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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended April 3, 2010

 

or

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to              .

 

Commission file number 333-142188

 

DJO Finance LLC

(Exact name of Registrant as specified in its charter)

 

Delaware

 

20-5653965

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification Number)

 

 

 

1430 Decision Street
Vista, California

 

92081

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (800) 336-5690

 

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 o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o  No o

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x
(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of May 12, 2010, 100% of the issuer’s membership interests were owned by DJO Holdings LLC.

 

 

 



Table of Contents

 

DJO FINANCE LLC

FORM 10-Q

TABLE OF CONTENTS

 

 

 

Page
No.

 

PART I—Financial Information

 

Item 1.

Condensed Consolidated Balance Sheets as of April 3, 2010 (Unaudited) and December 31, 2009

3

 

Unaudited Condensed Consolidated Statements of Operations for the three months ended April 3, 2010 and March 28, 2009

4

 

Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended April 3, 2010 and March 28, 2009

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

Item 4.

Controls and Procedures

38

 

PART II—Other Information

 

Item 1.

Legal Proceedings

39

Item 1A.

Risk Factors

40

Item 5.

Other Information

40

Item 6.

Exhibits

41

SIGNATURES

 

42

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

DJO Finance LLC

 

Unaudited Condensed Consolidated Balance Sheets

 

(in thousands)

 

 

 

April 3,
2010

 

December 31,
2009

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

54,039

 

$

44,611

 

Accounts receivable, net

 

151,245

 

146,212

 

Inventories, net

 

94,600

 

95,880

 

Deferred tax assets, net

 

39,490

 

40,448

 

Prepaid expenses and other current assets

 

26,003

 

14,725

 

Total current assets

 

365,377

 

341,876

 

Property and equipment, net

 

81,522

 

86,714

 

Goodwill

 

1,188,736

 

1,191,497

 

Intangible assets, net

 

1,167,882

 

1,187,677

 

Other non-current assets

 

40,714

 

42,415

 

Total assets

 

$

2,844,231

 

$

2,850,179

 

 

 

 

 

 

 

Liabilities and Membership Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

47,406

 

$

42,144

 

Accrued interest

 

36,981

 

10,968

 

Long-term debt and capital leases, current portion

 

12,628

 

15,926

 

Other current liabilities

 

83,888

 

90,608

 

Total current liabilities

 

180,903

 

159,646

 

Long-term debt and capital leases, net of current portion

 

1,800,172

 

1,796,944

 

Deferred tax liabilities, net

 

329,928

 

321,131

 

Other non-current liabilities

 

16,041

 

14,089

 

Total liabilities

 

2,327,044

 

2,291,810

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Membership equity:

 

 

 

 

 

Paid-in capital

 

828,112

 

827,617

 

Accumulated deficit

 

(305,933

)

(272,275

)

Accumulated other comprehensive income (loss)

 

(7,170

)

518

 

DJO Finance LLC membership equity

 

515,009

 

555,860

 

Noncontrolling interests

 

2,178

 

2,509

 

Total membership equity

 

517,187

 

558,369

 

Total liabilities and membership equity

 

$

2,844,231

 

$

2,850,179

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3



Table of Contents

 

DJO Finance LLC

 

Unaudited Condensed Consolidated Statements of Operations

 

(in thousands)

 

 

 

Three Months Ended

 

 

 

April 3,
2010

 

March 28,
2009

 

Net sales

 

$

240,076

 

$

217,653

 

Cost of sales (exclusive of amortization of $8.9 million and $9.5 million for the three months ended April 3, 2010 and March 28, 2009 respectively, included below)

 

87,354

 

79,000

 

Gross profit

 

152,722

 

138,653

 

Operating expenses:

 

 

 

 

 

Selling, general and administrative

 

110,526

 

100,600

 

Research and development

 

5,571

 

5,803

 

Amortization of acquired intangibles

 

19,054

 

19,131

 

Operating income

 

17,571

 

13,119

 

Other income (expense):

 

 

 

 

 

Interest income

 

353

 

336

 

Interest expense

 

(40,712

)

(38,591

)

Other expense, net

 

(780

)

(1,380

)

Loss from continuing operations before income taxes

 

(23,568

)

(26,516

)

Provision (benefit) for income taxes

 

9,768

 

(11,937

)

Loss from continuing operations

 

(33,336

)

(14,579

)

Income from discontinued operations, net of tax

 

 

410

 

Net loss

 

(33,336

)

(14,169

)

Less: Net income attributable to noncontrolling interests

 

322

 

139

 

Net loss attributable to DJO Finance LLC

 

$

(33,658

)

$

(14,308

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4



Table of Contents

 

DJO Finance LLC

 

Unaudited Condensed Consolidated Statements of Cash Flows

 

(in thousands)

 

 

 

Three Months Ended

 

 

 

April 3,
2010

 

March 28,
2009

 

OPERATING ACTIVITIES:

 

 

 

 

 

Net loss

 

$

(33,336

)

$

(14,169

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

6,795

 

6,035

 

Amortization of intangibles

 

19,054

 

19,131

 

Amortization of debt issuance costs

 

5,313

 

3,256

 

Stock-based compensation

 

495

 

569

 

Loss on disposal of assets

 

494

 

157

 

Deferred income taxes

 

8,736

 

(12,135

)

Provision for doubtful accounts and sales returns

 

8,957

 

9,220

 

Inventory reserves

 

1,727

 

960

 

Changes in operating assets and liabilities, net of acquired assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(14,515

)

(10,907

)

Inventories

 

(905

)

(260

)

Prepaid expenses, other assets and liabilities

 

(11,582

)

(4,141

)

Accrued interest

 

26,013

 

31,683

 

Accounts payable and other current liabilities

 

2,614

 

(11,791

)

Net cash provided by operating activities

 

19,860

 

17,608

 

INVESTING ACTIVITIES:

 

 

 

 

 

Acquisition of businesses, net of cash acquired

 

(810

)

(3,929

)

Purchases of property and equipment

 

(4,111

)

(8,159

)

Other, net

 

(524

)

175

 

Net cash used in investing activities

 

(5,445

)

(11,913

)

FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from long-term debt and revolving line of credit

 

105,130

 

 

Payments on long-term debt and revolving line of credit

 

(106,411

)

(4,095

)

Payment of debt issuance costs

 

(3,097

)

 

Dividend paid to noncontrolling interests

 

(529

)

 

Net cash used in financing activities

 

(4,907

)

(4,095

)

Effect of exchange rate changes on cash and cash equivalents

 

(80

)

(1,339

)

Net increase in cash and cash equivalents

 

9,428

 

261

 

Cash and cash equivalents at beginning of period

 

44,611

 

30,483

 

Cash and cash equivalents at end of period

 

$

54,039

 

$

30,744

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

11,331

 

$

3,584

 

Cash paid (received) for income taxes (refunds)

 

$

1,602

 

$

(673

)

Non-cash investing and financing activities:

 

 

 

 

 

Increases in property and equipment and in other liabilities in connection with capitalized software costs

 

$

2,275

 

$

2,894

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5



Table of Contents

 

DJO Finance LLC

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

 

Basis of Presentation and Principles of Consolidation.  We are a global provider of high-quality orthopedic devices, with a broad range of products used for rehabilitation, pain management and physical therapy. We also develop, manufacture and distribute a broad range of surgical reconstructive implant products. We offer healthcare professionals and patients a diverse range of orthopedic rehabilitation products addressing the complete spectrum of preventative, pre-operative, post-operative, clinical and home rehabilitation care. Our products are used by orthopedic specialists, primary care physicians, pain management specialists, physical therapists, podiatrists, chiropractors, athletic trainers and other healthcare professionals to treat patients with musculoskeletal conditions resulting from degenerative diseases, deformities, traumatic events and sports-related injuries. In addition, many of our non-surgical medical devices and related accessories are used by athletes and patients for injury prevention and at-home physical therapy treatment.

 

We market and distribute our products through three operating segments, Domestic Rehabilitation, International, and Domestic Surgical Implant. Our Domestic Rehabilitation Segment offers to customers in the United States, non-invasive medical products that are used before and after surgery to assist in the repair and rehabilitation of soft tissue and bone, and to protect against further injury; electrotherapy devices and accessories used to treat pain and restore muscle function; iontophoretic devices and accessories used to deliver medication; clinical therapy tables, traction equipment and other clinical therapy equipment; orthotic devices used to treat joint and spine conditions; orthopedic soft goods; rigid knee braces; and vascular systems which include products intended to prevent deep vein thrombosis following surgery. Our Domestic Surgical Implant Segment offers a comprehensive suite of reconstructive joint products to customers in the United States. Our International segment offers all of our products to customers outside the United States.

 

Except as otherwise indicated, references to “us”, “we”, “DJOFL”, “our”, “DJO”, or “our Company”, refers to DJO Finance LLC and its consolidated subsidiaries.

 

On June 12, 2009 we sold our Empi Therapy Solutions (“ETS”) catalog business, formerly known as Rehab Medical Equipment, or RME, to Patterson Medical Supply, Inc. for approximately $21.8 million. As such, results of the ETS business for periods prior to the date of sale have been presented as discontinued operations in our consolidated financial statements and the accompanying notes.

 

Noncontrolling interests reflect the 50% separate ownership of Medireha GmbH (“Medireha”) not owned by us, which we have consolidated due to our controlling interest. Our controlling interest consists of our 50% ownership and our control of one of the two director seats, our rights to prohibit certain business activities that are not consistent with our plans for the business and our exclusive distribution rights for products manufactured by Medireha. All significant intercompany balances and transactions have been eliminated in consolidation.

 

The accompanying unaudited condensed consolidated financial statements as of April 3, 2010 and for the three months ended April 3, 2010 and March 28, 2009 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States for complete financial statements. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The accompanying unaudited condensed consolidated financial statements as of April 3, 2010 and for the three months ended April 3, 2010 and March 28, 2009 have been prepared on the same basis as the audited consolidated financial statements and include all adjustments consisting of normal recurring accruals which, in the opinion of management, are necessary for a fair presentation of the financial position, operating results and cash flows for the interim date and interim periods presented. Results for the interim periods are not necessarily indicative of the results to be achieved for the entire year or future periods.

 

Use of Estimates.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates, including those related to contractual allowances, doubtful accounts, inventories, rebates, product returns, warranty obligations, self insurance, income taxes, goodwill and intangible assets and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

 

6



Table of Contents

 

Cash and Cash Equivalents.  Cash consists of deposits with financial institutions. We consider all short-term, highly liquid investments and investments in money market funds and commercial paper with original maturities of less than three months at the time of purchase to be cash equivalents. While our cash and cash equivalents are on deposit with high-quality institutions, such deposits exceed Federal Deposit Insurance Corporation insured limits.

 

Computer Software Costs.  Software is stated at cost less accumulated amortization and is amortized using the straight-line method over its estimated useful life ranging from three to seven years.  In accordance with ASC Topic 350 (formerly American Institute of Certified Public Accountants Statement of Position (“SOP”) 98-1, “Accounting for  the Costs of Computer software Developed or Obtained for Internal Use”), we capitalize costs of internally developed software during the development stage.  Additionally, we capitalize related costs including external consulting costs, cost of software licenses, and internal payroll and payroll-related costs for employees who are directly associated with a software project.  Software assets are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable over the remaining lives of the assets. Upgrades and enhancements are capitalized if they result in added functionality.  In 2008, we began implementing a new ERP system resulting in approximately $14.2 million of capitalized software costs as of April 3, 2010. We will begin amortizing capitalized software upon implementation of the new ERP system.

 

Derivative Financial Instruments.  We account for derivatives pursuant to ASC Topic 815 (formerly SFAS No. 133, “Accounting for Derivative Instruments and Hedging”), which requires that all derivative instruments be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them.

 

Foreign Exchange Forward Contracts

 

We use foreign exchange forward contracts to hedge expense commitments that are denominated in currencies other than the U.S. dollar. The purpose of our foreign currency hedging activities is to fix the dollar value of specific commitments and payments to foreign vendors. Before acquiring a derivative instrument to hedge a specific risk, potential natural hedges are evaluated.  While our foreign exchange contracts act as economic hedges, we have not designated such instruments as hedges under ASC Topic 815. We determine the fair value of our foreign forward contracts in accordance with ASC Topic 820 (formerly SFAS No. 157, “Fair Value Measurement”).  The classification of gains and losses resulting from changes in the fair values of derivatives is dependent on the intended use of the derivative and its resulting designation. The change in fair value of the derivatives is recorded in unrealized gains or losses within the statement of operations.  At April 3, 2010, the fair value of our foreign exchange forward contracts was a gain of $1.1 million and was determined through the use of models that consider various assumptions, including time value, yield curves, as well as other relevant economic measures, which are inputs that are classified as Level 2 in the valuation hierarchy.

 

Interest Rate Swap Agreements

 

We make use of debt financing as a source of funds and are therefore exposed to interest rate fluctuations in the normal course of business. Our credit facilities are subject to floating interest rates. We manage the risk of unfavorable movements in interest rates by hedging a portion of the outstanding loan balance, thereby locking in a fixed rate on a portion of the principal, reducing the effect of possible rising interest rates and making interest expense more predictable.  We have designated these interest rate swap agreements as cash flow hedges and account for our interest rate swap agreements in accordance with ASC Topic 815.  At April 3, 2010, the fair value of our interest rate swap agreements was a loss of $11.9 million and was determined through the use of models that consider various assumptions, including time value, yield curves, as well as other relevant economic measures, which are inputs that are classified as Level 2 in the valuation hierarchy.

 

Foreign Currency Translation.  The financial statements of our international subsidiaries, where the local currency is the functional currency, are translated into U.S. dollars using period-end exchange rates for assets and liabilities and average exchange rates during the period for revenues and expenses. Cumulative translation gains and losses are excluded from results of operations and recorded as a separate component of consolidated membership equity. Gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity’s local currency) are included in the condensed consolidated statements of operations.

 

7



Table of Contents

 

Comprehensive loss consists of the following for the three months ended April 3, 2010 (in thousands):

 

 

 

DJO Finance
LLC

 

Noncontrolling
Interests

 

Total

 

Net income (loss), as reported

 

$

(33,658

)

$

322

 

$

(33,336

)

Foreign currency translation adjustments

 

(7,306

)

 

(7,306

)

Change in fair value of interest rate swap, net of tax

 

(382

)

 

(382

)

Comprehensive income (loss)

 

$

(41,346

)

$

322

 

$

(41,024

)

 

Comprehensive loss consists of the following for the three months ended March 28, 2009 (in thousands):

 

 

 

DJO Finance
LLC

 

Noncontrolling
Interests

 

Total

 

Net income (loss), as reported

 

$

(14,308

)

$

139

 

$

(14,169

)

Foreign currency translation adjustments

 

(3,094

)

 

(3,094

)

Change in fair value of interest rate swap, net of tax

 

(3,346

)

 

(3,346

)

Comprehensive income (loss)

 

$

(20,748

)

$

139

 

$

(20,609

)

 

Discontinued Operations. On June 12, 2009 we sold our ETS catalog business, formerly known as Rehab Medical Equipment, or RME, to Patterson Medical Supply, Inc. for approximately $21.8 million. As such, results of the ETS business for periods prior to the date of sale have been presented as discontinued operations in our consolidated financial statements and the accompanying notes.

 

Reclassifications.  The condensed consolidated financial statements and accompanying footnotes reflect certain reclassifications to prior year consolidated financial statements to conform to the current year presentation.

 

Recent Accounting Pronouncements.  In January 2010, we adopted ASC Topic 810 (formerly SFAS No. 167, “Amendments to FASB Interpretation No. 46 (R)”).  ASC Topic 810 amends certain requirements of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), including the addition of entities previously considered qualifying special-purpose entities. The adoption of ASC Topic 815 had no impact on our consolidated financial statements.

 

In January 2010, we adopted ASC Topic 860 (formerly SFAS No. 166, “Accounting for the Transfers of Financial Assets as amendment of FASB Statement No. 140” (“SFAS 166”) which amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets” (“SFAS 140”).  SFAS 166 makes the following amendments to SFAS 140: 1) removes concept of qualifying special-purpose entities from SFAS 140; 2) modifies the financial components approach used and limits the circumstances in which a transferor has not transferred the original financial asset to an entity that is not consolidated with the transferor in the financial statements; 3) establishes conditions for reporting a transfer of a portion of a financial asset as a sale; 4) redefines a participating interest; 5) clarifies that an entity must consider all arrangements or agreements made contemporaneously with, or in contemplation of, a transfer, even if not entered into at the time of the transfer; 6) clarifies that the transferor must evaluate whether it, its consolidated affiliates included in the financial statements being presented, or its agency effectively control the transferred financial asset directly or indirectly; 7) requires that the transferor recognize and initially measure at fair value all assets obtained and liabilities incurred as a result of the a transfer of an entire asset or group of financial assets accounted for as a sale; 8) removes special provisions for guaranteed mortgage securitizations to require them to be treated that same as any other transfer of financial assets; 9) Removes fair value practicability exception from measuring the proceeds received by a transferor in a transfer that meet the conditions for sale accounting at fair value; and 10) requires enhanced disclosures. The adoption of ASC Topic 860 had no impact on our consolidated financial statements.

 

In September 2009, the FASB issued ASU 2009-13, which amends ASC Topic 605 (formerly EITF Issue No. 08-1, “Revenue Arrangements with Multiple Deliverables.”). ASU 2009-13 provides guidance concerning (1) the determination of whether an arrangement involving multiple deliverables contains more than one unit of accounting, and (2) the manner in which consideration should be measured and allocated to the separate units of accounting in the multiple-element arrangement and is effective for fiscal years beginning on or after June 15, 2010. We are currently evaluating the impact, if any, this issue will have on our consolidated financial statements. However, we do not expect that this issue will result in a change in current practice.

 

8



Table of Contents

 

2. ACCOUNTS RECEIVABLE RESERVES

 

A summary of activity in our accounts receivable reserves for doubtful accounts and sales returns is presented below (in thousands):

 

 

 

Three Months Ended

 

 

 

April 3,
2010

 

March 28,
 2009

 

Balance, beginning of period

 

$

48,306

 

$

36,521

 

Provision for doubtful accounts and sales returns

 

8,957

 

9,220

 

Write-offs, net of recoveries

 

(6,322

)

(5,532

)

Balance, end of period

 

$

50,941

 

$

40,209

 

 

3. INVENTORIES

 

Inventories consist of the following (in thousands):

 

 

 

April 3,
2010

 

December 31,
2009

 

Components and raw materials

 

$

25,510

 

$

29,967

 

Work in process

 

5,662

 

3,745

 

Finished goods

 

51,115

 

50,558

 

Inventory held on consignment

 

23,041

 

24,121

 

 

 

105,328

 

108,391

 

Less inventory reserves

 

(10,728

)

(12,511

)

 

 

$

94,600

 

$

95,880

 

 

A summary of the activity in our reserves for estimated slow moving, excess, obsolete and otherwise impaired inventory is presented below (in thousands):

 

 

 

Three Months Ended

 

 

 

April 3,
2010

 

March 28,
2009

 

Balance, beginning of period

 

$

12,511

 

$

17,798

 

Provision charged to cost of sales

 

1,727

 

960

 

Write-offs, net of recoveries

 

(3,510

)

(2,385

)

Balance, end of period

 

$

10,728

 

$

16,373

 

 

The write-offs to the reserve were principally related to the disposition of fully reserved inventory.

 

4. GOODWILL AND INTANGIBLE ASSETS

 

A summary of adjustments to our goodwill balance for the three months ended April 3, 2010 is as follows (in thousands):

 

Balance, beginning of period

 

$

1,191,497

 

Foreign currency translation

 

(2,761

)

Balance, end of period

 

$

1,188,736

 

 

Identifiable intangible assets consisted of the following as of April 3, 2010 (in thousands):

 

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Intangible Assets,
Net

 

Amortizable intangible assets:

 

 

 

 

 

 

 

Technology-based

 

$

458,726

 

$

(103,304

)

$

355,422

 

Customer-based

 

487,998

 

(106,788

)

381,210

 

 

 

$

946,724

 

$

(210,092

)

736,632

 

Indefinite-lived intangible assets:

 

 

 

 

 

 

 

Trademarks and trade names

 

 

 

 

 

428,269

 

Accumulated foreign currency translation adjustments

 

 

 

 

 

2,981

 

Net identifiable intangible assets

 

 

 

 

 

$

1,167,882

 

 

9



Table of Contents

 

Identifiable intangible assets consisted of the following as of December 31, 2009 (in thousands):

 

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Intangible Assets,
Net

 

Amortizable intangible assets:

 

 

 

 

 

 

 

Technology-based

 

$

458,726

 

$

(94,385

)

$

364,341

 

Customer-based

 

487,998

 

(96,906

)

391,092

 

 

 

$

946,724

 

$

(191,291

)

755,433

 

Indefinite-lived intangible assets:

 

 

 

 

 

 

 

Trademarks and trade names

 

 

 

 

 

428,269

 

Accumulated foreign currency translation adjustments

 

 

 

 

 

3,975

 

Net identifiable intangible assets

 

 

 

 

 

$

1,187,677

 

 

Our amortizable intangible assets are being amortized using the straight-line method over the weighted average estimated useful lives of 10 years for both technology-based and customer-based intangible assets.

 

Estimated amortization expense related to identifiable intangible assets for the next five years and thereafter is as follows (in thousands):

 

Remaining 2010

 

$

57,713

 

2011

 

75,675

 

2012

 

74,438

 

2013

 

69,189

 

2014

 

67,368

 

Thereafter

 

392,249

 

 

5. OTHER CURRENT LIABILITIES

 

Other current liabilities consist of the following (in thousands):

 

 

 

April 3,
2010

 

December 31,
2009

 

Wages and related expenses

 

$

25,652

 

$

20,668

 

Commissions and royalties

 

11,793

 

12,953

 

Taxes

 

2,283

 

3,061

 

Integration costs

 

3,631

 

6,779

 

Professional fees

 

5,934

 

5,529

 

Rebates

 

5,030

 

4,482

 

Accrued ERP costs

 

1,881

 

5,800

 

Interest rate swap derivative

 

8,477

 

9,701

 

Other accrued liabilities

 

19,207

 

21,635

 

 

 

$

83,888

 

$

90,608

 

 

6. LONG-TERM DEBT AND CAPITAL LEASES

 

Long-term debt (including capital lease obligations) consists of the following (in thousands):

 

 

 

April 3,
2010

 

December 31,
2009

 

Term loan under Senior Secured Credit Facility, net of unamortized original issue discount ($8.0 million and $9.3 million at April 3, 2010 and December 31, 2009, respectively)

 

$

929,825

 

$

1,034,427

 

10.875% Senior notes, net of unamortized original issue premium ($4.9 million at April 3, 2010)

 

679,866

 

575,000

 

11.75% Senior subordinated notes

 

200,000

 

200,000

 

Loans and revolving credit facilities at various European banks

 

 

355

 

Capital lease obligations and other

 

108

 

228

 

Notes payable for acquisitions

 

3,001

 

2,860

 

 

 

1,812,800

 

1,812,870

 

Less — current portion

 

(12,628

)

(15,926

)

Long-term debt and capital leases, net of current portion

 

$

1,800,172

 

$

1,796,944

 

 

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Table of Contents

 

Senior Secured Credit Facility

 

On November 20, 2007, we entered into the Senior Secured Credit Facility which consists of a $1,065.0 million term loan facility maturing May 2014 and a $100.0 million revolving credit facility maturing November 2013. We issued the term loan facility at a 1.2% discount, resulting in net proceeds of $1,052.4 million. The original $12.6 million discount is being amortized as additional interest expense over the term of the term loan facility increasing the reported outstanding balance accordingly. The market value of our term loan facility was approximately $905.0 million as of April 3, 2010 and was determined using trading prices for our term loan on or near that date. As of April 3, 2010, no amounts were drawn related to our revolving credit facility.

 

Interest Rate and Fees.  Borrowings under the Senior Secured Credit Facility bear interest at a rate equal to an applicable margin plus, at our option, either (a) a base rate determined by reference to the higher of (1) the prime rate of Credit Suisse and (2) the federal funds rate plus 0.50% or (b) the Eurodollar rate determined by reference to the costs of funds for deposits in U.S. dollars for the interest period relevant to each borrowing adjusted for required reserves. The initial applicable margin for borrowings under the term loan facility and the revolving credit facility is 2.00% with respect to base rate borrowings and 3.00% with respect to Eurodollar borrowings. The applicable margin for borrowings under the term loan facility and the revolving credit facility may be reduced subject to us attaining certain leverage ratios.

 

We use interest rate swap agreements in an effort to hedge our exposure to fluctuating interest rates related to a portion of our Senior Secured Credit Facility (See Note 13).  On November 20, 2007, we entered into an interest rate swap agreement for a notional amount of $515.0 million at a fixed LIBOR rate of 4.205% which expired at December 31, 2009. In February 2009, we entered into two additional non-amortizing interest rate swap agreements. The first agreement was for a notional amount of $550.0 million at a fixed LIBOR rate of 1.04% beginning February 2009 and expired at December 31, 2009. The second is for a notional amount of $750.0 million at a fixed LIBOR rate of 1.88% beginning January 2010 through December 2010.  In August 2009, we entered into four new non-amortizing interest swap agreements with notional amounts aggregating $300.0 million. Each of the four agreements has a term beginning January 2011 through December 2011. The four agreements are at a weighted average fixed LIBOR rate of 2.5825%.   As of April 3, 2010, our weighted average interest rate for all borrowings under the Senior Secured Credit Facility was 4.55%.

 

In addition to paying interest on outstanding principal under the Senior Secured Credit Facility, we are required to pay a commitment fee to the lenders under the revolving credit facility with respect to the unutilized commitments thereunder. The current commitment fee rate is 0.50% per annum. The commitment fee rate may be reduced subject to us attaining certain leverage ratios. We must also pay customary letter of credit fees.

 

Principal Payments.  We are required to pay annual payments in equal quarterly installments on the loans under the term loan facility in an amount equal to 1.00% of the funded total principal amount through February 2014, with any remaining amount payable in May 2014. Principal amounts outstanding under the revolving credit facility are due and payable in full at maturity.

 

Prepayments.  The Senior Secured Credit Facility requires us to prepay outstanding term loans, subject to certain exceptions, with (1) 50% (which percentage can be reduced to 25% or 0% upon our attaining certain leverage ratios) of our annual excess cash flow, as defined; (2) 100% of the net cash proceeds above an annual amount of $25.0 million from non-ordinary course asset sales (including insurance and condemnation proceeds) by DJO Finance LLC (“DJOFL”) and its restricted subsidiaries, subject to certain exceptions to be agreed upon, including a 100% reinvestment right if reinvested or committed to reinvest within 15 months of such sale or disposition so long as reinvestment is completed within 180 days thereafter; and (3) 100% of the net cash proceeds from issuances or incurrences of debt by DJOFL and its restricted subsidiaries, other than proceeds from debt permitted to be incurred under the Senior Secured Credit Agreement. Any mandatory prepayments are applied to the term loan facilities in direct order of maturity.  Based on estimated excess cash flows for the year ended December 31, 2009, we were required to make a prepayment of the term loan outstanding under our Senior Secured Credit Facility of approximately $2.0 million, which we paid in March 2010. We expect to reinvest the net proceeds from our 2009 asset sales during 2010 as permitted by our credit agreement and, as such, our calculation of estimated excess cash flows excluded those net proceeds. We may voluntarily prepay outstanding loans under the Senior Secured Credit Facility at any time without premium or penalty, provided that voluntary prepayments of Eurodollar loans made on a date other than the last day of an interest period applicable thereto shall be subject to customary breakage costs.  In January 2010 we issued $100 million of new 10.875% Senior Notes (see further discussion noted below) and used the net proceeds to make a voluntary prepayment of $101.5 million towards the aggregate principal amount of our term loan under the Senior Secured Credit Facility.  As a result of such prepayment, we accelerated the amortization associated with our unamortized original discount by approximately $0.8 million relating to the portion of the term loans that were repaid.

 

Guarantee and Security.  All obligations under the Senior Secured Credit Facility are unconditionally guaranteed by DJO Holdings LLC (“Holdings”) and each existing and future direct and indirect wholly-owned domestic subsidiary of DJOFL other than immaterial subsidiaries, unrestricted subsidiaries and subsidiaries that are precluded by law or regulation from guaranteeing the obligations (collectively, the “Guarantors”).

 

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All obligations under the Senior Secured Credit Facility, and the guarantees of those obligations, are secured by pledges of 100% of the capital stock of DJOFL, 100% of the capital stock of each wholly owned domestic subsidiary and 65% of the capital stock of each wholly owned foreign subsidiary that is, in each case, directly owned by DJOFL or one of the Guarantors; and a security interest in, and mortgages on, substantially all tangible and intangible assets of Holdings, DJOFL and each Guarantor.

 

Certain Covenants and Events of Default.  The Senior Secured Credit Facility contains a number of covenants that, among other things, restrict, subject to certain exceptions, our and our subsidiaries’ ability to:

 

·                  incur additional indebtedness;

·                  create liens on assets;

·                  change fiscal years;

·                  enter into sale and leaseback transactions;

·                  engage in mergers or consolidations;

·                  sell assets;

·                  pay dividends and other restricted payments;

·                  make investments, loans or advances;

·                  repay subordinated indebtedness;

·                  make certain acquisitions;

·                  engage in certain transactions with affiliates;

·                  restrict the ability of restricted subsidiaries that are not Guarantors to pay dividends or make distributions;

·                  amend material agreements governing our subordinated indebtedness; and

·                  change our lines of business.

 

In addition, the Senior Secured Credit Facility requires us to maintain a maximum senior secured leverage ratio of 4.15:1 as of the twelve months ended April 3, 2010, stepping down over time to 3.25:1 by the end of 2011. The Senior Secured Credit Facility also contains certain customary affirmative covenants and events of default. Our maximum senior secured leverage ratio was within the covenant level as of April 3, 2010.

 

10.875% Senior Notes Payable

 

On November 20, 2007, DJOFL and DJO Finance Corporation (“Finco”) (collectively, the “Issuers”) issued $575.0 million aggregate principal amount of 10.875% Senior Notes (the “10.875% Notes”) under an agreement dated as of November 20, 2007 (the “10.875% Indenture”) among the Issuers, the guarantors party thereto and The Bank of New York Mellon (formerly known as The Bank of New York), as trustee.

 

On January 20, 2010, we issued $100.0 million aggregate principal amount of new 10.875% Notes, pursuant to the 10.875% Indenture, that also governs our existing 10.875% Notes due 2014 that were issued on November 20, 2007. The net proceeds of the issuance (excluding approximately $2.0 million of interest accrued from November 15, 2009 to January 19, 2010, which amount will be included in the interest payment we will make to noteholders on May 15, 2010, the first interest payment date), along with cash on hand, were used to repay $101.5 million aggregate principal amount of existing term loans under the Senior Secured Credit Facility. In connection with the issuance of these notes, we received an unamortized premium of $5.0 million which is capitalized and amortized over the term of the note within interest expense within our condensed consolidated statement of operations.

 

The 10.875% Notes require semi-annual interest payments of approximately $36.7 million each May 15 and November 15 and are due November 15, 2014. The market value of the 10.875% Notes was approximately $713.8 million as of April 3, 2010 and was determined using trading prices for the 10.875% Notes on or near that date. We believe the trading prices reflect certain differences between prevailing market terms and conditions and the actual terms of our 10.875% Notes.

 

Optional Redemption.  Under the 10.875% Indenture, prior to November 15, 2011, the Issuers have the option to redeem some or all of the 10.875% Notes for cash at a redemption price equal to 100% of the then outstanding principal balance plus an applicable make-whole premium plus accrued and unpaid interest. Beginning on November 15, 2011, the Issuers may redeem some or all of the 10.875% Notes at a redemption price of 105.438% of the then outstanding principal balance plus accrued and unpaid interest. The redemption price decreases to 102.719% and 100% of the then outstanding principal balance at November 2012 and November 2013, respectively. Additionally, from time to time, before November 15, 2010, the Issuers may redeem up to 35% of the 10.875% Notes at a redemption price equal to 110.875% of the principal amount then outstanding, in each case, with proceeds we raise, or a direct or indirect parent company raises, in certain offerings of equity of DJOFL or its direct or indirect parent companies, as long as at least 65% of the aggregate principal amount of the notes issued remains outstanding.

 

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Change of Control.  Upon the occurrence of a change of control, unless DJOFL has previously sent or concurrently sends a notice exercising its optional redemption rights with respect to all of the then-outstanding 10.875% Notes, DJOFL will be required to make an offer to repurchase all of the then-outstanding 10.875% Notes at 101% of their principal amount, plus accrued and unpaid interest.

 

Covenants.  The 10.875% Indenture contains covenants limiting, among other things, our and our restricted subsidiaries’ ability to incur additional indebtedness or issue certain preferred and convertible shares, pay dividends on, redeem, repurchase or make distributions in respect of the capital stock of DJO or make other restricted payments, make certain investments, sell certain assets, create liens on certain assets to secure debt, consolidate, merge, sell or otherwise dispose of all or substantially all of our assets, enter into certain transactions with affiliates, and designate our subsidiaries as unrestricted subsidiaries. As of April 3, 2010, we were in compliance with all applicable covenants.

 

11.75% Senior Subordinated Notes Payable

 

The Issuers issued $200.0 million aggregate principal amount of 11.75% senior subordinated notes in November 2006 (the “11.75% Notes”). The 11.75% Notes require semi-annual interest payments of approximately $11.8 million each May 15 and November 15 and are due November 15, 2014.

 

The market value of the 11.75% Notes was approximately $217.0 million as of April 3, 2010 and was determined using trading prices for the 11.75% Notes on or near that date. We believe the trading prices reflect certain differences between prevailing market terms and conditions and the actual terms of our 11.75% Notes.

 

The 11.75% Notes contain similar provisions as the 10.875% Notes with respect to change of control and covenant requirements. Under the Indenture governing the 11.75% Notes (the “11.75% Indenture”), prior to November 15, 2010, the Issuers have the option to redeem some or all of the 11.75% Notes for cash at a redemption price equal to 100% of the then outstanding principal balance plus an applicable make-whole premium plus accrued and unpaid interest. Beginning on November 15, 2010, the Issuers may redeem some or all of the 11.75% Notes at a redemption price of 105.875% of the then outstanding principal balance plus accrued and unpaid interest on the 11.75% Notes. The redemption price decreases to 102.938% and 100% of the then outstanding principal balance at November 2011 and November 2012, respectively. Additionally, from time to time, before November 15, 2009, the Issuers may redeem up to 35% of the 11.75% Notes at a redemption price equal to 111.75% of the principal amount then outstanding, in each case, with proceeds we raise, or a direct or indirect parent company raises, in certain offerings of equity of DJOFL or its direct or indirect parent companies, as long as at least 65% of the aggregate principal amount of the notes issued remains outstanding.

 

Our ability to continue to meet the covenants related to our indebtedness specified above in future periods will depend, in part, on events beyond our control, and we may not continue to meet those ratios. A breach of any of these covenants in the future could result in a default under the Senior Secured Credit Facility, the 11.75% Indenture and the 10.875% Indenture (collectively, the “Indentures”), at which time the lenders could elect to declare all amounts outstanding under the Senior Secured Credit Facility to be immediately due and payable. Any such acceleration would also result in a default under the Indentures.

 

Debt Issue Costs

 

We incurred $30.7 million, $27.6 million, and $10.2 million of debt issue costs in connection with the Senior Secured Credit Facility, the 10.875% Notes, and the 11.75% Notes, respectively, including $3.1 million incurred in the three months ended April 3, 2010 in connection with the sale of the new 10.875% Notes . These costs have been capitalized and are included in other non-current assets in the condensed consolidated balance sheets at April 3, 2010 and December 31, 2009. Debt issue costs are being amortized over the terms of the respective debt instruments through November 2014.

 

7. STOCK OPTION PLANS AND STOCK-BASED COMPENSATION

 

2007 Stock Incentive Plan

 

We have one active equity compensation plan, the DJO Incorporated 2007 Incentive Stock Plan (the “2007 Plan”), under which we are authorized to grant options up to 7,500,000 shares, subject to adjustment in certain events. Options issued under the 2007 Plan can be either incentive stock options or non-qualified stock options. The exercise price of stock options granted will not be less than 100% of the fair market value of the underlying shares on the date of grant, and will expire no more than ten years from the date of grant. We adopted a form of non-statutory stock option agreement (the “DJO Form Option Agreement”) for employee stock option awards under the 2007 Plan. Under the DJO Form Option Agreement, one-third of stock options will vest over a specified

 

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Table of Contents

 

period of time (typically five years) contingent solely upon the awardees’ continued employment with us (“Time-Based Tranche”). As initially adopted, another one-third of stock options will vest over a specified performance period (typically five years) from the date of grant upon the achievement of certain pre-determined performance targets based on Adjusted EBITDA and free cash flow on an annual basis (“Performance-Based Tranche”), as defined in the DJO Form Option Agreement. As amended in March 2009, the final one-third of stock options will vest based upon achieving a minimum internal rate of return (“IRR”) and a minimum return of money on of invested capital (“MOIC”), as defined in the DJO Form Option Agreement and is each measured with respect to Blackstone’s aggregate investment in our capital, to be achieved by Blackstone following a liquidation of all or a portion of its investment in our capital stock (“Enhanced Market-Return Tranche”).

 

During March 2010, the Compensation Committee approved further modifications to the terms of the outstanding options and the DJO Form Option Agreement. The Time-Based Tranche and Enhanced Market-Return Tranche terms remain the same as discussed above. The financial performance targets for the future years of the Performance-Based Tranche were replaced by targets with different financial metrics. These new targets are similar to the Enhanced Market-Return Tranche as they require achievement of a minimum IRR and MOIC, each measured with respect to Blackstone’s aggregate investment in our capital stock, to be achieved by Blackstone following a liquidation of all or a portion of its investment in our capital stock (referred to herein as the “Market-Return Tranche”). As a result of this modification, the Market-Return Tranche has both a performance component and a market condition component.

 

Options granted under the 2007 Plan contain change-in-control provisions that cause the vesting of the Time-Based Tranche upon the occurrence of a change-in-control. Specifically, the Time-Based Tranche will become immediately exercisable upon the occurrence of a change-in-control if the optionee remains in continuous employment of the Company until the consummation of the change-in-control. This provision does not operate to vest the Market-Return or the Enhanced Market-Return Tranches which require the achievement of the IRR and MOIC targets by Blackstone on its equity investment in us.

 

Employee Stock Options

 

During the three months ended April 3, 2010 we granted 194,050 stock options under the 2007 Plan to our executive officers, senior management, and certain other employees.

 

We recorded non-cash compensation expense of approximately $0.4 million and $0.5 million for the three months ended April 3, 2010 and March 28, 2009, respectively, associated with stock options issued under the 2007 Plan. We record compensation expense for awards with a service or market condition ratably over the service period.  We record compensation expense for awards with a performance condition only to the extent deemed probable of achievement.  We are required to reassess at each reporting period whether the achievement of any performance condition is probable, at which time we would recognize the related compensation expense over the remaining performance or service period, if any. To date, no amount has been recorded for the Market Return or the Enhanced Market-Return Tranches, as achievement of the performance component is not deemed probable at this time.

 

The fair value of each option is estimated on the date of grant, using the Black-Scholes-Merton option pricing model for service awards and a binomial model for market based awards. In estimating fair value for new options issued under the 2007 Plan, expected volatility was based completely on historical volatility of comparable publicly-traded companies. As our historical share option exercise experience does not provide a reasonable basis upon which to estimate the expected term, we used the simplified approach to calculate the expected term. Expected life is calculated in two tranches based on the employment level defined as executive or employee. The risk-free rate used in calculating fair value of service and performance-based stock options for periods within the expected term of the option is based on the U.S. Treasury yield bond curve in effect at the time of grant. As a result of the 2009 modification, we will no longer use the original grant date fair value to measure compensation cost and have re-assessed the assumptions used to determine the fair value of options at the date of modification and at subsequent grant dates.

 

The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and experience. The following table presents the assumptions we used in calculating the fair value of employee stock options for the three months ended April 3, 2010 and March 28, 2009:

 

 

 

Three Months Ended

 

 

 

April 3,
2010

 

March 28,
2009

 

Expected dividends

 

0.0

%

0.0

%

Expected volatility

 

34.5

%

34.4

%

Risk-free rate

 

3.0

%

2.3

%

Expected term (in years)

 

6.4 years

 

6.3 years

 

 

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Table of Contents

 

Non-Employee Stock Options

 

During the three months ended April 3, 2010 we did not grant any additional stock options under the 2007 Plan to non-employees (“non-employee options”). The non-statutory stock option agreement for the non-employees states that the options have an exercise price of $16.46 per share, which was equal to 100% of the estimated fair market value of the stock and will become effective upon the defined effective date and expire ten years from that date. A number of shares equal to 25% of the options granted become vested and exercisable at the end of each of the first four years subsequent to the effective date, provided the optionee is still affiliated with and providing services to the Company. The non-employee option agreement does not include any performance requirements on the optionee’s part in order to vest in the options granted.  Non-employee options are accounted for in accordance with ASC Topic 505 (formerly Emerging Issues Task Force Issue No. 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services”) which states that the fair value of each option will be re-measured at the end of each reporting period until vested, when the final fair value of the vesting of the option is determined. We recorded non-cash compensation expense of approximately $0.1 million for each of the three months ended April 3, 2010 and March 28, 2009.

 

8. SEGMENT AND GEOGRAPHIC INFORMATION

 

We provide a broad array of orthopedic rehabilitation and regeneration products, as well as implants to customers in the United States and abroad.  We currently develop, manufacture and distribute our products through the following three operating segments.

 

Domestic Rehabilitation Segment

 

Our Domestic Rehabilitation Segment, which generates its revenues in the United States, is divided into five main businesses:

 

·                  Bracing and Supports.  Our Bracing and Supports business unit offers our DonJoy, ProCare and Aircast products, including rigid knee bracing, orthopedic soft goods, cold therapy products, and vascular systems.  This business unit also includes our OfficeCare business, through which we maintain an inventory of soft goods and other products at healthcare facilities, primarily orthopedic practices, for immediate distribution to patients.

 

·                  Empi.  Our Empi business unit offers our home electrotherapy, iontophoresis, and home traction products. We primarily sell these products directly to patients or to physical therapy clinics. For products sold to patients, we arrange billing to the patients and their third party payors.

 

·                  Regeneration.  Our Regeneration business unit primarily sells our bone growth stimulation products. We sell these products either directly to patients or to independent distributors. For products sold to patients, we arrange billing to the patients and their third party payors.

 

·                  Chattanooga.  Our Chattanooga business unit offers products in the clinical rehabilitation market in the categories of clinical electrotherapy devices, clinical traction devices, and other clinical products and supplies such as treatment tables, continuous passive motion (“CPM”) devices and dry heat therapy.

 

·                  Athlete Direct.  Our Athlete Direct business unit offers our Compex electrostimulation device to consumers, which range from people interested in improving their fitness to competitive athletes, to assist in athletic training programs through muscle development and to accelerate muscle recovery after training sessions.

 

International Segment

 

Our International Segment, which generates most of its revenues in Europe, sells all of our products and certain third party products through a combination of direct sales representatives and independent distributors.

 

Domestic Surgical Implant Segment

 

Our Domestic Surgical Implant Segment develops, manufactures and markets a wide variety of knee, hip and shoulder implant products that serve the orthopedic reconstructive joint implant market in the United States.

 

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Table of Contents

 

Information regarding our reportable business segments is presented below (in thousands). This information excludes the impact of certain expenses not allocated to segments, primarily general corporate expenses and non-recurring charges related to our integration activities.

 

 

 

Three Months Ended

 

 

 

April 3,
2010

 

March 28,
2009

 

Net sales:

 

 

 

 

 

Domestic Rehabilitation Segment

 

$

159,220

 

$

147,204

 

International Segment

 

63,894

 

55,146

 

Domestic Surgical Implant Segment

 

16,962

 

15,303

 

Consolidated net sales

 

$

240,076

 

$

217,653

 

Gross profit:

 

 

 

 

 

Domestic Rehabilitation Segment

 

$

103,972

 

$

96,188

 

International Segment

 

37,729

 

31,505

 

Domestic Surgical Implant Segment

 

13,462

 

11,898

 

Expenses not allocated to segments/Eliminations

 

(2,441

)

(938

)

Consolidated gross profit

 

$

152,722

 

$

138,653

 

Operating income:

 

 

 

 

 

Domestic Rehabilitation Segment

 

$

40,648

 

$

33,742

 

International Segment

 

15,318

 

10,063

 

Domestic Surgical Implant Segment

 

2,748

 

2,460

 

Expenses not allocated to segments/Eliminations

 

(41,143

)

(33,146

)

Consolidated operating income

 

$

17,571

 

$

13,119

 

 

The accounting policies of the reportable segments are the same as the accounting policies of the Company. We allocate resources and evaluate the performance of segments based on net sales, gross profit, operating income and other non-GAAP measures as defined. Moreover, we do not allocate assets to reportable segments because a significant portion of assets are shared by the segments.

 

Geographic Area

 

Following are our net sales by geographic area, based on location of customer (in thousands):

 

 

 

Three Months Ended

 

 

 

April 3,
2010

 

March 28,
2009

 

Net sales:

 

 

 

 

 

United States

 

$

172,504

 

$

162,017

 

Germany

 

21,072

 

16,747

 

Other Europe, Middle East, & Africa

 

25,806

 

28,614

 

Asia Pacific

 

6,233

 

3,051

 

Other

 

14,461

 

7,224

 

 

 

$

240,076

 

$

217,653

 

 

9. INCOME TAXES

 

Income taxes for the interim periods presented have been included in the accompanying condensed consolidated financial statements on the basis of an estimated annual effective tax rate, adjusted for discrete items. The tax expense for these periods differed from the amount which would have been recorded using the U.S. statutory tax rate due primarily to the impact of nondeductible expenses, foreign taxes, and deferred taxes on the assumed repatriation of foreign earnings. Because our current annual financial projection results in a marginal net pre-tax loss, the impact of the nondeductible expenses, foreign taxes, and deferred taxes on the assumed repatriation of foreign earnings causes our projected annualized effective tax rate to be negative.  Given the relationship between fixed dollar tax items and pre-tax financial results, the projected effective tax rate can change materially based on small variations of income.

 

For the three months ended April 3, 2010, we recorded income tax expense of approximately $9.8 million on a pre-tax loss of approximately $23.6 million, resulting in a negative 41.5% effective tax rate.  For the three months ended March 28, 2009, we recorded an income tax benefit of approximately $11.9 million on a pre-tax loss of approximately $26.5 million, resulting in a 44.9% effective tax rate. The difference in the tax benefit and tax expense recorded during the first quarter of 2009 and the first quarter of 2010 is primarily due to differences in the projected annualized effective tax rates for each year as determined by the Company.  In addition, a beneficial impact of a tax law change was recorded during the first quarter of 2009 as a discrete item.

 

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We and our subsidiaries file income tax returns in the U.S. federal jurisdiction, various states and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2005. The Internal Revenue Service (“IRS”) is currently examining the 2005 and 2006 tax years. It is anticipated that the examination will be completed during 2010. At December 31, 2009, our gross unrecognized tax benefits were $19.1 million. For the three months ended April 3, 2010, we did not have any material increases in unrecognized tax benefits. Our total gross unrecognized tax benefits were $19.1 million at April 3, 2010, including $1.6 million related to interest and penalties.  There is a reasonable possibility that the closing of the IRS examination could result in a material reduction to our unrecognized tax benefits within the next twelve months. Due to the fact that the audit has not been finalized, the amount of the unrecognized tax benefits that may be reduced can not be reasonably estimated. Due to our adoption of ASC Topic 805 (formerly SFAS No. 141R, “Business Combinations”) on January 1, 2009, all unrecognized tax benefits will impact our effective tax rate upon recognition. We believe that it is reasonably possible that an increase of $0.2 million in unrecognized tax benefits related to various immaterial state exposures may be necessary within the next twelve months.

 

10. RESTRUCTURING AND RELATED CHARGES

 

In June 2009, we announced our plans to close our Chattanooga manufacturing and distribution facility, located in Hixson, Tennessee, and to integrate the operations of the Chattanooga site into our other existing sites. The transition of our Chattanooga activities is expected to take approximately nine to 12 months to complete. We do not expect to incur additional material cash expenses as a result of the transition.

 

A summary of the activity relating to the restructuring is as follows (in thousands):

 

 

 

Severance &
Employee
Retention

 

Other

 

Total

 

Balance at January 1, 2009

 

 

 

 

Expensed during period

 

4,896

 

479

 

5,375

 

Payments made during period

 

(847

)

(74

)

(921

)

Balance at December 31, 2009

 

4,049

 

405

 

4,454

 

Expensed during period

 

1,111

 

123

 

1,234

 

Payments made during period

 

(1,963

)

(197

)

(2,160

)

Balance at April 3, 2010

 

$

3,197

 

$

331

 

$

3,528

 

 

Expenses incurred related to the transition of our Chattanooga activities are recorded within selling, general and administrative expense in our condensed consolidated statements of operations.

 

11. COMMITMENTS AND CONTINGENCIES

 

The manufacture and sale of orthopedic devices and related products exposes us to a significant risk of product liability claims. From time to time, we have been, and we are currently, subject to a number of product liability claims alleging that the use of our products resulted in adverse effects. Even if we are successful in defending against any liability claims, such claims could nevertheless distract our management, result in substantial costs, harm our reputation, adversely affect the sales of all our products and otherwise harm our business. If there is a significant increase in the number of product liability claims, our business could be adversely affected.

 

We are currently defendants in approximately 80 product liability cases, including a lawsuit in Canada seeking class action status, related to a disposable drug infusion pump product manufactured by two third party manufacturers that we distributed through our Bracing and Supports business unit of our Domestic Rehabilitation segment. We discontinued our sale of these products in the second quarter of 2009. These cases have been brought against the manufacturers and certain distributors of these pumps, and in some cases, the manufacturers of the anesthetics used in these pumps. All of these lawsuits allege that the use of these pumps with certain anesthetics in certain shoulder surgeries over prolonged periods have resulted in cartilage damage to the plaintiffs. We have sought indemnity and tendered the defense of these cases to the two manufacturers who supplied these pumps to us, to their products liability carriers and to our products liability carriers. The products liability carriers for both manufacturers have accepted coverage for our defense of these claims; however, both manufacturers have rejected our tenders of indemnity. The base policy for one of the manufacturers has been exhausted and the excess liability carriers for that manufacturer are not obligated to provide a defense until a

 

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$5 million self-insured retention has been paid. Our products liability carrier has accepted coverage of these cases, subject to a reservation of the right to deny coverage for customary matters, including punitive damages and off-label promotion. The lawsuits allege damages ranging from unspecified amounts to claims between $1.0 million and $10.0 million. These cases are in varying stages from initial pleading and discovery to pre-trial preparation. We could be exposed to material liabilities if our insurance coverage is not available or inadequate and the resources of the two manufacturers, including their respective products liability insurance policies, are unavailable or insufficient to pay the defense costs and settlements or judgments in these cases.

 

We maintain products liability insurance that is subject to annual renewal. Our current policy covers claims reported between July 1, 2009 and June 30, 2010 and provides for coverage (together with excess policies) of up to a limit of $80 million, provided that the top layer of $25 million excess over $55 million covers only claims reported after February 25, 2010 and the next layer down of $10 million excess over $45 million covers only claims reported after February 18, 2010. This coverage is subject to a self-insured retention of $500,000 for claims related to pain pumps described above and claims related to the IceMan cold therapy product, a self-insured retention of $250,000 on claims related to all other invasive products and a self-insured retention of $50,000 on claims related to all other non-invasive products, with an aggregate self-insured retention of $1.0 million for all products liability claims. In addition, the top layer of $25 million excess over $55 million has a separate self-insured retention of $50,000 per claim.  Our prior two products liability policies cover claims reported between July 1, 2007 and February 15, 2008 and between February 15, 2008 and July 1, 2009, respectively.  The 2007-2008 policy provides for coverage (together with excess policies) of up to a limit of $20 million and the 2008-2009 policy provides for coverage (together with excess policies) of up to a limit of $25 million.  Certain of the pain pump cases described above were reported under and are covered by these two policies.  If a products liability claim or series of claims is brought against us for uninsured liabilities or in excess of our insurance coverage, our business could suffer materially. In addition, in certain instances, a products liability claim could also result in our having to recall some of our products, which could result in significant costs to us. On our condensed consolidated balance sheet as of April 3, 2010 and December 31, 2009, we have accrued approximately $1.1 million and $2.0 million, respectively, for expenses related to products liability claims.  The amount accrued is based upon previous claim experience in part due to the fact that in 2003 we exceeded the coverage limits in effect at that time for certain historical product liability claims involving one of our discontinued surgical implant products and such products are excluded from coverage under our current policies.

 

Due to the nature of our business, we are subject to a variety of audits by government agencies and other private interests.  In the third quarter of 2009, we received a Form FDA-483 “Inspectional Observations” in connection with an FDA audit of our Surgical Implant Segment, stating that: (1) we failed to follow our standard operating procedures to ensure that the designs of certain products were correctly transferred into production; (2) we failed to adequately analyze certain quality data to identify existing and potential causes of nonconforming product and quality problems, resulting in disposal or reworking of certain nonconforming parts in the later stages of our production processes; (3) our complaint handling procedures were not well defined to ensure that all complaints are processed in a uniform and timely manner; and (4) we failed to follow our standard operating procedures related to procurement to minimize receipt of nonconforming materials from suppliers. We promptly implemented corrective action that we believe adequately address each Inspectional Observation and submitted a timely response to the FDA. We cannot assure you that the FDA will agree with our actions or will not take further action in the future, including issuing a warning letter related to these observations, seeking injunction, initiating seizure, or delaying review of pending applications.

 

On April 15, 2009, we became aware of a qui tam action filed in Federal Court in Boston, Massachusetts in March 2005 and amended in December 2007 that names us as a defendant along with each of the other companies that manufactures and sells external bone growth stimulators, as well as our principal stockholder, The Blackstone Group, and the principal stockholder of one of the other companies in the bone growth stimulation business. This case is captioned United States ex rel. Beirman v. Orthofix International, N.V., et al., Civil Action No. 05-10557 (D. Mass.). The case was sealed when originally filed and unsealed in March 2009. The plaintiff, or relator, alleges that the defendants have engaged in Medicare fraud and violated Federal and state false claims acts from the time of the original introduction of the devices by each defendant to the present by seeking reimbursement for bone growth stimulators as a purchased item rather than a rental item. The relator also alleges that the defendants are engaged in other marketing practices constituting violations of the Federal and various state anti-kickback statutes. On December 4, 2009, we filed a motion to dismiss the relator’s complaint, and we are currently awaiting a response from the relator. Shortly before becoming aware of the qui tam action, we were advised that our bone growth stimulator business was the subject of an investigation by the Department of Justice (“DOJ”), and on April 10, 2009, we were served with a subpoena under the Health Insurance Portability and Accountability Act (“HIPAA”) seeking numerous documents relating to the marketing and sale by us of bone growth stimulators. On September 21, 2009, we were served with a second HIPAA subpoena related to this DOJ investigation seeking additional documents relating to the marketing and sale by us of bone growth stimulators. We believe that these subpoenas are related to the DOJ’s investigation of the allegations in the qui tam action, although the DOJ has decided not to intervene in the qui tam action at this time. We believe that our marketing practices in the bone growth stimulation business are in compliance with applicable legal standards and we intend to defend this case and investigation vigorously. We can make no assurance as to the resources that will be needed to respond to these matters or the final outcome of such action.

 

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12. RELATED PARTY TRANSACTIONS

 

Blackstone Management Partners V L.L.C. (“BMP”), an affiliate of our major shareholder, provides certain monitoring, advisory and consulting services to us for an annual monitoring fee equal to the greater of $7.0 million or 2% of consolidated EBITDA as defined in the Transaction and Monitoring Fee Agreement, payable in the first quarter of each year. At any time in connection with or in anticipation of a change of control of DJOFL, a sale of all or substantially all of DJOFL’s assets or an initial public offering of common stock of DJOFL, BMP may elect to receive, in lieu of remaining annual monitoring fee payments, a single lump sum cash payment equal to the then-present value of all then-current and future annual monitoring fees payable under the transaction and monitoring fee agreement, assuming a hypothetical termination date of the agreement to be the twelfth anniversary of such election. The monitoring fee agreement will continue until the earlier of the twelfth anniversary of the date of the agreement or such date as DJOFL and BMP may mutually determine. DJOFL will agree to indemnify BMP and its affiliates, directors, officers, employees, agents and representatives from and against all liabilities relating to the services contemplated by the transaction and monitoring fee agreement and the engagement of BMP pursuant to, and the performance of BMP and its affiliates of the services contemplated by, the transaction and monitoring fee agreement. For each of the three month periods ended April 3, 2010 and March 28, 2009, we recognized $1.75 million related to the monitoring fee, which is recorded as a component of selling, general and administrative expense in our condensed consolidated statements of operations.

 

13. DERIVATIVE INSTRUMENTS

 

We operate internationally and are therefore exposed to foreign currency exchange rate fluctuations in the normal course of our business, in particular to changes in the Mexican Peso due to our Mexico-based manufacturing operations that incur costs that are largely denominated in Mexican Pesos. As part of our risk management strategy, we use derivative instruments to hedge portions of our exposure. While our foreign exchange contracts act as economic hedges, we have not designated such instruments as hedges under ASC Topic 815.  Before acquiring a derivative instrument to hedge a specific risk, potential natural hedges are evaluated. Derivative instruments are only utilized to manage underlying exposures that arise from our business operations. Factors considered in the decision to hedge an underlying market exposure include the materiality of the risk, the volatility of the market, the duration of the hedge, and the availability, effectiveness and cost of derivative instruments.  At April 3, 2010, we had foreign exchange forward contracts, with a notional amount of $188.9 million Mexican Pesos, or approximately $14.1 million and an aggregate fair market value of approximately $1.1 million. These foreign exchange forward contracts expire weekly throughout the fiscal year 2010.

 

Additionally, we make use of debt financing as a source of funds and are therefore exposed to interest rate fluctuations in the normal course of business. Our credit facilities are subject to floating interest rates. We manage the risk of unfavorable movements in interest rates by hedging a portion of the outstanding loan balance, thereby locking in a fixed rate on a portion of the principal, reducing the effect of possible rising interest rates and making interest expense more predictable. On November 20, 2007, we entered into an interest rate swap agreement related to the Senior Secured Credit Facility for a notional amount of $515.0 million at a fixed LIBOR rate of 4.205% which expired on December 31, 2009.  In February 2009, we entered into two new non-amortizing interest rate swap agreements.  The first agreement was for a notional amount of $550.0 million at a fixed LIBOR rate of 1.04% beginning in February 2009 which expired on December 31, 2009.  The second agreement is for a notional amount of $750.0 million at a fixed LIBOR rate of 1.88% with a term beginning January 2010 through December 2010.  In August 2009, we entered into four new non-amortizing interest swap agreements with notional amounts aggregating $300.0 million. Each of the four agreements has a term beginning January 2011 through December 2011. The four agreements are at a weighted average fixed LIBOR rate of 2.5825%.  We have designated these interest rate swap agreements as cash flow hedges under ASC Topic 815.

 

In accordance with ASC Topic 820, we follow the three levels of the fair value hierarchy for disclosure of the inputs to valuation. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. At April 3, 2010, the fair value of our interest rate swap agreements and our foreign currency exchange forward contracts were determined through the use of models that consider various assumptions, including time value, yield curves, as well as other relevant economic measures, which are inputs that are classified as Level 2 in the valuation hierarchy.

 

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The following table summarizes our derivative instruments, which, since the fair values reflect gains and losses are, included within our assets and other current and non-current liabilities, in our condensed consolidated balance sheets (in thousands):

 

 

 

April 3,
2010

 

December 31,
2009

 

Assets:

 

 

 

 

 

Foreign exchange contracts

 

$

1,128

 

$

89

 

Total derivative assets

 

$

1,128

 

$

89

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Interest rate swaps

 

$

11,872

 

$

11,244

 

Total derivative liabilities

 

$

11,872

 

$

11,244

 

 

The following table summarizes the effect our derivative instruments have on our condensed consolidated statements of operations (in thousands):

 

 

 

Location of Gain or
(Loss)

 

Amount of Gain or
(Loss)

 

Three Months Ended April 3, 2010

 

 

 

 

 

Foreign exchange contracts

 

Other income (expense), net

 

$

1,128

 

Interest rate swaps

 

Interest expense

 

(3,195

)

Total net loss

 

 

 

$

(2,067

)

 

 

 

 

 

 

Three Months Ended March 28, 2009

 

 

 

 

 

Foreign exchange contracts

 

Other income (expense), net

 

$

(3,006

)

Interest rate swaps

 

Interest expense

 

(3,377

)

Total net loss

 

 

 

$

(6,383

)

 

14. SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

 

DJOFL and its direct wholly-owned subsidiary, Finco, issued the 10.875% Notes with aggregate principal amounts of $575.0 million and $100.0 million on November 20, 2007 and January 20, 2010, respectively. On November 3, 2006, DJOFL and Finco issued the 11.75% Notes with an aggregate principal amount of $200.0 million. Finco was formed solely to act as a co-issuer of the notes, has only nominal assets and does not conduct any operations. The Indentures generally prohibit Finco from holding any assets, becoming liable for any obligations, or engaging in any business activity. The 10.875% Notes are jointly and severally, fully and unconditionally guaranteed, on an unsecured senior basis by all of the DJOFL’s domestic subsidiaries (other than the co-issuer) that are 100% owned, directly or indirectly, by DJOFL (the “Guarantors”). The 11.75% Notes are jointly and severally, fully and unconditionally guaranteed, on an unsecured senior subordinated basis by the Guarantors. Our foreign subsidiaries (the “Non-Guarantors”) do not guarantee the notes. The Guarantors also unconditionally guarantee the Senior Secured Credit Facility.

 

The following tables present the financial position, results of operations and cash flows of DJOFL, the Guarantors, the Non-Guarantors and certain eliminations as of April 3, 2010 and December 31, 2009 and for the three months ended April 3, 2010 and March 28, 2009, respectively.

 

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DJO Finance LLC

 

Unaudited Condensed Consolidating Balance Sheets

As of April 3, 2010

(in thousands)

 

 

 

DJOFL

 

Guarantors

 

Non-
Guarantors

 

Eliminations

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,012

 

$

33,162

 

$

16,865

 

$

 

$

54,039

 

Accounts receivable, net

 

 

115,204

 

36,041

 

 

151,245

 

Inventories, net

 

 

79,742

 

25,138

 

(10,280

)

94,600

 

Deferred tax assets, net

 

 

35,981

 

3,655

 

(146

)

39,490

 

Prepaid expenses and other current assets

 

118

 

22,376

 

3,509

 

 

26,003

 

Total current assets

 

4,130

 

286,465

 

85,208

 

(10,426

)

365,377

 

Property and equipment, net

 

 

72,006

 

13,119

 

(3,603

)

81,522

 

Goodwill

 

 

1,108,702

 

110,184

 

(30,150

)

1,188,736

 

Intangible assets, net

 

 

1,129,679

 

38,203

 

 

1,167,882

 

Investment in subsidiaries

 

1,271,686

 

1,657,685

 

35,804

 

(2,965,142

)

33

 

Intercompany receivable

 

1,059,721

 

 

 

(1,059,721

)

 

Other non-current assets

 

37,893

 

1,389

 

1,399

 

 

40,681

 

Total assets

 

$

2,373,430

 

$

4,255,926

 

$

283,917

 

$

(4,069,042

)

$

2,844,231

 

Liabilities and Membership Equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 

$

38,754

 

$

8,652

 

$

 

$

47,406

 

Long-term debt and capital leases, current portion

 

9,594

 

65

 

2,969

 

 

12,628

 

Other current liabilities

 

48,730

 

53,400

 

18,739

 

 

120,869

 

Total current liabilities

 

58,324

 

92,219

 

30,360

 

 

180,903

 

Long-term debt and capital leases, net of current portion

 

1,800,097

 

75

 

 

 

1,800,172

 

Deferred tax liabilities, net

 

 

315,261

 

14,667

 

 

329,928

 

Intercompany payable, net

 

 

963,527

 

96,194

 

(1,059,721

)

 

Other non-current liabilities

 

 

13,008

 

3,033

 

 

16,041

 

Total liabilities

 

1,858,421

 

1,384,090

 

144,254

 

(1,059,721

)

2,327,044

 

Noncontrolling interests

 

 

 

2,178

 

 

2,178

 

Total membership equity

 

515,009

 

2,871,836

 

137,485

 

(3,009,321

)

515,009

 

Total liabilities and membership equity

 

$

2,373,430

 

$

4,255,926

 

$

283,917

 

$

(4,069,042

)

$

2,844,231

 

 

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DJO Finance LLC

 

Condensed Consolidating Balance Sheets

As of December 31, 2009

(in thousands)

 

 

 

DJOFL

 

Guarantors

 

Non-
Guarantors

 

Eliminations

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,999

 

$

17,389

 

$

20,223

 

$

 

$

44,611

 

Accounts receivable, net

 

 

113,258

 

32,954

 

 

146,212

 

Inventories, net

 

 

80,491

 

23,705

 

(8,316

)

95,880

 

Deferred tax assets, net

 

 

40,474

 

993

 

(1,019

)

40,448

 

Prepaid expenses and other current assets

 

162

 

11,368

 

3,195

 

 

14,725

 

Total current assets

 

7,161

 

262,980

 

81,070

 

(9,335

)

341,876

 

Property and equipment, net

 

 

76,883

 

12,811

 

(2,980

)

86,714

 

Goodwill

 

 

1,108,703

 

82,794

 

 

1,191,497

 

Intangible assets, net

 

 

1,147,504

 

40,173

 

 

1,187,677

 

Investment in subsidiaries

 

1,275,652

 

2,362,165

 

71,566

 

(3,709,383

)

 

Intercompany receivable

 

1,065,693

 

 

 

(1,065,693

)

 

Other non-current assets

 

38,946

 

(1,913

)

5,382

 

 

42,415

 

Total assets

 

$

2,387,452

 

$

4,956,322

 

$

293,796

 

$

(4,787,391

)

$

2,850,179

 

Liabilities and Membership Equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 

$

34,750

 

$

7,393

 

$

1

 

$

42,144

 

Long-term debt and capital leases, current portion

 

12,568

 

140

 

3,218

 

 

15,926

 

Other current liabilities

 

22,165

 

60,992

 

18,419

 

 

101,576

 

Total current liabilities

 

34,733

 

95,882

 

29,030

 

1

 

159,646

 

Long-term debt and capital leases, net of current portion

 

1,796,859

 

83

 

2

 

 

1,796,944

 

Deferred tax liabilities, net

 

 

302,870

 

15,272

 

2,989

 

321,131

 

Intercompany payable, net

 

 

960,790

 

104,903

 

(1,065,693

)

 

Other non-current liabilities

 

 

11,162

 

2,927

 

 

14,089

 

Total liabilities

 

1,831,592

 

1,370,787

 

152,134

 

(1,062,703

)

2,291,810

 

Noncontrolling interests

 

 

 

2,509

 

 

2,509

 

Membership equity

 

555,860

 

3,585,535

 

139,153

 

(3,724,688

)

555,860

 

Total liabilities and membership equity

 

$

2,387,452

 

$

4,956,322

 

$

293,796

 

$

(4,787,391

)

$

2,850,179

 

 

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DJO Finance LLC

 

Unaudited Condensed Consolidating Statements of Operations

For the Three Months Ended April 3, 2010

(in thousands)

 

 

 

DJOFL

 

Guarantors

 

Non-
Guarantors

 

Eliminations

 

Consolidated

 

Net sales

 

$

 

$

210,811

 

$

70,349

 

$

(41,084

)

$

240,076

 

Cost of sales (exclusive of amortization of $8.9 million included below)

 

 

83,564

 

43,688

 

(39,898

)

87,354

 

Gross profit

 

 

127,247

 

26,661

 

(1,186

)

152,722

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

90,095

 

20,431

 

 

110,526

 

Research and development

 

 

4,732

 

839

 

 

5,571

 

Amortization of acquired intangibles

 

 

18,077

 

977

 

 

19,054

 

Operating income

 

 

14,343

 

4,414

 

(1,186

)

17,571

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

10,750

 

803

 

150

 

(11,350

)

353

 

Interest expense

 

(40,342

)

(10,787

)

(933

)

11,350

 

(40,712

)

Other income (expense), net

 

(4,066

)

(25,508

)

(731

)

29,525

 

(780

)

Income (loss) from continuing operations before income taxes

 

(33,658

)

(21,149

)

2,900

 

28,339

 

(23,568

)

Provision (benefit) for income taxes

 

 

8,784

 

984

 

 

9,768

 

Net income (loss)

 

(33,658

)

(29,933

)

1,916

 

28,339

 

(33,336

)

Less: Net income attributable to noncontrolling interests

 

 

 

322

 

 

322

 

Net income (loss) attributable to DJO Finance LLC

 

$

(33,658

)

$

(29,933

)

$

1,594

 

$

28,339

 

$

(33,658

)

 

DJO Finance LLC

 

Unaudited Condensed Consolidating Statements of Operations

For the Three Months Ended March 28, 2009

(in thousands)

 

 

 

DJOFL

 

Guarantors

 

Non-
Guarantors

 

Eliminations

 

Consolidated

 

Net sales

 

$

 

$

186,782

 

$

60,979

 

$

(30,108

)

$

217,653

 

Cost of sales (exclusive of amortization of $9.5 million included below)

 

 

69,096

 

39,566

 

(29,662

)

79,000

 

Gross profit

 

 

117,686

 

21,413

 

(446

)

138,653

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

80,213

 

20,387

 

 

100,600

 

Research and development

 

 

5,062

 

741

 

 

5,803

 

Amortization of acquired intangibles

 

 

18,639

 

492

 

 

19,131