May 09, 2002

DAG MEDIA INC (DAGM)

Quarterly Report (SEC form 10QSB)

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 unaudite 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, the fourth edition was printed and distributed in October 2001 and the fifth edition is expected to be printed in April 2002. New Yellow competes directly with the Verizon Yellow Pages in New York City. New Yellow is the only general interest yellow page directory to provide full-color advertisements. 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 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).

Results of Operations

Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001

Advertising revenues

Advertising revenues for three months ended March 31, 2002 were $1,575,000 compared to $1,503,000 for the three months ended March 31, 2001, an increase of $72,000. The increase was primarily attributable to the general growth in business activity and reflects an increase in sales of the 2002 edition of the Jewish Yellow Pages directory.

Publication costs

Publication costs for the three months ended March 31, 2002 were $217,000 compared to $189,000, for the corresponding period in 2001, an increase of $28,000. As a percentage of advertising revenues, publication costs were 13.78% in the period ending March 31, 2002 compared to 12.57%, in the corresponding 2001 period. The increase in publication costs primarily reflects the increase in the printing costs of the Jewish Yellow Pages directory.

Selling expenses

Selling expenses for the three months ended March 31, 2002 were $450,000 compared to $586,000 for the corresponding period in 2001, a decrease of $136,000. This decrease is primarily a result of a decrease in the selling personnel.

General and administrative costs

General and administrative expenses for the quarter ended March 31, 2002 were $656,000 compared to $675,000 for the same period in 2001, a decrease of 2.79 %. This decrease is primarily attributable to a reduction in investor relation costs.

Other income

For the quarter ended March 31, 2002, the Company had other income of $70,000 compared to other income of $82,000 for the quarter ended March 31, 2001. This decrease was attributable to the decrease in interest rates resulting in decreased interest income in the first quarter of 2002.

Provision (benefit) for income taxes

Provision for income taxes in the three months ended March 31, 2002 and 2001 was $ 155,000 and $ 69,000, respectively. In the first quarter of 2002, we used a 46% rate to calculate taxes on the expected annual income.

Liquidity and Capital Resources

At March 31, 2002 we had cash and cash equivalents, including preferred stocks and other marketable securities of $6,993,000 and working capital of $6,759,000 as compared to cash and cash equivalents, including preferred stocks and other marketable securities of $7,154,000 and working capital of $6,737,000 at March 31, 2001. The decrease primarily reflects the use of cash in operating and investing activities.

Net cash provided by operating activities was $36,000 for the three months ended March 31, 2002. For the comparable 2001 period, net cash provided by operating activities was $6,000. The increase in net cash provided by operating activities reflects the increase in corporate earnings and the publication of the Jewish Israeli Yellow Pages directory.

Net cash provided by investing activities was $1,483,000 for the three months ended March 31, 2002 compared to net cash used in investing activities of $1,000 for the comparable 2001 period. Net cash provided by investing activities for the quarter ended March 31, 2002 was primarily the result of the company's selling of preferred stocks and other marketable securities.

Net cash provided by financing activities was $ 11,000 for the three months ended March 31, 2002 compared to none at the comparable 2001 period. The net cash provided by financing activities for the quarter ended March 31, 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 NewYellow.

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.

New Accounting Pronouncements

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.

Comparative information is as follows:

                                                            2002          2001
                                                            ----          ----
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Reported Net (Loss) Income                               $(727,326)     $66,383
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Add back cumulative effect of change in accounting
principle                                                  895,000           --
--------------------------------------------------------------------------------
Add back goodwill amortization                                  --       10,000
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Adjusted Net Income                                      $ 167,674      $76,383
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Basic earning per share
--------------------------------------------------------------------------------
Reported Net (Loss) Income                               $   (0.25)     $  0.02
--------------------------------------------------------------------------------
Goodwill amortization                                           --         0.01
--------------------------------------------------------------------------------
Cumulative effect of change in accounting principle           0.31           --
--------------------------------------------------------------------------------
Adjusted Net Income                                      $    0.06      $  0.03
--------------------------------------------------------------------------------
Diluted earning per share
--------------------------------------------------------------------------------
Reported Net (Loss) Income                               $   (0.25)     $  0.02
--------------------------------------------------------------------------------
Goodwill amortization                                           --         0.01
--------------------------------------------------------------------------------
Cumulative effect of change in accounting principle           0.31           --
--------------------------------------------------------------------------------
Adjusted Net Income                                      $    0.06      $  0.03
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In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 will be effective for financial statements of fiscal years beginning after December 15, 2001. Dag Media expects the adoption of SFAS No. 144 will not have material impact on the Company's financial position, results of operations or cash flows.

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.

                                 DAG MEDIA, INC.

 

SOURCE: DAG Media, Inc.

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