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 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. NewYellow 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 third 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 an agreement, 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

 

Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000

 

Advertising revenues

 

Advertising revenues for three months ended June 30, 2001 were $1,432,000 compared to $135,000 for the three months ended June 30, 2000, an increase of $1,297,000. The increase was primarily attributable to the fact that only The Jewish Master Guide directory was published in the three months period ended June 30, 2000 whereas in the three months period ended June 30, 2001 both The Jewish Master Guide directory and the New Yellow directory were published.

 

Publication costs

 

Publication costs for the three months ended June 30, 2001 were $600,000 compared to $61,000, for the corresponding period in 2000, an increase of $539,000. As a percentage of advertising revenues, publication costs were 41.9% in the period ending June 30, 2001 compared to 45.2%, in the corresponding 2000 period. The increase in publication costs primarily reflects that in the three month period ending June 30, 2001, we published two directories including the larger New Yellow directory. The decrease in the publication cost as a percentage of revenues is a result of minor decreases in the overall publication costs.

 

Selling expenses

 

Selling expenses for the three months ended June 30, 2001 were $490,000 compared to $84,000 for the corresponding period in 2000, an increase of $406,000. This increase is primarily a result of the increased sales.

 

General and administrative costs

 

General and administrative expenses for the quarter ended June 30, 2001 were $513,000 compared to $569,000 for the same period in 2000, a decrease of 9.8 %. This decrease is primarily attributable to (1) decreased bad debt expense related to the Company's

 

assessment of its allowance for doubtful accounts (2) decreased consulting and investor relation costs.

 

Other income

 

For the quarter ended June 30, 2001, the Company had other income of $171,000 compared to other income of $106,000 for the quarter ended June 30, 2000. This increase was attributable to the gains on sales of the AdStar securities sold by the Company.

 

Provision (benefit) for income taxes

 

There was no provision for income taxes for the three months ended June 30, 2001 as opposed to an income tax benefit of $215,000 for the three month period ended June 30, 2000. In the second quarter of 2001, we used a 46% rate to calculate taxes on the expected annual income.

 

Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000

 

Advertising revenues

 

Advertising revenues for the six months ended June 30, 2001 were $2,935,000 compared to $2,769,000 for the six months ended June 30, 2000, an increase of $166,000 or 6.0%. The increase was primarily attributable to increased advertising revenue, primarily with respect to the third time publication of New Yellow.

 

Publication costs

 

Publication costs for the six months ended June 30, 2001 were $789,000 compared to $562,000 for the corresponding period in 2000, an increase of $227,000 that is attributable to the growth of the directories and increased costs relating particularly to New Yellow. As a percentage of net advertising revenues, publication costs were 26.9% in the 2001 period compared to 20.3%, in the 2000 period. The differential 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 six months ended June 30, 2001 were $1,076,000 compared to $944,000 for the corresponding period in 2000, an increase of 14.0%. As a percentage of advertising revenues, selling expenses increased to 36.7% from 34.1%. The increase in selling expenses was attributable to the increases in advertising revenues as well as an increase in the bonus payments paid on the commission rates particularly associated with New Yellow sales.

 

Administrative and general costs

 

Administrative and general costs for the six months ended June 30, 2001 were $1,188,000 compared to $1,248,000 for the same period in 2000, a decrease of 4.8%. The decrease was primarily attributable to (1) a decrease in the expense for uncollectible receivables (2)

 

ceasing to outsource the responsibilities of investor relations and (3) decreased consulting costs.

 

Other income

 

For the six months ended June 30, 2001 the Company had other income of $253,000 compared to other income of $186,000 for the six months ended June 30, 2000. This increase was primarily attributable to the approximate $89,000 gain on sale of AdStar securities previously invested in.

 

Provision (benefit) for income taxes

 

Provision (benefit) for income taxes for the six months ended June 30, 2001 and June 30, 2000 were $69,000 and $(95,000), respectively. The increase in the provision for income taxes was directly attributable to the change in operating income.

 

Liquidity and Capital Resources

 

At June 30, 2001 we had cash and cash equivalents of $6,653,000 and working capital of $6,720,000 as compared to cash and cash equivalents of $7,056,000 and working capital of $6,592,000 at June 30, 2000. The decrease primarily reflects the cash placed under restriction due to the pending settlement of the AdStar shares previously invested in.

 

Net cash used in operating activities was $235,000 for the six months ended June 30, 2001. For the comparable 2000 period, net cash used in operating activities was $42,000. The increase in net cash used in operating activities reflects increased costs particularly relating to the expansion of the company and the publication of the New Yellow Manhattan directory.

 

Net cash used in investing activities was $261,000 for the six months ended June 30, 2001. Net cash used in investing activities for the quarter ended June 30, 2001 was primarily used for the investment in AdStar. For the comparable 2000 period net cash used in investing activities was $103,000.

 

There was no cash used in financing activities for the periods ended June 30, 2001 and 2000, respectively.

 

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 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.