Item 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in cash or evidenced by a receivable, generated in advance of publication dates, are recorded as "Advanced billings for unpublished directories" on our balance sheet.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. 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 advertising revenue. The trends suggested by this table may not be indicative of future operating results.

 

	2001	2000
Advertising revenues	100.0%	100.0%
Publishing costs	26.9%	22.8%
Gross profit	73.1%	77.2%
Selling expenses	35.0%	33.8%
Administrative and general expenses	49.0%	47.4%
Total operating costs and expense	84.0%	81.2%
Other income, net	7.2%	6.8%
Earnings before provisions for income taxes and equity income	-3.6%	2.8%
(Benefit) provision for income taxes	-1.5%	1.4%
Cumulative effect of change in accounting	--	-8.2%
Net loss	-2.1%	-6.8%

 

Years-ended December 31, 2001 and 2000

Advertising revenues

Advertising revenues

 

Advertising revenues in 2001 and 2000 were $ 5,586,000 and $ 6,237,000 , respectively, representing a decrease of $ 651,000 , or 10.4%, in 2001. This decrease was primarily attributable to the general slowdown in business activity and particularly to the decrease in sales of the October edition of our NewYellow directory subsequent to the September 11th event. In addition, the decrease also reflects that only five directories were published in 2001 whereas six directories were published in 2000. The second edition of the Jewish Master Guide, which was scheduled to be published at December 2001, was rescheduled to be published in the middle of 2002.

 

Publishing costs

 

Publishing costs for 2001 and 2000 were $ 1,502,000 and $ 1,422,000, respectively, representing an increase of $80,000, or 5.6 %, in 2001. As a percentage of advertising revenues, publishing costs were 26.9 % in 2001 compared to 22.8% in 2000. The increase in publication costs primarily reflects the retention of a more expensive distributor to obtain broader distribution of NewYellow, as well as minor increases in the overall publication costs.

 

Selling expenses

 

Selling expenses for the year ended December 31, 2001 and 2000 were $ 1,953,000 and $ 2,109,000, respectively, representing a decrease of $ 156,000, or 7.4 %, in 2001. As a percentage of advertising revenues, selling expenses increased to 35.0 % from 33.8 %. The decrease in selling expenses is primarily a result of the decrease in sales. The increase in selling expenses as a percentage of revenues results from the fact that more sales were through sales agencies compared to sales from the in-house offices. The Company pays a higher commission rate to its sales agencies then to the in-house offices.

 

Administrative and general costs

 

Administrative and general expenses for 2001 and 2000 were $ 2,737,000 and $ 2,958,000 , respectively, representing a decrease of $ 221,000, or 7.4%, in 2001. This decrease is primarily attributable to (1) decreased write-offs of uncollectible accounts due to decreasing sales and a more stringent Company policy with respect of collecting debtor's balances and (2) a decrease in investors relations expenses.

 

Other income, net

 

For the year ended December 31, 2001 and 2000 we had other income of $ 405,000, and $ 425,000, respectively. This decrease of $ 20,000 was primarily attributable to a decrease in interest and dividend income due to a decrease in the interest rate offset by a realized gain on preferred stocks and other marketable securities.

 

Earnings before provision for income taxes and cumulative effect of change in accounting principle

 

Losses before provision for income taxes for the year ended December 31, 2001 was $(201,000) compared to earnings of $ 173,000 for the year ended December 31, 2000. The decrease of $ 374,000 was primarily attributable to the decrease in advertising revenues partially offset by the decrease of selling expenses, administrative and general expenses.

 

(Benefit) provision for income taxes

 

(Benefit) provision for income taxes in 2001 and 2000 was $ (84,000) and $ 88,000 , respectively. The decrease in provision for income taxes reflects the decrease in earnings. The change from provision to benefit is due to the fact that during 2000 the Company operated in a gain position before the cumulative effect of a change in accounting principal while in 2001 the Company operated in a loss position and can utilize tax benefits.

 

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 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 last year, effective from January 1, 2000.

 

Net loss available to common shareholders

Net loss was $ (117,000) compared to $ (425,000) in 2001 and 2000, respectively. This decrease in net loss is primarily attributable to the cumulative effect of change in accounting principle in fiscal year 2000, the decrease in bad debt expenses in fiscal year 2001 associated with a more stringent policy with respect to collecting debtors' balances as well as a decrease in selling, administrative and general expenses.

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. As a result of our initial public offering in May 1999, we received proceeds of approximately $6.7 million, which is also increased our availability to pay operating expenses. We have no debt to third parties or credit facilities. As of December 31, 2001 the funds from the initial public offering are being invested as follows: $ 3,098,000 (representing 46.0% of the total funds) in money market and $ 3,634,000 (representing 54.0% of the total funds) in preferred stocks.

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. This agreement calls for annual salary of $ 125,000. Mr. Ran's employment term initially ends June 30, 2002 but renews automatically for successive one-year periods until either party gives 180 days written notice of its intention to terminate the agreement.

At December 31, 2001 we had cash and cash equivalents, preferred stocks and other marketable securities of $ 6,941,000 and working capital of $ 6,562,000 compared to cash and cash equivalents of $ 7,149,000 and working capital of $ 6,633,000 at December 31, 2000. The decrease is primarily attributable to the use of cash in operating and investing activity.

Net cash used in operating activities was $232,000 for the year ended December 31, 2001 compared to net cash provided by operating activities of $ 66,000 for the year ended December 31, 2000. The decrease in net cash provided by operating activities is due to a decrease in corporate earnings in 2001.

Net cash used in investing activities was $ 3,687,000 for the year ended December 31, 2001 compared to net cash used in investing activities of $ 118,000 for the year ended December 31, 2000. Net cash used in investing activities in 2001 is primarily the result of the company's investment in preferred stocks and other marketable securities.

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.

Staff Accounting bulletin SAB 101 effects

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 month period ended -

	3/31/00	6/30/00	9/30/00
As reported	$421,654	$(124,065)	$142,430
Effect for applying SAB 101	(568,733)	(133,746)	(33,921)
Net (loss) income	$(147,079)	$ (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	$(0.20)	$(0.05)	$(0.01)
Net (loss) income	$(0.05)	$(0.09)	$0.04
Diluted earnings per common share:
As reported	$0.15	$ (0.04)	$ 0.05
Effect for applying SAB 10	$(0.20)	$(0.05)	$(0.01)
Net (loss) income	$(0.05)	$(0.09)	$0.04

 

Recent Technical Accounting Pronouncements

 

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 a material impact on the Company's financial position, results of operations or cash flows.

 

In June 2001, the FASB issued SFAS No. 141 and 142 entitled, "Business Combination" and "Goodwill and Other Intangible Assets", respectively, SFAS No. 141 among other things, eliminates the pooling of interest 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. SFAS No. 142 is effective beginning January 1, 2002. The Company is in the process of evaluating the effect these changes in accounting principles will have on the Company's financial position, results of operations and cash flows.