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

November 13, 2000- 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 yellow page directories in print and on the worldwide web. Our directories are target niche markets as well as challenge the dominance of Verizon directories in the mainstream yellow page industry in the New York metropolitan area. We sell yellow page advertisements as part of an overall media package that includes print advertising, on-line advertising and other added value services such as our referral service and consumer discount club.

We operate three 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 Hasidic communities. Our principal source of revenue derives from the sale of ads in our print and on-line 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in cash or evidenced by a receivable, generated in advance of publication dates, are recorded as "Advanced billings for unpublished directories" on our balance sheet.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 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 September 30, 2000 Compared to Three Months Ended September 30, 1999

Net advertising revenues

Net advertising revenues for three months ended September 30, 2000 were $ 1,812,000 compared to $1,594,000 for the three months ended September 30, 1999, an increase of 13.7 %. The increase was primarily attributable to increased sales resulting primarily from Internet sales relating to the NewYellow.com.

Publication costs

Publication costs for the three months ended September 30, 2000 were $188,000 compared to $68,000, for the corresponding period in 1999, an increase of 176.5 %. As a percentage of net advertising revenues, publication costs were 10.4 % in the period ending September 30, 2000 compared to 4.3 %, in the corresponding 1999 period. The increase in publication costs primarily reflects that in the three month period ending September 30, 2000, we published a larger directory and distribution costs for our print directories increased. Also, there was an increase in the graphic department costs as they relate to the on-line publication of NewYellow.com, which is growing rapidly.

Selling expenses

Selling expenses for the three months ended September 30, 2000 were $773,000 compared to $949,000 for the corresponding period in 1999, a decrease of 18.5 %. As a percentage of net advertising revenues, selling expenses decreased to 42.7 % in the period ending September 30, 2000 from 59.5 % in the corresponding 1999 period. This decrease primarily results from the sales breakout between DAG direct sales representatives versus agency sales representatives whom receive higher commission rates.

Administrative and general costs

Administrative and general expenses for the quarter ended September 30, 2000 were $686,000 compared to $409,000 for the same period in 1999, an increase of 67.7 %. This increase is primarily attributable to (1) increased bad debt (2) increased officer and administrative salaries related to the Company's expansion (3) increased consulting, investor relations and professional service costs and (4) increased advertising costs for the promotion of New Yellow and the Company itself.

Interest income

For the quarter ended September 30, 2000, we had interest income of $111,000 compared to interest income of $87,000 for the quarter ended September 30, 1999. This increase was primarily attributable to increased interest rates resulting in increased interest income in the third quarter of 2000.

Provision for income taxes

Provision for income taxes for the three months ended September 30, 2000 and September 30, 1999 was $134,000 and $109,000 respectively. In the third quarter of 2000, we used a 46 % rate to calculate taxes.

Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,

Net advertising revenues

Net advertising revenues for the nine months ended September 30, 2000 was $ 5,295,000 compared to $3,863,000 for the nine months ended September 30, 1999, an increase of 37.1 %. The increase was primarily attributable to increased advertising revenue with respect to the publication of (1) the year 2000 issues of the The Jewish Israeli Yellow Pages, (2) the third edition of the Master Guide directory in September 2000 and (3) the first printed edition of the New Yellow Manhattan directory as well as its internet version on-line. Also, in the prior comparable period, we did not have Internet advertising sales for the full period.

Publication costs

Publication costs for the nine months ended September 30, 2000 were $1,041,000 compared to $399,000 for the corresponding period in 1999, an increase of 160.9 %. However, as a percentage of net advertising revenues, publication costs were 19.7 % in the 2000 period compared to 10.3 %, in the 1999 period. The increase in publication costs reflects the fact that we published four directories in the nine month period ended of 2000 compared to three directories in the nine month period ended 1999. The increase of publication costs as a percentage of net advertising revenues reflect the costs related to additional directories, both in print and on-line 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 nine months ended September 30, 2000 were $1,779,000 compared to $1,569,000 for the corresponding period in 1999, an increase of 13.4 %. As a percentage of net advertising revenues, selling expenses decreased to 33.6 % from 40.6 %. 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. The decrease in selling expenses as a percentage of revenues is related to the combined effect of which directory is published in the given period and thereby its revenues recognized, as well as which office is generating the sale thereby giving effect to a different selling commission rate structure.

Administrative and general costs

Administrative and general costs for the nine months ended September 30, 2000 were $1,929,000 compared to $911,000 for the same period in 1999, an increase of 111.7 %. 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 nine months ended September 30, 2000 we had net interest income of $ 298,000 compared to net interest income of $130,000 for the nine months ended September 30, 1999. This increase was attributable to the investment of the net proceeds of our initial public offering for the full nine month period ending September 30, 2000 as well as an overall increase in interest rates during fiscal year 2000.

Provision for income taxes

Provision for income taxes for the nine months ended September 30, 2000 and September 30, 1999 were $404,000 and $515,000 respectively. The decrease in the provision for income taxes was directly attributable to the decrease in operating income.

Liquidity and Capital Resources

At September 30, 2000 we had cash and cash equivalents of $6,111,000 and working capital of $6,366,000 as compared to cash and cash equivalents of $ 7,169,000 and working capital of $7,374,000 at September 30, 1999. This decrease primarily reflects the use of proceeds for the Company's decision to place $1,000,000 in restricted cash as explained note 2 to the Company's financial statements.

Net cash provided by operating activities was $17,000 for the nine months ended September 30, 2000. For the comparable 1999 period, net cash provided by operating activities was $279,000. 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 nine month period ending September 30, 2000 compared to the same period in 1999.

Net cash used by investing activities was $1,107,000 for the nine months ended September 30, 2000. Net cash used by investing activities in the nine months ended September 30, 2000 was primarily used for providing security for a promissory note signed by the CEO as explained in note 2 to the Company's financial statements. For the comparable 1999 period net cash provided by investing activities was $82,000.

There were no financing activities during the nine months ended September 30, 2000. For the comparable 1999 period, net cash provided by financing activities was $6,497,000 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.

Back to the Press Releases