DAG MEDIA INC (DAGM)
Quarterly Report (SEC form 10QSB)
Tuesday August 5,
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.
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