<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, 1998
---------------------------------
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.)
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 / /
7,026,920 shares of common stock were outstanding as of May 8, 1998.
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EMPI, INC.
INDEX PAGE
Part I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheets as of
March 31, 1998 and December 31, 1997 3
Unaudited Consolidated Statements of Operations
for the periods ended March 31, 1998 and 1997 4
Unaudited Consolidated Statements of Cash Flows
for the periods ended March 31, 1998 and 1997 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 8
Part II. OTHER INFORMATION 10
SIGNATURES 11
2
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PART I - - FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
EMPI, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31 December 31
1998 1997
----------- -----------
(In thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,290 $ 3,020
Short-term investments 17,364 21,480
Accounts receivable, less allowances 16,913 18,046
Inventories - Note B 8,242 8,003
Deferred income taxes 3,874 3,874
Other 1,175 1,072
-------- --------
TOTAL CURRENT ASSETS 52,858 55,495
PROPERTY, PLANT AND EQUIPMENT--NET 6,067 6,506
OTHER ASSETS 1,592 1,892
-------- --------
$ 60,517 $ 63,893
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,956 $ 1,990
Customer advances 316 332
Employee compensation 1,287 1,655
Commissions payable 507 526
Current portion of long-term debt 269 269
Income taxes 1,402 ---
Other 387 366
-------- --------
TOTAL CURRENT LIABILITIES 6,124 5,138
LONG-TERM DEBT, LESS CURRENT PORTION 66 66
SHAREHOLDERS' EQUITY:
Common stock 2,944 9,847
Retained earnings 51,383 48,842
-------- --------
TOTAL SHAREHOLDERS' EQUITY 54,327 58,689
-------- --------
$ 60,517 $ 63,893
-------- --------
-------- --------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
FORM 10-Q - - PART I - ITEM 1 (CONTINUED)
EMPI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1998 1997
--------- ---------
(In thousands, except per share data)
<S> <C> <C>
Net sales $ 16,997 $ 18,025
Cost of goods sold 4,255 4,723
--------- ---------
GROSS PROFIT 12,742 13,302
Operating expenses:
Selling, general and administrative 8,103 8,649
Research and development 841 968
--------- ---------
Total operating expenses 8,944 9,617
--------- ---------
INCOME FROM OPERATIONS 3,798 3,685
Other income, net 333 229
--------- ---------
INCOME BEFORE INCOME TAXES 4,131 3,914
Income tax expense 1,590 1,507
--------- ---------
NET INCOME $ 2,541 $ 2,407
--------- ---------
--------- ---------
DILUTED EARNINGS PER SHARE $ .32 $ .29
--------- ---------
--------- ---------
Diluted weighted average shares outstanding--Note C 7,927 8,369
--------- ---------
--------- ---------
BASIC EARNINGS PER SHARE $ .32 $ .30
--------- ---------
--------- ---------
Weighted average shares outstanding--Note C 7,821 8,157
--------- ---------
--------- ---------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
FORM 10-Q - - PART I - ITEM 1 (CONTINUED)
EMPI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1998 1997
-------- -------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,541 $ 2,407
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 859 961
Provision for deferred income taxes ---- (486)
Provision for loss on accounts receivable 557 511
Changes in operating assets and liabilities:
Accounts receivable 576 (670)
Inventories (239) (532)
Accounts payable and accrued expenses (438) (933)
Income taxes payable 1,402 602
Other (81) 248
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,177 2,108
INVESTING ACTIVITIES
Maturities of short-term investments 5,079 2,295
Purchase of short-term investments (963) (2,351)
Reductions in other assets --- 381
Purchase of equipment and improvements (120) (633)
-------- --------
NET CASH PROVIDED BY(USED IN) INVESTING ACTIVITIES 3,996 (308)
FINANCING ACTIVITIES
Purchases and retirement of common stock (7,096) (2,955)
Proceeds from exercise of common stock options 193 490
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (6,903) (2,465)
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,270 (665)
Cash and cash equivalents at beginning of year 3,020 2,849
-------- --------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 5,290 $ 2,184
-------- --------
-------- --------
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
FORM 10-Q - - PART I - ITEM 1 (CONTINUED)
EMPI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - ACCOUNTING POLICIES
The accompanying unaudited 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, 1998 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1998. 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, 1997.
NOTE B - INVENTORIES
<TABLE>
<CAPTION>
March 31 December 31
1998 1997
---------- -----------
(In thousands)
<S> <C> <C>
Finished goods $ 5,753 $ 5,515
Work in process 696 556
Raw materials 1,793 1,932
-------- --------
$ 8,242 $ 8,003
-------- --------
-------- --------
</TABLE>
6
<PAGE>
FORM 10-Q - - PART I - ITEM 1 (CONTINUED)
NOTE C - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended
March 31
1998 1997
-------- --------
(In thousands, except per share data)
<S> <C> <C>
Net income $ 2,541 $ 2,407
Denominator for earnings per share:
Weighted average shares; denominator
for basic earnings per share 7,821 8,157
Effect of dilutive securities:
Employee and nonemployee stock options 106 212
-------- --------
Dilutive common shares; denominator
for diluted earnings per share 7,927 8,369
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------- -------
Basic earnings per share $ .32 $ .30
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------- -------
Diluted earnings per share $ .32 $ .29
------- -------
------- -------
</TABLE>
7
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
SALES
Empi, Inc.'s ("Empi" or the "Company") net sales for the 1998 first quarter
totaled $17.0 million compared to 1997 first quarter sales of $18.0 million, a
decrease of 6 percent. This percentage decrease in net sales was a result of a
4 percent reduction in volume, combined with a 2 percent reduction in average
selling price. Electrotherapy sales accounted for approximately 62 percent and
67 percent of total sales for the first quarters of 1998 and 1997, respectively.
The electrotherapy product group experienced a 13 percent reduction in sales
compared to the same period last year as the Company continues to encounter
pricing pressures from third-party payors. The Company achieved sales growth of
11 percent growth within the iontophoretic drug delivery group, 4 percent growth
within its orthotics product group and 13 percent growth in its incontinence
product line. International sales for the first quarter, as a percentage of
total sales, decreased to 2 percent compared to 5 percent for the same period
last year.
GROSS PROFIT
Gross profit for the 1998 first quarter was $12.7 million compared to $13.3
million for the 1997 first quarter, a decrease of 4 percent. Gross profit as a
percentage of sales for the first quarters of 1998 and 1997 was 75 percent and
74 percent, respectively. Continued manufacturing efficiencies combined with
the decrease in international sales, which have lower gross margins, offset the
reduction in average selling price. The Company anticipates that gross profit,
as a percentage of sales, will remain near its current level or experience a
slight decrease due to on-going price erosion and a continued increase in
orthotic products in the product mix.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for the first quarter were $8.1
million and $8.6 million in 1998 and 1997, respectively. Stated as a
percentage of sales, selling, general and administrative expenses were 48
percent in both the first quarters of 1998 and 1997. Selling expenses were
down 5 percent as compared to the same quarter last year, which was primarily
driven by reduced commission expenses resulting from a decrease in revenues.
As compared to the same quarter last year, general and administrative
expenses were down 10 percent mainly due to a decrease in facility related
expenses.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased to $841,000 in the first quarter
of 1998 compared to $968,000 in the first quarter of 1997, due primarily to a
restructuring of the department in the last quarter of 1997. Stated as a
percentage of sales, research and development costs were 5 percent for the
first quarters of 1998 and 1997. Research and development spending continues
to be driven by activities related to developing new products, continuation
engineering and next-generation products.
8
<PAGE>
FORM 10-Q - - PART I - ITEM 2 (Continued)
OTHER INCOME AND EXPENSES
Interest income for the first quarter of 1998 was $253,000 compared to $233,000
in first quarter of 1997. Interest income remained relatively constant from the
first quarter of 1998 as compared to the first quarter of 1997, despite an
increase in the Company's stock buy-back efforts, due to an increase in the net
cash provided by operating activities. The increase in other income in the
first quarter of 1998, as compared to the first quarter of 1997, was mainly
attributable to an insurance settlement.
NET INCOME
Net income for the first quarter of 1998 was $2.5 million compared to $2.4
million for the first quarter of 1997, an increase of 6 percent. An increased
gross margin percentage and an overall decrease in operating expenses of 7
percent were the primary reasons for the improvement in net income despite a 6
percent decrease in sales. The effective tax rate for each of the first
quarters of 1998 and 1997 remained flat at 38.5 percent.
LIQUIDITY AND CAPITAL REQUIREMENTS
The Company's cash and security investments were approximately $22.7 million at
March 31, 1998, which reflects a decrease of $1.8 million from year end 1997
primarily due to Empi's continued stock repurchase efforts during the first
quarter of 1998. Empi purchased a total of 356,900 shares in the first quarter
of 1998 at a total cost of approximately $7.1 million. In April 1998, the Board
of Directors authorized the expenditure of an additional $15.0 million to
continue the repurchase of the Company's shares on the open market. Empi's
working capital at March 31, 1998 was $46.7 million, a decrease of approximately
$3.7 million compared to December 31, 1997. The current ratio at the end of the
first quarter was 8.6 to 1. The Company believes its cash and security
investments, together with the cash flow from operations will be sufficient to
meet its working capital requirements for the immediate and foreseeable future.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
9
<PAGE>
PART II - - OTHER INFORMATION
Item 5. OTHER INFORMATION
At the Annual Meeting of Shareholders held at corporate headquarters
on April 29, 1998, Harold G. Olson officially resigned from the Board
of Directors. Additionally, Bradley J. Beard was appointed by the
Board to serve as a Class Three director of the Company for a term of
three years.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION PAGE NO.
(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, 1998.
10
<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.
May 13, 1998 By /s/ Joseph E. Laptewicz, Jr.
---------------------------------------------
Joseph E. Laptewicz, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
May 13, 1998 By /s/ Patrick D. Spangler
---------------------------------------------
Patrick D. Spangler
Vice President, Chief Financial Officer and
Assistant Secretary
(Principal Financial and Accounting Officer)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIRST
QUARTER 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,290
<SECURITIES> 17,364
<RECEIVABLES> 21,666
<ALLOWANCES> 4,753
<INVENTORY> 8,242
<CURRENT-ASSETS> 52,858
<PP&E> 17,599
<DEPRECIATION> 11,532
<TOTAL-ASSETS> 60,517
<CURRENT-LIABILITIES> 6,124
<BONDS> 0
0
0
<COMMON> 2,944
<OTHER-SE> 51,383
<TOTAL-LIABILITY-AND-EQUITY> 60,517
<SALES> 16,997
<TOTAL-REVENUES> 16,997
<CGS> 4,255
<TOTAL-COSTS> 4,255
<OTHER-EXPENSES> 8,944
<LOSS-PROVISION> 557
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,131
<INCOME-TAX> 1,590
<INCOME-CONTINUING> 2,541
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,541
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
