November 06, 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 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

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.

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.

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,

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

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.

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.


SOURCE: DAG Media, Inc.

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