Item 2. Management's Discussion and Analysis of
DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND CONSOLIDATED RESULTS OF OPERATIONS

 

The following management's discussion and analysis of consolidated financial condition and results of consolidated operations should be read in conjunction with our unaudited 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 business directories in print and on the worldwide web, both in the mainstream, as well as in targeted niche markets in the nation. Our principal source of revenue derives from the sale of ads in our print and on-line directories. As a sales incentive the Company also provides added values such as referral services and consumer discount club.

 

We operate 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 and Hasidic communities.

 

New Yellow, the Company's first general interest, English only yellow page directory 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. Also, as part of our services, we offer to all New Yellow advertisers publication of two editions per year, referral services and consumer discount club.

 

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.

 

On August 5th , 2002 the Company purchased the business and assets of the Blackbook from Brandera.com [U.S], Inc. The Blackbook is a leading publisher of photography and illustration source books 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 25,000 art directors, creative directors, designers and corporations worldwide using Blackbook to find the talent they need. The Blackbook 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 than 100 leading corporate annual reports designers as well as the Blackbook's web site, the blackbook.com.

 

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).

 

Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002

 

Advertising revenues

 

Advertising revenues for three months ended June 30, 2003 were $1,526,000 compared to $1,381,000 for the three months ended June 30, 2002, an increase of $145,000. The increase was primarily attributable to the general growth in business activity and reflects an increase in sales of both 2002 second edition - and the first 2003 edition of the Jewish Israeli Yellow Pages directory. The Blackbook's contribution for recognized revenue for the three months period ended June 30, 2003 totaled to $114,000.

 

Publication costs

 

Publication costs for the three months ended June 30, 2003 were $495,000 compared to $521,000, for the corresponding period in 2002, a decrease of $26,000. As a percentage of advertising revenues, publication costs were 32.44% in the three months period ending June 30, 2003 compared to 37.73%, in the corresponding 2002 period. The decrease in publication costs primarily reflects the decrease in the paper and distribution costs of the April edition of the New Yellow Manhattan directory compared to the equivalent edition last year partially off-set by the Blackbook's contribution for publication costs for the three months period ended June 30, 2003 which totaled $23,000.

 

Selling expenses

 

Selling expenses for the three months ended June 30, 2003 were $524,000 compared to $549,000 for the corresponding period in 2002, a decrease of $25,000. This decrease in selling expenses was primarily attributable to the general increase in sales generated by sales representatives who work directly for the Company rather then sales generated by agencies with higher commission rates. Blackbook's selling expenses added in the Company's financial statements this quarter totaled $67,000.

 

Administrative and general costs

 

General and administrative expenses for the three months period ended June 30, 2003 were $838,000 compared to $495,000 for the same period in 2002, an increase of 69.29%. This increase is primarily attributable to the $175,000 of the Blackbook's administrative costs added due to the inclusion of Blackbook in the Company's consolidated financial statements as well as increase in salaries of $53,000, an increase in the expense for uncollected receivables of $50,000 and increase in professional fees totaling $29,000.

 

Other income

 

For the three months period ended June 30, 2003, the Company had other income of $53,000 compared to other income of $52,000 for the three months period ended June 30, 2002.

 

Provision for income taxes

 

Benefit for income taxes in the three months ended June 30, 2003 and 2002 was $52,000 and $61,000, respectively. Starting year-end 2003, the Company will file its tax returns according to the accrual basis of income recognition and therefore adjust prior years taxes accruals. In addition, the Company created deferred tax assets due to net operating loss accumulated for tax purposes, which the company believes, will be used in the near future.

 

Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002

 

Advertising revenues

 

Advertising revenues for six months ended June 30, 2003 were $3,688,000 compared to $2,955,000 for the six months ended June 30, 2002, an increase of $733,000. The increase was primarily attributable to the general growth in business activity and reflects an increase in sales of both 2002 second edition - and the first 2003 edition of the Jewish Israeli Yellow Pages directory. The Blackbook's contribution for recognized revenue for the six months period ended June 30, 2003 totaled to $151,000.

 

Publication costs

 

Publication costs for the six months ended June 30, 2003 were $833,000 compared to $737,000, for the corresponding period in 2002, an increase of $96,000. As a percentage of advertising revenues, publication costs were 22.58% in the period ending June 30, 2003 compared to 24.95%, in the corresponding 2002 period. The increase in publication costs primarily reflects the additional $130,000 of the Blackbook publishing costs added due to the inclusion of Blackbook in the Company's consolidated financials statements. In addition, the increase is attributable to the increase in the printing costs of the Jewish Israeli Yellow Pages directory due to a larger number of pages being printed off-set by the decrease in the paper and distribution costs of the April edition of the New Yellow Manhattan directory compared to the equivalent edition last year.

 

Selling expenses

 

Selling expenses for the six months ended June 30, 2003 were $1,550,000 compared to $999,000 for the corresponding period in 2002, an increase of $551,000. This increase in selling expenses was primarily attributable to the general increase in sales commission and promotions paid due to the increase in sales as well as an increase in secured income payments resulting from the Company's expansion of its sales force. Blackbook's selling expenses added in the Company's financial statements this quarter totaled $99,000.

 

Administrative and general costs

 

General and administrative expenses for the Six months ended June 30, 2003 were $1,558,000 compared to $1,151,000 for the same period in 2002, an increase of 35.36%. This increase is primarily attributable to the $390,000 of the Blackbook's administrative costs added due to the inclusion of Blackbook in the Company's consolidated financial statements.

 

Other income

 

For the six months ended June 30, 2003, the Company had other income of $108,000 compared to other income of $123,000 for the six months ended June 30, 2002. This decrease was attributable to the decrease in interest rates resulting in decreased interest income in the six months period ended June 30, 2003.

 

Provision for income taxes

 

Provision for income taxes in the six months ended June 30, 2003 and 2002 was $16,000 and $ 94,000, respectively. We used a 46% rate to calculate taxes on the expected annual income. Starting year-end 2003,the Company will file its tax returns according to the accrual basis of income recognition and therefore adjusted prior years taxes accruals. In addition, the Company created deferred tax assets due to net operating loss accumulated for tax purposes, which the Company believes, will be used in the near future.

 

Liquidity and Capital Resources

 

At June 30, 2003 the Company had cash and cash equivalents and marketable securities of $7,339,000 and working capital of $5,686,000 as compared to cash and cash equivalents and marketable securities of $6,093,000 and working capital of $6,699,000 at June 30, 2002. The increase in cash and cash equivalents and marketable securities primarily reflects the cash provided by operating activity by both the Company and Blackbook. The decrease in working capital primarily reflects the general growth in business activity and therefore the increased deferred revenues and commissions liability.

 

Net cash provided by operating activities was $312,000 for the six months ended June 30, 2003. For the comparable 2002 period, net cash used in operating activities was $38,000. The increase in net cash provided by operating activities reflects the increase in corporate sales and collections.

 

Net cash provided by investing activities was $130,000 for the six months ended June 30, 2003 compared to net cash used in investing activities of $766,000 for the comparable 2002 period. Net cash provided by investing activities was primarily the result of the Company's selling of marketable securities.

 

There was no net cash provided by financing activities for the six months ended June 30, 2003 whereas at the comparable 2002 period there were $21,000. The net cash provided by financing activities for the six months ended June 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 NewYellow.

 

Change In Accounting Principals

 

The Company has adopted SFAS No. 142 "Goodwill and Other Intangible Assets", as of 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 carrying 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.