-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D0MWLhW4aaFFp0zby1GDqYv3M2fZEltmTkpeLNCG40XfctQtdgoQqEV9txj3PRGw Q9tTyn94NYgfKVTE6ASJyw== 0000912057-96-005149.txt : 19960327 0000912057-96-005149.hdr.sgml : 19960327 ACCESSION NUMBER: 0000912057-96-005149 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960326 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMPI INC CENTRAL INDEX KEY: 0000317032 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 411310335 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-09387 FILM NUMBER: 96538425 BUSINESS ADDRESS: STREET 1: 1275 GREY FOX RD CITY: ST PAUL STATE: MN ZIP: 55112-6989 BUSINESS PHONE: 6126366600 MAIL ADDRESS: STREET 2: 1275 GREY FOX ROAD CITY: ST PAUL STATE: MN ZIP: 55112-6989 10-K405 1 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ______________________ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 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.) 5255 EAST RIVER ROAD MINNEAPOLIS, MINNESOTA 55421 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (612) 586-7300 --------------- ______________________ Securities registered pursuant to Section 12 (b) of the Act: NONE ---- Securities registered pursuant to Section 12 (g) of the Act: NO PAR VALUE COMMON STOCK ------------------------- (Title of Class) 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 twelve 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 / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant on March 22, 1996, was approximately $157,103,610. The number of shares outstanding of the registrant's class of common stock as of March 22, 1996, was 8,608,417 shares of no par value common stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held May 6, 1996, are incorporated by reference into Part III. There are 41 pages to this Report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS GENERAL Empi, Inc., "the Company", was organized as a Minnesota corporation in October 1977. The Company develops, manufactures and markets non-invasive biomedical devices and accessories for applications in the rehabilitation, orthopedic and incontinence treatment medical markets. REHABILITATION MARKET Currently, the Company manufacturers and markets the following rehabilitation products: TENS (Transcutaneous Electrical Nerve Stimulation) devices for the treatment of chronic and acute pain; NMES (Neuromuscular Electrical Stimulation) devices for restoring muscle tone and mobility; iontophoresis systems to non- invasively deliver local anesthesia and anti-inflammatory medications through the skin; dynamic orthoses for restoring joint range of motion; surface electromyography (sEMG) biofeedback systems to monitor and teach proper muscle movement and control. In addition, the Company distributes cervical traction devices to reduce pain by stretching tensed muscles or separated vertebra and a complete line of accessories for its products. In August 1995, the Company entered into a strategic alliance with Tennessee- based Rehab Med+Equip under which the Company markets a catalog of rehabilitation products that meet the growing needs of its customers. The catalog includes over 200 products, such as ice packs, whirlpool baths, lumbar and cervical rolls and supports, as well as orthotics and bracing products. In 1996, the Company plans to expand the breadth of catalog offerings by adding new products. The Company's primary strategies in the rehabilitation market are to achieve sales growth and improve profitability. The Company sells its rehabilitation products directly to physicians, physical therapists and their patients through a direct sales force. The Company continues to focus on more effectively using its direct sales force by expanding the Company's product offerings through the development of proprietary products and the distribution of select products for the rehabilitation marketplace. Further contributions to profitability have come through product line diversification and from efficiencies in the Company's distribution, manufacturing and medical billing systems. INCONTINENCE MARKET The Company developed INNOVA-Registered Trademark- PFS, a pelvic floor stimulation system for primary care physicians, obstetricians, gynecologists, urogynecologists and urologists to treat female urinary incontinence. The Company began marketing INNOVA PFS through its direct rehabilitation sales force in the first quarter of 1992. In 1993, the Company diversified its incontinence product line by acquiring Physical Health Devices, Inc., a surface electromyography (sEMG) biofeedback company with both rehabilitation and incontinence products. The Company's efforts will be focused in two areas in 1996. Its sales efforts will be directed to HMOs, managed care organizations and other third-party payors who are looking for alternative solutions to high-cost surgery for minor to moderate incontinence problems in males and females. In addition, the Company is attempting to secure reimbursement for INNOVA PFS from Medicare. Its ability to generate satisfactory INNOVA PFS sales is dependent in part on securing Medicare reimbursement. INTERNATIONAL MARKET The Company sells its products internationally through distributors and dealers. With the acquisition of the Nortech division of Medtronic, Inc. in November 1992, new international marketing opportunities were added through dealers from that division's network in Canada, Europe, Australia and New Zealand. The international presence has allowed the Company to expand distribution of its new products in both the rehabilitation and incontinence markets. In 1994 the Company began to focus on establishing master distributors for each business segment in key international markets. In April 1995, the Company closed its Canadian office and now markets its 2 products through a master distributor in Canada. One of the major objectives for the international market for 1996 is introducing its products in Japan. ACQUISITIONS During 1994, the Company completed two dealer acquisitions. On October 7, 1994, the Company acquired all the inventory, customer lists and other intangible assets of Eagle Medical Services, Inc. for $429,000 in cash and an additional obligation of $800,000. On November 18, 1994, the Company acquired all the inventory, customer lists and other intangibles of Bowerman's Pharmacy, Inc. for $200,000 in cash. Contingent payments may be made under both agreements if certain revenue levels are achieved. MANUFACTURED PRODUCTS The Company manufactures several biomedical devices and related accessories which use its technologies to treat a variety of medical conditions and diseases. TENS DEVICES. Physicians and physical therapists have treated their patients' chronic and acute pain with electrical stimulation, often referred to as "transcutaneous electrical nerve stimulation" or "TENS," for over 20 years. Although TENS is not effective for every patient or every condition, medical professionals have generally accepted TENS as an effective treatment for chronic or acute pain resulting from a variety of medical conditions. TENS devices are most frequently used to treat persistent orthopedic conditions such as low back pain, joint stiffness and muscle spasm. Physicians have also prescribed TENS for pain resulting from a variety of other conditions including abdominal surgery, post-operative pain, arthritis, tendonitis, phantom limb pain and child birth. TENS devices generally reduce pain while the device is being used, as well as for a period of time following usage, but do not cure the cause of the pain. TENS devices consist of a small, portable, battery-powered electrical pulse generator which is connected via wires to electrodes placed at or near the site of the patient's pain. The devices are small enough to fit into a shirt pocket and weigh approximately 5 ounces, allowing patients to alleviate pain conveniently at home or elsewhere. The electrodes are attached to the skin with an interface layer of conductive gel. The stimulator produces low voltage pulses of electricity which can be delivered continuously or intermittently in different wave forms. Two theories have been advanced to explain the manner in which TENS alleviates pain. The "gate control theory" postulates that the electrical impulses from TENS devices block or interfere with the neurological transmission of pain signals from the site of the injury to the brain. A second theory suggests that the electrical impulses prompt the release of endogenous opiates or endorphins, the body's natural pain suppressing agents. Neither theory has conclusive support in the scientific literature. Under either theory, TENS relieves pain without the costs and risks associated with surgery or the undesirable side effects and physiological problems of prolonged drug use including addiction, stupor, depression, disorientation, nausea and ulcers. The Company's current TENS product line consists of five products. The EPIX XL- Registered Trademark-, introduced in 1988, uses a microprocessor which allows the user to select from eight pre-programmed treatment regimens. These regimens supplement the Company's traditional modulation options to offer more specialized patient care. In addition, the Company sells the following TENS units acquired in the Nortech acquisition: ECLIPSE+-Registered Trademark-, COMFORT PULSE-TM-, DYNEX-Registered Trademark- IV and med-TENS-TM- 100. The Company believes that the market for TENS devices is approximately $68 million and that the market is growing at a rate of approximately 5% per annum in unit volume, but that growth may be offset by price erosion in 1996. NMES DEVICES. In addition to using TENS to modify the perception of pain, medical professionals have used similar electrical stimulation to activate muscles for rehabilitation purposes. Neuromuscular stimulation has proven effective in producing controlled, involuntary muscle contractions which can maintain the strength and mobility of a limb or prevent deterioration of muscle tissues in patients who are unable to perform voluntary muscle contraction. Physicians have prescribed neuromuscular stimulation in a variety of circumstances intended to improve muscle tone, increase joint mobility and accelerate recovery from traumatic injury. Common conditions for which NMES therapy may be prescribed include common knee injuries, swelling, spasticity and improper gait. In April 1982, the Company introduced its first NMES device. Various models have been designed and sold by the Company since that time. In 1989, the Company introduced FOCUS-Registered Trademark-, a compact, microprocessor-controlled neuromuscular stimulation device which offers a set of pre-programmed regimens to treat specific clinical 3 problems. The Company also sells the following NMES devices acquired in the Nortech acquisition: RESPOND II-Registered Trademark- and RESPOND SELECT- Registered Trademark-. The Company believes that the market for neuromuscular stimulation devices is approximately $21 million and that the market is growing at a rate of approximately 7% per annum in unit volume. IONTOPHORESIS SYSTEM. Iontophoresis is a process which uses electric current to assist drug transfer through the skin. Iontophoretic applications include the delivery of local anesthesia and anti-inflammatory medication for tissue management. For many applications, use of iontophoresis is superior to a syringe because it allows medications to be dispersed over a wider range of tissue and avoids many of the systemic and localized side effects associated with oral medications and injections. The Company has developed both a proprietary iontophoresis device and patented buffered electrode capable of delivering small molecule drugs that can be ionized, such as drugs for arthritis, bursitis, tendonitis and related conditions. The system is controlled by a microprocessor and uses continuous low voltage electrical current which delivers charged drug particles just below the skin's surface. The Company estimates that the current market for iontophoresis systems is approximately $28 million and that the market defined in sales dollars is growing at a rate of approximately 15% per annum. The Company received FDA 510 (k) clearance in July 1990 for its iontophoresis device and in November 1991 for its buffered electrode. The Company introduced its iontophoresis system, DUPEL-Registered Trademark-, to the marketplace in the first quarter of 1992. SURFACE ELECTROMYOGRAPHY (sEMG) SYSTEM. The BIO-SCOPE-Registered Trademark- clinical sEMG system provides biofeedback through auditory and visual display to aid in muscle re-education and rehabilitation. A portable sEMG device, BIO- PROMPT-Registered Trademark-, enables patients to benefit from this technology in their own homes. For the incontinence market, the INNOVA-Registered Trademark- clinical sEMG system, a computerized system, aids the clinician in accurately assessing muscle strength and helps both patients and clinicians identify proper muscles during exercises. The INNOVA Home Trainer allows treatment sessions to be conducted in the privacy of the patient's home. ACCESSORIES. The Company meets the needs of the customer by supplying accessories such as electrodes, cables, conductive gel, skin care products, batteries and other accessories, which are either manufactured by Empi or purchased from other vendors for resale. The Company has exclusive rights to distribute several unique models of electrodes. The Company believes that the market for TENS and NMES accessories is approximately $48 million and that the market defined in sales dollars is growing at a rate which is greater than the market growth rate for TENS devices. ORTHOSES. The Advance Dynamic ROM-TM- Orthoses product line is used to correct joint range of motion limitations at the wrist, elbow, knee or ankle. The Company's Advance Dynamic ROM orthosis is based on the principle that periarticular connective tissue will remodel over time in response to the type and amount of physical stress it receives. The Advance Dynamic ROM orthosis addresses the permanent or plastic component of connective tissue deformation to achieve long-term range of motion improvement. It does this by gently delivering low-load stress at the joint's end-range over a prolonged period of time. The Company's Advance Dynamic ROM orthosis product line consists of models for the elbow, wrist, knee and ankle joints and was introduced in the first quarter of 1995. Range of motion limitations, generally referred to as contractures, often result following long periods of restricted motion or when scar adhesions form following trauma. The Advance Dynamic ROM-TM- models were developed and are manufactured by the Company and are the Company's first R&D departure from electrotherapy products. The dynamic orthoses line fits very well with the Company's focus on cost effective treatments used outside the clinic setting. The Company estimates that the current orthotics market is approximately $30 million and that the growth potential in the next few years is estimated at 20% per year. FEMALE URINARY INCONTINENCE PRODUCTS. In 1987, the Company began a research project relating to the application of its electro-therapeutic technology to the treatment of female urinary incontinence. In July 1991, the Company received FDA 510 (k) clearance for INNOVA PFS, the Company's female pelvic floor stimulation system. Urinary incontinence is the involuntary loss of urine so severe as to have social, psychological or hygienic consequences. According to the 1996 Agency for Health Care Policy and Research (AHCPR) guidelines, "the U.S. spends $16 billion a year to care for people with urinary incontinence, up from $10 billion in 1990." At least 50% of the 1.5 4 million men and women in nursing homes suffer from incontinence. This condition is often a principal reason that leads families of the elderly to commit them to full-time care. Current treatments for female urinary incontinence range from surgical procedures with a three to four day hospital stay and costs $6,000 to $13,000, to behavioral therapy or drugs. Products designed to manage the problem of urinary incontinence include incontinence appliances such as catheters and collection devices as well as incontinence disposables such as adult diapers or briefs, padded undergarments and bed pads designed to keep urine away from the patient's skin. INNOVA PFS is designed to cure or control stress, urge and mixed incontinence. Stress incontinence is the inability of the urethra to hold back urine when there is a sudden increased pressure on the bladder. Leakage of urine commonly occurs with activities such as coughing, sneezing, lifting and exercising. Urge incontinence occurs when the bladder is irritated and contracts prematurely causing a sudden need to urinate. Mixed incontinence, the most common form, is a combination of both stress and urge incontinence. Traditionally, urge incontinence has been treated with pharmacological intervention. Many patients are intolerant of the medication's side effects. Stress incontinence is poorly treated by pharmacological intervention and therefore, in most cases, has resulted in surgical intervention. INNOVA PFS, an electro-therapeutic device, causes involuntary contractions of the pelvic musculature and urinary sphincter. The strengthening of these muscles can improve continence in the same manner as Kegel exercises (a quick or sustained voluntary contraction of the pelvic floor muscles). INNOVA PFS automates this exercise regimen through electrical activation of the sensory reflex pathways as well as direct activation of the pelvic musculature. Published studies indicate a success rate for pelvic stimulation ranging from 60 - - 90%. Results from the world's first placebo-controlled study, sponsored by Empi, on pelvic floor stimulation were published in the July 1995 edition of the AMERICAN JOURNAL OF OBSTETRICS AND GYNECOLOGY. Initial results from a second study, also sponsored by Empi, reported on optimizing treatment of stress, urge and mixed incontinence using Innova PFS. The outcomes of this study were presented at the American College of Obstetricians and Gynecologists meeting and the American Urogynecology meeting in 1995. They will also be presented at the Multispecialty Nursing meeting in 1996. INNOVA PFS is composed of an externally worn, microprocessor-based electrical neuromuscular stimulator that activates a proprietary multi-channel vaginal or rectal electrode. The device automatically delivers timed dosages of stimulation for the treatment of stress, urge and mixed incontinence during 15 minute treatment sessions. The treatment sessions are generally performed twice a day in the convenience and privacy of the home. The regular use of INNOVA PFS can improve or control stress, urge or mixed incontinence. The Company believes electro-therapeutic pelvic muscle stimulation will eventually be selected as one of the first choice treatments before more invasive treatments (i.e., surgery and drug therapy) due to its noninvasive, lower cost, lower risk and lack of side effects. The recent AHCPR guidelines, for the treatment of adult urinary incontinence, gives pelvic floor electrical stimulation (PFS) a "B" strength of evidence recommendation for stress, urge and mixed incontinence. This is the same rating currently enjoyed by available surgical alternatives. While there are other pelvic muscle stimulation devices available, the Company believes its device will be more readily accepted for several reasons. INNOVA PFS is easy to operate and is clinically proven, safe and effective. The Company has designed an intravaginal electrode which it believes has several significant improvements over other electrodes. These improvements include ComfortPulse-Registered Trademark- technology which makes the electrode electrically matched to the body providing uniform current distribution over the electrode surface, making higher levels of intensity more comfortable and effective. In addition, the tampon-like electrode is lightweight, flexible and has been designed for physical conformity. While most of the other pelvic muscle stimulation products have been marketed to urologists, the Company markets INNOVA PFS to obstetricians, gynecologists, urogynecologists, incontinence clinics, primary care physicians and nurse practitioners of HMO, MCO and POS medical facilities. It is estimated that more than 13 million women in the United States suffer from urinary incontinence. The Company believes that for various reasons, electro- therapeutic treatment will not be appropriate for a portion of these women. The Company's initial target market includes women aged 35-65 who, when properly diagnosed, would benefit from electrical stimulation therapy. The Company estimates that there are at least 6 million women in this target market. 5 DISTRIBUTED PRODUCTS To complement the Company's existing product lines and allow it to better utilize its investment in a direct sales force, the Company distributes medical products manufactured by other companies which meet its performance, quality and profit standards. These products are available on an exclusive or limited distribution basis for the markets served by the Company's direct sales force. The Company distributes cervical traction devices as well as several lines of TENS and NMES accessories. The Company negotiated a national distribution agreement for PRONEX-TM-, a cervical traction device used to relieve chronic neck pain by relaxing muscle tension and spasms and by mechanical separation of the cervical vertebrae. The PRONEX cervical traction device is sold through the Company's direct sales force to physical therapists and patients. In the third quarter of 1995, the Company began marketing the Rehab Med+Equip catalog of products. The catalog contains well over 200 products made up of Empi and Rehab Med+Equip distributed products which the Company markets to its physical therapy customers. MARKETING REHABILITATION As of year-end 1995, the Company had approximately 120 sales representatives selling rehabilitation products domestically on a direct basis to physicians, physical therapists and their patients. The Company currently serves over 10,000 physical therapy clinics and hospital physical therapy departments and has a network for direct billing to insurance claims offices, Medicare carriers, HMOs or managed healthcare programs. This direct link to both patients and third-party payors is a benefit for products currently available from the Company. The Company now considers its direct sales force, patient follow-up and insurance billing system to be distinct competitive advantages. An additional link to the third-party payors was added in 1994 with the addition of a specialized sales force that calls on managed care organizations and third-party payors. These national account managers address coverage and reimbursement issues and seek purchase contracts for Empi's products. At the end of 1995, Empi had six national account managers. National account managers will cover both rehabilitation and incontinence markets. The Company has also invested in both telemarketing and direct mail programs to contact patients who use its TENS and NMES devices. Telemarketing and direct sales programs are also used to contact home healthcare dealers who purchase the Company's products for resale to hospitals, clinicians and patients. INCONTINENCE The Company commenced marketing its INNOVA PFS systems in 1992 through its direct rehabilitation sales force. In 1994, the Company established a specialty sales force to market the Company's incontinence products to primary care physicians, obstetricians, gynecologists, urogynecologists, urologists, allied health professionals and physical therapists in key incontinence markets. At the end of 1995, the Company employed five incontinence sales representatives. The sales representatives work closely with the Company's national account managers to penetrate the HMOs, MCOs and third-party payor markets. In 1994, the Company opened an incontinence clinic in Minneapolis, Minnesota. The clinic offered a variety of diagnostic and treatment options; treatments were not limited to those which include the Company's PFS or sEMG products. Staffed by a nurse practitioner, the clinic offered conservative, alternative care for the woman suffering from incontinence prior to more radical options such as surgery. In the fall of 1995, the Company sold its incontinence clinic to Continence Clinics, Inc. in order to focus its efforts on the development and marketing of incontinence products. The Company maintains a close relationship with Continence Clinics, Inc., and uses the clinic to test new product concepts. 6 MANUFACTURING The Company manufactures most of its electro-therapeutic and orthoses devices, as well as some components and related accessory products, at its Clear Lake, South Dakota facility. Manufacturing activities at the Clear Lake facility include electronic and mechanical assembly, electrode fabrication and assembly and fabric sewing processes. The Company's products are comprised of a variety of components including metal or plastic cases, plastic subassemblies, die cast metal parts, injection-molded plastic parts, printed circuit boards, electronic components, alkaline and rechargeable nickel cadmium batteries, battery chargers, leadwires, electrodes and other components. These parts are purchased from outside suppliers and some are manufactured by others on a custom basis for the Company. Many of the component parts and raw materials used by the Company in its manufacturing and assembly operations are available from more than one supplier. However, several component parts and accessory products are currently purchased through a single supply source. If these components were no longer available, the Company believes it could develop alternative sources which it believes would avoid any material adverse effect upon the Company's operations. RESEARCH AND DEVELOPMENT The Company's research and development programs are designed primarily to apply the Company's electro-therapeutic technology and expertise to the treatment or diagnosis of wide ranging medical conditions and diseases. Research and development expenses (including clinical studies) amounted to $2,763,000, $3,432,000 and $3,424,000 in 1993, 1994 and 1995, respectively. The majority of the Company's current research and development expenses are devoted to new products being developed by the Company to expand its product lines for the incontinence, rehabilitation and neurology markets. Current research and development projects include electrode designs to treat incontinence in females and males, dynamic range of motion orthoses, a motor movement evaluation system for the measurement of effective treatment for Parkinson's disease, a next- generation TENS device and a next-generation sEMG device. Existing devices and accessories are periodically updated and redesigned to improve their features, performance and reliability. PATENTS AND TRADEMARKS The Company currently owns numerous United States patents issued between 1982 and 1995 relating to its product lines. These patents cover various electronic features of the TENS and NMES devices and associated electrodes. Several patents have been issued between 1990 and 1995 for our incontinence device and electrodes. Also, three patents relating to the buffered electrode for iontophoresis have been obtained since 1990, and two patents have been obtained on the device. A number of patents and trademarks were obtained as a result of the Nortech and PHD acquisitions, which cover various aspects of electrodes, stimulators and surface sEMG equipment. In addition, numerous patents have been filed on aspects of the Company's Advance Dynamic ROM-TM- range of motion orthosis, new developments in incontinence electrodes and apparatus and new electrodes for iontophoresis. The initial life of each patent issued to the Company is either 14 or 17 years from the date of issue. Although the Company generally seeks patent protection when possible, it does not consider patent protection to be a significant, competitive advantage in the marketplace for electro-therapeutic devices; however, patent protection may be of significance with various aspects of the Company's incontinence electrode technology and its orthosis technology. There is no assurance that any of the Company's existing patents or any patents obtained in the future will provide substantial protection, or be of commercial benefit to the Company, or that their validity will not be successfully challenged; and there is also no assurance that the Company's products will not infringe upon any patents held by others. The Company has also registered and filed applications to register various trademarks with the U.S. Patent and Trademark Office and appropriate offices in foreign countries. There is no assurance that the Company's assertion of trademark protection will prevent competitors from infringing on the Company's trademarks. 7 COMPETITION Numerous other companies currently manufacture and market TENS and NMES devices and related accessory products which compete with the Company's products. The Company believes that its two strongest competitors, with the largest market share, are Rehabilicare, Inc. and Staodyn, Inc. The Company believes that the principal competitive factors in the TENS and NMES marketplace are price, product quality and service. The Company believes its competitive advantage, over the others, is higher quality products and better service. The Company's pain control products may, in some instances, be deemed to be competitive with drugs and surgical procedures. The Company believes its primary competitors in the iontophoresis market are IOMED, Inc., Life-Tech, Inc. and Henley International, Inc. The Company's major competitors in the dynamic orthotics market are Dynasplint and DeRoyal/LMB. In the cervical traction market, the Company faces three main competitors: Saunders, Staodyn and Lossing. Hollister Inc., of Libertyville, Illinois, Self- Regulating Systems, Inc., of Redmond, Washington and Verimed of Coral Springs, Florida market sEMG systems for the incontinence market. Thought Technology, a Canadian firm, is the Company's primary sEMG competitor in the rehabilitation market. Several companies are developing new treatment products designed to cure or control incontinence problems, including injectable biomaterials, improved drug therapy, other electro-therapeutic devices and muscle contraction biofeedback devices. Each of these treatment approaches is aimed at eliminating or reducing a patient's reliance on incontinence appliances or disposables. Utah Medical, BMR and Stimtech all have pelvic floor stimulation devices on the market. Currently, none of these devices have placebo-controlled clinical studies to back up their products. GOVERNMENT REGULATION AND REIMBURSEMENT FDA AND SIMILAR FOREIGN REGULATION. Medical device development, testing, manufacturing, labeling and marketing are regulated under the Federal Food, Drug and Cosmetic Act (the "ACT"), as amended, and additional regulations promulgated thereunder. These statutes and regulations require that manufacturers adhere to certain standards designed to assure product safety and effectiveness. The FDA's "Good Manufacturing Practices of Medical Devices" regulation establishes standards for the Company's manufacturing processes, requires maintenance of certain records and provides for unscheduled inspections of the Company facilities. Certain requirements of state, local and foreign governments must also be complied with in the manufacture and marketing of the Company's products. The Company believes its operations meet the requirements of these regulations. New medical devices require regulatory approval prior to market introduction. In the United States, new medical devices are subject to either the 510(k) Pre- Market Notification regulation or the Pre-Market Approval (PMA) regulation; the pathway is dependent on the device's nature and intended use. International registration and approval requirements vary and are country dependent. Most regulatory approvals require submission of extensive documentation, engineering, pre-clinical testing and manufacturing information to demonstrate compliance with the pertinent regulations. In some cases, product electronics, appearance or labeling must be modified in order to comply with the foreign regulations. In addition, some products may require extensive clinical testing to obtain regulatory approval. The Company anticipates FDA may require submission of additional clinical testing concerning iontophoretic drug delivery. In this regard, the Company is preparing the necessary clinical trial data to support the ongoing sale of its iontophoresis product, Dupel. The Company has contracted with an outside certification authority to review the conformance of its quality assurance system to two recognized international quality system standards, ISO-9001 and EN 46001. Successful certification is an essential step towards compliance with the Medical Device Directive in the European Union and must be in place no later than June 14, 1998. The Company anticipates receiving this certification well in advance of this deadline. REIMBURSEMENT. A significant portion of the Company's revenues are paid by third-party payors, such as Medicare, workers compensation, private insurance companies and health maintenance organizations, on behalf of the patients who rent or purchase the Company's products. The Company maintains a large support staff that verifies third-party payor coverage prior to each purchase and bills the third-party payor directly. When appropriate, the Company's staff obtains appropriate letters of medical necessity from the prescribing physician and sends such 8 letters to the third-party payor. Delays in obtaining appropriate documentation and the time required for claims processing by the third-party payors has a significant impact on the Company's outstanding receivables. The Company's dependence on third-party payors exposes the Company to the risk of government regulations limiting the amount that such third-party payors may pay for the Company's products. Effective January 1994, Medicare reduced reimbursement for TENS units by 30 percent. Revenues from Medicare claims represent approximately 9 percent of the Company's TENS revenue. The Company does not believe that these recent governmental actions will have a material adverse effect on the Company. The Company would be adversely affected, however, if private insurers or health maintenance organizations become subject to, or voluntarily adopt, similar reimbursement limits. The Company anticipates a continuing dependence on third-party payors with respect to new products, such as its pelvic floor stimulation device. With the recent recommendations given by the AHCPR guidelines, the Company is optimistic that pelvic floor stimulation should be a covered treatment option and remains hopeful that Medicare will grant favorable reimbursement status in the near future. PRODUCT LIABILITY INSURANCE The marketing and sale of medical products exposes the Company to the risk of product liability. The Company currently carries product liability insurance for its products covering up to $11 million in liability claims. EMPLOYEES As of December 31, 1995, the Company had 507 employees. Of these, 76 were engaged in production, 14 in quality control, reliability and warranty repair, 53 in purchasing, material control and distribution, 33 in research and development, 198 in sales and marketing and customer service, 58 in billing, reimbursement and credit/collection and 75 in various management and administrative capacities. None of the Company's employees is represented by a labor union, and the Company believes that it has an amiable and positive working relationship with its employees. MAJOR CUSTOMER No individual customer accounted for 10 percent or more of total revenue for 1995, 1994 or 1993, respectively. CAUTIONARY STATEMENTS As provided for under the Private Securities Litigation Reform Act of 1995, the Company wishes to caution investors that the following important factors, among others, in some cases have affected and in the future could affect the Company's actual results of operations and cause such results to differ materially from those anticipated in forward-looking statements made in this document and elsewhere by or on behalf of the Company. Markets for the Company's current and future products are highly competitive and subject to continuing technological change and development. Some of the Company's products also compete against drugs, therapies, surgical procedures or new products which may result from future technological or medical advances. Future revenue growth of the Company will depend to some degree on the ability of the Company to continue to successfully market its current and future products in this competitive environment. The Company's future revenue growth is dependent on its ability to continually offer new products to the marketplace. Any inability of the Company to develop new products internally or to acquire distribution rights from other product manufacturers could have a material and adverse impact on future revenues. Most of the Company's products are used by patients and reimbursed by Medicare carriers, workers compensation programs, managed care and private insurance payors. Changes in reimbursement policies or payment levels could adversely affect the Company. The Company has not yet received reimbursement approval from Medicare for its Innova PFS product. Failure to secure Medicare reimbursement will adversely affect future sales levels of this product. The Company's future revenue growth would be materially and adversely affected by any inability to generate significant sales of Innova. 9 The Company's products are regulated under the Federal Food, Drug and Cosmetic Act, and the Company is required to secure clearance from the FDA prior to marketing new products. Lack of clearance or delays in securing clearance could negatively impact revenue from new products. The Company currently purchases, and will in the future purchase, products, parts and components from vendors. The Company attempts wherever practical, to have more than a single source of supply for each product, part and component. The Company does, in some situations, have only one supplier for a product, part or component. If a supplier was unable or unwilling to supply any such product, part or component in a timely manner, the Company's business could be adversely affected. ITEM 2. PROPERTIES The Company is currently leasing 31,713 square feet of office space located in Arden Hills, Minnesota at a monthly rental of $19,821 plus pro rata operating costs. The Company's lease agreement runs through August 31, 1996. With the 1992 acquisition of the Nortech division from Medtronic, Inc., the Company assumed a lease covering 23,917 square feet and a supplemental lease covering 16,116 square feet of office space located in Fridley, Minnesota. The Company currently is leasing this space through February 28, 1997 at base monthly rates of $14,171 and $9,495, respectively, plus a pro rata share of operating costs. During 1993, the Company entered into a lease agreement for 4,402 square feet of office and warehouse space located in Mississauga, Ontario at an approximate monthly rental of (U.S.) $1,700, plus pro rata share of operating costs through March 1998. In 1995, the Company closed its Canadian office and is currently sub-leasing the space. In July 1994, the Company entered into a seven year lease agreement for 1,234 square feet of office space located in Edina, Minnesota. On September 29, 1995 the Company assigned responsibility for the leased premises in Edina, Minnesota to Continence Clinics, Inc., as part of the purchase agreement related to the sale of the Company's Urofitness-TM- Center. The Company owns two properties in Clear Lake, South Dakota. One location is a 24,000 square foot manufacturing facility on 4 acres of property, and the other is a 10,000 square foot warehouse on 1.3 acres. ITEM 3. LEGAL PROCEEDINGS There are no material legal proceedings to which the Company is party or of which any of its property is the subject other than ordinary, routine litigation incidental to the Company's business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS There were no matters submitted to a vote of shareholders during the fourth quarter ended December 31, 1995. 10 EXECUTIVE OFFICERS OF THE COMPANY AS OF MARCH 25, 1996 Each executive officer is elected to office by the Board of Directors and holds the office until his successor is elected and qualified. There are no family relationships among any of the Company's Directors or Officers. The following table sets forth information with regard to the executive officers of the Company: PRINCIPAL OCCUPATION, BUSINESS NAME AND AGE OF OFFICER EXPERIENCE PAST FIVE YEARS - ----------------------- -------------------------- Donald D. Maurer (59) Founder of the Company in 1977. Chairman of the Company since December 1979 and Chief Scientific Officer since October 1994. Chief Executive Officer of the Company from April 1979 to September 1994. Mr. Maurer held the additional position of President from April 1979 to December 1988 and from February 1993 to September 1994. Mr. Maurer is a director of Angeion, Inc. and Daktronics, Inc. Joseph E. Laptewicz (47) President and Chief Executive Officer of the Company since October 1994. From March 1990 to September 1994, Mr. Laptewicz held the following positions at Schneider (USA) Inc., a Plymouth, Minnesota based manufacturer of medical devices and a division of Pfizer, Inc.; President and Chief Executive Officer from April 1992 to September 1994, Executive Vice President from July 1991 to March 1992 and Vice President and General Manager, of the Stent division, from March 1990 to June 1991. Timothy E. Briggs (48) Executive Vice President and Chief Financial Officer of the Company since December 1988 and Treasurer and Assistant Secretary since December 1994. Mr. Briggs served as Treasurer of the Company from December 1988 to March 1992. John A. Shipley (43) Executive Vice President of Sales of the Company's rehabilitation business since December 1994. Executive Vice President of Sales and Marketing of the Company from January 1993 to December 1994. Vice President of Sales and Marketing of the Company from August 1990 to January 1993. Mr. Shipley served as General Manager of Sales and Marketing for the Company from December 1989 to August 1990. Robert W. Clapp (46) Vice President of Manufacturing of the Company since March 1993. Mr. Clapp served in the capacity of Vice President of Manufacturing at Dacomed Corp., a medical products manufacturer and distributor, from February 1987 to March 1993. Shawn F. Featherston (42) Vice President of Human Resources since January 1996. Mr. Featherston served as Director of Human Resources from January 1993 to December 1995. Prior to joining the Company, he served as Human Resources Consulting Manager for McGladry and Pullen from January 1989 to December 1992. Mary K. Full (37) Vice President of Sales Operations of the Company since December 1994. Ms. Full served as Controller from October 1984 to December 1994 and as Treasurer and Assistant Secretary of the Company from March 1992 to December 1994. 11 Gary D. Sullivan (46) Vice President of Marketing of the Company since February 1995. Prior to joining the Company, Mr. Sullivan was Director of Sales and Marketing at Schneider (USA) Inc., a division of Pfizer, Inc., from October 1993 to February 1995. From November 1991 to October 1993, he served as Director of Marketing for Cordis Corp., a manufacturer of medical devices. Mr. Sullivan worked as an Associate at Lumsden Company, an executive search firm specializing in bio-technology, pharmaceuticals and diagnostics, from October 1989 to November 1991. 12 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS The Company's common stock trades on the Nasdaq National Market tier of The Nasdaq Stock Market-SM- under the symbol EMPI. High and low closing sale prices for each quarter of fiscal years ended December 31, 1995 and 1994 are presented below. 1995 1994 HIGH LOW HIGH LOW First. . . . . . . . . . $12 1/8 $ 7 $21 1/4 $10 3/4 Second . . . . . . . . $16 5/8 $11 5/8 $13 1/2 $ 9 1/8 Third . . . . . . . . . $21 1/8 $15 $12 3/8 $ 8 1/4 Fourth . . . . . . . . . $27 1/8 $18 1/2 $10 1/8 $ 7 The Company had 724 common shareholders of record as of March 22, 1996. The Company has not paid any cash dividends and the Company does not anticipate that any dividends will be paid in the foreseeable future. 13 ITEM 6. SELECTED FINANCIAL DATA SELECTED SIX-YEAR FINANCIAL DATA EMPI, INC.
(IN THOUSANDS, YEAR ENDED DECEMBER 31 EXCEPT PER SHARE AMOUNTS) 1995 1994 1993 1992 1991 1990 - ----------------------------------------------------------------------------------------------------------------------------- OPERATIONS STATEMENT DATA Net sales. . . . . . . . . . . . . $ 67,342 $ 61,304 $ 66,377 $ 33,355 $ 21,819 $ 16,028 Operating income . . . . . . . . 12,335 6,197 15,325 6,309 3,420 1,711 Net income . . . . . . . . . . . . 8,002 3,356 9,334 4,049 2,041 903 Net income per share . . . . . . . .90 .39 1.08 .48 .29 .16 Weighted average shares outstanding . . . . . . . 8,899 8,611 8,660 8,438 6,930 5,776 BALANCE SHEET DATA Working capital. . . . . . . . . . $ 42,512 $ 34,344 $ 30,434 $ 22,076 $ 18,013 $ 6,101 Total assets . . . . . . . . . . . 60,737 52,708 50,185 34,551 22,300 9,372 Long-term debt . . . . . . . . . . 1,468 1,800 1,603 2,016 30 2,577 Shareholders' equity . . . . . . . 53,079 45,000 41,355 27,265 20,105 4,772
ALL SHARE AND PER SHARE DATA HAVE BEEN RESTATED TO REFLECT A 3-FOR-2 STOCK SPLIT, EFFECTIVE AUGUST 1991, AND A 2-FOR-1 STOCK SPLIT, EFFECTIVE JUNE 1993. QUARTERLY FINANCIAL DATA (UNAUDITED) EMPI, INC.
YEAR ENDED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FIRST SECOND THIRD FOURTH - ------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1995 Net sales. . . . . . . . . . . . . . . . . . . . . . . . . $ 16,524 $ 16,274 $ 17,273 $ 17,271 Operating income . . . . . . . . . . . . . . . . . . . . . 2,695 2,985 3,266 3,389 Net income . . . . . . . . . . . . . . . . . . . . . . . . 1,708 1,939 2,124 2,231 Net income per share . . . . . . . . . . . . . . . . . . . .20 .22 .24 .24 DECEMBER 31, 1994 Net sales. . . . . . . . . . . . . . . . . . . . . . . . . $ 14,367 $ 16,039 $ 14,468 $ 16,430 Operating income . . . . . . . . . . . . . . . . . . . . . 2,153 2,828 1,199 17 Net income . . . . . . . . . . . . . . . . . . . . . . . . 1,283 1,709 756 (392) Net income per share . . . . . . . . . . . . . . . . . . . .15 .20 .09 (.05)
14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items reflected in the financial statements as a percent of sales: PERCENT OF SALES
YEAR ENDED DECEMBER 31 1995 1994 1993 - ------------------------------------------------------------------------------ Net sales. . . . . . . . . . . . . 100.0% 100.0% 100.0% Cost of goods sold . . . . . . . . 26.3 25.7 25.4 Gross margin . . . . . . . . . . . 73.7 74.3 74.6 Selling, general and administrative . . . . . . 50.3 58.6 47.4 Research and development . . . . . 5.1 5.6 4.2 Other income (expense), net . . . 1.2 (.1) .1 Income before taxes. . . . . . . . 19.5 10.0 23.2 Net income . . . . . . . . . . . . 11.9 5.5 14.1 ----- ----- ----- ----- ----- -----
RESULTS OF OPERATIONS SALES Empi, Inc.'s (the "Company") total sales for 1995 were $67.3 million compared to $61.3 million for 1994, an increase of 10 percent. Sales from the Company's core rehabilitation products of TENS (transcutaneous electrical nerve stimulation) devices, NMES (neuromuscular electrical stimulation) devices and related accessory products increased 2 percent to $46.1 million from $45.4 million in 1994. Sales from the Company's non-core products of Innova-Registered Trademark- PFS (pelvic floor stimulator), DUPEL-Registered Trademark- iontophoresis drug delivery system, Advance Dynamic ROM-Registered Trademark- orthoses, sEMG (surface electromyography) biofeedback, PRONEX-Registered Trademark- pneumatic device to manage cervical pain and other miscellaneous products increased 33 percent to $21.2 million from $15.9 million in 1994. The Company's sales increase was primarily attributable to the growth of the Company's newer, non-core rehabilitation products. The DUPEL, Advance Dynamic ROM and PRONEX accounted for most of the dollar gains in sales. While incontinence sales increased slightly from prior year levels, lack of consistent reimbursement continues to adversely impact growth in the Company's incontinence product lines. The Company is continuing to work with healthcare providers, payors and government agencies to secure consistent reimbursement for its incontinence products. The Company does not believe that significant incontinence product sales will be generated until Medicare grants favorable reimbursement status. Pricing remained relatively consistent from 1994 to 1995 in the Company's retail and wholesale rehabilitation markets. The Company reduced the retail price of its Innova PFS product line at the end of 1994 as a result of the inconsistent reimbursement. As of year-end 1995, the Company had approximately 120 sales representatives selling products domestically on a retail basis. International sales, as a percentage of total sales, were 6 percent in 1995 and 1994. During 1995, the Company closed its Canadian sales office. All Canadian sales are now being handled by one master distributor located in Canada. Empi's 1994 sales decreased by 8 percent to $61.3 million from $66.4 million in 1993. Sales from the Company's core products decreased 15 percent in 1994 from 1993 levels, while sales from the non-core products in 1994 resulted in a 20 percent increase over the previous year. The decrease in 1994 sales of core rehabilitation products was driven by price pressures due to healthcare reform, declining demand in the wholesale market and a 30 percent reduction in reimbursement for TENS devices by Medicare. 15 GROSS MARGIN Gross margin for 1995 was 73.7 percent of sales compared to 74.3 percent for 1994. The primary contributors to the lower gross margin percentage for 1995 were higher manufacturing costs and higher distribution costs related to the increase in volume of retail product shipped. Lower margin wholesale sales were 11 percent of total sales for 1995 compared to 12 percent for 1994. Gross margin for 1994 was 74.3 percent of sales compared to 74.6 percent in 1993. During 1994, the Company experienced some price erosion in its core products, but was able to offset most of the impact to gross margin by improving manufacturing efficiencies and implementing tighter cost controls. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses stated as a percentage of sales for 1995 and 1994 were 50.3 percent and 58.6 percent, respectively. Selling, general and administrative expenses for 1995 totaled $33.9 million compared to $35.9 million in 1994. The decrease in 1995 is attributable to lower facility costs due to the closing of two office locations and a lower provision for bad debts. These decreases were offset by higher payroll and incentive compensation expenses. In addition, in 1994 the Company incurred one-time charges for a goodwill write-down, incremental bad debt provision and workforce reduction costs. After adjusting for 1994's one-time charges, total spending for selling, general and administrative in 1995 was flat compared to 1994. Selling, general and administrative expenses for 1994 were 58.6 percent of sales compared to selling, general and administrative expenses for 1993 of 47.4 percent of sales. Full-year spending for 1994 totaled $35.9 million compared to $31.4 million in 1993, which reflects an increase in spending of $4.5 million, or 14 percent, over 1993. The major contributors to increased spending in 1994 were higher selling and marketing costs associated with the incontinence and sEMG biofeedback product lines, one-time charges for goodwill write-down, incremental bad debt provision and workforce reduction costs. The goodwill write-down related to a revaluation of the goodwill associated with the 1993 acquisition of Physical Health Devices, Inc. RESEARCH AND DEVELOPMENT Research and development expenses were $3.4 million for 1995 and 1994. Stated as a percentage of sales, research and development expenses for 1995 were 5.1 percent compared to 5.6 percent for 1994. The consistent expense levels in research and development reflected the success of the Company's cost containment measures initiated in 1994. The Company's research and development expenses in 1995 were spread relatively evenly within the TENS/NMES, orthoses and iontophoresis product groups, with slightly higher expenditures on incontinence and other new product research and development, and lower expenditures on the sEMG product group. Research and development expenses for 1994 increased 24 percent to $3.4 million from $2.8 million in 1993. The $600,000 increase in research and development expense levels in 1994 was directly related to an increase in staffing and associated costs to support a number of incontinence and rehabilitation projects. The Company also invested development dollars designing the Advance Dynamic ROM orthoses product line, which the Company manufactures and began selling in March of 1995. OTHER INCOME AND EXPENSE Interest income for 1995 was $798,000 compared to $311,000 for 1994. The increase in interest income is attributable to the Company's improved cash position. Interest expense was $114,000 and $168,000 for 1995 and 1994, respectively. The majority of interest expense for both years is due to an interest-bearing note issued to finance the Company's acquisition of Nortech in 1992. Also in 1995, the Company had a one-time gain of $42,000 from the sale of its UROFITNESS-TM- CENTER to Continence Clinics, Inc. of Minneapolis, Minnesota, and a one-time gain of $70,000 on MedAmicus, Inc.'s common stock. Other income and expense for 1994 also included a $170,000 write-down of the Company's investment in MedAmicus, Inc.'s common stock. Interest income was $311,000 in 1994 compared to $166,000 in 1993, resulting from Empi's improved cash position. Interest expense was $168,000 in 1994 compared to $145,000 in 1993. 16 NET INCOME Net income for 1995 of $8.0 million improved by $4.6 million compared to 1994's net income of $3.4 million, but is less than the Company's 1993 net income of $9.3 million. Higher sales combined with relatively flat spending and no major one-time charges, plus the improvement in other income, were the main reasons for the increase in net income for 1995. Lower sales, coupled with the incremental costs to establish the Innova Division and one-time charges, were the primary factors accounting for the decrease in 1994. INFLATION AND CHANGING PRICES Government and other outside pressures to reduce healthcare costs could affect the Company's output, both in terms of unit sales and reimbursement levels. In 1994, Medicare reduced its reimbursement level on the Company's TENS devices by 30 percent. Late in 1995, Medicare increased its reimbursement of TENS devices by 3 percent. Approximately 9 percent and 8 percent of the Company's TENS revenue related to Medicare business in 1995 and 1994, respectively. Inflation has had negligible effect on the Company's operations for 1995 and the previous two years. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents and short-term investments were approximately $19.0 million at December 31, 1995, and increased $8.1 million from the prior year due primarily to cash generated from operations. Due to its strong cash position, the Company decided to cancel its $7.0 million line of credit in 1995. The Company has also initiated a limited stock repurchase program. During 1995, the Company repurchased and retired 62,000 shares of its common stock at a total price of $1.2 million. The Company intends to continue its stock repurchase program in 1996. The Company's working capital at December 31, 1995, was $42.5 million and its current ratio was 7.9 to 1.0. Accounts receivable decreased $1.0 million, or 6 percent, while sales increased nearly 10 percent, reflecting increased collection efforts in 1995. Inventories increased $800,000, or 10 percent, in 1995. Most of the inventory increase consisted of Advance Dynamic ROM and PRONEX products which were introduced in 1995. The Company believes its cash and cash equivalents and short-term investments together with cash flow from operations will be sufficient to meet the Company's currently projected needs for working capital and capital requirements for the foreseeable future. Capital expenditures were $1.9 million, up 7 percent over 1994 expenditures. Most of the capital expenditures in 1995 were for manufacturing facilities and equipment and information systems improvements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to List of Financial Statements and Financial Statement Schedule which appears on page 25 herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 regarding the Company's directors included in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held May 6, 1996 under the caption "Election of Directors" is incorporated herein by reference. The information required by Item 10 regarding the Company's executive officers is set forth in Part I of this report. The information required by Item 10 regarding compliance with Section 16(a) of the Exchange Act included in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held May 6, 1996 under the caption "Compliance with Section 16 (a) of the Exchange Act" is incorporated herein by reference. 17 ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 regarding executive compensation and stock options included in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held May 6, 1996 under the caption "Executive Compensation" is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT The information required by Item 12 regarding voting securities and principal holders thereof included in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held May 6, 1996 under the caption "Principal Shareholders and Management Ownership" is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 included in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 6, 1996 under the caption "Certain Transactions" is incorporated herein by reference. 18 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) AND (2) -- FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES. See Index to Consolidated Financial Statements and Schedule which appears on Page 25 herein. (3) -- EXHIBITS. (2.1) Asset Purchase Agreement effective November 18, 1992, between the Registrant and Medtronic, Inc. has been filed as Exhibit 1 to the Company's Report on Form 8-K dated November 18, 1992, and is included herein by reference pursuant to Rule 12b-32. (2.2) Warrant to purchase 250,000 shares of the Registrant's Common Stock by Medtronic, Inc. has been filed as Exhibit 2 to the Company's Report on Form 8-K dated November 18, 1992, and is included herein by reference pursuant to Rule 12b-32. (2.3) Promissory note of the Registrant in the principal amount of $2 million due to Medtronic, Inc. has been filed as Exhibit 3 to the Company's Report on Form 8-K dated November 18, 1992, and is included herein by reference pursuant to Rule 12b-32. (2.4) Asset Purchase Agreement dated May 18, 1993 and effective August 13, 1993 between the Registrant and Physical Health Devices, Inc. has been filed as Exhibit 1 to the Company's Report on Form 8-K dated May 18, 1993, and is included herein by reference pursuant to Rule 12b-32. (3.1) Restated Articles of Incorporation, as amended has been filed as Exhibit 3.1 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1994 and are included herein by reference pursuant to Rule 12b-32. (3.2) Bylaws together with amendment adopted June 12, 1986, have been filed as Exhibit 3.2 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1987, and are included herein by reference pursuant to Rule 12b-32. (4.1) Certificate for shares of Common Stock has been filed as Exhibit 4.1 to the Company's Registration Statement on Form S-2, Registration No. 33-42568, and is incorporated herein by reference pursuant to Rule 12b-32. (10.1) Employment agreement with Timothy E. Briggs, dated March 1, 1990, has been filed as Exhibit 10.2 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1990, and is incorporated herein by reference pursuant to Rule 12b-32.* (10.2) Employment agreement with John A. Shipley, dated March 1, 1991, has been filed as Exhibit 10.3 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1990, and is incorporated herein by reference pursuant to Rule 12b-32.* (10.3) Employment agreement with Donald D. Maurer, dated May 1, 1993 has been filed as Exhibit 10.3 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1993, and is incorporated herein by reference pursuant to Rule 12b-32.* (10.4) Lease dated November 26, 1986, between the Company and Northpark Investment Company, a limited Partnership covering office and warehouse space in Arden Hills, Minnesota has been filed as Exhibit 10.4 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1986, and is included herein by reference pursuant to Rule 12b-32. 19 ITEM 14. -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - CONTINUED (10.5) First Amendment to Lease Agreement dated April 3, 1991, between the Registrant and Pharmacia Deltec, Inc. related to Lease Agreement dated November 26, 1986, has been filed as Exhibit 10.5 to the Company's Registration Statement on Form S-2, Registration No. 33-42568, and is incorporated herein by reference pursuant to Rule 12b-32. (10.6) Lease Agreement and First Addendum to Lease Agreement dated February 1, 1991, between Medtronic, Inc. and Teachers' Retirement System of the State of Illinois covering office and warehouse space in Fridley, Minnesota, and assumed by the Registrant on November 18, 1992, has been filed as Exhibit 10.5 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1992, and is incorporated herein by reference pursuant to Rule 12b-32. (10.7) Second Addendum to Lease Agreement dated March 15, 1992, between Medtronic, Inc. and Teachers' Retirement System of the State of Illinois related to Lease Agreement dated February 1, 1991, and assumed by the Registrant on November 18, 1992, has been filed as Exhibit 10.6 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1992, and is incorporated herein by reference pursuant to Rule 12b-32. (10.8) Third Addendum to Lease Agreement dated December 8, 1993, between the Registrant and Teachers' Retirement System of the State of Illinois related to Lease Agreement dated February 1, 1991 has been filed as Exhibit 10.8 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1993, and is incorporated herein by reference pursuant to Rule 12b-32. (10.9) Fourth Addendum to Lease Agreement dated January 26, 1996, between Registrant and Teachers' Retirement System of the State of Illinois related to Lease Agreement dated February 1, 1991. (10.10) Second Amendment to Lease Agreement dated January 26, 1994, between the Registrant and Pharmacia Deltec, Inc. related to Lease Agreement dated November 26, 1986 has been filed as Exhibit 10.9 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1993, and is incorporated herein by reference pursuant to Rule 12b-32. (10.11) Empi, Inc. 1987 Stock Option Plan together with Forms of incentive and non-qualified option agreements has been filed as Exhibit 10.7 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1987, and is incorporated herein by reference pursuant to Rule 12b-32.* (10.12) Amendment to Empi, Inc. 1987 Stock Option Plan has been filed as Exhibit 10.8 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1992, and is incorporated herein by reference pursuant to Rule 12b-32.* (10.13) Empi, Inc. 1992 Employee Stock Purchase Plan has been filed as Exhibit 10.9 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1992, and is incorporated herein by reference pursuant to Rule 12b-32.* (10.14) Amendment to Empi, Inc. 1987 Stock Option Plan dated December 22, 1992 has been filed as Exhibit 10.13 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1993, and is incorporated herein by reference pursuant to Rule 12b-32.* (10.15) Employment agreement with Joseph E. Laptewicz, dated October 1, 1994 has been filed as Exhibit 10 to the Company's Report on Form 10-Q for the quarter ended September 30, 1994, and is incorporated herein by reference pursuant to Rule 12b-32.* 20 ITEM 14. -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - CONTINUED (10.16) Third Amendment to Lease Agreement dated October 17, 1994 between the Registrant and SIMS Deltec, Inc., formerly known as Pharmacia Deltec, Inc., related to Lease Agreement dated November 26, 1986 has been filed as Exhibit 10.15 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1994, and is incorporated herein by reference pursuant to Rule 12b-32. (10.17) Amendment to Empi, Inc. 1987 Stock Option Plan dated February 9, 1995, has been filed as Exhibit 10.16 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1994, and is incorporated herein by reference pursuant Rule 12b-32.* (11) Statement re: computation of per share earnings. (21) Subsidiaries of the Company has been filed as Exhibit 21 to the Company's Report on Form 10-K for the fiscal year ended December 31, 1993, and is incorporated herein by reference pursuant to Rule 12b-32. (23) Consent of Independent Auditors. (24) Power of Attorney for Joseph E. Laptewicz Jr., Donald D. Maurer, Timothy E. Briggs, Kenneth F. Tempero, Scott R. Anderson and Everett F. Carter. (Included on signature page of this report.) (27) Financial Data Schedule (Filed only in electronic format.) * Management contract or compensatory plan. (b) REPORTS ON FORM 8-K None. (c) EXHIBITS The response to this portion of Item 14(a)(3) is submitted as a separate section of this report. (d) FINANCIAL STATEMENT SCHEDULE See Index to Consolidated Financial Statements and Financial Statement Schedule which appears on Page 25 herein. 21 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. EMPI, INC. March 25, 1996 By /s/ Joseph E. Laptewicz Jr. ---------------------------------- Joseph E. Laptewicz Jr., President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. (Power of Attorney) Each person whose signature appears below constitutes and appoints Joseph E. Laptewicz Jr. and Timothy E. Briggs as his true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. March 25, 1996 /s/ Joseph E. Laptewicz Jr. ----------------------------------- Joseph E. Laptewicz Jr., President, Chief Executive Officer and Director (Principal Executive Officer) March 25, 1996 /s/ Timothy E. Briggs ----------------------------------- Timothy E. Briggs, Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) March 25, 1996 /s/ Donald D. Maurer ----------------------------------- Donald D. Maurer, Chairman and Chief Scientific Officer March 25, 1996 /s/ Scott R. Anderson ----------------------------------- Scott R. Anderson, Director March 25, 1996 ----------------------------------- Warren S. West, Director March 25, 1996 /s/ Kenneth F. Tempero ----------------------------------- Kenneth F. Tempero, Director 22 SIGNATURES (CONTINUED) March 25, 1996 ----------------------------------- Harold G. Olson, Director March 25, 1996 /s/ Everett F. Carter ----------------------------------- Everett F. Carter, Director 23 ANNUAL REPORT ON FORM 10-K ITEM 8, ITEM 14 (a) (1) AND (2), AND ITEM 14 (d) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE FINANCIAL STATEMENTS FINANCIAL STATEMENT SCHEDULE YEAR ENDED DECEMBER 31, 1995 EMPI, INC. MINNEAPOLIS, MINNESOTA 24 FORM 10-K -- ITEM 14 (a) (1) and (2) EMPI, INC. INDEX TO LIST OF CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE 1. FINANCIAL STATEMENTS PAGE ----- Report of Independent Auditors. . . . . . . . . . . . . . . . . . . . 26 Consolidated Balance Sheets -- December 31, 1995 and 1994 . . . . . . 27 Consolidated Statements of Operations -- Years ended December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . 28 Consolidated Statements of Shareholders' Equity -- Years ended December 31, 1995, 1994 and 1993 . . . . . . . . . . . . 29 Consolidated Statements of Cash Flows -- Years ended December 31, 1995, 1994 and 1993 . . . . . . . . . . . . 30 Notes to Consolidated Financial Statements -- December 31, 1995. . . . . . . . . . . . . . . . . . . . . . . . . .31-36 2. FINANCIAL STATEMENT SCHEDULE Schedule II -- Valuation and Qualifying Accounts. . . . . . . . . . . 37 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 25 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders Empi, Inc. We have audited the accompanying consolidated balance sheets of Empi, Inc. as of December 31, 1995 and 1994, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Empi, Inc. at December 31, 1995 and 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernest & Young LLP -------------------------------- Minneapolis, Minnesota January 31, 1996 26 EMPI, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) 1995 1994 - ------------------------------------------------------------------------------------ ASSETS Current assets: Cash and cash equivalents $ 5,949 $ 5,652 Short-term investments 13,090 5,309 Accounts receivable, less allowances $5,966--1995; $7,684--1994) 15,846 16,825 Inventories 8,269 7,487 Deferred income taxes 4,842 4,277 Other 706 702 ------------------------------- Total current assets 48,702 40,252 Equipment and improvements: Equipment 10,144 8,996 Furniture and fixtures 1,147 1,159 Leasehold improvements 1,187 691 ------------------------------- 12,478 10,846 Less accumulated depreciation and amortization 7,349 5,516 ------------------------------- 5,129 5,330 Other assets 4,906 6,025 Long-term investments 2,000 1,101 ------------------------------- Total assets $ 60,737 $ 52,708 ------------------------------- ------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,924 $ 2,941 Employee compensation 1,955 981 Commissions payable 747 559 Current portion of long-term debt 676 603 Income taxes 634 584 Other 254 240 ------------------------------- Total current liabilities 6,190 5,908 Long-term debt, less current portion 1,468 1,800 Shareholders' equity: Common Stock, no par value: Authorized shares - 25,000,000 Issued and outstanding shares - 8,668,659 in 1995 and 8,570,371 in 1994 24,110 24,033 Retained earnings 28,969 20,967 ------------------------------- Total shareholders' equity 53,079 45,000 ------------------------------- Total liabilities and shareholders' equity $ 60,737 $ 52,708 ------------------------------- -------------------------------
SEE ACCOMPANYING NOTES 27 EMPI, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1995 1994 1993 - ---------------------------------------------------------------------------------------- Net sales $ 67,342 $ 61,304 $ 66,377 Cost of goods sold 17,688 15,730 16,854 ------------------------------------------- Gross profit 49,654 45,574 49,523 Operating expenses: Selling, general and administrative 33,895 35,945 31,435 Research and development 3,424 3,432 2,763 ------------------------------------------- 37,319 39,377 34,198 ------------------------------------------- Income from operations 12,335 6,197 15,325 Other income (expense), net 783 (38) 74 ------------------------------------------- Income before income taxes 13,118 6,159 15,399 Income tax expense 5,116 2,803 6,065 ------------------------------------------- Net income $ 8,002 $ 3,356 $ 9,334 ------------------------------------------- ------------------------------------------- Net income per common and common equivalent share $ .90 $ .39 $ 1.08 ------------------------------------------- ------------------------------------------- Weighted average common and common equivalent shares outstanding during the year 8,899 8,611 8,660 ------------------------------------------- -------------------------------------------
SEE ACCOMPANYING NOTES. 28 EMPI, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK RETAINED (IN THOUSANDS, EXCEPT SHARE AMOUNTS) SHARES AMOUNT EARNINGS - --------------------------------------------------------------------------------------------- Balance December 31, 1992 4,086,832 $ 18,988 $ 8,277 Exercise of stock options and warrants 118,825 709 - Tax benefits of stock options - 1,005 - Stock split (2-for-1) 4,154,957 - - Employee stock purchase plan 34,009 542 - Issuance of common stock in connection with acquisition 105,820 2,500 - Net income - - 9,334 -------------------------------------------- Balance December 31, 1993 8,500,443 23,744 17,611 Exercise of stock options and warrants 48,525 90 - Tax benefits of stock options - (21) - Employee stock purchase plan 21,403 220 - Net income - - 3,356 -------------------------------------------- Balance December 31, 1994 8,570,371 24,033 20,967 Exercise of stock options and warrants 57,025 470 - Tax benefits of stock options - 105 - Employee stock purchase plan 103,263 722 - Purchase and retirement of stock (62,000) (1,220) - Net income - - 8,002 -------------------------------------------- Balance December 31, 1995 8,668,659 $ 24,110 $ 28,969 -------------------------------------------- --------------------------------------------
SEE ACCOMPANYING NOTES. 29 EMPI, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 (IN THOUSANDS) 1995 1994 1993 - --------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 8,002 $ 3,356 $ 9,334 Adjustments to reconcile net income to net cash provided by operating activities: Permanent impairment of investments - 170 - Depreciation and amortization 3,512 4,020 2,207 Provision for deferred income taxes (566) (1,729) (1,081) Gain on sale of long-term investments (70) - - Loss (gain) on sale of equipment 56 4 (19) Provision for loss on accounts receivable 2,565 4,395 3,510 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable (1,586) 578 (12,606) (Increase) decrease in inventories (782) (1,344) 395 (Increase) decrease in other 25 (348) (122) (Decrease) increase in accounts payable and accrued expenses 145 (514) (188) Increase in income taxes payable 155 67 881 ------------------------------------------ Net cash provided by operating activities 11,456 8,655 2,311 INVESTING ACTIVITIES Sale of short-term investments 2,100 2,497 4,285 Purchase of short-term investments (9,881) (7,306) (500) Sale of long-term investments 1,080 - - Purchase of long-term investments (1,909) (1,021) (250) Additions to other assets (115) (450) (154) Acquisition of Nortech - (1,115) - Purchase of equipment and improvements (1,864) (1,744) (3,602) Proceeds from sale of equipment 79 8 328 ------------------------------------------ Net cash (used in) provided by investing activities (10,510) (9,131) 107 FINANCING ACTIVITIES Payments on long-term debt (619) (413) (11) Purchase and retirement of common stock (1,220) - - Proceeds from exercise of common stock options 1,190 310 1,251 ------------------------------------------ Net cash (used in) provided by financing activities (649) (103) 1,240 ------------------------------------------ Net increase (decrease) in cash and cash equivalents 297 (579) 3,658 Cash and cash equivalents at beginning of year 5,652 6,231 2,573 ------------------------------------------ Cash and cash equivalents at end of year $ 5,949 $ 5,652 $ 6,231 ------------------------------------------ ------------------------------------------
SEE ACCOMPANYING NOTES 30 EMPI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS The Company develops, manufactures and distributes, non-invasive biomedical devices and accessories for applications in the rehabilitation, orthopedic and incontinence treatment medical markets. The primary market for the Company's products is in the United States. The Company also does a small percentage of business in Canada, Europe and the Far East. BASIS OF PRESENTATION The consolidated financial statements include the Company and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. RECLASSIFICATION Certain 1994 amounts have been reclassified to conform with the 1995 presentation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS The Company's Canadian subsidiary's functional currency is considered to be its local currency. The effect of the cumulative translation adjustment is not material and has not been separately disclosed in the Company's financial statements. CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. INVESTMENTS Investments in marketable equity securities and debt securities are classified as available-for-sale. Available-for-sale securities are carried at fair value with the unrealized gains and losses, net of tax, reported as a separate component of shareholders' equity. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities, interest and dividends are included in investment income. INVENTORIES Inventories are valued at the lower of cost (first-in, first-out method) or market. EQUIPMENT AND IMPROVEMENTS Equipment and improvements are stated on the basis of cost. Depreciation and amortization of equipment and improvements are computed on the straight-line method for book purposes (accelerated methods for income tax purposes) over estimated useful lives of 25 years for building improvements, seven to eight years for furniture and fixtures and five years for equipment. 31 EMPI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) OTHER ASSETS Other assets consist primarily of intangible assets including goodwill of $2,813,000, a $3,000,000 non-compete agreement with Medtronic, Inc., costs paid to wholesale distributors for territorial distribution rights and patent costs. These assets are being amortized on a straight-line basis over their estimated useful lives ranging from four to seven years. Accumulated amortization was $4,333,000 and $2,807,000 at December 31, 1995 and 1994, respectively. The Company reduced the carrying amount of its goodwill by $700,000 at December 31, 1994, due to indicators of an impairment of the asset. The Company performs a periodic analysis to determine if the carrying value of assets is impaired. EARNINGS PER SHARE Earnings per share is based on the weighted average number of common shares outstanding plus common share equivalents resulting from dilutive stock options and warrants. Primary and fully diluted earnings per share are approximately the same. INCOME TAXES The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." As permitted under the new rules, prior year financial statements have not been restated. The adoption of Statement No. 109 did not have a significant impact on the Company's financial condition or results of operations. NOTE 2. ACQUISITIONS During 1994, the Company completed two dealer acquisitions. On October 7, 1994, the Company acquired all of the inventory, customer lists and other intangibles of Eagle Medical Services, Inc. for $429,000 in cash and a note payable of $800,000. On November 18, 1994, the Company acquired all the inventory, customer lists and other intangibles of Bowerman's Pharmacy, Inc. for $200,000 in cash. On August 12, 1993, the Company acquired substantially all of the assets and liabilities of Physical Health Devices, Inc. (PHD), a privately-held electromyography (EMG) biofeedback company for $2.5 million of the Company's Common Stock. All acquisitions have been accounted for as purchases and, accordingly, their net assets and operating results are included in the Company's financial statements from the respective date of acquisition. The pro forma impact of these acquisitions on the Company's results of operations for all periods presented was not material. NOTE 3. INVESTMENTS Investments consist of the following: (IN THOUSANDS)
CASH SHORT- LONG- TYPE EQUIVALENTS TERM TERM TOTAL - --------------------------------------------------------------------------------------------- DECEMBER 31, 1995 Preferred stock $ 500 $ 6,000 $ - $ 6,500 Bonds - 5,619 2,000 7,619 Commercial paper 887 1,000 - 1,887 Other 882 471 - 1,353 ---------------------------------------------------------------- $ 2,269 $ 13,090 $ 2,000 $ 17,359 ---------------------------------------------------------------- ---------------------------------------------------------------- DECEMBER 31, 1994 Preferred stock $ 2,000 $ 3,500 $ - $ 5,500 Bonds - 1,024 1,021 2,045 Commercial paper 2,463 492 - 2,955 Other - 293 80 373 ---------------------------------------------------------------- $ 4,463 $ 5,309 $ 1,101 $ 10,873 ---------------------------------------------------------------- ----------------------------------------------------------------
32 EMPI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At December 31, 1995, the cost of investments approximated market value. During 1994, the Company recognized a loss of $170,000 due to a decline in the value of an equity security deemed to be other than temporary. The security was sold in 1995 and a gain of $70,000 was recognized. Interest income included in other income was $798,000, $311,000, and $166,000 for the years ended December 31, 1995, 1994 and 1993, respectively. NOTE 4. INVENTORIES Inventories consist of the following:
DECEMBER 31 (IN THOUSANDS) 1995 1994 - ------------------------------------------------------------------------- Finished goods $ 5,873 $ 5,254 Work in process 632 794 Raw materials 1,764 1,439 ---------------------------------- $ 8,269 $ 7,487 ---------------------------------- ----------------------------------
NOTE 5. BORROWINGS Long-term borrowings consist of:
DECEMBER 31 (IN THOUSANDS) 1995 1994 - ------------------------------------------------------------------------- Notes payable $ 2,144 $ 2,400 Other - 3 ---------------------------------- 2,144 2,403 Less current maturities 676 603 ---------------------------------- $ 1,468 $ 1,800 ---------------------------------- ----------------------------------
On November 18, 1992, the Company issued a promissory note for $2 million in conjunction with the acquisition of the Nortech division of Medtronic, Inc. The note is repayable in five annual installments of $400,000, with the first payment occurring on November 11, 1994. The note bears interest at 7 percent with accrued interest payable semi-annually. In the event of default, the payor has the right to convert the remaining principal balance, along with accrued interest, into shares of the Company's Common Stock at $14.20 per share. Notes payable also includes $944,000 of debt issued in conjunction with dealer acquisitions and non-compete agreements. Annual maturities of long-term debt are: 1996--$676,000, 1997--$706,000, 1998-- $696,000 and 1999--$66,000. Total interest paid for the years ended December 31, 1995, 1994 and 1993 was $121,000, $168,000 and $145,000, respectively. Interest expense included in other income (expense) was $114,000, $168,000 and $145,000 for the years ended December 31, 1995, 1994 and 1993, respectively. 33 EMPI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6. INCOME TAXES At December 31, 1995, the Company has a net operating loss carryforward of $1.1 million for income tax purposes, resulting from the Company's 1993 acquisition of Physical Health Devices, Inc., which will expire in the year 2007. The Company's ability to utilize the net operating loss carryforward will be subject to Internal Revenue Code Section 382 limitations. For financial reporting purposes, a valuation allowance of $382,000 and $431,000 at December 31, 1995 and 1994, respectively, has been recognized to offset the deferred tax asset related to the carryforward. If realized, the tax benefit for this item will reduce the goodwill related to the acquisition of Physical Health Devices, Inc. Deferred income taxes reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31, 1995 and 1994 are as follows:
(IN THOUSANDS) 1995 1994 - ------------------------------------------------------------------------------ Deferred tax assets: Allowance for doubtful accounts $ 3,829 $ 3,737 Net operating loss carryforwards 382 431 Amortization of non-compete agreement 476 307 Self-insurance medical accrual 105 97 Vacation accrual 168 175 Inventory 239 58 Other 332 150 ----------------------------- Total deferred tax assets 5,531 4,955 Deferred tax liabilities 255 180 ----------------------------- Net deferred tax assets 5,276 4,775 Valuation allowance for deferred tax assets (434) (498) ----------------------------- $ 4,842 $ 4,277 ----------------------------- -----------------------------
(IN THOUSANDS) 1995 1994 1993 - ------------------------------------------------------------------------------ Current: Federal $ 4,811 $ 3,804 $ 5,924 State 871 728 1,222 Deferred: Federal (504) (1,547) (952) State (62) (182) (129) --------------------------------------------- $ 5,116 $ 2,803 $ 6,065 --------------------------------------------- ---------------------------------------------
Reconciliation of the statutory federal income tax rate to the Company's effective tax rate follows:
1995 1994 1993 ----------------------------- Statutory rate 34% 34% 34% Increase (decrease) resulting from: State taxes, net of federal tax benefit 4 5 5 Amortization of goodwill 1 6 - Other - 1 - ----------------------------- Effective rate 39% 46% 39% ----------------------------- -----------------------------
Total income taxes paid during the years ended December 31, 1995, 1994 and 1993 were $5,469,000, $4,485,000, and $6,269,000, respectively. 34 EMPI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7. STOCK OPTIONS The Company has a qualified and nonqualified stock option plan for officers, key employees and directors. The options are granted at fair market value and are exercisable over periods up to 10 years from grant date in various increments. Option activity is summarized as follows:
QUALIFIED NON-QUALIFIED OPTION OPTION SHARES SHARES PRICE PER SHARE - ------------------------------------------------------------------------------------------------- Balance December 31, 1992 364,300 23,000 $ .71 to $19.25 Granted 156,764 115,236 17.00 to 28.00 Canceled/expired (60,000) (10,000) 2.04 to 23.50 Exercised (128,950) (8,000) .71 to 13.50 ------------------------------ Balance December 31, 1993 332,114 120,236 .92 to 28.00 Granted 133,255 184,521 8.25 to 10.75 Canceled/expired (23,024) - 10.75 to 23.50 Exercised (48,525) - .92 to 7.54 ------------------------------ Balance December 31, 1994 393,820 304,757 1.96 to 28.00 Granted 77,015 31,568 7.50 to 21.88 Canceled/expired (16,700) (2,500) 8.25 to 27.00 Exercised (42,025) (15,000) 1.96 to 23.50 ------------------------------ Balance December 31, 1995 412,110 318,825 2.04 to 28.00 ------------------------------ ------------------------------
At December 31, 1995, 1994 and 1993, options for 158,000, 85,075, and 64,650 shares, respectively, were exercisable. During 1992, certain options were exercised through the exchange of previously held common shares. Total shares reserved for issuance upon the exercise of warrants and options were 1,315,824 at December 31, 1995. The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options. Under APB 25, when the exercise price of employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized. NOTE 8. CAPITAL STOCK On May 11, 1994, the Board of Directors and shareholders authorized an additional 10,000,000 shares of common stock. On May 19, 1993, the Board of Directors declared a 2-for-1 Common Stock split effected in the form of a 100 percent stock dividend to be paid to shareholders of record as of May 28, 1993. All per share amounts have been restated to reflect this stock split. NOTE 9. LEASES The Company leases office space and equipment under noncancelable operating leases. These leases expire on various dates through 1997. Future minimum payments under all lease arrangements in the five years subsequent to 1995 are: 1996--$514,000 and 1997--$47,000. 35 EMPI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Rent expense for the years ended December 31, 1995, 1994 and 1993 was $526,000, $552,000, and $658,000, respectively. NOTE 10. EMPLOYEE BENEFIT PLANS The Company has a Retirement Profit Sharing and Savings Plan under Section 401(k) of the Internal Revenue Code. The Plan allows employees to defer up to 10% of their income on a pre-tax basis through contributions to the Plan. For every dollar the employee contributes up to 6% of their income, the Company will contribute $.50. In 1995, 1994 and 1993, the Company's matching contribution was $421,000, $377,000, and $318,000, respectively. The Company adopted an employee stock purchase plan effective July 1, 1992. The Plan enables employees to contribute up to 10 percent of their compensation toward the purchase of the Company's Common Stock at 85 percent of market value. At December 31, 1995, 125,527 shares are reserved for future employee purchases of stock under the Plan. 36 EMPI, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS)
Col. A Col. B Col. C Col. D Col. E - --------------------------------------------------------------------------------------------------------------------------------- Additions ------------------------------------ (1) (2) (3) Charged to Other Beginning Of Charged to Costs Accounts -- Deductions -- Balance at End Description Period and Expenses Describe Describe of Period - -------------------- ------------ ---------------- ------------------ ------------- --------------- Year ended December 31, 1995: Allowance for doubtful accounts $ 7,684 $ 2,565 $ -0- $ 4,283 $ 5,966 Inventory reserve $ 2,490 875 -0- 608 2,757 -------- -------- -------- -------- -------- Total $10,174 $ 3,440 $ -0- $ 4,891 $ 8,723 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Year ended December 31, 1994: Allowance for doubtful accounts $ 5,289 $ 4,395 $ -0- $ 2,000 $ 7,684 Inventory reserve 2,593 555 -0- 658 2,490 -------- -------- -------- -------- -------- Total $ 7,882 $ 4,950 $ -0- $ 2,658 $10,174 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Year ended December 31, 1993: Allowance for doubtful accounts $ 1,917 $ 3,510 $ 319 $ 457 $ 5,289 Inventory reserve 2,969 894 209 1,479 2,593 -------- -------- -------- -------- -------- Total $ 4,886 $ 4,404 $ 528 $ 1,936 $ 7,882 -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(1) Provisions for write-off of uncollectable receivables and inventory adjustments. (2) Represents reserves related to acquisitions. (3) Represents write-offs of doubtful accounts, net of recoveries, and write- offs and disposals of inventory. 37 EX-10.9 2 EXHIBIT 10.9 FOURTH ADDENDUM TO LEASE EXHIBIT 10.9 -- FOURTH ADDENDUM TO LEASE THIS FOURTH ADDENDUM TO LEASE is made and entered into as of the 26th day of January, 1996, by and between TEACHER'S RETIREMENT SYSTEM OF THE STATE OF ILLINOIS ("Landlord"), and EMPI, INC., a Minnesota corporation ("Tenant"). RECITALS: FIRST: Landlord and Medtronic, Inc. made and entered into a Lease Agreement dated January 28, 1991, and a First Addendum to Lease dated January 28, 1991 for the rental of Suite 204, consisting of approximately 23,917 square feet ("Suite 204"), and a Second Addendum to Lease dated March 15, 1992 for the rental of Suite 208, consisting of approximately 16,116 square feet ("Suite 208"), River Road Business Center, 5255 East River Road, Fridley. SECOND: Medtronic, Inc. assigned its interest in the Lease, as amended to Tenant by a Lease Assignment and Assumption Agreement dated November 18, 1992, which assignment and assumption was consented to by Landlord; THIRD: Landlord and Tenant made and entered into a Third Addendum to Lease dated December 8, 1993 (said Lease, First Addendum, and Third Addendum are hereinafter collectively referred to as the "Lease"); FOURTH: The Lease term for Suite 204 expires February 28, 1996; FIFTH: Notwithstanding the notice provisions contained in the Lease, Tenant wishes to exercise its option to extend the Lease term relative to Suite 204, and Landlord is agreeable to such extension upon the terms and conditions of this Addendum. AGREEMENT: NOW, THEREFORE, in consideration of the foregoing and the mutual covenants hereinafter contained, the Landlord and Tenant do hereby agree as follows: 1. TERM. The term of the Lease for Suite 204 is hereby extended from March 1, 1996 to February 28, 1997. 2. RENT. Base rent for Suite 204, commencing March 1, 1996, shall be Seven and 11/100th ($7.11) Dollars per square foot per year, or Fourteen Thousand One Hundred Seventy-nine and 33/100 ($14,179.33) Dollars per month. Notwithstanding the foregoing with respect to the base rent for Suite 204, in the event that Tenant enters into a lease on or before February 29, 1996, with Landlord for at least 70,000 square feet of space for a term extending after March 1, 1997, then (I) the rent for Suite 204 for the extended term (March 1, 1996 through February 28, 1997) shall be Five and 08/100 ($5.08) Dollars per rentable square foot per year or Ten Thousand One Hundred Twenty-four and 86/100 ($10,124.86) Dollars per month, (ii) the rent for Suite 204 for such extended term shall be adjusted to the rate provided in (I) above, and (iii) Landlord shall immediately pay to Tenant a refund of any excess base rent paid by Tenant to Landlord for Suite 204 for such extended term. 3. MISCELLANEOUS. Except as herein expressly modified or amended, the Lease shall remain unchanged and in full force and effect. 38 EXHIBIT 10.9 -- FOURTH ADDENDUM TO LEASE (CONTINUED) IN WITNESS WHEREOF, the parties hereto have executed this Fourth Addendum to Lease as of the date and year first above noted. LANDLORD: TENANT: TEACHERS' RETIREMENT SYSTEM EMPI, INC. OF THE STATE OF ILLINOIS By: CAPITAL ASSOCIATES REALTY BY: ADVISERS ------------------------------- Its: Its: Investment Manager, Duly --------------------- Authorized Agent and Attorney-in-fact By: -------------------------------- Its: -------------------------- 39 EX-11 3 EXHIBIT 11 STATEMENT RE: COMPUT. OF PER SHARE EARN EXHIBIT 11 -- STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31 ---------------------- 1995 1994 1993 ---- ---- ---- Primary earnings per share: Average shares outstanding 8,588 8,537 8,334 Net effect of dilutive stock options and warrants -- based on the treasury stock method using average market price 311 74 326 -------- -------- -------- 8,899 8,611 8,660 -------- -------- -------- -------- -------- -------- Net income $ 8,002 $ 3,356 $ 9,334 -------- -------- -------- -------- -------- -------- Per share amount $ .90 $ .39 $ 1.08 -------- -------- -------- -------- -------- -------- Fully-diluted earnings per share: Average shares outstanding 8,588 8,537 8,334 Net effect of dilutive stock options and warrants -- based on the treasury stock method using closing market price 581 74 326 -------- -------- -------- 9,169 8,611 8,660 -------- -------- -------- -------- -------- -------- Net income $ 8,002 $ 3,356 $ 9,334 -------- -------- -------- -------- -------- -------- Per share amount $ .87 $ .39 $ 1.08 -------- -------- --------
Note: All share and per share amounts have been adjusted to reflect a 2-for-1 stock split effective May 28, 1993. 40 EX-23 4 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS Exhibit 23 -- Consent of Independent Auditors We consent to the incorporation by reference in Form S-8, Registration Statement Nos. 33-28177, 33-42510, 33-49614 and 33-49616 dated May 4, 1989, August 23, 1991, July 10, 1992 and July 10, 1992, respectively, and in Registration Statement No. 33-57780 on Form S-3 dated February 3, 1993, of our report dated January 31, 1996, with respect to the consolidated financial statements and schedule of Empi, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 1995. Minneapolis, Minnesota March 21, 1996 41 EX-27 5 EXHIBIT 27 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FOURTH QUARTER 1995 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 5949 13090 21812 5966 8269 48702 12478 7349 60737 6190 1468 0 0 24110 28969 60737 67342 67342 17688 17688 37319 2565 114 13118 5116 8002 0 0 0 8002 .90 .90
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