MEDIA INC (DAGM)
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 two yellow page directories, the Jewish Israeli Yellow Pages and the Master Guide, in print and on the worldwide web. These directories are distributed throughout the New York metropolitan area and northern New Jersey. In addition, to give added value to users of and advertisers in our directories, we also operate the Jewish Referral Service and a "portal" web site, www.porty.com.
On May 12, 1999, we launched NewYellow, a general interest, English only yellow page directory that competes directly with the Bell Atlantic Yellow Pages in New York City. Currently, NewYellow is available online at our web site and we expect that the first edition of NewYellow will be available in print by June 2000. We have recently opened two new sales offices in Manhattan that are dedicated exclusively to NewYellow ad sales and we expect a third sales office to be opened soon.
Our principal source of revenue derives from the sale of ads for our directories. Our advertising rates for new advertisers have increased approximately 20% to 30% a year since 1990. However, we believe it is unlikely that this trend will continue. Any further increases in our advertising rates would reduce the disparity between our rates and those of the Bell Atlantic Yellow Pages and may cause some of our advertisers to stop advertising in our 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in cash or evidenced by a receivable, generated in advance of publication dates, are recorded as "Advanced billings for unpublished directories" on our balance sheet.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 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. In the case of NewYellow, a portion of the advertising fee is allocated to internet advertising, and is, therefore, recognized when the ad is published in the online version of NewYellow. Similarly, 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 NewYellow, we pay commissions to our sales representatives before we collect the related advertising revenue. We do not have any 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, 1999 Compared to Three Months Ended June 30, 1998
Net advertising revenues
Net advertising revenuesfor the quarter ended June 30, 1999, were $282,909 of which approximately $176,000 was attributable to the publication of the second edition of the Master Guide directory in June 1999 and approximately $106,000 was attributable to NewYellow internet advertising. For the three months ended June 30, 1998 we did not recognize any advertising revenues because we did not publish any directories during that period nor were any of our revenues attributable internet advertising sales.
Publication costs for the quarter ended June 30, 1999 were $35,970. There were no publication costs for the same period in 1998.
Selling expenses for the quarter ended June 30, 1999 were $45,697. There were no selling expenses for the corresponding period in 1998.
Administrative and general costs
Administrative and general expenses for the quarter ended June 30, 1999 were $183,212 compared to $213,907 for the same period in 1998, a decrease of 14.3%. This decrease was attributable to the fact that we no longer out-source the collection of our accounts receivable.
Interest income, net
For the quarter ended June 30, 1999, we had net interest income of $40,959 compared to net interest income of $723 for the quarter ended June 30, 1998. This increase was attributable to the investment of the net proceeds of our initial public offering.
Earnings (loss) before provision for income taxes and equity income
Earnings before provision for income taxes and equity income for the quarter ended June 30, 1999 were $58,989 as compared to a loss of $213,184 for the quarter ended June 30, 1998. The increase was attributable to the revenues realized in the quarter ended June 30, 1999.
Provision (benefit) for income taxes
Provision for income taxes for the quarter ended June 30, 1999 was $12,913 whereas for the quarter ended June 30, 1998 we recorded a tax benefit of $108,000. This change was attributable to the operating income realized in the three months ended June 30, 1999 compared to the operating loss for the quarter ended June 30, 1998.
Equity in earnings of affiliate
Immediately prior to our initial public offering, DAH became our wholly owned subsidiary. Consequently, we had no equity in earnings of affiliate for the quarter ended June 30, 1999. For quarter ended June 30, 1998 equity in earnings of affiliate was $2,566.
Net income (loss)
Net income for the quarter ended June 30, 1999 was $46,076 compared to a loss of $102,618 for the corresponding period in 1998. As a percentage of net advertising revenues, net income for the quarter ended June 30,1999 was 16.3%.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Net advertising revenues Net advertising revenues for the six months ended June 30, 1999 was $2,268,781 compared to $986,612 for the six months ended June 30, 1998, an increase of 130%. The increase was primarily attributable to: (1) increased advertising revenue with respect to the publication of the February 1999 issue of the The Jewish Israeli Yellow Pages, (2) publication of the second edition of the Master Guide directory in June 1999, (3) recognition of revenues relating to internet advertising sales and (4) an overall increase in our advertising rates. In the prior comparable period, we neither published a Master Guide directory nor recognized revenue related to internet advertising sales.
Publication costs for the six months ended June 30, 1999 were $330,769 compared to $226,557, for the corresponding period in 1998, an increase of 46.0%. However, as a percentage of net advertising revenues, publication costs were 14.6% in the 1999 period compared to 23.0%, in the 1998 period. The increase in publication costs reflects the fact that we published two directories in the first half of 1999 compared to only one directory in the first half of 1998. The decrease of publication costs as a percentage of net advertising revenues reflects additional advertising revenues.
Selling expenses for the six months ended June 30, 1999 were $619,782 compared to $335,042 for the corresponding period in 1998, an increase of 85.0%. As a percentage of net advertising revenues, selling expenses decreased to 27.3% from 34.0%. The increase in selling expenses was attributable to the increase in net advertising revenues but was offset, in part, by a reduction in the rate of commission payable to our sales representatives.
Administrative and general costs
Administrative and general costs for the six months ended June 30, 1999 were $501,999 compared to $363,802 for the same period in 1998, a increase of 38.0%. The increase was primarily attributable to an increase in the expense for uncollectible receivables to $231,000 for the six months ended June 30, 1999 from $41,000 for the six months ended June 30, 1998. On the other hand, certain other administrative and general costs decreased. For example, collection costs decreased by $22,000 as a result of our decision not to outsource that function any longer. Interest income, net
For the six months ended June 30, 1999 we had net interest income of $43,062 compared to net interest income of $1,309 for the six months ended June 30, 1998. This increase was attributable to the investment of the net proceeds of our initial public offering.
Earnings (loss) before provision for income taxes and equity income
Earnings before provision for income taxes and equity for the six months ended June 30, 1999 were $859,293 as compared to $62,520 for the six months ended June 30, 1998. This increase is directly attributable to the growth in revenues.
Provision for income taxes
Provision for income taxes for the six months ended June 30, 1999 and June 30, 1998 were $405,913 and $30,000, respectively. The increase in the provision for income taxes was directly attributable to the increase in operating income.
Equity (loss) in earnings of affiliate
Immediately prior to our initial public offering, DAH became our wholly owned subsidiary. Accordingly, for the six months ended June 30, 1999 we recorded a loss with respect to the earnings of DAH of $2,654, all of which was incurred in the first quarter. For six months ended June 30, 1998 equity in earnings of affiliate was $11,333.
Net income for the six months period ended June 30, 1999 increased to $450,726 from $43,853 for the corresponding period in 1998. As a percentage of net advertising revenues, net income for the six month period ended June 30, 1999 increased to 19.9% from 4.4% in the corresponding period in 1998.
Liquidity and Capital Resources
Until our initial public offering, our only source of funds was cash flow from operations, which has funded both our working capital needs and capital expenditures. We have no debt or credit facilities. Generally advertising fees, whether collected in cash or evidenced by a receivable, are generated before the publication of the related directory and before many of the costs directly associated with publishing the related directory are incurred.
As a result of our initial public offering in May 1999, we received proceeds of approximately $6.4 million net of underwriting discounts and commissions and other expenses related to the offering of approximately $1.7 million. Assaf Ran, our president, chief executive officer and principal shareholder, repaid a loan of $295,262 out of the proceeds from the sale of his common shares in the offering. These funds were deposited in an interest bearing money market account.
The net proceeds of the public offering will be used to pay our sales representatives commissions on ad sales for NewYellow, for marketing expenses for NewYellow, for the cost of printing and distributing NewYellow, for marketing and developing our web site and online services and for other operating expenses that are expected to increase as we expand our business.
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 and Orna Kirsh. Those agreements call for annual salaries of $75,000 and $100,000 respectively. Mr. Ran's contract runs through June 30, 2002, and Ms. Kirsh's agreement expires on July 19, 2001. We had entered into an employment agreement with Dvir Langer. However, Mr. Langer resigned in July 1999. We do not have any severance obligations to Mr. Langer.
At June 30, 1999 we had cash and cash equivalents of $7,174,054 and working capital of $7,367,413 as compared to cash and cash equivalents of $95,280 and working capital of $88,139 at June 30, 1998.
Net cash provided by operating activities was $142,927 for the six months ended June 30, 1999. For the comparable 1998 period, net cash used in operating activities was $25,051. Net cash provided by investing activities was $83,929 for the six months ended June 30, 1999. For the comparable 1998 period, net cash used in investing activities was $37,251. Net cash provided by investing activities in the six month period ended June 30, 1999 is primarily derived from the result of our acquisition of the 50% interest in DAH that we did not previously own immediately prior to our initial public offering.
Net cash provided by financing activities for the six months ended June 30, 1999 was $6,637,013 consisting primarily of the net proceeds of our initial public offering and the proceeds from the repayment of Mr. Ran's loan. For the comparable 1998 period net cash provided by financing activities was $24,841.
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 continue to expand our on-line services.
Year 2000 Compliance
The "Year 2000" problem is the result of computer programs being written using two digits, rather than four, to define the applicable year. Computers, programs and microprocessors that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, or not recognize that date at all, which could result in major systems failures or miscalculations. Year 2000 problems experienced by us or our suppliers, could adversely impact our ability to service our customers or otherwise carry on our business, including causing interruptions in the operation of our web site, customer billing, and invoicing and data interfaces to and from these systems. We have not yet developed a contingency plan to address situations that may result if our suppliers or we are unable to achieve Year 2000 compliance. The cost of developing and implementing this kind of plan, if necessary, could be material.
We believe, based upon evaluation by our own staff and an outside consultant, that substantially all of our existing systems, software and hardware are Year 2000 compliant. The possibility exists that, despite assurances given by our vendors and suppliers, and our own internal assessment, our systems may contain undetected errors or defects relating to the Year 2000 problem. If these systems are not Year 2000 compliant, on January 1, 2000 they may either malfunction or shut down completely. In either case, historical data critical to our business, operations and financial condition may be temporarily lost forcing us to discontinue operations for a significant period of time until the lost data are retrieved or recreated, if possible. We may also have to expend significant amounts of capital to recreate the lost data and restore our computer systems to working order, which could force us to delay or discontinue our expansion plans.
During the third quarter of 1999 we plan to contact the banks, utility companies, telecommunications and transportation providers and material suppliers on whom we rely, including HaMakor Printing, the printer we use to publish our directories, to assess their compliance with Year 2000 related issues. Initially, we plan to send them letters asking them if they are Year 2000 compliant and, if not, when they expect to be. If we do not receive answers to these inquires, or if the answers we receive are unsatisfactory, we will evaluate our alternatives at that time. Such alternatives would include switching to new suppliers who are Year 2000 complaint.
In particular, we must confirm that HaMakor Printing is Year 2000 complaint. If HaMakor Printing is not Year 2000 compliant, then we will assess whether it's failure would affect it's ability to print our February 2000 Jewish Yellow Pages directory. If it does, we will have to find a new printer. While we believe that we will be able to find a new printer relatively quickly, we cannot be certain that a new printer will be willing or able to provide us with the same level of pricing, service and quality as HaMakor.
At the present time, we do not anticipate that these inquires will involve any significant cost and expense. However, this may change as we develop new information. We plan to use our administrative staff to handle these inquires. If the issues become too technical, we may retain the services of a Year 2000 consultant to advise us.
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. Such 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, (iv) our dependence on a limited number of suppliers and (v) our ability and those of third parties, including customers or suppliers, to adequately address the Year 2000 issue. 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. Such 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. AND SUBSIDIARIES