<PAGE> 1
Securities and Exchange Commission
Washington, D.C. 20549
Form 8-K/A
Amendment No. 1
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 6, 1997
SNYDER COMMUNICATIONS, INC.
(Exact name of registrant as specified in its character)
Delaware
(State or other jurisdiction of incorporation or organization)
1-12145 52-1983617
(Commission file number) (I.R.S. Employer Identification No.)
Two Democracy Center
6903 Rockledge Drive
15th Floor
Bethesda, Maryland 20817
(Address of principal (Zip Code)
executive offices)
(301) 468-1010
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since
last report)
<PAGE> 2
This Amendment No. 1 to the Current Report of Snyder Communications
Inc. (the "Registrant") on Form 8-K dated January 6, 1997 (the "Report")
relates to the Registrant's completion of the acquisition of MMD Inc., a
corporation organized and existing under the laws of the State of New Jersey
("MMD"), by means of a merger of Snyder Acquisition Corp., a corporation
organized and existing under the laws of the State of Delaware and a
wholly owned subsidiary of the Registrant ("Merger Sub"), with and into MMD,
pursuant to the Agreement and Plan of Merger, dated as of January 6, 1997,
among the Registrant, Merger Sub, MMD and the stockholders of MMD. The purpose
of this Amendment is to amend Item 7(A) to provide the financial statements of
MMD and Item 7(B) to provide the required pro forma financial information
relating to the business combination between the Registrant and MMD on January
6, 1997 which were impracticable to provide at the time the Registrant filed
this report.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(A) Financial statements of businesses acquired.
<PAGE> 3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of
MMD, Inc.:
We have audited the accompanying balance sheet of MMD, Inc. (a New Jersey
corporation), as of December 31, 1995 and 1996, and the related statements of
income, equity and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MMD, Inc., as of December 31,
1995 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II - Allowance for Doubtful
Accounts is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not a part of the basic financial
statements. This schedule, for the years ended December 31, 1994, 1995 and
1996, has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Washington, D.C.
March 7, 1997
<PAGE> 4
MMD, INC.
BALANCE SHEET
AS OF DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
ASSETS
1995 1996
------------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $1,277,625 $1,316,705
Accounts receivable, net of allowance for doubtful accounts of $32,721 and
$89,061 in 1995 and 1996, respectively 1,484,904 658,123
Unbilled services 1,567,015 3,823,608
Prepaid expenses and other assets 174,359 410,795
------------- ------------
Total current assets 4,503,903 6,209,231
PROPERTY AND EQUIPMENT, net 277,214 234,273
DEPOSITS AND OTHER ASSETS 512,952 366,091
------------- ------------
Total assets $5,294,069 $6,809,595
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $1,530,960 $4,205,897
Accrued payroll 40,115 72,214
Customer advances 63,895 554,830
Line of credit 1,000,000 500,000
Deferred income taxes 78,601 -
Distribution payable - 1,087,734
------------- ------------
Total current liabilities 2,713,571 6,420,675
DEFERRED RENT 43,949 88,718
------------- ------------
Total liabilities 2,757,520 6,509,393
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock - no par value; 2,500 shares authorized, 966 shares issued and
outstanding 8,494 8,494
Retained earnings 2,528,055 291,708
------------- ------------
Total stockholders' equity 2,536,549 300,202
------------- ------------
Total liabilities and stockholders' equity $5,294,069 $6,809,595
============= ============
</TABLE>
The accompanying notes are an integral part of this balance sheet.
<PAGE> 5
MMD, INC.
STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES $25,737,651 $27,369,338 $37,137,567
OPERATING EXPENSES:
Cost of services 15,825,201 20,166,792 29,495,946
Officer compensation 3,009,064 2,610,406 1,548,321
General and administrative expenses 3,167,486 2,998,702 5,136,031
------------ ------------ ------------
Income from operations 3,735,900 1,593,438 957,269
INCOME TAX PROVISION 402,730 178,729 104,149
------------ ------------ ------------
Net income $ 3,333,170 $ 1,414,709 $ 853,120
============ ============ ============
PRO FORMA INCOME DATA (UNAUDITED):
Historical income before income taxes as reported $ 3,735,900 $ 1,593,438 $ 957,269
Pro forma provision for income taxes 1,681,155 717,047 430,771
------------ ------------ ------------
Pro forma net income $ 2,054,745 $ 876,391 $ 526,498
============ ============ ============
</TABLE>
The accompanying notes are an integral part of this statement of income.
<PAGE> 6
MMD, INC.
STATEMENT OF EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED STOCKHOLDERS'
STOCK EARNINGS EQUITY
----------- -------------- ---------------
<S> <C> <C> <C>
BALANCE, December 31, 1993 $8,494 $ 985,162 $ 993,656
Net income - 3,333,170 3,333,170
Distributions to stockholders - (1,800,000) (1,800,000)
------ ----------- -----------
BALANCE, December 31, 1994 8,494 2,518,332 2,526,826
Net income - 1,414,709 1,414,709
Distributions to stockholders - (1,404,986) (1,404,986)
------ ----------- -----------
BALANCE, December 31, 1995 8,494 2,528,055 2,536,549
Net income - 853,120 853,120
Distributions to stockholders - (3,089,467) (3,089,467)
------ ----------- -----------
BALANCE, December 31, 1996 $8,494 $ 291,708 $ 300,202
====== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement of equity.
<PAGE> 7
MMD, INC.
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,333,170 $1,414,709 $ 853,120
Adjustments to reconcile net income to net cash provided by (used
in) operating activities-
Depreciation and amortization 45,668 81,769 110,551
Loss on sale of property and equipment - 12,990 22,330
Loss on investment in closely held company - - 145,808
Deferred income taxes (78,602) (78,602) (78,601)
Changes in operating assets and liabilities:
Accounts receivable (87,981) (338,030) 826,781
Unbilled services (2,212,878) 645,863 (2,256,593)
Prepaid expenses and other assets (18,119) (156,240) (236,436)
Deposits and other assets (115,843) (232,290) 1,053
Accounts payable and accrued expenses 2,633,328 (1,555,531) 2,707,036
Customer advances (881,693) (302,778) 490,935
Deferred rent - 43,949 44,769
----------- ----------- -----------
Net cash provided by (used in) operating activities 2,617,050 (464,191) 2,630,753
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (48,783) (274,048) (89,940)
Investment in closely held company - (145,808) -
----------- ----------- -----------
Net cash used in investing activities (48,783) (419,856) (89,940)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under line of credit - 1,000,000 (500,000)
Distributions to stockholders (1,800,000) (1,404,986) (2,001,733)
----------- ----------- -----------
Net cash used in financing activities (1,800,000) (404,986) (2,501,733)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 768,267 (1,289,033) 39,080
CASH AND EQUIVALENTS, beginning of year 1,798,391 2,566,658 1,277,625
----------- ----------- -----------
CASH AND EQUIVALENTS, end of year $2,566,658 $1,277,625 $1,316,705
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ - $ 4,489 $ 18,929
=========== =========== ===========
Income taxes $ 121,259 $ 388,302 $ 243,664
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Distribution payable $ - $ - $1,087,734
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement of cash flows.
<PAGE> 8
MMD, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995 AND 1996
1. PRINCIPAL BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
MMD, Inc. ("MMD"), was incorporated under the laws of the State of New Jersey
on December 7, 1982. MMD's principal business activity involves marketing
medical products throughout the United States for pharmaceutical companies.
On January 6, 1997, MMD consummated a merger transaction with Snyder
Communications, Inc. ("SCI"), in which MMD became a wholly owned subsidiary of
SCI. This merger has been accounted for as a pooling of interests for
accounting and financial reporting purposes. In the merger, 966 shares of
outstanding MMD common stock were converted into 1,354,500 shares of SCI common
stock.
CASH AND EQUIVALENTS
Cash and equivalents are comprised principally of amounts in operating
accounts, money market investments, and other short-term instruments, stated at
cost which approximates market value, with original maturities of three months
or less.
REVENUE RECOGNITION
MMD recognizes revenue and associated costs when services have been performed
by field representatives. Customer advances represent payments received under
contracts in advance of MMD performing the related service. These amounts are
deferred and recognized as revenue when services are performed. Unbilled
services represent revenues earned on contracts, but billed in a subsequent
accounting period.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. MMD depreciates furniture and
fixtures over five to seven years, and office equipment over five years. MMD
amortizes leasehold improvements over the term of the lease or the estimated
useful life of the improvements, whichever is shorter.
When assets are retired or sold, the cost and related accumulated depreciation
and amortization are removed from the accounts and any gain or loss is
reflected in income.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates by management affecting the
reported amounts of assets and liabilities and revenue and expenses and the
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates.
<PAGE> 9
-2-
CONCENTRATION OF CREDIT RISK
Concentration of credit risk is limited to accounts receivable and unbilled
services and is subject to the financial conditions of certain major customers
as described in Note 2. MMD's receivables are concentrated with customers in
the pharmaceutical industry. The Company does not require collateral or other
security to support clients' receivables.
PRO FORMA DATA
The unaudited pro forma net income and net income per share amounts include a
provision for Federal and state income taxes as if MMD had been a C Corporation
for all periods presented. The income tax rate used to calculate pro forma net
income reflects the combined Federal and state income taxes of approximately
45 percent for the years ended December 31, 1994, 1995 and 1996.
2. SIGNIFICANT CUSTOMERS:
MMD had one customer which comprised approximately 48, 77 and 46 percent of its
total revenues for the years end December 31, 1994, 1995 and 1996,
respectively. A second customer comprised approximately 17, 15 and 15 percent
of MMD's total revenues for the years ended December 31, 1994, 1995 and 1996,
respectively. A third customer comprised approximately 14 percent of MMD's
total revenues for the year ended December 31, 1996.
3. PROPERTY AND EQUIPMENT:
Property and equipment, at cost, consists of the following:
<TABLE>
<CAPTION>
1995 1996
----------- ----------
<S> <C> <C>
Furniture and fixtures $168,921 $113,551
Office equipment 280,898 159,595
Leasehold improvements 132,822 102,000
--------- ---------
582,641 375,146
Less- Accumulated depreciation (305,427) (140,873)
--------- ---------
$277,214 $234,273
========= =========
</TABLE>
4. INVESTMENT IN CLOSELY HELD COMPANY:
In 1995, MMD purchased a 3.5 percent interest in a closely held company. The
investment was accounted for under the cost method of accounting and is
included in other noncurrent assets in the accompanying balance sheet at
December 31, 1995. During the fourth quarter of 1996, MMD determined that this
investment of $145,808 had been impaired and wrote-off the asset.
<PAGE> 10
-3-
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of:
<TABLE>
<CAPTION>
1995 1996
------------- ------------
<S> <C> <C>
Accounts payable $ 282,050 $ 125,361
Accrued representatives' fees and bonuses 273,950 2,033,895
Bonuses 447,656 471,500
Other 527,304 1,575,141
------------ ------------
$1,530,960 $4,205,897
============ ============
</TABLE>
6. LINE OF CREDIT:
MMD has a revolving line of credit agreement with a bank. The line of credit
allows MMD to borrow up to $2,000,000. Borrowings under the line bear interest
at the bank's prime rate (8.25 percent as of December 31, 1996) for an
effective interest rate of 8 percent for the year ended December 31, 1996.
MMD had $1,000,000 outstanding at December 31, 1995 and $500,000 outstanding at
December 31, 1996. Borrowings pursuant to the line of credit are collateralized
by substantially all the assets of MMD. In February 1997, MMD paid off the
outstanding balance of $500,000.
7. COMMITMENTS AND CONTINGENCIES:
MMD is subject to lawsuits, investigations, and claims arising out of the
conduct of its business, including those related to commercial transactions,
contracts, government regulation, and employment matters. Certain claims, suits
and complaints have been filed or are pending against MMD. In the opinion of
management and legal counsel, and based on all known facts, all matters are
without merit or are of such kind, or involve such amounts, as would not have a
material effect on the financial position or results of operations of MMD if
disposed of unfavorably.
LEASES
MMD is obligated under an operating lease through September 2005 for its office
facility. The lease is noncancelable through September 2000. Beginning in
October 2000 and expiring in September 2005, MMD has the right to surrender a
portion or the entire premises by paying a cancellation penalty, as defined in
the lease agreement. At December 31, 1996, the aggregate minimum future
obligations under this lease are as follows:
<PAGE> 11
-4-
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
<S> <C>
1997 $ 262,056
1998 262,056
1999 264,786
2000 272,976
2001 272,976
Thereafter 1,056,420
----------
$2,391,270
==========
</TABLE>
The lease contains escalation clauses which provide for additional rent based
upon increases in MMD's pro rata share of real estate taxes and other operating
expenses.
Rent expense is charged to operations ratably over the lease term rather than
when payments are made in accordance with the lease. As a result, $43,949 and
$88,718 of deferred rent is reflected as a long-term liability in the
accompanying balance sheet at December 31, 1995 and 1996, respectively.
Rent expense charged to operations for the years ended December 31, 1994, 1995
and 1996 amounted to approximately $240,400, $182,600 and $248,800,
respectively.
STOCKHOLDERS' AGREEMENT
Pursuant to an agreement with all officers/stockholders, MMD is obligated to
purchase shares of stock upon the death of any of its officers/stockholders.
MMD maintains life insurance policies on the lives of each of the
officers/stockholders to fund these commitments.
Concurrent with the merger transaction discussed in Note 1, this agreement was
terminated in January 1997.
BONUSES
MMD has an obligation to pay a bonus to one of its officers, equal
to 5 percent of pretax profits (which is defined as pretax profits before
officers' salaries) in excess of $1,225,000. For the years ended December 31,
1994, 1995 and 1996, a bonus of approximately $260,000, $190,000 and $89,000,
respectively, was charged to operations pursuant to this agreement.
Concurrent with the merger transaction discussed in Note 1, MMD is no longer
obligated under this bonus agreement.
IRS EXAMINATION
The Internal Revenue Service ("IRS") is currently conducting an examination of
MMD's Federal employment tax returns for the calendar years ended December 31,
1992 and 1993. During the course of the examination, the IRS has requested
documentation from MMD to support MMD's classification of its representatives
as independent contractors. MMD believes that it has adequate support for its
treatment of representatives as independent contractors. In the opinion of
management, the resolution of this matter will not have a material effect on
the financial position or results of operations of MMD, and adequate provision
for any potential losses has been made in the accompanying financial
statements.
<PAGE> 12
-5-
8. INCOME TAXES:
Prior to November 1, 1992, MMD filed its income tax return using the cash-basis
method of reporting. Beginning November 1, 1992, MMD switched to the accrual
method. In connection with this change, MMD, for income tax purposes, was
required to recognize additional taxable income of approximately $642,000 over
a four-year period beginning in 1993. Accordingly, at December 31, 1995, a
deferred income tax liability of $78,601 is reflected as the balance due for
the change in the tax accounting method described above.
During 1994, MMD elected to be taxed as a small business corporation (S
Corporation) under the applicable sections of the Internal Revenue Code and New
York State income tax laws. Accordingly, no provision for federal income
taxes has been made in the accompanying financial statements. However, MMD is
subject to New York State income tax at reduced rates and New York City income
tax. MMD elected to retain its tax fiscal year-end, which was October 31,
through October 31, 1996. As an S Corporation with a year-end which is other
than a calendar year, a deposit was required to be held by the IRS. This
deposit amounted to $283,183 and $316,777 as of December 31, 1995 and 1996.
As a result of the merger transaction discussed in Note 1, MMD is in the
process of changing its tax fiscal year-end to December 31.
9. RELATED PARTY:
Included in accounts receivable and unbilled services is approximately $34,314
and $18,450, respectively, at December 31, 1995, $260,780 and $52,412, and
respectively, at December 31, 1996, due from a company approximately 50 percent
owned by the stockholders of MMD. Fee revenue from this company amounted to
approximately $0, $87,000, and $326,422, for the years ended December 31, 1994,
1995, and 1996, respectively.
10. DISTRIBUTION PAYABLE:
Consistent with MMD's prior practice, in Decmeber 1996, the Board of Directors
declared a distribution equal to MMD's estimated earnings determined under
generally accepted accounting principles for the twelve months ended October 31,
1996 (MMD's previous fiscal year-end.) This distribution was paid to MMD
stockholders prior to the merger with SCI.
<PAGE> 13
-6-
MMD, INC.
SCHEDULE II
ALLOWANCE FOR DOUBTFUL ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
ADDITIONS CHARGED DEDUCTIONS FROM RESERVE
BALANCE AT TO COST AND FOR PURPOSES FOR WHICH BALANCE AT
BEGINNING OF YEAR EXPENSE RESERVE WAS CREATED END OF YEAR
--------------------- -------------------- ------------------------- ---------------
<S> <C> <C> <C> <C>
1994 $50,000 $ - $ - $50,000
1995 50,000 10,000 27,279 32,721
1996 32,721 60,000 3,660 89,061
</TABLE>
<PAGE> 14
- 7 -
(B) Pro forma financial information.
The accompanying supplemental consolidated financial statements have been
retroactively restated to reflect the combined financial position and combined
results of operations and cash flows of the Registrant and MMD for all periods
presented, giving effect to the merger transaction as if it had occurred at the
beginning of the earliest period presented.
<PAGE> 15
-8-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Snyder Communications, Inc.:
We have audited the accompanying supplemental consolidated balance sheet of
Snyder Communications, Inc. and subsidiaries (the "Company") as of December 31,
1995 and 1996, and the related supplemental consolidated statements of income,
equity, and cash flows for each of the three years in the period ended December
31, 1996. The supplemental consolidated financial statements give retroactive
effect to the merger with MMD, Inc. on January 6, 1997, which has been
accounted for as a pooling of interests as described in Note 1. These
supplemental consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
supplemental consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion the supplemental consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Snyder Communications, Inc. and subsidiaries as of December 31, 1995 and 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, after giving retroactive effect to
the merger with MMD, Inc. as described in Note 1, all in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Washington, D.C.,
March 7, 1997
<PAGE> 16
-9-
SNYDER COMMUNICATIONS, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
(NOTE 1)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $5,159,137 $51,722,573
Accounts receivable, net of allowance for
doubtful accounts of $132,721 and $239,061
at December 31, 1995 and 1996, respectively 4,531,364 6,643,612
Unbilled services 1,567,015 3,823,608
Deferred tax asset 58,000 954,259
Prepaid expenses and other assets 299,196 624,069
------- -------
Total current assets 11,614,712 63,768,121
Note and advances to stockholders 2,770,426 --
Property and equipment, net 2,613,468 7,079,994
Deferred financing costs, net 496,001 --
Deposits and other assets 825,977 2,077,682
------- ---------
Total assets $18,320,584 $72,925,797
=========== ===========
LIABILITIES AND EQUITY
Current liabilities:
Lines of credit $1,000,000 $1,445,668
Current obligations under capital leases 204,047 773,520
Accrued payroll 2,894,745 5,175,719
Accounts payable and accrued expenses 4,957,612 10,995,544
Unearned revenue 2,273,704 4,641,998
Distribution payable -- 1,087,734
--------- ---------
Total current liabilities 11,330,108 24,120,183
Subordinated debentures due to related parties 5,125,821 --
Deferred income taxes -- 170,817
Deferred rent 43,949 88,718
Long-term obligations under capital leases 334,418 1,308,813
------- ---------
Total liabilities $16,834,296 $25,688,531
Commitments and contingencies
Equity:
Preferred stock, $.001 par value per
share, 5,000,000 shares authorized,
none issued and outstanding at December 31,
1995 and December 31, 1996 -- --
Common stock, no stated par value, 3,000
shares authorized, 2,000 shares issued
and outstanding at December 31, 1995 and $.001
par value, 1,354,500 shares authorized, issued
and outstanding at December 31, 1995;
$.001 par value, 120,000,000 shares
authorized, 34,876,062 shares issued
and outstanding at December 31, 1996 1,854 34,876
Additional paid-in capital 1,366,843 45,501,911
Retained earnings 1,567,921 1,700,479
Limited partners' deficit (1,450,330) --
--------- ----------
Total equity 1,486,288 47,237,266
--------- ----------
Total liabilities and equity $18,320,584 $72,925,797
=========== ===========
</TABLE>
The accompanying notes are an integral part of this supplemental
consolidated balance sheet.
<PAGE> 17
-10-
SNYDER COMMUNICATIONS, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME
(NOTE 1)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1994 1995 1996
--------------------------------------------------
<S> <C> <C> <C>
Revenues $37,477,886 $70,260,899 $119,977,514
Operating expenses:
Cost of services 22,288,904 47,646,482 86,289,129
Selling, general and administrative expenses 6,692,849 10,212,776 21,568,023
Compensation to stockholders 3,009,064 7,034,274 1,548,321
--------- --------- ---------
Income from operations 5,487,069 5,367,367 10,572,041
Interest expense-substantially all to related parties (295,774) (783,441) (1,024,262)
Interest income 19,600 197,954 812,658
Income before taxes and extraordinary item 5,210,895 4,781,880 10,360,437
Income tax provision (benefit) 487,730 (66,271) 1,314,909
------- -------- ---------
Income before extraordinary item 4,723,165 4,848,151 9,045,528
Extraordinary item, less applicable income
taxes of $805,874 -- -- (1,215,405)
------- -------- ----------
Net income $4,723,165 $4,848,151 $7,830,123
========== ========== ==========
PRO FORMA INCOME DATA (UNAUDITED):
Historical income before income taxes and
extraordinary item as reported $5,210,895 $4,781,880 $10,360,437
Pro forma provision for income taxes 2,110,412 1,936,661 4,195,977
--------- --------- ---------
Pro forma income before extraordinary item 3,100,483 2,845,219 6,164,460
Extraordinary item, less applicable income
taxes of $805,874 -- -- (1,215,405)
--------- --------- ---------
Pro forma net income $3,100,483 $2,845,219 $4,949,055
Pro forma income before extraordinary item
per share $0.10 $0.09 $0.19
===== ===== =====
Pro forma net income per share $0.10 $0.09 $0.15
===== ===== =====
Shares used in computing pro forma per
share amounts 30,812,900 30,812,900 32,104,815
Pro forma fully diluted income before
extraordinary item per share $0.10 $0.09 $0.19
===== ===== =====
Pro forma fully diluted net income per share $0.10 $0.09 $0.15
===== ===== =====
Shares used in computing pro forma fully diluted
per share amounts 30,812,900 30,812,900 32,184,832
</TABLE>
The accompanying notes are an integral part of this supplemental consolidated
statement of income.
<PAGE> 18
-11-
SNYDER COMMUNICATIONS, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF EQUITY
(NOTE 1)
<TABLE>
<CAPTION>
ADDITIONAL LIMITED
COMMON PAID-IN RETAINED PARTNERS'
STOCK CAPITAL EARNINGS DEFICIT TOTAL
----- ------- -------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993,
as previously reported $500 $138,342 $(693,823) $(2,680,421) $(3,235,402)
Pooling of MMD, Inc. 1,354 7,140 985,162 -- 993,656
------- ---------- ---------- ------------ ------------
Balance, December 31, 1993, as restated 1,854 145,482 291,339 (2,680,421) (2,241,746)
Distributions -- -- (1,820,128) -- (1,820,128)
Net income 3,453,224 1,269,941 4,723,165
------- ---------- ---------- ------------ ------------
Balance, December 31, 1994 1,854 145,482 1,924,435 (1,410,480) 661,291
Proceeds from sale of partnership
interest, net of income taxes of $815,000 -- 1,221,361 -- 13,639 1,235,000
Distributions -- -- (1,404,986) (3,853,168) (5,258,154)
Net income 1,048,472 3,799,679 4,848,151
------- ---------- ---------- ------------ ------------
Balance, December 31, 1995 1,854 1,366,843 1,567,921 (1,450,330) 1,486,288
Distributions -- -- (13,164,642) (8,612,050) (21,776,692)
Proceeds from Initial Public Offering 4,038 59,169,659 -- -- 59,173,697
Reorganization 28,959 (15,558,416) 7,630,431 7,899,026 --
Exercise of stock options 25 424,975 -- -- 425,000
Tax effect of option exercises -- 98,850 -- -- 98,850
Net income 5,666,769 2,163,354 7,830,123
------- ---------- ---------- ------------ ------------
Balance, December 31, 1996 $34,876 $45,501,911 $ 1,700,479 $ -- $47,237,266
------- ---------- ---------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of this supplemental
consolidated statement of equity.
<PAGE> 19
-12-
SNYDER COMMUNICATIONS, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
(NOTE 1)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1994 1995 1996
-------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $4,723,165 $4,848,151 $7,830,123
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 434,705 677,528 1,596,583
Loss on repayment of subordinated debt -- -- 2,021,279
Loss on disposal of assets -- 165,480 467,080
Deferred taxes 4,398 (18,602) (804,043)
Changes in assets and liabilities:
Accounts receivable (578,255) (2,071,211) (2,112,248)
Unbilled services (2,212,878) 645,863 (2,256,593)
Deposits and other assets (154,444) (474,914) (1,397,513)
Prepaid expenses and other assets (68,283) (218,301) (324,873)
Accrued payroll, accounts payable and
accrued expenses 1,399,432 3,472,469 8,496,357
Unearned revenue 512,470 583,892 2,368,294
Deferred rent -- . 43,949 44,769
------------ ------------ ------------
Net cash provided by operating
activities 4,060,310 7,654,304 15,929,215
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (579,289) (1,411,875) (4,135,824)
Note and net advances to stockholders (5,657) (2,764,769) --
Investment in closely held company -- (145,808) -- .
------------ ------------ ------------
Net cash used in investing
activities (584,946) (4,322,452) (4,135,824)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term notes payable to limited
partners and others (592,113) (2,641,968) --
Proceeds from issuance of subordinated
debentures due to related parties -- 5,000,000 --
Proceeds from sale of partnership interest -- 2,050,000 --
Tax effect of equity transaction -- (815,000) --
Debt issuance costs -- (557,000) --
Distributions (1,820,128) (5,258,154) (17,963,958)
Repayment of subordinated debentures -- -- (6,900,000)
Proceeds from line of credit borrowing -- 1,000,000 1,958,910
Repayment of line of credit borrowing -- -- (1,513,242)
Payments on capital lease obligations (49,060) (114,228) (410,362)
Proceeds from exercise of options -- -- 425,000
Proceeds from Initial Public Offering -- 59,173,697
------------ ------------ ------------
Net cash (used in) provided by
financing activities (2,461,301) (1,336,350) 34,770,045
------------ ------------ ------------
NET INCREASE IN CASH AND EQUIVALENTS 1,014,063 1,995,502 46,563,436
CASH AND EQUIVALENTS, beginning of year 2,149,572 3,163,635 5,159,137
------------ ------------ ------------
CASH AND EQUIVALENTS, end of year $3,163,635 $5,159,137 $51,722,573
========== ========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $247,339 $533,597 $783,606
Cash paid for income taxes $268,599 $391,732 $1,595,707
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Equipment purchased under capital leases $268,599 $433,154 $1,954,230
Distribution of note receivable from stockholder
to SMS stockholders $ -- $ -- $2,725,000
Distribution payable $ -- $ -- $1,087,734
</TABLE>
The accompanying notes are an integral part of this supplemental consolidated
statement of cash flows.
<PAGE> 20
-13-
SNYDER COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, BASIS OF PRESENTATION AND BUSINESS:
On October 19, 1988, Collegiate Marketing and Communications, Inc., a
Delaware corporation (the "General Partner"), and a Delaware limited
partnership beneficially owned by Mortimer B. Zuckerman and Fred Drasner (the
"Original Limited Partner") entered into a partnership agreement (the
"Partnership Agreement") pursuant to the provisions of the Delaware Act, under
the name Collegiate Marketing and Communications, L.P. (the "Partnership"). On
September 1, 1989, the name of the Partnership was changed to Snyder
Communications, L.P., and the name of the General Partner was changed to Snyder
Communications, Inc. On May 18, 1995, the Partnership Agreement was amended to
admit several new limited partners into the Partnership. On June 25, 1996, the
name of the General Partner was changed to Snyder Marketing Services, Inc.
("SMS").
Snyder Communications, Inc., a Delaware corporation, was incorporated on
June 25, 1996, to continue the business operations of the Partnership. Snyder
Communications, Inc., in conjunction with all of the existing partners in the
Partnership, reorganized on September 24, 1996 (the "Reorganization"), upon the
effectiveness of the initial public offering of its common stock.
Prior to the Reorganization, SMS owned 63.85 percent of the Partnership and
the limited partners owned the remaining 36.15 percent. The Reorganization
resulted in the stockholders of SMS exchanging 100 percent of their SMS stock
for stock of Snyder Communications, Inc. simultaneously with the limited
partners exchanging their limited partnership interests in the Partnership for
common stock of Snyder Communications, Inc. After consummation of the
Reorganization, Snyder Communications, Inc. owns 100 percent of the stock of
SMS and, directly and indirectly (through its ownership of SMS), 100 percent of
the interests in the Partnership. In connection with the Reorganization,
29,458,400 shares of common stock were issued to the stockholders of Snyder
Communications, Inc.
Because of the continuity of ownership, the Reorganization was accounted
for by combining the assets, liabilities and operations of SMS, the Partnership
and Snyder Communications, Inc., at their historical cost basis. Accordingly,
the accompanying supplemental consolidated balance sheet as of December 31,
1995 and the supplemental consolidated financial statements for the years ended
December 31, 1994 and 1995 include a combination of the accounts of SMS and the
Partnership after elimination of all significant intercompany transactions. The
accompanying supplemental consolidated financial statements as of and for the
year ended December 31, 1996 include the consolidated accounts of Snyder
Communications, Inc., SMS and the Partnership (the consolidated entity will be
referred to herein as "SCI" or "Snyder Communications") after elimination of
all significant intercompany transactions. Certain amounts previously presented
have been reclassified to conform to the December 31, 1996 presentation.
<PAGE> 21
-14-
Snyder Communications provides outsourced marketing services. SCI designs
and implements marketing programs for its customers utilizing field sales,
teleservices, sponsored wallboards and product sampling. SCI's operations are
conducted throughout the United States, and SCI plans to expand into the United
Kingdom.
On January 6, 1997, SCI acquired MMD, Inc. ("MMD") in a merger transaction
in which MMD became a wholly owned subsidiary of SCI (the "Merger"). In the
Merger, 966 shares of outstanding MMD common stock were converted into
1,354,500 shares of SCI common stock. The Merger has been accounted for as a
pooling of interests for accounting and financial reporting purposes. The
accompanying supplemental financial statements have been retroactively
restated to reflect the combined financial position and combined results of
operations and cash flows of SCI and MMD for all periods presented, giving
effect to the merger transaction as if it had occurred at the beginning of the
earliest period presented (the combined entity will be referred to herein as
the "Company"). The supplemental consolidated balance sheets for all periods
presented give effect to the conversion of the shares of MMD common stock to
1,354,500 shares of SCI common stock. Generally accepted accounting principles
prohibit giving effect to a consummated business combination accounted for by
the pooling of interests method in financial statements that do not include the
date of consummation. These financial statements do not extend through the date
of the consummation, however, they will become the historical consolidated
financial statements of Snyder Communications, Inc. after financial statements
covering the date of consummation of the business combination are issued.
MMD was incorporated under the laws of the state of New Jersey on December
7, 1982. MMD's principal business activity involves marketing medical products,
utilizing field sales, throughout the United States for pharmaceutical
companies. MMD previously utilized an October 31 year-end. Concurrent with the
Merger, MMD changed its fiscal year-end to December 31 and restated its
financial statements to conform to SCI's calendar year reporting.
There are important risks associated with the Company's business and
financial results. These risks include (i) the Company's current reliance on
four significant clients, which constituted 42, 15, 14 and 12 percent of its
1996 revenues and on other major clients (see Note 3); (ii) the Company's
ability to sustain and manage future growth; (iii) the Company's dependence on
industry trends toward outsourcing of marketing services; (iv) the risks
associated with the Company's contracts; and (v) the dependence of the
Company's success on its executive officers and other key employees, in
particular, its Chairman of the Board of Directors, Chief Executive Officer and
President.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND EQUIVALENTS
Cash and equivalents are comprised principally of amounts in operating
accounts, money market investments, and other short-term instruments, stated at
cost which approximates market value, with original maturities of three months
or less.
DEFERRED FINANCING COSTS
Deferred financing costs, which were incurred in connection with the
issuance of the subordinated debentures (see Note 5), were charged to expense
as additional interest expense over the life of the subordinated debentures
using the interest method.
<PAGE> 22
-15-
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. The Company depreciates
furniture, fixtures and office and telephone equipment on a straight-line basis
over three to seven years. Custom wood cases used to display wallboards are
placed in locations targeted at specific advertising markets. The original cost
of these cases is capitalized and depreciated over five years. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
term of the lease or the estimated useful life of the improvements.
When assets are retired or sold, the cost and related accumulated
depreciation and amortization are removed from the accounts and any gain or
loss is reflected in income.
REVENUE RECOGNITION
DIRECT SALES -- SCI performs marketing of telecommunication and other
services on behalf of its clients utilizing its field sales and teleservicing
resources. These contracts provide for payments based on accepted customers and
the type of service purchased by the customer. Revenues related to these sales
are recognized on the date the application for service is accepted by SCI's
clients. At this point, SCI has no further performance obligation related to
the submitted customer and is contractually entitled to payment. Certain of
SCI's contracts provide the client with the right to seek a return of
previously paid commissions if the customers submitted by SCI do not meet
certain defined characteristics and performance standards. These relate to the
client's ability to successfully provide service to the customer, the bad debt
experience of the customer base submitted by SCI, the achievement of targeted
customer goals and certain minimum usage and life measures of the customer
base. At the point of revenue recognition, an allowance is recorded by SCI
based on an estimate for these returned commissions. The allowance is estimated
based on SCI's historical experience and periodically reviewed by SCI and
adjusted when necessary.
Revenue and associated costs of pharmaceutical detailing are recognized
when services have been performed by field representatives. Customer advances
represent payments received under contracts in advance of MMD performing the
related service. These amounts are deferred and recognized as revenue when
services are performed. Unbilled services represent revenues earned on
contracts, but billed in a subsequent accounting period.
WALLBOARD(R) REVENUE -- SCI contracts with clients to display sponsored
information in mounted wall units at target market locations. Wallboard revenue
is recognized over the life of the contract as services are rendered which is
generally one year or less. Unearned revenue is recorded for billings prior to
the earning of such revenue.
PRODUCT SAMPLING -- SCI contracts with clients to produce and distribute
product samples, coupons and pieces of literature to target markets. Sampling
revenue is recognized over the contract term of the sampling program as
services are rendered which generally extends for one year.
<PAGE> 23
-16-
INCOME TAXES
The accompanying supplementary consolidated financial statements reflect no
provision for Federal or state income taxes related to income earned by the
Partnership prior to the Reorganization since each of the partners of the
Partnership reflected their share of the Partnership's net income on their
respective tax returns. Prior to January 1, 1996, SMS was taxed as a C
corporation and, accordingly, a provision (benefit) for taxes of SMS is
reflected in the accompanying statement of income for each of the two years in
the period ended December 31, 1995. During this period, SMS accounted for
income taxes in accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" "(SFAS 109)". Effective January 1, 1996, SMS
elected to be taxed as an S corporation under the Internal Revenue Code. In
lieu of corporate taxes, the stockholders of an S corporation are taxed on
their proportionate share of the Company's taxable income.
Effective with the Reorganization, the Company is treated as a C
corporation for Federal and state income tax purposes. At the date of the
Reorganization, the Company recognized a net deferred tax asset and an
associated tax benefit equal to the cumulative net deductible temporary
differences existing at that date. The income tax provision recorded for the
year ended December 31, 1996 includes a provision for income taxes for SCI for
the period from September 24, 1996, the date of the Reorganization, through
December 31, 1996, offset by the net deductible temporary differences existing
at the date of the Reorganization.
Prior to November 1, 1992, MMD filed its income tax return using the
cash-basis method of reporting. Beginning November 1, 1992, MMD switched to the
accrual method. In connection with this change, MMD, for income tax purposes,
was required to recognize additional taxable income of approximately $642,000
over a four-year period, beginning in 1993. Accordingly, at December 31, 1995,
a deferred income tax liability is reflected as the balance due for the change
in the tax accounting method described above and is included in accounts
payable and accrued expenses in the accompanying supplemental consolidated
balance sheet.
During 1994, MMD elected to be taxed as a small business corporation (S
Corporation) under the applicable sections of the Internal Revenue Code and
New York state income tax laws. Accordingly, no provision for Federal income
taxes has been made for MMD in the accompanying supplemental consolidated
financial statements. However, MMD is subject to New York state income tax at
reduced rates and New York City income tax. MMD elected to retain its tax
fiscal year-end, which was October 31, through October 31, 1996. As an S
Corporation with a year-end which is other than a calendar year, a deposit was
required to be held by the IRS. This deposit amounted to $283,183
and $316,777 as of December 31, 1995 and 1996, respectively. As a result of the
Merger, MMD is in process of changing its tax fiscal year-end to December 31.
PRO FORMA INCOME DATA (UNAUDITED)
The unaudited pro forma net income and net income per share amounts include
a provision for Federal and state income taxes as if the Company had been a
taxable C corporation for all periods presented. The shares used in computing
pro forma net income per share assume that the Reorganization and the Merger
had both occurred at the beginning of each of the periods presented and, for
1996 reflect the issuance of additional shares as a result of the initial
public offering and the exercise of stock options. The income tax rate used to
calculate pro forma net income reflects the combined Federal and state income
taxes of approximately 40.5 percent for the years ended December 31, 1994,
1995 and 1996.
<PAGE> 24
-17-
ACCOUNTING FOR STOCK OPTIONS
The Company accounts for its stock-based compensation plan using the
intrinsic value based method in accordance with the provisions of APB Opinion
No. 25, "Accounting for Stock Issued to Employees." Pro forma disclosure of net
income and earnings per share, calculated as if the Company accounted for its
stock-based compensation plan using the fair value based method in accordance
with the provisions of Statement of Financial Accounting Standards No. 123
("SFAS 123"), is included in Note 9.
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
Company's most significant estimates relate to certain of its contracts to
provide outsourced marketing services. The terms of these contracts provide
that the Company's clients may seek a return of previously paid commissions if
certain defined characteristics or performance standards are not met. The
Company has recorded an allowance in the accompanying supplemental consolidated
financial statements in an amount which it considers sufficient to satisfy any
claims which might be made pursuant to these provisions.
CONCENTRATION OF CREDIT RISK
Concentration of credit risk is limited to accounts receivable and unbilled
services and is subject to the financial conditions of certain major clients as
described in Note 3. The Company's receivables are concentrated with customers
in the telecommunications and pharmaceutical industries. The Company does not
require collateral or other security to support clients' receivables.
3. SIGNIFICANT CLIENTS:
The Company had one client which represented 5, 36 and 42 percent of the
Company's total revenues for the years ended December 31, 1994, 1995 and 1996,
respectively. The loss of this client would have a material adverse effect on
the Company's business. The Company's principal contract with this client
extends through December 1997. In January 1997 the Company entered into another
two-year contract with this client to provide additional services. The Company
had a second client which accounted for 15 percent of the Company's total
revenues for the year ended December 31, 1996. Effective January 1997, SCI isno
longer doing business with this client. The termination of the contract with
this client is not expected to have a material adverse effect on the Company,
because the Company has completed the Merger with MMD and has other pending
acquisitions as discussed in Note 15, and has entered into additional contracts
with other clients, including a contract with its largest client to provide
services similar to those previously provided to this client. The Company had a
third client which represented 33, 30 and 14 percent of the Company's total
revenues for the years ended December 31, 1994, 1995 and 1996, respectively and
a fourth client which accounted for 12, 6, and 5 percent of the Company's total
revenues for the years ended December 31, 1994, 1995 and 1996, respectively.
The Company's contract with the third client extends through December 1999.
<PAGE> 25
-18-
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1996
---- ----
<S> <C> <C>
WallBoards(R) $1,829,398 $1,790,566
Office and telephone equipment 1,696,693 5,938,314
Furniture and fixtures 335,840 538,217
Leasehold improvements 299,436 903,669
---------- ----------
4,161,367 9,170,766
Accumulated depreciation (1,547,899) (2,090,772)
---------- ----------
$2,613,468 $7,079,994
========== ==========
</TABLE>
5. DEBT:
LINES OF CREDIT
SCI obtained a $2.5 million line of credit in September 1996. The line of
credit has a variable rate of interest with borrowings payable on an amortizing
basis to September 1999, the date the line expires. At December 31, 1996,
$0.9 million was outstanding and the interest rate was 6.75 percent. The
weighted average interest for the period ended December 31, 1996 was 6.71
percent.
MMD has a $2.0 million revolving line of credit agreement with a bank. The
line of credit has a variable interest rate based on the bank's prime rate
(8.25 percent as of December 31, 1996). MMD had $1.0 and $0.5 million
outstanding on this line at December 31, 1995 and 1996, respectively, and the
effective interest rate was 8 percent for the year ended December 31, 1996.
Borrowings pursuant to the line of credit are collateralized by substantially
all of the assets of MMD. In February 1997, MMD paid off the outstanding
balance of $0.5 million.
SUBORDINATED DEBENTURES
On October 28, 1996 SCI used approximately $7.0 million of cash to redeem
in full the subordinated debentures ("the Debentures") due to related parties.
The Debentures were originally issued on May 18, 1995, with a face amount of
$6.0 million. Cash proceeds of $5.0 million were received upon issuance of the
Debentures. The difference between the cash proceeds received and the face
amount of the Debentures was accounted for as an original issue discount. The
Debentures had a stated interest rate of 12.25 percent (effective interest rate
to maturity of approximately 17 percent) and an original maturity date of
December 31, 2001. The Debentures were classified as long term at December 31,
1995, because SCI did not have the intent to repay them at that date. The $7.0
million payment consisted of the face amount of the Debentures, a prepayment
penalty and accrued interest. A nonrecurring charge of $1.2 million, net of a
$805,874 tax benefit, was recorded at December 31, 1996 as an extraordinary
loss related to this early debt extinguishment. The nonrecurring charge
consists of prepayment penalties and the write-off of unamortized discount and
debt issuance costs.
<PAGE> 26
-19-
NOTES PAYABLE
Concurrent with the formation of the Partnership, the Original Limited
Partner loaned the Partnership $350,000 as evidenced by a promissory note. On
May 10, 1989, the Partnership entered into another promissory note agreement
with the Original Limited Partner to repay the principal amount of advances
previously made by the Original Limited Partner to the Partnership. Effective
January 1, 1993, all prior notes payable and the related accrued interest to
the Original Limited Partner were combined into one note totaling $3,252,781.
This note bore interest of 8.00 percent per annum. This note was paid in full
in May 1995 with a portion of the proceeds from the Debentures.
6. INCOME TAXES:
Prior to January 1, 1996, SMS was taxed as a C corporation for Federal and
state corporate income tax purposes. Effective January 1, 1996, SMS elected to
be taxed as an S corporation and accordingly, SMS's income was taxable to its
stockholders.
The Company's income tax provision (benefit) for the periods when it
operated as a C corporation, the years ended December 31, 1994 and 1995 and for
the period from the date of Reorganization to December 31, 1996 includes the
following components. At the date of the Reorganization, a net deferred tax
asset was recorded with an associated credit to the provision for income taxes.
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C> <C>
Current Federal $2,000 $433,500 $1,590,176
State and City 402,730 255,229 508,175
------- ------- -------
404,730 688,729 2,098,351
Deferred Federal 83,000 51,000 (668,618)
State and City -- 9,000 (114,824)
------- ----- ---------
83,000 60,000 (783,442)
Tax effect of equity transaction -- (815,000) --
------- --------- ---------
Income tax provision (benefit) $487,730 $(66,271) $1,314,909
======== ========= ==========
</TABLE>
The provision for taxes on income before extraordinary item differs from
the amount computed by applying the U.S. Federal statutory tax rate as a result
of the following.
<PAGE> 27
-20-
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Taxes at statutory U.S. Federal income tax rate 35.00% 35.00% 35.00%
Income taxed directly to owners (30.66) (39.98) (21.38)
State and city income taxes
(benefit), net
of Federal tax benefit 5.02 3.59 2.47
Tax effect of Reorganization -- -- (6.86)
Other 3.46
----- ------- ------
Effective tax rate 9.36% (1.39)% 12.69%
===== ======= ======
</TABLE>
Deferred income taxes are recorded based upon differences between financial
statement and tax bases of assets and liabilities. There was no valuation
allowance relating to the deferred tax assets. As of December 31, 1995 and 1996
the net deferred tax asset consisted of the following.
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Accrued expenses and other liabilities $51,106 $791,667
Vacation and severance accruals 32,907 120,010
Allowance for doubtful accounts 40,000 42,582
Other 17,751 --
------ -------
Gross deferred tax assets 141,764 954,259
Property and equipment (83,764) (170,817)
-------- ---------
Gross deferred tax liabilities (83,764) (170,817)
-------- ---------
Net deferred tax asset $58,000 $783,442
======= ========
</TABLE>
7. LEASES:
The Company leases certain facilities, office equipment and other assets.
The following is a schedule of future minimum lease payments for capital leases
and for operating leases (with initial or remaining terms in excess of one year
at December 31, 1996).
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ -------- --------
<S> <C> <C>
1997 $975,789 $2,841,915
1998 878,571 2,446,764
1999 499,529 2,259,201
2000 80,590 1,872,837
2001 -- 1,695,444
Thereafter -- 1,646,401
--------- ----------
Total minimum lease payments 2,434,479 $12,762,562
--------- ==========
Less-Amount representing interest (352,146)
---------
Total obligation under capital leases 2,082,333
Less-Current portion (773,520)
---------
Long-term portion $1,308,813
=========
</TABLE>
<PAGE> 28
-21-
Property and equipment, net, on the supplemental consolidated balance
sheets includes $538,798 and $2,082,333 for equipment purchased under capital
leases as of December 31, 1995 and 1996, respectively.
Rental expense for all operating leases was approximately $674,400,
$1,383,600 and $1,947,227 for the years ended December 31, 1994, 1995 and
1996, respectively.
8. CAPITAL STOCK:
On September 30, 1996 SCI completed an initial public offering of
8,970,000 shares of its common stock, par value $0.001 per share (the "Common
Stock") at an offering price of $17.00 per share. The offering included
4,038,162 newly issued shares of Common Stock sold by SCI and 4,931,838
previously outstanding shares of Common Stock sold by selling stockholders. SCI
received net proceeds of $59.2 million from the offering (after deducting the
costs associated with the offering). SCI did not receive any proceeds from the
sale of shares of Common Stock in the offering by the selling stockholders.
In May 1995, SMS sold a 6.15 percent interest in the Partnership for
$2,050,000 in cash proceeds. These proceeds are reflected (net of associated
income taxes of $815,000 and SMS's basis in the equity interest) as a
contribution to additional paid-in capital in the accompanying supplemental
consolidated financial statements.
9. STOCK INCENTIVE PLAN:
In September 1996, SCI adopted the 1996 Stock Incentive Plan (the "Stock
Option Plan"). The Stock Option Plan authorizes SCI to grant incentive stock
options, non-qualified stock options, restricted stock awards and stock
appreciation rights ("SARs"). Subject to adjustment, the aggregate number of
shares of Common Stock which may be issued under the Stock Option Plan upon
exercise of options, SARs or in the form of restricted stock may not exceed
five million shares.
The exercise price of options granted under the Stock Option Plan may not
be less than 100 percent (110 percent in the case of an optionee who is a 10
percent stockholder) of the fair market value per share of Common Stock on the
date of the option grant. The vesting and other provisions of the options are
determined by the Company's Board of Directors. All options granted as of
December 31, 1996 vest on or before the fourth anniversary of the date of grant
and expire on or before the tenth anniversary of the date of grant.
A summary of the activity within the Stock Option Plan for the year
ended December 31, 1996 is as follows.
<PAGE> 29
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<TABLE>
<CAPTION>
Shares Weighted Average
Outstanding Exercise Price
----------- --------------
<S> <C> <C>
Beginning of year --- ---
Granted 4,237,000 $17.29
Exercised (25,000) 17.00
Forfeited (250,000) 17.23
Expired --- ---
----------- --------
End of year 3,962,000 $17.29
Exercisable at end of year 275,000 $17.00
</TABLE>
Weighted average fair value of options granted $37,498,732
Of the 3,962,000 options outstanding as of December 31, 1996, 3,767,500
options have an exercise price of $17.00 and a weighted average remaining
contractual life of 9.69 years. All 275,000 options exercisable at December 31,
1996 have an exercise price of $17.00. The remaining 194,500 options have
exercise prices between $19.375 and $27, with a weighted average exercise price
of $22.972 and a weighted average remaining contractual life of 9.93 years.
The fair value of each option grant is estimated on the date of grant using
a Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1996: risk-free interest rate of 6.2 percent,
expected dividend yield of zero, expected life of 5 years, and expected
volatility of 50 percent.
If the Company had recorded compensation expense using the fair value based
method prescribed by SFAS 123, the Company's pro forma net income and pro forma
net income per share amounts would have been reduced to the following as
adjusted amounts.
<TABLE>
<S> <C> <C>
Pro forma net income (loss): As reported $5,047,479
As adjusted (1,847,675)
Pro forma net
income (loss) per share: As reported $0.16
As adjusted (0.06)
Pro forma fully diluted
net income (loss) per share: As reported $0.16
As adjusted (0.06)
</TABLE>
10. RELATED PARTIES:
SCI's headquarters office space is leased from a third party, in which one
of the former limited partners has an ownership interest. Rent paid under this
lease was $355,483, $771,855 and $1,125,542 in 1994, 1995 and 1996,
respectively.
<PAGE> 30
-23-
During 1995, SCI advanced $2,725,000 to a stockholder of SMS as evidenced
by a promissory note. The note was non-interest bearing and secured by SMS
stock. This note was distributed to the SMS stockholders, pro rata, on June 30,
1996.
SCI produces a WallBoard(R) for which a publication beneficially owned by
the Original Limited Partner is one of the sponsors. Such publication
participates as a sponsor in exchange for the use by the Company of its
editorial information. Because it is not practicable to estimate the benefit
received by or provided to SCI and the Original Limited Partner, no accounting
recognition has been provided for this transaction in the accompanying
supplemental and consolidated financial statements.
11. COMPENSATION TO STOCKHOLDERS:
Prior to the Reorganization, SCI's operations were conducted by the
Partnership. SMS, the general partner of the Partnership, paid compensation to
certain officers and employees of the Partnership for services performed for
SMS. The compensation from SMS was in addition to the compensation that these
individuals received from the Partnership. Following consummation of the
Reorganization, these individuals are not performing any comparable duties or
responsibilities for SMS. No such compensation was paid by SMS to these
individuals in 1996 nor is any such compensation expected to be paid in the
future.
Prior to the Merger, the stockholders of MMD received compensation for
services provided to MMD. Following the Merger, two of the former stockholders
are not performing comparable duties for MMD. No such compensation is expected
to be paid to these individuals in the future. The remaining individual has
entered into an employment agreement with the Company which provides for
compensation at a reduced level compared to that paid for the periods
presented.
This non-recurring compensation from both SMS and MMD is presented as
compensation to stockholders on the Supplemental Consolidated Statement of
Income for the three years ended December 31, 1996.
12. COMMITMENTS AND CONTINGENCIES:
The Company is subject to lawsuits, investigations and claims arising out
of the conduct of its business, including those related to commercial
transactions, contracts, government regulation and employment matters. Certain
claims, suits and complaints have been filed or are pending against the
Company. In the opinion of management, all matters are without merit or are of
such kind, or involve such amounts, as would not have a material effect on the
financial position or results of operations of the Company if disposed of
unfavorably.
The Internal Revenue Service ("IRS") is currently conducting an examination
of MMD's Federal employment tax returns for the years ended December 31, 1992
and 1993. During the course of the examination, the IRS has requested
documentation from MMD to support MMD's classification of its representatives
as independent contractors. The Company believes that it has adequate support
for its treatment of representatives as independent contractors. In the opinion
of management, the resolution of this matter will not have a material effect on
the financial position or results of operations of the Company, and adequate
provision for any potential losses has been made in the accompanying
supplemental consolidated financial statements.
<PAGE> 31
-24-
13. DISTRIBUTION PAYABLE:
Consistent with MMD's prior practice, in December 1996, the Board of
Directors declared a distribution equal to MMD's estimated earnings determined
under generally accepted accounting principles for the twelve months ended
October 31, 1996 (MMD's previous fiscal year-end.) This distribution was paid
to MMD stockholders prior to the merger with SCI.
14. SUBSEQUENT EVENT - RECENT ACQUISITIONS:
On January 17, 1997, the Company acquired Supermarket Communications
Systems, Inc. ("SCS"). SCS provides marketing services through information
centers located in over 7,000 targeted retail outlets. Upon consummation of the
acquisition, SCS's name was changed to Good Neighbor Direct, Inc. ("Good
Neighbor"), and the information centers acquired will be operated by the
Company through Good Neighbor. The purchase price of $4,050,000 was paid in
cash and is subject to adjustment based upon certain procedures in the purchase
agreement which will determine the actual number of information centers
purchased. The Company does not expect the final purchase price to differ
materially from the amount paid and expects the purchase price to be finalized
by March 31, 1997. The assets acquired in the purchase include information
centers with a net book value of approximately $460,000 and certain other
assets with a book value of approximately $40,000.
15. SUBSEQUENT EVENTS - PENDING ACQUISITIONS (UNAUDITED):
On March 19, 1997, the Company announced its plans to acquire Brann
Holdings Limited ("Brann"), a United Kingdom company, in a merger transaction
in which Brann will become a wholly owned subsidiary of the Company. In the
merger, the Company expects to issue approximately 2.7 million shares of its
Common Stock in exchange for all of the Brann ordinary shares outstanding. The
ratio of exchange is based on a five day average closing price of the Company's
Common Stock. Each Brann stockholder will receive a pro-rata amount of the
Company's Common Stock in proportion to their relative percentage ownership
interest in Brann. The Company expects to complete this transaction on or
shortly after March 24, 1997. The merger will be accounted for as a pooling of
interests for accounting and financial reporting purposes. The Company expects
this acquisition to increase its ability to provide targeted outsourced
marketing services to leading companies operating in the United Kingdom.
On March 19, 1997, the Company entered into a definitive agreement to
acquire American List Corporation ("American List") in a merger transaction in
which American List will become a wholly owned subsidiary of the Company. Under
the terms of the agreement, the Company will issue one share of Common Stock in
exchange for each of the approximately 4.5 million shares of American List
common stock outstanding if the average trading price (as defined in the
agreement) of the Company's Common Stock prior to closing of the transaction is
at least $32 per share with the exchange ratio increasing if the average
trading price of the Company's Common Stock prior to closing is less than $32
per share. Each American List stockholder will receive a pro-rata amount of
the Company's Common Stock in proportion to their relative percentage
ownership in American List. This acquisition is subject to the approval of
American List stockholders and to customary regulatory approval. Pending
approval, the Company expects to complete this merger transaction in the second
quarter of 1997. This merger will be accounted for as a pooling of interests
for accounting and financial reporting purposes. American List is a targeted
marketing resource, providing clients with the ability to reach over 30 million
students and young adults through its proprietary database.
<PAGE> 32
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SNYDER COMMUNICATIONS, INC.
(Registrant)
Date: March 24, 1997 /s/ MICHELE D. SNYDER
-------------- -----------------------
Michele D. Snyder
Vice Chairman and
Chief Operating Officer
Date: March 24, 1997 /s/ A. CLAYTON PERFALL
-------------- -----------------------
A. Clayton Perfall
Chief Financial Officer
