<PAGE>
================================================================================
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):
AUGUST 31, 1998
SNYDER COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 1-12145 52-1983617
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) 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>
This Amendment No. 1 to the Current Report of Snyder Communications, Inc. (the
"Registrant") on Form 8-K dated August 31, 1998 (the "Report") relates to the
Registrant's completion of the acquisition of Clinical Communications Group,
Inc., a Delaware corporation ("Clinical") . The purpose of this Amendment is to
amend Item 7 (A) to provide the financial statements of Clinical and Item 7 (B)
to provide the required pro forma financial information relating to the business
combination between the Registrant and Clinical, which were impracticable to
provide at the time of the initial filing of the Current Report on Form 8-K.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(A) Financial statements of businesses acquired.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Clinical Communications Group, Inc.:
We have audited the accompanying balance sheets of Clinical Communications
Group, Inc. (a Delaware corporation) as of December 31, 1997 and 1996, and the
related statements of operations, shareholders' (deficit) equity and cash flows
for each of the years in the three year period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Clinical Communications Group,
Inc. as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the years in the three year period ended December 31,
1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
October 9, 1998
<PAGE>
CLINICAL COMMUNICATIONS GROUP, INC.
-----------------------------------
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------ ------------------------
1998 1997 1996
------------ ------------ ----------
<S> <C> <C> <C>
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 601,260 $ 3,471,705 $ 3,111,168
Short-term investments -- 222,245 2,729,811
Accounts and unbilled receivables, net of allowance of $690,217,
$690,217, and $0, respectively 6,229,325 5,107,861 883,891
Receivables from shareholders 28,322 215,942 524,440
Other current assets 1,370,380 708,154 2,221,601
------------ ------------ ----------
Total current assets 8,229,287 9,725,907 9,470,911
DEFERRED TAX ASSET 4,638,000 4,638,000 --
PROPERTY AND EQUIPMENT, net 1,455,831 864,851 282,343
DEFERRED BORROWING COSTS, net 752,578 839,738 --
OTHER NON-CURRENT ASSETS -- 115,000 17,662
------------ ------------ ----------
Total assets $ 15,075,696 $ 16,183,496 $9,770,916
============ ============ ==========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Line of credit $20,000,000 $ 20,000,000 $ --
Accounts payable and accrued expenses 9,504,015 11,878,389 4,137,056
Unearned revenue 6,337,714 5,500,174 3,912,891
Deferred tax liability 656,415 666,000 --
------------ ------------ ----------
Total current liabilities 36,498,144 38,044,563 8,049,947
NOTE PAYABLE TO FOUNDER 457,000 457,000 --
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK, $.01 par value; 750,000 authorized shares; 339,162,
337,667, and 0 Series A shares issued and outstanding, including $1,453,520,
$832,000, and $0 in cumulative dividends; redemption and liquidation value
$22,074,487, $21,303,467, and $0, respectively 22,074,487 21,303,467 --
SHAREHOLDERS' (DEFICIT) EQUITY:
Common stock, $.01 par value; 150,000 authorized shares; 108,377,
101,782, and 0 issued and outstanding, respectively 1,084 1,018 --
Common stock, no par value -- -- 7,000
Additional paid-in capital 5,431,011 5,390,982 --
Accumulated other comprehensive income (loss) -- (292) 14,199
Retained (deficit) earnings (49,386,030) (49,013,242) 1,699,770
------------ ------------ ----------
Total shareholders' (deficit) equity (43,953,935) (43,621,534) 1,720,969
------------ ------------ ----------
Total liabilities and shareholders' (deficit) equity $ 15,075,696 $ 16,183,496 $9,770,916
============ ============ ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE>
CLINICAL COMMUNICATIONS GROUP, INC.
-----------------------------------
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTH FOR THE YEAR ENDED
PERIOD ENDED JUNE 30, DECEMBER 31,
------------------------ ----------------------------------------
1998 1997 1997 1996 1995
----------- ---------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES $17,842,277 $6,671,599 $ 22,676,837 $14,747,000 $13,377,559
OPERATING EXPENSES:
Cost of services 13,842,577 4,716,165 19,786,601 8,308,471 5,476,468
Selling, general and administrative 2,709,780 610,654 3,575,719 2,212,050 2,112,297
Recapitalization costs -- -- 1,889,000 -- --
Compensation to shareholders -- 1,248,879 12,902,000 6,981,610 4,000,000
----------- ---------- ------------ ----------- -----------
Income (loss) from operations 1,289,920 95,901 (15,476,483) (2,755,131) 1,788,794
INTEREST EXPENSE (777,301) -- (763,000) -- --
INTEREST AND OTHER INCOME 74,409 158,130 251,471 404,107 325,000
----------- ---------- ------------ ----------- -----------
INCOME (LOSS) BEFORE TAXES 587,028 254,031 (15,988,012) (2,351,024) 2,113,794
INCOME TAX (PROVISION) BENEFIT (338,296) -- 3,227,000 -- (92,000)
----------- ---------- ------------ ----------- -----------
NET INCOME (LOSS) $ 248,732 $ 254,031 $(12,761,012) $(2,351,024) $ 2,021,794
=========== ========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
CLINICAL COMMUNICATIONS GROUP, INC.
-----------------------------------
STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
SHAREHOLDERS' (DEFICIT) EQUITY
---------------------------------------------------------------------------
UNREALIZED
REDEEMABLE ADDITIONAL LOSS (GAIN) ON RETAINED
PREFERRED COMMON COMMON PAID-IN MARKETABLE EARNINGS COMPREHENSIVE
STOCK SHARES STOCK CAPITAL SECURITIES (DEFICIT) TOTAL INCOME
----------- ------- ---------- -------------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 $ -- 7,000 $ 7,000 $ -- $ (88,000) $ 2,029,000 $ 1,948,000 $ --
Net income -- -- -- -- -- 2,021,794 2,021,794 2,021,794
Net change in unrealized
gain (loss) on
marketable securities -- -- -- -- 59,000 -- 59,000 59,000
------------
Comprehensive income -- -- -- -- -- -- -- $ 2,080,794
----------- ------- ------- ----------- ---------- ------------ ------------ ============
BALANCE, December 31, 1995 -- 7,000 7,000 -- (29,000) 4,050,794 4,028,794 --
Net loss -- -- -- -- -- (2,351,024) (2,351,024) (2,351,024)
Net change in unrealized
gain (loss) on
marketable securities -- -- -- -- 43,199 -- 43,199 43,199
------------
Comprehensive loss -- -- -- -- -- -- -- $ (2,307,825)
----------- ------- ------- ----------- ---------- ------------ ------------ ============
BALANCE, December 31, 1996 -- 7,000 7,000 -- 14,199 1,699,770 1,720,969 --
Redemption of
common stock -- (7,000) (7,000) -- -- (37,120,000) (37,127,000) --
Issuance of common and
preferred stock in
connection with
recapitalization 19,946,000 90,000 900 53,100 -- -- 54,000 --
Issuance of redeemable
preferred stock 525,467 -- -- -- -- -- -- --
Issuance of common stock -- 11,782 118 11,882 -- -- 12,000 --
Capital contribution
from Founder -- -- -- 5,326,000 -- -- 5,326,000 --
Accrued dividends,
redeemable preferred
stock 832,000 -- -- -- -- (832,000) (832,000) --
Net loss -- -- -- -- -- (12,761,012) (12,761,012) (12,761,012)
Net change in unrealized
gain (loss) on
marketable securities -- -- -- -- (14,491) -- (14,491) (14,491)
------------
Comprehensive loss -- -- -- -- -- -- -- $(12,775,503)
----------- ------- ------- ----------- ---------- ------------ ------------ ============
BALANCE, December 31, 1997 21,303,467 101,782 1,018 5,390,982 (292) (49,013,242) (43,621,534)
Issuance of common stock
(unaudited) -- 6,595 66 6,591 -- -- 6,657 --
Compensation on
restricted stock
grant (unaudited) -- -- -- 33,438 -- -- 33,438 --
Issuance of redeemable
preferred stock
(unaudited) 149,500 -- -- -- -- -- -- --
Accrued dividends,
redeemable preferred
stock (unaudited) 621,520 -- -- -- -- (621,520) (621,520) --
Net income (unaudited) -- -- -- -- -- 248,732 248,732 248,732
Net change in unrealized
gain (loss) on
marketable securities
(unaudited) -- -- -- -- 292 -- 292 292
------------
Comprehensive income
(unaudited) -- -- -- -- -- -- -- $ 294,024
----------- ------- ------- ----------- ---------- ------------ ------------ ============
BALANCE , June 30, 1998
(unaudited) $22,074,487 108,377 $ 1,084 $ 5,431,011 $ -- $(49,386,030) $(43,953,935)
=========== ======= ======= =========== ========== ============ ============
</TABLE>
<PAGE>
CLINICAL COMMUNICATIONS GROUP, INC.
-----------------------------------
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTH PERIOD
ENDED JUNE 30,
-------------------------------
1998 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 248,732 $ 254,031
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities
Deferred income taxes (9,585) --
Depreciation and amortization 217,552 157,926
Net realized (gain) loss on sale of marketable
securities -- (13,661)
Compensation on restricted stock grant 33,438 --
Change in assets and liabilities
Accounts receivable, net (1,121,464) (1,195,451)
Receivables from shareholders 187,620 (544,377)
Other current assets (662,226) 929,301
Other non-current assets 115,000 (103,322)
Accounts payable and accrued expenses (2,504,474) 178,481
Unearned revenue 837,540 795,055
----------- -----------
Net cash (used in) provided by operating activities (2,657,867) 457,983
INVESTING ACTIVITIES:
Purchase of property and equipment (590,980) (141,667)
Purchase of marketable securities -- (2,527,519)
Sale/redemption of marketable securities 222,245 1,639,880
----------- -----------
Net cash (used in) provided by investing activities (368,735) (1,029,306)
----------- -----------
FINANCING ACTIVITIES:
Redemption of common stock -- --
Issuance of common and preferred stock in connection with
recapitalization -- --
Loan provided by Investor -- --
Payment of Investor loan -- --
Founder capital contribution -- --
Sale of common and preferred stock 156,157 --
Credit facility costs -- --
Proceeds from credit facility -- --
----------- -----------
Net cash provided by financing activities 156,157 --
----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,870,445) (571,323)
----------- -----------
CASH AND CASH EQUIVALENTS, beginning of period 3,471,705 3,111,168
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 601,260 $ 2,539,845
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 326,300 $ --
=========== ===========
Cash paid for income taxes $ -- $ 22,750
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING:
Redemption of common stock in exchange for note payable $ -- $ --
=========== ===========
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(12,761,012) $(2,351,024) $ 2,021,794
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities
Deferred income taxes (3,972,000) -- --
Depreciation and amortization 197,829 128,650 98,919
Net realized (gain) loss on sale of marketable
securities 36,000 2,000 (25,000)
Compensation on restricted stock grant -- -- --
Change in assets and liabilities
Accounts receivable, net (4,223,970) 1,248,000 6,057,000
Receivables from shareholders 308,498 (494,000) (30,000)
Other current assets 1,513,447 101,000 (2,069,000)
Other non-current assets (97,338) 67,878 3,000
Accounts payable and accrued expenses 7,741,333 1,894,951 518,000
Unearned revenue 1,587,283 (4,016,000) 884,000
------------ ----------- -----------
Net cash (used in) provided by operating activities (9,669,930) (3,418,545) 7,458,713
INVESTING ACTIVITIES:
Purchase of property and equipment (804,566) (91,000) (137,000)
Purchase of marketable securities (2,658,000) (7,723,000) (2,517,000)
Sale/redemption of marketable securities 5,165,566 7,608,000 474,000
------------ ----------- -----------
Net cash (used in) provided by investing activities 1,703,000 (206,000) (2,180,000)
------------ ----------- -----------
FINANCING ACTIVITIES:
Redemption of common stock (36,670,000) -- --
Issuance of common and preferred stock in connection with
recapitalization 20,000,000 -- --
Loan provided by Investor 10,000,000 -- --
Payment of Investor loan (10,000,000) -- --
Founder capital contribution 5,326,000 -- --
Sale of common and preferred stock 537,467 -- --
Credit facility costs (866,000) -- --
Proceeds from credit facility 20,000,000 -- --
------------ ----------- -----------
Net cash provided by financing activities 8,327,467 -- --
------------ ----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 360,537 (3,624,545) 5,278,713
------------ ----------- -----------
CASH AND CASH EQUIVALENTS, beginning of period 3,111,168 6,735,713 1,457,000
------------ ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 3,471,705 $ 3,111,168 $ 6,735,713
============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 664,000 $ -- $ --
============ =========== ===========
Cash paid for income taxes $ 525,000 $ -- $ --
============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING:
Redemption of common stock in exchange for note payable $ 457,000 $ -- $ --
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
CLINICAL COMMUNICATIONS GROUP, INC.
-----------------------------------
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION:
Clinical Communications Group, Inc. (the "Company"), a Delaware Corporation, was
incorporated on July 25, 1997, to continue the operations of three separate
companies (the "Group Companies") then owned by a sole shareholder (the
"Founder"). The Company completed a recapitalization on August 1, 1997. The
business conducted by the Group Companies, and thereafter by the Company, is the
provision of educational marketing and conferencing services to the
pharmaceutical industry. The Group Companies commenced business in 1991.
On August 1, 1997, the Company, the Group Companies, the Founder and an investor
group (the "Investor") entered into an agreement (the "Formation Agreement")
pursuant to which the Investor purchased common and preferred stock for cash,
and the Founder's capital stock ownership interest in the Group Companies was
exchanged for 36,000 shares of the Company's $.01 par value common stock,
132,973 shares of the Company's Series A $.01 par value preferred stock,
$30,000,000 in cash, an interest bearing promissory note in the amount of
$6,670,000, and an interest bearing promissory note in the amount of $457,000,
which represented the Group Companies' August 1, 1997, working capital position
as defined in the Formation Agreement. The aggregate value of the consideration
provided to the Founder in exchange for the Group Companies capital stock was
approximately $37,127,000.
Concurrent with the Founder's ownership exchange, the Investor purchased 54,000
shares of the Company's $.01 par value common stock for $54,000, and 199,460
shares of the Company's Series A $.01 par value preferred stock for $19,946,000.
The Investor also provided a $10,000,000 interest-bearing loan to the Company.
The Founder and Investor's equity ownership interests in the Company upon
completion of these transactions were 40 percent and 60 percent, respectively,
in each of the Company's classes of issued and outstanding shares of common and
Series A preferred stock.
The Company incurred $1,889,000 in costs related to the August 1, 1997,
recapitalization consisting of investment banking, legal and accounting fees.
These costs are included in 1997 operating expenses in the accompanying
statements of operations.
The transactions conducted pursuant to the Formation Agreement have been
recognized in the accompanying financial statements as a sale of newly issued
stock by the Company and a redemption of previously outstanding shares.
Accordingly, the financial statements for the years ended December 31, 1996 and
1995, are based upon a combination of the historical accounts of the Group
Companies after elimination of all significant intercompany transactions. The
financial statements as of and for the year ended December 31, 1997, include the
accounts of the Company and the Group Companies after elimination of all
significant intercompany transactions.
<PAGE>
On August 31, 1998, Snyder Communications, Inc. ("SNC"), a Delaware corporation,
consummated a merger (the "Merger") whereby Snyder CC Acquisition, Inc., a
Delaware corporation and wholly owned subsidiary of SNC, was merged with and
into the Company, with the Company surviving the Merger as a wholly owned
subsidiary of SNC. SNC issued 3,324,618 shares of its common stock, $.001 par
value, in exchange for all of the issued and outstanding common and preferred
stock of the Company. The Merger was accounted for as a pooling of interests
for accounting and financial reporting purposes.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying consolidated balance sheet as of June 30, 1998, the
accompanying consolidated statement of shareholders' (deficit) equity for the
six month period ended June 30, 1998, and the accompanying consolidated
statements of operations and cash flows for the six month periods ended June 30,
1998 and 1997, included herein have been prepared by the Company and are
unaudited. The information furnished in the unaudited financial statements
referred to above includes all adjustments which are, in the opinion of
management, necessary for a fair presentation of such financial statements. The
results of operations for the six month period ended June 30, 1998, are not
necessarily indicative of the results to be expected for the entire fiscal year.
REVENUE RECOGNITION
The Company's revenues are derived from two principal activities: (i) the sale
of targeted educational marketing programs and materials and (ii) the
coordination of educational conferencing services.
Revenue from targeted educational marketing programs and materials is recognized
as services are performed on behalf of clients. Estimated revenues and costs for
educational marketing programs and materials are reviewed and revised
periodically throughout the duration of each client engagement, with adjustments
to revenues, project costs and resulting profits (losses) from such revisions
being recorded on a cumulative basis in the period in which the revisions are
made.
Revenue from coordination of educational conferencing services is recognized
upon the completion of the meeting or meetings, or publication of post-meeting
materials. For customer arrangements which require multiple meetings,
recognized revenue is based upon an average amount per meeting. In those cases
where conferencing services require the Company to develop and train outside
speakers, prepare slide kits or provide other pre-meeting services, revenue is
recognized as these services are performed. Third-party costs and direct labor
incurred by the Company in advance of meetings are recorded as prepaid project
costs. Third party costs primarily include site deposits, attendee airfare and
attendance fees. Prepaid project costs are charged to cost of services at the
completion of the meetings to which they relate. Prepaid project costs at
December 31, 1997 and 1996, respectively, totaled $181,202 and $163,997.
The Company must continually replace its contracts with new contracts to sustain
its revenue. In addition, educational marketing programs and materials and
conferencing services may be canceled or delayed by clients upon notice.
<PAGE>
UNBILLED RECEIVABLES AND UNEARNED REVENUE
Unbilled receivables represent revenue recognized which has not been billed as
of the balance sheet date. Unbilled receivables totaled $1,404,000 and $216,000
as of December 31, 1997 and 1996, respectively. In certain instances, the
Company will bill customers in advance of the performance of services. The
excess of amounts billed over revenue recognized, if any, represents unearned
revenue.
INCOME TAXES
Prior to the August 1, 1997, recapitalization, the Group Companies elected "S"
corporation status for federal income tax purposes.
The net income (loss) of the "S" corporation companies for all periods through
July 31, 1997, were included in the individual federal income tax returns of the
Founder. The state of Connecticut does not recognize "S" corporation status.
Therefore, net income was taxed at the applicable Connecticut tax rate.
Effective with the August 1, 1997, recapitalization, the Company and its
subsidiaries began operations as a "C" corporation for federal and state income
tax purposes.
Deferred income taxes are provided for the tax effects of differences between
the financial statement carrying amounts and the tax basis of assets and
liabilities using enacted income tax rates.
USE OF ESTIMATES
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. The most significant estimates relate to the Company's
estimates to complete on its educational marketing programs and materials.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, trade accounts receivable, short-term borrowings,
trade accounts payable and accrued liabilities are carried at cost which
approximates fair value due to the short-term maturity of these instruments.
The carrying amount of the Company's borrowings under its revolving credit
agreement approximates fair value, as the obligation bears interest at a
variable rate. Management believes that the fair value of all other long-term
obligations approximate cost based on market rates for similar types of
arrangements.
CONCENTRATION OF CREDIT RISK
The Company's revenues have been derived to date from customers in North
America. In 1997, three customers accounted for approximately 63 percent of
revenues. In 1996, two customers accounted for approximately 68 percent of
revenues. In 1995, two customers accounted for approximately 67 percent of
revenues.
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral. The Company maintains reserves for potential
losses for uncollectible accounts.
<PAGE>
The Company places its investments primarily with highly rated financial
institutions, state, and local municipalities.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less when purchased to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation of property and
equipment is provided using the straight-line method over the estimated useful
lives of the assets, which range from five to seven years. Amortization of
leasehold improvements is provided using the straight-line method over the
related lease term or estimated useful life, whichever is shorter.
MARKETABLE SECURITIES
In accordance with the requirements of Statement of Financial Accounting
Standard ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," the Company has classified its investments as "available for
sale." Such investments are recorded at fair value, with unrealized gains and
losses reported as a separate component of shareholders' (deficit) equity.
The amortized costs, gross unrealized gains and losses and fair values of the
Company's available-for-sale securities at December 31, 1997 and 1996, were as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAIN LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1997:
Municipal tax-exempt bonds $ 222,537 $ - $ (292) $ 222,245
========== ======== ======== ==========
December 31, 1996:
Municipal tax-exempt bonds 2,424,830 16,048 (995) 2,439,883
Mutual funds 13,162 279 (798) 12,643
Equity securities 277,620 10,899 (11,234) 277,285
---------- -------- -------- ----------
$2,715,612 $27,226 $(13,027) $2,729,811
========== ======== ======== ==========
</TABLE>
The net realized (losses) gains on the sale of marketable securities totaled
$(36,000), $(2,000), and $25,000 for the years ended December 31, 1997, 1996,
and 1995, respectively.
At December 31, 1997 and 1996, the Company's marketable securities had
maturities of less than one year. The Company calculates realized gains and
losses using historical and amortized costs for equity and debt.
DEFERRED BORROWING COSTS
Borrowing costs of $866,000 were incurred in connection with the November 1997
establishment of the Company's $50,000,000 credit facility. These costs are
capitalized and
<PAGE>
amortized on a basis which reflects the mandatory annual reductions of the
credit commitment. Accumulated amortization at December 31, 1997, was $26,262.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The Company adopted SFAS No. 130 during the first quarter
of 1998. Included within accumulated other comprehensive income are the
unrealized gains and losses on marketable securities. The (loss) gain on
marketable securities was $(14,491), $43,199, and $59,000 in 1997, 1996, and
1995, respectively.
3. CREDIT AGREEMENT:
In November 1997, the Company entered into a Credit Agreement which provides a
secured reducing revolving line of credit through December 31, 2003. The
agreement provides for borrowings of up to $50,000,000, decreasing thereafter as
follows:
<TABLE>
<CAPTION>
YEAR ENDED QUARTERLY ANNUAL
DECEMBER 31, REDUCTION REDUCTION
------------ ----------- -----------
<S> <C> <C>
1999 $ 625,000 $ 2,500,000
2000 1,250,000 5,000,000
2001 1,875,000 7,500,000
2002 3,750,000 15,000,000
2003 5,000,000 20,000,000
-----------
Total $50,000,000
===========
</TABLE>
Under the Credit Agreement, the Company may borrow pursuant to prime rate,
Federal Funds rate or LIBOR interest rate options. Accordingly, a margin may be
added to the interest rate charged pursuant to the interest rate option elected
by the Company. The relative margins are adjusted on a quarterly basis for
changes, if any, in the Company's leverage ratio. A fee of .375 to .500 percent
per annum is charged on the unused portion of the reduced line. Interest is
payable quarterly.
At December 31, 1997, there was $20,000,000 in borrowings outstanding under the
Credit Agreement at an interest rate of 7.5 percent. The total outstanding
principal amount under the Credit Agreement is due on December 31, 2003.
The Credit Agreement requires the Company to meet certain financial ratios and
covenants, including debt to earnings and interest cover ratios, fixed charge
coverage and acquisition limitations. Substantially all of the Company's assets
are pledged as security under the Credit Agreement. The Company was not in
compliance at December 31, 1997, with certain Credit Facility financial
covenants and administrative requirements.
All outstanding amounts under the Credit Agreement were paid-off on September 1,
1998, in connection with the acquisition of the Company by SNC.
<PAGE>
4. INCOME TAXES:
The components of the (benefit) provision for income taxes are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $ --
State 745,000 -- 92,000
----------- ----------- -----------
745,000 -- 92,000
----------- ----------- -----------
Deferred:
Federal (3,379,000) -- --
State (593,000) -- --
----------- ----------- -----------
(3,972,000) -- --
----------- ----------- -----------
$(3,227,000) $ -- $ 92,000
=========== =========== ===========
</TABLE>
Significant components of the Company's deferred tax assets (liabilities)
consist of the following at December 31, 1997:
<TABLE>
<S> <C>
Net operating loss carryforwards $ 4,638,000
Payroll related accruals 219,000
Allowance for doubtful accounts 224,000
Inventory related deferred costs 667,000
Other 144,000
Cumulative revenue recognition differences (1,920,000)
-----------
Net deferred tax asset $ 3,972,000
===========
</TABLE>
On August 1, 1997, the Group Companies that previously filed their tax returns
as "S" corporations terminated this status and the Company and its subsidiaries
began operations as a "C" corporation for federal and state income tax purposes.
For the period August 1, 1997, to December 31, 1997, the Company generated a net
operating loss carryforward of approximately $11.2 million at December 31, 1997.
This loss expires in 2012.
The reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate for the year ended December 31, 1997, is as follows:
<TABLE>
<S> <C>
Federal statutory rate (34.0)%
Income taxed directly to owners (4.4)
Tax effect to reorganization 1.9
Non-deductible expenses 15.8
Other 0.5
-------
(20.2)%
=======
</TABLE>
<PAGE>
5. SHAREHOLDERS' (DEFICIT) EQUITY:
Dividends are payable when declared. Each common share has the right to one
vote except for those matters which the Company's Certificate of Incorporation
provides are subject to vote by the Series A preferred shareholders. At
December 31, 1997, a total of 1,500 common shares were reserved for issuance to
key employees of the Company, including officers.
Prior to the August 31, 1998, Merger, the Company sold to a group of investors
34,539 shares of $.01 par value common stock and 144,816 shares of Series A $.01
par value preferred stock for a total consideration of approximately
$27,900,000.
RESTRICTED STOCK PLAN
The Company's restricted stock plan (the "Plan") provides for the issuance of up
to 11,500 shares of restricted common stock to employees, including officers and
directors who are also employees. The Plan was implemented at the time of the
August 1, 1997, recapitalization. The objectives of the Plan are to further the
growth and financial success of the Company and to motivate, attract and retain
the service of employees who have the ability to increase shareholder value. A
total of 10,250 restricted common shares were issued in 1997 pursuant to the
Plan.
The terms of the Plan provide for restricted share vesting over ten years. The
vesting may be accelerated if the Company meets certain performance criteria for
each of calendar years 1997, 1998, 1999, 2000 or 2001. The performance criteria
for 1997 was achieved and, accordingly, 1,500 shares were fully vested as of
December 31, 1997.
The Plan also provides that if the Company is acquired by a third party, all
issued but unvested shares scheduled to vest in that calendar year shall vest
immediately prior to the acquisition.
In connection with the acquisition by SNC, the restricted shares were exchanged
for SNC shares equal to the estimated fair value of the restricted shares.
PREFERRED STOCK, SERIES A
Series A preferred shareholders are entitled to receive dividends at the annual
rate of 6 percent (computed on the basis of $100 per share), whether or not
declared by the Company's Board of Directors. The dividends are computed in
arrears on December 31 of each year commencing December 31, 1997, and accrue on
a cumulative basis. No dividends have been declared by the Board of Directors
as of December 31, 1997. Dividends in arrears are $832,000 at December 31,
1997. The holders of the Series A Preferred Stock have exclusive voting rights
on certain matters that have been approved or adopted by the Board of Directors
and are required by law to be presented to the shareholders. Each Series A
preferred share has the right to one vote.
The Series A preferred stock may be redeemed, in whole or in part, at any time
at the election of the Corporation by resolution of its Board of Directors at
the redemption price of $100 per share, plus accrued and unpaid dividends to the
redemption date.
If at any time less than all of the Series A preferred stock outstanding is to
be redeemed, the shares to be redeemed will be pro rata. Notwithstanding
anything to the contrary, the Company may not redeem less than all of the Series
A preferred stock outstanding unless all accrued and unpaid dividends have been
paid on all then outstanding shares of Series A preferred stock.
<PAGE>
In the event of any liquidation, dissolution or winding down of the affairs of
the Company, whether voluntary or involuntary, after payment or provision for
payment of the debts and other liabilities of the Company, the holder of shares
of the Series A preferred stock shall be entitled to receive for each share of
Series A preferred stock then held, out of the assets of the Company, whether
such assets are capital or surplus and whether or not any dividends as such are
declared, the applicable redemption price on the date fixed for distribution,
and no more, before any distribution shall be made to the holders of the common
stock with respect to the distribution of assets.
6. RELATED-PARTY TRANSACTIONS:
COMPENSATION TO SHAREHOLDERS
In conjunction with the August 1, 1997, recapitalization, the Company committed
to pay approximately $11,883,000 in bonuses to the Founder, officers and
employees of the Company, all of whom are shareholders. The Founder contributed
$5,326,000 to the Company in October 1997 toward the payment of these bonuses.
The remaining bonus obligations were paid subsequent to December 31, 1997.
Compensation to shareholders of $1,019,000, $6,981,610, and $4,000,000 in 1997,
1996 and 1995, respectively, represents compensation paid to the Company's
Founder, the then sole shareholder.
PROMISSORY NOTES
In accordance with the provisions of the Formation Agreement, the Company issued
promissory notes (the "Notes") to the Founder and Investor in the principal
amounts of $6,670,000 and $10,000,000, respectively. The Notes were unsecured,
with interest at the prime rate plus 2.0 percent and were payable no later than
August 1, 1998. The Notes were repaid on November 25, 1997, together with
accrued interest of $564,000.
The working capital adjustment provided for in the Formation Agreement (see Note
1) resulted in the issuance of a Promissory Note payable to the Founder in the
amount of $457,000. The note may be prepaid at any time prior to maturity,
January 1, 2004. Interest is payable annually at 6 percent, commencing January
1, 1999.
MANAGEMENT FEES
In accordance with the terms of an August 1, 1997, Corporate Development and
Services Agreement, the Investor committed to provide certain management
services to the Company. No fees were due under this agreement for 1997. The
Company reimbursed the Investor $35,000 for out-of-pocket expenses, including
attendance at Board of Director and management meetings.
The Company also paid $450,000 to the Investor and $300,000 to the Founder in
one-time fees in connection with the August 1, 1997, recapitalization.
DIRECTORS
Beginning on April 1, 1997, the Company received consulting services from a firm
whose acting president was also the Chairman of the Board of Directors of the
Company. The Company retained the firm at a fee of $8,800 per month. For the
year ended December 31, 1997, the Company paid approximately $105,000 for these
services. Additionally, this Director received a
<PAGE>
one-time payment of $100,000 for consulting services rendered in connection with
the August 1, 1997, recapitalization.
SHAREHOLDERS AND OFFICERS
Prior to the August 1, 1997, recapitalization, the Company periodically provided
non-interest bearing loans and advances to the Founder, officers, and others.
Non-interest bearing loans totaled approximately $216,000 and $524,000 at
December 31, 1997 and 1996, respectively.
JHB ENTERPRISES, INC.
In the ordinary course of business, the Company purchases materials for its
educational marketing programs and educational conferences from JHB Enterprises,
Inc. ("JHB"), a corporation owned by a relative of the Founder. During the
years ended December 31, 1997, 1996, and 1995, the Company's purchases from JHB
were $4,405,000, $3,895,000, and $2,411,000, respectively. As partial
consideration for the services rendered by JHB, the Company provides
accommodations to JHB at its facilities and pays certain common accommodation
and administrative costs. The fair market value of these costs, is considered
by the Company in the pricing of materials to be provided by JHB. Included in
other current assets on the accompanying balance sheets at December 31, 1996, is
an advance of $19,000 made by the Company to JHB for future projects.
7. RETIREMENT PLAN:
The Company maintains a 401(k) defined contribution plan under which all
employees are eligible to participate. A participant in the plan may contribute
up to 12 percent of gross compensation, subject to certain defined limits. The
Company may contribute to the plan up to 3 percent of a participant's defined
compensation, however, this contribution may not exceed certain plan
limitations. The Company's contributions equaled $61,000, $38,000, and $27,000
for the years ended December 31, 1997, 1996, and 1995, respectively.
8. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
---------- --------
<S> <C> <C>
Computer and equipment $ 522,208 $186,452
Furniture and fixtures 231,491 123,262
Transportation equipment 336,917 214,295
Leasehold improvements 196,615 --
---------- --------
1,287,231 524,009
Less Accumulated depreciation and amortization 422,380 241,666
---------- --------
$ 864,851 $282,343
========== ========
</TABLE>
<PAGE>
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
----------- ----------
<S> <C> <C>
Accounts payable $ 841,000 $ 684,000
Accrued project costs 3,667,539 2,361,831
Accrued shareholders' bonuses 5,998,000 763,000
Accrued payroll and commissions 600,210 283,225
Other accrued expenses 771,640 45,000
----------- ----------
$11,878,389 $4,137,056
=========== ==========
</TABLE>
10. COMMITMENTS AND CONTINGENCIES:
The Company leases office space under noncancelable operating leases which
expire at various dates through December 2000. Future minimum annual lease
payments required under such leases at December 31, 1997, and for leases entered
into subsequent to year-end are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1998 $ 655,000
1999 1,070,000
2000 979,000
----------
Total $2,704,000
==========
</TABLE>
Rent expense for the years ended December 31, 1997, 1996, and 1995, was
$280,000, $182,000, and $166,000, respectively.
<PAGE>
(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 Registrant and
Clinical for all periods presented, giving effect to the merger
transaction as if it had occurred at the beginning of the earliest
period presented. The Registrant acquired MKM Marketinginstitut GmbH
("MKM"), a German company, in a pooling of interests transaction on
September 10, 1998. The accompanying consolidated financial statements
of the Registrant have also been retroactively restated to reflect the
financial position, results of operations and cash flows of MKM for all
periods presented, giving effect to the merger transaction with MKM as
if it had occurred at the beginning of the earliest period presented.
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SNYDER COMMUNICATIONS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet as of September 30, 1998 (Unaudited) and
December 31, 1997........................................................................... 1
Unaudited Condensed Consolidated Statement of Income for the nine months ended
September 30, 1998 and 1997................................................................. 2
Unaudited Condensed Consolidated Statement of Cash Flows for the nine months ended
September 30, 1998 and 1997................................................................. 3
Unaudited Condensed Consolidated Statement of Equity for the nine months ended
September 30, 1998............ ............................................................. 4
Notes to Unaudited Condensed Consolidated Financial Statements............................... 5
Report of Independent Public Accountants..................................................... 10
Consolidated Balance Sheet as of December 31, 1997 and 1996.................................. 11
Consolidated Statement of Income, including unaudited pro forma data, for the years ended
December 31, 1997, 1996 and 1995............................................................ 12
Consolidated Statement of Equity for the years ended December 31, 1997, 1996 and 1995........ 13
Consolidated Statement of Cash Flows for the years ended December 31, 1997, 1996 and 1995.... 15
Notes to Consolidated Financial Statements................................................... 17
BRANN HOLDINGS LIMITED
Report of Independent Accountants............................................................ 45
AMERICAN LIST CORPORATION
Report of Independent Certified Public Accountants........................................... 46
</TABLE>
<PAGE>
SNYDER COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------- ------------
1998 1997
-------------- ------------
(UNAUDITED)
<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.................................................. 85,272 74,964
Related party receivables............................................................ 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
Deferred 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 per share, 5,000 shares authorized, none issued and
outstanding at September 30, 1998 and December 31, 1997, respectively................. -- --
Common stock, $.001 par value per share, 120,000 shares authorized, 68,313 and
64,469 shares issued and outstanding 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.
1
<PAGE>
SNYDER COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
-------------------
ENDED SEPTEMBER 30,
-------------------
1998 1997
---------- ----------
(IN THOUSANDS EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues................................................................ $534,325 $398,966
Operating expenses:
Cost of services...................................................... 361,272 278,241
Selling, general, and administrative expenses......................... 97,005 78,462
Compensation to stockholders.......................................... -- 16,137
ESOP expense.......................................................... -- 3,412
Recapitalization costs................................................ -- 1,889
Acquisition and related costs......................................... 43,378 33,207
-------- --------
Income (loss) from operations........................................... 32,670 (12,382)
Interest income (expense), net.......................................... 1,244 (379)
-------- --------
Income (loss) from continuing operations before income taxes............ 33,914 (12,761)
Income tax provision.................................................... (18,399) (7,902)
-------- --------
Income (loss) from continuing operations................................ 15,515 (20,663)
Loss from discontinued operations....................................... -- (1,481)
-------- --------
Net income (loss)..................................................... $ 15,515 $(22,144)
======== ========
Historical net income (loss) per share:
Basic net income (loss) per share
Income (loss) from continuing operations.............................. $ 0.24 $ (0.35)
======== ========
Net income (loss)..................................................... $ 0.24 $ (0.37)
======== ========
Diluted net income (loss) per share
Income (loss) from continuing operations.............................. $ 0.23 $ (0.35)
======== ========
Net income (loss)..................................................... $ 0.23 $ (0.37)
======== ========
Pro forma net income (loss) per share (Note 6):
Basic net income (loss) per share
Income (loss) from continuing operations.............................. $ 0.21 $ (0.38)
======== ========
Net income (loss)..................................................... $ 0.21 $ (0.40)
======== ========
Diluted net income (loss) per share
Income (loss) from continuing operations.............................. $ 0.21 $ (0.38)
======== ========
Net income (loss)..................................................... $ 0.21 $ (0.40)
======== ========
</TABLE>
The accompanying notes are an integral part of this condensed consolidated
statement of income.
2
<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
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)
Purchase 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 intangible assets..................................................................... (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)
Repayment 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 borrowings (repayments) on 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 purchases of treasury stock......................................... -- 215
</TABLE>
The accompanying notes are an integral part of this condensed consolidated
statement of cash flows.
3
<PAGE>
SNYDER COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON ACCUMULATED
------ -----------
COMMON STOCK ADDITIONAL RETAINED OTHER
------ ----- ---------- -------- -----
STOCK PAR PAID-IN EARNINGS TREASURY COMPREHENSIVE COMPREHENSIVE
----- --- ------- -------- -------- ------------- -------------
SHARES VALUE CAPITAL (DEFICIT) STOCK INCOME TOTAL INCOME
---------- ------- --------- --------- -------- ------ ------- ------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997,
as previously restated for
poolings........................ 64,469,000 $64 $178,939 $(52,300) $(5,473) $ 651 $121,881 --
Distributions and dividends.... -- -- -- (4,250) -- -- (4,250) --
Net proceeds from secondary
stock offering................ 500,000 1 17,328 -- -- -- 17,329 --
Exercise of stock options
and subsidiary stock
appreciation rights........... 1,012,000 1 29,862 -- 20 -- 29,883 --
Issuance of shares for
purchase of subsidiaries...... 1,268,000 1 52,455 -- -- -- 52,456 --
Reissuance of treasury stock
by subsidiaries prior to
Merger with SNC............... 1,064,000 1 34,773 -- -- -- 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................ -- -- 87 -- (2,122) -- (2,035) --
Reclassification of redeemable
ESOP stock.................... -- -- -- 354 -- -- 354 --
Tax benefit from taxable
merger transaction............ -- -- 44,348 -- -- -- 44,348 --
Net income..................... -- -- -- 15,515 -- -- 15,515 15,515
-------
Comprehensive income........... -- -- -- -- -- -- -- $17,460
---------- ---- -------- -------- ------- ------ -------- =======
Balance, September 30, 1998...... 68,313,000 $68 $357,792 $(40,681) $(7,575) $2,596 $312,200
========== === ======== ======== ======= ====== ========
</TABLE>
The accompanying notes are an integral part of this condensed consolidated
statement of equity.
4
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(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") 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. 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. 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 for its clients. Clinical, located in the U.S., provides a
complete range of healthcare services including educational marketing and
publishing for the pharmaceutical industry. MKM markets medical products for
pharmaceutical companies in Germany utilizing field sales.
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 1998 Mergers common stock 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;
5
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 ended December 31,
1998. The unaudited condensed consolidated financial statements should be read
in conjunction with the financial statements and footnotes thereto included
elsewhere in this Form 8-K/A.
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>
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
6
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$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.
During the first nine months of 1998 SNC completed purchase business
combinations, including CLI Pharma (March 25, 1998) and HealthCare Promotions
("HCP") (February 13, 1998), for total consideration paid of approximately
$52.6 million (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 1998 purchases of HCP
and CLI Pharma 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 (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
--------------------
ENDED SEPTEMBER 30,
--------------------
1998 1997
--------- ---------
(UNAUDITED)
<S> <C> <C>
Pro Forma Revenues................................... $545,092 $444,987
Pro Forma Income (Loss) 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.
7
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 implement the Company's 1998 consolidation of certain 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 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 (LOSS) 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. 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 nondeductibility of certain of the acquisition and related costs.
The table below presents this pro forma calculation of net loss (in
thousands):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
---------------------
ENDED SEPTEMBER 30,
---------------------
1998 1997
---------- ---------
<S> <C> <C>
Pro forma net income (loss) data:
Historical income (loss) from continuing operations before income taxes...... $ 33,914 $(12,761)
Pro forma provisions for income taxes........................................ (19,954) (10,011)
-------- --------
Pro forma income (loss) from continuing operations........................... 13,960 (22,772)
-------- --------
Loss from discontinued operations, less applicable pro forma income taxes.... -- (884)
-------- --------
Pro forma net income (loss).................................................. $ 13,960 $(23,656)
======== ========
</TABLE>
8
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $2,585,000 and $587,000 as of September 30, 1998 and
December 31, 1997, respectively. The cumulative gain on marketable securities
was $11,000 and $64,000 as of September 30, 1998 and December 31, 1997,
respectively.
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 (LOSS) 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 (loss)
used to compute basic earnings per share was used to compute diluted earnings
per share.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
-------------------
ENDED SEPTEMBER 30,
-------------------
1998 1997
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Weighted average shares outstanding for the period used in
computation of basic net income (loss) per share............................... 65,538 59,627
Diluted impact of stock options................................................. 2,191 --
------ ------
Shares used in computation of diluted net income (loss) per share............... 67,729 59,627
</TABLE>
For the nine months ended September 30, 1998 and 1997, there existed
weighted average common stock equivalents of 684,553 and 1,469,849,
respectively, which are not included in the calculation of diluted net income
per share because they were antidilutive for the periods.
9
<PAGE>
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, 1996
and 1997, and the related consolidated statements of income, equity, and cash
flows for each of the years in the three year period ended December 31, 1997.
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 1995 and 1996
financial statements of American List Corporation or Brann Holdings Limited
included in the consolidated financial statements of the Company, which
statements reflect total assets constituting 17 percent of the related
consolidated total as of December 31, 1996, and revenues constituting 14 percent
and 18 percent of the related consolidated totals in 1996 and 1995,
respectively. These statements were audited by other auditors whose reports
thereon have been furnished to us, and our opinion expressed herein, insofar as
it relates to the amounts included for American List Corporation or Brann
Holdings Limited, is based solely upon the reports 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 reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based upon our audits and the reports 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, 1996 and 1997, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Washington, D.C.
November 12, 1998
10
<PAGE>
SNYDER COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEET
(NOTE 1)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and equivalents..................................................................... $ 86,354 $ 74,031
Marketable securities.................................................................... 2,349 9,715
Accounts receivable, net of allowance for doubtful accounts of $7,654 and $2,492
at December 31, 1997 and 1996, respectively............................................ 88,800 58,962
Receivables from pass through costs...................................................... 74,964 64,483
Related party receivables................................................................ 3,335 1,439
Unbilled services........................................................................ 19,462 13,739
Other current assets..................................................................... 27,911 15,810
-------- --------
Total current assets.................................................................. 303,175 238,179
-------- --------
Property and equipment, net................................................................ 43,737 34,357
Goodwill and other intangible assets, net.................................................. 68,943 23,432
Deposits and other assets.................................................................. 14,756 9,759
-------- --------
Total assets.......................................................................... $430,611 $305,727
======== ========
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Lines of credit.......................................................................... $ 27,427 $ 7,421
Current maturities of long-term debt..................................................... 2,086 6,920
Accrued payroll.......................................................................... 24,143 8,516
Accounts payable......................................................................... 99,176 81,982
Accrued expenses......................................................................... 93,412 55,967
Client advances.......................................................................... 10,696 8,152
Unearned revenue......................................................................... 28,619 21,797
-------- --------
Total current liabilities............................................................. 285,559 190,755
-------- --------
Related party borrowings................................................................... 5,210 11,697
Mandatorily redeemable preferred stock, held by related parties............................ -- 8,452
Long-term obligations under capital leases................................................. 1,751 2,413
Long-term debt, net of current maturities.................................................. 3,935 14,145
Other liabilities (including deferred income taxes of $2,803 and $285 at December 31,
1997 and 1996, respectively).............................................................. 6,997 4,532
Commitments and contingencies
Redeemable ESOP stock, 147 and 72 shares outstanding at December 31, 1997 and
1996, respectively........................................................................ 5,278 2,452
Equity:
Preferred stock, $.001 par value per share, 5,000 shares authorized, none issued and
outstanding at December 31, 1997 and 1996................................................. -- --
Common stock, $.001 par value per share, 120,000 shares authorized, 64,469 and
60,715 shares issued and outstanding at December 31, 1997 and 1996, respectively.......... 64 60
Additional paid-in capital................................................................. 178,939 58,072
Treasury stock, at cost, 1,146 and 1,059 shares at December 31, 1997 and 1996,
respectively.............................................................................. (5,473) (9,431)
Accumulated other comprehensive income..................................................... 651 269
Unearned ESOP compensation................................................................. -- (1,566)
Retained (deficit) earnings................................................................ (52,300) 23,877
-------- --------
Total equity.......................................................................... 121,881 71,281
-------- --------
Total liabilities and equity.......................................................... $430,611 $305,727
======== ========
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
11
<PAGE>
SNYDER COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF INCOME
(NOTE 1)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
------------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues.................................................................. $558,429 $447,462 $349,182
Operating expenses:
Cost of services........................................................ 394,276 309,732 221,908
Selling, general and administrative expenses............................ 113,673 91,902 73,700
Compensation to stockholders............................................ 26,525 14,344 13,439
ESOP expense............................................................ 5,411 6,553 2,172
Recapitalization costs.................................................. 1,889 -- --
Acquisition and related costs........................................... 39,430 -- --
-------- -------- --------
Income (loss) from operations............................................. (22,775) 24,931 37,963
Interest expense, including amounts to related parties of $1,663, $2,728
and $1,785 in 1997, 1996, and 1995, respectively......................... (4,290) (5,123) (3,684)
Investment income......................................................... 3,342 3,054 2,196
-------- -------- --------
Income (loss) from continuing operations before income taxes.............. (23,723) 22,862 36,475
Income tax provision...................................................... (4,396) (5,895) (9,605)
-------- -------- --------
Income (loss) from continuing operations.................................. (28,119) 16,967 26,870
Loss from discontinued operations......................................... (1,507) (1,498) --
-------- -------- --------
Income (loss) before extraordinary item................................... (29,626) 15,469 26,870
Extraordinary item, less applicable income taxes of $806.................. -- (1,215) --
-------- -------- --------
Net income (loss)....................................................... $(29,626) $ 14,254 $ 26,870
======== ======== ========
Historical net income (loss) per share:
Basic net income (loss) per share
Income (loss) from continuing operations................................ $ (.46) $ .30 $ .48
======== ======== ========
Net income (loss)....................................................... $ (.49) $ .25 $ .48
======== ======== ========
Diluted net income (loss) per share
Income (loss) from continuing operations................................ $ (.46) $ .30 $ .48
======== ======== ========
Net income (loss)....................................................... $ (.49) $ .25 $ .48
======== ======== ========
Pro forma net income (loss) per share (unaudited) (Note 3):
Basic net income (loss) per share
Income (loss) from continuing operations................................ $ (.53) $ .17 $ .42
======== ======== ========
Net income (loss)....................................................... $ (.54) $ .13 $ .42
======== ======== ========
Diluted net income (loss) per share
Income (loss) from continuing operations................................ $ (.53) $ .16 $ .42
======== ======== ========
Net income (loss)....................................................... $ (.54) $ .13 $ .42
======== ======== ========
</TABLE>
The accompanying notes are an integral part of this consolidated statement of
income.
12
<PAGE>
SNYDER COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF EQUITY
(NOTE 1)
<TABLE>
<CAPTION>
COMMON
COMMON STOCK ADDITIONAL RETAINED LIMITED
STOCK PAR PAID-IN EARNINGS PARTNERS'
SHARES VALUE CAPITAL (DEFICIT) DEFICIT
----------- ------- ----------- --------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994, as
previously restated for
poolings............................ 14,490,000 $14 $ 7,600 $ 13,527 $(1,410)
Pooling of 1998 Mergers............. 12,008,000 12 6,208 6,080 --
---------- --- -------- -------- ---------
Balance, December 31, 1994, as
restated for poolings............... 26,498,000 26 13,808 19,607 (1,410)
Pooling of Bounty Group
Holdings Ltd....................... 1,327,000 1 171 (5,008) --
Proceeds from sale of
Partnership interest, net of
income taxes of
$815,000........................... -- -- 1,221 -- 14
Distributions and dividends......... -- -- -- (7,809) (3,853)
Issuance of common stock............ 819,000 1 226 -- --
Exercise of stock options........... 480,000 -- 827 -- --
Foreign currency translation
adjustment......................... -- -- -- -- --
Unrealized gain on
marketable securities.............. -- -- -- -- --
Purchases and retirements of
treasury stock..................... (28,000) -- (517) -- --
ESOP obligation..................... -- -- -- -- --
Release of ESOP shares.............. -- -- (54) (142) --
Reclassification to redeemable
ESOP stock......................... -- -- 5 -- --
Net income.......................... -- -- -- 23,070 3,800
Comprehensive income................ -- -- -- -- --
---------- --- -------- -------- ---------
Balance, December 31, 1995........... 29,096,000 28 15,687 29,718 (1,449)
Distributions and dividends......... -- -- -- (24,988) (8,612)
Net proceeds from
stock issuances.................... 4,271,000 4 59,364 -- --
Reorganization...................... 28,959,000 29 (15,558) 7,630 7,899
Exercise of stock options........... 63,000 -- 1,005 -- --
Foreign currency translation
adjustment......................... -- -- -- -- --
Unrealized loss on marketable
securities......................... -- -- -- -- --
Purchases and retirements of
treasury stock..................... (1,674,000) (1) (2,768) (34) --
Reissuance of treasury
stock.............................. -- -- 96 -- --
Release of ESOP shares.............. -- -- 2,429 (539) --
Reclassification to redeemable
ESOP stock......................... -- -- (2,183) -- --
Net income.......................... -- -- -- 12,090 2,162
Comprehensive income................ -- -- -- -- --
---------- --- -------- -------- ---------
Balance, December 31, 1996........... 60,715,000 60 58,072 23,877 --
Distributions and dividends......... -- -- -- (7,927) --
Net proceeds from secondary
stock offering..................... 1,850,000 2 42,711 -- --
Exercise of stock options........... 1,789,000 2 39,179 -- --
Issuance of shares for
purchase of subsidiaries........... 644,000 1 13,855 -- --
Foreign currency translation
adjustment......................... -- -- -- -- --
Unrealized gain on
marketable securities.............. -- -- -- -- --
Purchases and retirements of
treasury stock..................... (634,000) (1) (4,223) -- --
Reissuance of treasury
stock.............................. 105,000 -- 3,949 -- --
Release of ESOP shares.............. -- -- 1,971 -- --
Reclassification to redeemable
ESOP stock......................... -- -- (2,826) -- --
Effect of recapitalization of
acquired subsidiary................ -- -- 20,827 (37,119) --
Capital contribution
Subsidiary......................... -- -- 5,424 -- --
Net loss............................ -- -- -- (29,626) --
Comprehensive income
(loss)............................. -- -- -- -- --
Impact from differing fiscal
year-ends (Note 1)................. -- -- -- (1,505) --
---------- --- -------- -------- ---------
Balance, December 31, 1997........... 64,469,000 $64 $178,939 $(52,300) $ --
========== === ======== ======== =========
<CAPTION>
ACCUMULATED
UNEARNED OTHER
ESOP TREASURY COMPREHENSIVE COMPREHENSIVE
COMPENSATION STOCK INCOME TOTAL INCOME
------------ -------- ------------- -------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994, as
previously restated for
poolings............................ $ -- $ (420) $ 64 $ 19,375 $ --
Pooling of 1998 Mergers............. (5,249) (1,920) (20) 5,111 --
------------ ------- ----- -------- --------
Balance, December 31, 1994, as
restated for poolings............... (5,249) (2,340) 44 24,486 --
Pooling of Bounty Group
Holdings Ltd....................... -- -- -- (4,836) --
Proceeds from sale of
Partnership interest, net of
income taxes of
$815,000........................... -- -- -- 1,235 --
Distributions and dividends......... -- -- -- (11,662) --
Issuance of common stock............ -- -- -- 227 --
Exercise of stock options........... -- -- -- 827 --
Foreign currency translation
adjustment......................... -- -- 101 101 101
Unrealized gain on
marketable securities.............. -- -- 365 365 365
Purchases and retirements of
treasury stock..................... -- (1,133) -- (1,650) --
ESOP obligation..................... (1,729) -- -- (1,729) --
Release of ESOP shares.............. 2,654 -- -- 2,458 --
Reclassification to redeemable
ESOP stock......................... -- -- -- 5 --
Net income.......................... -- -- -- 26,870 26,870
--------
Comprehensive income................ -- -- -- -- $ 27,336
------------ ------- ----- -------- ========
Balance, December 31, 1995........... (4,324) (3,473) 510 36,697 --
Distributions and dividends......... -- -- -- (33,600) --
Net proceeds from
stock issuances.................... -- -- -- 59,368 --
Reorganization...................... -- -- -- -- --
Exercise of stock options........... -- -- -- 1,005 --
Foreign currency translation
adjustment......................... -- -- (130) (130) (130)
Unrealized loss on marketable
securities......................... -- -- (111) (111) (111)
Purchases and retirements of
treasury stock..................... -- (6,433) -- (9,236) --
Reissuance of treasury
stock.............................. -- 475 -- 571 --
Release of ESOP shares.............. 2,758 -- -- 4,648 --
Reclassification to redeemable
ESOP stock......................... -- -- -- (2,183) --
Net income.......................... -- -- -- 14,252 14,252
--------
Comprehensive income................ -- -- -- -- $ 14,011
------------ ------- ----- -------- ========
Balance, December 31, 1996........... (1,566) (9,431) 269 71,281
Distributions and dividends......... -- -- -- (7,927) --
Net proceeds from secondary
stock offering..................... -- -- -- 42,713 --
Exercise of stock options........... -- -- -- 39,181 --
Issuance of shares for
purchase of subsidiaries........... -- -- -- 13,856 --
Foreign currency translation
adjustment......................... -- -- 360 360 360
Unrealized gain on
marketable securities.............. -- -- 22 22 22
Purchases and retirements of
treasury stock..................... -- 3,010 -- (1,214) --
Reissuance of treasury
stock.............................. -- 948 -- 4,897 --
Release of ESOP shares.............. 1,566 -- -- 3,537 --
Reclassification to redeemable
ESOP stock......................... -- -- -- (2,826) --
Effect of recapitalization of
acquired subsidiary................ -- -- -- (16,292)
Capital contribution
Subsidiary......................... -- -- -- 5,424
Net loss............................ -- -- -- (29,626) (29,626)
--------
Comprehensive income
(loss)............................. -- -- -- -- $(29,244)
========
Impact from differing fiscal
year-ends (Note 1)................. -- -- -- (1,505)
------------ ------- ----- --------
Balance, December 31, 1997........... $ -- $(5,473) $ 651 $121,881
============ ======= ===== ========
</TABLE>
The accompanying notes are an integral part of this consolidated
statement of equity.
13
<PAGE>
SNYDER COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(NOTE 1)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................................................ $(29,626) $ 14,254 $ 26,870
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization .......................................................... 15,052 13,189 11,543
Loss on repayment of subordinated debt ................................................. -- 2,021 --
Noncash charge from accelerated vesting of Brann Holdings options ...................... 9,097 -- --
Noncash ESOP expense ................................................................... 4,851 5,282 --
Loss on disposal of assets ............................................................. 3,357 820 139
Net realized (gain) loss on sale of marketable securities................................ 36 2 (25)
Other noncash amounts .................................................................. (10,474) (1,116) (64)
Changes in assets and liabilities:
Accounts receivable, net ............................................................... (41,627) (36,126) (5,194)
Related party receivables................................................................ 308 (494) (30)
Unbilled services ...................................................................... (5,623) (4,887) 246
Deposits and other assets .............................................................. 141 (428) (4,773)
Other current assets ................................................................... 3,119 (1,510) (3,254)
Accrued payroll, accounts payable and accrued expenses ................................. 62,695 40,844 10,945
Unearned revenue ....................................................................... 7,424 4,068 1,972
Less impact from differing year ends ................................................... (2,761) -- --
-------- ---------- --------
Net cash provided by operating activities ............................................. 15,969 35,919 38,375
-------- ---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of subsidiaries ................................................................. (22,066) -- (5,659)
Purchase of property and equipment ....................................................... (19,278) (12,402) (9,748)
Proceeds from sale of equipment .......................................................... 219 245 168
Net (purchases) sales of marketable securities ........................................... 7,808 1,906 (2,613)
Purchase of intangible assets ............................................................ (5,088) (2,845) (3,395)
Note and net advances to stockholders .................................................... 1,467 30 (2,765)
Less impact from differing year ends ..................................................... (446) -- --
-------- ---------- --------
Net cash used in investing activities ................................................. (37,384) (13,066) (24,012)
-------- ---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term notes payable to limited partners and others ...................... (31,090) (3,483) (4,984)
Proceeds from issuance of subordinated debentures due to related parties ................. -- 294 9,531
Repayment of subordinated debentures due to related parties .............................. -- (6,900) --
Net proceeds from sale of partnership interest ........................................... -- -- 1,235
Debt issuance costs ...................................................................... -- (25) (604)
Distributions and dividends .............................................................. (9,547) (30,325) (10,609)
Acquisition of treasury stock ............................................................ (1,214) (6,641) (1,435)
Net increase in short term borrowings .................................................... -- 500 2,500
Proceeds from long-term debt ............................................................. 7,101 1,592 915
Proceeds from mandatorily redeemable preferred stock ..................................... -- 3,238 --
Redemption of mandatorily redeemable preferred stock ..................................... (8,330) -- --
Net borrowings (repayments) on line of credit ............................................ 17,864 (6,669) 6,299
Payments on capital lease obligations .................................................... (2,052) (1,079) (1,123)
Proceeds from exercise of options ........................................................ 25,128 425 --
Proceeds from stock offerings ............................................................ 43,250 60,233 166
Issuance of stock in connection with recapitalization of acquired company.................. (16,670) -- --
Loan provided by Investor.................................................................. 10,000 -- --
Payment of Investor loan................................................................... (10,000) -- --
Investor capital contribution.............................................................. 5,424 -- --
Impact from effect of differing year ends ................................................ 3,704 -- --
-------- ---------- --------
Net cash provided by financing activities ............................................. 33,568 11,160 1,891
-------- ---------- --------
Effect of exchange rate changes .......................................................... 170 1,180 (295)
-------- ---------- --------
Net increase in cash and equivalents ..................................................... 12,323 35,193 15,959
Cash and equivalents, beginning of period ................................................ 74,031 38,838 22,879
-------- ---------- --------
Cash and equivalents, end of period ...................................................... $ 86,354 $ 74,031 $ 38,838
======== ========== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest including dividends on mandatorily redeemable preferred stock ..... $ 2,089 $ 3,872 $ 2,485
Cash paid for income taxes ............................................................... 7,451 8,225 7,573
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Equipment purchased under capital leases ................................................. 717 3,558 526
Distribution of note receivable from stockholder to SMS Stockholders ..................... -- 2,725 437
Issuance of shares of common stock for purchase of subsidiaries .......................... 13,320 -- 215
Issuance of note for purchase of treasury stock .......................................... 215 2,595 --
Redemption of common stock in exchange for note payable.................................... 457 -- --
</TABLE>
The accompanying notes are an integral part of this consolidated statement of
cash flows.
14
<PAGE>
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. 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. 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 financial statements as of and for the year ended
December 31, 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 years ended
December 31, 1997 and 1996, include the consolidated accounts of Snyder
Communications, Inc., SMS and the Partnership (the consolidated entity will be
referred to herein as "SNC" or "Snyder Communications") after elimination of all
significant intercompany transactions. Certain amounts previously presented have
been reclassified to conform to the December 31, 1997 presentation. Throughout
1997 and the first nine months of 1998, SNC acquired several companies in
transactions that were accounted for as poolings of interests for financial
reporting purposes. The accompanying consolidated financial statements have been
retroactively restated to reflect the poolings of interests transactions. During
1997, the Company (as defined herein) also made several acquisitions that have
been accounted for as purchase business combinations.
Snyder Communications provides fully integrated outsourced marketing
solutions. The Company identifies high value market 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
educational 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;
15
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and direct mail and fulfillment capabilities. The Company's operations are
conducted throughout the United States, the United Kingdom ("U.K."), France,
Germany, Ireland, Holland and Hungary.
The Company characterizes its service offerings into three types: healthcare
services, direct services and creative services. The Company provides complete
marketing solutions for its clients by integrating these three types of services
into sales and marketing programs.
The healthcare services offered by the Company are designed to establish and
monitor marketing plans as well as to provide face-to-face interaction with
physicians and other healthcare providers. Healthcare services consist primarily
of pharmaceutical detailing and sales force training, but also include
educational communications as well as establishing marketing plans, targeting
specific markets and evaluating sales performance. 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, Health Products Research, Inc. ("HPR"), Publimed Promotions
S.A. ("Publimed"), Clinical Communications Group, Inc. ("Clinical") and MKM
Marketinginstitut GmbH ("MKM"). During 1997, the Company also acquired
Halliday Jones Sales Ltd. ("HJ") in a purchase transaction. MMD, RDL, HJ,
PharmFlex, Publimed and MKM all market medical products for pharmaceutical
companies utilizing field sales. MMD and PharmFlex operate throughout the U.S.
RDL operates primarily in the U.K., but also in Hungary; HJ in the U.K., but
also Ireland; Publimed in France; and MKM in Germany. GEM and Clinical 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 to leading pharmaceutical and medical device manufacturers.
HPR's services include sales and marketing resource allocation, sales force
planning and the integration and evaluation of sales and marketing promotions.
The direct services offered by the Company are marketing and sales programs
designed to directly reach certain, sometimes targeted, consumer groups. The
programs offered within direct services focus on stimulating and creating brand
awareness as well as acquiring and retaining customers. The specific services
offered within direct services include strategic planning and design,
WallBoard(R) and other information displays, proprietary sampling programs and
publications, face-to-face field sales, teleservices, database mailings,
interactive services, and return-on-investment evaluation. 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's operations are conducted
throughout the U.K. and consist primarily of 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 direct marketing and selling. Blau's
operations are conducted throughout the U.S. and consist primarily of strategic
consulting and design; program creation and implementation; consumer database
management; response tracking and analysis; and production management. 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 provides targeted product sampling and
proprietary publications to expectant mothers, new mothers and parents of
toddlers in the U.K. and Ireland. SCA distributes product samples and
proprietary publications on behalf of consumer packaged goods manufacturers in
the U.S. through primary and secondary schools, daycare centers, colleges and
immigrant organizations. American List develops, maintains and markets
databases of high school, college and pre-school through junior high school
students in the U.S. Prior to its merger with the Company,
16
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
American List utilized a February 28 fiscal year end. Concurrent with its merger
with the Company, American List changed its fiscal year end to December 31.
The creative services offered by the Company were established with the
acquisition of Arnold Communications, Inc. ("Arnold") and are designed to create
the right kind of advertising for clients. The specific services offered within
creative services include advertising, creative design, public relations, media
placement and interactive services. During the first nine months of 1998, the
Company issued 2,779,171 shares in a pooling of interests transaction with
Arnold.
The companies with whom Snyder 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 accompanying 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 combined entity will be
referred to herein as the "Company"). The accompanying consolidated balance
sheet as of December 31, 1996 reflects the combination of the accounts of
American List as of February 28, 1997, while the related consolidated statements
of income, equity and cash flows for each of the two years in the period ended
December 31, 1996 reflect the combination of the American List statements of
income, equity and cash flows for the two years in the period ended February 28,
1997. The consolidated balance sheets for all periods presented give effect to
the conversion of the shares of the Pooled Entities' common stock into
27,096,611 shares of SNC common stock. The accompanying financial statements
include the financial information of SNC's combinations with Arnold
Communications, Inc., Health Products Research, Inc., Blau Marketing
Technologies, Inc., Publimed Promotions, S.A., Clinical Communications Group,
Inc., and MKM Marketinginstitut GmbH (the "1998 Mergers") which are accounted
for as poolings of interests.
The following details revenues and net income (loss) for each of the years
ended December 31, 1997, 1996, and 1995 of SNC and the Pooled Entities through
the dates of their respective Acquisitions.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
SNC ................................ $220,907 $ 82,840 $ 42,892
Pooled Entities .................... 337,522 364,622 306,290
-------- -------- --------
$558,429 $447,462 $349,182
======== ======== ========
Net (Loss) Income:
SNC ................................ $(14,435) $ 6,977 $ 3,433
Pooled Entities .................... (15,191) 7,277 23,437
-------- -------- --------
$(29,626) $ 14,254 $ 26,870
======== ======== ========
</TABLE>
During the year ended December 31, 1997, SNC recorded $74.8 million in non-
recurring acquisition and related costs, ESOP expense, recapitalization costs,
compensation to stockholders and discontinued operations in conjunction with the
consummation of its mergers with the Pooled Entities (see Note 11). Excluding
the non-recurring acquisition and related costs, ESOP expense, recapitalization
costs, compensation to stockholders, and discontinued operations SNC would have
recorded $28.1 million in net income for the year ended December 31, 1997.
17
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's 1997 purchase business combination transactions resulted in
the recognition of additional amounts of goodwill and other intangible assets of
approximately $42.4 million.
The total consideration paid in connection with the acquisition of HJ,
including the repayment of assumed debt immediately following the closing, was
$19.4 million, consisting of 425,478 shares of SNC common stock and $7.4 million
in cash. The following table presents pro forma financial information as if the
Company's 1997 purchase business combination of HJ had been consummated at the
beginning of each of the periods presented and all of the Company's operations
had been taxed as a C corporation (in thousands).
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1997 1996
------------ -----------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Pro Forma Revenues. ................................... $568,951 $462,980
Pro Forma (Loss) Income from Continuing Operations .... (31,818) 9,183
Pro Forma Net (Loss) Income ........................... (33,325) 6,469
Pro Forma Basic Net (Loss) Income Per Share ........... (0.55) 0.11
Pro Forma Diluted Net (Loss) Income Per Share ......... (0.55) 0.11
</TABLE>
The pro forma loss from continuing operations and the pro forma net loss for
the year ended December 31, 1997, include $73.3 million in non-recurring
acquisition and related costs, ESOP expense, recapitalization costs and
compensation to stockholders that were recorded in conjunction with the
consummation of the Company's mergers with the Pooled Entities. Excluding the
non-recurring acquisition and related costs, ESOP expense, recapitalization
costs and compensation to stockholders, the Company would have recorded pro
forma income from continuing operations and pro forma net income of
$28.2 million and $26.7 million, respectively.
The Company's other purchase business combinations are immaterial to the
consolidated financial statements.
There are important risks associated with the Company's business and
financial results. These risks include: (i) the Company's reliance on
significant clients, one of which constituted 11 percent of its 1997 revenues
(see Note 2); (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 reliance on technology and the risk of business
interruption resulting from a temporary or permanent loss of such technology;
(viii) the entrance of new competitors with greater resources than the Company;
(ix) the Company's ability to recruit and retain qualified personnel; and
(x) the dependence of the Company's success on its executive officers and other
key employees, in particular, its Chairman of the Board of Directors and Chief
Executive Officer.
2. SIGNIFICANT CLIENTS:
The Company had one client which represented 11 percent, 11 percent and
7 percent of the Company's total revenues for the years ended December 31, 1997,
1996 and 1995, respectively. The Company's principal contract with this client
extended through December 1997. In December 1997 the Company elected not to
renew its contract with this client, and instead has entered into a contract
with a new client to provide services similar to those
18
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
previously provided to this customer. There can be no assurance, however, that
the contract with the new client will generate revenues or profitability which
are greater than or equal to those generated by this one client.
3. 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.
Marketable Securities
The Company's investments are classified into two categories. Those
securities classified as "available-for-sale" are reported at market value. Debt
securities consisting of state municipal bonds, certificates of deposit, and
U.S. Treasury bills are classified as "held-to-maturity" and are reported at
amortized cost. Cost is determined using the specific identification method.
Unrealized gains and losses from securities "available-for-sale" are reported as
a separate component of equity.
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.
Debt Issuance Costs
Debt issuance costs are charged to expense as additional interest expense
over the life of the related debt using the effective 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 years and buildings over fifty
years. Leasehold improvements are amortized on a straight-line basis over the
shorter of the term of the lease or the estimated useful lives 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
HEALTHCARE SERVICES--On pharmaceutical detailing contracts, the Company
recognizes revenue and associated costs when services have been performed by
account executives. On educational marketing programs the Company recognizes
revenues and associated costs as services are performed on behalf of clients,
and for certain contracts, the percentage of completion method is used.
Unbilled services represent revenues earned on contracts but billed in a
subsequent accounting period.
19
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DIRECT SERVICES--The Company performs marketing and sales communications
services on behalf of its clients, including field sales, teleservices, database
management, creative design, direct response marketing and print production.
Revenues are recognized as services are rendered in accordance with the terms of
the contracts. Certain of these contract 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 contracts include postage and other pass-through costs
incurred by the Company on behalf of its clients. For these contracts, the
Company records as revenue the net billings to its clients. Certain other
contracts of the Company have provided 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. Revenues from
WallBoard(R) information displays and sampling programs are recognized over the
contract term as program services are rendered. Unearned revenue is recorded for
billings prior to the earning of such revenue. Revenues from the sale of lists
are recognized upon the shipment to customers of lists on computerized labels,
magnetic tape or computer diskettes for a one-time usage. Additional billings
are made by the Company for additional usage by the customers.
CREATIVE SERVICES--The Company provides advertising, creative design, public
relations, media placement, and interactive services to its clients. Revenue is
recognized as services are rendered. Certain of the contracts include postage
and other pass-through costs incurred by the Company on behalf of its clients.
For these contracts, the Company records as revenue the net billings to its
clients.
Goodwill and Other Intangible Assets
Goodwill equal to the fair value of consideration paid in excess of the fair
value of net assets purchased has been recorded in conjunction with several of
the Company's purchase business combinations and is being amortized on a
straight-line basis over periods of fifteen to thirty years.
The cost of customer lists which were acquired in conjunction with certain
of the Company's purchase business combinations are amortized on a straight line
basis over seven years. The covenant not to compete and the marketing rights are
amortized over the term of the related agreements, which are four and ten to
fifteen years, respectively.
Costs of purchased lists are amortized on a straight-line basis over their
estimated useful lives, generally one to five years. The Company determines the
useful lives of its lists based upon the estimated period of time such lists are
marketable. The Company periodically reviews the marketability of its lists and,
accordingly, their respective estimated useful lives.
The costs of licenses to use, reproduce, distribute lists, and market
pharmaceutical products are amortized on a straight-line basis over the term of
the related license agreement.
20
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
When conditions or events occur which management believes might indicate
that the goodwill or any other intangible asset is impaired, an analysis of
estimated future undiscounted cash flows is undertaken to determine if any write
down in the carrying value of the asset is required.
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 for taxes of SMS is reflected in the accompanying consolidated
statement of income for the year 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 No. 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, SNC is treated as a C corporation for
federal and state income tax purposes. At the date of the Reorganization, SNC
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 SNC 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 their combination with SNC, certain of the U.S. based Pooled
Entities were taxed as S corporations. Accordingly, no provision for federal or,
in the case of all the U.S. based acquirees except one which was incorporated in
Massachusetts, state income taxes has been made for these entities through the
date of their mergers with SNC in the accompanying consolidated financial
statements.
The Pooled Entities with operations in the U.K., France and Germany pay
taxes in their respective countries, on a corporate level similar to a C
corporation in the United States.
Pro Forma Income Data (Unaudited)
The unaudited pro forma net income (loss) and 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 shares used in
computing pro forma net income (loss) per share assume that the Reorganization
and the Acquisitions had occurred at the beginning of each of the periods
presented, reflect the issuance of additional shares as a result of issuances of
stock, the exercise of stock options, and the repurchase of outstanding shares
by certain subsidiaries of the Company prior to their mergers with SNC. The pro
forma income tax rate on the Company's recurring operations reflects the
combined federal and state income taxes of approximately 43.36, 44.94, and 35.83
percent, for the years ended December 31, 1997, 1996 and 1995, 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 nondeductibility of
certain of the acquisition and related costs. The Company's December 31, 1997
tax provision exceeds its statutory rate due to the recognition of certain
acquisition and related costs which are not deductible for income tax purposes.
21
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The table below presents this pro forma calculation of net income (loss) (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Pro forma net income (loss) data (unaudited):
Historical income (loss) from continuing operations before
income taxes ................................................ $(23,723) $ 22,862 $ 36,475
Pro forma provision for income taxes .......................... (8,111) (13,513) (13,068)
-------- -------- --------
Pro forma income (loss) from continuing operations ............ (31,834) 9,349 23,407
Discontinued operations, less applicable pro forma income
taxes of $607 and $603 for 1997 and 1996, respectively ...... (900) (895) --
Extraordinary item, less applicable income taxes of $806 ...... -- (1,215) --
-------- -------- --------
Pro forma net income (loss) ................................... $(32,734) $ 7,239 $ 23,407
======== ======== ========
</TABLE>
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 No. 123"), is included in
Note 14.
Foreign Currency Translations
Assets and liabilities of the Company's international subsidiaries are
translated using the exchange rate in effect at the balance sheet date. Revenue
and expense accounts for these subsidiaries 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.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosures of the fair value of certain financial instruments. For
purposes of this disclosure, the fair value of a financial instrument is the
amount at which the instrument could be exchanged in a current transaction
between willing parties. Cash and equivalents, accounts receivable, unbilled
services, and accounts payable approximate fair value because of the
22
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
relatively short maturity of these instruments. As a result of the related party
nature of the majority of the Company's outstanding December 31, 1997 and 1996
borrowings, and the fact that these borrowings were secured by the previously
independent Pooled Entities who had capital structures which are different than
the Company's, it is impracticable to estimate the fair value of the debt
outstanding at these dates.
Concentration of Credit Risk
Concentration of credit risk is limited to cash and equivalents, marketable
securities, accounts receivable, and unbilled services and is subject to the
financial conditions of a major client as described in Note 2. The Company
places its investments in highly rated financial institutions, U.S. Treasury
bills, investment grade short-term debt instruments and state and local
municipalities, while limiting the amount of credit exposure to any one entity.
The Company's receivables are concentrated with customers in the
telecommunications, pharmaceutical and consumer packaged goods industries. The
Company does not require collateral or other security to support clients'
receivables.
New Accounting Pronouncements
During 1997, the Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" ("SFAS No. 128") and has applied its provisions to
all years presented in these financial statements. SFAS No. 128 requires primary
earnings per share ("EPS") to be replaced with basic EPS. Basic 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 also reported. Diluted EPS gives effect to common stock
equivalents and other potentially dilutive securities outstanding during the
period.
During June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. The Company
adopted SFAS No. 130 during the first quarter of 1998. Included within
accumulated other comprehensive income are the cumulative amounts for foreign
currency translation adjustments and unrealized gains and losses on marketable
securities. The accompanying consolidated financial statements have been
restated to conform to the SFAS No. 130 requirements. The cumulative foreign
currency translation adjustment was $587,000 and $227,000 as of December 31,
1997 and 1996, respectively. The cumulative gain on marketable securities was
$64,000 and $42,000 as of December 31, 1997 and 1996, respectively.
23
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. MARKETABLE SECURITIES
The amortized cost, unrealized gains and losses, and market values of the
Company's held-to-maturity and available-for-sale securities are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
--------- ---------- ------------ --------
COST GAINS LOSSES VALUE
--------- ---------- ------------ --------
<S> <C> <C> <C> <C>
December 31, 1997
Held to maturity, maturing in less than one year:
State and municipal bonds ........................ $ 665 $ -- $ -- $ 665
------ ---- ---- ------
$ 665 $ -- $ -- $ 665
====== ==== ==== ======
Available for sale:
Equity securities ................................ $ 915 $ 60 $ -- $ 975
Government income securities ..................... 483 4 -- 487
Municipal tax-exempt bonds......................... 223 -- (1) 222
------ ---- ---- ------
$1,621 $ 64 $ (1) $1,684
====== ==== ==== ======
December 31, 1996
Held to maturity, maturing in less than one year:
State and municipal bonds ........................ $5,571 $ -- $ -- $5,571
Certificates of deposit............................ 190 -- -- 190
------ ---- ---- ------
$5,761 -- -- $5,761
====== ==== ==== ======
Available for sale:
Equity securities ................................ $1,018 $ 42 $(12) $1,048
Government income securities ..................... 457 -- (2) 455
Municipal tax-exempt bonds ....................... 2,424 16 (1) 2,439
Mutual funds ..................................... 13 -- (1) 12
------ ---- ---- ------
$3,912 $ 58 $(16) $3,954
====== ==== ==== ======
</TABLE>
As a result of changes in market value of the available-for-sale security
portfolio, a cumulative valuation adjustment of $64, $42 and $153 is recorded as
a separate component of equity at December 31, 1997, 1996 and 1995,
respectively.
5. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Buildings and leasehold improvements .............. $ 26,692 $ 22,662
Computers and equipment ........................... 41,383 32,745
Furniture and fixtures ............................ 12,982 10,629
-------- --------
81,057 66,036
Accumulated depreciation .......................... (37,320) (31,679)
-------- --------
$ 43,737 $ 34,357
======== ========
</TABLE>
24
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill and other intangible assets consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Goodwill ....................................... $ 60,080 $ 17,806
Unamortized costs of lists ..................... 4,459 5,121
License agreements ............................. 7,669 4,451
Customer lists and covenant not to compete ..... 12,669 9,294
-------- --------
84,877 36,672
Accumulated amortization ....................... (15,934) (13,240)
-------- --------
$ 68,943 $ 23,432
======== ========
</TABLE>
Goodwill arose from management buy-outs and purchase acquisitions at certain
of the acquirees prior to their respective mergers with SNC and the Company's
1997 purchase business combinations.
Effective July 1, 1994, one acquiree entered into an exclusive licensing
agreement, whereby it obtained a ten-year license to use, reproduce and
distribute a defined segment of the licensor's lists and to use its sources and
customer list to compile and market its own lists. As consideration for the
granting of the license, it is obligated to pay a total of $4.2 million. The
license fee is payable in three annual installments of $0.6 million which began
July 1994; three annual installments of $0.5 million which began July 1997;
three annual installments of $0.3 million beginning July 2000; and a final
installment of $0.1 million in July 2003 (see Note 7). The Company recorded the
cost and related obligation for the license, net of imputed interest at 7.25%,
which approximated $3.3 million. The net cost of the license was amortized on a
straight-line basis over the ten-year term of the license agreement. In
conjunction with SNC's acquisitions in July 1997 and the Company's current
competitive strategy, management determined that the intangible asset associated
with the license fee had been impaired and accordingly, an impairment loss was
recorded in the Company's third quarter 1997 income statement as an acquisition
related cost.
Amortization expense of goodwill and other intangible assets totaled
$4.2 million, $4.3 million and $4.4 million in 1997, 1996, and 1995,
respectively.
7. DEBT:
As of October 31, 1998, the Company has $13.8 million of outstanding debt
and financing obligations, including capital leases.
Long-Term Borrowings
In the U.K., the Company had a loan payable to a commercial bank in the
amount of $7.2 million as of December 31, 1996. The loan had an interest rate of
7.6275 percent per annum until January 28, 1999, at which date the interest rate
was to change to the bank's base rate plus 1.75 percent. The loan was payable in
annual installments of $0.9 million, until March 1, 2004, when the entire unpaid
amount was due in full. The loan was secured by certain of the Company's assets
in the U.K. and the book value of the loan approximated its fair value as of
December 31, 1996. In April 1997, the full amount of the loan outstanding was
repaid. At December 31, 1997, the Company has a loan payable to a commercial
bank in the U.K. of $0.4 million. The loan has an interest rate of 2.25 percent
above the bank's base rate, which equated to an interest rate of 7.25 percent at
December 31, 1997. The loan is due in full in December 2006.
25
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company had a loan payable to a commercial bank in the U.K. in the
amount of $4.1 million as of December 31, 1996. The loan had an interest rate of
2.75 percent above the bank's base rate, which equated to an interest rate of
8.75 percent at December 31, 1996. The loan was secured by certain of the
Company's assets in the U.K. In September 1997, the full amount of the loan
outstanding was repaid.
The Company is obligated under a license agreement to make future payments
(see Note 6). This net obligation is $1.9 million and $1.6 million at December
31, 1996 and 1997, respectively. Of these amounts, $0.4 million and $0.4 million
have been classified as current at December 31, 1996 and 1997, respectively, and
the remaining balance has been classified as a long-term borrowing in the
accompanying consolidated balance sheet.
The Company had a loan payable to a commercial bank in the U.K. in the
amount of $0.4 million as of December 31, 1996. The loan had an interest rate of
1.25 percent above the bank's base rate. Of this amount, $0.04 million was
classified as current as of December 31, 1996. On December 31, 1997, the full
amount of the loan outstanding was repaid.
The Company had a loan payable to a commercial bank in the U.S. in the
amount of $4.4 million as of December 31, 1996. The loan had an interest rate of
the bank's prime rate plus .25% (8.25% as of December 31, 1996). During 1997,
the Company refinanced this loan payable with a financial institution. The
balance of this loan payable at December 31, 1997 was $2.1 million. The loan had
an interest rate of the 30 day commercial paper rate plus 2.7%, or 8.55% as of
December 31, 1997. Of these amounts, $2.3 million and $0.6 million are
classified as current at December 31, 1996 and 1997, respectively and the
remaining balance is classified as a long-term borrowing in the accompanying
consolidated balance sheet.
The Company had promissory notes in the amount of $1.7 million and $1.2
million as of December 31, 1996 and 1997, respectively which were issued in
conjunction with certain 1996 and 1997 purchase business combinations. The notes
were recorded at their present value, with effective rates ranging from 6% to
9%. Of this amount, $0.4 million and $0.3 million is classified as current as of
December 31, 1996 and 1997, respectively with the remaining balance classified
as a long-term borrowing in the accompanying consolidated balance sheet.
The Company had a loan payable to a commercial bank in Germany in the amount
of $0.6 million as of December 31, 1996. The loan had an interest rate of 6.9%
at December 31, 1996. In July 1997, the full amount of the loan outstanding was
repaid.
Related Party Borrowings--Subordinated Debentures
On October 28, 1996 SNC 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 $7.0 million payment consisted of the face amount of the
Debentures, a prepayment penalty and accrued interest. A non-recurring charge of
$1.2 million ($0.02 per diluted share), net of a $0.8 million tax benefit, was
recorded at December 31, 1996 as an extraordinary loss related to this early
debt extinguishment. The extraordinary item consists of prepayment penalties and
the write-off of unamortized discount and debt issuance costs.
26
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Related Party Borrowings--Stockholder Loans
A subsidiary of the Company borrowed approximately $10.4 million from
certain of its stockholders to fund, in part, its August 1995 management buy-
out. The borrowings had a blended stated interest rate of 8.31 percent with
maturities beginning in 1996 and extending through 2008. At December 31, 1996,
$10.5 million remained outstanding under these borrowings. In July 1997, the
full amount outstanding under these borrowings was repaid.
During 1994, a subsidiary of the Company borrowed approximately $0.4 million
from its principal shareholder. The borrowings had interest rates equivalent to
the U.K. bank rate applied quarterly with a maturity on December 31, 2004. At
December 31, 1996, $0.1 million remained outstanding under these borrowings. In
October 1997, the full amount outstanding under these borrowings was repaid.
In conjunction with the repurchase during 1995 and 1996 of common stock from
certain former employees by a subsidiary of the Company prior to its merger with
SNC, the subsidiary incurred borrowings at interest rates ranging from 5.73 to
5.91 percent with maturities from 1997 to 1999. At December 31, 1997, the
Company had $1.6 million outstanding under these borrowings. Of this amount,
$0.5 million is classified as current as of December 31, 1997.
Related Party Borrowings--Notes Payable
Concurrent with the formation of the Partnership, the Original Limited
Partner loaned the Partnership $0.4 million 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 $3.3 million. This
note bore interest of 8% per annum. This note was paid in full in May 1995 with
a portion of the proceeds from the Debentures.
In conjunction with an October 1997 purchase business combination, the
Company issued a $3.7 million note payable to the former owner of the acquired
company. Interest is payable on the note quarterly at the rate of 7% per annum.
The note may be repaid at any time after the third anniversary of the issuance
and matures on September 30, 2002.
In accordance with the provisions of its formation agreement and prior to
its merger with SNC, a subsidiary issued promissory notes to its founder and an
investor in the principal amounts of $6.7 million and $10.0 million,
respectively. The notes were unsecured, with interest at the prime rate plus 2.0
percent and were payable no later than August 1, 1998. The notes were repaid on
November 25, 1997, together with accrued interest of $0.5 million. In addition,
the subsidiary issued a promissory note payable to the founder of the subsidiary
in the amount of $0.4 million. The note may be prepaid at any time prior to
maturity, January 1, 2004. Interest is payable annually at 6 percent, commencing
January 1, 1999.
27
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum payments as of December 31, 1997 on all long-term borrowings,
excluding capital leases, are as follows (in thousands):
<TABLE>
<S> <C>
1998........................................... $ 1,995
1999........................................... 2,035
2000........................................... 1,209
2001........................................... 1,224
2002........................................... 4,176
Thereafter..................................... 592
-------
Total.......................................... 11,231
Less--current portion.......................... 2,086
-------
Total....................................... $ 9,145
=======
</TABLE>
Lines of Credit
SNC 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%. The
weighted average interest for the period ended December 31, 1996 was 6.71%.
There were no amounts outstanding on this line at December 31, 1997.
One of the Company's U.S. subsidiaries 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% as of December 31, 1996). The outstanding
balance on this line was $0.5 million at December 31, 1996 and the effective
interest rate was 8.0% for the year ended December 31, 1996. Borrowings pursuant
to the line of credit are collateralized by substantially all of the assets of
the subsidiary. In February 1997, the outstanding balance of $0.5 million was
repaid, and no amounts were outstanding on this line at December 31, 1997.
Two of the Company's U.K. subsidiaries maintain lines of credit for general
business expenditures. These lines bear interest at the commercial bank's base
rate plus 1.25 to 2.75 percent. There was $1.0 million outstanding under these
lines of credit at December 31, 1996, and no amounts were outstanding on these
lines at December 31, 1997.
Another U.S. subsidiary maintained a $4.0 million line of credit that was
due on demand. The line of credit bore interest at the bank's prime rate plus
.5%. The subsidiary has $3.0 million outstanding on this line of credit as of
December 31, 1996. During 1997, the subsidiary obtained a new line of credit
with a financial institution. The line of credit bears interest at the 30 day
commercial paper rate plus 2.7%. There were no borrowings outstanding as of
December 31, 1997. Borrowings pursuant to the line of credit are collateralized
by substantially all of its assets. The weighted average interest rates of the
borrowings were 8.75% and 8.55% as of December 31, 1996 and 1997.
One of the Company's French subsidiaries maintains various lines of credit
with varying borrowing limits from approximately $0.07 million to $0.7 million.
The aggregate borrowing limit of all of the lines of credits combined is
approximately $4.1 million. These lines of credit have expiration dates ranging
from August 1998 to August 2004 and interest rates on borrowings ranging from
6.7% to 11.16%. The weighted average of the stated interest rates is 8.02% as of
December 31, 1997. The subsidiary has $1.1 million and $2.6 million outstanding
on these lines of credit as of December 31, 1996 and 1997, respectively.
28
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
One of the Company's U.S. subsidiaries has a revolving line-of-credit
agreement with a bank, which is renewed annually. The revolving credit agreement
provides for advances up to the lesser of $10.0 million or 50% of accounts
receivable, as defined. Among other things, the agreement requires the
subsidiary to meet certain restrictive covenants concerning net worth and debt
service coverage. As of December 31, 1997, the subsidiary was in default of
certain financial reporting and maximum employee lending covenants. Advances
under the revolving credit agreement are secured by all assets of the
subsidiary. This line is guaranteed by an officer of the subsidiary. Interest is
charged at the bank's prime rate or LIBOR plus 1%. As of December 31, 1997, no
amounts were outstanding under the revolving credit agreement.
In November 1997, one of the Company's U.S. subsidiaries entered into a
credit agreement which provides a secured reducing revolving loan through
December 31, 2003. At December 31, 1997, there was $20.0 million in borrowings
outstanding under the credit agreement at an interest rate of 7.5 percent. The
Company was not in compliance at December 31, 1997 with certain financial
covenants and administrative requirements. Accordingly, the outstanding balance
has been reflected as a current liability as of December 31, 1997. All
outstanding amounts were paid off on September 1, 1998.
8. MANDATORILY REDEEMABLE PREFERRED STOCK:
The preferred shares were redeemed in full subsequent to December 31, 1996,
in conjunction with the Acquisitions.
On January 25, 1994, in connection with the management buy-out at one of the
Company's acquirees in the U.K., fixed cumulative mandatorily redeemable
preferred shares with a par value of (Pounds)0.90 were issued for (Pounds)1.00.
All of the 3,067,000 authorized shares were issued yielding proceeds of
$4.6 million less associated issue costs of $0.1 million. A fixed cumulative
dividend was payable at the following rates:
<TABLE>
<S> <C>
1995 .................................................... 6%
1996 .................................................... 7%
1997 .................................................... 8%
Thereafter .............................................. 8%
</TABLE>
The shares were redeemable at (Pounds)1.00 per share, including the
(Pounds)0.10 premium per share on the following dates by the holders or earlier
at the option of the acquiree.
<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>
In October 1996, a subsidiary of the Company in the U.K. issued 750,000
shares of fixed cumulative mandatorily redeemable preferred shares with a par
value of (Pounds)1.0 per share. A fixed cumulative dividend was payable on these
preferred shares at 8% through December 1997 increasing to 10% thereafter. The
shares were mandatorily redeemable in five equal annual installments beginning
September 30, 2003.
In September 1996, a subsidiary of the Company in the U.K. issued 1,333,333
shares of fixed cumulative mandatorily redeemable preferred shares for
$2.1 million. A fixed cumulative dividend was payable on these
29
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
preferred shares at (Pounds).09 per annum per share. The shares were mandatorily
redeemable in three equal installments commencing on December 31, 2000.
The preferred shares were mandatorily redeemable on specific dates, did not
carry voting rights unless dividends were in arrears, which did not occur, and
were not convertible into common equity. Accordingly, the preferred shares are
classified as long-term debt obligations and the dividends, as well as the
amortization of associated issue costs and discounts, are charged as a component
of interest expense in the accompanying consolidated financial statements.
Dividends included in interest expense were $0.4 million, $0.6 million, and $0.2
million in 1995, 1996, and 1997, respectively.
9. CAPITAL STOCK:
On September 24, 1997 the Company completed the public offering of 8,776,334
shares of its common stock, par value $0.001 per share at an offering price of
$25.8125 per share. The offering included 1,850,000 newly issued shares of
common stock sold by the Company and 6,926,334 previously outstanding shares of
common stock sold by selling stockholders. The Company received net proceeds of
approximately $42.7 million from the offering, net of offering costs. The
Company did not receive any proceeds from the sale of shares of common stock in
the offering by the selling stockholders.
On September 30, 1996 SNC completed an initial public offering of 8,970,000
shares of its common stock, par value $0.001 per share at an offering price of
$17.00 per share. The offering included 4,038,162 newly issued shares of common
stock sold by SNC and 4,931,838 previously outstanding shares of common stock
sold by selling stockholders. SNC received net proceeds of approximately $59.2
million from the offering, net of offering costs. SNC did not receive any
proceeds from the sale of shares of common stock in the offering by the selling
stockholders.
In May 1994, the Board of Directors of one of the Company's acquirees
approved a stock repurchase plan that pertained to any stockholder terminating
employment with the acquiree. Under such plan, shares were required to be
repurchased by the acquiree. The shares were valued based on a certain
percentage of gross income over a three-year period, less outstanding bank and
stockholder debt. Payment terms for repurchased stock varied based on total
aggregate shares purchased over specified periods and ranged from 1 to 10 years.
In conjunction with its merger with SNC, the provisions of this stock repurchase
plan were terminated.
30
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES:
The Company's income tax provision includes the following components (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C> <C>
Current....................U.S.--Federal $ 6,947 $ 5,647 $ 5,416
U.S.--State and City 3,530 1,299 1,257
Foreign 4,858 2,217 4,129
-------- ------- -------
15,335 9,163 10,802
-------- ------- -------
Deferred...................U.S.--Federal (8,493) (1,953) (101)
U.S.--State and City (1,991) (469) (32)
Foreign (455) (846) (249)
-------- ------- -------
(10,939) (3,268) (382)
Tax effect of equity transaction.................... -- -- (815)
-------- ------- -------
Income tax provision................................ $ 4,396 $ 5,895 $ 9,605
-------- ------- -------
</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,
----------------------------------------
1997 1996 1995
------------ ----------- -------------
<S> <C> <C> <C>
Taxes at statutory U.S. Federal income tax rate ............ 35.00% 35.00% 35.00%
Income taxed directly to owners ............................ 18.66 (18.23) (12.93)
State and city income taxes, net of Federal tax benefit .... (7.81) 4.16 3.67
Tax effect of Reorganization ............................... (1.25) (2.82) 0.00
Foreign tax rate differential .............................. 4.05 0.14 0.19
Dividends on mandatorily redeemable preferred stock ........ (0.71) 0.80 0.33
Goodwill amortization ...................................... (1.16) 0.59 0.29
Acquisition costs and other permanent differences .......... (63.47) 4.06 0.00
Other........................................................ (1.85) 2.09 (0.22)
------ ----- -----
Effective tax rate ......................................... (18.54%) 25.79% 26.33%
====== ===== =====
</TABLE>
31
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred income taxes are recorded based upon differences between the
financial statement and tax bases of assets and liabilities. As of December 31,
1997 and 1996 temporary differences that give rise to the deferred tax assets
and liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Reserve for doubtful accounts ......................................... $ 2,466 $ 419
Accrued expenses ...................................................... 8,961 1,657
Tax losses of a non U.S. subsidiary ................................... 6,533 2,352
Tax benefit of capital losses ......................................... 1,202 1,202
Other, net ............................................................ 586
------- -------
Gross deferred tax assets ............................................. 19,748 5,630
------- -------
Prepaid pension costs ................................................. (74) (84)
Performance revenues .................................................. (2,660)
Other, net ............................................................ (69) (201)
------- -------
Gross deferred tax liabilities ........................................ (2,803) (285)
Valuation allowance ................................................... (3,167) (3,167)
------- -------
Net deferred tax asset ................................................ $13,778 $ 2,178
======= =======
</TABLE>
Two of the Company's subsidiaries have certain tax capital and operating
losses which can be realized only if these subsidiaries generate taxable capital
gains or operating income, respectively. At December 31, 1997 and 1996,
management determined that a valuation allowance against the deferred tax asset
associated with these tax losses was required for one of these subsidiaries.
11. ACQUISITION AND RELATED COSTS:
The Company recorded $39.4 million in non-recurring acquisition and related
costs during 1997. Of the $39.4 million, $34.1 million are costs directly
related to the consummation of the Acquisitions. These costs consist primarily
of investment banking fees, other professional service fees, certain U.K. excise
and transfer taxes, as well as a non-cash charge of approximately $9.1 million
related to the accelerated vesting of the options held by employees of one of
the Company's acquirees. The remaining $5.3 million consists of the write-off of
deferred license fees and the accrual of a liability expected to resolve
outstanding litigation. Both the write-off of the deferred fees and the accrual
of the liability were recorded due to changes in fact that resulted from the
Acquisitions.
12. COMPENSATION TO STOCKHOLDERS:
Prior to the Reorganization, SNC'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 1997 or 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 their merger with SNC, certain stockholders of the acquired
companies received annual compensation in their roles as managers in excess of
amounts that they will receive pursuant to employment agreements they have
entered into with the Company. The amount by which the historical compensation
paid to these managers exceeds
32
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
that provided in their employment contracts has been classified as compensation
to stockholders in the accompanying consolidated statement of income.
13. EMPLOYEE STOCK OWNERSHIP PLAN:
One of the Company's U.S. subsidiaries sponsors a leveraged employee stock
ownership plan (ESOP) which covers primarily all of its employees who work one
thousand hours or more per plan year. Contributions to the ESOP were made at the
discretion of the subsidiary's Board of Directors and were equal to the ESOP's
debt service less dividends received by the ESOP. In December 1994, the ESOP
acquired 534,800 shares from the former chairman of the subsidiary in exchange
for $0.4 million in cash and a promissory note of $6.0 million. The note was
guaranteed by the subsidiary, secured by the ESOP stock and bore interest, which
was payable monthly at 2.7% over the 30 day commercial paper rate. Principal
payments were due in five annual installments of $1.2 million commencing January
1, 1996. As of December 31, 1997, the subsidiary had repaid the entire amount.
In January 1995, the ESOP acquired an additional 176,571 shares at a cost of
$1.9 million. Of this amount, $1.7 million was financed through a promissory
note with the remaining $0.1 million paid in cash. This promissory note was
guaranteed by the subsidiary and its former chairman and was due in 84 monthly
installments commencing January 1996 with interest at 2.7% over the 30 day
commercial paper rate. As of December 31, 1997, the subsidiary had repaid this
borrowing.
All dividends and contributions received by the ESOP are used to pay debt
service. As the debt is repaid, shares are released and allocated to active
employees, based on the proportion of debt service paid in the year. The ESOP is
accounted for in accordance with Statement of Position No. 93-6 "Employees'
Accounting for Employee Stock Ownership Plans". Accordingly, the debt of the
ESOP is recorded as debt in the accompanying consolidated balance sheet and the
shares that have not been allocated to participants are reported as unearned
ESOP compensation in the equity section on the consolidated balance sheet. As
shares are committed to be released, the Company records compensation expense
equal to the current market price of the shares committed to be released, and
the shares become outstanding for earnings-per-share (EPS) computations.
Dividends on allocated ESOP shares are recorded as a reduction of retained
earnings; dividends on unallocated ESOP shares are recorded as a reduction of
debt and accrued interest. ESOP compensation expense was $5.4 million, $6.5
million, and $2.2 million for 1997, 1996, and 1995, respectively. The status of
ESOP shares as of December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Allocated shares .................................. 570,590 337,411
Shares released for allocation .................... 140,781 233,179
Unreleased shares ................................. -- 140,781
-------- ----------
Total ESOP shares ................................. 711,371 711,371
-------- ----------
Fair value of unreleased shares at December 31, ... $ -- $4,784,000
======== ==========
</TABLE>
Former employees who had terminated employment with the subsidiary prior to
its merger with SNC may, at their option, require SNC to repurchase their vested
SNC shares held by the ESOP for fair value. The balance necessary to satisfy
this repurchase obligation has been classified as Redeemable ESOP stock in the
accompanying consolidated balance sheet with a like amount shown as a reduction
of paid-in-capital for each year.
14. STOCK INCENTIVE PLAN:
In September 1996, SNC adopted the 1996 Stock Incentive Plan (the Stock
Option Plan"). The Stock Option Plan authorizes SNC to grant incentive stock
options, non-qualified stock options, restricted stock awards and stock
33
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
17.5% of the number of shares of common stock outstanding.
In conjunction with the management buy-out at one of the Company's acquirees
in January 1994, the acquiree adopted a stock option plan. Granted options were
exercisable upon a sale or flotation of the acquiree as defined in the terms of
the plan. No compensation expense was recognized in the financial statements for
the acquiree's options for any of the periods prior to its merger with SNC as
the conditions for their exercise were not probable. In conjunction with the
March 1997 acquisition by SNC, all of the outstanding options of the acquiree
were exchanged for options of the common stock of the Company under the Stock
Option Plan. The exchange of the acquiree's options for SNC options was based on
the final common stock exchange rates used in the acquisition, with the SNC
options possessing identical terms to the acquiree's options at the date of
conversion. The Company recognized a charge to first quarter 1997 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, 1997 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, 1997, after giving retroactive effect to the conversion of
the Pooled Entities options, is as follows:
<TABLE>
<CAPTION>
SHARES OUTSTANDING
----------------------------
1997 1996 1995
------ ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning of year ........................ 5,157 970 1,027
Granted ............................... 5,705 4,619 321
Exercised ............................. (1,790) (66) (336)
Forfeited ............................. (2,160) (281) (42)
Expired ............................... -- (85) --
------ ----- -----
End of year .............................. 6,912 5,157 970
====== ===== =====
Exercisable at end of year ............... 1,281 863
====== =====
</TABLE>
34
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
----------------
EXERCISE PRICE
----------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Beginning of year ....................... $14.97 $ 4.88 $3.29
Granted .............................. 24.11 17.07 6.98
Exercised ............................ 14.10 13.73 2.21
Forfeited ............................ 20.24 15.65 1.47
Expired .............................. -- 15.79 --
End of year ............................. 22.59 14.97 4.88
Exercisable at end of year .............. 17.03 11.07
</TABLE>
The weighted average option fair value on the grant date was $9.97 for
options issued during the year ended December 31, 1997.
The following table presents information related to the 6.9 million options
outstanding at December 31, 1997.
<TABLE>
<CAPTION>
WEIGHTED
--------
AVERAGE
COMPANY OPTIONS -------
- --------------- NUMBER OF CONTRACTUAL
ISSUED BY --------- -------------
--------- OPTIONS EXERCISE PRICE LIFE IN YEARS
------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
SNC prior to initial public offering ......... 1,615 $ 17.00 8.68
SNC subsequent to initial public offering .... 4,689 $19.38 - $33.94 9.45
Pooled Entities .............................. 608 $ 1.31 - $29.59 8.41
-----
6,912
=====
</TABLE>
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 1997 and 1996: risk-free interest rate of 5.7
percent and 6.2 percent, expected dividend yield of zero, expected life of 5
years, and expected volatility of 50 percent and 48 percent.
If the Company had recorded compensation expense using the fair value based
method prescribed by SFAS No. 123, the Company's 1997 and 1996 pro forma net
income (loss) and 1997 and 1996 pro forma net income (loss) per share amounts,
which reflect a pro forma adjustment for income taxes, would have been reduced
to the following as adjusted amounts.
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Pro forma net income (loss):
As reported ........................................... $(32,734) $7,239
As adjusted ........................................... (46,139) 344
Pro forma basic net income (loss) per share:
As reported ........................................... (.54) .13
As adjusted ........................................... (.76) .01
Pro forma diluted net income (loss) per share:
As reported ........................................... (.54) .13
As adjusted ........................................... (.76) .01
</TABLE>
35
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. PENSION AND PROFIT-SHARING PLANS:
One of the Company's subsidiaries in the U.K. operates a retirement benefit
plan, which is a funded defined benefit plan available to all employees. The
assets of the plan are held separately from those of the subsidiary and are
invested in managed funds principally comprised 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
actuaries using the projected unit credit method.
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 update of the plan's liabilities was performed as of
December 31, 1997. The significant assumptions used and the funded status of the
plan are set out in the tables below.
<TABLE>
<CAPTION>
SIGNIFICANT
-----------
ASSUMPTIONS
-----------
AS OF DECEMBER 31,
--------------------------
1997 1996 1995
--------- ------ -------
% % %
--------- ------ -------
<S> <C> <C> <C>
Discount rate ............................................... 6.75 8.0 8.0
Expected long-term rate of return on plan assets ............ 7.75 9.0 9.0
Rate of increase in compensation ............................ 5.25 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>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- -------------
<S> <C> <C> <C>
Service cost ......................................................... $ 1,360 $ 1,109 $ 726
Interest cost on projected benefit obligation ........................ 1,065 875 710
Actual return on plan assets ......................................... (2,899) (1,078) (1,704)
Net amortization of unrecognized net loss and deferral of actual
return on plan assets .............................................. 1,638 125 915
------- ------- -------
Net periodic pension cost ............................................ $ 1,164 $ 1,031 $ 647
======= ======= =======
</TABLE>
36
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated and fully vested .......................... $14,351 $11,501
------- -------
Accumulated benefit obligation ........................ 14,351 11,501
Effect of projected future compensation levels ........ 3,151 2,430
------- -------
Projected benefit obligation .......................... 17,502 13,931
Plan assets at fair value ............................. 17,321 13,777
------- -------
Plan assets less than projected benefit obligation .... (181) (154)
Unrecognized loss ..................................... 428 411
------- -------
Prepaid pension cost .................................. $ 247 $ 257
======= =======
</TABLE>
The Company and certain of its subsidiaries maintain defined contribution
benefit plans. Pension and profit sharing costs related to these plans amounted
to approximately $1.0 million, $0.8 million and $0.6 million for 1997, 1996, and
1995, respectively.
The Company and certain of its subsidiaries maintain deferred compensation
plans for certain key executives. The related expense for these agreements, on a
present value basis, is being recognized as earned. The Company recognized
approximately $0.4 million, $1.2 million and $0.3 million of deferred
compensation expense, including interest charges in 1997, 1996, and 1995,
respectively.
16. NET INCOME PER SHARE
A reconciliation of the shares used to compute basic and diluted earnings
per share follows. For each of the years presented, the same net income used to
compute basic earnings per share was used to compute diluted earnings per share.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Weighted average shares outstanding for the period used in
computation of basic net income per share ....................... 60,479 56,334 55,878
Diluted impact of stock options ................................. -- 554 91
Shares used in computation of diluted net income per share ...... 60,479 56,888 55,969
</TABLE>
For the years ended December 31, 1997 and 1995, there existed weighted
average common stock equivalents of 1,432,136 and 12,437, respectively, which
are not included in the calculation of diluted net income per share because they
were antidilutive for the period.
37
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. DISCONTINUED OPERATIONS
On October 24, 1997, the Board of Directors of one of the Company's 1998
acquirees approved the spin-off of its sports management operations, which were
carried on by Bob Woolf Associates, Inc. ("BWA"), a wholly owned subsidiary. The
acquiree purchased BWA in May 1996. The spin-off was executed in the form of a
dividend to the acquiree's stockholders of record on October 31, 1997, whereby
each stockholder received one share of BWA for each share of the acquiree's
common stock held.
The net losses of BWA prior to October 31, 1997, are included in the
accompanying consolidated statement of income under "discontinued operations"
and represent a net loss of $0.03 and $0.05 per diluted share for 1997 and 1996.
Revenues from BWA were approximately $0.3 million for the period from May 1,
1996 (date of BWA acquisition) to December 31, 1996, and approximately $2.0
million for the ten months ended October 31, 1997.
18. 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, 1997 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, CAPITAL LEASES OPERATING LEASES
- ------------------------- -------------- ----------------
<S> <C> <C>
1998 .......................................... $ 1,993 $ 27,346
1999 .......................................... 1,522 22,267
2000 .......................................... 375 17,964
2001 .......................................... 74 14,236
2002 .......................................... -- 12,895
Thereafter .................................... -- 33,734
------- --------
Total minimum lease payments .................. 3,964 $128,442
========
Less--Amount representing interest ............ (337)
-------
Total obligation under capital leases ......... 3,627
Less--Current portion ......................... (1,876)
-------
Long-term portion ............................. $ 1,751
=======
</TABLE>
Property and equipment, net, on the consolidated balance sheet includes
$3.7 million and $4.2 million for equipment purchased under capital leases as of
December 31, 1997 and 1996, respectively.
Rental expense for all operating leases was approximately $23.5 million,
$21.1 million and $17.6 million for the years ended December 31, 1997, 1996, and
1995, respectively.
19. COMMITMENTS AND CONTINGENCIES:
The Company has entered into employment agreements with certain key
executives and consulting agreements with certain former executives that call
for guaranteed minimum salaries and bonuses for varying terms.
An officer of one of the acquired Companies was terminated in February 1997,
and the matter is subject to ongoing litigation. Due to changes in fact that
resulted from the acquisition, the Company recorded a liability in the quarter
ended September 30, 1997 equal to the expected cost to resolve the matter.
38
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
One of the Company's U.S. subsidiaries issued irrevocable letters of credit,
automatically renewable on an annual basis for $2,200 to a landlord as a
security deposit for a lease. This subsidiary also has standby letters of credit
with a bank, secured by compensating balance arrangements, totaling $1,267. The
standby letters of credit renew annually and interest is charged at a rate of
1.25% per year.
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 and legal counsel, 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.
20. RELATED PARTIES:
SNC's headquarters office space is leased from a third party, in which one
of the non-employee directors of the Company has a minority ownership interest.
Rent paid under this lease was $0.8 million, $1.1 million, and $2.4 million in
1995, 1996 and 1997, respectively.
During 1995, SNC advanced $2.7 million 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.
SNC produces a WallBoard(R) for which a publication beneficially owned by
certain non-employee directors of the Company is one of the sponsors. Revenues
earned under this program were $2.0 million in 1997.
In December 1997, the Company entered into a software license agreement with
a company in which certain non-employee directors of the Company are directors
and in which they own a minority interest. The Company will pay approximately
$2.5 million for the license and related equipment.
39
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
21. GEOGRAPHICAL DATA:
After giving effect to the Acquisitions, the Company has operations in the
United States, the U.K., France, Germany, Ireland, the Netherlands and Hungary.
Financial information for the Company's operations in the U.K., France, Germany,
Ireland, Holland and Hungary are classified as international and consist
primarily of operations in the U.K (in thousands).
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
------------ ----------- ------------
<S> <C> <C> <C>
Revenues
United States .................................... $373,392 $301,428 $220,192
International .................................... 185,037 146,034 128,990
-------- -------- --------
Total revenues ................................ $558,429 $447,462 $349,182
======== ======== ========
Income (loss) from operations
United States .................................... $(26,662) $ 21,754 $ 26,988
International .................................... 3,887 3,177 10,975
-------- -------- --------
Total income (loss) from operations ........... $(22,775) $ 24,931 $ 37,963
======== ======== ========
Identifiable assets
United States .................................... $297,506 $224,151
International .................................... 133,105 81,576
-------- --------
Total identifiable assets ..................... $430,611 $305,727
======== ========
</TABLE>
The following table summarizes financial data by quarter for the Company for
1997 and 1996, giving effect to the Acquisitions as if they had occurred at the
beginning of the earliest period presented (Unaudited, in thousands, except per
share data).
<TABLE>
<CAPTION>
1997 QUARTER ENDED
--------------------------------------------------------
March 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
------------ ----------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues ............................................ $123,099 $136,407 $139,460 $159,463 $558,429
Gross profit ........................................ 36,788 42,839 41,098 43,428 164,153
Income from continuing operations ................... (9,830) 9,303 (20,136) (7,456) (28,119)
Income from continuing operations per share
(diluted) .......................................... (0.17) 0.15 (0.33) (0.12) (0.47)
Net income .......................................... (10,388) 8,679 (20,435) (7,482) (29,626)
Net income per share (diluted) ...................... (0.18) 0.14 (0.34) (0.12) (0.50)
Pro forma net income from continuing
operations ......................................... (11,016) 7,291 (19,046) (9,063) (31,834)
Pro forma net income from continuing operations
per share (diluted) ................................ (.19) .12 (.32) (.14) (.53)
Pro forma net income ................................ (11,349) 6,919 (19,225) (9,079) (32,734)
Pro forma net income per share (diluted) ............ (.19) .11 (.32) (.14) (.54)
Pro forma net income, excluding non-recurring
acquisition and related costs, ESOP expense,
recapitalization costs and compensation to
stockholders......................................... 6,818 9,153 7,910 4,176 28,057
Pro forma net income, excluding non-recurring
acquisition and related costs, ESOP expense,
recapitalization costs and compensation to
stockholders per share (diluted)..................... .11 .15 .13 .06 .45
</TABLE>
40
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1996 QUARTER ENDED
-----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
----------- ----------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues ............................................ $97,997 $106,809 $114,777 $127,880 $447,463
Gross profit ........................................ 29,633 33,218 35,299 39,580 137,730
Income (loss) from continuing operations ............ 3,680 5,166 5,210 2,911 16,967
Income (loss) from continuing operations per
share (diluted) .................................... 0.07 0.09 0.09 0.05 0.30
Net income (loss) ................................... 3,680 4,977 4,503 1,094 14,254
Net income (loss) per share (diluted) ............... 0.07 0.09 0.08 0.02 0.26
Pro forma net income (loss) from continuing
Operations ......................................... 2,245 3,025 1,694 2,374 9,338
Pro forma net income (loss) from continuing
Operations per share (diluted) ..................... .04 .05 .03 .04 .16
Pro forma net income (loss) ......................... 2,245 2,912 1,272 799 7,228
Pro forma net income (loss) per share
(diluted) (a) ...................................... .04 .05 .02 .01 .12
Pro forma net income, excluding non-recurring
acquisition and related costs, ESOP expense,
recapitalization costs and compensation to
stockholders......................................... 5,276 6,053 5,449 7,309 24,087
Pro forma net income, excluding non-recurring
acquisition costs, ESOP expense, recapitalization
costs and compensation to stockholders per share
(diluted)............................................ .09 .11 .10 .12 .42
</TABLE>
The pro forma amounts include a provision for federal and state income taxes
as if the Company had been a taxable C corporation for all periods presented.
(a) The sum of these amounts does not equal the annual amount because the
quarterly calculations are based on varying numbers of shares outstanding.
22. SUBSEQUENT EVENTS (UNAUDITED):
In February 1998, the Company acquired Healthcare Promotions, LLC, a
provider of pharmaceutical marketing and sales force training services, in the
United States. The transaction was valued at $22.0 million and was accounted for
as a purchase business combination.
In March 1998, the Company acquired CLI Pharma S.A., a provider of
outsourced pharmaceutical sales and sales force recruitment services in France.
The transaction was valued at $25.0 million and was accounted for as a purchase
business combination.
41
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In October 1998, the Company acquired Response Marketing Group ("RMG"). RMG
develops integrated marketing solutions that enable its clients to maximize the
effectiveness of their direct marketing programs. RMG's service offerings
include database and analytical services, strategic consulting and design
services, and marketing program management services. 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.
42
<PAGE>
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 (not
presented separately herein). 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 respect
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 audited by us present
fairly, in all material respects, the financial position of the Company and its
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 in conformity with generally accepted accounting principles in
the United States.
Price Waterhouse
Chartered Accountants and Registered Auditors
Bristol, England
May 30, 1997
43
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
American List Corporation
We have audited the consolidated balance sheet of American List Corporation
and Subsidiaries as of February 28, 1997, and the related consolidated
statements of earnings, stockholders' equity and cash flows for each of the
years in the two-year period then ended (not presented separately herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American List
Corporation and Subsidiaries as of February 28, 1997, and the consolidated
results of their operations and their consolidated cash flows for each of the
years in the two-year period then ended in conformity with generally accepted
accounting principles.
Grant Thornton LLP
Melville, New York
April 11, 1997
44
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
Snyder Communications, Inc.
Date: November 13, 1998 By: /s/ Michele D. Snyder
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Name: Michele D. Snyder
Title: Vice Chairman, President and Chief
Operating Officer
Date: November 13, 1998 By: /s/ A. Clayton Perfall
-------------------------------------------
Name: A. Clayton Perfall
Title: Chief Financial Officer
45
