================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED):
DECEMBER 31, 1998
SNYDER COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 1-12145 52-1983617
(STATE OR OTHER JURISDICTION (COMMISSION (I.R.S. EMPLOYER
OF INCORPORATION) FILE NUMBER) IDENTIFICATION NO.)
TWO DEMOCRACY CENTER, 6903 ROCKLEDGE DRIVE
15TH FLOOR, BETHESDA, MARYLAND 20817
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(301) 468-1010
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
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<PAGE>
ITEM 5. OTHER EVENTS.
SNYDER COMMUNICATIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
SNYDER COMMUNICATIONS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
Report of Independent Public Accountants................................................................ F-1
Consolidated Balance Sheet as of December 31, 1998 and 1997............................................. F-2
Consolidated Statement of Income, including unaudited pro forma data, for the
years ended December 31, 1998, 1997 and 1996......................................................... F-3
Consolidated Statement of Equity and Comprehensive Income for the years
ended December 31, 1998, 1997 and 1996............................................................... F-4
Consolidated Statement of Cash Flows for the years ended December 31, 1998,
1997 and 1996........................................................................................ F-6
Notes to Consolidated Financial Statements.............................................................. F-8
BRANN HOLDINGS LIMITED
Report of Independent Accountants....................................................................... F-31
AMERICAN LIST CORPORATION
Report of Independent Certified Public Accountants...................................................... F-32
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Snyder Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Snyder
Communications, Inc. and subsidiaries (the "Company") as of December 31, 1998
and 1997, and the related consolidated statements of income, equity and
comprehensive income and cash flows for each of the years in the three year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the 1996 financial statements of American List Corporation or Brann
Holdings Limited included in the consolidated financial statements of the
Company, which statements reflect revenues constituting 13% of the related
consolidated total in 1996. These statements were audited by other auditors
whose reports have been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts included for American List Corporation or
Brann Holdings Limited, is based solely upon the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Snyder Communications, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 3, 1999
F-1
<PAGE>
SNYDER COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents................................................................ $ 73,595 $ 89,829
Marketable securities............................................................... 612 2,348
Accounts receivable, net of allowance for doubtful accounts of $10,002 and $7,817 at
December 31, 1998 and 1997, respectively.......................................... 122,422 97,696
Receivables from pass-through costs................................................. 86,015 77,221
Related party receivables........................................................... 190 3,763
Unbilled services................................................................... 34,920 20,730
Current portion of deferred tax asset............................................... 19,546 12,013
Other current assets................................................................ 21,929 18,932
--------- --------
Total current assets................................................... 359,229 322,532
--------- --------
Property and equipment, net.............................................................. 80,395 46,130
Goodwill and other intangible assets, net................................................ 153,016 68,943
Deferred tax asset....................................................................... 93,349 4,569
Deposits and other assets................................................................ 9,671 10,172
--------- --------
Total assets........................................................... $695,660 $452,346
========= ========
LIABILITIES AND EQUITY
Current liabilities:
Lines of credit..................................................................... $ 2,023 $ 32,050
Current maturities of long-term debt................................................ 1,085 2,615
Accrued payroll..................................................................... 27,412 25,055
Accounts payable.................................................................... 120,333 105,154
Accrued expenses.................................................................... 126,321 101,572
Client advances..................................................................... 13,718 12,675
Unearned revenue.................................................................... 22,981 30,127
--------- --------
Total current liabilities.............................................. 313,873 309,248
--------- --------
Related party borrowings................................................................. 8,924 7,529
Long-term obligations under capital leases............................................... 1,750 1,860
Long-term debt, net of current maturities................................................ 3,089 3,935
Other liabilities (including deferred income taxes of $3,329 at December 31, 1998)....... 7,686 6,235
Commitments and contingencies
Redeemable ESOP stock, 88 and 147 shares outstanding at December 31, 1998 and 1997,
respectively.......................................................................... 2,960 5,278
Equity:
Preferred stock, $.001 par value per share, 5,000 shares authorized, none issued and
outstanding at December 31, 1998 and 1997......................................... -- --
Common stock, $.001 par value per share, 400,000 and 120,000 shares authorized, 71,480
and 67,950 shares issued and outstanding at December 31, 1998 and 1997, respectively 71 68
Additional paid-in capital.......................................................... 375,114 180,086
Treasury stock, at cost, 1,053 shares at December 31, 1997.......................... -- (42,705)
Accumulated other comprehensive income.............................................. 1,829 640
Retained deficit.................................................................... (19,636) (19,828)
--------- --------
Total equity........................................................... 357,378 118,261
--------- --------
Total liabilities and equity........................................... $695,660 $452,346
========= ========
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-2
<PAGE>
SNYDER COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net revenues................................................................. $815,303 $612,039 $493,927
Operating expenses:
Cost of services........................................................ 554,057 430,245 341,715
Selling, general and administrative expenses............................ 144,361 126,159 103,665
Compensation to stockholders............................................ 1,315 28,060 17,279
ESOP expense............................................................ -- 5,411 6,553
Recapitalization costs.................................................. -- 1,889 --
Acquisition and related costs........................................... 65,863 39,430 --
--------- --------- ---------
Income (loss) from operations................................................ 49,707 (19,155) 24,715
Interest expense, including amounts to related parties of $555, $1,669 and
$2,734 in 1998, 1997 and 1996, respectively............................... (4,068) (4,795) (6,076)
Investment income............................................................ 5,488 3,512 3,167
--------- --------- ---------
Income (loss) from continuing operations before income taxes................. 51,127 (20,438) 21,806
Income tax provision......................................................... (28,321) (4,916) (6,242)
--------- --------- ---------
Income (loss) from continuing operations..................................... 22,806 (25,354) 15,564
Loss from discontinued operations............................................ -- (1,507) (1,498)
--------- --------- ---------
Income (loss) before extraordinary item...................................... 22,806 (26,861) 14,066
Extraordinary item, less applicable income taxes of $806..................... -- -- (1,216)
--------- --------- ---------
Net income (loss).......................................... $ 22,806 $(26,861) $ 12,850
========= ========= =========
Historical net income (loss) per share:
Basic net income (loss) per share
Income (loss) from continuing operations............................ $ 0.33 $ (0.40) $ 0.26
========= ========= =========
Net income (loss)................................................... $ 0.33 $ (0.42) $ 0.22
========= ========= =========
Diluted net income (loss) per share
Income (loss) from continuing operations............................ $ 0.32 $ (0.40) $ 0.26
========= ========= =========
Net income (loss)................................................... $ 0.32 $ (0.42) $ 0.21
========= ========= =========
Pro forma net income (loss) per share (unaudited) (Note 3):
Basic net income (loss) per share
Income (loss) from continuing operations............................ $0.29 $ (0.47) $ 0.15
========= ========= =========
Net income (loss)................................................... $0.29 $ (0.48) $ 0.11
========= ========= =========
Diluted net income (loss) per share
Income (loss) from continuing operations............................ $0.28 $ (0.47) $ 0.14
========= ========= =========
Net income (loss)................................................... $0.28 $ (0.48) $ 0.11
========= ========= =========
</TABLE>
The accompanying notes are an integral part of this
consolidated statement of income.
F-3
<PAGE>
SNYDER COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF EQUITY AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
COMMON COMMON ADDITIONAL RETAINED LIMITED UNEARNED
STOCK STOCK PAID-IN EARNINGS PARTNERS' ESOP TREASURY
SHARES PAR VALUE CAPITAL (DEFICIT) DEFICIT COMPENSATION STOCK
------ --------- ------- --------- ------- ------------ -----
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995, as previously
restated for poolings.................... 31,896,000 $32 $15,857 $ 28,987 $(1,450) $(4,324) $(3,585)
Distributions and dividends............ -- -- -- (27,735) (8,612) -- --
Net proceeds from stock issuances...... 4,747,000 5 59,662 -- -- -- --
Exercise of stock options and subsidiary
stock appreciation rights............ 63,000 -- 1,005 -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- -- --
Unrealized loss on marketable securities -- -- -- -- -- -- --
Purchases and retirements of treasury
stock................................ (1,727,000) (2) (2,777) (124) -- -- (6,433)
Reissuance of treasury stock........... -- -- 95 -- -- -- 475
Release of ESOP shares................. -- -- 2,429 (538) -- 2,758 --
Reclassification of redeemable ESOP stock -- -- (2,183) -- -- -- --
Reorganization......................... 28,959,000 29 (15,558) 7,630 7,899 -- --
Capital contribution - acquired
subsidiary........................... -- -- 469 -- -- -- --
Net income............................. -- -- -- 10,687 2,163 -- --
Comprehensive income...................
----------- ----- -------- -------- ------ -------- --------
Balance, December 31, 1996.................. 63,938,000 64 58,999 18,907 -- (1,566) (9,543)
Distributions and dividends............ -- -- -- (8,968) -- -- --
Net proceeds from stock issuances...... 1,850,000 2 42,711 -- -- -- --
Exercise of stock options and subsidiary
stock appreciation rights............ 1,789,000 2 39,179 -- -- -- --
Issuance of shares for purchase of
subsidiaries......................... 644,000 1 14,013 -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- -- --
Unrealized gain on marketable securities -- -- -- -- -- -- --
Purchases and retirements of treasury
stock................................ (740,000) (1) (4,241) (151) -- -- 3,011
Reissuance of treasury stock........... 105,000 -- 3,950 -- -- -- 947
Release of ESOP shares................. -- -- 1,971 -- -- 1,566 --
Reclassification of redeemable ESOP stock -- -- (2,826) -- -- -- --
Recapitalization of certain subsidiaries
acquired in 1998..................... 364,000 -- 20,827 (1,250) -- -- (37,120)
Capital contribution - acquired
subsidiary........................... -- -- 5,503 -- -- -- --
Net loss............................... -- -- -- (26,861) -- -- --
Impact from differing fiscal year end
(Note 1)............................. -- -- -- (1,505) -- -- --
Comprehensive loss.....................
----------- ----- -------- -------- ------ -------- --------
</TABLE>
F-4(a)
*Table continued on following page
<PAGE>
*Table continued from previous page
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE COMPREHENSIVE
INCOME TOTAL INCOME
------ ----- ------
<S> <C> <C> <C>
Balance, December 31, 1995, as previously
restated for poolings.................... $ 527 $ 36,044 $ --
Distributions and dividends............ -- (36,347) --
Net proceeds from stock issuances...... -- 59,667 --
Exercise of stock options and subsidiary
stock appreciation rights............ -- 1,005 --
Foreign currency translation adjustment (154) (154) (154)
Unrealized loss on marketable securities (111) (111) (111)
Purchases and retirements of treasury
stock................................ -- (9,336) --
Reissuance of treasury stock........... -- 570 --
Release of ESOP shares................. -- 4,649 --
Reclassification of redeemable ESOP stock -- (2,183) --
Reorganization......................... -- -- --
Capital contribution - acquired
subsidiary........................... -- 469 --
Net income............................. -- 12,850 12,850
---------
Comprehensive income................... $12,585
------ --------- =========
Balance, December 31, 1996.................. 262 67,123 --
Distributions and dividends............ -- (8,968) --
Net proceeds from stock issuances...... -- 42,713 --
Exercise of stock options and subsidiary
stock appreciation rights............ -- 39,181 --
Issuance of shares for purchase of
subsidiaries......................... -- 14,014 --
Foreign currency translation adjustment 356 356 356
Unrealized gain on marketable securities 22 22 22
Purchases and retirements of treasury
stock................................ -- (1,382) --
Reissuance of treasury stock........... -- 4,897 --
Release of ESOP shares................. -- 3,537 --
Reclassification of redeemable ESOP stock -- (2,826) --
Recapitalization of certain subsidiaries
acquired in 1998..................... -- --
(17,543)
Capital contribution - acquired
subsidiary........................... -- 5,503 --
Net loss............................... -- (26,861) (26,861)
Impact from differing fiscal year end
(Note 1)............................. -- (1,505) --
---------
Comprehensive loss..................... $(26,483)
------ --------- =========
</TABLE>
F-4(b)
<PAGE>
SNYDER COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF EQUITY AND COMPREHENSIVE INCOME - (CONTINUED)
<TABLE>
<CAPTION>
COMMON COMMON ADDITIONAL RETAINED LIMITED UNEARNED
STOCK STOCK PAID-IN EARNINGS PARTNERS' ESOP TREASURY
SHARES PAR VALUE CAPITAL (DEFICIT) DEFICIT COMPENSATION STOCK
------ --------- ------- --------- ------- ------------ -----
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997.................. 67,950,000 68 180,086 (19,828) -- -- (42,705)
Distributions and dividends............ -- -- -- (7,316) -- -- --
Net proceeds from secondary stock
issuances............................ 500,000 -- 17,329 -- -- -- --
Exercise of stock options and subsidiary
stock appreciation rights............ 1,094,000 1 32,259 -- -- -- 19
Issuance of shares for purchase of
subsidiaries and property............ 1,906,000 2 59,665 -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- -- --
Unrealized loss on marketable securities -- -- -- -- -- -- --
Purchases and retirements of treasury (1) (2,471) (17,617) -- -- 14,742
stock................................ (1,152,000)
Reissuance of treasury stock........... 1,064,000 1 7,065 -- -- -- 27,944
Reclassification of redeemable ESOP stock -- -- -- 2,319 -- -- --
Tax benefit from taxable merger
transactions......................... -- -- 76,927 -- -- -- --
Issuance of warrants by acquired
subsidiary........................... -- -- 219 -- -- -- --
Compensation on shares and options
issued by acquired subsidiaries...... 118,000 -- 4,035 -- -- -- --
Net income............................. -- -- -- 22,806 -- -- --
Comprehensive income...................
----------- ----- -------- -------- ------ -------- --------
Balance, December 31, 1998.................. 71,480,000 $71 $375,114 $(19,636) $ -- $ -- --
=========== ===== ======== ======== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of this
consolidated statement of equity and comprehensive income.
F-5(a)
*Table continued on following page
<PAGE>
*Table continued from previous page
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE COMPREHENSIVE
INCOME TOTAL INCOME
------ ----- ------
<S> <C> <C> <C>
Balance, December 31, 1997.................. 640 118,261 --
Distributions and dividends............ -- (7,316) --
Net proceeds from secondary stock
issuances............................ -- 17,329 --
Exercise of stock options and subsidiary
stock appreciation rights............ -- 32,279 --
Issuance of shares for purchase of
subsidiaries and property............ -- 59,667 --
Foreign currency translation adjustment 1,242 1,242 1,242
Unrealized loss on marketable securities (53) (53) (53)
Purchases and retirements of treasury -- (5,347) --
stock................................
Reissuance of treasury stock........... -- 35,010 --
Reclassification of redeemable ESOP stock -- 2,319 --
Tax benefit from taxable merger
transactions......................... -- 76,927 --
Issuance of warrants by acquired
subsidiary........................... -- 219 --
Compensation on shares and options
issued by acquired subsidiaries...... -- 4,035 --
Net income............................. -- 22,806 22,806
---------
Comprehensive income................... $23,995
------ --------- =========
Balance, December 31, 1998.................. $1,829 $357,378
====== =========
</TABLE>
F-5(b)
<PAGE>
SNYDER COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................................... $22,806 $(26,861) $12,850
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization....................................... 22,886 15,684 14,049
Loss on repayment of subordinated debt.............................. -- -- 2,021
Noncash charge from accelerated vesting of acquired subsidiary options 4,035 9,097 --
Noncash ESOP expense................................................ -- 4,851 5,282
Deferred taxes...................................................... (13,328) (11,415) (3,170)
Loss on disposal of assets.......................................... 751 3,382 861
Other noncash amounts............................................... 117 1,180 1,814
Changes in assets and liabilities:
Accounts receivable, net............................................ (2,473) (33,341) (6,086)
Receivables from pass-through costs................................. (8,794) (11,592) (28,998)
Related party receivables........................................... 3,573 (120) (494)
Unbilled services................................................... (13,256) (6,256) (5,309)
Deposits and other assets........................................... 1,941 (1) (343)
Other current assets................................................ (2,516) 3,462 (1,424)
Accrued payroll, accounts payable and accrued expenses.............. 19,888 67,387 39,746
Client advances..................................................... (665) -- --
Unearned revenue.................................................... (10,422) 7,238 5,268
Impact from differing fiscal year ends.............................. -- (2,761) --
--------- -------- --------
Net cash provided by operating activities.................. 24,543 19,934 36,067
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of subsidiaries, net of cash acquired.......................... (18,711) (22,066) --
Purchase of property and equipment...................................... (40,570) (20,862) (12,711)
Proceeds from sale of equipment......................................... 787 234 320
Net sales of marketable securities...................................... 1,837 8,081 1,893
Purchase of intangible assets........................................... (1,493) (5,088) (2,845)
Note and net advances to stockholders of acquired subsidiaries.......... (1,940) 1,467 30
Impact from differing fiscal year ends.................................. -- (446) --
--------- -------- --------
Net cash used in investing activities...................... (60,090) (38,680) (13,313)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term notes payable to limited partners and others..... (2,197) (31,090) (3,483)
Proceeds from issuance of subordinated debentures due to related parties -- 425 294
Repayment of subordinated debentures due to related parties............. -- -- (6,900)
Debt issuance costs..................................................... -- -- (25)
Distributions and dividends............................................. (6,161) (10,589) (31,872)
Proceeds (repayment) from long-term debt................................ (8,860) 5,372 1,516
Proceeds from mandatorily redeemable preferred stock.................... -- -- 3,238
Redemption of mandatorily redeemable preferred stock.................... -- (8,330) --
Net borrowings (repayments) on lines of credit.......................... (30,302) 19,297 (4,306)
Payments on capital lease obligations................................... (2,091) (2,115) (1,124)
Proceeds from exercise of options....................................... 21,053 25,128 425
Proceeds from stock issuances........................................... 52,339 43,250 60,532
Purchase and retirement of treasury stock............................... (5,347) (1,382) (6,741)
Redemption/issuance of stock in connection with recapitalization of
acquired subsidiary................................................... -- (16,769) --
Loans provided by related parties....................................... -- 10,000 --
Payment of related party loans.......................................... -- (10,000) --
Capital contribution - acquired subsidiary.............................. -- 5,503 --
Impact from differing fiscal year ends.................................. -- 3,704 --
--------- -------- --------
Net cash provided by financing activities.................. 18,434 32,404 11,554
--------- -------- --------
Effect of exchange rate changes.............................................. 879 206 1,171
Net (decrease) increase in cash and equivalents.............................. (16,234) 13,864 35,479
--------- -------- --------
Cash and equivalents, beginning of period.................................... 89,829 75,965 40,486
--------- -------- --------
F-6
<PAGE>
SNYDER COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS - (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
Cash and equivalents, end of period.......................................... $73,595 $89,829 $75,965
======== ======== ========
DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest including dividends on mandatorily redeemable $ 2,681 $ 2,667 $ 4,066
preferred stock.......................................................
Cash paid for income taxes.............................................. 13,811 7,726 8,276
DISCLOSURE OF NONCASH ACTIVITIES:
Equipment purchased under capital leases................................ 1,693 817 3,610
Distribution of note receivable from stockholder to SMS stockholders.... -- -- 2,725
Issuance of shares of common stock for purchase of subsidiaries......... 54,443 13,320 --
Issuance of note for purchase of treasury stock......................... -- 215 2,595
Redemption of common stock in exchange for note payable................. -- 457 --
Distribution of non-operating assets and distribution payable by subsidiary 1,154 -- --
Issuance of common stock related to stock appreciation rights........... 3,484 -- --
Tax benefit from exercise of stock options.............................. 7,742 5,312 99
Issuance of common stock for conversion of subsidiary debt.............. 1,741 -- --
Acquisition of property and assumption of debt for common stock......... 3,483 -- --
Issuance of notes for purchase of subsidiary............................ 5,242 -- --
Tax benefit from taxable merger transactions............................ 76,927 -- --
</TABLE>
The accompanying notes are an integral part of this
consolidated statement of cash flows.
F-7
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, BASIS OF PRESENTATION AND BUSINESS:
Organization
On October 19, 1988, Collegiate Marketing and Communications, Inc., a
Delaware corporation (the "General Partner"), and a Delaware limited partnership
beneficially owned by Mortimer B. Zuckerman and Fred Drasner (the "Original
Limited Partner") entered into a partnership agreement (the "Partnership
Agreement") under the name Collegiate Marketing and Communications, L.P. (the
"Partnership"). On September 1, 1989, the name of the Partnership was changed to
Snyder Communications, L.P., and the name of the General Partner was changed to
Snyder Communications, Inc. On May 18, 1995, the Partnership Agreement was
amended to admit several new limited partners into the Partnership. On June 25,
1996, the name of the General Partner was changed to Snyder Marketing Services,
Inc. ("SMS").
Snyder Communications, Inc., a Delaware corporation, was incorporated on
June 25, 1996, to continue the business operations of the Partnership. Snyder
Communications, Inc., in conjunction with all of the existing partners in the
Partnership, reorganized on September 24, 1996 (the "Reorganization"), upon the
effectiveness of the initial public offering of its common stock.
Prior to the Reorganization, SMS owned 63.85% of the Partnership, and the
limited partners owned the remaining 36.15%. The Reorganization resulted in the
stockholders of SMS exchanging 100% of their SMS stock for stock of Snyder
Communications, Inc., simultaneously with the limited partners exchanging their
limited partnership interests in the Partnership for common stock of Snyder
Communications, Inc. After consummation of the Reorganization, Snyder
Communications, Inc. owned 100% of the stock of SMS and, directly and indirectly
(through its ownership of SMS), 100% of the interests in the Partnership. In
connection with the Reorganization, 29,458,400 shares of common stock were
issued to the stockholders of Snyder Communications, Inc. ("SNC"). Because of
the continuity of ownership, the Reorganization was accounted for by combining
the assets, liabilities and operations of SMS, the Partnership and Snyder
Communications, Inc., at their historical cost basis.
Basis of Presentation
Throughout 1998 and 1997, SNC completed acquisitions that were accounted
for as poolings of interests for financial reporting purposes. The accompanying
consolidated financial statements have been retroactively restated to reflect
the pooling of interests transactions. During 1998 and 1997, the Company (as
defined herein) also made several acquisitions that have been accounted for as
purchase business combinations. The companies with which SNC has entered into
mergers accounted for as poolings of interests for financial reporting purposes
will be collectively referred to as the "Pooled Entities," and their mergers
will be referred to herein as the "Acquisitions." The accompanying consolidated
financial statements have been retroactively restated to reflect the combined
financial position and combined results of operations and cash flows of 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 (the
combined entity will be referred to hereafter as the "Company"). Prior to its
merger with SNC in July 1997, American List Corporation utilized a February 28
fiscal year end. Concurrent with the merger, American List Corporation changed
its fiscal year end to December 31. The accompanying consolidated statements of
income, equity and comprehensive income and cash flows for the year ended
December 31, 1996 reflect the combination of the American List Corporation
statements of income, equity and comprehensive income and cash flows for the
year ended February 28, 1997. Certain amounts previously presented have been
reclassified to conform to the December 31, 1998 presentation. The consolidated
balance sheets for all periods presented give effect to the conversion of the
shares of the Pooled Entities' common stock into 31,018,532 shares of SNC common
stock.
F-8
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Business
The Company provides fully integrated marketing solutions for its clients
and characterizes its service offerings into three types: direct services,
healthcare services and creative services. The Company's operations are
conducted throughout the United States ("U.S."), the United Kingdom ("U.K."),
France, Germany, Ireland, the Netherlands and Hungary.
The direct services offered by the Company are marketing and sales
solutions designed to directly reach certain, sometimes targeted, consumer
groups. The programs offered within direct services focus on stimulating and
creating brand awareness as well as acquiring and retaining customers. The
specific services offered within direct services include strategic planning and
design, WallBoard(R) and other information displays, proprietary sampling
programs and publications, face-to-face field sales, teleservices, database
mailings, interactive services, and return-on-investment evaluation. During 1998
and 1997, the Company issued 5,655,730 and 10,414,885 shares, respectively, in
pooling of interests transactions with companies that provide direct services.
These transactions include the acquisitions of Brann Holdings Limited ("Brann"),
Blau Marketing Technologies, Inc. ("Blau"), Response Marketing Group, LLC
("RMG"), Bounty Group Holdings Limited ("Bounty"), Sampling Corporation of
America ("SCA"), American List Corporation ("American List"), Echo Marketing,
Inc. ("Echo") and National Sales Services, Inc. ("NRS"). Brann's operations are
conducted throughout the U.K. and consist primarily of planning, creating and
delivering direct response marketing communications; marketing systems design
and consultancy; print production services; and telephone and response
management services for companies involved in direct marketing and selling.
Blau's operations are conducted throughout the U.S. and consist primarily of
strategic consulting and design; program creation and implementation; consumer
database management; response tracking and analysis; and production management.
RMG's operations are also conducted throughout the U.S. and consist primarily of
database and analytical services; strategic consulting and design; and marketing
campaign management. Brann, Blau and RMG all provide a broad range of services
and full-scale direct marketing and sales solutions. The services offered by
Bounty, SCA, American List and NRS are more focused and consist primarily of
product sampling at Bounty and SCA, data mining at American List and field
marketing at NRS. Bounty provides targeted product sampling and proprietary
publications to expectant mothers, new mothers and parents of toddlers in the
U.K. and Ireland. SCA distributes product samples and proprietary publications
on behalf of consumer packaged goods manufacturers in the U.S. through primary
and secondary schools, daycare centers, colleges and immigrant organizations.
American List develops, maintains and markets databases of high school, college
and pre-school through junior high school students in the U.S. NRS provides
marketing and merchandising services for its clients throughout the U.S., and
its services include reporting and data analysis, consulting, distribution and
in-store merchandising.
The healthcare services offered by the Company are designed to establish
and monitor marketing plans as well as to provide face-to-face interaction with
physicians and other healthcare providers. Healthcare services consist primarily
of pharmaceutical detailing and sales force training, but also include
educational communications as well as establishing marketing plans, targeting
specific markets and evaluating sales performance. During 1998 and 1997, the
Company issued 7,340,236 and 4,035,184 shares, respectively, in pooling of
interests transactions with companies that provide healthcare services. These
transactions include the acquisitions of MMD, Inc. ("MMD"), GEM Communications,
Inc. ("GEM"), Rapid Deployment Group Limited ("RDL"), PharmFlex, Inc.
("PharmFlex"), Health Products Research, Inc. ("HPR"), Publimed Promotions S.A.
("Publimed"), Clinical Communications Group, Inc. ("Clinical") and MKM
Marketinginstitut GmbH ("MKM"). The Company acquired Halliday Jones Sales Ltd.
("HJ") in a purchase transaction in 1997, as well as Healthcare Promotions, LLC
("HCP") and CLI Pharma S.A. ("CLI Pharma") in purchase transactions in 1998.
MMD, RDL, HJ, PharmFlex, HCP, Publimed, CLI Pharma and MKM all market medical
products for pharmaceutical companies utilizing technically trained sales
representatives. MMD, PharmFlex and HCP all operated throughout the U.S., and
their operations have been combined into Snyder Healthcare Sales - U.S. RDL and
HJ both operated primarily in the U.K., but RDL also had operations in Hungary.
RDL and HJ have been combined into Snyder Healthcare Services - U.K. Publimed
and CLI Pharma both operated in France, and their operations have been combined
into Snyder Healthcare Services - France. MKM continues to operate as such in
Germany. GEM and Clinical provided a complete range of healthcare communication
services with specialties in educational research, marketing and publishing for
the pharmaceutical industry. The operations of GEM and Clinical have been
F-9
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
combined into Snyder Healthcare Communications. HPR provides strategic and
tactical sales force market planning and evaluation services to leading
pharmaceutical and medical device manufacturers. HPR's services include sales
and marketing resource allocation, sales force planning and the integration and
evaluation of sales and marketing promotions.
The creative services offered by the Company were established with the
acquisition of Arnold Communications, Inc. ("Arnold") in the U.S. and expanded
with the acquisition of BDDH Group Plc ("BDDH") in the U.K. Creative services
are designed to provide customized advertising for clients and include
advertising, creative design, public relations, media placement and interactive
services. During 1998, the Company issued 3,572,497 shares in pooling of
interests transactions with Arnold and BDDH.
The following details revenues and net income (loss) for each of the years
ended December 31, 1998, 1997 and 1996 of SNC and the Pooled Entities through
the dates of their respective Acquisitions:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
SNC................................................... $673,011 $220,907 $ 82,840
Pooled Entities....................................... 142,292 391,132 411,087
--------- --------- ---------
$815,303 $612,039 $493,927
========= ========= =========
Net income (loss):
SNC................................................... $ 38,139 $ 7,576 $ 6,977
Pooled Entities....................................... (15,333) (34,437) 5,873
--------- --------- ---------
$ 22,806 $(26,861) $ 12,850
========= ========= =========
</TABLE>
Unaudited Pro Forma Information
During the year ended December 31, 1998, the Company recorded $67.2 million
of nonrecurring costs, consisting of acquisition and related costs and
compensation to stockholders. Consolidated net income adjusted to exclude
nonrecurring acquisition and related costs and compensation to stockholders was
$73.3 million for the year ended December 31, 1998.
During the year ended December 31, 1997, the Company recorded $76.3 million
of nonrecurring costs, consisting of acquisition and related costs, ESOP
expense, recapitalization costs, compensation to stockholders and discontinued
operations. Consolidated net income adjusted to exclude nonrecurring acquisition
and related costs, ESOP expense, recapitalization costs, compensation to
stockholders and discontinued operations was $31.0 million for the year ended
December 31, 1997.
During the year ended December 31, 1996, the Company recorded $27.4 million
of nonrecurring costs, consisting of ESOP expense, compensation to stockholders,
discontinued operations and the net extraordinary loss. Consolidated net income
adjusted to exclude ESOP expense, compensation to stockholders, discontinued
operations and an extraordinary loss was $25.2 million for the year ended
December 31, 1996.
During 1998, the Company completed purchase business combinations,
including CLI Pharma (March 25, 1998) and HCP (February 13, 1998), for total
consideration paid of approximately $91.6 million (1,376,099 shares of common
stock and $16.9 million in net cash). Based upon an allocation of purchase
consideration, these purchase business combinations have resulted in additional
goodwill of approximately $85.7 million. During 1997, the Company completed the
acquisition of HJ, and the total consideration paid, including the repayment of
assumed debt immediately following the closing, was $19.4 million and consisted
of 425,478 shares of common stock and $7.4 million in cash. The following table
presents pro forma financial information as if the Company's 1998 purchases of
F-10
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
HCP and CLI Pharma and 1997 purchase of HJ had been consummated at the beginning
of each of the periods presented and all of the Company's operations had been
taxed as a C corporation.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------
1998 1997
---- ----
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Pro forma revenues..................................................... $825,365 $672,182
Pro forma income (loss) from continuing operations..................... 20,235 (27,583)
Pro forma net income (loss)............................................ 20,235 (28,483)
Pro forma basic net income (loss) per share............................ 0.29 (0.44)
Pro forma diluted net income (loss) per share.......................... 0.28 (0.44)
</TABLE>
The pro forma income from continuing operations and the pro forma net
income for the year ended December 31, 1998 include $67.2 million of
nonrecurring acquisition and related costs and compensation to stockholders that
were recorded in conjunction with the consummation of the Company's mergers with
the Pooled Entities. Pro forma net income, adjusted to exclude nonrecurring
acquisition and related costs and compensation to stockholders, was $73.4
million. Pro forma basic and diluted net income per share for the same period
were $1.05 and $1.02, respectively.
The pro forma loss from continuing operations and the pro forma net loss
for the year ended December 31, 1997, include $76.3 million of nonrecurring
acquisition and related costs, ESOP expense, recapitalization costs,
compensation to stockholders and discontinued operations that were recorded by
Pooled Entities prior to their acquisitions by the Company. Pro forma net
income, adjusted to exclude nonrecurring acquisition and related costs, ESOP
expense, recapitalization costs, compensation to stockholders and discontinued
operations, was $33.3 million. Pro forma basic and diluted net income per share
for the same period were $0.51 and $0.50, respectively.
The Company's other purchase business combinations are immaterial to the
consolidated financial statements.
Business Considerations
There are important risks associated with the Company's business and
financial results. These risks include (i) the Company's reliance on significant
clients; however, no one client represented greater than 6% of its 1998 revenues
(see Note 2); (ii) the Company's ability to sustain and manage future growth;
(iii) the Company's ability to manage and successfully integrate the businesses
it has acquired and may acquire in the future; (iv) the Company's ability to
successfully manage its international operations; (v) the potential adverse
effects of fluctuations in foreign exchange rates; (vi) the Company's dependence
on industry trends toward outsourcing of marketing services; (vii) the risks
associated with the Company's reliance on technology and the risk of business
interruption resulting from a temporary or permanent loss of such technology;
(viii) the entrance of new competitors with greater resources than the Company;
(ix) the Company's ability to recruit and retain qualified personnel; and (x)
the dependence of the Company's success on its executive officers and other key
employees, in particular, its Chairman of the Board of Directors and Chief
Executive Officer.
2. SIGNIFICANT CLIENT:
The Company had one client that represented 10.3% and 10.2% of the
Company's total revenues for the years ended December 31, 1997 and 1996,
respectively. For the year ended December 31, 1998, no single client represented
greater than 6% of revenue.
F-11
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Equivalents
Cash and equivalents are comprised principally of amounts in operating
accounts, money market investments and other short-term instruments, stated at
cost, which approximates market value, with original maturities of three months
or less.
Marketable Securities
The Company's investments are classified into two categories. Those
securities classified as "available-for-sale" are reported at market value. Debt
securities consisting of state and municipal bonds are classified as
"held-to-maturity" and are reported at amortized cost. Cost is determined using
the specific identification method. Unrealized gains and losses from securities
"available-for-sale" are reported as a separate component of equity and
comprehensive income.
Receivables From Pass-Through Costs
Receivables from pass-through costs relate to services purchased from third
parties, on behalf of clients, for which no revenue is recorded.
Property and Equipment
Property and equipment is stated at cost. The Company depreciates
furniture, fixtures and office and telephone equipment on a straight-line basis
over three to ten years; computer equipment over two to four years and buildings
over forty years. Leasehold improvements are amortized on a straight-line basis
over the shorter of the term of the lease or the estimated useful lives of the
improvements.
When assets are retired or sold, the cost and related accumulated
depreciation and amortization are removed from the accounts, and any gain or
loss is reflected in income.
Revenue Recognition
DIRECT SERVICES--The Company performs marketing and sales communications
services on behalf of its clients, including database management, interactive
services, creative design, direct response marketing, WallBoard(R) information
displays, sampling programs, print production, field sales and teleservices.
Revenues are recognized as services are rendered in accordance with the terms of
the contracts. Certain of these contracts provide for payments based on accepted
customers and the type of service purchased by the customer. Revenues related to
these sales are recognized on the date the application for service is accepted
by the Company's clients. At this point, the Company has no further performance
obligation related to the submitted customer and is contractually entitled to
payment. Certain of the contracts include postage and other pass-through costs
incurred by the Company on behalf of its clients. For these contracts, the
Company records as revenue the net billings to its clients. For WallBoard(R) and
sampling programs, unearned revenue is recorded for billings prior to the
earning of such revenue. Revenues from the sale of lists are recognized upon the
shipment to customers of lists on computerized labels, magnetic tape or computer
diskettes for a one-time usage. Additional billings are made by the Company for
additional usage by the customers.
HEALTHCARE SERVICES--On pharmaceutical detailing contracts, the Company
recognizes revenue and associated costs when services have been performed by
account executives. On educational marketing programs the Company recognizes
revenues and associated costs as services are performed on behalf of clients.
Unbilled services represent revenues earned on contracts but billed in a
subsequent accounting period.
F-12
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CREATIVE SERVICES--The Company provides advertising, creative design,
public relations, media placement, and interactive services to its clients.
Revenue is recognized as services are rendered. Certain of the contracts include
media, postage and other pass-through costs purchased by the Company on behalf
of its clients. For these contracts, the Company records as revenue the net
billings to its clients.
Goodwill and Other Intangible Assets
Goodwill equal to the fair value of consideration paid in excess of the
fair value of net assets purchased has been recorded in conjunction with several
of the Company's purchase business combinations and is being amortized on a
straight-line basis over periods of seven to thirty years.
The costs of customer lists that were acquired in conjunction with certain
of the Company's purchase business combinations are amortized on a straight-line
basis over seven years. The contractual covenant and the marketing rights are
amortized over the term of the related agreements, which are four and ten to
fifteen years, respectively.
Costs of purchased lists are amortized on a straight-line basis over their
estimated useful lives, generally one to five years. The Company determines the
useful lives of its lists based upon the estimated period of time such lists are
marketable. The Company periodically reviews the marketability of its lists and,
accordingly, their respective estimated useful lives.
The costs of licenses to use, reproduce and distribute lists and market
pharmaceutical products are amortized on a straight-line basis over the term of
the related license agreement.
When conditions or events occur that management believes might indicate
that the goodwill or any other intangible asset is impaired, an analysis of
estimated future undiscounted cash flows is undertaken to determine if any write
down in the carrying value of the asset is required.
Income Taxes
Prior to their merger with SNC, certain of the U.S. based Pooled Entities
were treated as S corporations or Limited Liability Companies for income tax
purposes. Accordingly, no provision for federal or state income taxes, except in
certain states that do not recognize S Corporations or Limited Liability
Companies, has been made for these entities through the date of their mergers
with SNC in the accompanying consolidated financial statements.
The Company's subsidiaries with operations in the U.K., France and Germany
pay taxes in their respective countries, on a corporate level similar to a C
corporation in the U.S.
Effective January 1, 1996, SMS elected to be taxed as an S corporation
under the Internal Revenue Code. In lieu of corporate taxes, the stockholders of
an S corporation are taxed on their proportionate share of the Company's taxable
income. Effective with the Reorganization, SNC is treated as a C corporation for
federal and state income tax purposes. At the date of the Reorganization, SNC
recognized a net deferred tax asset and an associated tax benefit equal to the
cumulative net deductible temporary differences existing at that date. The
income tax provision recorded for the year ended December 31, 1996 includes a
provision for income taxes for SNC for the period from September 24, 1996, the
date of the Reorganization, through December 31, 1996, offset by the net
deductible temporary differences existing at the date of the Reorganization.
The accompanying consolidated financial statements reflect no provision for
federal or state income taxes related to income earned by the Partnership prior
to the Reorganization since each of the partners of the Partnership reflected
their share of the Partnership's net income on their respective tax returns.
F-13
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Pro Forma Income (Loss) Data (Unaudited)
The unaudited pro forma net income (loss) and pro forma net income (loss)
per share amounts include a provision for federal and state income taxes as if
the Company had been a taxable C corporation for all periods presented. The
shares used in computing pro forma net income (loss) per share assume that the
Reorganization and the Acquisitions had occurred at the beginning of each of the
periods presented, reflect the issuance of additional shares as a result of
issuances of stock, the exercise of stock options, and the repurchase of
outstanding shares by certain subsidiaries of the Company prior to their mergers
with SNC. The pro forma income tax rate on the Company's recurring operations
reflects the combined federal, state and foreign income taxes of approximately
38.0%, 42.9% and 44.8%, for the years ended December 31, 1998, 1997 and 1996,
respectively. The pro forma income tax rates in the table below differ from the
pro forma income tax rates on the Company's recurring operations due to the
nondeductibility of certain of the acquisition and related costs. The Company's
December 31, 1998 tax provision exceeds its 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 (loss):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Pro forma net income (loss) data (unaudited):
Historical income (loss) from continuing operations before
income taxes............................................ $51,127 $(20,438) $21,806
Pro forma provision for income taxes....................... (30,982) (9,453) (13,137)
-------- --------- ---------
Pro forma income (loss) from continuing operations......... 20,145 (29,891) 8,669
Discontinued operations, less applicable pro forma income
taxes of $607 and $603 for 1997 and 1996, respectively.. -- (900) (895)
Extraordinary item, less applicable income taxes of $806... -- -- (1,216)
-------- --------- ---------
Pro forma net income (loss)................................ $20,145 $(30,791) $ 6,558
======== ========= =========
</TABLE>
Accounting for Stock Options
The Company accounts for its stock-based compensation plan using the
intrinsic value based method in accordance with the provisions of APB Opinion
No. 25, "Accounting for Stock Issued to Employees." Pro forma disclosure of net
income and earnings per share, calculated as if the Company accounted for its
stock-based compensation plan using the fair value based method in accordance
with the provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), is included in Note
13.
Foreign Currency Translations
Assets and liabilities of the Company's international subsidiaries are
translated using the exchange rate in effect at the balance sheet date. Revenue
and expense accounts for these subsidiaries are translated using the average
exchange rate during the period. Foreign currency translation adjustments are
disclosed as a separate component of equity and comprehensive income.
Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-14
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of the fair value of certain financial instruments. For
purposes of this disclosure, the fair value of a financial instrument is the
amount at which the instrument could be exchanged in a current transaction
between willing parties. Cash and equivalents, accounts receivable, unbilled
services and accounts payable approximate fair value because of the relatively
short maturity of these instruments. As a result of the related party nature of
the majority of the Company's outstanding borrowings at December 31, 1998 and
1997, and the fact that substantially all borrowings from third parties were
secured by the previously independent Pooled Entities that had capital
structures different than the Company's, it is impracticable to estimate the
fair value of the debt outstanding at these dates.
Concentration of Credit Risk
Concentration of credit risk is limited to cash and equivalents, marketable
securities, accounts receivable and unbilled services. The Company places its
investments in highly rated financial institutions, U.S. Treasury bills,
investment grade short-term debt instruments and state and local municipalities,
while limiting the amount of credit exposure to any one entity. The Company's
receivables are concentrated with customers in the telecommunications,
pharmaceutical and consumer packaged goods industries. The Company does not
require collateral or other security to support clients' receivables.
New Accounting Pronouncements
During 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS No. 128") and has applied its
provisions to all years presented in these financial statements. SFAS No. 128
requires primary earnings per share ("EPS") to be replaced with basic EPS. Basic
EPS is computed by dividing reported earnings available to common stockholders
by the weighted average number of shares outstanding without consideration of
common stock equivalents or other potentially dilutive securities. Fully diluted
EPS, now called diluted EPS, is also reported. Diluted EPS gives effect to
common stock equivalents and other potentially dilutive securities outstanding
during the period.
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), and the
accompanying consolidated financial statements have been restated to conform to
the SFAS No. 130 requirements. Included within accumulated other comprehensive
income are the cumulative amounts for foreign currency translation adjustments
and unrealized gains and losses on marketable securities. The cumulative foreign
currency translation adjustment was $1,817,697 and $576,420 as of December 31,
1998 and 1997, respectively. The cumulative gain on marketable securities was
$10,849 and $64,194 as of December 31, 1998 and 1997, respectively.
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS No. 131"). The information required for operating groups is
disclosed in Note 20.
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS No. 132"). The disclosures required by SFAS No.
132 are provided in Note 14.
F-15
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. MARKETABLE SECURITIES:
The amortized cost, unrealized gains and losses, and market values of the
Company's held-to-maturity and available-for-sale securities are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
December 31, 1998
Held to maturity, maturing in less than
one year:
State and municipal bonds........... $ 4 $ -- $ -- $ 4
======= ====== ===== =======
Available for sale:
Equity securities................... $ 105 $ -- $ (15) $ 90
Government income securities........ 556 -- (38) 518
------- ------ ----- -------
$ 661 $ -- $ (53) $ 608
======= ====== ===== =======
December 31, 1997
Held to maturity, maturing in less than
one year:
State and municipal bonds........... $ 664 $ -- $ -- $ 664
======= ====== ===== =======
Available for sale:
Equity securities................... $ 915 $ 60 $ -- $ 975
Government income securities........ 483 4 -- 487
Municipal tax-exempt bonds.......... 223 -- (1) 222
------- ------ ----- -------
$ 1,621 $ 64 $ (1) $ 1,684
======= ====== ===== =======
</TABLE>
As a result of changes in market value of the available-for-sale security
portfolio, a cumulative valuation adjustment of $11 thousand, $64 thousand and
$41 thousand is recorded in accumulated other comprehensive income at December
31, 1998, 1997 and 1996, respectively.
5. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Buildings and leasehold improvements................................... $55,048 $25,135
Computers and equipment................................................ 63,719 47,435
Furniture and fixtures................................................. 14,330 13,804
-------- --------
133,097 86,374
Accumulated depreciation............................................... (52,702) (40,244)
-------- --------
$80,395 $46,130
======== ========
</TABLE>
F-16
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill and other intangible assets consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Goodwill............................................................... $149,313 $60,080
Unamortized costs of lists............................................. 5,674 4,459
License agreements..................................................... 8,438 7,669
Customer lists and contractual covenant................................ 11,104 12,669
--------- --------
174,529 84,877
Accumulated amortization............................................... (21,513) (15,934)
--------- --------
$153,016 $68,943
========= ========
</TABLE>
Goodwill arose from management buy-outs and purchase acquisitions at
certain of the Pooled Entities prior to their respective mergers with SNC and
from the Company's 1998 and 1997 purchase business combinations.
Amortization expense of goodwill and other intangible assets totaled $7.9
million, $4.2 million and $4.2 million in 1998, 1997 and 1996, respectively.
7. DEBT:
Long-Term Borrowings
Long-term borrowings consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Notes, principally acquisition related, 7%-8%, due January 2000 and 2002 $1,297 $1,226
German bank debt, 6.3% weighted average interest rate, due April 2004,
partially secured by building in Germany............................ 1,388 --
Belgian bank debt, 4.7% weighted average rate, due various dates
through 2005........................................................ 346 --
French bank debt, 8.02% weighted average rate, due August 2002......... 85 --
U.S. bank debt, commercial paper rate plus 2.7% (approximately 8.55%).. -- 2,099
United Kingdom bank debt, base rate plus 2.25% (approximately 7.25%),
secured by certain assets in the United Kingdom..................... -- 460
Obligations under license agreement, 7.25% imputed rate................ 1,058 1,558
Other, due within 12 months............................................ -- 437
--------- --------
4,174 5,780
Current maturities of long-term borrowings............................. (1,085) (1,845)
--------- --------
$3,089 $3,935
========= ========
</TABLE>
In addition to the debt listed above, approximately $5.1 million in debt
with a weighted average interest rate of 8.6%, primarily classified as current
as of December 31, 1996, was paid in full during 1997.
F-17
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Related Party Borrowings
Related party borrowings consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Note payable, acquisition related, 7%, due September 30, 2002.......... $7,504 $3,682
Note payable, acquisition related, 5% for first two years and 7% during
third, due February 18, 2001........................................ 1,420 --
Convertible subordinated debentures payable to shareholder of acquired
subsidiary, 7%, due September 2000, converted prior to subsidiary's
merger with SNC..................................................... -- 1,651
Shareholder loans of acquired subsidiary, 5.73% to 5.91%............... -- 1,571
Note payable to partner of acquired subsidiary, 9.5%................... -- 938
Promissory note payable to founder of acquired subsidiary, 6.0%........ -- 457
--------- --------
8,924 8,299
Current maturities of related party borrowings......................... -- (770)
--------- --------
$8,924 $7,529
========= ========
</TABLE>
On October 28, 1996, the Company used approximately $7.0 million of cash to
redeem in full the subordinated debentures (the "Debentures") due to related
parties. The Debentures were originally issued on May 18, 1995, with a face
amount of $6.0 million. Cash proceeds of $5.0 million were received upon
issuance of the Debentures. The difference between the cash proceeds received
and the face amount of the Debentures was accounted for as an original issue
discount. The Debentures had a stated interest rate of 12.25% (effective
interest rate to maturity of approximately 17%) and an original maturity date of
December 31, 2001. The $7.0 million payment consisted of the face amount of the
Debentures, a prepayment penalty and accrued interest. A nonrecurring charge of
$1.2 million ($.02 per diluted share), net of an $0.8 million tax benefit, was
recorded at December 31, 1996 as an extraordinary loss related to this early
debt extinguishment. The extraordinary item consists of prepayment penalties and
the write-off of unamortized discount and debt issuance costs.
In accordance with the provisions of its formation agreement and prior to
its merger with the Company, a subsidiary issued promissory notes to its founder
and an investor in the principal amounts of $6.7 million and $10.0 million,
respectively. The notes were unsecured, with interest at the prime rate plus
2.0%, and were payable no later than August 1, 1998. The notes were repaid in
full on November 25, 1997, together with accrued interest of $0.5 million.
In addition to the debt listed above, approximately $10.6 million in
related party debt with a weighted average interest rate of 8.3% and with
maturities that extended to 2008 was paid in full during 1997.
Both foreign and domestic term debt from banking and financing institutions
require certain subsidiaries to meet restrictive covenants concerning net worth
and debt service coverage and are secured by the assets of those subsidiaries.
F-18
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Future minimum payments as of December 31, 1998, on long-term borrowings,
excluding capital leases, are as follows (in thousands):
1999....................................................... $1,085
2000....................................................... 848
2001....................................................... 2,244
2002....................................................... 8,189
2003....................................................... 455
Thereafter................................................. 277
--------
Total.................................... 13,098
Current maturities......................................... (1,085)
--------
Total.................................... $12,013
========
Lines of Credit
Lines of credit consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
U.S. bank line of credit, prime rate plus 0.5% (8.25% at December 31,
1998), $2.3 million maximum borrowing limit......................... $1,825 $ 1,500
French bank line of credit, 8.02% weighted average stated interest rate,
$4.1 million aggregate borrowing limit, various expiration dates
through 2004........................................................ 198 2,609
Secured reducing revolving loan of acquired U.S. subsidiary, 7.5%, due
December 31, 2003, reflected as current liability as subsidiary was
not in compliance with certain financial covenants, terminated by the
Company in 1998..................................................... -- 20,000
U.S. financial banking institution line of credit, 30-day commercial
paper rate plus 2.7% (7.94% at December 31, 1998), $5.5 million
maximum borrowing limit............................................. -- 4,537
U.S. bank line of credit, 8.6% weighted average interest rate.......... -- 266
Related party line of credit from acquired U.S. subsidiary, prime rate
plus 1% (9.5% at December 31, 1997), terminated by the Company in 1998 -- 3,123
Other borrowings outstanding under credit lines........................ -- 15
------- --------
$2,023 $32,050
======= ========
</TABLE>
The Company maintains various lines of credit with banking and financial
institutions, requiring certain subsidiaries to meet restrictive covenants
concerning net worth and debt service coverage and are secured by the assets of
those subsidiaries. In aggregate, the Company had lines of credit available for
$24.8 million with interest rates ranging from 7.50% to 8.60% at December 31,
1998.
8. CAPITAL STOCK:
On May 21, 1998, the Company completed the public offering of 7,068,006
shares of its common stock, par value $0.001 per share at an offering price of
$42.00 per share. The offering included 500,064 newly issued shares of common
stock sold by the Company and 6,567,942 previously outstanding shares of common
stock sold by selling stockholders. The Company received net proceeds of
approximately $17.3 million from the offering, net of offering costs. The
Company did not receive any proceeds from the sale of shares of common stock in
the offering by the selling stockholders.
F-19
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On September 24, 1997, the Company completed the public offering of
8,776,334 shares of its common stock, par value $0.001 per share at an offering
price of $25.8125 per share. The offering included 1,850,000 newly issued shares
of common stock sold by the Company and 6,926,334 previously outstanding shares
of common stock sold by selling stockholders. The Company received net proceeds
of approximately $42.7 million from the offering, net of offering costs. The
Company did not receive any proceeds from the sale of shares of common stock in
the offering by the selling stockholders.
On September 30, 1996, the Company completed an initial public offering of
8,970,000 shares of its common stock, par value $0.001 per share at an offering
price of $17.00 per share. The offering included 4,038,162 newly issued shares
of common stock sold by the Company and 4,931,838 previously outstanding shares
of common stock sold by selling stockholders. The Company received net proceeds
of approximately $59.2 million from the offering, net of offering costs. The
Company did not receive any proceeds from the sale of shares of common stock in
the offering by the selling stockholders.
9. INCOME TAXES:
The Company's income tax provision includes the following components:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
U.S.--Federal.......................................... $17,197 $ 6,947 $ 5,647
U.S.--State and city................................... 4,509 3,530 1,299
Foreign............................................... 11,400 5,377 2,564
-------- --------- ---------
33,106 15,854 9,510
-------- --------- ---------
Deferred:
U.S.--Federal.......................................... (4,689) (8,493) (1,953)
U.S.--State and city................................... (1,169) (1,990) (469)
Foreign............................................... 1,073 (455) (846)
-------- --------- ---------
(4,785) (10,938) (3,268)
-------- --------- ---------
Income tax provision.................................. $28,321 $ 4,916 $ 6,242
======== ========= =========
</TABLE>
The provision for taxes on income before extraordinary item differs from
the amount computed by applying the U.S. federal income tax rate as a result of
the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Taxes at statutory U.S. federal income tax rate............ 35.00% 35.00% 35.00%
Income taxed directly to owners............................ (5.20) 25.69 (30.59)
State and city income taxes, net of federal tax benefit.... 5.60 (9.64) 5.45
Tax effect of Reorganization............................... -- (1.45) (2.96)
Foreign tax rate differential.............................. (6.15) 5.03 0.28
Dividends on mandatorily redeemable preferred stock........ -- (0.82) 0.84
Goodwill amortization...................................... 1.57 (1.35) 0.62
Acquisition costs and other permanent differences.......... 24.57 (76.51) 19.99
------- ------- -------
Effective tax rate......................................... 55.39% (24.05)% 28.63%
======= ======= =======
</TABLE>
F-20
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Deferred income taxes are recorded based upon differences between the
financial statement and tax bases of assets and liabilities. As of December 31,
1998 and 1997, temporary differences that give rise to the deferred tax assets
and liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1998 1997
---- ----
<S> <C> <C>
Reserve for doubtful accounts.......................................... $ 4,502 $ 2,466
Accrued expenses....................................................... 6,847 5,097
Intangible assets...................................................... 85,093 --
Deferred compensation.................................................. 4,230 3,864
Tax losses of subsidiaries............................................. 5,919 6,533
Tax benefit of capital losses.......................................... 1,202 1,202
Other.................................................................. 8,269 586
--------- ---------
Gross deferred tax assets.............................................. 116,062 19,748
--------- ---------
Property and equipment................................................. (1,351) (37)
Performance revenues................................................... (4,048) (2,660)
Other.................................................................. (3,091) (106)
--------- ---------
Gross deferred tax liabilities......................................... (8,490) (2,803)
Valuation allowance.................................................... (3,167) (3,167)
--------- ---------
Net deferred tax asset................................................. $104,405 $13,778
========= =========
</TABLE>
Several of the Company's subsidiaries have capital and operating loss tax
carryforwards that can be realized only if these subsidiaries generate taxable
capital gains or operating income, respectively. At December 31, 1998 and 1997,
management determined that a valuation allowance against the deferred tax asset
associated with these tax losses was required for one of these subsidiaries.
Management continually assesses whether the Company's deferred tax asset is
realizable and believes that the deferred tax asset, net of the valuation
allowance, is realizable at December 31, 1998.
The Company will receive a future benefit arising from the tax treatment of
three of its taxable mergers completed in 1998. In accordance with generally
accepted accounting principles, as a result of the mergers being accounted for
as poolings of interests, the net estimated future tax benefit of approximately
$76.9 million is reflected as a deferred tax asset in the accompanying
consolidated balance sheet as of December 31, 1998, with the offsetting credit
to additional paid-in capital.
At December 31, 1998, cumulative undistributed earnings of the Company's
foreign subsidiaries were approximately $11,070,000. No provision for U.S.
income taxes or foreign withholding taxes has been made since the Company
considers the undistributed earnings to be permanently invested in the foreign
countries. Determination of the amount of unrecognized deferred tax liability,
if any, for the cumulative undistributed earnings of the foreign subsidiaries is
not practicable since it would depend upon a number of factors which cannot be
known until such time as a decision to repatriate the earnings is made.
10. ACQUISITION AND RELATED COSTS:
The Company recorded $65.9 million in nonrecurring acquisition and related
costs during 1998. These costs are primarily related to the consummation of 1998
mergers and consist of investment banking fees, expenses associated with the
accelerated vesting of options held by employees of certain of the Company's
acquirees, other professional service fees, transfer taxes and other contractual
payments. In addition, this amount includes a charge of approximately $13.3
million for costs necessary to consolidate and integrate certain of the
Company's acquired operations in the U.S., the U.K. and France. The Company is
integrating acquired subsidiaries that provide similar services within the same
geographic regions. Approximately thirteen locations will be consolidated into
six, and the efforts will not have a significant impact on the Company's
workforce. The Company expects these integration activities to be substantially
complete by the third quarter of 1999. The charge consists of approximately $5.0
F-21
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
million to consolidate and terminate lease obligations, $6.9 million of
severance and other costs associated with the termination of 239 employees, and
$1.4 million of fees incurred for consulting services and other costs related to
these integration activities. Included in the terminated employees are 55
employees who elected not to relocate and will be replaced. The remaining
employees who were terminated are primarily redundant operations and
administrative personnel whose functions will be performed by others upon
completion of the integration. As of December 31, 1998, 58 employees had
terminated employment with the Company and $3.0 million had been charged against
the total liability, including $1.5 million in severance and related payments.
The Company recorded $39.4 million in nonrecurring acquisition and related
costs during 1997. Of the $39.4 million, $34.1 million are costs directly
related to the consummation of 1997 mergers. These costs consist primarily of
investment banking fees, other professional service fees, certain U.K. excise
and transfer taxes, as well as a noncash charge of approximately $9.1 million
related to the accelerated vesting of the options held by employees of one of
the Company's acquirees. The remaining $5.3 million consists of the write-off of
deferred license fees and the accrual of a liability expected to resolve
outstanding litigation. Both the write-off of the deferred fees and the accrual
of the liability were recorded due to changes in fact that resulted from the
mergers.
11. COMPENSATION TO STOCKHOLDERS:
Prior to their merger with SNC, certain stockholders of the acquired
companies received annual compensation in their roles as managers in excess of
amounts that they will receive pursuant to employment agreements they have
entered into with the Company. The amount by which the historical compensation
paid to these managers exceeds that provided in their employment contracts has
been classified as compensation to stockholders in the accompanying consolidated
statement of income.
12. EMPLOYEE STOCK OWNERSHIP PLAN:
One of the Company's U.S. subsidiaries sponsors an employee stock ownership
plan ("ESOP") which covers primarily all of its employees who work one thousand
hours or more per plan year. Contributions to the ESOP were made at the
discretion of the subsidiary's Board of Directors and were equal to the ESOP's
debt service less dividends received by the ESOP. In December 1994, the ESOP
acquired 534,800 shares from the former chairman of the subsidiary in exchange
for $0.4 million in cash and a promissory note of $6.0 million. The note was
guaranteed by the subsidiary, secured by the ESOP stock and bore interest, which
was payable monthly at 2.7% over the 30-day commercial paper rate. Principal
payments were due in five annual installments of $1.2 million commencing January
1, 1996. As of December 31, 1997, the entire amount had been repaid. In January
1995, the ESOP acquired an additional 176,090 shares at a cost of $1.9 million.
Of this amount, $1.8 million was financed through a promissory note with the
remaining $0.1 million paid in cash. This promissory note was guaranteed by the
subsidiary and its former chairman and was due in 84 monthly installments
commencing January 1996 with interest at 2.7% over the 30-day commercial paper
rate. As of December 31, 1997, the entire amount had been repaid.
F-22
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
All dividends and contributions received by the ESOP were used to pay debt
service for the period which the ESOP was leveraged. As the debt was repaid,
shares were released and allocated to active participants based on the
proportion of debt service paid in the year. The ESOP was accounted for in
accordance with Statement of Position No. 93-6 "Employers' Accounting for
Employee Stock Ownership Plans." Accordingly, the debt of the ESOP was recorded
as debt in the accompanying consolidated balance sheet, and the shares that had
not been allocated to participants were reported as unearned ESOP compensation
in the equity section on the consolidated balance sheet. As shares were
committed to be released, the Company recorded compensation expense equal to the
then current market price of the shares committed to be released, and the shares
were treated as outstanding for earnings-per-share (EPS) computations. Dividends
on allocated ESOP shares were recorded as a reduction of retained earnings;
dividends on unallocated ESOP shares were recorded as a reduction of debt and
accrued interest. ESOP compensation expense was $5.4 million and $6.5 million
for 1997 and 1996, respectively. The status of ESOP shares as of December 31 is
as follows:
AS OF DECEMBER 31,
------------------
1998 1997
---- ----
Allocated shares........................... 710,890 570,590
Shares released for allocation............. -- 140,300
Shares sold................................ (301,459) --
-------- --------
Total ESOP shares.......................... 409,431 710,890
======== ========
All ESOP shares had been released as of December 31, 1998 and 1997.
Former employees who had terminated employment with the subsidiary prior to
its merger with SNC may, at their option, require the Company to repurchase
their vested shares held by the ESOP for fair value. The balance necessary to
satisfy this repurchase obligation has been classified as Redeemable ESOP stock
in the accompanying consolidated balance sheet with a like amount shown as a
reduction of paid-in capital for each year.
13. STOCK INCENTIVE PLAN:
In September 1996, the Company adopted the 1996 Stock Incentive Plan (the
"Stock Option Plan"). The Stock Option Plan authorizes the Company to grant
incentive stock options, nonqualified stock options, restricted stock awards and
stock appreciation rights ("SARs"). Subject to adjustment, the aggregate number
of shares of common stock that may be issued under the Stock Option Plan upon
exercise of options, SARs or in the form of restricted stock may not exceed
17.5% of the number of shares of common stock outstanding.
The exercise price of options granted under the Stock Option Plan may not
be less than 100% (110% in the case of an optionee who is a 10% stockholder) of
the fair market value per share of common stock on the date of the option grant.
The vesting and other provisions of the options are determined by the Company's
Board of Directors. All options granted as of December 31, 1998 vest on or
before the fourth anniversary of the date of grant and expire on or before the
tenth anniversary of the date of grant. In October 1998, the Company repriced
3,526,900 options to their fair market value at the date of repricing.
F-23
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A summary of the activity within the Stock Option Plan, for the three years
ended December 31, 1998, after giving retroactive effect to the conversion of
the Pooled Entities' options, is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning of year.......................................... 6,963 5,164 970
Granted............................................... 11,340 5,749 4,626
Exercised............................................. (1,012) (1,790) (66)
Forfeited ............................................ (5,231) (2,160) (281)
Expired............................................... -- -- (85)
-------- -------- --------
End of year................................................ 12,060 6,963 5,164
======== ======== ========
Exercisable at end of year................................. 2,133 1,281 863
======== ======== ========
WEIGHTED AVERAGE EXERCISE PRICE
-------------------------------
1998 1997 1996
---- ---- ----
Beginning of year.......................................... $22.58 $14.95 $ 4.88
Granted............................................... 31.47 24.11 17.05
Exercised............................................. 20.58 14.10 13.73
Forfeited ............................................ 34.73 20.24 15.65
Expired............................................... -- -- 15.79
-------- -------- --------
End of year................................................ $26.01 $22.58 $14.95
======== ======== ========
Exercisable at end of year................................. $19.68 $17.03 $11.07
======== ======== ========
</TABLE>
The following table presents information related to options outstanding at
December 31, 1998.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE CONTRACTUAL
COMPANY OPTIONS ISSUED BY OPTIONS PRICE LIFE IN YEARS
------------------------- ------- ----- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
SNC prior to initial public offering.. 1,031 $17.00 7.68
SNC subsequent to initial public
offering........................... 10,417 $19.38 - $43.81 9.11
Pooled Entities....................... 612 $0.01 - $29.59 7.29
-------
12,060
=======
</TABLE>
The fair value of each option grant is estimated on the date of grant using
a Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1998 and 1997: risk-free interest rate of 5.1%
and 6.2%, expected dividend yield of zero, expected life of 5 years and expected
volatility of 51% and 48%.
The weighted average option fair value on the grant date was $20.60 for
options issued during the year ended December 31, 1998.
F-24
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
If the Company had recorded compensation expense using the fair value based
method prescribed by SFAS No. 123, the Company's 1998 and 1997 pro forma net
income (loss) and 1998 and 1997 pro forma net income (loss) per share amounts,
which reflect a pro forma adjustment for income taxes, would have been reduced
to the following as adjusted amounts:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1998 1997
---- ----
(IN THOUSANDS EXCEPT
PER SHARE DATA,
UNAUDITED)
<S> <C> <C>
Pro forma net income (loss):
As reported....................................................... $20,145 $(30,791)
As adjusted....................................................... (13,926) (44,855)
Pro forma basic net income (loss) per share:
As reported....................................................... 0.29 (0.48)
As adjusted....................................................... (0.20) (0.70)
Pro forma diluted net income (loss) per share:
As reported....................................................... 0.28 (0.48)
As adjusted....................................................... (0.20) (0.70)
</TABLE>
14. PENSION AND PROFIT-SHARING PLANS:
One of the Company's subsidiaries in the U.K. operates a retirement benefit
plan, which is a funded defined benefit plan available to all employees. The
assets of the plan are held separately from those of the subsidiary and are
invested in managed funds principally comprised of equity securities. Plan
benefits are based on years of service and compensation levels at the time of
retirement. The funding of the plan is determined following consultation with
actuaries using the projected unit credit method.
For purposes of these consolidated financial statements, the actuarial
value of the plan's liabilities has been estimated using the available actuarial
valuations, and the plan's asset values reflect the actual market value of those
assets at each balance sheet date based on records maintained by the plan's
trustees. The most recent actuarial update of the plan's liabilities was
performed as of December 31, 1998. The significant assumptions used and the
funded status of the plan are set out in the tables below.
<TABLE>
<CAPTION>
SIGNIFICANT ASSUMPTIONS
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Discount rate.............................................. 5.5% 6.75% 8.0%
Expected long-term rate of return on plan assets........... 8.5 7.75 9.0
Rate of increase in compensation........................... 4.0 5.25 6.0
</TABLE>
F-25
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Net Periodic Pension Cost
Net periodic pension cost is determined using the assumptions as of the
beginning of the year and is comprised of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost............................................... $1,375 $1,360 $1,109
Interest cost on projected benefit obligation.............. 1,177 1,065 875
Expected return on plan assets............................. (1,392) (2,899) (1,078)
Net amortization of unrecognized net loss and deferral of
actual return on plan assets............................ -- 1,638 125
-------- -------- --------
Net periodic pension cost.................................. $1,160 $1,164 $1,031
======== ======== ========
</TABLE>
Funded Status
The funded status is determined using the assumption as of the end of the
year and is reflected as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year................................ $17,502 $13,931
Service cost........................................................... 1,375 1,360
Interest cost.......................................................... 1,177 1,065
Plan participants' contributions....................................... 646 590
Actuarial gain......................................................... 1,143 1,195
Benefits paid.......................................................... (464) (639)
--------- ---------
Benefit obligation at end of year...................................... $21,379 $17,502
========= =========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year......................... $17,321 $13,777
Actual return on plan assets........................................... 2,913 2,430
Employee contribution.................................................. 646 590
Employer contribution.................................................. 1,342 1,163
Benefits paid.......................................................... (464) (639)
--------- ---------
Fair value of plan assets at end of year............................... $21,758 $17,321
========= =========
</TABLE>
The Company and certain of its subsidiaries maintain defined contribution
benefit plans. Pension and profit sharing costs related to these plans amounted
to approximately $2.4 million, $1.5 million, and $1.2 million for 1998, 1997 and
1996, respectively.
F-26
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
15. NET INCOME PER SHARE:
A reconciliation of the shares used to compute basic and diluted earnings
per share follows. For each of the years presented, the same net income used to
compute basic earnings per share was used to compute diluted earnings per share.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Weighted average shares outstanding for the period used in
computation of basic net income per share................... 69,587 63,752 59,194
Diluted impact of stock options and other dilutive securities.. 2,425 -- 798
-------- ------- -------
Shares used in computation of diluted net income per share..... 72,012 63,752 59,992
======== ======= =======
</TABLE>
For the years ended December 31, 1998 and 1997, there existed weighted
average common stock equivalents of 542,897 and 1,807,903, respectively, which
are not included in the calculation of diluted net income per share because they
were antidilutive for the period.
16. DISCONTINUED OPERATIONS:
On October 24, 1997, the Board of Directors of one of the Company's 1998
acquirees approved the spin-off of its sports management operations, which were
carried on by Bob Woolf Associates, Inc. ("BWA"), a wholly owned subsidiary. The
acquiree purchased BWA in May 1996. The spin-off was executed in the form of a
dividend to the acquiree's stockholders of record on October 31, 1997, whereby
each stockholder received one share of BWA for each share of the acquiree's
common stock held.
The net losses of BWA prior to October 31, 1997, are included in the
accompanying consolidated statement of income under "discontinued operations"
and represent a net loss of $0.02 and $0.03 per diluted share for 1997 and 1996.
Revenues from BWA were approximately $0.3 million for the period from May 1,
1996 (date of BWA acquisition) to December 31, 1996, and approximately $2.0
million for the ten months ended October 31, 1997.
17. LEASES:
The Company leases certain facilities, office equipment and other assets.
The following is a schedule of future minimum lease payments for capital leases
and for operating leases with initial or remaining terms in excess of one year
at December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, CAPITAL LEASES OPERATING LEASES
- ------------------------- -------------- ----------------
<S> <C> <C>
1999.................................................. $2,034 $ 23,113
2000.................................................. 970 19,006
2001.................................................. 351 15,723
2002.................................................. 301 11,351
2003.................................................. 171 7,964
Thereafter............................................ 5 26,793
--------- ----------
Total minimum lease payments.......................... 3,832 $103,950
==========
Less: Amount representing interest................... (376)
---------
Total obligation under capital leases................. 3,456
Less: Current portion................................ (1,706)
---------
Long-term portion..................................... $1,750
=========
</TABLE>
F-27
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Property and equipment, net, on the consolidated balance sheet includes
$3.8 million for equipment purchased under capital leases as of December 31,
1998 and 1997.
Rental expense for all operating leases was approximately $24.3 million,
$23.1 million and $21.8 million for the years ended December 31, 1998, 1997 and
1996, respectively.
18. COMMITMENTS AND CONTINGENCIES:
The Company has entered into employment agreements with certain key
executives and consulting agreements with certain former executives that call
for guaranteed minimum salaries and bonuses for varying terms.
One of the Company's U.S. subsidiaries has standby letters of credit with a
bank, secured by compensating balance arrangements, totaling $6.0 million. The
standby letters of credit renew annually and interest is charged at a rate of
1.25% per year.
The Company is subject to lawsuits, investigations and claims arising out
of the conduct of its business, including those related to commercial
transactions, contracts, government regulation and employment matters. Certain
claims, suits and complaints have been filed or are pending against the Company.
In the opinion of management and legal counsel, all matters are without merit or
are of such kind, or involve such amounts, as would not have a material effect
on the financial position or results of operations of the Company if disposed of
unfavorably.
19. RELATED PARTIES:
The Company's headquarters office space is leased from a third party, in
which one of the nonemployee directors of the Company has a minority ownership
interest. Rent paid under this lease was $1.1 million, $2.4 million and $1.1
million in 1998, 1997 and 1996, respectively.
The Company produces a WallBoard(R) for which a publication beneficially
owned by certain nonemployee directors of the Company is one of the sponsors.
Revenues earned under this program were $2.0 million in 1997.
In December 1997, the Company entered into a software license agreement
with a company in which certain nonemployee directors of the Company are
directors and in which they own a minority interest. The Company paid
approximately $2.5 million for the license and related equipment.
20. SEGMENT INFORMATION:
The Company provides sales and marketing solutions for its clients and
strives to integrate its service capabilities within as well as across its three
operating groups: Direct Services, Healthcare Services and Creative Services.
Direct Services provides services centered on marketing and sales programs
designed to reach certain, sometimes targeted, consumer groups through strategic
planning and consulting services, proprietary sampling programs, field sales,
teleservices, database mailings, information displays and interactive services.
Healthcare Services focuses on providing outsourced pharmaceutical detailing,
sales force training, marketing plan design and evaluation services and
healthcare educational, marketing and publishing services. Creative Services
establishes brand awareness for clients through advertising, creative design,
public relations, media placement and interactive services.
The accounting policies of the operating groups are the same as those
described in the Summary of Significant Accounting Policies (Note 3). The
Company primarily evaluates performance based on earnings before interest and
taxes (EBIT) from the combined subsidiaries in each operating group, excluding
nonrecurring acquisition and related costs, compensation to stockholders, ESOP
expense and recapitalization costs. Sales between operating groups are accounted
F-28
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
for at fair value as if the sales were to third parties. All activity between
operating groups has been eliminated with respect to revenue and EBIT.
The Company's operating groups are strategic business units that offer
different services. They are managed separately because each business requires
different marketing, service and pricing strategies. The operating groups are
primarily an aggregate of businesses acquired as separate units over the course
of time.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES:
Direct Services....................................... $386,333 $319,339 $281,789
Healthcare Services................................... 321,660 208,960 144,710
Creative Services..................................... 107,310 83,740 67,428
--------- --------- ---------
Total.................................... $815,303 $612,039 $493,927
--------- --------- ---------
EBIT:
Direct Services....................................... $ 76,492 $ 43,192 $ 37,716
Healthcare Services................................... 42,483 19,829 15,371
Creative Services..................................... 12,790 2,082 3,921
Corporate and other................................... (14,880) (9,468) (8,461)
--------- --------- ---------
Total.................................... $116,885 $ 55,635 $ 48,547
--------- --------- ---------
TOTAL ASSETS:
Direct Services....................................... $291,343 $187,118 $175,355
Healthcare Services................................... 204,942 105,276 51,180
Creative Services..................................... 189,804 111,121 83,838
Corporate and other................................... 9,571 48,831 9,257
--------- --------- ---------
Total.................................... $695,660 $452,346 $319,630
--------- --------- ---------
GEOGRAPHIC INFORMATION:
Revenues:
United States......................................... $511,465 $415,067 $338,571
United Kingdom........................................ 204,247 145,507 119,169
Western Europe........................................ 91,957 47,572 33,854
Other................................................. 7,634 3,893 2,333
--------- --------- ---------
Total.................................... $815,303 $612,039 $493,927
--------- --------- ---------
RECONCILIATION OF EBIT TO INCOME (LOSS) FROM OPERATIONS:
Total EBIT for operating groups....................... $116,885 $ 55,635 $ 48,547
Compensation to stockholders.......................... (1,315) (28,060) (17,279)
ESOP expense.......................................... -- (5,411) (6,553)
Recapitalization costs................................ -- (1,889) --
Acquisition and related costs......................... (65,863) (39,430) --
--------- --------- ---------
Income (loss) from operations......................... $ 49,707 $(19,155) $ 24,715
--------- --------- ---------
</TABLE>
F-29
<PAGE>
SNYDER COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
21. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE
DATA):
The following table summarizes financial data by quarter for the Company
for 1998 and 1997, giving effect to the Acquisitions as if they had occurred at
the beginning of the earliest period presented.
<TABLE>
<CAPTION>
1998 QUARTER ENDED
------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
-------- ------- ------------ ----------- -----
<S> <C> <C> <C> <C> <C>
Revenues......................................... $176,940 $202,562 $209,818 $225,983 $815,303
Gross profit..................................... 58,680 66,673 65,112 70,781 261,246
Net income (loss)................................ (8,628) 17,794 10,664 2,976 22,806
Net income (loss) per share (diluted) (a)........ (0.13) 0.25 0.15 0.04 0.32
Pro forma net income (loss)...................... (10,624) 17,391 10,182 3,196 20,145
Pro forma net income (loss) per share (diluted) (a) (0.16) 0.24 0.14 0.04 0.28
Pro forma net income, excluding nonrecurring
acquisition and related costs and compensation
to stockholders............................... 14,919 17,676 19,109 21,645 73,349
Pro forma net income, excluding nonrecurring
acquisition costs and compensation to
stockholders per share (diluted).............. 0.21 0.25 0.26 0.30 1.02
1997 QUARTER ENDED
------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
-------- ------- ------------ ----------- -----
Revenues......................................... $135,795 $148,027 $152,859 $175,358 $612,039
Gross profit..................................... 41,148 46,372 45,860 48,414 181,794
Income (loss) from continuing operations......... (9,117) 9,272 (18,393) (7,116) (25,354)
Income (loss) from continuing operations per
share (diluted) (a)........................... (0.15) 0.14 (0.29) (0.11) (0.40)
Net income (loss)................................ (9,675) 8,649 (18,692) (7,143) (26,861)
Net income (loss) per share (diluted) (a)........ (0.15) 0.13 (0.30) (0.11) (0.42)
Pro forma net income (loss) from continuing
operations.................................... (10,440) 7,591 (18,236) (8,806) (29,891)
Pro forma net income (loss) from continuing
operations per share (diluted)................ (0.17) 0.12 (0.29) (0.13) (0.47)
Pro forma net income (loss)...................... (10,773) 7,219 (18,415) (8,822) (30,791)
Pro forma net income (loss) per share (diluted).. (0.17) 0.11 (0.29) (0.13) (0.48)
Proforma net income from continuing operations,
excluding nonrecurring acquisition and
related costs, ESOP expense, recapitalization
costs and compensation to stockholders........ 7,532 9,637 9,046 4,820 31,035
Proforma net income from continuing operations,
excluding nonrecurring acquisition and
related costs, ESOP expense, recapitalization
costs and compensation to stockholders per
share (diluted) (a)........................... 0.12 0.15 0.14 0.07 0.47
</TABLE>
The pro forma amounts include a provision for federal and state income
taxes as if the Company had been a taxable C corporation for all periods
presented.
(a) The sum of these amounts does not equal the annual amount because the
quarterly calculations are based on varying numbers of shares outstanding.
F-30
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Brann Holdings Limited:
We have audited the consolidated balance sheets of Brann Holdings Limited
(the Company) and its subsidiaries as of December 31, 1995 and 1996, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1996
(not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United Kingdom, which do not differ in any material respect
from generally accepted auditing standards in the United States. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements audited by us present
fairly, in all material respects, the financial position of the Company and its
subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles in
the United States.
PRICE WATERHOUSE
Chartered Accountants and Registered Auditors
Bristol, England
May 30, 1997
F-31
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
American List Corporation
We have audited the consolidated balance sheet of American List Corporation
and Subsidiaries as of February 28, 1997, and the related consolidated
statements of earnings, stockholders' equity and cash flows for the year then
ended (not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of American List
Corporation and Subsidiaries as of February 28, 1997, and the consolidated
results of their operations and their consolidated cash flows for the year then
ended in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Melville, New York
April 11, 1997
F-32
<PAGE>
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED HEREUNTO DULY AUTHORIZED.
SNYDER COMMUNICATIONS, INC.
Date: March 19, 1999 By: /S/ MICHELE D. SNYDER
------------------------------------
Name: Michele D. Snyder
Title: Vice Chairman, President and
Chief Operating Officer
Date: March 19, 1999 By: /S/ A. CLAYTON PERFALL
------------------------------------
Name: A. Clayton Perfall
Title: Chief Financial Officer
