<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, 1998
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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
-------------------------------- -------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
599 Cardigan Road
St. Paul, Minnesota 55126-4099
----------------------- ------------
(Address of principal (Zip code)
executive offices)
Registrant's telephone number, including area code (651) 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 / /
6,756,614 shares of common stock were outstanding as of August 5, 1998.
<PAGE>
EMPI, INC.
<TABLE>
<CAPTION>
INDEX PAGE
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<S> <C> <C>
Part I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997 3
Unaudited Consolidated Statements of Operations
for the periods ended June 30, 1998 and 1997 4
Unaudited Consolidated Statements of Cash Flows
for the periods ended June 30, 1998 and 1997 5
Notes to Unaudited Consolidated Financial
Statements 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 8
Part II. OTHER INFORMATION 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
</TABLE>
2
<PAGE>
PART I - - FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
EMPI, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,345 $ 3,020
Short-term investments 5,050 21,480
Accounts receivable, less allowances 17,649 18,046
Inventories - Note B 8,274 8,003
Deferred income taxes 3,747 3,874
Other 1,110 1,072
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TOTAL CURRENT ASSETS 38,175 55,495
PROPERTY, PLANT AND EQUIPMENT - NET 5,670 6,506
OTHER ASSETS 1,303 1,892
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$ 45,148 $63,893
-------- -------
-------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,975 $ 1,990
Customer advances 357 332
Employee compensation 1,507 1,655
Commissions payable 533 526
Current portion of long-term debt 269 269
Income taxes 1,060 ----
Other 395 366
-------- -------
TOTAL CURRENT LIABILITIES 6,096 5,138
LONG-TERM DEBT, LESS CURRENT PORTION 66 66
SHAREHOLDERS' EQUITY:
Common stock (15,185) 9,847
Retained earnings 54,171 48,842
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TOTAL SHAREHOLDERS' EQUITY 38,986 58,689
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$ 45,148 $63,893
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</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
FORM 10 - Q - - PART I - ITEM 1 (CONTINUED)
EMPI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
--------- --------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $18,266 $18,444 $35,263 $36,469
Cost of goods sold 4,715 4,707 8,970 9,430
------- ------- ------- -------
GROSS PROFIT 13,551 13,737 26,293 27,039
Operating expenses:
Selling, general and
administrative 8,372 8,918 16,475 17,567
Research and development 844 979 1,685 1,947
------- ------- ------- -------
Total operating expenses 9,216 9,897 18,160 19,514
------- ------- ------- -------
INCOME FROM OPERATIONS 4,335 3,840 8,133 7,525
Other income, net 200 246 533 475
------- ------- ------- -------
EARNINGS BEFORE INCOME TAXES
4,535 4,086 8,666 8,000
Income tax expense 1,747 1,573 3,337 3,080
------- ------- ------- -------
NET EARNINGS $ 2,788 $ 2,513 $ 5,329 $ 4,920
------- ------- ------- -------
------- ------- ------- -------
BASIC EARNINGS PER SHARE $ .39 $ .31 $ .71 $ .61
------- ------- ------- -------
------- ------- ------- -------
Weighted average shares
outstanding - Note C 7,115 8,110 7,466 8,132
DILUTED EARNINGS PER SHARE $ .39 $ .30 $ .71 $ .59
------- ------- ------- -------
------- ------- ------- -------
Diluted weighted average shares
outstanding - Note C 7,190 8,272 7,557 8,329
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
FORM 10 - Q - - PART I - ITEM 1 (CONTINUED)
EMPI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30
1998 1997
---------- ----------
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,329 $ 4,920
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,704 1,931
Provision for deferred income taxes 127 (420)
Provision for loss on accounts receivable 1,099 1,120
Changes in operating assets and liabilities:
Accounts receivable (702) (1,045)
Inventories (271) (748)
Other assets/liabilities (9) 296
Accounts payable and accrued expenses (131) (919)
Income taxes payable 1,083 139
-------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,229 5,274
INVESTING ACTIVITIES
Maturities of short-term investments 21,880 7,200
Purchase of short-term investments (5,450) (8,707)
Reductions in (additions to) other assets (1) 367
Purchase of equipment and improvements (278) (1,139)
-------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 16,151 (2,279)
FINANCING ACTIVITIES
Payments on long-term debt ---- (12)
Purchases and retirement of common stock (25,277) (3,840)
Proceeds from exercise of common stock options 222 547
-------- -------
NET CASH USED IN FINANCING ACTIVITIES (25,055) (3,305)
-------- -------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (675) (310)
Cash and cash equivalents at beginning of year 3,020 2,849
-------- -------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 2,345 $ 2,539
-------- -------
-------- -------
</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 and six months ended June 30, 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
(In thousands)
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
--------- -----------
<S> <C> <C>
Finished goods $5,963 $5,515
Work in process 697 556
Raw materials 1,614 1,932
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$8,274 $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 Six Months Ended
June 30 June 30
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net income $2,788 $2,513 $5,329 $4,920
Denominator for earnings per share:
Weighted average shares; denominator
for basic earnings per share 7,115 8,110 7,466 8,132
Effect of dilutive securities:
Employee and nonemployee stock options 75 162 91 197
------ ------ ------ ------
Dilutive common shares; denominator
for diluted earnings per share 7,190 8,272 7,557 8,329
------ ------ ------ ------
------ ------ ------ ------
Basic earnings per share $ .39 $ .31 $ .71 $ .61
------ ------ ------ ------
------ ------ ------ ------
Diluted earnings per share $ .39 $ .30 $ .71 $ .59
------ ------ ------ ------
------ ------ ------ ------
</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 second quarter
totaled $18.3 million compared to 1997 second quarter sales of $18.4 million, a
decrease of 1 percent. This percentage decrease in net sales was a result of a
reduction in average selling prices offset by a slight increase in volume. Total
sales for the first six months of 1998 were $35.3 million, representing a 3
percent decrease over 1997 sales for the same period of $36.5 million.
Electrotherapy sales accounted for approximately 63 percent of total sales for
the 1998 second quarter and first six months, respectively. Electrotherapy
sales in 1997 were 65 percent and 66 percent of total sales for the second
quarter and first six months. Empi experienced a 4 percent reduction in
electrotherapy sales in the second quarter of 1998, as compared to the same
period last year, as the Company continues to encounter pricing pressures from
third-party payors and price volume concessions within preferred supplier
agreements. The decrease in electrotherapy sales was partially offset by sales
growth of 5 percent within the iontophoretic drug delivery group, 3 percent
within the orthotics product group and 8 percent in the incontinence product
line. International sales accounted for 3 percent of total sales for both the
second quarter and the first six months of 1998.
GROSS PROFIT
Gross profit for the 1998 second quarter was $13.6 million compared to $13.7
million for the 1997 second quarter, a decrease of 1 percent. Gross profit
for the first six months of 1998 and 1997 was $26.3 million and $27.0
million, respectively. Gross profit as a percentage of sales held constant
at 74 percent for the second quarter and first six months of 1998 and 1997.
The Company anticipates that throughout 1998 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, offset by continuing manufacturing and distribution
efficiencies.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for the second quarter and the
first six months of 1998 were $8.4 million and $16.5 million, respectively, as
compared to $8.9 million and $17.6 million for the same periods in 1997. Stated
as a percentage of sales, selling, general and administrative expenses were 46
percent and 47 percent for the second quarter and first six months of 1998
compared to 48 percent of net sales for both the second quarter and the first
six months of 1997. Selling, general and administrative expenses for the first
six months of 1998 decreased by 6 percent due primarily to reduced commission
expenses resulting from a decrease in sales, combined with decreases in facility
related expenses.
8
<PAGE>
FORM 10 - Q - - PART I - ITEM 2 (Continued)
RESEARCH AND DEVELOPMENT
Research and development expenses were $844,000 and $1.7 million in the
second quarter and first six months of 1998, respectively, compared to
$979,000 and $1.9 million for the same periods in 1997. Stated as a
percentage of net sales, research and development expenses continued to be 5
percent for the second quarter and first six months of 1998 and 1997.
Research and development spending continues to be driven by activities
related to the development of new products, continuation engineering and
next-generation products.
OTHER INCOME AND EXPENSES
Interest income for the second quarter and first six months of 1998 was $181,000
and $434,000, respectively, compared to $243,000 and $476,000 in the same
periods of 1997. The decrease in interest income was attributable to a lower
cash position, primarily as a result of the Company's stock buy-back program.
NET EARNINGS
Net earnings for the second quarter of 1998 was $2.8 million compared to $2.5
million for the second quarter of 1997, an increase of 11 percent. Net earnings
for the first six months of 1998 and 1997 was $5.3 million and $4.9 million,
respectively. The effective tax rate for each of the second quarters of 1998
and 1997 remained flat at 38.5 percent.
LIQUIDITY AND CAPITAL REQUIREMENTS
The Company's cash and security investments were approximately $7.4 million at
June 30, 1998, which reflects a decrease of $17.1 million from year end 1997 due
primarily to Empi's continued stock repurchase efforts during the first half of
1998. Empi has purchased a total of 1,301,500 shares year to date at a total
cost of approximately $25.3 million. Empi's working capital at June 30, 1998 was
$32.1 million, a decrease of approximately $18.3 million compared to the
Company's working capital position at December 31, 1997. The current ratio at
the end of the second quarter was 6.3 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on Wednesday, April 29,
1998.
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 6,953,110 shares in favor, with 314,028 shares opposed and
21,810 shares abstaining, with no shares represented by broker non-votes,
the shareholders set the number of directors to be elected at seven (7).
The following person was elected as a Class Three Director of the Company
with a term expiring in 2001, by the votes indicated:
<TABLE>
<CAPTION>
NOMINEE NUMBER OF VOTES FOR NUMBER OF VOTES WITHHELD
----------------- ------------------- ------------------------
<S> <C> <C>
Everett F. Carter 6,946,922 342,026
</TABLE>
<TABLE>
<CAPTION>
DIRECTORS WITH CONTINUING TERMS TERM ENDING
----------------------------------- -----------
<S> <C>
Scott R. Anderson 2000
Bradley J. Beard 2001
Nazie M. Eftekhari 2000
Joseph E. Laptewicz 2000
Donald D. Maurer 1999
Dr. Kenneth F. Tempero 1999
</TABLE>
By a vote of 7,056,630 shares in favor, with 213,147 shares opposed and
19,171 shares abstaining, with no shares represented by broker non-votes,
the shareholders approved the appointment of Ernst & Young LLP as the
Company's independent auditors for the year ended December 31, 1998.
Please refer to the Company's Proxy Statement for the Annual Meeting
of Shareholders for further details.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
----------- ----------- --------
<S> <C> <C>
(27) Financial Data Schedule
(filed only in electronic format) -----
</TABLE>
(b) No report on Form 8-K has been filed during the quarter ended June 30,
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.
August 11, 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 SECOND
QUARTER 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2345
<SECURITIES> 5050
<RECEIVABLES> 22304
<ALLOWANCES> 4655
<INVENTORY> 8274
<CURRENT-ASSETS> 38175
<PP&E> 17756
<DEPRECIATION> 12086
<TOTAL-ASSETS> 45148
<CURRENT-LIABILITIES> 6096
<BONDS> 0
0
0
<COMMON> (15185)
<OTHER-SE> 54171
<TOTAL-LIABILITY-AND-EQUITY> 45148
<SALES> 35263
<TOTAL-REVENUES> 35263
<CGS> 8970
<TOTAL-COSTS> 8970
<OTHER-EXPENSES> 18160
<LOSS-PROVISION> 1099
<INTEREST-EXPENSE> 9
<INCOME-PRETAX> 8666
<INCOME-TAX> 3337
<INCOME-CONTINUING> 5329
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5329
<EPS-PRIMARY> .71
<EPS-DILUTED> .71
</TABLE>
