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DJO Reports 2008 Results

DJO Incorporated (DJO), a orthopedic devices company, has reported net sales of $980.2 million for the full year of 2008, up 99.2%, compared with the net sales of $492.1 million in the previous year-end. It has also posted net loss of $97.8 million for the full year of 2008, compared with the net loss of $82.4 million in the previous year-end.

Fourth Quarter Results

DJO Finance LLC (DJOFL) achieved actual net sales for the fourth quarter of 2008 of $247.0 million, reflecting growth of 44.7% over actual net sales of $170.7 million in the fourth quarter of 2007, driven in large part by recent acquisitions. In 2007, in addition to the DJO Incorporated (DJO) Merger, the company completed acquisitions of IOMED, Inc. and The Saunders Group, Inc. in August 2007 and July 2007, respectively, and of two immaterial businesses. Collectively, these acquisitions are referred to as the “Other Acquisitions.” On a pro forma basis, as if the DJO Merger and the Other Acquisitions had all closed on January 1, 2007, sales for the fourth quarter of 2008 would have reflected growth of approximately 3.6%, compared to $238.4 million for the fourth quarter of 2007. Sales for the fourth quarter of 2008 were reduced by $5.9 million due to unfavorable changes in foreign exchange rates from the rates in effect in the fourth quarter of 2007. On a constant currency basis, sales in the fourth quarter of 2008 grew 6.1% over pro forma sales in the fourth quarter of 2007.

For the fourth quarter of 2008, DJOFL reported a net loss of $38.4 million, compared to a net loss of $57.3 million for the fourth quarter of 2007. The results for the current and prior year fourth quarter periods were impacted by significant purchase accounting adjustments, non-recurring charges and other adjustments related to the DJO Merger and the Other Acquisitions.

The company defines Adjusted EBITDA as net income (loss) plus interest expense, net, provision (benefit) for income taxes, and depreciation and amortization, further adjusted for certain non-cash items, non-recurring items and other adjustment items, including the addition of certain future cost savings expected to be achieved related to recent acquisitions, all as permitted in calculating covenant compliance under the company’s senior secured credit facility and the indentures governing its 10.875% senior notes and its 11.75% senior subordinated notes. A reconciliation between net loss and Adjusted EBITDA is included in the attached financial tables.

Adjusted EBITDA for the fourth quarter of 2008, before future cost savings to be achieved related to the DJO Merger, was $54.5 million, or 22.1% of net sales, reflecting growth of $15.3 million, or 39.1%, compared with pro forma Adjusted EBITDA, before future cost savings, of $39.2 million, or 16.4% of net sales, achieved in the fourth quarter of 2007. The improvement is primarily attributable to growth in the company’s business and to cost savings realized in connection with the integration of the Other Acquisitions and the DJO Merger.

Full Year 2008 Results

On a pro forma basis, as if the DJO Merger and the Other Acquisitions had all closed on January 1, 2007, sales for the full year 2008 would have reflected growth of approximately 5.9%, compared to pro forma sales of $925.3 million for the full year 2007.

The results for both years were impacted by significant purchase accounting adjustments, non-recurring charges and other adjustments related to the DJO Merger and the Other Acquisitions, and the 2007 results were also impacted by non-recurring charges and other adjustments related to the Prior Transaction and certain other acquisitions completed by ReAble in 2006.

Adjusted EBITDA for the full year of 2008, before future cost savings to be achieved related to the DJO Merger, was $214.4 million, or 21.9% of net sales, reflecting growth of $30.3 million, or 16.4%, compared with pro forma Adjusted EBITDA, before future cost savings, of $184.1 million, achieved in the full year of 2007. For the year ended December 31, 2008, Adjusted EBITDA was $259.6 million, or 26.5% of net sales, including future cost savings to be achieved related to the DJO Merger of $45.2 million.

Cash flow from operations was strong at $49.0 million in the fourth quarter, before cash interest paid of $72.7 million, including semi-annual interest payments of approximately $43.0 million on the company’s 10.875% senior notes and 11.75% senior subordinated notes, which are made in the second and fourth quarters of each year. The company had cash balances of $30.5 million at December 31, 2008 and available liquidity of $76 million under its revolving line of credit.

“We are pleased to report our first full year as the new DJO, since merging DJO with ReAble Therapeutics in November 2007,” said Les Cross, president and chief executive officer of DJO. “By nearly all measures, it was a great year for DJO. We achieved a number of significant merger-related milestones and continued to penetrate our markets. The year was made possible by the hard work of our employees who simultaneously integrated the operations of two legacy businesses, implemented many new cost savings initiatives across the new organization, and maintained the sales momentum within each business segment. By the year’s end, our sales had grown nearly 6%, on a pro forma basis, to $980 million, with each of our three business segments contributing to the gains, and our adjusted EBITDA had grown by over 16%, compared to pro forma fiscal year 2007, or more than double the rate of our sales growth.

“The success of our efforts throughout 2008 enabled the company to end the year with a strong fourth quarter finish. Fourth quarter sales, excluding the effects of changes in foreign exchange rates, grew 6.1% over pro forma sales from the fourth quarter of 2007. Our fourth quarter adjusted gross profit margins improved sequentially from the third quarter of 2008 by 90 basis points to 62.8%. Excluding the effects of fourth quarter changes in foreign exchange rates, fourth quarter adjusted EBITDA would have been $56.4 million, or 22.2% of net sales.

“Looking at the performance of our business segments for the fourth quarter of 2008, sales in our Domestic Rehabilitation segment, which is made up of our Bracing and Supports, Empi, Regeneration and Chattanooga business units, grew by 6.3% over pro forma sales for the fourth quarter of 2007. Once again, this result was led by strong sales from our Regeneration business.

“Reported growth in our International Rehabilitation segment was significantly impacted in the fourth quarter as the U.S. dollar strengthened against foreign currencies. On a constant currency basis, fourth quarter International Rehabilitation sales grew 7.3%, compared to pro forma International Rehabilitation sales in the fourth quarter of 2007. This growth rate reflects acceleration from previous quarterly results and reflects approximately twice the market’s estimated rate of growth.

“And finally, fourth quarter sales in our Surgical Implants segment grew 4.7% over sales in the fourth quarter of 2007. Growth in the quarter was again driven by knees and shoulders, but was impacted by a delay in certain new product launches. We expect to see improving sales growth as we move forward into 2009, driven in part by several new products, which are scheduled to be launched this year.

“From an operations perspective, we accomplished the majority of our merger-related initiatives that we set at the beginning of the year. We generated meaningful cost savings in 2008 and continue to expect additional savings in 2009, exceeding our original estimates. We also adopted a very positive new culture and value system for DJO, which will drive the achievement of our mission to deliver outstanding sales and customer service, operational excellence, and to continuously improve all that we do.

“With most of the merger-related integration behind us and the cost reduction initiatives progressing, we turn our attention to 2009. While we expect 2009 to be another year of operational excellence for DJO, our primary focus for 2009 is on revenue acceleration based on enhanced sales force productivity and a robust pipeline of new produ