-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WqbBfjDji8OYgpzgXNKe8nyV8HdrlNsS1wjLzh5JYw6+CCvWKiXUds4V9Q9NGcoM 04tuiWeexM92rXbN8HsNKQ== 0000950130-97-004363.txt : 19971006 0000950130-97-004363.hdr.sgml : 19971006 ACCESSION NUMBER: 0000950130-97-004363 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19971003 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYNETIC INC CENTRAL INDEX KEY: 0000850436 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS PRODUCTS, NEC [3089] IRS NUMBER: 222975182 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-17822 FILM NUMBER: 97690854 BUSINESS ADDRESS: STREET 1: 669 RIVER DRIVE CITY: ELMWOOD PARK STATE: NJ ZIP: 07407-1361 BUSINESS PHONE: 2017033400 MAIL ADDRESS: STREET 1: 669 RIVER DRIVE CITY: ELMWOOD PARK STATE: NJ ZIP: 07407-1361 10-K/A 1 FORM 10-K/A ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1997 Commission file number 0-17822 SYNETIC, INC. (Exact name of registrant as specified in its charter) DELAWARE 22-2975182 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 669 RIVER DRIVE ELMWOOD PARK, NEW JERSEY 07407-1361 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (201) 703-3400 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: TITLE OF EACH CLASS ------------------- COMMON STOCK, $.01 PAR VALUE 5% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2007 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the registrant's voting stock (based on the last sale price of registrant's voting stock on the NASDAQ National Market System on September 15, 1997 and, for the purpose of this computation only, the assumption that all of the registrant's directors and executive officers are affiliates) held by non-affiliates of the registrant was approximately $484,876,600. The number of shares of registrant's Common Stock, $.01 par value, outstanding at September 15, 1997 was 17,650,965. DOCUMENTS INCORPORATED BY REFERENCE None. ================================================================================ PART II ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. As described in "Item 1. Business--Introduction", the Company completed the Divestiture of its Institutional Pharmacies Business on December 14, 1994. The Company's consolidated financial statements for the fiscal year ended June 30, 1995 report separately the results of operations and net assets of the Institutional Pharmacies Business as discontinued operations. The following table sets forth for the periods indicated the percentage which certain items in the financial statements of the Company bear to net sales.
PERCENTAGES OF NET SALES FISCAL YEARS ENDED JUNE 30, -------------------------- 1997 1996 1995 ----- ----- ----- Net sales........................................ 100% 100% 100% Costs and expenses Cost of sales................................... 54.9 55.6 58.7 Selling, general and administrative............. 39.4 33.1 31.0 Investment income............................... (24.3) (18.0) (18.7) Interest expense................................ 5.9 -- 9.2 Purchased research and development and other.... 70.7 -- 17.0 ----- ----- ----- 146.6 70.7 97.2 ----- ----- ----- Income (loss) before provision for income taxes.. (46.6) 29.3 2.8 Provision for income taxes....................... 5.3 10.2 1.1 ----- ----- ----- Income (loss) from continuing operations......... (51.9)% 19.1% 1.7% ===== ===== =====
The historical operations of the Company are primarily related to its plastics technology business. All revenues and a significant majority of operating expenses were derived from these operations. As discussed below, the consolidated financial statements for the fiscal year ended June 30, 1997 include certain costs associated with the Company's activities in developing its healthcare communications business. Fiscal Years Ended June 30, 1997 and 1996 Consolidated Results of Operations Net sales for the year ended June 30, 1997 increased by $7,757,000, or 17.2%, over the comparable prior year period. The sales increase was due primarily to increased unit sales in surgical products in the healthcare segment and increased unit sales of writing components, pipette filters and pipette tips in the consumer segment. Cost of sales for the year ended June 30, 1997 increased by $3,927,000, or 15.6%, over the comparable prior year period due to the increased sales volume noted above and product development costs. As a percent of net sales, cost of sales for the year ended June 30, 1997 decreased to 54.9% from 55.6% in the comparable prior year period principally due to increased leverage of certain fixed costs which do not increase proportionally with sales and improvements in material and labor usage. 2 Selling, general and administrative expenses for the year ended June 30, 1997 increased by $5,911,000, or 39.6%, over the comparable prior year period due primarily to the inclusion of expenses of $4,628,000 associated with the Company's healthcare communications business which primarily related to research and development activities. Excluding these costs, as a percent of net sales, selling, general and administrative expenses for the year ended June 30, 1997 decreased to 30.7% from 33.1% due principally to increased sales which were not proportionately offset by such expenses, since a portion of these costs is fixed in nature and does not vary directly with sales. Investment income, which is comprised of interest and other income and dividend income, for the year ended June 30, 1997 increased by $4,782,000, or 58.9%, over the comparable prior year period primarily as a result of the income earned on the proceeds of the Company's $165,000,000 5% Convertible Subordinated Debentures due 2007 (the "Convertible Debentures") issued in February 1997. Interest expense for the year ended June 30, 1997 increased by $3,116,000 from the prior year period as a result of the interest expense associated with the Company's Convertible Debentures. During the year ended June 30, 1997, the Company recorded non-recurring charges to income of $37,413,000 related to purchased research and development costs from the acquisitions of Avicenna and CareAgents and the acquisition of rights to certain intellectual property and software technologies to be utilized in the development of the Company's healthcare communications business. Excluding the portion of the research and development charge relating to the acquisitions of Avicenna and CareAgents for which no tax benefits were recognized, the effective tax rate for the year ended June 30, 1997 increased to 37.5% from 35% in the prior year period primarily as a result of the change in composition of the Company's marketable securities resulting in the decrease in investment income subject to the dividend received deduction. Fiscal Years Ended June 30, 1996 and 1995 Consolidated Results of Operations Net sales for the year ended June 30, 1996 increased by $5,949,000, or 15.2%, over the comparable prior year period. The sales increase was due primarily to increased unit sales in medical products and plastic vials in the healthcare segment and, to a lesser extent, to increased unit sales of writing components, personal care items and home water filters in the consumer segment. Cost of sales for the year ended June 30, 1996 increased by $2,102,000, or 9.1%, over the comparable prior year period due to the increased sales volume noted above and additional depreciation and product development costs. As a percent of net sales, cost of sales for the year ended June 30, 1996 decreased to 55.6% from 58.7% in the comparable prior year period principally due to certain fixed costs which do not increase proportionally with sales and improvements in material and labor usage. Selling, general and administrative expenses for the year ended June 30, 1996 increased by $2,805,000, or 23.1%, over the comparable prior year period due primarily to an increase in expenses associated with the increase in sales volume noted above and an increase in corporate overhead expense. As a percent of net sales, selling, general and administrative expenses for the year ended June 30, 1996 increased to 33.1% from 31.0% in the prior year primarily due to the increased corporate overhead noted above. Interest and other income and dividend income for the year ended June 30, 1996 increased by $800,000, or 10.9%, over the comparable prior year period primarily as a result of the income earned on a full year of investment of the net proceeds received from the sale of the Institutional Pharmacies Business. 3 Interest expense for the year ended June 30, 1996 decreased by $3,619,000 from the prior year period as a result of the conversion and redemption of the Company's Convertible Subordinated Debentures due December 1, 2001 (the "1991 Debentures") into common stock of the Company in February 1995. Other expenses for the year ended June 30, 1996 decreased by $6,663,000 over the comparable prior year period as a result of the one-time charge in December 1994 related to the issuance of stock options to certain officers as compensation for services in conjunction with the consummation of the Purchase and Sale Agreement and costs associated with the conversion and redemption in February 1995 of the 1991 Debentures. The effective tax rate for the year ended June 30, 1996 decreased to 35% from 41% in the prior year period primarily due to the nondeductibility of certain conversion and redemption costs in the prior year. Capital Resources and Liquidity As of June 30, 1997, the Company had $77,303,000 of cash and cash equivalents and $238,525,000 of marketable securities. Cash and cash equivalents increased $55,093,000 for the fiscal year ended June 30, 1997 as a result of proceeds from the issuance of the Convertible Debentures, the majority of which were invested in marketable securities. Net cash provided by operations was $9,017,000, a decrease of $2,276,000 from the fiscal year ended June 30, 1996. This decrease was primarily related to expenditures associated with the development of the Company's healthcare communications business and increased working capital requirements. The significant funds generated from operating activities are reinvested in existing businesses and are used to fund capital expenditures. Net cash provided by financing activites was $161,008,000 for the fiscal year ended June 30, 1997, primarily resulting from the issuance of the Convertible Debentures. Net cash used for investing activities was $114,932,000 for the fiscal year ended June 30, 1997, reflecting the investment of a portion of the proceeds from the issuance of the Convertible Debentures in marketable securities. As a result of the continuing efforts in developing its healthcare communications business, the Company expects to incur significant research and development expenditures in connection with this new area of business until the products and services are successfully developed and marketed. During the second half of the fiscal year ended June 30, 1997, the Company incurred expenditures of approximately $4,976,000 related to the development of its healthcare communications business. The Company expects to increase the rate of such expenditures during fiscal 1998. The Company believes that its cash flow from operations and the income earned on its investments are sufficient to meet the anticipated working capital requirements of its business, including the research and development expenditures noted above. The Company continues to pursue an acquisition program pursuant to which it seeks to effect one or more acquisitions or other similar business combinations with businesses it believes have significant growth potential. Financing for such acquisitions may come from several sources, including, without limitation, (a) the Company's cash, cash equivalents and marketable securities and (b) proceeds from the incurrence of additional indebtedness or the issuance of common stock, preferred stock, convertible debt or other securities. There can be no assurance that the Company's acquisition program will be successful. See "Item 1. Business--Acquisition Program". 4 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Pursuant to General Instruction G(3) to the Annual Report on Form 10-K, the information regarding executive officers of the Company required by Item 401 of Regulation S-K is included in Part I of this report. The directors of the Company are as follows:
Director Principal Name Age Since Occupation - -------------------------------- --- -------- ------------------------------------------------- Thomas R. Ferguson 70 1989 Mr. Ferguson has been a member of the law firm of Ferguson, Case, Orr, Paterson & Cunningham for more than five years. Mervyn L. Goldstein, M.D. 60 1989 Dr. Goldstein has been a physician in private practice, Associate Clinical Professor of Medicine at the Albert Einstein College of Medicine in New York City and Attending Physician in Medicine and Oncology at Montefiore Medical Center in New York City for more than five years. Ray E. Hannah 61 1989 See "Part I. Executive Officers." Roger H. Licht 43 1989 Mr. Licht has been a member of the law firm of Licht & Licht for more than five years. James V. Manning 50 1989 See "Part I. Executive Officers." Charles A. Mele 41 1989 See "Part I. Executive Officers." Herman Sarkowsky 72 1989 Mr. Sarkowsky has been Chairman of the Board and Chief Executive Officer of Sarkowsky Investment Corporation, a diversified investment company, for more than five years. Since May 1992, he has been a director of Seafirst Bank. Mr. Sarkowsky is also a director of Eagle Hardware & Garden Inc. and Hollywood Park, Inc. Paul C. Suthern 45 1993 Mr. Suthern has been Vice Chairman of the Company since July 1996 and was the President and Chief Operating Officer of the Company from February 1993 until July 1996 and was also the Chief Executive Officer from October 1993 until January 1995. Mr. Suthern was also President and Chief Operating Officer of Medco Containment Services, Inc. ("Medco") from November 1992 through December 1994 and Assistant to Medco's Chairman
5 from December 1991 to November 1992. Prior thereto he was Executive Vice President--Operations of Medco for more than five years. Albert M. Weis 70 1989 Mr. Weis has been President of A.M. Weis & Co., Inc., a commodities trading corporation, for more than five years. Since August 1997, Mr. Weis has been the Chairman of the Board of the New York Cotton Exchange. Mr. Weis is also a member of the Board of the Commodities Clearing Corporation. Martin J. Wygod 57 1989 Mr. Wygod has been Chairman of the Board of the Company since May 1989. From May 1989 to February 1993, Mr. Wygod also served as the Company's President and Chief Executive Officer and until May 1994 was an executive officer of the Company. Until May 1994, Mr. Wygod was Chairman of the Board of Medco for more than five years, and until January 1993 he also served as Chief Executive Officer of Medco. He is also engaged in the business of racing, boarding and breeding thoroughbred horses and is President of River Edge Farm, Inc., which is engaged in the business of breeding and boarding thoroughbred horses.
No family relationship exists among any of the directors or executive officers except that Martin J. Wygod, Chairman of the Board of the Company, and Paul C. Suthern are brothers-in-law. No arrangement or understanding exists between any director or executive officer and any other person pursuant to which any director or executive officer was selected as a director or executive officer of the Company. All executive officers are elected annually by the Board of Directors and serve at the discretion of the Board. -------------------- SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Company during the year ended June 30, 1997 and Forms 5 and amendments thereto furnished to the Company for such year, no person failed to disclose on a timely basis, as disclosed in the above forms, reports required by Section 16(a) of the Securities Exchange Act of 1934, as amended, during such year. 6 ITEM 11. EXECUTIVE COMPENSATION. Prior to the consummation of the purchase of shares of Common Stock from Merck & Co., Inc. ("Merck") by the Company and SN Investors (the "Purchase") on December 14, 1994, the Company bore a proportionate share of the cost or expense in respect of Medco compensation, benefits and travel and entertainment expenses of certain officers of the Company who were also employees of Medco or its subsidiaries other than the Company. During the period from July 1, 1994 through December 14, 1994, the executive officers of the Company, other than Ray E. Hannah, Vice President--Porex Technologies Group of the Company, did not receive any cash compensation for services to the Company or its subsidiaries. In the case of Mr. Hannah, all amounts shown below were paid by the Company. Following the consummation of the Purchase, the other executive officers of the Company became salaried employees of the Company and began to participate in the employee benefit plans and arrangements of the Company. The following table presents information concerning compensation paid for services to the Company during the last three fiscal years to Mr. Manning, the Chief Executive Officer of the Company, and to Messrs. Hannah, Marrero, Mele and Vuolo, the only other executive officers whose combined salary and bonus during the fiscal year ended June 30, 1997 exceeded $100,000 (the "Named Executive Officers"): 7
SUMMARY COMPENSATION TABLE -------------------------- LONG TERM ANNUAL COMPENSATION COMPENSATION ----------------------------------- ------------ OTHER SECURITIES ANNUAL UNDERLYING ALL OTHER COMPEN- OPTIONS/ COMPEN- NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) SATION ($) SARS (#) SATION ($) - --------------------------------- --------- ------------ --------- ---------- ----------- --------------- James V. Manning................. 1997 100,000 -- -- -- -- President and Chief 1996 100,000 -- -- -- -- Executive Officer 1995 50,000(1) -- -- 150,000 -- Ray E. Hannah.................... 1997 163,461 100,000 4,505 40,000 5,901(2) Vice President 1996 160,000 74,140 -- -- 3,239(2) --Porex Technologies Group 1995 160,000 -- -- -- 4,146(2) Charles A. Mele.................. 1997 150,000 -- 12,000 195,000 2,019(3) Vice President and General 1996 150,000 12,460 12,000 -- 1,540(3) Counsel 1995 -- -- -- -- -- Anthony Vuolo.................... 1997 150,000 -- 12,000 81,000 2,019(3) Vice President and Chief 1996 150,000 -- 12,000 -- 1,419(3) Financial Officer (since May 1995 43,269(4) -- 3,461 125,000 -- 1997) Victor L. Marrero................ 1997 150,000 -- 12,000 31,000 2,019(3) Vice President and Chief 1996 150,000 -- 12,000 -- 1,419(3) Financial Officer (through 1995 75,000(5) -- 6,000 125,000 -- May 1997)
- ---------------------- (1) During the period beginning on July 1, 1994 and ending on December 14, 1994, the date of consummation of the Purchase, Mr. Manning was paid a salary of $186,923 by Medco, none of which was attributed to services rendered to the Company. During the period beginning on December 15, 1994 and ending on June 30, 1995, Mr. Manning was paid a salary of $50,000 by the Company. Effective August 1, 1996, Mr. Manning assumed the responsibilities of acting President of the Company. (2) Includes Company matching contributions to the Porex 401(k) plan and life insurance premiums paid on behalf of Mr. Hannah of $2,043 and $2,103, respectively, in the fiscal year ended June 30, 1995, $1,878 and $1,361, respectively, in the fiscal year ended June 30, 1996 and $3,795 and $2,106, respectively, in the fiscal year ended June 30, 1997. (3) Comprised of Company matching contributions to the Porex 401(k) Plan. (4) During the period beginning on July 1, 1994 and ending on December 14, 1994, the date of consummation of the Purchase, Mr. Vuolo was paid a salary of approximately $115,000 by Medco, none of which was attributed to services rendered to the Company. During the period beginning on December 15, 1994 and ending on June 30, 1995, Mr. Vuolo was paid a salary of $43,269 by the Company. 8 (5) During the period beginning on July 1, 1994 and ending on December 14, 1994, the date of consummation of the Purchase, Mr. Marrero was paid a salary of approximately $115,000 by Medco, none of which was attributed to services rendered to the Company. During the period beginning on December 15, 1994 and ending on June 30, 1995, Mr. Marrero was paid a salary of $75,000 by the Company. Mr. Marrero was the Chief Financial Officer from December 1994 until May 1997, at which time Mr. Vuolo became the Chief Financial Officer. -------------------- The following table presents information concerning the options granted to the Named Executive Officers during the last fiscal year.
OPTION/SAR GRANTS IN LAST FISCAL YEAR INDIVIDUAL GRANTS ----------------------------------------------------- NUMBER OF SECURITIES % OF TOTAL UNDERLYING OPTIONS/SARS EXERCISE OPTIONS/ GRANTED TO OR BASE SARS EMPLOYEES PRICE EXPIRATION GRANT DATE NAME GRANTED (#) IN FISCAL YEAR ($/SH) DATE PRESENT VALUE ($)(2) - ------------------- ------------- --------------- --------- ---------- -------------------- Ray E. Hannah...... 40,000(1) 1.1% 35.50 4/16/07 459,998 Victor L. Marrero.. 31,000(1) .8% 32.25 10/02/06 309,874 Charles A. Mele.... 195,000(1) 5.3% 32.25 10/02/06 1,949,204 Anthony Vuolo...... 31,000(1) .8% 32.25 10/02/06 309,874 50,000(1) 1.4% 35.53 6/23/07 575,981
____________ (1) These options vest and become exercisable at the rate of 20% per year, commencing on the first anniversary of the date of grant and were granted on the following dates: Mr. Hannah, all on April 16, 1997; Messrs. Marrero and Mele, all on October 2, 1996; and Mr. Vuolo, 31,000 on October 2, 1996 and 50,000 on June 23, 1997. (2) The estimated grant date present value reflected in the above table is determined using the Black-Scholes model. The material assumptions and adjustments incorporated in the Black-Scholes model in estimating the value of the options reflected in the above table include the following: (i) the respective option exercise price, specified above, equal to the fair market value of the underlying stock on the date of grant; (ii) the exercise of options within one year of the date that they become exercisable; (iii) a risk-free interest rate of 6.5% per annum; and (iv) volatility of 0.2722 calculated using daily stock prices of the Company during the period from the date of the Purchase to June 30, 1997. The ultimate values of the options will depend on the future market price of the Company's stock, which cannot be forecasted with reasonable accuracy. The actual value, if any, an optionee will realize upon exercise of an option will depend on the excess of the market value of the Company's Common Stock over the exercise price on the date the option is exercised. There is no assurance that the value realized by an optionee will be at or near the value estimated by the Black-Scholes model or any other model applied to value the options. 9 No options to purchase Common Stock were exercised by the Named Executive Officers during the fiscal year ended June 30, 1997. Messrs. Marrero and Vuolo realized income of $2,522,534 and $2,006,240, respectively, from the exercise of options to purchase common stock of Merck granted prior to the closing of the Purchase, but which continued to vest and remained exercisable thereafter as a result of their employment by the Company. See "Item 13. Certain Relationships and Related Transactions--Purchase and Sale Agreement; Divestiture." The following table presents information concerning the fiscal year-end value of options to purchase Common Stock held by the Named Executive Officers. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/ OPTIONS/SARS AT FY-END (#) SARS AT FY-END ($)(1) --------------------------- --------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------- --------------------------- --------------------------- James V. Manning... 225,000 90,000 6,488,750 2,430,000 Ray E. Hannah...... 64,000 40,000 1,754,500 60,000 Victor L. Marrero.. 60,000 106,000 1,667,500 2,172,250 Charles A. Mele.... 70,000 195,000 1,945,000 926,250 Anthony Vuolo...... 86,000 164,000 2,293,000 2,482,500 - ----------------------------- (1) Based upon the fiscal year-end closing price of the Common Stock of $37.00. 10 PLANS AND ARRANGEMENTS OF THE COMPANY PENSION PLAN Employees of the Company and certain of its subsidiaries who satisfy certain age and service requirements are eligible to participate in the Pension Plan for Employees of Porex Technologies Corp. (the "Pension Plan"), a defined benefit plan. The Company bears the entire cost of the Pension Plan. The Company's contributions to the Pension Plan are computed on an actuarial basis in order to fund the defined retirement benefits. Normal retirement benefits are payable monthly for life to a participant upon retirement at his or her retirement date (i.e., age 65), and are equal to 1/12 of the sum of (a) 0.6% of the participant's average annual compensation for the five consecutive calendar years that the participant's compensation was the highest during the ten consecutive years of service immediately preceding retirement ("Final Average Compensation"), multiplied by the participant's credited years of service up to a maximum of 35 years, and (b) 0.6% of the participant's Final Average Compensation in excess of the average annual Social Security taxable wage base for the 35-year period ending with the year the participant would reach normal retirement age, multiplied by the participant's credited years of service up to a maximum of 35 years. A participant becomes 100% vested in his or her accrued retirement benefit after completion of five years of service or upon attainment of normal retirement at age 65. Retirement benefits are not subject to any deduction for Social Security or other offset amounts. Under a defined benefit plan such as the Pension Plan, contributions allocable to individual participants cannot be readily and accurately calculated. The table below shows estimated annual retirement benefits for executives at specified levels of remuneration and years of service. The estimates assume that benefits commence at age 65 under a straight life annuity form. The table discloses the benefits that an individual would receive at age 65 if he participated in the Pension Plan for 15, 20, 25, 30 and 35 years. PENSION PLAN TABLE Years of Service - --------------------------------------------------------- Remuneration 15 20 25 30 35 - -------------- ------ ------ ------ ------ ------ 100,000 15,363 20,484 25,604 30,725 35,864 115,000 18,063 24,084 30,104 36,125 42,146 125,000 19,863 26,484 33,104 39,725 46,346 150,000 24,363 32,484 40,604 48,725 56,846 152,000 24,723 32,964 41,204 49,445 57,686 or more Ray E. Hannah, the only Named Executive Officer participating in the Pension Plan, had accrued 29 credited years of service under the Pension Plan and had annual remuneration covered by the Pension Plan of $160,000 as of January 1, 1997. Sections 401(a)(17) and 415 of the Internal Revenue Code limit the amount of compensation that may be considered in computing benefits under a qualified retirement plan. For 1995 and 1996, the maximum amount of compensation allowed for use in calculating an individual's pension benefits under the Retirement Plan was $150,000. For 1997, the maximum increased to $160,000. 11 COMPENSATION OF DIRECTORS Those directors who are not officers or employees of the Company received no cash compensation for serving as directors for the fiscal year ended June 30, 1997. The Company's 1991 Director Stock Option Plan (the "Director Plan") provides that on the first business day of each fiscal year of the Company, each director who is not an officer or employee of the Company then in office will automatically be granted an option to purchase 10,000 shares of Common Stock. In addition, each director who is not an officer or employee of the Company automatically receives an option to purchase 10,000 shares of Common Stock at the time such director is first elected to the Board. The Director Plan is administered by the Board of Directors or any executive officer or officers designated by the Board. Non-employee directors have also received in the past options to purchase Common Stock under the Company's 1989 Class A Stock Option Plan (the "Class A Plan"), and the Company from time to time has granted options to purchase Common Stock to certain of such directors outside the Company's stock option plans on terms similar to those contained in the Class A Plan. 12 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. PRINCIPAL STOCKHOLDERS The following table sets forth certain information as of September 15, 1997 (except as otherwise indicated) concerning the beneficial ownership of the Company's Common Stock by each person known by the Company to own more than 5% of its Common Stock. AMOUNT NAME AND ADDRESS OF AND NATURE OF PERCENT BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS (1) - --------------------------------------- ------------------------ ------------ Martin J. Wygod................... 5,421,468(2)(3) 30.3% River Edge Farm P.O. Box 1949 Buellton, California 93427 SN Investors, L.P................. 5,061,857(2) 28.7% P.O. Box 616 Fair Lawn, New Jersey 07410 FMR Corp.......................... 1,157,582(4) 6.6% 82 Devonshire Street Boston, Massachusetts 02107 The Prudential Insurance Company.. 1,019,743(5) 5.8% of America ("Prudential") Prudential Plaza Newark, New Jersey 07102 James R. Buell.................... 1,010,916(6) 5.7% Star Route Box 129 Orovada, Nevada 89425 - ------------------------------------- (1) The number of shares of Common Stock deemed outstanding includes: (i) 17,650,965 shares of Common Stock outstanding as of September 15, 1997, (ii) the number of shares, if any, of Common Stock that the respective persons named in the above table have the right to acquire presently or within 60 days of September 15, 1997 upon exercise of stock options and (iii) the number of shares, if any, of Common Stock, which the respective persons named in the above table have the right to acquire upon conversion of the Company's 5% Convertible Subordinated Debentures due 2007 ("Convertible Debentures"). (2) SN Investors, the general partner of which is controlled by Mr. Wygod, is the record and beneficial owner of 5,061,857 shares of Common Stock. Mr. Wygod is an indirect beneficial owner of such shares and they are included in the total of 5,421,468 shares listed as beneficially owned by Mr. Wygod. See "Item 13. Certain Relationships and Related Transactions-- Purchase and Sale Agreement; Divestiture" and "--Investment Agreement" for additional information regarding SN Investors. 13 (3) Includes 256,000 shares of Common Stock that Mr. Wygod has the right to acquire presently or within 60 days of September 15, 1997 upon exercise of stock options or upon conversion of Convertible Debentures. Includes 2,000 shares of Common Stock beneficially owned by Mr. Wygod's spouse, as to which shares Mr. Wygod disclaims beneficial ownership. Does not include 3,500 shares of Common Stock and shares of Common Stock issuable upon conversion of $1,500,000 principal amount of Convertible Debentures owned by Medco Containment Services Foundation, Inc., a charitable foundation of which Messrs. Manning, Suthern and Wygod are trustees and share voting and dispositive power nor 105,350 shares of Common Stock and shares of Common Stock issuable upon conversion of $500,000 principal amount of Convertible Debentures owned by the Rose Foundation, a private charitable foundation of which Messrs. Wygod and Mele are trustees and share voting and dispositive power. (4) The information shown is as of December 31, 1996 and is based upon information disclosed by FMR Corp., Fidelity Management and Research Company, Fidelity VIP Equity-Income Fund, Abigail P. Johnson and Edward C. Johnson, 3d, the controlling stockholder of FMR Corp., in a Schedule 13G filed with the Commission. Such persons reported that FMR Corp. is the parent holding company of Fidelity Management and Research Company, and that Edward C. Johnson, 3d, FMR Corp., through its control of Fidelity Management and Research Company, and the Funds each has sole power to dispose of such shares. Sole power to vote the shares resides in the Fund's Board of Trustees. (5) The information shown is as of December 31, 1996 and is based upon information disclosed by Prudential in its Schedule 13G filed with the Securities and Exchange Commission (the "Commission"). Prudential reported in its Schedule 13G that it has shared voting and dispositive power over such shares. (6) Includes 131,667 shares of Common Stock that Mr. Buell has the right to acquire presently or within 60 days of September 15, 1997 upon exercise of stock options or upon conversion of Convertible Debentures. The information shown is as of May 28, 1997 and is based upon information disclosed by Mr. Buell in his Schedule 13D filed with the Securities and Exchange Commission. Mr. Buell reported in his Schedule 13D that he has sole voting and dispositive power over such shares. 14 SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth certain information, as of September 15, 1997, concerning the ownership of Common Stock by each of the directors, each of the Named Executive Officers, and by all directors and executive officers of the Company as a group. AMOUNT AND NATURE OF BENEFICIAL PERCENT OF NAME OF BENEFICIAL OWNER OWNERSHIP (1)(2) CLASS (3) - -------------------------------------- ------------------------ ----------- Thomas R. Ferguson.................... 108,117 * Mervyn L. Goldstein................... 110,717(4) * Ray E. Hannah......................... 137,628 * Roger H. Licht........................ 81,333 * James V. Manning...................... 269,740(5) 1.51% Victor L. Marrero..................... 68,958 * Charles A. Mele....................... 112,188(6) * Herman Sarkowsky...................... 230,724(7) 1.30% Paul C. Suthern....................... 202,500(5) 1.13% Anthony Vuolo......................... 94,858 * Albert M. Weis........................ 157,169(8) * Martin J. Wygod....................... 5,421,468(5)(6)(9) 30.28% All directors and executive officers as a group (13 persons)............. 7,000,750 36.79% - -------------------------------- * Less than one percent. (1) The persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, unless otherwise indicated in the following footnotes. (2) Includes the following number of shares of Common Stock that the following persons have the right to acquire presently or within 60 days of September 15, 1997 upon exercise of stock options and the number of shares of Common Stock that the following persons have the right to acquire upon conversion of Convertible Debentures: Mr. Ferguson, 103,667; Dr. Goldstein, 98,667; Mr. Hannah, 64,167; Mr. Licht, 79,333; Mr. Manning, 233,333; Mr. Marrero, 67,033; Mr. Mele, 109,833; Mr. Sarkowsky, 127,000; Mr. Suthern, 200,500; Mr. Vuolo, 93,033; Mr. Weis, 106,167; Mr. Wygod, 256,000; and all directors and executive officers as a group, 1,471,700. Includes 1,461 shares of Common Stock allocated to the account of Mr. Hannah, 100 shares of Common Stock allocated to the account of Mr. Marrero, 105 shares of Common Stock allocated to the account of Mr. Mele and 100 shares of Common Stock allocated to the account of Mr. Vuolo under the Porex Technologies Corp. 401(k) Savings Plan as of June 30, 1997. (3) The number of shares of Common Stock deemed outstanding includes: (i) 17,650,965 shares of Common Stock outstanding as of September 15, 1997, (ii) the number of shares of Common Stock that the respective persons named in the above table have the right to acquire presently or within 60 days of September 15, 1997 upon exercise of stock options and (iii) the number of shares of Common Stock that the respective persons named in the above table have the right to acquire upon conversion of Convertible Debentures. (4) Includes 200 shares of Common Stock owned by Dr. Goldstein's spouse, as to which Dr. Goldstein disclaims beneficial ownership. 15 (5) Does not include 3,500 shares of Common Stock and shares of Common Stock issuable upon conversion of $1,500,000 principal amount of Convertible Debentures owned by Medco Containment Services Foundation, Inc., a charitable foundation of which Messrs. Manning, Suthern and Wygod are trustees and share voting and dispositive power. (6) Does not include 105,350 shares of Common Stock and shares of Common Stock issuable upon conversion of $500,000 principal amount of Convertible Debentures owned by the Rose Foundation, a private charitable foundation of which Messrs. Wygod and Mele are trustees and share voting and dispositive power. (7) Includes 14,705 shares of Common Stock owned by a charitable foundation of which Mr. Sarkowsky is a director. (8) Includes 3,050 shares of Common Stock owned by a corporation of which Mr. Weis is the sole stockholder, sole director and president and 3,200 shares of Common Stock held in trust for Mr. Weis's children. (9) Includes 2,000 shares of Common Stock beneficially owned by Mr. Wygod's spouse, as to which shares Mr. Wygod disclaims beneficial ownership. See also "Footnote 2 to Principal Stockholders Table". 16 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. PURCHASE AND SALE AGREEMENT; DIVESTITURE. On December 14, 1994, pursuant to the Purchase and Sale Agreement dated as of May 24, 1994 between the Company and Merck (the "Purchase and Sale Agreement"), the Company purchased 5,268,463 shares of the Company's Common Stock from Merck for an aggregate purchase price of $37,764,019. At the time of the purchase by the Company, SN Investors purchased 5,061,857 shares of the Company's Common Stock (the "Wygod Shares" and, collectively with the shares purchased by the Company, the "Shares") from Merck for an aggregate purchase price of $36,283,079. The purchase prices for the Shares stated above reflect a final purchase price adjustment, pursuant to the terms of the Purchase and Sale Agreement, in the amount of $2,331,256 that was paid by the Company to Merck on July 31, 1996, $1,142,315 of which was reimbursed to the Company by SN Investors. The purchase by SN Investors was made pursuant to an assignment by the Company to Mr. Wygod of the right to purchase the Wygod Shares pursuant to the Investment Agreement between Mr. Wygod and the Company, dated as of September 13, 1994 (the "Investment Agreement"). Mr. Wygod, as permitted under the Investment Agreement, further assigned to SN Investors his right to purchase the Wygod Shares. The Investment Agreement governs the terms and conditions under which the Wygod Shares will be held by Mr. Wygod and his permitted assignees and transferees. See "--Investment Agreement." Also on December 14, 1994, the Company consummated the sale (the "Divestiture") of the subsidiaries conducting the Company's institutional pharmacies business (the "Institutional Pharmacies Business") to Pharmacy Corporation of America, an indirect, wholly owned subsidiary of Beverly Enterprises, Inc. ("Beverly"), for approximately $107,300,000. In the Purchase and Sale Agreement, the Company agreed, until May 24, 1999, to be bound by the restrictions contained in the Consulting Agreement described below under "--Consulting Agreement," provided that such restrictions shall be of no further force and effect in the event of the death of Mr. Wygod, or if Mr. Wygod ceases to be a director of the Company or any subsidiary of the Company, ceases to have any ownership interest in the Company (provided that if the Company is a public company he may have up to a 1% equity interest in the Company), and is not a principal, agent or employee of or consultant to the Company or any subsidiary of the Company, or is not otherwise rendering any services to the Company or any subsidiary of the Company. Pursuant to the terms of the Purchase and Sale Agreement, options to purchase common stock of Merck and its subsidiaries (other than the Company and its subsidiaries) previously granted to certain employees and consultants were modified so that employment by or consulting services to the Company or its subsidiaries (in the case of employees and consultants continuing with the Company after the closing of the Purchase) or Beverly or its subsidiaries (in the case of employees and consultants continuing with the Institutional Pharmacies Business after the closing of the Divestiture) will be considered employment by or consulting services to Merck and its subsidiaries for purposes of vesting and continued exercisability of such options; provided that no further vesting of such options occurred after June 1, 1996. INVESTMENT AGREEMENT. In the Investment Agreement, the Company assigned the rights and obligations to purchase the Wygod Shares to Mr. Wygod. The Investment Agreement governs the terms and conditions under which the Wygod Shares will be held by Mr. Wygod and his permitted assignees and transferees. Mr. Wygod, as permitted under the Investment Agreement, assigned such rights and obligations to SN Investors. Pursuant to the Investment Agreement, SN Investors was (1) required to be a limited partnership in which Mr. Wygod or an entity controlled by Mr. Wygod is the general partner and one or more of his family trusts and/or partnerships (collectively, the "Wygod Entities") and/or independent third parties are limited partners and (2) required to agree to be bound by all of the restrictions and obligations applicable to Mr. Wygod under the Investment Agreement. The Investment Agreement required the initial investment of the Wygod Entities in SN Investors to be at least $20,000,000 (on a cost basis) (the "Wygod Investment"). 17 The Investment Agreement provides that, until the earliest to occur of (a) December 14, 1998, (b) the death or adjudication of incompetency of Mr. Wygod or (c) a Change of Control (as defined in the Investment Agreement) (the "Restriction Period"), in respect of the Wygod Investment, except to the extent of proceeds from sales of the Wygod Shares pursuant to a tender or exchange offer for shares of Common Stock that is not opposed by the Board of Directors of the Company, the Wygod Entities will at all times maintain (directly and/or through SN Investors) at least $20,000,000 (on a cost basis) in the Wygod Investment and will not cause or allow the amount of the Wygod Investment (on a cost basis) to be less than $20,000,000 (net of any disposition, transfer, pledge, distribution by SN Investors or any other arrangement involving the transfer of ownership or interests in Wygod Shares (or proceeds therefrom), but not taking into account any reduction in the Wygod Investment by virtue of a decline in the value of Wygod Shares). A "Change of Control" under the Investment Agreement means: (a) the acquisition by any person, entity or group of at least 50% of the voting power of the voting securities of the Company other than the Wygod Shares; (b) individuals who, as of the date of the Investment Agreement, constitute the Board of Directors of the Company (the "Incumbent Board") ceasing for any reason to constitute at least a majority of the Board of Directors (provided that directors whose nomination or election was approved by the Incumbent Board are also generally deemed to be part of the Incumbent Board); (c) a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), excluding, however, such a Business Combination pursuant to which (i) all or substantially all of the individuals and entities who were the beneficial owners of the Company's voting securities immediately prior to such Business Combination beneficially own more than 60% of, respectively, the then- outstanding shares of common stock and the combined voting power of the then- outstanding securities entitled to vote generally in the election of directors of the corporation resulting from such Business Combination, in substantially the same proportions as their ownership immediately prior to such Business Combination of the Company's voting securities, and (ii) at least a majority of the board of directors of the resulting corporation were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board of Directors providing for such Business Combination; (d) a complete liquidation or dissolution of the Company; or (e) the issuance by the Company following the closing of the Purchase of shares of Common Stock constituting in the aggregate more than 50% of the shares of Common Stock outstanding as of immediately following the closing of the Purchase. As of September 15, 1997, the Company had issued 5,141,256 shares of Common Stock since the closing of the Purchase. Accordingly, the issuance of an aggregate of 1,113,599 additional shares of Common Stock would be a "Change of Control" as defined in clause (e) above. Pursuant to the Investment Agreement, during the Restriction Period: (a) Mr. Wygod and SN Investors are required to vote (or cause to be voted) the Wygod Shares (i) with respect to election of directors, for the nominees who would have been elected based on the vote of all shares of Common Stock, other than the Wygod Shares, in proportion to the votes that such nominees received, and (ii) on all other matters to come before the stockholders of the Company, in the same manner as a majority of the outstanding shares of Common Stock (other than the Wygod Shares) are voted; and (b) except for sales pursuant to a tender or exchange offer for the shares of Common Stock that is not opposed by the Board of Directors of the Company, neither Mr. Wygod nor SN Investors may transfer interests in the Wygod Shares (except that Mr. Wygod may transfer interests in SN Investors to the extent otherwise permitted by the Investment Agreement). Upon the expiration of the obligations of Mr. Wygod and SN Investors described in this paragraph, Mr. Wygod and SN Investors may be in a position to influence the election of the Company's Board of Directors as well as the direction and future operations of the Company. Under the Investment Agreement, following the earlier to occur of (a) December 14, 1998 or (b) the death or adjudication of incompetency of Mr. Wygod: (i) to the extent the Wygod Entities and/or SN Investors retain the power to vote Wygod Shares that have, in the aggregate, in excess of 20% of the voting power of the Company's voting securities outstanding at the time of any vote by stockholders of the Company, Mr. Wygod and SN Investors will vote (or cause to be voted) the portion of such Wygod Shares representing the excess above 20% of such voting power, (A) with respect to the election of directors, for the nominees who would have been elected 18 based on the vote of all shares of Common Stock, other than the Wygod Shares, in proportion to the votes that such nominees received, and (B) on all other matters to come before the stockholders of the Company, in the same manner as a majority of the outstanding shares of Common Stock, other than the Wygod Shares, are voted; and (ii) to the extent that Wygod Entities and/or SN Investors retain beneficial ownership of Wygod Shares that have, in the aggregate, in excess of 20% of the voting power of the outstanding voting securities of the Company, the portion of such Wygod Shares representing the excess above 20% of such voting power at the time of any proposed sale or transfer thereof shall not be sold or transferred except (A) to transferees reasonably acceptable to the Company (provided that, without the Company's consent, no such transfer or series of transfers to a single person, entity or group will involve the transfer of more than 9.9% of the voting power of the Company's outstanding voting securities and no such transfer or series of transfers will be made to a single person, entity or group that will own, following such transfers, more than 50% of the voting power of the Company's outstanding voting securities), (B) to the partners of SN Investors in proportion to their respective interests in SN Investors (provided that, without the Company's consent, no such transfer or series of transfers to a single person, entity or group (other than Mr. Wygod or the Wygod Entities) will involve the transfer of more than 9.9% of the voting power of the Company's outstanding voting securities), (C) in ordinary open market transactions, or (D) pursuant to an underwritten public offering. The Investment Agreement provides that the restrictions described in the foregoing paragraph will not apply (a) in the event there has been, or from and after the occurrence of, a Change of Control (as defined in the Investment Agreement) of the Company, (b) at any time after December 14, 2004 or (c) to any person or entity, other than Mr. Wygod, the Wygod Entities or SN Investors, to whom Wygod Shares are transferred (including by means of distributions from SN Investors) in accordance with the provisions of the foregoing paragraph. The Investment Agreement also provides certain demand registration rights to Mr. Wygod at Mr. Wygod's expense that are assignable to any permitted transferee of the Wygod Shares; provided that, in no event is the Company required to file in the aggregate more than two registration statements in connection therewith. Mr. Wygod has not assigned such registration rights to SN Investors. While Mr. Wygod currently intends to assign such registration rights to SN Investors in the event the General Partner determines to sell or otherwise transfer the Wygod Shares under circumstances in which registration would be required, Mr. Wygod is under no obligation to do so. Certain provisions of the Investment Agreement may have the effect of deterring a change of control of the Company that is not supported by the Board of Directors of the Company or Mr. Wygod. During the Restriction Period, Mr. Wygod and SN Investors are prohibited from transferring the Wygod Shares, except pursuant to a tender or exchange offer that is not opposed by the Board of Directors of the Company or to specified permitted transferees. In addition, under the Investment Agreement, in the event that a Change of Control (as defined in the Investment Agreement) were to occur during the Restriction Period, Mr. Wygod and SN Investors would no longer be obligated under the Investment Agreement to vote the Wygod Shares with respect to nominees for election as directors based on the vote of shares other than the Wygod Shares and with respect to other matters in the same manner as the majority of the other outstanding shares of Common Stock (other than the Wygod Shares) are voted, with the result that Mr. Wygod and SN Investors would have unrestricted voting power with respect to the Wygod Shares. The effect of these provisions of the Investment Agreement may be to discourage the commencement of a tender or exchange offer opposed by the Board of Directors of the Company during the Restriction Period and to discourage a proxy solicitation to change a majority of the Board of Directors of the Company absent the support of Mr. Wygod. CONSULTING AGREEMENT. In the Consulting Agreement, dated as of May 24, 1994 (the "Consulting Agreement"), by and among Mr. Wygod, Merck and Medco, Mr. Wygod has agreed that, until May 24, 1999, absent Merck's prior written approval, he will not (as principal, agent, employee, consultant or otherwise) directly or indirectly engage in activities with, nor render services to, any business engaged or about to become engaged in a Competitive Business (as defined in the Consulting Agreement). A "Competitive Business" is defined in the Consulting Agreement as: (a) the pharmaceutical business of Merck and its affiliates (unless such business is subsequently disposed of and Mr. Wygod did not have material involvement in such business during the two-year period preceding May 24, 1994), (b) the business, as of either November 18, 1993 or May 24, 1994, of Medco 19 and its subsidiaries (unless such business is subsequently disposed of and Mr. Wygod did not have material involvement in such business during the two-year period preceding May 24, 1994), other than the business of Porex and the other plastic businesses of the Company as conducted as of May 24, 1994, or (c) any other then-current business of Merck and its affiliates as to which Mr. Wygod became materially involved following November 18, 1993; provided, however, that the Consulting Agreement permits Mr. Wygod to have a 1% or less equity interest in a Competitive Business that is a public corporation. In addition, the Consulting Agreement provides that, until May 24, 1999, Mr. Wygod will not, directly or indirectly: (i) solicit or contact any customer or prospective customer of Medco and/or any of its affiliates as to matters that relate to a Competitive Business in which Medco or its affiliates is then engaged or which is in any way inconsistent or interferes therewith; (ii) induce, or attempt to induce, any employees or agents or consultants of Medco and/or its affiliates to do anything from which Mr. Wygod is restricted by reason of the Consulting Agreement; or (iii) offer or aid others to offer employment to any employees of Medco or its affiliates. OTHER. The Company was reimbursed approximately $121,600 and $49,500 by a corporation controlled by Mr. Wygod for the partial use of two of the Company's office facilities and for services rendered by one Company employee during the fiscal years ended June 30, 1997 and 1996, respectively. 20 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1)-(2) Financial Statements and Schedules: The financial statements and schedules listed in the accompanying Index to Consolidated Financial Statements and Supplemental Data at page F-l are filed as part of this Report. (a)(3) Index to Exhibits: See Index to Exhibits on page E-1. (b) Reports on Form 8-K: None. 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SYNETIC, INC. Date: October 1, 1997 By: /s/ Charles A. Mele ------------------------------------ Name: Charles A. Mele Title: Vice President-General Counsel 22 SYNETIC, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA The following financial statements of the Registrant and its subsidiaries required to be included in Item 14.(a) (1) of Form 10-K are listed below: PAGE ---- Report of Independent Public Accountants............... F-2 Consolidated Balance Sheets at June 30, 1997 and 1996.. F-3 Consolidated Statements of Income for the Years Ended June 30, 1997, 1996 and 1995............. F-5 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended June 30, 1997, 1996 and 1995......................... F-6 Consolidated Statements of Cash Flows for the Years Ended June 30, 1997, 1996 and 1995............. F-7 Notes to Consolidated Financial Statements............. F-8 The following financial statement supplementary data of the Registrant and its subsidiaries required to be included in Item 14.(a) (2) of Form 10-K are listed below: PAGE ---- Schedule II - Valuation and Qualifying Accounts............................................. S-1 All other schedules not listed above have been omitted as not applicable or because the required information is included in the Consolidated Financial Statements or in the notes thereto. Columns omitted from schedules filed have been omitted because the information is not applicable. These financial statements have been prepared from the Company's books and records after making all necessary adjustments thereto, and they represent the final statements for the period under audit. F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO SYNETIC, INC.: We have audited the accompanying consolidated balance sheets of Synetic, Inc. (a Delaware corporation) and subsidiaries as of June 30, 1997 and 1996, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended June 30, 1997. These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Synetic, Inc. and subsidiaries as of June 30, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1997 in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to consolidated financial statements and supplemental data is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP New York, New York September 24, 1997 F-2 SYNETIC, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) ASSETS
JUNE 30, ------------------- 1997 1996 ------------------- CURRENT ASSETS: Cash and cash equivalents.......................... $ 77,303 $ 22,210 Marketable securities.............................. 11,765 140,268 Accounts receivable, net of allowances for doubtful accounts and sales returns of $739 and $671 at June 30, 1997 and 1996, respectively..... 9,094 7,299 Inventories........................................ 5,505 5,253 Other current assets............................... 9,233 4,821 -------- -------- Total current assets............................. 112,900 179,851 -------- -------- PROPERTY, PLANT AND EQUIPMENT: Land and improvements.............................. 1,613 823 Buildings and improvements......................... 9,911 8,992 Machinery and equipment............................ 23,444 19,295 Furniture and fixtures............................. 3,283 2,856 Construction in progress........................... 2,516 1,306 -------- -------- 40,767 33,272 Less: Accumulated depreciation.................... (18,681) (16,014) -------- -------- Property, plant and equipment, net............... 22,086 17,258 -------- -------- OTHER ASSETS: Marketable securities.............................. 226,760 - Other.............................................. 20,357 2,483 -------- -------- Total other assets.............................. 247,117 2,483 -------- -------- $382,103 $199,592 ======== ========
The accompanying notes are an integral part of these consolidated balance sheets. F-3 SYNETIC, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30, ------------------------- 1997 1996 ------------------------- CURRENT LIABILITIES: Accounts payable........................................... $ 2,344 $ 1,303 Accrued liabilities........................................ 14,203 7,014 Income taxes payable....................................... 3,044 5,206 -------- -------- Total current liabilities................................ 19,591 13,523 -------- -------- LONG TERM DEBT, LESS CURRENT PORTION............................ 165,000 - OTHER LIABILITIES............................................... 8,776 4,980 COMMITMENTS AND CONTINGENCIES (NOTE 10) STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value; 10,000,000 shares authorized; none issued.................................. - - Common stock, $.01 par value; 50,000,000 shares authorized; 22,865,149 and 22,007,290 shares issued; 17,564,980 and 16,738,827 shares issued and outstanding at June 30, 1997 and 1996, respectively.................. 229 220 Paid-in capital............................................ 196,212 158,227 Treasury stock, at cost; 5,300,169 and 5,268,463 at June 30, 1997 and 1996, respectively.................. (39,462) (36,575) Retained earnings.......................................... 31,757 59,217 -------- -------- Total stockholders' equity............................... 188,736 181,089 -------- -------- $382,103 $199,592 ======== ========
The accompanying notes are an integral part of these consolidated balance sheets. F-4 SYNETIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data)
YEARS ENDED JUNE 30, ----------------------------- 1997 1996 1995 --------- -------- -------- Net sales....................................... $ 52,885 $45,128 $39,179 -------- ------- ------- Costs and expenses: Cost of sales................................. 29,035 25,108 23,006 Selling, general and administrative........... 20,841 14,930 12,125 Interest and other income..................... (11,065) (3,952) (4,757) Dividend income............................... (1,829) (4,160) (2,555) Interest expense.............................. 3,116 - 3,619 Purchased research and development and other.. 37,413 - - Purchase and Sale Agreement related expenses and other.................................. - - 6,663 -------- ------- ------- 77,511 31,926 38,101 -------- ------- ------- Income (loss) from continuing operations before provision for income taxes............. (24,626) 13,202 1,078 Provision for income taxes...................... 2,834 4,617 443 -------- ------- ------- Income (loss) from continuing operations........ $(27,460) $ 8,585 $ 635 -------- ------- ------- Discontinued operations: Income from discontinued operations, net of provision for income taxes of $842....................................... - - 963 Gain on sale of Institutional Pharmacy operations, net of taxes of $23,037........... - - 14,496 -------- ------- ------- Net income (loss)............................... $(27,460) $ 8,585 $16,094 ======== ======= ======= Net income (loss) per share: Continuing operations......................... $(1.60) $.48 $ .04 Discontinued operations....................... - - .89 -------- ------- ------- Net income (loss) per share..................... $(1.60) $.48 $ .93 -------- ======= ======= Weighted average shares outstanding............. 17,133 18,026 17,379 ======== ======= =======
The accompanying notes are an integral part of these consolidated statements. F-5 SYNETIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands)
Common Stock -------------------- Number TOTAL of PAID-IN RETAINED TREASURY STOCKHOLDERS' Shares AMOUNT CAPITAL EARNINGS STOCK EQUITY ------------ ------ -------- --------- --------- -------------- Balance, June 30, 1994........................... 17,621 $176 $ 70,416 $ 34,538 - $105,130 ------ ---- -------- -------- -------- -------- Net income..................................... - - - 16,094 - 16,094 Issuance of common stock for exercise of stock options and 401(k) plan................ 368 4 5,200 - - 5,204 Issuance of common stock for conversion of debentures..................... 3,877 39 76,940 - - 76,979 Purchase of 5,268,463 shares of common stock for Treasury................. - - - - (36,575) (36,575) ------ ---- -------- -------- -------- -------- Balance, June 30, 1995........................... 21,866 $219 $152,556 $ 50,632 $(36,575) $166,832 ------ ---- -------- -------- -------- -------- Net income..................................... - - - 8,585 - 8,585 Issuance of common stock for exercise of stock options and 401(k) plan................ 141 1 5,671 - - 5,672 ------ ---- -------- -------- -------- -------- Balance, June 30, 1996........................... 22,007 $220 $158,227 $ 59,217 $(36,575) $181,089 ------ ---- -------- -------- -------- -------- Net (loss)..................................... - - - (27,460) - (27,460) Issuance of common stock for exercise of stock options and 401(k) plan................ 323 3 13,503 - - 13,506 Issuance of common stock and warrants for acquisitions of Avicenna and CareAgents...... 535 6 24,482 - - 24,488 Adjustment to purchase price of Treasury stock........................................ - - - - (1,712) (1,712) Purchase of 49,506 shares of common stock for Treasury, net of 17,800 shares reissued.. - - - - (1,175) (1,175) ------ ---- -------- -------- -------- -------- Balance, June 30, 1997........................... 22,865 $229 $196,212 $ 31,757 $(39,462) $188,736 ====== ==== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. F-6 SYNETIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
YEARS ENDED JUNE 30, ---------------------------------- 1997 1996 1995 ---------- ---------- ---------- Cash flows from operating activities: Net income (loss)......................................... $ (27,460) $ 8,585 $ 16,094 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Write-off of purchased research and development costs.. 37,413 - - Income from discontinued operations.................... - - (963) Gain on sale of Institutional Pharmacy business............................................... - - (14,496) Other expense.......................................... - - 1,056 Depreciation and amortization.......................... 3,294 2,619 1,545 Deferred income taxes.................................. (2,100) (254) (301) Changes in operating assets and liabilities, net of the effects of acquisitions: Accounts receivable, net............................. (795) (634) (1,056) Inventories.......................................... 147 193 804 Other assets......................................... (7,184) (173) (3,365) Accounts payable..................................... 776 655 (423) Accrued liabilities.................................. 1,690 (2,323) 1,206 Other liabilities.................................... 48 - 4,980 Income taxes payable................................. 3,188 2,625 946 --------- --------- --------- Net cash provided by operating activities............................ 9,017 11,293 6,027 --------- --------- --------- Cash flows from investing activities: Sales of marketable securities......................... 396,638 708,685 383,064 Purchases of marketable securities..................... (494,895) (704,099) (430,916) Capital expenditures................................... (6,063) (2,790) (3,398) Net proceeds from sale of Institutional Pharmacy business.................................... - - 82,911 Net cash paid for acquired businesses.................. (10,612) - - --------- --------- --------- Net cash provided by (used for) investing activities............................ (114,932) 1,796 31,661 --------- --------- --------- Cash flows from financing activities: Purchases of Treasury stock............................ (3,570) - (36,575) Proceeds from issuance of stock options and 401(k) purchases..................................... 3,688 1,838 4,369 Proceeds from issuance of Convertible Debentures, net of underwriting discount......................... 160,890 - - Payments on long-term debt............................. - (216) (3,532) --------- --------- --------- Net cash provided by (used for) financing activities............................ 161,008 1,622 (35,738) --------- --------- --------- Net increase in cash and cash equivalents................. 55,093 14,711 1,950 Cash and cash equivalents, beginning of period................................................. 22,210 7,499 5,549 --------- --------- --------- Cash and cash equivalents, end of period.................. $ 77,303 $ 22,210 $ 7,499 ========= ========= =========
The accompanying notes are an integral part of these consolidated statements. F-7 SYNETIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: On November 18, 1993, Medco Containment Services, Inc. ("Medco") became a wholly-owned subsidiary of Merck & Co., Inc. ("Merck"). As a result of this transaction, Merck acquired voting control of Synetic, Inc. (the "Company"). On May 24, 1994, Merck and the Company entered into a Purchase and Sale Agreement (the "Agreement") by which the Company and its Chairman, Martin J. Wygod, would purchase the Company's common stock owned by Merck. As part of this Agreement, the Company agreed to divest its Institutional Pharmacy business. On December 14, 1994, the Company consummated the transactions described above pursuant to which (1) the Company sold its Institutional Pharmacy business to Pharmacy Corporation of America ("PCA") for $107.3 million, subject to certain closing adjustments, and (2) the Company and a limited partnership, whose general partner is controlled by the Company's Chairman, purchased from Merck the 10,330,320 shares of the Company's common stock held by Merck. The Company has granted stock options with an exercise price below fair market value on the date of award to certain officers in recognition of their contribution in completing these transactions. Accordingly, included in Purchase and Sale Agreement related expenses and other in the accompanying financial statements for the fiscal year ended June 30, 1995, the Company recorded a non-recurring charge of approximately $5 million relating to such stock options in conjunction with the consummation of these transactions. Principles of Consolidation-- The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned operating subsidiaries, Porex Technologies Corp. and subsidiaries ("Porex"), Avicenna and CareAgents, after elimination of all material intercompany accounts and transactions. On December 14, 1994, the Company sold its Institutional Pharmacy business to Pharmacy Corporation of America, a wholly-owned subsidiary of Beverly Enterprises, Inc., for approximately $107.3 million in cash, subject to certain closing adjustments. As a result of this transaction, the Company recorded an after-tax gain of $14,496,000. The consolidated financial statements for the fiscal year ended June 30, 1995 report separately as discontinued operations the net assets and operating results of the Institutional Pharmacy business. For the year ended June 30, 1997, the operations of the Company were primarily related to its plastics technology business. All revenues and a significant majority of operating expenses were derived from these operations. The consolidated financial statements for the fiscal year ended June 30, 1997 include certain costs associated with the Company's efforts in developing its healthcare communications business. Cash and Cash Equivalents-- The Company considers all liquid investment instruments with an original maturity of three months or less to be the equivalent of cash for purposes of balance sheet presentation and for the consolidated statements of cash flows. These short-term investments are stated at cost, which approximates market. Marketable Securities-- Marketable securities consisted primarily of U.S. Treasury Notes and Federal Agency Notes at June 30, 1997 and U.S. Treasury Notes, Federal Agency Notes and Money Market Preferred Stock investments at June 30, 1996. These investments, which are carried at a cost of $238,525,000 and $140,268,000, net of unamortized premium, at June 30, 1997 and June 30, 1996, respectively, had an aggregate market value of $238,151,000 and $140,537,000 at June 30, 1997 and 1996, respectively. At June 30, 1997, gross unrealized losses pertaining to marketable securities and other investments were $374,000. Gains and losses on the sale of marketable securities and other investments are calculated using the specific identification method. F-8 SYNETIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) Investments in Debt and Equity Securities-- Effective July 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No. 115"). This Statement addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. At June 30, 1997, the Company's investments consisted principally of U.S. Treasury Notes and Federal Agency Notes. The U.S. Treasury Notes and Federal Agency Notes maturing January 2002 through March 2002 are classified as held-to-maturity and are carried at cost, net of unamortized premium. Inventories-- Inventories are stated at the lower of (first-in, first-out) cost or market. Cost includes raw materials, direct labor, and manufacturing overhead. Market is based on current replacement cost for raw materials and supplies and on net realizable value for work-in-process and finished goods. Inventories consisted of the following (in thousands):
JUNE 30, -------------- 1997 1996 ------ ------ Raw materials and supplies.. $2,672 $2,468 Work-in-process............. 347 548 Finished goods.............. 2.486 2,237 ------ ------ $5,505 $5,253 ====== ======
Property, Plant and Equipment-- Property, plant and equipment are stated at cost. For financial reporting purposes, depreciation is provided principally on the straight-line method over the estimated useful lives of the assets. Annual depreciation rates range from 2% to 5% for buildings and improvements and from 9% to 33% for machinery and equipment and furniture and fixtures. For income tax purposes, certain assets are depreciated using accelerated methods. Expenditures for maintenance, repair and renewals of minor items are charged to operations as incurred. Major betterments are capitalized. Development Costs-- The Company capitalizes costs incurred for the production of computer software used in the sale of its services. Costs capitalized include direct labor and related overhead for software produced by the Company and the costs of software purchased from third parties. All costs in the software development process which are classified as research and development are expensed as incurred until technological feasibility has been established. Once technological feasibility has been established, such costs are capitalized until the software is commercially available. Such costs are recorded at the lower of unamortized cost or net realizable value. For the year ended June 30, 1997, capitalized costs were not material and no costs were capitalized in previous years. Company-sponsored development costs related to both present and future products are expensed currently. Total development expenses were $6,419,000, $2,014,000, and $1,490,000 for the years ended June 30, 1997, 1996 and 1995, respectively, of which $4,628,000 in 1997 related to the healthcare communications business. F-9 SYNETIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) Accrued Liabilities-- Accrued liabilities consisted of the following (in thousands):
JUNE 30, --------------- 1997 1996 ------- ------ Accrued payroll and benefit costs.. $ 4,633 $3,568 Accrued interest................... 2,957 - Accrued acquisition costs.......... 3,236 - Accrued legal costs................ 1,575 1,890 Other.............................. 1,802 1,556 ------- ------ Total.......................... $14,203 $7,014 ======= ======
Income Taxes-- The Company accounts for income taxes pursuant to Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS No. 109"), which uses the liability method to calculate deferred income taxes. The realization of deferred tax assets is based on historical tax positions and expectations about future taxable income. Foreign Currency Translation-- The financial statements and transactions of Porex's foreign manufacturing facilities are maintained in their functional currency (Deutsche mark and Pound sterling) and translated into U.S. dollars. The adjustments which result from the process of translating these financial statements are not material and, therefore, are not separately disclosed in the accompanying consolidated financial statements. Revenue Recognition-- The Company designs, manufactures and distributes porous and solid plastic components and products used in healthcare, industrial and consumer applications. Revenue is recognized upon product shipment, net of sales returns and allowances. Net Income (Loss) Per Share-- Net income (loss) per share is determined by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the fiscal year and, if dilutive, common stock equivalents. Common stock equivalents consist of common stock which may be issuable upon exercise of outstanding stock options as calculated using the treasury stock method. The Debentures, if converted, would not have had a dilutive effect on net income per share for the periods presented. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). The new standard simplifies the computation of net income per share and increases comparability to international standards. Under SFAS No. 128, primary net income per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. F-10 SYNETIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) The Company is required to adopt the new standard during fiscal 1998, beginning with the December 31, 1997 interim consolidated financial statements. All prior periods presented are required to be restated at that time. The pronouncement is not expected to have a material impact on the Company's reported earnings per share. Reclassifications-- Certain reclassifications have been made to prior year amounts to conform to the current year presentation. Accounting for Stock-Based Compensation-- Effective July 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). As permitted by the standard, the Company has elected to continue following the guidance of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), for measurement and recognition of stock-based transactions with employees. The Company discloses on a pro-forma basis both net income and earnings per share as if the fair value based accounting method were used and the difference between compensation cost recognized by APB No. 25 and the fair value method of SFAS No. 123. (See Note 9) Use of Estimates-- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (2) ACQUISITIONS: Avicenna -- On December 24, 1996, the Company acquired the outstanding equity and indebtedness (including employee stock options) of Avicenna, a privately-held, developmental-stage company located in Cambridge, Massachusetts, for 428,643 shares of the Company's common stock and 161,015 shares of the Company's common stock to be issued in connection with the exercise of employee stock options. The shares issued are subject to certain limitations restricting the liquidity and transferability of such shares. The shares were valued, based on an independent appraisal, at approximately $47.37 per share. As additional consideration, the Company agreed to issue to certain sellers, nontransferable warrants covering 250,000 shares of the Company's common stock, exercisable after December 23, 1998 at a price of $54.50 per share. Avicenna's business plan has been to market and build Intranets for managed care organizations, hospitals and physician groups. The acquisition was accounted for using the purchase method with the purchase price being allocated to assets acquired and liabilities assumed based on their appraised fair values. Avicenna's results of operations have been included in the Company's financial statements since December 24, 1996. A summary of the purchase price allocation is as follows (in thousands):
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 =======
F-11 SYNETIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (2) ACQUISITIONS: (CONTINUED) The amount allocated to purchased research and development of $28,600,000 was determined based on an independent appraisal using established valuation techniques. Remaining amounts have been allocated to intangible assets and goodwill. CareAgents-- On January 23, 1997, the Company acquired CareAgents for 106,029 shares of the Company's common stock. The shares issued are subject to certain limitations restricting the liquidity and transferability of such shares. The shares were valued, based on an independent appraisal, at approximately $30.65 per share. CareAgents was an early development stage company focused on Internet-based clinical commerce applications. The acquisition was accounted for using the purchase method with the purchase price being allocated entirely to purchased research and development. CareAgents' results of operations have been included in the Company's financial statements since January 23, 1997. The amount allocated to purchased research and development of $3,585,000 was determined based on an independent appraisal using established valuation techniques. The following summary, prepared on a pro forma basis, combines the results of operations of the Company, Avicenna and CareAgents assuming the acquisitions were consummated at the beginning of the period presented (in thousands, except per share amount): Year ended June 30, 1997 ------------- (unaudited) Sales $ 52,885 Net loss $(29,381) Net loss per share $ (1.69) The pro forma results are not necessarily indicative of what actually would have occurred if the acquisitions had been in effect for the entire period presented. In addition, they are not intended to be a projection of future results. The pro forma impact of the Avicenna and CareAgents acquisitions for the year ended June 30, 1996 was not material. Purchased Research and Development and Other-- The appraisal amounts allocated to purchased research and development of approximately $28,600,000 and $3,585,000 related to Avicenna and CareAgents, respectively, were expensed in the periods of acquisition, with no corresponding tax benefits, as such research and development was in process at the time of the acquisitions and had no alternative commercial use. In addition, in June 1997, the Company charged to expense research and development costs of $5,228,000 associated with the acquisition of rights to certain intellectual property and software technologies to be utilized in the development of the Company's healthcare communications business. (3) Stockholders' Equity: In April 1997, the Company announced that its Board of Directors authorized a repurchase program involving the purchase of the Company's common stock and outstanding convertible debentures not to exceed $15 million in the aggregate. For the year ended June 30, 1997, the Company repurchased 49,506 shares at a cost of approximately $1,858,000 and the Company reissued 17,800 of these shares for employee stock option exercises. As of June 30, 1997, 31,706 of the shares repurchased were included in Treasury stock. In January 1997, the Company issued 106,029 shares for the acquisition of CareAgents and, in December 1996, the Company issued 428,643 shares for the acquisition of Avicenna. In February 1995, the Company issued 3,877,607 shares of its common stock resulting from the conversion of $79,104,000 aggregate principle amount of its 7% Convertible Subordinated Debentures due December 1, 2001 (the "1991 Debentures"). (See Note 4.) F-12 SYNETIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (4) LONG-TERM DEBT: In February 1997, the Company issued to the public $165,000,000 aggregate principal amount of its 5% Convertible Subordinated Debentures due 2007 (the "Convertible Debentures"). The Convertible Debentures are convertible at any time prior to maturity, unless previously redeemed into shares of the Company's common stock, at a conversion price of $60.00 per share, subject to adjustment under certain circumstances. In connection with the issuance of the Convertible Debentures, the Company recorded debt issuance costs of approximately $5.1 million which are included in other assets in the consolidated financial statements. Such costs are being amortized to interest expense using the effective interest method over the life of the Convertible Debentures. In December 1991, the Company issued to the public $80,500,000 aggregate principal amount of its 1991 Debentures. The 1991 Debentures were convertible at any time prior to maturity, unless previously redeemed, into shares of the Company's common stock at a conversion price of $20.40 per share, subject to adjustment under certain circumstances. On January 27, 1995, the Company called for redemption on February 13, 1995 the 1991 Debentures. Holders of $79,104,000 aggregate principal amount of the 1991 Debentures surrendered them for conversion into an aggregate of 3,877,607 shares of common stock. The remaining $1,396,000 of the outstanding 1991 Debentures were redeemed at the redemption price of 104% plus accrued interest. Included in Purchase and Sale Agreement related expenses and other in the accompanying financial statements for the year ended June 30, 1995 are approximately $1.1 million of costs associated with the call for redemption. (5) INCOME TAXES: The income tax provisions are summarized as follows (in thousands):
YEARS ENDED JUNE 30, --------------------------- 1997 1996 1995 -------- ------- -------- Current: Federal.......................... $ 4,427 $4,060 $ 2,594 State............................ 507 811 491 ------- ------ ------- Total current................. 4,934 4,871 3,085 ------- ------ ------- Deferred: Federal.......................... (2,057) (194) (2,070) State............................ (43) (60) (572) ------- ------ ------- Total deferred................ (2,100) (254) (2,642) ------- ------ ------- Total income tax provision.. $ 2,834 $4,617 $ 443 ======= ====== =======
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:
YEARS ENDED JUNE 30, ----------------------------- 1997 1996 1995 ---------- --------- -------- Federal statutory rate.............................................................. (35.0)% 35.0% 35.0% State tax, net of federal benefit................................................... 2.1 3.7 (4.8) Dividend exclusion.................................................................. (2.0) (7.7) (52.3) Non-deductible research and development............................................. 45.1 - - Non-deductible conversion costs..................................................... - - 67.6 Other, net.......................................................................... 1.4 4.0 (4.4) --------- --------- -------- 11.6% 35.0% 41.1% ========= ========= ========
F-13 SYNETIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (5) Income Taxes: (continued) Temporary differences resulted in the following deferred tax expense (benefit) (in thousands):
YEARS ENDED JUNE 30, --------------------------- 1997 1996 1995 -------- -------- -------- Book/tax differences in accounting method for assets acquired................................. $ (10) $ (69) $ 15 Accrued expenses..................................... (716) (140) (643) Deferred compensation - stock options................ - - (2,038) Difference between tax and book depreciation and amortization........................................ (1,414) (45) 38 Other, net........................................... 40 - (14) ------- ----- ------- $(2,100) $(254) $(2,642) ======= ===== =======
Deferred tax liabilities (assets) at June 30, 1997, are comprised of the following (in thousands): Tax over book depreciation and amortization......... $ (767) Intangible assets amortization...................... 64 Accrued expenses.................................... (2,417) Deferred compensation - stock options............... (1,693) Inventory........................................... (347) Prepaids and other.................................. (62) --------- $ (5,222) =========
In accordance with the disclosure provisions of SFAS No. 109, the Company has included approximately $2,888,000 and $2,334,000 of deferred tax assets in other current assets and other assets, respectively, representing the effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the carrying amounts for income tax purposes. (6) Major Customers and Foreign and Export Product Sales: For the years ended June 30, 1997, 1996 and 1995, no customer accounted for more than 10% of the Company's net sales. Foreign product sales and net income of Porex's foreign manufacturing facilities, which are made principally in Europe, amounted to $7,854,000 and $1,247,000; $6,665,000 and $975,000; and $5,381,000 and $397,000 for the fiscal years ended June 30, 1997, 1996 and 1995, respectively. Identifiable assets of this facility were not material for the years presented. Export product sales of Porex, which are made principally to Europe and Asia, were $6,213,000, $5,605,000 and $5,022,000 for the fiscal years ended June 30, 1997, 1996 and 1995, respectively. (7) Pension and Profit Sharing Plans: The Company has defined benefit pension plans covering substantially all of its employees. Net pension cost for the years ended June 30, 1997, 1996 and 1995 included the following components (in thousands):
1997 1996 1995 -------- ------ ------ Service cost.................. $ 277 $ 269 $ 240 Interest cost................. 338 310 273 Actual return on plan assets.. (1,377) (789) (427) Net amortization.............. 923 447 127 ------- ----- ----- Net pension cost............ $ 161 $ 237 $ 213 ======= ===== =====
F-14 SYNETIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (7) PENSION AND PROFIT SHARING PLANS: (CONTINUED) The following table sets forth the funded status of the plans and amounts recognized in the Company's consolidated balance sheets (in thousands):
JUNE 30, ------------------ 1997 1996 -------- -------- Actuarial present value of benefit obligation: Vested benefit obligation..................... $(3,311) $(2,944) Nonvested benefit obligation.................. (67) (55) ------- ------- Accumulated benefit obligation................ (3,378) (2,999) Effect of future salary increases............. (1,600) (1,548) ------- ------- Projected benefit obligation.................... (4,978) (4,547) Plan assets at fair value....................... 6,703 5,105 ------- ------- Funded status................................... 1,725 558 Unrecognized net gain........................... (1,848) (792) Unrecognized net asset.......................... (194) (216) Unrecognized prior service cost................. 56 61 ------- ------- Consolidated balance sheets................... $ (261) $ (389) ======= =======
The Company funds the plans through annual contributions representing no less than the minimum amounts required as computed by actuaries to be consistent with the plans' objectives and government regulations. The net pension liability is included in accrued liabilities. Assumptions used in the accounting for the Company's defined benefit plans as of June 30, 1997 and 1996 were:
1997 1996 ----- ----- Discount rate................................ 7.5% 7.5% Rate of increase in compensation levels...... 0%-5% 0%-5% Expected long-term rate of return on assets.. 8.0% 8.0%
Plan assets consist primarily of debt and equity investments. In addition to the defined benefit pension plans discussed above, the Company maintains a defined contribution profit sharing plan covering substantially all of its employees. Participants must be at least 21 years of age and have completed one year of service and may contribute up to $9,500 of their earnings annually. Effective February 1, 1997 the Company matches 50% of the first 2% and 25% of the second 4% of participants earnings which are contributed to the plan. From July 1, 1996 through January 31, 1997 and for the fiscal years ending June 30, 1996 and June 30, 1995 the Company matched 25% of the first 4% of participants earnings which were contributed to the plan. For the year ended June 30, 1997, the Company issued 3,341 shares of common stock to the plan. For the years ended June 30, 1997, 1996 and 1995, Company contributions were approximately $132,500, $81,000 and $59,100, respectively. (8) Related Party Transactions: Tax-sharing agreement-- The Company and Medco had a tax-sharing agreement which provided, among other things, for the allocation of federal income taxes on a separate company basis prior to July 6, 1989 and other related matters with respect to income taxes of the Company. F-15 SYNETIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (8) RELATED PARTY TRANSACTIONS: (CONTINUED) Services agreement-- Through December 14, 1994, the Company and Medco had a services agreement pursuant to which Medco provided the Company with various services of its management. The Company paid the actual costs of providing these services. Where actual costs were not available, the Company paid amounts based on mutually agreed upon allocation methods. Costs for such services were approximately $337,000 for the year ended June 30, 1995. No costs were incurred under this agreement for the years ended June 30, 1997 and June 30, 1996. (9) STOCK OPTIONS: In May 1989, the Company adopted two stock option plans, the 1989 Class A Stock Option Plan (the "Class A Plan") and the 1989 Class B Stock Option Plan (the "Class B Plan"). In September 1991, the Company adopted the 1991 Special Non-qualified Stock Option Plan (the "1991 Special Plan") and in December 1991, the Company adopted the 1991 Director Stock Option Plan (the "Director Plan"). In fiscal 1997, the Company adopted two stock option plans, the 1996 Class C Stock Option Plan (the "Class C Plan") and the 1997 Class D Stock Option Plan (the "Class D Plan"), and upon its acquisition of Avicenna, amended and assumed the Avicenna Systems Corp. 1995 Stock Plan (the "Avicenna Plan"), and converted options to purchase Avicenna shares into options to purchase the Company's shares. Non-Qualified stock options are granted under the Class A Plan, Class C Plan, Class D Plan, the 1991 Special Plan and the Director Plan. Options granted under the Class B Plan may be either incentive stock options or non-qualified stock options. Eligibility for the grant of options under the Class A Plan and the Director Plan are limited to certain of the Company's directors. Eligibility for the grant of options under the Class B Plan, the Class C Plan, the Class D Plan and the 1991 Special Plan are limited to the Company's officers, certain directors, employees, consultants, agents and key contractors. No additional options may be granted under the Avicenna Plan subsequent to the December 24, 1996 acquisition closing date. Except for the Avicenna Plan, no options under the plans may be exercised during the first year after the date of grant, and options granted under the Plans become exercisable at a rate of either 20% in each successive year after the date of grant, or 40% after the second anniversary of the grant and 20% in each successive year. The Avicenna Plan options vested 50% on December 24, 1996 (the closing date of the Avicenna acquisition) with the remaining 50% vesting on December 24, 1998 (the second anniversary of the closing date). No options may be granted under any of the Plans after January 23, 2007, and all options expire within ten to fifteen years from the date of the grant. Under the Class B, the Class C, the Class D Plans, the 1991 Special Plan and the Director Plan, the exercise price may not be less than 100% of the fair market value of the Company's common stock on the date of grant. Under the Class A Plan, the exercise price may not be less than 85% of the fair market value of the Company's common stock on the date of grant. All options granted under the Class A Plan had an exercise price equal to 100% of the fair market value on the date of grant. The options granted under the Avicenna Plan were assumed and converted to the Company's stock options at an exercise price of $1.25 per share and were included in the acquisition cost of Avicenna. There are 7,920,045 shares reserved for issuance under the Company's plans. In addition to the Company's stock option plans, the Company has granted options to certain directors, consultants and key employees. At June 30, 1997, there were 438,000 options granted to these individuals. The terms of these grants are similar to the Company's non-qualified stock option plans. F-16 SYNETIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (9) STOCK OPTIONS: (CONTINUED) The Company has elected to follow APB No. 25 in accounting for its employee stock options. Accordingly, no compensation cost has been recognized for the Company's option plans. Had the determination of compensation costs for these plans been based on the fair value at the grant dates for awards under these plans, consistent with the method of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: 1997 1996 ---- ---- Net income (loss): As reported $(27,460) $8,585 Pro forma $(30,746) $8,190 Earnings per share: As reported $ (1.60) $ 0.48 Pro forma $ (1.79) $ 0.45 The pro forma results indicated above are not intended to be indicative of or a projection of future results. The fair value of each option grant is estimated on the date of grant by using the Black-Scholes option-pricing model. The following weighted average assumptions were used for grants in 1997 and 1996: 1997 1996 ---- ---- Expected dividend yield 0% 0% Expected volatility .2722 .2722 Risk-free interest rates 6.5% 6.5% Expected option lives (years) .083-1.74 .083-1.74 Weighted average fair value of options granted during the year $ 10.11 $ 5.08 A summary of the status of the Company's stock option plans for the three year period ended June 30, 1997 is presented below:
Years Ended June, 30 ----------------------------------------------------------- 1997 1996 1995 ------------------- ------------------ ------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ -------- ------ -------- ------ --------- Beginning of year.............. 3,746,750 $12.52 3,591,900 $11.50 3,239,830 $12.16 Granted........................ 4,047,264 $39.22 366,000 $24.54 1,228,000 $11.37 Exercised...................... (343,990) $ 9.94 (137,350) $12.81 (364,570) $11.82 Canceled....................... (313,445) $39.90 (73,800) $16.13 (511,360) $15.17 --------- --------- --------- End of year.................... 7,136,579 $26.58 3,746,750 $12.63 3,591,900 $11.50 ========= ========= ========= Exercisable at end of year.................. 2,379,281 2,160,050 1,846,300 ========= ========= =========
F-17 SYNETIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (9) STOCK OPTIONS: (CONTINUED) The following table summarizes information with respect to options outstanding and options exercisable at June 30, 1997:
Options Outstanding Options Exercisable --------------------------------------------------- --------------------------- Weighted Average Weighted Weighted Range of Exercise Options Remaining Average Options Average Prices (in dollars) Outstanding Contractual Life Exercise Price Exercisable Exercise Price - ------------------ ----------- ---------------- -------------- ----------- -------------- $1.25-$5.25 647,547 3.60 $ 4.75 581,081 $ 5.15 $6.63-$10.00 977,000 7.51 $ 9.57 474,200 $ 9.11 $11.50-$25.00 1,859,600 9.91 $16.32 1,322,400 $15.43 $31.25-$37.00 2,179,250 12.30 $34.26 1,600 $32.94 $46.88-$52.56 1,473,182 10.14 $49.07 -- --
(10) COMMITMENTS AND CONTINGENCIES: Leases-- The Company leases office and warehouse space, equipment and automobiles under various noncancellable operating leases. Rental expense was $803,000, $318,000 and $197,000 for the fiscal years ended June 30, 1997, 1996 and 1995, respectively. The minimum aggregate rental commitments under noncancellable leases, excluding renewal options, are as follows (in thousands): YEARS ENDING JUNE 30, --------------------- 1998........ $2,043 1999........ 2,046 2000........ 2,023 2001........ 1,966 2002........ 1,360 Thereafter.. 3,625 Legal proceedings-- In the normal course of business, the Company is involved in various claims and legal proceedings. While the ultimate resolution of these matters has yet to be determined, the Company does not believe that their outcome will have a material adverse effect on its financial position. Porex has been named as one of many co-defendants in a number of actions brought by recipients of silicone mammary implants. One of the pending claims is styled as a purported class action. Certain of the actions against Porex have been dismissed or settled by the manufacturer or insurance carriers of Porex without material cost to Porex. The Company believes its insurance coverage provides adequate coverage against liabilities that could arise from actions or claims arising out of Porex's distribution of implants. F-18 SYNETIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (11) QUARTERLY FINANCIAL DATA (UNAUDITED): The following table summarizes the quarterly financial data for the fiscal years ended June 30, 1997 and 1996 (in thousands, except per share data). Net income per share, excluding the non-recurring charges discussed in Note (2), are also presented below. Net income (loss) per share calculations for each of the quarters are based on the weighted average number of shares outstanding for each period; therefore, the sum of the quarters may not necessarily be equal to the full fiscal year per share amount.
INCOME (LOSS) NET BEFORE INCOME PROVISION (LOSS) QUARTER ENDED NET SALES FOR TAXES NET INCOME (LOSS) PER SHARE - -------------------------- ------------ ---------- ----------------- -------------------------- EXCLUDING NON-RECURRING ACTUAL ITEMS ------ ----- 1996 - ---- September 30, 1995........ $11,036 $ 3,127 $1,924 $.11 $.11 December 31, 1995......... 10,283 3,124 2,073 .12 .12 March 31, 1996............ 11,311 3,184 2,101 .12 .12 June 30, 1996............. 12,498 3,767 2,487 .14 .14 Year ended June 30, 1996.. $45,128 $13,202 $8,585 $.48 $.48 INCOME (LOSS) NET BEFORE INCOME PROVISION (LOSS) QUARTER ENDED NET SALES FOR TAXES NET INCOME (LOSS) PER SHARE - -------------------------- ------------ ---------- ----------------- -------------------------- EXCLUDING NON-RECURRING ACTUAL(a) ITEMS(b) --------- -------- 1997 - ---- September 30, 1996........ $11,185 $ 3,527 $2,389 $.13 $.13 December 31, 1996......... 11,899 (24,545) (25,934) (1.54) .14 March 31, 1997............ 14,243 (1,516) (2,420) (.14) .06 June 30, 1997............. 15,558 (2,092) (1,495) (.09) .10 Year Ended June 30, 1997.. $52,885 $(24,626) $(27,460) $(1.60) $.43
(a) The per share amounts shown differ from those previously reported to reflect the anti-dilutive impact of common stock equivalents resulting from the net loss caused by the non-recurring charges discussed in Note 2. (b) The per share amounts shown include expenses of $.09 and $.08 per share in the quarters ended March 31, 1997 and June 30, 1997, respectively, which primarily relate to research and development costs associated with the Company's healthcare communications business activities. F-19 SYNETIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (12) FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company using available market information. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. AT JUNE 30, 1997 -------------------- CARRYING ESTIMATED AMOUNT FAIR VALUE -------- ---------- (in thousands) Assets: Cash and cash equivalents.. $ 77,303 $ 77,303 Marketable securities...... 238,525 238,151 Liabilities: Long term debt............. 165,000 146,025 Cash and cash equivalents-- The carrying amounts of these items are a reasonable estimate of their fair value. Marketable securities-- Marketable securities, consisting of publicly-traded U.S. Treasury Notes and Federal Agency Notes, are valued based on quoted market prices or dealer quotes. Long term debt-- The Convertible Debentures are publicly traded and are valued based on quoted market prices. (See Note (4).) The fair value estimates presented herein are based on information available to the Company as of June 30, 1997. Although the Company is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been revalued since that date, and current estimates of fair value may differ significantly from the amounts presented herein. F-20 SYNETIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (13) SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS): YEARS ENDED JUNE 30, ----------------------- 1997 1996 1995 ------ ------ ------- Interest Paid...... $ - $ 6 $ 2,870 Income Taxes Paid.. 1,788 3,212 27,435 The following non-cash transactions were excluded from the consolidated statements of cash flows for the years ended June 30, 1997, 1996 and 1995: In fiscal years 1997, 1996 and 1995, the Company recognized tax benefits related to the exercise of stock options as increases to additional paid in capital and decreases to income taxes payable of $7,450,000, $3,833,000 and $835,000, respectively. In February 1995, in connection with the call for redemption of the Company's 1991 Debentures, holders of $79,104,000 aggregate principal amount of the 1991 Debentures surrendered them for conversion into an aggregate of 3,877,607 shares of common stock. The remaining $1,396,000 of the outstanding 1991 Debentures were redeemed at the redemption price of 104% plus accrued interest. (See Note (4).) Additional information with respect to the acquisitions referred to in Note (2) above is as follows (in thousands): Year Ended June 30, 1997 ------------- Fair value of assets acquired $47,537 Net cash paid (10,612) Value of stock paid (24,488) ------- Liabilities assumed $12,437 ======= F-21 SYNETIC, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Years Ended June 30, 1997, 1996 and 1995
Col. A Col. B Col. C Col. D Col. E - ---------------------------------------- ---------- ----------------------- --------------- ---------- Additions ----------------------- Balance at Charges to Charges to Balance at Beginning Costs and Other End of Description of Period Expenses Accounts (Deductions) Period - ---------------------------------------- ---------- ---------- ----------- --------------- ---------- Deducted in the Balance Sheet from the asset to which it applies: Allowance for doubtful accounts and sales returns June 30, 1997........................... $671,000 205,000 14,000 (151,000)(1) $739,000 June 30, 1996........................... $636,000 126,000 (7,000) (84,000)(1) $671,000 June 30, 1995........................... $393,000 307,000 7,000 (71,000)(1) $636,000
- ------------------------------------ (1) Write-off of uncollectible accounts and other reductions, net of recoveries. S-1 INDEX TO EXHIBITS Number Title ------ ----- 3.1 Certificate of Incorporation of the Company, as amended. Incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (No. 33-28654) (the "Registration Statement"). 3.2 By-Laws of the Company, as amended. Incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1994 (the "1994 10-K"). 10.1 1989 Class A Non-Qualified Stock Option Plan of the Company. Incorporated by reference to Exhibit 10.1 to the Registration Statement.* 10.2 1989 Class B Non-Qualified Stock Option Plan of the Company. Incorporated by reference to Exhibit 10.2 to the Registration Statement.* 10.3 1991 Director Stock Option Plan of the Company. Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-8 (No. 33-46640).* 10.4 Form of Stock Option Agreement dated as of May 17, 1989 between the Company and the members of the Stock Option Committee of the Board of Directors. Incorporated by reference to Exhibit 10.3 to the Registration Statement.* 10.5 Retirement Plan for Salaried Employees of Porex Technologies Corp. of Georgia. Incorporated by reference to Exhibit 10.4 to the Registration Statement.* 10.7 Form of Indemnification Agreement between the Company and the directors and officers of the Company. Incorporated by reference to Exhibit 10.6 to the Registration Statement. 10.8 Form of Services Agreement between the Company and Medco. Incorporated by reference to Exhibit 10.7 to the Registration Statement. 10.9 Form of Tax Sharing Agreement between the Company and Medco. Incorporated by reference to Exhibit 10.8 to the Registration Statement. 10.10 Form of Indemnification Agreement between the Company and Medco. Incorporated by reference to Exhibit 10.9 to the Registration Statement. 10.11 Purchase and Sale Agreement, dated as of May 24, 1994, between Merck & Co., Inc. and the Company (the "Purchase and Sale Agreement"). Incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K dated June 6, 1994. E-1 Number Title ------ ----- 10.12 Purchase Agreement, dated as of May 24, 1994, between Medco Containment Services, Inc. and Porex Technologies Corp. Incorporated by reference to Exhibit 10.23 to the 1994 10-K. 10.13 Stock Purchase Agreement, dated as of August 9, 1994, between the Company and Pharmacy Corporation of America. Incorporated by reference to Exhibit 10.24 to the 1994 10-K. 10.14 Amended and Restated Investment Agreement, dated as of September 13, 1994, between Martin J. Wygod and the Company. Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8- K dated September 16, 1994. 10.15 Form of Stock Option Agreement, made as of December 7, 1994, between the Company and each of James V. Manning (for 150,000 shares), Paul C. Suthern (for 180,000 shares), Victor L. Marrero (for 125,000 shares), David J. Schlanger (for 125,000 shares), Pamela B. Spira (for 125,000 shares) and Anthony Vuolo (for 125,000 shares). Incorporated by reference to Annex A to the Company's Proxy Statement for its Annual Meeting of Stockholders held on May 17, 1995.* 10.16 Merger Agreement, dated December 23, 1996, among the Company, Synternet Acquisition Corp., a wholly owned subsidiary of the Company, Avicenna and the certain other individuals and entities. Incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-3 (No. 333-18771). 10.17 1996 Class C Stock Option Plan of the Company. Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8 (No. 333-36041).* 10.18 1997 Class D Stock Option Plan of the Company. Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-8 (No. 333-36041).* 10.19 1991 Special Non-Qualified Stock Option Plan of the Company. Incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-8 (No. 333-36041).* 21.1** Subsidiaries of the Company. 23.1 Consent of Arthur Andersen LLP. 23.2 Consent of Kegler, Brown, Hill & Ritter Co., L.P.A. 24.1** Powers of Attorney of the Company. 27** Financial Data Schedule. 99.1 Excerpt from the Consulting Agreement between Merck & Co., Inc. and Martin J. Wygod relating to provisions incorporated in the Purchase and Sale E-2 Number Title - ------ ----- Agreement. Incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K dated June 6, 1994. ___________________________ * Management contract or compensation plan or arrangement. ** Previously filed with the Company's Annual Report on Form 10-K for the Fiscal Year Ended June 30, 1997. E-3 EX-23.1 2 CONSENT OF ARTHUR ANDERSEN LLP Conformed Copy Exhibit 23.1 [LETTERHEAD OF ARTHUR ANDERSEN LLP] CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K-A, into the previously filed Registration Statements of Synetic, Inc. and Subsidiaries on Form S-8 (File Nos. 33-34925, 33-34926, 33-38446, 33-46639, 33-46640, 333-19043, 333-21555 and 333-36041) and Form S-3 (File No. 333-18771). ARTHUR ANDERSEN /s/ Arthur Andersen LLP New York, New York October 2, 1997 EX-23.2 3 CONSENT OF KEGLER, BROWN, HILL & RITTER CO. L.P.A. Conformed Copy Exhibit 23.2 [LETTERHEAD OF KEGLER, BROWN, HILL & RITTER] Synetic, Inc. 669 River Drive Elmwood Park, NJ 07407-1361 Dear Ladies and Gentlemen: We hereby consent to the incorporation by reference into the Synetic, Inc. Registration Statements on Form S-8 (File Nos. 33-34925, 33-34926, 33- 38446, 33-46639, 33-46640, 333-19043, 333-21555 and 333-36041), including any Form S-3 resale prospectuses included therein, and on Form S-3 (File No. 333- 18771), filed with the Securities and Exchange Commission, of the Company's Annual Report on Form 10-K/A for the fiscal year ended June 30, 1997. We also consent to all references to our firm included in such Registration Statements. Columbus, Ohio October 2, 1997 Very truly yours, KEGLER, BROWN, HILL & RITTER CO., L.P.A. By: /s/ Jack A. Bjerke ---------------------------------- Jack A. Bjerke, Vice President -----END PRIVACY-ENHANCED MESSAGE-----