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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
Commission file number 0-22726
SAFESKIN CORPORATION
(Exact name of registrant as specified in its charter)
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FLORIDA 59-2617525
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12671 HIGH BLUFF DRIVE
SAN DIEGO, CALIFORNIA 92130
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code (619) 794-8111
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
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 (or for such shorter period that the
Registrant was required to file such reports), 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 [ ].
As of March 20, 1998, the aggregate market value of the voting stock of
the Registrant held by non-affiliates of the Registrant was $1,535,976,215.
As of March 20, 1998, the number of outstanding shares of Common Stock,
par value $.01 per share, of the Registrant was 26,855,342.
Documents Incorporated by Reference
Information required by Part III is incorporated by reference to portions
of the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders
which will be filed with the Securities and Exchange Commission within 120 days
after the close of the 1997 fiscal year.
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TABLE OF CONTENTS
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PART I
Item 1. Business ............................................................................1
Item 2. Properties .........................................................................11
Item 3. Legal Proceedings ..................................................................12
Item 4. Submission of Matters to a Vote of Security Holders ................................12
PART II
Item 5. Market for the Registrant's Common Equity and
Related Shareholder Matters.........................................................13
Item 6. Selected Consolidated Financial Data ...............................................14
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations ......................................15
Item 8. Financial Statements and Supplementary Data ........................................21
Item 9. Disagreements on Accounting and Financial Disclosures...............................43
PART III
Item 10. Directors and Executive Officers of the Registrant..................................43
Item 11. Executive Compensation..............................................................43
Item 12. Security Ownership of Certain Beneficial Owners and Management .....................43
Item 13. Certain Relationships and Related Transactions......................................43
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K ............................................................43
Signatures ..................................................................................46
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PART I
ITEM 1. BUSINESS
The Company is a leading manufacturer of high quality disposable
latex medical examination gloves for the United States market and believes that
it is the world's leading manufacturer of high quality disposable latex
powder-free examination gloves. The Company sells its gloves to the medical,
dental, high technology and scientific and consumer markets. The Company markets
high quality gloves designed to prevent the transmission of infectious disease
while at the same time minimizing the risk of any debilitating side effects
which may result from prolonged use by the wearer; high quality gloves
engineered to meet the stringent contamination control requirements of cleanroom
applications in the semiconductor and pharmaceutical industries; and gloves for
consumer use. In 1995, the Company became the market share leader, in both sales
dollars and total units, of medical examination gloves to acute care facilities
(hospitals) in the United States. Based upon information provided by its
distributors, the Company believes that, in 1997, approximately 60% of the sales
(in units) of the Company's products to end user customers were to acute care
facilities; approximately 30% were to alternate care (primary care and extended
care) and dental facilities; and approximately 10% were to the high technology
and scientific and consumer markets.
The Company began operations in 1987 to take advantage of the
opportunity presented by the growing demand for high quality latex gloves which
would be safe, durable and comfortable to don and wear for extended time
periods. The Company built a manufacturing facility in Malaysia and began
producing latex gloves in 1988. In order to protect the wearer from the glove,
the Company developed manufacturing processes which produced gloves that were
lower in chemical allergens than those on the market at that time. In August
1989, the Company was the first manufacturer to receive FDA clearance to market
non-sterile latex gloves labeled "hypoallergenic" and "lightly powdered." In
November 1989, the Company received FDA clearance to market non-sterile latex
gloves labeled "hypoallergenic" and "powder-free;" these gloves were introduced
to the market early in 1990 and have become the Company's largest selling and
fastest growing product. (See "Product Labeling" for a discussion of the
Company's use of the "hypoallergenic" label.) In 1992, the Company introduced
its line of HypoClean(R) gloves for high technology and scientific uses; in
1994, the Company introduced a powder-free latex surgical glove; in 1995, the
Company introduced a powder-free glove made of a non-latex material called
nitrile designed for use in the high technology and scientific market. During
1995, the Company received FDA clearance to label its powder-free gloves as
having the lowest protein level claim that the FDA allows for medical grade
latex gloves. The Company was the first glove manufacturer to receive clearance
for use of this claim for its powder-free examination glove products. In 1996,
the Company introduced its Safeskin 2000(TM) powder-free latex surgical glove,
which was developed through the use of computer-aided design (CAD) and a new
rapid prototyping technique known as "laminated object manufacturing." In
December 1996, the Company gained FDA clearance to market a glove made of
nitrile; these gloves were introduced to the market in 1997 and were designated
primarily for use in the medical market. In addition, as a result of its
acquisition of Tactyl Technologies, Inc. ("Tactyl"), the Company began offering
Tactylon(R) synthetic examination and surgical gloves. In February 1998, the
Company completed the acquisition of Absolute Quality Leadership, Inc., (AQL).
AQL is a California based marketer of glove products for the
high-technology/scientific markets. (See "Recent Developments" for additional
information regarding this acquisition.)
INDUSTRY
In 1997, the total market for medical gloves, which includes medical
examination and surgical gloves, in the United States was approximately $1
billion. The market for acute care medical examination gloves, those medical
examination gloves used in hospitals, accounted for approximately $325 million
and the market size of the powder-free segment of the acute care medical
examination glove market is approximately $165 million. The Company estimates
that it has 29% of the acute care medical examination glove market and 47% of
the powder-free segment (including sales of the Company's product under private
label agreements) of the acute care medical examination glove market. The growth
in the market for medical examination gloves over the past ten years has largely
resulted from the increased concerns among health care professionals over
protection from the transmission of infectious diseases, particularly viruses
such as AIDS and Hepatitis B. In 1987, the Centers for Disease Control and
Prevention ("CDC") issued recommendations that anyone coming into contact with
bodily fluids should use "universal precautions," including the wearing of
gloves. Additionally, since 1991 Occupational Safety and Health Administration
("OSHA") regulations have required that protective gloves be worn when it can be
reasonably anticipated that an employee will have contact with blood, saliva or
other potentially infectious substances.
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The demand for latex gloves has also grown among users in the
semiconductor, biotechnology, pharmaceutical, general industrial manufacturing
and research segments of the high technology and scientific market.
Increasingly, the manufacturing processes in these industries take place in
cleanrooms requiring gloves that minimize the amount of particulates to prevent
product contamination.
As people began wearing more latex gloves for longer periods, there
was an increase in irritations to the powder used to make the glove, in allergic
reactions to the water soluble proteins in latex and to the chemicals and other
additives used in processing latex and manufacturing gloves. In 1991, the FDA
issued a medical alert warning health care professionals about the increased
incidences of allergic reactions to latex medical products by both medical
personnel and patients. In response to the increase in allergic reactions to
latex gloves, glove manufacturers attempted to reduce the amount of powder,
latex proteins and chemical allergens in their gloves, which may contribute to
the possibility of allergic reaction. OSHA regulations in effect since 1991
require that all employers provide gloves that are both low in chemical
residuals and powder-free for employees who are allergic to the gloves otherwise
provided.
PRODUCTS
The Company currently manufactures and markets three basic types of
gloves: medical examination gloves, surgical gloves and high technology and
scientific gloves. The Company's gloves consist of six types of latex gloves,
two types of nitrile gloves and two types of Tactylon(R) gloves. The majority of
the Company's gloves are marketed under the "Safeskin" trade name to enhance
market recognition and brand loyalty. The Company markets its non-latex surgical
glove under the Tactylon(R) trade name. Each type of the Company's latex gloves
comes in various sizes. All gloves are manufactured with a beaded cuff for added
strength and ease in donning. The Company manufactures both ambidextrous and
hand specific gloves.
MEDICAL EXAMINATION GLOVES
- - Medical Examination Gloves-Powder-Free. Safeskin powder-free medical
examination gloves were introduced to the market in 1990. Medical
examination gloves are designed to be used for medical uses where a
sterile glove is not required. These gloves are manufactured utilizing a
proprietary process that make them easy to don and remove without the need
for corn starch powder. These are also processed to reduce further both
proteins in the latex and additives used in the manufacturing process. The
lack of powder makes the gloves more desirable to wearers who may develop
reactions to prolonged use of powdered gloves. Additionally, powder-free
gloves eliminate complications which could be caused by powder entering
open wounds, and they eliminate airborne powder which may cause distress
to respiratory and neo-natal patients. According to market studies, end
users typically pay between $.10 and $.20 per pair for powder-free medical
examination gloves.
- - Medical Examination Gloves-Lightly Powdered. Safeskin lightly powdered
medical gloves were the Company's first product introduced to the market
in 1989. The lightly powdered glove is the Company's least expensive and
is designed to minimize the incidence of contact dermatitis. "Lightly
Powdered" refers to the corn starch powder added to the inside of the
glove in order to make it easier to don and remove. Principal users are
hospital personnel. The glove is also used by other healthcare personnel
such as paramedics, nursing home workers and dental professionals.
According to market studies, end users typically pay between $.08 and $.16
per pair for lightly powdered medical examination gloves.
- - Medical Examination Gloves-Nitrile. Safeskin nitrile medical examination
gloves were introduced to the market in 1997. These gloves are made out of
a material called nitrile, a synthetic co-polymer that contains no natural
rubber latex. The nitrile medical examination glove provides an
alternative for individuals allergic to natural rubber latex. This glove
is powder-free and manufactured with reduced chemical levels. In addition,
the nitrile glove is easy to don, comfortable to wear for extended
periods, durable and designed to be soft, odor-free, and non-sticky.
According to market studies, end users typically pay between $.26 and $.36
per pair for powder-free, nitrile medical examination gloves.
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SURGICAL GLOVES
- - Safeskin 2000(TM) Powder-Free Surgical Gloves. In 1996, the Company
introduced a powder-free, sterile surgical glove, which was developed
through the use of computer-aided design (CAD) and a new rapid prototyping
technique known as "laminated object manufacturing (LOM)." Surgical gloves
are designed to meet the more rigorous demands of the operating room
environment. In addition to being sterile, the glove is non-pyrogenic,
reducing the risk of endotoxin (dead bacteria) contamination of surgical
sites. Utilizing data from a United States Army Anthropometric Survey on
several thousand hand measurements and spatial relationships for unique
fit, the CAD/LOM program revolutionized prototype and mold design
processes, greatly decreasing the time between product development and
market launch. According to market studies, end users typically pay
between $1.40 and $1.50 per pair for powder-free surgical gloves.
- - Tactylon(R) Surgical Gloves. In March 1997, the Company acquired the
synthetic glove business of Tactyl, a San Diego-based developer and
manufacturer of non-latex surgical gloves for the domestic and
international markets. As a result of this acquisition, the Company
incorporated Tactylon(R) synthetic examination and surgical gloves into
its product line. Tactyl's surgical glove is the synthetic market leader,
with an approximate 37% share in the fastest growing segment of the
surgical glove market. Tactyl's gloves are constructed from a patented and
advanced synthetic thermoplastic elastomer technology, developed to
address the needs of healthcare professionals and patients who are
sensitive to natural rubber latex. This technology enhances the tactile
sensitivity as compared to other synthetic materials while providing
barrier protection and latex allergy avoidance. The Company's management
believes that Tactyl's patented technology and surgical glove business
strategically complement the Company's Safeskin 2000(TM) powder-free
surgeons' glove by permitting the Company to be able to offer surgeons the
choice of two products which provide the quality, barrier integrity,
comfort and tactile sensitivity required of latex and synthetic surgical
gloves. According to market studies, end users typically pay between $2.65
and $3.25 per pair for Tactylon(R) synthetic surgical gloves.
HIGH TECHNOLOGY AND SCIENTIFIC GLOVES
- - HypoClean 100(R) Cleanroom Latex Gloves. Introduced in 1992, HypoClean
100(R) cleanroom gloves are engineered and processed to meet the stringent
contamination control requirements of highly critical cleanroom
applications in the semiconductor and pharmaceutical industries. These
gloves are produced through an integrated manufacturing process, the
Oxyglazed System(TM). The Oxyglazed System(TM) is a proprietary process
that minimizes particulates, reduces latex proteins, removes residual
chemicals and enables the Company to offer the first non-cytotoxic (i.e.,
does not destroy cells) glove to the high technology and scientific
market. In addition, HypoClean 100(R) gloves receive further ultra pure
cleaning and are packaged in a cleanroom for compatibility with all
critical environment applications. According to market studies, end users
in the high technology and scientific fields typically pay between $.24
and $.80 per pair for latex gloves designed for a cleanroom environment.
- - HypoClean(R) Powder-Free Latex Gloves. These hand specific and
ambidextrous gloves, which were introduced in 1992 and are produced
through the Oxyglazed System(TM), are sold to the high technology and
scientific market for applications where glove powders can interfere with
production yields and laboratory processes. According to market studies,
end users in the high technology and scientific fields typically pay
between $.18 and $.40 per pair for powder-free latex gloves.
- - High Technology and Scientific Nitrile Gloves. The Company introduced its
synthetic gloves made of nitrile in its high technology and scientific
product line in 1995. These gloves are manufactured from a synthetic
material, thus eliminating natural rubber protein antigens, contain lower
levels of extractable contaminants, and offer a broader range of
resistance to many of the chemicals used in high technology and laboratory
applications. According to market studies, end users in the high
technology and scientific fields typically pay between $.24 and $.55 per
pair for powder-free and cleanroom nitrile gloves.
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RESEARCH AND DEVELOPMENT
The Company's research and development strategy is to develop high
quality disposable gloves for the medical, dental, high technology and
scientific markets. In 1997, 1996 and 1995, the Company's research and
development expenses were approximately $3,505,000, $2,209,000 and $1,493,000,
respectively. The Company expects these costs to increase as the Company
increases the number of new products it introduces.
PRODUCT LABELING
In August 1989, the Company was the first manufacturer to receive
FDA clearance to market non-sterile latex gloves labeled "hypoallergenic". This
clearance, which was also obtained for subsequent versions of the Company's
latex gloves, was based on the low level of residual chemicals in the gloves
following their manufacture, as demonstrated by their passing the modified
Draize test for hypoallergenicity. The clearance did not relate to the level of
latex proteins in the glove, which at that time was not recognized as a
potential issue. It was subsequently discovered that proteins in latex gloves
may provoke allergic reactions in latex allergic individuals. As a result, in
June 1996, the FDA proposed issuing regulations prohibiting the use of the term
"hypoallergenic" on natural rubber latex gloves. In 1997, the FDA issued
regulations to that effect, which become effective September 30, 1998.
Recognizing that certain users of its latex gloves might mistake the
term "hypoallergenic" to apply to latex proteins rather than chemical residuals
only, Safeskin has already removed the term "hypoallergenic" from its packaging
in advance of the FDA mandated regulation.
SALES AND MARKETING
The Company's sales and marketing efforts focus principally on the
acute care market (hospitals), alternate care market (primary care and extended
care facilities) and dental market with respect to medical products and on the
semiconductor, biotechnology, pharmaceutical, general industrial manufacturing
and research market segments with respect to high technology and scientific
products. Based upon information provided by its distributors, the Company
believes that, in 1997, approximately 60% of the sales (in units) of the
Company's products to end user customers were to acute care facilities;
approximately 30% were to alternate care facilities; and approximately 10% were
to the high technology and scientific and consumer markets.
The Company's sales and marketing activities in the medical products
area are directed at the end users of medical glove products, such as hospitals,
group purchasing organizations, integrated healthcare networks and primary or
alternate care providers. The Company targets decision makers at these entities
and attempts to increase demand for the Company's medical glove products with
them and among their constituencies. Sales to end users are then made by a
medical products distributor who will purchase the Company's products, stock
inventory and resell and deliver the products to the healthcare provider or
other end user, typically pursuant to a contract between the Company and the
distributor specifying prices to be paid by the distributor for gloves sold to a
particular end user. As of December 31, 1997, the Company's gloves were used in
over 3,800 hospitals.
Purchasing decisions by healthcare systems are customarily made by a
clinical staff committee which evaluates potential products based on quality
criteria, such as effectiveness, durability and likelihood to cause dermatitis,
as well as price and value. The Company's sales representatives work with
healthcare personnel to ensure that the Company's products are considered in the
process and that their comparative advantages are known by the committee. The
Company's sales staff also participates in healthcare trade shows to introduce
prospective customers to its products and to generate sales orders for the
distributors. The Company also participates in various workshops and educational
programs relating to end users, patient and personnel protection in healthcare
related areas as well as educational programs for personnel in the
high-technology and scientific markets in order to promote the Company's
products and educate.
The Company's sales force for medical gloves comprises 49 persons,
as of December 31, 1997, who are supervised by seven Regional Managers and the
Director of Sales, Medical Division. In addition, as of December 31, 1997, the
Company has two sales representatives focused on the dental market who report to
a dental sales manager. The sales representatives are paid salaries plus
performance-based commissions. Each sales
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representative possesses at least five years of previous sales experience and
is trained by the Company in the dermatological and immunological aspects of
glove use. They are also specifically trained to conduct continuing education
programs for healthcare personnel to educate them on the reactions possible from
latex gloves. The sales force maintains regular interaction with healthcare
personnel, thereby providing the Company with valuable feedback on market
perception of the Company's products as well as new developments within the
industry. In 1997, the Company had seven nurse consultants supporting the
Company's sales efforts through clinical education. The Company continues to
expand its healthcare marketing efforts to other healthcare professionals,
including physicians offices, nursing homes, outpatient clinics, surgical
centers, blood banks and other areas of the alternate-care market.
The Company's national accounts department promotes sales to and
negotiates agreements with group purchasing organizations, integrated delivery
networks, large non-acute care customers and multifacility high technology and
scientific customers. The national accounts department is also responsible for
assuring that all operating functions of the Company provide high service levels
to these national accounts and maintain relationships with the purchasing agents
and senior officers at each such account once a contract is in place. As of
December 31, 1997, the Company has three national account managers who are
supervised by a Director of National Accounts. In addition, the Company added
three strategic alliance managers focused on national accounts distributor
relations and implementing supply chain management initiatives with key
distributor partners.
The Company's sales and marketing efforts are supported by the
Company's logistics team that delivers services to medical products distributors
and end users designed to assist them in their businesses. Specifically, the
Company's logistics personnel work with medical products distributors to reduce
their order cycle time and inventory levels. In addition, the Company actively
promotes the use of electronic data interchange (EDI) technology, for
applications such as order entry, invoicing, and sales tracing, which produces
savings for both the Company and its distributors.
All domestic sales of the Company's medical products are made
through approximately 167 national, regional and local distributors, typically
pursuant to a contract between the Company and the distributor specifying prices
to be paid by the distributor for gloves sold to a particular end user. Two of
the largest distributors to the general hospital market, McKesson General
Medical ("MGM") and Owens & Minor, Inc. ("Owens & Minor") currently carry the
Company's product line on a non-exclusive basis. MGM and Owens & Minor
distributed gloves accounting for approximately 22.2% and 19.6%, respectively,
of the Company's 1997 consolidated net sales. Medical products distributors
provide the Company with an extensive nationwide distribution network. This
enables the Company's products to reach hospitals, clinics, physicians and
dental offices located in metropolitan as well as rural areas. The distributors
do not, however, necessarily promote the sale of the Company's products more
aggressively than the other competing lines of gloves which they carry.
Effective October 1, 1994, the Company entered into a three year
contract with MGM governing sales of the Company's gloves through MGM. The
contract designated the Company as the exclusive manufacturer of MGM's private
label gloves. Sales of gloves under the contract first occurred in 1995. In July
1996, the contract was amended to extend its term for an additional two years,
expiring on October 1, 1999, and to name the Company as MGM's preferred glove
manufacturer. In the amendment, MGM also agreed to promote sales of the
Company's gloves and the private label gloves manufactured by the Company. MGM
is a leading national medical/surgical products distributor and is the nation's
largest distributor to the alternate healthcare market.
In December 1996, the Company entered into a five year contract,
subject to early termination, to supply its examination gloves to Premier
Purchasing Partners, L.P. ("Premier"), a national group purchasing organization
("GPO") which is the largest hospital alliance in the United States. The Company
is currently one of three examination glove suppliers selected by Premier.
Premier comprises 1,800 healthcare facilities with 315,000 beds, approximately
one-third of the U.S. hospital marketplace. Premier corporate guidelines direct
members to utilize contracted vendors for a minimum of 90 percent of their
product requirements.
In December 1996, the Company also entered into a three year
contract, subject to early termination, to supply its examination gloves to
Catholic Materials Management Alliance ("CMMA"), a GPO representing
approximately 230 healthcare facilities with 40,000 beds in the United States.
The contract contemplates that the Company will be the sole contracted supplier
of examination gloves to CMMA members between March 1997 and February 2000.
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In March 1997, the Company entered into an exclusive supply
agreement with Costco Wholesale ("Costco") for Safeskin lightly powdered
examination gloves for consumer use. Costco operates approximately 270
warehouses throughout the United States, Canada, Mexico and the United Kingdom.
This agreement reflects the Company's intent to continue to pursue new market
opportunities beyond its present penetration of the hospital, doctors' office,
dental, and high-technology and scientific markets.
In April 1997, the Company entered into an exclusive, six-year
contract to supply Columbia/HCA Healthcare Corporation ("Columbia") with latex
examination gloves. Columbia is the largest provider of health care services in
the United States. The Columbia network includes hospitals, surgery centers,
home health locations, and nationwide pharmacy benefit management. The estimated
value of the six-year contract is approximately $120 million.
The Scientific Division markets its products for a variety of
cleanroom and laboratory applications in the semiconductor, biotechnology,
pharmaceutical, general industrial manufacturing and research segments of the
high technology and scientific market. Like the medical segment, more workers in
the high technology and scientific market are using gloves. Gloves protect both
the worker and the products or processes in these industries. As of December 31,
1997, the Company's high technology and scientific products were sold by a
network of approximately 107 distribution companies, including the two largest
distributors of high-technology and scientific gloves in the United States, VWR
Scientific Products Corporation ("VWR Scientific Products") and Fisher
Scientific International, Inc. The Company has a sales force of seven company
sales representatives, a sales manager and two independent manufacturing
representatives actively supporting the distribution network and end user
customers. As a result of the Company's recent acquisition of AQL, the Company
will now be able to market a broad line of proprietary latex and synthetic glove
products, specifically designed for the microelectronics (semiconductor and disk
drive), health technologies (pharmaceutical, medical device and biotechnology),
and general laboratory and safety market segments. Products are marketed under
the CertiClean(R), MicroGrip(TM), NXT(TM) and VeriSafe(TM) trade names and are
distributed primarily through VWR Scientific Products.
The Company established a sales and marketing office in The
Netherlands in 1992. In 1994, the Company established sales and marketing
subsidiaries in Germany and the United Kingdom. The Company also recruited and
trained a sales organization in 1994 and continues to expand its distribution
network throughout the European Union (the "EU"). The Company also sells its
products in South America, Australia, Africa and Japan. During 1997,
international sales represented approximately twelve percent of the Company's
total sales. Foreign sales may be subject to certain additional risks, including
import and export license requirements, trade regulations, tariffs and foreign
medical regulations.
MANUFACTURING AND QUALITY CONTROL
The Company currently manufactures its products at two manufacturing
facilities in Ipoh, Malaysia, one manufacturing facility in Hat Yai, Thailand,
and one manufacturing facility in Vista, California. The latex manufacturing
facilities locations are selected to be close to the rubber tree plantations,
which are the Company's source of natural latex, as well as for favorable cost
and availability of labor supply. Immediately after daily harvest from rubber
trees, raw natural rubber is sold by the plantations to latex processing firms
which concentrate the rubber to produce latex concentrate and incorporate
additives and preservatives to prevent spoilage.
Traditionally, the Company had purchased latex concentrate from
latex processing firms in Malaysia and Thailand. However, in mid-1997 Safeskin
broke ground, in Thailand, on one of the world's largest latex concentrate
plants. Removing a significant portion of this process from the domain of the
independent concentrators allows Safeskin to apply its stringent quality
standards and proprietary formulations directly on incoming raw latex while also
driving down costs. The plant was 75% complete and contributing to Safeskin's
profitability within the first six months of operation. Scheduled for completion
in early 1998, the plant is expected to generate enough raw latex to supply
approximately 80% of the Company's present needs.
The gloves are manufactured on production machines which can run
continuously and can be changed quickly to produce different types and sizes of
gloves. Quality control and testing are emphasized throughout the Company's
manufacturing process. Each batch is tested to ensure that it meets Company
quality
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standards. Each latex glove is formed by dipping a porcelain mold into the latex
compound. Water soluble proteins which occur naturally in latex, and certain
additives added for processing, are reduced by means of an extensive heating and
leaching processes. In both the Thailand and Malaysian facilities, the Company
has automated the glovestripping process. In the past, the lack of rigidity of
newly-manufactured gloves required that they be removed manually from their
molds; new glovestripping equipment streamlines the procedure by reducing
manpower requirements. Proteins and chemicals are minimized as a result of the
Company's proprietary latex formulations. In addition, the majority of the
Company's gloves are treated under a proprietary process to make them
powder-free and lower in protein. Throughout the manufacturing process the
Company's quality assurance team performs in-process testing of gloves for
thickness, tensile strength, tear resistance and water tightness. A sample of
every batch is retained for future analysis.
The Company's HypoClean 100(R) gloves for use in cleanrooms are
processed and packaged in a Class M3.5 (100) cleanroom built into one of the
Company's Ipoh, Malaysia factories in 1993. Cleanrooms are classified by the
level and size distribution of allowed airborne particles per given volume of
air and are increasingly required for the manufacture of sensitive
microelectronic components. In a Class M3.5 (100) cleanroom, no more than 100
airborne particles per cubic foot of air are allowed.
The Company's facilities in Ipoh, Malaysia, Hat Yai, Thailand and
Vista, California have received an ISO 9002 certification. ISO standards are
internationally recognized quality manufacturing standards established by the
International Organization for Standardization based in Geneva, Switzerland. To
obtain its ISO registrations, the Company's factories were independently audited
to ensure compliance with the applicable standards, and to maintain
registrations, the factories receive regular, announced inspections by an
independent certification organization. The Company believes that the ISO 9002
registration makes it more competitive in the marketplace as customers are
increasingly recognizing the standard as an indication of product quality.
The Company's Thailand facility began producing gloves in the first
quarter of 1995 and is capable of producing all types of the Company's latex
medical examination glove products. Processes have been added in order to allow
the Company to further reduce protein levels and chemical contact sensitizers to
minimize adverse reactions to natural rubber latex gloves and in anticipation of
potential FDA labeling regulations. See "--Product Labeling." Current results
indicate that the new facility generates significant labor, raw materials, and
water processing savings and efficiencies as compared to the Company's Malaysian
facilities. As of December 31, 1997, the Company's continuing expansion brought
its total production capacity, in both Thailand and Malaysia, to 3.5 billion
latex and synthetic gloves annually. To accommodate the Company's increased
production requirements, the Company completed construction and began operating
the first of its new production lines located in its Thailand facility in July
1997, referred to by the Company as the "Grand Master." Two additional "Grand
Master" production lines began operating in the first quarter of 1998. The
Company's management believes that a single "Grand Master" production line will
have the highest capacity of any glove production line in the world, equivalent
in capacity to approximately eight of the existing production lines in the
facility. The Company believes these three Grand Master production lines will
boost production by over one billion gloves annually when fully operational.
In April 1997, the Company announced plans for the expansion of its
Southeast Asian manufacturing operations in order to meet the demand for its
latex and synthetic medical examination, surgical and high-technology and
scientific gloves. The Company's expansion plans over the next two years include
(i) the construction of a fifth building and related machinery at the Company's
existing Hat Yai, Thailand facility and (ii) the construction of a second
manufacturing facility in Tambol Patong, Thailand that is expected to produce
latex and synthetic surgical, high-technology and scientific and medical
examination gloves. The fifth building at the Company's existing Hat Yai
facility will house 22 high-speed and product-flexible dipping production lines.
These dipping production lines are scheduled for staggered commissioning
throughout 1998, beginning in the second quarter, and will boost production by
an additional 1.5 billion gloves annually when fully operational. Construction
of the new manufacturing facility in Tambol Patong, Thailand began in the second
half of 1997 after preliminary approval by the Thailand Board of Investment.
Four production buildings are expected to be constructed on this site. One of
these buildings will house the expansion of the Company's Tactylon(R) synthetic
medical examination and surgical glove production and the Company's nitrile
glove production and is scheduled to be completed during the second half of
fiscal 1998. This building is expected to increase by over 200 percent the
production capacity of the Tactylon(R) product line in comparison to the
existing
-7-
<PAGE> 10
facility which is located in Vista, California. The second building will provide
additional capacity for the production of the Company's surgical and clean-room
glove products and is scheduled to be completed in the fourth quarter of 1998.
Finally, the additional two buildings will provide the Company increased
capacity for latex and synthetic medical examination, surgical and scientific
glove production. Production at these two additional buildings is scheduled to
begin in 1999. The new buildings, machines and supporting infrastructure at the
new Tambol Patong manufacturing facility are expected to cost approximately $80
million in the aggregate and is expected to increase the Company's annual
production capacity by over 2.5 billion gloves, when fully operational.
On December 13, 1996, the Company announced plans to move all of its
remaining latex medical examination glove production from its Malaysian facility
to its Hat Yai, Thailand facility in 1997. In connection with the move, the
Company took a $3 million charge against earnings in the fourth quarter of 1996.
Subsequent to December 31, 1996, the Company extended the planned use of the
Malaysian facility due to increasing production requirements and the timing of
bringing new production capacity on-line in Thailand. The Company will continue
to operate both of its Malaysian facilities for the production of medical
examination gloves and higher value products, such as the newly introduced
Safeskin 2000(TM) powder-free surgical glove, the high technology and scientific
division's HypoClean(R) products and nitrile products and its Vista, California
manufacturing facility for its Tactylon(R) product line until new production
facilities in Thailand are completed.
Although the Company has never experienced an interruption in the
availability of latex due to natural phenomena or transportation problems or by
a factory shutdown resulting from fire, power outage, employee strike or other
cause, there can be no assurance that the Company's production of gloves will
not be adversely affected by such events.
COMPETITION
The Company faces substantial competition from a number of
manufacturers of latex gloves. The leading competitors in the medical glove
product line are Allegiance Corporation (a spin-off of Baxter International),
Maxxim Medical Inc., Ansell-Perry Inc., and Johnson & Johnson. The Company's
management believes that Allegiance Corporation is the leading competitor in the
high technology and scientific glove market. There are also a number of other
competitors which are engaged in manufacturing or distributing high technology
and scientific gloves. Many of the Company's competitors, particularly those
competitors which are large medical and pharmaceutical and hospital supply
companies, have substantially greater financial, manufacturing, marketing and
technical resources than the Company. The Company and other synthetic glove
manufacturers also sell products in the medical and non-medical glove market.
Synthetic gloves are generally more expensive than natural rubber latex gloves
and do not, in the opinion of the Company's management, present a significant
threat to the Company's natural rubber latex products at this time.
The Company's management believes the primary competitive factors
within its markets are product quality, durability, reliability, consistency,
clinical value, ease of product use, access to distribution channels, price and
the availability of prompt delivery. Failure of the Company to continue to
distinguish its products on the basis of quality, reliability and value could
have a material adverse effect on the Company's business and results of
operations. Furthermore, there can be no assurance that the Company's
competitors or others will not develop products, manufacturing processes or new
technologies which would be more cost effective or more efficient than those of
the Company or that the Company's gloves will not be rendered obsolete or
uncompetitive. Such competition could have a material adverse effect on the
Company's business, financial condition and results of operations.
GOVERNMENT REGULATION
The Company's products are subject to regulation by numerous
governmental authorities in the United States and other countries, particularly
as to safety and efficacy, and adherence to the Good Manufacturing Practices
("GMP") regulations for medical devices. In the United States, examination and
surgical gloves are classified as Class I medical device products regulated by
the FDA. The Federal Food, Drug, and Cosmetic Act (the "FFD&C Act") and other
federal statutes and regulations govern or influence the testing, manufacture,
safety, labeling, storage, record-keeping, approval, advertising and promotion
of Class I devices. Noncompliance with the FFD&C Act or regulations promulgated
thereunder can result in administrative enforcement, such as warning letters,
-8-
<PAGE> 11
import alerts and administrative detention, or in civil penalties, product bans,
defect notifications, mandatory field corrections, seizures, recalls,
injunctions and criminal prosecution. Periodically the FDA inspects shipments of
medical gloves as they arrive in United States ports. The time period during
which the tests are conducted and the FDA review of the results may cause delays
in delivery and thus can result in a loss or delay in recognition of income by
the Company.
Medical examination and surgical gloves must be submitted to the FDA
for clearance to market by a pre-market notification filing under Section 510(k)
of the FFD&C Act. An application is made for a particular use or performance
claim for each type of glove produced by a specific manufacturer. Applications
under the 510(k) procedure must demonstrate substantial equivalence to a legally
marketed device. Additional data requirements apply to gloves such as surgical
gloves, which are sterile. Applicants must defer marketing until a written order
is issued by the FDA finding the firm's device substantially equivalent to a
legally marketed device. This notice may be issued within 90 days of submission,
but may take substantially longer. The FDA, however, may determine that the
proposed device is not substantially equivalent, or the agency may require the
Company to submit further information, such as additional test data, before it
is able to make a substantial equivalence determination. Such an adverse
determination or request for additional information could have the effect of
materially delaying the commencement of marketing. As part of the substantial
equivalence determination, the Company must demonstrate that the glove complies
with the American Society of Testing and Materials testing standards relating to
physical specifications for the product and must pass the FDA "leakage test."
In addition, the FDA may inspect the manufacturing facilities before issuing a
notice of substantial equivalence and may delay or decline to issue such notice.
The Company has obtained 510(k) clearance for each type of currently
marketed glove which requires clearance. The Company has not experienced any
substantial difficulty in obtaining 510(k) clearances in the past. If the
Company makes any changes to a type of glove previously cleared by the FDA that
could significantly affect its safety or effectiveness (such as significant
changes in the manufacturing process), a new 510(k) submission will be required.
The Company is subject to periodic inspection by the FDA for
compliance with GMP regulations. Under GMP regulations, the Company is subject
to significant procedural and documentation requirements with respect to
manufacturing, packaging, storage and control activities. The Company also may
be subject to inspection by foreign regulatory authorities to determine
compliance with comparable standards. Due to the FDA's recently promulgated
Quality System Regulation, which will replace the GMP regulations for medical
devices and will incorporate preproduction design and development controls and
achieve consistency with quality system requirements worldwide, the Company must
continue to expend time, monies and efforts in the areas of production and
quality control to ensure full technical compliance with these standards.
The Company must also comply with various FDA labeling and
post-market reporting requirements. Failure to comply with applicable regulatory
requirements can result in administrative enforcement, such as warning letters,
import alerts and administrative detention, or in product bans, field
corrections, seizures, recalls, injunctions and criminal prosecutions. Changes
in existing requirements or adoption of new requirements could adversely affect
the ability of the Company to comply with regulatory requirements. Failure to
comply with regulatory requirements could have a material adverse effect on the
Company's business, financial condition and results of operations.
Whether or not FDA clearance is obtained for a new product, approval
or clearance of a product by regulatory authorities in foreign countries may be
required prior to the commencement of commercial sales of the product in such
countries. The requirements governing product approvals or clearances vary
widely from country to country, and the time required for approval may be longer
or shorter than that required for FDA approval.
The Company must meet various regulatory requirements for the sale
and distribution of its products throughout the European Union ("EU"). The
Company currently meets such regulatory requirements for the majority of its
products sold in Europe, including registration with the appropriate notified
bodies, which register companies for the sale of products throughout the EU. In
order to continue selling its products within the EU following June 14, 1998,
the Company will be required to comply with the EU's Medical Devices Directive.
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<PAGE> 12
Although the Company's customers do not bill third-party
reimbursement sources separately for purchases of the Company's gloves, the
Company's ability to sell its medical gloves profitably may depend in part on
the reimbursement policies and regulations of government health administration
authorities, private health insurers and other organizations. Such third-party
payors are increasingly challenging the price of medical products and services.
Additionally, reform measures, if adopted, could adversely affect the pricing of
the Company's medical gloves.
In addition to the statutes and regulations described above, the
Company is also subject to Malaysian and Thai occupational, health and
environmental laws and regulations.
PRODUCT LIABILITY AND INSURANCE
Participants in the medical supply industry are subject to lawsuits
alleging product liability, many of which involve significant damage claims and
defense costs. The Company currently has in force product liability insurance
policies. The Company's insurance policies are on a "claims made" basis and are
subject to annual renewal. A successful claim against the Company in excess of
the Company's insurance coverage could have a material adverse effect on the
Company's results of operations or financial condition. Claims made against the
Company, regardless of their merit, also could have a material adverse effect on
the Company's reputation. There is no assurance that the coverage limits of the
Company's insurance policies will be adequate. While the Company has been able
to obtain product liability insurance in the past, such insurance varies in
cost, is difficult to obtain and may not be available in the future on
acceptable terms or at all.
EMPLOYEES
As of December 31, 1997, the Company had approximately 5,341
employees of whom approximately 5,088 were employed in Malaysia and Thailand.
The Malaysian factory workers are represented by a company union which has
entered into a collective bargaining agreement with the Company's Malaysian
subsidiary. The agreement was reinstated beginning October 1, 1997 and will
expire on September 30, 2000. The Company considers its relations with its
employees to be good.
RECENT DEVELOPMENTS
On February 17, 1998, the Company authorized a 100% stock dividend
on its common stock to be distributed on April 1, 1998 to shareholders of record
at the close of business on February 27, 1998. No effect of the stock dividend
has been reflected in the accompanying financial statements.
On February 20, 1998, the Company completed the acquisition of
Absolute Quality Leadership, Inc. ("AQL"). AQL is a California-based marketer of
glove products for the high-technology and scientific markets. AQL markets a
broad line of proprietary latex and synthetic glove products, specifically
designed for the microelectronics (semiconductor and disk drive), health
technologies (pharmaceutical, medical device, and biotechnology), and general
laboratory and safety market segments. Products are marketed under the
CertiClean(R), MicroGrip(TM), NXT(TM) and VeriSafe(TM) trade names and are
distributed primarily through VWR Scientific Products. The Company believes that
the acquisition of AQL and its solid reputation for quality within the
high-technology and scientific market provides synergies for the Company's
high-margin scientific glove business. As a result of this acquisition, the
Company expects to have greater product depth and management focus pertaining to
the high-technology and scientific market. The Company intends to change the
name of AQL to Safeskin Scientific Corporation.
In February 1998, the Company established a partnership with Perot
Systems Corporation, a leader in information technology services, in order to
enable the Company to streamline distribution and administrative procedures for
itself and its customers.
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<PAGE> 13
ITEM 2. PROPERTIES
The Company owns two manufacturing facilities located in Ipoh,
Malaysia, totaling approximately 300,000 square feet, and a latex concentrate
manufacturing and processing plant located in Seremban, Malaysia, comprised of
approximately 30,000 square feet. The Company leases the land where its
facilities are located under long-term leaseholds from the state government
which have expiration dates ranging from the year 2063 to the year 2072. Any
transfer of a land leasehold by the Company requires the prior approval of the
state. The Company announced plans to close one of the smaller Malaysian
facilities in 1997. Subsequent to December 31, 1996, the Company extended the
planned use of the Malaysian facility due to existing production requirements
and the timing of bringing new production capacity on-line in Thailand. In
connection with the plant closure, the Company took a charge of approximately $3
million in 1996. The charge relates to the Company's anticipated costs to
relocate all of its remaining lightly powdered and powder-free latex medical
examination glove production from its Malaysian facility to its Thailand
facility. As of December 31, 1997, the Malaysian facility is still considered
held for sale and the delay in moving the examination glove production from
Malaysia to Thailand has had no impact on the Company's restructuring plan and
the write-down of fixed assets recorded in 1996. The relocation will enable the
Company to capitalize on its substantially lower operating costs in Thailand.
The Company also owns a manufacturing facility in Hat Yai, Thailand
totaling approximately 500,000 square feet. The Company owns the approximately
42 acres of land on which the facility is located. In addition, the Company also
owns a latex concentrate manufacturing and processing plant located in Nathavee
District, 50 kilometers from Hat Yai, Thailand totaling approximately 94,000
square feet. The Company owns the 40 acres of land on which this facility is
located.
In the United States, the Company leases approximately 19,265 square
feet of warehouse space for its sample fulfillment center in Hanover, Maryland.
The Company leases two buildings, one with approximately 42,000 square feet and
the other with approximately 12,000 square feet of office space, respectively in
San Diego, California for its headquarters and approximately 1,755 square feet
of additional office space in Boca Raton, Florida. The Company also leases
approximately 6,063 square feet of space in San Diego, California for its
research and development laboratory and related storage space.
The Company leases space in Vista, California totaling approximately
16,933 square feet for the headquarters, related storage space and production
facilities of Tactyl. In Mexico, the Company also leases 11,000 square feet
located in La Mesa, Tijuana for the packing and distribution operations of
Tactyl.
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<PAGE> 14
ITEM 3. LEGAL PROCEEDINGS
From May 1995 through March 26, 1998, 135 product liability lawsuits
seeking monetary damages, in most cases of an unspecified amount, have been
filed in federal and state courts against the Company, and other manufacturers
of latex gloves, alleging injures ranging from dermatitis to severe allergic
reactions caused by the residual chemicals or latex proteins in gloves worn by
medical workers while performing their duties. The Company has been dismissed
from 22 of those product liability lawsuits. On February 26, 1997, the Judicial
Panel on Multi-District Litigation entered an order transferring all latex
allergy lawsuits brought on behalf of healthcare workers against the Company and
other latex glove manufacturers in the Federal courts to the docket of Judge
Edmund V. Ludwig of the United States District Court for the Eastern District of
Pennsylvania, consolidating those cases for discovery management and other
pre-trial proceedings. The Company has referred the defense of these lawsuits to
its insurance carriers. While the Company maintains levels of insurance coverage
which it believes will be adequate to cover the costs of the legal defense of
these suits, there can be no assurance that the Company's insurance will be
sufficient to meet any damages for which the Company may be found liable in the
existing lawsuits, which are still in relatively early stages of discovery, or
any others that may be filed in the future, or that the outcome of such suits
will not adversely affect the Company's results of operations or financial
condition.
From time to time, the Company is involved in other litigation
relating to claims arising out of its operations in the normal course of
business. As of the date hereof, the Company is not a party to any other legal
proceedings, the adverse outcome of which, in management's opinion, individually
or in the aggregate, would have a material adverse effect on the Company's
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE> 15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
(a) MARKET INFORMATION
The Company's Common Stock trades on The Nasdaq Stock Market(SM)
under the symbol "SFSK." The following table sets forth the high and low sales
prices of a share of the Company's Common Stock for each quarter in 1996 and
1997, and the interim period indicated, as reported by The Nasdaq Stock
Market(SM) and restated to give effect to the 100% stock dividend distributed on
January 2, 1997.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1996
First Quarter 13 5/8 8
Second Quarter 20 3/4 12 1/2
Third Quarter 20 5/8 15
Fourth Quarter 26 11/16 17 7/8
1997
First Quarter 27 1/4 17 5/8
Second Quarter 29 1/2 17 5/8
Third Quarter 47 5/8 28
Fourth Quarter 58 40
1998
First Quarter 68 3/4 51 1/2
(through March 20, 1998)
</TABLE>
The closing price of the Company's Common Stock on March 20, 1998,
as reported by The Nasdaq Stock Market(SM) was $68 1/4.
On December 12, 1996, the Board of Directors of the Company declared
a dividend on its shares of Common Stock of preferred share purchase rights
("Preferred Share Purchase Rights") as part of a shareholder rights plan. The
Preferred Share Purchase Rights trade in tandem with the Common Stock of the
Company until the earlier to occur of (i) 10 business days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") has acquired, or obtained the right to acquire, beneficial
ownership of 15% or more of the outstanding shares of the Common Stock, or (ii)
within ten (10) business days (or such later date as may be determined by the
Board of Directors prior to such time as any person or group of affiliated
persons becomes an Acquiring Person) following the commencement of a tender
offer or exchange offer that would result in a person or group beneficially
owning 15% or more of the outstanding shares of the Common Stock.
(b) HOLDERS
The number of record holders of the Company's common stock as of
March 20, 1998 was 446. The Company believes that a larger number of beneficial
owners hold such shares of Common Stock in depository or nominee form.
(c) DIVIDENDS
The Company has not paid cash dividends on its common stock and does
not intend to pay any cash dividends in the foreseeable future.
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<PAGE> 16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
The following selected consolidated financial data of the Company
for the five years ended December 31, 1997 are derived from the audited
consolidated financial statements of the Company, except for per share
information, which has been restated to give effect to the 100% stock dividend
on the common stock effected on January 2, 1997. The consolidated financial
statements as of December 31, 1997 and 1996 and for each of the three years
ended December 31, 1997, 1996, 1995 are included elsewhere in this Report. The
financial information for the Company at December 31, 1994 and 1993 was derived
from financial statements of the Company not included in this Report. The
following information should be read in conjunction with the Consolidated
Financial Statements of the Company and the related notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial information included elsewhere in this Report.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $ 182,998 $ 146,089 $ 117,014 $ 84,142 $ 57,264
Costs of goods sold 98,144 84,325 75,756 50,376 33,237
--------- --------- --------- --------- ---------
Gross profit 84,854 61,764 41,258 33,766 24,027
Selling expenses 22,700 17,693 16,120 11,685 7,999
Research and development 3,504 2,209 1,493 977 398
General and administrative expenses 15,923 12,287 6,397 3,625 2,561
Write-down of fixed assets -- 2,979 -- -- --
--------- --------- --------- --------- ---------
Income from operations 42,727 26,596 17,248 17,479 13,069
Interest expense, related parties -- -- -- -- 156
Interest expense (income), net (823) (58) 194 17 1,285
Other expense (income), net (2,699) 133 (163) (825) (237)
--------- --------- --------- --------- ---------
Income before income tax 46,249 26,521 17,217 18,287 11,865
Income tax provision 4,999 2,939 2,326 3,920 213
--------- --------- --------- --------- ---------
Net income $ 41,250 $ 23,582 $ 14,891 $ 14,367 $ 11,652
========= ========= ========= ========= =========
Net income per share-basic (2) $ 1.58 $ .93 $ .60 $ .59 $ .58
Net income per share-diluted (1) (2) $ 1.41 $ .85 $ .58 $ .57 $ .56
Weighted average common shares
outstanding-basic 26,130 25,472 24,750 24,506 20,025
Weighted average common shares
outstanding-diluted 29,269 27,775 25,605 25,392 20,817
BALANCE SHEET DATA:
Working capital $ 43,201 $ 48,310 $ 28,055 $ 22,987 $ 22,310
Total assets 138,520 116,749 84,675 61,230 43,224
Long-term debt -- -- 2,750 -- --
Shareholders' equity 106,578 103,015 69,861 54,260 38,750
</TABLE>
(1) Net income per share-diluted is computed by dividing net income by the
weighted average of common shares outstanding and dilutive common stock
equivalents. Common stock options are common stock equivalents and are
included in the weighted average of common shares outstanding using the
treasury stock method.
(2) The number of shares outstanding has been adjusted to reflect the 100%
stock dividend of the Common Stock distributed on January 2, 1997.
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<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and related Notes thereto
incorporated by reference herein.
The Company's net sales have grown substantially over the past
several years. The Company attributes the growth in net sales during this period
principally to increased market penetration due to the implementation of sales
and marketing programs, the introduction of new products and growth in markets
for its products. The Company introduced lightly powdered medical gloves,
powder-free medical gloves, HypoClean(R) powder-free gloves, powder-free latex
surgical gloves, high technology and scientific nitrile gloves, and Safeskin
2000(TM) powder-free latex surgical gloves in 1989, 1990, 1992, 1994, 1995 and
1996, respectively. In 1997, the Company began selling a medical examination
glove made of a non-latex material called nitrile. In addition, as a result of
its acquisition of the synthetic glove business of Tactyl Technologies, Inc.,
the Company began selling Tactylon(R) synthetic examination and surgical gloves.
Although the Company has continued to develop new products and expects to do so
in the future, no assurance can be given that the new products will be accepted
in the marketplace or will have similar growth rates.
The Company's net sales are derived from the sale of finished
products, net of contractual allowable rebates and fees provided to distributors
and group purchasing organizations for the resale of the Company's products in
specific volumes to specified end user customers. The Company estimates
allowable rebates on a monthly basis through the analysis of actual sales
information from customers, contractual arrangements and historical trends
related to actual rebates issued. Cost of goods sold includes all costs to
manufacture the finished product plus related costs associated with ocean
freight, customs duty and warehousing. Selling expenses include all salaries for
sales and marketing staffs and other related expenses such as sales commissions,
and costs associated with travel, trade show participation, advertising and
product delivery. Research and development expenses include salaries for
research and development staffs and related expenses for consulting, product
testing and travel. General and administrative expenses include salaries for
administrative and information technology staffs and related expenses for
travel, insurance, facilities, consulting and professional fees. The income tax
provision is less than statutory rates as a result of the tax free status of the
Company's foreign manufacturing operations. During June 1994, the Company's
Malaysian manufacturing operations were granted five additional years of tax
free status retroactive to October 1, 1993, the date on which the original five
year grant of tax free status expired. The Company's existing Thailand
manufacturing operations have been granted tax free status through 2003 and have
been granted a reduced tax rate through 2007. As the Company begins to build new
production facilities in Thailand, it has applied for and received similar tax
free status for these operations.
The Company's medical glove distributor customers do not bill
third-party reimbursement sources separately for purchases of the Company's
gloves. Consequently, the timing and effect of third-party payments to hospitals
and clinics do not have a material effect on the Company's operations or
liquidity.
1997 COMPARED TO 1996
Net sales for 1997 were $182,998,000 which represents a 25.3%
increase over net sales of $146,089,000 in 1996. The predominant cause for the
sales growth was an increase in unit volumes sold during the 1997 period, which
includes sales of lightly-powdered gloves associated with the Company's new
contracts with group purchasing organizations as well as increased sales of
powder-free exam gloves, powder-free surgical gloves and scientific glove
products. The Company's sales into international markets continued to
demonstrate strong growth in 1997; international net sales increased by 24.8%
over the prior year.
Cost of goods sold increased l6.4% from $84,325,000 for 1996 to
$98,144,000 for 1997. As a percentage of net sales, cost of goods sold decreased
from 57.7% in 1996 to 53.6% in 1997. This decrease in cost of goods sold as a
percentage of net sales was principally attributable to the favorable impact of
greater manufacturing efficiencies, the continued shift of production to the
Company's lower-cost manufacturing facility in Thailand, and lower latex prices.
Although sales of the Company's lower margin lightly powdered gloves increased
slightly as a
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<PAGE> 18
percentage of net sales in the 1997 period as compared to the 1996 period, the
impact on the gross profit margin was partially offset by increased sales of
higher margin powder-free surgical and scientific glove products. In addition,
the Company's gross profit margin was favorably impacted in 1997 due to the
positive effects of the significant devaluation of the currencies in both
Malaysia and Thailand. As a result of the above factors, gross profits increased
37.4% from $61,764,000 in 1996 to $84,854,000 in 1997.
Selling expenses increased 28.3% from $17,693,000 in 1996 to
$22,700,000 in 1997. As a percentage of net sales, selling expenses increased
slightly from 12.1% in 1996 to 12.4% in 1997. The increase in selling expenses
as a percentage of net sales is primarily attributed to increased selling
expenses in the Company's European operations.
Research and development expenses increased 58.7% from $2,209,000 in
1996 to $3,504,000 in 1997. As a percentage of net sales, research and
development expenses increased from 1.5% in 1996 to 1.9% in 1997. The increase
in research and development expenses as a percentage of net sales reflects an
increase in the Company's product testing, research and development personnel
and research and development costs related to the Tactylon(R) product line.
General and administrative expenses increased 29.6% from $12,287,000
in 1996 to $15,923,000 in 1997. As a percentage of net sales, general and
administrative expenses increased slightly from 8.4% for the 1996 period to 8.7%
for the 1997 period. The increase in general and administrative expenses as a
percentage of net sales was caused primarily by increased costs associated with
the Company's acquisition of Tactyl Technologies, Inc.
On December 13, 1996, the Company announced plans to move all of its
remaining latex examination glove production from its Malaysian facility to its
Thailand facility in 1997. In connection with the move, the Company took a $3
million charge against earnings in the fourth quarter of 1996, reflected in the
accompanying financial statements as a write-down of fixed assets. During 1997,
the Company extended the planned use of the Malaysian facility due to existing
production requirements and the timing of bringing new production capacity
on-line in Thailand. The Malaysian facility is still considered held for sale
and the delay in moving examination glove production from Malaysia to Thailand
has had no impact on the Company's restructuring plan and the write-down of
fixed assets recorded in 1996.
Income from operations increased 60.6% from $26,596,000 in 1996 to
$42,727,000 in 1997. Operating margins increased from 18.2% in 1996 to 23.3% in
1997. Excluding the effects of the write-down of fixed assets in 1996, income
from operations increased 44.5% from $29,575,000 in 1996 to $42,727,000 in 1997.
Operating margins, excluding the effects of the write-down of fixed assets,
would have been 20.2% in 1996.
Interest expense (income), net, increased from $58,000 of interest
income in 1996 to $823,000 of interest income in 1997, and is primarily due to
the fact that in 1997 the Company did not have any debt outstanding and
generated investment returns on its increased cash balances. Since 1996, the
Company has been able to successfully fund its operations, including its
acquisition of Tactyl Technologies, Inc. and the expansion of the Company's
foreign manufacturing operations, with internally generated cash while, at the
same time, generating excess cash balances.
Other expense (income), net, changed from $133,000 of other expense
in 1996 to $2,699,000 of other income in 1997. This change in other expense was
substantially due to net foreign currency transaction gains experienced in the
Company's Malaysian and Thailand subsidiaries in 1997. Due to their
immateriality and because substantially all of the sales of these subsidiaries
were intercompany sales, the gains and losses from foreign currency transactions
for the Company's Malaysian and Thailand subsidiaries were recorded as a
component of cost of sales in 1996. With the significant devaluation of the
Malaysian ringgit and the Thai baht since June 30, 1997, the Company has
experienced an increased amount of net foreign currency transaction gains and,
therefore, has decided to record these net foreign currency transaction gains as
a component of other expense (income), net in 1997. In future periods, the
Company will record net foreign currency transaction gains and losses,
regardless of materiality, as a component of other expense (income), net.
Provision for income taxes increased 70.1% from $2,939,000 in 1996
to $4,999,000 in 1997. The
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<PAGE> 19
income tax provisions recorded in both 1996 and 1997 remain less than statutory
rates due to the tax free status of the Company's foreign manufacturing
operations.
Net income increased 74.9% from $23,582,000 in 1996 to $41,250,000
in 1997 and the net income margin increased from 16.1% in 1996 to 22.5% in 1997
due to the foregoing factors. Excluding the effects of the write-down of fixed
assets in 1996, net income increased 55.3% from $26,561,000 in 1996 to
$41,250,000 in 1997. Net income margin, excluding the effects of the write-down
of fixed assets, was 18.2% in 1996.
1996 COMPARED TO 1995
Net sales for 1996 were $146,089,000 which represents a 24.8%
increase over net sales of $117,014,000 in 1995. The predominant causes for the
sales growth were the shift in product mix to higher priced powder-free gloves
and an increase in unit volumes sold in the 1996 period as compared to the 1995
period.
Cost of goods sold increased l1.3% from $75,756,000 for 1995 to
$84,325,000 for 1996. As a percentage of net sales, cost of goods sold decreased
from 64.7% in 1995 to 57.7% in 1996. This decrease in cost of goods sold as a
percentage of net sales was principally attributable to improved operating
efficiencies in the Thai facility as well as decreased raw material costs during
the 1996 period. As a result of the above, gross profits increased 49.7% from
$41,258,000 in 1995 to $61,764,000 in 1996.
Selling expenses increased 9.8% from $16,120,000 in 1995 to
$17,693,000 in 1996. As a percentage of net sales, selling expenses decreased
from 13.8% in 1995 to 12.1% in 1996. The decrease in selling expenses as a
percentage of net sales is primarily a result of selling expenses such as
salaries, travel costs and delivery expenses remaining comparable to the prior
year while sales have significantly increased over the prior year.
Research and development expenses increased 47.9% from $1,493,000 in
1995 to $2,209,000 in 1996. As a percentage of net sales, research and
development expenses increased from 1.3% in 1995 to 1.5% in 1996.
General and administrative expenses increased 92.1% from $6,397,000
in 1995 to $12,287,000 in 1996. As a percentage of net sales, general and
administrative expenses increased from 5.5% for the 1995 period to 8.4% for the
1996 period. The increase in general and administrative expenses as a percentage
of net sales pertains primarily to increased costs associated with the continued
investments in information technology to support the continued growth of the
Company. Additional factors include increased compensation and facilities costs
as well as expenses associated with the Company's secondary offering which was
completed in January 1997.
On December 13, 1996, the Company announced plans to move all of its
remaining latex examination glove production from its Malaysian facility to its
Thailand facility. In connection with the move, the Company took a $3 million
charge against earnings in the fourth quarter of 1996, reflected in the
accompanying financial statements as a write-down of fixed assets. The Company
anticipates that the move will improve profit margins in future years due to the
lower production costs at the Thailand facility.
Income from operations increased 54.2% from $17,248,000 in 1995 to
$26,596,000 in 1996. Operating margins increased from 14.7% in 1995 to 18.2% in
1996. Income from operations, excluding the effects of the write-down of fixed
assets, was $29,575,000 in 1996; representing an increase of 71.5% over the
prior year. Operating margins, excluding the effects of the write-down of fixed
assets, would have been 20.2% in 1996.
Interest expense (income), net, decreased from $194,000 of interest
expense in 1995 to $58,000 of interest income in 1996, and is primarily due to
the Company's reduction of debt from $2,750,000 in 1995 to $0 in 1996.
Other expense (income), net, increased from $163,000 of other income
in 1995 to $133,000 of other expense in 1996. The increase in other expense was
substantially due to losses experienced from foreign currency transactions in
the Company's European subsidiaries in 1996.
-17-
<PAGE> 20
Provision for income taxes increased 26.4% from $2,326,000 in 1995
to $2,939,000 in 1996. The income tax provisions recorded in both 1995 and 1996
remain less than statutory rates due to the foreign tax free status.
Net income increased 58.4% from $14,891,000 in 1995 to $23,582,000
in 1996 and the net income margin increased from 12.7% in 1995 to 16.1% in 1996
due to the foregoing factors. Net income, excluding the effects of the
write-down of fixed assets, was $26,561,000 in 1996; representing an increase of
78.4% over the prior year. Net income margin, excluding the effects of the
write-down of fixed assets, was 18.2% in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations generated approximately $62,512,000,
$30,937,000, and $10,843,000 of cash during 1997, 1996 and 1995, respectively.
Further, during 1997, 1996 and 1995, the Company acquired capital assets of
approximately $35,183,000, $20,230,000, and $16,461,000, respectively, most of
which were for the expansion of the Company's foreign manufacturing operations.
Included in the 1997 amount was approximately $31,015,000 for the expansion of
the Company's manufacturing operations and latex concentrate plant located in
Thailand. Included in the 1996 and 1995 amounts were approximately $16,441,000
and $14,319,000, respectively, for the expansion of the Company's foreign
manufacturing operations and the acquisition of land at the Company's
manufacturing facility in Hat Yai, Thailand.
During 1997, the Company completed construction and began operating
the first of its new production lines located in its Thailand facility, referred
to by the Company as the "Grand Master." Two additional production lines began
operating in the first quarter of 1998. The Company's management believes that a
single "Grand Master" production line will have the highest capacity of any
glove production line in the world, equivalent in capacity to approximately
eight of the existing production lines in this facility. The construction of
these production lines has been funded with internally generated cash.
In addition, the Company is currently building a latex concentrate
plant in Thailand. The output of the plant will supply latex concentrate to the
Company's factories in Thailand and Malaysia for the manufacture of its
disposable latex gloves. The Company began initial production of latex
concentrate in the third quarter of 1997 and expects the final phase of
construction of its latex concentrate plant to be completed within a year. The
Company anticipates that this construction will be funded with internally
generated cash. This plant will allow the Company to integrate its manufacturing
processes to gain better control over the quality, cost and reliability of latex
supplies.
In April 1997, the Company announced plans for the expansion of its
Southeast Asian manufacturing operations in order to meet the continued strong
demand and anticipated future demand for its latex and synthetic medical
examination, surgical and high-technology and scientific gloves. The Company's
expansion plans over the next two years include the construction of an
additional building and related machinery at the Company's existing Thailand
facility. Additionally, the Company also plans to construct a second
manufacturing facility to be located in southern Thailand that is expected to
produce latex and synthetic surgical, high-technology and scientific and
examination gloves. Construction of this site began in the second half of 1997
after approval by the Thailand Board of Investment. Four production buildings
are expected to be constructed on this site. One of these buildings will house
the expansion of the Company's Tactylon(R) synthetic examination and surgical
glove and the Company's nitrile glove production and is scheduled to be
completed during the second half of fiscal 1998. This building is expected to
increase by over 200 percent the production capacity of the Tactylon(R) product
line in comparison to the existing facility which is located in Vista,
California. The second building will be constructed to provide additional
capacity for the production of the Company's surgical and cleanroom glove
products. Production is scheduled to begin in the fourth quarter of 1998. In the
interim, these products will continue to be manufactured at the Company's
Malaysia and Vista, California facilities. An additional two buildings will be
constructed to house the Company's increased capacity for latex exam,
scientific, synthetic and surgical gloves. Production is scheduled to begin in
1999. The new buildings, machines and supporting infrastructure are expected to
cost approximately $80 million in the aggregate. The significant investment by
the Company in its manufacturing operations is expected to increase the
Company's annual production capacity by over 2.5 billion gloves. Due to the
Company's strong cash flow, financing for the total capital expenditures for the
two-year period is projected to come from internally
-18-
<PAGE> 21
generated funds, with any shortfalls financed through borrowings from the
existing credit facilities.
As of December 31, 1996, the Company's plan for the Malaysian
operations included transfer of production to Thailand in 1997. At December 31,
1996, the Malaysian facility was considered held for sale. Subsequent to
December 31, 1996, the Company extended the planned use of the Malaysian
facility due to existing production requirements and the timing of bringing new
production capacity on-line in Thailand. The Company still intends to transfer
production to Thailand. As of December 31, 1997, the Malaysian facility is still
considered held for sale and the delay in moving the examination glove
production from Malaysia to Thailand has had no impact on the Company's
restructuring plan and the write-down of fixed assets recorded in 1996.
The Company has outstanding contractual commitments at December 31,
1997 for the construction of plant and equipment in Malaysia and Thailand in the
approximate amount of $6,035,000.
In March 1997, the Company acquired the synthetic glove business of
Tactyl Technologies, Inc., a San Diego based developer and manufacturer of
non-latex surgical gloves for the domestic and international markets. The
acquisition, which has been accounted for under the purchase method, included an
acquisition price of approximately $14.5 million payable at the closing, plus up
to an additional $5 million payment which is contingent upon the Tactyl business
achieving certain future sales and performance targets, including the
development of the next generation of synthetic latex technology. Such
additional payment, if any, would be recorded as goodwill and amortized over its
remaining life.
In February 1998, the Company completed the acquisition of Absolute
Quality Leadership, Inc., a California based marketer of glove products for the
high-technology and scientific markets. The Company paid for this acquisition
with internally generated cash.
The Company has an unsecured two-year credit facility for financing
general working capital needs, up to a maximum of $25,000,000. As of December
31, 1997, there were no borrowings outstanding under this credit facility.
The Company's foreign manufacturing subsidiaries have revolving
lines of credit for financing general working capital needs up to approximately
$8,900,000. As of December 31, 1997, there were no borrowings outstanding under
these credit facilities. These borrowings are secured by a guarantee of the
Company.
In July 1997, the Thai baht and Malaysian ringgit were permitted to
float against the U.S. dollar and other currencies, and as a result, the baht
and ringgit have devalued from approximately 24.7 bahts/dollar and 2.5235
ringgits/dollar, as of June 30, 1997 to approximately 48.15 bahts/dollar and
3.8903 ringgits/dollar as of December 31, 1997, respectively. The significant
devaluation in both the Thailand and Malaysian currencies has resulted in an
increased amount of foreign currency transaction net gains, which are included
in other income, and an increased amount of foreign currency translation
adjustments, which are recorded as a separate component of equity. The
devaluation of the baht and ringgit may cause the Company's competitive
environment to improve. It is not possible at this time to determine what effect
the devaluation will have upon pricing or costs, but management believes the
devaluation will not have a material adverse effect and may have a positive
impact upon the Company's operating results for 1998 and beyond.
RISKS ASSOCIATED WITH YEAR 2000
The Company recognizes the need to ensure its operations will not be
adversely impacted by the inability of the Company's systems to process data
having dates on or after January 1, 2000 (the "Year 2000" issues). Processing
errors due to software failures arising from calculations using the Year 2000
date are a recognized risk. The Company has engaged Perot Systems Corporation
for the management of its information technology systems. Both the Company and
Perot Systems Corporation are currently addressing the risk, with respect to the
availability and integrity of its financial systems and the reliability of its
operating systems, and are in the process of communicating with suppliers,
customers, financial institutions and others with whom it conducts business
transactions to assess whether they are Year 2000 compliant. The Company does
not believe that it will incur a material financial impact from the risk, or
from assessing the risk, arising from the Year 2000 issues. However, there can
be no guarantee that the Company's initial assessment of the financial impact of
this risk will be accurate; actual results could differ materially from those
anticipated. Specific factors that might cause such material differences,
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.
-19-
<PAGE> 22
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This report and the documents incorporated by reference herein
contain "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended and Section 21E of the Securities Exchange
Act of 1934, as amended. These forward-looking statements include, among others,
statements concerning the Company's outlook for 1998 and beyond, the effect of
currency fluctuations in Thailand and Malaysia on the operating results of the
Company, the Company's liquidity and working capital, the Company's ability to
complete construction of new facilities as scheduled, the production capacity
and the Company's ability to achieve additional efficiencies in its
manufacturing facilities and other statements of expectations, beliefs, future
plans and strategies, anticipated events or trends, anticipated growth in the
Company's markets and growth in the Company's market share and similar
expressions concerning matters that are not historical facts. The
forward-looking statements in this report are subject to risks and uncertainties
that could cause the assumptions underlying such forward-looking statements and
the actual results to differ materially from those expressed in or implied by
the statements.
The most important factors that could prevent the Company from
achieving its goals--and cause the assumptions underlying forward-looking
statements and the actual results of the Company to differ materially from those
expressed in or implied by those forward-looking statements--include, but are
not limited to, the following;
- the competitive nature of the industry and the ability of the
Company to continue to distinguish its products on the basis of
quality, reliability and value, the ability of the Company to
maintain strong distributor relationships, and the ability of the
Company to maintain selling prices and anticipated volumes;
- adverse outcomes regarding product liability lawsuits or the ability
to obtain sufficient product liability insurance coverage at
reasonable rates;
- the ability of the Company to meet existing or future FDA
regulations regarding the manufacture and sale of the Company's
gloves;
- delays in the completion of the Company's construction of its new
production facilities in Thailand and the failure of these
production facilities to generate anticipated productivity and
efficiencies;
- risks associated with investments and operations in foreign
countries, particularly Thailand and Malaysia, including exchange
rate fluctuations, local economic conditions, exchange rate
fluctuations, governmental policies regarding foreign ownership of
manufacturing facilities, local regulatory requirements, tax
holidays and political factors;
- the consistent availability, at budgeted prices, of raw rubber from
independent growers and concentrate plant operators in Malaysia and
Thailand;
- delays in the completion of the final phase of the Company's
construction of its latex concentrate plant in Thailand or the
failure of this plant to generate anticipated productivity and
efficiencies;
- failure of the Company's new production lines, referred to by the
Company as "Grand Masters," to generate anticipated productivity and
efficiencies;
- economic conditions in the healthcare industry, including the
potential impact of industry consolidation and cost constraints on
the end-user;
- changes in significant government regulations affecting the
healthcare industry;
- the ability of the Company to protect its proprietary products,
know-how and manufacturing processes;
- changes in the Company's rates or basis of income taxation; and
- rapid levels of inflation, which could have a significant effect on
the Company's net sales and profitability.
These and other risks and uncertainties affecting the Company are discussed in
greater detail in this report and in other filings by the Company with the
Securities and Exchange Commission.
-20-
<PAGE> 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
INDEPENDENT AUDITORS' REPORT 22
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets at December 31, 1997 and 1996 23
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995 24
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995 25
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997, 1996 and 1995 26
Notes to Consolidated Financial Statements 27-38
FINANCIAL STATEMENT SCHEDULES:
Schedule I - Condensed Financial Information of
Parent Company 39-41
Schedule II- Valuation of Qualifying Accounts 42
</TABLE>
-21-
<PAGE> 24
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
Safeskin Corporation:
We have audited the accompanying consolidated balance sheet of Safeskin
Corporation and subsidiaries as of December 31, 1997 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of Safeskin
Corporation for the year ended December 31, 1996 and for each of the two years
in the period then ended were audited by other auditors whose report, dated
February 17, 1997, expressed an unqualified opinion on these statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of Safeskin Corporation and
subsidiaries as of December 31, 1997, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
San Diego, California
February 27, 1998
-22-
<PAGE> 25
SAFESKIN CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 23,916,959 $ 16,265,468
Accounts receivable, net of allowance of
$966,000 and $665,000, respectively 22,195,828 19,848,253
Inventory 21,242,732 21,867,835
Other current assets 5,692,369 4,062,314
------------- -------------
Total current assets 73,047,888 62,043,870
Property, plant and equipment, net 52,904,271 53,391,423
Intangibles and other assets 12,568,245 1,313,731
------------- -------------
Total assets $ 138,520,404 $ 116,749,024
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,922,540 $ 5,362,273
Accrued liabilities 22,924,623 8,371,962
------------- -------------
Total current liabilities 29,847,163 13,734,235
Deferred income taxes and other liabilities 2,094,928 --
------------- -------------
Total liabilities 31,942,091 13,734,235
Commitments and contingencies
Shareholders' equity:
Preferred stock; $.01 par value; 10,000,000 shares
authorized and no shares issued or outstanding in
1997 and 1996 -- --
Common stock; $.01 par value; 40,000,000 shares
authorized; 26,482,112 and 25,811,048 shares
outstanding in 1997 and 1996, respectively 264,821 258,110
Additional paid-in-capital 47,782,274 39,101,451
Foreign currency translation adjustment (45,687,717) 686,544
Retained earnings 104,218,935 62,968,684
------------- -------------
Total shareholders' equity 106,578,313 103,014,789
------------- -------------
Total liabilities and shareholders' equity $ 138,520,404 $ 116,749,024
============= =============
</TABLE>
See notes to consolidated financial statements.
-23-
<PAGE> 26
SAFESKIN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 182,998,305 $ 146,089,348 $ 117,014,207
Cost of goods sold 98,144,224 84,325,513 75,756,616
------------- ------------- -------------
Gross profit 84,854,081 61,763,835 41,257,591
------------- ------------- -------------
Operating expenses:
Selling 22,699,975 17,693,236 16,119,769
Research and development 3,504,553 2,208,436 1,493,562
General and administrative 15,922,824 12,286,798 6,396,666
Write-down of fixed assets -- 2,979,146 --
------------- ------------- -------------
Total operating expenses 42,127,352 35,167,616 24,009,997
------------- ------------- -------------
Income from operations 42,726,729 26,596,219 17,247,594
Interest expense (income), net (822,981) (58,337) 193,808
Other expense (income), net (2,699,335) 133,278 (162,884)
------------- ------------- -------------
Income before income tax provision 46,249,045 26,521,278 17,216,670
Income tax provision 4,998,794 2,938,879 2,325,972
------------- ------------- -------------
Net income $ 41,250,251 $ 23,582,399 $ 14,890,698
============= ============= =============
Per share amounts:
Earnings per share of common stock
and common stock equivalents:
Basic $ 1.58 $ .93 $ .60
Diluted $ 1.41 $ .85 $ .58
Weighted average number of shares of common
stock and common stock equivalents outstanding
Basic 26,130,269 25,471,907 24,750,184
Diluted 29,268,847 27,775,334 25,605,102
</TABLE>
See notes to consolidated financial statements.
-24-
<PAGE> 27
SAFESKIN CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
FOREIGN
COMMON STOCK ADDITIONAL CURRENCY
---------------------------------- PAID-IN TRANSLATION
SHARES AMOUNT CAPITAL ADJUSTMENT
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1995 24,529,354 $ 245,294 $ 29,064,185 $ 454,990
Exercise of common stock options 231,708 2,316 352,005 --
Foreign currency translation
adjustment -- -- -- (106,139)
Deferred compensation related to
stock grant 200,000 2,000 1,473,000
Amortization of deferred compensation
related to stock grant
Net income -- -- -- --
------------- ------------- ------------- -------------
Balance, December 31, 1995 24,961,062 249,610 30,889,190 348,851
Exercise of common stock options 966,654 9,667 5,342,257 --
Foreign currency translation
adjustment -- -- -- 337,693
Forfeited stock related to stock grant (116,668) (1,167) (859,259) --
Amortization of deferred compensation
related to stock grant -- -- -- --
Tax benefit from exercise of options 3,729,263
Net income -- -- -- --
------------- ------------- ------------- -------------
Balance, December 31, 1996 25,811,048 258,110 39,101,451 686,544
Exercise of common stock options 671,064 6,711 4,244,423 --
Foreign currency translation
adjustment -- -- -- (46,374,261)
Tax benefit from exercise of options -- -- 4,436,400 --
Net income -- -- -- --
------------- ------------- ------------- -------------
Balance, December 31, 1997 26,482,112 $ 264,821 $ 47,782,274 $ (45,687,717)
============= ============= ============= ==============
</TABLE>
<TABLE>
<CAPTION>
DEFERRED RETAINED
COMPENSATION EARNINGS TOTAL
------------- ------------- -------------
<S> <C> <C> <C>
Balance, January 1, 1995 $ -- $ 24,495,587 $ 54,260,056
Exercise of common stock options -- -- 354,321
Foreign currency translation
adjustment -- -- (106,139)
Deferred compensation related to
stock grant (1,475,000) -- --
Amortization of deferred compensation
related to stock grant 462,105 462,105
Net income -- 14,890,698 14,890,698
------------- ------------- -------------
Balance, December 31, 1995 (1,012,895) 39,386,285 69,861,041
Exercise of common stock options -- -- 5,351,924
Foreign currency translation
adjustment -- -- 337,693
Forfeited stock related to stock grant 860,426 -- --
Amortization of deferred compensation
related to stock grant 152,469 -- 152,469
Tax benefit from exercise of options -- -- 3,729,263
Net income -- 23,582,399 23,582,399
------------- ------------- -------------
Balance, December 31, 1996 -- 62,968,684 103,014,789
Exercise of common stock options -- -- 4,251,134
Foreign currency translation
adjustment -- -- (46,374,261)
Tax benefit from exercise of options -- -- 4,436,400
Net income 41,250,251 41,250,251
------------- ------------- -------------
Balance, December 31, 1997 $ -- $ 104,218,935 $ 106,578,313
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
-25-
<PAGE> 28
SAFESKIN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 41,250,251 $ 23,582,399 $ 14,890,698
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,138,338 6,094,758 3,772,090
Exchange loss unrealized 182,460 -- --
Write-down of fixed assets -- 2,979,146 --
Loss (gain) on sale of equipment 125,725 57,919 (56,493)
Deferred taxes 1,872,000 (2,287,424) (144,000)
Amortization of deferred compensation -- 152,469 462,105
Changes in operating assets and liabilities:
Accounts receivable (1,794,099) (2,319,400) (3,395,844)
Inventory (548,485) (3,895,369) (8,630,091)
Other assets (4,683,784) 1,161,148 (1,149,137)
Accounts payable and accrued liabilities 18,969,217 5,411,489 5,093,564
------------ ------------ ------------
Net cash provided by operating activities 62,511,623 30,937,135 10,842,892
------------ ------------ ------------
Cash flows from investing activities:
Net cash paid for acquisition of subsidiary (14,463,092) -- --
Purchases of property, plant and equipment (35,182,574) (20,230,415) (16,460,874)
Proceeds from sale of equipment 52,113 36,519 101,950
------------ ------------ ------------
Net cash used by investing activities (49,593,553) (20,193,896) (16,358,924)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 4,251,134 5,351,924 354,321
Increase (decrease) in long-term debt -- (2,750,000) 2,750,000
------------ ------------ ------------
Net cash provided by financing activities 4,251,134 2,601,924 3,104,321
------------ ------------ ------------
Effect of exchange rate changes on cash (9,517,713) 833,333 (82,734)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 7,651,491 14,178,496 (2,494,445)
Cash and cash equivalents at beginning of year 16,265,468 2,086,972 4,581,417
------------ ------------ ------------
Cash and cash equivalents at end of year $ 23,916,959 $ 16,265,468 $ 2,086,972
============ ============ ============
Supplemental cash flow information:
Amounts paid for:
Interest $ -- $ 133,550 $ 113,637
Income taxes $ 1,600 $ 1,831,678 $ 2,275,000
Supplemental schedule of non-cash investing activities:
The Company acquired an entity, assets acquired and
liabilities were assumed as follows:
Fair value of assets acquired $ 14,728,362
Liabilities assumed (265,270)
------------
Net cash paid for acquisition $ 14,463,092
============
</TABLE>
See notes to consolidated financial statements.
-26-
<PAGE> 29
SAFESKIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------
1. Description of Business:
Safeskin Corporation (the "Company") is a leading manufacturer of high
quality disposable latex medical examination gloves for the United States
market. The Company is also a leading manufacturer of powder-free
disposable latex and synthetic examination gloves for the medical, dental
and high-technology and scientific markets worldwide. The Company
manufactures its products in Malaysia and Thailand, using proprietary
formulations and processes, for sale primarily in the United States.
2. Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its domestic and foreign subsidiaries after elimination of all
significant intercompany transactions and accounts.
Foreign Currency Translation
The accounts of the Company's foreign subsidiaries are measured using
local currency as the functional currency. For those operations, assets
and liabilities are translated into U.S. dollars at period-end exchange
rates and income and expense accounts are translated at average exchange
rates in effect during the year. Net currency exchange gains or losses
resulting from such translation are excluded from net income and
accumulated in a separate component of shareholders' equity.
Foreign Currency Transactions and Hedging Activities
The Company is exposed to exchange rate risk when its U.S. and non-U.S.
subsidiaries enter into transactions denominated in currencies other than
their functional currency. Certain firmly committed transactions are
hedged with forward foreign exchange contracts. As exchange rates change,
gains and losses on the exposed transactions are partially offset by gains
and losses related to the hedging contracts. Both the exposed transactions
and the hedging contracts are translated at current spot rates, with gains
and losses included in earnings. The Company's derivative activities, all
of which consist of forward foreign exchange contracts as of December 31,
1997, are initiated primarily to hedge intercompany receivables and
payables.
The forward foreign exchange contracts generally require the Company to
exchange U.S. dollars for foreign currencies based on pre-established
exchange rates at the contracts maturity dates. If the counterparties to
the exchange contracts (primarily AA rated international institutions) do
not fulfill their obligations to deliver the contracted currencies, the
Company could be at risk for currency related fluctuations (generally
limited to unrealized gains). Management believes that the high credit
worthiness of the counterparties to the hedging contracts minimizes the
risk of non-performance.
For the year ended December 31, 1997, the Company recognized foreign
exchange transaction net gains of $19,837,286 related to transactions with
its manufacturing subsidiaries in Malaysia and Thailand, offset by net
losses on forward foreign exchange contracts of $16,441,247, which have
been recorded net as other income in the accompanying statement of
operations. Gains and losses from foreign currency transactions during the
years ended December 31, 1996 and 1995 were not significant.
-27-
<PAGE> 30
SAFESKIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Additions and
improvements are capitalized, while maintenance and repairs are expensed
when incurred. Asset and accumulated depreciation accounts are relieved
for dispositions with resulting gains or losses recorded in the statements
of operations. Depreciation of plant and equipment is computed over
estimated useful lives using the straight-line method as follows:
Building and improvements 10 to 50 years
Machinery and equipment 3 to 10 years
Computer and office equipment 3 to 10 years
Inventory
Inventory is valued at the lower of cost, determined on a first-in,
first-out basis, or market, determined on a net realizable value basis.
Consideration is given to obsolescence and other factors in evaluating net
realizable value.
Income Taxes
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. This standard requires, among other things, recognition of future
tax benefits, measured by enacted tax rates, attributable to deductible
temporary differences between financial statement and income tax bases of
assets and liabilities, and net operating loss carryforwards to the extent
that realization of such benefits is more likely than not. The provision
for income taxes consists of taxes payable for the year and the changes
during the year of deferred income tax assets and liabilities. Valuation
allowances are established when necessary to reduce deferred income tax
assets to amounts expected to be realized.
Cash and Cash Equivalents
The Company considers highly liquid investments, those with maturities of
less than three months when acquired, to be cash equivalents.
Net Income Per Share
The Company accounts for net income per share in accordance with the
provisions of Statement of Financial Accounting Standards No. 128,
Earnings Per Share. Net income per share is computed by dividing net
income by the weighted average number of common shares outstanding and
dilutive common stock equivalents. Common stock options are common stock
equivalents and are included in the weighted average number of common
shares outstanding using the treasury stock method.
Revenue Recognition
The Company recognizes revenue upon shipment of products to customers. The
Company's net sales are derived from the sales of finished products, net
of contractual allowable rebates and fees provided to distributors and
group purchasing organizations for the resale of the Company's products in
specific volumes to specified end user customers. The Company estimates
allowable rebates on a monthly basis
-28-
<PAGE> 31
SAFESKIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------
through the analysis of actual sales information from customers,
contractual arrangements and historical trends related to actual rebates
issued.
Research and Development Expenses
Expenditures for research and development of new products are expensed as
incurred. Research and development expenses incurred by the Company were
approximately $3,505,000, $2,209,000 and $1,493,000 for the years ended
December 31, 1997, 1996, and 1995, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from estimates.
Shareholders' Equity
On November 14, 1996, the Company authorized a two-for-one stock split of
its common stock to be effective in the form of a stock dividend
distributed on January 2, 1997 to shareholders of record at the close of
business on November 29, 1996. The holders of the Company's common stock
received a stock dividend at the rate of one share of common stock for
each share of common stock owned. The stated par value of each share was
not changed from $.01. A total of $129,055 and $124,805 was reclassified
from the Company's additional paid-in capital account to the Company's
common stock account for the years ending December 31, 1996 and 1995,
respectively. All share and per share amounts have been retroactively
restated to reflect the stock split.
On February 17, 1998, the Company authorized a two-for-one stock split of
its common stock to be effective in the form of a stock dividend to be
distributed on April 1, 1998 to shareholders of record at the close of
business on February 27, 1998. The holders of the Company's common stock
will receive a stock dividend at the rate of one share of common stock for
each share of common stock owned. The stated par value of each share will
not change from $.01. No effect of the stock split has been reflected in
the accompanying financial statements.
Stock Based Compensation
Statement of Financial Accounting Standard No. 123, Accounting for
Stock-Based Compensation, ("SFAS 123") encourages, but does not require,
companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has elected to continue to
account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of
the quoted market price of the Company's stock at the date of grant over
the grant price.
-29-
<PAGE> 32
SAFESKIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------
3. Inventory:
Inventory at December 31, 1997 and 1996 consisted of:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Raw materials $ 2,700,643 $ 1,919,992
Work in process 690,480 114,443
Finished goods 17,851,609 19,833,400
----------- -----------
$21,242,732 $21,867,835
=========== ===========
</TABLE>
4. Property, Plant and Equipment:
Property, plant and equipment at December 31, 1997 and 1996 consisted of:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land $ 4,488,277 $ 6,902,944
Buildings and improvements 8,651,187 9,277,472
Machinery and equipment 31,741,450 37,624,679
Computer and office equipment 9,020,427 5,947,480
Construction in progress 12,402,336 6,982,522
----------- -----------
66,303,677 66,735,097
Less accumulated depreciation 13,399,406 13,343,674
----------- -----------
$52,904,271 $53,391,423
=========== ===========
</TABLE>
Statement of Financial Accounting Standard No. 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
("SFAS 121"), requires the evaluation of long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.
In December 1996, the Company announced plans to move all of its latex
examination glove production from its Malaysian facility to its Thailand
facility and its intent to sell the Malaysian facility during 1997. At
December 31, 1996, the Malaysian facility was considered held for sale. In
fiscal year 1997, the Company extended the planned use of the Malaysian
facility due to existing production requirements and the timing of
bringing new production capacity on-line in Thailand. The Company still
intends to transfer production to Thailand and to sell the Malaysian
facility. In connection with the announced move in fiscal year 1996, the
Company took an approximately $3,000,000 charge against earnings that is
reflected in the accompanying financial statements as a write-down of
fixed assets, to reflect the Malaysian facility at estimated fair value.
-30-
<PAGE> 33
SAFESKIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------
5. Accrued Liabilities:
Accrued liabilities at December 31, 1997 and 1996 consisted of:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Accrued salary and bonuses $ 3,519,880 $ 3,796,037
Forward foreign exchange contract accrual 12,062,942 --
Accrued equipment purchase orders 2,185,935 --
Accrued commissions 541,255 579,447
Income taxes payable (receivable) 431,847 (21,127)
Other 4,182,764 4,017,605
----------- -----------
$22,924,623 $ 8,371,962
=========== ===========
</TABLE>
The forward foreign exchange contract accrual results from outstanding
forward foreign exchange contracts to purchase Malaysian ringgit in the
amount of $35,466,327, with a weighted average exchange rate of 2.78
Malaysian ringgit to 1 U.S. dollar.
6. Due to Banks and Other Financial Institutions:
During 1997, the Company amended its unsecured domestic two-year term
credit facility for financing general working capital needs up to a
maximum of $25,000,000. Obligations under this arrangement are due July
31, 1999 and bear interest at the London Interbank Offered Rate (LIBOR)
plus .80% or the banks' reference rate. The credit facility specifies
various financial covenants such as minimum quick ratio, tangible net
worth, and debt to equity. As of December 31, 1997 and 1996, there were no
borrowings outstanding under this credit facility.
The Company has foreign credit facilities for financing general working
capital needs up to a maximum of approximately $8,900,000. These
facilities bear interest ranging from .9% to 1.2% over the base lending
rate or the discount rate of the foreign banks (9.3% to 11.3% at December
31, 1997). These facilities are guaranteed by the Company. As of December
31, 1997 and 1996, there were no borrowings outstanding under these
foreign credit facilities.
7. Foreign Operations:
The Company has wholly-owned subsidiaries that operate manufacturing
facilities in the countries of Malaysia and Thailand. Principally all of
the subsidiaries' sales are to other subsidiaries of the Company and are,
therefore, eliminated in consolidation. Further, the Company has
wholly-owned subsidiaries in Germany, the Netherlands and the United
Kingdom that operate as distributors. Domestic product sales were 88% of
net consolidated sales for both of the years ended December 31, 1997 and
1996. Substantially all product sales were domestic for the year ended
December 31, 1995.
-31-
<PAGE> 34
SAFESKIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------
Included in the consolidated balance sheets are the following domestic and
foreign components at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Domestic $ 43,960,273 $ 50,184,459
Foreign 29,087,615 11,859,411
------------ ------------
$ 73,047,888 $ 62,043,870
============ ============
Property, plant and equipment, net:
Domestic $ 7,184,131 $ 4,052,660
Foreign 45,720,140 49,338,763
------------ ------------
$ 52,904,271 $ 53,391,423
============ ============
Other assets:
Domestic $ 3,658,055 $ 358,252
Foreign 8,910,190 955,479
------------ ------------
$ 12,568,245 $ 1,313,731
============ ============
Total assets:
Domestic $ 54,802,459 $ 54,595,371
Foreign 83,717,945 62,153,653
------------ ------------
$138,520,404 $116,749,024
============ ============
</TABLE>
-32-
<PAGE> 35
SAFESKIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------
8. Income Taxes:
The income tax provision for the years ended December 31, 1997, 1996 and
1995, consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ 2,131,000 $ 3,078,000 $ 1,903,000
State 509,000 312,000 451,000
Foreign 487,000 (5,000) 116,000
----------- ----------- -----------
3,127,000 3,385,000 2,470,000
----------- ----------- -----------
Deferred:
Federal 1,618,000 (433,000) (109,000)
State 254,000 (13,000) (35,000)
----------- ----------- -----------
1,872,000 (446,000) (144,000)
----------- ----------- -----------
Total provision $ 4,999,000 $ 2,939,000 $ 2,326,000
=========== =========== ===========
</TABLE>
The provision for income taxes is different from that which would be
obtained by applying the statutory Federal income tax rate (35%) to income
before provision for income taxes. The items causing this difference for
the period December 31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Statutory federal rate 35.0% 35.0% 35.0%
Foreign taxes less than federal statutory rate (25.5) (23.7) (34.3)
Change in valuation allowance 1.1 2.0 9.6
Miscellaneous .2 (2.2) 3.2
------ ------ ------
Effective tax rate 10.8% 11.1% 13.5%
====== ====== ======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the net deferred tax liability as of December
31, 1997 and the deferred tax assets as of December 31, 1996 are as
follows:
-33-
<PAGE> 36
SAFESKIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets (liability):
Net operating losses $ 4,565,000 $ 3,219,000
Depreciation and amortization 2,428,000 1,825,000
Bad debt reserves 439,000 382,000
Rebate reserves 486,000 179,000
Inventory reserves 110,000 481,000
Foreign exchange reserve 827,000 --
Charitable contributions 298,000 --
State taxes (266,000) (25,000)
Other 753,000 314,000
----------- -----------
9,640,000 6,375,000
Other liabilities (7,604,000) (2,993,000)
Valuation allowance (3,905,000) (3,379,000)
----------- -----------
Total $(1,869,000) $ 3,000
=========== ===========
</TABLE>
A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The
Company's net increase to the valuation allowance is primarily
attributable to the European subsidiaries current year losses. Deferred
income taxes resulting from the tax effect of cumulative temporary
differences between the foreign subsidiaries' book and tax bases of
certain assets and liabilities, are a net asset subject to a 100%
valuation allowance since realization is considered uncertain.
In Malaysia, the subsidiary company has been granted pioneer status under
that country's Promotion of Investment Act of 1986. As a result of the
pioneer status, the subsidiary company is exempt from paying tax on profit
earned from pioneer products through September 1998. In Thailand, the
subsidiary company has been granted exempt status with respect to profit
earned through 2003 under that country's Investment Promotion Act, and has
been granted a reduced tax rate through 2007. As the Company begins to
build new production facilities in Thailand, it has applied for and
received similar tax free status for these operations.
As of December 31, 1997, the Company has net operating loss carryovers of
approximately $6,780,000, $5,684,000 and $1,967,000 for federal, state,
and foreign tax purposes. At December 31, 1996, the Company had net
operating loss carryovers of approximately $2,264,000 and $1,441,000, for
state and foreign tax purposes, respectively. These carryovers expire in
various years through 2013.
-34-
<PAGE> 37
SAFESKIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------
9. Commitments and Contingencies:
At December 31, 1997, approximate future minimum rental payments
applicable to noncancelable operating leases for office and warehouse
space were as follows:
<TABLE>
<S> <C>
1998 $2,174,000
1999 1,919,000
2000 1,199,000
2001 53,000
----------
$5,345,000
==========
</TABLE>
Rent expense for the years ended December 31, 1997, 1996 and 1995 was
$1,547,000, $1,144,000 and $695,000, respectively.
The Company has outstanding contractual commitments at December 31, 1997
for the construction of plant and equipment in Malaysia and Thailand in
the approximate amount of $6,035,000.
Litigation
The Company is the defendant in certain product liability lawsuits
occurring in the normal course of business. Management has referred the
defense of these cases to insurance carriers. The Company maintains levels
of insurance coverage which it believes will be adequate to cover the cost
of the legal defense of these suits. Although the ultimate outcome of
these matters is uncertain, if such insurance coverage is not sufficient
to meet damages for which the Company may be found liable, a negative
outcome related to these matters could have a material, adverse affect on
the Company's financial condition or results from operations.
10. Equity Compensation Plan and Stock Options:
The Company's Equity Compensation Plan (the "Plan"), adopted in 1993,
provides for the issuance of stock options, stock appreciation rights and
restricted stock to eligible directors, certain employees, and
consultants. The Company has reserved 6,662,053 shares of common stock for
issuance under the Plan.
All stock options are granted at a price not less than the fair market
value on the date the option is granted. The stock options granted can be
exercised over periods of zero to ten years from the date of grant and
will expire ten years from the date of grant.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Had compensation costs for the
Company's stock option plan been determined based on the fair value at the
grant date for awards in 1997, 1996 and 1995 consistent with the
provisions of SFAS No. 123, net income and net income per common share
would have been reduced to the pro forma amounts indicated below:
-35-
<PAGE> 38
SAFESKIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Net income:
As reported $ 41,250,251 $ 23,582,399 $ 14,890,698
Pro forma 38,791,856 21,221,580 14,767,818
Basic earnings per share:
As reported $ 1.58 $ 0.93 $ 0.60
Pro forma 1.48 0.83 0.60
Diluted earnings per share:
As reported $ 1.41 $ 0.85 $ 0.58
Pro forma 1.33 0.76 0.58
</TABLE>
The fair value of each option grant is estimated as of the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997, 1996 and 1995:
dividend yield of 0%; expected volatility of 51.6%, 52.7% and 52.7%,
respectively; risk-free interest rate ranging from 5.0% to 7.2%; and
expected lives of 3 to 8 years.
Stock option activity for the years ended December 31, 1997 and 1996 was
as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
OPTIONS PRICES
---------- ----------------
<S> <C> <C>
Outstanding at January 1, 1996 4,190,800 $ 6.85
Granted 1,466,400 $ 12.24
Exercised (878,300) $ 6.08
Forfeited (159,400) $ 7.19
---------- ----------
Outstanding at December 31, 1996 4,619,500 $ 8.69
Granted 1,044,100 $ 30.52
Exercised (590,710) $ 7.28
Forfeited (96,560) $ 9.88
---------- ----------
Outstanding at December 31, 1997 4,976,330 $ 13.41
========== ==========
Shares exercisable as of December 31, 1997 2,265,990 $ 10.94
========== ==========
</TABLE>
As of December 31, 1997 and 1996, options outstanding have exercise prices
between $5.00 and $56.25 and $5.00 and $25.88, respectively, and a
weighted-average remaining contractual life of 8 years.
During 1995, the Company issued a restricted stock grant of 200,000 shares
at $7.38, the fair market value at date of grant, to a former executive of
the Company. Restrictions on the shares granted lapse in five annual
installments beginning in January of 1996 through January 2000. During
1996, 116,668 shares relating to this restricted stock grant were
forfeited, in conjunction with the terms of a separation agreement between
the Company and the former executive.
In August 1990, the Company granted an option to an employee, which
expires July 2000, to purchase 441,770 shares of common stock at an option
price of $.12 per share. The option provides for the exercise of 88,354
shares at the grant date and the exercise of 88,354 shares annually from
April 1994 through April
-36-
<PAGE> 39
1997. At December 31, 1997, options to acquire the 441,770 shares had been
exercised and none are exercisable.
11. Major Customers and Concentrations of Credit Risk:
Major customers are those that individually account for more than 10% of
the Company's consolidated net sales. During 1997, two customers accounted
for approximately 22.2% and 19.6% of consolidated net sales. During 1996,
two customers accounted for approximately 21.7% and 22.5% of consolidated
net sales. During 1995, two customers accounted for approximately 29.8%
and 30.3% of consolidated net sales.
The majority of the Company's sales are to medical supply distribution
companies. This could unfavorably affect the Company's overall exposure to
credit risk inasmuch as these customers could be affected by similar
economic or other conditions. At December 31, 1997, 1996 and 1995,
approximately 55.5%, 50.2%, and 48.7%, respectively, of net receivables
were represented by three customers. Historically, the Company's
uncollectible accounts receivable have not been significant, and typically
the Company does not require collateral for its receivables.
In addition, in assessing its concentration of credit risk related to cash
and cash equivalents, the Company places its cash and cash equivalents,
which may at times exceed FDIC insurance limits, in foreign and domestic
financial institutions.
12. Employee Benefits:
In 1995, the Company established and implemented a 401(k) defined
contribution plan (the "401(k) Plan") available to eligible employees who
have completed at least one year of service. Participants may defer, until
termination of employment with the Company, salary up to the limit imposed
by the Internal Revenue Code for any calendar year. In 1997 and 1996,
contributions were matched by the Company in an amount equal to 33-1/3% of
the participant's contribution. For the years ended December 31, 1997 and
1996, the Company incurred costs of approximately $276,000 and $139,000,
respectively, in connection with the 401(k) Plan.
-37-
<PAGE> 40
13. Quarterly Financial Data (Unaudited):
Summarized quarterly financial data for the periods ended December 31,
1997 and 1996 is as follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
Basic Diluted
Earnings Earnings
Revenues Gross Profit Net Income Per Share Per Share
-------- ------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
1997:
December 31 $49,985 $23,296 $11,997 $.46 $.40
September 30 46,897 21,400 11,560 .44 .39
June 30 44,948 20,749 9,203 .35 .32
March 31 41,168 19,409 8,490 .33 .30
1996:
December 31 $39,555 $17,806 $4,891 $.20 $.17
September 30 37,492 16,470 7,052 .27 .25
June 30 35,987 14,219 6,189 .24 .22
March 31 33,055 13,269 5,450 .22 .21
</TABLE>
-38-
<PAGE> 41
SAFESKIN CORPORATION
(PARENT COMPANY ONLY)
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
The following condensed financial statements reflect those of the parent
company only. The parent company has accounted for its subsidiaries on the
equity method of accounting.
All footnote disclosures have been omitted because all the information is
included in the Safeskin Corporation consolidated financial statements included
elsewhere in this Report.
CONDENSED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 21,908,840 $ 14,514,225
Accounts receivable 18,243,363 18,075,373
Inventory 10,092,806 26,358,943
Other current assets 836,805 635,919
------------- -------------
Total current assets 51,081,814 59,584,460
Investment in and advances to wholly-owned subsidiaries 111,140,323 87,842,651
Property, plant and equipment, net 6,240,405 4,052,660
Intangibles and other assets 116,034 358,252
------------- -------------
Total assets $ 168,578,576 $ 151,838,023
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 10,016,903 $ 6,705,828
Payable to wholly-owned subsidiaries 49,888,432 42,117,406
------------- -------------
Total current liabilities 59,905,335 48,823,234
Deferred income taxes and other liabilities 2,094,928 --
------------- -------------
Total liabilities 62,000,263 48,823,234
Shareholders' equity:
Common stock 264,821 258,110
Additional paid-in-capital 47,782,273 39,101,451
Foreign currency translation adjustment (45,687,717) 686,544
Retained earnings 104,218,936 62,968,684
------------- -------------
Total shareholder's equity 106,578,313 103,014,789
------------- -------------
Total liabilities and shareholders' equity $ 168,578,576 $ 151,838,023
============= =============
</TABLE>
-39-
<PAGE> 42
SAFESKIN CORPORATION
(PARENT COMPANY ONLY)
SCHEDULE I - (CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net sales ....................................... $ 158,938,566 $ 128,614,248 $ 109,959,572
Cost of goods sold .............................. 121,347,644 95,576,710 81,255,007
------------- ------------- -------------
Gross profit ......................... 37,590,922 33,037,538 28,704,565
------------- ------------- -------------
Operating expenses:
Selling .............................. 19,179,398 15,935,764 19,761,304
Research and development ............. 1,962,366 1,676,684 1,411,109
General and administrative ........... 14,731,012 12,286,798 6,396,666
------------- ------------- -------------
Total operating expenses ........... 35,872,776 29,899,246 27,569,079
------------- ------------- -------------
Income from operations ............. 1,718,146 3,138,292 1,135,486
Interest expense (income), net .................. (676,270) (58,337) 130,738
Other expense (income), net ..................... 1,602,855 (168,603) 213,806
Equity in net income of wholly-owned subsidiaries (45,457,484) (23,156,046) (16,425,728)
------------- ------------- -------------
Income before income tax provision ... 46,249,045 26,521,278 17,216,670
Income tax provision ............................ 4,998,794 2,938,879 2,325,972
------------- ------------- -------------
Net income ........................... $ 41,250,251 $ 23,582,399 $ 14,890,698
============= ============= =============
</TABLE>
-40-
<PAGE> 43
SAFESKIN CORPORATION
(PARENT COMPANY ONLY)
SCHEDULE I - (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ....................................... $ 41,250,251 $ 23,582,399 $ 14,890,698
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization .................. 1,445,783 761,231 207,801
Loss on sale of equipment ...................... 21,209 6,542 8,423
Deferred taxes ................................. 1,872,000 (2,287,424) (144,000)
Amortization of deferred compensation .......... -- 152,469 462,106
Undistributed net income of wholly-owned
subsidiaries ................................... (45,457,484) (23,156,046) (16,425,728)
Change in operating assets and liabilities:
Accounts receivable .......................... (167,990) (1,742,990) (2,407,311)
Inventory .................................... 16,266,137 (7,602,653) (10,675,808)
Other assets ................................. 41,332 3,188,760 (686,187)
Accounts payable and other accrued liabilities 7,970,404 5,738,454 2,154,409
Payable to wholly-owned subsidiaries ......... 7,771,026 15,023,324 16,744,408
------------ ------------ ------------
Net cash provided by operating activities ...... 31,012,668 13,664,066 4,128,811
------------ ------------ ------------
Cash flows from investing activities:
Decrease (increase) in investment in and
advances to wholly-owned subsidiaries ........... (9,751,357) 1,927,507 (8,247,150)
Net cash paid for acquisition of subsidiary ....... (14,463,092) -- --
Purchase of property, plant and equipment ......... (3,686,946) (3,750,137) (732,123)
Proceeds from sale of equipment ................... 32,208 9,000 7,000
------------ ------------ ------------
Net cash used by investing activities ........... (27,869,187) (1,813,630) (8,972,273)
------------ ------------ ------------
Cash flows from financing activities:
Increase (decrease) in long-term debt ............ -- (2,750,000) 2,750,000
Proceeds from issuance of common stock ........... 4,251,134 5,351,924 354,321
------------ ------------ ------------
Net cash provided by financing activities ....... 4,251,134 2,601,924 3,104,321
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 7,394,615 14,452,360 (1,739,141)
Cash and cash equivalents at beginning of year ..... 14,514,225 61,865 1,801,006
------------ ------------ ------------
Cash and equivalents at end of year ................ $ 21,908,840 $ 14,514,225 $ 61,865
============ ============ ============
</TABLE>
-41-
<PAGE> 44
SAFESKIN CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO BALANCE AT
DECEMBER 31, COSTS AND DECEMBER 31,
DESCRIPTION 1996 EXPENSES DEDUCTIONS 1997
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts receivable $ 665,000 $ 301,000 -- $ 966,000
Allowance for inventory cost to net
realizable value ...................... $ 1,112,000 $ 33,000 $ 879,000 $ 266,000
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO BALANCE AT
DECEMBER 31, COSTS AND DECEMBER 31,
DESCRIPTION 1995 EXPENSES DEDUCTIONS 1996
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts receivable $ 321,000 $ 344,000 -- $ 665,000
Allowance for inventory cost to net
realizable value ...................... $ 180,000 $ 932,000 -- $ 1,112,000
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO BALANCE AT
DECEMBER 31, COSTS AND DECEMBER 31,
DESCRIPTION 1994 EXPENSES DEDUCTIONS 1995
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts receivable $ 311,000 $ 480,000 $ 470,000 $ 321,000
Allowance for inventory cost to net
realizable value ...................... $ 406,780 ___ $ 226,780 $ 180,000
</TABLE>
-42-
<PAGE> 45
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10, 11, 12 AND 13.
The information required under these items is contained in the Company's
1998 Proxy Statement, which will be filed with the Securities and Exchange
Commission within 120 days after the close of the Company's fiscal year end.
This information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS A PART OF THIS REPORT:
1. Financial Statements
The financial statements required by this item are included
and listed in the accompanying Index to Consolidated Financial
Statements and Schedules in Part II, Item 8 of this Report.
2. Financial Statement Schedules
The financial statement schedules required by this item are
included and listed in the accompanying Index to Consolidated
Financial Statements and Schedules in Part II, Item 8 of this
Report.
3. Exhibits
The following is a list of all exhibits filed as a part of
this Report:
EXHIBIT DESCRIPTION OF DOCUMENT
------- -----------------------
3.1 Amended and Restated Articles of Incorporation(1)
3.2 Amended and Restated Bylaws(8)
10.1 Safeskin Corporation Amended and Restated Equity
Compensation Plan(1)
10.2 Employment Agreement, dated June 15, 1993, between Neil K.
Braverman and Safeskin Corp.(1)
10.3 Employment Agreement, dated June 15, 1993, between Richard
Jaffe and Safeskin Corp.(1)
10.4 Office Lease Agreement, dated November 14, 1989, between
Crocker Center Associates IV, Ltd. and Safeskin Corp.(1)
10.5 Standard Industrial Sublease, dated April 14, 1993, between
Tri Gem Computer, Inc. and Safeskin Corporation(1)
10.6 Lease, dated August 7, 1992, between Merritt-Bavar Limited
Partnership and Safeskin Corporation(1)
10.7 Accounts Financing Agreement, dated February 27, 1989,
between Congress Financial Corporation (Florida) and
Safeskin Corp., and amendment thereto(1)
10.8 Promissory Note, dated November 9, 1993, by Safeskin Corp.
to Bankers Trust Company(1)
-43-
<PAGE> 46
EXHIBIT DESCRIPTION OF DOCUMENT
------- -----------------------
10.9 Promissory Note, dated December 31, 1991, by Safeskin Corp.
to The Jaffe Family Partnership(1)
10.10 Promissory Note, dated July 23, 1992, by Safeskin Corp. to
Mr. Neil K. Braverman(1)
10.11 Promissory Note, dated December 21, 1992, by Safeskin Corp.
to Mr. Neil K. Braverman(1)
10.12 Promissory Note, dated December 21, 1992, by Safeskin Corp.
to The Jaffe Family Partnership(1)
10.13 Letter of Offer of Banking Facilities, dated November 25,
1992, by Perwira Habib Bank Malaysia Berhad to Safeskin
Corporation (Malaysia) Sdn. Bhd., and amendment thereto(1)
10.14 Letter of Offer of Banking Facilities, dated March 4, 1992,
by Standard Chartered Bank to Safeskin Corporation (M) Sdn.
Bhd.(1)
10.15 Guarantee, dated February 3, 1992, by Safeskin Corp. to
Standard Chartered Bank(1)
10.16 Letter of Offer of Banking Facilities, dated January 30,
1992, by Perwira Habib Bank Malaysia Berhad to Safeskin
Latex Company Sdn. Bhd.(1)
10.17 Corporate Guarantee, dated March 24, 1992, by Safeskin
Corporation (Malaysia) Sdn. Bhd. to Perwira Habib Bank
Malaysia Berhad(1)
10.18 Debenture, dated June 27, 1991, between Safeskin Corporation
(Malaysia) Sdn. Bhd. and Perwira Habib Bank Malaysia
Berhad(1)
10.19 Debenture, dated March 10, 1992, between Safeskin
Corporation (Malaysia) Sdn. Bhd. and Perwira Habib Bank
Malaysia Berhad(1)
10.20 Debenture, dated June 1, 1992, between Safeskin Corporation
(M) Sdn. Bhd. and Standard Chartered Bank(1)
10.21 Corporate Guarantee, dated February 8, 1993, by Safeskin
Corporation to Perwira Habib Bank Malaysia Berhad(1)
10.22 Letter of Offer of Banking Facilities, dated December 28,
1992, by The Hong Kong and Shanghai Banking Corporation
Limited to Safeskin Corporation (M) Bhd. Sdn.
10.23 Continuing Guaranty, dated February 22, 1993, by Safeskin
Corp. to The Hong Kong and Shanghai Banking Corporation
Limited(1)
10.24 Agreement, dated December 7, 1992, between Norsechem Latex
Products (M) Sdn. Bhd. and Safeskin Corporation (M) Sdn.
Bhd.(1)
10.25 Corporate Guarantee and Indemnity, dated February 18, 1993,
by Safeskin Corp. to Norsechem Latex Products (M) Sdn. Bhd.
and Synthetic Bakelites (Malaysia) Sdn. Bhd.(1)
10.26 Bank Guarantee and Indemnity, dated February 27, 1993, The
Hong Kong and Shanghai Banking Corporation Limited to
Synthetic Bakelites (Malaysia) Sdn. Bhd.(1)
10.27 Stock Option Grant by Safeskin Corp. to Lee Chee Ming(1)
10.28 Collective Agreement, dated October 25, 1991, between
Safeskin Corporation (M) Sdn. Bhd. and Kesatuan
Pekerja-Pekerja Safeskin Corporation (M) Sdn. Bhd.(1)
10.29 Trust Deed, dated June 9, 1993, with respect to shares of
Safeskin Latex Company Sdn. Bhd.(1)
10.30 Trust Deed, dated June 9, 1993, with respect to shares of
Safeskin Latex Company Sdn. Bhd.(1)
10.31 Letter of Review of Credit Facilities--Enhancement, dated
August 18, 1993 by Perwira Habib Bank Malaysia Berhad(1)
10.32 Corporate Guarantee, dated October 8, 1993, by Safeskin
Corporation to Perwira Habib Bank Malaysia Berhad(1)
10.33 Industrial Real Estate Lease, dated January 1, 1994, between
California State Teachers Retirement System and Safeskin
Corporation(2)
10.34 Employment Agreement, dated July 20, 1995, between David L.
Morash and Safeskin Corp.(3)
-44-
<PAGE> 47
EXHIBIT DESCRIPTION OF DOCUMENT
------- -----------------------
10.35 Employment Agreement, dated June 29, 1995, between Judy W.
Grimes and Safeskin Corporation (4)
10.36 Office Lease, dated October 31, 1995, between SDC LP and
Safeskin Corporation
10.37 Credit Agreement, dated July 15, 1996, by Safeskin
Corporation to Union Bank(5)
10.38 Letter of Agreement between Judy Grimes and Safeskin
Corporation(5)
10.39 Consulting Agreement, dated as of January 1, 1997, between
Neil K. Braverman and Safeskin Corporation (6)
10.40 Amended and Restated Assets Purchase Agreement, dated as of
March 24, 1997, by and among TT Acquisition Company, EQ
Corporation and Tactyl Technologies, Inc.(6)
10.41 Executive Deferred Compensation Plan of Safeskin
Corporation(7)
11 Statement re: Computation of Per Share Earnings (8)
21 Subsidiaries of the Registrant (8)
23.1 Consent of Deloitte & Touche LLP (8)
23.2 Consent of Coopers & Lybrand L.L.P. (8)
99 Report of Independent Accountants (8)
- ----------
(1) Filed as an exhibit to the Company's Registration Statement on
Form S-1, No. 33-68284, as filed with the Securities and Exchange
Commission and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Form 10-K for the fiscal
year ended December 31, 1993.
(3) Filed as an exhibit to the Company's Form 10-Q for the fiscal
quarter ending September 30, 1995 as 10a.
(4) Filed as an exhibit to the Company's Form 10-Q for the fiscal
quarter ending September 30, 1995 as 10b.
(5) Filed as an exhibit to the Company's Form 10-Q for the fiscal
quarter ending June 30, 1996.
(6) Filed as on exhibit to the Company's Form 10-Q for the fiscal
quarter ending March 31, 1997.
(7) Filed as on exhibit to the Company's Form 10-Q for the fiscal
quarter ending September 30, 1997.
(8) Filed as on exhibit hereto.
(b) REPORTS ON FORM 8-K:
During the quarter ending December 31, 1997, the Company filed one Form
8-K. The Form 8-K filing, which was dated October 7, 1997, reported
"Changes in Registrant's Certifying Accountant".
-45-
<PAGE> 48
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.
SAFESKIN CORPORATION
By: /s/ Richard Jaffe
-----------------------------------------
Dated: March 30, 1998 Richard Jaffe, Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Richard Jaffe Chairman, President, Chief Executive March 30, 1998
- ---------------------------- Officer and Director
Richard Jaffe
/s/ David L. Morash Executive Vice President March 30, 1998
- ----------------------------- and Chief Financial Officer
David L. Morash
/s/ Seth S. Goldman Vice President, Finance March 30, 1998
- ----------------------------- Controller and Secretary
Seth S. Goldman
/s/ Neil K. Braverman Director March 30, 1998
- ---------------------------
Neil K. Braverman
/s/ Irving Jaffe Chairman Emeritus and Director March 30, 1998
- ----------------------------
Irving Jaffe
/s/ Howard L. Shecter Director March 26, 1998
- ----------------------------
Howard L. Shecter
/s/ Joseph Stemler Director March 24, 1998
- ----------------------------
Joseph Stemler
/s/ Cam L. Garner Director March 30, 1998
- -------------------------
Cam L. Garner
</TABLE>
-46-
<PAGE> 49
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF DOCUMENT
- ------- -----------------------
3.2 Amended and Restated Bylaws
11 Statement re: Computation of Per Share Earnings
21 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule
99 Report of Independent Accountants
-47-
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
SAFESKIN CORPORATION
(a Florida corporation)
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I
Offices............................................................................. 1
Section 1.01. Principal Office.................................................... 1
Section 1.02. Registered Office................................................... 1
Section 1.03. Other Offices....................................................... 1
ARTICLE II
Meetings of Shareholders............................................................ 1
Section 2.01. Annual Meeting...................................................... 1
Section 2.02. Special Meetings.................................................... 1
Section 2.03. Place of Meetings................................................... 2
Section 2.04. Voting Lists........................................................ 2
Section 2.05. Fixing of a Record Date............................................. 2
Section 2.06. Notice of Meetings.................................................. 3
Section 2.07. Precondition to Delivery of Notice of Special Meeting of
Shareholders Called by Shareholders................................. 3
Section 2.08. Quorum.............................................................. 3
Section 2.09. Adjournment......................................................... 3
Section 2.10. Organization........................................................ 4
Section 2.11. Voting.............................................................. 4
Section 2.12. Proxies............................................................. 5
Section 2.13. Action by Shareholders Without a Meeting............................ 5
ARTICLE III
Board of Directors.................................................................. 6
Section 3.01. Powers and Duties................................................... 6
Section 3.02. Qualification and Election.......................................... 7
Section 3.03. Number and Term of Office........................................... 7
Section 3.04. Organization........................................................ 8
Section 3.05. Place of Meetings................................................... 8
Section 3.06. Annual Meetings..................................................... 8
Section 3.07. Regular Meetings.................................................... 8
Section 3.08. Special Meetings.................................................... 8
Section 3.09. Action by Written Consent Without a Meeting......................... 8
Section 3.10. Conference Telephone Meetings....................................... 8
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 3.11. Quorum.............................................................. 9
Section 3.12. Voting.............................................................. 9
Section 3.13. Adjournment......................................................... 9
Section 3.14. Compensation........................................................ 9
Section 3.15. Resignations........................................................ 9
Section 3.16. Vacancies........................................................... 9
Section 3.17. Removal............................................................. 10
Section 3.18. Executive and Other Committees of the Board......................... 10
ARTICLE IV
Notice and Waiver of Notice......................................................... 12
Section 4.01. Notice.............................................................. 12
Section 4.02. Waiver of Notice.................................................... 12
ARTICLE V
Officers............................................................................ 12
Section 5.01. Number and Qualification............................................. 12
Section 5.02. Election and Term of Office......................................... 12
Section 5.03. Subordinate Officers, Committees and Agents......................... 13
Section 5.04. The Chairman of the Board........................................... 13
Section 5.05. The Chief Executive Officer. ...................................... 13
Section 5.06. The President....................................................... 13
Section 5.07. The Chief Financial Officer......................................... 13
Section 5.08. The Vice Presidents................................................. 14
Section 5.09. The Secretary....................................................... 14
Section 5.10. The Treasurer....................................................... 14
Section 5.11. Salaries and Compensation........................................... 14
Section 5.12. Resignations........................................................ 15
Section 5.13. Removal............................................................. 15
Section 5.14. Vacancies........................................................... 15
ARTICLE VI
Certificates of Stock, Transfer..................................................... 15
Section 6.01. Share Certificates, Issuance........................................ 15
Section 6.02. Transfer............................................................ 16
Section 6.03. Registered Shareholders............................................. 16
Section 6.04. Lost, Destroyed or Mutilated Certificates........................... 16
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE VII
Indemnification of Directors, Officers,
Employees and Agents................................................................ 16
Section 7.01. Directors, Officers, Employees and Agents........................... 16
Section 7.02. Expenses............................................................ 17
Section 7.03. Determination of Standard of Conduct................................ 17
Section 7.04. Advance Expenses.................................................... 18
Section 7.05. Benefit............................................................. 18
Section 7.06. Insurance........................................................... 18
Section 7.07. No Rights of Subrogation............................................ 18
Section 7.08. Indemnification for Past Directors.................................. 19
Section 7.09. Affiliates.......................................................... 19
Section 7.10. Reliance and Non-Exclusivity........................................ 19
Section 7.11. Miscellaneous....................................................... 19
Section 7.12 Insider Trading Violations Exclusion................................ 19
ARTICLE VIII
Miscellaneous....................................................................... 20
Section 8.01. Checks.............................................................. 20
Section 8.02. Dividends........................................................... 20
Section 8.03. Deposits............................................................ 20
Section 8.04. Fiscal Year......................................................... 20
Section 8.05. Severability........................................................ 20
</TABLE>
<PAGE> 5
ARTICLE I
Offices
Section 1.01. Principal Office. The principal office of the
corporation in the State of Florida, which may be the registered office, shall
be established at such place as the board of directors shall from time to time
determine.
Section 1.02. Registered Office. The registered office of the
corporation in the State of Florida shall be at the office of its registered
agent as stated in the articles of incorporation or as the board of directors
shall from time to time determine.
Section 1.03. Other Offices. The corporation may have additional
offices at such other places, either within or without the State of Florida, as
the board of directors may from time to time determine or the business of the
corporation may require.
ARTICLE II
Meetings of Shareholders
Section 2.01. Annual Meeting. The annual meeting of shareholders
shall be held after the close of each fiscal year on such date and at such time
as determined by the board of directors. The shareholders entitled to vote at
such meeting shall elect the directors and shall transact such other business as
may properly be brought before the meeting.
Section 2.02. Special Meetings. Special meetings of the
shareholders of the corporation may be called, for any purpose or purposes
permitted by law, by the board of directors on its own initiative and shall be
called by the board of directors upon written request by the chairman of the
board, the chief executive officer, the president of the corporation, or, upon
delivery to the secretary of one or more written demands for the meeting
describing the purpose or purposes for which it is to be held, by the holders of
not less than twenty percent of all the shares entitled to be cast on any issue
proposed to be considered at the proposed special meeting. Notice of such
meeting shall be given by the secretary as provided herein. Only business within
the purpose or purposes described in the special meeting notice may be conducted
at a special shareholders' meeting.
<PAGE> 6
Section 2.03. Place of Meetings. All meetings of the shareholders
of the corporation shall be held at such place within or without the State of
Florida as shall be designated from time to time by the board of directors and
stated in the notice of such meeting or in a duly executed waiver of notice
thereof.
Section 2.04. Voting Lists. The officer or agent of the
corporation having charge of the stock transfer books for shares of the
corporation shall make, at least ten days before each meeting of shareholders, a
complete list of the shareholders entitled to vote at the meeting and any
adjournment thereof, arranged in alphabetical order, with the address of and the
number of shares held by each shareholder, which list shall be kept on file at
the place identified in the meeting notice in the city where the meeting will be
held or its principal place of business or at the office of its registrar or
transfer agent for a period of at least ten days prior to the meeting, and shall
be subject to inspection by any shareholder at any time during usual business
hours. Such list shall also be produced and kept open at the time and place of
the meeting, and shall be subject to the inspection of any shareholder during
the whole time of the meeting. The original share ledger or transfer book, or a
duplicate thereof, shall be prima facie evidence as to who are the shareholders
entitled to examine such list or share ledger or transfer book, or to vote, in
person or by proxy, at any meeting of the shareholders.
Section 2.05. Fixing of a Record Date. The board of directors may
fix in advance a date as the record date for any determination of shareholders
entitled to notice of, or to vote at, any meeting of shareholders, or entitled
to payment of a dividend or allotment of any rights or privileges, such date in
any case to be not more than seventy days and, in the case of a meeting of
shareholders, not less than ten days prior to the date on which the particular
action, requiring such determination of shareholders, is to be taken.
If no record date is fixed for the determination of shareholders
entitled to notice of, or to vote at, a meeting of shareholders, or shareholders
entitled to receive payment of a dividend, the date on which the secretary mails
the notice of the meeting or the date on which the resolution of the board of
directors declaring such dividend is adopted, as the case may be, shall be the
record date for such determination of shareholders.
When a determination of shareholders entitled to vote at any
meeting of shareholders has been made as provided in this section, such
determination shall apply to any adjournment thereof, unless the board of
directors fixes a new record date under this section for the adjourned meeting
which it must do if the meeting is adjourned to a date more than 120 days after
the date fixed for the original meeting.
-2-
<PAGE> 7
Section 2.06. Notice of Meetings. Written notice stating the
place, day and hour of every meeting of the shareholders shall be given by the
secretary to each shareholder entitled to vote at such meeting, either
personally or by first class mail, at least ten days, but not more than sixty
days, prior to the day named for the meeting. If mailed, such notice shall be
deemed to be delivered when deposited in the United States first-class mail
postage prepaid, addressed to the shareholder at his or her address as it
appears on the stock transfer books of the corporation.
Section 2.07. Precondition to Delivery of Notice of Special
Meeting of Shareholders Called by Shareholders. The secretary shall inform
shareholders who have delivered a written request for a special meeting and
otherwise complied with section 2.02 of the reasonably estimated costs of
preparing and mailing a notice of the meeting, and, on payment of these costs to
the corporation, the secretary shall deliver notice of such meeting to each
shareholder entitled thereto.
Section 2.08. Quorum. The presence, in person or by proxy, of
share holders entitled to cast a majority of the votes which all shareholders
are entitled to cast shall constitute a quorum for such meeting. Treasury
shares, shares of this corporation's stock which are owned by another
corporation the majority of the voting stock of which is owned by this
corporation, and shares of this corporation's stock held by another corporation
in a fiduciary capacity for the benefit of this corporation shall not be counted
in determining the total number of outstanding shares for voting purposes at any
given time. After a quorum has been established at a shareholders' meeting, the
subsequent withdrawal of shareholders, so as to reduce the number of
shareholders entitled to vote at the meeting below the number required for a
quorum, shall not affect the validity of any action taken at the meeting or any
adjournment thereof. When a specified item of business is required to be voted
on by any class or series of stock, a majority of the shares of such class or
series shall constitute a quorum for transaction of such item of business by
that class or series.
Section 2.09. Adjournment. When a meeting which is properly
called is adjourned to another time or place, it shall not be necessary to give
any notice of the adjourned meeting if the time and place to which the meeting
is adjourned are announced at the meeting at which the adjournment is taken, and
at the adjourned meeting any business may be transacted that might have been
transacted on the original date or place of the meeting. If, however, after the
adjournment the board fixes a new record date for the adjourned meeting, a
notice of the adjourned meeting shall be given to each shareholder of record on
the new record date entitled to vote at such meeting.
-3-
<PAGE> 8
The holders of a majority of the shares represented, and who
would be entitled to vote at a meeting if a quorum were present, where a quorum
is not present, may adjourn such meeting from time to time.
Section 2.10. Organization. At every meeting of the shareholders,
the chairman of the board, if there be one, or in the case of vacancy in office
or absence of the chairman of the board, one of the following officers present
in the order stated: the chief executive officer, the president, the chief
financial officer, the vice presidents in their order of rank and then
seniority, or a chairman chosen by the shareholders entitled to cast a majority
of the votes which all shareholders present in person or by proxy are entitled
to cast, shall act as chairman, and the secretary, or, in the secretary's
absence, an assistant secretary, or, in the absence of both the secretary and
assistant secretaries, a person appointed by the chairman, shall act as
secretary.
Section 2.11. Voting. If a quorum is present at any meeting,
action on a matter (other than the election of directors) is approved if the
votes cast in favor exceed the votes cast in opposition, unless the question is
one for which, by express provision of the law or of the articles of
incorporation or these bylaws, a different vote is required, in which case such
express provision shall govern and control the decision of such question.
Except as may be otherwise provided in the articles of
incorporation, every shareholder of record shall have the right, at every
shareholders' meeting, to one vote for every share, and to a fraction of a vote
equal to every fractional share, of stock of the corporation standing in his or
her name on the books of the corporation. A shareholder may vote either in
person or by proxy.
Treasury shares, shares of this corporation's stock which are
owned by another corporation the majority of the voting stock of which is owned
by this corporation, and the shares of this corporation's stock held by another
corporation in a fiduciary capacity for the benefit of this corporation shall
not be voted, directly or indirectly, at any meeting of shareholders.
At each election for directors, every shareholder entitled to
vote shall have the right to vote the number of shares owned by the shareholder,
for as many persons as there are directors to be elected at that time and for
whose election the shareholder has a right to vote.
-4-
<PAGE> 9
Shares standing in the name of another corporation, domestic or
foreign, may be voted by the officer, agent, or proxy designated by the bylaws
of the corporate shareholder; or, in the absence of any applicable bylaw, by
such person as the board of directors of the corporate shareholder may
designate. Proof of such designation may be made by presentation of a certified
copy of the bylaws or other instrument of the corporate shareholder. In the
absence of any such designation, or in case of conflicting designation, by the
corporate shareholder, the chairman of the board, chief executive officer,
president, chief financial officer, any vice president, secretary and treasurer
of the corporate shareholder shall be presumed to possess, in that order,
authority to vote such shares.
Shares held by an administrator, executor, guardian or
conservator may be voted by such person, either in person or by proxy, without a
transfer of such shares into the name of such person.
Shares standing in the name of a trustee may be voted by such
trustee, either in person or by proxy, but no trustee shall be entitled to vote
shares held by such trustee without a transfer of such shares into the name of
such trustee. Shares held by or under the control of a receiver, a trustee in
bankruptcy proceedings, or an assignee for the benefit of creditors may be voted
by such person or the name of a nominee, without the transfer thereof into such
person's name.
A shareholder whose shares are pledged shall be entitled to vote
such shares until the shares have been transferred into the name of the pledgee,
and thereafter the pledgee or the nominee of the pledgee shall be entitled to
vote the shares so trans ferred.
Section 2.12. Proxies. Every shareholder entitled to vote at a
meeting of shareholders or to express consent or dissent to corporate action in
writing without a meeting may authorize another person or persons to act by
proxy in accordance with applicable laws.
Section 2.13. Action by Shareholders Without a Meeting. Unless
otherwise provided in the articles of incorporation, any action required to be
taken at any annual or special meeting of shareholders of the corporation, or
any action which may be taken at any annual or special meeting of the
shareholders, may be taken without a meeting, without prior notice and without a
vote, if one or more consents in writing, setting forth the action so taken,
shall be dated and signed by the holders of outstanding stock having not less
than the minimum number of votes that would be
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necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted, and delivered to the
corporation by delivery to its principal office in Florida, its principal place
of business, the corporate secretary, or another officer or agent of the
corporation having custody of the minute book. If any class of shares is
entitled to vote thereon as a class, such written consent shall be required of
the holders of a majority of the shares of such class and of the total shares
entitled to vote. No written consent shall be effective to take the corporate
action referred to therein unless, within sixty days of the date of the earliest
dated consent delivered in the manner set forth above, written consents signed
by the holders of the number of shares required to take action are delivered to
the corporation by delivery as set forth above.
ARTICLE III
Board of Directors
Section 3.01. Powers and Duties. All corporate powers shall be
exercised by or under the authority of, and the business and affairs of the
corporation shall be managed under the direction of, a board of directors,
except as may be otherwise pro vided in the Florida Business Corporation Act or
the articles of incorporation.
A director shall perform his or her duties as a director,
including duties as a member of any committee of the board upon which the
director may serve, in good faith, in a manner the director reasonably believes
to be in the best interests of the corporation, and with such care as an
ordinarily prudent person in a like position would use under similar
circumstances. In performing such duties, a director shall be entitled to rely
on information, opinions, reports or statements, including financial statements
and other financial data, in each case prepared or presented by:
(1) one or more officers or employees of the corporation
whom the director reasonably believes to be reliable and competent in the
matters presented,
(2) counsel, public accountants or other persons as to
matters which the director reasonably believes to be within such person's
professional or expert competence, or
(3) a committee of the board upon which the director
does not serve, duly designated in accordance with provisions of the articles of
incorporation or
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these bylaws, as to matters within its designated authority, which committee the
director reasonably believes to merit confidence.
A director shall not be considered to be acting in good faith if
the director has knowledge concerning the matter in question that would cause
such reliance described in the preceding subsection to be unwarranted.
A person who performs his or her duties in compliance with this
section shall not be liable for any action taken as a director or any failure to
take any action.
A director of the corporation who is present at a meeting of the
board of directors at which action on any corporate matter is taken shall be
presumed to have assented to the action taken, unless the director votes against
such action or abstains from voting in respect thereto because of an asserted
conflict of interest.
Section 3.02. Qualification and Election. Directors need not be
residents of Florida or shareholders in the corporation. Except in the case of
vacancies, directors shall be elected by the shareholders. Upon the demand of
any shareholder or the shareholder's proxy at any meeting of shareholders for
the election of directors, the chairman of the meeting shall call for and shall
afford a reasonable opportunity for the making of nominations for the office of
director (except to the extent, if any, restricted by the articles of
incorporation). Any shareholder or the shareholder's proxy may nomi nate as many
persons for the office of director as there are positions to be filled by
providing the secretary with a written acceptance of nomination as director
executed by such nominee. If nominations for the office of director have been
called for as herein provided, only candidates who have been nominated in
accordance therewith shall be eligible for election. If the board of directors
is classified with respect to the power to elect directors or with respect to
the terms of directors and if, due to a vacancy or vacancies, or otherwise,
directors of more than one class are to be elected, each class of directors to
be elected at the meeting shall be nominated and elected separately. The
candidates receiving the greatest number of votes, up to the number of directors
to be elected, shall be elected directors.
Section 3.03. Number and Term of Office. The board of directors
shall consist of six directors. The number of directors may be increased or
decreased from time to time by amendment to these bylaws, but no decrease shall
have the effect of
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shortening the term of any incumbent director. Each director shall serve until
the next annual meeting of the shareholders and until his or her successor shall
have been elected and qualified or until his or her earlier resignation, removal
from office or death.
Section 3.04. Organization. At every meeting of the board of
directors, the chairman of the board, if there be one, or in the absence of the
chairman of the board, the chief executive officer, the president of the
corporation or a chairman chosen by a majority of the directors present, shall
preside, and the secretary or any person appointed by the chairman of the
meeting, shall act as secretary of the meeting.
Section 3.05. Place of Meetings. Meetings of the board of
directors of the corporation, regular or special, may be held either within or
without the State of Florida.
Section 3.06. Annual Meetings. The board of directors shall hold
an annual meeting each year immediately following the annual meeting of the
shareholders at the place where such meeting of the shareholders was held for
the purpose of election of officers and consideration of any other business that
may be properly brought before the meeting. Notice of such annual meetings need
not be given to either old or new members of the board of directors.
Section 3.07. Regular Meetings. If the board of directors
determines to hold regular meetings, such meetings shall be held on such dates
as shall be designated in this Section 3.07 by amendment to these bylaws. Notice
of such regular meetings need not be given to any member of the board of
directors.
Section 3.08. Special Meetings. Special meetings of the board of
directors may be called by any two directors, the chairman of the board, the
chief executive officer or the president on two days' prior written notice.
Section 3.09. Action by Written Consent Without a Meeting. Any
action of the board of directors or of any committee thereof, which is required
or permitted to be taken at a regular or special meeting, may be taken without a
meeting if consent in writing, setting forth the action so to be taken, signed
by all of the members of the board of directors or of the committee, as the case
may be, is filed in the minutes of the proceedings of the board of directors or
committee.
Section 3.10. Conference Telephone Meetings. One or more members
of the board of directors may participate in meetings of the board or a
committee of the
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board by means of a conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other.
Participation in a meeting pursuant to this section shall constitute presence in
person at such meeting.
Section 3.11. Quorum. A majority of the directors in office shall
be present at each meeting in order to constitute a quorum for the transaction
of business. Interested directors may be counted in determining the presence of
a quorum at a meeting of the board of directors which authorizes, approves or
ratifies such contract or transaction.
Section 3.12. Voting. Except as otherwise specified in the
articles of incorporation or these bylaws or provided by statute, the acts of a
majority of the directors present at a meeting at which a quorum is present
shall be the acts of the board of directors.
Section 3.13. Adjournment. A majority of the directors present,
regardless of whether or not a quorum exists, may adjourn any meeting of the
board of directors, to another time and place and no notice of any adjourned
meeting need be given, other than by announcement at the meeting.
Section 3.14. Compensation. The board of directors shall have the
authority to fix the compensation of directors for their attendance at meetings
of the board of directors or committees thereof, and such compensation may
include expenses, if any, associated with attendance at such meetings.
Section 3.15. Resignations. Any director of the corporation may
resign at any time by giving written notice to the president or the secretary of
the corporation. Such resignation shall take effect at the date of the receipt
of such notice or at any later time specified therein and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
Section 3.16. Vacancies. Any vacancy occurring in the board of
directors, including any vacancy created by reason of an increase in the number
of directors, may be filled by the affirmative vote of a majority of the
remaining directors, or by the shareholders in the manner provided in the
Florida Business Corporation Act. A director elected to fill a vacancy shall
hold office only until the next election of directors by the shareholders.
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Section 3.17. Removal. The shareholders may remove one or more
directors from office, with or without cause, by a vote or written consent of
the holders of a majority of the shares then entitled to vote. In case the board
of directors or any such class of the board of directors, or any one or more
directors be so removed, new directors may be elected at the same meeting or by
the same written consent.
Section 3.18. Executive and Other Committees of the Board. The
board of directors, by resolution adopted by a majority of the entire board,
shall designate from among its members an executive committee and may designate
one or more other committees. Each committee shall have two or more directors
who serve at the pleasure of the board of directors.
Each committee shall have and exercise such authority of the
board as provided in these bylaws or in the resolution designating the
committee, except that no committee of the board shall have the authority of the
board of directors to take any of the following actions:
(1) approve or recommend to shareholders actions or
proposals required by law to be approved by shareholders;
(2) fill vacancies on the board of directors or any
committee thereof;
(3) amend or repeal these bylaws;
(4) authorize or approve the reacquisition of shares
unless pursuant to a general formula or method specified by the board of
directors; or
(5) authorize or approve the issuance or sale of or
contract for the sale of shares or determine the designation and relative
rights, preferences and limitations of a voting group unless within limits
specifically prescribed by the board of directors.
A majority of the directors in office designated to a committee
shall be present at each meeting to constitute a quorum for the transaction of
business and the acts of a majority of the directors in office designated to a
committee or their replacements shall be the acts of the committee.
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Each committee shall keep regular minutes of its proceedings and
report such proceedings periodically to the board of directors.
Sections 3.05, 3.08, 3.09, 3.10 and 3.11 shall be applicable to
committees of the board of directors.
ARTICLE IV
Notice and Waiver of Notice
Section 4.01. Notice. Whenever written notice is required to be
given to any director under the provisions of the articles of incorporation,
these bylaws or the Florida Business Corporation Act, it shall be given by
personal delivery, facsimile transmission, delivery to an overnight courier
service or representative, deposit in the United States first-class mail, or by
certified or registered mail, addressed to the address of such person appearing
on the books of the corporation, or supplied by such person to the corporation
for the purpose of notice. A notice of a meeting shall specify the place, day
and hour of the meeting. Notices to shareholders shall be given as provided in
Section 2.06 hereof.
Section 4.02. Waiver of Notice. Whenever any notice is required
to be given under the Florida Business Corporation Act, a waiver thereof in
writing, signed by the person or persons entitled to such notice, whether before
or after the time stated therein, shall be deemed equivalent to the giving of
such notice. Except in the case of a special meeting of shareholders, neither
the business to be transacted at, nor the purpose of, the meeting need be
specified in the waiver of notice of such meeting.
Attendance of a person, either in person or by proxy, at any
meeting, shall constitute a waiver of notice of such meeting, unless and to the
extent the shareholder objects in the manner provided in the Florida Business
Corporation Act.
ARTICLE V
Officers
Section 5.01. Number and Qualification. The officers of the
corporation shall consist of such officers and agents as may be appointed by the
board of directors. One person may hold more than one office. Officers may but
need not be directors or shareholders of the corporation. The board of directors
may elect from among the members of the board a chairman of the board who, if
elected, shall be an officer of the
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corporation. A duly appointed officer may appoint one or more officers or
assistant officers to the extent authorized by the board of directors.
Section 5.02. Election and Term of Office. Except such officers
as may be elected pursuant to Section 5.03, the officers of the corporation
shall be appointed to hold office until the next annual organizational meeting
of directors and until a successor shall have been duly elected and qualified,
or until death, resignation or removal.
Section 5.03. Subordinate Officers, Committees and Agents. The
board of directors may from time to time elect such officers and appoint such
committees, employees or other agents as the board of directors deems the
business of the corporation may require, to hold office for such period, have
such authority, and perform such duties as are provided in these bylaws, or as
the board of directors may delegate.
Section 5.04. The Chairman of the Board. The chairman of the
board shall have general supervision, direction and control over the business
and operations of the corporation, subject to the authority of the board of
directors. The chairman of the board shall sign, execute and acknowledge, in the
name of the corporation, deeds, mortgages, bonds, contracts or other instruments
except in cases where the signing and execution thereof shall be expressly
delegated by the board of directors, or by these bylaws, to some other officer
or agent of the corporation. The chairman of the board shall preside at all
meetings of the shareholders and of the board of directors, and shall perform
such other duties as may from time to time be assigned by the board of
directors.
Section 5.05. The Chief Executive Officer. The board of directors
may designate a chief executive officer. In the absence of such designation, the
chairman of the board shall be the chief executive officer of the corporation.
The chief executive officer shall have general responsibility for implementation
of the policies of the corporation, as determined by the board of directors, and
for the management of the business and affairs of the corporation.
Section 5.06. The President. The president shall perform all
duties incident to the office of president and such other duties as from time to
time may be assigned to him by the board of directors.
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Section 5.07. The Chief Financial Officer. The board of directors
may designate a chief financial officer. The chief financial officer shall have
the responsibilities and duties as set forth by the board of directors.
Section 5.08. The Vice Presidents. The vice presidents shall
perform duties as may from time to time be assigned to them by the board of
directors or the president.
Section 5.09. The Secretary. The secretary shall attend all
meetings of the board of directors and committees thereof and shall record the
time and place of holding of such meeting, whether regular or special, and if
special, how authorized, the notice given, the names of those present at
directors' meetings or the number of shares present or represented at
shareholders' meetings in books to be kept for that purpose; shall see that
notices are given and records and reports properly kept and filed by the
corporation as required by law; shall be the custodian of the seal of the
corporation and see that it is affixed to all documents to be executed on behalf
of the corporation under its seal; and, in general, shall perform all duties
incident to the office of secretary, and such other duties as may from time to
time be assigned by the board of directors or the president.
Section 5.10. The Treasurer. The treasurer, if elected, shall
have or provide for the custody of the funds or other property of the
corporation and shall keep a separate book account of the same as treasurer;
shall keep and maintain, or cause to be kept and maintained, adequate and
correct accounts of the properties and business transactions of the corporation,
including, but not limited to, accounts of its assets, liabilities, receipts,
disbursements, gains, losses, capital-surplus and shares; shall collect and
receive or provide for the collection and receipt of moneys earned by or in any
manner due to or received by the corporation; shall deposit all funds in his or
her cus tody as treasurer in such banks or other places of deposit as the board
of directors may from time to time designate; shall, whenever so required by the
board of directors, render an accounting showing transactions as treasurer and
the financial condition of the corporation; and, in general, shall discharge
such other duties as may from time to time be assigned by the board of directors
or the president. The books of account shall be open at all reasonable times to
inspection by any director. In the absence of a designation of a chief financial
officer by the board of directors, the treasurer shall be the chief financial
officer of the corporation.
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Section 5.11. Salaries and Compensation. The salaries, if any, of
the officers elected by the board of directors shall be fixed from time to time
by the board of directors or by such officer as may be designated by resolution
of the board. The salaries or other compensation of any officers, employees and
agents elected, appointed or retained by an officer or committee to which the
board of directors has delegated such a power shall be fixed from time to time
by such officer or committee. No officer shall be prevented from receiving such
salary or other compensation by reason of the fact that he or she is also a
director of the corporation.
Section 5.12. Resignations. Any officer or agent may resign at
any time by giving written notice of resignation to the board of directors or to
the president or the secretary of the corporation. Any such resignation shall
take effect at the date of the receipt of such notice or at any later time
specified therein and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
Section 5.13. Removal. Any officer, committee member, employee or
agent of the corporation may be removed, either for or without cause, by the
board of directors or other authority which elected or appointed such officer,
committee member or other agent.
Section 5.14. Vacancies. A vacancy in any office because of
death, resignation, removal, disqualification, or any other cause, shall be
filled by the board of directors or by the officer or committee to which the
power to fill such office has been delegated, as the case may be.
ARTICLE VI
Certificates of Stock, Transfer
Section 6.01. Share Certificates, Issuance. Every shareholder
shall be entitled to have a certificate representing all shares to which the
shareholder is entitled; and such certificate shall be signed (either manually
or in facsimile) by the chairman of the board, if any, or by the chief executive
officer, president, chief financial officer or a vice president and by the
secretary or any assistant secretary of the corporation and may be sealed with
the corporate seal or a facsimile thereof. In the event any officer who has
signed, or whose facsimile signature has been placed upon any share certificate
shall have ceased to be such officer because of death, resignation or otherwise,
before the certificate is issued, it may be issued with the same effect as if
the officer had not ceased to be such
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at the date of its issue. Certificates representing shares of the corporation
shall otherwise be in such form as provided by statute and approved by the board
of directors. Every certificate exchanged or returned to the corporation shall
be marked "CANCELED", with the date of cancellation.
Section 6.02. Transfer. Transfers of shares shall be made on the
books of the corporation upon surrender of the certificates therefor, endorsed
by the person named in the certificate or by an attorney lawfully constituted in
writing.
Section 6.03. Registered Shareholders. Except as otherwise
expressly set forth in these bylaws, the corporation shall be entitled to
recognize a person registered on its books in whose name any shares of the
corporation are registered as the absolute owner thereof with the exclusive
rights to receive dividends, and to vote such shares as owner. Except as
otherwise provided by law, the corporation shall not be bound to recognize any
equitable or other claim regardless of whether the corporation shall have
express or other notice thereof.
Section 6.04. Lost, Destroyed or Mutilated Certificates. The
holder of any shares of the corporation shall immediately notify the corporation
of any loss, destruction or mutilation of the certificates therefor, and the
board of directors may, in its discretion, cause new certificates to be issued
to him, upon satisfactory proof of such loss, destruction, or mutilation and, if
the board of directors shall so determine, the deposit of a bond in such form
and in such sum, and with such surety or sureties, as it may direct.
ARTICLE VII
Indemnification of Directors, Officers,
Employees and Agents
Section 7.01. Directors, Officers, Employees and Agents. The
corporation shall indemnify any person who was or is a party or is threatened
to be made a party (which shall include the giving of testimony or similar
involvement) to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by, or in the right of the corporation) by reason of the fact that he
or she is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of any other corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees), judgments, fines,
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and amounts paid in settlement actually and reasonably incurred by him or her in
connection with such action, suit or proceeding, including any appeal thereof,
if he or she acted in good faith in a manner he or she reasonably believed to be
in, or not opposed to the best interests of the corporation, and with respect to
any criminal action or proceedings, had no reasonable cause to believe that his
or her conduct was unlawful. The termination of any action, suit or proceeding
by judgment, order, settlement, con viction or upon a plea of nolo contendere or
its equivalent shall not create, of itself, a presumption that the person did
not act in good faith or in a manner which he or she reasonably believed to be
in, or not opposed to, the best interest of the corporation or, with respect to
any criminal action or proceeding, had reasonable cause to believe that his or
her conduct was unlawful.
The corporation shall indemnify any person who was or is a party,
or is threatened to be made a party (which shall include the giving of testimony
or similar involvement), to any threatened, pending, or completed action or suit
by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he or she is or was a director, officer, employee or
agent of the corporation or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses (including attorneys'
fees) and amounts paid in settlement (to the extent permitted by law), including
any appeal thereof. Such indemnification shall be authorized if such person
acted in good faith and in a manner he or she reasonably believed to be in, or
not opposed to, the best interests of the corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable unless, and only to the
extent that, the court in which such proceeding was brought, or any other court
of competent jurisdiction, shall determine upon application that, despite the
adjudication of liability but in view of all circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
such court shall deem proper.
Section 7.02. Expenses. To the extent that a director, officer,
employee or agent of the corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to above, or in
any defense of any claim, issue or matter therein, the corporation shall
indemnify him or her against expenses (including attorneys' fees) actually and
reasonably incurred by him or her in connection therewith.
Section 7.03. Determination of Standard of Conduct. Any indemnifi
cation hereunder, unless pursuant to a determination by a court, shall be made
by the corporation as authorized upon a determination that indemnification of
the director,
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officer, employee or agent is proper in the circumstances because such person
has met the applicable standard of conduct set forth above. Such determination
shall be made either (1) by the board of directors by a majority vote of a
quorum consisting of direc tors who were not parties to such proceeding, (2) by
majority vote of a committee duly designated by the board of directors
consisting of two or more directors not at the time parties to the proceeding,
(3) by the shareholders who were not parties to such action, suit or
proceedings, or (4) by independent legal counsel (selected in accordance with
the Florida Business Corporation Act) in a written opinion.
Section 7.04. Advance Expenses. Expenses including attorney's
fees incurred in defending any action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding as authorized in the manner provided above or upon receipt of any
undertaking by or on behalf of the director, officer, employee or agent to repay
such amount, unless it shall ultimately be determined that he or she is not
entitled to be indemnified by the corporation as authorized herein.
Section 7.05. Benefit. The indemnification provided by this
Article VII shall be in addition to the indemnification rights provided pursuant
to the Florida Business Corporation Act and shall not be deemed exclusive of any
other rights to which person seeking indemnification may be entitled under any
bylaw, agreement, vote of shareholders or disinterested directors or otherwise,
both as to action in such person's official capacity and as to action in another
capacity while holding such office, and shall continue as to a person who has
ceased to be a director, officer, employee or agent of the corporation and shall
inure to the benefit of the heirs, executors and administrators of such a
person.
Section 7.06. Insurance. The corporation shall be empowered to
pur chase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation or is or was serving at
the request of the corpora tion as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against liability asserted against such person and incurred by him or her in any
such capacity or arising out of his or her status as such, whether or not the
corporation would have the power to indemnify such person against such liability
under the provisions contained herein.
Section 7.07. No Rights of Subrogation. Indemnification herein
shall be a personal right and, the corporation shall have no liability under
this Article VII to any insurer or any person, corporation, partnership,
association, trust or other entity
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(other than the heirs, executors or administrators of such person) by reason of
subrogation, assignment or succession by any other means to the claim of any
person to indemnification hereunder.
Section 7.08. Indemnification for Past Directors. Indemnification
as provided in this section shall continue as to a person who has ceased to be a
director, officer, employee, or agent and shall inure to the benefit of the
heirs, executors, and administrators of such a person.
Section 7.09. Affiliates. For the purposes of this Article VII,
references to "the corporation" include all constituent corporations absorbed in
a consolidation or merger, as well as the resulting or surviving corporation, so
that any person who is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise shall stand in the same
position under the provisions of this Article VII with respect to the resulting
or surviving corporation as he or she would if he or she had served the
resulting or surviving corporation in the same capacity.
Section 7.10. Reliance and Non-Exclusivity. Each person who shall
act as an authorized representative of the corporation shall be deemed to be
doing so in reliance upon such rights of indemnification as are provided in this
Article VII.
Section 7.11. Miscellaneous. The corporation shall have the power
to make any other or further indemnification, except an indemnification against
gross negli gence or willful misconduct, under any bylaw, agreement, vote of
shareholders or disinterested directors, or otherwise, both as to action in his
or her official capacity and as to action in another capacity while holding such
office.
Section 7.12 Insider Trading Violations Exclusion.
Notwithstanding anything to the contrary in this Article VII or the Florida
Business Corporation Act, the corporation shall not indemnify any person who was
or is a party to any claim, action, suit or proceeding arising out of or
resulting from any violation by such person of (i) the Safeskin Corporation
Policy Statement on Securities Trading by Safeskin Personnel, as it may be
amended by the Board of Directors from time to time, or (ii) Sections 16, 20A or
21A of the Securities Exchange Act of 1934 and regulations promulgated
thereunder; except that the corporation shall indemnify such person, in the
manner provided in this Article VII, in the event such person has successfully
defended any such action, suit or proceeding on the merits and such action, suit
or proceeding has terminated with no possibility of further appeal or in the
event the Board of Directors so determines.
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ARTICLE VIII
Miscellaneous
Section 8.01. Checks. All checks or demands for money and notes
of the corporation shall be signed by such officer or officers or such other
person or persons as the board of directors may designate from time to time.
Section 8.02. Dividends. The board of directors, at any regular
or special meeting thereof, subject to any restrictions contained in the
articles of incorporation, may declare and pay dividends upon the shares of the
corporation's stock in cash, property or the corporation's shares in accordance
with the Florida Business Corporation Act.
Section 8.03. Deposits. All funds of the corporation shall be
deposited from time to time to the credit of the corporation in such financial
institutions or other depositaries as the board of directors may approve or
designate.
Section 8.04. Fiscal Year. The fiscal year of the corporation
shall end on the 31st day of December in each year.
Section 8.05. Severability. The provisions of these bylaws shall
be separable each from any and all other provisions of these bylaws, and if any
such provision shall be adjudged to be invalid or unenforceable, such invalidity
or unenforceability shall not affect any other provision hereof, or the powers
granted to this corporation by the articles of incorporation or bylaws.
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EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
DILUTED:
Net income $41,250,251 $23,582,399 $14,890,698 $14,367,075 $11,651,641 $ 6,016,782
Dilutive proforma reduction in
interest expense -- -- -- -- -- 17,540
----------- ----------- ----------- ----------- ----------- -----------
Proforma net income $41,250,251 $23,582,399 $14,890,698 $14,367,075 $11,651,641 $ 6,034,322
=========== =========== =========== =========== =========== ===========
Weighted average number of
shares of common stock
outstanding
26,130,269 25,471,907 24,750,184 24,506,354 20,025,000 14,187,118
Net effect of dilutive stock
options--based on the treasury
stock method using average
market price
3,138,578 2,303,427 854,918 885,194 792,350 3,303,852
----------- ----------- ----------- ----------- ----------- -----------
Total weighted average number
of shares of common stock and
common stock equivalents
outstanding
29,268,847 27,775,334 25,605,102 25,391,548 20,817,350 17,490,970
=========== =========== =========== =========== =========== ===========
Net income per common share $ 1.41 $ .85 $ .58 $ .57 $ .56 $ .34
BASIC:
Net income $41,250,251 $23,582,399 $14,890,698 $14,367,075 $11,651,641 $ 6,016,782
Dilutive proforma reduction in
interest expense -- -- -- -- -- 17,540
----------- ----------- ----------- ----------- ----------- -----------
Proforma net income $41,250,251 $23,582,399 $14,890,698 $14,367,075 $11,651,641 $ 6,034,322
=========== =========== =========== =========== =========== ===========
Weighted average number of
shares of common stock
outstanding
26,130,269 25,471,907 24,750,184 24,506,354 20,025,000 14,187,118
=========== =========== =========== =========== =========== ===========
Net income per common share $ 1.58 $ .93 $ .60 $ .59 $ .58 $ .43
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Absolute Quality Leadership, Inc.
Safeskin Corporation (Malaysia) Sdn. Bhd.
Safeskin Engineering & Machinery Sdn. Bhd.
Safeskin Latex Company Sdn. Bhd.
Safeskin Latex Thailand Limited
Safeskin International B.V.
Safeskin Corporation Thailand Limited
Eastern Safeskin Corporation (Inactive)
Safeskin (Deutschland) GmbH
Safeskin (UK) Limited
Safeskin (B.V.I.) Limited
Safeskin Insurance Management, Inc.
Tactyl Technologies, Inc.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements No.
333-39449 and No. 333-40017 of Safeskin Corporation on Form S-8 of our report
dated February 27, 1998, appearing in this Annual Report on Form 10-K of
Safeskin Corporation for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
San Diego, California
March 26, 1998
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement No.
333-39449, filed on November 4, 1997 of Safeskin Corporation on Form S-8 and on
Registration Statement No. 333-40017 of Safeskin Corporation filed on November
12, 1997 on Form S-8 of our report dated February 17, 1997, appearing in this
Annual Report on Form 10-K of Safeskin Corporation for the year ended December
31, 1997.
COOPERS & LYBRAND L.L.P.
San Diego, California
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 23,916,959
<SECURITIES> 0
<RECEIVABLES> 22,195,828
<ALLOWANCES> 966,000
<INVENTORY> 21,242,732
<CURRENT-ASSETS> 73,047,888
<PP&E> 52,904,271
<DEPRECIATION> 13,399,406
<TOTAL-ASSETS> 138,520,404
<CURRENT-LIABILITIES> 29,847,163
<BONDS> 0
0
0
<COMMON> 264,821
<OTHER-SE> 106,313,492
<TOTAL-LIABILITY-AND-EQUITY> 138,520,404
<SALES> 182,998,305
<TOTAL-REVENUES> 182,998,305
<CGS> 98,144,224
<TOTAL-COSTS> 98,144,224
<OTHER-EXPENSES> 3,504,553
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (822,981)
<INCOME-PRETAX> 46,249,045
<INCOME-TAX> 4,998,794
<INCOME-CONTINUING> 41,250,251
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,250,251
<EPS-PRIMARY> 1.41
<EPS-DILUTED> 1.41
</TABLE>
<PAGE> 1
EXHIBIT 99
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Safeskin Corporation:
We have audited the accompanying consolidated balance sheet of Safeskin
Corporation and subsidiaries as of December 31, 1996 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the two years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 consolidated financial position of Safeskin
Corporation and subsidiaries as of December 31, 1996 and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
San Diego, California
February 17, 1997
