DAG MEDIA INC (DAGM)

Quarterly Report (SEC form 10-Q)

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.newyellow.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in cash or evidenced by a receivable, generated in advance of publication dates, are recorded as "Advanced billings for unpublished directories" on our balance sheet.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 June 30, 2000 Compared to Three Months Ended June 30, 1999

Net advertising revenues

Net advertising revenues for three months ended June 30, 2000 were $413,000 compared to $283,000 for the three months ended June 30, 1999, an increase of 45.9%. The increase was primarily attributable to increased sales resulting from entire quarter's Internet sales relating to the NewYellow.com for the first time in the second quarter of 2000 as well as increased sales for The Jewish Master Guide directory.

Publication costs

Publication costs for the three months ended June 30, 2000 were $57,000 compared to $36,000, for the corresponding period in 1999, an increase of 58.3 %. As a percentage of net advertising revenues, publication costs were 13.8% in the period ending June 30, 2000 compared to 12.7%, in the corresponding 1999 period. The increase in publication costs primarily reflects that in the three month period ending June 30, 2000, we published a larger directory as well as there was an increase in the market price of paper.

Selling expenses

Selling expenses for the three months ended June 30, 2000 were $118,000 compared to $46,000 for the corresponding period in 1999, an increase of 156.5%. As a percentage of net advertising revenues, selling expenses increased to 28.6% in the period ending June 30, 2000 from 16.3% in the corresponding 1999 period. This increase is primarily a result of increased New Yellow Internet related sales for which higher commission rates are being paid.

Administrative and general costs

Administrative and general expenses for the quarter ended June 30, 2000 were $564,000 compared to $183,000 for the same period in 1999, an increase of 208.2%. This increase is primarily attributable to (1) increased bad debt expense related to the Company's reassessment of its allowance for doubtful accounts (2) increased officer and administrative salaries related to the Company's expansion (3) increased consulting, investor relations and professional service costs of related to our status as a public company and (4) increased advertising costs for the promotion of New Yellow.

Interest income

For the quarter ended June 30, 2000, we had interest income of $106,000 compared to interest income of $41,000 for the quarter ended June 30, 1999. This increase was attributable to the interest earned, for the complete second quarter of 2000, on the investment of the net proceeds from our initial public offering in May 1999 whereas in the 1999 period interest was earned on the net IPO proceeds for only a partial quarter.

Provision (benefit) for income taxes

Provision (refund) for income taxes for the three months ended June 30, 2000 and June 30, 1999 were $(96,000) and $13,000, respectively. In the second quarter of 2000, we used a 46% rate to calculate taxes on the expected annual income thereby yielding an expected tax benefit.

Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999

Net advertising revenues

Net advertising revenues for the six months ended June 30, 2000 was $3,483,000 compared to $2,269,000 for the six months ended June 30, 1999, an increase of 53.5%. The increase was primarily attributable to increased advertising revenue with respect to the publication of (1) the February 1999 issue of the The Jewish Israeli Yellow Pages, (2) the third edition of the Master Guide directory in June 2000 and (3) the first edition of the New Yellow Manhattan directory . Also, in the prior comparable period, we did not have any Internet advertising sales for the full period.

Publication costs

Publication costs for the six months ended June 30, 2000 were $853,000 compared to $331,000, for the corresponding period in 1999, an increase of 157.7%. However, as a percentage of net advertising revenues, publication costs were 24.5% in the 2000 period compared to 14.6%, in the 1999 period. The increase in publication costs reflects the fact that we published three directories in the first half of 2000 compared to two directories in the first half of 1999. The increase of publication costs as a percentage of net advertising revenues reflect the costs related to additional directories as well as a general increase in the current year for the cost of paper thereby affecting the printing costs of the directories

Selling expenses

Selling expenses for the six months ended June 30, 2000 were $1,006,000 compared to $620,000 for the corresponding period in 1999, an increase of 62.3%. As a percentage of net advertising revenues, selling expenses increased to 28.9% from 27.3%. The increase in selling expenses was attributable to the increases in net advertising revenues as well as an increase in the commission rates and bonus payments made, particularly associated with New Yellow sales.

Administrative and general costs

Administrative and general costs for the six months ended June 30, 2000 were $1,243,000 compared to $502,000 for the same period in 1999, an increase of 147.6%. The increase was primarily attributable to (1) an increase in the expense for uncollectible receivables (2) increased officer and administrative salaries related to the company's expansion (3) increased consulting, investor relations and professional service costs related to our status as a public company and (4) increased advertising costs for the promotion of New Yellow.

Interest income, net

For the six months ended June 30, 2000 we had net interest income of $186,000 compared to net interest income of $43,000 for the six months ended June 30, 1999. This increase was attributable

to the investment of the net proceeds of our initial public offering for the full six month period ending June 30, 2000.

Provision for income taxes

Provision for income taxes for the six months ended June 30, 2000 and June 30, 1999 were $271,000 and $406,000, respectively. The decrease in the provision for income taxes was directly attributable to the decrease in operating income.

Liquidity and Capital Resources

At June 30, 2000 we had cash and cash equivalents of $7,056,000 and working capital of $7,295,000 as compared to cash and cash equivalents of $7,174,000 and working capital of $7,367,000 at June 30, 1999. These decreases primarily reflect the use of proceeds for the Company's expansion.

Net cash used by operating activities was $42,000 for the six months ended June 30, 2000. For the comparable 1999 period, net cash provided by operating activities was $146,000. The decrease in net cash provided by operating activities reflects increased costs related to the expansion of the company and the first time publication of the New Yellow Manhattan directory in the six month period ending June 30, 2000 compared to the same period in 1999.

Net cash used by investing activities was $ 103,000 for the three months ended June 30, 2000. Net cash used by investing activities in the quarter ended June 30, 2000 was primarily used for the purchase of improved accounting and data information systems. For the comparable 1999 period net cash provided by investing activities was $81,000.

There was no cash used for financing activities for the six months ended June 30, 2000. For the comparable 1999 period, net cash provided by financing activities was $6,637,000 consisting primarily of the net proceeds of our initial public offering in May 1999 and the proceeds from the repayment of Mr. Ran's loans.

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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