<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):
MARCH 19, 1997
SNYDER COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION
OF INCORPORATION)
1-12145
(COMMISSION FILE NUMBER)
52-1983617
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
TWO DEMOCRACY CENTER
6903 ROCKLEDGE DRIVE
15TH FLOOR
BETHESDA, MARYLAND 20817
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(301) 468-1010
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT.)
================================================================================
<PAGE> 2
This Amendment No. 1 to the Current Report of Snyder Communications, Inc.
(the "Company") on Form 8-K dated March 18, 1997 (the "Report") relates to the
Company's completion of the acquisition of Brann Holdings Limited ("Brann") in a
share exchange in which Brann became a wholly-owned subsidiary of the Company.
The purpose of this Amendment is to amend Item 7(A) to provide the financial
statements of Brann and Item 7(B) to provide the required pro forma financial
information relating to the business combination between the Company and Brann
on March 27, 1997 which were impracticable to provide at the time the Company
filed this report. This Amendment also contains the financial results of the
Company for the first full calendar month following the closing of the
acquisition in Item 5.
ITEM 5. OTHER EVENTS
POST-MERGER FINANCIAL RESULTS
The following is a summary of certain interim financial information of the
Company, on a consolidated basis, reflecting the combined operations of the
Company and Brann. At April 30, 1997, the Company had consolidated current
assets and noncurrent assets of $62.7 million and $30.9 million, respectively.
Also, at April 30, 1997, the Company had current liabilities and noncurrent
liabilities of $36.5 million and $3.5 million, respectively. For the one month
period ended April 30, 1997, the Company had consolidated revenues and gross
profit of approximately $17.2 million and $5.0 million, respectively. Also, the
Company had income before taxes and net income of $1.8 million and $1.1 million,
respectively.
The Company entered into a definitive agreement on March 18, 1997 to
acquire American List Corporation ("American List"). The American List
acquisition is subject to the approval of the American List stockholders and to
customary regulatory approval. The acquisition will be accounted for as a
pooling of interests. The summary interim financial information presented herein
does not include the financial information of American List. Upon consummation
of the American List acquisition, the Company's financial information will be
restated to include the financial information of American List.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
2
<PAGE> 3
BRANN HOLDINGS LIMITED
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Brann Holdings Limited:
We have audited the consolidated balance sheets of Brann Holdings Limited
(the Company) and its subsidiaries as of December 31, 1995 and 1996, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1996
appearing on pages 4 to 15 of this Report. 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 in the United Kingdom, which do not differ in any material respects
from generally accepted auditing standards in the United States. 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 consolidated financial statements appearing on pages 4
to 15 of this Report present fairly, in all material respects, the financial
position of the Company and its subsidiaries at 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 in conformity with generally accepted
accounting principles in the United States.
PRICE WATERHOUSE
Chartered Accountants
and Registered Auditors
Bristol, England
May 30, 1997
3
<PAGE> 4
BRANN HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
ASSETS
Cash and equivalents............................................... $ 3,874,483 $ 1,752,474
Accounts receivable, net of allowance for doubtful accounts of
$400,595 and $540,802 at December 31, 1995 and 1996,
respectively..................................................... 11,631,184 13,710,025
Inventory (note 3)................................................. 682,095 763,284
Prepaid expenses and other current assets.......................... 498,037 1,449,556
Deferred income taxes (note 7)..................................... 85,069 369,662
----------- -----------
Total current assets..................................... 16,770,868 18,045,001
Property and equipment, net (note 4)............................... 9,283,294 10,235,883
Goodwill........................................................... 3,173,828 3,386,861
----------- -----------
Total assets............................................. $29,227,990 $31,667,745
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of notes payable (note 5).......................... $ 768,710 $ 848,854
Current portion of obligations under capital leases................ 95,895 335,434
Accounts payable................................................... 6,820,947 8,009,352
Accrued expenses................................................... 3,422,847 4,762,826
Accrued income taxes............................................... 1,543,607 872,814
Other taxes........................................................ 1,656,516 2,134,116
----------- -----------
Total current liabilities................................ 14,308,522 16,963,396
Deferred income taxes (note 7)..................................... 334,087 --
Long term debt and obligations under capital leases (note 5)....... 6,604,408 6,734,359
Mandatorily redeemable preferred stock (note 6).................... 4,596,793 5,110,241
----------- -----------
25,843,810 28,807,996
Equity:
'A' ordinary shares of L1 par value, 133,000 shares authorized,
issued and outstanding........................................... 198,702 198,702
Ordinary shares of L1 par value, 300,000 shares authorized, 206,000
issued and outstanding........................................... 307,764 307,764
Retained earnings.................................................. 2,882,664 2,058,536
Cumulative foreign currency translation adjustment................. (4,950) 294,747
----------- -----------
Total stockholders' equity............................... 3,384,180 2,859,749
----------- -----------
Total liabilities and stockholders' equity............... $29,227,990 $31,667,745
========== ==========
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
4
<PAGE> 5
BRANN HOLDINGS LIMITED
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues.............................................. $42,951,152 $62,540,474 $65,462,899
Operating expenses
Cost of services................................. 30,929,676 46,177,618 53,069,513
Selling, general and administrative expenses..... 9,061,652 11,539,914 12,314,793
----------- ----------- -----------
Income from operations................................ 2,959,824 4,822,942 78,593
Other non operating income............................ -- 31,560 143,686
Interest expense...................................... (952,904) (987,828) (968,316)
Interest income....................................... 61,280 118,350 28,112
----------- ----------- -----------
Income (loss) before taxes............................ 2,068,200 3,985,024 (717,925)
Income tax provision.................................. 977,416 1,637,964 96,832
----------- ----------- -----------
Net income (loss)..................................... $ 1,090,784 $ 2,347,060 $ (814,757)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this consolidated statement of
income.
5
<PAGE> 6
BRANN HOLDINGS LIMITED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
COMMON STOCK CURRENCY
------------------- RETAINED TRANSLATION
NUMBER AMOUNT EARNINGS ADJUSTMENTS TOTAL
------- -------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993....................... -- $ -- $ -- $ -- $ --
Issuance of:
Ordinary shares........................ 206,000 307,764 -- -- 307,764
'A' ordinary shares.................... 133,000 198,702 -- -- 198,702
Net income.................................. -- -- 1,090,784 -- 1,090,784
Dividends to stockholders................... -- -- (9,192) -- (9,192)
Foreign currency translation................ -- -- -- 46,740 46,740
------- -------- ---------- ----------- ----------
Balance, December 31, 1994....................... 339,000 506,466 1,081,592 46,740 1,634,798
Net income.................................. -- -- 2,347,060 -- 2,347,060
Dividends to stockholders................... -- -- (545,988) -- (545,988)
Foreign currency translation................ -- -- -- (51,690) (51,690)
------- -------- ---------- ----------- ----------
Balance, December 31, 1995....................... 399,000 506,466 2,882,664 (4,950) 3,384,180
Net income.................................. -- -- (814,757) -- (814,757)
Dividends to stockholders................... -- -- (9,371) -- (9,371)
Foreign currency translation................ -- -- -- 299,697 299,697
------- -------- ---------- ----------- ----------
Balance, December 31, 1996....................... 399,000 $506,466 $2,058,536 $ 294,747 $2,859,749
======= ======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of this consolidated statement of
equity.
6
<PAGE> 7
BRANN HOLDINGS LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................ $ 1,090,784 $ 2,347,060 $ (814,757)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............... 1,708,180 2,183,952 3,173,577
Amortization of goodwill.................... 111,836 115,194 114,011
Gain on disposal of equipment and
investments............................... -- (31,560) (143,695)
Deferred taxes.............................. (1,532) 48,887 (588,798)
Changes in assets and liabilities; excluding
business acquisitions
Accounts receivable......................... (1,774,414) (2,876,802) (2,078,841)
Inventory................................... 72,744 (7,838) (81,190)
Prepaid expenses and other assets........... 18,592 151,189 (951,518)
Accounts payable............................ 3,078,422 1,425,331 1,188,405
Accrued expenses............................ 1,515,014 333,157 1,339,979
Accrued income taxes........................ 695,885 421,932 (670,793)
Other taxes................................. 299,232 617,754 477,600
----------- ----------- -----------
Total adjustments................................ 5,723,959 2,381,196 1,778,737
Net cash provided by operating activities... 6,814,743 4,728,256 963,980
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Brann Limited (note 12).............. (3,498,948) -- --
Purchase of property and equipment............... (2,786,196) (3,249,617) (2,683,475)
Proceeds from sale of equipment.................. 173,648 75,788 63,322
Proceeds from sale of investments................ -- -- 145,469
----------- ----------- -----------
Net cash used in investing activities....... (6,111,496) (3,173,829) (2,474,684)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock......................... 506,466 -- --
Issuance of redeemable preferred stock........... 4,582,098 -- --
Issuance costs................................... (180,774) -- --
Dividends to stockholders........................ (9,192) (545,988) (9,371)
Net proceeds from borrowing...................... 7,768,800 -- --
Repayment of borrowing........................... (225,274) (580,013) (855,700)
Repayment of loan payable (note 12).............. (8,666,694) -- --
Payments on capital lease obligations............ (625,760) (536,705) (244,730)
----------- ----------- -----------
Net cash provided by (used in) financing
activities................................ 3,149,670 (1,662,706) (1,109,801)
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES....................... 242,682 (112,837) 498,496
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS....... 4,095,599 (221,116) (2,122,009)
CASH AND EQUIVALENTS, beginning of year............... -- 4,095,599 3,874,483
----------- ----------- -----------
CASH AND EQUIVALENTS, end of year..................... $ 4,095,599 $ 3,874,483 $ 1,752,474
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, including preference
dividends...................................... $ 876,304 $ 904,194 $ 952,698
Cash paid for income taxes....................... $ 343,168 $ 1,120,380 $ 1,535,249
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND
FINANCING ACTIVITIES:
Equipment purchased under capital leases......... -- $ 92,802 $ 749,593
</TABLE>
The accompanying notes are an integral part of this consolidated statement of
cash flows.
7
<PAGE> 8
BRANN HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, BASIS OF PRESENTATION AND BUSINESS
Brann Holdings Limited ("Brann Holdings" or "the Company"), a United
Kingdom ("UK") registered company, began operations on January 25, 1994 when it
acquired all of the outstanding common stock of Brann Direct Marketing Limited
through a management buy-out. On January 11, 1995 Brann Direct Marketing Limited
changed its name to Brann Limited.
On March 27, 1997 all of the outstanding common stock of the Company was
acquired in a merger transaction by Snyder Communications, Inc. a public
corporation registered on the New York Stock Exchange. See note 13 for
additional information.
The Company is the holding company for Brann Limited whose principal
activities are planning, creating and delivering direct response marketing
communications; marketing systems design and consultancy; print production
services; and telephone and response management services, for companies involved
in marketing, advertising and direct selling and services. The Company's
operations are conducted throughout the United Kingdom.
The consolidated financial statements comprise those of the Company and its
subsidiary undertakings after elimination of inter-company accounts and
transactions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Equivalents
Cash and equivalents are comprised of operating accounts, money market
investments, and other short term instruments, with original maturities of three
months or less and are stated at cost which approximates market value.
Property and Equipment and Depreciation
Property and equipment is stated at cost. The Company depreciates
furniture, fixtures, and office equipment on a straight line basis over three to
ten years; computer equipment over two to four years; automobiles over three to
five years; buildings over fifty years and leasehold improvements over the
shorter of the period of the lease or the useful economic life.
When assets are retired or sold, the cost and related accumulated
depreciation are removed from the accounts and any gain or loss is reflected in
income.
Revenue Recognition
The Company provides integrated targeted marketing services to its clients
under contracts that provide for payment as the services are rendered. The
services include database management, creative design, teleservices, direct
response marketing and print production. Revenues are recognized when the
services are completed in accordance with the terms of the contracts.
Goodwill
Goodwill was recorded in connection with the acquisition of Brann Limited
and is amortized on a straight line basis over thirty years from the acquisition
date. When conditions or events occur which management believes might impact the
value of the goodwill, an analysis of future undiscounted cashflows is
undertaken to determine if any write down in the carrying value of the goodwill
is required.
8
<PAGE> 9
BRANN HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Inventory
Inventory is stated at the lower of cost or market. Cost is the direct cost
of bought in materials on a First In First Out basis, plus attributable labor
and expenses with respect to work in progress.
Foreign Currency Translation
Assets and liabilities are translated at the exchange rate prevailing at
the balance sheet date. Revenue and expense accounts are translated using the
weighted average exchange rate during the period. Foreign currency translation
adjustments are disclosed as a separate component of equity.
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 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.
Financial Instruments
The fair value of financial instruments approximates their book value.
Earnings Per Share
Earnings per share have not been presented in these financial statements
since the Company's shares are not publicly traded in the United Kingdom and all
of the outstanding shares of Brann were acquired by Snyder Communications, Inc.
in a transaction accounted for as a pooling of interests on March 27, 1997. See
note 13 for additional information.
3. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
-------- --------
<S> <C> <C>
Paper, envelopes and other materials............................ $221,178 $231,039
Work in progress................................................ 460,917 532,245
-------- --------
$682,095 $763,284
======== ========
</TABLE>
9
<PAGE> 10
BRANN HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
Buildings.................................................. $ 3,735,281 $ 4,127,897
Leasehold improvements..................................... 1,003,808 1,541,971
Computer equipment......................................... 9,210,599 12,720,836
Printing equipment and office furniture.................... 6,120,292 7,122,847
Automobiles................................................ 269,126 253,287
----------- -----------
20,339,106 25,766,838
Accumulated depreciation................................... 11,055,812 15,530,955
----------- -----------
$ 9,283,294 $10,235,883
========== ==========
</TABLE>
5. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
Bank loan.................................................... $7,246,290 $7,165,631
Less current portion of notes payable........................ 768,710 848,854
---------- ----------
6,477,580 6,316,777
Capital leases (note 8)...................................... 126,829 417,582
---------- ----------
$6,604,409 $6,734,359
========= =========
</TABLE>
The loan from Lloyds Bank was denominated in British Pounds Sterling
and was secured by the Company's assets; it was repayable in annual
installments of pound 500,000 ($865,700) with a final settlement of pound
700,000 ($1,198,000) due on March 1, 2004; interest was payable at the rate of
7.6725% per annum until 26 January 1999, then 1.75% over Lloyds Bank base rate.
The loan balance is stated net of issue costs which were $34,867 in January
1994 and are being amortized over 10 years.
The book value of the bank loan approximates its fair value; on April 14,
1997 the bank loan was repaid in full by Snyder.
Brann Limited also has an unused line of credit from its bank of $1,283,000
for general business expenditure. This line of credit is cross guaranteed by the
Company and bears interest at the rate of 1.25% above Lloyds Bank base rate on
amounts drawn down, which at December 31, 1996 were nil.
6. MANDATORILY REDEEMABLE PREFERRED STOCK
On January 24, 1994, in connection with the acquisition of Brann Direct
Marketing Limited by Brann Holdings, fixed cumulative redeemable preference
shares with a par value of pound 0.90 were issued for pound 1.00. All
10
<PAGE> 11
BRANN HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. MANDATORILY REDEEMABLE PREFERRED STOCK -- (CONTINUED)
of the 3,067,000 authorized shares were issued yielding proceeds of $4,582,098
less associated issue costs of $129,978. A fixed cumulative dividend is payable
at the following rates:
<TABLE>
<S> <C>
1994........................................................... 5%
1995........................................................... 6%
1996........................................................... 7%
Thereafter..................................................... 8%
</TABLE>
The shares were redeemable at L1.00 per share, including the L0.10 premium
per share on the following dates by the holders or earlier at the option of the
company.
<TABLE>
<CAPTION>
NUMBER
-------
<S> <C>
December 31, 1998.......................................... 517,000
December 31, 1999.......................................... 850,000
December 31, 2000.......................................... 850,000
December 31, 2001.......................................... 850,000
</TABLE>
The preference shares are mandatorily redeemable at specific dates. They do
not carry voting rights unless dividends are in arrears, which has not occurred,
and are not convertible into ordinary or 'A' ordinary shares. Accordingly, the
preference shares are classified as long term obligations and the dividends,
together with the amortization of issue costs, are charged as a component of
interest expense in the accompanying financial statements. As discussed under
subsequent events in note 13, the preference shares were acquired subsequent to
December 31, 1996.
7. INCOME TAXES
The Company's income tax provision for the years ended December 31, 1994,
1995 and 1996 includes the following components:
<TABLE>
<CAPTION>
1994 1995 1996
-------- ---------- ---------
<S> <C> <C> <C>
Current............................................ $978,948 $1,589,077 $ 685,630
Deferred........................................... (1,532) 48,887 (588,798)
-------- ---------- ---------
Income tax provision............................... $977,416 $1,637,964 $ 96,832
======== ========= =========
</TABLE>
The provision for taxes on income differs from the amount computed by
applying the UK statutory tax rate as a result of the following:
<TABLE>
<CAPTION>
1994 1995 1996
---------------- ------------------ ------------------
$ % $ % $ %
<S> <C> <C> <C> <C> <C> <C>
Taxes at statutory UK income tax
rate........................... 682,506 33.00 1,315,058 33.00 (236,915) (33.00)
Tax effect of preference
dividend....................... 107,179 5.18 120,812 3.03 119,572 16.65
Tax effect of goodwill
amortization................... 36,906 1.78 38,014 0.95 37,624 5.24
Tax effect of other disallowable
items.......................... 150,825 7.30 164,080 4.12 176,551 24.60
------- ----- --------- ----- -------- ------
Effective tax rate............... 977,416 47.26 1,637,964 41.10 96,832 13.49
======= ===== ======== ===== ======== ======
</TABLE>
11
<PAGE> 12
BRANN HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES -- (CONTINUED)
Deferred income taxes are recorded based upon differences between financial
statement and tax bases of assets and liabilities. As of December 31, 1995 and
1996, the net deferred tax (liability) asset consisted of the following:
<TABLE>
<CAPTION>
1995 1996
--------- --------
<S> <C> <C>
Accrued expenses and other liabilities......................... $ 69,600 $369,662
Accrued interest............................................... 15,469 --
--------- --------
Current deferred tax asset..................................... 85,069 369,662
--------- --------
Prepaid pension cost........................................... (60,321) (83,859)
Property and equipment......................................... (273,766) 83,859
--------- --------
Deferred tax liabilities....................................... (334,087) --
--------- --------
Net deferred tax (liability) asset............................. (249,018) 369,662
Valuation allowance............................................ -- --
--------- --------
Net deferred tax (liability) asset recognized.................. $(249,018) $369,662
========= ========
</TABLE>
Management believes that it is more likely than not that sufficient future
taxable income will be available to utilize the deferred tax assets which have
been identified and, therefore, has not provided any valuation allowance against
those assets.
8. LEASES
The Company leases certain facilities, office equipment and other assets
under capital and operating leases. The following is a schedule of future
minimum lease payments for capital leases and for operating leases (with terms
in excess of one year) at December 31, 1996.
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------------------------------------------- -------- -----------
<S> <C> <C>
1997............................................... $378,595 $ 2,855,276
1998............................................... 288,822 2,519,693
1999............................................... 148,472 1,713,892
2000............................................... -- 1,316,250
2001............................................... -- 1,291,658
Thereafter......................................... -- 8,896,713
-------- -----------
Total minimum lease payments.................. 815,889 18,593,482
-----------
Less: Amount representing interest................. 62,873
--------
Total obligation under capital leases......... 753,016
Less: Current portion.............................. 335,434
--------
Long term portion.................................. 417,582
========
</TABLE>
12
<PAGE> 13
BRANN HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LEASES -- (CONTINUED)
As of December 31, assets recorded under capital leases consist of:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Computer equipment........................................... $2,723,739 $3,667,530
Printing equipment and office furniture...................... 1,965,856 2,288,142
---------- ----------
4,689,595 5,955,672
Accumulated depreciation..................................... 3,902,324 4,779,940
---------- ----------
$ 787,271 $1,175,732
========= =========
</TABLE>
Depreciation expense for assets under capital leases is included in total
depreciation expense.
Rental expense for all operating leases was approximately $1,132,000,
$1,455,000 and $2,172,464 for the years ended December 31, 1994, 1995 and 1996,
respectively.
9. PENSIONS
The group operates The Brann Retirement Benefits Plan, which is a funded
defined benefit plan, available to all employees. The assets of the plan are
held separately from those of the group and are invested in managed funds,
principally comprising of equity securities. Plan benefits are based on years of
service and compensation levels at the time of retirement. The funding of the
Plan is determined following consultation with the actuaries using the projected
unit credit method.
An actuarial valuation of the pension plan is performed on a triennial
basis consistent with regulations governing pension plans and the accounting
therefor in the United Kingdom. The most recent actuarial valuation of the
plan's liabilities was performed as of April 1, 1996. SFAS No. 87 requires an
annual valuation of a plan's assets and liabilities. For purposes of these
financial statements, the actuarial value of the plan's liabilities have been
estimated using the available actuarial valuations; the plan asset values
reflect the actual market value of those assets at each balance sheet date based
on records maintained by the plan's trustees. The significant assumptions used
and the funded status of the plan are set out in the tables below.
Significant Assumptions
<TABLE>
<CAPTION>
AT DECEMBER 31 1994 1995 1996
------------------------------------------------------------------- ---- ---- ----
% % %
<S> <C> <C> <C>
Discount rate...................................................... 9.0 8.0 8.0
Expected long-term rate of return on plan assets................... 10.0 9.0 9.0
Rate of increase in compensation................................... 7.0 6.0 6.0
</TABLE>
Net periodic pension cost is determined using the assumptions as of the
beginning of the year.
13
<PAGE> 14
BRANN HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. PENSIONS -- (CONTINUED)
Net Periodic Pension Cost
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1995 1996
------------------------------------------------------------ ------ ------ -----
$000 $000 $000
<S> <C> <C> <C>
Service cost................................................ 812 726 1,109
Interest cost on projected benefit obligation............... 521 710 875
Actual return on plan assets................................ 935 (1,704) (1,078)
Net amortization of unrecognized net (gain) loss and
deferral of actual return on plan assets.................. (1,578) 915 125
------ ------ ------
Net periodic pension cost................................... 690 647 1,031
====== ====== ======
</TABLE>
The funded status is determined using the assumptions as of the end of the
year.
Funded Status
<TABLE>
<CAPTION>
AT DECEMBER 31 1995 1996
-------------------------------------------------------------------- ------ ------
$000 $000
<S> <C> <C>
Actuarial present value of benefit obligation
Accumulated and fully vested................................... 9,033 11,501
Effect of projected future compensation levels...................... 1,918 2,430
------ ------
Projected benefit obligation........................................ 10,951 13,931
Plan assets at fair value........................................... 9,930 13,777
------ ------
Plan assets in excess of (less than) projected benefit obligation... (1,021) (154)
Unrecognized net loss............................................... 1,206 411
------ ------
Prepaid pension cost................................................ 185 257
====== ======
</TABLE>
10. CAPITAL STOCK
The common stock of the company consists of ordinary and 'A' ordinary
shares. Each of the ordinary and 'A' ordinary shares has one vote but the 'A'
ordinary shares are entitled to at least 40% of the vote. For the 'A' ordinary
shares, a fixed cumulative dividend of five percent is payable, ranking after
the dividend on the preferred stock.
11. STOCK OPTIONS
Certain directors, associate directors and senior managers of the company
were granted options to purchase ordinary shares of the company with exercise
prices approximating the directors' estimate of the market value of the shares
on the date of grant. The number of options and dates of grant are set out
below:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Shares subject to option:
Balance at January 1........................................ -- 65,900 62,000
Options granted at L1 per share exercise price.............. 65,900 600 --
Options granted at L10 per share exercise price............. -- -- 8,600
Options terminated.......................................... -- (4,500) (5,000)
------ ------ ------
Balance at December 31...................................... 65,900 62,000 65,600
====== ====== ======
</TABLE>
14
<PAGE> 15
BRANN HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. STOCK OPTIONS -- (CONTINUED)
The options are exercisable only upon a sale or flotation of the company as
defined in the terms of the plan. No compensation expense has been recognized in
the financial statements for any of the periods presented as the conditions for
exercise were not probable at any of the balance sheet dates. In conjunction
with the acquisition of the company by Snyder Communications, Inc. (see note 13
to these financial statements) all of the outstanding options of Brann Holdings
Limited were exchanged for options in the common stock of Snyder Communications,
Inc. resulting in a first quarter 1997 charge to the combined Snyder entity of
$9.1 million.
For purposes of Statement of Financial Accounting Standards No. 123, due to
the contingent exercise provisions of the options, it is not possible to
reasonably estimate the fair value of these options. However, the ultimate pro
forma compensation expense required to be disclosed under the provisions of FAS
123 for the options granted in 1995 and 1996 approximates the charge recognized
in the first quarter of 1997 relative to those option grants.
12. ACQUISITION
On January 25, 1994 the Company acquired the entire issued common stock of
Brann Direct Marketing Limited, the acquisition comprised:
<TABLE>
<CAPTION>
FAIR VALUE
-----------
<S> <C>
Net assets acquired:
Cash and equivalents................................................... $ 1,277,370
Other current assets, less liabilities................................. 2,481,534
Property, plant and equipment.......................................... 6,981,462
Loan payable........................................................... (8,666,694)
Deferred tax........................................................... (195,714)
Capital lease obligation............................................... (385,452)
-----------
1,492,506
Goodwill............................................................... 3,283,812
-----------
Satisfied by cash consideration........................................ $ 4,776,318
==========
</TABLE>
The cashflow statement shows the consideration outflow as $3,498,948, which
is net of the above cash and equivalents acquired.
13. SUBSEQUENT EVENT
On March 27, 1997 the Company merged with Snyder Communications, Inc.
("Snyder"), a United States company publicly traded on the New York Stock
Exchange. In the merger transaction, the Company became a wholly owned
subsidiary of Snyder. Snyder issued 2,350,152 shares of its common stock in
exchange for all of the Brann ordinary and 'A' ordinary shares outstanding and
issued 389,730 Snyder options to Brann option holders in exchange for the
cancellation of all the Brann options outstanding. The ratio of exchange was
based on a five day average closing price of Snyder's common stock. Each Brann
stockholder received a pro-rata amount of Snyder's common stock in proportion to
their relative percentage ownership interest in Brann. Each Brann stock option
holder received a pro-rata amount of Snyder's stock options in proportion to
their relative percentage interest in Brann through their ownership of Brann
stock options. Snyder options have exercise prices consistent with those of the
Brann options and will result in a 1997 first quarter charge to the combined
Snyder entity of $9.1 million. In connection with the merger, Snyder also
acquired the redeemable preferred stock at its redemption value at the closing
date, which was equivalent to book value.
15
<PAGE> 16
(B) PRO FORMA FINANCIAL INFORMATION.
The accompanying consolidated financial statements have been retroactively
restated to reflect the combined financial position and combined results of
operations and cash flows of the Company and Brann for all periods presented,
giving effect to the merger transaction as if it had occurred at the beginning
of the earliest period presented
16
<PAGE> 17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Snyder Communications, Inc.:
We have audited the accompanying consolidated balance sheet of Snyder
Communications, Inc. and subsidiaries (the "Company") as of December 31, 1995
and 1996, and the related consolidated statements of income, equity, and cash
flows for each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the financial
statements of Brann Holdings Limited included in the consolidated financial
statements of the Company, which statements reflect total assets constituting 61
percent and 30 percent of the related consolidated totals as of December 31,
1995 and 1996, respectively, and revenues constituting 53 percent, 47 percent
and 35 percent of the related consolidated totals in 1994, 1995 and 1996,
respectively. These statements were audited by other auditors whose report
thereon has been furnished to us, and our opinion expressed herein, insofar as
it relates to the amounts included for Brann Holdings Limited, is based solely
upon the report of the other auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audit and the report of the other auditors,
the 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.
ARTHUR ANDERSEN LLP
Washington, D.C.
May 30, 1997
17
<PAGE> 18
SNYDER COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEET
(NOTE 1)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents................................................... $ 9,033,620 $ 53,475,047
Accounts receivable, net of allowance for doubtful accounts of $533,306
and $779,863 at December 31, 1995 and 1996, respectively.............. 16,162,548 20,353,637
Unbilled services...................................................... 1,567,015 3,823,608
Inventory.............................................................. 682,095 763,284
Deferred tax asset..................................................... 143,069 1,323,921
Prepaid expenses and other assets...................................... 797,234 2,073,625
----------- ------------
Total current assets.............................................. 28,385,581 81,813,122
Note and advances to stockholders.......................................... 2,770,426 --
Property and equipment, net................................................ 11,896,761 17,315,877
Deferred financing costs, net.............................................. 496,001 --
Goodwill................................................................... 3,173,828 3,386,861
Deposits and other assets.................................................. 825,977 2,077,682
----------- ------------
Total assets...................................................... $47,548,574 $104,593,542
============ =============
LIABILITIES AND EQUITY
Current liabilities:
Lines of credit........................................................ $ 1,768,710 $ 2,294,522
Current obligations under capital leases............................... 299,942 1,108,954
Accrued payroll........................................................ 2,894,745 5,175,719
Accounts payable and accrued expenses.................................. 18,401,528 26,774,652
Unearned revenue....................................................... 2,273,704 4,641,998
Distribution payable................................................... -- 1,087,734
----------- ------------
Total current liabilities......................................... 25,638,629 41,083,579
Subordinated debentures due to related parties............................. 5,125,821 --
Deferred income taxes...................................................... 334,087 170,817
Deferred rent.............................................................. 43,949 88,718
Brann Holdings Limited mandatorily redeemable preferred stock, held by
related parties.......................................................... 4,596,793 5,110,241
Long-term obligations under capital leases................................. 461,247 1,726,395
Long-term debt............................................................. 6,477,580 6,316,777
----------- ------------
Total liabilities...................................................... $42,678,106 $ 54,496,527
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 120,000,000 shares authorized, 3,704,652 and 37,226,214 shares
issued and outstanding at December 31, 1995 and December 31, 1996,
respectively............................................................. 4,204 37,226
Additional paid-in capital................................................. 1,870,959 46,006,027
Retained earnings.......................................................... 4,450,585 3,759,015
Cumulative foreign currency translation adjustment......................... (4,950) 294,747
Limited partners' deficit.................................................. (1,450,330) --
----------- ------------
Total equity...................................................... 4,870,468 50,097,015
----------- ------------
Total liabilities and equity...................................... $47,548,574 $104,593,542
============ =============
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
18
<PAGE> 19
SNYDER COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF INCOME
(NOTE 1)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1994 1995 1996
----------- ------------ ------------
<S> <C> <C> <C>
Revenues............................................ $80,429,038 $132,801,373 $185,440,413
Operating expenses:
Cost of services............................... 53,218,580 93,824,100 139,358,642
Selling, general and administrative expenses... 15,754,501 21,721,130 33,739,130
Compensation to stockholders................... 3,009,064 7,034,274 1,548,321
----------- ------------ ------------
Income from operations.............................. 8,446,893 10,221,869 10,794,320
Interest expense, including amounts to related
parties of $620,558, $1,149,537 and $1,370,736 in
1994, 1995 and 1996, respectively................. (1,248,678) (1,771,269) (1,992,578)
Interest income..................................... 80,880 316,304 840,770
----------- ------------ ------------
Income before taxes and extraordinary item.......... 7,279,095 8,766,904 9,642,512
Income tax provision................................ 1,465,146 1,571,693 1,411,741
----------- ------------ ------------
Income before extraordinary item.................... 5,813,949 7,195,211 8,230,771
Extraordinary item, less applicable income taxes of
$805,874.......................................... -- -- (1,215,405)
----------- ------------ ------------
Net income.......................................... $ 5,813,949 $ 7,195,211 $ 7,015,366
========== =========== ===========
PRO FORMA INCOME DATA (UNAUDITED):
Historical income before income taxes and
extraordinary item as reported............... $ 7,279,095 $ 8,766,904 $ 9,642,512
Pro forma provision for income taxes........... 3,087,792 3,574,267 4,292,846
----------- ------------ ------------
Pro forma income before extraordinary item..... 4,191,303 5,192,637 5,349,666
Extraordinary item, less applicable income
taxes of $805,874............................ -- -- (1,215,405)
----------- ------------ ------------
Pro forma net income........................... $ 4,191,303 $ 5,192,637 $ 4,134,261
Pro forma income before extraordinary item
per share............................... $ 0.13 $ 0.16 $ 0.16
========== =========== ===========
Pro forma net income per share............ $ 0.13 $ 0.16 $ 0.12
========== =========== ===========
Shares used in computing pro forma per
share amounts........................... 33,163,052 33,163,052 34,454,967
Pro forma fully diluted income before
extraordinary item per share............ $ 0.13 $ 0.16 $ 0.16
========== =========== ===========
Pro forma fully diluted net income per
share................................... $ 0.13 $ 0.16 $ 0.12
========== =========== ===========
Shares used in computing pro forma fully
diluted per share amounts............... 33,163,052 33,163,052 34,534,984
</TABLE>
The accompanying notes are an integral part of this consolidated statement of
income.
19
<PAGE> 20
SNYDER COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF EQUITY
(NOTE 1)
<TABLE>
<CAPTION>
FOREIGN
ADDITIONAL LIMITED CURRENCY
COMMON PAID-IN RETAINED PARTNERS' TRANSLATION
STOCK CAPITAL EARNINGS DEFICIT ADJUSTMENT TOTAL
------- ------------ ------------ ----------- ----------- ------------
<S> <C> <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)
Pooling of Brann Holdings
Limited.................. 2,350 504,116 -- -- -- 506,466
Distributions and
dividends................ -- -- (1,829,320) -- -- (1,829,320)
Foreign currency
translation adjustment... -- -- -- -- 46,740 46,740
Net income................. -- -- 4,544,008 1,269,941 5,813,949
------- ------------ ------------ ----------- ----------- ------------
Balance, December 31, 1994..... 4,204 649,598 3,006,027 (1,410,480) 46,740 2,296,089
Proceeds from sale of
partnership interest, net
of income taxes of
$815,000................. -- 1,221,361 -- 13,639 -- 1,235,000
Distributions and
dividends................ -- -- (1,950,974) (3,853,168) -- (5,804,142)
Foreign currency
translation adjustment... -- -- -- -- (51,690) (51,690)
Net income................. -- -- 3,395,532 3,799,679 -- 7,195,211
------- ------------ ------------ ----------- ----------- ------------
Balance, December 31, 1995..... 4,204 1,870,959 4,450,585 (1,450,330) (4,950) 4,870,468
Proceeds from Initial
Public Offering.......... 4,038 59,169,659 -- -- -- 59,173,697
Distributions and
dividends................ -- -- (13,174,013) (8,612,050) -- (21,786,063)
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
Foreign currency
translation adjustment... -- -- -- -- 299,697 299,697
Net income................. -- -- 4,852,012 2,163,354 -- 7,015,366
------- ------------ ------------ ----------- ----------- ------------
Balance, December 31, 1996..... $37,226 $ 46,006,027 $ 3,759,015 $ -- $ 294,747 $ 50,097,015
======== ============= ============= ============ ========== =============
</TABLE>
The accompanying notes are an integral part of this consolidated statement of
equity.
20
<PAGE> 21
SNYDER COMMUNICATIONS, INC.
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......................................................... $ 5,813,949 $ 7,195,211 $ 7,015,366
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................. 2,254,721 2,976,674 4,884,171
Loss on repayment of subordinated debt......................... -- -- 2,021,279
Loss on disposal of assets..................................... -- 133,920 323,385
Deferred taxes................................................. 2,866 30,285 (1,392,841)
Changes in assets and liabilities:
Accounts receivable............................................ (2,352,669) (4,948,013) (4,191,089)
Unbilled services.............................................. (2,212,878) 645,863 (2,256,593)
Inventory...................................................... 72,744 (7,838) (81,190)
Deposits and other assets...................................... (154,444) (474,914) (1,397,513)
Prepaid expenses and other assets.............................. (49,691) (67,112) (1,276,391)
Accrued payroll, accounts payable and accrued expenses......... 6,688,753 5,652,889 10,353,948
Unearned revenue............................................... 512,470 583,892 2,368,294
Other taxes.................................................... 299,232 617,754 477,600
Deferred rent.................................................. -- 43,949 44,769
----------- ----------- ------------
Net cash provided by operating activities.................. 10,875,053 12,382,560 16,893,195
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Brann Limited.......................................... (3,498,948) -- --
Proceeds from sale of investments.................................. -- -- 145,469
Note and advances to stockholders.................................. (5,657) (2,764,769) --
Other.............................................................. (3,191,837) (4,731,512) (6,755,977)
----------- ----------- ------------
Net cash used in investing activities...................... (6,696,442) (7,496,281) (6,610,508)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term notes payable to limited partners and
others........................................................... (9,258,807) (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................................................ (180,774) (557,000) --
Distributions and dividends........................................ (1,829,320) (5,804,142) (17,973,329)
Repayment of subordinated debentures............................... -- -- (6,900,000)
Proceeds from line of credit borrowing............................. 7,768,800 1,000,000 1,958,910
Repayment of line of credit borrowing.............................. (225,274) (580,013) (2,368,942)
Payments on capital lease obligations.............................. (674,820) (650,933) (655,092)
Proceeds from exercise of options.................................. -- -- 425,000
Proceeds from Initial Public Offering.............................. -- -- 59,173,697
Issuance of Brann common stock..................................... 506,466 -- --
Issuance of redeemable preferred stock, held by related parties.... 4,582,098 -- --
----------- ----------- ------------
Net cash provided by (used in) financing activities........ 688,369 (2,999,056) 33,660,244
Effect of exchange rate changes.................................... 242,682 (112,837) 498,496
----------- ----------- ------------
NET INCREASE IN CASH AND EQUIVALENTS................................... 5,109,662 1,774,386 44,441,427
CASH AND EQUIVALENTS, beginning of year................................ 2,149,572 7,259,234 9,033,620
----------- ----------- ------------
CASH AND EQUIVALENTS, end of year...................................... $ 7,259,234 $ 9,033,620 $ 53,475,047
=========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest including dividends on mandatorily
redeemable preferred shares...................................... $ 1,123,643 $ 1,437,791 $ 1,736,304
Cash paid for income taxes......................................... $ 464,427 $ 1,512,112 $ 3,130,956
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Equipment purchased under capital leases........................... $ 268,599 $ 525,956 $ 2,703,823
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 consolidated statement of
cash flows.
21
<PAGE> 22
SNYDER COMMUNICATIONS, INC.
NOTES TO 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 consolidated balance sheet as of December 31, 1995 and the
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
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.
Snyder Communications provides outsourced marketing services. SCI designs
and implements marketing programs for its customers utilizing field sales,
teleservices, sponsored WallBoards(R) and product sampling. SCI's operations are
conducted throughout the United States and in 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. In this transaction, 966
shares of outstanding MMD common stock were converted into 1,354,500 shares of
SCI common stock. In addition, on March 27, 1997, SCI acquired Brann Holdings
Limited ("Brann") in a share exchange transaction in which Brann became a wholly
owned subsidiary of SCI. In this transaction, 339,000 shares of outstanding
Brann common stock were converted into 2,350,152 shares of SCI common stock,
while 63,850 Brann options, which were fully vested and immediately exercisable,
were converted into 389,730 SCI options with similar terms. Collectively the MMD
and Brann business combinations will be referred to herein as the
"Acquisitions." The Acquisitions have been accounted for as a pooling of
interests for accounting and financial reporting purposes. The accompanying
financial statements have been retroactively restated to reflect the combined
financial position and combined results of operations and cash flows of SCI, MMD
and Brann for all periods presented, giving effect to the Acquisitions
22
<PAGE> 23
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. ORGANIZATION, BASIS OF PRESENTATION AND BUSINESS: -- (CONTINUED)
as if they had occurred at the beginning of the earliest period presented (the
combined entity will be referred to herein as the "Company"). The consolidated
balance sheet for all periods presented give effect to the conversion of the
shares of MMD and Brann common stock to 3,704,652 shares of SCI common stock.
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
for pharmaceutical companies, utilizing field sales, throughout the United
States. MMD previously utilized an October 31 year-end. Concurrent with its
merger with SCI, MMD changed its fiscal year-end to December 31 and restated its
financial statements to conform to SCI's calendar reporting.
Brann, a United Kingdom ("U.K.") registered company, began operations on
January 25, 1994 when it acquired all of the outstanding common stock of Brann
Direct Marketing Limited through a management buy-out. On January 11, 1995,
Brann Direct Marketing Limited changed its name to Brann Limited. Brann's
principal business activities are planning, creating and delivering direct
response marketing communications; marketing systems design and consultancy;
print production services; and telephone and response management services, for
companies involved in marketing, advertising and direct selling and services.
Brann's operations are conducted throughout the United Kingdom.
The Company recognized a charge to first quarter 1997 income of
approximately $16.2 million (before income taxes) related to costs incurred and
resulting from the Acquisitions. This charge consists primarily of investment
banking, other professional service fees and certain U.K. exercise and transfer
taxes as well as a charge of approximately $9.1 million related to the
accelerated vesting of Brann options (see Note 10).
There are important risks associated with the Company's business and
financial results. These risks include (i) the Company's current reliance on two
significant clients, which constituted 27 and 10 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 ability to manage and successfully
integrate the businesses it has acquired and may acquire in the future; (iv) the
Company's ability to successfully manage its international operations; (v) the
potential adverse effects of fluctuations in foreign exchange rates; (vi) the
Company's dependence on industry trends toward outsourcing of marketing
services; (vii) the risks associated with the Company's contracts; and (viii)
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.
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 ten years; computer equipment over two to four
23
<PAGE> 24
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
years; automobiles over three to five years and buildings over fifty years.
Custom wood cases used to display WallBoards(R) 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 -- The Company 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 the Company's clients. At this point, the Company has no further performance
obligation related to the submitted customer and is contractually entitled to
payment. Certain of the Company's contracts provide the client with the right to
seek a return of previously paid commissions if the customers submitted by the
Company 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 the Company,
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 the Company based on an estimate for these returned commissions.
The allowance is estimated based on the Company's historical experience and
periodically reviewed by the Company and adjusted when necessary.
WALLBOARD(R) REVENUE -- The Company contracts with clients to display
sponsored information in mounted wall units at target market locations.
WallBoard(R) 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 -- The Company 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.
MEDICAL SERVICES REVENUE -- The Company recognizes revenue and associated
costs when services have been performed by field representatives. Customer
advances represent payments received under contracts in advance of the Company
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.
INTERNATIONAL SERVICES REVENUE -- The Company provides integrated targeted
marketing services to its clients in the United Kingdom under contracts that
provide for payment as services are rendered. Services provided include database
management, creative design, teleservices, direct response marketing, and print
production. Revenues are recognized as services are rendered in accordance with
the terms of the contracts.
Goodwill
Goodwill was recorded in connection with the January 25, 1994 acquisition
of Brann Limited by Brann and is amortized on a straight-line basis over thirty
years from the acquisition date. When conditions or events occur which
management believes might impact the value of the goodwill, an analysis of
future undiscounted cash flows is undertaken to determine if any write down in
the carrying value of the goodwill is required.
24
<PAGE> 25
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Inventory
Inventory, consisting primarily of paper and supplies, is stated at the
lower of cost or market. Cost is the direct cost of purchased materials on a
First In First Out basis, plus attributable labor and expenses with respect to
work in progress.
Income Taxes
The accompanying 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
consolidated 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, SCI is treated as a C corporation for
federal and state income tax purposes. At the date of the Reorganization, SCI
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 of $78,601 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 consolidated balance sheet.
During 1994, MMD elected to be taxed as a small business corporation (S
corporation) under the applicable sections of the Code and New York state income
tax laws. Accordingly, no provision for federal income taxes has been made for
MMD in the accompanying 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 on account with 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 transaction discussed above, MMD has
changed its tax fiscal year-end to December 31.
Brann incurs and pays taxes in the U.K. on a corporate level similar to a C
corporation in the United States.
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
Acquisitions had occurred at the beginning of each of the periods presented and,
for 1996 reflect the issuance
25
<PAGE> 26
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
of additional shares as a result of the initial public offering and the exercise
of stock options. The pro forma income tax rate reflects the combined federal
and state income taxes of approximately 42.4 percent, 40.8 percent and 44.5
percent, for the years ended December 31, 1994, 1995 and 1996, respectively.
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,
"Accounting for Stock-Based Compensation" ("SFAS 123"), is included in Note 10.
Foreign Currency Translations
Assets and liabilities of Brann are translated using the exchange rate at
the balance sheet date. Revenue and expense accounts for this subsidiary are
translated using the average exchange rate during the period. Foreign currency
translation adjustments are disclosed as a separate component of equity.
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 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.
New Accounting Pronouncements
During February 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"). This statement is effective for years ending after December 15,
1997 and will be implemented by the Company in its December 31, 1997 financial
statements.
SFAS 128 requires primary earnings per share ("EPS") to be replaced with
basic EPS. Primary EPS is computed by dividing reported earnings available to
common stockholders by the weighted average number of shares outstanding without
consideration of common stock equivalents or other potentially dilutive
securities. Fully diluted EPS, now called diluted EPS is still included. As
discussed in Note 10, SCI adopted its stock option plan and began offering stock
options in September 1996. Because the options were outstanding for only a short
period of time during 1996, management has established that the effect of this
pronouncement on
26
<PAGE> 27
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
the computation of basic EPS is immaterial for 1996. However, in future years,
when the options are outstanding for the entire year, management has estimated
that the Company's reported EPS will be higher under SFAS 128 than under the old
EPS standard.
3. SIGNIFICANT CLIENTS:
The Company had one client which represented 2, 19 and 27 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 10 percent of the Company's total
revenues for the year ended December 31, 1996. Effective January 1997, the
Company is no longer doing business with this client. The termination of the
contract with this client is not expected to have a material impact on the
Company. The Company had a third client which represented 15, 16 and 9 percent
of the Company's total revenues for the years ended December 31, 1994, 1995 and
1996, respectively.
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
Buildings........................................ 3,735,281 4,127,897
Computer equipment............................... 9,210,599 12,720,836
Office and telephone equipment................... 7,816,985 13,061,161
Furniture and fixtures........................... 335,840 538,217
Automobiles...................................... 269,125 253,287
Leasehold improvements........................... 1,303,244 2,445,640
------------ ------------
24,500,472 34,937,604
Accumulated depreciation......................... (12,603,711) (17,621,727)
------------ ------------
$ 11,896,761 $ 17,315,877
=========== ===========
</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,
approximately $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 8.0 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.
27
<PAGE> 28
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT: -- (CONTINUED)
Brann has a loan payable to a commercial bank in the amount of $7,246,290
and $7,165,631 as of December 31, 1995 and 1996, respectively. The loan has an
interest rate of 7.6275 percent per annum until January 28, 1999, at which date
the interest rate changes to the bank's base rate plus 1.75 percent. The loan is
payable in annual installments of $855,700, until March 1, 2004, when the entire
unpaid amount is due in full. The loan is secured by Brann's assets and the book
value of the loan approximates its fair value as of December 31, 1996. On April
14, 1997, the full amount of the loan outstanding was repaid.
Future minimum payments on the loan are as follows:
<TABLE>
<S> <C>
1997............................................ $ 855,700
1998............................................ 855,700
1999............................................ 855,700
2000............................................ 855,700
2001............................................ 855,700
Thereafter...................................... 2,887,131
----------
Total................................. $7,165,631
=========
</TABLE>
Brann also has a $1,283,000 line of credit for general business
expenditures. The line of credit bears interest at the commercial bank's base
rate plus 1.25 percent. There was no balance outstanding under this line of
credit at December 31, 1996.
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.
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
of 1995 with a portion of the proceeds from the Debentures.
28
<PAGE> 29
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
During 1994, MMD elected to be taxed as an S corporation for federal and
state corporate income tax purposes. However, MMD is subject to New York State
income tax at reduced rates and New York City income tax.
At the date of the Reorganization, a net deferred tax asset was recorded
with an associated credit to the provision for income taxes. 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.
<TABLE>
<CAPTION>
1994 1995 1996
------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Current.............................. U.S.-Federal $ 2,000 $ 433,500 $ 1,590,176
U.S.-State and City 402,730 255,229 508,175
U.K. 978,948 1,589,077 685,630
---------- ---------- ----------
1,383,678 2,277,806 2,783,981
Deferred............................. U.S.-Federal 83,000 51,000 (668,618)
U.S.-State and City -- 9,000 (114,824)
U.K. (1,532) 48,887 (588,798)
---------- ---------- ----------
81,468 108,887 (1,372,240)
Tax effect of equity transaction..... -- (815,000) --
---------- ---------- ----------
Income tax provision................. $ 1,465,146 $ 1,571,693 $ 1,411,741
========== ========== ==========
</TABLE>
The provision for taxes on income before extraordinary item differs from
the amount computed by applying the U.S. Federal income tax rate as a result of
the following:
<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
U.S./U.K. tax rate differential..................................... (0.57) (0.91) 0.15
Income taxed directly to owners..................................... (21.95) (21.80) (16.55)
State and city income taxes (benefit), net of federal tax benefit... 3.58 1.96 2.71
Tax effect of Reorganization........................................ -- -- (6.69)
Tax effect of dividends on mandatorily redeemable preferred stock... 1.47 1.38 (1.18)
Tax effect of U.K. permanent differences............................ 2.59 2.30 (2.17)
Other............................................................... -- -- 3.37
------ ------ ------
Effective tax rate.................................................. 20.12 17.93 14.64
====== ====== ======
</TABLE>
Deferred income taxes are recorded based upon differences between the
financial statement and tax bases of assets and liabilities. There has been no
valuation allowance recorded relating to the deferred tax assets. As
29
<PAGE> 30
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES: -- (CONTINUED)
of December 31, 1995 and 1996 temporary differences that give rise to the
deferred tax assets and liabilities consisted of the following:
<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
Accrued expenses and other liabilities............................... $ 52,411 $1,161,329
Vacation and severance accruals...................................... 32,907 120,010
Allowance for doubtful accounts...................................... 40,000 42,582
Other................................................................ 17,751 --
--------- ----------
Gross deferred tax assets............................................ 143,069 1,323,921
Property and equipment............................................... (273,766) (86,958)
Prepaid pension cost................................................. (60,321) (83,859)
--------- ----------
Gross deferred tax liabilities....................................... (334,087) (170,817)
--------- ----------
Net deferred tax (liability) asset................................... $(191,018) $1,153,104
========= =========
</TABLE>
At December 31, 1996, cumulative undistributed earnings of Brann were
approximately $2.4 million. No provision for U.S. income taxes or U.K.
withholding taxes has been made since the Company considers these undistributed
earnings to be permanently invested in the U.K. The Company has estimated that
because of available tax planning strategies such earnings, if repatriated,
would not result in an additional material tax provision.
7. INTERNATIONAL OPERATIONS:
After giving effect to the Acquisitions, the Company has operations in both
the United States and the U.K. Financial information by country is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1994 1995 1996
----------- ------------ ------------
<S> <C> <C> <C>
Revenues
United States.................. $37,477,886 $ 70,260,899 $119,977,514
U.K. .......................... 42,951,152 62,540,474 65,462,899
----------- ------------ ------------
Total Revenues...................... $80,429,038 $132,801,373 $185,440,413
========== =========== ===========
Income from operations
United States.................. $ 5,487,069 $ 5,367,367 $ 10,572,041
U.K............................ 2,959,824 4,854,502 222,279
----------- ------------ ------------
Total income from operations........ $ 8,446,893 $ 10,221,869 $ 10,794,320
========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
1995 1996
----------- ------------
<S> <C> <C>
Identifiable assets
United States............................ $18,320,584 $ 72,925,797
U.K. .................................... 29,227,990 31,667,745
----------- ------------
Total identifiable assets..................... $47,548,574 $104,593,542
========== ===========
</TABLE>
30
<PAGE> 31
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. 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............................................................... $ 1,354,384 $ 5,697,191
1998............................................................... 1,167,393 4,966,457
1999............................................................... 648,001 3,973,093
2000............................................................... 80,590 3,189,087
2001............................................................... -- 2,987,102
Thereafter......................................................... -- 10,543,113
----------- -----------
Total minimum lease payments.................................. 3,250,368 31,356,043
==========
Less -- Amount representing interest............................... (415,019)
-----------
Total obligation under capital leases......................... 2,835,349
Less -- Current portion............................................ (1,108,954)
-----------
Long-term portion.................................................. $ 1,726,395
==========
</TABLE>
Property and equipment, net, on the consolidated balance sheets includes
$1,326,069 and $3,258,065 for equipment purchased under capital leases as of
December 31, 1995 and 1996, respectively.
Rental expense for all operating leases was approximately $1,806,400,
$2,838,600 and $4,119,691 for the years ended December 31, 1994, 1995 and 1996,
respectively.
9. 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 consolidated
financial statements.
10. 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.
In conjunction with Brann's purchase of Brann Limited in January 1994,
Brann adopted a stock option plan. Granted options were exercisable upon a sale
or flotation of Brann as defined in the terms of the plan. No compensation
expense has been recognized in the financial statements for the Brann options
for any of the periods presented as the conditions for their exercise were not
probable at any of the balance sheet dates. In
31
<PAGE> 32
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK INCENTIVE PLAN: -- (CONTINUED)
conjunction with the acquisition of Brann by SCI, all of the outstanding options
of Brann were exchanged for options of the common stock of the Company under the
Stock Option Plan. The exchange of Brann options for SCI options was based on
the final common stock exchange rates used in the acquisition, with the SCI
options possessing identical terms to the Brann options at the date of
conversion. Management recognized a charge to first quarter income of
approximately $9.1 million related to the accelerated vesting of these options.
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 three years
ended December 31, 1996, after giving retroactive effect to the conversion of
the Brann options, is as follows:
<TABLE>
<CAPTION>
SHARES OUTSTANDING
-------------------------------
1994 1995 1996
------- ------- ---------
<S> <C> <C> <C>
Beginning of year.............................. -- 402,254 378,448
Granted................................... 402,254 3,662 4,289,494
Exercised................................. -- -- (25,000)
Forfeited................................. -- (27,468) (280,520)
Expired................................... -- -- --
------- ------- ---------
End of year.................................... 402,254 378,448 4,362,422
======= ======= ========
Exercisable at end of year..................... -- -- 275,000
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED AVERAGE EXERCISE
PRICE
----------------------------
1994 1995 1996
----- ----- ------
<S> <C> <C> <C>
Beginning of year................................ $ -- $0.27 $ 0.27
Granted..................................... 0.27 0.27 15.18
Exercised................................... -- -- 17.00
Forfeited................................... -- 0.27 15.38
Expired..................................... -- -- --
----- ----- ------
End of year...................................... $0.27 $0.27 $15.18
===== ===== ======
</TABLE>
Weighted average fair value of options granted $37,498,732
Of the 4,362,422 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. Another 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 remaining 400,422
options relate to the previously converted Brann options which have exercise
prices between $0.27 and $2.67 and a remaining contractual life of 7 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.
32
<PAGE> 33
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK INCENTIVE PLAN: -- (CONTINUED)
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>
11. MANDATORILY REDEEMABLE PREFERRED STOCK:
On January 25, 1994, in connection with the acquisition of Brann Direct
Marketing Limited by Brann Holdings, fixed cumulative mandatorily redeemable
preferred shares with a par value of L0.90 were issued for L1.00. All of the
3,067,000 authorized shares were issued yielding proceeds of $4,582,098 less
associated issue costs of $129,978. A fixed cumulative dividend was payable at
the following rates:
<TABLE>
<S> <C>
1994................................................... 5%
1995................................................... 6%
1996................................................... 7%
Thereafter............................................. 8%
</TABLE>
The shares were redeemable at L1.00 per share, including the L0.10 premium
per share on the following dates by the holders or earlier at the option of
Brann.
<TABLE>
<CAPTION>
NUMBER
-------
<S> <C>
December 31, 1998.................................. 517,000
December 31, 1999.................................. 850,000
December 31, 2000.................................. 850,000
December 31, 2001.................................. 850,000
</TABLE>
The preferred shares are mandatorily redeemable on a specific date, do not carry
voting rights unless dividends are in arrears, which has not occurred, and are
not convertible into Brann common equity. Accordingly, the preference shares are
classified as long term debt obligations and the dividends as well as the
amortization of associated issue costs are charged as a component of interest
expense in the accompanying consolidated financial statements. Dividends
included in interest expense were $324,784, $366,096 and $362,338 in 1994, 1995
and 1996, respectively. The preferred shares were acquired subsequent to
December 31, 1996, as part of the Acquisitions.
12. PENSIONS:
Brann operates The Brann Retirement Benefits Plan, which is a funded
defined benefit plan available to all employees. The assets of the plan are held
separately from those of Brann and are invested in managed funds principally
comprising equity securities. Plan benefits are based on years of service and
compensation levels at the time of retirement. The funding of the plan is
determined following consultation with actuaries using the projected unit credit
method.
33
<PAGE> 34
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. PENSIONS: -- (CONTINUED)
An actuarial valuation of the pension plan is performed on a triennial
basis consistent with regulations governing pensions plans and the accounting
therefor in the United Kingdom. SFAS No. 87 requires an annual valuation of a
plan's assets and liabilities. For purposes of these financial statements, the
actuarial value of the plan's liabilities has been estimated using the available
actuarial valuations and the plan's asset values reflect the actual market value
of those assets at each balance sheet date based on records maintained by the
plan's trustees. The most recent actuarial valuation of the plan's liabilities
was performed as of April 1, 1996. The significant assumptions used and the
funded status of the plan are set out in the tables below.
Significant Assumptions
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1995 1996
---- ----
1994 % %
----
%
<S> <C> <C> <C>
Discount rate...................................................... 9.0 8.0 8.0
Expected long-term rate of return on plan assets................... 10.0 9.0 9.0
Rate of increase in compensation................................... 7.0 6.0 6.0
</TABLE>
Net Periodic Pension Cost
Net periodic pension cost is determined using the assumptions as of the
beginning of the year and is comprised of the following (in thousands).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Service cost............................................. $ 812 $ 726 $ 1,109
Interest cost on projected benefit obligation............ 521 710 875
Actual return on plan assets............................. 935 (1,704) (1,078)
Net amortization of unrecognized net (gain) loss and
deferral of actual return on plan assets............... (1,578) 915 125
------- ------- -------
Net periodic pension cost................................ $ 690 $ 647 $ 1,031
======= ======= =======
</TABLE>
Funded Status
The funded status is determined using the assumption as of the end of the
year and is reflected as follows (in thousands).
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1995 1996
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated and fully vested......................... $ 9,033 $11,501
Accumulated benefit obligation............................ 9,033 11,501
Effect of projected future compensation levels............ 1,918 2,430
------- -------
Projected benefit obligation.............................. 10,951 13,931
Plan assets at fair value................................. 9,930 13,777
------- -------
Plan assets less than projected benefit obligation........ (1,021) (154)
Unrecognized loss......................................... 1,206 411
------- -------
Prepaid pension cost...................................... $ 185 $ 257
======= =======
</TABLE>
34
<PAGE> 35
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. 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.
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
consolidated financial statements.
14. 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. This non-recurring compensation is included in compensation to
stockholders on the consolidated statement of income for the year ended December
31, 1995.
Prior to its merger with SCI, the stockholders of MMD received compensation
for services provided to MMD. Following this 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. Based on this individual's compensation for the year ended
December 31, 1996, it is anticipated that compensation levels will decrease
approximately $1.1 million in 1997.
15. 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 field
representatives as independent contractors. The Company believes that it has
adequate support for its treatment of field 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 consolidated financial statements.
35
<PAGE> 36
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE
DATA):
The following table summarizes financial data by quarter for SCI, MMD and
Brann for all periods presented, giving effect to the Mergers as if they had
occurred at the beginning of the earliest period presented.
<TABLE>
<CAPTION>
QUARTER ENDED 1995
--------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
-------- ------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
Revenues................................. $28,759 $30,678 $ 33,136 $40,228 $132,801
Gross Profit............................. 8,622 8,558 9,981 11,816 38,977
Net Income............................... 2,104 1,677 2,860 554 7,195
Pro Forma Net Income..................... 1,473 1,191 2,112 417 5,193
Pro Forma Net Income per share........... $ 0.04 $ 0.04 $ 0.07 $ 0.01 $ 0.16
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED 1996
--------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
-------- ------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
Revenues................................. $40,506 $44,249 $ 45,335 $55,350 $185,440
Gross Profit............................. 10,215 10,860 11,007 14,000 46,082
Income Before
Extraordinary Item.................. 2,372 1,751 2,169 1,939 8,231
Net Income............................... 2,372 1,751 2,169 723 7,015
Pro Forma Net Income
Before Extraordinary Item........... 1,332 1,004 902 2,112 5,350
Pro Forma Net Income..................... 1,332 1,004 902 896 4,134
Pro Forma Net Income
Before Extraordinary Item per
Share............................. $ 0.04 $ 0.03 $ 0.03 $ 0.06 $ 0.16
Pro Forma Net Income per share........... $ 0.04 $ 0.03 $ 0.03 $ 0.02 $ 0.12
</TABLE>
17. SUBSEQUENT EVENT -- RECENT ACQUISITION:
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 $4,150,000 was paid in cash. The
assets acquired in the purchase include information centers with a net book
value of approximately $498,000 and certain other assets with a book value of
approximately $29,000.
18. SUBSEQUENT EVENT -- PENDING ACQUISITION:
On March 18, 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 all of the outstanding stock of each of the approximately 4.5
million shares of American List common stock outstanding if the average trading
price 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.
Therefore, 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.
36
<PAGE> 37
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 thereunto duly authorized.
SNYDER COMMUNICATIONS, INC.
(Registrant)
<TABLE>
<S> <C>
Date: June 2, 1997 /s/ MICHELE D. SNYDER
----------------------------------------------
MICHELE D. SNYDER
VICE CHAIRMAN, PRESIDENT
AND CHIEF OPERATING OFFICER
Date: June 2, 1997 /s/ A. CLAYTON PERFALL
----------------------------------------------
A. CLAYTON PERFALL
CHIEF FINANCIAL OFFICER
</TABLE>
37
