DAG MEDIA INC (DAGM)Quarterly Report (SEC form 10QSB)

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 three yellow page directories, NewYellow, the Jewish Israeli Yellow Pages and the Master Guide, in print and on the worldwide web. The Jewish Israeli Yellow Pages and the Master Guide directories are targeted at niche markets and are primarily distributed to the Israeli and Jewish communities throughout the greater New York metropolitan area and northern New Jersey. NewYellow is a general interest, English only yellow page directory that is currently being distributed throughout Manhattan. In addition, to give added value to users and advertisers in our directories, we also operate the Referral Service and a "portal" web site, www.porty.com.

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. NewYellow competes directly with the Bell Atlantic Yellow Pages in New York City. NewYellow is available online at our web site www.porty.com.

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 Bell Atlantic 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in cash or evidenced by a receivable, generated in advance of publication dates, are recorded as "Advanced billings for unpublished directories" on our balance sheet.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 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 March 31, 2000 Compared to Three Months Ended March 31, 1999

Net advertising revenues

Net advertising revenues for three months ended March 31, 2000 were $ 3,070,000 compared to $1,986,000 for the three months ended March 31, 1999, an increase of 54.6 %. The increase was primarily attributable to increased sales resulting from the first time publication of the NewYellow directory in March 2000.

Publication costs

Publication costs for the three months ended March 31, 2000 were $796,000 compared to $295,000, for the corresponding period in 1999, an increase of 169.8 %. As a percentage of net advertising revenues, publication costs were 25.9 % in the period ending March 31, 2000 compared to 14.9 %, in the corresponding 1999 period. The increase in publication costs primarily reflects that in the three month period ending March 31, 2000, we published two directories, NewYellow and the Jewish Israeli Yellow Pages, whereas during the comparable period in 1999 we published only one directory, the Jewish Israeli Yellow Pages. Furthermore, in publishing NewYellow for the first time, we incurred start-up expenses plus some initial typesetting and graphics expenses for the new directory.

Selling expenses

Selling expenses for the three months ended March 31, 2000 were $888,000 compared to $574,000 for the corresponding period in 1999, an increase of 54.7 %. As a percentage of net advertising revenues, selling expenses remained consistent at 28.9%.

Administrative and general costs

Administrative and general expenses for the quarter ended March 31, 2000 were $679,000 compared to $319,000 for the same period in 1999, an increase of 112.9 %. This increase is primarily attributable to (1) increased bad debt expense of approximately $169,000 related to the Company's reassessment of its allowance for doubtful accounts (2) increased officer and administrative salaries of $74,000 related to the Company's expansion (3) increased consulting, investor relations and

professional service costs of $57,000 related to our status as a public company and (4) increased advertising costs of $24,000.

Interest income

For the quarter ended March 31, 2000, we had interest income of $80,000 compared to interest income of $2,100 for the quarter ended March 31, 1999. This increase was attributable to the interest earned on the investment of the net proceeds from our initial public offering in May 1999.

Provision for income taxes

Provision for income taxes for the three months ended March 31, 2000 and March 31, 1999 were $ 367,000 and $393,000, respectively. In the first quarter of 2000, we used a 47 % rate to calculate taxes on the expected annual income, whereas we used a 49 % rate to calculate taxes for the comparable 1999 period.

Net income

Net income for the quarter ended March 31, 2000 was $ 422,000 compared to $405,000 for the corresponding period in 1999. This increase was primarily the result of increased revenues related to NewYellow sales. As a percentage of net advertising revenues, net income for the three month period ended March 31, 2000, decreased to 13.7% from 20.4 % in the corresponding period in 1999. This decrease is attributable to significant increases in initial publication and expansion cost as well as increased overhead costs related to the Company's new status as public corporation.

Liquidity and Capital Resources

At March 31, 2000 we had cash and cash equivalents of $ 7,318,000 and working capital of $ 7,421,000 as compared to cash and cash equivalents of $190,000 and working capital of $317,000 at March 31,1999. These increases primarily reflect the net proceeds of our initial public offering completed in May 1999.

Net cash provided by operating activities was $ 197,000 for the three months ended March 31, 2000. For the comparable 1999 period, net cash operating activities was $138,000. The increase in net cash provided by operating activities reflects increased advertising sales in the three month period ending March 31, 2000 compared to the same period in 1999.

Net cash used by investing activities was $ 80,000 for the three months ended March 31, 2000. Net cash used by investing activities in the quarter ended March 31, 2000 was primarily used for the purchase of improved accounting and data information systems. For the comparable 1999 period there was no net cash used by investing activities. Net cash used by investing activities in the three month period ended March 31, 2000 is primarily the result of losses incurred by our 50% interest in DAH.

There was no cash provided by financing activities for the three months ended March 31, 2000. For the comparable 1999 period, net cash used by financing activities was $ 258,000 and was primarily used to pay for registration costs as they related to the Company's initial public offering in May 1999.

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 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. 

 

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