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 June 30, 2000 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) 263-8454 (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 August 4, 2000, there were outstanding 2,907,460 shares of the issuer's common shares, $.001 par value. DAG MEDIA, INC. QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 TABLE OF CONTENTS Part I - FINANCIAL INFORMATION Page Number ----------- Item 1. Financial Statements (unaudited) Balance Sheet at June 30, 2000 (unaudited).............. 2 Statement of Operations for the Three and Six Month Periods Ended June 30, 2000 and 1999.............. 3 Statements of Cash Flows for the Six Month Periods Ended June 30, 2000 and 1999.............. 4 Notes to Financial Statements........................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 7 Part II - OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds............... 11 Item 6. Exhibits and Reports.................................... 12 SIGNATURES ....................................................... 13 DAG MEDIA, INC. BALANCE SHEET JUNE 30, 2000 (unaudited) Assets Current assets: Cash and cash equivalents $ 7,055,694 Trade accounts receivable, net of allowance for doubtful accounts of $447,750 2,660,014 Directories in progress 744,765 Other current assets 261,850 ------------ Total current assets 10,722,323 ------------ Fixed assets, net of accumulated depreciation of $46,578 228,515 Goodwill and trademarks, net of accumulated amortization of $60,795 1,290,186 Other assets 12,501 ------------ Total assets $ 12,253,525 ============ Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued expenses $ 53,506 Accrued commissions and commissions payable 598,234 Advanced billing for unpublished directories 1,998,265 Income tax payable 424,819 Deferred tax payable 352,710 ------------ Total current liabilities 3,427,534 ------------ Shareholders' equity: Preferred shares - $.01 par value; 5,000,000 shares authorized; no shares issued -- Common shares - $.001 par value; 25,000,000 authorized; 2,976,190 issued and 2,907,460 outstanding 2,976 Additional paid-in capital 7,799,789 Treasury stock, at cost-68,730 shares (231,113) Retained earnings 1,254,339 ------------ Total shareholders' equity 8,825,991 ------------ Total liabilities and shareholders' equity $ 12,253,525 ============ The accompanying notes are an integral part of this balance sheet. 2 DAG MEDIA, INC. STATEMENTS OF OPERATIONS (unaudited) Three Months Ended June 30, Six Months Ended June 30, 2000 1999 2000 1999 ---- ---- ---- ---- Net advertising revenues $ 413,172 $ 282,909 $ 3,483,445 $ 2,268,781 Publishing costs 57,179 35,970 852,812 330,769 ----------- ----------- ----------- ----------- Gross profit 355,993 246,939 2,630,633 1,938,012 Operating costs and expenses: Selling expenses 118,380 45,697 1,006,085 619,782 Administrative and general 564,016 183,212 1,242,696 501,999 ----------- ----------- ----------- ----------- Total operating costs and expenses 682,396 228,909 2,248,781 1,121,781 Interest income 106,263 40,959 186,262 43,062 (Loss) earnings from operations before provision (benefits) for income taxes and equity in loss of affiliate (220,140) 58,989 568,114 859,293 Provision (benefit) for income taxes (96,075) 12,913 270,525 405,913 Equity in loss of affiliate -- -- -- (2,654) ----------- ----------- ----------- ----------- Net (loss) income available to common shareholders $ (124,065) $ 46,076 $ 297,589 $ 450,726 =========== =========== =========== =========== Net (loss) income per common share --Basic $ (.04) $ .02 $ .10 $ .28 =========== =========== =========== =========== --Diluted $ (.04) $ .02 $ .10 $ .28 =========== =========== =========== =========== Weighted average number of common shares outstanding --Basic 2,907,460 2,101,452 2,907,460 1,615,923 =========== =========== =========== =========== --Diluted 2,907,460 2,101,452 2,908,133 1,615,923 =========== =========== =========== =========== The accompanying notes are an integral part of these financial statements. 3 DAG MEDIA, INC. STATEMENTS OF CASH FLOWS (unaudited) Six Months Six Months Ended Ended June 30, 2000 June 30, 1999 ------------- ------------- Cash flows from operating activities: Net income $ 297,589 $ 450,726 Adjustment to reconcile net income to net cash provided by by operating activities-- Depreciation and amortization 45,374 17,580 Bad debt expense 526,933 (68,903) Equity in loss of affiliate -- 2,654 Changes in operating assets and liabilities-- Accounts receivable (721,390) (68,523) Directories in progress 168,504 (38,134) Deferred tax asset 21,000 Advances to employees (90,841) -- Other current and noncurrent assets (60,440) (64,657) Dividend receivable -- (14,050) Accounts payable and accrued expenses 23,551 (54,097) Commissions payable 27,929 -- Advance billing for unpublished directories (527,089) (94,921) Income taxes payable 267,529 56,906 ----------- ----------- Net cash (used) provided by operating activities (42,351) 145,581 ----------- ----------- Cash flows from investing activities: Investments in affiliates -- 39,221 Acquisition of business -- 41,875 Net purchase (sale) of fixed assets (102,812) 179 ----------- ----------- Net cash (used) provided by investing activities (102,812) 81,275 Cash flows from financing activities: Proceeds from IPO, net of expenses -- 6,431,790 Repayment of loans to shareholders, net -- 205,223 ----------- ----------- Net cash provided by financing activities -- 6,637,013 ----------- ----------- Net (decrease) increase in cash (145,163) 6,863,869 ----------- ----------- Cash and cash equivalents, beginning of period 7,200,857 310,185 ----------- ----------- Cash and cash equivalents, end of period $ 7,055,694 $ 7,174,054 =========== =========== The accompanying notes are an integral part of these financial statements. 4 DAG MEDIA, INC. Item 1. NOTES TO FINANCIAL STATEMENTS June 30, 2000 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, 1999 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. 2. NEW ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission (SEC) issues Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements. SAB No. 101" expresses the views of the SEC staff in applying generally accepted accounting principles to certain revenue recognition issues. The Company has concluded that this SAB did not have a material impact on its financial position or its result of operations. 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 is 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: Six Months Ended June 30, 2000 1999 - -------------------------------------------------------------------------------- Basic 2,907,460 1,615,923 Incremental shares for assumed conversion of options 673 -- - -------------------------------------------------------------------------------- Diluted 2,908,133 1,615,923 - -------------------------------------------------------------------------------- 5 The difference between basic and diluted weighted average common shares resulted from the assumption that the dilutive stock options outstanding were exercised. There were 74,384 and 86,884 convertible securities that options were not included in the diluted earnings per share calculation for the year 2000 three months period-ended and six months period-ended, respectively, as their effect would have been anti-dilutive. 4. SUBSEQUENT EVENTS At the Company's annual shareholder meeting held on July 18, 2000, an amendment to the Company's Stock Option Plan to increase by 145,000 options the maximum number of options issuable there under was proposed and passed. 6 DAG MEDIA, INC. 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 unaudited consolidated 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 three yellow page directories, NewYellow, the Jewish Israeli Yellow Pages and the Master Guide, in print and on the worldwide web. The Jewish Israeli Yellow Pages and the Master Guide directories are targeted at niche markets and are primarily distributed to the Israeli and Jewish communities throughout the greater New York metropolitan area and northern New Jersey. NewYellow is a general interest, English only yellow page directory that is currently being distributed throughout Manhattan. In addition, to give added value to users and advertisers in our directories, we also operate the Referral Service and a "portal" web site, www.porty.com. 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. NewYellow competes directly with the Bell Atlantic Yellow Pages in New York City. NewYellow is available online at our web site www.newyellow.com. 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 Bell Atlantic 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 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 which the ad appears is published. In the case of NewYellow, a portion of the advertising fee is allocated to internet advertising, and is, therefore, recognized when the ad is published in the online version of NewYellow. Similarly, 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. However, in connection with NewYellow we pay commissions to our sales representatives even before we collect the related advertising revenue. 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, 7 licensing fees, office overhead and wages and fees paid to employees and contract workers (other than sales representatives). Results of Operations Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999 Net advertising revenues Net advertising revenues for three months ended June 30, 2000 were $413,000 compared to $283,000 for the three months ended June 30, 1999, an increase of 45.9%. The increase was primarily attributable to increased sales resulting from entire quarter's Internet sales relating to the NewYellow.com for the first time in the second quarter of 2000 as well as increased sales for The Jewish Master Guide directory. Publication costs Publication costs for the three months ended June 30, 2000 were $57,000 compared to $36,000, for the corresponding period in 1999, an increase of 58.3 %. As a percentage of net advertising revenues, publication costs were 13.8% in the period ending June 30, 2000 compared to 12.7%, in the corresponding 1999 period. The increase in publication costs primarily reflects that in the three month period ending June 30, 2000, we published a larger directory as well as there was an increase in the market price of paper. Selling expenses Selling expenses for the three months ended June 30, 2000 were $118,000 compared to $46,000 for the corresponding period in 1999, an increase of 156.5%. As a percentage of net advertising revenues, selling expenses increased to 28.6% in the period ending June 30, 2000 from 16.3% in the corresponding 1999 period. This increase is primarily a result of increased New Yellow Internet related sales for which higher commission rates are being paid. Administrative and general costs Administrative and general expenses for the quarter ended June 30, 2000 were $564,000 compared to $183,000 for the same period in 1999, an increase of 208.2%. This increase is primarily attributable to (1) increased bad debt expense related to the Company's reassessment of its allowance for doubtful accounts (2) increased officer and administrative salaries related to the Company's expansion (3) increased consulting, investor relations and professional service costs of related to our status as a public company and (4) increased advertising costs for the promotion of New Yellow. Interest income For the quarter ended June 30, 2000, we had interest income of $106,000 compared to interest income of $41,000 for the quarter ended June 30, 1999. This increase was attributable to the interest earned, for the complete second quarter of 2000, on the investment of the net proceeds from our initial public offering in May 1999 whereas in the 1999 period interest was earned on the net IPO proceeds for only a partial quarter. 8 Provision (benefit) for income taxes Provision (refund) for income taxes for the three months ended June 30, 2000 and June 30, 1999 were $(96,000) and $13,000, respectively. In the second quarter of 2000, we used a 46% rate to calculate taxes on the expected annual income thereby yielding an expected tax benefit. Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999 Net advertising revenues Net advertising revenues for the six months ended June 30, 2000 was $3,483,000 compared to $2,269,000 for the six months ended June 30, 1999, an increase of 53.5%. The increase was primarily attributable to increased advertising revenue with respect to the publication of (1) the February 1999 issue of the The Jewish Israeli Yellow Pages, (2) the third edition of the Master Guide directory in June 2000 and (3) the first edition of the New Yellow Manhattan directory . Also, in the prior comparable period, we did not have any Internet advertising sales for the full period. Publication costs Publication costs for the six months ended June 30, 2000 were $853,000 compared to $331,000, for the corresponding period in 1999, an increase of 157.7%. However, as a percentage of net advertising revenues, publication costs were 24.5% in the 2000 period compared to 14.6%, in the 1999 period. The increase in publication costs reflects the fact that we published three directories in the first half of 2000 compared to two directories in the first half of 1999. The increase of publication costs as a percentage of net advertising revenues reflect the costs related to additional directories as well as a general increase in the current year for the cost of paper thereby affecting the printing costs of the directories Selling expenses Selling expenses for the six months ended June 30, 2000 were $1,006,000 compared to $620,000 for the corresponding period in 1999, an increase of 62.3%. As a percentage of net advertising revenues, selling expenses increased to 28.9% from 27.3%. The increase in selling expenses was attributable to the increases in net advertising revenues as well as an increase in the commission rates and bonus payments made, particularly associated with New Yellow sales. Administrative and general costs Administrative and general costs for the six months ended June 30, 2000 were $1,243,000 compared to $502,000 for the same period in 1999, an increase of 147.6%. The increase was primarily attributable to (1) an increase in the expense for uncollectible receivables (2) increased officer and administrative salaries related to the company's expansion (3) increased consulting, investor relations and professional service costs related to our status as a public company and (4) increased advertising costs for the promotion of New Yellow. Interest income, net For the six months ended June 30, 2000 we had net interest income of $186,000 compared to net interest income of $43,000 for the six months ended June 30, 1999. This increase was attributable 9 to the investment of the net proceeds of our initial public offering for the full six month period ending June 30, 2000. Provision for income taxes Provision for income taxes for the six months ended June 30, 2000 and June 30, 1999 were $271,000 and $406,000, respectively. The decrease in the provision for income taxes was directly attributable to the decrease in operating income. Liquidity and Capital Resources At June 30, 2000 we had cash and cash equivalents of $7,056,000 and working capital of $7,295,000 as compared to cash and cash equivalents of $7,174,000 and working capital of $7,367,000 at June 30, 1999. These decreases primarily reflect the use of proceeds for the Company's expansion. Net cash used by operating activities was $42,000 for the six months ended June 30, 2000. For the comparable 1999 period, net cash provided by operating activities was $146,000. The decrease in net cash provided by operating activities reflects increased costs related to the expansion of the company and the first time publication of the New Yellow Manhattan directory in the six month period ending June 30, 2000 compared to the same period in 1999. Net cash used by investing activities was $ 103,000 for the three months ended June 30, 2000. Net cash used by investing activities in the quarter ended June 30, 2000 was primarily used for the purchase of improved accounting and data information systems. For the comparable 1999 period net cash provided by investing activities was $81,000. There was no cash used for financing activities for the six months ended June 30, 2000. For the comparable 1999 period, net cash provided by financing activities was $6,637,000 consisting primarily of the net proceeds of our initial public offering in May 1999 and the proceeds from the repayment of Mr. Ran's loans. 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 significantly over the next 12 months as we continue to market our directories and expand our on-line services, in particular for NewYellow. 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 10 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. 11 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. (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. 12 (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: $5,585,089 ========== New Yellow printing and distribution cost $ 569,674 ========== Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 27- Financial Data Schedule (b) Reports on Form 8-K - none 13 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: August 4, 2000 By /s/ Assaf Ran ----------------------------------------- Assaf Ran, President Date: August 4, 2000 By: /s/ Orna Kirsh ----------------------------------------- Orna Kirsh, Chief Financial Officer 14