-----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, ScOYkprXrbRcOTF8Bx9bRpG+Xo+qIfh5D9PzRQymrio/N8rtS4Tp+zb2cMmn2mai YPva1NQh1hVF0v3oNZdWNQ== 0000914190-99-000197.txt : 19990514 0000914190-99-000197.hdr.sgml : 19990514 ACCESSION NUMBER: 0000914190-99-000197 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990513 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-Q SEC ACT: SEC FILE NUMBER: 000-09387 FILM NUMBER: 99620073 BUSINESS ADDRESS: STREET 1: 599 CARDIGAN ROAD CITY: ST. PAUL STATE: MN ZIP: 55126-4099 BUSINESS PHONE: 6514159000 MAIL ADDRESS: STREET 1: 599 CARDIGAN ROAD STREET 2: 1275 GREY FOX ROAD CITY: ST. PAUL STATE: MN ZIP: 55126-4099 10-Q 1 FIRST QUARTER 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For Quarter Ended March 31, 1999 Commission File Number 0-9387 Empi, Inc. (Exact name of registrant as specified in its charter) Minnesota 41-1310335 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 599 Cardigan Road St. Paul, Minnesota 55126-4099 (Address of principal (Zip code) executive offices) Registrant's telephone number, including area code (651) 415-9000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| 6,090,930 shares of common stock were outstanding as of May 7, 1999. EMPI, INC. & SUBSIDIARIES INDEX PAGE Part I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Unaudited Consolidated Balance Sheet as of March 31, 1999 and Audited Consolidated Balance Sheet as of December 31, 1998 3 Unaudited Consolidated Statements of Operations for the periods ended March 31, 1999 and 1998 4 Unaudited Consolidated Statements of Cash Flows for the periods ended March 31, 1999 and 1998 5 Notes to Unaudited Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial 9 Condition and Results of Operations Part II. OTHER INFORMATION Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 13 PART I - - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements EMPI, INC. & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
March 31 December 31 1999 1998 -------- -------- (Unaudited) (Audited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 2,020 $ 1,851 Accounts receivable, net of allowances 19,930 20,441 Inventories - Note B 8,296 8,023 Deferred income tax benefit 4,294 4,294 Other 801 805 -------- -------- TOTAL CURRENT ASSETS 35,341 35,414 PROPERTY, PLANT AND EQUIPMENT - NET 4,938 5,087 OTHER ASSETS 661 799 -------- -------- TOTAL ASSETS $ 40,940 $ 41,300 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 2,509 $ 1,720 Customer advances 307 351 Employee compensation 1,340 1,801 Commissions payable 504 585 Current portion of long-term debt 66 66 Income taxes payable 1,082 584 Other 390 405 -------- -------- TOTAL CURRENT LIABILITIES 6,198 5,512 SHAREHOLDERS' EQUITY: Common stock (28,466) (24,853) Retained earnings 63,208 60,641 -------- -------- TOTAL SHAREHOLDERS' EQUITY 34,742 35,788 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 40,940 $ 41,300 ======== ========
See notes to consolidated financial statements. FORM 10 - Q - - PART I - ITEM 1 (CONTINUED) EMPI, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Three Months Ended March 31 1999 1998 ------- ------- (Unaudited) Net sales $17,281 $16,997 Cost of goods sold 4,357 4,255 ------- ------- GROSS PROFIT 12,924 12,742 Operating expenses: Selling, general and administrative 7,918 8,103 Research and development 875 841 ------- ------- Total operating expenses 8,793 8,944 ------- ------- INCOME FROM OPERATIONS 4,131 3,798 Other income, net 10 333 ------- ------- EARNINGS BEFORE INCOME TAXES 4,141 4,131 Income tax expense 1,574 1,590 ------- ------- NET EARNINGS $ 2,567 $ 2,541 ======= ======= BASIC EARNINGS PER SHARE $ .41 $ .32 ======= ======= Weighted average shares outstanding - Note C 6,238 7,821 ======= ======= DILUTED EARNINGS PER SHARE $ .40 $ .32 ======= ======= Diluted weighted average shares outstanding - Note C 6,349 7,927 ======= =======
See notes to consolidated financial statements. FORM 10 - Q - - PART I - ITEM 1 (CONTINUED) EMPI, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Three Months Ended March 31 1999 1998 ------- ------- (Unaudited) OPERATING ACTIVITIES Net earnings $ 2,567 $ 2,541 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 597 859 Provisions for loss on accounts receivable 741 557 Changes in operating assets and liabilities: Accounts receivable (230) 576 Inventories (273) (239) Accounts payable and accrued expenses 203 (438) Income taxes payable 498 1,402 Other assets and liabilities 9 (81) ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 4,112 5,177 INVESTING ACTIVITIES Maturities of short-term investments -- 5,079 Purchase of short-term investments -- (963) Purchase of equipment and improvements (309) (120) ------- ------- NET CASH PROVIDED BY(USED IN) INVESTING ACTIVITIES (309) 3,996 FINANCING ACTIVITIES Purchases and retirement of common stock (4,004) (7,096) Proceeds from exercise of common stock options 370 193 ------- ------- NET CASH USED IN FINANCING ACTIVITIES (3,634) (6,903) ------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS 169 2,270 Cash and cash equivalents at beginning of year 1,851 3,020 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,020 $ 5,290 ======= =======
See notes to consolidated financial statements. FORM 10 - Q - - PART I - ITEM 1 (CONTINUED) EMPI, INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE A - ACCOUNTING POLICIES The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management of the Company, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation of the results have been included. Operating results for the three months ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in Empi, Inc. and Subsidiaries' annual report on Form 10-K for the year ended December 31, 1998. NOTE B - INVENTORIES (In thousands) March 31 December 31 1999 1998 ----------- ----------- (Unaudited) (Audited) Finished goods $ 5,634 $ 5,670 Work in process 590 651 Raw materials 2,072 1,702 ----------- ----------- $ 8,296 $ 8,023 =========== =========== FORM 10 - Q - - PART I - ITEM 1 (CONTINUED) NOTE C - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended March 31 1999 1998 ------- --------- (In thousands, except per share data) Net earnings $ 2,567 $ 2,541 Denominator for earnings per share: Weighted average shares; denominator for basic earnings per share 6,238 7,821 Effect of dilutive securities: Employee and nonemployee stock options 111 106 ------ --------- Dilutive common shares; denominator for diluted earnings per share 6,349 7,927 ====== ========= Basic earnings per share $ .41 $ .32 ====== ========= Diluted earnings per share $ .40 $ .32 ====== ========= NOTE D - SEGMENT INFORMATION The Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") in the fiscal year ended December 31, 1998. SFAS 131 establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS 131 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions how to allocate resources and assess performance. To date, the Company has viewed its operations as principally one segment, the sale of non-invasive biomedical devices and accessories. As a result, the financial information disclosed herein, materially represents all of the financial information related to the Company's principal operating segment. FORM 10 - Q - - PART I - ITEM 1 (CONTINUED) NOTE D - SEGMENT INFORMATION, CONTINUED Net sales from the Company's product lines are as follows: Three Months Ended March 31 1999 1998 ------- ------- (In thousands) Electrotherapy $11,021 $10,546 Iontophoresis and Orthotics 6,105 6,190 Incontinence 155 261 ------- ------- Total net sales $17,281 $16,997 ======= ======= Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations Sales Empi, Inc.'s ("Empi" or the "Company") net sales for first quarter 1999 totaled $17.3 million compared to 1998 first quarter sales of $17.0 million, an increase of 2%. This percentage increase in net sales was a result of a 1% increase in volume, combined with a 1% increase in average net selling price. Electrotherapy sales accounted for approximately 64% and 62% of total sales for the first quarters of 1999 and 1998, respectively. The electrotherapy product group experienced a 5% increase in net sales compared to the same period last year of which 3% was a result of higher average net selling prices and 2% due to increased volume. The Company experienced a 4% decrease within the iontophoretic drug delivery group due to the less aggressive launch of the new product, Dupel B.L.U.E., during first quarter 1999. The orthotics product group increased 5% which was led by double digit growth in the Advance Dynamic ROM(R) product line. The incontinence product line decreased 41% from an already small base. International sales for the first quarter of 1999, as a percentage of total sales, increased to 3% compared to 2% for the same period last year. The strength of the U.S. dollar continues to adversely impact international sales. Even though Empi continues to encounter pricing pressures from third-party payors and price volume concessions within preferred supplier agreements relative to its electrotherapy products, the Company's overall average net selling prices for these products have improved in 1999 given the continual shift from wholesale to more profitable retail sales. Lack of Medicare reimbursement for pelvic floor stimulation continues to adversely impact growth of the Company's incontinence product line, and management does not anticipate that this situation will change in the near future. However, the Company continues to have discussions with the Health Care Financing Administration ("HCFA") for a favorable national reimbursement decision relative to its incontinence treatment products. Gross Profit Gross profit for the first quarter of 1999 was $12.9 million compared to $12.7 million for the 1998 first quarter, an increase of 2%. Gross profit as a percentage of net sales for the first quarters of 1999 and 1998 was 75% for each period as a result of manufacturing efficiencies and an increase in retail electrotherapy sales. The Company anticipates that throughout 1999, gross profit, as a percentage of net sales, will remain near its current level or experience a slight decrease. Factors that continue to influence the Company's gross profit margin include: competitive pricing and reimbursement pressures, shifts in product mix, proportion of wholesale to retail sales, and efficiencies achieved in manufacturing and distribution. FORM 10 - Q - - PART I - ITEM 2 (Continued) Selling, General and Administrative Selling, general and administrative expenses for first quarter were $7.9 million, or 46% of net sales, and $8.1 million, or 48% of net sales, in 1999 and 1998, respectively. The primary contributor to the 2% decrease of selling, general and administrative expenses from the same quarter last year was reduced amortization expense related to previous acquisitions. The Company plans for no significant increases or decreases in selling, general and administrative expenses for 1999. Research and Development Research and development expenses increased to $875,000 in the first quarter of 1999 compared to $841,000 in the first quarter of 1998, due primarily to increased clinical and consulting expenses. Stated as a percentage of net sales, research and development costs remained consistent at 5% for the first quarters of 1999 and 1998. Research and development spending continues to be driven by activities related to developing new products, continuation engineering and next-generation products. Empi's products are regulated under the federal Food, Drug and Cosmetic Act requiring clearance from the U.S. Food and Drug Administration (FDA) prior to market introduction. The Company's long-term growth is dependent upon continued FDA clearance, which may be delayed or denied, thus determining the successful introduction of new products or new applications of existing technology. Other Income and Expenses Interest income for the first quarter of 1999 was $47,000 compared to $253,000 in first quarter of 1998. Interest income decreased substantially as a result of the reduced cash position from the continued stock repurchasing program. In addition, first quarter 1998 included income received from an insurance settlement. Net Earnings Net earnings for the first quarter of 1999 was $2.6 million compared to $2.5 million for the first quarter of 1998, an increase of 1%. An increase in gross margin of 1% and an overall decrease in operating expenses of 2% offset by reduced interest income were the primary reasons for the improvement in net earnings. Diluted earnings per share increased from $.32 per share in first quarter 1998 to $.40 in first quarter of 1999. The Company's stock repurchase program contributed $.02 per share to the $.08 diluted earnings per share increase. To achieve strong net earnings growth in 1999, the Company must have both a growth in net sales and continued management of expenses. FORM 10 - Q - - PART I - ITEM 2 (Continued) Liquidity and Capital Requirements The Company's cash and cash equivalents were approximately $2.0 million at March 31, 1999, compared to $1.9 million at the end of December 1998. The increase in cash and cash equivalents is primarily a result of higher cash receipts compared to fourth quarter 1998 offset by stock repurchases during first quarter 1999. The Company repurchased 165,610 shares of common stock for approximately $4.0 million during first quarter 1999. The Company intends to continue throughout 1999 its stock repurchase program, initiated in 1995, given favorable market conditions, the Company's cash position and available line of credit. Empi's working capital as of March 31, 1999 was $29.1 million, a decrease of $800,000 compared to December 31, 1998. The current ratio was 5.7 to 1 at the end of first quarter 1999 compared with 6.4 to 1 at December 31, 1998. The Company believes its existing cash together with internally generated funds and its $10 million uncommitted line of credit, will be sufficient to meet its working capital and other cash requirements for the immediate and foreseeable future. Year 2000 The Year 2000 ("Y2K") century date issue affects software, hardware and databases from nearly every source. Historically, most computer systems were designed to represent century dates with two digits rather than four. As a result, if these systems recognize "00" as the year 1900 rather than the year 2000, the systems could fail or create erroneous results. Incomplete or untimely resolution of the Y2K issue by the Company, its key suppliers, customers and other parties could have a material adverse effect on the Company's results of operations, financial condition and cash flows. To address the Y2K issue, Empi has established a Year 2000 Project team led by the Chief Financial Officer, with participation from the Director of Information Systems and other business department representatives. The Company's Y2K Project is divided into three major phases: Inventory and Assessment of Business Systems, Remediation and Replacement, and Testing. Inventory and Assessment of Business Systems This phase commenced in August of 1998 and was designed to identify internal and external business systems that are susceptible to failure or miscalculation due to the Y2K issue. The Company has completed the inventory and assessment of its critical information technology ("IT") business systems. The Company has completed the inventory of its non-critical IT and non-information technology ("non-IT") systems. The assessment of these systems was substantially completed by March 31, 1999. Non-IT systems include, but are not limited to, manufacturing production lines, elevators, heating and air conditioning systems. As part of this phase, Empi sent questionnaires to over 3,000 suppliers and service providers requesting representation as to their Y2K readiness. The Company has identified 200 of these vendors as critical to its business operations. The Company submitted similar questionnaires to FORM 10 - Q - - PART I - ITEM 2 (Continued) significant customers, including managed health care organizations and governmental entities, during first quarter of 1999. The readiness of its key suppliers and customers will continue to be monitored by Empi throughout 1999. Remediation and Replacement The Company commenced remediation and replacement efforts in early 1999, with a projected completion date of May 1999 for all affected critical internal IT business systems and a completion date of December 1999 for all non-critical IT and non-IT systems. Given the Company's initial assessment, the estimated total cost of remediation and replacement will approximate $500,000. To date, the Company has spent approximately $200,000. Internally generated cash flows are expected to fund these costs, of which a substantial amount will be capitalized. Testing Testing of the remediation and replacement of all other internal and external affected systems is expected to occur throughout 1999. Testing of all critical IT business systems is expected to be completed by May 1999, and testing of non-critical IT and non-IT systems is expected to be completed by December 1999. Empi's company-wide efforts involved with its Year 2000 Project are being designed to minimize the adverse effects of significant disruptions. There is no assurance that the Company's Y2K readiness efforts will prevent a material adverse impact on the results of its operations, financial condition and cash flows since its compliance is dependent upon third parties also being Y2K ready in a timely manner. Noncompliance by the Company or these third parties could result in, among other things, delays in billing and collection, delays in the receipt of supplies, and delays in delivery of finished product. Contingency plans are being developed by the Company to mitigate, to the extent possible, potential disruptions. The Company believes that if unforeseen delays were to occur within the manufacturing process, consigned inventory of certain key products would be sufficient to meet customers' immediate needs. Cautionary Statements The Management's Discussion and Analysis contains certain forward-looking statements related primarily to reimbursement for pelvic floor stimulation devices; gross profits remaining at current levels or decreasing; and Year 2000 issues, potential resolutions and costs. The statements are subject to certain risks and uncertainties, which could cause results to differ materially from those projected. These risks and uncertainties, in addition to those discussed in Management's Discussion and Analysis, include (i) shifts in product mix and proportion of wholesale to retail sales; (ii) competitive pricing pressures and manufacturing and distribution efficiencies; and (iii) the accuracy and reliability of the Company's, its suppliers' and its customers' assessment and remediation of Year 2000 issues. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable. PART II - - OTHER INFORMATION Item 5. Other Information At the Annual Meeting of Shareholders held at corporate headquarters on April 28, 1999, Donald D. Maurer officially resigned from the Board of Directors and two directors, Dr. Kenneth F. Tempero and H. Philip Vierling, were elected. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description (27) Financial Data Schedule (filed only in electronic format) (b) On April 15, 1999, the Company filed a report on Form 8-K to report the restructuring of its business by the transfer of its manufacturing and certain administrative functions to a newly-created subsidiary named Empi Corp. This new subsidiary is wholly owned by the Company. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. Empi, Inc. May 13, 1999 By /s/ Joseph E. Laptewicz, Jr. Joseph E. Laptewicz, Jr. Chief Executive Officer and Chairman of the Board (Principal Executive Officer) May 13, 1999 By /s/ Patrick D. Spangler Patrick D. Spangler Vice President, Chief Financial Officer and Assistant Secretary (Principal Financial and Accounting Officer) EX-27 2 ART 5 FDS FOR FIRST QUARTER 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIRST QUARTER 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. Dollars 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 1 2,020 0 19,930 0 8,296 35,341 4,938 0 40,940 6,198 0 0 0 (28,466) 63,208 40,940 17,281 17,281 4,357 4,357 8,793 741 0 4,141 1,574 2,567 0 0 0 2,567 .41 .40
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