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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ______
Commission File Number 0-17822
SYNETIC, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2975182
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
River Drive Center 2
669 River Drive
Elmwood Park, New Jersey 07407
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (201) 703-3400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at May 8,1995
- --------------------- -------------------------
Common Stock 16,579,737 shares par value
$.01 per share
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SYNETIC, INC. AND SUBSIDIARIES
Index
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Page
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Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets --
March 31, 1995 and June 30, 1994 3
Consolidated Statements of Income --
Quarters and Nine Months Ended
March 31, 1995 and 1994 5
Consolidated Statements of Cash Flows --
Nine Months Ended March 31, 1995 and 1994 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and
Analysis of Results of Operations and
Financial Condition 10
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
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SYNETIC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
<TABLE>
<CAPTION>
March 31, June 30,
1995 1994
--------- --------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............. $ 5,700 $ 4,232
Marketable securities.................. 92,568 50,063
Accounts receivable, net of
allowances for doubtful accounts
and sales returns of $492 and $393
at March 31, 1995 and June 30,
1994, respectively.................... 6,261 5,609
Inventories............................ 6,212 6,250
Other current assets................... 2,680 5,016
-------- --------
Total current assets.................. 113,421 71,170
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land and improvements.................. 772 754
Building and improvements.............. 8,001 7,789
Machinery and equipment................ 16,419 13,613
Furniture and fixtures................. 2,316 1,687
Construction in progress............... 2,960 3,241
-------- --------
30,468 27,084
Less: Accumulated depreciation........ (13,719) (12,042)
-------- --------
Property, plant and equipment, net.... 16,749 15,042
-------- --------
OTHER ASSETS:
Marketable securities.................. 48,192 48,256
Net assets of discontinued operations.. - 55,882
Other.................................. 1,854 3,659
-------- --------
Total other assets 50,046 107,797
-------- --------
$180,216 $194,009
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
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SYNETIC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, June 30,
1995 1994
---------- --------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable........................... $ 768 $ 1,071
Accrued liabilities........................ 9,335 4,079
-------- --------
Total current liabilities................. 10,103 5,150
-------- --------
LONG-TERM DEBT.............................. - 80,716
DEFERRED TAXES AND OTHER LIABILITIES........ 8,181 3,013
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value;
10,000,000 shares authorized; none
issued.................................... - -
Common stock $.01 par value; 50,000,000
shares authorized; 21,841,776 and
17,621,462 shares issued at
March 31, 1995 and June 30, 1994,
respectively; 16,573,313 and 17,621,512
shares outstanding at March 31, 1995
and June 30, 1994, respectively........... 218 176
Paid-in capital............................ 151,807 70,416
Treasury stock, at cost; 5,268,463 shares
at March 31, 1995......................... (35,778) -
Retained earnings.......................... 45,685 34,538
-------- --------
Total stockholders' equity................ 161,932 105,130
-------- --------
$180,216 $194,009
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
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SYNETIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Quarters and Nine Months Ended March 31, 1995 and 1994
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
March 31, March 31,
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales.................................. $ 9,865 $ 8,472 $28,288 $23,832
Cost and expenses:
Cost of sales............................ 5,828 5,234 16,875 15,024
Selling, general and administrative...... 3,318 2,247 8,729 6,899
Interest and other income................ (2,029) (1,222) (5,011) (3,774)
Interest expense......................... 635 1,487 3,603 4,500
Purchase and Sale Agreement related
expenses and Other..................... 1,083 - 6,663 563
------- ------- ------- -------
8,835 7,746 30,859 23,212
------- ------- ------- -------
Income (loss) from continuing operations
before provision for income taxes........ 1,030 726 (2,571) 620
Provision (benefit) for income taxes....... 386 276 (970) 238
------- ------- ------- -------
Income (loss) from continuing operations... 644 450 (1,601) 382
------- ------- ------- -------
Discontinued operations:
Income from operations, net of income
taxes of $355 for the quarter ended
March 31, 1994 and $842 and $1,285
for the nine months ended
March 31, 1995 and 1994.................. - 153 963 1,241
Gain on sale of Institutional
Pharmacy operations, net of taxes
of $22,638............................... - - 11,785 -
------- ------- ------- -------
Income from discontinued operations........ - 153 12,748 1,241
------- ------- ------- -------
Net income................................. $ 644 $ 603 $11,147 $ 1,623
======= ======= ======= =======
Net income per share:
Continuing operations.................... $ .04 $ .02 $ (.09) $ .02
Discontinued operations.................. - .01 .74 .07
------- ------- ------- -------
Net income per share....................... $ .04 $ .03 $ .65 $ .09
======= ======= ======= =======
Weighted average shares outstanding........ 15,829 17,913 17,236 17,966
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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SYNETIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 1995 and 1994
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income.................................... $ 11,147 $ 1,623
Adjustments to reconcile net income to
net cash provided by operating activities:
Income from Discontinued Operations...... (963) (1,241)
Gain on Sale of Institutional
Pharmacy business...................... (11,785) -
Other expense............................ 1,083 -
Depreciation and amortization............ 1,724 1,830
Changes in operating assets and liabilities:
Accounts receivable, net................. (652) (728)
Inventories.............................. 38 74
Other assets............................. (1,158) 1,082
Accounts payable......................... (303) (17)
Accrued liabilities...................... (1,301) 2,039
Other liabilities........................ 4,980 -
Income taxes payable..................... (22,627) (923)
--------- --------
Net cash provided by (used for)
operating activities................. (19,817) 3,739
--------- --------
Cash flows from investing activities:
Sales of marketable securities................ 201,871 21,219
Purchase of marketable securities............. (244,312) (47,765)
Capital expenditures.......................... (3,384) (1,610)
Proceeds from sale of Institutional
Pharmacy business.......................... 102,314 -
--------- --------
Net cash provided by (used for)
investing activities................. 56,489 (28,156)
--------- --------
Cash flows from financing activities:
Payments for treasury stock................... (35,778) -
Proceeds from exercise of stock options and
401(k) purchases............................ 3,987 171
Payments and redemption of long-term debt..... (3,413) (542)
-------- --------
Net cash (used for)
financing activities.................. (35,204) (371)
--------- --------
Net increase (decrease) in cash and cash equivalents 1,468 (24,788)
Cash and cash equivalents, beginning of period.. 4,232 31,150
-------- --------
Cash and cash equivalents, end of period........ $ 5,700 $ 6,362
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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SYNETIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Financial statement presentation:
In the opinion of management, the accompanying consolidated financial
statements contain all normal and recurring adjustments necessary to present
fairly the financial position of Synetic, Inc. and subsidiaries (the "Company")
as of March 31, 1995 (unaudited) and June 30, 1994 (audited), and the results of
their operations and their cash flows for the nine months ended March 31, 1995
and 1994 (unaudited).
Principles of Consolidation--
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned operating subsidiary, Porex Technologies Corp.
("Porex"), after elimination of all material intercompany accounts and
transactions. All periods and related notes thereto have been restated to
reflect the sale of the Institutional Pharmacy Business, as discussed in Note 2.
The accounting policies followed by the Company are set forth in the Notes
to Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1994 (the "Annual Report"), which
notes are incorporated herein by reference.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full fiscal year.
Certain reclassifications have been made to prior year amounts to conform
to the current year presentation.
(2) Purchase and Sales Transactions:
On May 24, 1994, Merck & Co., Inc. ("Merck") and the Company entered into
an agreement by which the Company and its Chairman, Martin J. Wygod, would
purchase the Company's common stock owned by Merck. As part of this agreement,
the Company agreed to divest its Institutional Pharmacy Business. On December
14, 1994, the Company consummated these transactions pursuant to which (1) the
Company sold its Institutional Pharmacy Business to Pharmacy Corporation of
America ("PCA") for $107.3 million and (2) the Company and a limited
partnership, whose general partner is controlled by the Company's Chairman,
purchased from Merck the 10,330,320 shares of the Company's common stock held by
Merck.
The Company has granted stock options with an exercise price below fair
market value on the date of award to certain officers in recognition of their
contribution in completing these transactions. Accordingly, the Company has
recorded a non-recurring charge of approximately $5 million relating to such
stock options in conjunction with the consummation of these transactions.
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(2) Purchase and Sale Transactions: (continued)
The consolidated financial statements have been restated to report
separately the net assets and operating results of the discontinued operations.
As of June 30, 1994, the investment in the net assets of the discontinued
operation consisted of (in thousands):
<TABLE>
<CAPTION>
1994
--------
<S> <C>
Current assets $21,700
Current liabilities (5,544)
-------
Net current assets 16,156
Net fixed assets 4,215
Other noncurrent assets 42,723
Noncurrent liabilities (7,212)
-------
$55,882
=======
</TABLE>
Net sales of the discontinued operations were $19,345 and $39,583 for the
quarter and nine months ended March 31, 1994, respectively.
(3) Inventories:
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, June 30,
1995 1994
--------- --------
<S> <C> <C>
(unaudited)
Raw materials and supplies.. $2,917 $3,089
Work-in-process............. 569 564
Finished goods.............. 2,726 2,597
------ ------
$6,212 $6,250
====== ======
</TABLE>
(4) Marketable securities:
At March 31, 1995, marketable securities consisted primarily of U.S.
Treasury Notes and Money Market Preferred Stock.
(5) Computation of net income per share:
Net income per share is determined by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the applicable period. Common stock equivalents consist of
common stock which may be issuable upon exercise of outstanding stock options as
calculated using the treasury stock method.
(6) Conversion of Subordinated Debentures:
On January 27, 1995, the Company announced its intention to call for
redemption on February 13, 1995, its outstanding $80,500,000 7% Convertible
Subordinated Debentures Due 2001 (the "Debentures"). Holders of $79,104,000
aggregate principal amount of the Debentures surrendered their Debentures for
conversion into an aggregate of 3,877,607 shares of common stock of the Company.
The remaining $1,396,000 of the outstanding Debentures were redeemed at the
redemption price of 104% plus accrued interest.
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(7) Supplemental cash flow information (in thousands):
<TABLE>
<CAPTION>
March 31,
Cash paid during the periods for: 1995 1994
--------- ----
<S> <C> <C>
Interest...................... $ 2,864 $2,831
Income taxes.................. 25,007 705
</TABLE>
For the nine months ended March 31, 1995, non-cash financing activities
related to the conversion of the Company's Debentures into shares of the
Company's common stock totaled approximately $77,415. (See Note 6)
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Consolidated Results of Operations:
- ----------------------------------
Net sales for the quarter and nine months ended March 31, 1995 increased by
$1,393,000, or 16.4% and $4,456,000, or 18.7%, respectively, over the comparable
prior year periods as a result of sales increases across several product lines,
principally increased sales of writing instrument components in the consumer
sector and medical products in the health care sector.
Cost of sales for the quarter and nine months ended March 31, 1995
increased by $594,000, or 11.3%, and $1,851,000, or 12.3%, respectively, over
the comparable prior year periods due to the increased sales volume noted above
and costs associated with the establishment of additional manufacturing
capabilities. As a percent of net sales, cost of sales for the quarter and nine
months ended March 31, 1995 decreased to 59.1% and 59.7% from 61.8% and 63.0%,
respectively, in the comparable prior year periods principally due to increased
sales of higher margin products and manufacturing efficiencies resulting from
the automation of certain production processes.
Selling, general and administrative expenses for the quarter and nine
months ended March 31, 1995 increased by $1,071,000 or 47.7% and $1,830,000 or
26.5%, respectively, over the comparable prior year periods due primarily to
costs associated with: (i) the addition of sales personnel, (ii) the expansion
of European operations,and (iii) increased corporate overhead. As a percent of
net sales, selling, general and administrative expenses for the quarter and nine
months ended March 31, 1995 increased to 33.6% and 30.9% from 26.5% and 28.9%,
respectively, primarily due to the increased corporate overhead noted above.
Interest and other income for the quarter and nine months ended March 31,
1995 increased by $807,000 or 66.0% and $1,237,000 or 32.8%, respectively, over
the comparable prior year periods as a result of higher interest rates on the
Company's marketable securities and the income on the net proceeds received from
the sale of the Institutional Pharmacy Business.
Interest expense for the quarter and nine months ended March 31, 1995
decreased by $852,000 and $897,000, respectively, from the comparable prior year
periods as a result of the conversion and redemption of the Company's Debentures
into common stock of the Company in February 1995.
Purchase and Sale Agreement related expenses and other for the quarter
ended March 31, 1995 were $1,083,000 which represented costs associated with the
conversion and redemption of the Company's Convertible Debentures during the
quarter. For the nine months ended March 31, 1995, such costs were $6,663,000
which represented the conversion and redemption costs noted above, as well as
the one-time charge in December 1994 related to the issuance of stock options to
certain officers as compensation for services in conjunction with the
consummation of the Purchase and Sale Agreement.
The effective tax rate for the quarter and nine months ended March 31, 1995
did not vary materially from the comparable prior year periods.
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Capital Resources and Liquidity:
- -------------------------------
Cash, cash equivalents and marketable securities increased by $43,909,000
to $146,460,000 during the nine months ended March 31, 1995 principally due to
the proceeds received from the sale of the Institutional Pharmacy Business which
was reduced by tax payments relating to such sale and the Company's purchase of
5,268,463 shares of its common stock from Merck. Excluding the effects of these
transactions, cash provided by operations, net of capital expenditures,
increased by approximately $1,200,000.
In accordance with the Purchase and Sale Agreement, the Company and Merck
entered into a six month agreement for the provision of certain transition
services by Merck or its subsidiaries to the Company, in order to permit an
orderly transition to the Company's status as an independent entity. Such
services include, among other things, administrative, legal and other transition
services at a cost determined on the same basis as historically determined. As
a result of the consummation of the Purchase and Sale Agreement noted above, the
Company operates independently from Merck and Medco, and will no longer be
charged corporate overhead costs based on the cost-sharing methodology
previously utilized by Medco. The Company is now directly incurring certain
corporate overhead costs, which were allocated pursuant to its services
agreement with Medco prior to the consummation of the Purchase and Sale
Agreement. The Company estimates such additional costs, which consist primarily
of salaries and benefits, rent and insurance, will increase corporate overhead
by approximately $2 million over the next twelve months. The Company believes
that its cash flow from operations and the income earned on its investments are
sufficient to meet the anticipated working capital requirements of its business,
including these increased corporate overhead expenses, during this period.
The Company continues to pursue an acquisition program pursuant to which it
seeks to effect one or more acquisitions or other similar business combinations
with businesses it believes have significant growth potential. Financing for
such acquisitions may come from various sources, including, without limitation,
(a) its cash, cash equivalents and marketable securities and (b) proceeds from
the incurrence of additional indebtedness or the issuance of common stock,
preferred stock, convertible debt or other securities. There can be no
assurance that the Company's acquisition program will be successful.
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SYNETIC INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) No exhibits are required to be filed with this report.
(b) On January 27, 1995, the Company filed a report on Form 8-K presenting
the consolidated financial statements of the Company, previously
included in the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1994, restated to report separately the net assets
and operating results of the discontinued operations of the
institutional pharmacy business sold to Pharmacy Corporation of
America, an indirect wholly owned subsidiary of Beverly Enterprises,
Inc., on December 14, 1994.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYNETIC, INC.
/s/ VICTOR L. MARRERO
--------------------------------
Victor L. Marrero
Vice President - Finance
and Chief Financial Officer
Dated: May 12, 1995
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