<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 September 30, 1999
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)
(858) 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.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT OCTOBER 31, 1999
----- -------------------------------
<S> <C>
Common Stock, par value $0.01 per share 55,515,909
Treasury Stock, par value $0.01 per share 1,999,900
</TABLE>
<PAGE> 2
SAFESKIN CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C> <C>
PART I: Financial Information 3
ITEM 1. Financial Statements..................................................................................... 3
Condensed Consolidated Balance Sheets at September 30, 1999 and December 31, 1998........................ 4
Condensed Consolidated Statements of Operations for the three months ended September 30, 1999 and 1998... 5
Condensed Consolidated Statements of Operations for the nine months ended September 30, 1999 and 1998.... 6
Consolidated Statements of Comprehensive Income for the three months ended September 30, 1999 and 1998... 7
Consolidated Statements of Comprehensive Income for the nine months ended September 30, 1999 and 1998.... 8
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 1998... 9
Notes to Condensed Consolidated Financial Statements..................................................... 10
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 11
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk................................................17
PART II: Other Information........................................................................................ 21
ITEM 4. Submission of Matters to a Vote of Security Holders.......................................................21
ITEM 6. Exhibits and Reports on Form 8-K......................................................................... 21
SIGNATURES............................................................................................... 22
</TABLE>
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
<CAPTION>
INDEX PAGE
- ----- ------
<S> <C>
Condensed Consolidated Balance Sheets at September 30, 1999 and December 31, 1998............................ 4
Condensed Consolidated Statements of Operations for the three months ended September 30, 1999 and 1998....... 5
Condensed Consolidated Statements of Operations for the nine months ended September 30, 1999 and 1998........ 6
Consolidated Statements of Comprehensive Income for the three months ended September 30, 1999 and 1998....... 7
Consolidated Statements of Comprehensive Income for the nine months ended September 30, 1999 and 1998........ 8
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 1998........ 9
Notes to Condensed Consolidated Financial Statements......................................................... 10
</TABLE>
3
<PAGE> 4
SAFESKIN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999 DECEMBER 31,
(UNAUDITED) 1998
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 6,825,739 $ 9,416,802
Accounts receivable, net ......................... 36,002,141 32,511,412
Inventory ........................................ 38,723,299 37,056,821
Other current assets ............................. 11,322,179 9,829,335
------------- -------------
Total current assets ...................... 92,873,358 88,814,370
Property, plant and equipment, net ..................... 137,591,068 119,456,352
Deferred taxes and other assets ........................ 41,687,650 40,690,386
------------- -------------
Total assets .............................. $ 272,152,076 $ 248,961,108
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................. $ 9,416,535 $ 8,661,602
Accrued liabilities .............................. 18,637,516 24,515,378
Current portion of long-term debt ................ 7,500,000 4,500,000
------------- -------------
Total current liabilities ................. 35,554,051 37,676,980
Long-term debt ......................................... 107,213,795 87,731,158
Other long-term liabilities ............................ 4,210,462 2,140,682
------------- -------------
Total liabilities ......................... 146,978,308 127,548,820
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; 55,515,309 shares
and 54,600,399 shares outstanding .......... 555,153 546,004
Additional paid-in-capital ....................... 78,978,179 75,360,306
Treasury stock, at cost; 1,999,900 shares in
1999 and 1998 .............................. (74,214,168) (73,589,169)
Accumulated other comprehensive loss ............. (43,698,457) (26,993,003)
Retained earnings ................................ 163,553,061 146,088,150
------------- -------------
Total shareholders' equity ................. 125,173,768 121,412,288
------------- -------------
Total liabilities and shareholders' equity . $ 272,152,076 $ 248,961,108
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
4
<PAGE> 5
SAFESKIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Net sales .......................... $ 60,921,718 $ 59,967,870
Cost of goods sold ................. 34,469,592 29,060,838
------------ ------------
Gross profit ............. 26,452,126 30,907,032
------------ ------------
Operating expenses:
Selling ........................ 6,896,128 6,737,474
Research and development ....... 1,777,409 1,371,922
General and administrative ..... 8,052,670 8,773,480
------------ ------------
Total operating expenses . 16,726,207 16,882,876
------------ ------------
Income from operations ... 9,725,919 14,024,156
Interest expense, net .............. 2,140,785 758,145
Other income, net .................. (190,551) (1,575,781)
------------ ------------
Income before income tax provision . 7,775,685 14,841,792
Income tax provision ............... 155,514 329,644
------------ ------------
Net income ......................... $ 7,620,171 $ 14,512,148
============ ============
Per share amounts:
Earnings per share of common stock
and common stock equivalents:
Basic $ 0.14 $ 0.27
Diluted 0.14 0.24
Weighted average number of shares of
common stock and common stock
equivalents outstanding:
Basic 53,762,676 53,534,207
Diluted 56,164,975 60,528,350
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
5
<PAGE> 6
SAFESKIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Net sales ................................. $ 161,757,286 $ 171,906,301
Cost of goods sold ........................ 87,189,098 82,405,251
------------- -------------
Gross profit .................... 74,568,188 89,501,050
------------- -------------
Operating expenses:
Selling ............................... 22,639,494 18,509,596
Research and development .............. 4,976,646 4,886,141
General and administrative ............ 22,141,249 20,824,688
------------- -------------
Total operating expenses ........ 49,757,389 44,220,425
------------- -------------
Income from operations .......... 24,810,799 45,280,625
Interest expense, net ..................... 5,839,519 598,479
Other expense (income), net ............... 473,787 (1,615,763)
------------- -------------
Income before income tax provision ........ 18,497,493 46,297,909
Income tax provision ...................... 1,032,582 3,475,255
------------- -------------
Net income ................................ $ 17,464,911 $ 42,822,654
============= =============
Per share amounts:
Earnings per share of common stock
and common stock equivalents:
Basic $ 0.33 $ 0.82
Diluted 0.31 0.71
Weighted average number of shares of common
stock and common stock equivalents
outstanding:
Basic 53,134,457 52,088,524
Diluted 56,594,048 60,451,759
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
6
<PAGE> 7
SAFESKIN CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Net income ................................... $ 7,620,171 $ 14,512,148
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (16,827,415) 7,294,106
------------ ------------
Comprehensive income (loss) .................. $ (9,207,244) $ 21,806,254
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
7
<PAGE> 8
SAFESKIN CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Net income ..................................................................... $ 17,464,911 $ 42,822,654
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments .................................. (16,705,454) 13,542,155
------------ ------------
Comprehensive income ........................................................... $ 759,457 $ 56,364,809
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
8
<PAGE> 9
SAFESKIN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income ....................................... $ 17,464,911 $ 42,822,654
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization ............... 11,310,634 8,795,714
Exchange gain ............................... (2,466,160) (453,193)
Non-cash severance expense .................. -- 1,275,375
Loss on sale of equipment ................... 29,253 14,501
Changes in operating assets and liabilities:
Accounts receivable .................... (3,633,020) (13,768,251)
Inventory .............................. (2,794,039) (12,040,695)
Other assets ........................... (4,290,387) (7,572,955)
Accounts payable and accrued liabilities (1,757,003) (5,549,071)
------------- -------------
Net cash provided by operating activities ... 13,864,189 13,524,079
------------- -------------
Cash flows from investing activities:
Net cash paid for acquisitions ................... -- (14,346,460)
Proceeds from sale of subsidiary ................. -- 574,703
Purchases of property, plant and equipment ....... (41,819,411) (44,465,409)
Proceeds from sale of equipment .................. 4,566 --
------------- -------------
Net cash used in investing activities ....... (41,814,845) (58,237,166)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock ........... 3,627,023 7,019,739
Repurchase of common stock ....................... (624,999) (70,432,858)
Borrowings of debt ............................... 279,101,662 170,283,534
Repayments of debt ............................... (256,619,026) (47,932,575)
------------- -------------
Net cash provided by financing activities ... 25,484,660 58,937,840
------------- -------------
Effect of exchange rate changes on cash ................ (125,067) 1,056,620
------------- -------------
Net increase (decrease) in cash and cash equivalents ... (2,591,063) 15,281,373
Cash and cash equivalents at beginning of period ....... 9,416,802 23,916,959
------------- -------------
Cash and cash equivalents at end of period ............. $ 6,825,739 $ 39,198,332
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
9
<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, 1998. The December 31,
1998 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 September 30, 1999 consisted of $6,227,000, $320,000 and
$32,176,000 for raw materials, work in process and finished goods,
respectively. At December 31, 1998, inventories consisted of $5,587,000,
$909,000 and $30,561,000 for raw materials, work in process and finished
goods, respectively.
3. 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 September 30,
1999, 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 A2 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 using A2 rated
international institutions as counterparties to the hedging contracts
minimizes the risk of non-performance.
4. As of March 5, 1999, the Company entered into a seven-year lease for a new
corporate headquarters campus facility ("the Lease"). At the expiration of
the Lease, the Company has the option to purchase the land and land
improvements. As of June 30, 1999, the Lease term was reduced to March 31,
2000 and in connection with such Lease term reduction, the lender's maximum
loan commitment was reduced from $60 million to $17.5 million. In connection
with these modifications, the Company has elected to exercise its option to
purchase the land and land improvements up to a maximum of $17.5 million on
or before March 31, 2000. There have been no additional modifications or
changes to the Lease since June 30, 1999. Further disclosure relating to the
Company's commitments is included in Notes 9 and 13 in the Notes to the 1998
Consolidated Financial Statements.
5. As of September 23, 1999, the shareholders approved a Stock Purchase Plan
(the "Plan"). The Board of Directors reserved 1,000,000 shares of Common
Stock for the Plan. The Plan provides eligible employees of the Company
with a means to purchase, through payroll deductions, Shares of Common Stock
at a discount consistent with the provisions of the Internal Revenue Code of
1986, as amended.
10
<PAGE> 11
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
Safeskin has achieved its current sales levels principally due to the
implementation of sales and marketing programs, the introduction of new products
and growth in markets for its products. Safeskin introduced lightly powdered
medical gloves in 1989, powder-free medical gloves in 1990, HypoClean(R)
powder-free gloves in 1992, powder-free latex surgical gloves in 1994 and
various high technology and scientific nitrile gloves in 1995. In 1997, Safeskin
began selling a medical examination glove made of nitrile, a non-latex material.
Additionally, in 1997, as a result of its acquisition of the synthetic glove
business of Tactyl Technologies, Inc. ("Tactyl"), Safeskin began selling
Tactylon(R) synthetic examination and surgical gloves. In February 1998, as a
result of its acquisition of Absolute Quality Leadership, Inc. ("AQL"), Safeskin
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. In 1999,
Safeskin introduced a coated vinyl glove to the marketplace and has made
improvements to its existing nitrile glove. Although Safeskin 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.
Safeskin's net sales are derived from the sale of finished products, net of
contractually allowable rebates, incentives, fees and allowance for estimated
returns. These rebates are provided to distributors for the resale of Safeskin's
products in specific volumes to specified end user customers and fees are
provided to group purchasing organizations based on sales made to their member
organizations. Safeskin estimates allowable rebates, on a monthly basis, through
the analysis of actual sales information from distributors, Safeskin's
projections of distributor inventories, contractual arrangements and historical
and projected trends related to actual rebates issued. Safeskin establishes an
allowance for estimated returns based on historical return patterns and
estimated future returns. 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 primarily as a result of the tax-free
status of Safeskin's foreign manufacturing operations. Safeskin's existing
Thailand manufacturing facilities have been granted tax-free status through 2003
and have been granted a reduced tax rate through 2007. In 1998, Safeskin built
new production facilities in Thailand, and applied for and received similar
tax-free status for these operations. These new facilities in Thailand have been
granted tax-free status expiring in 2006 through 2007 and were granted a reduced
tax rate status expiring in 2010 through August 2012. Safeskin's Malaysian
manufacturing operations were granted five years of tax-free status which
expired on September 30, 1998. The expiration of this tax-free status will not
have a material adverse effect upon Safeskin's operations as substantially all
of the Malaysian manufacturing operations were transferred to Thailand during
the first quarter of 1999.
Restructuring
During 1996, Safeskin announced plans to move all of its remaining latex
examination glove production from its Malaysian facility to its Thailand
facility. Safeskin also announced that the Malaysian facility would continue to
operate as Safeskin's manufacturing source of higher-value synthetic, surgical,
and scientific products. At December 31, 1996, the Malaysian facility was
considered held for sale. During 1997, Safeskin 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. During 1998, Safeskin
successfully increased its examination glove production capacity at its existing
Thailand facility and in 1998, Safeskin commenced operations at its new 54-acre
manufacturing facility in Thailand. This facility was constructed to provide
additional capacity for the production of Safeskin's synthetic, surgical, and
scientific products. As a result of this increased production capacity in
Thailand for specialized gloves, during 1998 Safeskin decided to move all of its
remaining examination, surgical, and synthetic glove production from its Ipoh,
Malaysia and Vista, California production facilities to Safeskin's manufacturing
facilities in Thailand by the end of the first quarter of 1999. In addition,
Safeskin completed the integration of AQL in the fourth quarter of 1998 by
relocating AQL's offices from Santa Maria, California to Safeskin's corporate
headquarters in San Diego, California. In connection with the closure of
Safeskin's facilities in Ipoh, Malaysia and Vista and Santa Maria, California,
(the "closed facilities"), Safeskin recognized an expense of $14,331,000 in the
fourth quarter of 1998. This expense consists of approximately $5,134,000
related to fixed assets written down to estimated fair value, $3,883,000 related
to employee
11
<PAGE> 12
termination costs, $3,335,000 related to impairment of goodwill associated with
the Tactyl acquisition, $1,535,000 related to the write-off of leased equipment
and the costs to renovate a leased facility, and approximately $444,000
associated with various other unusual charges. All remaining assets of the
closed facilities were assumed to be scrapped. The net book value of assets
expected to be disposed of totaled approximately $14 million as of December 31,
1998. As of September 30, 1999, Safeskin had not yet disposed of a significant
portion of its fixed assets at the closed facilities (primarily those at its
Ipoh, Malaysia facility), which were written down to estimated fair value.
Safeskin intends to dispose of these assets in 1999 and in the first half of
2000. There have been no significant changes to the carrying amount of fixed
assets held for disposal. In connection with the restructuring activities
related to the closure of Safeskin's facilities in Ipoh, Malaysia and Vista and
Santa Maria, California, Safeskin accrued restructuring charges totaling
$5,158,889 at December 31, 1998. As of September 30, 1999, there have been no
significant changes in Safeskin's previous estimates of accrued restructuring
charges. These charges related primarily to liabilities associated with
anticipated employee termination costs totaling $3,809,545 and costs associated
with the write-off of an equipment lease and costs to renovate a leased facility
totaling $1,349,344. As a result of the restructuring activities, Safeskin
terminated approximately 1,800 employees primarily in Malaysia, in the first and
second quarters of 1999.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998
Net sales for the three months ended September 30, 1999 were $60,921,000 which
represents a 1.6% increase over net sales of $59,968,000 for the same period in
1998. The predominant causes for the increase in sales were an increase in unit
volumes sold and the shift in product mix to higher priced powder-free gloves in
the 1999 period as compared to the 1998 period, offset by lower average selling
prices.
Cost of goods sold increased 18.6% from $29,061,000 for the three months ended
September 30, 1998 to $34,469,000 for the three months ended September 30, 1999.
As a percentage of net sales, cost of goods sold increased from 48.5% for the
three months ended September 30, 1998 to 56.7% for the same period in 1999. This
increase in cost of goods sold as a percentage of net sales was primarily
attributable to lower average selling prices, the negative effects of foreign
currency in the current period due to the strengthening of the Thai baht,
start-up production costs associated with Safeskin's new plant in Thailand and
wind-down production costs associated with relocating significant glove capacity
from Malaysia to Thailand. In addition, costs of goods sold has been adversely
affected by higher air freight costs in the current period due to low inventory
levels of Safeskin's synthetic glove products associated with the inability of
the new manufacturing facilities in Thailand to increase capacity sufficiently
to meet U.S. demand for these products. These factors were partially offset
by lower latex costs, an increased mix of higher-margin powder-free gloves, and
lower costs associated with the shift of production from Malaysia to Thailand.
As a result of the above factors, gross profits decreased 14.4% from $30,907,000
for the three months ended September 30, 1998 to $26,452,000 for the three
months ended September 30, 1999.
Selling expenses increased 2.4% from $6,737,000 for the three months ended
September 30, 1998 to $6,896,000 for the three months ended September 30, 1999.
As a percentage of net sales, selling expenses were 11.3% for both the three
months ended September 30, 1999 and 1998.
Research and development expenses increased 29.6% from $1,372,000 for the three
months ended September 30, 1998 to $1,777,000 for the three months ended
September 30, 1999. As a percentage of net sales, these expenses increased from
2.3% for the three months ended September 30, 1998 to 2.9% for the three months
ended September 30, 1999. The increase in research and development expenses
pertain to increased costs associated with developing and testing new products
as well as improving upon the quality of Safeskin's existing glove products.
Various new products are scheduled for introduction in the fourth quarter of
1999 and in the first half of 2000. In the third quarter of 1999, Safeskin
enhanced the quality of its existing nitrile glove and introduced a coated vinyl
glove to the marketplace.
General and administrative expenses decreased 8.2% from $8,773,000 for the three
months ended September 30, 1998 to $8,053,000 for the three months ended
September 30, 1999. As a percentage of net sales, general and administrative
expenses decreased from 14.6% for the 1998 period to 13.2% for the 1999 period.
The decrease in general and administrative expenses as a percentage of net sales
was caused primarily by decreased compensation costs in the 1999 period. For the
three months ended September 30, 1998, Safeskin terminated certain employees and
incurred non-cash severance expenses in conjunction with these terminations
totaling approximately $1.3 million. Excluding these additional compensation
costs in the 1998 period, general and administrative expenses as a percentage of
net sales would have been 12.5%. The increase in general and administrative
expenses, excluding these additional compensation costs in the prior year, was
caused primarily by increased costs associated with Safeskin's efforts to
improve and streamline its information technology systems and services as well
as increased legal and related expenses associated with product liability and
other lawsuits.
12
<PAGE> 13
Income from operations decreased 30.6% from $14,024,000 for the three months
ended September 30, 1998 to $9,726,000 for the three months ended September 30,
1999. Operating margins decreased from 23.4% in the 1998 period to 16.0% in the
1999 period.
Interest expense, net, increased from $758,000 of interest expense for the three
months ended September 30, 1998 to $2,141,000 of interest expense for the three
months ended September 30, 1999, primarily due to the fact that in 1999 Safeskin
had incurred interest expense on average debt outstanding during the period
totalling approximately $116,000,000. In 1998, Safeskin had incurred interest
expense on average debt outstanding totaling approximately $69,000,000.
Other income, net, decreased from $1,576,000 of other income for the three
months ended September 30, 1998 to $191,000 of other income for the three months
ended September 30, 1999. In 1998, Safeskin incurred significant net foreign
currency transaction gains due to the strengthening of the Thai baht and the
German deutschmark. In 1999, Safeskin was not significantly impacted by net
foreign currency transaction gains or losses.
Provision for income taxes decreased from $330,000 for the three months ended
September 30, 1998 to $156,000 for the three months ended September 30, 1999.
The income tax provision recorded in both 1998 and 1999 was less than United
States statutory rates due primarily to the tax-free status of a significant
portion of Safeskin's foreign manufacturing operations and the effect of a
transaction entered into by two of Safeskin's subsidiaries, during the third
quarter of 1998, that qualified as a Section 351 Exchange, as defined in Section
351 of the Internal Revenue Code.
Net income decreased 47.5% from $14,512,000 for the three months ended September
30, 1998 to $7,620,000 for the three months ended September 30, 1999. Due to the
foregoing factors, net income as a percentage of net sales decreased from 24.2%
in 1998 to 12.5% in 1999.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Net sales for the nine months ended September 30, 1999 were $161,757,000 which
represents a 5.9% decrease from net sales of $171,906,000 for the same period in
1998. The predominant causes for the sales decline were a decrease in unit
volumes sold and lower average selling prices by the medical division in the
1999 period as compared to the 1998 period. Safeskin began operating certain of
its new manufacturing facilities in the second half of 1998, which enabled
Safeskin to increase its production capacity during 1998. From July 1997 to June
1998, Safeskin operated with its customers on an allocation of product basis, as
Safeskin was only able to fill a portion of each distributor's orders. As
Safeskin increased production capacity, Safeskin's sales personnel began a new
and increased sales program directed at new and current end-user customers. As
part of this sales program, Safeskin, its distributors and certain end-users
entered into new three-way contracts providing for the pricing and supply of
Safeskin products to such end-users. During the third and fourth quarter of
1998, Safeskin's distributors increased their orders to enable them to fulfill
new sales they anticipated would be placed pursuant to these contracts. Safeskin
expected these trends to continue into the first quarter of 1999. However,
end-users did not purchase products under the new contracts as quickly as
anticipated and Safeskin discovered that its major distributors had higher
inventory levels than anticipated. In addition, during the first quarter of
1999, Safeskin experienced a longer than anticipated sales cycle for signing new
contracts. As a result, in March 1999, Safeskin publicly announced its
expectation that sales and earnings for the first quarter and full year 1999
would be lower than anticipated.
Cost of goods sold increased 5.8% from $82,405,000 for the nine month period
ended September 30, 1998 to $87,189,000 for the nine months ended September 30,
1999. As a percentage of net sales, cost of goods sold increased from 47.9% for
the nine months ended September 30, 1998 to 53.9% for the same period in 1999.
This increase in cost of goods sold as a percentage of net sales was
attributable to lower average selling prices, the negative effects of foreign
currency in the current period due to the strengthening of the Thai baht,
start-up production costs associated with Safeskin's new plant in Thailand and
wind-down production costs associated with relocating significant glove capacity
from Malaysia to Thailand. These factors were partially offset by an increased
mix of higher-margin powder-free gloves, lower latex costs, and lower costs
associated with the shift of production from Malaysia to Thailand. As a result
of the above factors, gross profits decreased 16.7% from $89,501,000 for the
nine months ended September 30, 1998 to $74,568,000 for the nine months ended
September 30, 1999. For the remainder of fiscal 1999, Safeskin anticipates that
gross profit margins will continue to be negatively affected by startup
production costs associated with transferring operations to the new Thailand
facility and continued pricing pressures in the industry.
Selling expenses increased 22.3% from $18,509,000 for the nine months ended
September 30, 1998 to $22,639,000 for the nine months ended September 30, 1999.
As a percentage of net sales, selling expenses increased from 10.8% for the nine
months ended September 30, 1998 to 14.0% for the same period in 1999. The
increase in selling expenses as a percentage of net sales can be
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attributed to lower sales levels for the nine months ended September 30, 1999
and increased selling expenses related to Safeskin's efforts to expand its
business in scientific and international markets.
Research and development expenses increased 1.9% from $4,886,000 for the nine
months ended September 30, 1998 to $4,977,000 for the nine months ended
September 30, 1999. As a percentage of net sales, these expenses increased from
2.8% for the nine months ended September 30, 1998 to 3.1% for the nine months
ended September 30, 1999. The increase in research and development expenses
pertains to increased costs associated with developing and testing new products
as well as improving upon the quality of Safeskin's existing glove products.
Various new products are scheduled for introduction in the fourth quarter of
1999 and in the first half of 2000. In the third quarter of 1999, Safeskin
enhanced the quality of its existing nitrile glove and introduced a coated vinyl
glove to the marketplace.
General and administrative expenses increased 6.3% from $20,825,000 for the nine
months ended September 30, 1998 to $22,141,000 for the nine months ended
September 30, 1999. As a percentage of net sales, general and administrative
expenses increased from 12.1% for the 1998 period to 13.7% for the 1999 period.
The increase in general and administrative expenses as a percentage of net sales
can be attributed to lower sales levels for the nine months ended September 30,
1999 and increased costs associated with its efforts to improve and streamline
its information technology systems and services as well as increased legal and
related expenses associated with product liability and other lawsuits.
Income from operations decreased 45.2% from $45,281,000 for the nine months
ended September 30, 1998 to $24,811,000 for the nine months ended September 30,
1999. Operating margins decreased from 26.3% in the 1998 period to 15.3% in the
1999 period.
Interest expense, net, increased from $599,000 of interest expense for the nine
months ended September 30, 1998 to $5,839,000 of interest expense for the nine
months ended September 30, 1999, and is primarily due to the fact that in 1999
Safeskin had incurred interest expense on debt outstanding during the period. In
1998, Safeskin did not incur debt until the beginning of the second quarter
1998, and generated investment returns on its cash balances. The average debt
outstanding in 1998 was substantially less than the average debt outstanding in
1999.
Other expense, (income) net, changed from $1,616,000 of other income for the
nine months ended September 30, 1998 to $474,000 of other expense for the nine
months ended September 30, 1999. In 1998, Safeskin incurred significant net
foreign currency transaction gains due primarily to the strengthening of the
Thai baht and the German deutschmark. In 1999, Safeskin was not significantly
impacted by net foreign currency transaction gains or losses.
Provision for income taxes decreased from $3,475,000 for the nine months ended
September 30, 1998 to $1,033,000 for the nine months ended September 30, 1999.
The income tax provision recorded in both 1998 and 1999 was less than United
States statutory rates due primarily to the tax-free status of a significant
portion of Safeskin's foreign manufacturing operations and the effect of a
transaction entered into by two of Safeskin's subsidiaries, during the third
quarter of 1998, that qualified as a Section 351 Exchange, as defined in Section
351 of the Internal Revenue Code.
Net income decreased 59.2% from $42,823,000 for the nine months ended September
30, 1998 to $17,465,000 for the nine months ended September 30, 1999. Due to the
foregoing factors, net income as a percentage of net sales decreased from 24.9%
to 10.8% in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Safeskin began operating certain of its new manufacturing facilities in the
second half of 1998, which enabled Safeskin to increase its production capacity
during 1998. From July 1997 to June 1998, Safeskin operated with its customers
on an allocation of product basis, as Safeskin was only able to fill a portion
of each distributor's orders. As Safeskin increased production capacity,
Safeskin's sales personnel began a new and increased sales program directed at
new and current end-user customers. As part of this sales program, Safeskin, its
distributors and certain end-users entered into new three-way contracts
providing for the pricing and supply of Safeskin products to such end-users.
During the third and fourth quarter of 1998, Safeskin's distributors increased
their orders from Safeskin to enable them to fulfill new sales they anticipated
would be placed pursuant to these contracts. Safeskin expected these trends to
continue into the first quarter of 1999. However, end-users did not purchase
products under the new contracts as quickly as anticipated and Safeskin
discovered that its major distributors had higher inventory levels than
anticipated. In addition, during the first quarter of 1999, Safeskin experienced
a longer than anticipated sales cycle for signing new contracts. As a result,
Safeskin's inventory levels as of March 31, 1999 increased significantly from
$37,057,000 at December 31, 1998 to $44,798,000 at March 31, 1999. As of
September 30, 1999, Safeskin's inventory levels declined to $38,723,000 from its
higher inventory levels as of March 31, 1999.
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During the nine months ended September 30, 1999 and 1998, Safeskin added capital
assets of approximately $41,819,000 and $44,465,000, respectively, primarily for
the expansion of Safeskin's foreign manufacturing operations.
In 1997 and 1998, Safeskin built a latex concentrate plant in Thailand. The
output of the plant currently supplies approximately 70% of the latex
concentrate required by Safeskin's factories in Thailand for the manufacture of
its disposable latex gloves. Safeskin believes that this plant allows it to
integrate its manufacturing processes to gain better control over the quality,
cost and reliability of latex supplies.
Safeskin is expanding its Thailand manufacturing operations and has transferred
manufacturing capacity from California and Malaysia to capitalize on the
increased production efficiencies and lower operating costs in Thailand that
Safeskin expects to realize. Safeskin completed construction of a fifth building
and related machinery at Safeskin's existing Hat Yai, Thailand facility in 1998.
This building houses 22 high-speed and product-flexible dipping production lines
which were commissioned throughout 1998, beginning in the second quarter, and
increased production capacity by an additional 1.5 billion gloves annually as of
the end of 1998. During 1999, Safeskin's expansion plans include the
construction of a second manufacturing facility in Sadao, Thailand that is
expected to produce latex and synthetic surgical, high-technology and scientific
and medical examination gloves. Construction of the new manufacturing facility
in Sadao, Thailand began in the fourth quarter of 1997 after
approval by the Thailand Board of Investment. Four production buildings have
been constructed on this site. The first building provides additional capacity
for the production of Safeskin's surgical and cleanroom glove products and was
completed in the fourth quarter of 1998. The second building is expected to
house the expansion of Safeskin's Tactylon(R) synthetic medical examination and
surgical glove products and Safeskin's nitrile glove production. This building
is expected to increase by over 200 percent the production capacity of the
Tactylon(R) product line in comparison to the previous facility located in
Vista, California. Finally, the additional two buildings are expected to provide
Safeskin increased capacity for latex and synthetic medical examination,
surgical and scientific glove production. The new buildings, machines and
supporting infrastructure at the new Sadao manufacturing facility and the fifth
building at the Hat Yai facility are currently expected to cost approximately
$90 million in the aggregate, approximately $77 million of which has been
expended as of September 30, 1999. Safeskin believes that its significant
investment in its manufacturing operations has increased Safeskin's annualized
production capacity from approximately 3.5 billion gloves to approximately 5.5
billion gloves as of December 31, 1998. Financing for the total capital
expenditures is projected to come from internally generated funds and borrowings
from Safeskin's credit facilities.
In the fourth quarter of 1998, Safeskin began construction of a facility in
southern Thailand designed to manufacture boxes and ceramic glove formers for
its own use. This facility is expected to allow Safeskin to further integrate
its manufacturing operations to gain better control over the quality,
timeliness, cost and reliability of these products. This facility began initial
production in September 1999 and is expected to produce approximately 80% of
Safeskin's requirements when fully operational. The total expected costs for the
construction of these facilities is approximately $8 million, approximately $7
million of which has been expended as of September 30, 1999. This construction
is expected to be funded through internally generated cash and borrowings under
Safeskin's credit facilities.
During 1998, Safeskin had an unsecured two-year credit facility for financing
general working capital needs, up to a maximum of $40,000,000 in borrowings (the
"Revolving Credit Facility"). As of December 31, 1998, there was approximately
$12,000,000 outstanding under the Revolving Credit Facility. On July 30, 1998,
Safeskin, through its subsidiary Safeskin (B.V.I.) Limited ("Safeskin BVI"),
entered into and closed a credit agreement for a $100 million loan facility (the
"BVI Facility") with Union Bank of California, N.A., as Agent. The BVI Facility
was secured by a first priority lien on the Common Stock of Safeskin 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 had the option to accrue interest
on the BVI Facility at an annual rate equal to either (i) the base rate plus
0.25% or (ii) LIBOR plus 1.75%. As of December 31, 1998, there was approximately
$80,000,000 outstanding under the BVI Facility. During the second half of 1998,
Safeskin used a majority of the funds from the BVI Facility to repurchase
approximately two million shares of its Common Stock. The cost of the treasury
stock acquired in this share buyback was approximately $73,600,000 for the year
ended December 31, 1998. As of September 30, 1999, additional costs of
approximately $600,000 had been incurred in conjunction with this share buyback.
Borrowings above the cost of Safeskin's share buyback were used to finance (i)
Safeskin's ongoing investment in its Thailand facilities (ii) Safeskin's working
capital requirements and (iii) other general corporate purposes.
On March 5, 1999, Safeskin entered into a $100 million loan agreement, including
a $60 million term loan (the "Term Loan") and a $40 million revolving credit
facility (the "Revolver") both maturing in 2004. The Term Loan and the Revolver
bear interest at approximately LIBOR plus 1.625%, however, the rate may vary
according to certain financial ratios. Concurrently, Safeskin also closed a
private placement of $40 million of senior secured notes due 2009 (the "Notes")
with a final maturity of ten years and an average life of seven-years. The Notes
bear interest at an annual fixed rate of 6.89%. The Notes constitute senior debt
of Safeskin,
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ranking pari passu with Safeskin's other senior bank indebtedness. The proceeds
of the Term Loan, the Revolver and the Notes were used to repay amounts
outstanding under the Revolving Credit Facility and BVI Facility, which were
subsequently canceled. The Term Loan, Revolver, and the Notes are secured by
certain assets of Safeskin as well as a guarantee of all current and future
significant domestic subsidiaries. As of September 30, 1999, there was
approximately $115,000,000 outstanding under these credit facilities. As of
September 30, 1998, the Company had approximately $122,000,000 outstanding under
its 1998 Revolving Credit Facility and the BVI facility. As of June 30, 1999,
Safeskin amended certain of its covenants related to the Term Loan and Revolver.
On March 5, 1999, Safeskin also entered into a seven year lease for a new
corporate headquarters campus facility ("the Lease"). At the expiration of the
Lease, Safeskin has the option to purchase the land and land improvements. As of
June 30, 1999, the Lease term was reduced to March 31, 2000 and in connection
with such Lease term reduction, the lender's maximum loan commitment was reduced
from $60 million to $17.5 million. In connection with these modifications,
Safeskin has also elected to exercise its option to purchase the land and land
improvements up to a maximum of $17.5 million on or before March 31, 2000. There
have been no additional modifications or changes to the Lease since June 30,
1999.
YEAR 2000 READINESS DISCLOSURE
Overview
The Year 2000 Issue is the issue of whether information and non-information
technology systems will be able to accurately recognize and process
date-sensitive information involving dates in and beyond the Year 2000. Safeskin
relies, directly and indirectly, on information technology systems, such as
desktop computers, network hardware equipment and applications software, to
manage its business data and to perform a variety of administrative services
including, accounting, financial reporting, payroll and invoicing. Safeskin also
relies on non-information technology systems including office equipment,
security systems, telephone systems and process controllers, to control its
manufacturing systems and carry out its day-to-day operations. In addition,
third parties material to Safeskin's operations, such as suppliers, vendors and
customers, rely on information and non-information technology systems to manage
their businesses. All of these technology systems could potentially be affected
by the Year 2000 Issue.
In order to minimize the risk of Year 2000 related losses, Safeskin has
completed a comprehensive assessment of its Year 2000 Issue. Perot Systems
Corporation has been retained to provide resources to help Safeskin in
Safeskin's efforts to (i) identify and update or replace non-Year 2000 compliant
information and non-information technology systems that are material to
Safeskin's operations and (ii) develop contingency and business continuation
plans in the event that Safeskin is unable to timely address its Year 2000
Issue.
Safeskin's Year 2000 assessment involved the testing and analyzing of all
information technology equipment, software applications and non-information
technology systems used by Safeskin, and the evaluation of the Year 2000
preparedness of third parties critical to Safeskin's operations. As of September
30, 1999, Safeskin's Year 2000 assessment in each of these areas was complete.
The assessment revealed that two of the material software applications on which
Safeskin relied were not Year 2000 compliant. In early 1998, Safeskin began to
implement a Year 2000 compliant enterprise-wide business systems application.
Although Safeskin installed the application in order to improve the management
of its business data, the application is also expected to have the effect of
ensuring that a significant percentage of Safeskin's information technology
systems are Year 2000 compliant. This application was online at Safeskin's U.S.
facilities in January 1999 and Safeskin expects it to be online at the Southeast
Asian manufacturing facilities by the end of the fourth quarter of 1999.
Safeskin has developed preliminary remediation plans for each of the areas
targeted by the Year 2000 assessment. Specifically, non-Year 2000 compliant
information technology equipment, including obsolete hardware components and
outdated operating systems, BIOS or chip codes, will be updated or replaced.
Software applications that are not Year 2000 compliant are expected to be
converted or replaced by the end of the fourth quarter of 1999. Any
non-information technology systems or processors that are either non-Year 2000
compliant or suspect due to lack of information from the vendor have been
replaced or upgraded to a compliant version.
In addition, Safeskin requested confirmation that suppliers and customers who
are material to its operations are, or within a short period of time are
planning to become, Year 2000 compliant. This investigation did not reveal any
issues that would have a material adverse affect on Safeskin's business.
Safeskin approved and began implementing a final remediation plan for addressing
all known Year 2000 Issues in the fourth quarter of 1998. Safeskin's remediation
plan gave priority to those non-Year 2000 compliant technology systems
which are material to Safeskin's operations. Safeskin acquired resources from
Perot Systems Corporation to assist Safeskin in handling all remediation
efforts, including, if necessary, the replacement of any information technology
hardware or software, the upgrading of manufacturing
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systems and the changing of BIOS or chip codes. Safeskin continues to work with
Perot Systems Corporation in connection with Safeskin's remediation efforts in
order to avoid, to the extent possible, disruption of Safeskin's business
processes. Safeskin expects that contingency plans for all known Year 2000
Issues will be finalized in the fourth quarter of 1999.
Safeskin is also preparing contingency plans in the event that there is a
disruption to the business caused by Year 2000 data processing problems.
Although Safeskin anticipates complete remediation by late 1999, it is possible
that delays in the remediation process or Year 2000 issues caused by third party
trading partners could arise. Safeskin is assessing these issues and is
developing contingency plans that would provide for uninterrupted business
operations. Safeskin expects these contingency plans will be fully developed in
the fourth quarter of 1999.
Safeskin also plans to examine the Year 2000 readiness of any information or
non-information technology systems acquired in the future and develop
remediation and contingency plans as necessary.
Costs
Although the total costs associated with becoming Year 2000 compliant have not
been fully identified, Safeskin does not currently expect the costs of
remediating its Year 2000 Issues to be material to its operations, results of
operations or financial condition. As of September 30, 1999, Safeskin has spent
approximately $269,000 on Year 2000 Issues, primarily attributable to the cost
of conducting the Year 2000 assessment and developing a remediation plan.
The future cost of identifying and remediating Year 2000 Issues is expected to
be at least $38,000. Costs for replacements or modifications that would have
been necessary independent of Year 2000 Issues, including the approximately $1.0
million that will be spent to install the new enterprise-wide business
applications software at Safeskin's Asian operation sites, have not been
included in Safeskin's Year 2000 cost estimates.
Risks
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations of Safeskin. Such failures could materially and adversely affect
Safeskin's results of operations and financial condition. In addition, the costs
associated with the remediation of the Year 2000 Issues may be significantly
higher than Safeskin estimates, depending upon the availability and cost of
personnel trained in the remediation of Year 2000 Issues, the ability to locate
and correct all relevant computer codes, the ability to obtain timely responses
to and corrections by third-parties and suppliers, the ability to implement
interfaces between the new systems and the systems not being replaced and
similar uncertainties. Due to the general uncertainty inherent in the Year 2000
problem, resulting in part from the uncertainty of the Year 2000 readiness of
third party suppliers and customers and of the infrastructure in those countries
in which Safeskin operates, there can be no assurance that Year 2000 Issues will
not have a material impact on Safeskin's results of operations or financial
condition. However, Safeskin's Year 2000 remediation efforts are expected to
significantly reduce Safeskin's level of uncertainty about the Year 2000 Issue
and, in particular, about the Year 2000 compliance and readiness of its material
third party suppliers, customers and vendors. Furthermore, Safeskin believes
that, with the implementation of new business systems and the completion of its
Year 2000 remediation plan as scheduled, the possibility of significant
interruptions of normal operations will be minimal.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of Safeskin. Safeskin,
in the normal course of doing business, is exposed to the risks associated with
foreign currency exchange rates, changes in interest rates, and certain
commodity prices. Safeskin employs established policies and procedures governing
the use of financial instruments to manage its exposure to such risks. These
financial exposures are monitored and managed by Safeskin as an integral part of
Safeskin's overall risk management program, which recognizes the
unpredictability of financial markets and seeks to reduce the potentially
adverse effect on Safeskin's results.
Foreign Currency Exchange Rate Risk
Safeskin 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
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earnings. Safeskin's derivative activities, all of which consist of forward
foreign exchange contracts, are initiated primarily to hedge intercompany
receivables and payables.
The forward foreign exchange contracts generally require Safeskin 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 A2 rated international institutions) do not fulfill their obligations
to deliver the contracted currencies, Safeskin could be at risk for currency
related fluctuations (generally limited to unrealized gains). Management
believes using A2 rated international institutions as counterparties to the
hedging contracts minimizes the risk of non-performance. As of September 30,
1999, Safeskin had forward foreign exchange contracts to purchase Thai baht in
the aggregate amount of $47,500,000 outstanding, with a weighted average
exchange rate of 38.85 Thai baht to 1 U.S. dollar. For the nine months ended
September 30, 1999, Safeskin recorded an unrealized loss of approximately
$2,417,000 in connection with these contracts. Further disclosure relating to
forward foreign exchange contracts is included in Note 2 in the Notes to the
1998 Consolidated Financial Statements.
Interest Rate Risk
Except for indebtedness under Safeskin's Note Agreement which is fixed rate
financing, the balance of Safeskin's indebtedness is variable rate financing.
Safeskin believes that its exposure to market risk relating to interest rate
risk is not material. Safeskin does not expect changes in interest rates to have
a material effect on income or cash flows in fiscal 1999, although there can be
no assurances that interest rates will not significantly change. Further
disclosure relating to financial instruments is included in Note 6 and Note 13
in the Notes to the 1998 Consolidated Financial Statements.
Commodity Price and Availability Risk
Safeskin is subject to risk associated with the consistent availability, at
budgeted prices, of raw rubber from independent growers and latex concentrate
from plant operators in Malaysia and Thailand and the availability of nitrile.
Safeskin enters into commodity forward contracts with suppliers. Such contracts
are executed to offset Safeskin's exposure to the potential change in supply
mainly for raw rubber and latex concentrate used in the manufacturing of
Safeskin's gloves.
LEGAL PROCEEDINGS
Approximately 248 product liability lawsuits seeking monetary damages, in most
cases of an unspecified amount, were pending in federal and state courts against
Safeskin. Other manufacturers of latex gloves are codefendants with Safeskin in
the majority of these cases. These lawsuits allege injuries 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.
Safeskin has referred the defense of these lawsuits to its insurance carriers.
In 1997, the U.S. Judicial Panel on Multi-District Litigation entered an order
transferring all latex allergy lawsuits brought on behalf of healthcare workers
in the Federal courts to the United States District Court for the Eastern
District of Pennsylvania, consolidating those cases for discovery management and
other pre-trial proceedings.
Since March 11, 1999, numerous lawsuits (collectively the "Securities Actions")
have been filed in the U.S. District Court for the Southern District of
California against Safeskin and certain officers and directors alleging
violations of Sections 10(b) and 20(a) of the Securities and Exchange Act of
1934, and Rule 10b-5 promulgated thereunder. The Securities Actions were brought
by plaintiffs in their individual capacity and on behalf of a purported class of
persons who purchased or otherwise acquired Safeskin publicly traded securities
during various periods occurring between October 23, 1997 and March 11, 1999.
The suits allege that plaintiffs purchased Safeskin securities at prices
artificially inflated by defendants' misrepresentations and omissions concerning
Safeskin's financial condition and prospects and seek an unspecified amount of
damages. In addition, a shareholder derivative action has been filed against
certain of Safeskin's directors, and Safeskin as a nominal defendant, in the
Supreme Court of the State of California, San Diego County (the "Derivative
Action"). The Derivative Action alleges breach of fiduciary duty, waste of
corporate assets and gross negligence in connection with Safeskin's stock
repurchase program and seeks an unspecified amount of damages. On August 3,
1999, the District Court issued an order designating lead plaintiffs in the
Securities Actions and instructing them to file a consolidated amended
complaint. By stipulation of the parties, that complaint is to be served on or
before November 19, 1999 and Safeskin has until January 17, 2000 to answer, move
or otherwise respond with respect to the complaint. On October 27, 1999, the
director defendants submitted their answer in the Derivative Action. The court
has stayed discovery in the Derivative Action so that it can be coordinated with
discovery in the Securities Actions. Safeskin believes that these claims are
without merit and intends to contest the claims vigorously.
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From time to time, Safeskin is involved in other litigation relating to claims
arising out of its operations in the normal course of business. As of the date
hereof, Safeskin 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 Safeskin's business, results of
operation or financial condition.
Safeskin's tax returns for the years ended December 31, 1995, 1996 and 1997 are
currently being audited by the Internal Revenue Service.
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, the
following statements included in Management's Discussion and Analysis:
o statements regarding Safeskin's estimates with respect to sales, revenues,
cost of goods sold and operating margins;
o the ability of Safeskin to dispose of its Malaysian and Vista, California
assets in 1999 and to realize estimated fair values;
o the effect on gross profit margins of start-up production costs associated
with transferring operations to the new Thailand facility, wind-down
production costs associated with the closing of the Malaysian manufacturing
facility and increased pricing pressures;
o the effect of currency fluctuations in Thailand on the cost of goods sold
and upon Safeskin's operating results;
o statements concerning Safeskin's outlook for 1999 and beyond including the
ability of Safeskin to retain and increase sales under GPO, end-user and
distributor contracts;
o Safeskin's liquidity and working capital;
o Safeskin's ability to complete construction of new facilities as scheduled;
o Safeskin's ability to achieve anticipated production capacity in the new
manufacturing facilities and recognize certain operating efficiencies and
savings in Thailand; and
o 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 Safeskin from achieving its goals
- -- and cause the assumptions underlying forward-looking statements and the
actual results of Safeskin 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 Safeskin to
continue to distinguish its products on the basis of quality, reliability
and value; possible obsolescence of Safeskin's primary products due to the
development by competitors of new products, manufacturing processes or
technologies including latex alternatives; the ability of Safeskin to
maintain and build strong distributor relationships and attract new
customer orders; and the ability of Safeskin to maintain selling prices and
anticipated volumes;
o the ability of Safeskin to meet existing or future FDA regulations
regarding the manufacture and sale of Safeskin's gloves;
o Safeskin's ability to successfully develop and introduce new products to
the market through record or even combined internal investments into
product development or research and development;
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o risks associated with investments and operations in foreign countries,
particularly Thailand, including exchange rate fluctuations,
local economic conditions, governmental policies regarding foreign
ownership of manufacturing facilities, local regulatory requirements, tax
holidays and political factors;
o Safeskin's ability to successfully integrate the operations of acquired
businesses in a timely and efficient manner and to realize the anticipated
benefits of such acquisitions;
o the consistent availability, at budgeted prices, of raw rubber from
independent growers and latex concentrate from plant operators in Thailand
and the availability of nitrile;
o adverse outcomes or excessive legal expenses in connection with lawsuits or
the ability to obtain and maintain sufficient insurance coverage at
reasonable rates;
o delays in the completion of the construction of Safeskin's new production
facilities in Thailand or the failure of these production facilities to
generate anticipated productivity and efficiencies;
o delays in the completion of the final phase of Safeskin's construction of
its latex concentrate plant in Thailand or the failure of this plant to
generate anticipated productivity and efficiencies;
o Safeskin's ability to make the necessary capital investments, which are
required to expand its manufacturing operations and capacity;
o the non-linearity of Safeskin's sales throughout the quarter which limits
Safeskin's ability to accurately monitor and predict net sales and
profitability;
o Safeskin's ability to monitor inventories of products held by third-party
distributors and to predict sales trends given Safeskin's limited
visibility of sales to end user customers;
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;
o the ability of Safeskin to protect its proprietary products, know-how and
manufacturing processes;
o the ability to attract and retain key personnel;
o Safeskin's ability to develop, maintain and improve information systems
that provide the Company with accurate and timely information;
o changes in Safeskin's rates or basis of income taxation, including
applicable U.S. tax laws and policies governing foreign operations and
Section 351 transactions;
o the ability of Safeskin to complete its Year 2000 project and remediate its
Year 2000 Issues within the specified time frames or within currently
estimated costs; and
o rapid levels of inflation which could have a significant effect on
Safeskin's net sales and profitability.
These and other risks and uncertainties affecting Safeskin are discussed in
greater detail in this report and in other filings by Safeskin with the
Securities and Exchange Commission.
20
<PAGE> 21
PART II: OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
On September 23, 1999, at the Company's annual meeting, the shareholders
reelected each of the following seven directors, with the following votes:
<TABLE>
<CAPTION>
NAME VOTES FOR VOTES WITHHELD
---- --------- --------------
<S> <C> <C>
Irving Jaffe 50,172,046 1,675,714
Cam L. Garner 50,180,216 1,667,544
Jeffrey Stiefler 50,189,116 1,658,644
Neil K. Braverman 50,182,796 1,664,964
Joseph Stemler 50,179,816 1,667,944
Richard Jaffe 50,184,196 1,663,564
Howard L. Shecter 50,188,316 1,659,444
</TABLE>
In addition, the shareholders approved the proposal to adopt the Company's
Stock Purchase Plan (the "Plan"). The Board of Directors reserved 1,000,000
shares of Common Stock for the Plan, subject to an adjustment in the event of a
subdivision or consolidation of shares or other capital adjustment, the payment
of a stock dividend, or other increase or decrease in such shares. The Plan
provides eligible employees of Safeskin with a means to purchase, through
payroll deductions, shares of Common Stock at a discount consistent with the
provisions of the Internal Revenue Code of 1986, as amended. This second
proposal received the following votes: for 49,144,227; against 2,264,708;
abstain 430,825 and broker non-votes 0.
Finally, the shareholders approved a third proposal to amend Article VI of
Safeskin's Articles of Incorporation that would stipulate that the Board of
Directors will consist of between five and ten directors, with staggered terms,
each of whom may be removed only for cause. This change is intended to increase
the commitment of the members of the Board of Directors by extending the term of
each director to three years, and to reduce the number of directors that are
subject to election by the shareholders of any annual shareholders meeting. This
third proposal received the following votes: for 23,149,839; against 10,709,740;
abstain 487,938 and broker non-votes 17,500,243.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF DOCUMENT
------- ------------------------
<S> <C>
11 Statement Re: Computation of per share earnings
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None.
21
<PAGE> 22
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: November 12, 1999 By /s/ David L. Morash
-------------------------------
David L. Morash,
Executive Vice- President,
Chief Financial Officer
22
<PAGE> 1
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
FOR THREE MONTHS ENDED SEPTEMBER 30, FOR NINE MONTHS ENDED SEPTEMBER 30,
1999 1998 1999 1998
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic:
Net income ................. $ 7,620,171 $14,512,148 $17,464,911 $42,822,654
=========== =========== =========== ===========
Weighted average number of
shares of common stock
outstanding ................ 53,762,676 53,534,207 53,134,457 52,088,524
Net income per common
share ..................... $ 0.14 $ 0.27 $ 0.33 $ 0.82
=========== =========== =========== ===========
Diluted:
Net income ................. $ 7,620,171 $14,512,148 $17,464,911 $42,822,654
=========== =========== =========== ===========
Weighted average number of
shares of common stock
outstanding ................ 53,762,676 53,534,207 53,134,457 52,088,524
Net effect of dilutive
stock options--based on
the treasury stock method
using average market price.. 2,402,299 6,994,143 3,459,591 8,363,235
----------- ----------- ----------- -----------
Total weighted average
number of shares of common
stock and common stock
equivalents outstanding .... 56,164,975 60,528,350 56,594,048 60,451,759
=========== =========== =========== ===========
Net income per common
share ..................... $ 0.14 $ 0.24 $ 0.31 $ 0.71
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 6,826
<SECURITIES> 0
<RECEIVABLES> 36,002
<ALLOWANCES> 0
<INVENTORY> 38,723
<CURRENT-ASSETS> 92,873
<PP&E> 137,591
<DEPRECIATION> 0
<TOTAL-ASSETS> 272,152
<CURRENT-LIABILITIES> 35,554
<BONDS> 0
0
0
<COMMON> 555
<OTHER-SE> 124,619
<TOTAL-LIABILITY-AND-EQUITY> 272,152
<SALES> 161,757
<TOTAL-REVENUES> 161,757
<CGS> 87,189
<TOTAL-COSTS> 87,189
<OTHER-EXPENSES> 4,977
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,839
<INCOME-PRETAX> 18,498
<INCOME-TAX> 1,033
<INCOME-CONTINUING> 17,465
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,465
<EPS-BASIC> .33
<EPS-DILUTED> .31
</TABLE>
