SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: July 21, 1998
SYNETIC, INC.
(Exact name of Registrant as specified in its charter)
Delaware 0-17822 22-2975182
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
669 River Drive, River Drive Center II,
Elmwood Park, NJ 07407
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (201) 703-3400
<PAGE>
2
Item 2. Acquisition or Disposition of Assets.
On July 21, 1998, pursuant to an Agreement and Plan of Merger, dated
as of March 6, 1998, as amended on May 22, 1998 (the "Merger Agreement"), among
Synetic, Inc., a Delaware corporation (the "Registrant"), Point Plastics, Inc.
("Point Plastics"), a California Corporation, Plastics Acquisition Corp., a
Delaware corporation and wholly owned subsidiary of the Registrant, the trustees
of the Point Plastics, Inc. Employee Stock Ownership Plan and Trust (the "ESOP")
and certain individual holders of capital stock of Point Plastics, Point
Plastics was acquired by the Registrant by way of a merger with Plastics
Acquisition Crop. (the "Merger"). In the Merger, each outstanding share of
common stock of Point Plastics was converted into the right to receive $59.299
in cash; or 0.956 shares of common stock, par value $0.01 per share, of the
Registrant (the "Registrant Common Stock"); or some combination of Registrant
Common Stock and cash. The source of funds used in connection with the
acquisition were from the cash reserves of the Registrant. The Registrant
intends to operate Point Plastics as a wholly owned subsidiary. The Merger is
expected to be accounted for as a purchase.
A copy of the press release dated July 21, 1998 issued by the
Registrant relating to the consummation of the Merger is attached as an exhibit
hereto and is incorporated by reference herein.
<PAGE>
3
Item 7. Financial Statements and Exhibits.
(a) Financial statements of businesses acquired.
The following historical financial statements and notes thereto are of
Point Plastics prior to the consummation of the Merger and are attached hereto
at pages F-1 to F-27.
o Independent Auditor's Report
o Consolidated balance sheets as of December 31, 1996 and December 31,
1997.
o Consolidated statements of income as of December 31, 1996 and December
31, 1997.
o Consolidated statements of changes in stockholders' deficit as of
December 31, 1995, December 31, 1996 and December 31, 1997.
o Consolidated statements of cash flows as of December 31, 1995,
December 31, 1996 and December 31, 1997.
o Notes to the consolidated financial statements.
o Consolidated balance sheets (unaudited) as of March 31, 1998.
o Consolidated statements of income (unaudited) as of March 31, 1997 and
March 31, 1998.
o Consolidated statements of cash flows (unaudited) as of March 31, 1997
and March 31, 1998.
o Notes to the consolidated financial statements (unaudited).
(b) Pro forma financial information.
The following pro forma financial statements and notes thereto are attached
hereto at pages PF-1 to PF-6:
o Pro Forma Combined Condensed Consolidated Statement of Income
(unaudited) for the year ended June 30, 1997.
o Pro Forma Combined Condensed Consolidated Statement of Income
(unaudited) for the nine months ended March 31, 1998.
o Pro Forma Combined Condensed Balance Sheet (unaudited) as of March 31,
1998.
o Notes to Pro Forma Combined Condensed Consolidated Financial
Statements (unaudited).
<PAGE>
4
(c) Exhibits.
Exhibit
No. Description
--- -----------
2.1 Agreement and Plan of Merger, dated as of March 6, 1998 among
Synetic, Inc., Point Plastics, Inc., Plastics Acquisition Corp.,
the trustees of the Point Plastics, Inc. Employee Stock Ownership
Plan and Trust and certain individual holders of capital stock of
Point Plastics (incorporated by reference to Annex IA to
Amendment No. 3 to the Joint Proxy Statement/Prospectus included
as part of the Registrant's Registration Statement on Form S-4
(File No. 333-50801) filed on July 8, 1998).
2.2 Amendment No. 1 to Agreement and Plan of Merger, dated as of May
22, 1998 among Synetic, Inc., Point Plastics, Inc., Plastics
Acquisition Corp., the trustees of the Point Plastics, Inc.
Employee Stock Ownership Plan and Trust and certain individual
holders of capital stock of Point Plastics (incorporated by
reference to Annex IB to Amendment No. 3 to the Joint Proxy
Statement/Prospectus included as part of the Registrant's
Registration Statement on Form S-4 (File No. 333-50801) filed on
July 8, 1998).
23.1 Consent of Linkenheimer LLP.
99.1 Press Release, dated July 21, 1998.
<PAGE>
5
SIGNATURES
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 hereunto duly authorized.
SYNETIC, INC.
Date: July 29, 1998 By: /s/ Charles A. Mele
-----------------------------------
Name: Charles A. Mele
Title: Vice President and
General Counsel
<PAGE>
POINT PLASTICS, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF C O N T E N T S
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1995, 1996 AND 1997:
Page
----
Independent Auditor's Report F-2
Consolidated balance sheets F-3 to F-4
Consolidated statements of income F-5
Consolidated statements of changes in stockholders' deficit F-6
Consolidated statements of cash flows F-7 to F-8
Notes to the consolidated financial statements F-9 to F-20
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
MONTHS ENDED MARCH 31, 1997 AND 1998:
Unaudited consolidated balance sheets F-22 to F-23
Unaudited consolidated statements of income F-24
Unaudited consolidated statements of cash flows F-25
Notes to the consolidated financial statements F-26 to F-27
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Point Plastics, Inc.
Petaluma, California
We have audited the accompanying consolidated balance sheets of Point
Plastics, Inc. and Subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and
cash flows for the years ended December 31, 1997, 1996 and 1995. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
those financial statements 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 consolidated financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Point Plastics, Inc. and Subsidiary as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for the years
ended December 31, 1997, 1996 and 1995 in conformity with generally
accepted accounting principles.
/s/ Linkinheimer LLP
Santa Rosa, California
April 2, 1998
F-2
<PAGE>
POINT PLASTICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS
1997 1996
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents (Notes 15 and 18) $ 2,987,664 $ 3,231,202
Accounts receivable, net of allowance
for doubtful accounts of $40,000
in each year (Notes 9 and 15) 3,078,567 2,988,231
Other receivables 99,964 194,119
Inventories (Notes 2 and 9) 3,303,511 3,335,135
Prepaid expenses and deposits 41,349 42,497
Prepaid income taxes 268,408 141,411
Prepaid retirement plan expense - 11,997
Short-term annuity investment (Notes 4 and 18) 7,397 6,984
Short-term investment in securities (Notes 3 and 18) 4,982,938 2,975,488
Deferred tax benefit (Note 14) 459,705 338,416
---------------- ---------------
Total current assets 15,229,503 13,265,480
---------------- ---------------
LONG-TERM INVESTMENTS AND RECEIVABLES
Investment in securities (Notes 3, 9 and 18) 3,170,821 4,197,311
Annuity investment (Notes 4 and 18) 44,092 51,489
Investment in partnership (Notes 5 and 18) 128,874 128,874
---------------- ---------------
3,343,787 4,377,674
---------------- ---------------
LAND, BUILDINGS AND EQUIPMENT, net (Notes 6 and 9) 10,915,968 9,663,740
---------------- ---------------
INTANGIBLES, net (Note 7) 53,354 95,802
---------------- ---------------
OTHER ASSETS (Note 12) 30,620 14,224
---------------- ---------------
$ 29,573,232 $ 27,416,920
================ ===============
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
POINT PLASTICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Continued)
December 31, 1997 and 1996
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
1997 1996
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 428,462 $ 481,679
Accrued salaries and vacation 651,952 465,051
Other accrued expenses 32,574 24,950
Interest payable (Note 9) 104,056 104,202
Short-term pension benefit obligation (Note 4) 7,397 6,984
Current portion of long-term debt (Notes 9 and 18) 407,437 31,311
-------------- --------------
Total current liabilities 1,631,878 1,114,177
-------------- --------------
LONG-TERM LIABILITIES
Long-term debt, net of current portion (Notes 9 and 18) 6,704,114 7,111,550
Long-term pension benefit obligation (Note 4) 44,092 51,489
Deferred taxes (Note 14) 1,115,552 1,050,745
-------------- --------------
7,863,758 8,213,784
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Notes 8, 10 and 11)
MINORITY INTEREST (Note 11) 132,324 129,479
-------------- --------------
REDEEMABLE COMMON STOCK
Redeemable common stock, no par value, 10,000,000
shares authorized; 1,401,288 and 1,424,475
shares issued and outstanding at December 31,
1997 and 1996, respectively (Note 11) 36,853,874 34,187,400
ESOP NOTE RECEIVABLE (Note 13) (2,657,272) -
-------------- --------------
STOCKHOLDERS' DEFICIT
Deferred compensation (Note 12) (343,500) (425,000)
Retained deficit (13,907,830) (15,802,920)
(14,251,330) (16,227,920)
$ 29,573,232 $ 27,416,920
============== ==============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
POINT PLASTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES (Note 15) $ 24,828,484 $ 21,472,829 $ 20,013,624
Cost of sales 12,948,179 11,446,396 10,887,707
------------ ------------ ------------
GROSS PROFIT 11,880,305 10,026,433 9,125,917
Selling, general and administrative expenses 3,161,856 2,691,388 2,343,430
ESOP Contribution (Note 13) 558,681 562,773 571,895
------------ ------------ ------------
Operating expenses 3,720,537 3,254,161 2,915,325
------------ ------------ ------------
OPERATING INCOME 8,159,768 6,772,272 6,210,592
------------ ------------ ------------
Other income (expense):
Interest income 678,338 491,617 429,375
Interest expense (459,800) (470,681) (527,600)
Write-down of investment and other (555) (40,395) (20,868)
------------ ------------ ------------
217,983 (19,459) (119,093)
------------ ------------ ------------
INCOME BEFORE MINORITY INTEREST
AND INCOME TAXES 8,377,751 6,752,813 6,091,499
Less minority interest 2,845 2,476 3,382
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 8,374,906 6,750,337 6,088,117
Federal and state income taxes (Note 14) 3,203,521 2,661,228 2,280,130
------------ ------------ ------------
NET INCOME $ 5,171,385 $ 4,089,109 $ 3,807,987
============ ============ ============
EARNINGS PER SHARE
Basic $ 3.67 $ 2.86 $ 2.66
============ ============ ============
Diluted $ 3.62 $ 2.82 $ 2.63
============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 1,408,672 1,428,811 1,430,472
============ ============ ============
Diluted 1,426,893 1,445,961 1,445,871
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
POINT PLASTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' DEFICIT
Years Ended December 31, 1997, 1996 and 1995
Deferred Retained
Compensation Deficit
------------ ------------
BALANCE, DECEMBER 31, 1994 $ -- $(12,179,233)
Stock options (Note 12) (495,000) --
Accretion due to
redeemable common stock -- (7,221,336)
Net income -- 3,807,987
------------ ------------
BALANCE, DECEMBER 31, 1995 (495,000) (15,592,582)
Stock redemptions (Note 11) -- --
Stock options (Note 12) 70,000 --
Accretion due to
redeemable common stock -- (4,299,447)
Net income -- 4,089,109
------------ ------------
BALANCE, DECEMBER 31, 1996 (425,000) (15,802,920)
Stock options (Note 12) 81,500 --
Accretion due to
redeemable common stock -- (3,276,295)
Net income -- 5,171,385
------------ ------------
BALANCE, DECEMBER 31, 1997 $ (343,500) $(13,907,830)
============ ============
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
POINT PLASTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,171,385 $ 4,089,109 $ 3,807,987
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 1,164,110 1,086,120 969,525
Amortization 56,821 56,665 50,373
Bond (premium) discount amortization (49,139) 15,030 23,435
Compensation expense on stock options granted 81,500 70,000 55,000
Write off of intangible asset -- 9,395 --
Minority interest in net income of
consolidated subsidiary 2,845 2,476 3,382
Increase (decrease) in deferred taxes (56,482) 79,927 167,627
Loss on sale of assets 584 4,269 20,868
Annuity interest income (3,016) (3,546) (4,473)
Unrealized loss on investment -- 36,216 --
Principal payments on ESOP bank loan -- -- 80,000
Net change in operating assets and liabilities (Note 17) 49,373 (270,216) (684,361)
----------- ----------- -----------
Net cash provided by operating activities 6,417,981 5,175,445 4,489,363
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of land, building and equipment (2,420,422) (2,425,086) (1,361,105)
Purchase of intangible assets (14,373) (3,791) (46,197)
Purchase of marketable securities (3,931,821) (2,957,704) (3,176,250)
Redemptions of marketable securities 3,000,000 1,500,000 --
Disbursements on notes receivable (2,657,272) -- (12,000)
Purchase of partnership interest -- (9,000) (20,000)
Payments received on notes receivable -- 7,995 26,288
Proceeds from equipment sale 3,500 5,000 --
----------- ----------- -----------
Net cash used in investing activities (6,020,388) (3,882,586) (4,589,264)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt (31,310) (657,500) (26,618)
Redemption of Company stock (609,821) (208,134) (103,988)
Principal payments on ESOP bank loans -- -- (80,000)
Proceeds from issuance of common stock -- -- 10,010
----------- ----------- -----------
Net cash used in financing activities (641,131) (865,634) (200,596)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (243,538) 427,225 (300,497)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 3,231,202 2,803,977 3,104,474
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 2,987,664 $ 3,231,202 $ 2,803,977
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
POINT PLASTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the years for:
Interest $ 459,946 $ 473,421 $ 529,336
========== ========== ==========
Income taxes $3,387,000 $2,457,000 $2,234,300
========== ========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Distribution to former employee and current
board member from annuity investment (Note 4) $ 10,000 $ 20,000 $ 20,000
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
POINT PLASTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of business:
Point Plastics, Inc. (the "Company") manufactures high usage
disposable plastic items used by testing laboratories, medical
laboratories and hospitals. These items consist of pipette tips,
tubes, vials, caps and associated items which are used in testing
of fluids.
The Company sells its product to direct users and to distributors
throughout the U.S. and several foreign countries. Marketing is
conducted through a division, Quality Scientific Plastics, and a
subsidiary, Out Patient Services, Inc.
A summary of the Company's significant accounting policies
follows:
Principles of consolidation:
The consolidated financial statements include the accounts of the
parent and 93.4% owned subsidiary, Out Patient Services, Inc. All
significant inter-company transactions and accounts are eliminated
in consolidation.
Cash and cash equivalents:
For purposes of reporting the statements of cash flow, the Company
considers all cash accounts, which are not subject to withdrawal
restrictions or penalties, and all highly liquid debt instruments
purchased with a maturity of three months or less to be cash
equivalents. At December 31, 1997, $1,747,177 of corporate debt
securities are considered cash equivalents.
Inventories:
Inventories are stated at the lower of cost or market. Cost is
determined on the first-in, first-out basis. Cost includes raw
materials, direct labor and manufacturing overhead.
Investments:
Investments consist of debt securities and an annuity contract
which are reported at amortized cost and a 3.3% limited
partnership interest which is stated at the lower of cost or
market. Realized gains and losses on dispositions are based upon
net proceeds and the adjusted book value of the securities sold
using the specific identification method.
Depreciation methods:
Buildings and equipment are shown at cost and are depreciated
using straight-line and declining balance methods over their
estimated useful lives ranging from 8 to 10 years for equipment
and 30 years for buildings. Leasehold improvements are depreciated
over the life of the lease with renewal options.
Revenue recognition:
Revenue is recognized upon product shipment to direct users and
distributors, net of sales returns and allowances. The terms of
such sales generally provide for payment within 30 days.
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.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(cont'd)
Accounting for stock based compensation:
Effective January 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 12).
Computation of net income per share:
Net income per share has been determined using Statement of
Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS No. 128"). Under SFAS No. 128, basic net income per share
is computed by dividing net income by the weighted average number
of 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. Dilutive securities consist of common stock
which may be issuable upon exercise of outstanding stock options
as calculated using the treasury stock method.
Investments in debt and equity securities:
Effective January 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 December 31, 1997,
the Company's investments consisted principally of federal and
California government obligations. Securities are reported at
amortized cost based on the Company's positive intent and ability
to hold such securities to maturity.
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 amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 2. INVENTORIES
At December 31, 1997 and 1996, the following items made up the
inventories on hand:
1997 1996
---------------- ------------------
Raw materials $ 643,752 $ 695,831
Finished goods 2,659,759 2,639,304
---------------- ------------------
$ 3,303,511 $ 3,335,135
================ ==================
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS IN SECURITIES
Investments consist of federal and California government
obligations adjusted for amortization of premiums and
accretions of discounts. The Company plans to hold these
investments to maturity. The estimated fair value amounts have
been determined by the Company using available market prices
or dealer quotes. The amortized cost, unrealized gains and
losses, and fair values of investment securities held to
maturity at December 31, 1997 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Due in one year or less $4,982,938 $ 3,092 $ -- $4,986,030
Due after one year but
less than five years 2,164,408 97,172 -- 2,261,580
Due after five years but
less than ten years 1,006,413 41,447 -- 1,047,860
---------- ---------- ---------- ----------
$8,153,759 $ 141,711 $ -- $8,295,470
========== ========== ========== ==========
</TABLE>
The amortized cost, unrealized gains and losses, and fair
values of investment securities held to maturity at December
31, 1996 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Due in one year or less $2,975,488 $ 5,397 $ -- $2,980,885
Due after one year but
less than five years 998,630 -- 9,570 989,060
Due after five years but
less than ten years 3,198,681 99,379 -- 3,298,060
---------- ---------- ---------- ----------
$7,172,799 $ 104,776 $ 9,570 $7,268,005
========== ========== ========== ==========
</TABLE>
NOTE 4. ANNUITY INVESTMENT
In 1994, the Company purchased two annuities with an insurance
company to provide a retired company officer who is also a current
member of the Board of Directors with a supplemental pension. The
annuities will distribute directly to the former officer $20,000
per year for two years beginning April 1995 and then $10,000 per
year for 7 years. A summary of the activity is as follows:
1997 1996
-------- --------
Annuity balance at beginning of year $ 58,473 $ 74,927
Annuity interest 3,016 3,546
Distribution (10,000) (20,000)
-------- --------
Annuity balance at end of year 51,489 58,473
Current portion 7,397 6,984
-------- --------
Long-term portion $ 44,092 $ 51,489
======== ========
A corresponding liability has been set up to reflect the Company's
obligation.
NOTE 5. INVESTMENT IN PARTNERSHIP
The Company is a limited partner in a partnership. The investment
is stated at lower of cost or market. The cost of the partnership
investment is $165,000. A summary of the investment activity is as
follows:
1997 1996
--------- ---------
Partnership balance at beginning of year $ 128,874 $ 165,000
Unrealized loss -- (36,126)
--------- ---------
Partnership balance at end of year $ 128,874 $ 128,874
========= =========
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. LAND, BUILDINGS AND EQUIPMENT
A summary of the Company's land, buildings and equipment at
December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Land $ 1,264,705 $ 1,264,705
Buildings 5,113,218 4,516,942
Machinery and equipment 6,817,995 5,882,479
Tooling-molds 4,459,484 3,889,933
Furniture and fixtures 204,169 182,693
Leasehold improvements 336,971 277,526
Vehicles 39,977 30,212
Equipment and construction in progress 554,602 353,720
------------ ------------
18,791,121 16,398,210
Accumulated depreciation (7,875,153) (6,734,470)
------------ ------------
$ 10,915,968 $ 9,663,740
============ ============
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1996
and 1995 was $1,164,110, $1,086,120 and $969,525, respectively.
NOTE 7. INTANGIBLES
Intangibles are stated at cost. In 1997 and 1996, intangibles
consist of a patent, two licensing agreements to manufacture a
plastic tip and a tube pack, and patent pending costs. The
perfected intangibles are being amortized on a straight-line basis
over their estimated useful lives of 5 years.
NOTE 8. LEASES
The Company is leasing two buildings at its current location under
a 10 year operating lease. The lease expires June 1999 and has a
five year renewal option. The lease agreement requires the Company
to pay the property taxes and insurance on the building.
The Company leased another building during 1993 under a six year
operating lease. The lease expires March 1999 and has a five year
renewal option. The lease agreement requires the Company to pay
the property taxes and insurance on the building in excess of the
base year rates.
In 1994, the Company began leasing an access way under a five-year
lease. The access way lease expires May 1999 and has a five year
renewal option.
Rent expense, including taxes and insurance, for the years ended
December 31, 1997, 1996 and 1995 was $286,824, $293,620 and
$355,968, respectively. Future minimum rental payments are as
follows:
1998 $ 281,760
1999 104,920
----------
$ 386,680
==========
The Company also leases certain equipment under two and three year
operating leases. The rental expense for the years ended December
31, 1997, 1996 and 1995 was $21,750, $20,971 and $21,561,
respectively. Following are the future minimum rental payments for
these equipment leases:
1998 $ 23,724
1999 14,194
----------
$ 37,918
==========
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. NOTES PAYABLE AND LONG-TERM DEBT
Balances included in long-term debt at December 31, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Note payable to the U.S. Small Business Administration at
12.94%, secured by a deed of trust on land and building.
Principal, interest and fee payable at $2,628 per month
Matures July 2009. $ 180,282 $ 186,634
Note payable to individuals, secured by deed
of trust on land and building. Principal and
interest payments of $4,494 per month, with
interest at 7%. Matures July 1998. 400,212 425,170
Note payable to former stockholder for redemption
of Company stock. Secured by inventory, accounts
receivable, and U.S. treasury note. Quarterly interest
only payments bear interest at 6.23% per annum
Matures March 2003 or is callable by the seller upon
the sale of substantially all of the stock or assets
of the Company. 6,531,057 6,531,057
---------- ----------
7,111,551 7,142,861
Less: Current portion 407,437 31,311
---------- ----------
$6,704,114 $7,111,550
========== ==========
</TABLE>
Aggregate maturities required on long-term debt at December 31,
1997 are as follows:
1998 $ 407,437
1999 8,218
2000 9,347
2001 10,631
2002 12,092
Subsequent 6,663,826
----------
$7,111,551
==========
In 1993, the Company repurchased shares of common stock from a
major stockholder. Interest in the amount of $406,885 was paid to
this former stockholder in 1997, 1996 and 1995, respectively. In
addition, $101,721 in interest is due to the former stockholder
and is included in interest payable at December 31, 1997 and
December 31, 1996, respectively.
NOTE 10. CONTINGENCIES
In 1997, the Internal Revenue Service issued a notice of tax
deficiency against the Company for income taxes totaling
$4,791,422 for the tax years 1993, 1994 and 1995. The Company has
filed a petition to the U.S. Tax Court challenging the basis of
any deficiency claimed. The Company and outside counsel believes
its position on this tax matter is strong and that any likely
settlement on the entire case will be less than $100,000. No
provision has been made in the accompanying financial statement
for the proposed tax deficiencies.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. REDEEMABLE COMMON STOCK
Common stock which is mandatorily redeemable or is subject to
redemption outside of the Company's control is reported at its
fair value at the date of issuance. Increases in the carrying
amount are charged to retained earnings so that the carrying
amount of the redeemable common stock will equal the redemption
amount.
During 1995, the Company redeemed 4,952 shares at $21 per share
for an amount totaling $103,988. The shares redeemed were ESOP
shares that had been distributed to a member of the Board of
Directors. Also in 1995, a credit of $560,010 was made to
redeemable common stock to reflect the stock option grant of
50,000 shares to a member of the Board of Directors. This
individual exercised a portion of the stock options in 1995 and
purchased 1,001 shares of common stock from the Company. (See Note
12). At December 31, 1995, the parent company had 10,000,000
shares of authorized, no par common stock, with 1,433,147 issued
and outstanding.
During 1996, the Company redeemed 8,672 shares at $24 per share
for an amount totaling $208,134. The shares redeemed were ESOP
shares that had been distributed to two current members of the
Board of Directors.
During 1997, the Company redeemed 23,187 shares at $26.30 per
share for an amount totaling $609,820. The shares redeemed were
ESOP shares of which 4,431 were redeemed from a former stockholder
and 3,873 were redeemed from a current member of the Board of
Directors.
In the event of death or disability of the individual
stockholders, the Company agrees to purchase their Company common
stock at the appraised price per share as of the last corporate
year end prior to the event. At December 31, 1997, 1996 and 1995,
these stockholders hold 675,034 shares of common stock. The
appraised market value of the Company stock at January 1, 1997,
1996 and 1995 was $26.30, $24 and $21 per share, respectively.
Under the terms of the Company's Employee Stock Ownership Plan
(Note 13), a participant shall have the right to "put" his or her
shares of common stock to the Company. The Company must then
purchase such shares at their fair market value as defined in the
ESOP. The fair market value during 1997, 1996 and 1995 was $26.30,
$24 and $21, respectively, as determined by an independent
appraisal. The ESOP held 726,254, 749,441 and 758,113 shares of
Company common stock at December 31, 1997, 1996 and 1995,
respectively.
Redemptions of common stock are paid out of current assets. There
are no projected redemptions over the next five years.
NOTE 12. STOCK OPTION PLAN
The Company approved a stock option plan effective January 1,
1995. The plan was put into place to enable selected officers and
key employees to acquire Company stock. On January 1, 1995, the
Company granted, to an employee who is also a Board member,
options to purchase 50,000 shares of Company stock at $10 per
share. The options vest 10% per year for ten years and expire
December 31, 2004.
The company applies APB Opinion 25, Accounting for Stock Issues to
Employees, in accounting for its stock option plan which records
compensation expense for the difference between the exercise price
and the estimated fair value of its stock. Compensation cost
charged to operations was $81,500, $70,000 and $55,000 in 1997,
1996 and 1995, respectively (See Note 16).
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. STOCK OPTION PLAN (continued)
Had compensation cost been determined on the basis of fair value
pursuant to FASB Statement No. 123, Accounting for Stock Based
Compensation, net income would have been as follows:
Net Income: 1997 1996 1995
---------- ---------- ----------
As reported under APB 25 $5,171,385 $4,089,109 $3,807,987
========== ========== ==========
Under FASB 123 $5,177,485 $4,083,709 $3,787,587
========== ========== ==========
FASB 123 computations are based upon the current value of the
stock at the grant date reduced by expected dividends and the
present value of the exercise price over the life of the option. A
risk free interest rate of 5.25% was assumed.
The following is a summary of the stock option plan:
<TABLE>
<CAPTION>
Number of Shares
1997 1996 1995
------ ------ --------
<S> <C> <C> <C>
Options outstanding and unexercised at beginning of year 48,999 48,999 --
Options granted -- -- 50,000
Options vested and exercised -- -- (1,001)
------ ------ --------
Options outstanding and unexercised at end of year 48,999 48,999 48,999
====== ====== ========
Options exercisable at the end of the year 13,999 8,999 3,999
====== ====== ========
Fair value of options granted, per share: 1997 1996 1995
------ ------ --------
Under APB 25 $ -- $ -- $ 11
====== ====== ========
Under FASB 123 $ -- $ -- $ 15
====== ====== ========
</TABLE>
NOTE 13. EMPLOYEE STOCK OWNERSHIP PLAN
On January 1, 1986, the Company established an Employee Stock
Ownership Plan (Plan) to provide additional retirement benefits
for all full-time employees with one or more years of service who
have attained the age of 21 and who are not part of a retirement
program covered by a collective bargaining agreement. The
Company's contributions to the Plan are determined by its Board of
Directors. However, the Company is obligated to make a
contribution to the Plan which equals the ESOP's debt service less
dividends received by the ESOP. All dividends received by the ESOP
are used to pay debt service. Contributions under the Plan
amounted to $558,681, $562,773 and $571,895 in 1997, 1996 and
1995, respectively.
The Company accounts for its ESOP in accordance with Statement of
Position 93-6. Accordingly, the shares pledged as collateral are
considered unearned ESOP shares and are reduced from stockholders'
equity. As shares are released from collateral, the Company
reports compensation expense equal to the current market price of
the shares, and the shares become outstanding for earnings per
share calculations. Dividends on allocated ESOP shares are
recorded as a reduction of retained earnings; dividends on
unallocated shares are recorded as a reduction of debt and accrued
interest.
During December 1997, the Trust purchased 101,037 shares from
separated participants of the Plan. The purchase was made with the
proceeds of a $2,657,272 loan from the Company, which is payable
in annual installments over a ten year period. The balance on the
note at December 31, 1997 was $2,657,272. For financial statement
purposes, the note receivable at December 31, 1997 related to
these unearned ESOP shares reduces stockholders' equity.
As the Plan makes each payment of principal, an appropriate
percentage of stock will be allocated to eligible employees'
accounts in the proportion that each such participant's covered
compensation bears to the total covered compensation of all such
participants for that year in accordance with applicable
regulations under the Internal Revenue Code. Forfeitures and stock
re-purchases from separated participants are allocated in the same
manner as employer contributions. All the purchased stock is held
in the Trust established under the Plan.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. EMPLOYEE STOCK OWNERSHIP PLAN (continued)
Shares vest according to the following vesting schedule upon
allocation:
Years of Service Percentage vested
---------------- -----------------
Less than 2 0%
2 years 20%
3 years 30%
4 years 40%
5 years 60%
6 years 80%
7 years 100%
At December 31, 1997, 726,254 of the Company's common shares are
held by the Employee Stock Ownership Trust (Trust), which was
established to fund the Plan. At December 31, 1997, the Trust's
common shares consist of 101,067 of unallocated shares and 625,187
allocated shares. There were no unallocated shares committed to be
released during 1997. The fair value of the unallocated shares at
December 31, 1997 was $2,657,272. All shares of the Trust were
fully allocated at December 31, 1996 and 1995.
Any participant's Plan benefit which is retained in the Trust
after the anniversary date coinciding with or immediately
following the date on which he terminates employment will be
credited to a separate account in the name of the participant, and
such account shall be credited with interest on the unpaid
principal balance at the rate paid on one-year certificates of
deposit (as of the beginning of each Plan year) as quoted in the
Wall Street Journal. Such separate account shall not require
segregation of the Trust assets.
Participants that terminate due to retirement, death or disability
will begin receiving their distributions in the year following the
Plan year in which the termination occurred. Distributions are
generally made in equal installments over a period of five years.
Distributions may be made in cash or, if a participant elects, in
the form of Company common shares.
Each participant is entitled to exercise voting rights
attributable to the shares allocated to his or her account that
were acquired with a Securities Acquisition Loan completed after
June 6, 1989 to which Section 133 of the Internal Revenue Code
applied. Each participant is to be notified by the Plan Trustees
prior to the time that such rights are to be exercised. The
Trustees are not permitted to vote any of these shares for which
instructions have not been given by a participant. Allocated
shares acquired prior to June 6, 1989 and shares acquired through
a loan where Section 133 did not apply, shall be voted by the
Trustees in accordance with instructions from the Plan's
Committee, except with respect to any vote required for the
approval or disapproval of any corporate merger or consolidation,
recapitalization, reclassification, liquidation, dissolution, sale
of substantially all assets of a trade or business, or other
similar transaction prescribed by regulations, in which case the
participant will vote the shares (See Note 17). Any unallocated
shares held by the Trust shall be voted by the Trustees in
accordance with instructions from the Committee.
Subsequent to December 31, 1997, the Company signed a merger
agreement with Synetic, Inc. The merger agreement stipulates that
prior to the merger's effective date, the ESOP shall be amended to
provide that: (I) the Trustees shall vote allocated and
unallocated shares of the Company common stock for which no voting
instructions are received, in proportion to the voting
instructions received on allocated shares; (ii) ESOP participants
may make the elections described in Section 1.09 and 1.11 of the
Plan by instructing the Trustees with respect to their allocated
shares; (iii) all ESOP Participants shall become 100% vested in
their ESOP accounts at the effective date of the merger; and (iv)
the ESOP will be terminated (no earlier than December 31, 1998).
Vested participants in the Plan hold shares with an approximate
total market value of $17,857,319 at December 31, 1996, using the
latest appraised market value of $26.30 per share.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. INCOME TAXES
Deferred tax assets as of December 31 consisted of the following:
1997 1996
-------- --------
Current:
Federal $413,930 $307,598
State 45,775 30,818
-------- --------
Total $459,705 $338,416
======== ========
Deferred tax liabilities as of December 31 consisted of the
following:
1997 1996
-------- --------
Noncurrent:
Federal $ 977,905 $ 919,596
State 137,647 131,149
---------- ----------
Total $1,115,552 1,050,745
========== ==========
Deferred tax liabilities (assets) at December 31, are comprised of
the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Tax over book depreciation and amortization $ 1,193,826 $ 1,094,371
Intangible assets amortization (21,631) (10,815)
Accrued expenses (209,204) (119,085)
Inventory (76,944) (58,833)
State taxes (239,157) (190,809)
Other, net 8,957 (2,500)
----------- -----------
$ 655,847 $ 712,329
=========== ===========
</TABLE>
Income tax expense for the years ended December 31 consisted of
the following:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ 2,595,687 $ 2,020,804 $ 1,727,307
State 664,316 561,202 385,196
----------- ----------- -----------
Total Current 3,260,003 2,582,006 2,112,503
----------- ----------- -----------
Deferred:
Federal (48,023) 65,277 146,473
State (8,459) 13,945 21,154
----------- ----------- -----------
Total Noncurrent (56,482) 79,222 167,627
----------- ----------- -----------
Total $ 3,203,521 $ 2,661,228 $ 2,280,130
=========== =========== ===========
</TABLE>
Temporary differences resulted in the following deferred tax
expense (benefit):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Difference between tax and book
depreciation and amortization $ 88,064 $ 90,035 $ 139,598
Accrued expenses (89,162) (18,665) (12,447)
Franchise tax (48,348) (11,868) 6,594
Other, net (7,036) 19,720 33,882
--------- --------- ---------
$ (56,482) $ 79,222 $ 167,627
========= ========= =========
</TABLE>
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. INCOME TAXES (Continued)
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:
1997 1996 1995
---- ---- ----
Federal statutory rate 34.0% 34.0% 34.0%
State tax, net of federal benefit 6.0 6.5 6.5
Other, net (1.7) (1.1) (3.0)
---- ---- ----
38.3% 39.4% 37.5%
==== ==== ====
NOTE 15. CONCENTRATION OF CREDIT RISK/MAJOR CUSTOMER/EXPORT SALES
For the year ended December 31, 1997, one customer, who is a
distributor, comprised 28% of total sales and 30% of accounts
receivable. For the year ended December 31, 1996, one customer,
who is a distributor, comprised 22% of total sales and 23% of
accounts receivable. For the year ended December 31, 1995, one
customer, who is a distributor, comprised 20% of total sales.
The Company grants credit generally on an unsecured basis. The
risk of loss on any accounts receivable is the balance due at the
time of default. Their customers are located in various
geographical areas of the U.S. and overseas.
The Company has $1,329,043 of cash on deposit with a single
financial institution, excluding outstanding checks at December
31, 1997. One of the cash accounts is a sweep account which is not
federally insured. This account routinely sweeps the cash from all
the other accounts except for $50,000. Therefore, only $50,000 is
insured at any given time.
Export product sales, which are made principally to Europe and
Asia, were $8,786,112, $7,669,794 and $6,792,515 for the years
ended December 31, 1997, 1996 and 1995, respectively.
NOTE 16. SUBSEQUENT EVENTS
Sale of Company On March 6, 1998, the Company agreed to be
acquired by Synetic, Inc. in a merger for $86,000,000. In order to
ensure that the merger qualifies as a tax-free reorganization for
federal income taxes, the aggregate purchase price shall be
payable 40% in cash and 60% in shares of Synetic common stock. The
merger agreement stipulates that one year following the merger's
effective date, the ESOP will be terminated.
In the event the merger transaction is consummated, acceleration
of the options granted under the Company's Stock Option Plan to a
current member of the Board of Directors shall occur. The Company
will grant the Board member a bonus for the exercise price of $10
per share for the 48,999 shares that remain unexercised at
December 31, 1997. (See Note 12).
As a result of the merger, the note payable to a former
stockholder becomes callable (See Note 9).
Building Construction
The Company is planning on constructing a building on land already
owned. A cost estimate of construction was prepared by architects
and is expected to exceed $2,000,000. Completion of the building
is anticipated in late 1998.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. NET CHANGE IN OPERATING ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(Increase) decrease in operating assets:
Accounts receivable $ (90,336) $ 104,272 $(392,029)
Other receivables - current 94,155 (41,991) 91,856
Inventory 31,624 (248,610) (120,985)
Prepaid expenses 1,148 89 18,818
Prepaid ESOP 11,997 (11,997) --
Prepaid income taxes (126,997) 124,211 (121,797)
Other receivables -- -- 50,000
Deposits (16,396) 12,411 1,112
Increase (decrease) in operating liabilities:
Accounts payable (53,217) 157,415 (217,645)
Accrued salaries and vacation 186,901 (343,335) 10,469
Accrued expenses 7,624 (23,487) (8,445)
Interest payable (146) (2,740) (188)
Pension obligation 3,016 3,546 4,473
--------- --------- ---------
$ 49,373 $(270,216) $(684,361)
========= ========= =========
</TABLE>
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is
practicable to estimate fair value;
Cash and cash equivalents
The carrying amount approximates fair value due to the short
maturity of these instruments.
Annuity investment
The carrying amount of the annuity investment, based upon rates
currently available, approximates fair value.
Investment in securities
The fair value of investment in securities is based upon current
market rates. These quotes are obtained from an independent source
and are approximations.
Investment in partnership
The investment in the partnership is carried at lower of cost or
fair market value. The partnership's fair market value has been
determined using current negotiated sales prices of properties
held by the partnership, less liabilities and selling costs.
(See Note 5)
Long-term debt The fair value of some of the Company's long-term
debt is based upon estimated borrowing rates currently available
to the Company.
The estimated fair values of the Company's financial instruments
are as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 2,987,664 $ 2,987,664 $ 3,231,202 $ 3,231,202
Annuity investment $ 51,489 $ 51,489 $ 58,473 $ 58,473
Investment in securities $ 8,153,759 $ 8,295,470 $ 7,172,799 $ 7,268,005
Investment in partnership $ 128,874 $ 128,874 $ 128,874 $ 128,874
Long-term debt $(7,111,551) $(6,351,500) $(7,142,861) $(6,361,715)
</TABLE>
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. EARNINGS PER SHARE
Basic earnings per share are computed by dividing earnings
available to common stockholders by the weighted average number of
common shares outstanding during the period. Diluted earnings per
share reflect per share amounts that would have resulted if
dilutive potential common stock had been converted to common
stock. The following reconciles amounts reported in the financial
statements:
<TABLE>
<CAPTION>
For the year ended December 31, 1997
------------------------------------
Weighted
Net Average
Income shares Per-share Amount
------ -------- ----------------
<S> <C> <C> <C>
Income available to common
stockholders -basic earnings per share $5,171,385 1,408,672 $3.671
======
Effect of dilutive securities - stock options -- 18,221
---------- ---------
Income available to common
stockholders - diluted earnings per share $5,171,385 1,426,893 $3.624
========== ========= ======
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1997
------------------------------------
Weighted
Net Average
Income shares Per-share Amount
------ -------- ----------------
<S> <C> <C> <C>
Income available to common
stockholders -basic earnings per share $4,089,109 1,428,811 $2.862
======
Effect of dilutive securities - stock options -- 17,150
---------- ---------
Income available to common
stockholders - diluted earnings per share $4,089,109 1,445,961 $2.828
========== ========= ======
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1997
------------------------------------
Weighted
Net Average
Income shares Per-share Amount
------ -------- ----------------
<S> <C> <C> <C>
Income available to common
stockholders -basic earnings per share $3,807,987 1,430,472 $2.662
======
Effect of dilutive securities - stock options -- 15,400
---------- ---------
Income available to common
stockholders - diluted earnings
per share $3,807,987 1,445,872 $2.634
========== ========= ======
</TABLE>
F-20
<PAGE>
POINT PLASTICS, INC. AND SUBSIDIARY
INTERIM CONSOLIDATED FINANCIAL REPORT
(Unaudited)
MARCH 31, 1998
F-21
<PAGE>
POINT PLASTICS, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED BALANCE SHEETS
March 31, 1998
ASSETS
1998
-----------
CURRENT ASSETS
Cash and cash equivalents (Note 2) $ 5,911,624
Accounts receivable, net 3,341,215
Inventories (Note 3) 3,679,757
Short-term investment in securities (Note 4) 3,003,893
Prepaid retirement plan expense 340,269
Prepaid expense and other current assets 585,805
-----------
Total current assets 16,862,563
-----------
LONG-TERM INVESTMENTS AND RECEIVABLES
Investment in securities (Note 4) 3,163,855
-----------
Other investments 173,590
3,337,445
-----------
LAND, BUILDINGS AND EQUIPMENT, net (Note 5) 11,213,819
-----------
INTANGIBLES, net 198,886
-----------
OTHER ASSETS 19,211
-----------
$31,631,924
===========
See Notes to Consolidated Financial Statements.
F-22
<PAGE>
POINT PLASTICS, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED BALANCE SHEETS
(Continued)
March 31, 1998
LIABILITIES AND STOCKHOLDERS' DEFICIT
1998
------------
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 2,033,337
Current portion of long-term debt 401,737
------------
Total current liabilities 2,435,074
------------
LONG-TERM LIABILITIES
Long-term debt, net of current portion (Note 6) 6,702,157
Deferred taxes and other non-current liabilities 1,124,639
------------
7,826,796
------------
MINORITY INTEREST 132,324
------------
REDEEMABLE COMMON STOCK 39,656,450
------------
ESOP NOTE RECEIVABLE (Note 7) (2,590,840)
------------
STOCKHOLDERS' DEFICIT
Deferred compensation (329,750)
Retained deficit (15,498,130)
------------
(15,827,880)
------------
$ 31,631,924
============
See Notes to Consolidated Financial Statements.
F-23
<PAGE>
POINT PLASTICS, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
For the three months ended
March 31,
--------------------------
1998 1997
---------- ----------
NET SALES (Note 8) $5,866,710 $5,815,356
Cost of sales 2,988,381 2,973,703
---------- ----------
GROSS PROFIT 2,878,329 2,841,653
Selling, general and administrative 782,560 759,479
ESOP contribution (Note 7) 252,336 147,000
---------- ----------
Operating expenses 1,034,896 906,479
---------- ----------
OPERATING INCOME 1,843,433 1,935,174
---------- ----------
Other income:
Interest income, net 41,074 29,051
---------- ----------
INCOME BEFORE MINORITY INTEREST
AND INCOME TAXES 1,884,507 1,964,225
Less minority interest -- --
---------- ----------
INCOME BEFORE INCOME TAXES 1,884,507 1,964,225
Federal and state income taxes 733,635 763,254
---------- ----------
NET INCOME $1,150,872 $1,200,971
========== ==========
EARNINGS PER SHARE
Basic $ .884 $ .843
========== ==========
Diluted $ .872 $ .832
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 1,301,514 1,424,475
========== ==========
Diluted 1,320,525 1,442,696
========== ==========
See Notes to Consolidated Financial Statements.
F-24
<PAGE>
POINT PLASTICS, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the three months ended
March 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
NET CASH PROVIDED FROM OPERATING ACTIVITIES 1,702,663 1,912,364
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of land, building and equipment (623,798) (335,384)
Purchase of intangible assets (147,248) (3,245)
Redemptions of marketable securities 2,000,000 --
----------- -----------
Net cash provided by (used in) investing activities 1,228,954 (338,629)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt (7,657) (3,951)
----------- -----------
Net cash used in financing activities (7,657) (3,951)
----------- -----------
Net increase in cash and cash equivalents 2,923,960 1,569,784
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 2,987,664 3,231,202
----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 5,911,624 $ 4,800,986
=========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the quarters for:
Interest $ 112,570 $ 115,149
=========== ===========
Income taxes $ -- $ --
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-25
<PAGE>
POINT PLASTICS, INC. AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The unaudited consolidated financial statements for the three
month period ended March 31, 1998 and 1997 have been prepared in
conformity with generally accepted accounting principles for
interim financial statements. For further information, reference
is made to the audited financial statements and the notes thereto
included in the Company's 1997 Consolidated Financial Report in
the S-4 Registration Statement filed on April 23, 1998.
Below are notes to the unaudited financial statements where they
are significantly different from those presented in the audited
financial statements for the year ended December 31, 1997.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
The Company has made no significant changes in accounting policies
since December 31, 1997. Refer to pages F-9 to F-10 of the 1997
Consolidated Financial Report.
At March 31, 1998, $3,473,297 of corporate debt securities are
considered cash equivalents.
NOTE 3. INVENTORIES
At March 31, 1998, the following items made up the inventories on
hand:
Raw materials $ 693,001
Finished goods 2,986,756
----------------
$ 3,679,757
================
NOTE 4. INVESTMENTS IN SECURITIES
Investments consist of federal and California government
obligations adjusted for amortization of premiums and accretions
of discounts. The Company plans to hold these investments to
maturity. The estimated fair value amounts have been determined by
the Company using available market prices or dealer quotes.
The amortized cost, unrealized gains and losses, and fair values
of investment securities held to maturity at March 31, 1998 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Due in one year or less $3,003,893 $ -- $ 2,643 $3,001,250
Due after one year but
less than five years 2,157,748 94,752 -- 2,252,500
Due after five years but
less than ten years 1,006,107 40,143 -- 1,046,250
---------- -------- ---------- ----------
$6,167,748 $134,895 $ 2,643 $6,300,000
========== ======== ========== ==========
</TABLE>
F-26
<PAGE>
POINT PLASTICS, INC. AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5. LAND, BUILDINGS AND EQUIPMENT
A summary of the Company's land, buildings and equipment at March
31, 1998 is as follows:
Land, buildings and equipment 19,414,919
Accumulated depreciation (8,201,100)
-----------
$11,213,819
===========
Depreciation expense for the three months ended March 31, 1998
and 1997 was $325,947 and $264,433, respectively.
NOTE 6. TRANSACTIONS WITH RELATED PARTIES
Long-term debt:
Interest in the amount of $101,721 was paid to a former
stockholder during the three months ended March 31, 1998 and 1997,
respectively. In addition, $101,721 in interest is due to the
former stockholder and is included in accrued liabilities at March
31, 1998.
Stock options:
The Company granted 50,000 stock options on January 1, 1995, to an
employee who is also a Board member. The stock options granted
vest at 5,000 shares per year, for ten years, beginning on January
1, 1995 and allow this individual to purchase Company stock at $10
per share.
The company applies APB Opinion 25, Accounting for Stock Issues to
Employees, in accounting for its stock option plan which records
compensation expense for the difference between the exercise price
and the estimated fair value of its stock. Compensation cost
charged to operations was $13,750 and $20,375 for the three months
ended March 31, 1998 and 1997, respectively.
NOTE 7. EMPLOYEE STOCK OWNERSHIP PLAN
Contributions under the Plan amounted to $252,336 and $147,000 for
the three months ended March 31, 1998 and 1997.
The balance on the ESOP note receivable at March 31, 1998 was
$2,590,840. For financial statement purposes, stockholders' equity
has been reduced by the balance of the note receivable from the
Plan.
NOTE 8. SUBSEQUENT EVENTS
Notification by Major Customer
On May 4, 1998, the Company was notified by the customer referred
to in Note 15 of its 1997 Consolidated Financial Statements that
it would no longer be purchasing a substantial portion of its
products from the Company. All sales to this customer were final
and no material product returns are anticipated.
F-27
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
In the table below, we attempt to illustrate the financial results
that might have occurred if the merger of Point Plastics into Plastics
Acquisition Corp, a wholly owned subsidiary of the Registrant (the "Merger") had
been completed previously. Presented is the Unaudited Pro Forma Combined
Condensed Consolidated Statements of Income for the fiscal year ended June 30,
1997 and the nine months ended March 31, 1998 as if the Merger had been
consummated at the beginning of the earliest period presented. Also presented is
the Unaudited Pro Forma Combined Condensed Consolidated Balance Sheet as of
March 31, 1998 as if the Merger had been completed on March 31, 1998. These
unaudited pro forma combined condensed consolidated financial statements should
be read in conjunction with the historical consolidated financial statements of
the Registrant and Point Plastics and related notes and "Management's Discussion
and Analysis of Results of Operations and Financial Condition" contained, with
respect to the Registrant, in the Registrant's Annual Report on Form 10-K, as
amended, for the year ended June 30, 1997 and the Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998 and, with respect to Point Plastics, in the
accompanying audited financial statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in the Proxy
Statement/Prospectus included as part of the Registrant's Registration Statement
on Form S-4 (File No. 333-50801) filed on July 7, 1998, for a more detailed
explanation.
It is important to remember that this information is hypothetical,
and does not necessarily reflect the financial performance that would have
actually resulted if the Merger had been completed on that date. It is also
important to remember that this information does not necessarily reflect future
financial performance if the Merger actually occurs.
PF-1
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Combined Condensed Consolidated Statement of Income
For the Year Ended June 30, 1997
(unaudited)
(in thousands, except per share data)
Point
Synetic Plastics Pro Forma Pro Forma
Historical Historical Adjustments Combined
<S> <C> <C> <C> <C> <C>
Net Sales...................................... $ 52,885 $ 23,654 (463) (1) $ 76,076
--------- -------- ---------- ---------
Cost of Sales.................................. 29,035 12,529 (463) (1) 41,101
Selling, General and Administrative Expenses... 20,841 3,441 2,085 (2) 26,367
Other (Income) Expense, Net.................... 27,635 (98) 2,306 (3) 29,843
--------- --------- ---------- ---------
77,511 15,872 3,928 97,311
--------- --------- ---------- ---------
Income (Loss) Before Taxes..................... (24,626) 7,782 (4,391) (21,235)
Provision for Income Taxes..................... 2,834 3,080 (922) (4) 4,992
--------- ---------- ---------- ---------
Net Income (Loss).............................. $ (27,460) $ 4,702 $ (3,469) $ (26,227)
--------- -------- ---------- ---------
Net Income (Loss) per Share-- Basic/Diluted.... $ (1.60) $ (1.46)
======== =========
Weighted Average Number of Common
Shares Outstanding........................ 17,133 832 (5) 17,965
========= ========== =========
</TABLE>
Note: The accompanying notes are an integral part of these pro forma combined
condensed consolidated financial statements.
PF-2
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Combined Condensed Consolidated Statement of Income
For the Nine Months Ended March 31, 1998
(unaudited)
(in thousands, except per share data)
Point
Synetic Plastic Pro Forma Pro Forma
Historical Historical Adjustments Combined
<S> <C> <C> <C> <C> <C>
Net Sales....................................... $46,710 $ 18,439 (586) (1) $ 64,563
--------- -------- -------- --------
Cost of Sales................................... 24,986 9,476 (586) (1) 33,876
Selling, General and Administrative Expenses.... 20,735 2,991 1,564 (2) 25,290
Other (Income) Expense, Net..................... (9,236) (165) 1,730 (3) (7,671)
--------- -------- -------- --------
36,485 12,302 2,708 51,495
--------- -------- -------- --------
Income (Loss) Before Taxes...................... 10,225 6,137 (3,294) 13,068
Provision (Benefit) for Income Taxes............ 4,064 2,312 (692) (4) 5,684
--------- -------- -------- --------
Net Income (Loss)............................... $ 6,161 $ 3,825 $ (2,602) $ 7,384
========= ======== ======== ========
Net Income (Loss) per Share --
Basic..................................... $ .35 $ .40
========= ========
Diluted................................... $ .32 $ .36
========= ========
Weighted Average Number of Common
Shares Outstanding --
Basic..................................... 17,652 832 (5) 18,484
========== ======== ========
Diluted................................... 19,558 832 (5) 20,390
========== ======== ========
</TABLE>
Note: The accompanying notes are an integral part of these pro forma combined
condensed consolidated financial statements.
PF-3
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Combined Condensed Consolidated Balance Sheet
as of March 31, 1998
(unaudited)
(in thousands)
Point
Synetic Plastics Pro Forma Pro Forma
Historical Historical Adjustments Combined
ASSETS
Current Assets:
<S> <C> <C> <C> <C> <C>
Cash and Cash Equivalents................ $ 82,921 $ 5,912 (34,400) (6) $ 54,433
Marketable Securities.................... 3,206 3,004 6,210
Accounts Receivable, Net................. 10,534 3,341 13,875
Inventories.............................. 5,915 3,680 9,595
Other Current Assets..................... 11,263 926 _______ 12,189
--------- --------- ---------
Total Current Assets..................... 113,839 16,863 (34,400) 96,302
Property and Equipment, Net.................... 26,018 11,214 37,232
Other Assets, Net.............................. 247,320 3,555 67,263 (7) 318,138
--------- --------- -------- ---------
Total Assets................................ $387,177 $ 31,632 32,863 $ 451,672
======== ========= ======== =========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Current Liabilities............................ $ 20,231 $ 2,435 2,500 (8) $ 31,868
6,702 (9)
Long-Term Debt................................. 159,500 6,702 (6,702) (9) 159,500
Deferred Taxes and Other Liabilities........... 5,692 1,258 -- 6,950
--------- --------- -------- ---------
Total Long-Term Liabilities................. 165,192 7,960 (6,702) 166,450
--------- --------- -------- ---------
Redeemable Common Equity 39,656 (39,656) (11)
Stockholders' Equity........................... 201,754 (18,419) 51,600 (10) 253,354
--------- --------- ---------
18,419 (11)
-------
Total Liabilities and Stockholders' Equity..... $387,177 $ 31,632 32,863 $ 451,672
======== ========= ======== =========
</TABLE>
Note: The accompanying notes are an integral part of these pro forma combined
condensed consolidated financial statements.
PF-4
<PAGE>
Notes to Pro Forma Combined Condensed Consolidated
Financial Statements
(unaudited)
The Unaudited Pro Forma Combined Condensed Consolidated Statements of
Income have been prepared to reflect the Merger as if the Merger occurred at the
beginning of the period presented. The Merger has been accounted for under the
purchase method of accounting. The excess of the purchase price over the fair
value of the net assets acquired is being amortized over periods of up to 40
years.
The following is a summary of the adjustments reflected in the
Unaudited Pro Forma Combined Condensed Consolidated Statements of Income:
1. Represents the eliminations of product sales from Synetic
to Point Plastics. The elimination amounts represent the
sales value charged by Synetic for products sold to Point
Plastics. The profits in ending inventory attributable to
inter-company sales has not been eliminated as such amounts
are immaterial.
2. Represents the amortization of the excess of the purchase
price over the net assets of Point Plastics acquired.
3. Represents the decrease in interest income to reflect (a)
the payment of the cash portion of the purchase price and
(b) the expenses associated with the Merger.
4. Represents the tax effect of the adjustments to the
Unaudited Pro Forma Combined Condensed Consolidated
Statements of Income, excluding the amortization of
goodwill, based on the combined federal and state effective
tax rate for the periods presented.
5. Represents the increase in the number of outstanding shares
of Synetic Common Stock to reflect the payment of the stock
portion of the purchase price.
The Unaudited Pro Forma Combined Condensed Consolidated Balance Sheet
was prepared to reflect the Merger as of March 31, 1998.
The following is a summary of the adjustments reflected in the
Unaudited Pro Forma Combined Condensed Consolidated Balance Sheet:
6. Represents the decrease in Cash and Cash Equivalents to
reflect the payment of the cash portion of the purchase
price.
7. Represents the preliminary estimate of the excess purchase
price over the net assets acquired as follows:
Purchase price (including $2,500 of transaction expenses) $ 88,500
Net book value of acquired assets 21,237
------
Excess of purchase price over net assets acquired $ 67,263
========
Allocated to:
Intangible assets (including patents and non-compete) $ 2,750
Goodwill 64,513
------
$ 67,263
========
PF-5
<PAGE>
The final determination of the allocation of the Point Plastics
purchase price is dependent on the receipt of a third party appraisal
of Point Plastics. The company believes that the final allocation
will not vary materially from the preliminary estimate.
The identifiable assets are being amortized over their estimated
useful lives. Goodwill is being amortized over periods of up to 40
years. The amortization period for goodwill is based upon the
underlying manufacturing process utilized by Point Plastics, Point
Plastics' long history of profitability and the stability of the
industry in which Point Plastics operates.
Subsequent to the acquisition, the Company will review the carrying
values assigned to goodwill to determine whether later events or
circumstances have occurred that indicate that the balance of
goodwill may be impaired. The Company's principal consideration in
determining the impairment of goodwill include the strategic benefit
to the Company of the particular business as measured by undiscounted
current and expected future operating income and expected
undiscounted future cash flows.
8. Represents the amount of estimated costs for legal and accounting
services and other expenses associated with the Merger.
9. Represents the reclassification of a long term note that upon
consummation of the merger can be called for payment at the option of
the holder.
10. Represents the issuance of Synetic common stock to reflect the
payment of the stock portion of the purchase price.
11. Represents the elimination of Point Plastics' historical equity.
PF-6
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
--- -----------
2.1 Agreement and Plan of Merger, dated as of March 6, 1998 among
Synetic, Inc., Point Plastics, Inc., Plastics Acquisition Corp.,
the trustees of the Point Plastics, Inc. Employee Stock Ownership
Plan and Trust and certain individual holders of capital stock of
Point Plastics (incorporated by reference to Annex IA to the
Joint Proxy Statement/Prospectus included as part of Amendment
No. 3 to the Registrant's Registration Statement on Form S-4
(File No. 333-50801) filed on July 8, 1998).
2.2 Amendment No. 1 to Agreement and Plan of Merger, dated as of May
22, 1998 among Synetic, Inc., Point Plastics, Inc., Plastics
Acquisition Corp., the trustees of the Point Plastics, Inc.
Employee Stock Ownership Plan and Trust and certain individual
holders of capital stock of Point Plastics (incorporated by
reference to Annex IB to the Joint Proxy Statement/Prospectus
included as part of Amendment No. 3 to the Registrant's
Registration Statement on Form S-4 (File No. 333-50801) filed on
July 8, 1998).
23.1 Consent of Linkenheimer LLP.
99.1 Press Release, dated July 21, 1998.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated April 2, 1998 on our audit of the consolidated financial
statements of POINT PLASTICS, INC. AND SUBSIDIARY included in this Form 8-K,
into the previously filed Registration Statement of Synetic, Inc. and
Subsidiaries on Form S-8 (Files 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).
/s/ LINKENHEIMER LLP
Santa Rosa, California
July 29, 1998
EXHIBIT 99.1
Tuesday July 21, 5:13 pm Eastern Time
Company Press Release
Synetic Completes The Acquisition Of Point Plastics, Inc.
ELMWOOD PARK, N.J.--(BUSINESS WIRE)--July 21, 1998--Synetic, Inc. (NASDAQ:
SNTC - news) announced today that it has completed the acquisition of Point
Plastics, Inc., a manufacturing company located in Petaluma, Calif.
Point Plastics designs, manufactures and distributes injection-molded,
disposable laboratory plastics used for liquid handling in the life sciences
marketplace. Such products include pipette tips, micro centrifuge tubes and PCR
tubes. Point Plastics had net sales of approximately $25 million for calender
year 1997. The purchase price for all of the outstanding capital stock of Point
Plastics is $86 million, payable 60 percent in shares of Synetic stock and 40
percent in cash. The shareholders of Point Plastics have agreed not to sell
Synetic stock received in the merger until July 21, 1999. The tax free merger
will be accounted for using the purchase method of accounting and is expected to
be accretive to Synetic's earnings.
Synetic operates two principal lines of business, plastic filtration
technologies and healthcare communications.
The statements contained in this release, other than the terms of the
acquisition of Point Plastics, are forward looking statements that involve risks
and uncertainties including, but not limited to, product demand and market
risks, the effect of economic conditions, the impact of competitive products and
pricing, and other risks detailed in Synetic's Securities and Exchange
Commission filings.
Contact:
Synetic Inc., Elmwood Park
Anthony Vuolo
201/703-3400
