<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, 1997
------------------
Commission File Number 0-9387
-----------
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.)
599 Cardigan Road
St. Paul, Minnesota 55126-4099
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(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 / /
7,983,217 shares of common stock were outstanding as of August 8, 1997.
1
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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 ("Empi" or the "Company") revenue for the second quarter of 1997
totaled $18.4 million, a 9 percent increase over the 1996 second quarter
revenue of $16.9 million. This increase was attributable to an 11 percent
improvement in revenue volume offset by a 2 percent reduction in average
selling prices. Total revenues for the first six months of 1997 were $36.5
million, an 8 percent increase over the same period revenues of $33.8 million
for 1996. Electrotherapy revenues accounted for approximately 65 percent and
66 percent of total revenues for the 1997 second quarter and first six
months, respectively. Electrotherapy revenues in 1996 were 69 percent of
total revenues for both the second quarter and the first six months. Empi
achieved revenue growth in the second quarter of 2 percent within the
electrotherapy product group, 19 percent within the iontophoretic drug
delivery group, and 48 percent within its orthotics product group. Revenue
growth for the first six months of 1997 was 3 percent, 15 percent, and 37
percent for electrotherapy, iontophoretic drug delivery, and orthotics
product groups, respectively. The incontinence product group recorded a 17
percent reduction in revenue in the second quarter and a 12 percent decline
in revenues for the first six months due to fewer sEMG system sales.
International sales comprised 3 percent of total revenue for the second
quarter of 1997 and 4 percent for the first six months, compared to 5
percent of total revenue for the same periods in 1996.
GROSS PROFIT
Gross profit for the second quarter of 1997 totaled $13.7 million compared to
$12.5 million for 1996, an increase of 10 percent. Gross profit for the first
six months of 1997 and 1996 was $27.0 million and $25.0 million,
respectively. Gross profit, as a percentage of revenue, was held constant
from 1996 to 1997 at 74 percent for the second quarter and first six months.
Higher volume related total costs for material and labor continue to be
offset by improvements in production processes and cost reduction efforts
within manufacturing. The Company anticipates that gross profit, as a
percentage of revenue, will remain near its current level throughout 1997,
with the impact of lower prices and minor shift in lower margin product mix
being offset by increased volume and continued manufacturing process
improvements.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for the second quarter and the
first six months of 1997 were $8.9 million and $17.6 million, respectively
compared to $8.3 million and $16.9 million for the same periods of 1996.
Stated as a percentage of revenue, selling, general and administrative
expenses were 48 percent for both the second quarter and the first six months
of 1997 compared to 49 percent and 50 percent of total revenues for the
second quarter and first six months of 1996. Selling, general and
administrative expenses for the first six months of 1997 grew approximately 4
percent due to higher selling commissions and increased staffing within the
national accounts group.
2
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FORM 10 - Q - - PART I - ITEM 2 (Continued)
RESEARCH AND DEVELOPMENT
Research and development expenses were $1.0 million and $1.9 million in the
second quarter and first six months of 1997, respectively, compared to $.9
million and $1.7 million for the same periods in 1996. Stated as a
percentage of revenue, research and development spending remained flat, at 5
percent of revenues, for the second quarter and the first six months for both
1997 and 1996. Research and development spending continues to be driven by
activities related to the development of new products and next-generation
products, continuation engineering of existing products, and increased
clinical and regulatory spending.
OTHER INCOME AND EXPENSES
Interest income for the second quarter and the first six months of 1997 was
$243,000 and $476,000, respectively. Interest income for the same periods in
1996 was $221,000 and $522,000. The decrease in interest income for the
first six months of 1997 was attributable to the Company's lower cash
position, primarily as a result of Empi's stock buy-back program. Due to the
retirement of all outstanding interest bearing debt in 1996, Empi recorded no
interest expense for the first six months of 1997 compared to $42,000 for the
first six months of 1996. Other income for the first six months of 1997 as
compared to the same period for 1996 decreased mainly due to a $200,000
payment of a non-recurring trade dress settlement recorded in the first
quarter of 1996.
NET INCOME
Net income for the second quarter of 1997 was $2.5 million compared to $2.2
million for the second quarter of 1996. Net income for the first six months
of 1997 and 1996 was $4.9 million and $4.4 million, respectively. The
improvement in net income for the first six months of 1997 was due to revenue
growth of 8 percent, a consistent year-to-year gross margin percentage, and
overall operating expense growth rate of 5 percent. The effective tax rate
for each of the second quarters and the first six months of 1997 and 1996 was
38.5 percent.
LIQUIDITY AND CAPITAL REQUIREMENTS
Empi's cash, cash equivalents and short-term investments were approximately
$21.3 million at June 30, 1997, which reflects an increase of $1.2 million
from year-end 1996. During the first six months of 1997, Empi continued to
repurchase and retire shares of the Company's common stock. A total of
198,500 shares were repurchased during such period at a total cost of
approximately $3.8 million. In April 1997, the Board of Directors authorized
an increase in the stock repurchase program by an additional $7.5 million.
Empi's working capital at June 30, 1997 was $46.2 million, an increase of
approximately $3.0 million compared to the Company's working capital position
on December 31, 1996. The current ratio at the end of the second quarter was
10.2 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.
Certain statements in this Form 10-Q are forward looking and actual results
may differ from expectations. 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 1996 Form 10-K.
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
The Company held its Annual Meeting of Shareholders on Monday, May 13, 1997.
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 6,646,168 shares in favor, with 182,795 shares opposed and
20,433 shares abstaining, not including 19,633 shares represented by broker
non-votes, the shareholders set the number of directors to be elected at
seven (7).
The following persons were elected as Class Two Directors of the Company with
terms expiring in 2000, by the votes indicated:
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NOMINEE NUMBER OF VOTES FOR NUMBER OF VOTES WITHHELD
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Scott R. Anderson 6,583,021 267,375
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Joseph E. Laptewicz 6,520,352 330,044
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DIRECTORS WITH CONTINUING TERMS TERM ENDING
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Donald D. Maurer 1999
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Dr. Kenneth F. Tempero 1999
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Warren S. West 1997
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Everett F. Carter 1998
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Harold G. Olson 1998
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By a vote of 3,784,633 shares in favor, with 338,261 shares opposed and
57,581 shares abstaining, not including 2,676,371 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, 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.
August 8, 1997 By /s/ Joseph E. Laptewicz, Jr.
-----------------------------------------
Joseph E. Laptewicz, Jr.
President and Chief Executive Officer
August 8, 1997 By /s/ Patrick D. Spangler
-----------------------------------------
Patrick D. Spangler
Vice President and Chief Financial 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 SIX MONTHS ENDED JUNE 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 - - June 30, 1997 and
December 31, 1996.
Condensed Consolidated Statements of Operations - - Three and Six
months ended June 30, 1997 and 1996.
Condensed Consolidated Statements of Cash Flows - Six months ended
June 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)
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,539 $ 2,849
Short-term investments 18,722 17,215
Accounts receivable, less allowances 15,869 15,944
Inventories - Note B 8,068 7,320
Deferred income taxes 5,422 5,002
Other 578 707
-------- --------
TOTAL CURRENT ASSETS 51,198 49,037
PROPERTY, PLANT AND EQUIPMENT - NET 6,978 7,090
OTHER ASSETS 2,463 3,714
LONG-TERM INVESTMENTS --- ---
-------- --------
TOTAL ASSETS $ 60,639 $ 59,841
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,141 $ 2,455
Employee compensation 1,295 1,792
Commissions payable 488 596
Current portion of long-term debt 275 287
Income taxes 525 386
Other 298 335
-------- --------
TOTAL CURRENT LIABILITIES 5,022 5,851
LONG-TERM DEBT, LESS CURRENT PORTION 333 333
SHAREHOLDERS' EQUITY:
Common stock 12,038 15,331
Retained earnings 43,246 38,326
-------- --------
TOTAL SHAREHOLDERS' EQUITY 55,284 53,657
-------- --------
$ 60,639 $ 59,841
-------- --------
-------- --------
</TABLE>
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 Six Months Ended
June 30 June 30
1997 1996 1997 1996
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $18,444 $16,937 $36,469 $33,829
Cost of goods sold 4,707 4,418 9,430 8,806
-------- -------- -------- --------
GROSS PROFIT 13,737 12,519 27,039 25,023
Operating expenses:
Selling, general and administrative 8,918 8,345 17,567 16,934
Research and development 979 882 1,947 1,674
-------- -------- -------- --------
Total operating expenses 9,897 9,227 19,514 18,608
-------- -------- -------- --------
INCOME FROM
OPERATIONS 3,840 3,292 7,525 6,415
Other income/(expense), net 246 242 475 756
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 4,086 3,534 8,000 7,171
Income tax expense 1,573 1,361 3,080 2,761
-------- -------- -------- --------
NET INCOME $ 2,513 $ 2,173 $ 4,920 $ 4,410
-------- -------- -------- --------
-------- -------- -------- --------
NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARE $ .30 $ .25 $ .59 $ .50
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common and
common equivalent shares
outstanding during the period 8,272 8,754 8,329 8,863
-------- -------- -------- --------
-------- -------- -------- --------
</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)
<TABLE>
<CAPTION>
Six months Ended
June 30
1997 1996
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,920 $ 4,410
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,931 1,736
Provision for deferred income taxes (420) (797)
Loss on sale of equipment 3 19
Provision for loss on accounts receivable 1,120 1,082
Changes in operating assets and liabilities:
Accounts receivable (1,045) (204)
Inventories (748) 1,017
Other assets/liabilities 293 (7)
Accounts payable and accrued expenses (919) (627)
Income taxes payable 139 (280)
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NET CASH PROVIDED BY
OPERATING ACTIVITIES 5,274 6,349
INVESTING ACTIVITIES
Maturities of short-term investments 7,200 7,218
Purchase of short-term investments (8,707) (11,943)
Maturities of long-term investments --- 1,500
(Additions) reductions to other assets 367 (142)
Purchase of equipment and improvements (1,140) (723)
Proceeds from sale of equipment 1 14
---------- ---------
NET CASH USED IN INVESTING ACTIVITIES (2,279) (4,076)
FINANCING ACTIVITIES
Payments on long-term debt (12) (50)
Purchases and retirement of common stock
and warrant rights (3,840) (5,552)
Proceeds from exercise of common stock options 547 66
---------- ---------
NET CASH USED IN FINANCING ACTIVITIES (3,305) (5,536)
---------- ---------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (310) (3,263)
Cash and cash equivalents at beginning of year 2,849 5,949
---------- ---------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 2,539 $ 2,686
---------- ---------
---------- ---------
</TABLE>
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 six months ended
June 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)
June 30 December 31
1997 1996
----------- -----------
(unaudited)
Finished goods $ 5,498 $ 5,399
Work in process 950 678
Raw materials 1,620 1,243
--------- ---------
$ 8,068 $ 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
second quarter ended June 30, 1997 and June 30, 1996 of $0.01 and $0.00 per
share, respectively. The expected impact of FASB No. 128 for the first six
months of 1997 and 1996 would increase primary earnings per share by $0.02
and $0.01, 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.
NOTE D - RECLASSIFICATIONS
Certain prior year items have been reclassified to conform with the current year
presentation.
11
<PAGE>
FORM 10 - Q - - PART 1 - ITEM 1
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 Six Months Ended
June 30 June 30
1997 1996 1997 1996
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
Average shares outstanding 8,082 8,526 8,120 8,584
Net effect of dilutive stock
options and warrants - based on
the treasury stock method using
average market price 162 228 190 279
-------- -------- -------- --------
8,244 8,754 8,310 8,863
-------- -------- -------- --------
-------- -------- -------- --------
Net income $ 2,513 $ 2,173 $ 4,920 $ 4,410
-------- -------- -------- --------
-------- -------- -------- --------
Net income per share $ .30 $ .25 $ .59 $ .50
-------- -------- -------- --------
-------- -------- -------- --------
FULLY-DILUTED EARNINGS PER SHARE:
Average shares outstanding 8,082 8,526 8,120 8,584
Net effect of dilutive stock
options and warrants - based on
the treasury stock method using
closing market price 162 228 190 279
-------- -------- -------- --------
8,244 8,754 8,310 8,863
-------- -------- -------- --------
-------- -------- -------- --------
Net income $ 2,513 $ 2,173 $ 4,920 $ 4,410
-------- -------- -------- --------
-------- -------- -------- --------
Net income per share $ .30 $ .25 $ .59 $ .50
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
SECOND QUARTER 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2539
<SECURITIES> 18722
<RECEIVABLES> 21137
<ALLOWANCES> 5268
<INVENTORY> 8068
<CURRENT-ASSETS> 51198
<PP&E> 17031
<DEPRECIATION> 10053
<TOTAL-ASSETS> 60639
<CURRENT-LIABILITIES> 5022
<BONDS> 333
0
0
<COMMON> 12038
<OTHER-SE> 43246
<TOTAL-LIABILITY-AND-EQUITY> 60639
<SALES> 32579
<TOTAL-REVENUES> 36469
<CGS> 7941
<TOTAL-COSTS> 9430
<OTHER-EXPENSES> 19514
<LOSS-PROVISION> 1120
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 8000
<INCOME-TAX> 3080
<INCOME-CONTINUING> 4920
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4920
<EPS-PRIMARY> .59
<EPS-DILUTED> .59
</TABLE>
