<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
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.)
669 RIVER DRIVE
ELMWOOD PARK, NEW JERSEY 07407-1361
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 703-3400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
-------------------
COMMON STOCK, $.01 PAR VALUE
5% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2007
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the registrant's voting stock (based on
the last sale price of registrant's voting stock on the NASDAQ National Market
System on September 15, 1997 and, for the purpose of this computation only, the
assumption that all of the registrant's directors and executive officers are
affiliates) held by non-affiliates of the registrant was approximately
$484,876,600.
The number of shares of registrant's Common Stock, $.01 par value,
outstanding at September 15, 1997 was 17,650,965.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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<PAGE>
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
As described in "Item 1. Business--Introduction", the Company completed the
Divestiture of its Institutional Pharmacies Business on December 14, 1994. The
Company's consolidated financial statements for the fiscal year ended June 30,
1995 report separately the results of operations and net assets of the
Institutional Pharmacies Business as discontinued operations.
The following table sets forth for the periods indicated the percentage
which certain items in the financial statements of the Company bear to net
sales.
<TABLE>
<CAPTION>
PERCENTAGES OF NET SALES
FISCAL YEARS ENDED JUNE 30,
--------------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Net sales........................................ 100% 100% 100%
Costs and expenses
Cost of sales................................... 54.9 55.6 58.7
Selling, general and administrative............. 39.4 33.1 31.0
Investment income............................... (24.3) (18.0) (18.7)
Interest expense................................ 5.9 -- 9.2
Purchased research and development and other.... 70.7 -- 17.0
----- ----- -----
146.6 70.7 97.2
----- ----- -----
Income (loss) before provision for income taxes.. (46.6) 29.3 2.8
Provision for income taxes....................... 5.3 10.2 1.1
----- ----- -----
Income (loss) from continuing operations......... (51.9)% 19.1% 1.7%
===== ===== =====
</TABLE>
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 fiscal year ended June 30, 1997
include certain costs associated with the Company's activities in developing its
healthcare communications business.
Fiscal Years Ended June 30, 1997 and 1996
Consolidated Results of Operations
Net sales for the year ended June 30, 1997 increased by $7,757,000, or
17.2%, over the comparable prior year period. The sales increase was due
primarily to increased unit sales in surgical products in the healthcare segment
and increased unit sales of writing components, pipette filters and pipette tips
in the consumer segment.
Cost of sales for the year ended June 30, 1997 increased by $3,927,000, or
15.6%, over the comparable prior year period due to the increased sales volume
noted above and product development costs. As a percent of net sales, cost of
sales for the year ended June 30, 1997 decreased to 54.9% from 55.6% in the
comparable prior year period principally due to increased leverage of certain
fixed costs which do not increase proportionally with sales and improvements in
material and labor usage.
2
<PAGE>
Selling, general and administrative expenses for the year ended June 30,
1997 increased by $5,911,000, or 39.6%, over the comparable prior year period
due primarily to the inclusion of expenses of $4,628,000 associated with the
Company's healthcare communications business which primarily related to research
and development activities. Excluding these costs, as a percent of net sales,
selling, general and administrative expenses for the year ended June 30, 1997
decreased to 30.7% from 33.1% due principally to increased sales which were not
proportionately offset by such expenses, since a portion of these costs is fixed
in nature and does not vary directly with sales.
Investment income, which is comprised of interest and other income and
dividend income, for the year ended June 30, 1997 increased by $4,782,000, or
58.9%, over the comparable prior year period primarily as a result of the income
earned on the proceeds of the Company's $165,000,000 5% Convertible Subordinated
Debentures due 2007 (the "Convertible Debentures") issued in February 1997.
Interest expense for the year ended June 30, 1997 increased by $3,116,000
from the prior year period as a result of the interest expense associated with
the Company's Convertible Debentures.
During the year ended June 30, 1997, the Company recorded non-recurring
charges to income of $37,413,000 related to purchased research and development
costs from the acquisitions of Avicenna and CareAgents and the acquisition of
rights to certain intellectual property and software technologies to be utilized
in the development of the Company's healthcare communications business.
Excluding the portion of the research and development charge relating to
the acquisitions of Avicenna and CareAgents for which no tax benefits were
recognized, the effective tax rate for the year ended June 30, 1997 increased to
37.5% from 35% in the prior year period primarily as a result of the change in
composition of the Company's marketable securities resulting in the decrease in
investment income subject to the dividend received deduction.
Fiscal Years Ended June 30, 1996 and 1995
Consolidated Results of Operations
Net sales for the year ended June 30, 1996 increased by $5,949,000, or
15.2%, over the comparable prior year period. The sales increase was due
primarily to increased unit sales in medical products and plastic vials in the
healthcare segment and, to a lesser extent, to increased unit sales of writing
components, personal care items and home water filters in the consumer segment.
Cost of sales for the year ended June 30, 1996 increased by $2,102,000, or
9.1%, over the comparable prior year period due to the increased sales volume
noted above and additional depreciation and product development costs. As a
percent of net sales, cost of sales for the year ended June 30, 1996 decreased
to 55.6% from 58.7% in the comparable prior year period principally due to
certain fixed costs which do not increase proportionally with sales and
improvements in material and labor usage.
Selling, general and administrative expenses for the year ended June 30,
1996 increased by $2,805,000, or 23.1%, over the comparable prior year period
due primarily to an increase in expenses associated with the increase in sales
volume noted above and an increase in corporate overhead expense. As a percent
of net sales, selling, general and administrative expenses for the year ended
June 30, 1996 increased to 33.1% from 31.0% in the prior year primarily due to
the increased corporate overhead noted above.
Interest and other income and dividend income for the year ended June 30,
1996 increased by $800,000, or 10.9%, over the comparable prior year period
primarily as a result of the income earned on a full year of investment of the
net proceeds received from the sale of the Institutional Pharmacies Business.
3
<PAGE>
Interest expense for the year ended June 30, 1996 decreased by $3,619,000
from the prior year period as a result of the conversion and redemption of the
Company's Convertible Subordinated Debentures due December 1, 2001 (the "1991
Debentures") into common stock of the Company in February 1995.
Other expenses for the year ended June 30, 1996 decreased by $6,663,000
over the comparable prior year period as a result of 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 and costs associated with the conversion and redemption in
February 1995 of the 1991 Debentures.
The effective tax rate for the year ended June 30, 1996 decreased to 35%
from 41% in the prior year period primarily due to the nondeductibility of
certain conversion and redemption costs in the prior year.
Capital Resources and Liquidity
As of June 30, 1997, the Company had $77,303,000 of cash and cash
equivalents and $238,525,000 of marketable securities.
Cash and cash equivalents increased $55,093,000 for the fiscal year
ended June 30, 1997 as a result of proceeds from the issuance of the
Convertible Debentures, the majority of which were invested in marketable
securities. Net cash provided by operations was $9,017,000, a decrease of
$2,276,000 from the fiscal year ended June 30, 1996. This decrease was primarily
related to expenditures associated with the development of the Company's
healthcare communications business and increased working capital requirements.
The significant funds generated from operating activities are reinvested in
existing businesses and are used to fund capital expenditures.
Net cash provided by financing activites was $161,008,000 for the fiscal
year ended June 30, 1997, primarily resulting from the issuance of the
Convertible Debentures.
Net cash used for investing activities was $114,932,000 for the fiscal
year ended June 30, 1997, reflecting the investment of a portion of the proceeds
from the issuance of the Convertible Debentures in marketable securities.
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 second
half of the fiscal year ended June 30, 1997, the Company incurred expenditures
of approximately $4,976,000 related to the development of its healthcare
communications business. The Company expects to increase the rate of such
expenditures during fiscal 1998. 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".
4
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Pursuant to General Instruction G(3) to the Annual Report on Form 10-K,
the information regarding executive officers of the Company required by Item
401 of Regulation S-K is included in Part I of this report.
The directors of the Company are as follows:
<TABLE>
<CAPTION>
Director Principal
Name Age Since Occupation
- -------------------------------- --- -------- -------------------------------------------------
<S> <C> <C> <C>
Thomas R. Ferguson 70 1989 Mr. Ferguson has been a member of the law firm of
Ferguson, Case, Orr, Paterson & Cunningham for
more than five years.
Mervyn L. Goldstein, M.D. 60 1989 Dr. Goldstein has been a physician in private
practice, Associate Clinical Professor of Medicine at
the Albert Einstein College of Medicine in New York
City and Attending Physician in Medicine and
Oncology at Montefiore Medical Center in New York
City for more than five years.
Ray E. Hannah 61 1989 See "Part I. Executive Officers."
Roger H. Licht 43 1989 Mr. Licht has been a member of the law firm of
Licht & Licht for more than five years.
James V. Manning 50 1989 See "Part I. Executive Officers."
Charles A. Mele 41 1989 See "Part I. Executive Officers."
Herman Sarkowsky 72 1989 Mr. Sarkowsky has been Chairman of the Board and
Chief Executive Officer of Sarkowsky Investment
Corporation, a diversified investment company, for
more than five years. Since May 1992, he has been
a director of Seafirst Bank. Mr. Sarkowsky is also
a director of Eagle Hardware & Garden Inc. and
Hollywood Park, Inc.
Paul C. Suthern 45 1993 Mr. Suthern has been Vice Chairman of the
Company since July 1996 and was the President and
Chief Operating Officer of the Company from
February 1993 until July 1996 and was also the Chief
Executive Officer from October 1993 until January
1995. Mr. Suthern was also President and Chief
Operating Officer of Medco Containment Services,
Inc. ("Medco") from November 1992 through
December 1994 and Assistant to Medco's Chairman
</TABLE>
5
<PAGE>
<TABLE>
<S> <C> <C> <C>
from December 1991 to November 1992. Prior
thereto he was Executive Vice President--Operations
of Medco for more than five years.
Albert M. Weis 70 1989 Mr. Weis has been President of A.M. Weis & Co.,
Inc., a commodities trading corporation, for more
than five years. Since August 1997, Mr. Weis has
been the Chairman of the Board of the New York
Cotton Exchange. Mr. Weis is also a member of the
Board of the Commodities Clearing Corporation.
Martin J. Wygod 57 1989 Mr. Wygod has been Chairman of the Board of the
Company since May 1989. From May 1989 to
February 1993, Mr. Wygod also served as the
Company's President and Chief Executive Officer
and until May 1994 was an executive officer of the
Company. Until May 1994, Mr. Wygod was
Chairman of the Board of Medco for more than five
years, and until January 1993 he also served as Chief
Executive Officer of Medco. He is also engaged in
the business of racing, boarding and breeding
thoroughbred horses and is President of River Edge
Farm, Inc., which is engaged in the business of
breeding and boarding thoroughbred horses.
</TABLE>
No family relationship exists among any of the directors or executive
officers except that Martin J. Wygod, Chairman of the Board of the Company,
and Paul C. Suthern are brothers-in-law. No arrangement or understanding
exists between any director or executive officer and any other person pursuant
to which any director or executive officer was selected as a director or
executive officer of the Company. All executive officers are elected annually
by the Board of Directors and serve at the discretion of the Board.
--------------------
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company during the year ended June 30, 1997 and Forms 5 and
amendments thereto furnished to the Company for such year, no person failed to
disclose on a timely basis, as disclosed in the above forms, reports required
by Section 16(a) of the Securities Exchange Act of 1934, as amended, during
such year.
6
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
Prior to the consummation of the purchase of shares of Common Stock from
Merck & Co., Inc. ("Merck") by the Company and SN Investors (the "Purchase")
on December 14, 1994, the Company bore a proportionate share of the cost or
expense in respect of Medco compensation, benefits and travel and
entertainment expenses of certain officers of the Company who were also
employees of Medco or its subsidiaries other than the Company. During the
period from July 1, 1994 through December 14, 1994, the executive officers of
the Company, other than Ray E. Hannah, Vice President--Porex Technologies
Group of the Company, did not receive any cash compensation for services to
the Company or its subsidiaries. In the case of Mr. Hannah, all amounts shown
below were paid by the Company. Following the consummation of the Purchase,
the other executive officers of the Company became salaried employees of the
Company and began to participate in the employee benefit plans and
arrangements of the Company.
The following table presents information concerning compensation paid for
services to the Company during the last three fiscal years to Mr. Manning, the
Chief Executive Officer of the Company, and to Messrs. Hannah, Marrero, Mele
and Vuolo, the only other executive officers whose combined salary and bonus
during the fiscal year ended June 30, 1997 exceeded $100,000 (the "Named
Executive Officers"):
7
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
LONG TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
COMPEN- OPTIONS/ COMPEN-
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) SATION ($) SARS (#) SATION ($)
- --------------------------------- --------- ------------ --------- ---------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
James V. Manning................. 1997 100,000 -- -- -- --
President and Chief 1996 100,000 -- -- -- --
Executive Officer 1995 50,000(1) -- -- 150,000 --
Ray E. Hannah.................... 1997 163,461 100,000 4,505 40,000 5,901(2)
Vice President 1996 160,000 74,140 -- -- 3,239(2)
--Porex Technologies Group 1995 160,000 -- -- -- 4,146(2)
Charles A. Mele.................. 1997 150,000 -- 12,000 195,000 2,019(3)
Vice President and General 1996 150,000 12,460 12,000 -- 1,540(3)
Counsel 1995 -- -- -- -- --
Anthony Vuolo.................... 1997 150,000 -- 12,000 81,000 2,019(3)
Vice President and Chief 1996 150,000 -- 12,000 -- 1,419(3)
Financial Officer (since May 1995 43,269(4) -- 3,461 125,000 --
1997)
Victor L. Marrero................ 1997 150,000 -- 12,000 31,000 2,019(3)
Vice President and Chief 1996 150,000 -- 12,000 -- 1,419(3)
Financial Officer (through 1995 75,000(5) -- 6,000 125,000 --
May 1997)
</TABLE>
- ----------------------
(1) During the period beginning on July 1, 1994 and ending on December 14,
1994, the date of consummation of the Purchase, Mr. Manning was paid a
salary of $186,923 by Medco, none of which was attributed to services
rendered to the Company. During the period beginning on December 15,
1994 and ending on June 30, 1995, Mr. Manning was paid a salary of
$50,000 by the Company. Effective August 1, 1996, Mr. Manning assumed
the responsibilities of acting President of the Company.
(2) Includes Company matching contributions to the Porex 401(k) plan and life
insurance premiums paid on behalf of Mr. Hannah of $2,043 and $2,103,
respectively, in the fiscal year ended June 30, 1995, $1,878 and $1,361,
respectively, in the fiscal year ended June 30, 1996 and $3,795 and
$2,106, respectively, in the fiscal year ended June 30, 1997.
(3) Comprised of Company matching contributions to the Porex 401(k) Plan.
(4) During the period beginning on July 1, 1994 and ending on December 14,
1994, the date of consummation of the Purchase, Mr. Vuolo was paid a
salary of approximately $115,000 by Medco, none of which was attributed
to services rendered to the Company. During the period beginning on
December 15, 1994 and ending on June 30, 1995, Mr. Vuolo was paid a
salary of $43,269 by the Company.
8
<PAGE>
(5) During the period beginning on July 1, 1994 and ending on December 14,
1994, the date of consummation of the Purchase, Mr. Marrero was paid a
salary of approximately $115,000 by Medco, none of which was attributed
to services rendered to the Company. During the period beginning on
December 15, 1994 and ending on June 30, 1995, Mr. Marrero was paid a
salary of $75,000 by the Company. Mr. Marrero was the Chief Financial
Officer from December 1994 until May 1997, at which time Mr. Vuolo became
the Chief Financial Officer.
--------------------
The following table presents information concerning the options granted
to the Named Executive Officers during the last fiscal year.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
-----------------------------------------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS/SARS EXERCISE
OPTIONS/ GRANTED TO OR BASE
SARS EMPLOYEES PRICE EXPIRATION GRANT DATE
NAME GRANTED (#) IN FISCAL YEAR ($/SH) DATE PRESENT VALUE ($)(2)
- ------------------- ------------- --------------- --------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
Ray E. Hannah...... 40,000(1) 1.1% 35.50 4/16/07 459,998
Victor L. Marrero.. 31,000(1) .8% 32.25 10/02/06 309,874
Charles A. Mele.... 195,000(1) 5.3% 32.25 10/02/06 1,949,204
Anthony Vuolo...... 31,000(1) .8% 32.25 10/02/06 309,874
50,000(1) 1.4% 35.53 6/23/07 575,981
</TABLE>
____________
(1) These options vest and become exercisable at the rate of 20% per year,
commencing on the first anniversary of the date of grant and were granted
on the following dates: Mr. Hannah, all on April 16, 1997; Messrs.
Marrero and Mele, all on October 2, 1996; and Mr. Vuolo, 31,000 on
October 2, 1996 and 50,000 on June 23, 1997.
(2) The estimated grant date present value reflected in the above table is
determined using the Black-Scholes model. The material assumptions and
adjustments incorporated in the Black-Scholes model in estimating the
value of the options reflected in the above table include the following:
(i) the respective option exercise price, specified above, equal to the
fair market value of the underlying stock on the date of grant; (ii) the
exercise of options within one year of the date that they become
exercisable; (iii) a risk-free interest rate of 6.5% per annum; and (iv)
volatility of 0.2722 calculated using daily stock prices of the Company
during the period from the date of the Purchase to June 30, 1997. The
ultimate values of the options will depend on the future market price of
the Company's stock, which cannot be forecasted with reasonable accuracy.
The actual value, if any, an optionee will realize upon exercise of an
option will depend on the excess of the market value of the Company's
Common Stock over the exercise price on the date the option is exercised.
There is no assurance that the value realized by an optionee will be at
or near the value estimated by the Black-Scholes model or any other model
applied to value the options.
9
<PAGE>
No options to purchase Common Stock were exercised by the Named Executive
Officers during the fiscal year ended June 30, 1997. Messrs. Marrero and
Vuolo realized income of $2,522,534 and $2,006,240, respectively, from the
exercise of options to purchase common stock of Merck granted prior to the
closing of the Purchase, but which continued to vest and remained exercisable
thereafter as a result of their employment by the Company. See "Item 13.
Certain Relationships and Related Transactions--Purchase and Sale Agreement;
Divestiture."
The following table presents information concerning the fiscal year-end
value of options to purchase Common Stock held by the Named Executive
Officers.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/
OPTIONS/SARS AT FY-END (#) SARS AT FY-END ($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------- --------------------------- ---------------------------
James V. Manning... 225,000 90,000 6,488,750 2,430,000
Ray E. Hannah...... 64,000 40,000 1,754,500 60,000
Victor L. Marrero.. 60,000 106,000 1,667,500 2,172,250
Charles A. Mele.... 70,000 195,000 1,945,000 926,250
Anthony Vuolo...... 86,000 164,000 2,293,000 2,482,500
- -----------------------------
(1) Based upon the fiscal year-end closing price of the Common Stock of
$37.00.
10
<PAGE>
PLANS AND ARRANGEMENTS OF THE COMPANY
PENSION PLAN
Employees of the Company and certain of its subsidiaries who satisfy
certain age and service requirements are eligible to participate in the
Pension Plan for Employees of Porex Technologies Corp. (the "Pension Plan"), a
defined benefit plan. The Company bears the entire cost of the Pension Plan.
The Company's contributions to the Pension Plan are computed on an actuarial
basis in order to fund the defined retirement benefits.
Normal retirement benefits are payable monthly for life to a participant
upon retirement at his or her retirement date (i.e., age 65), and are equal to
1/12 of the sum of (a) 0.6% of the participant's average annual compensation
for the five consecutive calendar years that the participant's compensation
was the highest during the ten consecutive years of service immediately
preceding retirement ("Final Average Compensation"), multiplied by the
participant's credited years of service up to a maximum of 35 years, and (b)
0.6% of the participant's Final Average Compensation in excess of the average
annual Social Security taxable wage base for the 35-year period ending with
the year the participant would reach normal retirement age, multiplied by the
participant's credited years of service up to a maximum of 35 years. A
participant becomes 100% vested in his or her accrued retirement benefit after
completion of five years of service or upon attainment of normal retirement at
age 65. Retirement benefits are not subject to any deduction for Social
Security or other offset amounts.
Under a defined benefit plan such as the Pension Plan, contributions
allocable to individual participants cannot be readily and accurately
calculated. The table below shows estimated annual retirement benefits for
executives at specified levels of remuneration and years of service. The
estimates assume that benefits commence at age 65 under a straight life
annuity form. The table discloses the benefits that an individual would
receive at age 65 if he participated in the Pension Plan for 15, 20, 25, 30
and 35 years.
PENSION PLAN TABLE
Years of Service
- ---------------------------------------------------------
Remuneration 15 20 25 30 35
- -------------- ------ ------ ------ ------ ------
100,000 15,363 20,484 25,604 30,725 35,864
115,000 18,063 24,084 30,104 36,125 42,146
125,000 19,863 26,484 33,104 39,725 46,346
150,000 24,363 32,484 40,604 48,725 56,846
152,000 24,723 32,964 41,204 49,445 57,686
or more
Ray E. Hannah, the only Named Executive Officer participating in the
Pension Plan, had accrued 29 credited years of service under the Pension Plan
and had annual remuneration covered by the Pension Plan of $160,000 as of
January 1, 1997. Sections 401(a)(17) and 415 of the Internal Revenue Code
limit the amount of compensation that may be considered in computing benefits
under a qualified retirement plan. For 1995 and 1996, the maximum amount of
compensation allowed for use in calculating an individual's pension benefits
under the Retirement Plan was $150,000. For 1997, the maximum increased to
$160,000.
11
<PAGE>
COMPENSATION OF DIRECTORS
Those directors who are not officers or employees of the Company received
no cash compensation for serving as directors for the fiscal year ended June
30, 1997. The Company's 1991 Director Stock Option Plan (the "Director Plan")
provides that on the first business day of each fiscal year of the Company,
each director who is not an officer or employee of the Company then in office
will automatically be granted an option to purchase 10,000 shares of Common
Stock. In addition, each director who is not an officer or employee of the
Company automatically receives an option to purchase 10,000 shares of Common
Stock at the time such director is first elected to the Board. The Director
Plan is administered by the Board of Directors or any executive officer or
officers designated by the Board. Non-employee directors have also received
in the past options to purchase Common Stock under the Company's 1989 Class A
Stock Option Plan (the "Class A Plan"), and the Company from time to time has
granted options to purchase Common Stock to certain of such directors outside
the Company's stock option plans on terms similar to those contained in the
Class A Plan.
12
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of September 15,
1997 (except as otherwise indicated) concerning the beneficial ownership of
the Company's Common Stock by each person known by the Company to own more
than 5% of its Common Stock.
AMOUNT
NAME AND ADDRESS OF AND NATURE OF PERCENT
BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS (1)
- --------------------------------------- ------------------------ ------------
Martin J. Wygod................... 5,421,468(2)(3) 30.3%
River Edge Farm
P.O. Box 1949
Buellton, California 93427
SN Investors, L.P................. 5,061,857(2) 28.7%
P.O. Box 616
Fair Lawn, New Jersey 07410
FMR Corp.......................... 1,157,582(4) 6.6%
82 Devonshire Street
Boston, Massachusetts 02107
The Prudential Insurance Company.. 1,019,743(5) 5.8%
of America ("Prudential")
Prudential Plaza
Newark, New Jersey 07102
James R. Buell.................... 1,010,916(6) 5.7%
Star Route Box 129
Orovada, Nevada 89425
- -------------------------------------
(1) The number of shares of Common Stock deemed outstanding includes: (i)
17,650,965 shares of Common Stock outstanding as of September 15, 1997,
(ii) the number of shares, if any, of Common Stock that the respective
persons named in the above table have the right to acquire presently or
within 60 days of September 15, 1997 upon exercise of stock options and
(iii) the number of shares, if any, of Common Stock, which the respective
persons named in the above table have the right to acquire upon conversion
of the Company's 5% Convertible Subordinated Debentures due 2007
("Convertible Debentures").
(2) SN Investors, the general partner of which is controlled by Mr. Wygod, is
the record and beneficial owner of 5,061,857 shares of Common Stock. Mr.
Wygod is an indirect beneficial owner of such shares and they are included
in the total of 5,421,468 shares listed as beneficially owned by Mr.
Wygod. See "Item 13. Certain Relationships and Related Transactions--
Purchase and Sale Agreement; Divestiture" and "--Investment Agreement" for
additional information regarding SN Investors.
13
<PAGE>
(3) Includes 256,000 shares of Common Stock that Mr. Wygod has the right to
acquire presently or within 60 days of September 15, 1997 upon exercise of
stock options or upon conversion of Convertible Debentures. Includes 2,000
shares of Common Stock beneficially owned by Mr. Wygod's spouse, as to
which shares Mr. Wygod disclaims beneficial ownership. Does not include
3,500 shares of Common Stock and shares of Common Stock issuable upon
conversion of $1,500,000 principal amount of Convertible Debentures owned
by Medco Containment Services Foundation, Inc., a charitable foundation of
which Messrs. Manning, Suthern and Wygod are trustees and share voting and
dispositive power nor 105,350 shares of Common Stock and shares of Common
Stock issuable upon conversion of $500,000 principal amount of Convertible
Debentures owned by the Rose Foundation, a private charitable foundation of
which Messrs. Wygod and Mele are trustees and share voting and dispositive
power.
(4) The information shown is as of December 31, 1996 and is based upon
information disclosed by FMR Corp., Fidelity Management and Research
Company, Fidelity VIP Equity-Income Fund, Abigail P. Johnson and Edward C.
Johnson, 3d, the controlling stockholder of FMR Corp., in a Schedule 13G
filed with the Commission. Such persons reported that FMR Corp. is the
parent holding company of Fidelity Management and Research Company, and
that Edward C. Johnson, 3d, FMR Corp., through its control of Fidelity
Management and Research Company, and the Funds each has sole power to
dispose of such shares. Sole power to vote the shares resides in the Fund's
Board of Trustees.
(5) The information shown is as of December 31, 1996 and is based upon
information disclosed by Prudential in its Schedule 13G filed with the
Securities and Exchange Commission (the "Commission"). Prudential reported
in its Schedule 13G that it has shared voting and dispositive power over
such shares.
(6) Includes 131,667 shares of Common Stock that Mr. Buell has the right to
acquire presently or within 60 days of September 15, 1997 upon exercise of
stock options or upon conversion of Convertible Debentures. The information
shown is as of May 28, 1997 and is based upon information disclosed by Mr.
Buell in his Schedule 13D filed with the Securities and Exchange
Commission. Mr. Buell reported in his Schedule 13D that he has sole voting
and dispositive power over such shares.
14
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information, as of September 15,
1997, concerning the ownership of Common Stock by each of the directors, each
of the Named Executive Officers, and by all directors and executive officers
of the Company as a group.
AMOUNT AND
NATURE OF BENEFICIAL PERCENT OF
NAME OF BENEFICIAL OWNER OWNERSHIP (1)(2) CLASS (3)
- -------------------------------------- ------------------------ -----------
Thomas R. Ferguson.................... 108,117 *
Mervyn L. Goldstein................... 110,717(4) *
Ray E. Hannah......................... 137,628 *
Roger H. Licht........................ 81,333 *
James V. Manning...................... 269,740(5) 1.51%
Victor L. Marrero..................... 68,958 *
Charles A. Mele....................... 112,188(6) *
Herman Sarkowsky...................... 230,724(7) 1.30%
Paul C. Suthern....................... 202,500(5) 1.13%
Anthony Vuolo......................... 94,858 *
Albert M. Weis........................ 157,169(8) *
Martin J. Wygod....................... 5,421,468(5)(6)(9) 30.28%
All directors and executive officers
as a group (13 persons)............. 7,000,750 36.79%
- --------------------------------
* Less than one percent.
(1) The persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by
them, unless otherwise indicated in the following footnotes.
(2) Includes the following number of shares of Common Stock that the
following persons have the right to acquire presently or within 60 days
of September 15, 1997 upon exercise of stock options and the number of
shares of Common Stock that the following persons have the right to
acquire upon conversion of Convertible Debentures: Mr. Ferguson,
103,667; Dr. Goldstein, 98,667; Mr. Hannah, 64,167; Mr. Licht, 79,333;
Mr. Manning, 233,333; Mr. Marrero, 67,033; Mr. Mele, 109,833; Mr.
Sarkowsky, 127,000; Mr. Suthern, 200,500; Mr. Vuolo, 93,033; Mr. Weis,
106,167; Mr. Wygod, 256,000; and all directors and executive officers as
a group, 1,471,700. Includes 1,461 shares of Common Stock allocated to
the account of Mr. Hannah, 100 shares of Common Stock allocated to the
account of Mr. Marrero, 105 shares of Common Stock allocated to the
account of Mr. Mele and 100 shares of Common Stock allocated to the
account of Mr. Vuolo under the Porex Technologies Corp. 401(k) Savings
Plan as of June 30, 1997.
(3) The number of shares of Common Stock deemed outstanding includes:
(i) 17,650,965 shares of Common Stock outstanding as of September 15,
1997,
(ii) the number of shares of Common Stock that the respective persons
named in the above table have the right to acquire presently or within 60
days of September 15, 1997 upon exercise of stock options and (iii) the
number of shares of Common Stock that the respective persons named in the
above table have the right to acquire upon conversion of Convertible
Debentures.
(4) Includes 200 shares of Common Stock owned by Dr. Goldstein's spouse, as
to which Dr. Goldstein disclaims beneficial ownership.
15
<PAGE>
(5) Does not include 3,500 shares of Common Stock and shares of Common Stock
issuable upon conversion of $1,500,000 principal amount of Convertible
Debentures owned by Medco Containment Services Foundation, Inc., a
charitable foundation of which Messrs. Manning, Suthern and Wygod are
trustees and share voting and dispositive power.
(6) Does not include 105,350 shares of Common Stock and shares of Common
Stock issuable upon conversion of $500,000 principal amount of
Convertible Debentures owned by the Rose Foundation, a private charitable
foundation of which Messrs. Wygod and Mele are trustees and share voting
and dispositive power.
(7) Includes 14,705 shares of Common Stock owned by a charitable foundation
of which Mr. Sarkowsky is a director.
(8) Includes 3,050 shares of Common Stock owned by a corporation of which Mr.
Weis is the sole stockholder, sole director and president and 3,200
shares of Common Stock held in trust for Mr. Weis's children.
(9) Includes 2,000 shares of Common Stock beneficially owned by Mr. Wygod's
spouse, as to which shares Mr. Wygod disclaims beneficial ownership. See
also "Footnote 2 to Principal Stockholders Table".
16
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
PURCHASE AND SALE AGREEMENT; DIVESTITURE. On December 14, 1994, pursuant
to the Purchase and Sale Agreement dated as of May 24, 1994 between the
Company and Merck (the "Purchase and Sale Agreement"), the Company purchased
5,268,463 shares of the Company's Common Stock from Merck for an aggregate
purchase price of $37,764,019. At the time of the purchase by the Company, SN
Investors purchased 5,061,857 shares of the Company's Common Stock (the "Wygod
Shares" and, collectively with the shares purchased by the Company, the
"Shares") from Merck for an aggregate purchase price of $36,283,079. The
purchase prices for the Shares stated above reflect a final purchase price
adjustment, pursuant to the terms of the Purchase and Sale Agreement, in the
amount of $2,331,256 that was paid by the Company to Merck on July 31, 1996,
$1,142,315 of which was reimbursed to the Company by SN Investors. The
purchase by SN Investors was made pursuant to an assignment by the Company to
Mr. Wygod of the right to purchase the Wygod Shares pursuant to the Investment
Agreement between Mr. Wygod and the Company, dated as of September 13, 1994
(the "Investment Agreement"). Mr. Wygod, as permitted under the Investment
Agreement, further assigned to SN Investors his right to purchase the Wygod
Shares. The Investment Agreement governs the terms and conditions under which
the Wygod Shares will be held by Mr. Wygod and his permitted assignees and
transferees. See "--Investment Agreement."
Also on December 14, 1994, the Company consummated the sale (the
"Divestiture") of the subsidiaries conducting the Company's institutional
pharmacies business (the "Institutional Pharmacies Business") to Pharmacy
Corporation of America, an indirect, wholly owned subsidiary of Beverly
Enterprises, Inc. ("Beverly"), for approximately $107,300,000.
In the Purchase and Sale Agreement, the Company agreed, until May 24,
1999, to be bound by the restrictions contained in the Consulting Agreement
described below under "--Consulting Agreement," provided that such
restrictions shall be of no further force and effect in the event of the death
of Mr. Wygod, or if Mr. Wygod ceases to be a director of the Company or any
subsidiary of the Company, ceases to have any ownership interest in the
Company (provided that if the Company is a public company he may have up to a
1% equity interest in the Company), and is not a principal, agent or employee
of or consultant to the Company or any subsidiary of the Company, or is not
otherwise rendering any services to the Company or any subsidiary of the
Company.
Pursuant to the terms of the Purchase and Sale Agreement, options to
purchase common stock of Merck and its subsidiaries (other than the Company
and its subsidiaries) previously granted to certain employees and consultants
were modified so that employment by or consulting services to the Company or
its subsidiaries (in the case of employees and consultants continuing with the
Company after the closing of the Purchase) or Beverly or its subsidiaries (in
the case of employees and consultants continuing with the Institutional
Pharmacies Business after the closing of the Divestiture) will be considered
employment by or consulting services to Merck and its subsidiaries for
purposes of vesting and continued exercisability of such options; provided
that no further vesting of such options occurred after June 1, 1996.
INVESTMENT AGREEMENT. In the Investment Agreement, the Company assigned
the rights and obligations to purchase the Wygod Shares to Mr. Wygod. The
Investment Agreement governs the terms and conditions under which the Wygod
Shares will be held by Mr. Wygod and his permitted assignees and transferees.
Mr. Wygod, as permitted under the Investment Agreement, assigned such rights
and obligations to SN Investors. Pursuant to the Investment Agreement, SN
Investors was (1) required to be a limited partnership in which Mr. Wygod or
an entity controlled by Mr. Wygod is the general partner and one or more of
his family trusts and/or partnerships (collectively, the "Wygod Entities")
and/or independent third parties are limited partners and (2) required to
agree to be bound by all of the restrictions and obligations applicable to Mr.
Wygod under the Investment Agreement. The Investment Agreement required the
initial investment of the Wygod Entities in SN Investors to be at least
$20,000,000 (on a cost basis) (the "Wygod Investment").
17
<PAGE>
The Investment Agreement provides that, until the earliest to occur of
(a) December 14, 1998, (b) the death or adjudication of incompetency of Mr.
Wygod or (c) a Change of Control (as defined in the Investment Agreement) (the
"Restriction Period"), in respect of the Wygod Investment, except to the
extent of proceeds from sales of the Wygod Shares pursuant to a tender or
exchange offer for shares of Common Stock that is not opposed by the Board of
Directors of the Company, the Wygod Entities will at all times maintain
(directly and/or through SN Investors) at least $20,000,000 (on a cost basis)
in the Wygod Investment and will not cause or allow the amount of the Wygod
Investment (on a cost basis) to be less than $20,000,000 (net of any
disposition, transfer, pledge, distribution by SN Investors or any other
arrangement involving the transfer of ownership or interests in Wygod Shares
(or proceeds therefrom), but not taking into account any reduction in the
Wygod Investment by virtue of a decline in the value of Wygod Shares).
A "Change of Control" under the Investment Agreement means: (a) the
acquisition by any person, entity or group of at least 50% of the voting power
of the voting securities of the Company other than the Wygod Shares; (b)
individuals who, as of the date of the Investment Agreement, constitute the
Board of Directors of the Company (the "Incumbent Board") ceasing for any
reason to constitute at least a majority of the Board of Directors (provided
that directors whose nomination or election was approved by the Incumbent
Board are also generally deemed to be part of the Incumbent Board); (c) a
reorganization, merger or consolidation or sale or other disposition of all or
substantially all of the assets of the Company (a "Business Combination"),
excluding, however, such a Business Combination pursuant to which (i) all or
substantially all of the individuals and entities who were the beneficial
owners of the Company's voting securities immediately prior to such Business
Combination beneficially own more than 60% of, respectively, the then-
outstanding shares of common stock and the combined voting power of the then-
outstanding securities entitled to vote generally in the election of directors
of the corporation resulting from such Business Combination, in substantially
the same proportions as their ownership immediately prior to such Business
Combination of the Company's voting securities, and (ii) at least a majority
of the board of directors of the resulting corporation were members of the
Incumbent Board at the time of the execution of the initial agreement or of
the action of the Board of Directors providing for such Business Combination;
(d) a complete liquidation or dissolution of the Company; or (e) the issuance
by the Company following the closing of the Purchase of shares of Common Stock
constituting in the aggregate more than 50% of the shares of Common Stock
outstanding as of immediately following the closing of the Purchase. As of
September 15, 1997, the Company had issued 5,141,256 shares of Common Stock
since the closing of the Purchase. Accordingly, the issuance of an aggregate
of 1,113,599 additional shares of Common Stock would be a "Change of Control"
as defined in clause (e) above.
Pursuant to the Investment Agreement, during the Restriction Period: (a)
Mr. Wygod and SN Investors are required to vote (or cause to be voted) the
Wygod Shares (i) with respect to election of directors, for the nominees who
would have been elected based on the vote of all shares of Common Stock, other
than the Wygod Shares, in proportion to the votes that such nominees received,
and (ii) on all other matters to come before the stockholders of the Company,
in the same manner as a majority of the outstanding shares of Common Stock
(other than the Wygod Shares) are voted; and (b) except for sales pursuant to
a tender or exchange offer for the shares of Common Stock that is not opposed
by the Board of Directors of the Company, neither Mr. Wygod nor SN Investors
may transfer interests in the Wygod Shares (except that Mr. Wygod may transfer
interests in SN Investors to the extent otherwise permitted by the Investment
Agreement). Upon the expiration of the obligations of Mr. Wygod and SN
Investors described in this paragraph, Mr. Wygod and SN Investors may be in a
position to influence the election of the Company's Board of Directors as well
as the direction and future operations of the Company.
Under the Investment Agreement, following the earlier to occur of (a)
December 14, 1998 or (b) the death or adjudication of incompetency of Mr.
Wygod: (i) to the extent the Wygod Entities and/or SN Investors retain the
power to vote Wygod Shares that have, in the aggregate, in excess of 20% of
the voting power of the Company's voting securities outstanding at the time of
any vote by stockholders of the Company, Mr. Wygod and SN Investors will vote
(or cause to be voted) the portion of such Wygod Shares representing the
excess above 20% of such voting power, (A) with respect to the election of
directors, for the nominees who would have been elected
18
<PAGE>
based on the vote of all shares of Common Stock, other than the Wygod Shares,
in proportion to the votes that such nominees received, and (B) on all other
matters to come before the stockholders of the Company, in the same manner as
a majority of the outstanding shares of Common Stock, other than the Wygod
Shares, are voted; and (ii) to the extent that Wygod Entities and/or SN
Investors retain beneficial ownership of Wygod Shares that have, in the
aggregate, in excess of 20% of the voting power of the outstanding voting
securities of the Company, the portion of such Wygod Shares representing the
excess above 20% of such voting power at the time of any proposed sale or
transfer thereof shall not be sold or transferred except (A) to transferees
reasonably acceptable to the Company (provided that, without the Company's
consent, no such transfer or series of transfers to a single person, entity or
group will involve the transfer of more than 9.9% of the voting power of the
Company's outstanding voting securities and no such transfer or series of
transfers will be made to a single person, entity or group that will own,
following such transfers, more than 50% of the voting power of the Company's
outstanding voting securities), (B) to the partners of SN Investors in
proportion to their respective interests in SN Investors (provided that,
without the Company's consent, no such transfer or series of transfers to a
single person, entity or group (other than Mr. Wygod or the Wygod Entities)
will involve the transfer of more than 9.9% of the voting power of the
Company's outstanding voting securities), (C) in ordinary open market
transactions, or (D) pursuant to an underwritten public offering.
The Investment Agreement provides that the restrictions described in the
foregoing paragraph will not apply (a) in the event there has been, or from
and after the occurrence of, a Change of Control (as defined in the Investment
Agreement) of the Company, (b) at any time after December 14, 2004 or (c) to
any person or entity, other than Mr. Wygod, the Wygod Entities or SN
Investors, to whom Wygod Shares are transferred (including by means of
distributions from SN Investors) in accordance with the provisions of the
foregoing paragraph.
The Investment Agreement also provides certain demand registration rights
to Mr. Wygod at Mr. Wygod's expense that are assignable to any permitted
transferee of the Wygod Shares; provided that, in no event is the Company
required to file in the aggregate more than two registration statements in
connection therewith. Mr. Wygod has not assigned such registration rights to
SN Investors. While Mr. Wygod currently intends to assign such registration
rights to SN Investors in the event the General Partner determines to sell or
otherwise transfer the Wygod Shares under circumstances in which registration
would be required, Mr. Wygod is under no obligation to do so.
Certain provisions of the Investment Agreement may have the effect of
deterring a change of control of the Company that is not supported by the
Board of Directors of the Company or Mr. Wygod. During the Restriction
Period, Mr. Wygod and SN Investors are prohibited from transferring the Wygod
Shares, except pursuant to a tender or exchange offer that is not opposed by
the Board of Directors of the Company or to specified permitted transferees.
In addition, under the Investment Agreement, in the event that a Change of
Control (as defined in the Investment Agreement) were to occur during the
Restriction Period, Mr. Wygod and SN Investors would no longer be obligated
under the Investment Agreement to vote the Wygod Shares with respect to
nominees for election as directors based on the vote of shares other than the
Wygod Shares and with respect to other matters in the same manner as the
majority of the other outstanding shares of Common Stock (other than the Wygod
Shares) are voted, with the result that Mr. Wygod and SN Investors would have
unrestricted voting power with respect to the Wygod Shares. The effect of
these provisions of the Investment Agreement may be to discourage the
commencement of a tender or exchange offer opposed by the Board of Directors
of the Company during the Restriction Period and to discourage a proxy
solicitation to change a majority of the Board of Directors of the Company
absent the support of Mr. Wygod.
CONSULTING AGREEMENT. In the Consulting Agreement, dated as of May 24,
1994 (the "Consulting Agreement"), by and among Mr. Wygod, Merck and Medco,
Mr. Wygod has agreed that, until May 24, 1999, absent Merck's prior written
approval, he will not (as principal, agent, employee, consultant or otherwise)
directly or indirectly engage in activities with, nor render services to, any
business engaged or about to become engaged in a Competitive Business (as
defined in the Consulting Agreement). A "Competitive Business" is defined in
the Consulting Agreement as: (a) the pharmaceutical business of Merck and its
affiliates (unless such business is subsequently disposed of and Mr. Wygod did
not have material involvement in such business during the two-year period
preceding May 24, 1994), (b) the business, as of either November 18, 1993 or
May 24, 1994, of Medco
19
<PAGE>
and its subsidiaries (unless such business is subsequently disposed of and Mr.
Wygod did not have material involvement in such business during the two-year
period preceding May 24, 1994), other than the business of Porex and the other
plastic businesses of the Company as conducted as of May 24, 1994, or (c) any
other then-current business of Merck and its affiliates as to which Mr. Wygod
became materially involved following November 18, 1993; provided, however,
that the Consulting Agreement permits Mr. Wygod to have a 1% or less equity
interest in a Competitive Business that is a public corporation. In addition,
the Consulting Agreement provides that, until May 24, 1999, Mr. Wygod will
not, directly or indirectly: (i) solicit or contact any customer or
prospective customer of Medco and/or any of its affiliates as to matters that
relate to a Competitive Business in which Medco or its affiliates is then
engaged or which is in any way inconsistent or interferes therewith; (ii)
induce, or attempt to induce, any employees or agents or consultants of Medco
and/or its affiliates to do anything from which Mr. Wygod is restricted by
reason of the Consulting Agreement; or (iii) offer or aid others to offer
employment to any employees of Medco or its affiliates.
OTHER. The Company was reimbursed approximately $121,600 and $49,500 by a
corporation controlled by Mr. Wygod for the partial use of two of the
Company's office facilities and for services rendered by one Company employee
during the fiscal years ended June 30, 1997 and 1996, respectively.
20
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.
(a)(1)-(2) Financial Statements and Schedules:
The financial statements and schedules listed in the
accompanying Index to Consolidated Financial Statements and
Supplemental Data at page F-l are filed as part of this
Report.
(a)(3) Index to Exhibits:
See Index to Exhibits on page E-1.
(b) Reports on Form 8-K:
None.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: October 1, 1997 By: /s/ Charles A. Mele
------------------------------------
Name: Charles A. Mele
Title: Vice President-General Counsel
22
<PAGE>
SYNETIC, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTAL DATA
The following financial statements of the Registrant and its subsidiaries
required to be included in Item 14.(a) (1) of Form 10-K are listed below:
PAGE
----
Report of Independent Public Accountants............... F-2
Consolidated Balance Sheets at June 30, 1997 and 1996.. F-3
Consolidated Statements of Income for the
Years Ended June 30, 1997, 1996 and 1995............. F-5
Consolidated Statements of Changes in
Stockholders' Equity for the Years Ended
June 30, 1997, 1996 and 1995......................... F-6
Consolidated Statements of Cash Flows for the
Years Ended June 30, 1997, 1996 and 1995............. F-7
Notes to Consolidated Financial Statements............. F-8
The following financial statement supplementary data of the Registrant and
its subsidiaries required to be included in Item 14.(a) (2) of Form 10-K are
listed below:
PAGE
----
Schedule II - Valuation and Qualifying
Accounts............................................. S-1
All other schedules not listed above have been omitted as not applicable or
because the required information is included in the Consolidated Financial
Statements or in the notes thereto. Columns omitted from schedules filed have
been omitted because the information is not applicable.
These financial statements have been prepared from the Company's books and
records after making all necessary adjustments thereto, and they represent the
final statements for the period under audit.
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO SYNETIC, INC.:
We have audited the accompanying consolidated balance sheets of Synetic,
Inc. (a Delaware corporation) and subsidiaries as of June 30, 1997 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 June 30, 1997.
These consolidated financial statements and the schedule referred to below are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Synetic, Inc. and
subsidiaries as of June 30, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1997 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements and supplemental data is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in our audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
September 24, 1997
F-2
<PAGE>
SYNETIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1997 1996
-------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 77,303 $ 22,210
Marketable securities.............................. 11,765 140,268
Accounts receivable, net of allowances for
doubtful accounts and sales returns of $739 and
$671 at June 30, 1997 and 1996, respectively..... 9,094 7,299
Inventories........................................ 5,505 5,253
Other current assets............................... 9,233 4,821
-------- --------
Total current assets............................. 112,900 179,851
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land and improvements.............................. 1,613 823
Buildings and improvements......................... 9,911 8,992
Machinery and equipment............................ 23,444 19,295
Furniture and fixtures............................. 3,283 2,856
Construction in progress........................... 2,516 1,306
-------- --------
40,767 33,272
Less: Accumulated depreciation.................... (18,681) (16,014)
-------- --------
Property, plant and equipment, net............... 22,086 17,258
-------- --------
OTHER ASSETS:
Marketable securities.............................. 226,760 -
Other.............................................. 20,357 2,483
-------- --------
Total other assets.............................. 247,117 2,483
-------- --------
$382,103 $199,592
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
SYNETIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1997 1996
-------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable........................................... $ 2,344 $ 1,303
Accrued liabilities........................................ 14,203 7,014
Income taxes payable....................................... 3,044 5,206
-------- --------
Total current liabilities................................ 19,591 13,523
-------- --------
LONG TERM DEBT, LESS CURRENT PORTION............................ 165,000 -
OTHER LIABILITIES............................................... 8,776 4,980
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; none issued.................................. - -
Common stock, $.01 par value; 50,000,000 shares
authorized; 22,865,149 and 22,007,290 shares issued;
17,564,980 and 16,738,827 shares issued and outstanding
at June 30, 1997 and 1996, respectively.................. 229 220
Paid-in capital............................................ 196,212 158,227
Treasury stock, at cost; 5,300,169 and 5,268,463
at June 30, 1997 and 1996, respectively.................. (39,462) (36,575)
Retained earnings.......................................... 31,757 59,217
-------- --------
Total stockholders' equity............................... 188,736 181,089
-------- --------
$382,103 $199,592
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
SYNETIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Net sales....................................... $ 52,885 $45,128 $39,179
-------- ------- -------
Costs and expenses:
Cost of sales................................. 29,035 25,108 23,006
Selling, general and administrative........... 20,841 14,930 12,125
Interest and other income..................... (11,065) (3,952) (4,757)
Dividend income............................... (1,829) (4,160) (2,555)
Interest expense.............................. 3,116 - 3,619
Purchased research and development and other.. 37,413 - -
Purchase and Sale Agreement related expenses
and other.................................. - - 6,663
-------- ------- -------
77,511 31,926 38,101
-------- ------- -------
Income (loss) from continuing operations
before provision for income taxes............. (24,626) 13,202 1,078
Provision for income taxes...................... 2,834 4,617 443
-------- ------- -------
Income (loss) from continuing operations........ $(27,460) $ 8,585 $ 635
-------- ------- -------
Discontinued operations:
Income from discontinued operations,
net of provision for income taxes
of $842....................................... - - 963
Gain on sale of Institutional Pharmacy
operations, net of taxes of $23,037........... - - 14,496
-------- ------- -------
Net income (loss)............................... $(27,460) $ 8,585 $16,094
======== ======= =======
Net income (loss) per share:
Continuing operations......................... $(1.60) $.48 $ .04
Discontinued operations....................... - - .89
-------- ------- -------
Net income (loss) per share..................... $(1.60) $.48 $ .93
-------- ======= =======
Weighted average shares outstanding............. 17,133 18,026 17,379
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
SYNETIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Stock
--------------------
Number TOTAL
of PAID-IN RETAINED TREASURY STOCKHOLDERS'
Shares AMOUNT CAPITAL EARNINGS STOCK EQUITY
------------ ------ -------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1994........................... 17,621 $176 $ 70,416 $ 34,538 - $105,130
------ ---- -------- -------- -------- --------
Net income..................................... - - - 16,094 - 16,094
Issuance of common stock for exercise of
stock options and 401(k) plan................ 368 4 5,200 - - 5,204
Issuance of common stock for
conversion of debentures..................... 3,877 39 76,940 - - 76,979
Purchase of 5,268,463 shares
of common stock for Treasury................. - - - - (36,575) (36,575)
------ ---- -------- -------- -------- --------
Balance, June 30, 1995........................... 21,866 $219 $152,556 $ 50,632 $(36,575) $166,832
------ ---- -------- -------- -------- --------
Net income..................................... - - - 8,585 - 8,585
Issuance of common stock for exercise of
stock options and 401(k) plan................ 141 1 5,671 - - 5,672
------ ---- -------- -------- -------- --------
Balance, June 30, 1996........................... 22,007 $220 $158,227 $ 59,217 $(36,575) $181,089
------ ---- -------- -------- -------- --------
Net (loss)..................................... - - - (27,460) - (27,460)
Issuance of common stock for exercise of
stock options and 401(k) plan................ 323 3 13,503 - - 13,506
Issuance of common stock and warrants for
acquisitions of Avicenna and CareAgents...... 535 6 24,482 - - 24,488
Adjustment to purchase price of Treasury
stock........................................ - - - - (1,712) (1,712)
Purchase of 49,506 shares of common stock
for Treasury, net of 17,800 shares reissued.. - - - - (1,175) (1,175)
------ ---- -------- -------- -------- --------
Balance, June 30, 1997........................... 22,865 $229 $196,212 $ 31,757 $(39,462) $188,736
====== ==== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
SYNETIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ (27,460) $ 8,585 $ 16,094
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Write-off of purchased research and development costs.. 37,413 - -
Income from discontinued operations.................... - - (963)
Gain on sale of Institutional Pharmacy
business............................................... - - (14,496)
Other expense.......................................... - - 1,056
Depreciation and amortization.......................... 3,294 2,619 1,545
Deferred income taxes.................................. (2,100) (254) (301)
Changes in operating assets and liabilities,
net of the effects of acquisitions:
Accounts receivable, net............................. (795) (634) (1,056)
Inventories.......................................... 147 193 804
Other assets......................................... (7,184) (173) (3,365)
Accounts payable..................................... 776 655 (423)
Accrued liabilities.................................. 1,690 (2,323) 1,206
Other liabilities.................................... 48 - 4,980
Income taxes payable................................. 3,188 2,625 946
--------- --------- ---------
Net cash provided by
operating activities............................ 9,017 11,293 6,027
--------- --------- ---------
Cash flows from investing activities:
Sales of marketable securities......................... 396,638 708,685 383,064
Purchases of marketable securities..................... (494,895) (704,099) (430,916)
Capital expenditures................................... (6,063) (2,790) (3,398)
Net proceeds from sale of Institutional
Pharmacy business.................................... - - 82,911
Net cash paid for acquired businesses.................. (10,612) - -
--------- --------- ---------
Net cash provided by (used for)
investing activities............................ (114,932) 1,796 31,661
--------- --------- ---------
Cash flows from financing activities:
Purchases of Treasury stock............................ (3,570) - (36,575)
Proceeds from issuance of stock options and
401(k) purchases..................................... 3,688 1,838 4,369
Proceeds from issuance of Convertible Debentures,
net of underwriting discount......................... 160,890 - -
Payments on long-term debt............................. - (216) (3,532)
--------- --------- ---------
Net cash provided by (used for)
financing activities............................ 161,008 1,622 (35,738)
--------- --------- ---------
Net increase in cash and cash equivalents................. 55,093 14,711 1,950
Cash and cash equivalents, beginning of
period................................................. 22,210 7,499 5,549
--------- --------- ---------
Cash and cash equivalents, end of period.................. $ 77,303 $ 22,210 $ 7,499
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
SYNETIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
On November 18, 1993, Medco Containment Services, Inc. ("Medco") became a
wholly-owned subsidiary of Merck & Co., Inc. ("Merck"). As a result of this
transaction, Merck acquired voting control of Synetic, Inc. (the "Company").
On May 24, 1994, Merck and the Company entered into a Purchase and Sale
Agreement (the "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 the transactions
described above pursuant to which (1) the Company sold its Institutional
Pharmacy business to Pharmacy Corporation of America ("PCA") for $107.3 million,
subject to certain closing adjustments, 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, included in
Purchase and Sale Agreement related expenses and other in the accompanying
financial statements for the fiscal year ended June 30, 1995, the Company
recorded a non-recurring charge of approximately $5 million relating to such
stock options in conjunction with the consummation of these transactions.
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 and CareAgents, after elimination of all
material intercompany accounts and transactions. On December 14, 1994, the
Company sold its Institutional Pharmacy business to Pharmacy Corporation of
America, a wholly-owned subsidiary of Beverly Enterprises, Inc., for
approximately $107.3 million in cash, subject to certain closing adjustments.
As a result of this transaction, the Company recorded an after-tax gain of
$14,496,000. The consolidated financial statements for the fiscal year ended
June 30, 1995 report separately as discontinued operations the net assets and
operating results of the Institutional Pharmacy business.
For the year ended June 30, 1997, the operations of the Company were primarily
related to its plastics technology business. All revenues and a significant
majority of operating expenses were derived from these operations. The
consolidated financial statements for the fiscal year ended June 30, 1997
include certain costs associated with the Company's efforts in developing its
healthcare communications business.
Cash and Cash Equivalents--
The Company considers all liquid investment instruments with an original
maturity of three months or less to be the equivalent of cash for purposes of
balance sheet presentation and for the consolidated statements of cash flows.
These short-term investments are stated at cost, which approximates market.
Marketable Securities--
Marketable securities consisted primarily of U.S. Treasury Notes and
Federal Agency Notes at June 30, 1997 and U.S. Treasury Notes, Federal Agency
Notes and Money Market Preferred Stock investments at June 30, 1996. These
investments, which are carried at a cost of $238,525,000 and $140,268,000, net
of unamortized premium, at June 30, 1997 and June 30, 1996, respectively, had an
aggregate market value of $238,151,000 and $140,537,000 at June 30, 1997 and
1996, respectively. At June 30, 1997, gross unrealized losses pertaining to
marketable securities and other investments were $374,000. Gains and losses on
the sale of marketable securities and other investments are calculated using the
specific identification method.
F-8
<PAGE>
SYNETIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Investments in Debt and Equity Securities--
Effective July 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No. 115"). This Statement addresses the accounting and
reporting for investments in equity securities that have readily determinable
fair values and for all investments in debt securities. At June 30, 1997, the
Company's investments consisted principally of U.S. Treasury Notes and Federal
Agency Notes. The U.S. Treasury Notes and Federal Agency Notes maturing January
2002 through March 2002 are classified as held-to-maturity and are carried at
cost, net of unamortized premium.
Inventories--
Inventories are stated at the lower of (first-in, first-out) cost or
market. Cost includes raw materials, direct labor, and manufacturing overhead.
Market is based on current replacement cost for raw materials and supplies and
on net realizable value for work-in-process and finished goods. Inventories
consisted of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------
1997 1996
------ ------
<S> <C> <C>
Raw materials and supplies.. $2,672 $2,468
Work-in-process............. 347 548
Finished goods.............. 2.486 2,237
------ ------
$5,505 $5,253
====== ======
</TABLE>
Property, Plant and Equipment--
Property, plant and equipment are stated at cost. For financial reporting
purposes, depreciation is provided principally on the straight-line method over
the estimated useful lives of the assets. Annual depreciation rates range from
2% to 5% for buildings and improvements and from 9% to 33% for machinery and
equipment and furniture and fixtures. For income tax purposes, certain assets
are depreciated using accelerated methods. Expenditures for maintenance, repair
and renewals of minor items are charged to operations as incurred. Major
betterments are capitalized.
Development Costs--
The Company capitalizes costs incurred for the production of computer
software used in the sale of its services. Costs capitalized include direct
labor and related overhead for software produced by the Company and the costs of
software purchased from third parties. All costs in the software development
process which are classified as research and development are expensed as
incurred until technological feasibility has been established. Once
technological feasibility has been established, such costs are capitalized until
the software is commercially available. Such costs are recorded at the lower of
unamortized cost or net realizable value. For the year ended June 30, 1997,
capitalized costs were not material and no costs were capitalized in previous
years.
Company-sponsored development costs related to both present and future
products are expensed currently. Total development expenses were $6,419,000,
$2,014,000, and $1,490,000 for the years ended June 30, 1997, 1996 and 1995,
respectively, of which $4,628,000 in 1997 related to the healthcare
communications business.
F-9
<PAGE>
SYNETIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Accrued Liabilities--
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------
1997 1996
------- ------
<S> <C> <C>
Accrued payroll and benefit costs.. $ 4,633 $3,568
Accrued interest................... 2,957 -
Accrued acquisition costs.......... 3,236 -
Accrued legal costs................ 1,575 1,890
Other.............................. 1,802 1,556
------- ------
Total.......................... $14,203 $7,014
======= ======
</TABLE>
Income Taxes--
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS No. 109"),
which uses the liability method to calculate deferred income taxes. The
realization of deferred tax assets is based on historical tax positions and
expectations about future taxable income.
Foreign Currency Translation--
The financial statements and transactions of Porex's foreign manufacturing
facilities are maintained in their functional currency (Deutsche mark and Pound
sterling) and translated into U.S. dollars. The adjustments which result from
the process of translating these financial statements are not material and,
therefore, are not separately disclosed in the accompanying consolidated
financial statements.
Revenue Recognition--
The Company designs, manufactures and distributes porous and solid plastic
components and products used in healthcare, industrial and consumer
applications. Revenue is recognized upon product shipment, net of sales returns
and allowances.
Net Income (Loss) Per Share--
Net income (loss) per share is determined by dividing net income (loss) by
the weighted average number of shares of common stock outstanding during the
fiscal year 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
Debentures, if converted, would not have had a dilutive effect on net income per
share for the periods presented.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No.
128"). The new standard simplifies the computation of net income per share and
increases comparability to international standards. Under SFAS No. 128, primary
net income per share is computed by dividing net income by the weighted-average
number of common shares outstanding for the period. Diluted net income per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
F-10
<PAGE>
SYNETIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The Company is required to adopt the new standard during fiscal 1998,
beginning with the December 31, 1997 interim consolidated financial statements.
All prior periods presented are required to be restated at that time. The
pronouncement is not expected to have a material impact on the Company's
reported earnings per share.
Reclassifications--
Certain reclassifications have been made to prior year amounts to conform
to the current year presentation.
Accounting for Stock-Based Compensation--
Effective July 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"). As permitted by the standard, the Company has elected to continue
following the guidance of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"), for measurement and
recognition of stock-based transactions with employees. The Company discloses
on a pro-forma basis both net income and earnings per share as if the fair value
based accounting method were used and the difference between compensation cost
recognized by APB No. 25 and the fair value method of SFAS No. 123. (See Note
9)
Use of Estimates--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount 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.
(2) ACQUISITIONS:
Avicenna --
On December 24, 1996, the Company acquired the outstanding equity and
indebtedness (including employee stock options) of Avicenna, a privately-held,
developmental-stage company located in Cambridge, Massachusetts, for 428,643
shares of the Company's common stock and 161,015 shares of the Company's common
stock to be issued in connection with the exercise of employee stock options.
The shares issued are subject to certain limitations restricting the liquidity
and transferability of such shares. The shares were valued, based on an
independent appraisal, at approximately $47.37 per share. As additional
consideration, the Company agreed to issue to certain sellers, nontransferable
warrants covering 250,000 shares of the Company's common stock, exercisable
after December 23, 1998 at a price of $54.50 per share. Avicenna's business plan
has been to market and build Intranets for managed care organizations, hospitals
and physician groups. The acquisition was accounted for using the purchase
method with the purchase price being allocated to assets acquired and
liabilities assumed based on their appraised fair values. Avicenna's results of
operations have been included in the Company's financial statements since
December 24, 1996.
A summary of the purchase price allocation is as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Cash $ 42
Short-term investments 240
Other assets 216
Property, plant and equipment 759
Purchased research and development 28,600
Intangible assets 1,502
Goodwill 116
-------
$31,475
=======
</TABLE>
F-11
<PAGE>
SYNETIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) ACQUISITIONS: (CONTINUED)
The amount allocated to purchased research and development of $28,600,000
was determined based on an independent appraisal using established valuation
techniques. Remaining amounts have been allocated to intangible assets and
goodwill.
CareAgents--
On January 23, 1997, the Company acquired CareAgents for 106,029 shares of
the Company's common stock. The shares issued are subject to certain limitations
restricting the liquidity and transferability of such shares. The shares were
valued, based on an independent appraisal, at approximately $30.65 per share.
CareAgents was an early development stage company focused on Internet-based
clinical commerce applications. The acquisition was accounted for using the
purchase method with the purchase price being allocated entirely to purchased
research and development. CareAgents' results of operations have been included
in the Company's financial statements since January 23, 1997. The amount
allocated to purchased research and development of $3,585,000 was determined
based on an independent appraisal using established valuation techniques.
The following summary, prepared on a pro forma basis, combines the results
of operations of the Company, Avicenna and CareAgents assuming the acquisitions
were consummated at the beginning of the period presented (in thousands, except
per share amount):
Year ended
June 30, 1997
-------------
(unaudited)
Sales $ 52,885
Net loss $(29,381)
Net loss per share $ (1.69)
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisitions had been in effect for the entire period
presented. In addition, they are not intended to be a projection of future
results. The pro forma impact of the Avicenna and CareAgents acquisitions for
the year ended June 30, 1996 was not material.
Purchased Research and Development and Other--
The appraisal amounts allocated to purchased research and development of
approximately $28,600,000 and $3,585,000 related to Avicenna and CareAgents,
respectively, were expensed in the periods of acquisition, with no corresponding
tax benefits, as such research and development was in process at the time of the
acquisitions and had no alternative commercial use. In addition, in June 1997,
the Company charged to expense research and development costs of $5,228,000
associated with the acquisition of rights to certain intellectual property and
software technologies to be utilized in the development of the Company's
healthcare communications business.
(3) Stockholders' Equity:
In April 1997, the Company announced that its Board of Directors authorized
a repurchase program involving the purchase of the Company's common stock and
outstanding convertible debentures not to exceed $15 million in the aggregate.
For the year ended June 30, 1997, the Company repurchased 49,506 shares at a
cost of approximately $1,858,000 and the Company reissued 17,800 of these shares
for employee stock option exercises. As of June 30, 1997, 31,706 of the shares
repurchased were included in Treasury stock.
In January 1997, the Company issued 106,029 shares for the acquisition of
CareAgents and, in December 1996, the Company issued 428,643 shares for the
acquisition of Avicenna.
In February 1995, the Company issued 3,877,607 shares of its common stock
resulting from the conversion of $79,104,000 aggregate principle amount of its
7% Convertible Subordinated Debentures due December 1, 2001 (the "1991
Debentures"). (See Note 4.)
F-12
<PAGE>
SYNETIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) LONG-TERM DEBT:
In February 1997, the Company issued to the public $165,000,000 aggregate
principal amount of its 5% Convertible Subordinated Debentures due 2007 (the
"Convertible Debentures"). The Convertible Debentures are convertible at any
time prior to maturity, unless previously redeemed into shares of the Company's
common stock, at a conversion price of $60.00 per share, subject to adjustment
under certain circumstances. In connection with the issuance of the Convertible
Debentures, the Company recorded debt issuance costs of approximately $5.1
million which are included in other assets in the consolidated financial
statements. Such costs are being amortized to interest expense using the
effective interest method over the life of the Convertible Debentures.
In December 1991, the Company issued to the public $80,500,000 aggregate
principal amount of its 1991 Debentures. The 1991 Debentures were convertible at
any time prior to maturity, unless previously redeemed, into shares of the
Company's common stock at a conversion price of $20.40 per share, subject to
adjustment under certain circumstances. On January 27, 1995, the Company called
for redemption on February 13, 1995 the 1991 Debentures. Holders of $79,104,000
aggregate principal amount of the 1991 Debentures surrendered them for
conversion into an aggregate of 3,877,607 shares of common stock. The remaining
$1,396,000 of the outstanding 1991 Debentures were redeemed at the redemption
price of 104% plus accrued interest. Included in Purchase and Sale Agreement
related expenses and other in the accompanying financial statements for the year
ended June 30, 1995 are approximately $1.1 million of costs associated with the
call for redemption.
(5) INCOME TAXES:
The income tax provisions are summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------
1997 1996 1995
-------- ------- --------
<S> <C> <C> <C>
Current:
Federal.......................... $ 4,427 $4,060 $ 2,594
State............................ 507 811 491
------- ------ -------
Total current................. 4,934 4,871 3,085
------- ------ -------
Deferred:
Federal.......................... (2,057) (194) (2,070)
State............................ (43) (60) (572)
------- ------ -------
Total deferred................ (2,100) (254) (2,642)
------- ------ -------
Total income tax provision.. $ 2,834 $4,617 $ 443
======= ====== =======
</TABLE>
A reconciliation of the income tax provision, computed by applying the
federal statutory rate to income before taxes, and the actual provision for
income taxes is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------
1997 1996 1995
---------- --------- --------
<S> <C> <C> <C>
Federal statutory rate.............................................................. (35.0)% 35.0% 35.0%
State tax, net of federal benefit................................................... 2.1 3.7 (4.8)
Dividend exclusion.................................................................. (2.0) (7.7) (52.3)
Non-deductible research and development............................................. 45.1 - -
Non-deductible conversion costs..................................................... - - 67.6
Other, net.......................................................................... 1.4 4.0 (4.4)
--------- --------- --------
11.6% 35.0% 41.1%
========= ========= ========
</TABLE>
F-13
<PAGE>
SYNETIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) Income Taxes: (continued)
Temporary differences resulted in the following deferred tax expense
(benefit) (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Book/tax differences in accounting method
for assets acquired................................. $ (10) $ (69) $ 15
Accrued expenses..................................... (716) (140) (643)
Deferred compensation - stock options................ - - (2,038)
Difference between tax and book depreciation and
amortization........................................ (1,414) (45) 38
Other, net........................................... 40 - (14)
------- ----- -------
$(2,100) $(254) $(2,642)
======= ===== =======
</TABLE>
Deferred tax liabilities (assets) at June 30, 1997, are comprised of the
following (in thousands):
<TABLE>
<S> <C>
Tax over book depreciation and amortization......... $ (767)
Intangible assets amortization...................... 64
Accrued expenses.................................... (2,417)
Deferred compensation - stock options............... (1,693)
Inventory........................................... (347)
Prepaids and other.................................. (62)
---------
$ (5,222)
=========
</TABLE>
In accordance with the disclosure provisions of SFAS No. 109, the Company
has included approximately $2,888,000 and $2,334,000 of deferred tax assets in
other current assets and other assets, respectively, representing the effects of
temporary differences between carrying amounts of assets and liabilities for
financial reporting purposes and the carrying amounts for income tax purposes.
(6) Major Customers and Foreign and Export Product Sales:
For the years ended June 30, 1997, 1996 and 1995, no customer accounted for
more than 10% of the Company's net sales.
Foreign product sales and net income of Porex's foreign manufacturing
facilities, which are made principally in Europe, amounted to $7,854,000 and
$1,247,000; $6,665,000 and $975,000; and $5,381,000 and $397,000 for the fiscal
years ended June 30, 1997, 1996 and 1995, respectively. Identifiable assets of
this facility were not material for the years presented. Export product sales
of Porex, which are made principally to Europe and Asia, were $6,213,000,
$5,605,000 and $5,022,000 for the fiscal years ended June 30, 1997, 1996 and
1995, respectively.
(7) Pension and Profit Sharing Plans:
The Company has defined benefit pension plans covering substantially all of
its employees. Net pension cost for the years ended June 30, 1997, 1996 and
1995 included the following components (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------ ------
<S> <C> <C> <C>
Service cost.................. $ 277 $ 269 $ 240
Interest cost................. 338 310 273
Actual return on plan assets.. (1,377) (789) (427)
Net amortization.............. 923 447 127
------- ----- -----
Net pension cost............ $ 161 $ 237 $ 213
======= ===== =====
</TABLE>
F-14
<PAGE>
SYNETIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) PENSION AND PROFIT SHARING PLANS: (CONTINUED)
The following table sets forth the funded status of the plans and
amounts recognized in the Company's consolidated balance sheets (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------
1997 1996
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefit obligation..................... $(3,311) $(2,944)
Nonvested benefit obligation.................. (67) (55)
------- -------
Accumulated benefit obligation................ (3,378) (2,999)
Effect of future salary increases............. (1,600) (1,548)
------- -------
Projected benefit obligation.................... (4,978) (4,547)
Plan assets at fair value....................... 6,703 5,105
------- -------
Funded status................................... 1,725 558
Unrecognized net gain........................... (1,848) (792)
Unrecognized net asset.......................... (194) (216)
Unrecognized prior service cost................. 56 61
------- -------
Consolidated balance sheets................... $ (261) $ (389)
======= =======
</TABLE>
The Company funds the plans through annual contributions representing no less
than the minimum amounts required as computed by actuaries to be consistent with
the plans' objectives and government regulations. The net pension liability is
included in accrued liabilities.
Assumptions used in the accounting for the Company's defined benefit plans as
of June 30, 1997 and 1996 were:
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
Discount rate................................ 7.5% 7.5%
Rate of increase in compensation levels...... 0%-5% 0%-5%
Expected long-term rate of return on assets.. 8.0% 8.0%
</TABLE>
Plan assets consist primarily of debt and equity investments.
In addition to the defined benefit pension plans discussed above, the
Company maintains a defined contribution profit sharing plan covering
substantially all of its employees. Participants must be at least 21 years of
age and have completed one year of service and may contribute up to $9,500 of
their earnings annually. Effective February 1, 1997 the Company matches 50% of
the first 2% and 25% of the second 4% of participants earnings which are
contributed to the plan. From July 1, 1996 through January 31, 1997 and for the
fiscal years ending June 30, 1996 and June 30, 1995 the Company matched 25% of
the first 4% of participants earnings which were contributed to the plan. For
the year ended June 30, 1997, the Company issued 3,341 shares of common stock to
the plan. For the years ended June 30, 1997, 1996 and 1995, Company
contributions were approximately $132,500, $81,000 and $59,100, respectively.
(8) Related Party Transactions:
Tax-sharing agreement--
The Company and Medco had a tax-sharing agreement which provided, among
other things, for the allocation of federal income taxes on a separate company
basis prior to July 6, 1989 and other related matters with respect to income
taxes of the Company.
F-15
<PAGE>
SYNETIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) RELATED PARTY TRANSACTIONS: (CONTINUED)
Services agreement--
Through December 14, 1994, the Company and Medco had a services agreement
pursuant to which Medco provided the Company with various services of its
management. The Company paid the actual costs of providing these services.
Where actual costs were not available, the Company paid amounts based on
mutually agreed upon allocation methods. Costs for such services were
approximately $337,000 for the year ended June 30, 1995. No costs were incurred
under this agreement for the years ended June 30, 1997 and June 30, 1996.
(9) STOCK OPTIONS:
In May 1989, the Company adopted two stock option plans, the 1989 Class A
Stock Option Plan (the "Class A Plan") and the 1989 Class B Stock Option Plan
(the "Class B Plan"). In September 1991, the Company adopted the 1991 Special
Non-qualified Stock Option Plan (the "1991 Special Plan") and in December 1991,
the Company adopted the 1991 Director Stock Option Plan (the "Director Plan").
In fiscal 1997, the Company adopted two stock option plans, the 1996 Class C
Stock Option Plan (the "Class C Plan") and the 1997 Class D Stock Option Plan
(the "Class D Plan"), and upon its acquisition of Avicenna, amended and assumed
the Avicenna Systems Corp. 1995 Stock Plan (the "Avicenna Plan"), and converted
options to purchase Avicenna shares into options to purchase the Company's
shares. Non-Qualified stock options are granted under the Class A Plan, Class C
Plan, Class D Plan, the 1991 Special Plan and the Director Plan. Options granted
under the Class B Plan may be either incentive stock options or non-qualified
stock options. Eligibility for the grant of options under the Class A Plan and
the Director Plan are limited to certain of the Company's directors. Eligibility
for the grant of options under the Class B Plan, the Class C Plan, the Class D
Plan and the 1991 Special Plan are limited to the Company's officers, certain
directors, employees, consultants, agents and key contractors. No additional
options may be granted under the Avicenna Plan subsequent to the December 24,
1996 acquisition closing date.
Except for the Avicenna Plan, no options under the plans may be exercised
during the first year after the date of grant, and options granted under the
Plans become exercisable at a rate of either 20% in each successive year after
the date of grant, or 40% after the second anniversary of the grant and 20% in
each successive year. The Avicenna Plan options vested 50% on December 24, 1996
(the closing date of the Avicenna acquisition) with the remaining 50% vesting on
December 24, 1998 (the second anniversary of the closing date). No options may
be granted under any of the Plans after January 23, 2007, and all options expire
within ten to fifteen years from the date of the grant. Under the Class B, the
Class C, the Class D Plans, the 1991 Special Plan and the Director Plan, the
exercise price may not be less than 100% of the fair market value of the
Company's common stock on the date of grant. Under the Class A Plan, the
exercise price may not be less than 85% of the fair market value of the
Company's common stock on the date of grant. All options granted under the Class
A Plan had an exercise price equal to 100% of the fair market value on the date
of grant. The options granted under the Avicenna Plan were assumed and converted
to the Company's stock options at an exercise price of $1.25 per share and were
included in the acquisition cost of Avicenna. There are 7,920,045 shares
reserved for issuance under the Company's plans.
In addition to the Company's stock option plans, the Company has granted
options to certain directors, consultants and key employees. At June 30, 1997,
there were 438,000 options granted to these individuals. The terms of these
grants are similar to the Company's non-qualified stock option plans.
F-16
<PAGE>
SYNETIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) STOCK OPTIONS: (CONTINUED)
The Company has elected to follow APB No. 25 in accounting for its employee
stock options. Accordingly, no compensation cost has been recognized for the
Company's option plans. Had the determination of compensation costs for these
plans been based on the fair value at the grant dates for awards under these
plans, consistent with the method of SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
1997 1996
---- ----
Net income (loss):
As reported $(27,460) $8,585
Pro forma $(30,746) $8,190
Earnings per share:
As reported $ (1.60) $ 0.48
Pro forma $ (1.79) $ 0.45
The pro forma results indicated above are not intended to be indicative of
or a projection of future results.
The fair value of each option grant is estimated on the date of grant by
using the Black-Scholes option-pricing model. The following weighted average
assumptions were used for grants in 1997 and 1996:
1997 1996
---- ----
Expected dividend yield 0% 0%
Expected volatility .2722 .2722
Risk-free interest rates 6.5% 6.5%
Expected option lives (years) .083-1.74 .083-1.74
Weighted average fair
value of options granted
during the year $ 10.11 $ 5.08
A summary of the status of the Company's stock option plans for the three
year period ended June 30, 1997 is presented below:
<TABLE>
<CAPTION>
Years Ended June, 30
-----------------------------------------------------------
1997 1996 1995
------------------- ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Beginning of year.............. 3,746,750 $12.52 3,591,900 $11.50 3,239,830 $12.16
Granted........................ 4,047,264 $39.22 366,000 $24.54 1,228,000 $11.37
Exercised...................... (343,990) $ 9.94 (137,350) $12.81 (364,570) $11.82
Canceled....................... (313,445) $39.90 (73,800) $16.13 (511,360) $15.17
--------- --------- ---------
End of year.................... 7,136,579 $26.58 3,746,750 $12.63 3,591,900 $11.50
========= ========= =========
Exercisable at
end of year.................. 2,379,281 2,160,050 1,846,300
========= ========= =========
</TABLE>
F-17
<PAGE>
SYNETIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) STOCK OPTIONS: (CONTINUED)
The following table summarizes information with respect to options outstanding
and options exercisable at June 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- ---------------------------
Weighted Average Weighted Weighted
Range of Exercise Options Remaining Average Options Average
Prices (in dollars) Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------------ ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.25-$5.25 647,547 3.60 $ 4.75 581,081 $ 5.15
$6.63-$10.00 977,000 7.51 $ 9.57 474,200 $ 9.11
$11.50-$25.00 1,859,600 9.91 $16.32 1,322,400 $15.43
$31.25-$37.00 2,179,250 12.30 $34.26 1,600 $32.94
$46.88-$52.56 1,473,182 10.14 $49.07 -- --
</TABLE>
(10) COMMITMENTS AND CONTINGENCIES:
Leases--
The Company leases office and warehouse space, equipment and automobiles
under various noncancellable operating leases. Rental expense was $803,000,
$318,000 and $197,000 for the fiscal years ended June 30, 1997, 1996 and 1995,
respectively. The minimum aggregate rental commitments under noncancellable
leases, excluding renewal options, are as follows (in thousands):
YEARS ENDING JUNE 30,
---------------------
1998........ $2,043
1999........ 2,046
2000........ 2,023
2001........ 1,966
2002........ 1,360
Thereafter.. 3,625
Legal proceedings--
In the normal course of business, the Company is involved in various claims
and legal proceedings. While the ultimate resolution of these matters has yet
to be determined, the Company does not believe that their outcome will have a
material adverse effect on its financial position.
Porex has been named as one of many co-defendants in a number of actions
brought by recipients of silicone mammary implants. One of the pending claims is
styled as a purported class action. Certain of the actions against Porex have
been dismissed or settled by the manufacturer or insurance carriers of Porex
without material cost to Porex. The Company believes its insurance coverage
provides adequate coverage against liabilities that could arise from actions or
claims arising out of Porex's distribution of implants.
F-18
<PAGE>
SYNETIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) QUARTERLY FINANCIAL DATA (UNAUDITED):
The following table summarizes the quarterly financial data for the fiscal
years ended June 30, 1997 and 1996 (in thousands, except per share data). Net
income per share, excluding the non-recurring charges discussed in Note (2), are
also presented below. Net income (loss) per share calculations for each of the
quarters are based on the weighted average number of shares outstanding for each
period; therefore, the sum of the quarters may not necessarily be equal to the
full fiscal year per share amount.
<TABLE>
<CAPTION>
INCOME
(LOSS) NET
BEFORE INCOME
PROVISION (LOSS)
QUARTER ENDED NET SALES FOR TAXES NET INCOME (LOSS) PER SHARE
- -------------------------- ------------ ---------- ----------------- --------------------------
EXCLUDING
NON-RECURRING
ACTUAL ITEMS
------ -----
<S> <C> <C> <C> <C> <C>
1996
- ----
September 30, 1995........ $11,036 $ 3,127 $1,924 $.11 $.11
December 31, 1995......... 10,283 3,124 2,073 .12 .12
March 31, 1996............ 11,311 3,184 2,101 .12 .12
June 30, 1996............. 12,498 3,767 2,487 .14 .14
Year ended June 30, 1996.. $45,128 $13,202 $8,585 $.48 $.48
<CAPTION>
INCOME
(LOSS) NET
BEFORE INCOME
PROVISION (LOSS)
QUARTER ENDED NET SALES FOR TAXES NET INCOME (LOSS) PER SHARE
- -------------------------- ------------ ---------- ----------------- --------------------------
EXCLUDING
NON-RECURRING
ACTUAL(a) ITEMS(b)
--------- --------
<S> <C> <C> <C> <C> <C>
1997
- ----
September 30, 1996........ $11,185 $ 3,527 $2,389 $.13 $.13
December 31, 1996......... 11,899 (24,545) (25,934) (1.54) .14
March 31, 1997............ 14,243 (1,516) (2,420) (.14) .06
June 30, 1997............. 15,558 (2,092) (1,495) (.09) .10
Year Ended June 30, 1997.. $52,885 $(24,626) $(27,460) $(1.60) $.43
</TABLE>
(a) The per share amounts shown differ from those previously reported to reflect
the anti-dilutive impact of common stock equivalents resulting from the net
loss caused by the non-recurring charges discussed in Note 2.
(b) The per share amounts shown include expenses of $.09 and $.08 per share in
the quarters ended March 31, 1997 and June 30, 1997, respectively, which
primarily relate to research and development costs associated with the
Company's healthcare communications business activities.
F-19
<PAGE>
SYNETIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments." The estimated fair value amounts have been determined
by the Company using available market information. However, considerable
judgment is required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
AT JUNE 30, 1997
--------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
(in thousands)
Assets:
Cash and cash equivalents.. $ 77,303 $ 77,303
Marketable securities...... 238,525 238,151
Liabilities:
Long term debt............. 165,000 146,025
Cash and cash equivalents--
The carrying amounts of these items are a reasonable estimate of their fair
value.
Marketable securities--
Marketable securities, consisting of publicly-traded U.S. Treasury Notes
and Federal Agency Notes, are valued based on quoted market prices or dealer
quotes.
Long term debt--
The Convertible Debentures are publicly traded and are valued based on
quoted market prices. (See Note (4).)
The fair value estimates presented herein are based on information
available to the Company as of June 30, 1997. Although the Company is not aware
of any factors that would significantly affect the estimated fair value amounts,
such amounts have not been revalued since that date, and current estimates of
fair value may differ significantly from the amounts presented herein.
F-20
<PAGE>
SYNETIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS):
YEARS ENDED JUNE 30,
-----------------------
1997 1996 1995
------ ------ -------
Interest Paid...... $ - $ 6 $ 2,870
Income Taxes Paid.. 1,788 3,212 27,435
The following non-cash transactions were excluded from the consolidated
statements of cash flows for the years ended June 30, 1997, 1996 and 1995:
In fiscal years 1997, 1996 and 1995, 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 $7,450,000, $3,833,000 and
$835,000, respectively.
In February 1995, in connection with the call for redemption of the
Company's 1991 Debentures, holders of $79,104,000 aggregate principal amount of
the 1991 Debentures surrendered them for conversion into an aggregate of
3,877,607 shares of common stock. The remaining $1,396,000 of the outstanding
1991 Debentures were redeemed at the redemption price of 104% plus accrued
interest. (See Note (4).)
Additional information with respect to the acquisitions referred to in Note
(2) above is as follows (in thousands):
Year Ended
June 30, 1997
-------------
Fair value of assets acquired $47,537
Net cash paid (10,612)
Value of stock paid (24,488)
-------
Liabilities assumed $12,437
=======
F-21
<PAGE>
SYNETIC, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
- ---------------------------------------- ---------- ----------------------- --------------- ----------
Additions
-----------------------
Balance at Charges to Charges to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts (Deductions) Period
- ---------------------------------------- ---------- ---------- ----------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Deducted in the Balance Sheet
from the asset to which it applies:
Allowance for doubtful accounts
and sales returns
June 30, 1997........................... $671,000 205,000 14,000 (151,000)(1) $739,000
June 30, 1996........................... $636,000 126,000 (7,000) (84,000)(1) $671,000
June 30, 1995........................... $393,000 307,000 7,000 (71,000)(1) $636,000
</TABLE>
- ------------------------------------
(1) Write-off of uncollectible accounts and other reductions, net of
recoveries.
S-1
<PAGE>
INDEX TO EXHIBITS
Number Title
------ -----
3.1 Certificate of Incorporation of the Company, as amended.
Incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (No. 33-28654) (the "Registration
Statement").
3.2 By-Laws of the Company, as amended. Incorporated by reference to
Exhibit 3.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1994 (the "1994 10-K").
10.1 1989 Class A Non-Qualified Stock Option Plan of the Company.
Incorporated by reference to Exhibit 10.1 to the Registration
Statement.*
10.2 1989 Class B Non-Qualified Stock Option Plan of the Company.
Incorporated by reference to Exhibit 10.2 to the Registration
Statement.*
10.3 1991 Director Stock Option Plan of the Company. Incorporated by
reference to Exhibit 4.2 to the Company's Registration Statement on
Form S-8 (No. 33-46640).*
10.4 Form of Stock Option Agreement dated as of May 17, 1989 between the
Company and the members of the Stock Option Committee of the Board
of Directors. Incorporated by reference to Exhibit 10.3 to the
Registration Statement.*
10.5 Retirement Plan for Salaried Employees of Porex Technologies Corp.
of Georgia. Incorporated by reference to Exhibit 10.4 to the
Registration Statement.*
10.7 Form of Indemnification Agreement between the Company and the
directors and officers of the Company. Incorporated by reference to
Exhibit 10.6 to the Registration Statement.
10.8 Form of Services Agreement between the Company and Medco.
Incorporated by reference to Exhibit 10.7 to the Registration
Statement.
10.9 Form of Tax Sharing Agreement between the Company and Medco.
Incorporated by reference to Exhibit 10.8 to the Registration
Statement.
10.10 Form of Indemnification Agreement between the Company and Medco.
Incorporated by reference to Exhibit 10.9 to the Registration
Statement.
10.11 Purchase and Sale Agreement, dated as of May 24, 1994, between
Merck & Co., Inc. and the Company (the "Purchase and Sale
Agreement"). Incorporated by reference to Exhibit 99.1 to the
Company's Current Report on Form 8-K dated June 6, 1994.
E-1
<PAGE>
Number Title
------ -----
10.12 Purchase Agreement, dated as of May 24, 1994, between Medco
Containment Services, Inc. and Porex Technologies Corp. Incorporated
by reference to Exhibit 10.23 to the 1994 10-K.
10.13 Stock Purchase Agreement, dated as of August 9, 1994, between the
Company and Pharmacy Corporation of America. Incorporated by
reference to Exhibit 10.24 to the 1994 10-K.
10.14 Amended and Restated Investment Agreement, dated as of September 13,
1994, between Martin J. Wygod and the Company. Incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-
K dated September 16, 1994.
10.15 Form of Stock Option Agreement, made as of December 7, 1994, between
the Company and each of James V. Manning (for 150,000 shares), Paul
C. Suthern (for 180,000 shares), Victor L. Marrero (for 125,000
shares), David J. Schlanger (for 125,000 shares), Pamela B. Spira
(for 125,000 shares) and Anthony Vuolo (for 125,000 shares).
Incorporated by reference to Annex A to the Company's Proxy
Statement for its Annual Meeting of Stockholders held on May 17,
1995.*
10.16 Merger Agreement, dated December 23, 1996, among the Company,
Synternet Acquisition Corp., a wholly owned subsidiary of the
Company, Avicenna and the certain other individuals and entities.
Incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-3 (No. 333-18771).
10.17 1996 Class C Stock Option Plan of the Company. Incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement on
Form S-8 (No. 333-36041).*
10.18 1997 Class D Stock Option Plan of the Company. Incorporated by
reference to Exhibit 4.2 to the Company's Registration Statement on
Form S-8 (No. 333-36041).*
10.19 1991 Special Non-Qualified Stock Option Plan of the Company.
Incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-8 (No. 333-36041).*
21.1** Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Kegler, Brown, Hill & Ritter Co., L.P.A.
24.1** Powers of Attorney of the Company.
27** Financial Data Schedule.
99.1 Excerpt from the Consulting Agreement between Merck & Co., Inc. and
Martin J. Wygod relating to provisions incorporated in the Purchase
and Sale
E-2
<PAGE>
Number Title
- ------ -----
Agreement. Incorporated by reference to Exhibit 99.1 to the
Company's Current Report on Form 8-K dated June 6, 1994.
___________________________
* Management contract or compensation plan or arrangement.
** Previously filed with the Company's Annual Report on Form 10-K for the
Fiscal Year Ended June 30, 1997.
E-3
<PAGE>
Conformed Copy
Exhibit 23.1
[LETTERHEAD OF ARTHUR ANDERSEN LLP]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K-A, into the previously filed Registration
Statements of Synetic, Inc. and Subsidiaries on Form S-8 (File Nos. 33-34925,
33-34926, 33-38446, 33-46639, 33-46640, 333-19043, 333-21555 and 333-36041) and
Form S-3 (File No. 333-18771).
ARTHUR ANDERSEN
/s/ Arthur Andersen LLP
New York, New York
October 2, 1997
<PAGE>
Conformed Copy
Exhibit 23.2
[LETTERHEAD OF KEGLER, BROWN, HILL & RITTER]
Synetic, Inc.
669 River Drive
Elmwood Park, NJ 07407-1361
Dear Ladies and Gentlemen:
We hereby consent to the incorporation by reference into the Synetic,
Inc. Registration Statements on Form S-8 (File Nos. 33-34925, 33-34926, 33-
38446, 33-46639, 33-46640, 333-19043, 333-21555 and 333-36041), including any
Form S-3 resale prospectuses included therein, and on Form S-3 (File No. 333-
18771), filed with the Securities and Exchange Commission, of the Company's
Annual Report on Form 10-K/A for the fiscal year ended June 30, 1997. We also
consent to all references to our firm included in such Registration Statements.
Columbus, Ohio
October 2, 1997
Very truly yours,
KEGLER, BROWN, HILL
& RITTER CO., L.P.A.
By: /s/ Jack A. Bjerke
----------------------------------
Jack A. Bjerke, Vice President
