<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 June 30, 1996
---------------------------
Commission File Number 0-9387
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Empi, Inc.
---------------------------
(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
- -------------------------------- --------------------------------
(Address of principal (Zip code)
executive offices)
Registrant's telephone number, including area code (612) 586-7300
---------------------------
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 / /
8,482,917 shares of Common Stock were outstanding as of August 7, 1996.
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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
REVENUE
Empi, Inc.'s (the "Company") total revenues for the 1996 second quarter equaled
$16.9 million compared to $16.3 million for the second quarter of 1995, an
increase of 4 percent. Total revenues for the first six months of 1996 were
$33.8 million, a 3 percent increase over the same period revenues of $32.8
million for 1995. Comparatively, overall revenues for the second quarter and
the first six months of 1996 have been adversely impacted due to strategic
actions to improve the Company's net income by transitioning from a multiple
wholesale/dealer customer base to master distributor systems within the United
States and Canada. Revenue from the Company's core rehabilitation products of
TENS (Transcutaneous Electrical Nerve Stimulation) devices, NMES (Neuromuscular
Electrical Stimulation) devices, and related accessories increased 6 percent and
2 percent for the second quarter and the first six months, respectively.
Revenue from the Company's non core products of Dupel-Registered Trademark- non
invasive drug delivery system, Advance Dynamic ROM-Registered Trademark-
orthosis, Pronex-Registered Trademark- pneumatic device to manage cervical pain,
Innova PFS-Registered Trademark- (Pelvic Floor Stimulator), sEMG (surface
Electromyography Biofeedback), and other miscellaneous products for 1996
decreased by 1 percent for the second quarter and ended the first six months
with a 4 percent increase over 1995. Results, within non core products, for the
second quarter were mixed. Pronex revenues and Innova revenues were up, Dupel
revenues were flat, and Advance ROM revenues were down, from second quarter
1995. Revenues for both the Innova and the Advance ROM product lines fell well
below expectations. Each of those product lines have been adversely impacted by
unfavorable Medicare reimbursement decisions this year; Advance being granted
only rental status while Innova PFS failed to receive a favorable coverage
policy decision. The Company plans to continue its dialogue with HCFA (Health
Care Financing Administration) regarding improved coverage. International sales
were 5 percent of total revenue dollars for both the second quarter and the
first six months of 1996 compared to 5 percent and 7 percent for the same
periods in 1995.
GROSS MARGIN
Gross margin for the 1996 second quarter was $12.5 million compared to $12.1
million for second quarter 1995. Stated as a percent of revenue second quarter
gross margin was 74 percent for both 1996 and 1995, respectively. Gross margin
for the first six months was $25.0 million and $24.1 million for 1996 and 1995,
respectively. Gross margin percentages for the first six months of 1996 and
1995 were 74 percent and 73 percent. respectively. Manufacturing costs, as a
percent of revenue, have remained flat. 1996 inflationary costs (payroll and
materials) have been offset by lower inventory provisions and production
efficiencies. The Company anticipates the gross margin percentage to remain
near its current level unless there is a major change in revenue.
2
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SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for the second quarter and the
first six months of 1996 were $8.3 million and $16.9 million, respectively,
compared to $8.2 million and $16.7 million for the same periods of 1995. Stated
as a percent of revenue, Selling, general and administrative expenses were 49
percent and 50 percent for the second quarter of 1996 and 1995, respectively and
were 50 percent and 51 percent for the first six months of 1996 and 1995,
respectively. Selling, general and administrative expenses for 1996 remain
under tight management control and were relatively flat after adjusting for a
one time charge during the second quarter for severance costs associated with an
organizational change.
RESEARCH AND DEVELOPMENT
Research and development expenses were $.9 million and $1.7 million for the
second quarter and the first six months, respectively, for both 1996 and 1995.
Stated as a percent of revenue, research and development expenses have been
averaging a steady 5 percent in the second quarter and the first six months for
both 1996 and 1995. Research and development efforts for 1996 have been focused
on developing next generation products and continuation engineering.
OTHER INCOME / EXPENSE
Interest income for the second quarter and the first six months of 1996 was
$221,000 and $522,000, respectively. Interest income for the same periods in
1995 was $179,000 and $339,000. The increase in interest income in 1996,
compared to 1995 is being driven by the Company's improved cash position and
investment activities. Interest expense for the second quarter and the first
six months was $21,000 and $42,000, respectively. Interest expense for the same
periods in 1995 was $32,000 and $60,000. The major driver impacting interest
expense is an interest-bearing note which was issued to finance the Company's
acquisition of the Nortech Division of Medtronic, Inc. in 1992. The Company
also realized a gain of $33,000 in the second quarter of 1996 due to the
disposal of an investment in common stock warrants and other income in excess
of $200,000 from a trade dress settlement recorded in the first quarter of
1996.
NET INCOME
Net income for the second quarter of 1996 was $2.2 million compared to $1.9
million in the second quarter of 1995. Net income for the first six months of
1996 and 1995 was $4.4 million and $3.6 million, respectively. The 21 percent
improvement in net income for the first six months of 1996 can be attributed to
four factors: (1) higher sales, (2) tight spending controls, (3) higher interest
income, and (4) other miscellaneous income items detailed above.
LIQUIDITY AND CAPITAL REQUIREMENTS
The Company's cash, cash equivalents, and short term investments for the quarter
ended June 30, 1996 was approximately $20.5 million, an increase of $1.5 million
from the year ended December 31, 1995. Due to the Company's strong cash
position, the Board approved a $4.0 million stock buy back program in 1995 and
in the first quarter of 1996 authorized the use of an additional $4.0 million to
buy back and retire shares throughout 1996. On August 6, 1996, Empi announced
the Board had approved an additional $6.0 million stock buy back program. Some
of the shares repurchased under the program will be used to cover stock
issuances in connection with the company's stock option and stock purchase
plans. The Company also canceled a $7.0 million line of credit in 1995. During
1995 the Company bought back and retired 62,000 shares of common stock at a
total cost of $1.2 million. During the first six months of 1996, the Company
bought back and retired an additional 489,000 warrants and shares of common
stock at a total cost of $5.6 million. The Company's working capital at the end
of the second quarter 1996 was approximately $44.6 million, an increase of $1.6
million from the year ended December 31, 1995. The current ratio and the quick
ratio at June 30, 1996 were 9.9 to 1 and 7.2 to 1, respectively.
3
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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 needs 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 1 of the Company's Form 10-K for year ended
December 31, 1995.
4
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PART II - - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on Monday, May 6, 1996.
Proxies for the Annual Meeting were solicited pursuant to Regulation 14 under
the Securities Exchange Act of 1934. There was no solicitation in opposition to
management's nominees as listed in the Company's Proxy Statement, and all
nominees were elected.
By a vote of 7,511,780 shares in favor, with 50,538 shares opposed and 59,799
shares abstaining, the shareholders set the number of directors to be elected at
seven (7).
The following persons were elected as Class One Directors of the Company with
terms expiring in 1999, by the votes indicated:
NOMINEE NUMBER OF VOTES FOR NUMBER OF VOTES WITHHELD
Donald M. Maurer 7,544,582 77,535
Dr. Kenneth F. Tempero 7,539,782 82,335
By a vote of 7,261,011 shares in favor, with 189,046 shares opposed and 68,585
shares abstaining, not including 97,475 shares represented by broker non-votes,
the shareholders approved the Company's 1997 Employee Stock Purchase Plan. The
Plan covers five years beginning January 1, 1997 and ending December 31, 2001.
The Plan will operate in five phases, consisting of 12 months each phase, and
calls for the Company to reserve 300,000 shares of the Company's common stock
for issuance throughout the duration of the Plan.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
------------- -------------
(11) Statement re: computation of
per share earnings
(27) Financial Data Schedule (filed only in electronic
format)
(b) No report on Form 8-K has been filed during the quarter ended
June 30, 1996.
5
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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.
August 08, 1996 By /s/ Joseph E. Laptewicz
---------------------------------------------
Joseph E. Laptewicz
President and Chief Executive Officer
(Principal Executive Officer)
August 08, 1996 By /s/ Timothy E. Briggs
---------------------------------------------
Timothy E. Briggs
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
6
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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 AND SIX MONTHS ENDED JUNE 30, 1996
EMPI, INC.
MINNEAPOLIS, MINNESOTA
7
<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 - - June 30, 1996 and
December 31, 1995,
Condensed Consolidated Statements of Operations - - Three and Six
months ended June 30, 1996 and 1995,
Condensed Consolidated Statements of Cash Flows - - Six months
ended June 30, 1996 and 1995.
Notes to Condensed Consolidated Financial Statements.
8
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FORM 10 - Q - - PART I - ITEM 1
EMPI, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30 December 31
1996 1995
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,686 $ 5,949
Short-term investments 17,815 13,090
Accounts and notes receivable-trade, less allowances 14,968 15,846
Inventories - Note B 7,252 8,269
Deferred income taxes 5,639 4,842
Other 726 706
----------- -----------
TOTAL CURRENT ASSETS 49,086 48,702
PROPERTY, PLANT AND EQUIPMENT - NET 4,871 5,129
OTHER ASSETS 4,203 4,906
LONG-TERM INVESTMENTS 500 2,000
----------- -----------
$ 58,660 $ 60,737
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,935 $ 1,924
Employee compensation 1,558 1,955
Commissions payable 506 747
Current portion of long-term debt 687 676
Income taxes 56 634
Other 210 254
----------- -----------
TOTAL CURRENT LIABILITIES 4,952 6,190
LONG-TERM DEBT, LESS CURRENT PORTION 1,407 1,468
SHAREHOLDERS' EQUITY:
Common Stock 18,922 24,110
Retained earnings 33,379 28,969
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 52,301 53,079
----------- -----------
$ 58,660 $ 60,737
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
9
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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 Six Months Ended
June 30 June 30
---------------------------- ---------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $16,937 $16,274 $33,829 $32,798
Cost of goods sold 4,418 4,195 8,806 8,715
----------- ----------- ----------- -----------
GROSS PROFIT 12,519 12,079 25,023 24,083
Operating Expenses:
Selling, general and administrative 8,345 8,195 16,934 16,666
Research and development 882 899 1,674 1,737
----------- ----------- ----------- -----------
9,227 9,094 18,608 18,403
----------- ----------- ----------- -----------
INCOME FROM
OPERATIONS 3,292 2,985 6,415 5,680
Other income/(expense), net 242 192 756 298
----------- ----------- ----------- -----------
INCOME BEFORE INCOME
TAXES 3,534 3,177 7,171 5,978
Income tax expense 1,361 1,238 2,761 2,331
----------- ----------- ----------- -----------
NET INCOME $ 2,173 $ 1,939 $ 4,410 $ 3,647
=========== =========== =========== ===========
NET INCOME PER COMMON
AND COMMON EQUIVALENT
SHARE $ .25 $ .22 $ .50 $ .42
=========== =========== =========== ===========
Weighted average common and
common equivalent shares
outstanding during the period 8,754 8,752 8,863 8,715
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
10
<PAGE>
FORM 10 - Q - - PART I - ITEM 1
EMPI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(IN THOUSANDS) Six Months Ended,
June 30
1996 1995
---------- -----------
(unaudited) (unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,410 $3,647
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,736 1,635
Provision for deferred income taxes (797) (408)
Gain on sale of long-term investments --- (70)
Loss on sale of equipment 19 5
Provision for loss on accounts receivable 1,082 1,269
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (204) 83
(Increase) decrease in inventories 1,017 (1,159)
Increase in other assets/liabilities (7) (253)
Increase (decrease) in accounts payable and accrued expenses (627) 57
Increase in income taxes payable (280) (465)
---------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,349 4,341
INVESTING ACTIVITIES
Sale of short-term investments 7,218 1,796
Purchase of short-term investments (11,943) (1,870)
Sale of long-term investments 1,500 150
Purchase of long-term investments --- (2,479)
Additions to other assets (142) ---
Purchase of equipment and improvements (723) (675)
Proceeds from sale of equipment 14 9
---------- -----------
NET CASH USED IN INVESTING ACTIVITIES (4,076) (3,069)
FINANCING ACTIVITIES
Payments on long-term debt (50) (3)
Purchase and retirement of Common Stock (5,552)
Proceeds from exercise of Common Stock options 66 36
---------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (5,536) 33
---------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (3,263) 1,305
Cash and cash equivalents at beginning of year 5,949 5,652
---------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 2,686 $ 6,957
========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
11
<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 and six months ended June
30, 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)
June 30 December 31
1996 1995
----------- -----------
(unaudited)
Finished goods $ 5,321 $ 5,873
Work in process 531 632
Raw materials 1,400 1,764
----------- -----------
$ 7,252 $ 8,269
=========== ===========
EXHIBITS
Exhibit No. Description
------------ -------------
(11) Statement re: computation of
per share earnings
(27) Financial Data Schedule
(filed only in electronic format)
12
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EXHIBIT 11 - - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended, Six Months Ended,
June 30 June 30
1996 1995 1996 1995
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
PRIMARY EARNINGS PER SHARE:
Average shares outstanding 8,526 8,592 8,584 8,585
Net effect of dilutive stock
options and warrants - based on
the treasury stock method using
average market price 228 160 279 130
----------- ----------- ----------- -----------
8,754 8,752 8,863 8,715
=========== =========== =========== ===========
Net income $ 2,173 $ 1,939 $ 4,410 $ 3,647
=========== =========== =========== ===========
Net income per share $ .25 $ .22 $ .50 $ .42
=========== =========== =========== ===========
FULLY-DILUTED EARNINGS PER SHARE:
Average shares outstanding 8,526 8,592 8,584 8,585
Net effect of dilutive stock
options and warrants - based on
the treasury stock method using
closing market price 228 176 279 130
----------- ----------- ----------- -----------
8,754 8,768 8,863 8,715
=========== =========== =========== ===========
Net income $ 2,173 $ 1,939 $ 4,410 $ 3,647
=========== =========== =========== ===========
Net income per share $ .25 $ .22 $ .50 $ .42
=========== =========== =========== ===========
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SECOND
QUARTER 1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,686
<SECURITIES> 17,815
<RECEIVABLES> 20,082
<ALLOWANCES> 5,114
<INVENTORY> 7,252
<CURRENT-ASSETS> 49,086
<PP&E> 13,101
<DEPRECIATION> 8,230
<TOTAL-ASSETS> 58,660
<CURRENT-LIABILITIES> 4,952
<BONDS> 1,407
18,922
0
<COMMON> 0
<OTHER-SE> 33,379
<TOTAL-LIABILITY-AND-EQUITY> 58,660
<SALES> 30,413
<TOTAL-REVENUES> 33,829
<CGS> 8,220
<TOTAL-COSTS> 8,806
<OTHER-EXPENSES> 18,608
<LOSS-PROVISION> 1,082
<INTEREST-EXPENSE> 42
<INCOME-PRETAX> 7,171
<INCOME-TAX> 2,761
<INCOME-CONTINUING> 4,410
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,410
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
</TABLE>
