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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
Commission file number 0-22726
SAFESKIN CORPORATION
(Exact name of registrant as specified in its charter)
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FLORIDA 59-2617525
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12671 HIGH BLUFF DRIVE
SAN DIEGO, CALIFORNIA 92130
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code (619) 794-8111
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
As of March 26, 1999, the aggregate market value of the voting stock of the
Registrant held by non-affiliates of the Registrant was $342,745,262.
As of March 26, 1999, the number of outstanding shares of Common Stock, par
value $.01 per share, of the Registrant was 55,095,209.
Documents Incorporated by Reference
Information required by Part III is incorporated by reference to portions of
the Registrant's Proxy Statement for the 1999 Annual Meeting of Shareholders
which will be filed with the Securities and Exchange Commission within 120 days
after the close of the 1998 fiscal year.
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TABLE OF CONTENTS PAGE
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PART I
Item 1. Business.................................................................................................. 3
Item 2. Properties................................................................................................ 10
Item 3. Legal Proceedings......................................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders....................................................... 11
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters................................. 11
Item 6. Selected Consolidated Financial Data...................................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 14
Item 7A. Quantitative and Qualitative Disclosure About Market Risk................................................. 23
Item 8. Financial Statements and Supplementary Data............................................................... 24
Item 9. Disagreements on Accounting and Financial Disclosures..................................................... 51
PART III
Item 10. Directors and Executive Officers of the Registrant........................................................ 51
Item 11. Executive Compensation.................................................................................... 51
Item 12. Security Ownership of Certain Beneficial Owners and Management............................................ 51
Item 13. Certain Relationships and Related Transactions............................................................ 51
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................................... 51
Signatures............................................................................................................... 55
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PART I
ITEM 1. BUSINESS
Safeskin is a leading developer, manufacturer and marketer of high quality
disposable gloves in the United States and believes that it is the world's
leading manufacturer of powder-free latex gloves. Safeskin sells its latex and
synthetic gloves to the acute care, alternate site, dental, high technology,
scientific, and consumer markets. For the past three years, Safeskin has been
the market share leader, in both sales dollars and units, of medical examination
gloves to acute care facilities (i.e., hospitals) in the United States.
Safeskin's gloves are used to prevent the transmission of infectious diseases
and to reduce contamination in cleanroom environments. In addition, Safeskin's
gloves are designed to maximize tactile sensitivity and comfort while minimizing
the risk of any debilitating side effects which may result from prolonged use.
Based on information provided by its distributors, Safeskin believes that in
1998 approximately 61% of Safeskin's end user unit sales were to acute care
facilities; approximately 26% were to alternate site and dental facilities; and
approximately 13% were to the high technology, scientific, and consumer markets.
Since commencing operations in 1988, Safeskin has developed a broad
portfolio of disposable gloves. Safeskin's gloves are made of either natural
rubber latex or synthetic materials, such as Tactylon(R) (a proprietary
synthetic co-polymer), nitrile (a widely used synthetic co-polymer) and other
co-polymers. Safeskin's product portfolio is also segmented by end use. Safeskin
manufactures and markets medical examination gloves, surgical gloves and
cleanroom and laboratory gloves. The majority of Safeskin's gloves are marketed
under the "Safeskin" trade name to enhance market recognition and cultivate
brand loyalty. Safeskin also manufactures a small percentage of its gloves under
a private label. Safeskin's gloves are manufactured in various sizes and in
ambidextrous or hand specific designs. Safeskin continues to develop and market
new products, thereby expanding both its product line and markets served.
In addition to developing new products internally, Safeskin also pursues
strategic acquisitions that either extend Safeskin's presence in selected
markets or possess attractive proprietary technologies. Safeskin generally
expects to realize synergies from such acquisitions by transferring
manufacturing to its efficient, low-cost Southeast Asian facilities and by
utilizing its dedicated sales force to market new products. In March 1997,
Safeskin acquired the synthetic glove business of Tactyl Technologies, Inc.
("Tactyl"), a developer and manufacturer of non-latex surgical gloves for the
domestic and international markets. As a result of the Tactyl acquisition,
Safeskin began offering Safeskin Tactylon(R) synthetic surgical gloves and has
begun developing additional products using the Tactylon(R) synthetic material.
In February 1998, Safeskin acquired Absolute Quality Leadership ("AQL"), a
developer and marketer of gloves for the high technology and scientific markets.
As a result of the AQL acquisition, Safeskin expanded its line of proprietary
latex and synthetic glove products for these markets. Safeskin plans to begin
manufacturing substantially all of its AQL products in Thailand by the first
quarter of 1999.
INDUSTRY
In 1998, the total U.S. market for disposable gloves was approximately $1.5
billion. Of this amount, the medical glove market was approximately $1.2
billion, according to IMS market data, and is expected to grow 5% annually over
the next three years. The growth in the market for medical gloves has largely
resulted from increased concerns among healthcare professionals regarding the
transmission of infectious diseases, particularly AIDS and hepatitis B. Of the
total medical glove market, the market for acute care medical examination gloves
was approximately $350 million, and the powder-free segment of the acute care
medical examination glove market was approximately $186 million. Safeskin
estimates that it has a 25% share of the overall acute care medical examination
glove market and a 38% share of the powder-free segment of the acute care
medical examination glove market. The high technology and scientific glove
markets comprised approximately $273 million of the total U.S. disposable glove
market in 1998 and, according to internal management estimates, are expected to
grow 9% annually over the next three years. The growth in the market for high
technology and scientific gloves has been driven by increased use of cleanroom
manufacturing processes which require stringent contamination controls. These
manufacturing process require the use of gloves that minimize the number of
particles on their surfaces to reduce the risk of contamination. In addition,
concerns in all glove markets over the adverse effects of prolonged exposure to
high allergen gloves containing latex and powder have led to a shift away from
commodity priced powdered latex gloves towards higher quality powder-free latex
and synthetic gloves.
As people began wearing latex gloves more often and for longer periods,
there was an increase in irritations to the powder used to make the glove, and
in allergic reactions to the water soluble proteins in latex and to the
chemicals and other additives used in processing latex and manufacturing gloves.
In 1991, the FDA issued a medical alert warning to healthcare professionals
about the increased incidences of allergic reactions to latex medical products
by both medical personnel and patients. In response to the increase in allergic
reactions to latex gloves, glove manufacturers attempted to reduce the amount of
powder, latex proteins and chemical allergens in their gloves.
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Occupational Safety Health Administration regulations in effect since 1991
require that all employers provide hypoallergenic gloves, glove liners,
powderless gloves, or other similar alternatives to those employees who are
allergic to the gloves normally provided.
PRODUCTS
Safeskin manufactures and markets medical examination gloves, surgical
gloves, cleanroom and laboratory gloves. Safeskin's gloves are used to prevent
the transmission of infectious diseases and to reduce contamination in cleanroom
environments. In addition, Safeskin's gloves are designed to maximize tactile
sensitivity and comfort while minimizing the risk of any debilitating side
effects which may result from prolonged use.
MEDICAL EXAMINATION GLOVES
- - Powder-Free Latex Gloves. In 1990, Safeskin introduced its first
powder-free latex examination glove. Safeskin currently manufactures and
markets several types of powder-free examination gloves with various
textures and lengths. Medical examination gloves are manufactured utilizing
a proprietary process that makes them easy to don and remove without the
need for corn starch powder. The lack of powder makes the gloves more
desirable to wearers who may develop reactions to prolonged use of powdered
gloves. In addition, powder free gloves eliminate airborne powder which may
cause distress to respiratory and neonatal patients. Safeskin sells
powder-free latex examination gloves to acute site facilities, alternate
site facilities and scientific laboratories. According to market studies, in
1998, end users typically paid between $.05 and $.12 per glove for
powder-free latex examination gloves.
- - Lightly Powdered Latex Gloves. In 1988, Safeskin introduced its lightly
powdered latex examination glove. The lightly powdered glove is Safeskin's
lowest priced glove. "Lightly Powdered" refers to the corn starch powder
added to the inside of the glove in order to make it easier to don and
remove. Safeskin sells its lightly powdered latex gloves primarily to acute
care facilities; alternate site facilities, such as nursing homes, clinics
and physician offices; dental offices; and the consumer market. According to
market studies, in 1998, end users typically paid between $.03 and $.07 per
glove for lightly powdered latex examination gloves.
- - Powder-Free Nitrile Gloves. In 1997, Safeskin introduced its nitrile
examination glove. These gloves are made out of a material called nitrile, a
synthetic co-polymer that contains no latex. The nitrile medical examination
glove provides an alternative for individuals allergic to latex. This glove
is powder-free and manufactured with reduced chemical levels. In addition,
the nitrile glove is easy to don, comfortable to wear for extended periods,
durable and designed to be soft, odor-free, and non-sticky. Safeskin sells
nitrile examination gloves to acute care facilities, alternate site
facilities and scientific laboratories. According to market studies, in
1998, end users typically paid between $.06 and $.12 per glove for
powder-free nitrile examination gloves.
SURGICAL GLOVES
- - Powder-Free Latex Surgical Gloves. In 1996, Safeskin introduced a sterile,
powder-free latex surgical glove, the Safeskin 2000(TM), which was designed
to meet the more rigorous demands of the operating room environment. The
Safeskin 2000(TM) surgical glove is non-pyrogenic, reducing the risk of
endotoxin contamination of surgical sites. In addition, powder-free gloves
eliminate complications which could be caused by powder entering open
wounds. Safeskin sells powder-free latex surgical gloves to acute care
facilities. According to market studies, in 1998, end users typically paid
between $.85 and $1.85 per pair for powder-free surgical gloves.
- - Tactylon(R) Surgical Gloves. In 1997, Safeskin acquired the synthetic
glove business of Tactyl and began offering Tactylon(R) synthetic surgical
gloves. Tactylon(R) synthetic surgical gloves are constructed from a
patented synthetic thermoplastic elastomer technology developed to address
the needs of healthcare professionals and patients who are sensitive to
latex. Safeskin's management believes that the Tactylon(R) synthetic
surgical glove strategically complements Safeskin's powder-free latex
surgical glove by permitting Safeskin to be able to offer surgeons the
choice of either a latex or a synthetic glove. According to market studies,
in 1998, end users typically paid between $1.55 and $2.50 per pair for
synthetic surgical gloves.
HIGH TECHNOLOGY AND SCIENTIFIC GLOVES
- - Latex Cleanroom Gloves. In 1992, Safeskin introduced its first cleanroom
latex glove. Cleanroom gloves are designed, processed and packaged to meet
the stringent contamination control requirements of the microelectronics
industry, including the semiconductor and disk drive segments, and the
health technologies industry, including the pharmaceutical, medical device
and biomedical segments. These glove products minimize the introduction of
sub-micron particulate contamination and chemical extractable contamination
into
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the end user's environment. Safeskin currently manufactures and markets
numerous types of sterile and non-sterile cleanroom gloves. According to
Safeskin's estimates, in 1998, end users typically paid between $.17 and
$.78 per pair for cleanroom latex gloves.
- - Latex Laboratory Gloves. In 1998, as a result of its acquisition of AQL,
Safeskin began offering powder-free latex gloves designed specifically for
laboratories. Certain of these latex gloves are also polymer coated to
enhance donning and grip characteristics. According to Safeskin's estimates,
in 1998 end users typically paid between $.08 and $.30 per pair for
laboratory latex gloves.
- - Synthetic Cleanroom and Laboratory Gloves. In 1995, Safeskin introduced
its first synthetic glove for the high technology and scientific markets.
Safeskin currently manufactures and markets numerous types of synthetic
cleanroom and laboratory gloves made of nitrile and other co-polymers. These
gloves are manufactured from synthetic materials which improve contamination
control performance, enhance resistance to various chemicals and solvents
and eliminate natural rubber protein antigens. According to Safeskin's
estimates, in 1998 end users in the high technology and scientific fields
typically paid between $.18 and $.85 per pair for non-vinyl, powder-free
synthetic cleanroom and laboratory gloves.
RESEARCH AND DEVELOPMENT
Safeskin's research and development expenses were approximately $6,347,000
in 1998, $3,504,000 in 1997, and $2,209,000 in 1996. Safeskin expects these
costs to increase as Safeskin increases the number of new products it
introduces. Safeskin's research and development efforts are focused on both
developing new products and improving its manufacturing facilities and
processes. Safeskin's product research and development seeks to: (i) address the
needs of the synthetic glove market for lower cost and higher quality synthetic
gloves and (ii) expand Safeskin's product line for the high technology and
scientific markets. Safeskin's manufacturing research and development is
directed toward designing and constructing new production lines that will meet
Safeskin's increasing capacity and quality demands. In addition, Safeskin
continues to dedicate resources to the research and development of other
disposable protective products. There can be no assurance that these new
products or processes will be successfully developed, will be cleared by the
FDA, will gain market acceptance, will command pricing levels acceptable to
Safeskin or will meet the demands of the market.
SALES AND MARKETING
Safeskin sells its latex and synthetic gloves to the acute care, alternate
site, dental, high technology, scientific and consumer markets. Based on
information provided by its distributors, Safeskin believes that in 1998,
approximately 61% of Safeskin's end user unit sales were to acute care
facilities; approximately 26% were to alternate site and dental facilities; and
approximately 13% were to the high technology, scientific, and consumer markets.
MEDICAL MARKET
Safeskin's sales and marketing activities in the medical products area are
directed at three groups: (i) medical personnel who are the actual end users of
gloves, (ii) group purchasing organizations ("GPOs") and integrated healthcare
networks and (iii) medical distributors. As of December 31, 1998, Safeskin had
47 sales representatives and 6 nurse consultants in the United States who market
to end users at acute care and alternate site facilities. Purchasing decisions
by healthcare systems are customarily made by a clinical staff committee which
evaluates potential products based on quality criteria, such as effectiveness,
durability and likelihood to cause dermatitis, as well as price and value.
Safeskin's sales representatives work with healthcare personnel to ensure that
Safeskin's products are considered in the purchasing process and that their
comparative advantages are known by the committee. Education is an integral part
of the sales approach to end users. Consequently, sales representatives and
nurse consultants are specifically trained and certified to conduct continuing
education programs for healthcare personnel. Sales representatives must possess
at least five years of previous medical sales experience and are paid salaries
plus performance-based commissions. As of December 31, 1998, Safeskin's gloves
were used in over 4,200 hospitals and 23,000 alternate site facilities.
Safeskin's national accounts department promotes sales to and negotiates
agreements with GPOs, integrated healthcare networks, large non-acute care
customers and multi-facility high technology and scientific customers. In
addition, Safeskin has entered into various contracts with certain national
GPOs, pursuant to which Safeskin is either the sole or one of a limited number
of approved suppliers from which the member healthcare and hospital facilities
may purchase examination and surgical gloves. GPOs with which Safeskin has
agreements include Premier Purchasing Partners, L.P., the largest hospital
alliance in the United States. Safeskin has also entered into an exclusive,
six-year contract to supply Columbia/HCA Healthcare Corporation, the largest
provider of healthcare services in the United States, with latex examination
gloves. During 1998, Safeskin also had a GPO contract with Catholic Materials
Management Alliance ("CMMA"), which was acquired by Consorta, Inc., during the
year, for the supply of examination gloves to member hospitals. On
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March 16, 1999, Safeskin was advised that this contract was being terminated.
Although Safeskin will no longer be the sole supplier of examination gloves,
Safeskin expects member hospitals to continue to purchase its examination gloves
pursuant to three-party contracts with such end-users. Safeskin does not expect
the contract termination to have a material adverse effect on Safeskin's 1999
revenues.
All domestic sales of Safeskin's medical products are made through national,
regional and local distributors. Safeskin believes that these partnerships
allows it to utilize the distributors' extensive infrastructure to access acute
care and alternate site facilities throughout the United States. Typically,
sales to distributors are made pursuant to a contract between Safeskin and the
distributor specifying prices to be paid by the distributor for gloves sold to a
particular end user. Safeskin works with medical products distributors seeking
to reduce their order cycle time, increase fill rates and optimize ordering
patterns and inventory levels. In addition, Safeskin actively promotes the use
of electronic data interchange (EDI) technology for applications such as order
entry, invoicing and sales tracing. These initiatives strive to produce savings
throughout the supply chain. In February 1998, Safeskin established a
partnership with Perot Systems Corporation which seeks to enable Safeskin to
streamline distribution and administrative procedures for itself and its
customers. Two of the largest distributors to the acute care market, McKesson
General Medical and Owens & Minor, currently carry Safeskin's product line on a
non-exclusive basis. McKesson General Medical and Owens & Minor distributed
gloves accounting for approximately 17.3% and 16.4%, respectively, of Safeskin's
1998 consolidated net sales. Although distributors often utilize Safeskin's
education and marketing programs to sell Safeskin's products, distributors do
not necessarily promote the sale of Safeskin's products more aggressively than
the other competing lines of gloves which they carry.
Effective October 1, 1994, Safeskin entered into a three year contact with
General Medical, which was later acquired by McKesson General Medical
(collectively "MGM"), governing sales of Safeskin's gloves. MGM is currently a
leading national medical/surgical products distributor and the nation's largest
distributor to the alternate site market. The contract designated Safeskin as
the exclusive manufacturer of MGM's private label gloves. Sales of gloves under
the contract first occurred in 1995. In July 1996, the contract was amended to
extend its term for an additional two years, expiring on October 1, 1999, and to
name Safeskin as MGM's preferred glove manufacturer. In the amendment, MGM also
agreed to promote sales of Safeskin's gloves and the private label gloves
manufactured by Safeskin.
In March 1999, Safeskin entered into a strategic alliance with Owens &
Minor, the nation's largest distributor of national name brand medical and
surgical supplies, establishing Safeskin as Owens & Minor's preferred
examination glove supplier. Under the alliance, Safeskin and Owens & Minor will
share common sales targets, with Owens & Minor receiving quarterly volume
incentives when these sales targets are achieved.
HIGH TECHNOLOGY AND SCIENTIFIC MARKETS
Safeskin markets its products for a variety of cleanroom and laboratory
applications in the semiconductor, biotechnology, pharmaceutical, general
industrial manufacturing and research segments of the high technology and
scientific markets. Like the medical segment, more workers in the high
technology and scientific markets are using gloves. As of December 31, 1998,
Safeskin's high technology and scientific products were sold through a network
of approximately 110 distributors, including the two largest distributors of
high technology and scientific gloves in the United States, Fisher Scientific
International Inc. and VWR Scientific Products Corporation. Safeskin has a sales
force consisting of 17 sales representatives supporting the distribution network
and end users. As a result of Safeskin's AQL acquisition, Safeskin expects that
it will be able to market a broad line of proprietary latex and synthetic glove
products, specifically designed for the microelectronics (semiconductor and disk
drive), health technologies (pharmaceutical, medical device and biotechnology)
and general laboratory and safety market segments.
INTERNATIONAL MARKETS
Safeskin believes that the non-U.S. market for disposable gloves was
approximately $2.0 billion in 1998. Safeskin's international net sales were
$26.3 million in 1998, or 11% of Safeskin's net sales. Sales in Europe comprised
$24.1 million of Safeskin's international sales. Safeskin's European operations
are headquartered in The Netherlands, and Safeskin also has sales offices in
Germany and the United Kingdom. Safeskin currently plans to open additional
sales offices in Europe over the next two years. As of December 31, 1998,
Safeskin had 12 sales representatives in Europe who focused primarily on the
medical market. Unlike the United States, where all of Safeskin's sales are to
distributors, approximately 30% of Safeskin's sales in Europe are made directly
to end users, primarily consisting of acute care and alternate site facilities.
Safeskin also sells its products in Latin America, Africa and Southeast Asia.
MANUFACTURING AND QUALITY CONTROL
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During 1998, Safeskin manufactured its products in Thailand, Malaysia, and
California. Factory locations are selected based on proximity to natural sources
of latex, the cost and availability of labor, favorable tax treatment and the
local political and social conditions. In 1998, Safeskin added annual production
capacity of approximately 2.0 billion gloves which brought its expected annual
production capacity as of year end 1998 to approximately 5.5 billion gloves. In
1997, Safeskin began production in its 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 and Malaysia 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.
Gloves are manufactured on production lines which have the ability to run
continuously and can be changed quickly to produce different types and sizes of
gloves. Quality control and testing are emphasized throughout Safeskin's
manufacturing process. Each latex glove is formed by dipping a porcelain mold
into the latex compound. Water soluble proteins which occur naturally in latex
and certain processing additives are reduced by means of extensive heating and
leaching processes. Proteins and chemicals are minimized as a result of
Safeskin's proprietary manufacturing processes.
All of Safeskin's current manufacturing facilities have received ISO 9002
certification. This certification demonstrates the facilities' compliance with
the internationally recognized quality manufacturing standards established by
the International Organization for Standardization based in Geneva, Switzerland.
Safeskin believes that the ISO 9002 certification makes it more competitive in
the marketplace as customers are increasingly recognizing the standard as an
indication of product quality.
Safeskin is expanding its Thailand manufacturing operations and transferring
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 has recently completed construction of a
fifth building and related machinery at Safeskin's existing Hat Yai, Thailand
facility. This building houses 22 high-speed and product-flexible dipping
production lines which were commissioned throughout 1998, beginning in the
second quarter, and are expected to increase production capacity by an
additional 1.5 billion gloves annually. During 1999, Safeskin's expansion plans
include the completion 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 second half of 1997 after approval by
the Thailand Board of Investment. Four production buildings have been
constructed on this site. The first building is expected to provide 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 existing facility which is
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 $80 million in the aggregate, approximately $48 million of which
had been expended as of December 31, 1998.
In the fourth quarter of 1998, Safeskin began construction of a facility in
southern Thailand designed to manufacture boxes and ceramic handformers for the
Company's use. This facility is expected to allow Safeskin to further integrate
its manufacturing operations to gain better control over the quality,
timeliness, costs and reliability of these products. This facility is expected
to commence production in May 1999 and is expected to produce approximately 80%
of Safeskin's requirements. The total expected costs for the construction of
these facilities will be approximately $7 million.
On December 13, 1996, Safeskin announced plans to move all of its remaining
latex medical examination glove production from its Malaysian facility to its
Thailand facility. Safeskin also announced that the Malaysia facility would
continue to operate as Safeskin's manufacturing source of higher-value
synthetic, surgical and scientific products. In connection with the move,
Safeskin recognized expense of approximately $3 million in the fourth quarter of
1996 reflected in the accompanying financial statements as a component of
restructuring and other unusual charges. Subsequent to December 31, 1996,
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. In December 1998, Safeskin recognized expense of
approximately $5 million to reflect the write-down of fixed assets at Safeskin's
facilities in Malaysia and Vista and Santa Maria, California. The write-down is
reflected in the accompanying financial statements as a component of
restructuring and other unusual charges. This write-down was a result of (i)
Safeskin's expectation that its previously announced plans to move all remaining
examination, surgical and synthetic glove production from its Ipoh, Malaysia and
Vista, California facilities would be completed during the first quarter of 1999
and (ii) the relocation, during the fourth quarter of 1998, of AQL's sales and
corporate operations to Safeskin's corporate headquarters.
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Although Safeskin has never experienced an interruption in the availability
of latex due to natural phenomena or transportation problems or by a factory
shutdown resulting from fire, power outage, employee strike or other cause,
there can be no assurance that Safeskin's production of gloves will not be
adversely affected by such events.
COMPETITION
Safeskin faces substantial competition from a number of manufacturers of
disposable gloves. The leading competitors in the medical glove product line are
Allegiance Corporation ("Allegiance"), Ansell-Perry, Inc., Maxxim Medical, Inc.,
Microflex Medical Corporation, and Johnson & Johnson Medical, Inc. Safeskin's
management believes that Allegiance is also the leading competitor in the high
technology and scientific markets. There are also a number of other competitors
which are engaged in manufacturing or distributing high technology and
scientific gloves. Many of Safeskin's competitors have substantially greater
financial, manufacturing, marketing and technical resources than Safeskin.
Safeskin's management believes the primary competitive factors within its
markets are product quality, durability, reliability, consistency, clinical
value, ease of product use, access to distribution channels, price and the
availability of prompt delivery. Failure of Safeskin to continue to distinguish
its products on the basis of any of these factors could have a material adverse
effect on Safeskin's business, results of operations or financial condition.
Furthermore, there can be no assurance that Safeskin's competitors or others
will not develop products, manufacturing processes or new technologies which
would be more cost effective or more efficient than those of Safeskin or that
Safeskin's gloves will not be rendered obsolete or uncompetitive. Such
competition could have a material adverse effect on Safeskin's business, results
of operations or financial condition.
GOVERNMENT REGULATION
Safeskin's products are subject to regulation by numerous governmental
authorities in the United States and other countries, particularly as to safety
and efficacy and adherence to the Quality System Regulation ("QSR") for medical
devices. In the United States, examination and surgical gloves are classified as
Class I medical device products regulated by the FDA. The Federal Food, Drug,
and Cosmetic Act (the "FFD&C Act") and other federal statutes and regulations
govern or influence the testing, manufacture, safety, labeling, storage,
record-keeping, clearance, advertising and promotion of Class I devices.
Noncompliance with the FFD&C Act or regulations promulgated thereunder can
result in administrative enforcement, such as warning letters, import alerts and
administrative detention, or in civil penalties, product bans, defect
notifications, mandatory field corrections, seizures, recalls, injunctions and
criminal prosecution. Periodically the FDA inspects shipments of medical gloves
as they arrive in United States ports. The time period during which the tests
are conducted and the FDA review of the results may cause delays in delivery and
thus can result in a loss or delay in recognition of income by Safeskin.
Medical examination and surgical gloves must be submitted to the FDA for
clearance to market by a pre-market notification filing under Section 510(k) of
the FFD&C Act. An application is made for a particular use or performance claim
for each type of glove produced by a specific manufacturer. Applications under
the 510(k) procedure must demonstrate substantial equivalence to a legally
marketed device. Additional data requirements apply to gloves such as surgical
gloves, which are sterile. Applicants must defer marketing until a written order
is issued by the FDA finding the firm's device substantially equivalent to a
legally marketed device. This notice may be issued within 90 days of submission,
but may take substantially longer. The FDA, however, may determine that the
proposed device is not substantially equivalent, or the agency may require
Safeskin to submit further information, such as additional test data, before it
is able to make a substantial equivalence determination. Such an adverse
determination or request for additional information could have the effect of
materially delaying the commencement of marketing. As part of the substantial
equivalence determination, Safeskin must demonstrate that the glove complies
with the American Society of Testing and Materials testing standards relating to
physical specifications for the product and must pass the FDA "leakage test." In
addition, the FDA may inspect the manufacturing facilities before issuing a
notice of substantial equivalence and may delay or decline to issue such notice.
Safeskin has obtained 510(k) clearance for each type of currently marketed
glove which requires clearance. Safeskin has not experienced any substantial
difficulty in obtaining 510(k) clearances in the past. If Safeskin makes any
changes to a type of glove previously cleared by the FDA that could
significantly affect its safety or effectiveness (such as significant changes in
the manufacturing process), a new 510(k) submission will be required.
Safeskin is subject to periodic inspection by the FDA for compliance with
QSR regulations. Under QSR regulations, Safeskin is subject to significant
procedural and documentation requirements with respect to manufacturing,
packaging, storage and control activities. Safeskin also may be subject to
inspection by foreign regulatory authorities to determine compliance with
comparable standards. Due to the FDA's recently promulgated QSR regulations for
medical devices which incorporate preproduction design and development controls
into one
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<PAGE> 9
system with quality system requirements worldwide, Safeskin must continue to
expend time, monies and efforts in the areas of production and quality control
to ensure full technical compliance with these standards.
Safeskin must also comply with various FDA labeling and post-market
reporting requirements. Failure to comply with applicable regulatory
requirements can result in administrative enforcement, such as warning letters,
import alerts and administrative detention, or in product bans, field
corrections, seizures, recalls, injunctions and criminal prosecutions. Changes
in existing requirements or adoption of new requirements could adversely affect
the ability of Safeskin to comply with regulatory requirements. Failure to
comply with regulatory requirements could have a material adverse effect on
Safeskin's business, results of operations or financial condition.
Whether or not FDA clearance is obtained for a new product, approval or
clearance of a product by regulatory authorities in foreign countries may be
required prior to the commencement of commercial sales of the product in such
countries. The requirements governing product approvals or clearances vary
widely from country to country and the time required for approval may be longer
or shorter than that required for FDA approval.
In August 1989, Safeskin received FDA clearance to market non-sterile latex
gloves labeled "hypoallergenic." This clearance, which was also obtained for
subsequent versions of Safeskin's latex gloves, was based on the low level of
residual chemicals in the gloves following their manufacture, as demonstrated by
their passing the modified Draize test for hypoallergenicity. The clearance did
not relate to the level of latex proteins in the glove, which at that time was
not recognized as a potential issue. It was subsequently discovered that
proteins in latex gloves may provoke allergic reactions in latex allergic
individuals. As a result, in June 1996, the FDA proposed issuing regulations
prohibiting the use of the term "hypoallergenic" on latex gloves. In 1997, the
FDA issued regulations to that effect, which became effective September 30,
1998. Recognizing that certain users of its latex gloves might mistake the term
"hypoallergenic" to apply to latex proteins rather than chemical residuals only,
Safeskin has already removed the term "hypoallergenic" from its packaging in
advance of the FDA mandated regulation.
Safeskin must meet various regulatory requirements for the sale and
distribution of its products throughout the European Union ("EU"). Safeskin
currently meets such regulatory requirements for the majority of its products
sold in Europe, as evidenced by the inclusion of the CE mark in product
labeling. The approval to "CE" mark its products was gained, in part, by having
each manufacturing facility's quality system registered with a European Notified
Body which is authorized to grant such approvals.
Safeskin's customers typically do not bill third-party reimbursement sources
separately for purchases of Safeskin's gloves. However, Safeskin's ability to
sell its medical gloves profitably may depend in part on the reimbursement
policies and regulations of government health administration authorities,
private health insurers and other organizations. Such third-party payors are
increasingly seeking to reduce the price of medical products and services.
Additionally, certain legislative measures, if adopted, could adversely affect
the pricing of, or the amount or availability of reimbursement for, Safeskin's
medical gloves.
In addition to the statutes and regulations described above, Safeskin is
also subject to U.S., Malaysian and Thai occupational, health and environmental
laws and regulations.
PRODUCT LIABILITY AND INSURANCE
Participants in the medical supply industry are subject to lawsuits alleging
product liability, many of which involve significant damage claims and defense
costs. Safeskin currently has in force product liability insurance policies.
Safeskin's insurance policies are on a "claims made" basis. Successful claims
against Safeskin in excess of Safeskin's insurance coverage could have a
material adverse effect on Safeskin's business, results of operations or
financial condition. Claims made against Safeskin, regardless of their merit,
also could have a material adverse effect on Safeskin's reputation. There can be
no assurance that the coverage limits of Safeskin's insurance policies will be
adequate. While Safeskin has been able to obtain product liability insurance in
the past, such insurance varies in cost, is difficult to obtain and may not be
available in the future on acceptable terms or at all. See "Legal Proceedings."
EMPLOYEES
As of December 31, 1998, Safeskin had approximately 7,200 employees, of whom
approximately 6,900 were employed in Thailand and Malaysia. The Malaysian
factory workers are represented by a company union which has entered into a
collective bargaining agreement with Safeskin's Malaysian subsidiary. The
agreement was reinstated beginning October 1, 1997 and expiring on September 30,
2000. As of March 30, 1999, Safeskin had approximately 7,200 employees in
Thailand and 222 in Malaysia, as the Company has terminated substantially all of
the Malaysian employees in connection with the transfer of manufacturing
operations from Malaysia to
9
<PAGE> 10
Thailand. The Company anticipates that an additional 191 employees in Malaysia
will be terminated during the second quarter of 1999. Safeskin considers its
relations with its employees to be good.
ITEM 2. PROPERTIES
Safeskin owns two manufacturing facilities located in Ipoh, Malaysia,
totaling approximately 300,000 square feet, and a latex concentrate
manufacturing and processing plant located in Seremban, Malaysia, comprised of
approximately 30,000 square feet. Safeskin leases the land where its facilities
are located under long-term leaseholds from the state government which have
expiration dates ranging from the year 2063 to the year 2072. Any transfer of a
land leasehold by Safeskin requires the prior approval of the state. Safeskin
has announced plans to close the Malaysian facility during 1999. See "Management
Discussion and Analysis of Financial Condition and Results of Operation -
Restructuring."
Safeskin also owns a manufacturing facility in Hat Yai, Thailand totaling
approximately 500,000 square feet. Safeskin owns the approximately 42 acres of
land on which the facility is located. In addition, Safeskin also owns a latex
concentrate manufacturing and processing plant located in Nathavee District, 50
kilometers from Hat Yai, Thailand totaling approximately 94,000 square feet.
Safeskin owns the 40 acres of land on which this facility is located. Safeskin
owns approximately 54 acres of land in Sadao, Thailand on which the new
manufacturing facility is being constructed. This new facility will have
approximately 940,000 square feet upon completion.
In the United States, Safeskin leases approximately 21,000 square feet of
warehouse space, approximately 90,000 square feet of office space and
approximately 17,000 square feet of manufacturing space.
In Mexico, Safeskin leases 11,000 square feet located in La Mesa, Tijuana
for the packing and distribution operations of Tactyl.
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 1998, approximately 213 product liability lawsuits
seeking monetary damages, in most cases of an unspecified amount, were pending
in federal and state courts against Safeskin and other manufacturers of latex
gloves. 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. On February 26, 1997, the
Judicial Panel on Multi-District Litigation entered an order transferring all
latex allergy lawsuits brought on behalf of healthcare workers against Safeskin
and other latex glove manufacturers 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. Safeskin has
referred the defense of these lawsuits to its insurance carriers.
Since March 11, 1999, approximately fifteen 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
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. They 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 buy
back program and seeks an unspecified amount of damages. Defendants' time to
respond to the allegations made in the Securities Actions and the Derivative
Action has not yet expired, however, Safeskin believes that these claims are
without merit and intends to contest the claims vigorously.
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.
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<PAGE> 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
(a) MARKET INFORMATION
Safeskin's Common Stock trades on The Nasdaq Stock Market(sm) under the
symbol "SFSK." The following table sets forth the high and low sales prices of a
share of Safeskin's Common Stock for each quarter in 1997 and 1998, and the
interim period indicated, as reported by The Nasdaq Stock Market(sm) and
restated to give effect to the 100% stock dividends distributed on April 1, 1998
and January 2, 1997.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1997
First Quarter 13 5/8 8 13/16
Second Quarter 14 3/4 8 13/16
Third Quarter 23 13/16 14
Fourth Quarter 29 20
1998
First Quarter 37 3/16 25 3/4
Second Quarter 45 31 3/4
Third Quarter 47 1/8 29 7/8
Fourth Quarter 35 1/4 17 3/8
1999
First Quarter 26 1/4 7 3/8
(through March 26,
1999)
</TABLE>
The closing price of Safeskin's Common Stock on March 26, 1999, as reported
by The Nasdaq Stock Market(sm) was $ 7 15/32.
(b) HOLDERS
The number of record holders of Safeskin's common stock as of March 26, 1999
was 780. Safeskin believes that a larger number of beneficial owners hold such
shares of Common Stock in depository or nominee form.
(c) DIVIDENDS
Safeskin has not paid cash dividends on its common stock and does not intend
to pay any cash dividends in the foreseeable future.
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<PAGE> 12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (In thousands, except share and per
share data)
The following selected consolidated financial data of Safeskin for the five
years ended December 31, 1998 are derived from the audited consolidated
financial statements of Safeskin, except for per share information, which has
been restated to give effect to the 100% stock dividends of the common stock
effected on April 1, 1998 and January 2, 1997. The consolidated financial
statements as of December 31, 1998 and 1997 and for each of the three years
ended December 31, 1998, 1997, 1996 are included elsewhere in this Report. The
financial information for Safeskin at December 31, 1995 and 1994 was derived
from financial statements of Safeskin not included in this Report. The following
information should be read in conjunction with the Consolidated Financial
Statements of Safeskin and the related notes thereto, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and other
financial information included elsewhere in this Report.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales $ 231,784 $ 182,998 $ 146,089 $ 117,014 $ 84,142
Costs of goods sold 110,746 102,229 87,004 78,256 52,079
--------- --------- --------- --------- ---------
Gross profit 121,038 80,769 59,085 38,758 32,063
Selling expenses 24,834 18,615 15,014 13,620 9,982
Research and development 6,347 3,504 2,209 1,493 977
General and administrative expenses 30,243 15,923 12,287 6,397 3,625
Restructuring and other unusual
charges 14,331 -- 2,979 -- --
--------- --------- --------- --------- ---------
Income from operations 45,283 42,727 26,596 17,248 17,479
Interest expense (income), net 3,026 (823) (58) 194 17
Other expense (income), net (3,085) (2,699) 133 (163) (825)
--------- --------- --------- --------- ---------
Income before income tax 45,342 46,249 26,521 17,217 18,287
Income tax provision 3,473 4,999 2,939 2,326 3,920
--------- --------- --------- --------- ---------
Net income $ 41,869 $ 41,250 $ 23,582 $ 14,891 $ 14,367
========= ========= ========= ========= =========
Net income per share-basic(1)(2) $ .78 $ .79 $ .46 $ .30 $ .29
Net income per share-diluted(1)(2) $ .70 $ .70 $ .42 $ .29 $ .28
Weighted average common shares
outstanding-basic 53,344 52,261 50,944 49,500 49,013
Weighted average common shares
outstanding-diluted 60,120 58,538 55,551 51,210 50,783
BALANCE SHEET DATA:
Working capital $ 51,137 $ 43,201 $ 48,310 $ 28,055 $ 22,987
Total assets 248,961 138,520 116,749 84,675 61,230
Long-term debt 87,731 -- -- 2,750 --
Shareholders' equity 121,412 106,578 103,015 69,861 54,260
</TABLE>
(1) The number of shares outstanding has been adjusted to reflect the 100%
stock dividends of the Common Stock distributed on April 1, 1998 and
January 2, 1997.
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<PAGE> 13
(2) Net income per share-diluted is computed by dividing net income by the
weighted average of common shares outstanding and dilutive common stock
equivalents. Common stock options are common stock equivalents and are
included in the weighted average of common shares outstanding using the
treasury stock method.
13
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto incorporated by
reference herein.
General
Safeskin's net sales have grown substantially over the past several years.
Safeskin 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. 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, various high technology and
scientific nitrile gloves in 1995, and Safeskin 2000(TM) powder-free latex
surgical gloves in 1996. 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. 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 or will have similar growth rates.
Safeskin's net sales are derived from the sale of finished products, net of
contractual 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 organization 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. The Company 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 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 through 2006 and were granted a reduced tax rate through 2010.
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 is not expected to have a material adverse effect upon
Safeskin's operations as the Malaysian manufacturing operations are expected to
be transferred to Thailand during the first quarter of 1999. During the third
quarter of 1998, two of Safeskin's subsidiaries entered into a transaction that
qualified as a Section 351 Exchange, as defined in Section 351 of the Internal
Revenue Code.
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. In connection with the move, Safeskin recognized
expense of approximately $3 million in the fourth quarter of 1996, reflected in
the accompanying financial statements as a component of restructuring and other
unusual charges. 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
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<PAGE> 15
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, Safeskin
recognized expense of $14,331,000 in the fourth quarter of 1998, reflected in
the accompanying financial statements as a component of restructuring and other
unusual charges. This expense consists of approximately $5,134,000 related to
fixed assets written down to estimated fair value, $3,883,000 related to
employee 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
were assumed to be scrapped at the disposition date. The net book value of
assets expected to be disposed of totaled approximately $14 million as of
December 31, 1998.
1998 COMPARED TO 1997
Net sales for 1998 were $231,784,000 which represents a 26.7% increase over
net sales of $182,998,000 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.
Safeskin's sales into international markets continued to demonstrate strong
growth in 1998; international net sales increased by 20.7% over the prior year.
However, in 1999 Safeskin anticipates that net sales will be negatively affected
by higher than estimated distributor inventory levels, slower than anticipated
increase in orders from the new end-user contracts and increased pricing
pressures in the industry.
Cost of goods sold increased 8.3% from $102,229,000 for 1997 to $110,746,000
for 1998. As a percentage of net sales, cost of goods sold decreased from 55.9%
in 1997 to 47.7% 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 comparable product cost manufacturing facility and to the shift of product
mix to higher margin powder-free gloves in 1998. In addition, Safeskin's gross
profit margin was favorably impacted in 1998 due to the positive effects on the
cost of goods sold of the devaluation of the currencies in Thailand and
Malaysia. In 1997, the positive effects of the devaluation of the currencies in
Thailand and Malaysia did not begin to have a favorable impact on Safeskin's
gross profit margin until the fourth quarter of 1997. As a result of the above
factors, gross profits increased 50.0% from $80,769,000 in 1997 to $121,038,000
in 1998. However, in 1999 Safeskin anticipates that gross profit margins will be
negatively affected by startup costs associated with transferring operations to
the new Thailand facility, wind-down costs associated with the closing of the
Malaysian manufacturing facility and increased pricing pressures in the
industry. In addition, if the baht remains at its present level it would
negatively impact cost of goods sold.
Selling expenses increased 33.4% from $18,615,000 in 1997 to $24,834,000 in
1998. As a percentage of net sales, selling expenses increased slightly from
10.2% in 1997 to 10.7% in 1998. The increase in selling expenses as a percentage
of net sales pertains primarily to increased costs and expenses related to
Safeskin's efforts to introduce new products and expand its business in high
technology and scientific markets.
Research and development expenses increased 81.1% from $3,504,000 in 1997 to
$6,347,000 in 1998. As a percentage of net sales, research and development
expenses increased from 1.9% in 1997 to 2.7% in 1998. The increase in research
and development expenses as a percentage of net sales is primarily due to costs
associated with developing and testing 21 new products scheduled for
introduction in 1998 and 1999.
General and administrative expenses increased 89.9% from $15,923,000 in 1997
to $30,243,000 in 1998. As a percentage of net sales, general and administrative
expenses increased from 8.7% for the 1997 period to 13.0% for the 1998 period.
The increase in general and administration expenses as a percentage of net sales
was due to increased costs associated with Safeskin's efforts to improve and
streamline its information technology systems and services, increased
compensation costs, increased legal and other related costs associated with
product liability lawsuits, and expenses associated with the operation of AQL.
In addition, as part of the terms of separation, non-competition and
non-solicitation agreements between Safeskin and three former officers, Safeskin
extended the time within which each officer could vest in and exercise
previously granted stock options and recorded aggregate non-cash compensation
expense of approximately $3.0 million during 1998.
Income from operations increased 6.0% from $42,727,000 in 1997 to
$45,283,000 in 1998. Operating margins decreased from 23.3% in 1997 to 19.5% in
1998. Excluding the effects of the restructuring and other unusual charges in
1998, income from operations increased 39.5% from $42,727,000 in 1997 to
$59,613,000 in 1998. Operating margins, excluding the effects of the
restructuring and other unusual charges, would have been 25.7% in 1998.
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<PAGE> 16
Interest expense (income), net, changed from $823,000 of interest income in
1997 to $3,026,000 of interest expense in 1998, primarily due to the fact that
in 1998 Safeskin had incurred interest expense on debt outstanding during the
period. By comparison, in 1997, Safeskin had no debt outstanding and generated
investment returns on its cash balances. In addition, the 1998 interest expense
includes nonrecurring interest costs totaling approximately $850,000 relating to
a write-off in 1998 of capitalized interest costs associated with a 1998
financing activity.
Other expense (income), net, increased from $2,699,000 of other income in
1997 to $3,085,000 of other income in 1998. Safeskin experienced significant
foreign currency transaction gains, net of hedging contracts, in Safeskin's
Malaysian and Thailand subsidiaries in 1997 and experienced significant foreign
currency transaction gains, net of hedging contracts, primarily in its European
and Thailand subsidiaries in 1998.
Provision for income taxes decreased 30.5% from $4,999,000 in 1997 to
$3,473,000 in 1998. The income tax provisions recorded in both 1997 and 1998
remain less than statutory rates due primarily to the tax-free status of a
significant portion of Safeskin's foreign manufacturing operations.
Net income increased 1.5% from $41,250,000 in 1997 to $41,869,000 in 1998
and the net income margin decreased from 22.5% in 1997 to 18.1% in 1998 due to
the foregoing factors. Excluding the effects of the restructuring and other
unusual charges (including nonrecurring interest costs) in 1998, net income
increased 38.3% from $41,250,000 in 1997 to $57,050,000 in 1998. Net income
margin, excluding the effects of the restructuring and other unusual charges
(including nonrecurring interest costs), was 24.6% in 1998.
1997 COMPARED TO 1996
Net sales for 1997 were $182,998,000 which represents a 25.3% increase over
net sales of $146,089,000 in 1996. The predominant cause for the sales growth
was an increase in unit volumes sold during the 1997 period, which includes
sales of lightly-powdered gloves associated with Safeskin's new contracts with
group purchasing organizations as well as increased sales of powder-free exam
gloves, powder-free surgical gloves and scientific glove products. Safeskin's
sales into international markets continued to demonstrate strong growth in 1997;
international net sales increased by 24.8% over the prior year.
Cost of goods sold increased 17.5% from $87,004,000 for 1996 to $102,229,000
for 1997. As a percentage of net sales, cost of goods sold decreased from 59.6%
in 1996 to 55.9% in 1997. This decrease in cost of goods sold as a percentage of
net sales was principally attributable to the favorable impact of greater
manufacturing efficiencies, the continued shift of production to Safeskin's
lower-cost manufacturing facility in Thailand, and lower latex prices. Although
sales of Safeskin's lower margin lightly powdered gloves increased slightly as a
percentage of net sales in the 1997 period as compared to the 1996 period, the
impact on the gross profit margin was partially offset by increased sales of
higher margin powder-free surgical and scientific glove products. In addition,
Safeskin's gross profit margin was favorably impacted in 1997 due to the
positive effects of the significant devaluation of the currencies in both
Malaysia and Thailand. As a result of the above factors, gross profits increased
36.7% from $59,085,000 in 1996 to $80,769,000 in 1997.
Selling expenses increased 24.0% from $15,014,000 in 1996 to $18,615,000 in
1997. As a percentage of net sales, selling expenses decreased slightly from
10.3% in 1996 to 10.2% in 1997.
Research and development expenses increased 58.7% from $2,209,000 in 1996 to
$3,504,000 in 1997. As a percentage of net sales, research and development
expenses increased from 1.5% in 1996 to 1.9% in 1997. The increase in research
and development expenses as a percentage of net sales reflects an increase in
Safeskin's product testing, research and development personnel and research and
development costs related to the Tactylon(R) product line.
General and administrative expenses increased 29.6% from $12,287,000 in 1996
to $15,923,000 in 1997. As a percentage of net sales, general and administrative
expenses increased slightly from 8.4% for the 1996 period to 8.7% for the 1997
period. The increase in general and administrative expenses as a percentage of
net sales was caused primarily by increased costs associated with Safeskin's
acquisition of Tactyl Technologies, Inc.
On December 13, 1996, Safeskin announced plans to move all of its remaining
latex examination glove production from its Malaysian facility to its Thailand
facility in 1997. In connection with the move, Safeskin took a $3 million charge
against earnings in the fourth quarter of 1996, reflected in the accompanying
financial statements as a component of restructuring and other unusual charges.
During 1997, Safeskin extended the planned use of the Malaysian facility due to
existing production requirements and the timing of bringing new
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<PAGE> 17
production capacity on-line in Thailand. The Malaysian facility is still
considered held for sale and the delay in moving examination glove production
from Malaysia to Thailand has had no impact on Safeskin's restructuring plan and
the restructuring charge recorded in 1996.
Income from operations increased 60.6% from $26,596,000 in 1996 to
$42,727,000 in 1997. Operating margins increased from 18.2% in 1996 to 23.3% in
1997. Excluding the effects of the restructuring charge in 1996, income from
operations increased 44.5% from $29,575,000 in 1996 to $42,727,000 in 1997.
Operating margins, excluding the effects of the restructuring charge, would have
been 20.2% in 1996.
Interest expense (income), net, increased from $58,000 of interest income in
1996 to $823,000 of interest income in 1997, and is primarily due to the fact
that in 1997 Safeskin did not have any debt outstanding and generated investment
returns on its increased cash balances. Since 1996, Safeskin has been able to
successfully fund its operations, including its acquisition of Tactyl
Technologies, Inc. and the expansion of Safeskin's foreign manufacturing
operations, with internally generated cash while, at the same time, generating
excess cash balances.
Other expense (income), net, changed from $133,000 of other expense in 1996
to $2,699,000 of other income in 1997. This change in other expense was
substantially due to net foreign currency transaction gains experienced in
Safeskin's Malaysian and Thailand subsidiaries in 1997. Due to their
immateriality and because substantially all of the sales of these subsidiaries
were intercompany sales, the gains and losses from foreign currency transactions
for Safeskin's Malaysian and Thailand subsidiaries were recorded as a component
of cost of sales in 1996. With the significant devaluation of the Malaysian
ringgit and the Thai baht since June 30, 1997, Safeskin has experienced an
increased amount of net foreign currency transaction gains and, therefore, has
recorded these net foreign currency transaction gains as a component of other
expense (income), net in 1997. In future periods, Safeskin will record net
foreign currency transaction gains and losses, regardless of materiality, as a
component of other expense (income), net.
Provision for income taxes increased 70.1% from $2,939,000 in 1996 to
$4,999,000 in 1997. The income tax provisions recorded in both 1996 and 1997
remain less than statutory rates due to the tax-free status of Safeskin's
foreign manufacturing operations.
Net income increased 74.9% from $23,582,000 in 1996 to $41,250,000 in 1997
and the net income margin increased from 16.1% in 1996 to 22.5% in 1997 due to
the foregoing factors. Excluding the effects of the restructuring charge in
1996, net income increased 55.3% from $26,561,000 in 1996 to $41,250,000 in
1997. Net income margin, excluding the effects of the restructuring charge, was
18.2% in 1996.
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 i.e. Safeskin was only able to fulfill 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 quarter and the 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. As a result of these
factors, Safeskin's accounts receivable increased from $22,196,000 at December
31, 1997 to $32,511,000 at December 31, 1998 and inventory increased from
$21,243,000 at December 31, 1997 to $37,057,000 at December 31, 1998. Safeskin
expected these trends to continue into the first quarter. However, end-users
have not purchased products under the new contracts as quickly as anticipated.
In addition, during the first quarter of 1999 the Company has experienced a
longer than anticipated sales cycle for signing new contracts. As a result,
Safeskin expects sales and earnings for the first quarter and full year 1999 to
be lower than anticipated.
In order to reduce debt and increase cash flow in conjunction with
Safeskin's plan to refinance its debt, Safeskin entered into a Non-Recourse
Receivables Purchase Agreement in December 1998. Under the agreement, Safeskin
sold accounts receivable valued at approximately $8,000,000 on a non-recourse
basis. Proceeds from the sale were used to repay monies owed under the Revolving
Credit Facility.
Safeskin acquired capital assets of approximately $65,360,000 during 1998,
$35,183,000 during 1997, and $20,230,000 during 1996 primarily for the expansion
of Safeskin's foreign manufacturing operations. Included in the 1998 and 1997
amounts were approximately $57,476,000 and $31,015,000, respectively, for the
expansion of Safeskin's foreign manufacturing operations and latex concentrate
plant
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located in Thailand. Included in the 1996 amount was approximately $16,441,000
for the expansion of Safeskin's foreign manufacturing operations and the
acquisition of land at Safeskin's manufacturing facility in Hat Yai, Thailand.
During 1997, Safeskin completed construction and began operating the first
of its three production lines located in its Thailand facility, referred to by
Safeskin as the "Grand Master(TM)." The two additional production lines began
operating in the first quarter of 1998. Safeskin's management believes that a
single "Grand Master"(TM) production line has the highest capacity of any glove
production line in the world, equivalent in capacity to approximately eight of
the previously existing production lines in this facility. The construction of
these production lines has been funded with internally generated cash.
In addition, Safeskin is currently building a latex concentrate plant in
Thailand. Safeskin began initial production of latex concentrate at this plant
in the third quarter of 1997 and expects the final phase of construction to be
completed in 1999. The output of the plant currently supplies approximately 70%
of the latex concentrate required by Safeskin's factories in Thailand and
Malaysia 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 anticipates that the completion of this construction will be funded
with internally generated funds and borrowings under the credit facility.
Safeskin is expanding its Thailand manufacturing operations and transferring
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 has recently completed construction of a
fifth building and related machinery at Safeskin's existing Hat Yai, Thailand
facility. This building houses 22 high-speed and product-flexible dipping
production lines which were commissioned throughout 1998, beginning in the
second quarter, and are expected to increase production capacity by an
additional 1.5 billion gloves annually. During 1999, Safeskin's expansion plans
include the completion 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 second half of 1997 after approval by
the Thailand Board of Investment. Four production buildings have been
constructed on this site. The first building is expected to provide 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 existing facility which is
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 $80 million in the aggregate, approximately $48 million of which
has been expended as of December 31, 1998. 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 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 the fourth quarter of 1998, Safeskin began construction of a facility in
southern Thailand designed to manufacture boxes and ceramic handformers for the
Company's 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 is expected to
commence production in May 1999 and is expected to produce approximately 80% of
Safeskin's requirements. The total expected costs for the construction of these
facilities is approximately $7 million. This construction is expected to be
funded through internally generated cash and borrowings under Safeskin's credit
facilities.
On December 13, 1996, Safeskin announced plans to move all of its remaining
latex medical 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. In connection with the move of the
remaining latex medical examination glove production, Safeskin recognized
expense of approximately $3 million in the fourth quarter of 1996 reflected in
the accompanying financial statements as a component of restructuring and other
unusual charges. 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 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 latex and synthetic examination
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 announced that it had completed the
integration of AQL in the fourth quarter of 1998 by relocating AQL's offices
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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, Safeskin recognized expense of
approximately $5 million that is reflected in the accompanying financial
statements as a component of restructuring and other unusual charges, to reflect
the fixed assets at Safeskin's Malaysia and Vista and Santa Maria, California
facilities at estimated fair value.
Safeskin has outstanding contractual commitments at December 31, 1998 for
the construction of plant and equipment in Thailand in the approximate amount of
$12,481,000.
In March 1997, Safeskin acquired the synthetic glove business of Tactyl
Technologies, Inc., a San Diego based developer and manufacturer of non-latex
surgical gloves for the domestic and international markets. The acquisition,
which has been accounted for under the purchase method, included an acquisition
price of approximately $14.5 million payable at the closing, plus up to an
additional $5 million payment which was contingent upon the Tactyl business
achieving certain future sales and performance targets, including the
development of the next generation of synthetic latex technology. Safeskin made
a final additional payment related to this agreement totaling approximately $3.3
million in 1998. The payment has been recorded as goodwill and is being
amortized over its remaining useful life.
In February 1998, Safeskin completed the acquisition of AQL, a California
based marketer of glove products for the high-technology and scientific markets.
The acquisition, which has been accounted for under the purchase method,
included an acquisition price of approximately $8.8 million and $1,564,000 in
stock options issued plus certain contingent payments totaling approximately $2
million based upon the performance of the Company's scientific business unit.
Safeskin paid for this acquisition with internally generated cash.
Safeskin has changed the name of AQL to Safeskin Scientific Corporation.
In May 1998, the Company acquired Sensicon Corporation, a San Diego based
developer and manufacturer of non-latex products. The acquisition, which has
been accounted for under the purchase method, included an acquisition price of
approximately $6 million in cash paid at the closing.
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 total
cost of the treasury stock acquired related to this share buyback totaled
approximately $73,600,000 for the year-to-date period ending December 31, 1998.
Borrowings above the cost of Safeskin's share buyback are being used to finance
(i) Safeskin's ongoing investment in its Thailand facilities where its
production capacity is expanding by nearly 60 percent above 1997 levels, (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 1.25%, 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, 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 will all be
secured by certain assets of Safeskin as well as a guarantee of all current and
future significant domestic subsidiaries. Safeskin also entered into a seven
year lease (the "Lease") for a new corporate headquarters campus facility to be
constructed for Safeskin. The lessor of the campus has committed to fund up to a
maximum of $60 million for the construction of the campus, with the portion of
the committed amount actually used to be determined by Safeskin. Safeskin has
the option to purchase the leased premises at any time during the lease. If
Safeskin elects not to purchase the premises, Safeskin has guaranteed that the
lessor, upon subsequent sale of the building, will receive a percentage of the
total amount of funding, up to $53.9 million. The Company's lease obligations,
including the payment of rents and the payment of the guaranteed residual value
is secured by the Company's interest in the real estate subject to the Lease
and, pari passu with the lenders on the Term Loan, Revolver, and Notes, certain
other assets of Safeskin.
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Safeskin's foreign manufacturing subsidiaries have revolving lines of credit
for financing general working capital needs up to approximately $9,100,000. As
of December 31, 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 Safeskin.
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 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. In 1997, the significant devaluation in
both the Thai and Malaysian currencies resulted in an increased amount of
foreign currency translation adjustments, which were recorded as accumulated
other comprehensive loss totaling approximately $46,400,000. As of December 31,
1998, the Thai baht and Malaysian ringgit strengthened to approximately 36.55
bahts/dollar and 3.8 ringgits/dollar, respectively. Safeskin has, experienced
approximately $18,700,000 of foreign currency translation adjustments that are
reflected as other comprehensive income in 1998.
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 help Safeskin (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 involves the testing and analyzing of all
information technology equipment, applications software 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 December
31, 1998, Safeskin's Year 2000 assessment in each of these areas was over 90%
complete. To date, the assessment has revealed that two of the material
applications software on which Safeskin relies are not Year 2000 compliant.
Safeskin plans to replace both of these applications in 1999. 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
third 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,
applications software that is not Year 2000 compliant are expected to be
converted or replaced by the end of the third quarter of 1999 and any
non-information technology systems or processors that are either non-Year 2000
compliant or suspect due to lack of information from the vendor are expected to
be replaced or upgraded to a compliant version. In addition, Safeskin is
currently requesting confirmation that all suppliers and customers material to
its operations are, or in within a short period of time are planning to become,
Year 2000 compliant.
Safeskin has 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 will give priority to those non-Year 2000 compliant technology
systems which are material to Safeskin's operations. Perot Systems Corporation
is expected to handle all remediation efforts, including, if necessary, the
replacement of any information technology hardware or software, the upgrading of
manufacturing systems and the changing of BIOS or chip codes. Perot Systems will
coordinate its remediation efforts with Safeskin in order to avoid, to the
extent possible, disruption of Safeskin's manufacturing capacity. Safeskin's
expects that contingency plans for all known Year 2000 Issues will be finalized
by mid-1999.
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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.
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 mid-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's expects these contingency plans will be fully developed
by the end of the second quarter in 1999.
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 December 31, 1998, Safeskin has spent
approximately $165,000 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 $175,000. Costs for replacements or modifications that would have
been necessary independent of Year 2000 Issues, including the $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.
RECENT DEVELOPMENTS
On March 11, 1999, Safeskin announced that it expects sales and earnings to
be below analysts' expectations for the first quarter and full year 1999.
Safeskin believes that net sales and earnings will be lower due to higher than
estimated distributor inventory levels, slower than anticipated ramp up of
orders from new end-user contracts and increased pricing pressures in the
industry. Subsequent to the press release on March 11, 1999, numerous purported
class action lawsuits alleging violations of federal securities laws and a
shareholder derivative action have been filed against Safeskin and certain of
its officers and directors. See "Legal 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
in the Management's Discussion & Analysis of Financial Condition and Results of
Operations, including statements regarding Safeskin's estimates with respect to
sales, revenues, cost of goods sold, operating margins, Safeskin's ability to
increase sales under end-user contracts, the effect of currency fluctuations in
Thailand on the cost of goods sold, and its ability to achieve anticipated
production capacity in the new manufacturing facilities and recognize certain
operating efficiencies and savings in Thailand, and statements elsewhere
concerning Safeskin's outlook for 1999 and beyond including the ability
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of Safeskin to retain and increase sales under GPO and end-user contracts, the
ability of Safeskin to sign new contracts, the effect of currency fluctuations
in Thailand and Malaysia on the operating results of Safeskin, Safeskin's
liquidity and working capital, Safeskin's ability to complete construction of
new facilities as scheduled, the production capacity and Safeskin'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 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:
- - 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;
- - the ability of Safeskin to meet existing or future FDA regulations regarding
the manufacture and sale of Safeskin's gloves;
- - Safeskin's ability to successfully develop and introduce new products to the
market;
- - 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;
- - 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;
- - 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;
- - adverse outcomes or excessive legal expenses in connection with lawsuits or
the ability to obtain and maintain sufficient insurance coverage at
reasonable rates;
- - 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;
- - 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;
- - the non-linearity of Safeskin's sales throughout the quarter which limits
Safeskin's ability to accurately monitor and predict net sales and
profitability;
- - 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;
- - economic conditions in the healthcare industry, including the potential
impact of industry consolidation and cost constraints on the end-user;
- - changes in significant government regulations affecting the healthcare
industry;
- - the ability of Safeskin to protect its proprietary products, know-how and
manufacturing processes;
- - Safeskin's ability to develop, maintain and improve information systems that
provide the Company with accurate and timely information;
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- - 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;
- - 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
- - 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.
ITEM 7A. 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
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 AA 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 AA rated international institutions as counterparties
to the hedging contracts minimizes the risk of non-performance. As of December
31, 1998, there were no forward foreign exchange contracts outstanding. Further
disclosure relating to forward foreign exchange contracts is included in Note 2
in the Notes to Consolidated Financial Statements.
Interest Rate Risk
Except for indebtedness under Safeskin's revolving credit facility which is
variable rate financing, the balance of Safeskin's indebtedness is fixed 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 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 prices
mainly for raw rubber and latex concentrate used in the manufacturing of
Safeskin's gloves.
23
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
INDEPENDENT AUDITORS' REPORT 25
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets at December 31, 1998 and 1997 26
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996 27
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 1998, 1997 and 1996 28
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996 29
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1998, 1997 and 1996 30
Notes to Consolidated Financial Statements 31-45
FINANCIAL STATEMENT SCHEDULES:
INDEPENDENT AUDITORS' REPORT 46
Schedule I - Condensed Financial Information of
Parent Company 47-49
Schedule II- Valuation and Qualifying Accounts 50
</TABLE>
-24-
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
Safeskin Corporation:
We have audited the accompanying consolidated balance sheets of Safeskin
Corporation and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, comprehensive income, shareholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits. The financial
statements of Safeskin Corporation for the year ended December 31, 1996 were
audited by other auditors whose report, dated February 17, 1997, expressed an
unqualified opinion on these statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such 1998 and 1997 consolidated financial statements present
fairly, in all material respects, the financial position of Safeskin Corporation
and subsidiaries as of December 31, 1998 and 1997, and the results of its
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
San Diego, California
April 5, 1999
-25-
<PAGE> 26
SAFESKIN CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,416,802 $ 23,916,959
Accounts receivable, net of allowance of
$1,181,000 and $966,000, respectively 32,511,412 22,195,828
Inventory 37,056,821 21,242,732
Other current assets 9,829,335 5,692,369
------------- -------------
Total current assets 88,814,370 73,047,888
Property, plant and equipment, net 119,456,352 52,904,271
Deferred taxes and other assets 40,690,386 12,568,245
------------- -------------
Total assets $ 248,961,108 $ 138,520,404
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,661,602 $ 6,922,540
Accrued liabilities 24,515,378 22,924,623
Current portion of long-term debt 4,500,000 --
------------- -------------
Total current liabilities 37,676,980 29,847,163
Long-term debt 87,731,158 --
Other long-term liabilities 2,140,682 2,094,928
------------- -------------
Total liabilities 127,548,820 31,942,091
Commitments and contingencies
Shareholders' equity:
Preferred stock; $.01 par value; 10,000,000 shares
authorized and no shares issued or outstanding in
1998 and 1997 -- --
Common stock; $.01 par value; 80,000,000 shares
authorized; 54,600,499 and 52,964,224 shares
outstanding in 1998 and 1997, respectively 546,004 529,642
Additional paid-in-capital 75,360,306 47,517,453
Treasury stock, at cost; 1,999,900 and 0 shares in 1998
and 1997, respectively (73,589,169) --
Accumulated other comprehensive loss (26,993,003) (45,687,717)
Retained earnings 146,088,150 104,218,935
------------- -------------
Total shareholders' equity 121,412,288 106,578,313
------------- -------------
Total liabilities and shareholders' equity $ 248,961,108 $ 138,520,404
============= =============
</TABLE>
See notes to consolidated financial statements.
-26-
<PAGE> 27
SAFESKIN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales $ 231,783,872 $ 182,998,305 $ 146,089,348
Cost of goods sold 110,746,344 102,229,142 87,004,617
------------- ------------- -------------
Gross profit 121,037,528 80,769,163 59,084,731
------------- ------------- -------------
Operating expenses:
Selling 24,834,113 18,615,057 15,014,132
Research and development 6,347,284 3,504,553 2,208,436
General and administrative 30,243,305 15,922,824 12,286,798
Restructuring and other unusual charges 14,330,573 -- 2,979,146
------------- ------------- -------------
Total operating expenses 75,755,275 38,042,434 32,488,512
------------- ------------- -------------
Income from operations 45,282,253 42,726,729 26,596,219
Interest expense (income), net 3,025,741 (822,981) (58,337)
Other expense (income), net (3,085,438) (2,699,335) 133,278
------------- ------------- -------------
Income before income tax provision 45,341,950 46,249,045 26,521,278
Income tax provision 3,472,735 4,998,794 2,938,879
------------- ------------- -------------
Net income $ 41,869,215 $ 41,250,251 $ 23,582,399
============= ============= =============
Per share amounts:
Earnings per share of common stock
and common stock equivalents:
Basic $ .78 $ .79 $ .46
Diluted $ .70 $ .70 $ .42
Weighted average number of shares of common
stock and common stock equivalents
outstanding:
Basic 53,344,082 52,260,538 50,943,814
Diluted 60,119,567 58,537,694 55,550,668
</TABLE>
See notes to consolidated financial statements.
-27-
<PAGE> 28
SAFESKIN CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income $ 41,869,215 $ 41,250,251 $ 23,582,399
Other comprehensive income (loss)
Foreign currency translation adjustments 18,694,714 (46,374,261) 337,693
------------ ------------ ------------
Comprehensive income (loss) $ 60,563,929 $ (5,124,010) $ 23,920,092
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
-28-
<PAGE> 29
SAFESKIN CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------------- PAID-IN TREASURY
SHARES AMOUNT CAPITAL STOCK, AT COST
----------- ------------- ---------- --------------
<S> <C> <C> <C> <C>
Balance, January 1, 1996 49,922,124 $ 499,220 $ 30,639,580 $ --
Exercise of common stock options 1,933,308 19,334 5,332,590 --
Other comprehensive income -- -- -- --
Forfeited stock related to stock grant (233,336) (2,333) (858,093) --
Amortization of deferred
compensation related to stock grant -- -- -- --
Tax benefit from exercise of
options 3,729,263
Net income -- -- -- --
-------------------------------------------------------------------------------
Balance, December 31, 1996 51,622,096 516,221 38,843,340 --
Exercise of common stock options 1,342,128 13,421 4,237,713 --
Other comprehensive loss -- -- -- --
Tax benefit from exercise of options -- -- 4,436,400 --
Net income -- -- --
-------------------------------------------------------------------------------
Balance, December 31, 1997 52,964,224 529,642 47,517,453 --
Exercise of common stock options 1,636,175 16,362 7,231,797 --
Repurchase of common stock (1,999,900) -- -- (73,589,169)
Other comprehensive income -- -- -- --
Tax benefit from exercise of options -- -- 16,061,831 --
Fair value of options granted in
acquisition -- -- 1,564,000 --
Value of options extended related
to employee terminations -- -- 2,985,225 --
Net income -- -- -- --
-------------------------------------------------------------------------------
Balance, December 31, 1998 52,600,499 $ 546,004 $ 75,360,306 $ (73,589,169)
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE DEFERRED RETAINED
INCOME (LOSS) COMPENSATION EARNINGS TOTAL
------------- ------------- -------- -----
<S> <C> <C> <C> <C>
Balance, January 1, 1996 $ 348,851 $ (1,012,895) $ 39,386,285 $ 69,861,041
Exercise of common stock options -- -- -- 5,351,924
Other comprehensive income 337,693 -- -- 337,693
Forfeited stock related to stock grant -- 860,426 -- --
Amortization of deferred
compensation related to stock grant -- 152,469 -- 152,469
Tax benefit from exercise of
options 3,729,263
Net income -- -- 23,582,399 23,582,399
-----------------------------------------------------------------------------
Balance, December 31, 1996 686,544 -- 62,968,684 103,014,789
Exercise of common stock options -- -- -- 4,251,134
Other comprehensive loss (46,374,261) -- -- (46,374,261)
Tax benefit from exercise of options -- -- -- 4,436,400
Net income -- -- 41,250,251 41,250,251
-----------------------------------------------------------------------------
Balance, December 31, 1997 (45,687,717) -- 104,218,935 106,578,313
Exercise of common stock options -- -- -- 7,248,159
Repurchase of common stock -- -- -- (73,589,169)
Other comprehensive income 18,694,714 -- -- 18,694,714
Tax benefit from exercise of options -- -- -- 16,061,831
Fair value of options granted
in acquisition -- -- -- 1,564,000
Value of options extended related
to employee terminations -- -- -- 2,985,225
Net income -- -- 41,869,215 41,869,215
-----------------------------------------------------------------------------
Balance, December 31, 1998 $ (26,993,003) $ -- $ 146,088,150 $ 121,412,288
=============================================================================
</TABLE>
-29-
<PAGE> 30
SAFESKIN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 41,869,215 $ 41,250,251 $ 23,582,399
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 12,838,676 7,138,338 6,094,758
Exchange gain (2,614,886) (16,849,739) --
Restructuring and other unusual charges 15,180,573 -- 2,979,146
Non-cash severance expense 2,985,225 -- --
Loss on sale of equipment 63,572 125,725 57,919
Deferred income taxes (5,328,169) 6,308,400 (2,287,424)
Amortization of deferred compensation -- -- 152,469
Changes in operating assets and liabilities:
Accounts receivable (7,888,217) (1,794,099) (2,319,400)
Inventory (14,101,994) (548,485) (3,895,369)
Other assets 2,252,800 (4,683,784) 1,161,148
Accounts payable and accrued liabilities (7,808,406) 22,595,759 5,411,489
------------ ------------ ------------
Net cash provided by operating activities 37,448,389 53,542,366 30,937,135
------------ ------------ ------------
Cash flows from investing activities:
Net cash paid for acquisitions (14,346,460) (14,463,092) --
Proceeds from sale of subsidiary 574,703 -- --
Purchases of property, plant and equipment (65,360,446) (35,182,574) (20,230,415)
Proceeds from sale of equipment 2,470 52,113 36,519
------------ ------------ ------------
Net cash used by investing activities (79,129,733) (49,593,553) (20,193,896)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 7,248,159 4,251,134 5,351,924
Repurchase of common stock (73,589,169) -- --
Increase (decrease) in long-term debt 92,231,158 -- (2,750,000)
------------ ------------ ------------
Net cash provided by financing activities 25,890,148 4,251,134 2,601,924
------------ ------------ ------------
Effect of exchange rate changes on cash 1,291,039 (548,456) 833,333
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (14,500,157) 7,651,491 14,178,496
Cash and cash equivalents at beginning of year 23,916,959 16,265,468 2,086,972
------------ ------------ ------------
Cash and cash equivalents at end of year $ 9,416,802 $ 23,916,959 $ 16,265,468
============ ============ ============
Supplemental cash flow information:
Amounts paid for:
Interest $ 3,525,579 $ -- $ 133,550
Income taxes $ 750 $ 1,600 $ 1,831,678
Supplemental schedule of non-cash investing activities:
Assets acquired and liabilities assumed related
to the Company's acquisitions were as follows:
Fair value of assets acquired $ 22,029,979 $ 14,728,362
Liabilities assumed (6,119,519) (265,270)
Options granted (1,564,000) --
------------ ------------
Net cash paid for acquisitions $ 14,346,460 $ 14,463,092
============ ============
</TABLE>
See notes to consolidated financial statements.
-30-
<PAGE> 31
SAFESKIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------
1. Description of Business:
Safeskin Corporation (the "Company") is a leading manufacturer of high
quality disposable latex medical examination gloves for the United
States market. The Company manufactures its products primarily in
Thailand and Malaysia, using proprietary formulations and processes, for
sale primarily in the United States.
2. Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its domestic and foreign subsidiaries after elimination of
all significant intercompany transactions and accounts.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from estimates.
Foreign Currency Translation
The accounts of the Company's foreign subsidiaries are measured using
local currency as the functional currency. For those operations, assets
and liabilities are translated into U.S. dollars at period-end exchange
rates and income and expense accounts are translated at average exchange
rates in effect during the year. Net currency exchange gains or losses
resulting from such translation are included in accumulated other
comprehensive loss.
Foreign Currency Transactions and Hedging Activities
The Company is exposed to exchange rate risk when its U.S. and non-U.S.
subsidiaries enter into transactions denominated in currencies other
than their functional currency. Certain firmly committed transactions
are hedged with forward foreign exchange contracts. As exchange rates
change, gains and losses on the exposed transactions are partially
offset by gains and losses related to the hedging contracts. Both the
exposed transactions and the hedging contracts are translated at current
spot rates, with gains and losses included in earnings. The Company's
derivative activities, all of which consist of forward foreign exchange
contracts, are initiated primarily to hedge intercompany receivables and
payables.
The forward foreign exchange contracts generally require the Company to
exchange U.S. dollars for foreign currencies based on pre-established
exchange rates at the contracts maturity dates. If the counterparties to
the exchange contracts (primarily AA rated international institutions)
do not fulfill their obligations to deliver the contracted currencies,
the Company could be at risk for currency related fluctuations
(generally limited to unrealized gains). Management believes using AA
rated international institutions as counterparties to the hedging
contracts minimizes the risk of non-performance.
-31-
<PAGE> 32
SAFESKIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------
For the years ended December 31, 1998 and 1997, the Company recognized
foreign exchange transaction net gains of $10,290,876 and $19,837,286
related to transactions with its manufacturing subsidiaries in Malaysia
and Thailand, offset by net losses on forward foreign exchange contracts
of $7,858,753 and $16,441,247, which have been recorded net as other
income in the accompanying statement of operations. Gains and losses
from foreign currency transactions for the year ended December 31, 1996
were not significant.
Cash and Cash Equivalents
The Company considers highly liquid investments, those with maturities
of less than three months when acquired, to be cash equivalents.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Additions and
improvements are capitalized, while maintenance and repairs are expensed
when incurred. Asset and accumulated depreciation accounts are relieved
for dispositions with resulting gains or losses recorded in the
statements of operations. Depreciation of plant and equipment is
computed over estimated useful lives using the straight-line method as
follows:
<TABLE>
<S> <C>
Building and improvements 10 to 50 years
Machinery and equipment 3 to 10 years
Computer and office equipment 3 to 10 years
</TABLE>
Inventory
Inventory is valued at the lower of cost, determined on a first-in,
first-out basis, or market, determined on a net realizable value basis.
Consideration is given to obsolescence and other factors in evaluating
net realizable value.
Income Taxes
The Company accounts for income taxes in accordance with the provisions
of Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes. This standard requires, among other things, recognition of
future tax benefits, measured by enacted tax rates, attributable to
deductible temporary differences between financial statement and income
tax bases of assets and liabilities, and net operating loss
carryforwards to the extent that realization of such benefits is more
likely than not. The provision for income taxes consists of taxes
payable for the year and the changes during the year of deferred income
tax assets and liabilities. Valuation allowances are established when
necessary to reduce deferred income tax assets to amounts expected to be
realized.
Shareholders' Equity
On November 14, 1996, the Company authorized a two-for-one stock split
of its common stock to be effective in the form of a stock dividend
distributed on January 2, 1997 to shareholders of record at the close of
business on November 29, 1996. The holders of the Company's common stock
received a stock dividend at the rate of one share of common stock for
each share of common stock owned. All share and per share amounts have
-32-
<PAGE> 33
SAFESKIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------
been retroactively restated to reflect the stock split.
On February 17, 1998, the Company authorized a two-for-one stock split
of its common stock to be effective in the form of a stock dividend to
be distributed on April 1, 1998 to shareholders of record at the close
of business on February 27, 1998. The holders of the Company's common
stock received a stock dividend at the rate of one share of common stock
for each share of common stock owned. The par value of each share will
not change from $.01. All share and per share amounts have been
retroactively restated to reflect the stock split.
Revenue Recognition
The Company recognizes revenue upon shipment of products to customers.
The Company's net sales are derived from the sales of finished products,
net of contractual allowable rebates and fees provided to distributors
and group purchasing organizations for the resale of the Company's
products in specific volumes to specified end user customers. The
Company estimates allowable rebates on a monthly basis through the
analysis of actual sales and inventory information from customers,
contractual arrangements and historical trends related to actual rebates
issued.
Research and Development Expenses
Expenditures for research and development of new products are expensed
as incurred. Research and development expenses incurred by the Company
were approximately $6,347,000, $3,504,000 and $2,209,000 for the years
ended December 31, 1998, 1997, and 1996, respectively.
Stock Based Compensation
Statement of Financial Accounting Standard No. 123, Accounting for
Stock-Based Compensation, ("SFAS 123") encourages, but does not require,
companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has elected to continue to
account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any,
of the quoted market price of the Company's stock at the date of grant
over the exercise price of the option.
Net Income Per Share
The Company accounts for net income per share in accordance with the
provisions of Statement of Financial Accounting Standards No. 128,
Earnings Per Share. Net income per share is computed by dividing net
income by the weighted average number of common shares outstanding and
dilutive common stock equivalents. Common stock options are common stock
equivalents and are included in the weighted average
-33-
<PAGE> 34
SAFESKIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------
number of common shares outstanding using the treasury stock method.
Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, during 1998. This standard expands or
modifies disclosures, and accordingly, has no impact on the Company's
financial position, results of operations or cash flows.
Segment Reporting
The Company adopted Statement of Financial Accounting Standards No. 131,
Disclosures About Segments of an Enterprise and Related Information,
during 1998. The implementation of this standard results in the use of a
management approach in identifying segments of an enterprise. Management
has determined that segment disclosures are not appropriate because the
Company operates in only one segment.
Derivative Instruments
During 1998, Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities, was issued
effective for all fiscal quarters for fiscal years beginning after June
15, 1999. This statement establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The Company
does not expect the adoption of this statement to materially effect the
consolidated financial statements.
Reclassifications
Certain amounts have been reclassified in the prior periods to conform
with the current year presentation.
3. Inventory:
Inventory at December 31, 1998 and 1997 consisted of:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Raw materials $ 5,587,270 $ 2,700,643
Work in process 908,723 690,480
Finished goods 30,560,828 17,851,609
----------- -----------
$37,056,821 $21,242,732
=========== ===========
</TABLE>
4. Property, Plant and Equipment:
Property, plant and equipment at December 31, 1998 and 1997 consisted
of:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land $ 8,770,647 $ 4,488,277
Buildings and improvements 19,195,015 8,651,187
Machinery and equipment 72,646,589 31,741,450
Computer and office equipment 16,034,551 9,020,427
Construction in progress 27,980,570 12,402,336
------------ ------------
144,627,372 66,303,677
Less accumulated depreciation 25,171,020 13,399,406
------------ ------------
$119,456,352 $ 52,904,271
============ ============
</TABLE>
Statement of Financial Accounting Standard No. 121, Accounting for the
Impairment of Long-Lived Assets and
-34-
<PAGE> 35
SAFESKIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------
Long-Lived Assets to be Disposed of ("SFAS 121"), requires the
evaluation of long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. (See Note 14).
5. Accrued Liabilities:
Accrued liabilities at December 31, 1998 and 1997 consisted of:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Accrued compensation $ 8,543,163 $ 4,061,135
Accrued restructuring charges 5,158,889 --
Accrued equipment purchase orders 2,476,927 2,185,935
Income taxes payable 1,898,355 431,847
Forward foreign exchange contract accrual -- 12,062,942
Other 6,438,044 4,182,764
----------- -----------
$24,515,378 $22,924,623
=========== ===========
</TABLE>
In connection with the restructuring activities related to the closure
of the Company's facilities in Ipoh, Malaysia and Vista and Santa Maria,
California, the Company accrued restructuring charges totaling
-35-
<PAGE> 36
SAFESKIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------
$5,158,889 at December 31, 1998. 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, the Company
anticipates that approximately 1,800 employees will be terminated
primarily in Malaysia, in the first quarter of 1999. (See Note 14).
As of December 31, 1997, the forward foreign exchange contract accrual
results from outstanding forward foreign exchange contracts to purchase
Malaysian ringgit in the amount of $35,466,327, with a weighted average
exchange rate of 2.78 Malaysian ringgit to 1 U.S. dollar. As of December
31, 1998, there were no forward foreign exchange contracts outstanding.
6. Long-Term Debt:
During 1998, the Company amended its unsecured domestic two-year credit
facility for financing general working capital needs up to a maximum of
$40,000,000 in borrowings (the "Credit Facility"). Obligations under
this arrangement are due July 31, 2000 and bear interest at the London
Interbank Offered Rate (LIBOR) plus .80% or the banks' reference rate.
The credit facility specifies various financial covenants such as
minimum quick ratio, tangible net worth, debt to equity, and
profitability. As of December 31, 1998 and 1997, there were
approximately $12,000,000 and $0, respectively, outstanding under this
credit facility.
On July 30, 1998, the Company, 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 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 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 this credit
facility. This credit facility was restructured subsequent to December
31, 1998, and as such has been recorded as long-term debt in accordance
with the new agreements (see Note 13).
The Company has foreign credit facilities for financing general working
capital needs up to a maximum of approximately $9,100,000. These
facilities bear interest ranging from 9.65% to 13.90% at December 31,
1998 and 9.3% to 11.3% at December 31, 1997. These facilities are
guaranteed by the Company. As of December 31, 1998 and 1997, there were
no borrowings outstanding under these foreign credit facilities.
7. Foreign Operations:
The Company has wholly-owned subsidiaries that operate manufacturing
facilities in the countries of Malaysia and Thailand. Principally all of
the subsidiaries' sales are to other subsidiaries of the Company and
are, therefore, eliminated in consolidation. Further, the Company has
wholly-owned subsidiaries in Germany, the Netherlands and the United
Kingdom that operate as limited-risk distributors. Domestic product
sales was 89% of net consolidated sales for the year ended December 31,
1998. For the years ended December 31, 1997 and 1996, domestic product
sales were 88% of net consolidated sales.
-36-
<PAGE> 37
SAFESKIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------
Included in the consolidated balance sheets are the following domestic
and foreign components at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current assets:
Domestic $ 48,274,366 $ 43,960,273
Foreign 40,540,004 29,087,615
------------ ------------
$ 88,814,370 $ 73,047,888
============ ============
Property, plant and equipment, net:
Domestic $ 10,391,275 $ 7,184,131
Foreign 109,065,077 45,720,140
------------ ------------
$119,456,352 $ 52,904,271
============ ============
Other assets:
Domestic $ 21,473,335 $ 3,658,055
Foreign 19,217,051 8,910,190
------------ ------------
$ 40,690,386 $ 12,568,245
============ ============
Total assets:
Domestic $ 80,138,976 $ 54,802,459
Foreign 168,822,132 83,717,945
------------ ------------
$248,961,108 $138,520,404
============ ============
</TABLE>
-37-
<PAGE> 38
SAFESKIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------
8. Income Taxes:
The income tax provision for the years ended December 31, 1998, 1997 and
1996, consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 20,741,000 $ 2,131,000 $ 3,078,000
State 3,654,000 509,000 312,000
Foreign 468,000 487,000 (5,000)
------------ ------------ ------------
24,863,000 3,127,000 3,385,000
------------ ------------ ------------
Deferred:
Federal (12,945,000) 1,618,000 (433,000)
State (8,445,000) 254,000 (13,000)
------------ ------------ ------------
(21,390,000) 1,872,000 (446,000)
------------ ------------ ------------
Total provision $ 3,473,000 $ 4,999,000 $ 2,939,000
============ ============ ============
</TABLE>
The provision for income taxes is different from that which would be
obtained by applying the statutory Federal income tax rate (35%) to
income before provision for income taxes. The items causing this
difference for the periods ended December 31, 1998, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal rate 35.0% 35.0% 35.0%
Foreign taxes less than federal statutory rate (44.3) (25.5) (23.7)
IRC Sec. 351 inventory basis difference (52.2) -- --
US tax on foreign earnings 4.5 -- --
Change in valuation allowance 73.7 1.1 2.0
Miscellaneous (9.0) .2 (2.2)
------ ------ ------
Effective tax rate 7.7% 10.8% 11.1%
====== ====== ======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the net deferred tax asset as of
December 31, 1998 and the deferred tax liability as of December 31, 1997
are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets (liability):
Net operating losses $ 62,053,000 $ 4,565,000
Depreciation and amortization 1,418,000 2,428,000
Bad debt reserves 492,000 439,000
Rebate reserves 2,349,000 486,000
Inventory reserves 342,000 110,000
Foreign exchange reserve -- 827,000
</TABLE>
-38-
<PAGE> 39
SAFESKIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Charitable contributions 26,000 298,000
State taxes (3,217,000) (266,000)
Other 1,983,000 753,000
------------ ------------
65,446,000 9,640,000
Other liabilities (15,000,000) (7,604,000)
Valuation allowance (38,321,000) (3,905,000)
------------ ------------
Total $ 12,125,000 $ (1,869,000)
============ ============
</TABLE>
A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
In Malaysia, the subsidiary company has been granted pioneer status
under that country's Promotion of Investment Act of 1986. As a result of
the pioneer status, the subsidiary company was exempt from paying tax on
profit earned from pioneer products through September 1998. In Thailand,
the subsidiary company has been granted exempt status with respect to
profit earned through 2003 under that country's Investment Promotion
Act, and has been granted a reduced tax rate through 2007. As the
Company begins to build new production facilities in Thailand, it has
applied for and received similar tax free status for these operations.
As of December 31, 1998, the Company has net operating loss carryovers
of approximately $144,571,000, $147,618,000 and $1,967,000 for federal,
state, and foreign tax purposes. At December 31, 1997, the Company had
net operating loss carryovers of approximately $6,780,000, $5,684,000
and $1,967,000 for federal, state, and foreign tax purposes. These
carryovers expire in various years through 2013.
The Company does not provide for income taxes which would be payable if
undistributed earnings of its foreign subsidiaries were remitted because
the Company considers these earnings to be invested indefinitely. During
the years ended December 31, 1998 and 1997, the Company recorded tax
benefits from stock option exercises of $16,062,000 and $4,436,000,
respectively, which were credited to shareholders' equity.
-39-
<PAGE> 40
SAFESKIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------
9. Commitments and Contingencies:
At December 31, 1998, approximate future minimum rental payments
applicable to noncancelable operating leases for office and warehouse
space were as follows:
<TABLE>
<S> <C>
1999 $1,814,760
2000 1,739,321
2001 587,645
2002 444,676
2003 256,654
----------
$4,843,056
==========
</TABLE>
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
$2,585,000, $1,547,000 and $1,144,000, respectively.
The Company has outstanding contractual commitments at December 31, 1998
for the construction of plant and equipment in Thailand in the
approximate amount of $12,481,000.
Subsequent to December 31, 1998, the Company entered into various debt
agreements which restructure the Company's existing credit facilities
(see Note 13).
Litigation
As of December 31, 1998, approximately 213 product liability lawsuits
seeking monetary damages, in most cases of an unspecified amount, were
pending in federal and state courts against the Company and other
manufacturers of latex gloves. 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. On February 26, 1997, the Judicial Panel on
Multi-District Litigation entered an order transferring all latex
allergy lawsuits brought on behalf of healthcare workers against the
Company and other latex glove manufacturers in the Federal courts to the
United States District Court for the Eastern District of Pennsylvania,
consolidating those cases for discovery management and other pre-trial
proceedings. The Company has referred the defense of these lawsuits to
its insurance carriers.
Since March 11, 1999, approximately fifteen lawsuits (collectively the
"Securities Actions") have been filed in the U.S. District Court for the
Southern District of California against the Company 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 purposed class of persons who
purchased or otherwise acquired the Company's publicly traded securities
during various periods occurring between October 23, 1997 and March 11,
1999. They allege that plaintiffs purchased the Company's securities at
prices artificially inflated by defendants' misrepresentations and
omissions concerning the Company's financial condition and prospects and
seek an unspecified amount of damages. In addition, a shareholder
derivative action has been filed against certain of the Company's
directors, and the Company 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 the Company's
stock buy back program and seeks an unspecified amount of damages.
Defendants' time to respond to the allegations made in the Securities
Actions and the Derivative Action has not yet expired, however, the
Company believes that these claims are without merit and intends to
contest the claims vigorously.
-40-
<PAGE> 41
SAFESKIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------
From time to time, the Company is involved in other litigation relating
to claims arising out of its operations in the normal course of
business. As of the date hereof, the Company is not a party to any other
legal proceedings, the adverse outcome of which, in management's
opinion, individually or in the aggregate, would have a material adverse
effect on the Company's business, results of operation or financial
condition.
The Company's tax returns for the years ended December 31, 1995, 1996
and 1997 are currently being audited by the Internal Revenue Service.
10. Equity Compensation Plan and Stock Options:
The Company's Equity Compensation Plan (the "Plan"), adopted in 1993,
provides for the issuance of stock options, stock appreciation rights
and restricted stock to eligible directors, certain employees, and
consultants. The Company has reserved 14,689,118 shares of common stock
for issuance under the Plan.
All stock options are granted at a price not less than the fair market
value on the date the option is granted. The stock options granted can
be exercised over periods of zero to ten years from the date of grant
and will expire ten years from the date of grant.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Had compensation costs for the
Company's stock option plan been determined based on the fair value at
the grant date for awards in 1998, 1997 and 1996 consistent with the
provisions of SFAS No. 123, net income and net income per common share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income:
As reported $41,869,215 $41,250,251 $23,582,399
Pro forma 23,047,236 38,791,856 21,221,580
Basic earnings per share:
As reported $.78 $.79 $.46
Pro forma .43 .74 .42
Diluted earnings per share:
As reported $.70 $.70 $.42
Pro forma .38 .66 .38
</TABLE>
The fair value of each option grant is estimated as of the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1998, 1997 and
1996:dividend yield of 0%; expected volatility of 55.4%, 51.6% and
52.7%, respectively; risk-free interest rate ranging from 5.0% to 7.2%;
and expected lives of 4 to 6 years.
-41-
<PAGE> 42
SAFESKIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------
Stock option activity for the years ended December 31, 1998, 1997 and
1996 was as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
OPTIONS PRICES
------- ------
<S> <C> <C>
Outstanding at January 1, 1996 8,381,600 $3.43
Granted 2,932,800 $6.12
Exercised (1,756,600) $3.04
Forfeited (318,133) $3.60
--------- -----
Outstanding at December 31, 1996 9,239,667 $4.35
Granted 2,088,200 $15.26
Exercised (1,165,420) $3.64
Forfeited (333,120) $4.72
--------- -----
Outstanding at December 31, 1997 9,829,327 $6.74
Granted 2,856,550 $33.67
Exercised (1,636,175) $4.43
Forfeited (359,295) $14.04
--------- ------
Outstanding at December 31, 1998 10,690,407 $14.04
========== ======
Shares exercisable as of December 31, 1998 5,980,671 $10.75
========= ======
</TABLE>
As of December 31, 1998, 1997 and 1996, options outstanding have
exercise prices between $2.50 and $50.00, $2.50 and $28.13, and $2.50
and $12.94, respectively, and a weighted-average remaining contractual
life ranging from 4 to 6 years.
During 1995, the Company issued a restricted stock grant of 400,000
shares at $3.69, the fair market value at date of grant, to a former
executive of the Company. Restrictions on the shares granted lapse in
five annual installments beginning in January of 1996 through January
2000. During 1996, 233,336 shares relating to this restricted stock
grant were forfeited, in conjunction with the terms of a separation
agreement between the Company and the former executive. At December 31,
1998, options to acquire the 166,664 shares had been exercised.
In August 1990, the Company granted an option to an employee, which
expires July 2000, to purchase 883,540 shares of common stock at an
option price of $.06 per share. The option provides for the exercise of
176,708 shares at the grant date and the exercise of 176,708 shares
annually from April 1994 through April 1997. At December 31, 1997,
options to acquire the 883,540 shares had been exercised.
11. Major Customers and Concentrations of Credit Risk:
Major customers are those that individually account for more than 10% of
the Company's consolidated net sales. During 1998, two customers
accounted for approximately 17.3% and 16.4% of consolidated net sales.
During 1997, two customers accounted for approximately 22.2% and 19.6%
of consolidated net sales. During 1996, two customers accounted for
approximately 21.7% and 22.5% of consolidated net sales.
The majority of the Company's sales are to medical supply distribution
companies. This could unfavorably affect the Company's overall exposure
to credit risk inasmuch as these customers could be affected by similar
economic or other conditions. At December 31, 1998, 1997 and 1996,
approximately 51.9%, 55.5%, and
-42-
<PAGE> 43
SAFESKIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------
50.2%, respectively, of net receivables were represented by three
customers. Historically, the Company's uncollectible accounts receivable
have not been significant, and typically the Company does not require
collateral for its receivables.
In addition, in assessing its concentration of credit risk related to
cash and cash equivalents, the Company places its cash and cash
equivalents, which may at times exceed FDIC insurance limits, in foreign
and domestic financial institutions.
12. Employee Benefits:
The Company's 401(k) defined contribution plan (the "401(k) Plan"),
adopted in 1995, is available to eligible employees who have completed
at least three months of service. Participants may defer, until
termination of employment with the Company, salary up to the limit
imposed by the Internal Revenue Code for any calendar year. In 1998,
1997 and 1996, contributions were matched by the Company in an amount
equal to 33-1/3% of the participant's contribution. For the years ended
December 31, 1998, 1997 and 1996, the Company incurred costs of
approximately $390,000, $276,000, and $139,000, respectively, in
connection with the 401(k) Plan.
The Company's deferred compensation plan, adopted in 1997, is available
to certain eligible highly compensated employees. Participants may
defer, until termination of employment with the Company, up to 50% of
annual salary and 100% of incentive compensation in conjunction with
this plan. In 1998 and 1997, contributions were matched by the Company
in an amount equal to 25% of the participants' contributions. For the
years ended December 31, 1998 and 1997, the Company incurred costs of
approximately $385,000 and $45,000, respectively, in conjunction with
this plan.
-43-
<PAGE> 44
SAFESKIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------
13. Subsequent Events
On March 5, 1999, the Company's existing bank borrowings were
restructured as a $100 million facility, 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 1.25%, however, the rate may vary
according to certain financial ratios. In conjunction with the
aforementioned bank borrowings, the Company issued $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 will constitute senior
debt of the Company, ranking pari passu with the Company's other senior
bank indebtedness. The Notes bear interest at an annual rate of 6.89%.
The proceeds of the Term Loan, the Revolver and the Notes were used to
repay outstanding amounts under the Credit Facility and the BVI
Facility, which were subsequently canceled. The Term Loan, Revolver, and
the Notes will all be secured by certain assets of the Company as well
as a guarantee of all current and future significant domestic
subsidiaries. The Company's future principal payments associated with
the Term Loan will be due on a quarterly basis beginning on June 30,
1999 through June 30, 2004. Applicable to the Term Loan and the Notes,
future minimum principal payments will be as follows:
<TABLE>
<S> <C>
1999 $ 4,500,000
2000 8,250,000
2001 11,250,000
2002 14,250,000
2003 20,264,300
Thereafter 41,485,700
------------
$100,000,000
============
</TABLE>
The Company also entered into a seven year lease (the "Lease") for a new
corporate headquarters campus facility to be constructed for the
Company. The lessor of the campus has committed to fund up to a maximum
of $60 million for the construction of the campus, with the portion of
the committed amount actually used to be determined by the Company. The
Company has the option to purchase the leased premises at any time
during the lease. If the Company elects not to purchase the premises,
the Company has guaranteed that the lessor, upon subsequent sale of the
building, will receive a percentage of the total amount of funding, up
to $53.9 million. The Company's lease obligations, including the payment
of rents and the payment of the guaranteed residual value is secured by
the Company's interest in the real estate subject to the Lease and, pari
passu with the lenders on the Term Loan, Revolver, and Notes, certain
other assets of the Company.
14. Restructuring and Other Unusual Charges
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. In connection with the
move, Safeskin recognized expense of approximately $3 million in the
fourth quarter of 1996, reflected in the accompanying financial
statements as a component of restructuring and other unusual charges. 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 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
capacity in Thailand, 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 announced that it had 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, Safeskin recognized expense of $14,331,000 in the fourth
quarter of 1998, reflected in the accompanying financial statements as a
component of restructuring and other unusual charges. This expense
consists of approximately $5,134,000 related to fixed assets written
down to estimated fair value, $3,883,000 related to employee 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 were assumed to be scrapped at the disposition date. The net book
value of assets expected to be disposed of totaled approximately $14
million as of December 31, 1998.
15. Acquisitions
In May 1998, the Company acquired Sensicon Corporation, a San Diego
based developer and manufacturer of non-latex products. The
acquisition, which has been accounted for under the purchase method,
included an acquisition price of approximately $6 million in cash paid
at the closing. The excess purchase price over the fair value of the
net assets acquired of $5.9 million was recorded as goodwill, which is
being amortized over 15 years.
In February 1998, the Company completed the acquisition accounted for
under the purchase method of Absolute Quality Leadership, Inc. ("AQL"),
a California-based marketer of glove products for the high-technology
and scientific markets. The acquisition, which has been accounted for
under the purchase method, included an acquisition price of
approximately $8.8 million and $1,564,000 in stock options issued plus
certain contingent payments totaling approximately $2 million based upon
the performance of the Company's scientific business unit. The Company
has changed the name of AQL to Safeskin Scientific Corporation. The
excess purchase price over the fair value of the net assets acquired of
$8.8 million was recorded as goodwill, which is being amortized over 15
years.
In March 1997, the Company acquired the synthetic glove business of
Tactyl Technologies, Inc., a San Diego based developer and manufacturer
of non-latex surgical gloves for the domestic and international
markets. The acquisition, which has been accounted for under the
purchase method, included an acquisition price of approximately $14.5
million in cash paid at the closing, plus up to an additional $5
million cash payment which was contingent upon the Tactyl business
achieving certain future sales and performance targets, including the
development of the next generation of synthetic latex technology. The
excess purchase price over the fair value of the net assets acquired of
$12.2 million was recorded as goodwill, which is being amortized over
15 years. In May 1998, Safeskin made a final payment related to this
agreement totaling approximately $3.3 million, which has been recorded
as an addition to goodwill and is being amortized over its remaining
life. During the fourth quarter of 1998, the Company recognized expense
of $3,335,000 related to goodwill impairment associated with the Tactyl
acquisition integration (see Note 14).
-44-
<PAGE> 45
SAFESKIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------
16. Quarterly Financial Data (Unaudited):
Summarized quarterly financial data for the periods ended December 31,
1998 and 1997 is as follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
BASIC DILUTED
NET INCOME EARNINGS (LOSS) EARNINGS (LOSS)
REVENUES GROSS PROFIT (LOSS) PER SHARE PER SHARE
-------- ------------ ------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
1998:
December 31 $59,878 $31,537 $ (954) $(.02) $(.02)
September 30 (as restated) 59,968 30,907 14,512 .27 .24
September 30
(as previously reported) 61,568 31,972 16,152 .30 .27
June 30 58,642 30,752 14,997 .28 .25
March 31 53,298 27,842 13,314 .25 .22
1997:
December 31 $49,985 $22,234 $11,997 $ .23 $ .20
September 30 46,897 20,265 11,560 .22 .20
June 30 44,948 19,839 9,203 .18 .16
March 31 41,168 18,431 8,490 .16 .15
</TABLE>
On March 11, 1999, the Company announced that it had determined that the
distributors with which the Company does business were carrying higher than
previously estimated levels of inventory of the Company's products. As such,
the Company re-examined the 1998 financial statements considering the higher
inventory levels and, as a result, determined that the accrual for sale
rebates at September 30, 1998 was understated by approximately $1.6 million. In
addition, the Company recorded certain other adjustments in the quarter ended
September 30, 1998 that in the aggregate were not material. Accordingly, the
Company has restated the financial statements for the quarter ended September
30, 1998 for these adjustments, which resulted in a reduction in net income
compared to what was previously reported in the amount of approximately $1.6
million.
-45-
<PAGE> 46
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
Safeskin Corporation:
We have audited the consolidated financial statements of Safeskin Corporation as
of December 31, 1998 and 1997, and for the years then ended and have issued our
report thereon dated April 5, 1999; such financial statements and report are
included in this Annual Report on Form 10-K. Our audits also included the
financial statement schedules of Safeskin Corporation, listed in Item 14. These
financial statement schedules are the responsibility of the Corporation's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedules, when considered in relation to
the basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein. The financial statements of Safeskin
Corporation for the year ended December 31, 1996 were audited by other auditors
whose report, dated February 17, 1997, expressed an unqualified opinion on those
statements.
Deloitte & Touche LLP
San Diego, California
April 5, 1999
-46-
<PAGE> 47
SAFESKIN CORPORATION
(PARENT COMPANY ONLY)
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
The following condensed financial statements reflect those of the parent
company only. For this purpose only, the parent company has accounted for its
subsidiaries on the equity method of accounting.
All footnote disclosures have been omitted because all the information
is included in the Safeskin Corporation consolidated financial statements
included elsewhere in this Report.
CONDENSED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................... $ 158 $ 21,908,840
Accounts receivable ........................... 23,434,089 18,243,363
Inventory ..................................... 3,891,471 10,092,806
Other current assets .......................... 3,316,079 836,805
------------- -------------
Total current assets .......................... 30,641,797 51,081,814
Investment in and advances to wholly-owned
subsidiaries .................................. 204,082,958 111,140,323
Property, plant and equipment, net ............ 9,876,330 6,240,405
Deferred taxes and other assets ............... 15,166,115 116,034
------------- -------------
Total assets .................................. $ 259,767,200 $ 168,578,576
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ...... $ 13,531,459 $ 10,016,903
Payable to wholly-owned subsidiaries .......... 44,546,772 49,888,432
Current portion of long-term debt ............. 4,500,000 --
------------- -------------
Total current liabilities ..................... 62,578,231 59,905,335
Long-term debt ................................ 7,731,158 --
Other long-term liabilities ................... 2,140,682 2,094,928
------------- -------------
Total liabilities ............................. 72,450,071 62,000,263
Shareholders' equity:
Common stock .................................. 546,004 529,642
Additional paid-in-capital .................... 75,360,306 47,517,453
Treasury stock ................................ (7,684,328) --
Accumulated other comprehensive loss .......... (26,993,003) (45,687,717)
Retained earnings ............................. 146,088,150 104,218,935
------------- -------------
Total shareholders' equity .................... 187,317,129 106,578,313
------------- -------------
Total liabilities and shareholders' equity .... $ 259,767,200 $ 168,578,576
============= =============
</TABLE>
-47-
<PAGE> 48
SAFESKIN CORPORATION
(PARENT COMPANY ONLY)
SCHEDULE I - (CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales ..................................... $ 195,452,471 $ 158,938,566 $ 128,614,248
Cost of goods sold ............................ 148,649,166 121,347,644 95,576,710
------------- ------------- -------------
Gross profit ............................ 46,803,305 37,590,922 33,037,538
------------- ------------- -------------
Operating expenses:
Selling ................................. 19,849,696 19,292,100 15,935,764
Research and development ................ 5,307,131 3,120,780 2,042,754
General and administrative .............. 26,209,675 14,731,012 12,286,798
Restructuring and other unusual
charges .......................... 113,050 -- --
------------- ------------- -------------
Total operating expenses ............... 51,479,552 37,143,892 30,265,316
------------- ------------- -------------
Income (loss) from operations .......... (4,676,247) 447,030 2,772,222
Interest expense (income), net ................ 624,852 (676,270) (58,337)
Other expense (income), net ................... (6,115,538) 331,739 (534,673)
Equity in net income of wholly-owned
subsidiaries .................................. (44,527,511) (45,457,484) (23,156,046)
------------- ------------- -------------
Income before income tax provision ..... 45,341,950 46,249,045 26,521,278
Income tax provision .......................... 3,472,735 4,998,794 2,938,879
------------- ------------- -------------
Net income ............................. $ 41,869,215 $ 41,250,251 $ 23,582,399
============= ============= =============
</TABLE>
-48-
<PAGE> 49
SAFESKIN CORPORATION
(PARENT COMPANY ONLY)
SCHEDULE I - (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ...................................... $ 41,869,215 $ 41,250,251 $ 23,582,399
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................... 3,777,241 1,445,783 761,231
Exchange (gain) loss ............................ (2,000,000) 2,000,000 --
Restructuring and other unusual charges ......... 113,050 -- --
Non-cash severance expense ...................... 2,985,225 -- --
Loss on disposal of equipment ................... 6,669 21,209 6,542
Deferred taxes .................................. (5,328,169) 6,308,400 (2,287,424)
Amortization of deferred compensation ........... -- -- 152,469
Undistributed net income of wholly-owned
subsidiaries .................................... (44,527,511) (45,457,484) (23,156,046)
Change in operating assets and liabilities:
Accounts receivable ............................. (5,190,726) (167,990) (1,742,990)
Inventory ....................................... 6,201,335 16,266,137 (7,602,653)
Other assets .................................... 3,747,594 41,332 3,188,760
Accounts payable and other accrued
liabilities .................................... 5,560,309 5,970,404 5,738,454
Payable to wholly-owned subsidiaries ............ (5,341,660) 3,334,626 15,023,324
------------ ------------ ------------
Net cash provided by operating activities ....... 1,872,572 31,012,668 13,664,066
------------ ------------ ------------
Cash flows from investing activities:
Decrease (increase) in investment in and
advances to wholly-owned subsidiaries ...... (17,654,651) (9,751,357) 1,927,507
Net cash paid for acquisitions ............... (11,076,460) (14,463,092) --
Proceeds from sale of subsidiary .............. 574,703 -- --
Purchase of property, plant and equipment ..... (7,419,835) (3,686,946) (3,750,137)
Proceeds from sale of equipment ............... -- 32,208 9,000
------------ ------------ ------------
Net cash used by investing activities ........ (35,576,243) (27,869,187) (1,813,630)
------------ ------------ ------------
Cash flows from financing activities:
Increase (decrease) in long-term debt ........... 12,231,158 -- (2,750,000)
Proceeds from issuance of common stock .......... 7,248,159 4,251,134 5,351,924
Repurchase of common stock .................... (7,684,328) -- --
------------ ------------ ------------
Net cash provided by financing activities .... 11,794,989 4,251,134 2,601,924
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents ................................ (21,908,682) 7,394,615 14,452,360
Cash and cash equivalents at beginning of
year ....................................... 21,908,840 14,514,225 61,865
------------ ------------ ------------
Cash and equivalents at end of year ............ $ 158 $ 21,908,840 $ 14,514,225
============ ============ ============
</TABLE>
-49-
<PAGE> 50
SAFESKIN CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO BALANCE AT
DECEMBER 31, COSTS AND DECEMBER 31,
DESCRIPTION 1997 EXPENSES DEDUCTIONS 1998
----------- ---- -------- ---------- ----
<S> <C> <C> <C> <C>
Allowance for doubtful accounts receivable .... $ 966,000 $ 231,000 $ 16,000 $1,181,000
Allowance for inventory cost to net
realizable value .............................. $ 266,000 $1,267,000 $ 164,000 $1,369,000
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO BALANCE AT
DECEMBER 31, COSTS AND DECEMBER 31,
DESCRIPTION 1996 EXPENSES DEDUCTIONS 1997
----------- ---- -------- ---------- ----
<S> <C> <C> <C> <C>
Allowance for doubtful accounts receivable .... $ 665,000 $ 301,000 $ -- $ 966,000
Allowance for inventory cost to net
realizable value .............................. $1,112,000 $ 33,000 $ 879,000 $ 266,000
BALANCE AT CHARGES TO BALANCE AT
DECEMBER 31, COSTS AND DECEMBER 31,
DESCRIPTION 1995 EXPENSES DEDUCTIONS 1996
----------- ---- -------- ---------- ----
<S> <C> <C> <C> <C>
Allowance for doubtful accounts receivable .... $ 321,000 $ 344,000 $ -- $ 665,000
Allowance for inventory cost to net
realizable value .............................. $ 180,000 $ 932,000 $ -- $1,112,000
</TABLE>
-50-
<PAGE> 51
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10, 11, 12 AND 13.
The information required under these items is contained in the
Company's 1999 Proxy Statement, which will be filed with the Securities and
Exchange Commission within 120 days after the close of the Company's fiscal year
end. This information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS A PART OF THIS REPORT:
1. Financial Statements
The financial statements required by this item are
included and listed in the accompanying Index to
Consolidated Financial Statements and Schedules in Part
II, Item 8 of this Report.
2. Financial Statement Schedules
The financial statement schedules required by this item
are included and listed in the accompanying Index to
Consolidated Financial Statements and Schedules in Part
II, Item 8 of this Report.
3. Exhibits
The following is a list of all exhibits filed as a part of
this Report:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
3.1 Amended and Restated Articles of Incorporation(1)
3.2 Amended and Restated Bylaws(8)
10.1 Safeskin Corporation Amended and Restated Equity Compensation
Plan(1)
10.2 Employment Agreement, dated June 15, 1993, between Neil K.
Braverman and Safeskin Corp.(1)
10.3 Employment Agreement, dated June 15, 1993, between Richard Jaffe
and Safeskin Corp.(1)
10.4 Office Lease Agreement, dated November 14, 1989, between Crocker
Center Associates IV, Ltd. and Safeskin Corp.(1)
10.5 Standard Industrial Sublease, dated April 14, 1993, between Tri
Gem Computer, Inc. and Safeskin Corporation(1)
10.6 Lease, dated August 7, 1992, between Merritt-Bavar Limited
Partnership and Safeskin Corporation(1)
10.7 Accounts Financing Agreement, dated February 27, 1989, between
Congress Financial Corporation (Florida) and Safeskin Corp., and
amendment thereto(1)
10.8 Promissory Note, dated November 9, 1993, by Safeskin Corp. to
Bankers Trust Company(1)
</TABLE>
-51-
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.9 Promissory Note, dated December 31, 1991, by Safeskin Corp. to
The Jaffe Family Partnership(1)
10.10 Promissory Note, dated July 23, 1992, by Safeskin Corp. to Mr.
Neil K. Braverman(1)
10.11 Promissory Note, dated December 21, 1992, by Safeskin Corp. to
Mr. Neil K. Braverman(1)
10.12 Promissory Note, dated December 21, 1992, by Safeskin Corp. to
The Jaffe Family Partnership(1)
10.13 Letter of Offer of Banking Facilities, dated November 25, 1992,
by Perwira Habib Bank Malaysia Berhad to Safeskin Corporation
(Malaysia) Sdn. Bhd., and amendment thereto(1)
10.14 Letter of Offer of Banking Facilities, dated March 4, 1992, by
Standard Chartered Bank to Safeskin Corporation (M) Sdn. Bhd.(1)
10.15 Guarantee, dated February 3, 1992, by Safeskin Corp. to Standard
Chartered Bank(1)
10.16 Letter of Offer of Banking Facilities, dated January 30, 1992,
by Perwira Habib Bank Malaysia Berhad to Safeskin Latex Company
Sdn. Bhd.(1)
10.17 Corporate Guarantee, dated March 24, 1992, by Safeskin
Corporation (Malaysia) Sdn. Bhd. to Perwira Habib Bank Malaysia
Berhad(1)
10.18 Debenture, dated June 27, 1991, between Safeskin Corporation
(Malaysia) Sdn. Bhd. and Perwira Habib Bank Malaysia Berhad(1)
10.19 Debenture, dated March 10, 1992, between Safeskin Corporation
(Malaysia) Sdn. Bhd. and Perwira Habib Bank Malaysia Berhad(1)
10.20 Debenture, dated June 1, 1992, between Safeskin Corporation (M)
Sdn. Bhd. and Standard Chartered Bank(1)
10.21 Corporate Guarantee, dated February 8, 1993, by Safeskin
Corporation to Perwira Habib Bank Malaysia Berhad(1)
10.22 Letter of Offer of Banking Facilities, dated December 28, 1992,
by The Hong Kong and Shanghai Banking Corporation Limited to
Safeskin Corporation (M) Bhd. Sdn.
10.23 Continuing Guaranty, dated February 22, 1993, by Safeskin Corp.
to The Hong Kong and Shanghai Banking Corporation Limited(1)
10.24 Agreement, dated December 7, 1992, between Norsechem Latex
Products (M) Sdn. Bhd. and Safeskin Corporation (M) Sdn. Bhd.(1)
10.25 Corporate Guarantee and Indemnity, dated February 18, 1993, by
Safeskin Corp. to Norsechem Latex Products (M) Sdn. Bhd. and
Synthetic Bakelites (Malaysia) Sdn. Bhd.(1)
10.26 Bank Guarantee and Indemnity, dated February 27, 1993, The Hong
Kong and Shanghai Banking Corporation Limited to Synthetic
Bakelites (Malaysia) Sdn. Bhd.(1)
10.27 Stock Option Grant by Safeskin Corp. to Lee Chee Ming(1)
10.28 Collective Agreement, dated October 25, 1991, between Safeskin
Corporation (M) Sdn. Bhd. and Kesatuan Pekerja-Pekerja Safeskin
Corporation (M) Sdn. Bhd.(1)
10.29 Trust Deed, dated June 9, 1993, with respect to shares of
Safeskin Latex Company Sdn. Bhd.(1)
10.30 Trust Deed, dated June 9, 1993, with respect to shares of
Safeskin Latex Company Sdn. Bhd.(1)
10.31 Letter of Review of Credit Facilities--Enhancement, dated August
18, 1993 by Perwira Habib Bank Malaysia Berhad(1)
10.32 Corporate Guarantee, dated October 8, 1993, by Safeskin
Corporation to Perwira Habib Bank Malaysia Berhad(1)
10.33 Industrial Real Estate Lease, dated January 1, 1994, between
California State Teachers Retirement System and Safeskin
Corporation(2)
10.34 Employment Agreement, dated July 20, 1995, between David L.
Morash and Safeskin Corp.(3)
10.35 Employment Agreement, dated June 29, 1995, between Judy W.
Grimes and Safeskin Corporation (4)
10.36 Office Lease, dated October 31, 1995, between SDC LP and
Safeskin Corporation
10.37 Credit Agreement, dated July 15, 1996, by Safeskin Corporation
to Union Bank(5)
10.38 Letter of Agreement between Judy Grimes and Safeskin
Corporation(5)
10.39 Consulting Agreement, dated as of January 1, 1997, between Neil
K. Braverman and Safeskin Corporation (6)
</TABLE>
-52-
<PAGE> 53
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.40 Amended and Restated Assets Purchase Agreement, dated as of
March 24, 1997, by and among TT Acquisition Company, EQ
Corporation and Tactyl Technologies, Inc.(6)
10.41 Executive Deferred Compensation Plan of Safeskin Corporation(7)
10.42 Services Agreement between Safeskin Corporation and Perot
Systems Corporation dated February 3, 1998 (9)
10.43 Amended and Restated Loan Agreement between Safeskin Corporation
and Union Bank of California, N.A. dated May 4, 1998 (10)
10.44 Loan Agreement dated as of July 30, 1998 among Safeskin (B.V.I.)
Limited and Union Bank of California, N.A. (11)
10.45 Revolving/Term Loan Agreement dated as of July 30, 1998 among
Safeskin Corporation and Union Bank of California, N.A. (11)
11 Statement re: Computation of Per Share Earnings (12)
21 Subsidiaries of the Registrant (12)
23.1 Consent of Deloitte & Touche LLP (12)
23.2 Consent of PricewaterhouseCoopers LLP (12)
99 Report of Independent Accountants (12)
</TABLE>
-------------------
(1) Filed as an exhibit to the Company's Registration
Statement on Form S-1, No. 33-68284, as filed with the
Securities and Exchange Commission and incorporated herein by
reference.
(2) Filed as an exhibit to the Company's Form 10-K for the
fiscal year ended December 31, 1993.
(3) Filed as an exhibit to the Company's Form 10-Q for the
fiscal quarter ending September 30, 1995 as 10a.
(4) Filed as an exhibit to the Company's Form 10-Q for the
fiscal quarter ending September 30, 1995 as 10b.
(5) Filed as an exhibit to the Company's Form 10-Q for the
fiscal quarter ending June 30, 1996.
(6) Filed as an exhibit to the Company's Form 10-Q for the
fiscal quarter ending March 31, 1997.
(7) Filed as an exhibit to the Company's Form 10-Q for the
fiscal quarter ending September 30, 1997.
(8) Filed as an exhibit to the Company's Form 10-K for the
fiscal year ended December 31, 1997.
(9) Filed as an exhibit to the Company's Form 10-Q for the
fiscal quarter ending March 31, 1998.
-53-
<PAGE> 54
(10) Filed as an exhibit to the Company's Form 10-Q for the
fiscal quarter ending June 30, 1998.
(11) Filed as an exhibit to the Company's Form 10Q for the
fiscal quarter ending September 30, 1998.
(12) Filed as an exhibit hereto.
(b) REPORTS ON FORM 8-K:
None.
-54-
<PAGE> 55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
SAFESKIN CORPORATION
By:/s/ Richard Jaffe
-------------------------------
Dated: April 6, 1999 Richard Jaffe, Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Richard Jaffe Chairman, President, Chief Executive April 6, 1999
- ---------------------- Officer and Director
Richard Jaffe
/s/ David L. Morash Executive Vice President April 6, 1999
- ---------------------- and Chief Financial Officer
David L. Morash
/s/ Seth S. Goldman Vice President, Finance April 6, 1999
- ---------------------- Controller and Secretary
Seth S. Goldman
/s/ Neil K. Braverman Director April 6, 1999
- ----------------------
Neil K. Braverman
/s/ Irving Jaffe Chairman Emeritus and Director April 6, 1999
- ----------------------
Irving Jaffe
/s/ Howard L. Shecter Director April 6, 1999
- ----------------------
Howard L. Shecter
/s/ Joseph Stemler Director April 6, 1999
- ----------------------
Joseph Stemler
/s/Cam L. Garner Director April 6, 1999
- ----------------------
Cam L. Garner
/s/Jeffrey Stiefler Director April 6, 1999
- ----------------------
Jeffrey Stiefler
</TABLE>
-55-
<PAGE> 56
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
11 Statement re: Computation of Per Share Earnings
21 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
99 Report of Independent Accountants
</TABLE>
-56-
<PAGE> 1
EXHIBIT 11
STATEMENT RE:COMPUTATION OF PER SHARE EARNINGS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
DILUTED:
Net income $41,869,215 $41,250,251 $23,582,399 $14,890,698 $14,367,075 $11,651,641
=========== =========== =========== =========== =========== ===========
Weighted average number of
shares of common stock
outstanding 53,344,082 52,260,538 50,943,814 49,500,368 49,012,708 40,050,000
Net effect of dilutive stock
options--based on the
treasury
stock method using average 6,775,482 6,277,156 4,606,854 1,709,836 1,770,388 1,584,700
----------- ----------- ----------- ----------- ----------- -----------
market price
Total weighted average
number of shares of common
stock and
common stock equivalents 60,119,564 58,537,694 55,550,668 51,210,204 50,783,096 41,634,700
=========== =========== =========== =========== =========== ===========
outstanding
Net income per common share $ .70 $ .70 $ .42 $ .29 $ .28 $ .28
=========== =========== =========== =========== =========== ===========
BASIC:
Net income $41,869,215 $41,250,251 $23,582,399 $14,890,698 $14,367,075 $11,651,641
=========== =========== =========== =========== =========== ===========
Weighted average number of
shares of common stock
outstanding 53,344,082 52,260,538 50,943,814 49,500,368 49,012,708 40,050,000
=========== =========== =========== =========== =========== ===========
Net income per common share $ .78 $ .79 $ .46 $ .30 $ .29 $ .29
=========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Safeskin Scientific Corporation
Safeskin Sensicon Corporation
Safeskin Corporation (Malaysia) Sdn. Bhd.
Safeskin (Malaysia) Engineering & Machinery Sdn. Bhd.
Safeskin Latex (Thailand) Limited
Safeskin International B.V.
Safeskin Corporation (Thailand) Limited
Safeskin Deutschland GmbH
Safeskin (U.K.) Limited
Safeskin (B.V.I.) Limited
Safeskin Insurance Management, Inc.
Tactyl Technologies, Inc.
Total Quality Leadership, Inc.
Safeskin Medical & Scientific (Thailand) Limited
Safeskin Healthcare (Thailand) Limited
Safeskin Industries (Thailand) Limited
Absolute Quality Leadership Corporation (Malaysia) Sdn. Bhd.
Safeskin Real Estate Incorporated
Safeskin France S.A.S.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
333-39449 and No. 333-40017 of Safeskin Corporation on Form S-8 of our reports
dated April 5, 1999, appearing in this Annual Report on Form 10-K of
Safeskin Corporation for the year ended December 31, 1998.
DELOITTE & TOUCHE LLP
San Diego, California
April 5, 1999
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement No.
333-39449, filed on November 4, 1997 of Safeskin Corporation on Form S-8 and on
Registration Statement No. 333-40017 of Safeskin Corporation filed on November
12, 1997 on Form S-8 of our report dated February 17, 1997, appearing in this
Annual Report on Form 10-K of Safeskin Corporation for the year ended December
31, 1998.
PricewaterhouseCoopers LLP
San Diego, California
April 5, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,416,802
<SECURITIES> 0
<RECEIVABLES> 32,511,412
<ALLOWANCES> 1,181,000
<INVENTORY> 37,056,821
<CURRENT-ASSETS> 88,814,370
<PP&E> 119,456,352
<DEPRECIATION> 25,171,020
<TOTAL-ASSETS> 248,961,108
<CURRENT-LIABILITIES> 37,676,980
<BONDS> 87,731,158
0
0
<COMMON> 546,004
<OTHER-SE> 120,866,284
<TOTAL-LIABILITY-AND-EQUITY> 121,412,288
<SALES> 231,783,872
<TOTAL-REVENUES> 231,783,872
<CGS> 110,746,344
<TOTAL-COSTS> 110,746,344
<OTHER-EXPENSES> 6,347,284
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,025,741
<INCOME-PRETAX> 45,341,950
<INCOME-TAX> 3,472,735
<INCOME-CONTINUING> 41,869,215
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,869,215
<EPS-PRIMARY> .70
<EPS-DILUTED> .70
</TABLE>
<PAGE> 1
EXHIBIT 99
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Safeskin Corporation:
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Safeskin Corporation and subsidiaries for
the year ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
Safeskin Corporation and subsidiaries for the year ended December 31, 1996 in
conformity with generally accepted accounting principles.
PricewaterhouseCoopers LLP
San Diego, California
February 17, 1997
