<PAGE>
United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From ________________ to __________________
Commission file number 1-12145
SNYDER COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
52-1983617
(IRS Employer Identification No.)
6903 Rockledge Drive, 15th Floor, Bethesda, Maryland 20817
(Address of principal executive office and zip code)
(301) 468-1010
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Outstanding at
Class November 10, 1999
- ----- -----------------
<S> <C>
Snyder Communications, Inc. - SNC Common Stock, par value $0.001 71,546,998
Snyder Communications, Inc. - Circle.com Common Stock, par value $0.001 22,177,044
</TABLE>
1
<PAGE>
SNYDER COMMUNICATIONS, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
<S> <C>
Item 1. Financial Statements
Snyder Communications, Inc. - Condensed Consolidated Financial Statements
The condensed consolidated financial statements of Snyder Communications,
Inc. include all of the accounts and operating results of the corresponding
SNC and Circle.com financial statements. Holders of SNC stock and Circle.com
stock are stockholders of Snyder Communications, Inc. and are subject to all
risks associated with an investment in Snyder Communications, Inc.
Condensed Consolidated Balance Sheets as of September 30, 1999
(unaudited) and December 31, 1998 4
Condensed Consolidated Statements of Income, including unaudited pro forma data,
for the three and nine months ended September 30, 1999 and 1998 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998 (unaudited) 7
Condensed Consolidated Statements of Equity and Comprehensive Income for the
nine months ended September 30, 1999 (unaudited) 9
Notes to Condensed Consolidated Financial Statements 10
SNC - Condensed Combined Financial Statements
The condensed combined financial statements of SNC comprise the combined
financial position, results of operations and cash flows of the businesses
that comprise Snyder Communications, Inc.'s direct marketing and advertising
agency. Accordingly, the SNC combined financial statements are supplemental
financial statements and should be read in conjunction with the Snyder
Communications, Inc. financial statements and the Circle.com financial
statements.
Condensed Combined Balance Sheets as of September 30, 1999 (unaudited)
and December 31, 1998 21
Condensed Combined Statements of Income, including Unaudited pro forma data, for
the three and nine months ended September 30, 1999 and 1998 (unaudited) 22
Condensed Combined Statements of Cash Flows for the nine months ended September
30, 1999 and 1998 (unaudited) 23
Condensed Combined Statements of Changes in Group Equity for the nine months
ended September 30, 1999 (unaudited) 25
Notes to Condensed Combined Financial Statements 26
</TABLE>
2
<PAGE>
SNYDER COMMUNICATIONS, INC.
FORM 10-Q
INDEX (continued)
<TABLE>
<CAPTION>
Circle.com - Condensed Combined Financial Statements Page
<S> <C>
The condensed combined financial statements of Circle.com comprise the combined
financial position, results of operations and cash flows of the businesses
that comprise Snyder Communications, Inc.'s Internet professional services
business. Accordingly, the Circle.com financial statements are supplemental
financial statements and should be read in conjunction with the Snyder
Communications, Inc. and SNC financial statements.
Condensed Combined Balance Sheets as of September 30, 1999 (unaudited) and
December 31, 1998 32
Condensed Combined Statements of Operations including Unaudited pro forma data
for the three and the nine months ended September 30, 1999 and 1998
(unaudited) 33
Condensed Combined Statements of Cash Flows for the nine months ended September
30, 1999 and 1998 (unaudited) 34
Condensed Combined Statements of Changes in Group Equity for the nine months
ended September 30, 1999 (unaudited) 35
Notes to Condensed Combined Financial Statements 36
Item 2. Management's Discussion and Analysis
Snyder Communications, Inc. Management's Discussion and Analysis of Financial
Condition and Results of Operations 41
SNC Management's Discussion and Analysis of Financial Condition and Results of
Operations 49
Circle.com Management's Discussion and Analysis of Financial Condition and
Results of Operations 57
PART II. OTHER INFORMATION
Item 2. Changes in Securities 62
Item 4. Submission of Matters to a Vote of Security Holders 62
Item 6. Exhibits and Reports on Form 8-K 62
</TABLE>
3
<PAGE>
PART I. FINANCIAL INFORMATION
SNYDER COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 40,672 $ 47,931
Marketable securities - 612
Accounts receivable, net of allowance for doubtful accounts of $3,744 and $7,031 at
September 30, 1999 and December 31, 1998, respectively 113,971 78,901
Receivables from pass-through costs 130,444 86,015
Related party receivables 190 190
Unbilled services 14,470 19,708
Current portion of deferred tax asset 11,904 13,671
Other current assets 24,197 11,560
Net current assets of discontinued operations - 24,447
---------------- ---------------
Total current assets 335,848 283,035
---------------- ---------------
Property and equipment, net 79,171 70,367
Goodwill and other intangible assets, net 202,080 72,288
Deferred tax asset 91,742 86,637
Deposits and other assets 8,489 5,645
Net long-term assets of discontinued operations - 95,280
---------------- ---------------
Total assets $ 717,330 $ 613,252
================ ===============
LIABILITIES AND EQUITY
Current liabilities:
Line of credit $ 740 $ 1,825
Current maturities of long-term debt 901 1,085
Accrued payroll 20,351 13,423
Accounts payable 149,642 114,541
Accrued expenses 119,605 80,547
Client advances 7,922 11,753
Unearned revenue 14,043 14,535
---------------- ---------------
Total current liabilities 313,204 237,709
---------------- ---------------
Related party borrowings 8,302 8,924
Long-term obligations under capital leases 1,272 1,743
Long-term debt, net of current maturities 146,283 1,616
Other liabilities 3,584 2,922
---------------- ---------------
Total liabilities 472,645 252,914
---------------- ---------------
Commitments and contingencies
Redeemable ESOP stock , 24 and 88 shares outstanding at September 30, 1999 and
December 31, 1998, respectively 443 2,960
Equity:
Preferred stock, $ .001 par value, 5,000 shares authorized; none issued and
outstanding at September 30, 1999 and December 31, 1998, respectively - -
Common stock, $ .001 par value, 400,000 shares authorized; 76,697 and 71,480 shares
issued and outstanding at September 30, 1999 and December 31, 1998,
respectively 77 71
Additional paid-in-capital 514,568 375,114
Treasury stock, at cost, 5,477 shares at September 30, 1999 (100,767) -
Accumulated other comprehensive income (loss) (355) 1,829
Retained deficit (169,281) (19,636)
---------------- ---------------
Total equity 244,242 357,378
---------------- ---------------
Total liabilities and equity $ 717,330 $ 613,252
================ ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
SNYDER COMMUNICATIONS, INC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net revenues $165,977 $129,586 $465,403 $357,775
Operating expenses:
Cost of services 120,309 84,566 321,045 234,058
Selling, general and administrative expenses 34,171 22,533 85,305 70,541
Compensation to stockholders - 191 - 573
Acquisition and related costs 14,432 96 15,814 22,693
---------- --------- --------- ---------
Income (loss) from operations (2,935) 22,200 43,239 29,910
Interest expense (1,534) (792) (2,230) (1,937)
Investment income 772 1,189 2,009 2,934
---------- --------- --------- ---------
Income (loss) from continuing operations before income taxes (3,697) 22,597 43,018 30,907
Income tax provision 4,935 8,162 24,123 9,924
---------- --------- --------- ---------
Income (loss) from continuing operations (8,632) 14,435 18,895 20,983
Loss from discontinued operations (net of income taxes) (24,201) (3,771) (11,562) (1,153)
---------- --------- --------- ---------
Net income (loss) $(32,833) $ 10,664 $ 7,333 $ 19,830
========== ========= ========= =========
Historical net income (loss) per share Snyder Communications,
Inc. common stock (see notes 3 and 5):
Basic net income (loss) per share:
Continuing operations $ (0.12) $ 0.20 $ 0.26 $ 0.30
Discontinued operations (0.32) (0.05) (0.16) (0.01)
---------- --------- --------- ---------
Total basic net income (loss) per share $ (0.44) $ 0.15 $ 0.10 $ 0.29
========== ========= ========= =========
Diluted net income (loss) per share:
Continuing operations $ (0.12) $ 0.20 $ 0.25 $ 0.29
Discontinued operations (0.32) (0.05) (0.15) (0.01)
---------- --------- --------- ---------
Total diluted net income (loss) per share $ (0.44) $ 0.15 $ 0.10 $ 0.28
========== ========= ========= =========
Pro forma net income (loss) per share Snyder Communications, Inc.
common stock (see notes 3 and 4):
Basic net income (loss) per share:
Continuing operations $ (0.10) $ 0.20 $ 0.27 $ 0.26
========== ========= ========= =========
Diluted net income (loss) per share:
Continuing operations $ (0.10) $ 0.19 $ 0.27 $ 0.25
========== ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
SNYDER COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (continued)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1999 1998 1999 1998
------ ------ ------ ------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Pro forma net income (loss) per share for effects of October 22, 1999
recapitalization:
SNC:
Historical net income (loss) per share (Note 5):
Basic and diluted net income (loss) per share:
Continuing operations $ (0.09) $ 0.20 $ 0.32 $ 0.29
======= ======= ======= =======
Pro forma net income (loss) per share (Note 5):
Adjusted basic and diluted net income (loss) per share:
Continuing operations $ (0.08) $ 0.19 $ 0.34 $ 0.25
======= ======= ======= =======
Shares used in computing pro forma SNC net income (loss) per share 71,541 71,541 71,541 71,541
======= ======= ======= =======
Circle.com:
Historical net income (loss) per share (Note 5):
Basic and diluted net income (loss) per share: $ (0.11) $ 0.01 $ (0.20) $ 0.01
======= ======= ======= =======
Pro forma shares used in computing pro forma Circle.com net
income (loss) per share 20,139 20,139 20,139 20,139
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements
6
<PAGE>
SNYDER COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
---------------------------------
1999 1998
------- ------
(in thousands)
<S> <C> <C>
Cash flows from operating activities of continuing operations:
Income from continuing operations $ 18,895 $ 20,983
Adjustments to reconcile net income from continuing
operations to net cash provided by operating
activities of continuing operations:
Depreciation and amortization 20,505 12,202
Noncash expense for stock issuances 14,275 89
Deferred taxes (584) (10,739)
Loss on disposal of assets 1,116 544
Other noncash amounts (11) -
Changes in assets and liabilities:
Accounts receivable, net (20,814) (8,021)
Receivables from pass through costs (44,429) (10,308)
Related party receivables - 1,424
Unbilled services 8,218 (673)
Deposits and other assets (2,763) (787)
Other current assets (7,387) (164)
Accrued payroll, accounts payable and
accrued expenses 45,773 16,143
Client advances (4,324) (10,873)
Unearned revenue (934) 928
------------------ --------------------
Net cash provided by operating activities of continuing operations 27,536 10,748
------------------ --------------------
Cash flows from investing activities of continuing operations:
Purchase of subsidiaries, net of cash acquired (30,682) (6,179)
Purchase of property and equipment (21,363) (26,136)
Proceeds from sale of equipment - 7
Net sales of marketable securities 612 380
Purchases of intangible assets (5,406) (431)
Note and net advances to stockholders of acquired
subsidiaries - 758
------------------ --------------------
Net cash used in investing activities of continuing operations (56,839) (31,601)
------------------ --------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
SNYDER COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
----------------------------------
1999 1998
------ ------
(in thousands)
<S> <C> <C>
Cash flows from financing activities of continuing operations:
Repayment of long-term notes (70) (1,071)
Distributions and dividends - (5,266)
Net proceeds from long-term debt 45,621 13,587
Net repayments on lines of credit (1,139) (7,350)
Payments on capital lease obligations (1,221) (1,417)
Proceeds from exercise of options 17,663 16,883
Purchase and retirement of treasury stock - (2,096)
Proceeds from issuance of stock - 43,370
------------------ -----------------
Net cash provided by financing activities of continuing operations 60,854 56,640
------------------ -----------------
Effect of exchange rate changes (514) 1,068
Net increase in cash and equivalents of continuing operations 31,037 36,855
Investments and advances/distributions to discontinued operations (38,296) (30,763)
Cash and equivalents, beginning of period 47,931 71,789
------------------ -----------------
Cash and equivalents, end of period $ 40,672 77,881
================== =================
Supplemental disclosures of cash flow information:
Cash paid for interest $ 1,518 $ 386
Cash paid for income taxes 20,336 8,185
Supplemental disclosures of noncash activities:
Equipment purchased under capital leases - 1,304
Issuance of shares of common stock for purchase of subsidiaries 122,737 52,568
Treasury stock acquired through the assumption of debt 100,767 -
Issuance of common stock related to appreciation rights - 3,484
Reclassification of redeemable ESOP stock 2,517 -
Tax benefits from exercise of stock options 2,434 7,106
Issuance of notes for the purchase of subsidiary - 1,350
Tax benefit from taxable merger transactions 941 44,348
Distribution of Ventiv to stockholders 119,929 -
</TABLE>
See accompanying notes to condensed consolidated financial statements.
8
<PAGE>
Snyder Communications, Inc.
CONDENSED CONSOLIDATED STATEMENT OF EQUITY AND COMPREHENSIVE INCOME
(unaudited)
<TABLE>
<CAPTION>
Common Common Stock Additional Retained Earnings
Stock Shares Par Value Paid-in-Capital (Deficit)
------------ ------------ --------------- -----------------
(in thousands, share data)
<S> <C> <C> <C> <C>
Balance, December 31, 1998 71,480,000 $71 $375,114 $ (19,636)
Distribution of Ventiv to stockholders (159,494)
Exercise of stock options 706,000 1 17,663
Issuance of shares for purchase of
subsidiaries and property 4,511,000 5 121,791
Foreign currency translation adjustment
Unrealized loss on marketable securities
Purchases of treasury stock
Reclassification of redeemable ESOP
stock 2,516
Net Income 7,333
Comprehensive Income
------------------- ------------ ----------------- -----------------
Balance, September 30, 1999 76,697,000 $77 $514,568 $(169,281)
=================== ============ ================= =================
<CAPTION>
Accumulated
Treasury Other Comprehensive Comprehensive
Stock Income (Loss) Total Income (Loss)
-------- ------------------- ----- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 $ - $ 1,829 $ 357,378 $ -
Distribution of Ventiv to stockholders 1,269 (158,225) 1,269
Exercise of stock options 17,664
Issuance of shares for purchase of
subsidiaries and property 121,796
Foreign currency translation adjustment (3,442) (3,442) (3,442)
Unrealized loss on marketable securities (11) (11) (11)
Purchases of treasury stock (100,767) (100,767)
Reclassification of redeemable ESOP
stock 2,516
Net Income 7,333 7,333
----------------
Comprehensive income $ 5,149
------------------- ------------ ----------------- ================
Balance, September 30, 1999 $(100,767) $ (355) $ 244,242
=================== ============ =================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
9
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization and Basis of Presentation:
Organization
Snyder Communications, Inc. ("Snyder Communications" or the "Company"), a
Delaware corporation, was incorporated on June 25, 1996, to continue the
business operations of Collegiate Marketing and Communications, L.P. Snyder
Communications completed an initial public offering of its common stock on
September 24, 1996. Snyder Communications provides direct marketing,
advertising and communication services, and Internet professional services to
its clients.
On June 22, 1999, the Board of Directors of the Company approved a plan to
effect the distribution (the "Distribution") of the Company's healthcare
services business to existing stockholders. The Company consummated the
Distribution on September 27, 1999 through a special dividend of one share of
common stock of a newly formed subsidiary, Ventiv Health, Inc. ("Ventiv") for
every three shares of existing common stock of the Company. As a result of the
Distribution, Ventiv became an independent, publicly traded corporation.
Accordingly, the healthcare services operating results are reflected in the
accompanying condensed consolidated financial statements as discontinued
operations for all periods presented. The accompanying notes, except note 2,
relate only to the continuing operations of the Company.
On October 22, 1999, the stockholders of the Company approved and the
Company implemented a recapitalization proposal (the "Recapitalization") which
resulted in authorization of the Company to issue two new classes of stock: 80
million shares of common stock designated as "Circle.com stock" and 320 million
shares of common stock designated as "SNC stock". The Circle.com stock tracks
the separate performance of the Company's Internet professional services
business unit, which it refers to as "Circle.com". The shares of Circle.com
stock that stockholders received in the Recapitalization initially represented
80% of the equity value attributed to Circle.com. The remaining equity value
attributed to Circle.com constituted SNC's retained interest in Circle.com. The
SNC stock tracks the separate performance of the remaining businesses of the
Company, which it refers to as its "SNC" business unit, and a retained interest
in Circle.com. Each share of existing common stock of the Company was converted
into one share of SNC stock and .25 of a share of Circle.com stock.
The SNC stock and the Circle.com stock constitute common stock of the
Company, and the issuance of these classes of stock did not result in any
transfer of assets or liabilities of the Company or any of its affiliates.
Although the Company allocates certain assets, liabilities, revenues, expenses,
and cash flows to Circle.com and SNC, the allocation did not change the legal
title to any assets or responsibility for any liabilities and will not affect
the rights of the creditors. Holders of SNC stock and Circle.com stock
generally do not have stockholder rights specific to their corresponding groups.
Instead, holders have customary stockholder rights relating to Snyder
Communications as a whole. As a result, stockholders continue to be subjected
to all of the risks associated with an investment in Snyder Communications and
all of its businesses, assets, and liabilities. The Company issued 80% of the
equity value attributed to Circle.com. The remaining equity value attributed to
Circle.com constitutes SNC's initial "retained interest" in Circle.com. This
retained interest in Circle.com is represented by a number of shares of
Circle.com stock that Snyder Communications could issue for the account of SNC
in respect of the retained interest. However, the retained interest has novoting
rights and no actual shares of Circle.com stock will be issued in respect of the
retained interest. If any dividends or distributions are made on the Circle.com
stock, a portion of the dividends or distributions equal to the percentage of
Circle.com's equity value represented by this retained interest will be retained
by Snyder Communications for the benefit of the holders of the SNC stock. These
amounts may be used in the SNC business or distributed as dividends on the SNC
stock.
10
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The percentage of Circle.com's equity value represented by the retained
interest will change in the future if the total number of outstanding shares of
Circle.com stock changes or if transfers of cash or other property between
SNC and Circle.com occur that are accounted for as either capital contributions
to Circle.com or as a return of capital by Circle.com. In October 1999, the
Company issued approximately 4.3 million additional shares of Circle.com stock
as consideration for the Circle.com acquisitions of Tsunami Consulting Group,
Inc., Natural Intelligence, Inc., and Interactive Bureau, LLC. These additional
issuances have reduced SNC's retained interest in Circle.com to approximately
16.9%.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared by Snyder Communications, Inc. pursuant to the interim reporting
rules and regulations of the Securities and Exchange Commission ("SEC"). As a
result, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles ("GAAP") 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, 1999 and
for the nine months ended September 30, 1999 and 1998. Certain amounts
previously presented have been reclassified to conform to September 30, 1999
presentation. Operating results for the nine month period ended September 30,
1999 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1999. The unaudited condensed consolidated financial
statements should be read in conjunction with the financial statements and
footnotes thereto included in the Company's Registration Statement on Form S-4
as amended, filed with the SEC on October 5, 1999.
Because the Recapitalization occurred prior to the filing of this Form 10-Q
with the SEC, the separate condensed combined financial statements of SNC and
Circle.com have been included.
2. Discontinued Operations:
As discussed above, on June 22, 1999, the Board of Directors of Snyder
Communications approved the spin-off of Ventiv to existing shareholders. Shares
of Ventiv common stock were distributed on the basis of one share of Ventiv for
every three shares of the Company's existing common stock on September 27, 1999
to stockholders of record as of September 20, 1999. As a result of the
Distribution, Ventiv became an independent, publicly traded corporation.
Accordingly, the results of Ventiv have been reclassified from amounts
previously reported, and are stated separately in the accompanying condensed
consolidated financial statements as discontinued operations. Summarized
financial information of the discontinued Ventiv operations is presented in the
following tables.
11
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Earnings from discontinued Ventiv operations included in the Condensed
Consolidated Statement of Income are as follows (in thousands):
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Revenues $ 72,900 $80,232 $254,159 $231,545
Operating expenses:
Cost of services 71,365 60,141 208,393 169,818
Selling, general and administrative expenses 13,668 11,883 35,253 31,812
Compensation to stockholders - 227 - 742
Acquisition and related costs 5,741 9,329 7,435 20,685
------------- ----------- ------------ ------------
Income (loss) from operations (17,874) (1,348) 3,078 8,488
Interest income (expense), net 65 (271) 315 (694)
------------- ----------- ------------ ------------
Income (loss) from operations before income taxes (17,809) (1,619) 3,393 7,794
Income tax provision (benefit) (6,928) 2,152 1,635 8,947
------------- ----------- ------------ ------------
Net loss of Ventiv Health, Inc. (10,881) (3,771) 1,758 (1,153)
Distribution costs, net of tax (13,320) - (13,320) -
------------- ----------- ------------ ------------
Net loss from discontinued operations $(24,201) $(3,771) $(11,562) $ (1,153)
============= =========== ============ ============
</TABLE>
During the nine months ended September 30, 1998, Ventiv recorded $20.7
million in nonrecurring acquisition and related costs. These costs are
primarily related to the consummation of pooling of interests transactions and
consist of investment banking fees, other professional service fees and other
contractual payments. In addition, this amount includes a charge of
approximately $4.4 million for costs necessary to consolidate and integrate
certain of Ventiv's acquired operations in the U.S. and the U.K.
During the nine months ended September 30, 1999, Ventiv recorded $7.4
million in nonrecurring acquisition and related costs. Included in this amount
is $5.7 million related to a payment made by Ventiv, in the form of 695,304
shares of Ventiv common stock, to the prior owners of PromoTech in exchange for
the release of any and all claims against Snyder Communications or Ventiv
related to the purchase of PromoTech. The payment was not provided for in the
purchase agreement and is not part of the purchase price for accounting
purposes. In addition, the $7.4 million expense includes a charge of
approximately $1.7 million for costs necessary to consolidate and integrate
certain of Ventiv's acquired operations in the U.S. and U.K. under the Ventiv
plan initiated in 1998. The charge recorded in the nine months ended September
30, 1999 consists of $1.3 million in severance and related costs associated with
the termination of 23 employees, and $0.4 million in consulting services and
other costs related to these integration activities. In 1998, Ventiv recorded
approximately $10.7 million of costs to consolidate and integrate certain of its
operations. As of September 30, 1999, 151 employees had terminated employment
with Ventiv and $11.4 million had been charged against the total liability of
$12.4 million.
The integration activities recorded in 1998 were recorded in accordance
with Emerging Issues Task Force 94-3, "Liability Recognition for Costs to Exit
an Activity (including certain costs incurred in a restructuring)" ("EITF 94-
3"). Additional expenses for Ventiv's integration activities recorded in 1999
represent additional costs incurred that did not qualify for accrual at December
31, 1998 in accordance with EITF 94-3. At September 30, 1999, Ventiv had
substantially completed these integration activities.
12
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the activity in the Ventiv integration
activities liability account:
<TABLE>
<CAPTION>
Beginning Deductions for Balance at End
Balance Additions Amount Paid of Period
--------------- ------------------ ---------------------- ------------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998 $ - $10,654 $(2,683) $7,971
Nine Months Ended September 30, 1999 $7,971 $ 1,696 $(8,679) $ 988
</TABLE>
During the nine months ended September 30, 1999, Snyder Communications
incurred and recorded approximately $13.3 million of costs, net of tax, related
to the Distribution. This amount is reflected in the "Loss from discontinued
operations (net of income taxes)" in the accompanying condensed consolidated
statement of operations for the Company and consists of financial advisory fees,
other professional service fees, and printing fees.
3. Net Income (Loss) Per Share
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128") has been applied to all periods presented in these financial
statements. SFAS No. 128 requires disclosure of basic and diluted earnings per
share ("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 and other potentially dilutive
securities. Diluted EPS give effect to common stock equivalents and other
potentially dilutive securities outstanding during the period.
A reconciliation of the shares used to compute basic and diluted earnings
per share follows. For each of the periods presented, the same net income used
to compute basic earnings per share was used to compute diluted earnings per
share.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited, in thousands)
<S> <C> <C> <C> <C>
Weighted average shares outstanding for the period used in
computation of basic net income per share 73,954 70,141 73,744 69,049
Dilutive impact of stock options and other dilutive securities - 2,426 896 2,525
------ ------ ------ ------
Shares used in computation of diluted income per share 73,954 72,567 74,640 71,574
====== ====== ====== ======
</TABLE>
For the nine months ended September 30, 1999 and 1998, there existed
weighted average common stock equivalents of 7,458,232 and 684,553 respectively,
which are not included in the calculation of diluted net income per share
because they were antidilutive for the period.
4. Pro Forma Income Data:
The pro forma net income amounts include a provision for federal and state
income taxes as if the Company had been a taxable C corporation for all periods
presented. The shares used in computing pro forma net income per share assume
that the acquisition of pooled entities 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 the Company. The pro forma income tax rate on the Company's recurring
13
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
operations reflects the combined federal, state, and foreign income taxes of
approximately 39.5% and 36.7% for the nine months ended September 30, 1999 and
1998, 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 September 30, 1999 and 1998 tax provisions exceed the Company's
statutory rate due to the recognition of certain acquisition and related costs
which are not deductible for income tax purposes.
The table below presents this pro forma calculation of net income
(unaudited):
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
1999 1998 1999 1998
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Pro forma net income data :
Historical income (loss) from continuing
operations before income taxes $(3,697) $22,597 $ 43,018 $30,907
Pro forma provision for income taxes 3,904 8,645 23,092 12,805
---------- ----------- ----------- ----------
Pro forma net income (loss) from continuing
operations $(7,601) $13,952 $ 19,926 $18,102
========== =========== =========== ==========
</TABLE>
5. Pro Forma Net Income (Loss) Per Share for Effects of October 22, 1999
Recapitalization:
For periods after the Recapitalization, the Company will no longer present
a single earnings per share for common stock. Earnings per share of common
stock will be presented separately for SNC stock and Circle.com stock in the
financial statements of Snyder Communications using the two-class method in
accordance with SFAS No. 128. The two-class method is an earnings allocation
formula that determines the earnings per share for each class of common stock
according to the participation rights in undistributed earnings. For SNC stock,
earnings per share is calculated using earnings applicable to the SNC
stockholders, which includes SNC's retained interest in Circle.com. For
Circle.com stock, earnings per share is calculated using earnings applicable to
Circle.com, which excludes earnings allocable to SNC's retained interest.
SNC Historical Net Income (Loss) Per Share
For all periods presented, basic EPS has been computed using the shares of
SNC stock that were outstanding as of October 22, 1999, the Recapitalization
date. Basic and diluted EPS are the same for all periods presented as there
were no SNC options granted before the Recapitalization.
14
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below presents historical net income from continuing operations
allocated to SNC shareholders (unaudited):
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
(in thousands)
Historical Net Income (Loss):
SNC net income (loss) from continuing operations $(5,898) $14,134 $24,018 $20,775
SNC 20% retained interest in Circle.com (547) 60 (1,025) 42
------- ------- ------- -------
Net income (loss) allocated to SNC shareholders $(6,445) $14,194 $22,993 $20,817
======= ======= ======= =======
</TABLE>
Circle.com Historical Net Income (Loss) Per Share
For all periods presented, basic EPS has been computed using the shares of
Circle.com stock that were outstanding as of October 22, 1999, the
Recapitalization date. The outstanding shares of Circle.com do not include any
shares attributable to SNC's 20% retained interest. Basic and diluted EPS are
the same for all periods presented as there were no Circle.com options granted
before the Recapitalization.
The table below represents historical net income (loss) allocated to
Circle.com shareholders (unaudited):
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
(in thousands)
Historical Net Income (Loss):
Circle.com net income (loss) $(2,735) $ 301 $(5,125) $ 208
SNC 20% retained interest in Circle.com (547) 60 (1,025) 42
------- ----- ------- -----
Net income (loss) allocated to Circle.com shareholders $(2,188) $ 241 $(4,100) $ 166
======= ===== ======= =====
</TABLE>
Pro Forma SNC Net Income (Loss) Per Share
The pro forma adjusted net income (loss) amounts include a provision for
federal and state income taxes as if SNC had been a taxable C corporation for
all periods presented. For all periods presented, basic EPS has been computed
using the shares of SNC stock that were outstanding as of October 22, 1999, the
Recapitalization date. Basic and diluted EPS are the same for all periods
presented as there were no SNC options granted before the Recapitalization.
15
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below represents pro forma net income (loss) allocated to SNC
shareholders (unaudited):
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Pro forma Net Income (Loss):
SNC net income (loss) $(4,866) $13,651 $25,051 $17,772
SNC 20% retained interest in Circle.com (547) 60 (1,025) 66
------- ------- ------- -------
Pro forma net income (loss) allocated to SNC shareholders $(5,413) $13,711 $24,026 $17,838
======= ======= ======= =======
</TABLE>
Pro Forma Circle.com Net Income (Loss) Per Share
The pro forma adjusted net income (loss) amounts include a provision for
federal and state income taxes as if Circle.com had been a taxable C corporation
for all periods presented. For all periods presented, basic EPS has been
computed using the shares of Circle.com stock that were outstanding as of
October 22, 1999, the Recapitalization date. Basic and diluted EPS are the same
for all periods presented as there were no Circle.com options granted before the
Recapitalization.
The table below presents pro forma net income (loss) allocated to
Circle.com shareholders (unaudited):
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Pro forma Net Income (Loss):
Circle.com net income (loss) $(2,735) $ 301 $(5,125) $ 330
SNC 20% retained interest in Circle.com (547) 60 (1,025) 66
------- ----- ------- -----
Pro forma net income (loss) allocated to Circle.com shareholders $(2,188) $ 241 $(4,100) $ 264
======= ===== ======= =====
</TABLE>
6. Business Combinations:
In 1998, the Company completed acquisitions that were accounted for as
poolings of interests for financial reporting purposes. During 1999 and 1998,
the Company also made several acquisitions that have been accounted for as
purchase business combinations. The entities with which the Company has entered
into mergers accounted for as poolings of interests for financial reporting
purposes will be collectively referred to as the "Pooled Entities," and their
mergers will be referred to herein as the "Acquisitions." The 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 Company and the Pooled Entities, after elimination of all
significant intercompany transactions, for all periods presented, giving effect
to the Acquisitions as if they had occurred at the beginning of the earliest
period presented.
During the first quarter of 1999, the Company issued shares of its common
16
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
stock in conjunction with the acquisitions of PromoTech Research Associates
("PromoTech") and MSG. PromoTech, as part of Ventiv, is included in the
Company's discontinued operations. These acquisitions were originally accounted
for as poolings of interests transactions in the first quarter of 1999.
However, as a result of the June 1999 decision by the Company to distribute
Ventiv to its existing shareholders, the financial statements for the first
quarter of 1999 have been previously restated to reflect the acquisitions of
PromoTech and MSG as purchases in accordance with Accounting Principles Board
Opinion No. 16, "Business Combinations".
The following details revenues and net income (loss) from continuing
operations for the three and nine months ended September 30, 1999 and 1998,
respectively, of the Company and the Pooled Entities through the dates of their
respective Acquisitions (in thousands):
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Revenues:
The Company $165,977 $109,831 $465,403 $307,791
Pooled Entities - 19,755 - 49,984
-------- -------- -------- --------
$165,977 $129,586 $465,403 $357,775
======== ======== ======== ========
Net income (loss) from continuing operations:
The Company $ (8,632) $ 13,044 $ 18,895 $ 27,618
Pooled Entities - 1,391 - (6,635)
-------- -------- -------- --------
$ (8,632) $ 14,435 $ 18,895 $ 20,983
======== ======== ======== ========
</TABLE>
During 1998, the Company completed several purchase business combinations
for total consideration paid of approximately $5.7 million (152,411 shares of
Snyder common stock and $636,000 in cash). Based upon an allocation of purchase
consideration, these purchase business combinations have resulted in goodwill of
approximately $6.6 million.
During 1999, the Company completed several purchase business combinations
including Media Syndication Global ("MSG") (March 30, 1999), Broadwell Marketing
Group ("Broadwell") (May 21, 1999), Natural Intelligence, Inc. ("Natural
Intelligence") (June 24, 1999) and Tsunami Consulting Group, Inc. ("Tsunami")
(June 25, 1999) for total consideration paid of approximately $123.4 million
(3,726,751 shares of Snyder common stock, of which 844,501 were exchanged for
2,253,394 of Circle.com common stock on the Recapitalization date, and $21.5
million of cash). These purchase business combinations have resulted in $123.2
million of goodwill. On October 29, 1999, the Company acquired Interactive
Bureau for total consideration of approximately $28.8 million ($8.8 million in
cash and $20.0 million in Circle.com stock).
17
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents pro forma financial information as if the 1998
and 1999 purchase business combinations 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.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Pro forma revenues
SNC $156,001 $144,165 $461,673 $393,376
Circle.com 13,359 8,033 34,320 20,430
Elimination of intersegment revenues (232) - (541) -
-------- -------- -------- --------
$169,128 $152,198 $495,452 $413,806
Pro forma net income (loss) $(32,546) $ 9,683 $ 5,939 $ 13,135
Pro forma net income (loss) per share--basic $ (0.44) $ 0.13 $ 0.08 $ 0.18
Pro forma net income (loss) per share--diluted $ (0.43) $ 0.13 $ 0.08 $ 0.17
</TABLE>
The Company's other purchase business combinations are immaterial to the
consolidated financial statements.
7. Acquisition and Related Costs:
During the nine months ended September 30, 1998, the Company recorded $22.7
million in nonrecurring acquisition and related costs. These costs are
primarily related to the consummation of pooling of interests transactions in
the first quarter of 1998 and consist primarily of investment banking fees,
other professional service fees and other contractual payments.
During the nine months ended September 30, 1999, the Company recorded $15.8
million in nonrecurring acquisition and related costs. Included in this amount
is $14.3 million related to a payment made by Snyder Communications in the form
of 1,171,223 shares of Snyder Communications common stock to the prior owners of
MSG in exchange for the release of any and all claims against Snyder following
the purchase of MSG. The amount of such payment resulted in non-cash expense of
approximately $14.3 million payable in Snyder Communications' common stock. The
remaining $1.5 million nonrecurring acquisition and related costs are incurred
to consolidate and integrate certain of the Company's acquired operations in the
U.S. under the Company's plan initiated in the fourth quarter of 1998. The
charge recorded in the nine months ended September 30, 1999 consists of
consulting services and other costs related to these integration activities.
In 1998, the Company recorded approximately $2.6 million of costs to
consolidate and integrate certain of the Company's operations, including costs
associated with the planned termination of 42 employees. The integration
activities recorded in 1998 were recorded in accordance with Emerging Issues
Task Force No. 94-3 "Liability Recognition for Costs to Exit an Activity
(including certain costs incurred in a restructuring)" ("EITF 94-3"). Additional
expenses for the Company's integration activities recorded in 1999 represent
additional costs incurred that did not qualify for accrual at December 31, 1998
in accordance with ETIF 94-3. At September 30, 1999, the Company substantially
18
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
completed these integration activities. As of September 30, 1999, 46 employees
had terminated employment with the Company and $3.7 million had been charged
against the total liability of $4.2 million.
The following table summarizes the activity in the integration activities
liability account:
<TABLE>
<CAPTION>
Beginning Deductions for Balance at End
Balance Additions Amount Paid of Period
--------- --------- -------------- --------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998 $ - $2,625 $ (305) $2,320
Nine Months Ended September 30, 1999 $2,320 $1,539 $(3,429) $ 430
</TABLE>
8. Long-term Debt:
In August 1999, the Company entered into a $195 million, four-year
unsecured revolving credit facility with a syndicate of banks (the "Lending
Bank"). The principal balance is not subject to payment on demand except at the
termination of the agreement absent an event of default. Interest on amounts
borrowed under the credit facility is based on the London Interbank Offered
Rate, the Lending Bank's base rate of interest or the federal funds rate.
Availability under this credit facility is subject to the Company's compliance
with various financial ratios, operating covenants and other customary
conditions.
On September 30, 1999, there was $145 million in outstanding borrowings
under the $195 million credit facility at a weighted average interest rate of
6.7%.
9. Income Taxes:
The Company's effective tax rate for the nine months ended September 30,
1999 and 1998 differs from the federal statutory rate due primarily to the
nondeductibility of certain goodwill amortization and nonrecurring acquisition
costs and state income taxes. Additionally, the 1998 rate also differs from the
different tax status of certain of the Pooled Entities prior to their merger
with Snyder Communications and different statutory rates for the Company's
international operations.
19
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Segment Information:
SNC develops and delivers messages to both broad and targeted audiences
through a broad range of communication channels. Circle.com provides Internet
professional services. The Circle.com stock separately tracks the performance
of Circle.com, and Circle.com is reported as an operating segment. The Company
evaluates the performance of its two groups based on earnings before interest
and taxes (EBIT) of the combined subsidiaries in each operating group, excluding
nonrecurring acquisition and related costs, and compensation to stockholders.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Circle.com $ 10,208 $ 4,142 $ 22,555 $ 8,972
SNC 156,001 125,444 443,389 348,803
Elimination of intersegment revenues (232) - (541) -
-------- -------- -------- --------
Total $165,977 $129,586 $465,403 $357,775
-------- -------- -------- --------
EBIT:
Circle.com $ (4,806) $ 556 $ (6,604) $ 675
SNC 16,303 21,931 65,657 52,501
-------- -------- -------- --------
Total $ 11,497 $ 22,487 $ 59,053 $ 53,176
-------- -------- -------- --------
Total Assets:
Circle.com $ 66,367 $ 66,367
SNC 651,038 651,038
Other unallocated amounts (75) (75)
-------- --------
Total $717,330 $717,330
-------- --------
Reconciliation of EBIT to income (loss)
from Operations:
Total EBIT for operating groups $ 11,497 $ 22,487 $ 59,053 $ 53,176
Compensation to stockholders - 191 - 573
Acquisition related costs 14,432 96 15,814 22,693
-------- -------- -------- --------
Income (loss) from operations (continuing
operations) $ (2,935) $ 22,200 $ 43,239 $ 29,910
-------- -------- -------- --------
</TABLE>
20
<PAGE>
SNC
(SNC represents the businesses that comprise Snyder Communications, Inc.'s
direct marketing and advertising agency)
CONDENSED COMBINED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------------- --------------------
<S> <C> <C>
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 39,012 $ 47,931
Marketable securities - 612
Accounts receivable, net of allowance for doubtful accounts of $2,966 and
$6,629 at September 30, 1999 and December 31, 1998, respectively 105,990 76,750
Receivables from pass-through costs 126,785 83,164
Related party receivables 190 190
Unbilled services 13,615 19,457
Current portion of deferred tax asset 10,481 13,549
Other current assets 23,578 11,285
Net current assets of discontinued operations - 24,447
-------------------- -------------------
Total current assets 319,651 277,385
-------------------- --------------------
Property and equipment, net 73,547 68,785
Goodwill and other intangible assets, net 158,212 65,863
Deferred tax asset 91,817 86,637
Deposits and other assets 7,811 5,645
Net long-term assets of discontinued operations - 95,280
-------------------- --------------------
Total assets $651,038 $599,595
=================== =====================
LIABILITIES AND INVESTMENTS AND ADVANCES
FROM SNYDER COMMUNICATIONS
Current liabilities:
Lines of credit $ 740 $ 1,825
Current maturities of long-term debt 901 1,085
Accrued payroll 18,845 12,337
Accounts payable 145,412 113,066
Accrued expenses 115,800 79,050
Client advances 7,783 11,753
Unearned revenue 14,043 14,042
-------------------- -------------------
Total current liabilities 303,524 233,158
-------------------- --------------------
Related party borrowings 8,302 8,924
Long-term obligations under capital leases 1,272 1,743
Long-term debt, net of current maturities 133,991 1,616
Other liabilities 3,584 2,922
Commitments and contingencies
Redeemable ESOP stock, 24 and 88 shares outstanding at September 30, 1999
and December 31, 1998, respectively 443 2,960
Investments and advances from Snyder Communications 199,922 348,272
-------------------- --------------------
Total liabilities and investments and advances
from Snyder Communications $651,038 $599,595
=================== =====================
</TABLE>
See accompanying notes to condensed combined financial statements.
21
<PAGE>
SNC
(SNC represents the businesses that comprise Snyder Communications, Inc.'s
direct marketing and advertising agency)
CONDENSED COMBINED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------------- -------------------------------
1999 1998 1999 1998
------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
(in thousands)
Net revenues $156,001 $125,444 $443,389 $348,803
Operating expenses:
Cost of services 112,216 82,112 304,399 228,528
Selling, general and administrative expenses 27,482 21,401 73,333 67,774
Compensation to stockholders - 191 - 573
Acquisition and related costs 14,432 96 15,814 22,693
------------- ------------- ------------- ---------------
Income before interest and taxes 1,871 21,644 49,843 29,235
Interest expense (1,300) (788) (1,996) (1,926)
Interest income 767 1,185 2,004 2,923
------------- ------------- ------------- ---------------
Income from continuing operations before taxes 1,338 22,041 49,851 30,232
Income tax provision 7,236 7,907 25,833 9,457
------------- ------------- ------------- ---------------
Income (loss) from continuing operations (5,898) 14,134 24,018 20,775
Loss from discontinued operations (24,201) (3,771) (11,562) (1,153)
------------- ------------- ------------- ---------------
Net income (loss) $(30,099) $ 10,363 $ 12,456 $ 19,622
============= ============= ============= ===============
</TABLE>
See accompanying notes to condensed combined financial statements.
22
<PAGE>
SNC
(SNC represents the businesses that comprise Snyder Communications, Inc.'s
direct marketing and advertising agency)
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
---------------------------------------------------
1999 1998
------------------------ -----------------------
(in thousands)
<S> <C> <C>
Cash flows from operating activities of continuing operations:
Income from continuing operations $ 24,018 $ 20,775
Adjustments to reconcile net income from
continuing operations to net cash provided by
operating activities of continuing operations:
Depreciation and amortization 17,849 11,882
Noncash expense for stock issuances 14,275 89
Deferred taxes (619) (10,757)
Loss on disposal of assets 1,116 544
Other noncash amounts (11) -
Changes in assets and liabilities:
Accounts receivable, net (15,722) (7,385)
Receivables from pass-through costs (43,621) (9,409)
Related party receivables - 1,424
Unbilled services 8,822 (673)
Deposits and other assets (2,147) (787)
Other current assets (5,795) (52)
Accrued payroll, accounts payable and
accrued expenses 43,295 15,778
Client advances (3,970) (10,873)
Unearned revenue (934) 928
------------------------ -----------------------
Net cash provided by operating activities of
continuing operations 36,556 11,484
------------------------ -----------------------
Cash flows from investing activities of continuing operations:
Purchase of subsidiaries, net of cash acquired (18,133) (6,179)
Purchase of property and equipment (16,995) (25,046)
Proceeds from sale of equipment - 7
Net sales of marketable securities 612 380
Purchase of intangible assets (5,406) (431)
Note and net advances to stockholders of acquired
subsidiaries - 758
------------------------ -----------------------
Net cash used in investing activities of continuing operations (39,922) (30,511)
======================== =======================
</TABLE>
See accompanying notes to condensed combined financial statements.
23
<PAGE>
SNC
CONDENSED COMBINED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-----------------------------------------------
1999 1998
------------------- ----------------------
<S> <C> <C>
(in thousands)
Cash flows from financing activities of continuing operations:
Repayment of long-term notes (70) (1,071)
Distributions and dividends - (5,266)
Net proceeds from long-term debt 33,329 13,587
Net repayments on lines of credit (1,139) (7,350)
Payments on capital lease obligations (1,221) (1,417)
Investments and advances from Snyder Communications 2,363 56,322
------------------- ----------------------
Net cash provided by financing activities of continuing operations 33,262 54,805
------------------- ----------------------
Effect of exchange rate changes (519) 1,077
Net increase in cash and equivalents of continuing operations 29,377 36,855
Investments and advances to discontinued operations (38,296) (30,763)
Cash and equivalents, beginning of period 47,931 71,789
------------------- ----------------------
Cash and equivalents, end of period $ 39,012 $ 77,881
=================== ======================
Supplemental disclosures of cash flow information:
Cash paid for interest $ 1,518 $ 386
Cash paid for income taxes 20,366 8,185
Supplemental disclosures of noncash activities:
Equipment purchased under capital leases - 1,304
Issuance of shares of common stock for purchase of subsidiaries 97,652 52,568
Issuance of shares related to stock appreciation rights - 3,484
Treasury stock acquired through the assumption of debt 100,767 -
Tax benefit from exercise of stock options 2,434 7,106
Reclassification of redeemable ESOP stock 2,517 -
Issuance of notes for the purchase of subsidiary - 1,350
Tax benefit from taxable merger transactions 941 44,348
Distribution to Ventiv shareholders 119,929 -
</TABLE>
See accompanying notes to condensed combined financial statements.
24
<PAGE>
SNC
(SNC represents the businesses that comprise Snyder Communications, Inc.'s
direct marketing and advertising agency)
CONDENSED COMBINED STATEMENTS OF CHANGES IN GROUP EQUITY
<TABLE>
<CAPTION>
Other
Retained Comprehensive
Other Earnings Income (Loss) Total
-------------- ------------- ---------------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Balance, December 31, 1998 $ 308,276 $ 38,154 $ 1,842 $ 348,272
Net income (unaudited) - 12,456 - 12,456
Foreign currency translation adjustment (unaudited) - - (3,448) (3,448)
Unrealized gain/loss on marketable securities
(unaudited) - - (11) (11)
Distribution to Ventiv Stockholders (unaudited) - (159,494) 1,269 (158,225)
Capital contribution (unaudited) 878 - - 878
-------------- ------------- ---------------- ------------
Balance, September 30, 1999 (unaudited) $ 309,154 $ (108,884) $ (348) $ 199,922
============== ============= ================ ============
</TABLE>
See accompanying notes to condensed combined financial statements.
25
<PAGE>
SNC
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(unaudited)
1. Organization and Basis of Presentation
Organization and Capitalization of Snyder Communications, Inc.
Snyder Communications, Inc. ("Snyder Communications" or "Snyder"), a
Delaware corporation, was incorporated on June 25, 1996, to continue the
business operations of Collegiate Marketing and Communications, L.P. Snyder
Communications completed an initial public offering of its common stock on
September 24, 1996. Snyder Communications provides direct marketing,
advertising and communication services and Internet professional services to its
clients. SNC is a business unit of Snyder Communications which consists of the
assets and operations of the direct marketing, advertising and communications
part of Snyder Communications' business.
SNC previously included Snyder Communications' healthcare marketing
services business. On June 22, 1999, the Board of Directors of Snyder
Communications approved a plan to effect the distribution (the "Distribution")
of Snyder Communications' healthcare marketing services business to Snyder
Communications' existing stockholders. Snyder Communications consummated the
Distribution on September 27, 1999 through a special dividend of one share of
common stock of a newly formed subsidiary, Ventiv Health, Inc., for every three
shares of existing Snyder Communications common stock.
On October 22, 1999, the stockholders of Snyder Communications approved a
"Recapitalization" which resulted in authorization of Snyder Communications to
issue two classes of stock as follows: 80 million shares of common stock
designated as "Circle.com stock" and 320 million shares of common stock
designated as "SNC stock." The Circle.com stock tracks the separate performance
of Snyder Communications' Internet professional services business unit, which
Snyder Communications calls "Circle.com", and the SNC stock separately tracks
the performance of the remaining Snyder Communications businesses, which Snyder
calls its "SNC" business unit, and a retained interest in Circle.com. Each
share of Snyder Communications common stock has been converted into one share of
SNC stock and .25 of a share of Circle.com stock.
The SNC stock and Circle.com stock constitute common stock of Snyder
Communications, and the issuance of these classes of stock did not result in any
transfer of assets or liabilities of Snyder Communications or any of its
affiliates. Snyder Communications issued shares of Circle.com stock
representing 80% of the equity value attributed to Circle.com. The remaining
equity value attributed to Circle.com constitutes SNC's "retained interest" in
Circle.com. The retained interest in Circle.com is not reflected in the
accompanying SNC statements of income or SNC balance sheet. The retained
interest is, however, considered in calculating earnings of Snyder
Communications allocated to the SNC stockholders.
Holders of Circle.com stock and SNC stock are stockholders of a single
company; Snyder Communications, Circle.com and SNC are not separate legal
entities. As a result, stockholders continue to be subject to all of the risks
associated with an investment in Snyder Communications and all of its
businesses, assets, and liabilities. The issuance of Circle.com stock and SNC
stock and the allocation of the assets and liabilities between Circle.com and
SNC did not affect ownership of any assets or responsibility for liabilities of
Snyder Communications or any of its subsidiaries. The assets of Snyder
Communications attributed to Circle.com could be subject to the liabilities of
SNC, whether such liabilities arise from lawsuits, contracts or indebtedness
26
<PAGE>
SNC
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
attributable to SNC. If Snyder Communications is unable to satisfy
Circle.com's liabilities out of assets attributed to it, Snyder Communications
may be required to satisfy these liabilities with assets attributed to SNC.
In October 1999, the Snyder Communications shares issued as consideration
for the Circle.com acquisitions of Tsunami Consulting Group, Inc. and Natural
Intelligence Inc., were exchanged for shares in Circle.com and shares were
issued for the acquisition of Interactive Bureau, LLC. These additional
issuances of approximately 4.3 million shares have reduced SNC's retained
interest in Circle.com to approximately 16.9%. The percentage of Circle.com's
equity value represented by the retained interest may further change in the
future if the total number of outstanding shares of Circle.com stock changes or
if transfers of cash or other property between SNC and Circle.com occur that are
accounted for as either capital contributions to Circle.com or as a return of
capital by Circle.com.
Financial effects arising from one group that affect Snyder Communications'
combined results of operations or financial condition could, if significant,
affect the results of operations or financial condition of the other group and
the market price of the common stock relating to the other group. Any net
losses of Circle.com or SNC and dividends and distributions on, or repurchases
of Circle.com stock or SNC stock will reduce the funds of Snyder Communications
legally available for payment on SNC stock.
Basis of Presentation
Because the Recapitalization occurred prior to the filing of this Form 10-Q
with the Securities and Exchange Commission ("SEC"), the separate condensed
combined financial statements of SNC have been included. The combined financial
statements of Circle.com and SNC comprise all of the accounts included in the
corresponding condensed consolidated financial statements of Snyder
Communications. The separate condensed combined financial statements of
Circle.com and SNC give effect to the accounting policies that will be
applicable for periods following the Recapitalization, including those
applicable to the allocation of expenses. The separate Circle.com and SNC
condensed combined financial statements have been prepared on a basis that
management believes to be reasonable and appropriate and reflect (1) the
combined financial position, results of operations and cash flows of the
businesses that comprise the Snyder Communications' Circle.com and SNC business
units, with all significant intracompany (within SNC and Circle.com,
respectively) transactions and balances eliminated, (2) in the case of the
Circle.com condensed combined financial statements, corporate assets and
liabilities of Snyder Communications and related transactions associated with or
conducted by Circle.com including allocated portions of Snyder Communications'
overhead and administrative shared services and (3) in the case of SNC's
condensed combined financial statements, all other corporate assets and
liabilities and related transactions of Snyder Communications, including
allocated portions of Snyder Communications' overhead and administrative shared
services. Intercompany transactions between Circle.com and SNC have not been
eliminated in SNC's condensed combined financial statements, except in instances
where they have not been realized by Circle.com or SNC.
The accompanying unaudited condensed combined financial statements have
been prepared in accordance with the interim reporting rules and regulations of
the SEC. As a result, certain information and footnote disclosures normally
included in financial statements prepared in accordance with GAAP have been
condensed or omitted. Snyder Communications believes the disclosures made are
adequate to make the information presented not misleading. In the opinion of
Snyder Communications, the accompanying unaudited condensed combined financial
statements reflect all adjustments, including only normal recurring adjustments,
necessary to present fairly the financial position of SNC at September 30, 1999
27
<PAGE>
SNC
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
and the results of operations and cash flows for the nine months ended September
30, 1999 and September 30, 1998. Operating results for the nine month period
ended September 30, 1999 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1999. The unaudited condensed
combined financial statements should be read in conjunction with the financial
statements of Snyder Communications and Circle.com.
During the nine months ended September 30, 1999, SNC recorded $541,000 of
expense associated with services purchased from Circle.com. There were no
intercompany transactions in 1998.
2. Discontinued Operations
SNC previously included Snyder Communications' healthcare marketing
services business which was contributed to Ventiv Health, Inc. On June 22, 1999,
the Board of Directors of Snyder Communications approved a plan to effect the
Distribution of 100% of the shares of common stock of a newly formed wholly
owned subsidiary, Ventiv Health, Inc., ("Ventiv"), to Snyder Communications'
common stockholders (the "Spin-off"). Shares of Ventiv common stock were
distributed on the basis of one share of Ventiv for every three shares of
existing Snyder Communications common stock on September 27, 1999 to
stockholders of record as of September 20, 1999. As a result of the
Distribution, Ventiv became an independent, publicly traded corporation.
Accordingly, the results of Ventiv have been reclassified from amounts
previously reported, and are stated separately in the accompanying condensed
combined financial statements as discontinued operations.
During the nine months ended September 30, 1998, Ventiv recorded $20.7
million in nonrecurring acquisition and related costs. These costs are
primarily related to the consummation of pooling of interests transactions and
consist of investment banking fees, other professional service fees and
other contractual payments. In addition, this amount includes a charge of
approximately $4.4 million for costs necessary to consolidate and integrate
certain of Ventiv's acquired operations in the U.S. and the U.K.
During the nine months ended September 30, 1999, Ventiv recorded $7.4
million in nonrecurring acquisition and related costs. Included in this amount
is $5.7 million related to a payment made by Ventiv, in the form of 695,304
shares of Ventiv common stock, to the prior owners of PromoTech in exchange for
the release of any and all claims against Snyder or Ventiv related to the
purchase of PromoTech. The payment was not provided for in the purchase
agreement and is not part of the purchase price for accounting purposes. In
addition, the $7.4 million expense includes a charge of approximately $1.7
million for costs necessary to consolidate and integrate certain of Ventiv's
acquired operations in the U.S. and U.K. under Ventiv's plan initiated in 1998.
The charge recorded in the nine months ended September 30, 1999 consists of $1.3
million in severance and related costs associated with the termination of 23
employees, and $0.4 million in consulting services and other costs related to
these integration activities. In 1998, Ventiv recorded approximately $10.7
million of costs to consolidate and integrate certain of its operations. As of
September 30, 1999, 151 employees had terminated employment with Ventiv and
$11.4 million had been charged against the total liability of $12.4 million.
The integration activities recorded in 1998 were recorded in accordance
with Emerging Issues Task Force 94-3, "Liability Recognition for Costs to Exit
an Activity (including certain costs incurred in a restructuring)" ("EITF 94-
3"). Additional expenses for Ventiv's integration activities recorded in 1999
represent additional costs incurred that did not qualify for accrual at December
31, 1998 in accordance with EITF 94-3. At September 30, 1999, Ventiv
substantially completed these integration activities.
28
<PAGE>
SNC
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
The following table summarizes the activity in the Ventiv integration activities
liability account:
<TABLE>
<CAPTION>
Beginning Deductions for Balance at End
Balance Additions Amount Paid Of Period
---------- ---------- -------------- --------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998 $ - 10,654 (2,683) $7,971
Nine Months Ended September 30, 1999 $7,971 1,696 (8,679) $ 988
</TABLE>
During the nine months ended September 30, 1999, SNC incurred and recorded
approximately $13.3 million of costs, net of tax, related to the Distribution.
This amount is reflected in the "Loss from discontinued operations (net of
income taxes)" and consists of financial advisory fees, other professional
service fees, and printing fees.
3. Business Combinations
In 1998, SNC completed acquisitions that were accounted for as poolings of
interests for financial reporting purposes. The entities with which SNC has
completed 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
condensed combined financial statements have been retroactively restated to
reflect the combined financial position and combined results of operations and
cash flows of SNC and the Pooled Entities, after elimination of all significant
intercompany transactions, for all periods presented, giving effect to the
Acquisitions as if they had occurred at the beginning of the earliest period
presented.
During the first quarter of 1999, Snyder Communications issued shares of
its common stock in conjunction with the acquisitions of PromoTech and MSG.
PromoTech, as part of Ventiv, is included in SNC's discontinued operations.
These acquisitions were originally accounted for as pooling of interests
transactions in the first quarter of 1999. However, as a result of the June
1999 decision by Snyder Communications to distribute Ventiv to its existing
shareholders, the financial statements for the first quarter of 1999 have been
previously restated to reflect the acquisitions of PromoTech and MSG as
purchases in accordance with Accounting Principles Board Opinion No. 16,
"Business Combinations".
The following details unaudited revenues and net income (loss) from
continuing operations for the three and nine month periods ended September 30,
1999 and 1998, respectively, of SNC and the Pooled Entities through the dates of
their respective Acquisitions.
<TABLE>
<CAPTION>
The Three Months ended September 30, The Nine Months ended September 30,
------------------------------------- --------------------------------------
1999 1998 1999 1998
---------------- ------------------ ------------------- ----------------
<S> <C> <C> <C> <C>
(unaudited, in thousands)
Revenues:
SNC $156,001 $105,689 $443,389 $299,296
Pooled Entities - 19,755 - 49,507
---------------- ------------------ ------------------- ----------------
$156,001 $125,444 $443,389 $348,803
================ ================== =================== ================
Net income (loss) from continuing operations:
SNC $ (5,898) $ 12,743 $ 24,018 $ 27,124
Pooled Entities - 1,391 - (6,349)
---------------- ------------------ ------------------- ----------------
$ (5,898) $ 14,134 $ 24,018 $ 20,775
================ ================== =================== ================
</TABLE>
29
<PAGE>
SNC
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
During 1999, SNC completed several purchase business combinations including
Media Syndication Global ("MSG") (March 30, 1999) and Broadwell Marketing Group
("Broadwell") (May 21, 1999) for total consideration of $87.0 million (2,882,250
shares of Snyder Communications common stock and $9.2 million in cash). These
purchases have resulted in allocation to goodwill of approximately $85.2
million. SNC's other purchase business combinations are immaterial to the
combined financial statements.
The following table presents unaudited pro forma financial information as
if the 1999 purchase business combinations had been consummated at the beginning
of each of the periods presented and all of SNC's operations had been taxed as a
C corporation.
<TABLE>
<CAPTION>
The Three Months Ended September 30, The Nine Months Ended September 30,
------------------------------------ -------------------------------------
1999 1998 1999 1998
--------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
(unaudited, in thousands)
Pro forma revenues $156,001 $144,165 $461,673 $393,376
Pro forma net income (loss) $(29,070) $ 11,241 $ 14,862 $ 18,553
</TABLE>
4. Acquisition and Related Costs
During the nine months ended September 30, 1998, SNC recorded $22.7 million
in nonrecurring acquisition and related costs. These costs are primarily related
to the consummation of pooling of interests transactions in the first quarter of
1998 and consist primarily of investment banking fees, other professional
service fees, transfer fees and other contractual payments.
During the nine months ended September 30, 1999, SNC recorded $15.8 million
in nonrecurring acquisition and related costs. Included in this amount is $14.3
million related to a payment made by SNC, in the form of 1,171,223 shares of
Snyder Communications common stock, to the prior owners of MSG in exchange for
the release of any and all claims against Snyder related to the purchase of MSG.
The payment was not provided for in the purchase agreement and is not part of
the purchase price for accounting purposes. The remaining $1.5 million charge
is for costs necessary to consolidate and integrate certain of SNC's acquired
operations in the U.S. under the plan initiated in the fourth quarter of 1998.
The charge recorded in the nine months ended September 30, 1999 consists of
consulting services and other costs related to these integration activities.
In 1998, SNC recorded a charge of approximately $2.6 million for costs
necessary to consolidate and integrate certain of SNC's acquired operations in
the U.S. Four locations have been combined into two. The charge consists of
approximately $1.6 million of severance and other costs associated with the
termination of 42 employees, and $1.0 million of fees incurred for other costs
related to these integration activities. The integration activities recorded in
1998 were recorded in accordance with Emerging Issues Task Force No. 94-3
"Liability Recognition for Costs to Exit an Activity (including certain costs
incurred in a restructuring)" ("EITF 94-3"). Additional expenses for SNC's
integration activities recorded in 1999 represent additional costs incurred that
did not qualify for accrual at December 31, 1998 in accordance with EITF 94-3.
As of September 30, 1999, 46 employees had terminated employment with the
Company and $3.7 million had been charged against the total liability of $4.2
million.
30
<PAGE>
SNC
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
The following table summarizes the activity in the integration activities
liability account:
<TABLE>
<CAPTION>
Beginning Deductions for Balance at End
Balance Additions Amounts Paid of Period
--------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998 $ -- $2,625 $ (305) $2,320
Nine Months Ended September 30, 1999 $2,320 $1,539 $(3,429) $ 430
</TABLE>
5. Long-Term Debt
In August 1999, Snyder Communications entered into a $195 million, four-
year unsecured revolving credit facility with a sydicate of banks (the "Lending
Bank"). The principal balance is not subject to payment on demand except at the
termination of the agreement absent an event of default. Interest on amounts
borrowed under the credit facility is based on the London Interbank Offered
Rate, the Lending Bank's base rate on interest or the federal funds rate.
Availability under this credit facility is subject to Snyder's compliance with
various financial ratios, operating covenants and other customary conditions.
On September 30, 1999, there was $132.7 million in outstanding
borrowings under the $195 million credit facility allocated to SNC at a weighted
average interest rate of 6.7%.
6. Pro Forma Adjusted Income (Loss) Data
The pro forma adjusted net income (loss) amounts include a provision for
federal and state income taxes as if the operations of SNC 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, state and foreign
taxes of approximately 38.0% and 36.5% for the nine months ended September 30,
1999 and 1998, respectively.
The table below presents this pro forma calculation of adjusted net income
(loss):
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------------- -----------------------
1999 1998 1999 1998
----------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
(unaudited, in thousands)
Pro forma adjusted net income (loss) data:
Historical income from continuing operations
before income taxes $ 1,338 $22,041 $49,851 $30,232
Pro forma provision for income taxes 6,204 8,390 24,800 12,460
----------- ------------- ------------ ----------
Pro forma adjusted income (loss) from continuing operations $(4,866) $13,651 $25,051 $17,772
=========== ============= ============ ==========
</TABLE>
31
<PAGE>
CIRCLE.COM
(Circle.com represents the businesses that comprise Snyder Communications,
Inc.'s
Internet professional services business)
CONDENSED COMBINED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- -------------
<S> <C> <C>
(unaudited)
ASSETS
Current assets:
Cash $ 1,660 $ -
Accounts receivable, net of allowance for doubtful accounts of $ 778 and $ 402 at
September 30, 1999 and December 31, 1998, respectively 7,981 2,151
Receivables from pass-through costs 3,659 2,851
Unbilled services 855 251
Deferred tax asset 1,423 162
Other current assets 619 219
---------- ---------
Total current assets 16,197 5,634
---------- ---------
Property and equipment, net 5,624 1,582
Goodwill, net 43,868 6,425
Deposits and other assets 678 56
---------- ---------
Total assets $66,367 $13,697
========== =========
LIABILITIES AND INVESTMENTS AND ADVANCES FROM SNYDER
COMMUNICATIONS
Current liabilities:
Accrued payroll $ 1,506 $ 1,086
Accounts payable 4,230 1,475
Accrued expenses 3,805 1,497
Client advances 139 493
---------- ---------
Total current liabilities 9,680 4,551
---------- ---------
Long term debt 12,292 -
Deferred tax liability 75 40
Commitments and contingencies - -
Investments and advances from Snyder Communications 44,320 9,106
---------- ---------
Total liabilities and investments and advances from Snyder Communications $66,367 $13,697
========== =========
</TABLE>
See accompanying notes to condensed combined financial statements.
32
<PAGE>
CIRCLE.COM
(Circle.com represents the businesses that comprise Snyder Communications,
Inc.'s
Internet professional service business)
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1999 1998 1999 1998
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
(in thousands)
Net revenues $10,208 $4,142 $22,555 $8,972
Operating expenses:
Professional services 6,256 2,031 13,384 4,451
Office and general 8,758 1,555 15,775 3,846
-------- ------ ------ -----
Income (loss) from operations (4,806) 556 (6,604) 675
Interest expense, net (229) - (229) -
------- ------ ------ -----
Income (loss) before income taxes (5,035) 556 (6,833) 675
Income tax (benefit) provision (2,300) 255 (1,708) 467
------- ------ ------- ------
Net income (loss) $(2,735) $ 301 $(5,125) $ 208
======= ====== ======= ======
</TABLE>
See accompanying notes to condensed combined financial statements.
33
<PAGE>
CIRCLE.COM
(Circle.com represents the businesses that comprise Snyder Communications,
Inc.'s
Internet professional service business)
CONDENSED COMBINED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-----------------------------------
1999 1998
---------- ----------
<S> <C> <C>
(in thousands)
Cash flows from operating activities:
Net income (loss) $(5,125) $ 208
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 2,656 320
Deferred taxes 35 18
Changes in assets and liabilities:
Accounts receivable, net (5,092) (636)
Receivables from pass-through costs (808) (899)
Unbilled services (604) -
Other current assets (1,592) (112)
Deposits and other assets (616) -
Accrued payroll, accounts payable and accrued expenses 2,494 365
Client advances (354) -
---------- ----------
Net cash used in operating activities (9,006) (736)
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (4,331) (1,090)
Cash at acquired subsidiary 1,193 -
Additional payment for purchase of subsidiary (1,450) -
---------- ----------
Net cash used in investing activities (4,588) (1,090)
---------- ----------
Cash flows from financing activities:
Investment and advances from Snyder Communications, net 15,248 1,835
---------- ----------
Net cash provided by financing activities 15,248 1,835
---------- ----------
Effect of exchange rates on cash 6 (9)
Net increase in cash and equivalents 1,660 -
Cash and equivalents, beginning of period - -
---------- ----------
Cash and equivalents, end of period $ 1,660 $ -
========== ==========
Supplemental disclosures of noncash activities:
Debt incurred for purchase of subsidiary $12,292 $ -
Business acquired with Snyder Communications common stock 25,085 5,095
</TABLE>
See accompanying notes to condensed combined financial statements.
34
<PAGE>
CIRCLE.COM
(Circle.com represents the businesses that comprise Snyder Communications,
Inc.'s
Internet professional service business)
CONDENSED COMBINED STATEMENTS OF CHANGES IN GROUP EQUITY
(in thousands)
<TABLE>
<CAPTION>
Retained Other
Earnings Comprehensive
Other (deficit) Income (Loss) Total
---------- ----------- ----------------- ---------
<S> <C> <C> <C> <C>
Balance, at December 31, 1998 $ 9,491 $ (372) $(13) $ 9,106
Net loss (unaudited) - (5,125) - (5,125)
Foreign currency translation adjustment (unaudited) - - 6 6
Capital contribution (unaudited) 40,333 - - 40,333
---------- ------------ ---------------- ---------
Balance, at September 30, 1999 (unaudited) $49,824 $(5,497) $ (7) $44,320
========== ============ ================ =========
</TABLE>
See accompanying notes to condensed combined financial statements.
35
<PAGE>
CIRCLE.COM
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(unaudited)
1. Organization and Basis of Presentation:
Organization and Capitialization of Snyder Communications, Inc.
Snyder Communications, Inc. ("Snyder Communications"), a Delaware
corporation, was incorporated on June 25, 1996, to continue the business
operations of Collegiate Marketing and Communications, L.P. Snyder
Communications completed an initial public offering of its common stock on
September 24, 1996. Snyder Communications provides direct marketing,
advertising, and communications services, Internet professional services and
healthcare marketing services to its clients.
Circle.com is a business unit of Snyder Communications which consists of
the assets and operations of the Internet professional services part of Snyder
Communications' business. On June 22, 1999, the Board of Directors (the
"Board") of Snyder Communications approved a plan to effect the distribution
(the "Distribution") of Snyder Communications' healthcare marketing services
business to Snyder Communications' existing stockholders. Snyder Communications
consummated the Distribution on September 27, 1999 through a special dividend of
one share of common stock of a newly formed subsidiary, Ventiv Health, Inc., for
every three shares of existing Snyder Communications common stock.
On October 22, 1999, the stockholders of Snyder Communications approved a
"Recapitalization" which resulted in authorization of Snyder Communications to
issue two classes of stock as follows: 80 million shares of common stock
designated as "Circle.com stock" and 320 million shares of common stock
designated as "SNC stock." The Circle.com stock tracks the separate performance
of Snyder Communications' Internet professional services business unit, which
Snyder Communications calls "Circle.com", and the SNC stock separately tracks
the performance of the remaining Snyder Communications businesses, which Snyder
calls its "SNC" business unit, and a retained interest in Circle.com. Each
share of Snyder Communications common stock has been converted into one share of
SNC stock and .25 of a share of Circle.com stock.
The SNC stock and Circle.com stock constitute common stock of Snyder
Communications, and the issuance of these classes of stock did not result in any
transfer of assets or liabilities of Snyder Communications or any of its
affiliates. Snyder Communications issued shares of Circle.com stock
representing 80% of the equity value attributed to Circle.com. The remaining
equity value attributed to Circle.com constitutes SNC's "retained interest" in
Circle.com.
Holders of Circle.com stock and SNC stock are stockholders of a single
company; Snyder Communications, Circle.com and SNC are not separate legal
entities. As a result, stockholders continue to be subject to all of the risks
associated with an investment in Snyder Communications and all of its
businesses, assets, and liabilities. The issuance of Circle.com stock and SNC
stock and the allocation of the assets and liabilities between Circle.com and
SNC did not affect ownership of any assets or responsibility for liabilities of
Snyder Communications or any of its subsidiaries. The assets of Snyder
Communications attributed to Circle.com could be subject to the liabilities of
SNC, whether such liabilities arise from lawsuits, contracts or indebtedness
attributable to SNC. If Snyder Communications is unable to satisfy SNC's
liabilities out of assets attributed to it, Snyder Communications may be
required to satisfy these liabilities with assets attributed to Circle.com.
36
<PAGE>
CIRCLE.COM
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
Financial effects arising from one group that affect Snyder Communications
consolidated results of operations or financial condition could, if significant,
affect the results of operations or financial condition of the other group and
the market price of the common stock relating to the other group.
Basis of Presentation
Because the Recapitalizaton occurred prior to the filing of this Form 10-Q
with the Securities and Exchange Commission ("SEC"), the separate condensed
combined financial statements of Circle.com have been included. The combined
financial statements of Circle.com and SNC comprise all of the accounts included
in the corresponding consolidated financial statements of Snyder Communications.
The combined financial statements of Circle.com give effect to the accounting
policies that will be applicable for periods following the Recapitalization,
including those applicable to the allocation of expenses. The separate
Circle.Com and SNC condensed combined financial statements have been prepared on
a basis that management believes to be reasonable and appropriate and reflect
(1) the combined financial position, results of operations, and cash flows of
the businesses that comprise the Snyder Communications' Circle.com and SNC
business units, with all significant intracompany (within SNC and Circle.com,
respectively), transactions and balances eliminated, (2) in the case of
Circle.com condensed combined financial statements, corporate assets and
liabilities of Snyder Communications and related transactions associated with or
conducted by Circle.com, including allocated portions of Snyder Communications'
overhead and administrative shared services and (3) in the case of SNC's
condensed combined financial statements, all other corporate assets and
liabilities and related transactions of Snyder Communications, including
allocated portions of Snyder Communications' overhead and administrative shared
services. Intercompany transactions between Circle.Com and SNC have not been
eliminated in Circle.com's condensed combined financial statements, except in
instances where they have not been realized by Circle.com or SNC.
The accompanying unaudited condensed combined financial statements have
been prepared in accordance with the interim reporting rules and regulations of
the SEC. As a result, certain information and footnote disclosures normally
included in financial statements prepared in accordance with GAAP have been
condensed or omitted. Snyder Communications believes the disclosures made are
adequate to make the information presented not misleading. In the opinion of
Snyder Communications, the accompanying unaudited condensed combined financial
statements reflect all adjustments, including only normal recurring adjustments,
necessary to present fairly the financial position of Circle.com at September
30, 1999 and the results of operations and cash flows for the nine months ended
September 30, 1999 and 1998. Operating results for the nine month period ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1999. The unaudited condensed combined
financial statements should be read in conjunction with the financial statements
of Snyder Communications and SNC.
During the nine months ended September 30, 1999, Circle.com recorded
$541,000 of revenue for services provided to SNC. There were no intercompany
transactions in 1998.
2. Business Combinations:
During 1998, Snyder Communications completed acquisitions that were
accounted for as pooling of interests for financial reporting purposes. Snyder
Communications' financial statements have been retroactively restated to reflect
the combined financial position and combined results of operations and cash
flows of Snyder Communications' and the pooled entities, after elimination of
all significant intercompany transactions, for all periods presented, giving
37
<PAGE>
CIRCLE.COM
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
effect to the acquisitions as if they had occurred at the beginning of the
earliest period presented. A portion of these pooled entities have been included
in the combined operations of Circle.com.
The following details revenues and net income (loss) of Circle.com for the
three and nine months ended September 30, 1999 and 1998, and the portion of the
pooled entities included in Circle.com through the dates of their respective
acquisitions (in thousands):
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------- --------------- --------------- -----------------
1999 1998 1999 1998
----------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C>
(unaudited)
Revenues:
Circle.com $10,208 $4,142 $22,555 $8,495
Pooled Entities - - - 477
----------------- --------------- --------------- -----------------
$10,208 $4,142 $22,555 $8,972
================= =============== =============== =================
Net income (loss):
Circle.com $(2,735) $ 301 $(5,125) $ 494
Pooled Entities - - - (286)
----------------- --------------- --------------- -----------------
$(2,735) $ 301 $(5,125) $ 208
================= =============== =============== =================
</TABLE>
During 1998, Snyder Communications completed several purchase business
combinations for total consideration paid of approximately $5.7 million (152,411
shares of Snyder Communications common stock and $636,000 in cash). Based upon
an allocation of purchase consideration, these purchase business combinations
have resulted in goodwill of approximately $6.6 million.
In June 1999, Snyder Communications completed purchase business
combinations including Tsunami Consulting Group, Inc. and Natural Intelligence,
Inc. for total consideration paid of approximately $36.4 million (844,499
shares of Snyder Communications common stock and $12.3 million in cash). Upon
the effectiveness of the Recapitalization, the majority of the Snyder
Communication shares issued in these acquisitions were exchanged for Circle.com
stock at an agreed upon value. These purchase business combinations have
resulted in a preliminary allocation to goodwill of approximately $38.0 million
and $7.7 million, respectively. Each of these acquired businesses constitute a
part of Circle.com's business. In October 1999, Snyder Communications acquired
Interactive Bureau for total consideration of approximately $28.8 ($8.8 million
in cash and $20.0 million in Circle.com stock).
38
<PAGE>
CIRCLE.COM
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
The following table presents pro forma financial information as if the 1998
and 1999 purchases, including Interactive Bureau purchased in October 1999, had
been consummated at the beginning of each of the periods presented and all of
Circle.com's operations had been taxed as a C corporation (in thousands):
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------- --------------- --------------- --------------
1999 1998 1999 1998
----------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
(unaudited)
Pro forma revenues $13,359 $ 8,033 $34,320 $20,430
Pro forma net loss $(3,480) $(1,580) $(8,939) $(5,408)
</TABLE>
3. Pro Forma Adjusted Income (Loss) Data
The pro forma adjusted net income (loss) amounts include a provision for
federal and state income taxes as if Circle.com had been a taxable C corporation
for all periods presented. The pro forma income tax rate reflects the combined
federal, state and foreign income taxes of approximately 25.0% and 51.1% for the
nine months ended September 30, 1999 and 1998, respectively.
The table below presents the calculation of pro forma net income (loss):
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------- --------------- --------------- -----------------
1999 1998 1999 1998
----------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C>
(unaudited, in thousands)
Historical income (loss) before income taxes $(5,035) $ 556 $(6,833) $ 675
Pro forma benefit (provision) for income taxes 2,300 (255) 1,708 (345)
----------------- --------------- --------------- -----------------
Pro forma adjusted net income (loss) $(2,735) $ 301 $(5,125) $ 330
================= =============== =============== =================
</TABLE>
The table below presents the calculation of pro forma adjusted net income
(loss) had the income tax provision (benefit) been calculated as if Circle.com
had been taxable as a "C" corporation on a separate return basis:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------- --------------- --------------- -----------------
1999 1998 1999 1998
----------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C>
(unaudited, in thousands)
Historical income (loss) before income taxes $(5,035) $ 556 $(6,833) $ 675
Pro forma benefit (provision) for income taxes - (255) - (345)
----------------- --------------- --------------- -----------------
Pro forma adjusted net income (loss) $(5,035) $ 301 $(6,833) $ 330
================= =============== =============== =================
</TABLE>
39
<PAGE>
CIRCLE.COM
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
The Circle.com income tax provision as calculated on a separate return
basis reflects no benefit for net operating loss carryforwards due to the
uncertainty associated with realizing those benefits on a separate return basis.
4. Long-term Debt
Snyder Communications incurs debt on behalf of Circle.com and SNC. As of
September 30, 1999, $12.3 million of Snyder Communications' debt which was
related to the acquisitions of Tsunami Consulting Group, Inc. and Natural
Intelligence Inc. had been allocated to Circle.com. As a result of the October,
1999 purchase of Interactive Bureau, an additional $9.7 million of Snyder
Communications' debt will be allocated to Circle.com.
40
<PAGE>
ITEM 2
SNYDER COMMUNICATIONS--MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations and of its
liquidity and capital resources of Snyder Communications, Inc. ("Snyder
Communications" or the "Company") is based upon the Company's consolidated
financial statements. The entities with which the Company has entered into
mergers accounted for as poolings of interests for financial reporting purposes
will be collectively referred to as the "Pooled Entities" and their mergers will
be referred to herein as the "Acquisitions". The consolidated financial
statements have been retroactively restated to reflect the combined financial
position and the combined results of operations and cash flows of the Pooled
Entities for all periods presented, giving effect to the Acquisitions as if they
had occurred at the beginning of the earliest period presented. The following
discussion should be read in conjunction with the consolidated financial
statements of the Company and the related notes thereto included elsewhere in
this Quarterly Report on Form 10-Q.
Overview
Since completing our initial public offering in September 1996, we have
significantly expanded the range of marketing services we are able to offer our
clients. This expansion has been accomplished by creating and initiating new
programs or service offerings and by acquiring businesses that offer
complementary services. Our strategy has been to grow our existing business and
to integrate services of our acquired companies with those of our existing
operations. The service offerings of acquired companies have been combined with
those previously offered by us to create SNC and Circle.com. SNC consists of the
Brann Worldwide, Bounty SCA Worldwide and Arnold Communications networks. Brann
Worldwide provides direct marketing and sales services for its clients, such as
direct mail advertising. Bounty SCA Worldwide distributes product samples and
other advertising materials for its clients. Arnold Communications operates
SNC's advertising and public relations operations. We strive to integrate our
service capabilities within, as well as across, our networks. The SNC stock
separately tracks the performances of SNC and a retained interest in Circle.com.
Circle.com provides Internet professional services. The Circle.com stock
separately tracks the performance of Circle.com. We plan to focus on internal
growth for the foreseeable future as the primary means of expanding SNC and
Circle.com, although we will consider attractive acquisition opportunities as
they arise.
Results of Operations
In SNC, net revenues from direct marketing and advertising services may be
based on a specific unit of performance, a fixed project amount or an annual
retainer. In Circle.com, net revenues from Internet professional services are
generally based on a fixed project amount or the time and materials utilized.
Cost of services consists of all costs specifically associated with client
programs, such as salary, commissions and benefits paid to personnel, including
senior management associated with specific service groups, inventory, payments
to third-party vendors and systems and other support facilities specifically
associated with client programs.
Selling, general and administrative expenses consist primarily of costs
associated with administrative functions, such as finance, accounting, human
resources and information technology, as well as personnel costs of senior
management not specifically associated with client services. Snyder
Communications' overhead and administrative shared services are allocated among
SNC and Circle.com based upon estimated usage.
Compensation to stockholders consists of excess compensation paid to
certain stockholders of acquired companies prior to their respective mergers
with Snyder Communications. The amount by which the historical compensation of
these stockholders exceeds that provided in their employment contracts with
Snyder Communications has been classified as compensation to stockholders.
41
<PAGE>
Acquisition and related costs consist primarily of investment banking fees,
other professional service fees, certain tax payments and other contractual
payments resulting from the consummation of our pooling of interests
transactions, as well as the costs of consolidating certain of our acquired
operations.
The following sets forth, for the periods indicated, certain components of
our income statement data, including such data as a percentage of revenues. Pro
forma net income includes a provision for income taxes as if all of our
operations had been taxed as a C corporation for all periods presented. We
consider compensation to stockholders, ESOP expense and acquisition costs to be
nonrecurring, because our current operations will not result in any compensation
to stockholders, ESOP expense or acquisition costs in future periods.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------------------------- ----------------------------------------------
1999 1998 1999 1998
------------------- ------------------ ------------------ ---------------------
(unaudited)
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $165,977 100.0% $129,586 100.0% $465,403 100.0% $357,775 100.0%
Operating expenses:
Cost of services 120,309 72.5 84,566 65.3 321,045 69.0 234,058 65.4
Selling, general and administrative
expenses 34,171 20.6 22,533 17.4 85,305 18.3 70,541 19.7
Compensation to stockholders - - 191 0.1 - - 573 0.2
Acquisition and related costs 14,432 8.7 96 0.1 15,814 3.4 22,693 6.3
-------- ----- -------- ----- -------- ----- -------- -----
Income (loss) from operations (2,935) (1.8) 22,200 17.1 43,239 9.3 29,910 8.4
-------- ----- -------- ----- -------- ----- -------- -----
Interest expense (1,534) (0.9) (792) (0.6) (2,230) (0.5) (1,937) (0.5)
Investment income 772 0.5 1,189 0.9 2,009 0.4 2,934 0.8
Income tax provision 4,935 3.0 8,162 6.3 24,123 5.2 9,924 2.8
-------- ----- -------- ----- -------- ----- -------- -----
Income (loss) from continuing (8,632) (5.2) 14,435 11.1 18,895 4.0 20,983 5.9
operations
Loss from discontinued operations
(net of income taxes) (24,201) (14.6) (3,771) (2.9) (11,562) (2.5) (1,153) (0.3)
-------- ----- -------- ----- -------- ----- -------- -----
Net income (loss) $(32,833) (19.8)% $ 10,664 8.2% $ 7,333 1.5% $ 19,830 5.6%
======== ===== ======== ===== ======== ===== ======== =====
Pro forma net income (loss) $(31,802) (19.2)% $ 10,181 7.9% $ 8,364 1.8% $ 16,949 4.7%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Revenues. Our revenues increased $36.4 million, or 28.1%, to $166.0 million
for the third quarter of 1999 from $129.6 million for the same period of 1998.
Exclusive of our Direct Services business, a component of Brann Worldwide, and
the revenues from MSG, purchased in March of 1999, our revenues increased $23.1
million, or 20.3%, for the third quarter of 1999 from the same period in 1998.
Revenues of Brann Worldwide increased $1.6 million, or 2.3%, for the three
months ended September 30, 1999 compared with the same period in 1998 due to
increased levels of service provided to both new and existing clients in the
U.S. and U.K. This increase accounted for 4.4% of the total increase in revenues
for the three months ended September 30, 1999. Revenues of Bounty SCA Worldwide
increased $22.0 million, or 80.3%, for the three months ended September 30, 1999
compared with the same period in 1998 as a result of increased sampling program
activities and the purchase of MSG in March 1999, which accounted for $20.4
million of the increase. Bounty SCA's increase in revenues accounted for 60.4%
of the total increase in revenues for the three months ended September 30, 1999.
42
<PAGE>
Revenues of Arnold Communications increased $6.9 million, or 24.2%, in the third
quarter ended September 30, 1999 compared with the same period in 1998 due to
increase in creative and advertising services provided to existing and new
clients. This increase accounted for 18.4% of the total increase in revenues for
the three months ended September 30, 1999. Revenues of Circle.com increased $6.1
million, or 148.8%, for the three months ended September 30, 1999 compared with
the same period in 1998 as a result of increases in service provided to both new
and existing clients and from purchase transactions completed during the fourth
quarter of 1998 and the nine months ended September 30, 1999.
Cost of services. Our cost of services increased $35.7 million, or 42.2%,
to $120.3 million for the third quarter of 1999 from $84.6 million in the same
period of 1998. Cost of services as a percentage of revenues increased to 72.5%
for the three months ended September 30, 1999 from 65.3% for the same period in
1998. The dollar fluctuations in cost of services at our various operating
units correspond to the revenue changes discussed above. Cost of services
within the Brann Worldwide network increased $5.9 million, or 12.2%, for the
third quarter of 1999 and accounted for 16.5% of the total increase in cost of
services. As a percentage of revenues, Brann Worldwide's cost of services
increased to 76.4% for the third quarter of 1999 from 69.7% for the same period
of 1998. Cost of services within the Bounty SCA Worldwide network increased
$20.1 million, or 157.6%, for the three months ended September 30, 1999 due
primarily to the purchase of MSG, which accounted for $16.0 million of the
increase. Bounty SCA's increase in cost of services accounted for 56.3% of the
total increase in cost of services. As a percentage of revenues, Bounty SCA's
cost of services for the three months ended September 30, 1999 increased to
66.3% from 46.5% for the corresponding period in 1998 primarily as a result of
the purchase of MSG. MSG has a higher cost of services as a percentage of
revenues than Bounty SCA's other businesses. Cost of services within the Arnold
Communications network increased $4.1 million, or 19.8%, for the three months
ended September 30, 1999 and accounted for 10.9% of the total increase in cost
of services. Arnold Communications's cost of services as a percentage of
revenues decreased to 70.7% for the third quarter of 1999 from 73.4% for the
same period of 1998 due to the ability of existing client support personnel
within the network to handle its growth. Cost of services within Circle.com
increased for the three months ended September 30, 1999 compared with September
30, 1998 due to increases in service provided to new and existing clients and
from purchase transactions completed during the fourth quarter of 1998 and the
nine months ended September 30, 1999.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses increased $11.7 million, or 52.0%, to $34.2 million for
the third quarter of 1999 from $22.5 million for the same period of 1998. The
increase in selling, general and administrative expenses is consistent with our
overall growth. Selling, general and administrative expenses as a percentage of
revenues increased to 20.6% for the three months ended September 30, 1999 from
17.4% for the same period of 1998, largely as a result of the expansion of
Circle.com's infrastructure which accounted for $5.6 million of the increase.
Compensation to Stockholders. No compensation to stockholders was
recorded for the three months ended September 30, 1999. Compensation to
stockholders was $0.2 million for the three months ended September 30, 1998.
Compensation to stockholders reflects compensation paid to certain stockholders
of acquired companies prior to their respective mergers with us that is in
excess of the compensation provided for in their employment contracts with us.
The amount by which the historical compensation paid to these stockholders
exceeds the amount provided for in their respective employment contracts with us
has been classified as compensation to stockholders. No compensation to
stockholders is recorded subsequent to an acquisition by us.
43
<PAGE>
Acquisition and Related Costs. We recorded $14.4 million in acquisition
and related costs during the three months ended September 30, 1999. In
September 1999, Snyder entered into a separate agreement with the prior owners
of MSG whereby Snyder agreed to pay incremental consideration to the prior
owners in exchange for the release of any and all claims against Snyder relating
to the purchase of MSG by Snyder. The amount of such payment resulted in non-
cash expense of approximately $14.3 million, payable in Snyder Communications
common stock.
Interest Expense. Our interest expense increased $0.7 million, or 87.5%,
to $1.5 million for the three months ended September 30, 1999 from $0.8 million
for the same period of 1998. The increase in interest expense is attributable
to borrowings from the $195 million unsecured revolving credit facility. On
September 30, 1999, there was $145 million in outstanding borrowings at a
weighted average interest rate of 6.7%. The borrowings under the credit
facility were used to acquire $100.8 million of treasury stock, finance the
acquisitions of Circle.com and general corporate purchases. We expect interest
expense to increase in future periods to the extent this level of debt remains
outstanding.
Investment Income. We recorded $0.8 million of investment income in the
third quarter of 1999 and $1.2 million of investment income in the same period
in 1998. Investment income varies based on the amount of cash and equivalents
available for investment during the periods.
Income Tax Provision. We recorded a tax provision of $4.9 million in the
three months ended September 30, 1999. Our effective tax rate on our recurring
operations is approximately 36.7% for the three months ended September 30, 1999.
The actual tax provision recorded differs from the effective rate due to the
nondeductibility of certain goodwill amortization and nonrecurring costs
recorded during the period.
Income (Loss) from Continuing Operations. Our income from continuing
operations decreased $23.0 million to a loss of $8.6 million for the third
quarter of 1999 from income of $14.4 million for the same period of 1998 due, in
part, to the $14.4 million of nonrecurring acquisition and related costs. In the
fourth quarter of 1999, we expect to incur approximately $7.5 million of
expenses related to the Recapitalization consisting primarily of financial
advisory fees, legal, accounting, SEC registration fees and printing fees. Our
intention to focus on internal growth for SNC and Circle.com as the primary
means of growth is a shift from our past acquisition growth pattern. To
facilitate our growth, we intend to invest in our business in the next 12 to 15
months to promote our brands, further enhance the skills of our employees,
further our business development efforts, and to make further investment in
technology. We expect that this additional investment to expand our business
will cause an increase in our expenses over that period.
Discontinued Operations. In June 1999, our board of directors approved
the spin-off of our healthcare services group through a distribution to existing
stockholders. The distribution was consummated on September 27, 1999 through a
special dividend of one share of common stock of Ventiv for three shares of
existing common stock of Snyder. Therefore, the results of operations of Ventiv
have been classified as discontinued operations. Ventiv reported a net loss of
$10.9 million and $3.8 million for the three months ended September 30, 1999 and
1998, respectively. Net loss from the discontinued healthcare operations
increased due to a decrease in revenue, combined with a higher cost of services
as a percentage of revenues for the three months ended September 30, 1999
compared with 1998. In addition to the results of Ventiv, $13.3 million of
costs, net of taxes, related to the Ventiv spin-off which were incurred by the
Company are reflected in the results from discontinued operations for the three
months ended September 30, 1999. These expenses consist primarily of financial
advisory fees, other professional service fees, and printing fees.
44
<PAGE>
Net Income (Loss). Our net income decreased $43.5 million to a loss of
$32.8 million for the three months ended September 30, 1999 from an income of
$10.7 million for the same period of 1998 due primarily to the expenses incurred
with regard to the Ventiv spin-off and an increase in nonrecurring acquisition
and related costs.
Pro Forma Net Income (Loss). Pro forma net income (loss) shows the
effect on net income (loss) assuming all of our operations were taxed as C
corporations for the three months ended September 30, 1999 and 1998,
respectively. Pro forma net income decreased $42.0 million to a loss of $31.8
million for the third quarter of 1999 from an income of $10.2 million for the
same period of 1998. The decrease in pro forma net income is due primarily to
the one-time Ventiv spin-off charge and an increase in nonrecurring acquisition
and related costs.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Revenues. Our revenues increased $107.6 million, or 30.1%, to $465.4
million for the nine months ended September 30, 1999 from $357.8 million for the
same period of 1998. Exclusive of our Direct Services business, a component
of Brann Worldwide, and the revenues from MSG, purchased in March of 1999, our
revenues increased $80.1 million, or 25.1%, for the nine months ended September
30,1999 from the same period in 1998. Revenues of Brann Worldwide increased
$31.9 million, or 17.0%, for the nine months ended September 30, 1999 compared
with the same period in 1998 due to increased levels of service provided to both
new and existing clients in the U.S. and U.K. This increase accounted for 29.6%
of the total increase in revenues for the nine months ended September 30, 1999.
Revenues of Bounty SCA Worldwide increased $51.1 million, or 69.0%, for the nine
months ended September 30, 1999 compared with the same period in 1998 as a
result of increased sampling program activities and the purchase of MSG in March
1999, which accounted for $36.0 million of the increase. Bounty SCA's increase
in revenues accounted for 47.5% of the total increase in revenues for the nine
months ended September 30, 1999. Revenues of Arnold Communications increased
$11.5 million, or 13.2%, for the nine months ended September 30, 1999 compared
with the same period in 1998 due to increase in creative and advertising
services provided to existing and new clients. This increase accounted for 10.2%
of the total increase in revenues for the nine months ended September 30, 1999.
Revenues of Circle.com increased $13.6 million, or 151.1%, for the nine months
ended September 30, 1999 compared with the same period in 1998 as a result of
increases in service provided to both new and existing clients and from purchase
transactions completed in 1998 and 1999.
Cost of services. Our cost of services increased $86.9 million, or 37.1%,
to $321.0 million for the nine months ended September 30, 1999 from $234.1
million in the same period of 1998. Cost of services as a percentage of revenues
increased to 69.0% for the nine months ended September 30, 1999 from 65.4% for
the same period in 1998. The dollar fluctuation in cost of services at our
various operating units corresponds to the revenue changes discussed above. Cost
of services within the Brann Worldwide network increased $26.6 million, or
20.0%, for the nine months ended September 30, 1999 and accounted for 30.1% of
the total increase in cost of services. As a percentage of revenues, Brann
Worldwide's cost of services increased slightly from 71.1% to 72.9% between the
nine months ended September 30, 1999 and the same period in 1998. Brann
Worldwide's cost of services as a percentage of revenues was favorably impacted
in 1999 by a fee of $3.8 million, net of related expenses, that was received for
termination of certain services under an existing contract. Cost of services
within the Bounty SCA Worldwide network increased $41.5 million, or 123.6%, for
the nine months ended September 30, 1999 due, in part, to the purchase of MSG,
which accounted for $27.6 million of the increase. Bounty SCA's increase in cost
of services accounted for 47.7% of the total increase in cost of services. As a
percentage of revenues, Bounty SCA's cost of services for the nine months ended
September 30, 1999 increased to 60.1% from 45.4% for the corresponding period in
1998 primarily as a result the purchase of MSG. MSG has a higher cost of
services as a percentage of revenues than Bounty SCA's other businesses. Cost of
services within the Arnold Communications network increased $7.7 million, or
45
<PAGE>
12.6%, for the nine months ended September 30, 1999 and accounted for 8.9% of
the total increase in cost of services. Arnold Communications' cost of services
as a percentage of revenues remained relatively constant between the nine months
ended September 30, 1999 and the same period in 1998 at 70.1% and 70.5%,
respectively. Cost of services within Circle.com increased for the nine months
ended September 30, 1999 compared to September 30, 1998 due to increase in
service provided to new and existing clients and from purchase transactions
completed during 1998.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses increased $14.8 million, or 20.9%, to $85.3 million for
the nine months ended September 30, 1999 from $70.5 million in the same period
in 1998 as a result of the growth in revenues discussed above. Selling, general
and administrative expenses as a percentage of revenues decreased to 18.3% for
the nine months ended September 30, 1999 from 19.7% for the same period in 1998
as a result of the close monitoring and containment of these expenses as our
revenues have increased.
Compensation to Stockholders. No compensation to stockholders was
recorded for the nine months ended September 30, 1999. Compensation to
stockholders was $0.6 million for the nine months ended September 30, 1998.
Compensation to stockholders reflects compensation paid to certain stockholders
of acquired companies prior to their respective mergers with us that is in
excess of the compensation provided for in their employment contracts with us.
The amount by which the historical compensation paid to these stockholders
exceeds the amount provided for in their respective employment contracts with us
has been classified as compensation to stockholders. No compensation to
stockholders is recorded subsequent to an acquisition by us.
Acquisition and Related Costs. We recorded $15.8 million in acquisition
and related costs during the nine months ended September 30, 1999, $14.3 million
of which is non-cash expense related to the payment to the prior owners of MSG
discussed above. The remaining $1.5 million of expense is related to the
consolidation and integration of certain of our acquired operations. We recorded
$22.7 million in acquisition and related costs during the nine months ended
September 30, 1998, and these costs were related to the consummation of pooling
of interests transactions during the nine months ended September 30, 1998. We
completed pooling of interests transactions valued at approximately $207.2
million during the nine months ended September 30, 1998.
Interest Expense. Our interest expense increased $0.3 million, or 15.8%,
to $2.2 million for the nine months ended September 30, 1999 from $1.9 million
in the same period of 1998. If we increase our borrowing levels to acquire
companies, repurchase our stock or for other purposes, interest expense will
increase in future periods.
Investment Income. We recorded $2.0 million of investment income during
the nine months ended September 30, 1999 and $2.9 million of investment income
in the same period in 1998. Investment income varies based on the amount of
cash and equivalents available for investment during the periods.
Income Tax Provision. We recorded a tax provision of $24.1 million during
the nine months ended September 30, 1999. Our effective tax rate on our
recurring operations is approximately 39.5% for the nine months ended September
30, 1999. The actual tax provision recorded differs from the effective rate due
to the nondeductibility of certain goodwill amortization and nonrecurring costs
recorded during the period.
Income (Loss) from Continuing Operations. Our income from continuing
operations decreased $2.1 million to $18.9 million for the nine months ended
September 30, 1999 from $21.0 million in the same period in 1998 due primarily
to a slight decrease in operating margins, offset by a decrease in nonrecurring
acquisition and related costs.
46
<PAGE>
Discontinued Operations. In June 1999, our board of directors approved the
spin-off of our healthcare services group through a distribution to existing
stockholders. The distribution was consummated on September 27, 1999 through a
special dividend of one share of common stock of Ventiv for three shares of
existing common stock of Snyder. Therefore, the results of operations of Ventiv
have been classified as discontinued operations. Ventiv reported net income of
$1.8 million and a net loss of $1.2 million for the nine months ended September
30, 1999 and 1998, respectively. Net loss from the discontinued healthcare
operations decreased due to a decrease in acquisition and related costs, a one-
time $2.0 million reduction in the estimated amount of employee related social
charges to be paid as a result of the integration of Ventiv's French sales
force, offset in part, by lower operating margins in 1999. In addition to the
results of Ventiv, $13.3 million of costs related to Ventiv spin-off which were
incurred by the Company are reflected in the results from discontinued
operations for the nine months ended September 30, 1999.
Net Income (Loss). Our net income decreased $12.5 million to $7.3 million
for the nine months ended September 30, 1999 from $19.8 million in the same
period in 1998 due primarily to the expenses incurred with regard to the Ventiv
spin-off and lower operating margins in 1999.
Pro Forma Net Income (Loss). Pro forma net income (loss) shows the effect
on net income (loss) assuming all of our operations were taxed as C corporations
for the nine months ended September 30, 1999 and 1998, respectively. Pro forma
net income decreased $8.5 million to $8.4 million for the nine months ended
September 30, 1999 from $16.9 million for the same period of 1998. The decrease
in pro forma net income is due primarily to the one-time Ventiv spin-off charge
and lower operating margins in 1999.
Liquidity and Capital Resources
At September 30, 1999, we had $40.7 million in cash and equivalents.
Cash and equivalents decreased $7.3 million during the nine months ended
September 30, 1999, due to the $27.5 million provided by operating activities
of continuing operations, the $60.8 million provided by financing activities,
offset by the $56.8 million used in investing activities for continuing
operations, the $38.3 million used by discontinued operations and the
$0.5 million effect of changes in the exchange rate. The $60.8 million in cash
provided by financing activities consists primarily of additional borrowings for
acquisitions and proceeds received from the exercise of stock options. The
$56.8 million in cash used in investing activities consists primarily of cash
used for business acquisitions and capital expenditures. Cash and equivalents
increased $32.8 million during the nine months ended September 30, 1998, due to
the $10.7 million provided by operating activities of continuing operations, the
$56.6 million provided by financing activities, the $1.1 million effect of
changes in the exchange rate, offset by the $31.6 million used in investing
activities and the $4.0 million used by discontinued operations.
We believe that our cash and equivalents, as well as the cash provided by
operations, and available financing will be sufficient to fund our current
operations, planned capital expenditures and anticipated growth of our existing
business over the next 12 months and beyond.
If we acquire additional businesses in transactions that include cash
payments as part of the purchase price, both in the short-term and the long-
term, we will first use excess cash available from operations and then pursue
additional debt or equity financing as sources of cash necessary to complete the
acquisitions. In August 1999, we entered into a $195 million unsecured revolving
credit facility with a term of four years for acquisitions and general corporate
purposes, as well as the repurchase of up to $250 million of Snyder
Communications common stock that the Board of Directors has previously approved.
Interest on amounts borrowed under the credit facility is based on the London
Interbank Offered Rate, the lending bank's base rate of interest or the federal
funds rate. Availability under this credit facility is subject to our compliance
with various financial ratios, operating covenants and other customary
conditions.
47
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On September 30, 1999, there was $145 million in outstanding borrowings
under the credit facility at a weighted average interest rate of 6.7%.
Of the $250 million approved stock buyback, $100 million is authorized only
for the repurchase of shares to be reissued in specifically identified purchase
business combinations. In the third quarter of 1999, we repurchased 5.4 million
shares of our existing common stock for a total of $100.8 million and returned
those shares to our corporate portfolio. In addition to borrowing under the line
of credit, we could pursue other debt or equity transactions to finance our
acquisitions, depending on market conditions. However, there can be no assurance
that we will be successful in raising the cash required to complete all
acquisition opportunities which we may seek in the future.
We have completed an assessment of our current systems and equipment and
are in the process of finalizing modifications necessary to address the issues
presented by the year 2000. Remediation and testing are complete at Circle.com
and at all but one of SNC's operating subsidiaries. This subsidiary accounted
for approximately 7.2% of SNC's revenue in 1998. We expect to complete the
remaining year 2000 compliance work in November 1999. We believe that we are
year 2000 compliant with respect to all operations other than this SNC
subsidiary, which we believe will be year 2000 compliant by year end. We expect
to incur no more than $3.0 million in capital expenditures on system upgrades
which are designed in part to address specific year 2000 requirements.
Approximately $2.8 million was incurred through September 30, 1999. Although we
believe that we will achieve year 2000 compliance for our systems prior to
January 1, 2000 without incurring significant additional costs, there can be no
assurance that such compliance will be achieved or that it will be achieved
without additional significant costs. If year 2000 compliance cannot be achieved
at the remaining subsidiary by January 1, 2000, we will implement our
contingency plan which has already been tested at the subsidiary.
We are subject to the impact of foreign currency fluctuations, specifically
that of the British pound. To date, changes in the British pound exchange rate
have not had a material impact on our liquidity or results of operations. We
continually evaluate our exposure to exchange rate risk but do not currently
hedge such risk.
Given the extent of our services currently provided in continental Europe
and the nature of those services, we do not expect the introduction of the Euro
to have a material impact on our operations or cash flows. We will continue to
evaluate the impact of the introduction of the Euro as we continue to expand the
services offered and the European locations in which we operate.
Private Securities Litigation Reform Act of 1995 -- A Caution Concerning
Forward-Looking Statements
Any statement made in this Form 10-Q that deals with information that is
not historical, such as statements concerning our anticipated financial results,
are forward-looking statements. We wish to caution readers not to place undo
reliance on any of these forward-looking statements, which speak only as of the
date made. Forward-looking statements are subject to the occurrence of many
events outside our control and to various risk factors that could cause results
to differ materially from those expressed in our periodic reports and
registration statements filed with the Securities and Exchange Commission,
including our Registration Statement on Form S-4 (No. 333-81749), as amended,
and our press releases or other public communications.
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SNC--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the SNC's results of operations and of its
liquidity and capital resources is based upon SNC's consolidated financial
statements. The entities with which SNC has entered into mergers accounted for
as pooling of interests for financial reporting purposes will be collectively
referred to as the "Pooled Entities" and their mergers will be referred to
herein as the "Acquisitions". The consolidated financial statements have been
retroactively restated to reflect the combined financial position and the
combined results of operations and cash flows of the Pooled Entities for all
periods presented, giving effect to the Acquisitions as if they had occurred at
the beginning of the earliest period presented. The following discussion should
be read in conjunction with the consolidated financial statements of SNC and the
related notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
Overview
SNC provides direct marketing and advertising services throughout the
United States, the United Kingdom and continental Europe. SNC consists of the
Brann Worldwide, Bounty SCA Worldwide and Arnold Communications networks. Brann
Worldwide provides direct marketing and sales services for its clients, such as
direct mail advertising. Bounty SCA distributes product samples and other
advertising materials for its clients. Arnold Communications operates SNC's
advertising and public relations operations. Throughout 1999, 1998 and 1997, SNC
completed acquisitions accounted for as both pooling of interests and as
purchases. SNC believes the complementary services it is able to offer to its
customers as a result of its acquisitions have increased its opportunities and
strengthened its client relationships. We plan to focus on internal growth for
the foreseeable future as the primary means of expanding SNC, although we will
consider attractive acquisition opportunities as they arise.
The Management's Discussion and Analysis of Financial Condition and Results
of Operations of SNC should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Snyder Communications and Circle.com.
Results of Operations
In SNC, net revenues from direct marketing and advertising services may be
based on a specific unit of performance, a fixed project amount or an annual
retainer.
Cost of services consists of all costs specifically associated with client
programs, such as salary, commissions and benefits paid to personnel, including
senior management associated with specific service groups, inventory, payments
to third-party vendors and systems and other support facilities specifically
associated with client programs.
Selling, general and administrative expenses consist primarily of costs
associated with administrative functions, such as finance, accounting, human
resources, and information technology, as well as personnel costs of senior
management not specifically associated with client services. A portion of Snyder
Communications' overhead and administrative shared services are allocated to SNC
based upon estimated usage.
Compensation to stockholders consists of excess compensation paid to
certain stockholders of acquired companies prior to their respective mergers
with SNC. The amount by which the historical compensation of these stockholders
exceeds that provided in their employment contracts with SNC has been classified
as compensation to stockholders.
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Acquisition and related costs consist primarily of investment banking fees,
other professional service fees, certain tax payments and other contractual
payments resulting from the consummation of SNC's poolings of interests
transactions, as well as the costs of consolidating certain of SNC's acquired
operations.
The following sets forth, for the periods indicated, certain components of
SNC's income statement data, including such data as the percentage of revenues.
Pro forma net income includes a provision for income taxes as if all operations
of SNC had been taxed as a C corporation for all periods presented. SNC
considers compensation to stockholders and acquisition costs to be nonrecurring,
because SNC's current operations will not result in any compensation to
stockholders, or acquisition costs in future periods.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-----------------------------------------------------------------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $156,001 100% $125,444 100% $443,389 100% $348,803 100%
Operating expenses:
Cost of services 112,216 71.9 82,112 65.5 304,399 68.7 228,528 65.5
Selling, general and
administrative expenses 27,482 17.6 21,401 17.1 73,333 16.5 67,774 19.4
Compensation to stockholders - - 191 0.2 - - 573 0.2
Acquisition and related costs 14,432 9.3 96 0.1 15,814 3.6 22,693 6.5
-----------------------------------------------------------------------------------
Income from operations 1,871 1.2 21,644 17.3 49,843 11.2 29,235 8.4
Interest expense (1,300) (0.8) (788) (0.6) (1,996) (0.5) (1,926) (0.6)
Investment income 767 0.4 1,185 0.9 2,004 0.5 2,923 0.8
Income tax provision 7,236 4.6 7,907 6.3 25,833 5.8 9,457 2.7
-----------------------------------------------------------------------------------
Income (loss) from continuing
operations (5,898) (3.8) 14,134 11.3 24,018 5.4 20,775 6.0
Loss from discontinued operations (24,201) (15.5) (3,771) (3.0) (11,562) (2.6) (1,153) (0.3)
-----------------------------------------------------------------------------------
Net income (loss) $(30,099) (19.3)% $ 10,363 8.3% $ 12,456 2.8% $ 19,622 5.6%
-----------------------------------------------------------------------------------
Pro Forma net income (loss) $(29,066) (18.3)% $ 9,880 7.9% $ 13,489 3.0% $ 16,619 4.8%
===================================================================================
</TABLE>
Three Months Ended September 30, 1999 Compared to Three Months Ended
September 30, 1998
Revenues. SNC's revenues increased $30.6 million, or 24.4%, to $156.0
million for the three months ended September 30, 1999 from $125.4 million for
the same period of 1998. Exclusive of our Direct Services business, a component
of Brann Worldwide, and the revenues from MSG, purchased in March of 1999, our
revenues increased $17.3 million or 15.8%, for the third quarter of 1999 from
the same period in 1998. The increase in revenues was due primarily to
increased services to customers within the Bounty SCA Worldwide network and to a
lesser extent, increased sales volumes within the Arnold Communications network.
Revenues of Brann Worldwide increased $1.6 million, or 2.3%, for the three
months ended September 30, 1999 compared with the same period in 1998 due to
increased levels of service provided to both new and existing clients in the
U.S. and U.K. This increase accounted for 5.2% of the total increase in
revenues for the three months ended September 30, 1999. Revenues of Bounty SCA
Worldwide increased $22.0 million, or 80.3%, for the three months ended
September 30, 1999 compared with the same period in 1998 as a result of
increased sampling program activities and the purchase of MSG in March 1999,
which accounted for $20.4 million of the increase. Bounty SCA's increase in
revenues accounted for 71.9% of the total increase in revenues for the three
months ended September 30, 1999. Revenues of Arnold Communications increased
$6.9 million, or 24.2%, for the three months ended September 30, 1999 compared
with the same period in 1998 due to an increase in creative and advertising
services provided to existing and new clients. This increase accounted for 22.5%
of the total increase in revenues for the three months ended September 30, 1999.
50
<PAGE>
Cost of services. SNC's cost of services increased $30.1 million, or
36.7%, to $112.2 million in the third quarter of 1999 from $82.1 million for the
same period of 1998. Cost of services as a percentage of revenues increased to
71.9% for the three months ended September 30, 1999 from 65.5% for the same
period in 1998. The dollar fluctuations in cost of services at our various
operating units correspond to the revenue changes discussed above. Cost of
services within the Brann Worldwide network increased $5.9 million, or 12.2%,
for the third quarter of 1999 and accounted for 19.6% of the total increase in
cost of services. As a percentage of revenues, Brann Worldwide's cost of
services increased to 76.4% for the third quarter of 1999 from 69.7% for the
same period of 1998. Cost of services within the Bounty SCA Worldwide network
increased $20.1 million, or 157.6%, for the three months ended September 30,
1999 due primarily to the purchase of MSG, which accounted for $16.0 million of
the increase. Bounty SCA's increase in cost of services accounted for 66.8% of
the total increase in cost of services. As a percentage of revenues, Bounty
SCA's cost of services for the three months ended September 30, 1999 increased
to 66.3% from 46.5% for the corresponding period in 1998 primarily as a result
of the purchase of MSG. MSG has a higher cost of services as a percentage of
revenues than Bounty SCA's other businesses. Cost of services within the Arnold
Communications network increased $4.1 million, or 19.8%, for the three months
ended September 30, 1999 and accounted for 13.6% of the total increase in cost
of services. Arnold Communications's cost of services as a percentage of
revenues decreased to 70.7% for the third quarter of 1999 from 73.4% for the
same period of 1998 due to the ability of existing client support personnel
within the network to handle its growth.
Selling, General and Administrative Expenses. SNC's selling, general and
administrative expenses increased $6.1 million, or 28.5%, to $27.5 million for
the three months ended September 30, 1999 from $21.4 million for the same period
of 1998. The increase in selling general and administrative expenses is
consistent with our overall growth. Selling, general and administrative expenses
as a percentage of revenues remained relatively constant for the three months
ended September 30, 1999 and the same period of 1998 at 17.6% and 17.1%,
respectively.
Compensation to Stockholders. No compensation to stockholders was recorded
in the three months ended September 30, 1999 compared with $0.2 million in the
same period in 1998. Compensation to stockholders reflects compensation paid to
certain stockholders of acquired companies prior to their respective mergers
with SNC that is in excess of the compensation provided for in their employment
contracts with SNC. The amount by which the historical compensation paid to
these stockholders exceeds the amount provided for in their respective
employment contracts with SNC has been classified as compensation to
stockholders. No compensation to stockholders is recorded subsequent to an
acquisition by SNC.
Acquisition and Related Costs. SNC recorded $14.4 million in acquisition
and related costs during the three months ended September 30, 1999. In
September 1999, Snyder Communications entered into a separate agreement with the
prior owners of MSG whereby Snyder Communications agreed to pay incremental
consideration to the prior owners in exchange for the release of any and all
claims against Snyder Communications relating to the purchase of MSG by Snyder
Communications. The amount of such payment resulted in non-cash expense of
approximately $14.3 million, payable in Snyder Communications common stock.
Interest Expense. SNC's interest expense increased $0.5 million, or
62.5%, to $1.3 million for the third quarter of 1999 from $0.8 million for the
same period of 1998. The increase in interest expense is attributable to
borrowings from the $195 million unsecured revolving credit facility. On
September 30, 1999, there was $132.7 million in outstanding borrowings
attributed to SNC at a weighted average interest rate of 6.7%. SNC expects
interest expense to increase in future periods to the extent this level of debt
remains outstanding.
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<PAGE>
Investment Income. SNC recorded $0.8 million of investment income for the
third quarter of 1999 and $1.2 million of investment income for the same period
of 1998. Investment income varies based on the amount of cash and equivalents
available for investment during the periods.
Income Tax Provision. SNC recorded a tax provision of $7.2 million in the
three months ended September 30, 1999. SNC's effective tax rate on its recurring
operations is approximately 39.6% for the three months ended September 30, 1999.
The actual tax provision recorded differs from the effective rate due to the
nondeductibility of certain goodwill amortization and nonrecurring costs
recorded during the period.
Income (Loss) from Continuing Operations. SNC's income from continuing
operations decreased $20.0 million to a loss of $5.9 million for the three
months ended September 30, 1999 from an income of $14.1 million for the same
period of 1998 due, in part, to the $14.4 million of nonrecurring acquisition
and related costs. In the fourth quarter of 1999, Snyder Communications expects
to incur approximately $7.5 million of expenses related to the Recapitalization.
These costs which will be reflected as expense equally on SNC's and Circle.com's
income statements will consist primarily of financial advisory fees, legal,
accounting, SEC registration fees and printing fees. Our intention to focus on
internal growth for SNC and Circle.com as the primary means of growth is a shift
from our past acquisition growth pattern. To facilitate our growth, we intend to
invest in our business in the next 12 to 15 months to promote our brands,
further enhance the skills of our employees, further our business development
efforts, and to make further investment in technology. We expect that this
additional investment to expand our business will cause an increase in SNC's
expenses over that period.
Discontinued Operations. In June 1999, Snyder Communications' Board of
Directors approved the spin-off of Snyder Communications' healthcare services
group through a distribution to existing Snyder Communications stockholders.
The distribution was consummated on September 27, 1999 through a special
dividend of one share of common stock of Ventiv for three shares of existing
common stock of Snyder. Therefore, the results of operations of Ventiv have
been classified as discontinued operations. Ventiv reported a net loss of $10.9
million and $3.8 million for the three months ended September 30, 1999 and 1998,
respectively. Net loss from the discontinued healthcare operations increased
due to a decrease in revenue, combined with a higher cost of services as a
percentage of revenues for the three months ended September 30, 1999 compared
with 1998. In addition to the results of Ventiv, $13.3 million of costs, net of
taxes, related to Ventiv spin-off are reflected in the results from discontinued
operations for the three months ended September 30, 1999. These expenses consist
primarily of financial advisory fees, other professional service fees and
printing fees.
Net Income (Loss). SNC's net income decreased $40.5 million to a loss of
$30.1 million for the three months ended September 30, 1999 from income of $10.4
million for the same period of 1998 due primarily to the expenses incurred with
regard to the Ventiv spin-off and an increase in nonrecurring acquisition and
related costs.
Pro Forma Net Income (Loss). Pro forma net income (loss) shows the effect
on net income (loss) assuming all of our operations were taxed as C corporations
for the three months ended September 30, 1999 and 1998, respectively. Pro forma
net income decreased $39.0 million to a loss of $29.1 million for the three
months ended September 30, 1999 from income of $9.9 million for the same period
of 1998. The decrease in pro forma net income is due primarily to the one-time
Ventiv spin-off charge and an increase in nonrecurring acquisition and related
costs.
52
<PAGE>
Nine months Ended September 30, 1999 Compared to Nine months Ended
September 30, 1998
Revenues. SNC's revenues increased $94.6 million, or 27.1%, to $443.4
million for the nine months ended September 30, 1999 from $348.8 million for the
same period of 1998. Exclusive of our Direct Services business, a component of
Brann Worldwide, and the revenues from MSG, purchased in March of 1999, our
revenues increased $67.0 million, or 21.6%, for the third quarter of 1999 from
the same period in 1998. Revenues of Brann Worldwide increased $31.9 million, or
17.0%, for the nine months ended September 30, 1999 compared with the same
period of 1998 due to increased levels of service provided to both new and
existing clients in the U.S. and U.K. This increase accounted for 33.8% of the
total increase in revenues for the nine months ended September 30, 1999.
Revenues of Bounty SCA Worldwide increased $51.1 million, or 69.0%, for the nine
months ended September 30, 1999 compared with the same period in 1998 as a
result of increased sampling program activities and the purchase of MSG in March
1999, which accounted for $36.0 million of the increase. Bounty SCA's increase
in revenues accounted for 54.0% of the total increase in revenues for the nine
months ended September 30, 1999. Revenues of Arnold Communications increased
$11.5 million, or 13.2%, for the nine months ended September 30, 1999 compared
with the same period of 1998 due to increase in creative and advertising
services provided to existing and new clients. This increase accounted for 12.2%
of the total increase in revenues for the nine months ended September 30, 1999.
Cost of services. SNC's cost of services increased $75.9 million, or
33.2%, to $304.4 million for the nine months ended September 30, 1999 from
$228.5 million for the same period of 1998. Cost of services as a percentage of
revenues increased to 68.7% for the nine months ended September 30, 1999 from
65.5% for the same period of 1998. The dollar fluctuations in cost of services
at our various operating units correspond to the revenue changes discussed
above. Cost of services within the Brann Worldwide network increased $26.6
million, or 20.0%, for the nine months ended September 30, 1999 and accounted
for 35.1% of the total increase in cost of services. As a percentage of
revenues, Brann Worldwide's cost of services increased slightly from 71.1% to
72.9% for the nine months ended September 30, 1999 and 1998, respectively.
Brann Worldwide's cost of services as a percentage of revenues was favorably
impacted in 1999 by a fee of $3.8 million, net of related expenses, that was
received for termination of certain services under an existing contract. Cost of
services within the Bounty SCA Worldwide network increased $41.5 million, or
123.6%, for the nine months ended September 30, 1999 due, in part, to the
purchase of MSG, which accounted for $27.6 million of the increase. Bounty SCA's
increase in cost of services accounted for 54.7% of the total increase in cost
of services. As a percentage of revenues, Bounty SCA's cost of services for the
nine months ended September 30, 1999 increased to 60.1% from 45.4% for the
corresponding period in 1998 primarily as a result of the purchase of MSG. MSG
has a higher cost of services as a percentage of revenues than Bounty SCA's
other businesses. Cost of services within the Arnold Communications network
increased $7.7 million, or 12.6%, for the nine months ended September 30, 1999
and accounted for 10.2% of the total increase in cost of services. Arnold
Communications' cost of services as a percentage of revenues remained relatively
constant at 70.1% and 70.5%, for the nine months ended September 30, 1999 and
the same period in 1998.
Selling, General and Administrative Expenses. SNC's selling, general and
administrative expenses increased $5.5 million, or 8.1%, to $73.3 million for
the nine months ended September 30, 1999 from $67.8 million for the same period
of 1998 as a result of the growth in revenues discussed above. Selling, general
and administrative expenses as a percentage of revenues decreased to 16.5% the
nine months ended September 30, 1999 from 19.4% in the same period in 1998 as a
result of the close monitoring and containment of these expenses as our revenues
have increased.
Compensation to Stockholders. No compensation to stockholders was
recorded in the nine months ended September 30, 1999 compared with $0.6 million
in the same period in 1998. Compensation to stockholders
53
<PAGE>
reflects compensation paid to certain stockholders of acquired companies prior
to their respective mergers with SNC that is in excess of the compensation
provided for in their employment contracts with SNC. The amount by which the
historical compensation paid to these stockholders exceeds the amount provided
for in their respective employment contracts with SNC has been classified as
compensation to stockholders. No compensation to stockholders is recorded
subsequent to an acquisition by SNC.
Acquisition and Related Costs. SNC recorded $15.8 million in acquisition
and related costs during the nine months ended September 30, 1999, $14.3 million
of which is noncash expense related to the payment to the prior owners of MSG
as discussed above. The remaining $1.5 million of expense is related to the
consolidation and integration of certain of our acquired operations. SNC
recorded $22.7 million in acquisition and related costs during the nine months
ended September 30, 1998, and these costs were related to the consummation of
pooling of interests transactions during the nine months ended September 30,
1998.
Interest Expense. SNC's interest expense increased $0.1 million, or 5.3%,
to $2.0 million for the nine months ended September 30, 1999 from $1.9 million
for the same period of 1998. The increase in interest expense is attributable to
borrowings from the $195 million unsecured revolving credit facility. We expect
interest expense to increase in future periods to the extent this level of debt
remains outstanding.
Investment Income. We recorded $2.0 million of investment income during
the nine months ended September 30, 1999 and $2.9 million of investment income
for the same period of 1998. Investment income varies based on the amount of
cash and equivalents available for investment during the periods.
Income Tax Provision. SNC recorded a tax provision of $25.8 million in the
nine months ended September 30, 1999. SNC's effective tax rate on its recurring
operations is approximately 38.0% for the nine months ended September 30, 1999.
The actual tax provision recorded differs from the effective rate partly due to
the nondeductibility of certain goodwill amortization and nonrecurring costs
recorded during the period.
Income (Loss) from Continuing Operations. SNC's income from continuing
operations increased $3.2 million to $24.0 million for the nine months ended
September 30, 1999 from $20.8 million for the same period of 1998 due primarily
to a slight decrease in operating margins, offset by a decrease in nonrecurring
acquisition and related costs.
Discontinued Operations. In June 1999, Snyder Communications' Board of
Directors approved the spin-off of our healthcare services group through a
distribution to existing stockholders. The distribution was consummated on
September 27, 1999 through a special dividend of one share of common stock of
Ventiv for three shares of existing common stock of Snyder. Therefore, the
results of operations of Ventiv have been classified as discontinued operations.
Ventiv reported net income of $1.8 million and net loss of $1.2 million for the
nine months ended September 30, 1999 and 1998, respectively. Net loss from the
discontinued healthcare operations decreased due to a decrease in acquisition
and related costs, a one-time $2.0 million reduction in the estimated amount of
employee related social charges to be paid as a result of the integration of
Ventiv's French sales force, offset, in part, by lower operating margins in
1999. In addition to the results of Ventiv, $13.3 million of costs, net of
taxes, related to Ventiv spin-off are reflected in the results from discontinued
operations for the nine months ended September 30, 1999.
Net Income (Loss). SNC net income decreased $7.1 million to $12.5 million
for the nine months ended September 30, 1999 from $19.6 million for the same
period of 1998 due primarily to the expenses incurred with regard to the Ventiv
spin-off and lower operating margins in 1999.
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Pro Forma Net Income (Loss). Pro forma net income (loss) shows the effect
on net income (loss) assuming all of our operations were taxed as C corporations
for the nine months ended September 30, 1999 and 1998, respectively. Pro forma
net income decreased $ 3.1 million to $ 13.5 million for the nine months ended
September 30, 1999 from $ 16.6 million for the same period of 1998. The decrease
in pro forma net income is due primarily to the one-time Ventiv spin-off charge
and lower operating margins in 1999.
Liquidity and Capital Resources
At September 30, 1999, SNC had $ 39.0 million in cash and equivalents.
Cash and equivalents decreased $ 8.9 million during the nine months ended
September 30, 1999, due to the $ 36.5 million provided by operating activities
from continuing operations, the $33.3 million provided by financing activities,
offset by the $39.9 million used in investing activities for continuing
operations, the $38.3 million used by discontinued operations, and the $0.5
million effect of changes in the exchange rate. The cash provided by financing
activities consists primarily of additional borrowings for acquisitions. The
$39.9 million in cash used in investing activities consists primarily of cash
used for business acquisitions and capital expenditures. Other than the $12.3
million of debt attributed to Circle.com at September 30, 1999, all cash
advances and businesses attributed to Circle.com have been considered a capital
contribution to Circle.com. After the recapitalization, Snyder Communications
will attribute each future incurrence or issuance of external debt and the
proceeds of that incurrence or issuance to SNC, to the extent the proceeds are
used for the benefit of SNC, and to Circle.com, to the extent the proceeds are
used for the benefit of Circle.com by SNC. As a result, with respect to the
allocation of interest and debt, the historical financial statements will not be
comparable to future periods. Cash and equivalents increased $6.1 million for
the nine months ended September 30, 1998, due to $11.5 million provided by
operating activities from continuing operations, the $54.8 million provided by
financing activities, the $1.1 million effect of changes in the exchange rates,
offset by the $30.5 million used in investing activities for continuing
operations and the $30.8 million used by discontinued operations.
SNC believes that its cash and equivalents, as well as the cash provided by
operations and available financing, will be sufficient to fund its current
operations, planned capital expenditures and anticipated growth of its existing
business over the next 12 months and beyond. If SNC acquires additional
businesses in transactions that include cash payments as part of the purchase
price, both in the short-term and the long-term, we will first use excess cash
available from operations and then pursue additional debt or equity financing as
sources of cash necessary to complete the acquisitions. In August 1999, Snyder
Communications entered into a $195 million unsecured revolving credit facility
with a term of four years, which we will use for acquisitions and general
corporate purposes, as well as the repurchase of up to $250 million of Snyder
Communications' common stock that the Board of Directors has previously
approved. Interest on amounts borrowed under the credit facility is based on the
London Interbank Offered Rate, the lending bank's base rate of interest or the
federal funds rate. Availability under the credit facility is subject to our
compliance with various financial ratios, operating covenants and other
customary conditions.
On September 30, 1999, there was $145 million in outstanding borrowings
under the credit facility at a weighted average interest rate of 6.7% and $132.7
million of that debt was attributed to SNC.
Of the $250 million approved stock buy-back, $100 million is authorized
only for the repurchase of shares to be reissued in specifically identified
purchase business combinations. In the third quarter of 1999, Snyder
Communications repurchased 5.4 million shares of its existing common stock for a
total of $100.8 million and returned those shares to its corporate portfolio. In
addition to borrowing under the line of credit, Snyder Communications could
pursue other debt or equity transactions to finance our acquisitions, depending
55
<PAGE>
on market conditions. We cannot assure you that we will be successful in raising
the cash required to complete all acquisition opportunities which SNC may seek
in the future.
SNC has undergone an assessment of its current systems and equipment and is
in the process of finalizing modifications necessary to address the issues
presented by the year 2000. We expect that our systems will be year 2000
compliant and that additional expenses related to the modifications will not be
material. However, we cannot assure you that this will be the case until these
systems are operational in the year 2000.
SNC is subject to the impact of foreign currency fluctuations, specifically
that of the British pound. To date, changes in the British pound exchange rate
have not had a material impact on SNC's liquidity or results of operation. SNC
continually evaluates its exposure to exchange rate risk but does not currently
hedge such risk.
Given the extent of its services currently provided in continental Europe
and the nature of those services, we do not expect the introduction of the Euro
to have a material impact on SNC's operations or cash flows. SNC will continue
to evaluate the impact of the introduction of the Euro as it continues to expand
the services offered and the European locations in which it operates.
Private Securities Litigation Reform Act of 1995 -- A Caution Concerning
Forward-Looking Statements
Any statement made in this Form 10-Q that deals with information that is
not historical, such as statements concerning our anticipated financial results,
are forward-looking statements. We wish to caution readers not to place undo
reliance on any of these forward-looking statements, which speak only as of the
date made. Forward-looking statements are subject to the occurrence of many
events outside our control and to various risk factors that could cause results
to differ materially from those expressed in Snyder Communications' periodic
reports and registration statements filed with the Securities and Exchange
Commission, including Snyder Communications' Registration Statement on Form S-4
(No. 333-81749), as amended, and press releases or other public communications
of Snyder Communications or SNC.
56
<PAGE>
CIRCLE.COM--MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Circle.com is engaged in the Internet professional services business.
Circle.com's services include consulting regarding its clients' e-commerce
strategies and related business process, consumer research, online media
planning and creative design, which it refers to as "front-end services," as
well as architecture design, systems integration, implementation and ongoing
performance analysis, which it refers to as "back-end services." Until May 1999,
the operations of Circle.com were contained within the Brann Worldwide and
Arnold Communications networks of Snyder Communications. In May 1999, these
operations were coordinated under the name Circle.com and placed under the
responsibility of a single management team.
The Management's Discussion and Analysis of Financial Condition and Results
of Operations of Circle.com should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Snyder Communications and SNC.
Results of Operations
Net revenues from Internet professional services are generally based on
either a fixed project amount or the time and materials utilized.
Professional services expenses consist primarily of compensation and
benefits of our employees engaged in the delivery of professional services.
Office and general expenses include costs associated with administrative
functions, such as finance, human resources and information technology, as well
as amortization of intangibles and office facilities costs. A portion of Snyder
Communications' overhead and administrative shared services have been allocated
to Circle.com based upon estimated usage.
The following sets forth, for the periods indicated, certain components of
Circle.com's income statement data, including such data as the percentage of
revenues. Pro forma net income includes a provision for income taxes as if all
operations of Circle.com had been taxed as a C corporation for all periods
presented.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------- ------------------- ---------------------- -----------------
1999 1998 1999 1998
----------------------- ------------------- ---------------------- -----------------
(unaudited, dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $10,208 100.0% $4,142 100.0% $22,555 100.0% $8,972 100.0%
Operating expenses:
Professional services 6,256 61.3 2,031 49.0 13,384 59.3 4,451 49.6
Office and general 8,758 85.8 1,555 37.6 15,775 70.0 3,846 42.9
------------ --------- -------- --------- ----------- --------- --------- ---------
Income (loss) from operations (4,806) (47.1) 556 13.4 (6,604) (29.3) 675 7.5
Interest expense, net (229) (2.2) -- -- (229) (1.0) -- --
------------ --------- --------- --------- ----------- --------- --------- ---------
Income (loss) before income (5,035) (49.3) 556 13.4 (6,833) (30.3) 675 7.5
taxes
Income tax (benefit) provision (2,300) (22.5) 255 6.1 (1,708) (7.6) 467 5.2
------------ --------- --------- --------- ----------- --------- --------- ---------
Net income (loss) $(2,735) (26.8)% $ 301 7.3% $(5,125) (22.7)% $ 208 2.3%
============ ========= ========= ========= =========== ========= ========= =========
Pro Forma net income (loss) $(2,735) (26.8)% $ 301 7.3% $(5,125) (22.7)% $ 330 3.7%
============ ========= ========= ========= =========== ========= ========= =========
</TABLE>
57
<PAGE>
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Net Revenues. Circle.com's net revenues increased $6.1 million, or
149.0%, to $10.2 million in the third quarter of 1999 from $4.1 million in the
same period in 1998. This includes approximately $3.3 million of revenue growth
from purchase transactions completed during 1998 and the first nine months of
1999. Circle.com has accelerated its hiring which has caused growth in its
client base, size and scope of client engagements and headcount in both the U.S.
and the U.K. from the third quarter of 1998 to the same period in 1999, as more
companies recognize that the Internet is an increasingly important marketing
tool and an effective way to reach customers.
Professional Service Expenses. Circle.com's professional service expenses
increased $4.3 million, or 215.0%, to $6.3 million in the third quarter of 1999
from $2.0 million in the same period in 1998. Professional service expenses as a
percentage of net revenues increased to 61.3% in the three months ended
September 30, 1999 from 49.0% in the same period in 1998. The increase in
professional service expenses is consistent with the purchase transactions and
increase in personnel at Circle.com necessary to support the increased level of
business in 1999. We have grown our infrastructure and personnel level at a
faster rate than our revenue level has increased in order to accommodate our
growth. We believe that our existing infrastructure can absorb additional
business without added cost. However, if we continue to pursue an aggressive
growth strategy our costs could continue to grow at a faster rate than our
revenues as we pursue this strategy.
Office and General Expenses. Office and general expenses increased $7.2
million, or 450.0%, to $8.8 million in the third quarter of 1999 from $1.6
million in the same period in 1998. Office and general expenses as a percentage
of net revenues increased to 85.8% in the third quarter of 1999 from 37.5% in
the same period in 1998. The increase in office and general expenses both as a
percentage of revenues and in absolute dollars is directly related to the
expansion of our infrastructure to support increased revenue and from $1.2
million of goodwill amortization which results from the purchase transactions
which were completed during the fourth quarter of 1998 and the nine months ended
September 30, 1999. We believe the expanded infrastructure can absorb additional
business without added cost. We expect that office and general expense will
increase as a percentage of revenues in the fourth quarter of 1999 due to
$500,000 of goodwill amortization from the purchase of Interactive Bureau in
October, 1999 and the increased costs of having a publicly traded security. The
office and general expenses reported through the nine months ended September 30,
1999 do not include any amounts related to the costs of having publicly traded
securities that track Circle.com's performance.
Interest Expense. Circle.com recorded $0.2 million of interest expense in
the three months ended September 30, 1999. There was no interest expense
recorded in the same period for 1998. Interest expense is related to the debt
attributed to Circle.com by Snyder Communications for certain acquisitions.
Interest expense is expected to increase in the fourth quarter for debt
allocated to Circle.com for the purchase of Interactive Bureau.
Income Tax Provision (Benefit). Circle.com recorded a tax benefit of $2.3
million in the three months ended September 30, 1999. The effective rate differs
from the statutory rate due primarily to nondeductible differences resulting
from goodwill amortization.
Net Income (Loss). Net income (loss) decreased to a loss of $2.7 million
in the third quarter of 1999 from net income of $0.3 million in the same period
in 1998 due to the decreased operating margin in 1999 which results from higher
levels of personnel necessary to accommodate growth of the business and due to
increased goodwill amortization.
58
<PAGE>
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Net Revenues. Circle.com's net revenues increased $13.6 million, or 151%,
to $22.6 million in the first nine months of 1999 from $9.0 million in the same
period of 1998. This includes approximately $5.5 million of revenue growth from
purchase transactions completed during 1998 and the first nine months of 1999.
Circle.com has accelerated its hiring which has caused growth in its client
base, size and scope of client engagements and headcount in both the U.S. and
the U.K. from the nine months ended September 30, 1998 to the same period in
1999, as more companies recognize that the Internet is an increasingly important
marketing tool and an effective way to reach customers
Professional Service Expenses. Circle.com's professional service expenses
increased $8.9 million, or 198%, to $13.4 million in the nine months ended
September 30, 1999 from $4.5 million in the same period in 1998. Professional
service expenses as a percentage of net revenues increased to 59.3% in the nine
months ended September 30, 1999 from 49.6% in the same period in 1998. The
increase in professional service expenses is consistent with the purchase
transactions and increase in personnel at Circle.com necessary to support the
increased level of business in 1999. We have grown our infrastructure and
personnel level at a faster rate than our revenue level has increased in order
to accommodate our growth. We believe that our existing infrastructure can
absorb additional business without added cost. However, if we continue to pursue
an aggressive growth strategy our costs could continue to grow at a faster rate
than our revenues as we pursue this strategy.
Office and General Expenses. Office and general expenses increased $12.0
million, or 316%, to $15.8 million in the nine months ended September 30, 1999
from $3.8 million in the same period in 1998. Office and general expenses as a
percentage of net revenues increased to 70.0% in the nine months ended September
30, 1999 from 42.9% in the same period in 1998. The increase in office and
general expenses both as a percentage of revenues and in absolute dollars is
directly related to the expansion of our infrastructure to support increased
revenue and from $1.9 million of goodwill amortization which results from the
purchase transactions which were completed during the fourth quarter of 1998 and
the nine months ended September 30, 1999. We believe the expanded infrastructure
can absorb additional business without added cost. We expect that office and
general expense will increase as a percentage of revenues in the fourth quarter
of 1999 due to $500,000 of goodwill amortization from the purchase of
Interactive Bureau in October, 1999 and the increased costs of having a publicly
traded security. The office and general expenses reported through the nine
months ended September 30, 1999 do not include any amounts related to the costs
of having publicly traded securities that track Circle.com's performance.
Interest Expense. Circle.com recorded $0.2 million of interest expense
for the nine months ended September 30, 1999. There was no interest expense
recorded in the same period for 1998. Interest expense is related to the debt
attributed to Circle.com by Snyder Communications for certain acquisitions.
Interest expense is expected to increase in the fourth quarter for debt
allocated to Circle.com for the purchase of Interactive Bureau.
Income Tax Provision (Benefit). Circle.com recorded a tax benefit of $1.7
million in the nine months ended September 30, 1999. The effective rate differs
from the statutory rate due primarily to nondeductible differences resulting
from goodwill amortization.
Net Income (Loss). Net income (loss) decreased to a loss of $5.1 million in
the nine months ended September 30, 1999 from net income of $0.2 million in the
same period in 1998 due to the decreased operating margin in 1999 which results
from higher levels of personnel necessary to accommodate growth of the business
and due to increased goodwill amortization. Pro forma net income (loss)
decreased to a $5.1 million loss in the nine months ended September 30, 1999
from $0.3 million income in the same period of 1998. Pro forma net loss
59
<PAGE>
includes a benefit for federal and state income taxes as if Circle.com had been
a taxable C corporation for all periods presented. To facilitate growth, we
intend to make investments in Circle.com over the next 12 to 15 months to
promote the business and its name, to further enhance the skills of our
employees, to further business development efforts and to make further
investment in technology. We expect that this additional investment in
Circle.com will cause an increase in our expenses over this period.
In the fourth quarter of 1999, Snyder Communications expects to incur
approximately $7.5 million of costs related to the Recapitalization. These
costs, which will be reflected as expense equally on SNC's and Circle.com's
income statements, will consist primarily of financial advisory fees, legal,
accounting, SEC registration fees and printing fees.
Liquidity and Capital Resources
Circle.com has incurred cumulative losses of $5.5 million from its
inception through September 30, 1999. For the nine months ended September 30,
1999, Circle.com recorded a net loss of $5.1 million. Circle.com has relied on
investments from SNC in order to build its business, acquire Internet services
companies, and to fund its operating and net losses.
SNC has invested $49.8 million in Circle.com cumulatively through September
30, 1999, with $40.3 million of that investment having been made during the nine
months ended September 30, 1999. Of the $40.3 million investment from SNC
received during the nine months ended September 30, 1999, $25.1 million
represents Snyder Communications common stock issued for acquisitions
contributed to Circle.com, $9.0 million was used in operating activities, $4.3
million was used for the purchase of computers and office equipment, and $1.5
million for additional cost to purchase a subsidiary, offset by $1.2 million of
cash acquired from purchase transactions. In addition, Snyder Communications
incurred $12.3 million in debt on behalf of Circle.com which was related to the
acquisitions of Tsunami and Natural Intelligence. Until May 1999, the operations
of Circle.com were contained within the Brann Worldwide and Arnold
Communications networks, and the operations which became Circle.com did not have
separately identified cash. As of September 30, 1999, Circle.com had $1.7
million of cash.
We believe that cash on hand as of September 30, 1999 will not be
sufficient to fund the operations of Circle.com through the end of 1999. We
currently expect that Circle.com will require additional cash to fund its growth
and operating losses over the next year and beyond. Accordingly, Circle.com will
need to obtain additional funding from SNC, borrow money from a third party, or
Snyder Communications may need to issue more shares of Circle.com stock. If
Snyder Communications issues additional shares of Circle.com stock in order to
fund Circle.com's operating losses, the result could be a dilution of the
interests of existing Circle.com stockholders and SNC's retained interest.
Circle.com does not have any borrowing arrangement in place with a third party
and, therefore, relies on Snyder Communications as its source of cash. Other
than the $12.3 million of debt allocated to Circle.com at September 30, 1999,
the funding provided to Circle.com by Snyder Communications prior to the
issuance of the Circle.com stock is considered an investment in Circle.com by
Snyder Communications. Following the issuance of the Circle.com stock, further
cash provided to Circle.com by Snyder Communications will be considered an
interest-bearing loan from SNC, a capital contribution resulting in an
adjustment in SNC's retained interest in Circle.com or an allocation of Snyder
Communications' debt and interest expense to Circle.com if Snyder Communications
must borrow the cash in order to fund Circle.com. As a result, with respect to
interest and debt allocation to Circle.com, the historical financial statements
will not be comparable to future periods.
In August 1999, Snyder Communications closed on a $195 million unsecured
revolving credit facility with a term of four years, which will be used for
acquisitions and general corporate purposes, as well as the repurchase of up
60
<PAGE>
to $250 million of Snyder Communications' common stock that the board of
directors has previously approved. Interest on amounts borrowed under the $195
million credit facility is based on the London Interbank Offered Rate, the
lending bank's base rate of interest or the federal funds rate. Availability
under this credit facility is subject to Snyder Communications' compliance with
various financial ratios, operating covenants and other customary conditions.
On September 30, 1999, there was $145 million in outstanding borrowings
under the credit facility at a weighted average interest rate of 6.7% and $12.3
million of that debt was attributed to Circle.com.
We anticipate that Snyder Communications will be in a position to fund the
needs of Circle.com in the future and we will monitor and evaluate market
conditions to assess the possibility of other sources of debt or equity
financing as the need arises. However, there can be no assurance that Circle.com
will be able to obtain third party debt or equity financing, or that Snyder
Communications will continue to be in a position to provide additional funding
to Circle.com in the longer-term.
Because Circle.com shares its systems and equipment with SNC, SNC has
undergone an assessment of these systems with regards to year 2000 compliance.
Circle.com has not undergone a separate assessment. We believe that these
systems and equipment are year 2000 compliant and that significant additional
costs will not be incurred. However, we cannot assure you that this will be the
case until these systems are operational in the year 2000. To the extent that
any acquisitions are consummated, Circle.com will need to evaluate how the year
2000 will impact those acquirees.
Circle.com is subject to the impact of foreign currency fluctuations,
specifically that of the British pound. To date, changes in the British pound
exchange rates have not had a material impact on Circle.com's liquidity or
results of operations. Circle.com continually evaluates its exposure to exchange
rate risk but does not currently hedge such risk.
Private Securities Litigation Reform Act of 1995 -- A Caution Concerning
Forward-Looking Statements
Any statement made in this Form 10-Q that deals with information that is
not historical, such as statements concerning our anticipated financial results,
are forward-looking statements. We wish to caution readers not to place undo
reliance on any of these forward-looking statements, which speak only as of the
date made. Forward-looking statements are subject to the occurrence of many
events outside our control and to various risk factors that could cause results
to differ materially from those expressed in Snyder Communications' periodic
reports and registration statements filed with the Securities and Exchange
Commission, including Snyder Communications' Registration Statement on Form S-4
(No. 333-81749), as amended, and press releases or other public communications
of Circle.com or Snyder Communications.
61
<PAGE>
Part II. Other Information
Item 2. Changes in Securities.
None
Item 4. Submission of Matter to a Vote of Security Holders
Matters as specified in the Company's Proxy Statement dated October 5,
1999, a copy of which has previously been filed with the Securities and
Exchange Commission, were considered and approved by the Company's
stockholders at the Special Meeting of Stockholders held on October 22,
1999. The results of such matters are as follows:
Proposal 1: To consider and act upon a proposal to adopt an amended and
restated certificate of incorporation under which each outstanding
share of our existing common stock will be changed into one share of
SNC stock and .25 of a share of Circle.com stock.
<TABLE>
<CAPTION>
Total Votes
Total Votes FOR AGAINST or WITHHELD ABSTENTIONS
----------------------- --------------------------------- ------------------
<S> <C> <C> <C>
Adopt an amended and restated
certificate of incorporation 47,989,533 51,803 24,523
</TABLE>
Proposal 2: To consider and act upon a proposal to adopt an amended and
restated stock incentive plan to provide for the granting of stock
awards and options in SNC stock and Circle.com stock.
<TABLE>
<CAPTION>
Total Votes
Total Votes FOR AGAINST or WITHHELD ABSTENTIONS
----------------------- --------------------------------- ------------------
<S> <C> <C> <C>
Adopt an amended and restated
stock incentive plan 32,263,457 15,765,179 37,223
</TABLE>
Proposal 3: To consider and act upon a proposal to adopt an amended and
restated employee stock purchase plan to permit employees to purchase
shares of both SNC stock and Circle.com stock at a discount.
<TABLE>
<CAPTION>
Total Votes
Total Votes FOR AGAINST or WITHHELD ABSTENTIONS
----------------------- --------------------------------- ------------------
<S> <C> <C> <C>
Adopt an amended and restated
employee stock purchase plan 47,633,394 385,345 47,120
</TABLE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
4.1 Pursuant to Regulation S-K Item 601 (b) (iii), the Company by
this filing agrees, upon request, to furnish to the Securities
and Exchange Commission a copy of other instruments defining the
rights of the holders of long-term debt of the Company.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1999.
62
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SNYDER COMMUNICATIONS, INC.
(Registrant)
Date: November 15, 1999 By: /s/ Michele D. Snyder
----------------------
Michele D. Snyder
Vice Chairman, President and
Chief Operating Officer
(Duly Authorized Officer)
Date: November 15, 1999 By: /s/ A. Clayton Perfall
-----------------------
A. Clayton Perfall
Chief Financial Officer
(Principal Financial Officer)
63
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 40,672
<SECURITIES> 0
<RECEIVABLES> 117,715
<ALLOWANCES> 3,744
<INVENTORY> 0
<CURRENT-ASSETS> 335,848
<PP&E> 140,082
<DEPRECIATION> 60,911
<TOTAL-ASSETS> 717,330
<CURRENT-LIABILITIES> 313,204
<BONDS> 0
0
0
<COMMON> 77
<OTHER-SE> 244,165
<TOTAL-LIABILITY-AND-EQUITY> 717,330
<SALES> 465,403
<TOTAL-REVENUES> 465,403
<CGS> 321,045
<TOTAL-COSTS> 321,045
<OTHER-EXPENSES> 101,119
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,230)
<INCOME-PRETAX> 43,018
<INCOME-TAX> 24,123
<INCOME-CONTINUING> 18,895
<DISCONTINUED> (11,562)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,333
<EPS-BASIC> .10
<EPS-DILUTED> .10
</TABLE>
