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, 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 directory in New York City. New Yellow is the only general interest yellow page directory in New York that provides 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. 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, printing and distribution. 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 September 30, 2001 Compared to Three Months Ended September 30, 2000

 

Advertising revenues

 

Advertising revenues for three months ended September 30, 2001 were $1,464,000 compared to $1,718,000 for the three months ended September 30, 2000, a decrease of $254,000. The decrease was primarily attributable to the general slowdown in business activity and reflects a decrease in sales of the 2001 edition of the Jewish Yellow Pages directory.

 

Publication costs

 

Publication costs for the three months ended September 30, 2001 were $213,000 compared to $308,000, for the corresponding period in 2000, a decrease of $95,000. As a percentage of advertising revenues, publication costs were 14.55% in the period ending September 30, 2001 compared to 17.92%, in the corresponding 2000 period. The decrease in publication costs primarily reflects the decrease in sales in the three months period ending September 30, 2001. The decrease in publication cost as a percentage of revenues is a result of decreases in the overall publication costs.

 

Selling expenses

 

Selling expenses for the three months ended September 30, 2001 were $624,000 compared to $633,000 for the corresponding period in 2000, a decrease of $9,000. This decrease is primarily a result of the decrease sales.

 

General and administrative costs

 

General and administrative expenses for the quarter ended September 30, 2001 were $479,000 compared to $686,000 for the same period in 2000, a decrease of 30.17 %. 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 (3) decreased travel costs and miscellaneous expenses due to better tracking of expense items.

 

Other income

 

For the quarter ended September 30, 2001, the Company had other income of $74,000 compared to other income of $111,000 for the quarter ended September 30, 2000. This decrease was attributable to the decrease in interest rates resulting in a decrease in interest income in the third quarter of 2001.

 

Provision for income taxes

 

There was a provision for income taxes for the three months ended September 30, 2001 and September 30, 2000 of $98,000 and $111,000, respectively. In the third quarter of 2001, we used a 46% rate to calculate taxes on the expected annual income.

 

Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30,

 

Advertising revenues

 

Advertising revenues for the Nine months ended September 30, 2001 were $4,399,000 compared to $4,487,000 for the nine months ended September 30, 2000, a decrease of $88,000 or 1.96%. The decrease was primarily attributable to the general slowdown in business activity and reflects a decrease in sales of the 2001 edition of the Jewish Yellow Pages directory.

 

Publication costs

 

Publication costs for the nine months ended September 30, 2001 were $1,002,000 compared to $875,000 for the corresponding period in 2000, an increase of $127,000 that is attributable to the increased costs relating particularly to New Yellow. The company hired a new distributing company for a better distribution of the New Yellow, the rates of the new distributor are higher by 35% then the previous one. As a percentage of net advertising revenues, publication costs were 22.77% in the 2001 period compared to 19.50%, 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 nine months ended September 30, 2001 were $1,700,000 compared to $1,577,000 for the corresponding period in 2000, an increase of 7.80%. As a percentage of advertising revenues, selling expenses increased to 38.65% from 35.15%. The increase in selling expenses was attributable to the Company's policy to hire and train more sales representatives as well as an increase in bonus payments paid on the commission rates particularly associated with New Yellow sales.

 

Administrative and general costs

 

Administrative and general costs for the nine months ended September 30, 2001 were $1,668,000 compared to $1,929,000 for the same period in 2000, a decrease of 13.53%. The decrease was primarily attributable to (1) a decrease in the expense for uncollectible receivables (2) reduction in relations investor (3) decreased consulting costs and (4) decreased travel costs and miscellaneous expenses.

 

Other income

 

For the nine months ended September 30, 2001 the Company had other income of $320,000 compared to other income of $298,000 for the nine months ended September 30, 2000. This increase was primarily attributable to the approximate $89,000 gain on sale of AdStar securities offset by a decrease in interest income.

 

Provision for income taxes

 

Provision for income taxes for the nine months ended September 30, 2001 and September 30, 2000 were $167,000 and $206,000, respectively. The decrease in the provision for income taxes was directly attributable to the change in operating income.

 

Liquidity and Capital Resources

 

At September 30, 2001 we had cash and cash equivalents of $6,965,000 and working capital of $6,866,000 as compared to cash and cash equivalents of $6,111,000 and working capital of $6,366,000 at September 30, 2000. The increase 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 $140,000 for the nine months ended September 30, 2001. For the comparable 2000 period, net cash provided by operating activities was $17,000. 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 $44,000 for the nine months ended September 30, 2001. Net cash used in investing activities for the quarter ended September 30, 2001 was primarily used for the investment in AdStar. For the comparable 2000 period net cash used in investing activities was $1,107,000.

 

There was no cash used in financing activities for the periods ended September 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 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.

 

DAG MEDIA, INC.