<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 September 30, 1997
Commission File Number 0-9387
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.)
599 Cardigan Road 55126-4099
St. Paul, Minnesota
------------------------------- -------------------
(Address of principal (Zip code)
executive offices)
Registrant's telephone number, including area code (612) 415-9000
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 / /
8,020,510 shares of common stock were outstanding as of November 7, 1997.
1
<PAGE>
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 ("Empi" or the "Company") revenues for the third quarter of 1997
totaled $18.4 million, a 4 percent increase over the 1996 third quarter
revenue of $17.8 million. This percentage increase in revenue was driven by
a 7 percent increase in overall volume, which was offset by a 3 percent
reduction in average selling prices. Total revenues for the first nine
months of 1997 were $54.9 million, a 6 percent increase over the same period
revenues of $51.6 million for 1996. Electrotherapy revenues for 1997
accounted for approximately 64 percent and 66 percent of total revenues for
the third quarter and the first nine months, respectively. Electrotherapy
revenues in 1996 were 69 percent of total revenue for both the third quarter
and the first nine months. Third quarter revenue results by product group
were: electrotherapy down 3 percent, iontophoresis up 12 percent, orthotics
up 52 percent, and incontinence down 35 percent. Electrotherapy revenue is
down because of continued price pressures and reimbursement issues. Revenue
by product group for the first nine months of 1997 grew by 1 percent, 14
percent, and 42 percent for electrotherapy, iontophoresis, and orthotics,
respectively. Incontinence revenue for the first nine months of 1997 was
down 21 percent. International sales were 3 percent of total revenue dollars
for both the third quarter and the first nine months of 1997 compared to 5
percent for the same periods in 1996. International distributor sales have
been soft in 1997 due to the strength of the U.S. dollar, which has made the
Company's products more expensive to foreign customers.
GROSS PROFIT
Gross profit for the third quarter of 1997 was $13.6 million compared to
$13.1 million for 1996, an increase of 4 percent. Gross profit for the first
nine months was $40.6 million and $38.1 million for 1997 and 1996,
respectively. Gross profit, as a percentage of revenue, remained at
approximately 74 percent from 1996 to 1997 for the third quarter and the
first nine months, respectively. The increase in sales volume related costs,
such as direct material and direct labor, have been offset by lower direct
material prices and higher overhead absorption. The Company anticipates that
gross profit, as a percentage of revenue, will stay near its current level
for the remainder of 1997.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for the third quarter and the
first nine months of 1997 were $8.4 million and $26.0 million, respectively,
compared to $8.6 million and $25.5 million for the same periods of 1996.
Stated as a percent of revenue, selling, general and administrative expenses
were 46 percent and 48 percent for the third quarter of 1997 and 1996,
respectively, and were 47 percent and 49 percent for the first nine months of
1997 and 1996, respectively. Selling, general and administrative expenses for
the first nine months of 1997 grew approximately 2 percent due to higher
selling expenses, which were partially offset by lower general and
administrative expenses.
2
<PAGE>
FORM 10-Q -- PART 1 - ITEM 2 (Continued)
RESEARCH AND DEVELOPMENT
Research and development expenses were $1.0 million for the third quarter of
1997 and $0.9 million for the third quarter of 1996. For the first nine
months of 1997 and 1996, research and development expenses were $3.0 million
and $2.5 million, respectively. Stated as a percent of revenue, research and
development expenses averaged a steady 5 percent in the third quarter and
the first nine months for both 1997 and 1996. Research and development
efforts for 1997 continue to focus on developing new and next generation
products, enhancing existing products, and increased clinical and regulatory
activities.
OTHER INCOME AND EXPENSES
Interest income for the third quarter and the first nine months of 1997 was
$237,000 and $713,000, respectively. Interest income for the same periods in
1996 was $290,000 and $812,000. The decrease in interest income for the
first nine months of 1997 was attributable to the Company's lower cash
position resulting from Empi's stock repurchase program. Due to the
retirement of a majority of the Company's outstanding interest bearing debt
in 1996, the Company incurred only $2,000 in interest expense for the first
nine months of 1997 as compared to $63,000 for the first nine months of 1996.
Other income for the first nine months of 1997, as compared to the same
period in 1996, decreased due to non-recurring receipts in 1996 for a trade
dress settlement and a realized gain from the sale of investment securities,
which combined for a total of $263,000.
NET INCOME
Net income for the third quarter of 1997 was $2.7 million compared to $2.4
million in the third quarter of 1996. Net income for the first nine months
of 1997 and 1996 was $7.6 million and $6.8 million, respectively. Empi's
improvement in net income for the first nine months is attributable to
revenue growth of 6 percent, consistent year-to-year gross margin percentage,
and operating expenses growing at half the rate of revenue growth. The
effective tax rate for all reporting periods referred to in this report was
38.5 percent.
LIQUIDITY AND CAPITAL REQUIREMENTS
The Company's cash, cash equivalents and short-term investments were
approximately $23.4 million at September 30, 1997, which reflects an increase
of $3.4 million from year-end 1996. During the first nine months of 1997,
Empi continued to repurchase and retire shares of the Company's common stock.
A total of 349,300 shares were repurchased during such period at a total cost
of approximately $6.4 million. In November 1997, the Board of Directors
authorized an additional $10.0 million to be used towards the repurchase of
the Company's stock. Empi's working capital at September 30, 1997 was $49.6
million, an increase of $6.4 million compared to the Company's working
capital position on December 31, 1996. The current ratio at the end of the
third quarter was 10.8 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 needs for the immediate and
foreseeable future.
Certain statements in this Form 10-Q relating to a projected consistent gross
profit level and the sufficiency of the Company's working capital are forward
looking and actual results may differ from expectations. Such projections
depend, among other things, upon consistent or increased revenues, controlled
costs and a certain level of return on investments, all of which cannot be
assured.
3
<PAGE>
FORM 10-Q -- PART 1 (Continued)
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II -- OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
On November 5, 1997, Empi announced the appointment of Scott R. Anderson,
president and chief executive officer of North Memorial Medical Center, as
chairman of its board of directors replacing Empi's founder, Donald D.
Maurer, who announced his retirement at the May 1997 annual meeting of
shareholders and who has been named chairman emeritus effective immediately.
In addition, Empi, Inc. has appointed M. Nazie Eftekhari, chief executive
officer and chairman of the ARAZ Group, to its board of directors as a class
one director to serve until the annual meeting of shareholders to be held in
1999.
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
September 30, 1997.
4
<PAGE>
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.
November 10, 1997 By /s/ JOSEPH E. LAPTEWICZ
-------------------------------------
Joseph E. Laptewicz
President and Chief Executive Officer
(Principal Executive Officer)
November 10, 1997 By /s/ PATRICK D. SPANGLER
-------------------------------------
Patrick D. Spangler
Vice President and Chief Financial Officer
(Principal Financial
and Accounting Officer)
5
<PAGE>
QUARTERLY REPORT ON FORM 10-Q
PART I - ITEM 1
LIST OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
EMPI, INC.
ST. PAUL, MINNESOTA
6
<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 -- September 30, 1997 and
December 31, 1996.
Condensed Consolidated Statements of Operations -- Three and Nine
months ended September 30, 1997 and 1996.
Condensed Consolidated Statements of Cash Flows -- Nine months
ended September 30, 1997 and 1996.
Notes to Condensed Consolidated Financial Statements.
7
<PAGE>
FORM 10-Q -- PART I - ITEM 1
EMPI, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
September 30 December 31
1997 1996
------------ -----------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,423 $ 2,849
Short-term investments 21,026 17,215
Accounts receivable, less allowances 16,797 15,944
Inventories - Note B 8,407 7,320
Deferred income taxes 5,097 5,002
Other 878 707
-------- --------
TOTAL CURRENT ASSETS 54,628 49,037
PROPERTY, PLANT AND EQUIPMENT - NET 6,677 7,090
OTHER ASSETS 2,207 3,714
-------- --------
$ 63,512 $ 59,841
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,211 $ 2,455
Employee compensation 1,746 1,792
Commissions payable 528 596
Current portion of long-term debt 275 287
Income taxes ---- 386
Other 301 335
-------- --------
TOTAL CURRENT LIABILITIES 5,061 5,851
LONG-TERM DEBT, LESS CURRENT PORTION 333 333
SHAREHOLDERS' EQUITY:
Common stock 12,188 15,331
Retained earnings 45,930 38,326
-------- --------
TOTAL SHAREHOLDERS' EQUITY 58,118 53,657
-------- --------
$ 63,512 $ 59,841
-------- --------
-------- --------
See notes to condensed consolidated financial statements.
8
<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 Nine Months Ended
September 30 September 30
-------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $ 18,409 $ 17,758 $ 54,878 $ 51,587
Cost of goods sold 4,839 4,695 14,269 13,501
-------- -------- -------- --------
GROSS PROFIT 13,570 13,063 40,609 38,086
Operating expenses:
Selling, general and administrative 8,393 8,561 25,960 25,495
Research and development 1,018 862 2,965 2,536
-------- -------- -------- --------
Total operating expenses 9,411 9,423 28,925 28,031
-------- -------- -------- --------
INCOME FROM
OPERATIONS 4,159 3,640 11,684 10,055
Other income/(expense), net 206 250 681 1,006
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 4,365 3,890 12,365 11,061
Income tax expense 1,681 1,498 4,761 4,259
-------- -------- -------- --------
NET INCOME $ 2,684 $ 2,392 $ 7,604 $ 6,802
-------- -------- -------- --------
-------- -------- -------- --------
NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARE - Note C $ .33 $ .28 $ .92 $ .78
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common and
common equivalent shares
outstanding during the period 8,230 8,500 8,281 8,729
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See notes to condensed consolidated financial statements.
9
<PAGE>
FORM 10-Q -- PART I - ITEM 1
EMPI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine Months Ended
September 30
1997 1996
----------- -----------
(unaudited) (unaudited)
OPERATING ACTIVITIES
Net income $ 7,604 $ 6,802
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,888 2,607
Provision for deferred income taxes (46) (378)
Loss on sale of equipment 3 42
Provision for loss on accounts receivable 1,723 1,637
Changes in operating assets and liabilities:
Accounts receivable (2,576) (541)
Inventories (1,087) 1,021
Other assets/liabilities (163) (1,426)
Accounts payable and accrued expenses (358) 26
Income taxes payable (151) (569)
-------- --------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 7,837 9,221
INVESTING ACTIVITIES
Maturities of short-term investments 14,700 11,983
Purchase of short-term investments (18,511) (15,739)
(Additions) reductions to other assets 410 (156)
Purchase of equipment and improvements (1,473) (1,019)
Proceeds from sale of equipment 1 32
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (4,873) (4,899)
FINANCING ACTIVITIES
Payments on long-term debt (12) (1,250)
Purchases and retirement of common stock
and warrant rights (6,403) (7,613)
Proceeds from exercise of common stock options 3,025 358
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (3,390) (8,505)
-------- --------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (426) (4,183)
Cash and cash equivalents at beginning of year 2,849 5,949
-------- --------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 2,423 $ 1,766
-------- --------
-------- --------
See notes to condensed consolidated financial statements.
10
<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 nine months ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1997. 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, 1996.
NOTE B - INVENTORIES
(In thousands)
September 30 December 31
1997 1996
------------ -----------
(unaudited)
Finished goods $ 5,817 $ 5,399
Work in process 633 678
Raw materials 1,957 1,243
-------- --------
$ 8,407 $ 7,320
-------- --------
-------- --------
NOTE C - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued statement
No. 128, EARNINGS PER SHARE, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The impact is
expected to result in an increase in primary earnings per share for the third
quarters ended September 30, 1997 and 1996 of $0.00 and $0.01 per share,
respectively. The expected impact of FASB No. 128 for the first nine months
of 1997 and 1996 would increase primary earnings per share by $0.02 and
$0.02, respectively. The impact of FASB 128 on the calculation of fully
diluted earnings per share has yet to be determined, but the impact is not
expected to be material.
11
<PAGE>
FORM 10-Q -- PART 1 - ITEM 1
NOTE D - RECLASSIFICATIONS
Certain prior year items have been reclassified to conform with the current year
presentation.
EXHIBITS
Exhibit No. Description
----------- -----------
(11) Statement re: computation of per share earnings
(27) Financial Data Schedule (filed only in electronic format)
12
<PAGE>
EXHIBIT 11 -- STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
Average shares outstanding 8,034 8,370 8,091 8,512
Net effect of dilutive stock options
and warrants - based on the treasury
stock method using average market
price 196 130 190 217
-------- -------- -------- --------
8,230 8,500 8,281 8,729
-------- -------- -------- --------
-------- -------- -------- --------
Net income $ 2,684 $ 2,392 $ 7,604 $ 6,802
-------- -------- -------- --------
-------- -------- -------- --------
Net income per share $ .33 $ .28 $ .92 $ .78
-------- -------- -------- --------
-------- -------- -------- --------
FULLY-DILUTED EARNINGS PER SHARE:
Average shares outstanding 8,034 8,370 8,091 8,512
Net effect of dilutive stock options
and warrants - based on the treasury
stock method using the higher of the
average market price or the closing
market price 196 130 190 217
-------- -------- -------- --------
8,230 8,500 8,281 8,729
-------- -------- -------- --------
-------- -------- -------- --------
Net income $ 2,684 $ 2,392 $ 7,604 $ 6,802
-------- -------- -------- --------
-------- -------- -------- --------
Net income per share $ .33 $ .28 $ .92 $ .78
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THIRD
QUARTER 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2423
<SECURITIES> 21026
<RECEIVABLES> 21825
<ALLOWANCES> 5028
<INVENTORY> 8407
<CURRENT-ASSETS> 54628
<PP&E> 17365
<DEPRECIATION> 10688
<TOTAL-ASSETS> 63512
<CURRENT-LIABILITIES> 5061
<BONDS> 333
0
0
<COMMON> 12188
<OTHER-SE> 45930
<TOTAL-LIABILITY-AND-EQUITY> 63512
<SALES> 48873
<TOTAL-REVENUES> 54878
<CGS> 11917
<TOTAL-COSTS> 14269
<OTHER-EXPENSES> 28925
<LOSS-PROVISION> 1723
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> 12365
<INCOME-TAX> 4761
<INCOME-CONTINUING> 7604
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7604
<EPS-PRIMARY> .92
<EPS-DILUTED> .92
</TABLE>
