<PAGE>
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1998
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From to
Commission file number 1-12145
SNYDER COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1983617
(State or other (IRS Employer
jurisdiction of Identification No.)
incorporation or
organization)
Two Democracy Center
6903 Rockledge Drive
15th Floor 20817
Bethesda, Maryland (Zip Code)
(Address of principal
executive office)
(301) 468-1010
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.001 Par Value, 68,991,851 shares outstanding as of November 6,
1998.
<PAGE>
SNYDER COMMUNICATIONS, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet as of September 30, 1998 and December 31, 1997 3
Condensed Consolidated Statement of Income for the three months and the nine
months ended September 30, 1998 and 1997 4
Condensed Consolidated Statement of Cash Flows for the nine months ended
September 30, 1998 and 1997 5
Condensed Consolidated Statement of Equity for the nine months ended September 30, 1998 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
PART II. OTHER INFORMATION
Item 2. Changes in Securities 19
Item 6. Exhibits and Reports on Form 8-K 19
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
SNYDER COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- -------------
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 98,916 $ 86,354
Marketable securities 861 2,349
Accounts receivable, net of allowance for doubtful accounts of $7,542
and $7,654 at September 30, 1998 and December 31, 1997, respectively 99,928 88,800
Receivables from pass through costs (Note 3) 85,272 74,964
Receivables from related parties 2,097 3,335
Unbilled services 27,047 19,462
Other current assets 33,401 27,911
-------------- -------------
Total current assets 347,522 303,175
-------------- -------------
Property and equipment, net 66,807 43,737
Goodwill and other intangible assets,net 120,234 68,943
Defered tax asset 53,595 4,784
Deposits and other assets 10,112 9,972
-------------- -------------
Total assets $598,270 $430,611
============== =============
LIABILITIES AND EQUITY
Current liabilities:
Lines of credit $ 568 $ 27,427
Current maturities of long-term debt 2,519 2,086
Accrued payroll 28,969 24,143
Accounts payable 115,025 99,176
Accrued expenses 100,269 93,412
Client advances 3,060 10,696
Unearned revenue 19,197 28,619
-------------- -------------
Total current liabilities 269,607 285,559
-------------- -------------
Related party borrowings 4,617 5,210
Long-term obligations under capital leases 1,549 1,751
Long-term debt, net of current maturities 2,288 3,935
Other liabilities 3,084 6,997
Commitments and contingencies:
Redeemable ESOP stock, 147 shares outstanding as of September 30, 1998
and December 31, 1997, respectively 4,925 5,278
Equity:
Preferred stock, $.001 par value, 5,000 shares authorized, none issued
and outstanding at September 30, 1998 and December 31, 1997, respectively - -
Common stock, $.001 par value, 120,000 shares authorized,
68,313 and 64,469 shares issued and oustanding at
September 30, 1998 and December 31, 1997, respectively 68 64
Additional paid in capital 357,792 178,939
Treasury stock, at cost, 1,096 and 1,059 shares at September 30, 1998
and December 31, 1997, respectively (7,575) (5,473)
Accumulated other comprehensive income 2,596 651
Retained deficit (40,681) (52,300)
-------------- -------------
Total equity 312,200 121,881
-------------- -------------
Total liabilities and equity $598,270 $430,611
============== =============
</TABLE>
The accompanying notes are an integral part of this
condensed consolidated balance sheet.
3
<PAGE>
SNYDER COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ---------- ---------- -----------
(in thousands except per share data)
<S> <C> <C> <C> <C>
Revenues $190,063 $139,461 $534,325 $398,966
Operating expenses:
Cost of services 131,081 98,363 361,272 278,241
Selling, general, and administrative expenses 30,717 26,996 97,005 78,462
Compensation to stockholders - 12,452 - 16,137
ESOP expense - 916 - 3,412
Recapitalization Costs - 1,889 - 1,889
Acquisition and related costs 9,425 17,026 43,378 33,207
----------- ---------- ---------- -----------
Income (loss) from operations 18,840 (18,181) 32,670 (12,382)
Interest income (expense), net 492 (152) 1,244 (379)
----------- ---------- ---------- -----------
Income (loss) from continuing operations before
income taxes 19,332 (18,333) 33,914 (12,761)
Income tax provision (10,178) (1,289) (18,399) (7,902)
----------- ---------- ---------- -----------
Income (loss) from continuing operations 9,154 (19,622) 15,515 (20,663)
Loss from discontinued operations - (558) - (1,481)
----------- ---------- ---------- -----------
Net income (loss) $ 9,154 $(20,180) $ 15,515 $(22,144)
=========== ========== ========== ===========
Historical net income (loss) per share:
Basic net income (loss) per share
Income (loss) from continuing operations $ 0.14 $ (0.33) $ 0.24 $ (0.35)
=========== ========== ========== ===========
Net income (loss) $ 0.14 $ (0.34) $ 0.24 $ (0.37)
=========== ========== ========== ===========
Diluted net income (loss) per share
Income (loss) from continuing operations $ 0.13 $ (0.33) $ 0.23 $ (0.35)
=========== ========== ========== ===========
Net income (loss) $ 0.13 $ (0.34) $ 0.23 $ (0.37)
=========== ========== ========== ===========
Pro forma net income (loss) per share (Note 6):
Basic net income (loss) per share
Income (loss) from continuing operations $ 0.14 $ (0.32) $ 0.21 $ (0.38)
=========== ========== ========== ===========
Net income (loss) $ 0.14 $ (0.32) $ 0.21 $ (0.40)
=========== ========== ========== ===========
Diluted net income (loss) per share
Income (loss) from continuing operations $ 0.13 $ (0.32) $ 0.21 $ (0.38)
=========== ========== ========== ===========
Net income (loss) $ 0.13 $ (0.32) $ 0.21 $ (0.40)
=========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of this condensed consolidated
statement of income.
4
<PAGE>
SNYDER COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
----------------------------------
1998 1997
------------ ------------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 15,515 $(22,144)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 14,978 11,370
Noncash charge from accelerated vesting of acquired
subsidiary options/stock grants 2,020 9,097
Noncash ESOP expense - 3,490
Loss on disposal of assets 89 2,917
Deferred taxes (54) (1,038)
Other noncash 126 (14)
Changes in assets and liabilities:
Accounts receivable, net 7,077 (16,988)
Related party receivables 1,424 455
Receivables from pass through costs (10,308) (13,899)
Unbilled services (6,649) (2,405)
Deposits and other assets (1,601) 1,262
Other current assets (6,929) (954)
Accrued payroll, accounts payable and accrued expenses 21,131 49,544
Unearned revenue (10,929) (1,129)
Client advances (10,576) 2,000
Less impact from differing fiscal year ends - (2,761)
------------ ------------
Net cash provided by operating activities 15,314 18,803
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of subsidiaries, net of cash acquired (3,990) (16,373)
Purchases of property and equipment (28,921) (13,704)
Proceeds from sale of equipment 786 82
Net sales of marketable securities 1,537 3,813
Purchase of intangibles (713) (4,626)
Note and net advances to stockholders 918 (107)
Impact from differing fiscal year ends - (446)
------------ ------------
Net cash used in investing activities (30,383) (31,361)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term notes payable to limited partners and others (1,071) -
Distributions and dividends (2,379) (9,094)
Acquisition of treasury stock (2,097) (2,110)
Net repayments of long-term debt (8,631) (6,592)
Redemption of mandatorily redeemable preferred stock - (6,305)
Redemption/Issuance of stock in connection with recapitalization of acquired company - (16,670)
Net repayments of line of credit (26,889) (587)
Payments on capital lease obligations (1,388) (1,066)
Proceeds from exercise of options 27,841 18,149
Proceeds from issuance of common stock 41,299 43,237
Impact from differing fiscal year ends - 3,704
------------ ------------
Net cash provided by financing activities 26,685 22,666
------------ ------------
Effect of exchange rate changes 946 583
------------ ------------
Net increase in cash and equivalents 12,562 10,691
Cash and equivalents, beginning of period 86,354 74,031
------------ ------------
Cash and equivalents, end of period $ 98,916 $ 84,722
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest including dividends on mandatorily redeemable
preferred stock $ 1,350 $ 1,897
Cash paid for income taxes 10,823 5,543
Supplemental disclosure of noncash activities:
Equipment purchased under capital leases 928 717
Distribution of non-operating assets by a subsidiary 974 -
Issuance of shares of common stock for purchase of subsidiaries 52,568 -
Issuance of common stock related to stock appreciation rights 3,484 -
Redemption of common stock in exchange for a note payable - 457
Issuance of notes payable for purchase of treasury stock - 215
</TABLE>
The accompanying notes are an integral part of this condensed consolidated
statement of cash flows.
5
<PAGE>
SNYDER COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON STOCK COMMON STOCK PAID-IN EARNINGS
STOCK SHARES PAR VALUE CAPITAL (DEFICIT)
---------------------------------------------------- -----------
(in thousands, except share data)
<S> <C> <C> <C> <C>
Balance, December 31, 1997, as
previously restated for poolings 64,469,000 $64 $178,939 $(52,300)
Distribution and dividends - - - (4,250)
Net proceeds from secondary stock
offering 500,000 1 17,328 -
Exercise of stock options and
subsidary stock apperciation rights 1,012,000 1 29,862 -
Issuance of shares for purchase of
subsadiaries 1,268,000 1 52,455 -
Reissuance of treasury stock by
subsidiaries prior to Merger with SNC 1,064,000 1 34,773 -
Foreign currency translation adjustment - - - -
Unrealized gain on marketable securities - - - -
Purchases and retirement of treasury stock - - 87 -
Change in market value of redeemable
ESOP stock - - - 354
Tax benefit from taxable merger transaction - - 44,348 -
Net income - - - 15,515
---------------------------------------------------- -----------
Comprehensive income - - - -
==================================================== ===========
Balance, September 30, 1998 68,313,000 $68 $357,792 $(40,681)
==================================================== ===========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED OTHER
TREASURY COMPHREHENSIVE COMPREHENSIVE
STOCK INCOME TOTAL INCOME
------------------------------------------------- ---------------
(in thousands, except share data)
<S> <C> <C> <C> <C>
Balance, December 31, 1997, as
previously restated for poolings $(5,473) $ 651 $121,881 -
Distribution and dividends - - (4,250) -
Net proceeds from secondary stock
offering - - 17,329 -
Exercise of stock options and
subsidary stock apperciation rights 20 - 29,883 -
Issuance of shares for purchase of
subsadiaries - - 52,456 -
Reissuance of treasury stock by
subsidiaries prior to Merger with SNC - - 34,774 -
Foreign currency translation adjustment - 1,998 1,998 1,998
Unrealized gain on marketable securities - (53) (53) (53)
Purchases and retirement of treasury stock (2,122) - (2,035) -
Change in market value of redeemable
ESOP stock - - 354 -
Tax benefit from taxable merger transaction - - 44,348 -
Net income - - 15,515 15,515
------------------------------------------------- ---------------
Comprehensive income - - - $17,460
================================================= ===============
Balance, September 30, 1998 $(7,575) $2,596 $312,200 $ -
================================================= ===============
</TABLE>
The accompanying notes are an integral part of this condensed consolidated
statement of equity.
6
<PAGE>
SNYDER COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
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"), 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. After
consummation of the Reorganization, Snyder Communications, Inc. owned 100
percent of the stock of SMS and, directly and indirectly (through its ownership
of SMS), 100 percent of the interests in the Partnership (the consolidated
entity will be referred to herein as "SNC" or "Snyder Communications").
During the first nine months of 1998, SNC issued 12,646,541 shares in pooling of
interests transactions (the "1998 Mergers"). The transactions include the
acquisitions of Health Products Research, Inc. ("HPR"), Publimed Promotions S.A.
("Publimed"), Blau Marketing Technologies, Inc. ("Blau"), Arnold Communications,
Inc. ("Arnold"), Clinical Communications Group, Inc. ("Clinical") and MKM
Marketinginstitut GmbH ("MKM"). HPR, Publimed, Clinical and MKM provide sales
and marketing services to the pharmaceutical industry. HPR operates primarily in
the U.S. and provides strategic and tactical sales force market planning and
evaluation services to leading pharmaceutical and medical device manufacturers.
Publimed markets medical products for pharmaceutical companies in France
utilizing field sales. Clinical, located in the U.S., provides a complete range
of healthcare services including educational research, marketing and publishing
for the pharmaceutical industry. MKM markets medical products for
pharmaceutical companies in Germany utilizing technically trained field
representatives. Blau's operations are conducted throughout the U.S. and consist
primarily of strategic consulting, creative services, program design and
implementation, consumer database management, response tracking and analysis,
interactive services and production management. Arnold's operations are also
conducted throughout the U.S. , and they include creative services, direct
marketing, new media marketing, database management services and full-service
public relations.
The accompanying condensed consolidated financial statements have been
retroactively restated to reflect the combined financial position and combined
results of operations and cash flows of the 1998 Mergers, giving effect to these
acquisitions 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
condensed consolidated balance sheet for all periods presented gives effect to
the conversion of the common stock of companies acquired in the 1998 Mergers to
12,646,541 shares of SNC common stock. Certain amounts previously presented have
been reclassified to conform to the September 30, 1998 presentation.
Snyder Communications provides fully integrated outsourced marketing solutions.
The Company identifies high value consumer segments; designs and implements
marketing programs to reach them; initiates and closes sales on behalf of its
clients; and provides customer care, retention and loyalty marketing services.
The Company's resources include proprietary databases of targeted customers and
small businesses; database management services; pharmaceutical detailing
services; pharmaceutical consulting; medical education communications;
proprietary product sampling programs and publications; sponsored information
displays in proprietary locations; marketing program consultants; creative
services; field sales and marketing representatives; customer service
representatives; and direct mail and fulfillment capabilities. The Company's
operations are conducted throughout the United States, the United Kingdom
("U.K."), France, Germany, Ireland, the Netherlands and Hungary.
7
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The accompanying unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. As a result, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The Company believes that
the disclosures made are adequate to make the information presented not
misleading. The condensed consolidated financial statements reflect all
adjustments (consisting of only normal recurring adjustments) which, in the
opinion of management, are necessary to present fairly the financial position,
results of operations and cash flows of the Company as of September 30, 1998 and
for the nine months ended September 30, 1998 and 1997. Operating results for the
nine month period ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998. The
unaudited condensed consolidated financial statements should be read in
conjunction with the financial statements and footnotes thereto included in the
Company's Form 8-K/A dated August 31, 1998 as filed with the Securities and
Exchange Commission.
2. BUSINESS COMBINATIONS
The following details revenues and net income (loss) for each of the nine months
ended September 30, 1998 and 1997 of SNC and all entities acquired by SNC
through pooling of interests combinations ("Pooled Entities") through the dates
of their respective mergers. The SNC amounts include the financial results of
the original operations of SNC for the entire period and the financial results
of the Pooled Entities for the period subsequent to the dates of their
respective mergers.
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1998 1997
------- --------
(in thousands)
<S> <C> <C>
Revenues:
SNC $452,206 $146,039
Pooled Entities 82,119 252,927
-------- --------
$534,325 $398,966
======== ========
Net income (loss):
SNC $23,287 $ 3,866
Pooled Entities (7,772) (26,010)
------- --------
$15,515 $(22,144)
======= ========
</TABLE>
During the nine months ended September 30, 1998, SNC and the Pooled Entities
recorded $14.8 million and $28.6 million, respectively, of non-recurring
acquisition and related costs. Excluding the non-recurring acquisition and
related costs and assuming that all of the Pooled Entities had been taxed
similarly to C corporations, SNC and the Pooled Entities would have recorded
approximately $34.4 million and $13.5 million, respectively of net income for
the nine months ended September 30, 1998 for a combined basic and diluted net
income per share from continuing operations and excluding non-recurring costs of
$0.73 and $0.71, respectively.
During the nine months ended September 30, 1997, SNC recorded $14.3 million of
non-recurring acquisition and related costs, and the Pooled Entities recorded
$41.8 million in non-recurring costs which consisted of $18.9 million of
acquisition and related costs, $16.1 million of compensation to stockholders,
$3.4 million of ESOP expense, $1.9 million of recapitalization costs and the
$1.5 million loss from discontinued operations. Excluding the non-recurring
costs and assuming that all of the Pooled Entities had been taxed similarly to C
corporations, SNC would have recorded approximately $13.8 million of net income
for the nine months ended September 30, 1997 and the Pooled Entities would have
recorded approximately $10.1 million of net income for the same period for a
combined basic and diluted net income per share from continuing operations and
excluding non- recurring costs of $0.40 and $0.39, respectively.
8
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During the first nine months of 1998, SNC completed purchse business
combinations, including CLI Pharma S.A. (March 25, 1998) and HealthCare
Promotions, LLC ("HCP") (February 13, 1998) for total consideration paid of
approximately $52.6 million consisting of 1,268,000 shares of SNC common stock
and $5 million in cash. Based upon a preliminary allocation of purchase
consideration, these purchase business combinations have resulted in additional
goodwill of approximately $50.0 million.
The following table presents pro forma financial information as if the Company's
1997 purchase of Halliday Jones Sales Ltd. and its 1998 purchases of CLI Pharma
and HCP had been consummated at the beginning of each of the periods presented
and all of the Company's operations had been taxed similarly to a C corporation:
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Pro forma revenues $545,092 $444,987
Pro forma income from continuing operations 14,726 (20,198)
Pro forma net income (loss) 14,726 (21,679)
Pro forma basic net income (loss) per share 0.22 (0.36)
Pro forma diluted net income (loss) per share 0.22 (0.36)
</TABLE>
During the nine months ended September 30, 1998, the Company recorded $43.4
million of non-recurring acquisition and related costs. Excluding the non-
recurring acquisition and related costs, the Company would have recorded $58.1
million in pro forma net income for the nine months ended September 30, 1998 and
pro forma basic and diluted net income per share of $0.88 and $0.85,
respectively, for the period.
During the nine months ended September 30, 1997, the Company recorded $56.1
million in non-recurring costs, consisting of $33.2 million of acquisition and
related costs, $16.1 million of compensation to stockholders, $3.4 million of
ESOP expense, $1.9 million of recapitalization costs and the $1.5 million loss
from discontinued operations. Excluding these non-recurring costs, the Company
would have recorded $34.9 million of pro forma net income for the nine months
ended September 30, 1997 and pro forma basic and diluted net income per share of
$0.57 and $0.56, respectively, for the period.
3. RECEIVABLES FROM PASS THROUGH COSTS:
Receivables from pass through costs relate to services purchased from third
parties, on behalf of clients, for which no revenue is recorded.
4. ACQUISITION AND RELATED COSTS:
During the nine months ended September 30, 1998, SNC recorded $43.4 million in
non-recurring acquisition and related costs. These costs are primarily related
to the consummation of the 1998 Mergers and consist of investment banking fees,
expenses associated with stock appreciation rights, other professional service
fees, tax payments and other contractual payments. In addition, this amount
includes a charge of approximately $4.7 million for costs necessary to
consolidate certain of the Company's U.S. and U.K. operations. The charge
consists of approximately $2.3 million to consolidate and terminate lease
obligations and write off leasehold improvements at the office facilities of
three acquired subsidiaries and $2.4 million in severance and related costs to
terminate the employment of 54 management and administrative personnel at the
acquired subsidiaries. As of September 30, 1998, 18 employees had terminated
employment with the Company and $2.0 million had been charged against the total
liability.
5. INCOME TAXES:
The Company's effective tax rate for the nine months ended September 30, 1998
and 1997 differs from the federal statutory rate due primarily to the
nondeductibility of certain non-recurring acquisition costs, state income
taxes, the different tax
9
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
status of certain of the Pooled Entities prior to their merger with SNC and
different statutory rates for the Company's international operations.
6. PRO FORMA INCOME DATA:
The pro forma net income (loss) 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 pro forma income tax rate on the
Company's recurring operations reflects the combined federal and state income
taxes of approximately 38.00 percent and 42.98 percent for the nine months ended
September 30, 1998 and 1997, respectively. The pro forma income tax rates in the
table below differ from the pro forma income tax rates on the Company's
recurring operations due to the nondeducitibility of certain of the acquisition
and related costs.
The table below presents this pro forma calculation of net income (loss):
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Pro forma net income (loss) data:
Historical income from continuing operations before
income taxes $ 19,332 $(18,333) $ 33,914 $(12,761)
Pro forma provision for income taxes (10,178) (713) (19,954) (10,011)
-------- -------- -------- --------
Pro forma income (loss) from continuing operations 9,154 (19,046) 13,960 (22,772)
Loss from discontinued operations, less applicable pro
forma income taxes -- (179) -- (884)
-------- -------- -------- --------
Pro forma net income (loss) $ 9,154 $(19,225) $13,960 $(23,656)
======== ======== ======== ========
</TABLE>
7. PUBLIC OFFERING OF COMMON STOCK:
On May 27, 1998 the Company completed the public offering of 7,068,006 shares of
its common stock, par value $0.001 per share (the "Common Stock") at an offering
price of $42.00 per share. The offering included 500,064 newly issued shares of
Common Stock sold by the Company and 6,567,942 previously outstanding shares of
Common Stock sold by selling stockholders. The Company received net proceeds of
$17.3 million from the offering (after deducting the estimated costs associated
with the offering). The Company did not receive any proceeds from the sale of
shares of Common Stock in the offering by the selling stockholders.
8. ACCUMULATED OTHER COMPREHENSIVE INCOME:
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," ("SFAS 130"), during the first quarter of
1998. SFAS 130 requires companies to report as comprehensive income all changes
in equity during a period, except those resulting from investments and
distributions to owners, in financial statements for the period in which they
are recognized. Included within accumulated other comprehensive income are the
cumulative amounts for foreign currency translation adjustments and unrealized
gains and losses on marketable securities. The cumulative foreign currency
translation adjustment was $2,585,490 and $586,512 as of September 30, 1998 and
December 31, 1997, respectively. The cumulative gain on marketable securities
was $10,849 and $64,195 as of September 30, 1998 and December 31, 1997,
respectively.
10
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. TAX BENEFIT FROM TAXABLE MERGER TRANSACTION:
SNC will receive a future tax benefit arising from the tax treatment of its
first quarter 1998 merger with Arnold Communications, Inc. In accordance with
generally accepted accounting principles, because the merger has been accounted
for as a pooling of interests, the net estimated future tax benefit of
approximately $44.4 million is reflected as a deferred tax asset in the
accompanying condensed consolidated balance sheet at September 30, 1998 with the
offsetting credit made to additional paid-in-capital.
10. NET INCOME PER SHARE:
A reconciliation of the shares used to compute basic and diluted earnings per
share follows. For each of the periods presented, the same net income used to
compute basic earnings per share was used to compute diluted earnings per share.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Weighted average shares outstanding for the period
used in computation of basic net income per
share.................................................... 66,623 60,210 65,538 59,627
Diluted impact of stock options........................... 2,092 -- 2,191 --
------ ------ ------ ------
Shares used in computation of diluted net income
per share................................................ 68,715 60,210 67,729 59,627
</TABLE>
For the three months ended September 30, 1998 and 1997 and the nine months ended
September 30, 1998 and 1997, weighted average common stock equivalents of
1,026,983, 1,448,766, 684,553 and 1,469,849, respectively, are not included in
the calculation of diluted net income per share because they were antidilutive
for the period.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's results of operations and of its
liquidity and capital resources is based upon the Company's condensed
consolidated financial statements. The entities with which the Company has
entered into mergers accounted for as poolings of interests for financial
reporting purposes will be collectively referred to as the "Pooled Entities" and
their mergers will be referred to herein as the "Acquisitions". The consolidated
financial statements have been retroactively restated to reflect the combined
financial position and combined results of operations and cash flows of the
Pooled Entities for all periods presented, giving effect to the Acquisitions as
if they had occurred at the beginning of the earliest period presented. The
following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements of the Company and related notes thereto
included elsewhere in this Quarterly Report on Form 10-Q.
OVERVIEW
Since completing its initial public offering in September 1996, the Company
has significantly expanded the range of marketing and sales services it is able
to offer its clients. This expansion has been accomplished both by building and
initiating new programs or service offerings and by acquiring businesses that
offer complementary services. The Company's strategy is to facilitate the growth
of its acquirees with improved sales and marketing resources and to integrate
the sales and marketing efforts of its acquirees with those of the existing
operating groups within the Company. The Company expects that the synergies
created by its acquisitions will increase its opportunities and strengthen its
customer relationships. The existing similarities among services and customers
within the different operating groups enable the Company to integrate its
service offerings. The Company has recorded $4.7 million of costs to consolidate
and integrate the operations and infrastructure of certain of its acquirees
within the Healthcare Services group. Where the Company determines that
efficiencies and profitability can be increased through integration of acquired
organizations, similar charges are likely to be incurred in the future. The
service offerings of acquired companies have been combined with those previously
offered by the Company to create three operating groups: Healthcare Services,
Direct Services and Creative Services. Healthcare services are designed to
establish and monitor marketing plans, to provide face-to-face interaction with
physicians and to conduct educational research and communication services.
Direct services are marketing and sales programs designed to directly reach
certain, sometimes targeted, consumer groups. Creative services are designed to
create the right kind of advertising for clients. The Company provides
integrated marketing solutions for its clients by utilizing the services of its
three operating groups to develop sales and marketing programs. Throughout 1997
and the first nine months of 1998, the Company has completed acquisitions
accounted for both as poolings of interests and as purchases. Those acquisitions
that are either significant to the Company's financial results or that may
provide significant future growth opportunities are discussed below.
The Company created its Healthcare Services group in January 1997 in a merger
transaction with a U.S. provider of pharmaceutical sales and marketing services.
During 1997 and the first nine months of 1998, the Company issued 4,035,182 and
7,340,236 shares, respectively, in poolings of interests transactions with
companies that provide healthcare services. These transactions include the
acquisitions of MMD, Inc. ("MMD"), GEM Communications, Inc. ("GEM"), Rapid
Deployment Group Limited ("RDL"), PharmFlex, Inc. ("PharmFlex"), Health Products
Research, Inc. ("HPR"), Publimed Promotions, S.A. ("Publimed"), Clinical
Communications Group, Inc. ("Clinical") and MKM Marketinginstitut GmbH (""MKM").
The Company also acquired Halliday Jones Sales Ltd. ("HJ") for approximately
$19.4 million of cash and common stock in a purchase transaction in 1997,
Healthcare Promotions, LLC ("HCP") for approximately $22.0 million of common
stock and CLI Pharma S.A. ("CLI Pharma") for approximately $25.0 million of
common stock in purchase transactions in the first quarter of 1998. MMD, RDL,
HJ, PharmFlex, HCP, Publimed, CLI Pharma and MKM all market medical products for
pharmaceutical companies utilizing field sales. MMD, PharmFlex and HCP have been
combined into Snyder Healthcare Sales. Snyder Healthcare Sales offers the
services of over 2,850 account executives and managers in the U.S. and provides
outsourced pharmaceutical sales and marketing services to some of the world's
premier pharmaceutical companies. Together HJ and RDL retain the services of
over 630 account executives and managers, and provide outsourced pharmaceutical
sales and marketing services to many leading pharmaceutical manufacturers. HJ
and RDL operate primarily in the U.K., but also in Ireland and Hungary. Publimed
and CLI Pharma both provide pharmaceutical sales and marketing services in
France, and utilize over 850 account executives and managers. MKM provides
outsourced pharmaceutical sales and marketing services in Germany with a network
of 485 technically trained representatives. GEM and Clinical both operate
primarily in the U.S. and provide a complete range of healthcare educational and
marketing services with specialties in educational research, marketing and
publishing for the pharmaceutical industry. HPR provides strategic and tactical
sales force market planning and evaluation services, including sales marketing
resource allocation, sales force planning and the integration and evaluation of
sales and marketing promotions to many leading pharmaceutical and medical device
manufacturers.
12
<PAGE>
The Company increased the scope of services provided by the Direct Services
group with the completion of strategic acquisitions. During 1997 and the first
nine months of 1998, the Company issued 10,414,888 and 2,527,134 shares,
respectively, in poolings of interests transactions with companies that provide
direct services. These transactions include the acquisitions of Brann Holdings
Limited ("Brann"), Blau Marketing Technologies, Inc. ("Blau"), Bounty Group
Holdings Limited ("Bounty"), Sampling Corporation of America ("SCA") and
American List Corporation ("American List"). Brann is a leading provider of
direct marketing solutions in the U.K., and offers a full range of services
including planning, creating and delivering direct response marketing
communications; marketing systems design and consultancy; print production
services; and telephone and data management services to companies involved in
direct marketing and selling. Blau is a leading provider of marketing
communications services in the U.S., and it provides direct marketing services,
including strategic consulting and design, program creation and implementation,
consumer database management, response tracking and analysis and production
management to large national and international corporations in the financial
services, technology, retail, telecommunications and utilities industries.
Brann and Blau both provide a broad range of services and full scale direct
marketing and selling programs. The programs offered by Bounty, SCA and
American List are more focused and consist primarily of product sampling at
Bounty and SCA and data mining at American List. Bounty is a U.K.-based
provider of targeted product sampling services and proprietary health-oriented
publications to expectant mothers, new mothers and parents of toddlers in the
U.K. and Ireland. SCA is a U.S. provider of targeted product sampling programs
for packaged goods manufacturers with distribution channels that include primary
and secondary schools, daycare/preschool centers, colleges and immigrant
organizations. American List develops, maintains and markets some of the
largest and most comprehensive databases of high school, college and pre-school
through junior high school students in the U.S.
The creative services offered by the Company were established with its March
1998 acquisition of Arnold Communications, Inc. ("Arnold"). The Company issued
2,779,171 shares in a pooling of interests transaction with Arnold. Arnold is a
full-service marketing communications firm that provides creative services, new
media marketing, interactive services, database management services and full-
service public relations to a roster of recognized national and international
corporations.
RESULTS OF OPERATIONS
In the Healthcare Services group, revenues and associated costs on
pharmaceutical detailing contracts are recognized when services have been
performed by account executives. For educational marketing programs within the
Healthcare Services Group, revenues and associated costs are recognized as
services are performed. In the Direct Services group, net revenues are
recognized when services are completed in accordance with the terms of the
contracts. On certain contracts, revenues from field sales and teleservices are
based on both the number of accepted customers and the type of services sold.
The Company typically receives a fixed dollar amount per customer. Revenues
related to such sales are recognized on the date that the application for
service is accepted by the Company's clients. For WallBoard(R) information
display and sample pack programs within the Direct Services group, the Company
is paid by the program sponsors in installments, generally quarterly or
semiannually, over the term of the contract under which services are rendered,
which is generally one year or less. Revenues are recognized upon shipment of
lists from the Direct Services group to customers for a one-time usage. In the
Creative Services group, net revenues are recognized when services are rendered
in accordance with the terms of the contracts.
Cost of services consists of all costs specifically associated with client
programs, such as salary, commissions and benefits paid to personnel, including
senior management associated with specific service groups, inventory, payments
to third-party vendors and systems and other support facilities specifically
associated with client programs.
Selling, general and administrative expenses consist primarily of costs
associated with the Company's centralized staff functions, such as finance,
accounting and human resources and personnel costs of senior management not
specifically associated with any single service group.
Compensation to stockholders consists of excess compensation paid to certain
stockholders of the Partnership prior to the Reorganization and excess
compensation paid to certain stockholders of acquired companies prior to their
respective mergers with the Company. The amount by which the historical
compensation of these stockholders exceeds that provided in their employment
contracts with the Company has been classified as compensation to stockholders.
ESOP expense is the compensation expense recorded when shares are committed to
be released to ESOP participants. The amount of the expense is based on the
current market price of the shares and will vary based upon the amount of debt
repaid by the ESOP during the period.
Recapitalization costs were recorded by one of the Company's 1998 acquirees at
the time of its recapitalization in 1997.
13
<PAGE>
Acquisition and related costs consist primarily of investment banking fees,
other professional service fees, certain tax payments and other contractual
payments resulting from the consummation of the Company's pooling of interests
transactions.
The following sets forth, for the periods indicated, certain components of the
Company's income statement data, including such data as a percentage of
revenues. Pro forma net income includes a provision for income taxes as if all
operations of the Company had been taxed as a C corporation for all periods
presented. Pro forma net income from continuing operations, excluding non-
recurring items represents income from continuing operations adjusted to reflect
a provision for income taxes as if the Company had been taxed similarly to a C
corporation for all periods presented and the elimination of compensation to
stockholders, ESOP expense, recapitalization costs and acquisition and related
costs. Compensation to stockholders, ESOP expense, recapitalization costs and
acquisition and related costs are considered to be nonrecurring by the Company,
because the Company's current operations will not result in any compensation to
stockholders, ESOP expense, recapitalization costs or acquisition and related
costs in future periods.
<TABLE>
<CAPTION>
For the Three Months ended For the Nine Months ended
September 30, September 30,
---------------------------------------- -------------------------------------
1998 1997 1998 1997
------------------- ------------------ ---------------- ------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $190,063 100.0% $139,461 100.0% $534,325 100.0% $398,966 100.0%
Operating expenses:
Cost of services 131,081 69.0 98,363 70.5 361,272 67.6 278,241 69.7
Selling, general, and administrative expenses 30,717 16.2 26,996 19.4 97,005 18.2 78,462 19.7
Compensation to stockholders - - 12,452 8.9 - - 16,137 4.0
ESOP expense - - 916 0.6 - - 3,412 0.9
Recapitalization costs - - 1,889 1.4 - - 1,889 0.5
Acquisition and related costs 9,425 4.9 17,026 12.2 43,378 8.1 33,207 8.3
--------- ---- -------- ----- ------- ---- ------- ----
Income loss from operations 18,840 9.9 (18,181) (13.0) 32,670 6.1 (12,382) (3.1)
Interest income (expense), net 492 0.3 (152) (0.1) 1,244 0.2 (379) (0.1)
Income tax provision (10,178) (5.4) (1,289) (0.9) (18,399) (3.4) (7,902) (2.0)
--------- ---- -------- ----- ------- ---- ------- ----
Income (loss) before continuing operations 9,154 4.8 (19,622) (14.0) 15,515 2.9 (20,663) (5.2)
--------- ---- -------- ----- ------- ---- ------- ----
Loss from discontinued operations - - (558) (0.4) - - (1,481) (0.4)
--------- ---- -------- ----- ------- ---- ------- ----
Net income (loss) $ 9,154 4.8% $(20,180) (14.4)% $ 15,515 2.9% $(22,144) (5.6)%
========= ==== ======== ===== ======= ==== ======= ====
Pro forma net income (loss) from continuing
operations $ 9,154 4.8% $(19,046) (13.7)% $ 13,960 2.6% $(22,772) (5.7)%
========= ==== ======== ===== ======= ==== ======= ====
Pro forma net Income (loss) $ 9,154 4.8% $(19,225) (13.8)% $ 13,960 2.6% $(23,656) (5.9)%
========= ==== ======== ===== ======= ==== ======= ====
Pro forma net income from continuing
operations, excluding non-recurring items $ 17,829 9.4% $ 7,911 5.7% $ 47,921 9.0% $ 23,881 6.0%
========= ==== ======== ===== ======= ==== ======= ====
</TABLE>
Revenues Revenues increased $50.6 million, or 36.3%, to $190.1 million in
the third quarter of 1998 from $139.5 million in the third quarter of 1997. For
the nine months ended September 30, 1998, revenues of $534.3 million were 33.9%
greater than the same period in 1997. The increase in revenues for the quarter
ended September 30, 1998 and the nine months ended September 30, 1998 was due
primarily to increased sales volumes in each of the Company's three operating
groups, Healthcare Services, Direct Services and Creative Services.
Revenues in the Healthcare Services group increased $29.3 million, or 57.5%,
to $80.3 million in the third quarter of 1998 and accounted for 58% of the
Company's total increase in revenues for the third quarter of 1998. For the
nine months ended September 30, 1998, revenues in the Healthcare Services group
increased $91.8 million, or 65.6%, to $231.7 million and accounted for 68% of
the Company's total increase in revenues for the nine months ended September 30,
1998. The Healthcare Services group experienced growth in the services provided
to both new and existing customers during the three months and the nine months
ended September 30, 1998. This includes revenue growth resulting from the
acquisitions of HCP and CLI Pharma in purchase transactions completed during the
first quarter of 1998. Revenue growth was greater during the nine months ended
September 30, 1998 than during the third quarter of 1998 due primarily to
seasonality created by the impact of summer holidays on the European operations
within Healthcare Services.
Revenues in the Direct Services group increased $15.9 million, or 22.5%, to
$86.7 million in the third quarter of 1998 and accounted for 31% of the
Company's total increase in revenues for the third quarter of 1998. For the
nine months ended September 30, 1998, revenues in the Direct Services group
increased $29.0 million, or 14.2%, to $233.4 million and accounted for 21% of
the Company's total increase in revenues for the nine months ended September 30,
1998. The Direct
14
<PAGE>
Services group experienced growth in the services provided to both new and
existing customers during the three months and the nine months ended September
30, 1998. Revenue growth was greater during the third quarter of 1998 than
during the nine months ended September 30, 1998 due primarily to the timing of
certain sampling programs and to the overall increase in programs throughout the
Direct Services group.
Revenues in the Creative Services group increased $5.4 million, or 30.5%, to
$23.1 million in the third quarter of 1998 and accounted for 11% of the
Company's total increase in revenues for the third quarter of 1998. For the
nine months ended September 30, 1998, revenues in the Creative Services group
increased $14.5 million, or 26.5%, to $69.2 million and accounted for 11% of the
Company's total increase in revenues for the nine month period ended September
30, 1998. Revenue growth during both the three months and the nine months ended
September 30, 1998 was due primarily to an increase in services provided to
existing customers.
Cost of Services. Cost of services increased $32.7 million, or 33.2%, to
$131.1 million in the third quarter of 1998 from $98.4 million in the third
quarter of 1997. Cost of services as a percentage of revenues decreased to 69.0%
in the third quarter of 1998 from 70.5% in the third quarter of 1997, and to
67.6% for the nine months ended September 30, 1998 from 69.7% for the nine
months ended September 30, 1997. The Company's management and client support
personnel were able to support increased client services during the three months
and the nine months ended September 30, 1998, resulting in a decrease in cost of
services as a percentage of revenues.
Cost of services in the Healthcare Services group increased $21.8 million, or
56.8%, to $60.2 million in the third quarter of 1998 and accounted for 67% of
the Company's total increase in cost of services. Cost of services as a
percentage of revenues remained relatively constant between the third quarter of
1998 and the third quarter of 1997 at 75.0% and 75.2%, respectively. Cost of
services as a percentage of revenues for the nine months ended September 30,
1998 decreased to 73.4% from 74.8% for the corresponding period in 1997. This is
due to the overall growth within Healthcare Services and the ability of the
client support personnel to handle increased client services.
Cost of services in the Direct Services group increased $9.6 million, or
21.4%, to $54.4 million in the third quarter of 1998 and accounted for 29% of
the Company's total increase in cost of services for the third quarter of 1998.
Cost of services as a percentage of revenues decreased to 62.8% for the third
quarter of 1998 from 63.3% for the third quarter of 1997. The existing client
services personnel within Direct Services were able to support the growth and
increased program activities. Cost of services as a percentage of revenues
was 63.1% for both the nine months ended September 30, 1998 and the nine months
ended September 30, 1997.
Cost of services in the Creative Services group increased $1.3 million, or
8.5%, to $16.5 million in the third quarter of 1998 and accounted for 4% of the
Company's total increase in cost of services. Cost of services as a percentage
of revenues decreased to 71.3% for the third quarter of 1998 compared to 86.2%
for the third quarter of 1997. Only a slight increase in costs was needed to
support the growth in services provided by the Creative Services group. Cost of
services also decreased for the nine months ended September 30, 1998 to 63.5%
from 81.5% for the nine months ended September 30, 1997. This is consistent
with the overall growth in Creative Services and the ability of the client
services personnel to support the overall increase in services provided.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $3.7 million, or 13.7%, to $30.7 million in
the third quarter of 1998 from $27.0 million in the third quarter of 1997.
Selling, general and administrative expenses as a percentage of revenues
decreased to 16.2% in the third quarter of 1998 from 19.4% in the third quarter
of 1997, and to 18.2% for the nine months ended September 30, 1998 from 19.7%
for the nine months ended September 30, 1997. A moderate increase in overhead
expense was spread over a larger base of revenues during the three months and
the nine months ended September 30, 1998, resulting in a decrease in selling,
general and administrative expenses as a percentage of revenues.
Selling, general and administrative expenses in the Healthcare Services group
increased $3.1 million, or 34.4%, to $12.1 million. Selling, general and
administrative expenses as a percentage of revenues decreased to 15.1% for the
third quarter of 1998 from 17.6% for the third quarter of 1997 due primarily to
the revenue growth from the significant increase in services provided throughout
1998. Selling, general and administrative expenses as a percentage of revenues
for the nine months ended September 30, 1998 decreased to 14.0% from 15.6% for
the corresponding period in 1997.
15
<PAGE>
Selling, general and administrative expenses in the Direct Services group
decreased $1.2 million, or 9.4%, to $11.6 million. Selling, general and
administrative expenses as a percentage of revenues decreased to 13.3% for the
third quarter of 1998 from 18.1% for the third quarter of 1997 because a
slightly lower overhead amount was spread over a larger base of revenues. A
portion of this reduction in selling, general and administrative expenses as a
percentage of revenues was attributable to a favorable settlement of litigation
which resulted in a $0.5 million reduction to selling, general and
administrative expenses in the third quarter of 1998. Selling, general and
administrative expenses as a percentage of revenues also decreased to 15.4% for
the nine months ended September 30, 1998 from 20.4% for the nine months ended
September 30, 1997.
Selling, general and administrative expenses in the Creative Services group
increased $0.9 million, or 27.3%, to $4.1 million. Selling, general and
administrative expenses remained relatively constant between the third quarter
of 1998 and the third quarter of 1997 at 18.1% and 18.4%, respectively. For the
nine months ended September 30, 1998, selling, general and administrative
expenses as a percentage of revenues increased to 23.4% from 16.1% for the nine
months ended September 30, 1997 due primarily to a relocation of offices and a
slight increase in personnel.
Corporate selling, general and administrative expenses increased $0.9 million,
or 45.0%, to $2.9 million. The increase in corporate selling, general and
administrative expenses is consistent with the overall growth of the Company.
Corporate selling, general and administrative expenses as a percentage of
revenues was consistent for the third quarter of 1998 and the third quarter of
1997 at 1.5% and 1.4%, respectively. For the nine months ended September 30,
1998, selling, general and administrative expenses as a percentage of revenues
increased to 2.1% from 1.4% for the nine months ended September 30, 1997.
Compensation to Stockholders. No compensation to stockholders was recorded
in the three months or the nine months ended September 30, 1998. Compensation to
stockholders was $12.5 million and $16.1 million in the three months and the
nine months ended September 30, 1997, respectively. Compensation to stockholders
reflects compensation paid to certain stockholders of acquired companies prior
to their respective mergers with the Company that is in excess of the
compensation provided for in their employment contracts with the Company. No
compensation to stockholders is recorded subsequent to an acquisition by the
Company.
ESOP Expense. No ESOP expense was recorded in the three months or the nine
months ended September 30, 1998. ESOP expense was $0.9 million and $3.4 million
in the three months and the nine months ended September 30, 1997, respectively.
During 1997, all obligations of the ESOP were settled, and the Company does not
expect to incur any ESOP expense in 1998 or in any future periods. The
employees of one of the acquired companies that previously participated in the
ESOP will now participate in the Company's stock incentive plan.
Recapitalization Costs. No recapitalization costs were recorded in the three
months or the nine months ended September 30, 1998. Recapitalization costs were
$1.9 million in both the three months and the nine months ended September 30,
1997. One of the acquired entities completed a recapitalization in August 1997
prior to its respective 1998 merger with the Company. The Company does not
expect to incur any recapitalization costs in 1998 or in any future periods.
Acquisition and Related Costs. The Company recorded $9.4 million and $17.0
million in acquisition and related costs during the three months ended September
30, 1998 and 1997, respectively. The $9.4 million in acquisition and related
costs recorded during the three months ended September 30, 1998 consist of $4.9
million of professional service fees, $3.5 million related to an employee equity
program at one of the acquired entities, and the write-off of $1.0 million of
deferred financing fees from the repayment of debt at the time of acquisition at
one of the acquired entities. The acquisition and related costs recorded during
the three months ended September 30, 1998 include adjustments of $0.9 million to
reduce amounts previously estimated in accordance with the actual invoices
received. The $17.0 million in acquisition and related costs recorded during
the three months ended September 30, 1997 were recorded as a result of the
Company's pooling of interests transactions completed during that period.
The Company recorded $43.4 million and $33.2 million of acquisition and
related costs during the nine months ended September 30, 1998 and 1997,
respectively. The $43.4 million of acquisition and related costs recorded
during the nine months ended September 30, 1998 includes $38.7 million of costs
resulting from the consummation of the Company's pooling of interests
transactions completed during the nine months ended September 30, 1998 and $4.7
million for the
16
<PAGE>
consolidation of certain acquired operations in the U.S. and the U.K. The $4.7
million charge consists of $2.3 million to consolidate and terminate lease
obligations and to write off leasehold improvements at the office facilities of
three acquired subsidiaries and $2.4 million in severance and related costs to
terminate employment of certain management and administrative personnel at three
acquired subsidiaries. In total, 54 employees will be terminated in the
restructuring, 18 of whom were laid off during the nine months ended September
30, 1998. The $33.2 million in acquisition and related costs recorded during the
nine months ended September 30, 1997 were costs resulting from the pooling of
interests transactions completed by the Company during that period.
Interest Income (Expense), net. The Company recorded net interest income of
$0.5 million and $1.2 million in the three months and the nine months ended
September 30, 1998, respectively, and net interest expense of $0.2 million and
$0.4 million in the three months and the nine months ended September 30, 1997,
respectively. The net interest income recorded during the three months and the
nine months ended September 30, 1998 corresponds to the increase in funds
available for investment. The Company's average cash balance in the three months
and the nine months ended September 30, 1998 was greater than in the three
months and the nine months ended September 30, 1997 due primarily to public
stock offerings and stock option exercises. The net interest expense recorded
during the three months and the nine months ended September 30, 1997 consists
primarily of interest on debt at acquired companies prior to their acquisition
by the Company. The Company generally repays the debt of its acquirees.
Income Tax Provision. The Company recorded an income tax provision of $10.2
million and $18.4 million during the three months and the nine months ended
September 30, 1998, respectively. The Company's effective tax rate on its
recurring operations is approximately 38% for the three months and the nine
months ended September 30, 1998. The actual tax provision recorded differs from
the effective rate due to the nondeductibility of certain of the nonrecurring
costs recorded during the period as well as the tax status of certain of the
acquired companies prior to their mergers with the Company.
The Company recorded an income tax provision of $1.3 million and $7.9 million
during the three months and the nine months ended September 30, 1997,
respectively. The income tax provision recorded for the three months and the
nine months ended September 30, 1997 reflects the combined results of the
Company and entities acquired in pooling of interests transactions subsequent to
September 30, 1997. Several of the entities acquired in pooling of interests
transactions subsequent to September 30, 1997 were not taxed as C corporations
prior to their acquisition by the Company.
Discontinued Operations. The loss from discontinued operations of $0.6
million and $1.5 million in the three months and the nine months ended September
30, 1997 consists of the loss from the sports management operations which were
spun off from one of the Company's 1998 acquirees in October 1997.
Net Income (Loss). Net income increased $29.4 million, or 146%, to $9.2
million in the third quarter of 1998 from a loss of $20.2 million in the third
quarter of 1997 due primarily to the Company's overall growth, improved
operating margins and the nonrecurring costs recorded during the third quarter
of 1997. Net income increased to $15.5 million in the nine months ended
September 30, 1998 from a loss of $22.1 million in the nine months ended
September 30, 1997 due primarily to the growth in revenues, the improved
operating margins, and the decreased amount of nonrecurring costs recorded
during the period.
Pro forma income from continuing operations and excluding nonrecurring costs
increased $9.9 million, or 125%, to $17.8 million in the third quarter of 1998
from $7.9 million in the third quarter of 1997, and to $47.9 million in the nine
months ended September 30, 1998 from $23.9 million in the nine months ended
September 30, 1997. Pro forma diluted net income per share from continuing
operations and excluding nonrecurring costs increased $0.13, or 100%, to $0.26
in the third quarter of 1998 from $0.13 in the third quarter of 1997, and to
$0.71 in the nine months ended September 30, 1998 from $0.39 in the nine months
ended September 30, 1997. The increase in pro forma income from continuing
operations and excluding nonrecurring costs is due primarily to the growth in
revenues and the improved operating margins.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had $98.9 million in cash and equivalents.
Cash and equivalents increased $12.6 million during the nine months ended
September 30, 1998, due to the $13.3 million provided by operating activities,
the $28.7 million provided by financing activities and the $1.0 million effect
of changes in exchange rates offset by the $30.4 million used in investing
activities. The cash provided by financing activities consists primarily of
proceeds received from the issuance of common stock and the exercise of common
stock options offset by repayments on borrowings. The cash used for investing
activities consists primarily of cash used for purchases of equipment. The
Company's operations provided positive cash flows in both the nine months ended
September 30, 1998 and the nine months ended September 30, 1997.
17
<PAGE>
The Company experienced significant growth during 1997 and during the nine
months ended September 30, 1998 and expects to continue to grow through both
internal expansion and complementary acquisitions. The Company believes that its
cash and equivalents, as well as the cash provided by operations, will be
sufficient to fund its current operations and planned capital expenditures. To
the extent that the consideration paid for future acquisitions does not include
securities of the Company, acquisitions will initially be financed using excess
cash and equivalents, but depending on the amount necessary to complete an
acquisition, additional financing may be required.
The Company is undergoing an assessment of its current systems and equipment
and is in the process of making the modifications necessary to address the
issues presented by the Year 2000 issue. The Company has identified certain
systems within its Direct Services and Healthcare Services groups that are not
yet compliant with the Year 2000. Modifications have already begun on all of
these systems. The Company expects to incur no more than $3.0 million in capital
expenditures in 1998 with respect to system upgrades which are designed in part
to address specific Year 2000 requirements. The Company began testing its
systems for compliance with the Year 2000 in 1997 and expects testing to be
completed on its current systems by the middle of 1999. Although the Company
believes that it will achieve Year 2000 compliance for its systems prior to
January 1, 2000 without incurring significant additional costs, there can be no
assurance that such compliance will be achieved or that it will be achieved
without additional significant costs. If Year 2000 compliance cannot be
confirmed subsequent to making the necessary modifications, the Company intends
to seek other compliant systems for itself or to develop other contingency
arrangements. To the extent that additional acquisitions are consummated, the
Company will need to evaluate how the Year 2000 will impact its future
acquirees.
The Company is subject to the impact of foreign currency fluctuations,
specifically that of the British pound and French franc. To date, changes in the
British pound and French franc exchange rates have not had a material impact on
the Company's liquidity or results of operations. The Company continually
evaluates its exposure to exchange rate risk but does not currently hedge such
risk.
Given the extent of the Company's services currently provided in continental
Europe and the nature of those services, the Company does not expect the
introduction of the EURO to have a material impact on its operations or cash
flows. The Company will continue to evaluate the impact of the introduction of
the EURO as it continues to expand the services offered and the European
locations in which it operates.
RECENT ACQUISITION
In October 1998, the Company added another component to its Direct Services
group with the acquisition of Response Marketing Group ("RMG"). RMG offers
database and analytical services; strategic consulting and design services; and
marketing program management services using a broad array of direct-to-customer
delivery channels designed to maximize the effectiveness and profitability of
marketing programs. The direct marketing solutions offered by RMG are designed
to identify the optimal target customer audience and predict its response for a
specific product or service, determine the appropriate direct marketing channels
for delivery to the targeted customers, and measure the response and
effectiveness of specific marketing programs. In the acquisition, the Company
issued 1,565,167 shares of common stock in exchange for all of the issued and
outstanding capital stock of RMG. The transaction was accounted for as a
pooling of interests for financial reporting purposes.
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130") during the three months ended
March 31, 1998. Comprehensive income includes net income and all other nonowner
changes in equity in a period. The Company's comprehensive income of $17.5
million for the nine months ended September 30, 1998 consists of its net income,
foreign currency translation adjustment and unrealized loss on marketable
securities.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"). This statement is effective
for fiscal years beginning after December 15, 1997. The Company will disclose
the information required for operating groups in its December 31, 1998 financial
statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable
18
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities.
(c) In August and September 1998, the Company issued 3,324,618 and
1,701,355 shares of its common stock in connection with the
acquisitions of privately held companies. All of the entities acquired
became wholly owned subsidiaries of the Company. The shares were
restricted and contained a legend against transfer. The issuance of
the shares was effected without registration in reliance upon the
exemption available under Section 4(2) of the Securities Act.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
(1) Current Report on Form 8-K, dated August 31, 1998
(2) Current Report on Form 8-K, dated September 10, 1998
(3) Form 8-K/A, dated August 31, 1998
19
<PAGE>
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)
Date: November 13, 1998 /s/ Michele D. Snyder
------------------ ----------------------------
Michele D. Snyder
Vice Chairman, President and
Chief Operating Officer
(Duly Authorized Officer)
Date: November 13, 1998 /s/ A. Clayton Perfall
------------------ ----------------------------
A. Clayton Perfall
Chief Financial Officer
(Principal Financial Officer)
20
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
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IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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