Djo Finance 10-Q 2015 Q1 Quarterly report

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 March 28, 2015

or

¨ 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)

State of 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  ¨    No  x (Note: As of January 1, 2014, the registrant was no longer subject to the filing requirements of Section 13 or 15(d) of the Exchange Act; however, the registrant filed all reports required to be filed during the period it was subject to Section 13 or 15(d) of the Exchange Act.)

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  x    No  ¨

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

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

As of April 20, 2015, 100% of the issuer’s membership interests were owned by DJO Holdings LLC.

DJO Finance LLC

INDEX

		Page Number
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements
	Unaudited Condensed Consolidated Balance Sheets as of March 28, 2015 and December 31, 2014		3
	Unaudited Condensed Consolidated Statements of Operations for the three months ended March 28, 2015 and March 29, 2014		4
	Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 28, 2015 and March 29, 2014		5
	Unaudited Condensed Consolidated Statement of Deficit for the three months ended March 28, 2015		6
	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 28, 2015 and March 29, 2014		7
	Notes to Unaudited Condensed Consolidated Financial Statements		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		36
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		44
Item 4.	Controls and Procedures		44
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings		45
Item 1A.	Risk Factors		46
Item 5.	Other Information		46
Item 6.	Exhibits		47

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PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements

DJO Finance LLC

Unaudited Condensed Consolidated Balance Sheets

(in thousands)

	March 28, 2015			December 31, 2014
Assets
Current assets:
Cash and cash equivalents	$	35,688		$	31,144
Accounts receivable, net		180,821			188,060
Inventories, net		179,700			175,340
Deferred tax assets, net		24,598			24,598
Prepaid expenses and other current assets		13,913			17,172
Total current assets		434,720			436,314
Property and equipment, net		119,036			120,107
Goodwill		1,133,893			1,141,188
Intangible assets, net		844,456			868,031
Other assets		30,783			32,853
Total assets	$	2,562,888		$	2,598,493
Liabilities and Deficit
Current liabilities:
Accounts payable	$	56,186		$	62,960
Accrued interest		55,549			29,600
Current portion of debt obligations		8,950			8,975
Other current liabilities		85,085			99,145
Total current liabilities		205,770			200,680
Long-term debt obligations		2,259,088			2,261,941
Deferred tax liabilities, net		249,523			243,123
Other long-term liabilities		14,177			14,365
Total liabilities	$	2,728,558		$	2,720,109
Commitments and contingencies
Deficit:
DJO Finance LLC membership deficit:
Member capital		840,394			839,781
Accumulated deficit		(987,938	)		(952,412	)
Accumulated other comprehensive loss		(20,761	)		(11,603	)
Total membership deficit		(168,305	)		(124,234	)
Noncontrolling interests		2,635			2,618
Total deficit		(165,670	)		(121,616	)
Total liabilities and deficit	$	2,562,888		$	2,598,493

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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DJO Finance LLC

Unaudited Condensed Consolidated Statements of Operations

(in thousands)

	Three Months Ended
	March 28, 2015			March 29, 2014
Net sales	$	280,101		$	282,744
Costs and operating expenses:
Cost of sales (exclusive of amortization of intangible assets of $7,887 and $8,683 for the three months ended March 28, 2015 and March 29, 2014, respectively)		109,242			115,715
Selling, general and administrative		119,773			123,530
Research and development		8,900			9,738
Amortization of intangible assets		22,109			23,559
		260,024			272,542
Operating income		20,077			10,202
Other expense:
Interest expense, net		(42,821	)		(43,671	)
Other expense, net		(4,151	)		(80	)
		(46,972	)		(43,751	)
Loss before income taxes		(26,895	)		(33,549	)
Income tax provision		(8,330	)		(2,624	)
Net loss		(35,225	)		(36,173	)
Net income attributable to noncontrolling interests		(301	)		(349	)
Net loss attributable to DJO Finance LLC	$	(35,526	)	$	(36,522	)

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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DJO Finance LLC

Unaudited Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

	Three Months Ended
	March 28, 2015			March 29, 2014
Net loss	$	(35,225	)	$	(36,173	)
Other comprehensive loss, net of taxes:
Foreign currency translation adjustments, net of tax benefit (provision) of $492 and $(11) for the three months ended March 28, 2015 and March 29, 2014, respectively		(9,442	)		(303	)
Other comprehensive loss		(9,442	)		(303	)
Comprehensive loss		(44,667	)		(36,476	)
Comprehensive income attributable to non-controlling interests		(17	)		(345	)
Comprehensive loss attributable to DJO Finance LLC	$	(44,684	)	$	(36,821	)

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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DJO Finance LLC

Unaudited Condensed Consolidated Statements of (Deficit) Equity

(in thousands)

	DJO Finance LLC
	Member capital		Accumulated Deficit			Accumulated other comprehensive income (loss)			Total membership (deficit) equity			Non-controlling interests			Total (deficit) equity
Balance at December 31, 2014	$	839,781	$	(952,412	)	$	(11,603	)	$	(124,234	)	$	2,618		$	(121,616	)
Net (loss) income		—		(35,526	)		—			(35,526	)		301			(35,225	)
Other comprehensive loss, net of taxes		—		—			(9,158	)		(9,158	)		(284	)		(9,442	)
Stock-based compensation		613		—			—			613			—			613
Balance at March 28, 2015	$	840,394	$	(987,938	)	$	(20,761	)	$	(168,305	)	$	2,635		$	(165,670	)

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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DJO Finance LLC

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

	Three Months Ended
	March 28, 2015			March 29, 2014
Cash Flows From Operating Activities:
Net loss	$	(35,225	)	$	(36,173	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		8,357			8,459
Amortization of intangible assets		22,109			23,559
Amortization of debt issuance costs and non-cash interest expense		2,288			2,090
Stock-based compensation expense		613			444
Loss (gain) on disposal of assets, net		74			(476	)
Deferred income tax provision		7,291			739
Changes in operating assets and liabilities, net of acquired assets and liabilities:
Accounts receivable		3,208			1,607
Inventories		(8,101	)		161
Prepaid expenses and other assets		2,782			4,417
Accrued interest		25,950			20,103
Accounts payable and other current liabilities		(11,690	)		(252	)
Net cash provided by operating activities		17,656			24,678
Cash Flows From Investing Activities:
Purchases of property and equipment		(8,731	)		(14,086	)
Cash paid in connection with acquisitions, net of cash acquired		—			(4,587	)
Other investing activities, net		—			(501	)
Net cash used in investing activities		(8,731	)		(19,174	)
Cash Flows From Financing Activities:
Proceeds on long term obligations		17,000			8,000
Repayments on long term obligations		(20,019	)		(8,023	)
Cash paid in connection with the cancellation of vested options		—			(2,001	)
Net cash used in financing activities		(3,019	)		(2,024	)
Effect of exchange rate changes on cash and cash equivalents		(1,362	)		(27	)
Net increase in cash and cash equivalents		4,544			3,453
Cash and cash equivalents, beginning of period		31,144			43,578
Cash and cash equivalents, end of period	$	35,688		$	47,031
Supplemental disclosures of cash flow information:
Cash paid for interest	$	14,574		$	21,465
Cash paid for taxes, net	$	2,302		$	1,072

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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Notes to Unaudited Condensed Consolidated Financial Statements

1. ORGANIZATION AND BASIS OF PRESENTATION

Organization and Business

We are a global developer, manufacturer and distributor of medical devices that provide solutions for musculoskeletal health, vascular health and pain management. Our products address the continuum of patient care from injury prevention to rehabilitation after surgery, injury or from degenerative disease, enabling people to regain or maintain their natural motion. Our products are used by orthopedic specialists, spine surgeons, primary care physicians, pain management specialists, physical therapists, podiatrists, chiropractors, athletic trainers and other healthcare professionals. Our product lines include rigid and soft orthopedic bracing, hot and cold therapy, bone growth stimulators, vascular therapy systems and compression garments, therapeutic shoes and inserts, electrical stimulators used for pain management and physical therapy products. Our surgical implant business offers a comprehensive suite of reconstructive joint products for the hip, knee and shoulder.

DJO Finance LLC (DJOFL) is a wholly owned indirect subsidiary of DJO Global, Inc. (DJO). Substantially all business activities of DJO are conducted by DJOFL and its wholly owned subsidiaries. Except as otherwise indicated, references to “us,” “we,” “DJOFL,” “our,” or “the Company,” refers to DJOFL and its consolidated subsidiaries.

Segment Reporting

We market and distribute our products through four operating segments, Bracing and Vascular, Recovery Sciences, Surgical Implant, and International. Our Bracing and Vascular, Recovery Sciences, and Surgical Implant segments generate their revenues within the United States. Our Bracing and Vascular segment offers rigid knee braces, orthopedic soft goods, cold therapy products, vascular systems, compression therapy products and therapeutic footwear for the diabetes care market. Our Recovery Sciences segment offers home electrotherapy, iontophoresis, home traction products, bone growth stimulation products and clinical physical therapy equipment. Our Surgical Implant segment offers a comprehensive suite of reconstructive joint products for the knee, hip and shoulder. Our International segment offers all of our products to customers outside the United States. See Note 13 for additional information about our reportable segments.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates and assumptions are used in accounting for, among other things, contractual allowances, rebates, product returns, warranty obligations, allowances for doubtful accounts, valuation of inventories, self-insurance reserves, income taxes, loss contingencies, fair values of derivative instruments, fair values of long-lived assets and any related impairments, capitalization of costs associated with internally developed software and stock-based compensation. Actual results could differ from those estimates.

Basis of Presentation

We consolidate the results of operations of our 50% owned subsidiary, Medireha GmbH (Medireha), and reflect the 50% share of results not owned by us as non-controlling interests in our Consolidated Statements of Operations. We maintain control of Medireha through certain rights that enable us to prohibit certain business activities that are not consistent with our plans for the business and provide us with exclusive distribution rights for products manufactured by Medireha.

Interim Reporting

The accompanying Unaudited Condensed Consolidated Financial Statements include our accounts and all voting interest entities where we exercise a controlling financial interest through the ownership of a direct or indirect majority voting interest. All significant intercompany accounts and transactions have been eliminated in consolidation. Our Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with GAAP and with the instructions to Form 10–Q and Article 10 of Regulation S–X for interim financial information. Accordingly, these financial statements do not include all of the information required by GAAP or Securities and Exchange Commission (SEC) rules and regulations for complete annual financial statements. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results of operations for the interim periods presented. The results of operations for any interim period are not

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necessarily indicative of results for the full year. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10–K for the year ended December 31, 2014.

Recent Accounting Standards

In April 2014, the FASB issued an accounting standards update, which includes amendments that change the requirements for reporting discontinued operations and require additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations—that is, a major effect on the organization’s operations and financial results should be presented as discontinued operations. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment. Additionally, the update requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The guidance is effective prospectively for fiscal years beginning after December 15, 2014 and interim periods within annual periods beginning on or after December 15, 2015. The adoption of this standard has the potential to impact the Company’s accounting for and disclosure of any future discontinued operations.

In May 2014, the FASB issued an accounting standards update related to revenue from contracts with customers. The new standard provides a five-step approach to be applied to all contracts with customers. The accounting standards update also requires expanded disclosures about revenue recognition. The guidance is effective for fiscal years beginning after December 15, 2016 and interim periods within that reporting period. Early adoption is not permitted. The Company is currently evaluating the new guidance to determine the impact it may have to its consolidated financial statements.

In June 2014, the FASB issued an accounting standards update related to accounting for share-based payments. The standard requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The guidance is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2015. Early application is permitted. Adoption of this new guidance is not expected to have a material effect on the Company’s financial statements.

In August 2014, the FASB issued an accounting standards update related to going concern disclosures. The standard requires an entity’s management to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. The guidance is effective for annual reporting periods ending after December 15, 2016, and interim periods thereafter. Early application is permitted. Adoption of this new guidance is not expected to have a material effect on the Company’s financial statements.

2. ACCOUNTS RECEIVABLE RESERVES

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

	Three Months Ended
	March 28, 2015			March 29, 2014
Balance, beginning of period	$	41,402		$	32,957
Provision for doubtful accounts		7,895			9,258
Write-offs, net of recoveries		(4,621	)		(8,507	)
Balance, end of period	$	44,676		$	33,708

Our allowance for sales returns balance was $3.6 million and $3.6 million as of March 28, 2015 and March 29, 2014, respectively.

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3. INVENTORIES

Inventories consist of the following (in thousands):

	March 28, 2015			December 31, 2014
Components and raw materials	$	57,471		$	59,578
Work in process		6,581			5,718
Finished goods		108,645			103,042
Inventory held on consignment		31,416			30,978
		204,113			199,316
Inventory reserves		(24,413	)		(23,976	)
	$	179,700		$	175,340

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
	March 28, 2015			March 29, 2014
Balance, beginning of period	$	23,976		$	23,686
Provision charged to costs of sales		1,996			1,758
Write-offs, net of recoveries		(1,559	)		(163	)
Balance, end of period	$	24,413		$	25,281

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

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4. LONG-LIVED ASSETS

Goodwill

Changes in the carrying amount of goodwill for the three months ended March 28, 2015 are presented in the table below (in thousands):

	Bracing & Vascular		Recovery Sciences			Surgical Implant			International			Total
Balance, beginning of period
Goodwill	$	483,258	$	495,999		$	47,406		$	340,631		$	1,367,294
Accumulated impairment losses		—		(178,700	)		(47,406	)		—			(226,106	)
		483,258		317,299			—			340,631			1,141,188
Acquisition		—		—			—			—			—
Foreign currency translation		—		—			—			(7,295	)		(7,295	)
Balance, end of period
Goodwill		483,258		495,999			47,406			333,336			1,359,999
Accumulated impairment losses		—		(178,700	)		(47,406	)		—			(226,106	)
	$	483,258	$	317,299		$	—		$	333,336		$	1,133,893

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Intangible Assets

Identifiable intangible assets consisted of the following (in thousands):

March 28, 2015	Gross Carrying Amount		Accumulated Amortization			Intangible Assets, Net
Definite-lived intangible assets:
Customer relationships	$	566,784	$	(352,566	)	$	214,218
Patents and technology		486,306		(271,859	)		214,447
Trademarks and trade names		25,831		(10,520	)		15,311
Distributor contracts and relationships		4,738		(3,506	)		1,232
Non-compete agreements		6,707		(4,937	)		1,770
	$	1,090,366	$	(643,388	)		446,978
Indefinite-lived intangible assets:
Trademarks and trade names							397,478
Net identifiable intangible assets						$	844,456

December 31, 2014	Gross Carrying Amount		Accumulated Amortization			Intangible Assets, Net
Definite-lived intangible assets:
Customer relationships	$	569,360	$	(341,353	)	$	228,007
Patents and technology		486,466		(264,132	)		222,334
Trademarks and trade names		25,970		(9,902	)		16,068
Distributor contracts and relationships		4,771		(3,401	)		1,370
Non-compete agreements		6,824		(4,723	)		2,101
	$	1,093,391	$	(623,511	)	$	469,880
Indefinite-lived intangible assets:
Trademarks and trade names							398,151
Net identifiable intangible assets						$	868,031

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Our definite lived intangible assets are being amortized using the straight line method over their remaining weighted average useful lives of 4.9 years for customer relationships, 8.1 years for patents and technology, 2.5 years for distributor contracts and relationships, 6.0 years for trademarks and trade names, and 2.0 years for non-compete agreements. Based on our amortizable intangible asset balance as of March 28, 2015, we estimate that amortization expense will be as follows for the next five years and thereafter (in thousands):

Remaining 2015	$	66,077
2016		83,704
2017		72,569
2018		62,426
2019		51,718
Thereafter		110,484
	$	446,978

5. OTHER CURRENT LIABILITIES

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

	March 28, 2015		December 31, 2014
Accrued wages and related expenses	$	31,473	$	32,220
Accrued commissions		13,195		16,611
Accrued rebates		8,681		12,981
Accrued other taxes		3,870		4,987
Accrued professional expenses		3,663		2,682
Income taxes payable		599		2,477
Deferred tax liability		343		343
Other accrued liabilities		23,261		26,844
	$	85,085	$	99,145

6. DERIVATIVE INSTRUMENTS

From time to time, we use derivative financial instruments to manage interest rate risk related to our variable rate credit facilities and risk related to foreign currency exchange rates. Our objective is to reduce the risk to earnings and cash flows associated with changes in interest rates and changes in foreign currency exchange rates. Before acquiring a derivative instrument to hedge a specific risk, we evaluate potential natural hedges. 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. We do not use derivative instruments for speculative or trading purposes.

All derivatives, whether designated as hedging relationships or not, are recorded on the balance sheet at fair value. The fair value of our derivatives is determined through the use of models that consider various assumptions, including time value, yield curves and other relevant economic measures which are inputs that are classified as Level 2 in the fair value hierarchy. 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. Our foreign exchange contracts have not been designated as hedges, and accordingly, changes in the fair value of the derivatives are recorded in income (loss).

Foreign Exchange Rate Contracts. In prior periods, we have utilized Mexican Peso (MXN) foreign exchange forward contracts to hedge a portion of our exposure to fluctuations in foreign exchange rates, as our Mexico-based manufacturing operations incur costs that are largely denominated in MXN. As of March 28, 2015, we did not have any outstanding foreign currency exchange forward contracts. While our foreign exchange forward contracts act as economic hedges, we have not designated such instruments as hedges for accounting purposes. Therefore, gains and losses resulting from changes in the fair values of these derivative instruments are recorded in Other income (expense), net, in our accompanying Unaudited Condensed Consolidated Statements of Operations.

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Information regarding the notional amounts of our foreign exchange forward contracts is presented in the table below (in thousands):

	Notional Amount (MXN)				Notional Amount (USD)
	March 28, 2015		December 31, 2014		March 28, 2015		December 31, 2014
Foreign exchange contracts not designated as hedges	$	—	$	7,682	$	—	$	526

The following table summarizes the fair value of derivative instruments in our Unaudited Condensed Consolidated Balance Sheets (in thousands):

	Balance Sheet Location	March 28, 2015		December 31, 2014
Derivative Liabilities:
Foreign exchange forward contracts not designated as hedges	Other current liabilities	$	—	$	4

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The following table summarizes the effect our derivative instruments have on our Unaudited Condensed Consolidated Statements of Operations (in thousands):

		Three Months Ended,
	Location of gain (loss)	March 28, 2015		March 29, 2014
Foreign exchange forward contracts not designated as hedges	Other income, net	$	4	$	70

7. FAIR VALUE MEASUREMENTS

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. Our assessment of the significance of a particular input to the fair value measurements requires judgment and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.

During the year ended December 31, 2014, we remeasured the fair value of contingent consideration related to our January 2014 acquisition of Speetec. We initially valued the contingent consideration at $1.6 million which equaled approximately 25% of the total potential contingent consideration of $7.3 million. The valuation was based on the probability weighted average estimate of achievement of revenue targets for 2014 and 2015. Our remeasurement of the fair value based on the probability of achieving the Speetec revenue targets and the discounted present value of the current estimate of the future contingent payments reduced the net fair value of the contingent consideration to zero. This fair value measurement is categorized within Level 3 of the fair value hierarchy.

As of March 28, 2015, the balance of financial assets and liabilities measured at fair value on a recurring basis was zero.

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2014 (in thousands):

As of December 31, 2014	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Recorded Balance
Liabilities:
Foreign exchange forward contracts not designated as hedges	$	—	$	4	$	—	$	4
Contingent consideration	$	—	$	—	$	—	$	—

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8. DEBT

Debt obligations consist of the following (in thousands):

	March 28, 2015			December 31, 2014
Senior secured credit facilities:
Revolving credit facility	$	14,000		$	17,000
Term Loan:
$884.6 million New Tranche B term loans, net of unamortized original issuance discount of $4.6 million and $5.1 million as of March 28, 2015 and December 31, 2014, respectively		879,917			879,476
8.75% Second priority senior secured notes, including unamortized original issue premium of $4.0 million and $4.4 million as of March 28, 2015 and December 31, 2014, respectively		334,083			334,377
9.875% Senior unsecured notes		440,000			440,000
7.75% Senior unsecured notes		300,000			300,000
9.75% Senior subordinated notes		300,000			300,000
Other		38			63
Total debt		2,268,038			2,270,916
Current maturities		(8,950	)		(8,975	)
Long-term debt	$	2,259,088		$	2,261,941

Senior Secured Credit Facilities

Our senior secured credit facilities consist of term loans and a $100.0 million revolving credit facility, originally entered into on November 20, 2007 and subsequently amended and restated on March 20, 2012.

On March 21, 2013, we entered into an amendment to the senior secured credit facilities which, among other things, (1) provided for the issuance of $421.4 million of additional term loans issued at par, the proceeds of which were used to prepay existing term loans; (2) extended the maturity of the term loans issued under the original senior secured credit facilities to September 15, 2017 (“extended term loans”); (3) combined the additional term loans and the extended term loans into one new tranche (“tranche B term loans”); (4) reduced the interest rate margin applicable to all borrowings under the senior secured credit facilities; and (5) set the senior secured first lien leverage ratio covenant at a level of 4.25x for the duration of the agreement.

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On April 8, 2014, we entered into an amendment (the “Amendment”) to the senior secured credit facilities that, among other things, (1) provided for the issuance of $851.2 million of refinancing term loans (the “Refinancing Term Loans”) at par, the proceeds of which were used to prepay existing tranche B term loans; (2) provided for the issuance of $40.0 million of incremental term loans (the “Incremental Term Loans”) at par, the proceeds of which were used, among other things, to prepay the loans then-outstanding under the revolving credit facility and fees and expenses associated with the Amendment; (3) combined the Refinancing Term Loans and the Incremental Term Loans into one new tranche ( the “New Tranche B Term Loans”); (4) reduced the interest rate margin applicable to all borrowings (including the revolving borrowing) under the senior secured credit facilities; and (5) set the senior secured first lien leverage ratio covenant at a level of 4.75x for the duration of the agreement. The remaining unamortized original issue discounts from the previous term loan issuances are being amortized over the term of the New Tranche B Term Loans using the effective interest method.

As of March 28, 2015, the market values of our New Tranche B Term Loans and drawings under our revolving credit facility were $886.8 million and $12.9 million, respectively. We determine market value using trading prices for the senior secured credit facilities on or near that date. This fair value measurement is categorized within Level 2 of the fair value hierarchy.

Interest Rates. Effective April 8, 2014, the interest rate margins applicable to borrowings under the senior secured revolving credit facilities are, at our option, either (a) the Eurodollar rate, plus 325 basis points or (b) a base rate determined by reference to the highest of (1) the prime rate, (2) the federal funds rate, plus 0.50% and (3) the Eurodollar rate for a one-month interest period, plus in each case 325 basis points. The interest rate margins applicable to the New Tranche B Term Loans are, at our option, either (a) the Eurodollar rate plus 325 basis points or (b) a base rate plus 325 basis points. There is a minimum LIBOR rate applicable to the Eurodollar component of interest rates on New Tranche B Term Loans of 1.00%. The applicable margin for borrowings under the senior secured revolving credit facilities may be reduced, subject to our attaining certain leverage ratios. As of March 28, 2015, our weighted average interest rate for all borrowings under the senior secured credit facilities was 4.24%.

Fees. In addition to paying interest on outstanding principal under the senior secured credit facilities, we are required to pay a commitment fee to the lenders under the senior secured revolving credit facilities with respect to the unutilized commitments thereunder. The current commitment fee rate is 0.50% per annum, subject to step-downs based upon the achievement of 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 New Tranche B Term Loans in an amount equal to 1.00% of the funded total principal amount through June 2017, with any remaining amount payable in full at maturity in September 2017.

Prepayments. The senior secured credit facilities require 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 in the credit agreement relating to the senior secured credit facilities (such agreement, the “Credit Agreement”); (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 us and our restricted subsidiaries, subject to certain exceptions, including a 100% reinvestment right if reinvested or committed to be reinvested within 15 months of such asset sale or disposition so long as such reinvestment is completed within 180 days thereafter; and (3) 100% of the net cash proceeds from the issuance or incurrence of debt by us and our restricted subsidiaries, other than proceeds from debt permitted to be incurred under the senior secured credit facilities and related amendments. Any mandatory prepayments are applied to the term loan facility in direct order of maturity. We were not required to make any such prepayments in the three months ended March 28, 2015.

Subject to certain exceptions, voluntary prepayments of the New Tranche B Term Loans within one year of the effective date of the Amendment are subject to a 1.0% “soft call” premium, while other voluntary prepayments of outstanding loans under the senior secured credit facilities may be made 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.

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

All obligations under the senior secured credit facilities, and the guarantees of those obligations, are secured by pledges of 100% of our capital stock, 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 us or one of the Guarantors, and a security interest in, and mortgages on, substantially all tangible and intangible assets of DJO Holdings, DJOFL and each Guarantor.

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Certain Covenants and Events of Default. The senior secured credit facilities contain 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 facilities require us to maintain a maximum senior secured first lien leverage ratio of consolidated senior secured first lien debt to Adjusted EBITDA (as defined in the Credit Agreement) of 4.75:1 for the trailing twelve months ended March 28, 2015. The senior secured credit facilities also contain certain customary affirmative covenants and events of default. As of March 28, 2015, our actual senior secured first lien net leverage ratio was 3.06:1, and we were in compliance with all other applicable covenants.

8.75% Second Priority Senior Secured Notes

On March 20, 2012 and October 1, 2012, we issued $330.0 million aggregate principal amount of 8.75% second priority senior secured notes (8.75% Notes) maturing on March 15, 2018. The 8.75% Notes are guaranteed jointly and severally and on a senior secured basis by each of DJOFL’s existing and future direct and indirect wholly-owned domestic subsidiaries that guarantee any of DJOFL’s indebtedness, or any indebtedness of DJOFL’s domestic subsidiaries, or is an obligor under the senior secured credit facilities.

Pursuant to a second lien security agreement, the 8.75% Notes are secured by second priority liens, subject to permitted liens, on certain of our assets that secure borrowings under the senior secured credit facilities.

As of March 28, 2015, the market value of the 8.75% Notes was $345.7 million. We determined market value using trading prices for the 8.75% Notes on or near that date. This fair value measurement is categorized within Level 2 of the fair value hierarchy.

Optional Redemption. Under the agreement governing the 8.75% Notes (8.75% Indenture), prior to March 15, 2015, we have the option to redeem some or all of the 8.75% 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 March 15, 2015, we may redeem some or all of the 8.75% Notes at a redemption price of 104.375% of the then outstanding principal balance, plus accrued and unpaid interest. The redemption price decreases to 102.188% and 100% of the then outstanding principal balance at March 15, 2016 and 2017, respectively, plus accrued and unpaid interest. Additionally, from time to time, before March 15, 2015, we may redeem up to 35% of the 8.75% Notes at a redemption price equal to 108.75% of the then outstanding principal balance, plus accrued and unpaid interest, 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 8.75% Notes issued remains outstanding.

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9.875% Senior Unsecured Notes

On October 1, 2012, we issued $440.0 million aggregate principal amount of new 9.875% senior unsecured notes (9.875% Notes) maturing on April 15, 2018. The 9.875% Notes are guaranteed jointly and severally and on an unsecured senior basis by each of DJOFL’s existing and future direct and indirect wholly owned domestic subsidiaries that guarantee any of DJOFL’s indebtedness or any indebtedness of DJOFL’s domestic subsidiaries or is an obligor under DJOFL’s senior secured credit facilities.

As of March 28, 2015, the market value of the 9.875% Notes was $460.9 million. We determined market value using trading prices for the 9.875% Notes on or near that date. This fair value measurement is categorized within Level 2 of the fair value hierarchy.

Optional Redemption. Under the agreement governing the 9.875% Notes (the 9.875% Indenture), prior to April 15, 2015, we have the option to redeem some or all of the 9.875% 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 April 15, 2015, we may redeem some or all of the 9.875% Notes at a redemption price of 104.938% of the then outstanding principal balance plus accrued and unpaid interest. The redemption price decreases to 102.469% and 100% of the then outstanding principal balance at April 2016 and 2017, respectively. Additionally, from time to time, before April 15, 2015, we may redeem up to 35% of the 9.875% Notes at a redemption price equal to 109.875% of the principal amount then outstanding, plus accrued and unpaid interest, 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 9.875% Notes issued remains outstanding.

7.75% Senior Unsecured Notes

On April 7, 2011, we issued $300.0 million aggregate principal amount of 7.75% senior unsecured notes (7.75% Notes) maturing on April 15, 2018. The 7.75% Notes are guaranteed jointly and severally and on a senior unsecured basis by each of DJOFL’s existing and future direct and indirect wholly-owned domestic subsidiaries that guarantee any of DJOFL’s indebtedness, or any indebtedness of DJOFL’s domestic subsidiaries, or is an obligor under the senior secured credit facilities.

As of March 28, 2015, the market value of the 7.75% Notes was $306.8 million. We determined market value using trading prices for the 7.75% Notes on or near that date. This fair value measurement is categorized within Level 2 of the fair value hierarchy.

Optional Redemption. Under the agreement governing the 7.75% Notes (the 7.75% Indenture), prior to April 15, 2014, we have the option to redeem some or all of the 7.75% 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. As of April 15, 2014, we were able to redeem some or all of the 7.75% Notes at a redemption price of 105.813% of the then outstanding principal balance plus accrued and unpaid interest. The redemption price decreases to 103.875%, 101.938% and 100% of the then outstanding principal balance at April 15, 2015, 2016 and 2017, respectively.

9.75% Senior Subordinated Notes

On October 18, 2010, we issued $300.0 million aggregate principal amount of 9.75% senior subordinated notes (9.75% Notes) maturing on October 15, 2017. The 9.75% Notes are guaranteed jointly and severally and on an unsecured senior basis by each of DJOFL’s existing and future direct and indirect wholly-owned domestic subsidiaries that guarantee any of DJOFL’s indebtedness, or any indebtedness of DJOFL’s domestic subsidiaries, or is an obligor under the senior secured credit facilities.

As of March 28, 2015, the market value of the 9.75% Notes was $308.3 million. We determined market value using trading prices for the 9.75% Notes on or near that date. This fair value measurement is categorized within Level 2 of the fair value hierarchy.

Optional Redemption. Under the agreement governing the 9.75% Notes (the 9.75% Indenture), prior to October 15, 2013, we have the option to redeem some or all of the 9.75% 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. As of October 15, 2014, we were able to redeem some or all of the 9.75% Notes at a redemption price 104.875% of the then outstanding principal balance, plus accrued and unpaid interest. The redemption price decreases to 102.438% and 100% of the then outstanding principal balance at October 15, 2015 and 2016, respectively.

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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 its 8.75% Notes, 9.875% Notes, 7.75% Notes, and 9.75% Notes (collectively, the Notes), DJOFL will be required to make an offer to repurchase all of the Notes at 101% of the then outstanding principal balance, plus accrued and unpaid interest.

Covenants

The 8.75% Indenture, the 9.75% Indenture, the 9.875% Indenture and the 7.75% Indenture (collectively, the Indentures) each contain covenants limiting, among other things, our and our restricted subsidiaries’ ability to (i) 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, (ii) make certain investments, (iii) sell certain assets, (iv) create liens on certain assets to secure debt, (v) consolidate, merge, sell or otherwise dispose of all or substantially all of our assets, (vi) enter into certain transactions with affiliates, or (vii) designate our subsidiaries as unrestricted subsidiaries. As of March 28, 2015, we were in compliance with all applicable covenants.

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 covenants. A breach of any of these covenants in the future could result in a default under the Agreement or the Indentures, at which time the lenders could elect to declare all amounts outstanding under the senior secured credit facilities to be immediately due and payable. Any such acceleration would also result in a default under the Indentures.

Debt Issuance Costs

As of March 28, 2015 and December 31, 2014, we had $26.5 million and $28.6 million, respectively, of unamortized debt issuance costs, which are included in Other Assets in our Unaudited Condensed Consolidated Balance Sheets.

For the three months ended March 28, 2015 and March 29, 2014, amortization of debt issuance costs was $2.1 million and $1.9 million, respectively. Amortization of debt issuance costs was included in Interest expense in our Unaudited Condensed Consolidated Statements of Operations for each of the periods presented.

9. INCOME TAXES

Income taxes for the interim periods presented have been included in our Unaudited Condensed Consolidated Financial Statements on the basis of an estimated annual effective tax rate, adjusted for discrete items. The income tax expense for these periods differed from the amounts which would have been recorded using the U.S. statutory tax rate due primarily to certain valuation allowances provided against deferred tax assets, the impact of nondeductible expenses, foreign taxes, and deferred taxes on the assumed repatriation of foreign earnings.

For the three months ended March 28, 2015, we recorded income tax expense of approximately $8.3 million on pre-tax losses of $26.9 million, resulting in a negative effective tax rate of 31.0%. For the three months ended March 29, 2014, we recorded income tax expense of $2.6 million on pre-tax losses of $33.5 million, resulting in a negative effective tax rate of 7.8%.

Our tax rates are negative because our U.S. federal tax losses, and certain state tax losses, are unavailable to offset income taxes arising in other states and in the foreign jurisdictions where we are subject to tax. In addition, we do not currently recognize a tax benefit for our US and state tax loss carryovers because we cannot conclude that it is more likely than not they will offset future taxable income.

We record net deferred tax assets to the extent we conclude that it is more likely than not that the related deferred tax assets will be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. At this time, we cannot conclude that it is more likely than not that the benefit from certain U.S. federal and state net operating loss carryforwards will be realized. Accordingly, we have provided a valuation allowance of $15.0 million on the deferred tax assets related to the net operating loss carryforwards generated in the three months ended March 28, 2015. If our assumptions change and we

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determine that it is more likely than not that we will be able to realize the deferred tax assets related to these net operating losses, reversal of the valuation allowances we have recorded against those deferred tax assets will be recognized as a reduction of income tax expense. The establishment of valuation allowances does not preclude us from utilizing our loss carryforwards or other deferred tax assets in the future and does not impact our cash resources.

We and our subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years before 2010.

At March 28, 2015, our gross unrecognized tax benefits were $14.1 million reflecting an increase of $0.2 million from the unrecognized amount of $13.9 million at December 31, 2014. As of March 28, 2015, we have $2.3 million accrued for interest and penalties related to these unrecognized tax benefits. To the extent all or a portion of our gross unrecognized tax benefits are recognized in the future, no U.S. federal tax benefit for related state income tax deductions would result due to the existence of the U.S. federal valuation allowance. We anticipate that approximately $0.4 million aggregate of unrecognized tax benefits each of which are individually immaterial will decrease in the next twelve months due to the expiration of statutes of limitation. As of March 28, 2015, we have unrecognized various foreign and U.S. state tax benefits of approximately $5.6 million, which, if recognized, would impact our effective tax rate in future periods.

10. STOCK OPTION PLANS AND STOCK-BASED COMPENSATION

Stock Option Plan

We have one active equity compensation plan, the DJO 2007 Incentive Stock Plan (2007 Plan) under which we are authorized to grant awards of restricted and unrestricted stock, options, and other stock-based awards based on the shares of common stock of our indirect parent, DJO, subject to adjustment in certain events. The total number of shares available to grant under the 2007 plan is 10,575,529.

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.

Options granted prior to 2012 vest as follows: one-third of each stock option grant vests over a specified period of time contingent solely upon the awardees’ continued employment with us (Time-Based Options). Another one-third of each stock option grant will vest upon achieving a minimum return of money on invested capital (MOIC), as defined, with respect to Blackstone’s aggregate investment in DJO’s capital stock, to be achieved by Blackstone following a liquidation of all or a portion of its investment in DJO’s capital stock (Market Return Options). The final one-third of each stock option grant will vest based upon achieving an increased minimum return of MOIC, as defined, with respect to Blackstone’s aggregate investment in DJO’s capital stock, to be achieved by Blackstone following a liquidation of all or a portion of its investment in DJO’s capital stock (Enhanced Market Return Options).

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Options granted to employees in 2012 vest in four equal installments beginning in 2012 and for each of the three calendar years following 2012, with each such installment vesting only if the final reported financial results for such year show that the Adjusted EBITDA for such year equaled or exceeded the Adjusted EBITDA amount in the financial plan approved by DJO’s Board of Directors for such year (Performance Options). In the event that the Adjusted EBITDA in any of such four years falls short of the amount of Adjusted EBITDA in the financial plan for that year, the installment that did not therefore vest at the end of such year shall be eligible for subsequent vesting at the end of the four year vesting period if the cumulative Adjusted EBITDA for such four years equals or exceeds the cumulative Adjusted EBITDA in the financial plans for such four years and the Adjusted EBITDA in the fourth vesting year equals or exceeds the Adjusted EBITDA in the financial plan for such year. In addition, in the event Blackstone achieves a minimum return on its aggregate investment in DJO’s capital stock following a liquidation of all or a portion of its investment in DJO’s capital stock, any unvested installments from prior years and all installments for future years shall thereupon vest.

In February 2013, 310,000 options previously granted to new employees in 2012 were amended to convert one-third of such options into Time-Based Options, with the remaining two-thirds continuing to be Performance Options. Additionally, all 2012 Performance Options were amended to allow for vesting of the 2012 Adjusted EBITDA tranche if the 2013 Adjusted EBITDA results equal or exceed an enhanced amount of Adjusted EBITDA over the amount reflected in the 2013 financial plan. Options granted in 2013 and 2014 to existing employees had the same terms as the Performance Options described above and options granted to new employees in 2013 and 2014 had the same terms as the options amended in February 2013.

In December 2013 and December 2014, options were granted to employees following the net exercise of their Rollover Options which were scheduled to expire in December 2013 and December 2014, respectively. These new options were fully vested on the date of grant and have a term of ten years (“Vested Options”).

In February 2014, all 2012 and 2013 Performance Options were amended to allow for vesting of the 2012 and 2013 Adjusted EBITDA tranches if the 2014 Adjusted EBITDA results equal or exceed an enhanced amount of Adjusted EBITDA reflected in the 2014 financial plan.

Except for options granted to the Chairman of the Board and two other board members as described below, options are typically granted annually to members of our Board of Directors who are not affiliates of Blackstone (referred to as Director Service Options). The Director Service Options vest in increments of 33 1/3% per year on each of the first through third anniversary dates of the grant date, contingent upon the optionee’s continued service as a director. The options granted to the Chairman of the Board and the two other board members vest as follows: one-third of the stock option grant vests in increments of 33 1/3% per year on each of the first through third anniversary dates from the grant date contingent upon the optionee’s continued service as a director; one-third of the stock option grant will vest in the same manner as the Market Return Options; and one-third of the stock option grant will vest in the same manner as the Enhanced Market Return Options.

Stock-Based Compensation

During the three months ended March 28, 2015, the compensation committee granted 261,121 options to employees, of which 215,834 were Performance Options, 24,166 were Time-Based Options and 21,121 were Vested Options. Additionally, the compensation committee granted 23,000 Director Performance Options to members of the Board of Directors. The weighted average grant date fair values of the Time-Based Options, the Vested Options, and the Director Options, granted during the three months ended March 28, 2015 were $6.07, $5.27, and $6.92, respectively.

During the three months ended March 29, 2014, the compensation committee granted 362,500 options to employees, of which 287,497 were Performance Options and 75,003 were Time-Based Options. The weighted average grant date fair values of the Time-Based Options granted during the three months ended March 29, 2014 were $6.08.

The following table summarizes certain assumptions we used to estimate the fair value of the Time-Based Options, the Vested Options and the Director Service Options granted:

	Three Months Ended
	March 28, 2015			March 29, 2014
Expected volatility		33.3	%		33.2	%
Risk-free interest rate		1.5%-2.0	%		2.0	%
Expected term until exercise		5.1-8.3			6.4
Expected dividend yield		0.0	%		0.0	%

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We recorded non-cash stock-based compensation expense during the periods presented as follows (in thousands):

	Three Months Ended
	March 28, 2015		March 29, 2014
Cost of sales	$	30	$	23
Operating expenses:
Selling, general and administrative		579		418
Research and development		4		3
	$	613	$	444

We have determined that it is not probable that we will meet the Adjusted EBITDA targets related to the Performance Options granted. As such, we did not recognize expense for any of the options which had the potential to vest in 2015. Additionally, we have not recognized expense for any of the options which have the potential to vest based on Adjusted EBITDA for 2016, 2017, and 2018. as some of these targets have not yet been established and we are unable to assess the probability of achieving such targets. Accordingly, we recognized stock-based compensation expense only for the Time-Based Options, the Vested Options and the Director Service Options granted in 2014 or 2015.

In each of the periods presented above, for the options granted prior to 2012, we recognized stock-based compensation expense only for Time-Based Options granted to employees, as the performance components of the Market Return and Enhanced Market Return Options are not deemed probable at this time.

Stock based compensation expense for options granted to non-employees was not significant to the Company for all periods presented, and was included in Selling, general and administrative expense in our Unaudited Condensed Consolidated Statements of Operations.

11. RELATED PARTY TRANSACTIONS

Blackstone Management Partners LLC (BMP) has agreed to provide 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. The monitoring fee agreement will continue until the earlier of November 2019, or such date as DJO and BMP may mutually determine. DJO has agreed 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. At any time in connection with or in anticipation of a change of control of DJO, a sale of all or substantially all of DJO’s assets or an initial public offering of common stock of DJO, 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 November 2019. For each of the three months presented, we expensed $1.75 million related to the annual monitoring fee, which is recorded as a component of Selling, general and administrative expense in the Consolidated Statements of Operations.

12. COMMITMENTS AND CONTINGENCIES

Pain Pump Litigation

Over the past 7 years, we have been named in numerous product liability lawsuits involving our prior distribution of a disposable drug infusion pump product (pain pump) manufactured by two third-party manufacturers that was distributed through our

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Bracing and Vascular segment. We currently are a defendant in two U.S. cases and a lawsuit in Canada which has been granted class action status for a class of approximately 45 claimants. 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. All of these lawsuits allege that the use of these pumps with certain anesthetics for prolonged periods after certain shoulder surgeries or, less commonly, knee surgeries, has resulted in cartilage damage to the plaintiffs. In the past four years, we have entered into settlements with plaintiffs in approximately 140 pain pump lawsuits. Except for the payment by the Company of policy deductibles or self-insured retentions, our products liability carriers in three policy periods have paid the defense costs and settlements related to these claims, subject to reservation of rights to deny coverage for customary matters, including punitive damages and off-label promotion. The range of potential loss for these claims is not estimable, although we believe we have adequate insurance coverage for such claims. As of March 28, 2015, we have accrued $0.2 million for unpaid settlements in this case, and a corresponding receivable as all of the settlements will be paid by our product liability carriers.

Lawsuit by Insurance Carrier

In December 2013, one of our product liability insurance carriers,Ironshore Specialty Ins. Co.filed a complaint in the U.S. District Court for the Southern District of California, which seeks (a) either (i) rescission of an insurance policy (the “Policy”) purchased by the Company from the plaintiff and repayment by the Company of all amounts allegedly paid under the Policy, approximately $10 million, less premiums paid by the Company for the Policy, or, in the alternative, (ii) reformation of the Policy to exclude coverage for pain pump claims and repayment by the Company of all amounts allegedly paid under the Policy for such claims, in an unspecified amount; and/or (b) damages and other relief in an unspecified amount for alleged fraud and negligent misrepresentation based on an alleged failure by the Company and/or the involved Policy producers to disclose alleged material information while applying for the Policy. While we believe this case is without merit, we have brought third-party indemnification claims against our insurance broker and a wholesale broker who were involved in securing the Policy. The carrier under our directors and officers liability policy has agreed to reimburse defense costs incurred in this matter, subject to reservation of rights to deny coverage for customary matters. The parties entered into a settlement agreement in February 2015 which settles all claims and dismisses the lawsuit in all respects, resulting in no material financial impact.

State Licensing Subpoenas

In July 2013 and October 2014, we were served with subpoenas under the Health Insurance Portability and Accountability Act (HIPAA) seeking documents relating to the fitting of custom-fabricated or custom-fitted orthoses in the States of New Jersey, Washington and Texas. The subpoenas were issued by the United States Attorney’s Office for the District of New Jersey in connection with an investigation of compliance with professional licensing statutes in those states relating to the practice of orthotics. We have supplied the documents requested under the subpoenas.

BGS Qui Tam Action

We are a defendant in a qui tam action filed in Federal Court in Boston, Massachusetts, captioned United States, ex rel. Bierman v. Orthofix International, N.V. et al., in which the relator, or whistleblower, names us and each other company engaged in the external bone growth stimulator industry as defendants. The case was filed under seal in March 2005 and unsealed in March 2009, during which time the government investigated the claims made by relator and decided not to intervene in the case. The government continued its investigation of DJO for several years following the unsealing of the case but did not ultimately bring any criminal or civil charges against us relating to the investigation. The 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 bone growth stimulation devices by each defendant to the present by seeking reimbursement for such devices as purchased items rather than rental items. The relator also alleges that the defendants are engaged in other marketing practices constituting violations of the federal and various state false claim and anti-kickback statutes. Orthofix International, N.V. has settled with the relator and we understand that two other defendants have reached settlements. The case continues against the remaining defendants, with the relator pressing for discovery after years of inactivity on the case. While we believe the case against us has no merit, we can make no assurances as to the resources that will be needed to respond to this matter or the final outcome of the case.

California Qui Tam Action

On October 11, 2013, we were served with a summons and complaint related to a qui tam action filed in U.S. District Court in Los Angeles, California in August 2012 and amended in December 2012 that names us as a defendant along with each of the other companies that manufactures and sells external bone growth stimulators for spinal applications. The case is captioned United States of America, et al.ex re. Doris Modglin and Russ Milko, v. DJO Global, Inc., DJO, LLC, DJO Finance LLC, Orthofix, Inc., Biomet, Inc., and EBI, LP., Case No. CV12-7152-MMM (JCGx) (C.D. Cal.). The plaintiffs, or relators, allege that the defendants have violated federal and state false claim acts by seeking reimbursement for bone growth stimulators for uses outside of the FDA approved

24

indications for use for such products. The plaintiffs are seeking treble damages alleged to have been sustained by the U.S. and the states, penalties and attorney’s fees and costs. The federal government and all of the named states have declined to intervene in this case. We filed a motion to dismiss the second amended complaint, which motion was granted with leave to amend. Relators then filed a third amended complaint and we filed a motion to dismiss the third amended complaint and that motion is pending. We believe that this lawsuit is without merit and intend to vigorously defend this case.

Minnesota Investigation

On April 1, 2015, we became aware of an investigation headed by an Assistant U.S. Attorney (“AUSA”) in Minneapolis, Minnesota into the sales from (July 1, 2010 to the present) of TENS products by our subsidiary, Empi, Inc., for which government payors reimbursed us. The AUSA has not provided any further description of the investigation, nor have we received a subpoena or other official document relating to the investigation.

13. SEGMENT AND GEOGRAPHIC INFORMATION

For the periods ended March 28, 2015 and March 29, 2014, we reported our business in four operating segments: Bracing and Vascular; Recovery Sciences; Surgical Implant and International.

Bracing and Vascular Segment

Our Bracing and Vascular segment, which generates its revenues in the United States, offers our rigid knee bracing products, orthopedic soft goods, cold therapy products, vascular systems, therapeutic shoes and inserts and compression therapy products, primarily under the DonJoy, ProCare, Aircast, Dr. Comfort, Bell-Horn and Exos brands. This segment also includes our OfficeCare channel, through which we maintain an inventory of soft goods and other products at healthcare facilities, primarily orthopedic practices, for immediate distribution to patients. The Bracing and Vascular segment primarily sells its products to orthopedic and sports medicine professionals, hospitals, podiatry practices, orthotic and prosthetic centers, home medical equipment providers and independent pharmacies. In 2014 we expanded our consumer channel to focus on marketing, selling and distributing our products, including bracing and vascular products, to professional and consumer retail customers and on-line. The bracing and vascular products sold through the channel will principally be sold under the DonJoy Performance, Bell-Horn and Doctor Comfort brands.

Recovery Sciences Segment

Our Recovery Sciences segment, which generates its revenues in the United States, is divided into four main channels:

• Empi.Our Empi channel 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.

• CMF. Our CMF channel 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 channel offers products in the clinical rehabilitation market in the category 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.

• Consumer.Our consumer channel offers professional and consumer retail customers our Compex electrostimulation device, which is used in training programs to aid muscle development and to accelerate muscle recovery after training sessions.

Surgical Implant Segment

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

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.

Information regarding our reportable business segments is presented below (in thousands). Segment results exclude the impact of amortization and impairment of goodwill and intangible assets, certain general corporate expenses, and charges related to various

25

integration activities, as defined by management. 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 in the senior secured credit facilities. We do not allocate assets to reportable segments because a significant portion of our assets are shared by the segments.

	Three Months Ended
	March 28, 2015			March 29, 2014
Net sales:
Bracing and Vascular	$	113,904		$	109,506
Recovery Sciences		67,115			68,870
Surgical Implant		26,926			23,932
International		72,156			80,436
	$	280,101		$	282,744
Operating income (loss):
Bracing and Vascular	$	20,896		$	19,485
Recovery Sciences		16,424			17,398
Surgical Implant		4,320			2,820
International		12,385			14,706
Expenses not allocated to segments and eliminations		(33,948	)		(44,207	)
	$	20,077		$	10,202

Geographic Area

Following are our net sales by geographic area (in thousands):

	Three Months Ended
	March 28, 2015		March 29, 2014
United States	$	207,945	$	202,308
Other Europe, Middle East, and Africa		33,694		38,377
Germany		21,034		24,471
Australia and Asia Pacific		9,891		9,114
Canada		5,352		6,213
Latin America		2,185		2,261
	$	280,101	$	282,744

26

14. SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

DJOFL and its direct wholly owned subsidiary, DJO Finco, jointly issued the 9.75% Notes, 7.75% Notes, 8.75% Notes and the 9.875% Notes. DJO 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 DJO Finco from holding any assets, becoming liable for any obligations or engaging in any business activity.

The 8.75% Notes are jointly and severally, fully and unconditionally guaranteed, on a senior secured basis by all of DJOFL’s domestic subsidiaries (other than the co-issuer) that are 100% owned, directly or indirectly, by DJOFL (the Guarantors). The 9.875% Notes and the 7.75% Notes are jointly and severally, fully and unconditionally guaranteed, on an unsecured senior basis by the Guarantors. The 9.75% 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 following tables present the financial position, results of operations and cash flows of DJOFL, the Guarantors, the Non-Guarantors and certain eliminations for the periods presented.

27

DJO Finance LLC

Unaudited Condensed Consolidating Balance Sheets

As of March 28, 2015

(in thousands)

	DJOFL			Guarantors			Non- Guarantors		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	28,732		$	(6,171	)	$	13,127	$	—		$	35,688
Accounts receivable, net		—			135,606			45,215		—			180,821
Inventories, net		—			145,860			49,967		(16,127	)		179,700
Deferred tax assets, net		—			24,368			230		—			24,598
Prepaid expenses and other current assets		117			9,021			4,775		—			13,913
Total current assets		28,849			308,684			113,314		(16,127	)		434,720
Property and equipment, net		—			105,726			13,427		(117	)		119,036
Goodwill		—			1,066,479			98,790		(31,376	)		1,133,893
Intangible assets, net		—			831,543			12,913		—			844,456
Investment in subsidiaries		1,297,699			1,686,558			50,463		(3,034,720	)		—
Intercompany receivables		802,196			—			—		(802,196	)		—
Other non-current assets		26,490			1,981			2,312		—			30,783
Total assets	$	2,155,234		$	4,000,971		$	291,219	$	(3,884,536	)	$	2,562,888
Liabilities and (Deficit) Equity
Current liabilities:
Accounts payable	$	—		$	44,711		$	11,475	$	—		$	56,186
Current portion of debt obligations		8,912			—			38		—			8,950
Other current liabilities		55,539			62,814			22,281		—			140,634
Total current liabilities		64,451			107,525			33,794		—			205,770
Long-term debt obligations		2,259,088			—			—		—			2,259,088
Deferred tax liabilities, net		—			244,971			4,552		—			249,523
Intercompany payables, net		—			505,389			149,709		(655,098	)		—
Other long-term liabilities		—			12,573			1,604		—			14,177
Total liabilities		2,323,539			870,458			189,659		(655,098	)		2,728,558
Noncontrolling interests		—			—			2,635		—			2,635
Total membership (deficit) equity		(168,305	)		3,130,513			98,925		(3,229,438	)		(168,305	)
Total liabilities and (deficit) equity	$	2,155,234		$	4,000,971		$	291,219	$	(3,884,536	)	$	2,562,888

28

DJO Finance LLC

Unaudited Condensed Consolidating Statements of Operations

For the Three Months Ended March 28, 2015

(in thousands)

	DJOFL			Guarantors			Non- Guarantors			Eliminations			Consolidated
Net sales	$	—		$	250,982		$	70,536		$	(41,417	)	$	280,101
Costs and operating expenses:		—
Cost of sales (exclusive of amortization of intangible assets of $7,887)		—			98,279			53,334			(42,371	)		109,242
Selling, general and administrative		—			96,926			22,847			—			119,773
Research and development		—			7,918			982			—			8,900
Amortization of intangible assets		—			21,479			630			—			22,109
		—			224,602			77,793			(42,371	)		260,024
Operating income (loss)		—			26,380			(7,257	)		954			20,077
Other (expense) income:
Interest (expense) income, net		(42,871	)		57			(7	)		—			(42,821	)
Other expense, net		—			(520	)		(3,631	)		—			(4,151	)
Intercompany income (expense), net		—			319			25			(344	)		—
Equity in loss of subsidiaries, net		7,344			—			—			(7,344	)		—
		(35,527	)		(144	)		(3,613	)		(7,688	)		(46,972	)
(Loss) income before income taxes		(35,527	)		26,236			(10,870	)		(6,734	)		(26,895	)
Income tax provision		—			(7,988	)		(342	)		—			(8,330	)
Net (loss) income		(35,527	)		18,248			(11,212	)		(6,734	)		(35,225	)
Net income attributable to noncontrolling interests		—			—			(301	)		—			(301	)
Net (loss) income attributable to DJOFL	$	(35,527	)	$	18,248		$	(11,513	)	$	(6,734	)	$	(35,526	)

29

DJO Finance LLC

Unaudited Condensed Consolidating Statements of Comprehensive Loss

For the Three Months Ended March 28, 2015

(in thousands)

	DJOFL			Guarantors		Non- Guarantors			Eliminations			Consolidated
Net (loss) income	$	(35,527	)	$	18,248	$	(11,212	)	$	(6,734	)	$	(35,225	)
Other comprehensive income, net of taxes:
Foreign currency translation adjustments, net of tax benefit of $492		—			—		(9,442	)		—			(9,442	)
Other comprehensive loss		—			—		(9,442	)		—			(9,442	)
Comprehensive (loss) income		(35,527	)		18,248		(20,654	)		(6,734	)		(44,667	)
Comprehensive income attributable to noncontrolling interests		—			—		(17	)		—			(17	)
Comprehensive (loss) income attributable to DJO Finance LLC	$	(35,527	)	$	18,248	$	(20,671	)	$	(6,734	)	$	(44,684	)

30

DJO Finance LLC

Unaudited Condensed Consolidating Statements of Cash Flows

For the Three Months Ended March 28, 2015

(in thousands)

	DJOFL			Guarantors			Non- Guarantors			Eliminations			Consolidated
Cash Flows From Operating Activities:
Net (loss) income	$	(35,527	)	$	18,248		$	(11,212	)	$	(6,734	)	$	(35,225	)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation		—			7,181			1,202			(26	)		8,357
Amortization of intangible assets		—			21,479			630			—			22,109
Amortization of debt issuance costs and non-cash interest expense		2,288			—			—			—			2,288
Stock-based compensation expense		—			613			—			—			613
Loss on disposal of assets, net		—			40			34			—			74
Deferred income tax expense (benefit)		—			7,631			(340	)		—			7,291
Equity in loss of subsidiaries, net		(7,344	)		—			—			7,344			—
Changes in operating assets and liabilities, net of acquired assets and liabilities:
Accounts receivable		—			5,176			(1,968	)					3,208
Inventories		—			(22	)		(5,291	)		(2,788	)		(8,101	)
Prepaid expenses and other assets		44			2,280			265			193			2,782
Accounts payable and other current liabilities		25,950			(12,205	)		(4,100	)		4,615			14,260
Net cash (used in) provided by operating activities		(14,589	)		50,421			(20,780	)		2,604			17,656
Cash Flows From Investing Activities:
Purchases of property and equipment		—			(7,229	)		(1,505	)		3			(8,731	)
Net cash (used in) provided by investing activities		—			(7,229	)		(1,505	)		3			(8,731	)
Cash Flows From Financing Activities:
Intercompany		33,363			(49,366	)		18,610			(2,607	)		—
Proceeds from issuance of debt		17,000			—			—			—			17,000
Repayments of debt obligations		(20,000	)		—			(19	)		—			(20,019	)
Payment of debt issuance, modification and extinguishment costs		—			—			—			—			—
Investment by parent		—			—			—			—			—
Payment of contingent consideration		—			—			—			—			—
Cancellation of vested options		—			—			—			—			—
Dividend paid by subsidiary to owners of noncontrolling interests		—			—			—			—			—
Net cash provided by (used in) financing activities		30,363			(49,366	)		(18,591	)		(2,607	)		(3,019	)
Effect of exchange rate changes on cash and cash equivalents		—			—			(1,362	)		—			(1,362	)
Net increase (decrease) in cash and cash equivalents		15,774			(6,174	)		(5,056	)		—			4,544
Cash and cash equivalents, beginning of year		12,958			3			18,183			—			31,144
Cash and cash equivalents, end of year	$	28,732		$	(6,171	)	$	13,127		$	—		$	35,688

31

DJO Finance LLC

Condensed Consolidating Balance Sheets

As of December 31, 2014

(in thousands)

	DJOFL			Guarantors		Non- Guarantors		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	12,958		$	3	$	18,183	$	—		$	31,144
Accounts receivable, net		—			140,782		47,278		—			188,060
Inventories, net		—			145,046		31,134		(840	)		175,340
Deferred tax assets, net		—			24,351		247		—			24,598
Prepaid expenses and other current assets		160			11,464		5,548		—			17,172
Total current assets		13,118			321,646		102,390		(840	)		436,314
Property and equipment, net		—			106,191		14,071		(155	)		120,107
Goodwill		—			1,066,479		109,260		(34,551	)		1,141,188
Intangible assets, net		—			853,023		15,008		—			868,031
Investment in subsidiaries		1,297,699			1,686,557		56,572		(3,040,828	)		—
Intercompany receivables		836,759			—		—		(836,759	)		—
Other non-current assets		28,632			1,822		2,399		—			32,853
Total assets	$	2,176,208		$	4,035,718	$	299,700	$	(3,913,133	)	$	2,598,493
Liabilities and (Deficit) Equity
Current liabilities:
Accounts payable	$	—		$	50,590	$	12,370	$	—		$	62,960
Current portion of debt obligations		8,912			—		63		—			8,975
Other current liabilities		29,589			70,073		29,083		—			128,745
Total current liabilities		38,501			120,663		41,516		—			200,680
Long-term debt obligations		2,261,941			—		—		—			2,261,941
Deferred tax liabilities, net		—			237,813		5,310		—			243,123
Intercompany payables, net		—			552,612		135,833		(688,445	)		—
Other long-term liabilities		—			12,243		2,122		—			14,365
Total liabilities		2,300,442			923,331		184,781		(688,445	)		2,720,109
Noncontrolling interests		—			—		2,618		—			2,618
Total membership (deficit) equity		(124,234	)		3,112,387		112,301		(3,224,688	)		(124,234	)
Total liabilities and (deficit) equity	$	2,176,208		$	4,035,718	$	299,700	$	(3,913,133	)	$	2,598,493

32

DJO Finance LLC

Unaudited Condensed Consolidating Statements of Operations

For the Three Months Ended March 29, 2014

(in thousands)

	DJOFL			Guarantors			Non- Guarantors			Eliminations			Consolidated
Net sales	$	—		$	238,179		$	78,076		$	(33,511	)	$	282,744
Costs and operating expenses:
Cost of sales (exclusive of amortization of intangible assets of $8,683)		—			100,258			53,960			(38,503	)		115,715
Selling, general and administrative		—			96,412			27,118			—			123,530
Research and development		—			8,523			1,215			—			9,738
Amortization of intangible assets		—			22,415			1,144			—			23,559
		—			227,608			83,437			(38,503	)		272,542
Operating income (loss)		—			10,571			(5,361	)		4,992			10,202
Other (expense) income:
Interest expense, net		(43,698	)		49			(22	)		—			(43,671	)
Other (expense) income, net		—			(207	)		127			—			(80	)
Intercompany income (expense), net		—			348			(264	)		(84	)		—
Equity in income of subsidiaries, net		7,176			—			—			(7,176	)		—
		(36,522	)		190			(159	)		(7,260	)		(43,751	)
(Loss) income before income taxes		(36,522	)		10,761			(5,520	)		(2,268	)		(33,549	)
Income tax (provision) benefit		—			(1,381	)		(1,243	)		—			(2,624	)
Net (loss) income		(36,522	)		9,380			(6,763	)		(2,268	)		(36,173	)
Net income attributable to noncontrolling interests		—			—			(349	)		—			(349	)
Net (loss) income attributable to DJOFL	$	(36,522	)	$	9,380			(7,112	)	$	(2,268	)	$	(36,522	)

33

DJO Finance LLC

Unaudited Condensed Consolidating Statements of Comprehensive Loss

For the Three Months Ended March 29, 2014

(in thousands)

	DJOFL			Guarantors		Non- Guarantors			Eliminations			Consolidated
Net (loss) income	$	(36,522	)	$	9,380	$	(6,763	)	$	(2,268	)	$	(36,173	)
Other comprehensive loss, net of taxes:
Foreign currency translation adjustments, net of tax provision of $11		—			—		(303	)		—			(303	)
Other comprehensive loss		—			—		(303	)		—			(303	)
Comprehensive (loss) income		(36,522	)		9,380		(7,066	)		(2,268	)		(36,476	)
Comprehensive loss attributable to noncontrolling interests		—			—		(345	)		—			(345	)
Comprehensive (loss) income attributable to DJO Finance LLC	$	(36,522	)	$	9,380	$	(7,411	)	$	(2,268	)	$	(36,821	)

34

DJO Finance LLC

Unaudited Condensed Consolidating Statements of Cash Flows

For the Year Three Months Ended March 29, 2014

(in thousands)

	DJOFL			Guarantors			Non- Guarantors			Eliminations			Consolidated
Cash Flows from Operating Activities:
Net (loss) income	$	(36,522	)	$	9,380		$	(6,763	)	$	(2,268	)	$	(36,173	)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation		—			6,883			1,630			(54	)		8,459
Amortization of intangible assets		—			22,415			1,144			—			23,559
Amortization of debt issuance costs and non-cash interest expense		2,090			—			—			—			2,090
Stock-based compensation expense		—			444			—			—			444
Gain (loss) on disposal of assets, net		—			(502	)		26			—			(476	)
Deferred income tax expense		—			779			(1	)		(39	)		739
Equity in income of subsidiaries, net		(7,176	)		—			—			7,176			—
Changes in operating assets and liabilities:
Accounts receivable		—			6,246			(4,639	)		—			1,607
Inventories		—			(132	)		4,931			(4,638	)		161
Prepaid expenses and other assets		44			5,896			(1,594	)		71			4,417
Accounts payable and other current liabilities		20,104			652			(567	)		(338	)		19,851
Net cash (used in) provided by operating activities		(21,460	)		52,061			(5,833	)		(90	)		24,678
Cash Flows from Investing Activities:
Cash paid in connection with acquisitions, net of cash acquired		—			—			(4,587	)		—			(4,587	)
Purchases of property and equipment		—			(12,676	)		(1,453	)		43			(14,086	)
Other investing activities, net		—			(412	)		(89	)		—			(501	)
Net cash used in (provided by) investing activities		—			(13,088	)		(6,129	)		43			(19,174	)
Cash Flows from Financing Activities:
Intercompany		25,645			(38,128	)		12,438			45			—
Proceeds from issuance of debt		8,000			—			—						8,000
Repayments of debt and capital lease obligations		(8,000	)		—			(23	)		—			(8,023	)
Cash paid in connection with the cancellation of vested options		(2,001	)		—			—			—			(2,001	)
Net cash provided by (used in) financing activities		23,644			(38,128	)		12,415			45			(2,024	)
Effect of exchange rate changes on cash and cash equivalents		—			—			(27	)		—			(27	)
Net increase (decrease) in cash and cash equivalents		2,184			845			426			(2	)		3,453
Cash and cash equivalents at beginning of period		22,370			358			20,848			2			43,578
Cash and cash equivalents at end of period	$	24,554		$	1,203		$	21,274		$	—		$	47,031

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

This management’s discussion and analysis of financial condition and results of operations is intended to provide an understanding of our results of operations, financial condition and where appropriate, factors that may affect future performance. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto as well as the other financial data included elsewhere in this Form 10-Q.

Forward Looking Statements

This report, and the following management’s discussion and analysis, contain “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. To the extent that any statements are not recitations of historical fact, such statements constitute forward-looking statements that, by definition, involve risks and uncertainties. These statements can be identified because they use words like “anticipates”, “believes”, “estimates”, “expects”, “forecasts”, “future”, “intends”, “plans” and similar terms. Specifically, statements referencing, without limitation, growth in sales of our products, profit margins and the sufficiency of our cash flow for future liquidity and capital resource needs may be forward-looking statements. These forward-looking statements are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements. The section entitled “Risk Factors” in our 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 20, 2015 describes these important risk factors that may affect our business, financial condition, results of operation, and/or liquidity. Results actually achieved may differ materially from expected results included in these statements as a result of these or other factors.

Overview of Business

We are a global developer, manufacturer and distributor of high-quality medical devices that provide solutions for musculoskeletal health, vascular health and pain management. Our products address the continuum of patient care from injury prevention to rehabilitation after surgery, injury or from degenerative disease, enabling people to regain or maintain their natural motion.

Our products are used by orthopedic specialists, spine surgeons, primary care physicians, pain management specialists, physical therapists, podiatrists, chiropractors, athletic trainers and other healthcare professionals. In addition, many of our medical devices and related accessories are used by athletes and patients for injury prevention and at-home physical therapy treatment. Our product lines include rigid and soft orthopedic bracing, hot and cold therapy, bone growth stimulators, vascular therapy systems and compression garments, therapeutic shoes and inserts, electrical stimulators used for pain management and physical therapy products. Our surgical implant business offers a comprehensive suite of reconstructive joint products for the hip, knee and shoulder.

Our products are marketed under a portfolio of brands including Aircast^®, DonJoy^®, ProCare^®, CMF™, Empi^®, Chattanooga, DJO Surgical, Dr. Comfort™, Compex^®, Bell-Horn™ and Exos™.

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Operating Segments

The company’s continuing operations consist of four operating segments; Bracing and Vascular; Recovery Sciences; Surgical Implant; and International. See Note 14 to our Unaudited Condensed Consolidated Financial Statements for financial and other additional information regarding our segments.

Some of the tables below present financial information for our reportable segments for the periods presented. Segment results exclude the impact of amortization of intangible assets, certain general corporate expenses, and non-recurring and integration charges.

	Three Months Ended
($ in thousands)	March 28, 2015			March 29, 2014
Bracing and Vascular:
Net sales	$	113,904		$	109,506
Operating income		20,896		$	19,485
Operating income as a percent of net segment sales		18.3	%		17.8	%
Recovery Sciences:
Net sales	$	67,115		$	68,870
Operating income		16,424		$	17,398
Operating income as a percent of net segment sales		24.5	%		25.3	%
Surgical Implant:
Net sales	$	26,926		$	23,932
Operating income		4,320		$	2,820
Operating income as a percent of net segment sales		16.0	%		11.8	%
International:
Net sales	$	72,156		$	80,436
Operating income		12,385		$	14,706
Operating income as a percent of net segment sales		17.2	%		18.3	%

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Results of Operations

The following table sets forth our statements of operations as a percentage of net sales ($ in thousands):

	Three Months Ended
	March 28, 2015					March 29, 2014
Net sales	$	280,101		100.0	%	$	282,744		100.0	%
Costs and operating expenses:
Cost of sales (exclusive of amortization of intangible assets (1))		109,242		38.9			115,715		40.9
Selling, general and administrative		119,773		42.8			123,530		43.7
Research and development		8,900		3.2			9,738		3.4
Amortization of intangible assets		22,109		7.9			23,559		8.3
		260,024		92.8			272,542		96.3
Operating income		20,077		7.2			10,202		3.7
Other expense:
Interest expense, net		(42,821	)	(15.3	)		(43,671	)	(15.5	)
Other expense, net		(4,151	)	(1.5	)		(80	)	(0.0	)
		(46,972	)	(16.8	)		(43,751	)	(15.5	)
Loss from continuing operations before income taxes		(26,895	)	(9.6	)		(33,549	)	(11.8	)
Income tax provision		(8,330	)	(3.0	)		(2,624	)	(1.0	)
Net loss		(35,225	)	(12.6	)		(36,173	)	(12.8	)
Net income attributable to noncontrolling interests		(301	)	(0.1	)		(349	)	(0.1	)
Net loss attributable to DJOFL	$	(35,526	)	(12.7	)%	$	(36,522	)	(12.9	)%

(1) Cost of sales is exclusive of amortization of intangible assets of $7,887 and $8,683 for the three months ended March 28, 2015 and March 29, 2014, respectively.

Three Months Ended March 28, 2015 (first quarter 2015) compared to Three Months Ended March 29, 2014 (first quarter 2014)

Net Sales. Our net sales for first quarter 2015 were $280.1 million, compared to net sales of $282.7 million for first quarter 2014, representing a 0.9% decrease year over year. In constant currency, excluding an unfavorable impact of $12.0 million related to changes in foreign exchange rates in effect in first quarter 2015 compared to the rates in effect in first quarter 2014, net sales increased by $9.4 million, or 3.3%, to $292.1 million for first quarter 2015 from $282.7 million for first quarter 2014.

The following table sets forth the mix of our net sales by business segment ($ in thousands):

	First Quarter 2015		% of Net Sales			First Quarter 2014		% of Net Sales			Increase (Decrease)			% Increase (Decrease)
Bracing and Vascular	$	113,904		40.7	%	$	109,506		38.7	%	$	4,398			4.0	%
Recovery Sciences		67,115		24.0			68,870		24.4			(1,755	)		(2.5	%)
Surgical Implant		26,926		9.6			23,932		8.5			2,994			12.5	%
International		72,156		25.7			80,436		28.4			(8,280	)		(10.3	%)
Total net sales	$	280,101		100.0	%	$	282,744		100.0	%	$	(2,643	)		(0.9	%)

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Net sales in our Bracing and Vascular segment were $113.9 million for first quarter 2015, an increase of 4.0% compared to net sales of $109.5 million for first quarter 2014. The increase is primarily due to new account acquisition in our OfficeCare channel, an increase in third party payor billing and increased sales in compression hosiery products and therapeutic footwear sold to government agencies and through online purchases.

Net sales in our Recovery Sciences segment were $67.1 million for first quarter 2015, decreasing 2.5% from net sales of $68.9 million for first quarter 2014. The decrease continues to be driven by changes in reimbursement for certain Empi products limiting the amount of reimbursement for certain diagnosis codes and requiring additional documentation which caused a lag in the billing process.

Net sales in our Surgical Implant segment were $26.9 million for first quarter 2015, increasing 12.5% from net sales of $23.9 million for first quarter 2014. The increase was driven by strong sales of our shoulder and new hip products.

Net sales in our International segment were $72.2 million for first quarter 2015, decreasing 10.3% from net sales of $80.4 million for first quarter 2014. In constant currency, excluding an unfavorable impact of $12.0 million related to changes in foreign exchange rates in effect in first quarter 2015 compared to the rates in effect in first quarter 2014, net sales for first quarter 2015 for the International segment increased 4.7% compared to net sales for first quarter 2014. Growth in net sales in this segment is being driven by sales from new products, improved sales execution, and increased sales penetration in certain geographies.

Cost of Sales. Costs of sales decreased to $109.2 million for first quarter 2015, from $115.7 million for first quarter 2014. As a percentage of net sales, costs of sales decreased to 38.9% for first quarter 2015, compared to 40.9% for first quarter 2014 due to benefits from certain cost savings and productivity initiatives.

Selling, General and Administrative (SG&A). SG&A expenses decreased to $119.8 million for first quarter 2015, from $123.5 million in first quarter 2014. As a percentage of net sales, SG&A expenses were 42.8% for first quarter 2015, compared to 43.7% for first quarter 2014. The decrease resulted from controlled selling and marketing costs and a decrease in reorganization and integration costs primarily related to information technology projects. These decreases were partially offset by higher variable selling expenses due to the relative increase in sales in the Bracing and Vascular, Surgical Implant and International segments, excluding currency impact.

Our SG&A expenses are impacted by significant non-recurring integration charges and other adjustments related to our ongoing restructuring activities and acquisitions. We incurred the following SG&A expenses in connection with such activities during the periods presented (in thousands):

	First Quarter 2015			First Quarter 2014
Integration charges:
Global business unit reorganization and integration	$	2,996		$	3,404
Acquisition related expenses and integration		500			417
CFO transition		—			107
Litigation and regulatory costs and settlements, net		936			1,053
Automation projects		747			3,242
Other non-recurring items		(108	)		1,709
	$	5,071		$	9,932

Research and Development (R&D). R&D expenses decreased to $8.9 million for first quarter 2015, from $9.7 million in first quarter 2014. As a percentage of net sales, R&D expense was 3.2% which was consistent with 3.4% in the first quarter 2014. The company continues to focus on the development of new products, as well as the enhancement of existing products with the latest technology and updated designs, primarily our Bracing and Vascular and Surgical Implant segments.

Amortization of Intangible Assets. Amortization of intangible assets decreased to $22.1 million for first quarter 2015, from $23.6 million for first quarter 2014. The decrease is due to certain intangible assets reaching full amortization primarily in our patents and technology category.

Interest Expense, net. Our interest expense, net decreased to $42.8 million for first quarter 2015, from $43.7 million for first quarter 2014. The decrease is due to lower weighted average interest rates on our senior secured credit facilities.

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Other Expense, Net. Other expense, net increased to $4.2 million for first quarter 2015, from $0.1 million for first quarter 2014. Results for both periods presented primarily represent net realized and unrealized foreign currency translation gains and losses.

Income Tax Provision. We record income tax expense using an estimated annual effective tax rate, adjusted for discrete items. We recorded income tax expense of $8.3 million on pre-tax losses of $26.9 million, resulting in a negative effective tax rate of 31.0% in first quarter 2015. For first quarter 2014, we recorded income tax expense of $2.6 million on pre-tax losses of $33.5 million, resulting in a negative effective tax rate of 7.8%.

Our tax rates are negative because our U.S. federal tax losses, and certain state tax losses, are unavailable to offset income taxes arising in other states and in the foreign jurisdictions where we are subject to tax. In addition, we do not currently recognize a tax benefit for our US and state tax loss carryovers because we cannot conclude that it is more likely than not they will offset future taxable income.

Liquidity and Capital Resources

As of March 28, 2015, our primary sources of liquidity consisted of cash and cash equivalents totaling $35.7 million and our $100 million revolving credit facility, of which $85.5 million was available. Our revolving credit balance was $14.0 million as of March 28, 2015 and we have provided a $0.5 million letter of credit related to collateral requirements under our product liability insurance policy. Working capital at March 28, 2015 was $229.0 million.

We believe that our existing cash, plus the amounts we expect to generate from operations and amounts available through our revolving credit facility, will be sufficient to meet our operating needs for the next twelve months, including working capital requirements, capital expenditures, and debt and interest repayment obligations. While we currently believe that we will be able to meet all of the financial covenants imposed by our senior secured credit facilities, there is no assurance that we will in fact be able to do so or that, if we do not, we will be able to obtain from our lenders waivers of default or amendments to the senior secured credit facilities. We and our subsidiaries, affiliates, or significant shareholders (including Blackstone and its affiliates) may from time to time, in our or their sole discretion, purchase, repay, redeem or retire any of our outstanding debt or equity securities (including any publicly issued debt securities), in privately negotiated or open market transactions, by tender offer or otherwise.

Cash Flows

Operating activities provided $17.7 million and $24.7 million of cash in first quarter 2015 and first quarter 2014, respectively. Cash provided by operating activities for all periods presented primarily represented our net loss, adjusted for non-cash expenses and changes in working capital. In the first quarter 2015, changes in working capital largely consisted of increases in inventories, timing of accounts payable, and payment of higher variable accrued expenses due to revenue growth. For first quarter 2015 and first quarter 2014, cash paid for interest was $14.6 million and $21.5 million, respectively.

Investing activities used $8.7 million and $19.2 million of cash for first quarter 2015 and first quarter 2014, respectively. Cash used in investing activities for first quarter 2015 primarily consisted of $8.8 million for purchases of property and equipment primarily for surgical instruments to support growth, IT automation technology, manufacturing equipment for new products and more efficient production. Cash used in investing activities for first quarter 2014 primarily consisted of $14.1 million for purchases of property and equipment and $4.6 million related to the acquisition of Speetec.

Financing activities used cash of $3.0 million and $2.0 million in first quarter 2015 and 2014, respectively. Cash used in financing activities in first quarter 2015 consisted of proceeds from the borrowings under our senior secured credit facilities, offset by payments of the senior secured credit facilities. Cash used in financing activities in first quarter 2014 consisted of payments related to the repurchase of Rollover Options from our former chief financial officer, upon her departure.

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Indebtedness

The principal amount and carrying value of our debt, exclusive of a net unamortized original issue discount of $0.6 million, was as follows for March 28, 2015 (in thousands):

	March 28, 2015				December 31, 2014
	Principal Amount		Carrying Value		Principal Amount		Carrying Value
Senior secured credit facilities:
Revolving credit facility	$	14,000	$	14,000	$	17,000	$	17,000
Term loans		884,561		879,917		884,560		879,476
		898,561		893,917		901,560		896,476
Note financing:
8.75% second priority senior secured notes		330,000		334,083		330,000		334,377
9.875% senior unsecured notes		440,000		440,000		440,000		440,000
7.75% senior unsecured notes		300,000		300,000		300,000		300,000
9.75% senior subordinated notes		300,000		300,000		300,000		300,000
		1,370,000		1,374,083		1,370,000		1,374,377
Other debt:		38		38		63		63
Total indebtedness	$	2,268,599	$	2,268,038	$	2,271,623	$	2,270,916

Senior Secured Credit Facilities. Our senior secured credit facilities at March 28, 2015 consist of $884.6 million of term loans which mature on September 15, 2017 and a $100.0 million revolving credit facility which matures on March 15, 2017. Our revolving credit balance was $14.0 million at March 28, 2015 and we have provided a $0.5 million letter of credit related to collateral requirements under our product liability insurance policy.

The interest rate margins applicable to borrowings under the senior secured revolving credit facilities are, at our option, either (a) the Eurodollar rate, plus 325 basis points or (b) a base rate determined by reference to the highest of (1) the prime rate, (2) the federal funds rate, plus 0.50% and (3) the Eurodollar rate for a one-month interest period, plus, in each case, 325 basis points. The interest rate margins applicable to the term loans are, at our option, either (a) the Eurodollar rate plus 325 basis points or (b) a base rate plus 325 basis points. There is a minimum LIBOR rate applicable to the Eurodollar component of interest rates on term loan borrowings of 1.00%. The applicable margin for borrowings under the senior secured revolving credit facilities may be reduced, subject to our attaining certain leverage ratios. As of March 28, 2015, our weighted average interest rate for all borrowings under the senior secured credit facilities was 4.24%.

We are required to pay annual payments in equal quarterly installments on the term loans in an amount equal to 1.00% of the funded total principal amount through June 2017, with any remaining amount payable in full at maturity in September 2017.

Note Financing. Our outstanding notes mature at various dates in 2017 and 2018. Assuming we are in compliance with the terms of the indentures governing the notes, we are not required to repay principal related to any of the notes prior to the final maturity dates of the notes. We pay interest semi-annually on the notes.

See Note 8 to our Unaudited Condensed Consolidated Financial Statements for additional information regarding our indebtedness.

Certain Covenants and Related Compliance. Pursuant to the terms of the senior secured credit facilities, we are required to maintain a maximum senior secured first lien leverage ratio of consolidated first lien net debt to Adjusted EBITDA of 4.75:1 for the trailing three months ended March 28, 2015. Adjusted EBITDA is defined as net income (loss) attributable to DJOFL, plus interest expense, net, income tax (provision) benefit and depreciation and amortization, further adjusted for certain non-cash items, non-recurring items and other adjustment items, as permitted in calculating covenant compliance under our senior secured credit facilities and the Indentures governing our 8.75% Notes, 9.875% Notes, 7.75% Notes and 9.75% Notes (collectively, the Notes). Adjusted EBITDA is a material component of these covenants. As of March 28, 2015, our actual senior secured first lien leverage ratio was within the required ratio at 3.06:1. Adjusted EBITDA should not be considered as an alternative to net income or other performance measures presented in accordance with GAAP, or as an alternative to cash flow from operations as a measure of our liquidity. Adjusted EBITDA does not represent net income (loss) or cash flow from operations as those terms are defined by GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. In particular, the definition of Adjusted EBITDA in

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the Indentures and our senior secured credit facilities allows us to add back certain non-cash, extraordinary, unusual or non-recurring charges that are deducted in calculating net loss. However, these are expenses that may recur, vary greatly and are difficult to predict. While Adjusted EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, Adjusted EBITDA is not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation.

Under the Indentures governing the Notes, our ability to incur additional debt, subject to specified exceptions, is tied to either improving the ratio of our Adjusted EBITDA to fixed charges or having this ratio be at least 2.00:1 on a pro forma basis after giving effect to such incurrence. Additionally, our ability to make certain restricted payments is also tied to having an Adjusted EBITDA to fixed charges ratio of at least 2.00:1 on a pro forma basis, as defined, subject to specified exceptions. Our ratio of Adjusted EBITDA to fixed charges for the three months ended March 28, 2015, measured on that date, was 1.71:1. Notwithstanding these limitations, the aggregate amount of term loan increases and revolving commitment increases shall not exceed the greater of (i) $150.0 million and (ii) the additional aggregate amount of secured indebtedness which would be permitted to be incurred as of any date of determination (assuming for this purpose that the full amount of any revolving credit increase had been utilized as of such date) such that, after giving pro forma effect to such incurrence (and any other transactions consummated on such date), the senior secured leverage ratio for the immediately preceding test period would not be greater than 4.75:1. Fixed charges is defined in the Indentures as consolidated interest expense plus all cash dividends or other distributions paid on any series of preferred stock of any restricted subsidiary and all dividends or other distributions accrued on any series of disqualified stock.

As described above, our senior secured credit facilities and the Notes governed by the Indentures represent significant components of our capital structure. Under the senior secured credit facilities, we are required to maintain compliance with a specified senior secured first lien leverage ratio and which ratio is determined based on our Adjusted EBITDA. If we fail to comply with the senior secured first lien leverage ratio under our senior secured credit facilities, we would be in default. Upon the occurrence of an event of default under the senior secured credit facilities, the lenders could elect to declare all amounts outstanding under the senior secured credit facilities to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders under the senior secured credit facilities could proceed against the collateral granted to them to secure that indebtedness. We have pledged substantially all of our assets as collateral under the senior secured credit facilities. Any acceleration under the senior secured credit facilities would also result in a default under the Indentures governing the Notes, which could lead to the note holders electing to declare the principal, premium, if any, and interest on the then outstanding Notes immediately due and payable. In addition, under the Indentures governing the Notes, our and our subsidiaries’ ability to engage in activities such as incurring additional indebtedness, making investments, refinancing subordinated indebtedness, paying dividends and entering into certain merger transactions is governed, in part, by our ability to satisfy tests based on Adjusted EBITDA.

Our ability to meet the covenants specified above will depend on future events, some of which are beyond our control, and we cannot assure you that we will meet those covenants. A breach of any of these covenants in the future could result in a default under our senior secured credit facilities and the Indentures, at which time the lenders could elect to declare all amounts outstanding under our senior secured credit facilities to be immediately due and payable. Any such acceleration would also result in a default under the Indentures.

The following table provides a reconciliation from our net loss to Adjusted EBITDA for the three months ended March 2015, 2014, and 2013. The terms and related calculations are defined in the credit agreement relating to our senior secured credit facilities and the Indentures.

	Three Months Ended,						Twelve Months Ended
(in thousands)	March 28, 2015			March 29, 2014			March 28, 2015
Net loss attributable to DJO Finance LLC	$	(35,526	)	$	(36,522	)	$	(89,538	)
Interest expense, net		42,821			43,671			173,441
Income tax expense (benefit)		8,330			2,624			18,596
Depreciation and amortization		30,466			32,018			127,258
Non-cash charges (a)		675			199			334
Non-recurring and integration charges (b)		5,929			15,418			33,069
Other adjustment items, before permitted pro forma adjustments (c)		6,279			2,248			18,414
Adjusted EBITDA	$	58,974		$	59,656		$	281,574

(a) Non-cash items are comprised of the following:

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	Three Months Ended						Twelve Months Ended
(in thousands)	March 28, 2015			March 29, 2014			March 28, 2015
Stock compensation expense	$	613		$	444		$	2,038
Purchase accounting adjustments (1)		287			207			(1,170	)
Gain on disposal of assets, net		(225	)		(452	)		(534	)
Total non-cash items	$	675		$	199		$	334

(1) Purchase accounting adjustments for the twelve months ended March 28, 2015 consist of $0.3 million of amortization of fair market value inventory adjustments, net of $1.5 million in adjustments to the contingent consideration for Speetec.

(b) Non-recurring and integration charges are comprised of the following:

	Three Months Ended				Twelve Months Ended
(in thousands)	March 28, 2015		March 29, 2014		March 28, 2015
Integration charges:
Global business unit reorganization and integration	$	3,494	$	4,275	$	9,249
Acquisition related expenses and integration (1)		499		420		410
CFO transition		—		107		120
Litigation and regulatory costs and settlements, net (2)		944		1,065		5,631
Other non-recurring items (3)		245		7,842		12,754
ERP implementation and other automation projects		747		1,709		4,905
Total non-recurring and integration charges	$	5,929	$	15,418	$	33,069

(1) Consists of direct acquisition costs and integration expenses related to acquired businesses and costs related to potential acquisitions.

(2) For the twelve months ended March 28, 2015, litigation and regulatory costs consisted of $0.6 million in litigation costs related to ongoing product liability issues related to our discontinued pain pump products and $5.0 million related to other litigation and regulatory costs and settlements.

(3) For the twelve months ended March 28, 2015, $9.7 million in specifically identified non-recurring operational and regulatory projects, $2.1 million in expenses related to our Tunisia factory fire and $2.3 million in professional fees and other non-recurring charges, offset by $1.3 million in adjustments to incremental Empi bad debt expense related to the Medicare CLBP decision.

(c) Other adjustment items before permitted pro forma adjustments are comprised of the following:

	Three Months Ended,				Twelve Months Ended
(in thousands)	March 28, 2015		March 29, 2014		March 28, 2015
Blackstone monitoring fee	$	1,750	$	1,750	$	7,000
Noncontrolling interests		301		349		924
Loss on modification and extinguishment of debt (1)		—		—		938
Other (2)		4,228		149		9,552
Total other adjustment items before permitted pro form adjustments	$	6,279	$	2,248	$	18,414

(1) Loss on modification and extinguishment of debt for the twelve months ending March 28, 2015 consists of $0.3 million of arrangement and amendment fees and other fees and expenses incurred in connection with the amendment of our senior secured credit facilities and $0.6 million related to the non-cash write off of unamortized debt issuance costs and original issue discount associated with the portion of our original term loans which were extinguished.

(2) Other adjustments consist primarily of net realized and unrealized foreign currency transaction gains and losses.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain market risks as part of our ongoing business operations, primarily risks from changing interest rates and foreign currency exchange rates that could impact our financial condition, results of operations, and cash flows.

Interest Rate Risk

Our primary exposure is to changing interest rates. We have historically managed our interest rate risk by including components of both fixed and variable debt in our capital structure. For our fixed rate debt, interest rate changes may affect the market value of the debt, but do not impact our earnings or cash flow. Conversely, for our variable rate debt, interest rate changes generally do not affect the fair market value of the debt, but do impact future earnings and cash flow, assuming other factors are constant. As of March 28, 2015, we have $1,370.0 million of aggregate fixed rate notes and $898.6 million of borrowings under the senior secured credit facilities which bear interest at floating rates based on the Eurodollar rate, as defined therein. A hypothetical 100 basis point increase in variable interest rates for the floating rate borrowings under our senior secured credit facilities would have impacted our earnings and cash flow for the three months ended March 28, 2015 by $0.4 million. As of March 28, 2015, our term loans are subject to a 1.00% minimum LIBOR rate which is higher than the actual LIBOR rate of 0.18% as of March 28, 2015. Accordingly, a hypothetical 100 basis point increase in the LIBOR rate during the three months ended March 28, 2015 would have increased the rate applicable to our variable debt by only 0.18%. We may use derivative financial instruments where appropriate to manage our interest rate risk. However, as a matter of policy, we do not enter into derivative or other financial investments for trading or speculative purposes.

Foreign Currency Risk

Due to the global reach of our business, we are exposed to market risk from changes in foreign currency exchange rates, particularly with respect to the U.S. dollar compared to the Euro and the Mexican Peso (MXN). Our wholly owned foreign subsidiaries are consolidated into our financial results and are subject to risks typical of an international business including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions and foreign exchange volatility. To date, we have not used international currency derivatives to hedge against our investment in our European subsidiaries or their operating results, which are converted into U.S. Dollars at period-end and average foreign exchange rates, respectively. However, as we continue to expand our business through acquisitions and organic growth, the sales of our products that are denominated in foreign currencies has increased, as well as the costs associated with our foreign subsidiaries which operate in currencies other than the U.S. dollar. Accordingly, our future results could be materially impacted by changes in these or other factors.

For the three months ended March 28, 2015, sales denominated in foreign currencies accounted for 23.3% of our consolidated net sales, of which 16.6% were denominated in the Euro. In addition, our exposure to fluctuations in foreign currencies arises because certain of our subsidiaries enter into purchase or sale transactions using a currency other than its functional currency. Accordingly, our future results could be materially impacted by changes in foreign exchange rates or other factors. Occasionally, we seek to reduce the potential impact of currency fluctuations on our business through hedging transactions.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as the term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on this evaluation and subject to the foregoing, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the quarter covered by this report, the design and operation of our disclosure controls and procedures were effective to accomplish their objectives at a reasonable assurance level.

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Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are plaintiffs or defendants in various litigation matters in the ordinary course of our business, some of which involve claims for damages that are substantial in amount. We believe that the disposition of claims currently pending will not have a material adverse impact on our financial position or results of operations. Except as disclosed below, there have been no material developments in the Legal Proceedings discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

Lawsuit by Insurance Carrier

In December 2013, one of our product liability insurance carriers,Ironshore Specialty Ins. Co.filed a complaint in the U.S. District Court for the Southern District of California, which seeks (a) either (i) rescission of an insurance policy (the “Policy”) purchased by the Company from the plaintiff and repayment by the Company of all amounts allegedly paid under the Policy, approximately $10 million, less premiums paid by the Company for the Policy, or, in the alternative, (ii) reformation of the Policy to exclude coverage for pain pump claims and repayment by the Company of all amounts allegedly paid under the Policy for such claims, in an unspecified amount; and/or (b) damages and other relief in an unspecified amount for alleged fraud and negligent misrepresentation based on an alleged failure by the Company and/or the involved Policy producers to disclose alleged material information while applying for the Policy. While we believe this case is without merit, we have brought third-party indemnification claims against our insurance broker and a wholesale broker who were involved in securing the Policy. The carrier under our directors and officers liability policy has agreed to reimburse defense costs incurred in this matter, subject to reservation of rights to deny coverage for customary matters. The parties entered into a settlement agreement in February 2015 which settles all claims and dismisses the lawsuit in all respects, resulting in no material financial impact.

BGS Qui Tam Action

We are a defendant in a qui tam action filed in Federal Court in Boston, Massachusetts, captioned United States, ex rel. Bierman v. Orthofix International, N.V. et al., in which the relator, or whistleblower, names us and each other company engaged in the external bone growth stimulator industry as defendants. The case was filed under seal in March 2005 and unsealed in March 2009, during which time the government investigated the claims made by relator and decided not to intervene in the case. The government continued its investigation of DJO for several years following the unsealing of the case but did not ultimately bring any criminal or civil charges against us relating to the investigation. The 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 bone growth stimulation devices by each defendant to the present by seeking reimbursement for such devices as purchased items rather than rental items. The relator also alleges that the defendants are engaged in other marketing practices constituting violations of the federal and various state false claim and anti-kickback statutes. Orthofix International, N.V. has settled with the relator, and we understand that two other defendants have reached settlements. The case continues against the remaining defendants, with the relator pressing for discovery after years of inactivity on the case. While we believe the case against us has no merit, we can make no assurances as to the resources that will be needed to respond to this matter or the final outcome of the case.

Minnesota Investigation

On April 1, 2015, we became aware of an investigation headed by an Assistant U.S. Attorney (“AUSA”) in Minneapolis, Minnesota into the sale from (July 1, 2010 to the present) of TENS products by our subsidiary, Empi, Inc., for which government payors reimbursed us. The AUSA has not provided any further description of the investigation, nor have we received a subpoena or other official document relating to the investigation.

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ITEM 1A. RISK FACTORS

For a discussion of the Company’s potential risks or uncertainties, please see Part I, Item IA, of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014 filed with the SEC on February 20, 2015. There have been no material changes to the risk factors disclosed in such Form 10-K.

ITEM 5. OTHER INFORMATION

Iran Sanctions Related Disclosure

Under the Iran Threat Reduction and Syrian Human Rights Act of 2012 (“ITRSHRA”), which added Section 13(r) of the Exchange Act, we are required to include certain disclosures in our periodic reports if we or any of our “affiliates” knowingly engaged in certain specified activities, transactions or dealings related to Iran or certain designated parties during the period covered by the report. An issuer must also concurrently file a separate notice with the SEC that such activities have been disclosed. We are not presently aware that we or our consolidated subsidiaries have knowingly engaged in any transaction or dealing reportable under Section 13(r) of the Exchange Act during the quarter ended March 28, 2015.

Because the SEC defines the term “affiliate” broadly, it includes any entity controlled by us as well as any person or entity that controls us or is under common control with us (“control” is also construed broadly by the SEC). As a result, The Blackstone Group L.P. (“Blackstone”), an affiliate of our major shareholder, and certain of the companies in which Blackstone’s affiliated funds are invested (the “portfolio companies”), may be deemed to be our affiliates. During the quarter ended March 28, 2015, one such portfolio company included information in its periodic report filed with the SEC regarding activities that require disclosure under the ITRSHR. This disclosure is reproduced in Exhibit 99.1 of this report and is incorporated by reference herein. We have no involvement in or control over such activities and we have not independently verified or participated in the preparation of the disclosures described in the filing.

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ITEM 6. EXHIBITS

(a)Exhibits

3.1	Certificate of Formation of DJOFL and amendments thereto (incorporated by reference to Exhibit 3.1 to DJOFL’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007).
3.2	Limited Liability Company Agreement of DJOFL (incorporated by reference to Exhibit 3.2 to DJOFL’s Registration Statement on Form S-4, filed April 18, 2007 (File No. 333-142188)).
31.1+	Certification (pursuant to Securities Exchange Act Rule 13a-14a) by Chief Executive Officer.
31.2+	Certification (pursuant to Securities Exchange Act Rule 13a-14a) by Chief Financial Officer.
32.1+	Section 1350—Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) by Chief Executive Officer.
32.2+	Section 1350—Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) by Chief Financial Officer.
99.1+	Section 13(r) Disclosure—Iran Sanctions.
101+	The following financial information from DJO Finance LLC’s Quarterly Report on Form 10-Q for the quarterly period ended March 28, 2015, formatted in XBRL: (i) the Unaudited Condensed Consolidated Balance Sheets as of March 28, 2015 and December 31, 2014, (ii) the Unaudited Condensed Consolidated Statements of Operations for the three months ended March 28, 2015 and March 29, 2014, (iii) the Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 28, 2015 and March 29, 2014, (iv) the Unaudited Consolidated Statement of Deficit as of March 28, 2015 and December 31, 2014, (v) the Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 28, 2015 and March 29, 2014 and (vi) the Notes to the Unaudited Condensed Consolidated Financial Statements.

+ Filed herewith

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	DJO FINANCE LLC
Date: April 20, 2015	By:	/s/    MICHAEL P. MOGUL
		Michael P. Mogul
		President and Chief Executive Officer
Date: April 20, 2015	By:	/s/    SUSAN M. CRAWFORD
		Susan M. Crawford
		Executive Vice President, Chief Financial Officer and Treasurer

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