<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
MARK ONE
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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 November 10, 1997
--------------------- --------------------------------
Common Stock 17,662,956 shares
par value $.01 per share
<PAGE>
SYNETIC, INC. AND SUBSIDIARIES
Index
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Page
----
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets --
September 30, 1997 and June 30, 1997 3
Consolidated Statements of Income --
Three Months Ended September 30, 1997 and 1996 5
Consolidated Statements of Cash Flows --
Three Months Ended September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and
Analysis of Results of Operations and
Financial Condition 9
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
----------------------------------------
This report contains certain forward-looking statements and information
relating to Synetic, Inc. (the "Company" or "Synetic") that are based on the
beliefs of the Company's management as well as assumptions made by and
information currently available to the Company's management. When used in this
report, the words "anticipate", "believe", "estimate", "expect" and similar
expressions, as they relate to the Company or the Company's management, are
intended to identify forward-looking statements. Such statements reflect the
current view of the Company's management with respect to future events and the
Company's future performance and are subject to certain risks, uncertainties and
assumptions. Should management's current view of the future or underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated or expected. The Company
does not intend to update these forward-looking statements.
<PAGE>
SYNETIC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
-------------- ---------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............. $ 75,002 $ 77,303
Marketable securities................. 11,745 11,765
Accounts receivable, net of
allowances for doubtful accounts
and sales returns of $789 and $739
at September 30, 1997 and June 30,
1997, respectively.................. 9,215 9,094
Inventories........................... 5,764 5,505
Other current assets.................. 10,510 9,233
-------- --------
Total current assets................ 112,236 112,900
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land and improvements................. 1,604 1,613
Building and improvements............. 10,055 9,911
Machinery and equipment............... 22,850 23,444
Furniture and fixtures................ 3,460 3,283
Construction in progress.............. 2,991 2,516
-------- --------
40,960 40,767
Less: Accumulated depreciation....... (19,578) (18,681)
-------- --------
Property, plant and equipment, net.. 21,382 22,086
-------- --------
OTHER ASSETS:
Marketable securities................. 226,779 226,760
Other................................. 21,499 20,357
-------- --------
Total other assets 248,278 247,117
-------- --------
$381,896 $382,103
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
3
<PAGE>
SYNETIC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
-------------- ---------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable............................ $ 1,805 $ 2,344
Accrued liabilities......................... 10,964 14,203
Income taxes payable........................ 2,723 3,044
-------- --------
Total current liabilities................. 15,492 19,591
-------- --------
LONG-TERM DEBT, LESS CURRENT PORTION......... 165,000 165,000
DEFERRED TAXES AND OTHER LIABILITIES......... 8,608 8,776
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value;
10,000,000 shares authorized; none
issued.................................... - -
Common stock $.01 par value; 50,000,000
shares authorized; 22,919,428 and
22,865,149 shared issued; 17,650,965 and
17,564,980 shares issued and outstanding
at September 30, 1997 and June 30, 1997,
respectively.............................. 229 229
Paid-in capital............................. 197,605 196,212
Treasury stock, at cost; 5,268,463 and
5,300,169 shares September 30, 1997 and
at June 30, 1997, respectively............ (38,287) (39,462)
Retained earnings........................... 33,249 31,757
-------- --------
Total stockholders' equity................ 192,796 188,736
-------- --------
$381,896 $382,103
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
4
<PAGE>
SYNETIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended September 30, 1997 and 1996
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1997 1996
-------------- --------
<S> <C> <C>
Net sales................................. $14,833 $11,185
Cost of sales........................... 8,316 6,126
Selling, general and administrative..... 6,682 3,751
Interest and other income............... (5,006) (2,219)
Interest expense........................ 2,191 -
------- -------
12,183 7,658
------- -------
Income before provision for income taxes.. 2,650 3,527
Provision for income taxes................ 1,158 1,138
------- -------
Net income................................ $ 1,492 $ 2,389
======= =======
Net income per share...................... $.08 $.13
======= =======
Weighted average shares outstanding....... 19,445 18,257
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE>
SYNETIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 1997 and 1996
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income..................................... $ 1,492 $ 2,389
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization............. 1,187 921
Changes in operating assets and liabilities:
Accounts receivable, net.................. (121) 269
Inventories............................... (259) (656)
Other assets.............................. (2,709) (140)
Accounts payable.......................... (539) 7
Accrued liabilities....................... (3,239) 583
Income taxes payable...................... 850 2,228
Other liabilities......................... (168) -
-------- ---------
Net cash provided by (used for)
operating activities................... (3,506) 5,601
-------- ---------
Cash flows from investing activities:
Sales of marketable securities................. 14,265 162,021
Purchase of marketable securities.............. (14,264) (162,351)
Capital expenditures........................... (193) (1,468)
-------- ---------
Net cash (used for)
investing activities................... (192) (1,798)
-------- ---------
Cash flows from financing activities:
Payments for treasury stock.................... - (1,712)
Proceeds from exercises of stock options and
401(k) purchases............................. 1,397 1,136
-------- ---------
Net cash provided by (used for)
financing activities................... 1,397 (576)
-------- ---------
Net increase (decrease) in cash and cash
equivalents.................................... (2,301) 3,227
Cash and cash equivalents, beginning of period.. 77,303 22,210
-------- ---------
Cash and cash equivalents, end of period........ $ 75,002 $ 25,437
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
6
<PAGE>
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 September 30, 1997 (unaudited) and June 30, 1997 (audited), the results of
their operations for the three months ended September 30, 1997 and 1996
(unaudited) and the results of their operations and their cash flows for the
three months ended September 30, 1997 and 1996 (unaudited).
Principles of Consolidation--
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned operating subsidiaries, Porex Technologies
Corp. and subsidiaries ("Porex"), Avicenna Systems Corp. ("Avicenna") and
CareAgents, Inc.("CareAgents"), after elimination of all material intercompany
accounts and transactions.
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, 1997 (the "1997 10-K"), 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) Inventories:
Inventories consisted of the following (in thousands):
September 30, June 30,
1997 1997
----------------------- --------
(unaudited)
Raw materials and supplies.. $3,119 $2,672
Work-in-process............. 362 347
Finished goods.............. 2,283 2,486
------ ------
$5,764 $5,505
====== ======
(3) Marketable securities:
At September 30, 1997 and June 30, 1997, marketable securities consisted
primarily of U.S. Treasury Notes and Federal Agency Notes.
(4) 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 outstanding during the periods
presented and, if dilutive, common stock equivalents. Common stock equivalents
consist of common stock which may be issuable upon exercise of outstanding stock
options as calculated using the treasury stock method. The $165 million 5%
Convertible Subordinated Debentures due 2007 (the "Convertible Debentures"), if
converted, would not have had a dilutive effect on net income per share for the
periods presented.
7
<PAGE>
(5) Supplemental cash flow information (in thousands):
For the three months ended September 30, 1997 and 1996, the Company
recognized tax benefits related to the exercise of stock options as increases to
additional paid-in capital and decreases to income taxes payable of $1,171,000
and $2,473,000, respectively.
September 30,
Cash paid during the periods for: 1997 1996
------- -----
Interest...................... $4,010 $ -
Income taxes.................. 261 940
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
The historical operations of the Company are primarily related to its
plastics technology business. All revenues and a significant majority of
operating expenses were derived from these operations. As discussed below, the
consolidated financial statements for the three months ended September 30, 1997
include certain costs associated with the Company's activities in developing its
healthcare communications business.
Consolidated Results of Operations:
- ----------------------------------
Net sales for the quarter ended September 30, 1997 increased by $3,648,000,
or 32.6%, over the comparable prior year period as a result of sales increases
across several product lines and, to a lesser extent, sales of Interflo
Technologies Inc. ("Interflo"), a company acquired in February 1997. The sales
increase was due principally to increased sales to medical original equipment
manufacturers ("OEMs") of porous components used in diagnostic products in the
healthcare area, increased sales of writing instrument components in the
consumer area and increased sales of porous plastic components used in
electronic devices in the industrial area.
Cost of sales for the quarter ended September 30, 1997 increased by
$2,190,000, or 35.7%, over the comparable prior year period due to the increased
sales volume noted above, the inclusion in the current period of the operations
of Interflo, and, to a lesser extent, additional depreciation for equipment
associated with process improvements. As a percent of net sales, cost of sales
for the quarter ended September 30, 1997 increased to 56.1% from 54.8% in the
prior year period due to certain higher costs associated with the operations of
Interflo. The Company expects to improve the productivity of Interflo through
the introduction of the Company's more efficient technology and manufacturing
processes.
Selling, general and administrative expenses for the quarter ended
September 30, 1997 increased by $2,931,000, or 78.1%, over the comparable prior
year period due primarily to the inclusion of $2,299,000 in expenses associated
with the Company's healthcare communications business which related primarily to
research and development activities for which there was no comparable amount in
the prior year period. Excluding these costs, as a percent of net sales,
selling, general and administrative expenses for the quarter ended September 30,
1997 decreased to 29.5% from 33.5% in the comparable prior year period due
principally to an increase in sales which was not proportionately offset by
expenses, since a portion of these expenses is fixed and does not vary directly
with sales.
Interest and other income, net of interest expense, for the quarter ended
September 30, 1997 increased by $596,000 or 26.9% over the comparable prior year
period principally as a result of an increase in funds available for investment
generated by the proceeds of the Company's Convertible Debentures issued in
February 1997 partially offset by the interest expense associated with the
Convertible Debentures.
9
<PAGE>
The effective tax rate for the three months ended September 30, 1997
increased to 43.7% from 32.3% in the prior year period as the Company currently
records no state tax benefit for the expenses associated with its healthcare
communications business and, to a lesser extent, due to the change in
composition of the Company's marketable securities resulting in a decrease in
investment income subject to the dividend received deduction.
Capital Resources and Liquidity:
- -------------------------------
Cash, cash equivalents and marketable securities decreased by $2,302,000 to
$313,526,000 during the three months ended September 30, 1997 principally due to
the interest payment related to the Convertible Debentures partially offset by
cash provided by operations.
As a result of the continuing efforts in developing its healthcare
communications business, the Company expects to incur significant research and
development expenditures in connection with this new area of business until the
products and services are successfully developed and marketed. During the three
months ended September 30, 1997, the Company incurred expenditures of
approximately $2,497,000 related to the development of its healthcare
communications business. 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 the research
and development expenditures noted above.
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 several sources, including, without limitation,
(a) the Company's 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. See
"Item 1. Business--Acquisition Program" in the 1997 10-K.
10
<PAGE>
SYNETIC INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Description
----------- -----------
11 Computation of Earnings Per Share
27 Financial Data Schedule
11
<PAGE>
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/ Anthony Vuolo
-------------------------------
Anthony Vuolo
Vice President and
Chief Financial Officer
Dated: November 14, 1997
12
<PAGE>
EXHIBIT INDEX
Number Description
------ -----------
11 Computation of Earnings Per Share
27 Financial Data Schedule
<PAGE>
Exhibit 11
----------
SYNETIC, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS ENDED
SEPTEMBER 30,
---------------
1997 1996
------- -------
Primary earnings from operations........ (A) $ 1,492 $ 2,389
Assumed conversion of convertible
debentures............................. 1,424 -
------- -------
Fully diluted earnings from operations.. (B) $ 2,916 $ 2,389
======= =======
Weighted average shares outstanding..... 17,615 16,796
Dilutive common stock equivalents for
primary earnings per share using the
treasury stock method.................. 1,830 1,461
------- -------
Weighted average shares and common
equivalent shares outstanding
for primary earnings per share......... (C) 19,445 18,257
Additional equivalent shares upon
assumed conversion of convertible
debentures............................. 2,750 -
------- -------
Weighted average shares and common
equivalent shares outstanding
for fully diluted earnings per
share.................................. (D) 22,195 18,257
EARNINGS PER SHARE
Primary................................. (A)/(C) $ .08 $ .13
Fully diluted........................... (B)/(D) $ .13 $ .13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SYNETIC
INC.'S 9/30/97 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 75,002
<SECURITIES> 11,745
<RECEIVABLES> 10,004
<ALLOWANCES> 789
<INVENTORY> 5,764
<CURRENT-ASSETS> 112,236
<PP&E> 40,960
<DEPRECIATION> 19,578
<TOTAL-ASSETS> 381,896
<CURRENT-LIABILITIES> 15,492
<BONDS> 165,000
0
0
<COMMON> 229
<OTHER-SE> 192,567
<TOTAL-LIABILITY-AND-EQUITY> 381,896
<SALES> 14,833
<TOTAL-REVENUES> 14,833
<CGS> 8,316
<TOTAL-COSTS> 8,316
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,191
<INCOME-PRETAX> 2,650
<INCOME-TAX> 1,158
<INCOME-CONTINUING> 1,492
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,492
<EPS-PRIMARY> .08
<EPS-DILUTED> 0
</TABLE>
