<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to ________________
Commission file number 0-22726
SAFESKIN CORPORATION
(Exact name of registrant as specified in its charter)
Florida 59-2617525
--------------------------------- -----------------------
(State or other jurisdiction (IRS Employer ID No.)
of incorporation or organization)
12671 High Bluff Drive, San Diego, California 92130
-----------------------------------------------------
(Address of principal executive offices)
(619) 794-8111
------------------------------------------------------
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at July 31, 1998
----- ----------------------------
Common Stock, par value $0.01 per share 54,424,739
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SAFESKIN CORPORATION
INDEX
<TABLE>
<CAPTION>
Page Number
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<S> <C> <C>
PART I: Financial Information................................ 1
ITEM 1. Financial Statements................................. 1
Condensed Consolidated Balance Sheets at June 30, 1998
and December 31, 1997................................ 2
Condensed Consolidated Statements of Operations for
the three months ended June 30, 1998 and 1997........ 3
Condensed Consolidated Statements of Operations for
the six months ended June 30, 1998 and 1997......... 4
Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 1998 and 1997.......... 5
Consolidated Statements of Comprehensive Income for 6
the three months ended June 30, 1998 and 1997 .......
Consolidated Statements of Comprehensive Income for 7
the six months ended June 30, 1998 and 1997 .........
Notes to Condensed Consolidated Financial Statements. 8
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 10
PART II: Other Information.................................... 21
ITEM 6. Exhibits and Reports on Form 8-K..................... 21
SIGNATURES........................................... 22
</TABLE>
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
<CAPTION>
INDEX PAGE
----- ----
Condensed Consolidated Balance Sheets at June 30, 1998
<S> <C>
and December 31, 1997.........................................................2
Condensed Consolidated Statements of Operations for
the three months ended June 30, 1998 and 1997.................................3
Condensed Consolidated Statements of Operations for
the six months ended June 30, 1998 and 1997...................................4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1998 and 1997.......................................5
Consolidated Statements of Comprehensive Income for the
three months ended June 30, 1998 and 1997 ....................................6
Consolidated Statements of Comprehensive Income for the
six months ended June 30, 1998 and 1997 ......................................7
Notes to Condensed Consolidated Financial Statements..........................8
</TABLE>
<PAGE> 4
SAFESKIN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
JUNE 30,
1998 DECEMBER 31,
(UNAUDITED) 1997
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 11,962,457 $ 23,916,959
Accounts receivable, net .......................... 24,882,778 22,195,828
Inventory ......................................... 31,216,976 21,242,732
Other current assets .............................. 11,444,252 5,692,369
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Total current assets ......................... 79,506,463 73,047,888
Property, plant and equipment, net ..................... 79,736,623 52,904,271
Intangibles and other assets ........................... 31,525,044 12,568,245
------------- -------------
Total assets ................................. $ 190,768,130 $ 138,520,404
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................. $ 9,288,869 $ 6,922,540
Accrued liabilities ............................... 20,986,471 22,924,623
------------- -------------
Total current liabilities .................... 30,275,340 29,847,163
Long-term debt ......................................... 16,000,000 --
Deferred income taxes and other liabilities ............ 3,594,313 2,094,928
------------- -------------
Total liabilities ............................ 49,869,653 31,942,091
Commitments and contingencies
Shareholders' equity:
Preferred stock; $.01 par value; 10,000,000
shares authorized and no shares outstanding -- --
Common stock; $.01 par value; 80,000,000 shares
authorized; 53,981,392 shares
and 52,964,224 shares outstanding ........... 539,814 529,642
Additional paid-in-capital ........................ 47,268,889 47,517,453
Accumulated other comprehensive loss .............. (39,439,668) (45,687,717)
Retained earnings ................................. 132,529,442 104,218,935
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Total shareholders' equity .................. 140,898,477 106,578,313
------------- -------------
Total liabilities and shareholders' equity .. $ 190,768,130 $ 138,520,404
============= =============
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
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SAFESKIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net sales ........................................... $ 58,642,596 $ 44,947,572
Cost of goods sold .................................. 27,890,151 25,108,097
------------ ------------
Gross profit ................................ 30,752,445 19,839,475
------------ ------------
Operating expenses:
Selling ......................................... 6,141,030 4,751,996
Research and development ........................ 1,679,546 961,038
General and administrative ...................... 6,130,258 3,743,624
------------ ------------
Total operating expenses .................... 13,950,834 9,456,658
------------ ------------
Income from operations ...................... 16,801,611 10,382,817
Interest expense (income), net ...................... 123,070 (140,119)
Other expense, net .................................. 16,160 206,765
------------ ------------
Income before income tax provision .................. 16,662,381 10,316,171
Income tax provision ................................ 1,666,237 1,113,040
------------ ------------
Net income .......................................... $ 14,996,144 $ 9,203,131
============ ============
Per share amounts:
Earnings per share of common stock and
common stock equivalents outstanding:
Basic ......................................... $ 0.28 $ 0.18
Diluted ....................................... 0.25 0.16
Weighted average number of shares of common stock and
common stock equivalents outstanding:
Basic ......................................... 53,849,094 52,053,816
Diluted ....................................... 61,120,471 57,656,780
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
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<PAGE> 6
SAFESKIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Net sales ........................................... $ 111,938,431 $ 86,115,950
Cost of goods sold .................................. 53,344,413 47,845,737
------------- -------------
Gross profit ................................ 58,594,018 38,270,213
------------- -------------
Operating expenses:
Selling ......................................... 11,772,122 9,192,490
Research and development ........................ 3,514,219 1,585,425
General and administrative ...................... 12,051,208 7,272,403
------------- -------------
Total operating expenses .................... 27,337,549 18,050,318
------------- -------------
Income from operations ...................... 31,256,469 20,219,895
Interest income, net ................................ (159,666) (333,175)
Other expense (income), net ......................... (39,982) 625,531
------------- -------------
Income before income tax provision .................. 31,456,117 19,927,539
Income tax provision ................................ 3,145,611 2,233,931
------------- -------------
Net income .......................................... $ 28,310,506 $ 17,693,608
============= =============
Per share amounts:
Earnings per share of common stock and
common stock equivalents outstanding:
Basic ......................................... $ 0.53 $ 0.34
Diluted ....................................... 0.47 0.31
Weighted average number of shares of common stock and
common stock equivalents outstanding:
Basic ......................................... 53,319,341 51,952,422
Diluted ....................................... 60,878,216 57,537,181
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
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<PAGE> 7
SAFESKIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................ $ 28,310,506 $ 17,693,608
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization ................ 5,360,857 3,367,232
Exchange loss-unrealized ..................... 6,332,129 --
Loss on disposal of equipment ................ 14,049 37,926
Changes in operating assets and liabilities:
Accounts receivable ...................... (365,083) (1,158,596)
Inventory ................................ (8,745,872) 1,335,670
Other assets ............................. (6,909,165) 769,295
Accounts payable and accrued liabilities.. 2,178,521 5,259,940
------------ ------------
Net cash provided by operating activities .... 26,175,942 27,305,075
------------ ------------
Cash flows from investing activities:
Payments for acquisitions ......................... (14,346,460) (14,463,092)
Purchase of property, plant and equipment ......... (26,664,206) (17,120,521)
Proceeds from sale of equipment ................... -- 24,662
------------ ------------
Net cash used by investing activities ........ (41,010,666) (31,558,951)
------------ ------------
Cash flows from financing activities:
Increase in long-term debt ........................ 16,000,000 --
Proceeds from issuance of common stock ............ 5,420,911 2,169,328
Repurchase of common stock ........................ (7,223,304) --
------------ ------------
Net cash provided by financing activities .... 14,197,607 2,169,328
------------ ------------
Effect of exchange rate changes on cash ............... (11,317,385) 443,618
------------ ------------
Net decrease in cash and cash equivalents ............. (11,954,502) (1,640,930)
Cash and cash equivalents at beginning of period ...... 23,916,959 16,265,468
------------ ------------
Cash and cash equivalents at end of period ............ $ 11,962,457 $ 14,624,538
============ ============
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
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<PAGE> 8
SAFESKIN CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net income ..................................... $ 14,996,144 $ 9,203,131
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments .. (7,114,749) 1,665,438
------------ ------------
Comprehensive income ........................... $ 7,881,395 $ 10,868,569
============ ============
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
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<PAGE> 9
SAFESKIN CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Net income .................................... $28,310,506 $17,693,608
Other comprehensive income, net of tax:
Foreign currency translation adjustments.. 6,248,049 1,660,518
----------- -----------
Comprehensive income .......................... $34,558,555 $19,354,126
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
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<PAGE> 10
SAFESKIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, which consist
only of normal and recurring adjustments, necessary for a fair presentation
of results for the periods indicated. The results of any interim period are
not necessarily indicative of results for the full year. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
related notes thereto for the year ended December 31, 1997. The December 31,
1997 condensed consolidated balance sheet was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles.
2. Inventories at June 30, 1998 consisted of $3,691,000, $1,604,000 and
$25,922,000 for raw materials, work in process and finished goods,
respectively. At December 31, 1997, inventories consisted of $2,701,000,
$690,000 and $17,852,000 for raw materials, work in process and finished
goods, respectively.
3. 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 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 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 $268,588 and $264,821 was reclassified from the Company's
additional paid-in capital account to the Company's common stock account for
the periods ending June 30, 1998 and December 31, 1997, respectively. All
share and per share amounts have been retroactively restated to reflect the
stock split.
4. The Company is exposed to exchange rate risk when it and certain of its
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 may be 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 June 30, 1998, 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 contacted 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
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<PAGE> 11
contracts minimizes the risk of non-performance. Net gains and losses from
foreign currency transactions for the three and six month periods ended June
30, 1998 and 1997 were not significant.
5. The Company has adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" in the first quarter of 1998. This standard
expands or modifies disclosures, and accordingly, has no impact on the
Company's financial position, results of operations or cash flows.
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<PAGE> 12
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The following discussion and analysis should be read in conjunction with the
condensed consolidated financial statements and related notes thereto.
GENERAL
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 and 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.
("Tactyl"), the Company began selling Tactylon(R) synthetic examination and
surgical gloves. In February 1998, as a result of its acquisition of Absolute
Quality Leadership, Inc. ("AQL"), the Company expanded its current product line
associated with the high-technology and scientific markets to include a broad
line of proprietary latex and synthetic glove products, specifically designed
for the microelectronics, health technologies and general laboratory and safety
market segments. 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,
warehousing and product delivery expenses. Selling expenses include salaries for
sales and marketing staffs and other related expenses such as sales commissions,
and costs associated with travel, trade show participation and advertising.
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 substantially less
than statutory rates as a result of the tax-free status of the Company's foreign
manufacturing operations. The Company's Malaysian manufacturing operations were
granted five years of tax-free status which expires on September 30, 1998. The
expiration of this tax-free status is not expected to have a material adverse
effect upon the
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<PAGE> 13
Company's operations in the foreseeable future. The Company's existing Thailand
manufacturing facilities 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.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 1997
Net sales for the three months ended June 30, 1998 were $58,642,000 which
represents a 30.5% increase over net sales of $44,948,000 for the same period in
1997. The predominant causes for the sales growth were an increase in unit
volumes sold and the shift in product mix to higher priced powder-free gloves in
the 1998 period as compared to the 1997 period.
Cost of goods sold increased 11.1% from $25,109,000 for the three month period
ended June 30, 1997 to $27,890,000 for the three months ended June 30, 1998. As
a percentage of net sales, cost of goods sold decreased from 55.9% for the three
months ended June 30, 1997 to 47.6% for the same period in 1998. This decrease
in cost of goods sold as a percentage of net sales was attributable to the
continued shift of production to Thailand's lower-cost manufacturing facility.
In addition, the Company's gross profit margin was favorably impacted in 1998
due to the positive effects of the devaluation of the currencies in Malaysia and
Thailand. As a result of the above factors, gross profits increased 55.0% from
$19,839,000 for the three months ended June 30, 1997 to $30,752,000 for the
three months ended June 30, 1998.
Selling expenses increased 29.2% from $4,752,000 for the three months ended June
30, 1997 to $6,141,000 for the three months ended June 30, 1998. As a percentage
of net sales, selling expenses decreased slightly from 10.6% for the three
months ended June 30, 1997 to 10.5% for the same period in 1998.
Research and development expenses increased 74.8% from $961,000 for the three
months ended June 30, 1997 to $1,679,000 for the three months ended June 30,
1998. As a percentage of net sales, these expenses increased from 2.1% for the
three months ended June 30, 1997 to 2.9% for the three months ended June 30,
1998. The increase in research and development expenses as a percentage of net
sales pertains primarily to increased compensation costs for research and
development personnel.
General and administrative expenses increased 63.8% from $3,744,000 for the
three months ended June 30, 1997 to $6,130,000 for the three months ended June
30, 1998. As a percentage of net sales, general and administrative expenses
increased from 8.3% for the 1997 period to 10.5% for the 1998 period. The
increase in general and administrative expenses as a percentage of net sales
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<PAGE> 14
was caused primarily by increased costs associated with the Company's efforts to
improve and streamline its information technology systems and services. An
additional factor can be attributed to costs and expenses associated with the
Company's acquisition of AQL.
Income from operations increased 61.8% from $10,382,000 for the three months
ended June 30, 1997 to $16,802,000 for the three months ended June 30, 1998.
Operating margins increased from 23.7% in the 1997 period to 28.7% in the 1998
period.
Interest expense (income), net, changed from $140,000 of interest income for the
three months ended June 30, 1997 to $123,000 of interest expense for the three
months ended June 30, 1998, primarily due to the fact that in 1998 the Company
had incurred interest expense on debt outstanding during the period. In 1997,
the Company had no debt outstanding and generated investment returns on its cash
balances.
Other expense, net, decreased from $206,000 for the three months ended June 30,
1997 to $16,000 for the three months ended June 30, 1998. The decrease in other
expense was due substantially to losses experienced from foreign currency
transactions in the Company's European subsidiaries in the three months ended
June 30, 1997. The Company did not experience significant net gains or losses
from foreign currency transactions for the three months ended June 30, 1998.
Income taxes increased from $1,113,000 for the three months ended June 30, 1997
to $1,666,000 for the three months ended June 30, 1998. The income tax
provisions recorded in both 1997 and 1998 remain less than statutory rates due
primarily to the foreign tax free status.
Net income increased 63.0% from $9,203,000 for the three months ended June 30,
1997 to $14,997,000 for the three months ended June 30, 1998 due to the
foregoing factors.
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<PAGE> 15
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Net sales for the six months ended June 30, 1998 were $111,938,000 which
represents a 30.0% increase over net sales of $86,116,000 for the same period in
1997. The predominant causes for the sales growth were an increase in unit
volumes sold and the shift in product mix to higher priced powder-free gloves in
the 1998 period as compared to the 1997 period.
Cost of goods sold increased 11.5% from $47,846,000 for the six month period
ended June 30, 1997 to $53,344,000 for the six months ended June 30, 1998. As a
percentage of net sales, cost of goods sold decreased from 55.6% for the six
months ended June 30, 1997 to 47.7% for the same period in 1998. This decrease
in cost of goods sold as a percentage of net sales was attributable to the
continued shift of production to Thailand's lower-cost manufacturing facility.
In addition, the Company's gross profit margin was favorably impacted in 1998
due to the positive effects of the devaluation of the currencies in Malaysia and
Thailand. As a result of the above, gross profits increased 53.1% from
$38,270,000 for the six months ended June 30, 1997 to $58,594,000 for the six
months ended June 30, 1998.
Selling expenses increased 28.1% from $9,193,000 for the six months ended June
30, 1997 to $11,772,000 for the six months ended June 30, 1998. As a percentage
of net sales, selling expenses decreased slightly from 10.7% for the six months
ended June 30, 1997 to 10.5% for the same period in 1998.
Research and development expenses increased 121.7% from $1,586,000 for the six
months ended June 30, 1997 to $3,514,000 for the six months ended June 30, 1998.
As a percentage of net sales, these expenses increased from 1.8% for the six
months ended June 30, 1997 to 3.1% for the six months ended June 30, 1998. The
increase in research and development expenses as a percentage of net sales is
primarily due to an increase in the number of research and development
personnel, an increase in other compensation expenses and costs totaling
approximately $700,000 associated with research related to the Company's
outstanding product liability claims.
General and administrative expenses increased 65.7% from $7,272,000 for the six
months ended June 30, 1997 to $12,051,000 for the six months ended June 30,
1998. As a percentage of net sales, general and administrative expenses
increased from 8.4% for the 1997 period to 10.8% for the 1998 period. The
increase in general and administrative expenses as a percentage of net sales
pertains primarily to increased costs associated with the Company's efforts to
improve and streamline its information technology systems and services as well
as increased compensation costs.
Income from operations increased 54.6% from $20,219,000 for the six months ended
June 30, 1997 to $31,257,000 for the six months ended June 30, 1998. Operating
margins increased from 23.5% in the 1997 period to 27.9% in the 1998 period.
Interest expense (income), net, decreased from $333,000 of interest income for
the six months ended June 30, 1997 to $160,000 of interest income for the six
months ended June 30, 1998, and is
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<PAGE> 16
primarily due to the fact that in 1998 the Company had incurred interest expense
on debt outstanding during the period. In 1997, the Company had no debt
outstanding and generated investment returns on its cash balances.
Other expense, net, changed from $625,000 of other expense for the six months
ended June 30, 1997 to $40,000 of other income for the six months ended June 30,
1998. The change in other expense was due substantially to losses experienced
from foreign currency transactions in the Company's European subsidiaries in the
six months ended June 30, 1997. The Company did not experience significant net
gains and losses from foreign currency transactions for the six months ended
June 30, 1998.
Income taxes increased from $2,234,000 for the six months ended June 30, 1997 to
$3,146,000 for the six months ended June 30, 1998. The income tax provisions
recorded in both 1997 and 1998 remain less than statutory rates due primarily to
the foreign tax free status.
Net income increased 60.0% from $17,693,000 for the six months ended June 30,
1997 to $28,311,000 for the six months ended June 30, 1998 due to the foregoing
factors.
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<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations generated approximately $26,176,000 and $27,305,000 of
cash during the six months ended June 30, 1998 and 1997, respectively. Further,
during the six months ended June 30, 1998 and 1997, the Company acquired or
constructed capital assets of approximately $26,664,000 and $17,121,000,
respectively, primarily all of which were for the expansion of the Company's
foreign manufacturing operations.
During 1997, the Company completed construction and began operating the first of
its three new production lines located in its Thailand facility, referred to by
the Company as the "Grand Master(TM)." The two additional production lines began
operating in the first quarter of 1998. The Company's management believes that a
single "Grand Master(TM)" 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 two years. 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 year include the construction of an additional building and
related machinery at the Company's existing Thai 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
1998. The first machine in 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 clean-room 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
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<PAGE> 18
constructed to house the Company's increased capacity for latex examination,
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 annualized production capacity from approximately 3.5 billion gloves
to approximately 5.5 billion gloves. Financing for the total capital
expenditures for the two-year period is projected to come from internally
generated funds, with any shortfalls to be financed through borrowings from the
credit facilities.
In February 1998, the Company completed the acquisition of AQL, 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 changed the name of AQL to Safeskin Scientific
Corporation.
The Company has an unsecured two-year credit facility for financing general
working capital needs, up to a maximum of $40,000,000 in borrowings. As of June
30, 1998, there was $16,000,000 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 $8,400,000. As
of June 30, 1998, there were no borrowings outstanding under these credit
facilities. These borrowings are collateralized by all assets of the
subsidiaries and are further supported 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 2.52
ringgits/dollar, as of June 30, 1997 to approximately 48.15 bahts/dollar and
3.89 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 other comprehensive income. As of June 30,
1998, the Thailand baht and Malaysian ringgit were approximately 42.2
bahts/dollar and 4.13 ringgits/dollar. The Company has not experienced
significant foreign currency transaction net gains and losses in 1998.
Nevertheless, the Company has experienced an increased amount of foreign
currency translation adjustments in 1998. 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 continued positive impact upon the
Company's operating results for 1998 and beyond.
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<PAGE> 19
SUBSEQUENT EVENTS
The Company on July 30, 1998, through its subsidiary Safeskin (B.V.I.) Limited
("Safeskin BVI"), entered into and closed a credit agreement for a $100.0
million loan facility (the "BVI Facility") with Union Bank of California, N.A.,
as Agent. The BVI Facility is secured by a first priority lien on the Common
Stock of the Company purchased by Safeskin BVI, a first priority lien on all the
assets of Safeskin BVI and a first priority pledge of the capital stock and
beneficial interest in Safeskin Corporation (Thailand) Limited. Safeskin BVI may
elect for interest on the BVI Facility to accrue at a rate per annum equal to
either (i) the base rate plus 0.25% or (ii) LIBOR plus 1.75%. The BVI Facility
matures six months after closing, with all principal and interest due on such
date.
In addition, On July 30, 1998, the Company signed a credit agreement with Union
Bank of California, N.A., as Agent, for a $100.0 million, term loan facility and
a $40.0 million revolving line of credit facility, the closing of which is
subject to numerous conditions.
LEGAL PROCEEDINGS
Since May 1995, 159 actively pending product liability lawsuits seeking monetary
damages have been filed in federal and state courts against the Company, and
other manufacturers of latex gloves. On February 26, 1997, the Judicial Panel on
Multi-District Litigation entered an order transferring all latex allergy
lawsuits brought by healthcare workers against the Company and other latex glove
manufacturers in the Federal courts to the Federal district court in
Philadelphia, consolidating those cases, and other pending and future Federal
court latex allergy lawsuits, for discovery management and other pre-trial
proceedings.
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
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<PAGE> 20
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
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:
o 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; possible obsolescence of the
Company's primary product due to the development by competitors of
new products, manufacturing processes or technologies including
latex alternatives; the ability of the Company to maintain strong
distributor relationships; and the ability of the Company to
maintain selling prices and anticipated volumes;
o adverse outcomes regarding product liability lawsuits or the ability
to obtain sufficient product liability insurance coverage at
reasonable rates;
o the ability of the Company to meet existing or future FDA
regulations regarding the manufacture and sale of the Company's
gloves;
o 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;
o risks associated with investments and operations in foreign
countries, particularly Thailand and Malaysia, including exchange
rate fluctuations, local economic conditions, governmental policies
regarding foreign ownership of manufacturing facilities, local
regulatory requirements, tax holidays and political factors;
o the consistent availability, at budgeted prices, of raw rubber from
independent growers and concentrate plant operators in Malaysia and
Thailand;
o 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;
o failure of the Company's new production lines, referred to by the
Company as "Grand Masters(TM)," to generate anticipated productivity
and efficiencies;
o economic conditions in the healthcare industry, including the
potential impact of industry consolidation and cost constraints on
the end-user;
o changes in significant government regulations affecting the
healthcare industry;
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<PAGE> 21
o the ability of the Company to protect its proprietary products,
know-how and manufacturing processes;
o changes in the Company's rates or basis of income taxation; and
o 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.
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<PAGE> 22
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. In February 1998, the Company 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.
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<PAGE> 23
PART II: OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
On May 6, 1998, at the Company's annual meeting, the shareholders
reelected each of the following six directors, with the following votes:
<TABLE>
<CAPTION>
NAME VOTES FOR VOTES WITHHELD
---- --------- --------------
<S> <C> <C>
Irving Jaffe 49,862,724 202,312
Cam L. Garner 49,863,800 201,236
Neil K. Braverman 49,863,600 201,436
Richard Jaffe 49,863,800 201,236
Howard L. Shecter 49,863,800 201,236
Joseph Stemler 49,863,800 201,236
</TABLE>
In addition, the shareholders approved a proposal to grant 1,200,000 performance
stock options to the Company's Chief Executive Officer. The second proposal
received the following votes: for 26,367,678; against 14,031,130; abstain
329,444 and broker non-votes 9,336,784.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
10.43 Amended and Restated Loan Agreement between Safeskin
Corporation and Union Bank of California, N.A., dated
May 4, 1998
11 Statement re: Computation of per share earnings
</TABLE>
(b) Reports on Form 8-K
None.
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<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
SAFESKIN CORPORATION
Date: August 14, 1998 By: /s/ David L. Morash
------------------------------------
David L. Morash, Executive Vice-
President, Chief Financial Officer
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<PAGE> 1
EXHIBIT 10.43
[UNION BANK OF CALIFORNIA LOGO]
AMENDED AND RESTATED
LOAN AGREEMENT
THIS AMENDED AND RESTATED LOAN AGREEMENT ("Agreement") is made and
entered into as of May 4, 1998 by and between SAFESKIN CORPORATION, a Florida
corporation, ("Borrower") and UNION BANK OF CALIFORNIA, N.A., ("Bank"). This
Agreement amends and restates in its entirety that certain loan agreement dated
May 15, 1996 between Bank and Borrower.
SECTION 1. THE LOAN
1.1. The Revolving Loan. Bank will loan to Borrower an amount not to
exceed Forty Million Dollars ($40,000,000.00) outstanding in the aggregate at
any one time (the "Revolving Loan"). Borrower may borrow, repay and reborrow all
or part of the Revolving Loan in accordance with the terms of the Revolving
Note. All borrowings of the Revolving Loan must be made before July 31, 2000 at
which time all unpaid principal and interest of the Revolving Loan shall be due
and payable. The Revolving Loan shall be evidenced by a promissory note (the
"Revolving Note") on the standard form used by Bank for commercial loans. Bank
shall enter each amount borrowed and repaid in Bank's records and such entries
shall be deemed to be the amount of the Revolving Loan outstanding. Omission of
Bank to make any such entries shall not discharge Borrower of its obligation to
repay in full with interest all amounts borrowed.
1.1.1 The Letter of Credit Sublimit. As a sublimit to the Revolving
Loan, Bank shall issue, for the account of Borrower, one or more irrevocable
commercial letters of credit (individually, a "Commercial L/C" and collectively,
the "Commercial L/Cs") and/or one or more irrevocable standby letters of credit
(individually a "Standby L/C" and collectively the "Standby L/Cs"). The
aggregate amount available to be drawn under all outstanding Commercial L/Cs and
Standby L/Cs and the aggregate amount of unpaid reimbursement obligations under
all drawn Commercial L/Cs and Standby L/Cs shall not exceed Two Million Five
Hundred Thousand Dollars ($2,500,000) and shall reduce, dollar for dollar, the
maximum amount available under the Revolving Loan. Each Commercial L/C and
Standby L/C shall call only for drafts drawn at sight. No Commercial L/C shall
have an expiry date more than 180 days from its date of issuance and no Standby
L/C shall have an expiry date more than 12 months from its date of issuance
provided, however, that in no event shall any Commercial L/C or Standby L/C have
an expiry date later than the maturity date of the Revolving Loan. Each
Commercial L/C and Standby L/C shall be drawn on such terms and conditions as
are acceptable to Bank and shall be governed by the terms of (and Borrower
agrees to execute) Bank's standard form of credit application and reimbursement
agreement or standby letter of credit application and reimbursement agreement,
as the case may be.
1.2 Terminology.
As used herein the word "Loan" shall mean, collectively, all the credit
facilities described above.
As used herein the word "Note" shall mean, collectively, all the
promissory notes described above.
As used herein, the words "Loan Documents" shall mean all documents
executed in connection with this Agreement.
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<PAGE> 2
1.3 Purpose of Loan. The proceeds of the Revolving Loan shall be used
for general working capital purposes, general operating needs, common and/or
preferred stock repurchases and acquisitions.
1.4 Interest. The unpaid principal balance of the Revolving Loan shall
bear interest at the rate or rates provided in the Note and selected by
Borrower. The Revolving Loan may be prepaid in full or in part only in
accordance with the terms of the Revolving Note and any such prepayment shall be
subject to the prepayment fee provided for therein.
1.5 Unused Commitment Fee. On the last calendar day of the third month
following the execution of this Agreement and on the last calendar day of each
three-month period thereafter until July 31, 2000, or the earlier termination of
the Loan, Borrower shall pay to Bank a fee of fifteen one-hundredths percent
(0.15%) per year on the average unused portion of the Loan for the preceding
quarter computed on the basis of actual days elapsed of a year of 360 days.
1.6 Balances. Borrower shall maintain its major depository accounts with
Bank until the Note and all sums payable pursuant to this Agreement have been
paid in full.
1.7 Disbursement. Upon execution hereof, Bank shall disburse the
proceeds of the Loan as provided in Bank's standard form Authorization executed
by Borrower.
1.8 Controlling Document. In the event of any inconsistency between the
terms of this Agreement and any Note or any of the other Loan Documents, the
terms of such Note or other Loan Documents will prevail over the terms of this
Agreement.
SECTION 2. CONDITIONS PRECEDENT
Bank shall not be obligated to disburse all or any portion of the
proceeds of the Loan unless at or prior to the time for the making of such
disbursement, the following conditions have been fulfilled to Bank's
satisfaction:
2.1 Compliance. Borrower shall have performed and complied with all
terms and conditions required by this Agreement to be performed or complied with
by it prior to or at the date of the making of such disbursement and shall have
executed and delivered to Bank the Note and other documents deemed necessary by
Bank.
2.2 Borrowing Resolution. Borrower shall have provided Bank with
certified copies of resolutions duly adopted by the Board of Directors of
Borrower, authorizing this Agreement and the Loan Documents. Such resolutions
shall also designate the persons who are authorized to act on Borrower's behalf
in connection with this Agreement and to do the things required of Borrower
pursuant to this Agreement.
2.3 Continuing Compliance. At the time any disbursement is to be made,
there shall not exist any event, condition or act which constitutes an event of
default under Section 6 hereof or any event, condition or act which with notice,
lapse of time or both would constitute such event of default; nor shall there be
any such event, condition, or act immediately after the disbursement were it to
be made.
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<PAGE> 3
SECTION 3. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants that:
3.1 Business Activity. The principal business of Borrower is as a
manufacturer and seller of disposable latex and synthetic gloves.
3.2 Affiliates and Subsidiaries. Borrower's affiliates and subsidiaries
(those entities in which Borrower has either a controlling interest or at least
a 25% ownership interest) and their addresses, and the names of Borrower's
principal shareholders, are as provided on a schedule delivered to Bank on or
before the date of this Agreement.
3.3 Authority to Borrow. The execution, delivery and performance of this
Agreement, the Note and all other agreements and instruments required by Bank in
connection with the Loan are not in contravention of any of the terms of any
indenture, agreement or undertaking to which Borrower is a party or by which it
or any of its property is bound or affected.
3.4 Financial Statements. The financial statements of Borrower,
including both a balance sheet at December 31, 1997, together with supporting
schedules, and an income statement for the twelve (12) months ended December 31,
1997, have heretofore been furnished to Bank, and are true and complete and
fairly represent the financial condition of Borrower during the period covered
thereby. Since December 31, 1997 there has been no material adverse change in
the financial condition or operations of Borrower.
3.5 Title. Except for assets which may have been disposed of in the
ordinary course of business, Borrower has good and marketable title to all of
the property reflected in its financial statements delivered to Bank and to all
property acquired by Borrower since the date of said financial statements, free
and clear of all liens, encumbrances, security interests and adverse claims
except those specifically referred to in said financial statements.
3.6 Litigation. There is no litigation or proceeding pending or
threatened against Borrower or any of its property which is reasonably likely to
affect the financial condition, property or business of Borrower in a materially
adverse manner or result in liability in excess of Borrower's insurance
coverage.
3.7 Default. Borrower is not now in default in the payment of any of its
material obligations, and there exists no event, condition or act which
constitutes an event of default under Section 6 hereof and no condition, event
or act which with notice or lapse of time, or both, would constitute an event of
default.
3.8 Organization. Borrower is duly organized and existing under the laws
of the state of its organization, and has the power and authority to carry on
the business in which it is engaged and/or proposes to engage.
3.9 Power. Borrower has the power and authority to enter into this
Agreement and to execute and deliver the Note and all of the other Loan
Documents.
3.10 Authorization. This Agreement and all things required by this
Agreement have been duly authorized by all requisite action of Borrower.
3.11 Qualification. Borrower is duly qualified and in good standing in
any jurisdiction where such qualification is required, except for any
jurisdiction where the failure to so qualify would not have a material adverse
effect on the operations or financial condition of Borrower.
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<PAGE> 4
3.12 Compliance With Laws. Borrower is not in violation with respect to
any applicable laws, rules, ordinances or regulations which materially affect
the operations or financial condition of Borrower.
3.13 ERISA. Any defined benefit pension plans as defined in the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), of Borrower meet,
as of the date hereof, the minimum funding standards of Section 302 of ERISA,
and no Reportable Event or Prohibited Transaction as defined in ERISA has
occurred with respect to any such plan.
3.14 Regulation U. No action has been taken or is currently planned by
Borrower, or any agent acting on its behalf, which would cause this Agreement or
the Note to violate Regulation U or any other regulation of the Board of
Governors of the Federal Reserve System or to violate the Securities and
Exchange Act of 1934, in each case as in effect now or as the same may hereafter
be in effect. Borrower is not engaged in the business of extending credit for
the purpose of purchasing or carrying margin stock as one of its important
activities and none of the proceeds of the Loan will be used directly or
indirectly for such purpose.
3.15 Continuing Representations. These representations shall be
considered to have been made again at and as of the date of each disbursement of
the Loan and shall be true and correct as of such date or dates.
SECTION 4. AFFIRMATIVE COVENANTS
Until the Note and all sums payable pursuant to this Agreement or any
other of the Loan Documents have been paid in full, unless Bank waives
compliance in writing, Borrower agrees that:
4.1 Use of Proceeds. Borrower will use the proceeds of the Loan only as
provided in subsection 1.3 above.
4.2 Payment of Obligations. Borrower will pay and discharge promptly all
taxes, assessments and other governmental charges and claims levied or imposed
upon it or its property, or any part thereof, provided, however, that Borrower
shall have the right in good faith to contest any such taxes, assessments,
charges or claims and, pending the outcome of such contest, to delay or refuse
payment thereof provided that adequately funded reserves are established by it
to pay and discharge any such taxes, assessments, charges and claims.
4.3 Maintenance of Existence. Borrower will maintain and preserve its
existence and assets and all rights, franchises, licenses and other authority
necessary for the conduct of its business and will maintain and preserve its
property, equipment and facilities in good order, condition and repair. Bank
may, at reasonable times on twenty-four (24) hours prior written notice, visit
and inspect any of the properties of Borrower.
4.4 Records. Borrower will keep and maintain full and accurate accounts
and records of its operations according to generally accepted accounting
principles and will permit Bank, at reasonable times on twenty-four (24) hours
prior written notice, to have access thereto, to make examination and
photocopies thereof, and to make audits during regular business hours.
Reasonable costs for such audits shall be paid by Borrower.
4.5 Information Furnished. Borrower will furnish to Bank:
(a) Within sixty (60) days after the close of each fiscal quarter,
except for the final quarter of each fiscal year, its unaudited balance sheet as
of the close of such fiscal quarter,
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<PAGE> 5
its unaudited income and expense statement with supportive schedules and
statement of retained earnings for that fiscal quarter, prepared in accordance
with generally accepted accounting principles;
(b) Within one hundred (100) days after the close of each fiscal year, a
copy of its consolidating financial statements and its consolidated statement of
financial condition including at least its balance sheet as of the close of such
fiscal year, its income and expense statement and retained earnings statement
for such fiscal year, examined and prepared on an audited basis by independent
certified public accountants selected by Borrower and reasonably satisfactory to
Bank, in accordance with generally accepted accounting principles applied on a
basis consistent with that of the previous year, except for any inconsistencies
explained in such audit of the notes thereto.
(c) As soon as available, copies of such financial statements and
reports as Borrower may file with any state or federal agency;
(d) Such other financial statements and information as Bank may
reasonably request from time to time;
(e) In connection with each financial statement provided hereunder, a
statement executed by chief financial officer of Borrower, certifying that no
default has occurred and no event exists which with notice or the lapse of time,
or both, would result in a default hereunder; and a certification of compliance
with all covenants under the Agreement, executed by Borrower's chief financial
officer or other duly authorized officer of Borrower, in form reasonably
acceptable to Bank;
(f) Prompt written notice to Bank of all events of default under any of
the terms or provisions of this Agreement or of any other agreement, contract,
document or instrument entered, or to be entered into with Bank; and of any
litigation which, if decided adversely to Borrower, would have a material
adverse effect on Borrower's financial condition; and of any other matter which
has resulted in, or is likely to result in, a material adverse change in its
financial condition or operations; and
(g) Written notice to Bank of any changes in Borrower's officers and
other senior management, and prior notice to Bank of any changes in Borrower's
name, the location of Borrower's assets, or Borrower's principal place of
business or chief executive office.
4.6 Quick Ratio. Borrower shall maintain at all times a ratio of cash,
accounts receivable and marketable securities to current liabilities of not less
than 1.0:1.0, as such terms are defined by generally accepted accounting
principles.
4.7 Tangible Net Worth. Borrower will at all times maintain Tangible Net
Worth of not less than the sum of (a) Fifty Million Dollars ($50,000,000) and
the aggregate amount of all infusions of equity, except for the grant or
exercise of stock options, made on or after January 1, 1998. "Tangible Net
Worth" shall mean net worth increased by indebtedness of Borrower subordinated
to Bank and decreased by patents, licenses, trademarks, trade names, goodwill
and other similar intangible assets, organizational expenses, and monies due
from affiliates (including officers, shareholders and directors).
4.8 Debt to Tangible Net Worth. Borrower will at all times maintain a
ratio of total liabilities to tangible net worth of not greater than 0.50:1.0.
4.9 Profitability. Borrower will maintain a net profit, after provision
for income taxes, of any positive amount as reported at the end of each fiscal
quarter, and Borrower will maintain
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<PAGE> 6
its annual net profit, after provision for income taxes, at not less than Ten
Percent (10%) of consolidated gross annual revenues.
4.10 Insurance. Borrower will keep all of its insurable property, real,
personal or mixed, insured by good and responsible companies against fire and
such other risks as are customarily insured against by companies conducting
similar business with respect to like properties. Borrower will maintain
adequate worker's compensation insurance and adequate insurance against
liability for damages to persons and property in such amounts as are customarily
maintained by companies engaged in similar businesses in the same general areas
in which Borrower operates.
4.11 Additional Requirements. Borrower will promptly, upon demand by
Bank, take such further action and execute all such additional documents and
instruments in connection with this Agreement as Bank in its reasonable
discretion deems necessary, and promptly supply Bank with such other information
concerning its affairs as Bank may request from time to time.
4.12 Litigation and Attorneys' Fees. Borrower will pay promptly to Bank
upon demand, reasonable attorneys' fees (including but not limited to the
reasonable estimate of the allocated costs and expenses of in-house legal
counsel and legal staff) and all costs and other expenses paid or incurred by
Bank in collecting, modifying or compromising the Loan or in enforcing or
exercising its rights or remedies created by, connected with or provided for in
this Agreement or any of the Loan Documents, whether or not an arbitration,
judicial action or other proceeding is commenced. If such proceeding is
commenced, only the prevailing party shall be entitled to attorneys' fees and
court costs.
4.13 Bank Expenses. Borrower will pay or reimburse Bank for all costs,
expenses and fees incurred by Bank in preparing and documenting this Agreement
and the Loan, and all amendments and modifications thereof, including but not
limited to all filing and recording fees, costs of appraisals, insurance and
attorneys' fees, including the reasonable estimate of the allocated costs and
expenses of in-house legal counsel and legal staff.
4.14 Reports Under Pension Plans. Intentionally Deleted.
SECTION 5. NEGATIVE COVENANTS
Until the Note and all other sums payable pursuant to this Agreement or
any other of the Loan Documents have been paid in full, unless Bank waives
compliance in writing, Borrower agrees that:
5.1 Encumbrances and Liens. Borrower will not create, assume or suffer
to exist any mortgage, pledge, security interest, encumbrance, or lien (other
than for taxes not delinquent and for taxes and other items being contested in
good faith) on property of any kind, whether real, personal or mixed, now owned
or hereafter acquired, or upon the income or profits thereof, except to Bank and
except for minor encumbrances and easements on real property which do not affect
its market value, and except for existing liens on Borrower's personal property
and future purchase money security interests encumbering only the personal
property purchased. All of such permitted personal property liens shall not
exceed, in the aggregate, One Million Five Hundred Thousand Dollars ($1,500,000)
at any time.
5.2 Borrowings. Borrower will not sell, discount or otherwise transfer
any account receivable or any note, draft or other evidence of indebtedness,
except to Bank or except to a financial institution at face value for deposit or
collection purposes only and without any fee other than fees normally charged by
the financial institution for deposit or collection services. Borrower will not
borrow any money, become contingently liable to borrow money, nor enter any
agreement to directly or indirectly obtain borrowed money, except pursuant to
agreements made with Bank.
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<PAGE> 7
5.3 Sale of Assets, Liquidation or Merger. Borrower will neither
liquidate nor dissolve nor enter into any consolidation, merger, partnership or
other combination, nor convey, sell or lease all or the greater part of its
assets or business, nor acquire all or the greater part of the assets or
business of another; provided, however, Borrower may merge or consolidate with
another corporation, and may acquire all or the greater part of the assets or
business of another, if (a) Borrower is in compliance with the covenants of this
Agreement immediately following the consummation of such transaction, (b) the
aggregate compensation paid or to be paid by Borrower in connection with such
transaction does not exceed fifteen percent (15%) of Borrower's Tangible Net
Worth as of the last day of the calendar month immediately preceding the
calendar month in which such transaction is consummated, (c) the assets acquired
in connection with such transaction are not, following the consummation of such
transaction, subject to any lien or encumbrance in favor of any person or entity
other than Bank unless otherwise permitted by the terms of this Agreement, and
(d) if such transaction is a merger or consolidation, Borrower is the surviving
corporation.
5.4 Loans, Advances and Guaranties. Borrower will not, except in the
ordinary course of business as currently conducted, make any loans or advances,
become a guarantor or surety, pledge its credit or properties in any manner or
extend credit; except, however, Borrower may offer, up to a maximum of Fifteen
Million Dollars ($15,000,000), its unsecured guarantee to its subsidiaries
located in Malaysia and Thailand.
5.5 Investments. Borrower will not purchase the debt or equity of
another person or entity except for savings accounts and certificates of deposit
from banks with deposits in excess of Five Hundred Million Dollars
($500,000,000), direct U.S. Government obligations and commercial paper issued
by corporations with the top ratings of Moody's or Standard & Poor's, provided
all such permitted investments shall mature within one year of purchase.
5.6 Payment of Dividends. Borrower will not declare or pay any
dividends, other than a dividend payable in its own common stock, or authorize
or make any other distribution with respect to any of its stock now or hereafter
outstanding, unless, subsequent to the payment of such dividend or distribution,
Borrower will be in compliance with the covenants contained in this Agreement.
5.7 Affiliate Transactions. Borrower will not transfer any property to
an affiliate or subsidiary, except for value received in the normal course of
business as business would be conducted with an unrelated or unaffiliated
entity. In no event shall management fees or fees for services be paid by
Borrower to any such affiliate without Bank's prior written approval.
5.8 Lease Obligations. Borrower will not incur new lease obligations as
lessee which would result in aggregate lease payments for any fiscal year
exceeding One Million Five Hundred Thousand Dollars ($1,500,000). Each said
lease shall be of equipment or real property needed by Borrower in the ordinary
course of its business.
SECTION 6. EVENTS OF DEFAULT
The occurrence of any of the following events ("Events of Default")
shall terminate any obligation on the part of Bank to make or continue the Loan
and automatically, unless otherwise provided under the Note, shall make all sums
of interest and principal and any other amounts owing under the Loan immediately
due and payable, without notice of default, presentment or demand for payment,
protest or notice of nonpayment or dishonor, or any other notices or demands:
-7-
<PAGE> 8
6.1 Borrower shall fail to pay when due any principal payment, or shall
fail to pay within ten (10) days of the date when due any interest or other
payment, required under the terms of the Note, this Agreement or any of the
other Loan Documents; or
6.2 Any default shall occur under the Note; or
6.3 Any of the following events or conditions shall occur or exist:
(a) Richard Jaffe, Irving Jaffe and/or Neil Braverman or their
respective affiliates shall cease to own or control, in the aggregate, at least
twenty percent (20%) of the issued and outstanding stock of Borrower; or
(b) Any person, entity or affiliated group other than Richard Jaffe,
Irving Jaffe and/or Neil Braverman or their respective affiliates shall own or
control twenty percent (20%) or more of the issued and outstanding stock of
Borrower; or
(c) Borrower and/or one or more subsidiaries of Borrower shall cease
to own or control at least eighty percent (80%) of the issued and outstanding
stock of any subsidiary of Borrower.
SECTION 7. MISCELLANEOUS PROVISIONS
7.1 Additional Remedies. The rights, powers and remedies given to Bank
hereunder shall be cumulative and not alternative and shall be in addition to
all rights, powers and remedies given to Bank by law against Borrower or any
other person, including but not limited to Bank's rights of setoff or banker's
lien.
7.2 Nonwaiver. Any forbearance or failure or delay by Bank in exercising
any right, power or remedy hereunder shall not be deemed a waiver thereof and
any single or partial exercise of any right, power or remedy shall not preclude
the further exercise thereof. No waiver shall be effective unless it is in
writing and signed by an officer of Bank.
7.3 Inurement. The benefits of this Agreement shall inure to the
successors and assigns of Bank and the permitted successors and assignees of
Borrower, and any assignment by Borrower without Bank's consent shall be null
and void.
7.4 Applicable Law. This Agreement and all other agreements and
instruments required by Bank in connection therewith shall be governed by and
construed according to the laws of the State of California.
7.5 Severability. Should any one or more provisions of this Agreement be
determined to be illegal or unenforceable, all other provisions nevertheless
shall be effective. In the event of any conflict between the provisions of this
Agreement and the provisions of any note or reimbursement agreement evidencing
any indebtedness hereunder, the provisions of such note or reimbursement
agreement shall prevail.
7.6 Integration Clause. Except for documents and instruments
specifically referenced herein, this Agreement constitutes the entire agreement
between Bank and Borrower regarding the Loan and all prior communications verbal
or written between Borrower and Bank shall be of no further effect or
evidentiary value.
7.7 Construction. The section and subsection headings herein are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
-8-
<PAGE> 9
7.8 Amendments. This Agreement may be amended only in writing signed by
all parties hereto.
7.9 Counterparts. Borrower and Bank may execute one or more counterparts
to this Agreement, each of which shall be deemed an original, but when together
shall be one and the same instrument.
SECTION 8. SERVICE OF NOTICES
8.1 Any notices or other communications provided for or allowed
hereunder shall be effective only when given by one of the following methods and
addressed to the respective party at its address given with the signatures at
the end of this Agreement and shall be considered to have been validly given:
(a) upon delivery, if delivered personally; (b) upon receipt, if mailed, first
class postage prepaid, with the United States Postal Service; (c) on the next
business day, if sent by overnight courier service of recognized standing; and
(d) upon telephoned confirmation of receipt, if telecopied.
8.2 The addresses to which notices or demands are to be given may be
changed from time to time by notice delivered as provided above.
THIS AGREEMENT is executed on behalf of the parties by duly authorized
officers as of the date first above written.
<TABLE>
<S> <C>
UNION BANK OF CALIFORNIA, N.A. SAFESKIN CORPORATION
By: /s/ BRUCE BRESLAU By: /s/ DAVID L. MORASH
-------------------------- ---------------------------------
Title Vice President Title Executive Vice-President and
-------------------------- Chief Financial Officer
---------------------------------
By: By:
-------------------------- ---------------------------------
Title: Title
-------------------------- ---------------------------------
Address: 530 "B" Street, 4th Floor Address: 12671 High Bluff Drive, Building "B"
San Diego, California 92186-5324 San Diego, California 92130
Attention: Bruce Breslau, Vice President Attention: David Morash, Chief Financial Officer
Telecopier: (619)230-3766 Telecopier: (619)350-2381
Telephone: (619)230-3758 Telephone: (619)350-2108
</TABLE>
-9-
<PAGE> 1
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
FOR THREE MONTHS ENDED FOR SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic:
Net Income ................... $14,996,144 $ 9,203,132 $28,310,506 $17,693,608
=========== =========== =========== ===========
Weighted average number of
shares of common stock
outstanding .................. 53,849,094 52,053,816 53,319,341 51,952,422
Net income per common
share ....................... $ 0.28 $ 0.18 $ 0.53 $ 0.34
=========== =========== =========== ===========
Diluted:
Net Income ................... $14,996,144 $ 9,203,132 $28,310,506 $17,693,608
=========== =========== =========== ===========
Weighted average number of
shares of common stock
outstanding .................. 53,849,094 52,053,816 53,319,341 51,952,422
Net effect of dilutive stock
options--based on the treasury
stock method using average
market price ................. 7,271,377 5,602,964 7,558,875 5,584,759
----------- ----------- ----------- -----------
Total weighted average number
of shares of common stock and
common stock equivalents
outstanding .................. 61,120,471 57,656,780 60,878,216 57,537,181
=========== =========== =========== ===========
Net income per common
share ....................... $ 0.25 $ 0.16 $ 0.47 $ 0.31
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 11,962,457
<SECURITIES> 0
<RECEIVABLES> 24,882,778
<ALLOWANCES> 0
<INVENTORY> 31,216,976
<CURRENT-ASSETS> 11,444,252
<PP&E> 79,736,623
<DEPRECIATION> 0
<TOTAL-ASSETS> 190,768,130
<CURRENT-LIABILITIES> 30,275,340
<BONDS> 0
0
0
<COMMON> 539,814
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 190,768,130
<SALES> 111,938,431
<TOTAL-REVENUES> 111,938,431
<CGS> 53,344,413
<TOTAL-COSTS> 53,344,413
<OTHER-EXPENSES> 3,514,219
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (159,666)
<INCOME-PRETAX> 31,456,117
<INCOME-TAX> 3,145,611
<INCOME-CONTINUING> 28,310,506
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,310,506
<EPS-PRIMARY> .47
<EPS-DILUTED> .47
</TABLE>
