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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, 1997
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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
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(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
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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 / /
8,068,389 shares of common stock were outstanding as of May 7, 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") total revenue for the 1997 first
quarter equaled $18.0 million compared to 1996 first quarter revenue of
$16.9 million, an increase of 7 percent. The 7 percent increase in revenue
was primarily driven by a 10 percent improvement in volume and a 3 percent
reduction in average selling prices. Electrotherapy revenues accounted for
approximately 67 percent and 69 percent of total revenues for the first
quarters of 1997 and 1996, respectively. The Company achieved revenue growth
of 3 percent within the electrotherapy product group, 11 percent growth
within the iontophoretic drug delivery group, and 28 percent growth within
its orthotics product group. The incontinence product group recorded a
6 percent reduction in revenue compared to the same period last year due to
fewer sEMG systems being sold. International sales for the first quarter, as
a percentage of total revenue, slipped to 5 percent compared to 6 percent for
the same period last year.
GROSS PROFIT
Gross profit for the 1997 first quarter was $13.3 million compared to $12.5
million for the 1996 first quarter, an increase of 6 percent. Gross profit as
a percentage of revenue for the first quarters of 1997 and 1996 was 74
percent. Low inflationary costs for labor and supplies were offset by
improved 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 due to price erosion and product
mix issues.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for the first quarter were
$8.6 million in both 1997 and 1996. Stated as a percentage of revenue,
selling, general and administrative expenses were 48 percent in the first
quarter of 1997 and 51 percent in the first quarter of 1996. Selling
expenses were up 5 percent, which was driven by higher commission expenses
and increased staffing related costs within the national accounts group.
General and administrative expenses were down 7 percent due to a decrease in
controllable expenses.
RESEARCH AND DEVELOPMENT
Research and development expenses were $969,000 in the first quarter of 1997
compared to $792,000 in the first quarter of 1996. Stated as a percentage of
revenue, research and development costs were 5 percent for first quarter 1997
and 1996. Research and development spending continues to be driven by
activities related to developing new products, next-generation products,
continuation engineering, and by clinical and regulatory spending.
2
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FORM 10 - Q - - PART I - ITEM 2 (Continued)
OTHER INCOME AND EXPENSES
Interest income for the first quarter of 1997 was $233,000 compared to
$301,000 in first quarter of 1996. The decrease in interest income was
attributable to the Company's lower cash position, which has been reduced due
to Empi's stock buy-back program. Since all interest bearing debt was
retired in late 1996, Empi recorded zero interest expense for the first
quarter of 1997 compared to $21,000 for the first quarter of 1996. The major
impetus behind reporting lower other income and expenses for the first
quarter of 1997, as compared to the same period of 1996, was a one-time
payment to Empi in excess of $200,000 for a trade dress settlement that was
recorded in the first quarter of 1996.
NET INCOME
Net income for the first quarter of 1997 was $2.4 million compared to
$2.2 million for the first quarter of 1996, an increase of 8 percent. The
primary reasons for the improvement in net income were revenue growth of 7
percent, a consistent gross margin percentage, and an overall operating
expense growth rate of 3 percent. The effective tax rate for each of the
first quarters of 1997 and 1996 was 38.5 percent.
LIQUIDITY AND CAPITAL REQUIREMENTS
The Company's cash, cash equivalents and short-term investments were
approximately $17.5 million at March 31, 1997, which reflects a decrease of
$600,000 from year-end 1996. During the first quarter of 1997 Empi continued
to repurchase and retire shares of the Company's common stock. A total of
148,500 shares were repurchased in the first quarter of 1997 at a total cost
of approximately $3.0 million. In April 1997, the Board of Directors
authorized the expenditure of an additional $7.5 million to continue to
repurchase the Company's shares on the open market. Empi's working capital
at March 31, 1997 was $53.9 million, a decrease of approximately $100,000
compared to December 31, 1996. The current ratio at the end of the first
quarter was 8.7 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.
PART II - - OTHER INFORMATION
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
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(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
March 31, 1997.
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 9, 1997 By /s/ Joseph E. Laptewicz, Jr.
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Joseph E. Laptewicz, Jr.
President and Chief Executive Officer
(Principal Executive Officer) and
Acting Chief Financial Officer
4
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QUARTERLY REPORT ON FORM 10 - Q
PART I - ITEM 1
LIST OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AND
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1997
EMPI, INC.
ST. PAUL, MINNESOTA
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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, 1997 and
December 31, 1996,
Condensed Consolidated Statements of Operations - - Three months ended
March 31, 1997 and 1996,
Condensed Consolidated Statements of Cash Flows - - Three months ended
March 31, 1997 and 1996.
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)
March 31 December 31
1997 1996
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(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,184 $ 2,849
Short-term investments 15,272 15,216
Accounts receivable, less allowances 16,103 15,944
Inventories - Note B 7,852 7,320
Deferred income taxes 5,488 5,002
Other 576 707
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TOTAL CURRENT ASSETS 47,475 47,038
PROPERTY, PLANT AND EQUIPMENT - NET 7,118 7,090
OTHER ASSETS 2,826 3,714
LONG-TERM INVESTMENTS 1,999 1,999
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$ 59,418 $ 59,841
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,253 $ 2,455
Employee compensation 1,163 1,792
Commissions payable 494 596
Current portion of long-term debt 287 287
Income taxes 988 386
Other 301 335
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TOTAL CURRENT LIABILITIES 5,486 5,851
LONG-TERM DEBT, LESS CURRENT PORTION 333 333
SHAREHOLDERS' EQUITY:
Common stock 12,866 15,331
Retained earnings 40,733 38,326
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TOTAL SHAREHOLDERS' EQUITY 53,599 53,657
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$ 59,418 $ 59,841
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See notes to condensed consolidated financial statements.
7
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FORM 10 - Q - - PART I - ITEM 1
EMPI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended
March 31
1997 1996
---- ----
(unaudited) (unaudited)
Net sales $ 18,025 $ 16,892
Cost of goods sold 4,723 4,388
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GROSS PROFIT 13,302 12,504
Operating expenses:
Selling, general and administrative 8,649 8,589
Research and development 968 792
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9,617 9,381
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INCOME FROM
OPERATIONS 3,685 3,123
Other income/(expense), net 229 514
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INCOME BEFORE INCOME TAXES 3,914 3,637
Income tax expense 1,507 1,400
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NET INCOME $ 2,407 $ 2,237
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NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
$ .29 $.25
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Weighted average common and common
equivalent shares outstanding
during the period 8,369 8,966
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See notes to condensed consolidated financial statements.
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FORM 10 - Q - - PART I - ITEM 1
EMPI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Ended
March 31
1997 1996
---- ----
(unaudited) (unaudited)
OPERATING ACTIVITIES
Net income $ 2,407 $ 2,237
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 961 899
Provision for deferred income taxes (486) (531)
(Gain) loss on sale of equipment -- (1)
Provision for loss on accounts receivable 511 531
Changes in operating assets and liabilities:
Accounts receivable (670) (211)
Inventories (532) 744
Other assets/liabilities 248 (19)
Accounts payable and accrued expenses (933) (812)
Increase in income taxes payable 602 1,404
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NET CASH PROVIDED BY
OPERATING ACTIVITIES 2,108 4,241
INVESTING ACTIVITIES
Maturities of short-term investments 2,295 3,327
Purchase of short-term investments (2,351) (4,436)
(Additions) reductions to other assets 381 (53)
Purchase of equipment and improvements (633) (343)
Proceeds from sale of equipment -- 2
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NET CASH (USED IN) INVESTING ACTIVITIES
(308) (1,503)
FINANCING ACTIVITIES
Purchases and retirement of common stock and
warrant rights (2,955) (2,788)
Proceeds from exercise of common stock options 490 60
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NET CASH USED IN FINANCING ACTIVITIES (2,465) (2,728)
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NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (665) 10
Cash and cash equivalents at beginning of year 2,849 5,949
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CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 2,184 $ 5,959
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See notes to condensed consolidated financial statements.
9
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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, 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)
March 31 December 31
1997 1996
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(unaudited)
Finished goods $ 5,552 $ 5,399
Work in process 827 678
Raw materials 1,473 1,243
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$ 7,852 $ 7,320
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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 first
quarter ended March 31, 1997 and March 31, 1996 of $0.01 and $0.01 per share,
respectively. The impact of Statement 128 on the calculation of fully
diluted earnings per share has yet to be determined, but the impact is not
expected to be material.
EXHIBITS
Exhibit No. Description Page No.
----------- ----------- --------
(11) Statement re: computation of 11
per share earnings
(27) Financial Data Schedule ----
(filed only in electronic format)
10
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EXHIBIT 11 - - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended
March 31
1997 1996
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(unaudited) (unaudited)
PRIMARY EARNINGS PER SHARE:
Average shares outstanding 8,157 8,643
Net effect of dilutive stock
options and warrants - based on the
treasury stock method using
average market price 212 323
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8,369 8,966
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Net income $ 2,407 $ 2,237
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Net income per share $ .29 $ .25
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FULLY-DILUTED EARNINGS PER SHARE:
Average shares outstanding 8,157 8,643
Net effect of dilutive stock
options and warrants - based on
the treasury stock method using
closing market price 212 323
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8,369 8,966
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Net income $ 2,407 $ 2,237
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Net income per share $ .29 $ .25
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11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIRST
QUARTER 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 2184
<SECURITIES> 15272
<RECEIVABLES> 21274
<ALLOWANCES> 5171
<INVENTORY> 7852
<CURRENT-ASSETS> 47475
<PP&E> 16546
<DEPRECIATION> 9428
<TOTAL-ASSETS> 59418
<CURRENT-LIABILITIES> 5486
<BONDS> 333
0
0
<COMMON> 12866
<OTHER-SE> 40733
<TOTAL-LIABILITY-AND-EQUITY> 59418
<SALES> 18025
<TOTAL-REVENUES> 18025
<CGS> 4730
<TOTAL-COSTS> 4723
<OTHER-EXPENSES> 9617
<LOSS-PROVISION> 511
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<INCOME-PRETAX> 3914
<INCOME-TAX> 1507
<INCOME-CONTINUING> 2407
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 2407
<EPS-PRIMARY> .29
<EPS-DILUTED> .29
</TABLE>
