<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
MARK ONE
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ______
Commission File Number 0-17822
SYNETIC, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2975182
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
River Drive Center 2
669 River Drive
Elmwood Park, New Jersey 07407
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (201) 703-3400
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at May 9, 1997
- --------------------- --------------------------
Common Stock 17,547,721 shares
par value $.01 per share
<PAGE>
SYNETIC, INC. AND SUBSIDIARIES
Index
-----
Page
----
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets --
March 31, 1997 and June 30, 1996 3
Consolidated Statements of Income --
Nine Months Ended March 31, 1997 and 1996 5
Consolidated Statements of Cash Flows --
Nine Months Ended March 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and
Analysis of Results of Operations and
Financial Condition 10
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
----------------------------------------
This report contains certain forward-looking statements and information
relating to Synetic, Inc. (the "Company" or "Synetic") that are based on the
beliefs of the Company's management as well as assumptions made by and
information currently available to the Company's management. When used in this
report, the words "anticipate", "believe", "estimate", "expect" and similar
expressions, as they relate to the Company or the Company's management, are
intended to identify forward-looking statements. Such statements reflect the
current view of the Company's management with respect to future events and the
Company's future performance and are subject to certain risks, uncertainties and
assumptions. Should management's current view of the future or underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated or expected. The Company
does not intend to update these forward-looking statements.
<PAGE>
SYNETIC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
---------- ---------
<S> <C> <C>
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents............ $ 82,732 $ 22,210
Marketable securities................ 36,097 140,268
Accounts receivable, net of
allowances for doubtful accounts
and sales returns of $496 and $671
at March 31, 1997 and June 30,
1996, respectively.................. 8,549 7,299
Inventories.......................... 6,149 5,253
Other current assets................. 6,332 4,821
-------- --------
Total current assets................ 139,859 179,851
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land and improvements................ 807 823
Building and improvements............ 9,552 8,992
Machinery and equipment.............. 22,852 19,295
Furniture and fixtures............... 3,150 2,856
Construction in progress............. 892 1,306
-------- --------
37,253 33,272
Less: Accumulated depreciation...... (17,789) (16,014)
-------- --------
Property, plant and equipment, net.. 19,464 17,258
-------- --------
OTHER ASSETS:
Marketable securities................ 202,027 -
Other................................ 19,222 2,483
-------- --------
Total other assets 221,249 2,483
-------- --------
$380,572 $199,592
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
-3-
<PAGE>
SYNETIC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
---------- ---------
<S> <C> <C>
(unaudited)
CURRENT LIABILITIES:
Accounts payable........................... $ 1,919 $ 1,303
Accrued liabilities........................ 15,312 7,014
Income taxes payable....................... 2,421 5,206
-------- --------
Total current liabilities................. 19,652 13,523
-------- --------
LONG-TERM DEBT, LESS CURRENT PORTION 165,000 -
DEFERRED TAXES AND OTHER LIABILITIES........ 8,728 4,980
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value;
10,000,000 shares authorized; none
issued.................................... - -
Common stock $.01 par value; 50,000,000
shares authorized; 17,545,419 and
16,738,827 shares issued at
March 31, 1997 and June 30, 1996,
respectively.............................. 229 220
Paid-in capital............................ 191,998 158,227
Treasury stock, at cost; 5,268,463 shares
at March 31, 1997......................... (38,287) (36,575)
Retained earnings.......................... 33,252 59,217
-------- --------
Total stockholders' equity................ 187,192 181,089
-------- --------
$380,572 $199,592
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
-4-
<PAGE>
SYNETIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Quarters and Nine Months Ended March 31, 1997 and 1996
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
March 31, March 31,
1997 1996 1997 1996
--------- --------- ------- --------
<S> <C> <C> <C> <C>
Net Sales................................. $14,243 $11,311 $ 37,327 $32,630
Cost of sales............................ 7,852 6,301 20,326 18,461
Selling, general and administrative...... 6,653 3,896 14,211 10,845
Interest and other income................ (3,260) (2,071) (7,795) (6,119)
Interest expense......................... 929 1 934 8
Other expense............................ 3,585 - 32,185 -
------- ------- -------- -------
15,759 8,127 59,861 23,195
------- ------- -------- -------
Income before provision for income taxes.. (1,516) 3,184 (22,534) 9,435
Provision for income taxes................ 904 1,083 3,431 3,337
------- ------- -------- -------
Net income (loss)......................... $(2,420) $ 2,101 $(25,965) $ 6,098
======= ======= ======== =======
Net income (loss) per share............... $(.12) $.12 $(1.38) $.34
======= ======= ======== =======
Weighted average shares outstanding....... 19,452 18,125 18,787 17,947
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-5-
<PAGE>
SYNETIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 1997 and 1996
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $ (25,965) $ 6,098
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Write-off of purchased research and
development costs............................ 32,185 -
Depreciation and amortization.................. 1,962 2,008
Changes in operating assets and liabilities:
Accounts receivable, net....................... (334) (394)
Inventories.................................... (497) 480
Other assets................................... (1,845) 154
Accounts payable............................... 352 250
Accrued liabilities............................ 753 (4,232)
Income taxes payable........................... 4,013 917
--------- ---------
Net cash provided by (used for)
operating activities....................... 10,624 5,281
--------- ---------
Cash flows from investing activities:
Sales of marketable securities..................... 345,171 526,763
Purchase of marketable securities.................. (443,027) (522,099)
Capital expenditures............................... (3,174) (1,910)
Net cash paid for acquired businesses.............. (10,744) -
--------- ---------
Net cash provided by (used for)
investing activities....................... (111,774) 2,754
--------- ---------
Cash flows from financing activities:
Payments for treasury stock........................ (1,712) -
Proceeds from exercises of stock options and
401(k) purchases................................. 2,494 1,191
Proceeds from issuance of convertible debentures,
net of underwriting discount..................... 160,890 -
Payments of long-term debt......................... - (216)
--------- ---------
Net cash provided by (used for)
financing activities....................... 161,672 975
--------- ---------
Net increase (decrease) in cash and cash
equivalents........................................ 60,522 9,010
Cash and cash equivalents, beginning of period........... 22,210 7,499
--------- ---------
Cash and cash equivalents, end of period................. $ 82,732 $ 16,509
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-6-
<PAGE>
SYNETIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Financial statement presentation:
In the opinion of management, the accompanying consolidated financial
statements contain all normal and recurring adjustments necessary to present
fairly the financial position of Synetic, Inc. and subsidiaries (the "Company")
as of March 31, 1997 (unaudited) and June 30, 1996 (audited), the results of
their operations for the three months ended March 31, 1997 and 1996 (unaudited)
and the results of their operations and their cash flows for the nine months
ended March 31, 1997 and 1996 (unaudited).
Principles of Consolidation--
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned operating subsidiaries, Porex Technologies
Corp. and subsidiaries ("Porex"), Avicenna Systems Corp. ("Avicenna") and
CareAgents, Inc.("CareAgents"), after elimination of all material intercompany
accounts and transactions.
The accounting policies followed by the Company are set forth in the Notes
to Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1996 (the "1996 10-K"), which
notes are incorporated herein by reference.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full fiscal year.
Certain reclassifications have been made to prior year amounts to conform
to the current year presentation.
(2) Inventories:
Inventories consisted of the following (in thousands):
March 31, June 30,
1997 1996
----------- --------
(unaudited)
Raw materials and supplies.. $2,360 $2,468
Work-in-process............. 518 548
Finished goods.............. 3,271 2,237
------ ------
$6,149 $5,253
====== ======
(3) Marketable securities:
At March 31, 1997, marketable securities consisted primarily of U.S.
Treasury Notes and U.S. Agency Notes.
(4) Issuance of Convertible Debentures:
In February 1997, the Company issued to the public $165,000,000 aggregate
principal amount of its 5% Convertible Subordinated Debentures due 2007 (the
"Debentures"). The 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.
-7-
<PAGE>
(5) Computation of net income per share:
Net income per share is determined by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the applicable period. Common stock equivalents consist of
common stock which may be issuable upon exercise of outstanding stock options as
calculated using the treasury stock method. The Debentures, if converted, would
not have had a dilutive effect on net income per share during the periods
presented.
(6) Supplemental cash flow information (in thousands):
For the nine months ended March 31, 1997 and 1996, the Company recognized
tax benefits related to the exercise of stock options as increases to additional
paid-in capital and decreases to income taxes payable of $5,216,000 and
$422,000, respectively.
March 31,
Cash paid during the periods for: 1997 1996
--------- ------
Interest...................... $ - $ 6
Income taxes.................. 1,276 2,530
(7) 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 shares of
the Company's stock with a market value of $30.5 million. As additional
consideration, the Company agreed to issue to certain sellers, nontransferable
warrants covering 250,000 shares of Synetic, Inc., 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 as of December 24,
1996.
A summary of the purchase price allocation is as follows (in thousands):
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
=======
The amount allocated to purchased research and development of $28.6 million
was determined based on an appraisal using known valuation techniques and was
immediately expensed, with no corresponding tax benefit, in the period of
acquisition because such research and development was in process and had no
alternative commercial use. Remaining amounts have been allocated to intangible
assets and goodwill.
-8-
<PAGE>
The following summary, prepared on a pro forma basis, combines the results
of operations of the Company and Avicenna assuming the acquisition was
consummated at the beginning of the period presented (in thousands, except per
share amount):
Nine months ended
March 31, 1997
-----------------
(unaudited)
Sales $ 37,327
Net loss (27,886)
Net loss per share (1.47)
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisition 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 acquisition for the nine months
ended March 31, 1996 was not material.
CareAgents--
On January 23, 1997, the Company acquired CareAgents for shares of the
Company's common stock. 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 as of
January 23, 1997. The amount allocated to purchased research and development of
$3.6 million was determined based on an appraisal using known valuation
techniques and was immediately expensed, with no corresponding tax benefit, in
the period of acquisition because such research and development was in process
and had no alternative commercial use. The pro forma impact of the CareAgents
acquisition on the results of operations for the nine months ended March 31,
1997 and 1996 was not material.
Interflo Technologies, Inc.--
On February 9, 1997 Porex acquired all of the assets and assumed certain
liabilities of Interflo Technologies, Inc. ("Interflo"). The Interflo
acquisition was accounted for using the purchase method. Interflo's results of
operations have been included in the Company's financial statements as of
February 10, 1997. The pro forma impact of the Interflo acquisition on the
results of operations for the nine months ended March 31, 1997 and 1996 was not
material.
-9-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
Consolidated Results of Operations:
- ----------------------------------
Net sales for the quarter and nine months ended March 31, 1997 increased by
$2,932,000, or 25.9% and $4,697,000, or 14.4%, respectively, over the comparable
prior year periods as a result of sales improvements across several product
lines. The increase in sales was due principally to continued growth in sales of
medical OEM porous and surgical products in the Healthcare sector and writing
instrument components in the Consumer sector.
Cost of sales for the quarter and nine months ended March 31, 1997
increased by $1,551,000, or 24.6%, and $1,865,000, or 10.1%, respectively, over
the comparable prior year periods due to the increase in sales volume noted
above. As a percent of net sales, cost of sales for the quarter and nine months
ended March 31, 1997 decreased to 55.1% and 54.5% from 55.7% and 56.6%,
respectively, in the comparable prior year periods due principally to purchasing
improvements in the cost of materials and the leverage of fixed manufacturing
costs.
Selling, general and administrative expenses for the quarter and nine
months ended March 31, 1997 increased by $2,757,000 or 70.8% and $3,366,000 or
31.0%, respectively, over the comparable prior year periods due primarily the
inclusion of the first full period of expenses of $2,522,000 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 quarter and nine months
ended March 31, 1997 decreased to 29.0% and 31.3% from 34.4% and 33.2%,
respectively, in the comparable prior year periods due principally to an
increase in sales which was not proportionately offset by expenses, since a
portion of these expenses are fixed and do not vary directly with sales.
Interest and other income, net of interest expense, for the quarter and
nine months ended March 31, 1997 increased by $261,000 or 12.6% and $750,000 or
12.2%, respectively, over the comparable prior year periods principally as a
result of an increase in funds available for investment generated by the
proceeds of the Company's Debenture offering partially offset by the interest
expense associated with the Debentures.
During the quarter ended March 31, 1997, the Company recorded a charge to
income of $3,585,000 for purchased research and development costs relating to
the acquisition of CareAgents.
Excluding the research and development charge discussed above and the
similar charge recorded for the purchase of Avicenna in the December quarter,
for which no tax benefits were recognized, the effective tax rate for the
quarter and nine months ended March 31, 1997 increased to 43.7% and 35.5% as
compared 34.0% and 35.4%, respectively, in the prior year periods as the Company
currently receives no state tax benefit for the expenses associated with the its
healthcare communications business.
-10-
<PAGE>
Capital Resources and Liquidity:
- -------------------------------
Cash, cash equivalents and marketable securities increased by $158,378,000
to $320,856,000 during the nine months ended March 31, 1997 principally due to
the proceeds of the Company's Debenture offering.
The Company believes that its cash flow from operations, cash and
marketable securities and the income earned on its investments are sufficient to
meet the anticipated working capital requirements of its business.
As a result of the acquisitions of Avicenna and CareAgents, the Company
expects to incur significant research and development expenses and incur
additional operating losses in connection with this new area of business until
the products and services are successfully developed or marketed. There can be
no assurances that the products or services will be successfully developed or
marketed.
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 other sources, including, without
limitation, (a) its cash, cash equivalents and marketable securities and (b)
proceeds from the incurrence of additional indebtedness or the issuance of
common stock, preferred stock, convertible debt or other securities. For a
further description of the Company's Acquisition Program, see "Item 1. Business
- - Acquisition Program" in the 1996 10-K.
-11-
<PAGE>
SYNETIC INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Description
----------- -----------
10 Indenture dated as of February 15, 1997 between
the Company and United States Trust Company of New
York, as Trustee, which governs the terms of the
Company's 5% Convertible Subordinated Debentures
due 2007.
27 Financial Data Schedule
(b) Reports on Form 8-K
On January 23, 1997, the Company filed a report on Form 8-K disclosing
its purchase of CareAgents which occurred on January 23, 1997.
-12-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
SYNETIC, INC.
/s/ Anthony Vuolo
---------------------------------
Anthony Vuolo
Vice President - Finance
and Chief Financial Officer
Dated: May 14, 1997
-13-
<PAGE>
EXHIBIT INDEX
Number Description
------ -----------
10 Indenture dated as of February 15, 1997
between the Company and United States Trust
Company of New York, as Trustee, which
governs the terms of the Company's 5%
Convertible Subordinated Debentures due 2007,
incorporated by reference to the Company's
Registration Statement on Form S-3
(No. 33-21041).
27 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
Synetic,Inc.'s 3/31/97 10-Q AND IS QUALLIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 82,732
<SECURITIES> 36,097
<RECEIVABLES> 9,045
<ALLOWANCES> 496
<INVENTORY> 6,149
<CURRENT-ASSETS> 139,859
<PP&E> 37,253
<DEPRECIATION> 17,789
<TOTAL-ASSETS> 380,572
<CURRENT-LIABILITIES> 19,652
<BONDS> 165,000
0
0
<COMMON> 229
<OTHER-SE> 186,963
<TOTAL-LIABILITY-AND-EQUITY> 380,572
<SALES> 37,327
<TOTAL-REVENUES> 37,327
<CGS> 20,326
<TOTAL-COSTS> 20,326
<OTHER-EXPENSES> 32,185
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 934
<INCOME-PRETAX> (22,534)
<INCOME-TAX> 3,431
<INCOME-CONTINUING> (25,965)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,965)
<EPS-PRIMARY> (1.38)
<EPS-DILUTED> 0
</TABLE>
