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 ------------------------------------ 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 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. EMPI, INC. INDEX PAGE ----- ----- 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 2 PART I - - FINANCIAL INFORMATION Item 1. CONSOLIDATED FINANCIAL STATEMENTS EMPI, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) June 30 December 31 1998 1997 ----------- ----------- (unaudited) 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 -------- ------- TOTAL CURRENT ASSETS 38,175 55,495 PROPERTY, PLANT AND EQUIPMENT - NET 5,670 6,506 OTHER ASSETS 1,303 1,892 -------- ------- $ 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 -------- ------- TOTAL SHAREHOLDERS' EQUITY 38,986 58,689 -------- ------- $ 45,148 $63,893 -------- ------- -------- ------- See notes to consolidated financial statements. 3 FORM 10 - Q - - PART I - ITEM 1 (CONTINUED) EMPI, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Three Months Ended Six Months Ended June 30 June 30 1998 1997 1998 1997 --------- --------- -------- -------- (Unaudited) (Unaudited) 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 See notes to consolidated financial statements. 4 FORM 10 - Q - - PART I - ITEM 1 (CONTINUED) EMPI, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) Six Months Ended June 30 1998 1997 ---------- ---------- (unaudited) 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 -------- ------- -------- ------- See notes to consolidated financial statements. 5 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) June 30 December 31 1998 1997 --------- ----------- Finished goods $5,963 $5,515 Work in process 697 556 Raw materials 1,614 1,932 ------ ------ $8,274 $8,003 ------ ------ ------ ------ 6 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: Three Months Ended Six Months Ended June 30 June 30 1998 1997 1998 1997 -------- -------- -------- -------- (In thousands, except per share data) 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 ------ ------ ------ ------ ------ ------ ------ ------ 7 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 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 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: NOMINEE NUMBER OF VOTES FOR NUMBER OF VOTES WITHHELD ----------------- ------------------- ------------------------ Everett F. Carter 6,946,922 342,026 DIRECTORS WITH CONTINUING TERMS TERM ENDING ----------------------------------- ----------- 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 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 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 June 30, 1998. 10 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