Reported Net (Loss) Income $ (0.31) $ 0.06 $ (0.03) $ 0.04 ---------------------------------------------------------------------------------------------------------------------- Goodwill amortization -- 0.01 -- -- ---------------------------------------------------------------------------------------------------------------------- Cumulative effect of change in 0.31 -- -- -- accounting principle ---------------------------------------------------------------------------------------------------------------------- Adjusted Net Income $ (0.00) $ 0.07 $ (0.03) $ 0.04 ----------------------------------------------------------------------------------------------------------------------
3. EARNINGS PER SHARE OF COMMON STOCK The Company has applied SFAS No. 128, "Earnings Per Share" in its calculation and presentation of earnings per share - "basic" and "diluted". Basic earnings per share are computed by dividing income available to common shareholders (the numerator) by the weighted average number of common shares (the denominator) for the period. The computation of diluted earnings per share is similar to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued. The numerator in calculating both basic and diluted earnings per common share for each period is the reported net income. The denominator is based on the following weighted average number of common shares:
Nine Months Ended Three Months Ended September 30, September 30, 2002 2001 2002 2001 ------------------------------------------------------------------------------------------------------------ Basic 2,921,516 2,907,460 2,927,460 2,907,460 Incremental shares for assumed conversion of options 9,814 6,978 -- 1,223 ------------------------------------------------------------------------------------------------------------ Diluted 2,931,330 2,914,438 2,927,460 2,908,744 ============================================================================================================
6 The difference between basic and diluted weighted average common shares resulted from the assumption that the dilutive stock options outstanding were exercised. There were 240,440 and 380,440 stock options and warrants not included in the diluted earnings per share calculation for the respective nine months and three months period ended September 30, 2002, as their effect would have been anti-dilutive. For the respective nine months and three months period ended September 30, 2001 there were 249,884 and 359,884 stock options and warrants not included in the diluted earnings per share calculation as their effect would have been anti-dilutive. 4. ACQUISITION On August 5th, 2002 the company purchased substantially all of the assets of The Blackbook business from BrandEra.com [U.S], Inc. (the "Blackbook Acquisition"). The Blackbook is a leading publisher of photography and illustration directories that have become "Industry Standard" and a reference point for finding photographers and illustrators in North America. The Blackbook Acquisition was made through Blackbook Photography Inc., a newly formed wholly owned subsidiary of DAG Media, Inc. The purchase price was $217,400 out of which $6,420 was paid in cash and the balance was offset against existing cash balances of Blackbook on the date of the transaction. In connection with the Blackbook Acquisition, the company incurred approximately $70,000 acquisition costs including legal, accounting and finder's fees. The acquisition has been accounted for under the purchase method of accounting. The aggregate purchase price of $287,000 is being allocated based on the preliminary estimates of the fair value of the tangible and intangible assets acquired and liabilities assumed as follows: -------------------------------------------------------------------------------- Assets Acquired: -------------------------------------------------------------------------------- Current Assets (including cash acquired of $211,000) $627,000 -------------------------------------------------------------------------------- Fixed Assets $ 25,000 -------------------------------------------------------------------------------- Intangibles in connection with Blackbook acquisition $333,000 -------------------------------------------------------------------------------- Deferred Tax Assets $282,000 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Liabilities Assumed: -------------------------------------------------------------------------------- Current Liabilities $980,000 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Total Purchase Price: $287,000 -------------------------------------------------------------------------------- The estimation of the fair value of assets acquired and liabilities assumed was determined by the company's management based on information currently available. The company is in the process of completing the evaluation of certain acquired assets, as well as certain intangibles. Accordingly, the allocation of the purchase price is subject to revisions. The consolidated financial statements herein include the accounts of the Company and its wholly owned subsidiary since the acquisition date. All material intercompany accounts and transactions have been eliminated. 7 The following unaudited pro forma consolidated statements of operations data for the nine months periods ended September 30, 2002 and 2001 give effect to the Blackbook Acquisition as if it had occurred as of the beginning of the periods reported. All of the following unaudited pro forma consolidated results of the operation give effect to purchase accounting adjustments. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what operating results would have been had the acquisition actually taken place as of the beginning of the periods reported, and may not be indicative of future operating results.
---------------------------------------------------------------------------------------------------------------------- Pro Forma Pro Forma DAG Media, Inc. DAG Media, Inc. Consolidated Consolidated For the Nine Months For the Nine Months Period Ended Period Ended September 30, 2002 September 30, 2001 ---------------------------------------------------------------------------------------------------------------------- Revenues 5,822,125 5,463,749 ---------------------------------------------------------------------------------------------------------------------- Net (loss) income before cumulative effect 88,049 (700,959) of change in accounting principal ---------------------------------------------------------------------------------------------------------------------- Net loss (806,951) (700,959) ---------------------------------------------------------------------------------------------------------------------- Earning (loss) per share - Basic and diluted $ 0.03 $ (0.24) Before cumulative effect $ (0.31) -- ---------- ---------- Cumulative effect $ (0.28) $ (0.24) ========== ========== ----------------------------------------------------------------------------------------------------------------------
8 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management's discussion and analysis of financial condition and results of operations should be read in conjunction with our unedited financial statements and notes thereto contained elsewhere in this report. This discussion contains forward-looking statements based on current expectations that involve risks and uncertainties. Actual results and the timing of certain events may differ significantly from those projected in such forward-looking statements. We currently publish and distribute yellow page directories in print and on the worldwide web, both in the mainstream yellow page industry as well as in targeted niche markets in the New York metropolitan area. We sell yellow page advertisements as part of an overall media package that includes print advertising, on-line advertising and other added value services such as our referral service and consumer discount club. We operate three internet portals, a mainstream general portal NewYellow.com, targeting the general population, JewishYellow.com targeting worldwide Jewish communities and JewishMasterguide.com, targeting the ultra-orthodox Hasidic communities. Our principal source of revenue derives from the sale of ads in our print and on-line directories. NewYellow was launched on May 12, 1999 as the Company's first general interest, English only yellow page directory. The first NewYellow publication was printed and distributed in March 2000 and the sixth edition was printed and distributed in October 2002. New Yellow competes directly with the Verizon Yellow Pages in New York City. New Yellow is the only general interest yellow page directory that provides full-color advertisements with no additional charges. NewYellow was also the first directory to include e-mail addresses. Also, as part of our service, we offer to all New Yellow advertisers free e-mail addresses as well as electronic mail boxes. These mailboxes are often used to provide our advertisers with electronic referrals. NewYellow is available online at our web site www.newyellow.com. New Yellow is now in its fourth year of production. Our principal source of revenue derives from the sale of ads for our NewYellow and Jewish Israeli Yellow Pages directories. Our NewYellow rates are significantly less than those of the Verizon Yellow Pages and must remain so in order to maintain our competitive sales advantage with our advertisers. Advertising fees, whether collected in cash or evidenced by a receivable, generated in advance of publication dates, are recorded as "Advanced billings for unpublished directories" on our balance sheet. Many of our advertisers pay the ad fee over a period of time. In that case, the entire amount of the deferred payment is booked as a receivable. Revenues are recognized at the time the directory in 9 which the ad appears is published. Thus, costs directly related to the publication of a directory in advance of publication are recorded as "Directories in progress" on our balance sheet and are recognized when the directory to which they relate is published. All other costs are expensed as incurred. The principal operating costs incurred in connection with publishing the directories are commissions payable to sales representatives and costs for paper and printing. Generally, advertising commissions are paid as advertising revenue is collected. We do not have any long term agreements with paper suppliers or printers. Since ads are sold before we purchase paper and print a particular directory, a substantial increase in the cost of paper or printing costs would reduce our profitability. Administrative and general expenses include expenditures for marketing, insurance, rent, sales and local franchise taxes, licensing fees, office overhead and wages and fees paid to employees and contract workers (other than sales representatives). On August 5th, 2002 the company purchased the business and assets of the Blackbook business from BrandEra.com [U.S], Inc. The Blackbook is a leading publisher of photography and illustration directories that have become the "Industry Standard" reference source for finding photographers, illustrators and graphic designers in North America. The Blackbook name is respected worldwide with an estimated 19,000 art directors, creative directors, designers and corporations using Blackbook to find the talent they need. The Blackbook's source books consist of three different books: Blackbook Photography, Blackbook Illustration and Blackbook AR100 that encompass 3 distinct advertiser groups: photographers, illustrators and a select group of more then 100 leading corporate annual reports. The Blackbook advertisers, also have integrated presence in our on-line property at Blackbook.com, which acts as a business-to-business electronic marketplace for the following three key segments of the creative community: advertising agencies, advertisers and the associated independent creative community. Blackbook.com is a showcase of the blackbook advertisers' portfolios on line. Blackbook.com offers a full service portfolio, which is managed by Blackbook sales consultants, as well as a self-managed portfolio. The primary competitors of the Blackbook directories include The Workbook, American Showcase, Alternative Pick and New York Gold. The consolidated financial information herein include the accounts of the Company and its wholly owned subsidiary since the acquisition date. All material intercompany accounts and transactions have been eliminated. 10 Results of Operations Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001 Advertising revenues Advertising revenues for three months ended September 30, 2002 were $1,850,000 compared to $1,464,000 for the three months ended September 30, 2001, an increase of $386,000. The increase was primarily attributable to the increase in sales of the August 2002 edition of the Jewish Israeli Yellow Pages directory compared to the equivalent edition last year. For the three months ended September 30, 2002 the Blackbook operation contributed total revenues of $17,000. Publication costs Publication costs for the three months ended September 30, 2002 were $295,000 compared to $213,000, for the corresponding period in 2001, an increase of $82,000. As a percentage of advertising revenues, publication costs were 15.95% in the three months period ending September 30, 2002 compared to 14.54%, in the corresponding 2001 period. The increase in publication costs primarily reflects the Blackbook's publication cost for the three months period ended September 30, 2002 of $72,000 that were included at the consolidated financial statements for the first time as well as to the increase in the paper and distribution costs of the August edition of the Jewish Israeli Yellow Pages directory compared to the equivalent edition last year. Selling expenses Selling expenses for the three months ended September 30, 2002 were $862,000 compared to $624,000 for the corresponding period in 2001, an increase of $238,000. This increase is primarily a result of an increase in sales resulting in more commissions and promotions payments as well as more sales made by agencies with higher commission rates versus sales made by representatives who work directly for the company. In addition, the selling expenses for the three months ended September 30, 2002 include the Blackbook selling expenses for the first time adding up to $38,000. Administrative and general costs General and administrative expenses for the quarter ended September 30, 2002 were $913,000 compared to $479,000 for the same period in 2001, an increase of 90.60%. This increase is primarily attributable to the additional administrative and general expenses of the Blackbook added for the first time in the consolidated financial statements amounting up to $123,000 and to the increase of bad debt expenses of $327,000 as well as depreciation costs, repairs and maintenance expenses. 11 Other income For the quarter ended September 30, 2002, the Company had other income of $46,000 compared to other income of $74,000 for the quarter ended September 30, 2001. This decrease was primarily attributable to the decrease in interest rates resulting in decreased interest income in the third quarter of 2002. Provision (benefit) for income taxes Benefit for income taxes in the three months ended September 30, 2002 was $87,000 as apposed to provision for income taxes of $98,000 for the three months ended September 30, 2001. The decrease was primarily attributable to the decrease in earnings from operation in the three months period ended September 30, 2002. In the third quarter of 2002, we used a 46% rate to calculate taxes on the expected annual income. Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001 Advertising Revenues Advertising revenues for the nine months ended September 30, 2002 were $4,805,000 compared to $4,399,000 for the nine months ended September 30, 2001, an increase of $406,000 or 9.2%. The increase was primarily attributable to increased advertising revenues, primarily with respect to the twenty fifth edition publication of the Jewish Israeli Yellow Pages directory. For the nine months ended September 30, 2002 the Blackbook operation contributed total revenues of $17,000. Publication Costs Publication costs for the nine months ended September 30, 2002 were $1,024,000 compared to $1,002,000 for the corresponding period in 2001, an increase of $22,000. This increase reflects the added $72,000 publication cost of the Blackbook that were included this quarter for the first time in the company's consolidated financial statements. As a percentage of net advertising revenues, publication costs were 21.3% in the 2002 period compared to 22.8%, in the 2001 period. The decrease in the percentage of publication costs reflects the decrease in the paper and distribution costs of the April 2002 edition on the New Yellow Manhattan directory as well as the Jewish Master Guide directory of June 2002. The difference in publication costs can vary as it corresponds to the particular requirements of the directory being published and on the prevalent paper costs. Selling Expenses Selling expenses for the nine months ended September 30, 2002 were $1,861,000 compared to $1,700,000 for the corresponding period in 2001, an increase of 9.4%. As a percentage of advertising revenues, selling expenses increased to 38.7% from 38.6%. The increase in selling expenses was attributable to the general increases in sales commissions and 12 promotion due to the increase in sales as well as additional $38,000 of the Blackbook selling costs added this quarter for the first time in the company's consolidated financial statements. Administrative and General Costs Administrative and general costs for the nine months ended September 30, 2002 were $2,072,000 compared to $1,668,000 for the same period in 2001, an increase of 24.2%. The increase was primarily attributable to an additional $123,000 general and administration cost of Blackbook added for the first time this quarter as well as an increase in the expense for uncollectible receivables of $361,000. Other income For the nine months ended September 30, 2002 the Company had other income of $169,000 compared to other income of $320,000 for the nine months ended September 30, 2001. This decrease was primarily attributable to the one time gain of approximately $89,000 included in the nine months period ended September 30, 2001 on the sale of AdStar securities as well as a general decrease in interest rates. Provision (benefit) for income taxes Provision for income taxes for the nine months ended September 30, 2002 and September 30, 2001 were $7,000 and $167,000, respectively. The decrease in the provision for income taxes was attributable directly to the decrease in the company's earning from operations. Liquidity and Capital Resources On September 30, 2002 we had cash and cash equivalents, including preferred stocks and other marketable securities of $7,148,000 and working capital of $5,775,000 as compared to cash and cash equivalents, including preferred stocks and other marketable securities of $6,965,000 and working capital of $6,866,000 at September 30, 2001. The increase primarily reflects the net cash provided by operating activities and the additional $50,000 cash of Blackbook included for the first time in the company's consolidated financial statements. Net cash provided by operating activities was $311,000 for the nine months ended September 30, 2002. For the comparable 2001 period, net cash used in operating activities was $140,000. The increase in net cash provided by operating activities reflects the profitable publication of both the Jewish Israeli Yellow Pages and the New Yellow Manhattan directories. Net cash used in investing activities was $1,799,000 for the nine months ended September 30, 2002 compared to $44,000 for the comparable 2001 period. Net cash used in investing activities for the nine months ended September 30, 2002 was primarily a result of purchasing of preferred stocks and other marketable securities as well as the company's purchase of the Blackbook business. 13 Net cash provided by financing activities was $21,000 for the nine months ended September 30, 2002 compared to none at the comparable 2001 period. The net cash provided by financing activities for the nine months ended September 30, 2002 was due to the exercise of stock options and the issuance of common shares, respectfully. We anticipate that our current cash balances together with our cash flows from operations will be sufficient to fund the production of our directories and the maintenance of our web site as well as increases in our marketing and promotional activities for the next 12 months. However, we expect our working capital requirements to increase over the next 12 months as we continue to market our directories and expand our on-line services, in particular for our NewYellow Manhattan directory. New Accounting Pronouncements In June 2001, the FASB approved SFAS Nos. 141 and 142 entitled "Business Combinations" and "Goodwill and Other Intangible Assets," respectively. SFAS No. 141, among other things, eliminates the pooling of interests method of accounting for business acquisitions entered into after June 30, 2001. SFAS No. 142 requires companies to use a fair-value approach to determine whether there is an impairment of existing and future goodwill. These statements are effective beginning January 1, 2002. In connection with a reorganization at the consumption of our initial public offering ("IPO") in 1999, the Company acquired the 50% interest of an affiliate, which resulted in the recognition of approximately $1 million in goodwill based on the IPO price. This goodwill was being amortized over 25 years. The Company adopted SFAS 142 effective January 1, 2002, which requires the determination of whether there has been impairment in the carting value of goodwill based on fair value. As a result of the decline in the market value of the Company's shares, and considering that this is considered entity level goodwill the Company determined that, as of January 1, 2002 the goodwill has been fully impaired. Accordingly, the goodwill has been written off as the cumulative effect of an accounting change in the accompanying Financial Statements. The Company is continuing to amortize its trademarks over 25 year-estimated life as it believes that they do not have unlimited future life. 14 Item 3. CONTROL AND PROCEDURES Assaf Ran, our Chief Executive Officer and Yael Shimor-Golan, our Chief Financial Officer evaluated our disclosure controls and procedures during the period November 1st, 2002 through November 5th , 2002. Based on their evaluation they concluded that the company's disclosure controls and procedures ensure that information relating to the company and its consolidated subsidiary, required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and adequately communicated to management. They have also concluded, based on their evaluation, that there were no significant deficiencies in the design or operation of the Company's internal controls and procedures which could adversely affect the Company's ability to record, process, summarize and report financial data. Subsequent to the date of their evaluation, there were no significant changes in the Company's internal controls and procedures. Forward Looking Statements This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements are typically identified by the words "believe", "expect", "intend", "estimate" and similar expressions. Those statements appear in a number of places in this report and include statements regarding our intent, belief or current expectations or those of our directors or officers with respect to, among other things, trends affecting our financial conditions and results of operations and our business and growth strategies. These forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those projected, expressed or implied in the forward-looking statements as a result of various factors (such factors are referred to herein as "Cautionary Statements"), including but not limited to the following: (i) our limited operating history, (ii) potential fluctuations in our quarterly operating results, (iii) challenges facing us relating to our rapid growth and (iv) our dependence on a limited number of suppliers. The accompanying information contained in this report, including the information set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations", identifies important factors that could cause such differences. These forward-looking statements speak only as of the date of this report, and we caution potential investors not to place undue reliance on such statements. We undertake no obligation to update or revise any forward-looking statements. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the Cautionary Statements. 15 DAG MEDIA, INC. PART II-OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds In May 1999, we completed an initial public offering of 1,325,000 common shares (the "IPO"), of which we sold 1,250,000 common shares and Assaf Ran, our president, chief executive officer and principal shareholder, sold 75,000 common shares. The common shares were sold for $6.50 each. Net proceeds, after expenses of the IPO, were $6,423,763. We have not previously filed an initial report of sales of securities and use of proceeds. We will report the following information in our quarterly and annual filings until the proceeds have been fully used. (a) Effective date of Registration Statement: May 13, 1999 (File No. 333-74203). (b) The offering was declared effective May 13, 1999 and was consummated on May 18, 1999. (c) The managing underwriters were Paulson Investment Company, Inc. and Redwine & Company, Inc. (d) Securities Sold: (i) Common shares - common shares par value $.001 per share (ii) Representatives' warrants - warrants convertible into 132,500 common shares at a price of $7.80 per share. The representatives' warrants are exercisable over the four year period beginning on the first anniversary of the offering. These warrants were issued to the underwriters in connection with the offering. (e) Amount registered and sold: (i) Common shares - 1,523,750 common shares were registered; 1,250,000 common shares were sold for the account of the issuer and 75,000 common shares were sold for the account of Assaf Ran, our president, chief executive officer and principal shareholder. 16 (ii) Representatives' warrants - 132,500 warrants registered and issued to the underwriters in connection with the IPO. (iii) Common shares issuable upon exercise of representatives' warrants - 132,500 common shares registered. (f) Gross proceeds to issuer: $8,125,000. (g) Expenses incurred in connection with issuance of securities: Underwriting discounts and commissions $ 731,250 Expenses paid to the underwriters $ 252,455 Other expenses $ 717,532 ---------- $1,701,237 (h) Net proceeds: $6,423,763. (i) Amount of net offering proceeds used for the purposes listed below: Temporary investments with maturities of three months or less: $ 3,052,002 =========== New Yellow printing and distribution cost $ 3,300,336 =========== Investment in Blackbook Photography Inc. $ 71,425 =========== Item 4. Submission of Matters to a Vote of Security Holders A. The Annual Meeting of stockholders was held on Wednesday, July 10, 2002. B. The names of the directors elected at the meeting: Assaf Ran, Michael J.Jackson, Yael Shimor-Golan, Phillip Michals, Eran Goldschmid and Stephen A. Zelnick. There are no directors whose term of office has not continued. C. At the Annual Meeting the following matters were approved by the vote indicated: 1. Election of six directors: Abstained Broker For Witheld Nonvotes --- ------- -------- Assaf Ran 2,921,030 1,400 Michael J. Jackson 2,921,030 1,400 Yael Shimor-Golan 2,921,030 1,400 Phillip Michals 2,921,030 1,400 Eran Goldschmid 2,921,030 1,400 Stephen A. Zelnick 2,921,030 1,400 17 2. Approval of an amendment to the Company's Stock Option Plan: Abstained Broker For Witheld Nonvotes --- ------- -------- 2,762,353 29,887 130,200 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit No. Description: ----------- ------------ 99.1 Chief Executive Officer Certification pursuant to 18 U.S.C section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 99.2 Chief Financial Officer Certification pursuant to 18 U.S.C section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K: There were no reports on Form 8-K filed during the quarter for which this report is filed SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DAG Media, Inc. (Registrant) Date: November 6, 2002 By /s/ Assaf Ran -------------------------------- Assaf Ran, President and Chief Executive Officer Date: November 6, 2002 By: /s/ Yael Shimor-Golan -------------------------------- Yael Shimor-Golan, Chief Financial Officer 18 CERTIFICATION I, Assaf Ran, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of DAG Media, Inc. ("the registrant"). 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant`s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date: 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 19 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most 7. recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 6, 2002 /s/ Assaf Ran -------------- Assaf Ran 20 CERTIFICATION I, Yael Shimor-Golan , certify that: 1. I have reviewed this quarterly report on Form 10-QSB of DAG Media, Inc. ("the registrant"). 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant`s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date: 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 21 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors 7. that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 6, 2002 /s/ Yael Shimor-Golan --------------------- Yael Shimor-Golan 22