6. Management's Discussion and Analysis or Plan of Operations

 

^{The following management's discussion and analysis of financial condition and results of operations should be read in conjunction with our audited 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.}

 

^Overview

 

^{We currently publish and distribute yellow page directories in print and on the worldwide web. Our directories target the mainstream yellow page market in New York City as well as 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.}

 

^{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in cash or evidenced by a receivable, generated in advance of publication dates, are recorded as "Advanced billings for unpublished directories" on our balance sheet.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. However, in connection with New Yellow 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, licensing fees, office overhead and wages and fees paid to employees and contract workers (other than sales representatives).}

 

^{Results of operations}

 

^{The following table sets forth for the periods presented statement of operations data as a percentage of net advertising revenue. The trends suggested by this table may not be indicative of future operating results.}

 

	2000	1999
	----	----
Net advertising revenues	100.0%	100.0%
Publishing costs	22.8%	10.0%
Gross profit	77.2%	90.0%
Selling expenses	33.8%	38.1%
Administrative and general expenses	47.4%	38.0%
Total operating costs and expenses	81.2%	76.0%
Other income, net	6.8%	5.0%
Earnings before provisions for income taxes and equity income	2.8%	18.9%
Provision for income taxes	1.4%	9.0%
Equity in loss of affiliat	--	-.01%
Cumulative effect of change in accounting	-8.2%	--
Net income	-6.8%	9.9%

 

Years-ended December 31, 2000 and 1999

 

^{Net advertising revenues}

 

^{Net advertising revenues in 2000 and 1999 were $6,237,000 and $4,365,000, respectively, representing an increase of $1,872,000, or 42.9 % in 2000. This increase was primarily attributable to: (1) the first time publication of New Yellow - Manhattan directory as well as its internet on-line version (2) increased advertising revenue with respect to the publication of The Jewish Israeli Yellow Pages and The Master Guide and (3) some increases in our advertising rates. Furthermore, in addition to the fact that in 1999 we had not published a New Yellow directory, we had only one publication of the MasterGuide and it was the second publication printed thus only establishing its initial history of publication.}

 

^{Publishing costs}

 

^{Publishing costs for 2000 and 1999 were $1,422,000 and $438,000, respectively, representing an increase of $984,000, or 224.7 % in 2000. As a percentage of net advertising revenues, publishing costs were 22.8 % in 2000 compared to 10.0% in 1999 . The increase in publishing costs as a percentage of net advertising revenues primarily reflects that in the fiscal year ended December 31, 2000 we first printed New Yellow which is (1) more costly to print than our other directories which are published abroad and (2) with an initial publication there are certain start-up costs involved with such an endeavor.}

 

^{Selling expenses}

 

^{Selling expenses for the year ended December 31, 2000 and 1999 were $2,109,000 and $1,661,000, respectively, representing an increase of $448,000, or 27.0 % in 2000. As a percentage of net advertising revenues, selling expenses decreased to 33.8 % from 38.1 %. The decrease in selling expenses as a percentage of revenues results from the fact that the range of commission percentages fluctuate dependant on the sales source and publication, i.e. if a sale is made by a given office or agency. The resulting ratio of agency sales versus office sales will thereby effect the overall sales commissions percentage as a percentage of revenues as seen in 2000.}

 

^{Administrative and general costs}

 

^{Administrative and general expenses for 2000 and 1999 were $2,958,000 and $ 1,657,000, respectively, representing an increase of $1,301,000, or 78.5%, in 2000. This increase is primarily attributable to (1)}

^{increased write-offs of uncollectible accounts due to increasing sales and a more stringent Company policy with respect to accounts receivable write-offs (2) a cumulative increase in consulting and professional services as well as insurance costs related to our status as a public company for the entire fiscal year (3) increased officer expenses and payroll expenses resulting from corporate expansion and (4) increased advertising costs for the Company as well as for the NewYellow publication.}

 

^{Other income, net}

 

^{For the year ended December 31, 2000 and 1999 we had other income of $425,000, and $226,000, respectively. This increase of $199,000 was primarily attributable to interest and dividends earned from the investment of the net proceeds from our initial public offering in May 1999. Earnings before provision for income taxes, equity income and cumulative effect of change in accounting principle Earnings before provision for income taxes and equity income for the year ended December 31, 2000 were $173,000 compared to $827,000 for the year ended December 31, 1999. The decrease of $654,000 was primarily attributable to the increase of $622,000 in bad debt expense, included in general and administrative expenses, since the prior year as well as increased publication costs and selling expenses associated with the establishment and growth of the Company and its newest publication NewYellow.}

 

^{Provision for income taxes}

 

^{Provision for income taxes in 2000 and 1999 was $88,000 and $391,000, respectively. The decrease in provision for income taxes reflects the decrease in earnings. As a percentage of net advertising revenues, provision for income taxes decreased to 1.4% in 2000 from 9.0% in 1999.}

 

^{Equity in Loss of affiliate}

 

^{There was no equity in loss of affiliate in 2000. In 1999, there was a $3,000 equity in loss of affiliate resulting from losses incurred in the first quarter of 1999 by our subsidiary at the time, DAH, that has since been consolidated pursuant to its acquisition by us that became effective with our initial public offering, in May 1999.}

 

^{Cumulative effect of change in accounting principle}

 

^{The cumulative effect of change in accounting principles incurred in fiscal year 2000 was a loss of $511,000, net of tax benefit. This charge was incurred as a result of the fact that in December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements. SAB No. 101 that expresses the views of the SEC staff in applying generally accepted accounting principles to certain revenue recognition issues. SAB 101 has since become a required accounting principle to be applied with the onset of the fourth quarter of this year, effective from January 1, 2000.}

 

^{Net income (loss) available to common shareholders}

 

^{Net loss for 2000 was $(425,000) compared to net income of $433,000 in 1999 respectively 1998. This decrease is primarily attributable to the resulting increased expenses in fiscal year 2000 associated with the growth of the Company, increased publishing costs as they relate to the company's newest publication, New Yellow, and its status as a public corporation for a full fiscal year.}

 

^{Liquidity and Capital Resources}

 

^{Until our initial public offering in 1999, our only source of funds was cash flow from operations, which has funded both our working capital needs and capital expenditures. We have no debt to third parties or credit facilities. Generally, advertising fees, whether collected in cash or evidenced by a receivable, are generated before the publication of the related directory and before many of the costs directly associated with publishing the related directory are incurred.}

 

^{As a result of our initial public offering in May 1999, we received proceeds of approximately $6.4 million net of underwriting discounts and commissions and other expenses. The funds from the initial public offering, $6.7 million in the aggregate, were deposited at the time in an interest bearing money market account, thereby increasing our working capital and are available to pay operating expenses including marketing expenses for NewYellow.}

 

^{We do not have any material commitments under any leases, sales agency agreements or employment agreements, other than those of the employment agreements with Assaf Ran and Orna Kirsh. Those agreements call for annual salaries of $75,000 and $100,000 respectively. Mr. Ran's contract runs through June 30, 2002, and Ms. Kirsh's agreement expires on July 19, 2001.}

 

^{At December 31, 2000 we had cash and cash equivalents of $7,149,000 and working capital of $6,643,000 compared to cash and cash equivalents of $7,201,000 and working capital of $6,997,000 at December 31, 1999. The decrease in cash and cash equivalents is primarily attributable to the use of cash in investing activity.}

 

^{Net cash provided by operating activities was $66,000 for the year ended December 31, 2000 compared to $500,000 for the year ended December 31, 1999. The decrease in net cash provided by operating activities reflects increased corporate expenses in 2000.}

 

^{Net cash used in investing activities was $118,000 for the year ended December 31, 2000 compared to net cash used in investing activities of $9,000 for the year ended December 31, 1999. Net cash used in investing activities in 2000 is primarily the result of various fixed asset purchases made.}

 

^{There was no cash provided by financing activities in 2000 as opposed to $6,399,000 of net cash provided by financing activities in 1999. The net cash provided from financing activities in 1999 reflects the initial public offering proceeds.}

 

^{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 NewYellow and expand our on-line services.}

 

^{Recent accounting pronouncements}

 

^{In December 1999, the Securities and Exchange Commission (SEC) issued 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 decided to apply this SAB effective fiscal year ending December 31, 2000. The effect of this application can be seen in the table below.}

 

Three months period end

	3/31/00	6/30/00	9/30/00
As reported	$421,654	$(124,065)	$142,430
Effect for applying SAB 101	225,990	(133,746)	(33,921)
Net income (loss)	$647,644	$(257,811)	$108,509
Per Share Amounts: Basic earnings per common share:
As reported	$0.15	$(0.04)	$0.05
Effect for applying SAB 101	$0.08	$(0.05)	$(0.01)
Net income (loss)	$0.23	$(0.09)	$0.04
Diluted earnings per common share:
As reported	$0.14	$(0.04)	$0.05
Effect for applying SAB 101	$0.08	$(0.05)	$(0.01)
Net income (loss)	$ 0.22	$(0.09)	$0.04

Item 7. Financial Statements

The financial statements of the Company required by this item are set forth beginning on page F-1.

Item 8. Change in and Disagreements with Accountants on Accounting Financial Disclosure.

Not Applicable.