<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1996
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Commission File Number 0-9387
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EMPI, INC.
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(Exact name of registrant as specified in its charter)
Minnesota 41-1310335
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
5255 East River Road
Minneapolis, Minnesota 55421
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(Address of principal (Zip code)
executive offices)
Registrant's telephone number, including area code (612) 586-7300
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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 / /
8,609,260 shares of Common Stock were outstanding as of May 7, 1996.
This document contains 11 pages.
The Exhibit Index is on page 10.
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PART I -- FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
The response to Part I, Item 1 is submitted as a separate section of
this report.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Empi, Inc.'s (the "Company") total sales for the 1996 first quarter totaled
$16.9 million compared to first quarter 1995 sales of $16.5 million, an
increase of 2.2 percent. Overall sales growth was adversely impacted due to
strategic actions to improve the Company's net earnings by converting within
the United States and Canada its multiple wholesale/dealer customer base to
master distributor systems. Sales from the Company's core rehabilitation
business of TENS (Transcutaneous Electrical Nerve Stimulation) devices, NMES
(Neuromuscular Electrical Stimulation) devices and related accessories were
relatively flat, with total sales of $11.7 million and $11.8 million for the
first quarter 1996 and 1995, respectively. Core retail sales increased
3.3. percent, while core wholesale/dealer sales decreased 19.5 percent. Sales
from the Company's non-core products of INNOVA PFS-Registered Trademark-
(pelvic floor stimulator), DUPEL-Registered Trademark- iontophoresis drug
delivery system, Advance Dynamic ROM-Registered Trademark- orthoses, surface
electromyography (sEMG) biofeedback, PRONEX-Registered Trademark- pneumatic
device to manage cervical pain and other miscellaneous products and services
equaled $5.2 million for first quarter 1996 compared to $4.7 million in the
first quarter of 1995, an increase of 9.0 percent. Both the Advance Dynamic
ROM and the PRONEX product lines posted significant increases in first
quarter 1996 compared to first quarter 1995, due to the fact that both
products were launched in first quarter 1995. DUPEL, INNOVA and sEMG sales
were down slightly for the quarter, when compared to first quarter 1995.
Non-core retail sales increased 14.9 percent, but that increase was partially
offset by a decrease in wholesale/dealer sales. International sales for the
first quarter, as a percentage of total sales, were 5.8 percent and
8.3 percent for 1996 and 1995, respectively.
Gross profit for the first quarter of 1996 was 74.0 percent compared to
72.6 percent for the first quarter of 1995. The 1.4 percentage point
improvement in margin was due primarily to lower provisions for inventory
obsolescence and to production efficiencies. The Company anticipates that
gross profit, as a percentage of sales, will remain near its current level
due to price sensitivity and product mix.
Selling, general and administrative expenses during the first quarter
combined were $8.6 million in 1996 and $8.5 million in 1995. Stated as a
percentage of sales SG&A expenses were 50.8 percent and 51.3 percent for 1996
and 1995, respectively. The minor increase in SG&A was driven by higher
labor costs and higher marketing expenses, which was partially offset by
lower bad debt expenses and cost savings from closing three office locations
in 1995.
Research and development expenses were $792,000 in first quarter 1996
compared to $838,000 for first quarter 1995. Stated as a percentage of
sales, research and development was 4.7 percent and 5.1 percent for first
quarter 1996 and 1995, respectively. The majority of the Company's research
and development resources in 1996 were allocated to the incontinence,
TENS/NMES and iontophoresis product groups.
2
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FORM 10-Q -- PART I - ITEM 2 (Continued)
Interest income for the first quarter of 1996 was $301,000 compared to
$160,000 in first quarter of 1995. The increase in interest income continues
to be driven by the Company's improved cash position and investment efforts.
Interest expense was $21,000 and $28,000 for the first quarter of 1996 and
1995, respectively. The Company also received and recognized as income a
payment in excess of $200,000 in the first quarter of 1996, resulting from
settlement of a trade dress infringement law suit.
Net income for the first quarter of 1996 was $2.2 million compared to
$1.7 million for the first quarter of 1995, an increase of $.5 million. The
primary reasons for the 31 percent improvement in net income were higher
sales, lower cost of sales, flat operating expenses and improvement in other
income. The effective tax rate for the first quarter of 1995 was
38.5 percent compared to 39 percent in first quarter 1995.
LIQUIDITY AND CAPITAL REQUIREMENTS
The Company's cash, cash equivalents and short-term investments were
approximately $20.2 million at March 31, 1996, which reflects an increase of
$1.1 million from year-end 1995. Due to the Company's strong cash position
it canceled a $7.0 million line of credit in 1995. The Company has also
initiated a limited stock repurchase program. During 1995 the company
repurchased and retired 62,000 shares of common stock at a total cost of
$1.2 million. During the first quarter of 1996 the Company repurchased and
retired 314,000 warrants and shares of common stock at a total cost of
$2.8 million. The Board of Directors has authorized the use of an additional
$4.0 million to repurchase shares throughout the remainder of 1996. The
Company's working capital at the end of first quarter 1996 was $42.6 million,
an increase of $100,000 compared to the fourth quarter ended 1995, and the
current ratio was 7.4 to 1. The Company believes its cash, cash equivalents
and short-term investments, together with cash flow from operations, will be
sufficient to meet its working capital requirements for the immediate and
foreseeable future.
Any forward-looking statements contained in this Management's Discussion and
Analysis section should be read in conjunction with the "cautionary
statements" contained in Part I, Item 1 of the Company's 1995 Form 10-K.
PART II -- OTHER INFORMATION
Item 5. OTHER INFORMATION
On May 7, 1996, the Company announced that it had been informed by
the Health Care Financing Administration (HCFA) that Medicare would
not alter its coverage policy for reimbursement of pelvic floor
stimulation (PFS) therapy for incontinence. Currently PFS is only
reimbursed on an individual appeal basis. This decision by HCFA will
negatively affect future sales growth of the Company's Innova PFS
product. The Company intends to continue to pursue reimbursement
through HCFA.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description Page No.
----------- ----------- --------
(11) Statement re: computation of per share 11
earnings
(27) Financial Data Schedule (filed only in
electronic format)
(b) No report on Form 8-K has been filed during the quarter ended
March 31, 1996.
3
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereto duly authorized.
Empi, Inc.
May 10, 1996 By /s/ Joseph E. Laptewicz, Jr.
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Joseph E. Laptewicz, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
May 10, 1996 By /s/ Timothy E. Briggs
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Timothy E. Briggs
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
4
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QUARTERLY REPORT ON FORM 10-Q
PART I - ITEM 1
LIST OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1996
EMPI, INC.
ST. PAUL, MINNESOTA
5
<PAGE>
FORM 10-Q -- PART I - ITEM 1
EMPI, INC.
LIST OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following condensed consolidated financial statements of Empi, Inc. are
included in Part I - Item 1.
Condensed Consolidated Balance Sheets -- March 31, 1996 and
December 31, 1995,
Condensed Consolidated Statements of Operations -- Three months
ended March 31, 1996 and 1995,
Condensed Consolidated Statements of Cash Flows -- Three months
ended March 31, 1996 and 1995.
Notes to Condensed Consolidated Financial Statements.
6
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FORM 10-Q -- PART I - ITEM 1
EMPI, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31 December 31
1996 1995
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,959 $ 5,949
Short-term investments 14,199 13,090
Accounts and notes receivable-trade,
less allowances 15,526 15,846
Inventories - Note B 7,525 8,269
Deferred income taxes 5,373 4,842
Other 743 706
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TOTAL CURRENT ASSETS 49,325 48,702
PROPERTY, PLANT AND EQUIPMENT - NET 4,947 5,129
OTHER ASSETS 4,595 4,906
LONG-TERM INVESTMENTS 2,000 2,000
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$60,867 $60,737
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,078 $ 1,924
Employee compensation 1,213 1,955
Commissions payable 523 747
Current portion of long-term debt 676 676
Income taxes 1,916 634
Other 283 254
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TOTAL CURRENT LIABILITIES 6,689 6,190
LONG-TERM DEBT, LESS CURRENT PORTION 1,468 1,468
SHAREHOLDERS' EQUITY:
Common Stock 21,504 24,110
Retained earnings 31,206 28,969
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TOTAL SHAREHOLDERS' EQUITY 52,710 53,079
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$60,867 $60,737
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-------- -------
</TABLE>
See notes to condensed consolidated financial statements.
7
<PAGE>
FORM 10-Q -- PART I - ITEM 1
EMPI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended,
March 31
1996 1995
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Net sales $16,892 $16,524
Cost of goods sold 4,388 4,520
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GROSS PROFIT 12,504 12,004
Operating expenses:
Selling, general and administrative 8,589 8,471
Research and development 792 838
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9,381 9,309
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INCOME FROM OPERATIONS 3,123 2,695
Other income (expense), net 514 106
-------- --------
INCOME BEFORE INCOME TAXES 3,637 2,801
Income tax expense 1,400 1,093
-------- --------
NET INCOME $ 2,237 $ 1,708
-------- --------
-------- --------
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE $ .25 $ .20
-------- --------
-------- --------
Weighted average common and common equivalent
shares outstanding during the period 8,966 8,641
-------- --------
-------- --------
</TABLE>
See notes to condensed consolidated financial statements.
8
<PAGE>
FORM 10 - Q -- PART I - ITEM 1
EMPI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended,
March 31
1996 1995
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,237 $ 1,708
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 899 872
Provision for deferred income taxes (531) (343)
(Gain) loss on sale of equipment (1) 5
Provision for loss on accounts receivable 531 650
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (211) (83)
(Increase) decrease in inventories 744 169
Increase in other assets/liabilities (19) (65)
Increase (decrease) in accounts payable and
accrued expenses (812) (160)
Increase (decrease) in income taxes payable 1,404 464
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NET CASH PROVIDED BY OPERATING ACTIVITIES 4,241 3,217
INVESTING ACTIVITIES
Sale of short-term investments 3,327 1,000
Purchase of short-term investments (4,436) (554)
Purchase of long-term investments -- (1,979)
Additions to other assets (53) (40)
Purchase of equipment and improvements (343) (178)
Proceeds from sale of equipment 2 9
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NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (1,503) (1,742)
FINANCING ACTIVITIES
Payments on long-term debt -- (3)
Purchases and retirement of Common Stock (2,788) (58)
Proceeds from exercise of Common Stock options 60 29
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NET CASH PROVIDED BY FINANCING ACTIVITIES (2,728) (32)
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NET INCREASE IN CASH AND CASH EQUIVALENTS 10 1,443
Cash and cash equivalents at beginning of year 5,949 5,652
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,959 $ 7,095
------- -------
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</TABLE>
See notes to condensed consolidated financial statements.
9
<PAGE>
FORM 10 - Q -- PART I - ITEM 1
EMPI, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management
of the Company, all adjustments (consisting of only normal recurring
accruals) considered necessary for a fair presentation of the results have
been included. Operating results for the three months ended March 31, 1996
are not necessarily indicative of the results that may be expected for the
year ended December 31, 1996. For further information, refer to the
consolidated financial statements and footnotes thereto included in Empi,
Inc. and Subsidiaries' annual report on Form 10-K for the year ended
December 31, 1995.
NOTE B - INVENTORIES
(In thousands)
<TABLE>
<CAPTION>
March 31 December 31
1996 1995
----------- ------------
(unaudited)
<S> <C> <C>
Finished goods $ 5,397 $ 5,873
Work in process 595 632
Raw materials 1,533 1,764
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$ 7,525 $ 8,269
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</TABLE>
EXHIBITS
Exhibit No. Description Page No.
----------- ----------- --------
(11) Statement re: computation of per share 11
earnings
(27) Financial Data Schedule -- (filed only in
electronic format) --
10
<PAGE>
EXHIBIT 11 -- STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended,
March 31
1996 1995
---------- ----------
(unaudited) (unaudited)
<S> <C> <C>
PRIMARY EARNINGS PER SHARE:
Average shares outstanding 8,643 8,579
Net effect of dilutive stock options and
warrants - based on the treasury stock
method using average market price 323 62
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8,966 8,641
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------- -------
Net income $ 2,237 $ 1,708
------- -------
------- -------
Net income per share $.25 $.20
------- -------
------- -------
FULLY-DILUTED EARNINGS PER SHARE:
Average shares outstanding 8,643 8,579
Net effect of dilutive stock options and
warrants - based on the treasury stock
method using closing market price 323 144
------- -------
8,966 8,723
------- -------
------- -------
Net income $ 2,237 $ 1,708
------- -------
------- -------
Net income per share $.25 $.20
------- -------
------- -------
</TABLE>
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIRST
QUARTER 1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 5959
<SECURITIES> 14199
<RECEIVABLES> 21464
<ALLOWANCES> 5938
<INVENTORY> 7525
<CURRENT-ASSETS> 49325
<PP&E> 12815
<DEPRECIATION> 7868
<TOTAL-ASSETS> 60867
<CURRENT-LIABILITIES> 6689
<BONDS> 1468
0
0
<COMMON> 21504
<OTHER-SE> 31206
<TOTAL-LIABILITY-AND-EQUITY> 60867
<SALES> 16892
<TOTAL-REVENUES> 16892
<CGS> 4388
<TOTAL-COSTS> 4388
<OTHER-EXPENSES> 9381
<LOSS-PROVISION> 531
<INTEREST-EXPENSE> 21
<INCOME-PRETAX> 3637
<INCOME-TAX> 1400
<INCOME-CONTINUING> 2237
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2237
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
</TABLE>