##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the quarterly period ended March 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 333142188
 ReAble Therapeutics Finance LLC
 (Exact name of Registrant as specified in its charter)
 Delaware
    
    20-5653965(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 
 
 o þ
  o o þ
 o þ




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##### 

\

ReAble Therapeutics Finance LLC
Quarterly Report on Form 10-Q
For the period ended March 31, 2007
 Index to Condensed Consolidated Financial Statements
 PagePART I  Financial InformationItem 1. Financial Statements
    
    
    2Unaudited condensed consolidated balance sheets as of March 31, 2007 and
December 31, 2006
    
    
    2Unaudited condensed consolidated statements of operations for the Successor
three month period ended March 31, 2007 and for the Predecessor three month period
ended April 1, 2006
    
    
    3Unaudited condensed consolidated statements of cash flows for the Successor
three month period ended March 31, 2007 and for the Predecessor three month period
ended April 1, 2006
    
    
    4Notes to unaudited condensed consolidated financial statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    24Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 4. Controls and Procedures
    
    
    36PART II  Other InformationItem 1. Legal Proceedings
    
    
    37Item 1A. Risk Factors
    
    
    37Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    37Item 3. Defaults Upon Senior Securities
    
    
    37Item 4. Submission of Matters to a Vote of Security Holders
    
    
    37Item 5. Other Information
    
    
    37Item 6. Exhibits
    
    
    38Signatures
    
    
    39Certification by CEOCertification by CFOCertification by CEOCertification by CFO
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Part I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 ReAble Therapeutics Finance LLC and Subsidiaries
 
 Unaudited Condensed Consolidated Balance Sheets
 (in thousands)
 March 31,
    
    
    December 31,2007
    
    
    2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    23,481
    
    
    $
    31,679Accounts receivable, net
    
    
    86,648
    
    
    
    74,155Inventories, net
    
    
    58,065
    
    
    
    67,673Deferred tax assets
    
    
    28,056
    
    
    
    25,734Prepaid expenses and other current assets
    
    
    7,896
    
    
    
    5,966Assets of discontinued operations
    
    
    4
    
    
    
    380Total current assets
    
    
    204,150
    
    
    
    205,587Property and equipment, net
    
    
    44,322
    
    
    
    41,251Goodwill
    
    
    486,744
    
    
    
    475,722Intangible assets, net
    
    
    310,539
    
    
    
    317,242Other non-current assets
    
    
    19,780
    
    
    
    20,834Total assets
    
    $
    1,065,535
    
    
    $
    1,060,636Liabilities, Minority Interests, and Membership EquityCurrent liabilities:Long-term debt and capital leases, current portion
    
    $
    6,396
    
    
    $
    6,505Accounts payable
    
    
    27,453
    
    
    
    18,895Accrued expenses
    
    
    50,127
    
    
    
    37,979Total current liabilities
    
    
    83,976
    
    
    
    63,379Long-term debt and capital leases, net of current portion
    
    
    547,091
    
    
    
    548,037Deferred tax liabilities
    
    
    107,792
    
    
    
    111,232Other non-current liabilities
    
    
    2,511
    
    
    
    1,871Total liabilities
    
    
    741,370
    
    
    
    724,519Minority interests
    
    
    764
    
    
    
    909Membership equity:Membership equity
    
    
    373,871
    
    
    
    373,469Accumulated deficit
    
    
    (52,721
    )
    
    
    (41,634
    )Accumulated other comprehensive income:Foreign currency translation adjustments
    
    
    3,309
    
    
    
    3,373Change in hedging gains and losses, net of tax
    
    
    (1,058
    )
    
    
    Total membership equity
    
    
    323,401
    
    
    
    335,208Total liabilities, minority interests, and membership equity
    
    $
    1,065,535
    
    
    $
    1,060,636
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ReAble Therapeutics Finance LLC and Subsidiaries
 
 Unaudited Condensed Consolidated Statements of Operations
 (in thousands)
 Three Months EndedSuccessor
    
    
    
    PredecessorMarch 31,
    
    
    
    April 1,2007
    
    
    
    2006Net sales
    
    $
    106,707
    
    
    
    $
    86,913Cost of sales
    
    
    45,124
    
    
    
    
    34,960Gross margin
    
    
    61,583
    
    
    
    
    51,953Operating expenses:Selling, general and administrative
    
    
    57,638
    
    
    
    
    38,526Research and development
    
    
    3,635
    
    
    
    
    6,848Operating income
    
    
    310
    
    
    
    
    6,579Other income (expense):Interest income
    
    
    217
    
    
    
    
    121Interest expense
    
    
    (14,021
    )
    
    
    
    (7,518
    )Other income (expense), net
    
    
    143
    
    
    
    
    (116
    )Loss from continuing operations before income taxes and
minority interests
    
    
    (13,351
    )
    
    
    
    (934
    )Provision (benefit) for income taxes
    
    
    (2,341
    )
    
    
    
    1,400Minority interests
    
    
    77
    
    
    
    
    59Loss from continuing operations
    
    
    (11,087
    )
    
    
    
    (2,393
    )Discontinued operations:Loss from discontinued operations (net of income tax
benefit of $121)
    
    
    
    
    
    
    
    (132
    )Net loss
    
    $
    (11,087
    )
    
    
    $
    (2,525
    )
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ReAble Therapeutics Finance LLC and Subsidiaries
 
 Unaudited Condensed Consolidated Statements of Cash Flows
 (in thousands)
 Three Months EndedSuccessor
    
    
    
    PredecessorMarch 31,
    
    
    
    April 1,2007
    
    
    
    2006OPERATING ACTIVITIES:Net loss
    
    $
    (11,087
    )
    
    
    $
    (2,525
    )Adjustments to reconcile net loss to net cash (used in) provided by operating activities:Depreciation
    
    
    3,080
    
    
    
    
    2,334Amortization of intangibles
    
    
    6,507
    
    
    
    
    1,466Amortization of debt issuance costs
    
    
    960
    
    
    
    
    542Non-cash interest expense
    
    
    
    
    
    
    
    27Stock-based compensation
    
    
    384
    
    
    
    
    823Loss on disposal of assets
    
    
    113
    
    
    
    
    222Deferred income taxes
    
    
    (3,548
    )
    
    
    
    (74
    )Provision for bad debt expense and sales returns
    
    
    2,322
    
    
    
    
    2,079Inventory reserves
    
    
    268
    
    
    
    
    1,064Minority interests
    
    
    77
    
    
    
    
    59Excess tax benefit associated with stock option exercises
    
    
    (17
    )
    
    
    
    (945
    )In-process research and development
    
    
    
    
    
    
    
    4,016Net effect of discontinued operations
    
    
    376
    
    
    
    
    (1,346
    )Changes in operating assets and liabilities, net of acquired assets and liabilities:Accounts receivable
    
    
    (12,837
    )
    
    
    
    (4,770
    )Inventories
    
    
    3,557
    
    
    
    
    (2,003
    )Prepaid expenses, other assets and liabilities
    
    
    (4,873
    )
    
    
    
    183Accounts payable and accrued expenses
    
    
    12,677
    
    
    
    
    (638
    )Net cash (used in) provided by operating activities
    
    
    (2,041
    )
    
    
    
    514INVESTING ACTIVITIES:Acquisition of businesses
    
    
    (4,200
    )
    
    
    
    (235
    )Acquisition of intangible assets
    
    
    
    
    
    
    
    (384
    )Proceeds from sale of assets held for sale and property and equipment
    
    
    3,573
    
    
    
    
    61Purchases of property and equipment
    
    
    (4,432
    )
    
    
    
    (3,833
    )Net cash used in investing activities
    
    
    (5,059
    )
    
    
    
    (4,391
    )FINANCING ACTIVITIES:Proceeds from issuance of common stock
    
    
    
    
    
    
    
    2,416Proceeds from long-term obligations
    
    
    
    
    
    
    
    25,300Payments on long-term obligations
    
    
    (988
    )
    
    
    
    (19,141
    )Dividend paid to minority interests
    
    
    (226
    )
    
    
    
    Excess tax benefit associated with stock option exercises
    
    
    17
    
    
    
    
    945Net cash (used in) provided by financing activities
    
    
    (1,197
    )
    
    
    
    9,520Effect of exchange rate on cash and cash equivalents
    
    
    99
    
    
    
    
    84Net (decrease) increase in cash and cash equivalents
    
    
    (8,198
    )
    
    
    
    5,727Cash and cash equivalents at beginning of period
    
    
    31,679
    
    
    
    
    17,200Cash and cash equivalents at end of period
    
    $
    23,481
    
    
    
    $
    22,927Supplemental disclosures of cash flow information:Cash paid for interest
    
    $
    7,327
    
    
    
    $
    2,795Cash paid for income taxes
    
    
    1,236
    
    
    
    
    571Non-cash investing and financing activities:Capital lease obligations related to equipment leases
    
    $
    
    
    
    
    $
    384
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ReAble Therapeutics Finance LLC and Subsidiaries
 
 Notes to Unaudited Condensed Consolidated Financial Statements
 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
 Basis of Presentation and Principles of Consolidation.
       Uses of Estimates
  Reclassifications
  2. RECENT ACCOUNTING PRONOUNCEMENTS
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3. MERGER TRANSACTION
   Fair Value
    
    
    Useful LifeCurrent assets
    
    $
    207,327Tangible and other non-current assets
    
    
    49,853Liabilities assumed
    
    
    (533,694
    )In-process research and development
    
    
    25,200Identifiable intangible assetsTechnology-based
    
    
    83,900
    
    
    3  11 yearsCustomer based
    
    
    133,800
    
    
    11  12 yearsTrademarks
    
    
    92,000
    
    
    IndefiniteNon-compete
    
    
    1,600
    
    
    1 yearGoodwill
    
    
    468,986
    
    
    
    N/APurchase price
    
    $
    528,972
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4. ACCOUNTS RECEIVABLE
  Three Months EndedSuccessor
    
    
    PredecessorMarch 31,
    
    
    April 1,2007
    
    
    2006Balance, beginning of period
    
    $
    513
    
    
    $
    4,016Provision
    
    
    2,322
    
    
    
    2,079Write-off charges and recoveries
    
    
    (15
    )
    
    
    (2,377
    )Balance, end of period
    
    $
    2,820
    
    
    $
    3,718
 5. INVENTORIES
  March 31,
    
    
    December 31,2007
    
    
    2006Components and raw materials
    
    $
    18,065
    
    
    $
    19,437Work in process
    
    
    2,664
    
    
    
    3,848Finished goods
    
    
    23,773
    
    
    
    27,974Inventory held on consignment
    
    
    14,912
    
    
    
    17,33259,414
    
    
    
    68,591Less  inventory reserves
    
    
    (1,349
    )
    
    
    (918
    )$
    58,065
    
    
    $
    67,673
  Three Months EndedSuccessor
    
    
    
    PredecessorMarch 31,
    
    
    
    April 1,2007
    
    
    
    2006Balance, beginning of period
    
    $
    918
    
    
    
    $
    7,397Provision charged to cost of sales
    
    
    268
    
    
    
    
    1,064Recoveries (write-offs) charged to reserve
    
    
    163
    
    
    
    
    (982
    )Balance, end of period
    
    $
    1,349
    
    
    
    $
    7,479
  6. GOODWILL AND INTANGIBLE ASSETS
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Successor
    
    
    
    PredecessorNovember 4,
    
    
    
    January 1,Three months
    
    
    2006 through
    
    
    
    2006 throughended March 31,
    
    
    December 31,
    
    
    
    November 3,2007
    
    
    2006
    
    
    
    2006Balance, beginning of period
    
    $
    475,722
    
    
    $
    
    
    
    
    $
    290,255Adjustment related to resolution of contingencies
    
    
    
    
    
    
    
    
    
    
    
    (173
    )Adjustment related to adoption of FIN 48
    
    
    5,039
    
    
    
    
    
    
    
    
    Adjustment related to tax benefit associated with stock option exercises
    
    
    
    
    
    
    
    
    
    
    
    (2,016
    )Goodwill associated with the acquisition of Osteoimplant Technology, Inc. (OTI)
    
    
    
    
    
    
    
    
    
    
    
    474Goodwill associated with the acquisition of Compex
    
    
    
    
    
    
    
    
    
    
    
    43,995Goodwill associated with the Merger
    
    
    4,014
    
    
    
    459,933
    
    
    
    
    Goodwill associated with the acquisition of Cefar
    
    
    (516
    )
    
    
    13,173
    
    
    
    
    Goodwill associated with the acquisition of a business
    
    
    2,420
    
    
    
    
    
    
    
    
    Foreign currency translation
    
    
    65
    
    
    
    2,616
    
    
    
    
    4,986Balance, end of period
    
    $
    486,744
    
    
    $
    475,722
    
    
    
    $
    337,521
     Gross Carrying
    
    
    Accumulated
    
    
    Intangibles,Amount
    
    
    Amortization
    
    
    NetAmortized intangible assets:Technology-based
    
    $
    85,700
    
    
    $
    (5,199
    )
    
    $
    80,501Customer-based
    
    
    138,600
    
    
    
    (5,343
    )
    
    
    133,257$
    224,300
    
    
    $
    (10,542
    )
    
    
    213,758Unamortized intangible assets:Trademarks
    
    
    
    
    
    
    
    
    
    
    95,400Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    1,381Total intangible assets
    
    
    
    
    
    
    
    
    
    $
    310,539
  Gross Carrying
    
    
    Accumulated
    
    
    Intangibles,Amount
    
    
    Amortization
    
    
    NetAmortized intangible assets:Technology-based
    
    $
    85,754
    
    
    $
    (1,990
    )
    
    $
    83,764Customer-based
    
    
    138,796
    
    
    
    (2,045
    )
    
    
    136,751$
    224,550
    
    
    $
    (4,035
    )
    
    
    220,515Unamortized intangible assets:Trademarks
    
    
    
    
    
    
    
    
    
    
    95,396Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    1,331Total intangible assets
    
    
    
    
    
    
    
    
    
    $
    317,242
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For nine months ending December 31, 2007
    
    $
    19,000For year ended December 31, 2008
    
    
    24,000For year ended December 31, 2009
    
    
    24,000For year ended December 31, 2010
    
    
    24,000For year ended December 31, 2011
    
    
    23,000For year ended December 31, 2012
    
    
    22,000
  Intangibles,Goodwill
    
    
    netOrthopedic Rehabilitation Division
    
    $
    438,752
    
    
    $
    278,298Surgical Implant Division
    
    
    47,992
    
    
    
    32,241Total
    
    $
    486,744
    
    
    $
    310,539
 7. LONG-TERM DEBT AND CAPITAL LEASES
  March 31,
    
    
    December 31,2007
    
    
    2006$400 million Senior Credit Facility to a syndicate of
financial institutions; composed of a seven-year $350 million
term loan and a six-year $50 million revolving credit
facility; collateralized by all domestic assets of RTI and
pledge of 100% of the membership interest of RTFL, 100% of the
capital stock of each domestic subsidiary of RTFL and 65% of
the stock of first-tier foreign subsidiaries of RTFL; interest
at Bank of Americas prime rate plus 0.50% or Eurodollar rate
adjusted for maximum reserves; $50 million available under the
revolving credit facility as of March 31, 2007; term loan
subject to quarterly principal payments of 0.25% of
outstanding principal balance with the last payment due
November 3, 2013; interest rate of 7.78% and 7.87% at March
31, 2007 and December 31, 2006, respectively.
    
    $
    348,252
    
    
    $
    349,125$200 million senior subordinated notes payable to
institutional investors; interest at 11.75%; interest payable
semi-annually on May 15 and November 15 of each year through
November 15, 2014; effectively and contractually subordinated
to the $400 million Senior Credit Facility.
    
    
    200,000
    
    
    
    200,000$2.9 million revolving credit facilities at various European
Banks; collateralized by certain of Cefar ABs (Cefar)
assets, interest rates ranging from 4.3% to 4.7% and 4.0% to
6.6% at March 31, 2007 and December 31, 2006, respectively;
interest added to outstanding balance quarterly; $500,000
available under the credit facilities as of March 31, 2007.
    
    
    2,397
    
    
    
    2,265$2.7 million term loans from various European banks;
collateralized by certain of Cefars assets, interest rates
based on various floating market rates; principal and interest
payments due quarterly through February 2013; interest rates
ranging from 3.75 % to 4.9% and 3.5% to 4.9% at March 31, 2007
and December 31, 2006, respectively.
    
    
    1,920
    
    
    
    2,037Note payable to a corporation, which is principally owned by
an employee of the Company, in connection with the acquisition
of Rehab Med+Equip by Empi in 2002; balance due July 2008;
interest at higher of 5% or prime on the first business day of
each calendar quarter; interest rate of 8.25% at March 31,
2007 and December 31, 2006.
    
    
    469
    
    
    
    469Capital lease obligations, collateralized by related equipment.
    
    
    449
    
    
    
    646553,487
    
    
    
    554,542Less  current portion
    
    
    (6,396
    )
    
    
    (6,505
    )Long-term debt and capital lease, net of current portion
    
    $
    547,091
    
    
    $
    548,037
 Senior Secured Credit Facility
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Interest Rate and Fees.
 Prepayments.
 Amortization.
 Guarantee and Security.
 Covenants.
 11.75% Senior Subordinated Notes
   Optional Redemption
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Change of Control
 Guarantees
 Covenants.
 8. STOCK OPTION PLANS AND STOCK-BASED COMPENSATION
    Summary of Plan  Post-Merger
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Summary of Plans  Pre-Merger
  Summary of Assumptions and Activity
   Three Months EndedSuccessor
    
    
    PredecessorMarch 31,
    
    
    April 1,2007
    
    
    2006Dividend Yield
    
    
    0.0
    %
    
    
    
    0.0
    %Expected volatility
    
    56.0  60.0
    %
    
    
    
    61.0
    %Risk-free interest rate
    
    
    4.70
    %
    
    
    
    4.50
    %Expected life
    
    5.2  7.1 years
    
    
    4.5  5.6 years
  Weighted AverageWeighted-
    
    
    RemainingAverage
    
    
    Contractual Term
    
    
    Aggregate IntrinsicNumber of Shares
    
    
    Exercise Price
    
    
    (Years)
    
    
    ValueOutstanding, beginning of period
    
    
    3,044,650
    
    
    $
    15.34Granted
    
    
    50,250
    
    
    $
    16.46Exercised
    
    
    
    
    
    
    Cancelled
    
    
    202,050
    
    
    $
    16.16Outstanding, end of period
    
    
    2,892,850
    
    
    $
    15.30
    
    
    
    9.2
    
    
    $
    3,440,534Options exercisable, end of period
    
    
    778,600
    
    
    $
    12.15
    
    
    
    7.6
    
    
    $
    3,440,534
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Three Months EndedSuccessor
    
    
    
    PredecessorMarch
    
    
    
    April 1,Stock-based compensation recognized:
    
    31, 2007
    
    
    
    2006Cost of sales
    
    $
    8
    
    
    
    $
    16Selling, general and administrative
    
    
    372
    
    
    
    
    799Research and development
    
    
    4
    
    
    
    
    8Total
    
    $
    384
    
    
    
    $
    823Related deferred income tax benefit
    
    
    150
    
    
    
    
    110Increase in net loss
    
    $
    234
    
    
    
    $
    713
 Restricted Stock
  9. SEGMENT AND GEOGRAPHIC INFORMATION
 Disclosures about Segments of an
Enterprise and Related Information
  Three Months EndedSuccessor
    
    
    
    PredecessorMarch 31,
    
    
    
    April 1,2007
    
    
    
    2006Net sales:Orthopedic Rehabilitation Division
    
    $
    89,906
    
    
    
    $
    71,488Surgical Implant Division
    
    
    16,801
    
    
    
    
    15,425Consolidated net sales
    
    $
    106,707
    
    
    
    $
    86,913Gross margin:Orthopedic Rehabilitation Division
    
    $
    49,814
    
    
    
    $
    40,164Surgical Implant Division
    
    
    11,769
    
    
    
    
    11,789Consolidated gross margin
    
    $
    61,583
    
    
    
    $
    51,953
  Geographic Area
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Three Months EndedSuccessor
    
    
    
    PredecessorMarch 31,
    
    
    
    April 1,2007
    
    
    
    2006Net sales:United States
    
    $
    77,813
    
    
    
    $
    68,800Germany
    
    
    9,795
    
    
    
    
    7,317Other Europe, Middle East, & Africa
    
    
    15,242
    
    
    
    
    7,653Asia Pacific
    
    
    1,514
    
    
    
    
    2,413Other
    
    
    2,343
    
    
    
    
    730$
    106,707
    
    
    
    $
    86,913
  March 31,
    
    
    December 31,2007
    
    
    2006United States
    
    $
    759,157
    
    
    $
    751,914Europe
    
    
    102,228
    
    
    
    103,135$
    861,385
    
    
    $
    855,049
 10. INCOME TAXES
   11. ACQUISTION OF COMPEX
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LeaseTerminationCosts
    
    
    Severance
    
    
    TotalAccrual, beginning of period
    
    $
    346
    
    
    $
    1,389
    
    
    $
    1,735Expensed during period
    
    
    
    
    
    
    155
    
    
    
    155Payments made during period
    
    
    (346
    )
    
    
    (1,025
    )
    
    
    (1,448
    )Accrual, end of period
    
    $
    
    
    
    $
    519
    
    
    $
    519
 12. ACQUISTION OF CEFAR
   Fair Value
    
    
    Wtd. Avg. Useful LifeCurrent assets
    
    $
    11,465Tangible and other non-current assets
    
    
    1,036Liabilities assumed
    
    
    (10,303
    )Identifiable intangible assets:Trade names and trademarks
    
    
    3,400
    
    
    IndefiniteElectrotherapy technology
    
    
    1,800
    
    
    6 yearsCustomer relationships
    
    
    3,200
    
    
    10 yearsGoodwill
    
    
    12,657Purchase Price
    
    $
    23,255
 13. DISCONTINUED OPERATIONS
  ®
 - 15 -




---



##### Table of Contents



Three Months EndedSuccessor
    
    
    
    PredecessorMarch 31,
    
    
    
    April 1,2007
    
    
    
    2006Net sales
    
    $
    
    
    
    
    $
    1,212Loss from operations
    
    
    
    
    
    
    
    (253
    )Loss before income taxes from discontinued operations
    
    
    
    
    
    
    
    (253
    )Income tax benefit
    
    
    
    
    
    
    
    121Loss from discontinued operations
    
    $
    
    
    
    
    $
    (132
    )
 14. COMMITMENTS AND CONTINGENCIES
  Louis Dudas et al. v. Encore Medical
Corporation et al., Robert Kemp et al. v. Alastair J. Clemow et al.
 inter alias
   15. RELATED PARTY TRANSACTIONS
  - 16 -




---



##### Table of Contents



16. DERIVATIVE INSTRUMENTS
    17.
SUBSEQUENT EVENTS
  18. SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
   - 17 -




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##### Table of Contents



ReAble Therapeutics Finance LLC and Subsidiaries
 Unaudited Condensed Consolidating Balance Sheets
As of March 31, 2007
(in thousands)
 Non-RTFL
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    25
    
    
    $
    15,183
    
    
    $
    8,273
    
    
    $
    
    
    
    $
    23,481Accounts receivable, net
    
    
    
    
    
    
    67,551
    
    
    
    19,097
    
    
    
    
    
    
    
    86,648Inventories, net
    
    
    
    
    
    
    49,702
    
    
    
    8,656
    
    
    
    (293
    )
    
    
    58,065Deferred tax assets
    
    
    
    
    
    
    24,754
    
    
    
    3,448
    
    
    
    (146
    )
    
    
    28,056Prepaid expenses and other current assets
    
    
    
    
    
    
    7,117
    
    
    
    779
    
    
    
    
    
    
    
    7,896Assets of discontinued operations
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    4Total current assets
    
    
    25
    
    
    
    164,311
    
    
    
    40,253
    
    
    
    (439
    )
    
    
    204,150Property and equipment, net
    
    
    
    
    
    
    38,413
    
    
    
    7,915
    
    
    
    (2,006
    )
    
    
    44,322Goodwill
    
    
    
    
    
    
    424,956
    
    
    
    61,788
    
    
    
    
    
    
    
    486,744Intangible assets, net
    
    
    
    
    
    
    276,131
    
    
    
    34,408
    
    
    
    
    
    
    
    310,539Investment in subsidiaries
    
    
    386,317
    
    
    
    (42,294
    )
    
    
    48,424
    
    
    
    (392,447
    )
    
    
    Intercompany receivable
    
    
    284,469
    
    
    
    
    
    
    
    
    
    
    
    (284,469
    )
    
    
    Other non-current assets
    
    
    19,204
    
    
    
    453
    
    
    
    123
    
    
    
    
    
    
    
    19,780Total assets
    
    $
    690,015
    
    
    $
    861,970
    
    
    $
    192,911
    
    
    $
    (679,361
    )
    
    $
    1,065,535Liabilities, Minority Interests and
Membership EquityCurrent liabilities:Long-term debt and capital leases,
current portion
    
    $
    3,469
    
    
    $
    183
    
    
    $
    2,744
    
    
    $
    
    
    
    $
    6,396Accounts payable
    
    
    
    
    
    
    21,178
    
    
    
    6,275
    
    
    
    
    
    
    
    27,453Accrued expenses
    
    
    13,609
    
    
    
    25,259
    
    
    
    11,259
    
    
    
    
    
    
    
    50,127Total current liabilities
    
    
    17,078
    
    
    
    46,620
    
    
    
    20,278
    
    
    
    
    
    
    
    83,976Long-term debt and capital leases, net of
current portion
    
    
    544,783
    
    
    
    736
    
    
    
    1,572
    
    
    
    
    
    
    
    547,091Deferred tax liabilities
    
    
    
    
    
    
    96,974
    
    
    
    10,818
    
    
    
    
    
    
    
    107,792Intercompany payable
    
    
    
    
    
    
    190,270
    
    
    
    94,199
    
    
    
    (284,469
    )
    
    
    Other non-current liabilities
    
    
    1,738
    
    
    
    773
    
    
    
    
    
    
    
    
    
    
    
    2,511Total liabilities
    
    
    563,599
    
    
    
    335,373
    
    
    
    126,867
    
    
    
    (284,469
    )
    
    
    741,370Minority interests
    
    
    
    
    
    
    
    
    
    
    764
    
    
    
    
    
    
    
    764Membership equity
    
    
    126,416
    
    
    
    526,597
    
    
    
    65,280
    
    
    
    (394,892
    )
    
    
    323,401Total liabilities, minority interests
and membership equity
    
    $
    690,015
    
    
    $
    861,970
    
    
    $
    192,911
    
    
    $
    (679,361
    )
    
    $
    1,065,535
 - 18 -




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##### Table of Contents



ReAble Therapeutics Finance LLC and Subsidiaries
 Unaudited Condensed Consolidating Balance Sheets
As of December 31, 2006
(in thousands)
 Non-RTFL
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    12
    
    
    $
    22,650
    
    
    $
    9,017
    
    
    $
    
    
    
    $
    31,679Accounts receivable, net
    
    
    
    
    
    
    55,854
    
    
    
    18,301
    
    
    
    
    
    
    
    74,155Inventories, net
    
    
    
    
    
    
    58,707
    
    
    
    9,188
    
    
    
    (222
    )
    
    
    67,673Deferred tax assets
    
    
    
    
    
    
    21,598
    
    
    
    4,282
    
    
    
    (146
    )
    
    
    25,734Prepaid expenses and other current assets
    
    
    21
    
    
    
    5,462
    
    
    
    483
    
    
    
    
    
    
    
    5,966Assets of discontinued operations
    
    
    
    
    
    
    380
    
    
    
    
    
    
    
    
    
    
    
    380Total current assets
    
    
    33
    
    
    
    164,651
    
    
    
    41,271
    
    
    
    (368
    )
    
    
    205,587Property and equipment, net
    
    
    
    
    
    
    35,141
    
    
    
    8,157
    
    
    
    (2,047
    )
    
    
    41,251Goodwill
    
    
    
    
    
    
    414,079
    
    
    
    61,643
    
    
    
    
    
    
    
    475,722Intangible assets, net
    
    
    
    
    
    
    281,992
    
    
    
    35,250
    
    
    
    
    
    
    
    317,242Investment in subsidiaries
    
    
    387,419
    
    
    
    (41,601
    )
    
    
    47,731
    
    
    
    (393,549
    )
    
    
    Intercompany receivable
    
    
    287,144
    
    
    
    
    
    
    
    
    
    
    
    (287,144
    )
    
    
    Other non-current assets
    
    
    19,940
    
    
    
    762
    
    
    
    132
    
    
    
    
    
    
    
    20,834Total assets
    
    $
    694,536
    
    
    $
    855,024
    
    
    $
    194,184
    
    
    $
    (683,108
    )
    
    $
    1,060,636Liabilities, Minority Interests and
Membership EquityCurrent liabilities:Long-term debt and capital leases,
current portion
    
    $
    3,500
    
    
    $
    332
    
    
    $
    2,673
    
    
    $
    
    
    
    $
    6,505Accounts payable
    
    
    
    
    
    
    13,455
    
    
    
    5,440
    
    
    
    
    
    
    
    18,895Accrued expenses
    
    
    7,909
    
    
    
    17,607
    
    
    
    12,463
    
    
    
    
    
    
    
    37,979Total current liabilities
    
    
    11,409
    
    
    
    31,394
    
    
    
    20,576
    
    
    
    
    
    
    
    63,379Long-term debt and capital leases, net of
current portion
    
    
    545,625
    
    
    
    783
    
    
    
    1,629
    
    
    
    
    
    
    
    548,037Deferred tax liabilities
    
    
    
    
    
    
    99,152
    
    
    
    12,080
    
    
    
    
    
    
    
    111,232Intercompany payable
    
    
    
    
    
    
    192,819
    
    
    
    94,325
    
    
    
    (287,144
    )
    
    
    Other non-current liabilities
    
    
    
    
    
    
    1,871
    
    
    
    
    
    
    
    
    
    
    
    1,871Total liabilities
    
    
    557,034
    
    
    
    326,019
    
    
    
    128,610
    
    
    
    (287,144
    )
    
    
    724,519Minority interests
    
    
    
    
    
    
    
    
    
    
    909
    
    
    
    
    
    
    
    909Membership equity
    
    
    137,502
    
    
    
    529,005
    
    
    
    64,665
    
    
    
    (395,964
    )
    
    
    335,208Total liabilities, minority
interests, and membership equity
    
    $
    694,536
    
    
    $
    855,024
    
    
    $
    194,184
    
    
    $
    (683,108
    )
    
    $
    1,060,636
 - 19 -




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##### Table of Contents



ReAble Therapeutics Finance LLC and Subsidiaries
 Unaudited Condensed Consolidating Statement of Operations
For the Successor Three Month Period Ended March 31, 2007
(in thousands)
 Non-RTFL
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    84,991
    
    
    $
    23,014
    
    
    $
    (1,298
    )
    
    $
    106,707Cost of sales
    
    
    
    
    
    
    33,758
    
    
    
    12,634
    
    
    
    (1,268
    )
    
    
    45,124Gross margin
    
    
    
    
    
    
    51,233
    
    
    
    10,380
    
    
    
    (30
    )
    
    
    61,583Operating expenses:Selling, general and administrative
    
    
    
    
    
    
    47,292
    
    
    
    10,346
    
    
    
    
    
    
    
    57,638Research and development
    
    
    
    
    
    
    2,755
    
    
    
    880
    
    
    
    
    
    
    
    3,635Operating income (loss)
    
    
    
    
    
    
    1,186
    
    
    
    (846
    )
    
    
    (30
    )
    
    
    310Other income (expense):Interest income
    
    
    3,959
    
    
    
    737
    
    
    
    63
    
    
    
    (4,542
    )
    
    
    217Interest expense
    
    
    (13,942
    )
    
    
    (4,198
    )
    
    
    (423
    )
    
    
    4,542
    
    
    
    (14,021
    )Other income (expense), net
    
    
    (1,104
    )
    
    
    59
    
    
    
    84
    
    
    
    1,104
    
    
    
    143Loss from continuing operations
before income taxes and minority
interests
    
    
    (11,087
    )
    
    
    (2,216
    )
    
    
    (1,122
    )
    
    
    1,074
    
    
    
    (13,351
    )Provision (benefit) for income taxes
    
    
    
    
    
    
    (2,646
    )
    
    
    305
    
    
    
    
    
    
    
    (2,341
    )Minority interests
    
    
    
    
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    77Net income (loss)
    
    $
    (11,087
    )
    
    $
    430
    
    
    $
    (1,504
    )
    
    $
    1,074
    
    
    $
    (11,087
    )
 - 20 -




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##### Table of Contents



ReAble Therapeutics Finance LLC and Subsidiaries
 Unaudited Condensed Consolidating Statement of Operations
For the Predecessor Three Month Period Ended April 1, 2006
(in thousands)
 Non-RTI
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    75,529
    
    
    $
    12,809
    
    
    $
    (1,425
    )
    
    $
    86,913Cost of sales
    
    
    
    
    
    
    30,494
    
    
    
    5,841
    
    
    
    (1,375
    )
    
    
    34,960Gross margin
    
    
    
    
    
    
    45,035
    
    
    
    6,968
    
    
    
    (50
    )
    
    
    51,953Operating expenses:Selling, general and administrative
    
    
    
    
    
    
    33,082
    
    
    
    5,444
    
    
    
    
    
    
    
    38,526Research and development
    
    
    
    
    
    
    6,472
    
    
    
    376
    
    
    
    
    
    
    
    6,848Operating income
    
    
    
    
    
    
    5,481
    
    
    
    1,148
    
    
    
    (50
    )
    
    
    6,579Other income (expense):Interest income
    
    
    
    
    
    
    3,883
    
    
    
    14
    
    
    
    (3,776
    )
    
    
    121Interest expense
    
    
    
    
    
    
    (11,283
    )
    
    
    (11
    )
    
    
    3,776
    
    
    
    (7,518
    )Other income (expense), net
    
    
    1,991
    
    
    
    5,892
    
    
    
    (304
    )
    
    
    (7,695
    )
    
    
    (116
    )Income (loss) from continuing operations
before income taxes and minority
interests
    
    
    1,991
    
    
    
    3,973
    
    
    
    847
    
    
    
    (7,745
    )
    
    
    (934
    )Provision for income taxes
    
    
    
    
    
    
    1,086
    
    
    
    338
    
    
    
    (24
    )
    
    
    1,400Minority interests
    
    
    
    
    
    
    
    
    
    
    59
    
    
    
    
    
    
    
    59Income (loss) from continuing operations
    
    
    1,991
    
    
    
    2,887
    
    
    
    450
    
    
    
    (7,721
    )
    
    
    (2,393
    )Discontinued operations:Loss from discontinued operations, net of tax
    
    
    
    
    
    
    (132
    )
    
    
    
    
    
    
    
    
    
    
    (132
    )Net income (loss)
    
    $
    1,991
    
    
    $
    2,755
    
    
    $
    450
    
    
    $
    (7,721
    )
    
    $
    (2,525
    )
 - 21 -




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##### Table of Contents



ReAble Therapeutics Finance LLC and Subsidiaries
 Unaudited Condensed Consolidating Statement of Cash Flows
For the Successor Three Month Period Ended March 31, 2007
(in thousands)
 NonRTFL
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedOPERATING ACTIVITIES:Net income (loss)
    
    $
    (11,087
    )
    
    $
    430
    
    
    $
    (1,504
    )
    
    $
    1,074
    
    
    $
    (11,087
    )Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:Depreciation
    
    
    
    
    
    
    2,394
    
    
    
    872
    
    
    
    (186
    )
    
    
    3,080Amortization of intangibles
    
    
    
    
    
    
    5,862
    
    
    
    645
    
    
    
    
    
    
    
    6,507Amortization of debt issuance costs
    
    
    960
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    960Stock-based compensation
    
    
    
    
    
    
    384
    
    
    
    
    
    
    
    
    
    
    
    384Loss on disposal of assets
    
    
    
    
    
    
    (17
    )
    
    
    150
    
    
    
    (20
    )
    
    
    113Deferred income taxes
    
    
    
    
    
    
    (2,923
    )
    
    
    (625
    )
    
    
    
    
    
    
    (3,548
    )Non-cash income from subsidiaries
    
    
    1,104
    
    
    
    
    
    
    
    
    
    
    
    (1,104
    )
    
    
    Provision for bad debt expense and sales returns
    
    
    
    
    
    
    2,236
    
    
    
    86
    
    
    
    
    
    
    
    2,322Inventory reserves
    
    
    
    
    
    
    203
    
    
    
    65
    
    
    
    
    
    
    
    268Minority interests
    
    
    
    
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    77Excess tax benefit associated with stock option exercises
    
    
    
    
    
    
    (17
    )
    
    
    
    
    
    
    
    
    
    
    (17
    )Net effect of discontinued operations
    
    
    
    
    
    
    376
    
    
    
    
    
    
    
    
    
    
    
    376Changes in operating assets and liabilities, net of
acquired assets and liabilities:Accounts receivable
    
    
    
    
    
    
    (12,095
    )
    
    
    (742
    )
    
    
    
    
    
    
    (12,837
    )Inventories
    
    
    
    
    
    
    1,601
    
    
    
    1,885
    
    
    
    71
    
    
    
    3,557Prepaid expenses, other assets and liabilities
    
    
    21
    
    
    
    (4,612
    )
    
    
    (282
    )
    
    
    
    
    
    
    (4,873
    )Accounts payable and accrued expenses
    
    
    5,700
    
    
    
    7,540
    
    
    
    (563
    )
    
    
    
    
    
    
    12,677Net cash provided by (used in) operating activities
    
    
    (3,302
    )
    
    
    1,362
    
    
    
    64
    
    
    
    (165
    )
    
    
    (2,041
    )INVESTING ACTIVITIES:Acquisition of businesses
    
    
    
    
    
    
    (4,200
    )
    
    
    
    
    
    
    
    
    
    
    (4,200
    )Proceeds from sale of assets held for sale
    
    
    
    
    
    
    3,480
    
    
    
    93
    
    
    
    
    
    
    
    3,573Purchases of property and equipment
    
    
    
    
    
    
    (3,780
    )
    
    
    (817
    )
    
    
    165
    
    
    
    (4,432
    )Net cash used in investing activities
    
    
    
    
    
    
    (4,500
    )
    
    
    (724
    )
    
    
    165
    
    
    
    (5,059
    )FINANCING ACTIVITIES:Intercompany
    
    
    4,171
    
    
    
    (4,132
    )
    
    
    (39
    )
    
    
    
    
    
    
    Payments on long-term obligations
    
    
    (873
    )
    
    
    (197
    )
    
    
    82
    
    
    
    
    
    
    
    (988
    )Excess tax benefit associated with stock option exercises
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17Dividend paid to minority interests
    
    
    
    
    
    
    
    
    
    
    (226
    )
    
    
    
    
    
    
    (226
    )Net cash provided by (used in) financing activities
    
    
    3,315
    
    
    
    (4,329
    )
    
    
    (183
    )
    
    
    
    
    
    
    (1,197
    )Effect of exchange rate on cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    99
    
    
    
    
    
    
    
    99Net increase (decrease) in cash and cash equivalents
    
    
    13
    
    
    
    (7,467
    )
    
    
    (744
    )
    
    
    
    
    
    
    (8,198
    )Cash and cash equivalents at beginning of period
    
    
    12
    
    
    
    22,650
    
    
    
    9,017
    
    
    
    
    
    
    
    31,679Cash and cash equivalents at end of period
    
    $
    25
    
    
    $
    15,183
    
    
    $
    8,273
    
    
    $
    
    
    
    $
    23,481
 - 22 -




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##### Table of Contents



ReAble Therapeutics Finance LLC and Subsidiaries
 Unaudited Condensed Consolidating Statement of Cash Flows
For the Predecessor Three Month Period Ended April 1, 2006
(in thousands)
 NonRTI
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedOPERATING ACTIVITIES:Net income (loss)
    
    $
    1,991
    
    
    $
    2,755
    
    
    $
    450
    
    
    $
    (7,721
    )
    
    $
    (2,525
    )Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:Depreciation
    
    
    
    
    
    
    1,687
    
    
    
    686
    
    
    
    (39
    )
    
    
    2,334Amortization of intangibles
    
    
    
    
    
    
    1,050
    
    
    
    416
    
    
    
    
    
    
    
    1,466Amortization of debt issuance costs
    
    
    
    
    
    
    542
    
    
    
    
    
    
    
    
    
    
    
    542Non-cash interest expense
    
    
    
    
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    27Stock-based compensation
    
    
    
    
    
    
    823
    
    
    
    
    
    
    
    
    
    
    
    823Loss on disposal of assets
    
    
    
    
    
    
    219
    
    
    
    85
    
    
    
    (82
    )
    
    
    222Deferred income taxes
    
    
    
    
    
    
    99
    
    
    
    (149
    )
    
    
    (24
    )
    
    
    (74
    )Non-cash income from subsidiaries
    
    
    (1,991
    )
    
    
    (5,119
    )
    
    
    
    
    
    
    7,110
    
    
    
    Provision for bad debt expense and sales returns
    
    
    
    
    
    
    1,986
    
    
    
    93
    
    
    
    
    
    
    
    2,079Inventory reserves
    
    
    
    
    
    
    1,012
    
    
    
    52
    
    
    
    
    
    
    
    1,064Excess tax benefit associated with stock option exercises
    
    
    
    
    
    
    (945
    )
    
    
    
    
    
    
    
    
    
    
    (945
    )Minority interests
    
    
    
    
    
    
    
    
    
    
    59
    
    
    
    
    
    
    
    59In-process research and development
    
    
    
    
    
    
    4,016
    
    
    
    
    
    
    
    
    
    
    
    4,016Net effect of discontinued operations
    
    
    
    
    
    
    (1,346
    )
    
    
    
    
    
    
    
    
    
    
    (1,346
    )Changes in operating assets and liabilities, net of
acquired assets and liabilities:
    
    
    Accounts receivable
    
    
    
    
    
    
    (5,688
    )
    
    
    918
    
    
    
    
    
    
    
    (4,770
    )Inventories
    
    
    
    
    
    
    (2,370
    )
    
    
    (221
    )
    
    
    588
    
    
    
    (2,003
    )Prepaid expenses, other assets and liabilities
    
    
    1,106
    
    
    
    (818
    )
    
    
    (105
    )
    
    
    
    
    
    
    183Accounts payable and accrued expenses
    
    
    341
    
    
    
    1,860
    
    
    
    (2,839
    )
    
    
    
    
    
    
    (638
    )Net cash provided by (used in) operating activities
    
    
    1,447
    
    
    
    (210
    )
    
    
    (555
    )
    
    
    (168
    )
    
    
    514INVESTING ACTIVITIES:Acquisition of businesses, net of cash acquired
    
    
    
    
    
    
    (235
    )
    
    
    
    
    
    
    
    
    
    
    (235
    )Acquisition of intangible assets
    
    
    
    
    
    
    (250
    )
    
    
    (134
    )
    
    
    
    
    
    
    (384
    )Purchases of property and equipment
    
    
    
    
    
    
    (3,151
    )
    
    
    (850
    )
    
    
    168
    
    
    
    (3,833
    )Proceeds from sale of assets
    
    
    
    
    
    
    61
    
    
    
    
    
    
    
    
    
    
    
    61Net cash used in investing activities
    
    
    
    
    
    
    (3,575
    )
    
    
    (984
    )
    
    
    168
    
    
    
    (4,391
    )FINANCING ACTIVITIES:Proceeds from issuance of common stock
    
    
    2,416
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,416Intercompany
    
    
    (3,725
    )
    
    
    (1,191
    )
    
    
    4,916
    
    
    
    
    
    
    
    Proceeds from long-term obligations
    
    
    
    
    
    
    25,300
    
    
    
    
    
    
    
    
    
    
    
    25,300Payments on long-term obligations
    
    
    
    
    
    
    (17,045
    )
    
    
    (2,096
    )
    
    
    
    
    
    
    (19,141
    )Excess tax benefit associated with stock option exercises
    
    
    
    
    
    
    945
    
    
    
    
    
    
    
    
    
    
    
    945Net cash provided by (used in) financing activities
    
    
    (1,309
    )
    
    
    8,009
    
    
    
    2,820
    
    
    
    
    
    
    
    9,520Effect of exchange rate on cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    84
    
    
    
    
    
    
    
    84Net increase in cash and cash equivalents
    
    
    138
    
    
    
    4,224
    
    
    
    1,365
    
    
    
    
    
    
    
    5,727Cash and cash equivalents at beginning of period
    
    
    308
    
    
    
    13,588
    
    
    
    3,304
    
    
    
    
    
    
    
    17,200Cash and cash equivalents at end of period
    
    $
    446
    
    
    $
    17,812
    
    
    $
    4,669
    
    
    $
    
    
    
    $
    22,927
 - 23 -




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Introduction
    Overview of Business
  
    
    Orthopedic Rehabilitation Division. We market our orthopedic rehabilitation products
through two brands in the United States: Chattanooga Group and Empi; and three brands in
Europe; Compex, Cefar and Ormed. These products are non-invasive medical devices that
are used before and after surgery to assist in the repair and rehabilitation of soft
tissue and bone and to protect against injury, such as at-home and clinical
electrotherapy, patient care and continuous passive motion devices (CPM) used to treat
pain and restore muscle function, physical therapy tables, home and clinical traction
products, iontophoretic devices and chiropractic treatment tables used to treat joint
and spine conditions. Our Orthopedic Rehabilitation Division accounted for approximately
84.3% of our net sales and 80.9% of our gross profit for the three month period ended
March 31, 2007.
    
    Surgical Implant Division. Our Surgical Implant Division develops, manufactures and
markets a wide variety of products that serve the orthopedic reconstructive joint
implant market. These products include knee, hip and shoulder reconstructive products,
along with the instruments used by surgeons to perform orthopedic reconstructive
surgery. Our Surgical Implant Division accounted for approximately 15.7% of our net
sales and 19.1% of our gross profit for the three month period ended March 31, 2007.
    The Merger
  - 24 -




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##### Table of Contents



Recent Acquisitions
   - 25 -




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##### Table of Contents



Results of Operations
  Three Months EndedSuccessor

    
    
    PredecessorMarch 31, 2007

    
    
    April 1, 2006Net sales
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    42.3
    
    
    
    40.2Gross margin
    
    57.7
    
    
    
    59.8Operating expenses:Selling, general and administrative
    
    54.0
    
    
    
    44.3Research and development
    
    3.4
    
    
    
    7.9Operating income
    
    0.3
    
    
    
    7.6Other income (expense):Interest income
    
    0.2
    
    
    
    0.1Interest expense
    
    (13.1
    )
    
    
    (8.7
    )Other income (expense), net
    
    0.1
    
    
    
    (0.1
    )Loss from continuing operations before income tax and minority interests
    
    (12.5
    )
    
    
    (1.1
    )Provision (benefit) for income taxes
    
    (2.2
    )
    
    
    1.6Minority interests
    
    0.1
    
    
    
    0.1Loss from continuing operations
    
    (10.4
    )
    
    
    (2.8
    )Discontinued operations:Loss from discontinued operations, net of tax
    
    0.0
    
    
    
    (0.2
    )Net loss
    
    (10.4
    )%
    
    
    (3.0
    )%
 Three Months Ended March 31, 2007, compared to Three Months Ended April 1, 2006
 Net Sales.
  Domestic
    
    
    International
    
    
    TotalSuccessor
    
    
    Predecessor
    
    
    
    
    
    
    Successor
    
    
    Predecessor
    
    
    
    
    
    
    Successor
    
    
    Predecessor%
    
    
    
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    
    
    
    %(In thousands, except %)
    
    2007
    
    
    2006
    
    
    Growth
    
    
    2007
    
    
    2006
    
    
    Growth
    
    
    2007
    
    
    2006
    
    
    GrowthOrthopedic Rehabilitation Division
    
    $
    62,991
    
    
    $
    55,758
    
    
    
    13.0
    %
    
    $
    26,915
    
    
    $
    15,730
    
    
    
    71.1
    %
    
    $
    89,906
    
    
    $
    71,488
    
    
    
    25.8
    %Surgical Implant Division
    
    
    14,822
    
    
    
    13,042
    
    
    
    13.6
    %
    
    
    1,979
    
    
    
    2,383
    
    
    
    (17.0
    )%
    
    
    16,801
    
    
    
    15,425
    
    
    
    8.9
    %Total
    
    $
    77,813
    
    
    $
    68,800
    
    
    
    13.1
    %
    
    $
    28,894
    
    
    $
    18,113
    
    
    
    59.5
    %
    
    $
    106,707
    
    
    $
    86,913
    
    
    
    22.8
    %
   - 26 -




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##### Table of Contents



Gross Margin.
 Selling, General and Administrative.
 Research and Development.
 Interest Expense.
 Provision (Benefit) for Income Taxes.
 Discontinued Operations.
 Net loss.
 Critical Accounting Policies and Estimates
  Revenue Recognition
   - 27 -




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##### Table of Contents



Reserves for Sales Allowances, Product Returns and Rental Credits
    Reserve for Uncollectible Accounts Receivable.
 Goodwill and Intangible Assets
  - 28 -




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##### Table of Contents



Deferred Tax Asset Valuation Allowance
   Inventory Reserves
  
    
    current inventory quantities on hand;
    
    product acceptance in the marketplace;
    
    customer demand;
    
    historical sales;
    
    forecasted sales;
    
    product obsolescence; and
    
    technological innovations.
   Recent Accounting Pronouncements
   - 29 -




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##### Table of Contents



Liquidity and Capital Resources
  Three Months EndedSuccessor
    
    
    
    PredecessorMarch 31,
    
    
    
    April 1,2007
    
    
    
    2006Cash (used in) provided by operating activities
    
    $
    (2,041
    )
    
    
    $
    514Cash used in investing activities
    
    
    (5,059
    )
    
    
    
    (4,391
    )Cash (used in) provided by financing activities
    
    
    (1,197
    )
    
    
    
    9,520Effect of exchange rate on cash and cash equivalents
    
    
    99
    
    
    
    
    84Net (decrease) increase in cash and cash equivalents
    
    $
    (8,198
    )
    
    
    $
    5,727
 Cash Flows
    - 30 -




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##### Table of Contents



Indebtedness
    Senior Credit Facility
 Overview.
 Interest Rate and Fees.
  Amortization.
  Certain Covenants and Events of Default.
 
    
    incur additional indebtedness or issue preferred stock;
    
    create liens on assets;
    
    enter into sale and leaseback transactions;
 - 31 -




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##### Table of Contents




    
    engage in mergers or consolidations;
    
    sell assets;
    
    pay dividends and other restricted payments;
    
    make investments, loans or advances;
    
    make capital expenditures;
    
    repay subordinated indebtedness (including the 11.75% Notes);
    
    make certain acquisitions;
    
    engage in certain transactions with affiliates;
    
    amend material agreements governing our subordinated indebtedness (including the 11.75% Notes);
    
    enter into certain burdensome agreements;
    
    change our lines of business; and
    
    change the status of Holdings as a passive holding company.
   11.75% Senior Subordinated Notes
  
    
    incur additional debt or issue certain preferred shares;
    
    pay dividends on or make other distributions in respect of our capital stock or make other restricted payments;
    
    make certain investments;
    
    sell certain assets;
    
    create liens on certain assets to secure debt;
    
    consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
    
    enter into certain transactions with our affiliates; and
    
    designate our subsidiaries as unrestricted subsidiaries.
  Covenant Compliance
  - 32 -




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##### Table of Contents



(unaudited)
    
    
    (unaudited)Three Months
    
    
    Twelve MonthsEnded March 31,
    
    
    Ended March 31,(in thousands)
    
    2007
    
    
    2007Net loss
    
    $
    (11,087
    )
    
    $
    (96,971
    )Interest expense, net
    
    
    13,804
    
    
    
    40,185Income tax benefit
    
    
    (2,341
    )
    
    
    (23,949
    )Depreciation and amortization
    
    
    9,587
    
    
    
    26,995EBITDA
    
    
    9,963
    
    
    
    (53,740
    )Non-cash items (a)
    
    
    4,549
    
    
    
    54,341Non-recurring items (b)
    
    
    2,106
    
    
    
    15,019Other adjustment items (c)
    
    
    7,694
    
    
    
    59,386Adjusted EBITDA
    
    $
    24,312
    
    
    $
    75,006
 
 (a)
    
    Non-cash items are comprised of the following: (unaudited)
    
    
    (unaudited)Three Months
    
    
    Twelve MonthsEnded March 31,
    
    
    Ended March 31,2007
    
    
    2007Stock compensation expense
    
    $
    384
    
    
    $
    10,289Loss on disposition of assets
    
    
    113
    
    
    
    441Loss on early extinguishment of debt
    
    
    
    
    
    
    9,154Purchase accounting adjustments (1)
    
    
    4,052
    
    
    
    33,391Loss on asset impairment (2)
    
    
    
    
    
    
    1,066Total non-cash items
    
    $
    4,549
    
    
    $
    54,341
 
 (1)
    
    Represents $4.1 million of expense related to the write-up to fair market value of acquired
inventory in connection with the Merger and the Cefar acquisition for the three months ended March 31, 2007.
Represents $25.1 million of expense related to the write-off of IPR&D and $8.3 million of
expense related to the write-up to fair market value of inventory acquired in connection with
the Compex acquisition, Cefar acquisition and the Merger during the twelve months ended March
31, 2007.(2)
    
    Represents $1.1 million of expense related to the impairment of certain application
software that will not be placed in service. - 33 -




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##### Table of Contents



(b)
    
    Non-recurring items are comprised of the following: (unaudited)
    
    
    (unaudited)Three Months
    
    
    Twelve MonthsEnded March 31,
    
    
    Ended March 31,2007
    
    
    2007Employee severance (1)
    
    $
    142
    
    
    $
    1,323Restructuring expense (2)
    
    
    2,107
    
    
    
    10,489Other (3)
    
    
    (143
    )
    
    
    3,207Total non-recurring adjustments
    
    $
    2,106
    
    
    $
    15,019
 
 (1)
    
    Represents employee severance expense incurred by RTI in connection with the Compex
acquisition.(2)
    
    Expense for the three months ended March 31, 2007 includes $0.9 million of integration
costs incurred in connection with the Compex acquisition, $0.4 million of integration costs
incurred in connection with the Cefar acquisition and $0.8 million of integration costs
incurred in connection with the Merger. Expense for the twelve months ended March 31, 2007
represents $6.5 million of expense related to field selling, information technology,
operations and product line consolidation incurred in connection with the integration of the
Compex acquisition. Also includes inventory reserves of $1.5 million related to the
discontinuation of certain products acquired from Osteoimplant Technology, Inc. (OTI) in
February 2005, $0.8 million of integration expenses related to the Cefar acquisition, and
$1.7 million of integration expenses related to the Merger.(3)
    
    Other expenses for the twelve months ended March 31, 2007 includes $3.2 million of other
non-recurring expenses, including provisions made for litigation settlements and additional
product liability claims.(c)
    
    Other adjustment items are comprised of the following: (unaudited)
    
    
    (unaudited)Three Months
    
    
    Twelve MonthsEnded March 31,
    
    
    Ended March 31,2007
    
    
    2007Transaction expenses (1)
    
    $
    1,333
    
    
    $
    24,834Compex acquisition adjustments (2)
    
    
    
    
    
    
    26,586Minority interest
    
    
    77
    
    
    
    215Pre-acquisition EBITDA (3)
    
    
    29
    
    
    
    977Cost savings (4)
    
    
    6,255
    
    
    
    6,255Discontinued operations
    
    
    
    
    
    
    519Total other items
    
    $
    7,694
    
    
    $
    59,386
 
 (1)
    
    Expenses for the three months ended March 31, 2007 include $0.5 million of legal,
advisory, consulting, and related expenses incurred in connection with mergers and
acquisitions initiatives and $0.8 million for monitoring fees paid to Blackstone. Expenses
for the twelve months ended March 31, 2007 includes $15.0 million of legal, advisory,
consulting, and related expenses incurred in connection with the closing of the Merger, $3.8
million for monitoring fees paid to Blackstone, $5.5 million of management retention bonuses
paid at the closing of the Merger, and $0.5 million of merger and acquisition related
expenses.(2)
    
    Represents adjustments and additional reserves related to the Compex acquisition and
operations. The amounts principally include $25.4 million of additional accounts receivable
reserves. During the second quarter of 2006, additional information was obtained regarding
the Compex payor mix and its accounts receivable collection rates and trends, which resulted
in a change in RTIs estimate of the value of the acquired accounts receivable and a $5.6
million charge to the reserve account. In addition, during December 2006, the decision was
made to outsource the Compex accounts receivable collection effort to a third party. Based
on collection estimates provided by the third party collection company, in the fourth quarter
of 2006, we recorded an additional adjustment to the carrying value of accounts receivable in
the amount of $19.8 million.(3)
    
    Represents EBITDA of $0.03 million from January 1, 2007 to February 16, 2007 related to the
Performance Modalities, Inc. (PMI) acquisition for the three months ended March 31, 2007
and EBITDA of $0.7 million from April 2, 2006 to November 7, 2006 primarily related to the
Cefar acquisition, which is included in the calculation of Adjusted EBITDA for the twelve
months ended March 31, 2007 pursuant to the definition of Adjusted EBITDA contained in the
credit agreement relating to the Senior Credit Facility and the Indenture.(4)
    
    Represents projected cost savings of $4.0 million related to actions already taken in
connection with the Compex acquisition as if such actions had been taken on January 1, 2007.
Such savings primarily relate to the consolidation of billing, manufacturing, general and
administrative, operations, and renegotiation of component supply agreements. Also includes
(i) projected cost savings of $2.1 million related to actions initiated in connection with
the Cefar acquisition, principally related to general and administrative consolidation and
(ii) $0.2 million of projected cost savings related to purchases under procurement contracts
related to freight, copier equipment, and office supplies.  CovenantRequirements
    
    Actual RatiosSenior Credit Facility (1)Consolidated total debt to Adjusted EBITDA
    
    *
    
    7.07:1Adjusted EBITDA to consolidated interest expense
    
    *
    
    1.49:111.75% Notes (2)Minimum Adjusted EBITDA to fixed charges ratio
required to incur additional debt pursuant to
ratio provisions
    
    2.00:1
    
    1.49:1
 
 *
    
    Under the terms of the credit agreement relating to the Senior Credit Facility, we are not
currently subject to the financial covenant requirements. These requirements take effect beginning
as of the twelve month period ending June 30, 2007.(1)
    
    Beginning with the twelve month period ending June 30, 2007, the Senior Credit Facility
requires us to maintain a consolidated total debt to Adjusted EBITDA ratio starting at a
maximum of 8.00:1 and stepping down over time to 4.75:1 by the end of 2013 and an Adjusted
EBITDA to consolidated interest expense ratio starting at a minimum of 1.25:1 and stepping up
over time to 1.80:1 by the end of 2013. Consolidated total debt is defined as aggregate
consolidated indebtedness of Holdings, RFTL and the restricted subsidiaries less the aggregate
amount of all cash and cash equivalents, free and clear of all liens subject to
certain exceptions, and consolidated interest expense is defined as consolidated cash interest
expense less cash interest income and further adjusted for certain noncash or nonrecurring
interest expense, under the Senior Credit Facility. (2)
    
    Our ability to incur additional debt and make certain restricted payments under the
Indenture, subject to specified exceptions, is tied to an Adjusted EBITDA to fixed charges
ratio of at least 2.0:1, except that we may incur certain debt and make certain restricted
payments and certain permitted investments without regard to the ratio, such as our ability to
(i) incur up to an aggregate principal amount of $400.0 million under credit facilities, plus
the lesser of (a) $50 million and (b) an amount equal to the aggregate amount of our EBITDA
for the four fiscal quarters for which internal financial statements are available immediately
preceding such date times five, with appropriate pro forma adjustments to EBITDA on the date
on which such indebtedness is to be incurred less the amount of our secured indebtedness
outstanding on the date of such incurrence, (ii) acquire persons engaged in a similar business
that becomes restricted subsidiaries and (iii) make other investments having an aggregate fair
market value not to exceed 3.5% of total assets provided that the Adjusted EBITDA to fixed
charges ratio is less than 6.00:1 on a pro forma basis after giving effect to such investment.
Fixed charges is defined in the Indenture 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. - 34 -




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##### Table of Contents



Impact
of Recent Accounting Pronouncements
  Forward Looking Statements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
  Foreign Currency Risk
   - 35 -




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##### Table of Contents



Item 4 . Controls and Procedures
     Changes in Internal Control Over Financial Reporting
  - 36 -




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##### Table of Contents



Part II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
    Louis Dudas et al. v. Encore Medical
Corporation et al., Robert Kemp et al. v. Alastair J. Clemow et al.
 inter alia
 
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales Of Equity Securities And Use of Proceeds
    
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
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##### Table of Contents



Item 6. Exhibits
 Exhibits
 3.1
    
    Certificate of Formation of ReAble Therapeutics Finance LLC (incorporated by
reference to Exhibit 3.1 of RTFLs Registration Statement on Form S-4, filed on April
18, 2007 (File No. 333-142188)).3.2
    
    Limited Liability Company Agreement of ReAble Therapeutics Finance LLC
(incorporated by reference to Exhibit 3.2 of RTFLs Registration Statement on Form
S-4, filed on 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.
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##### Table of Contents



SIGNATURES
  May 18, 2007

Date
    
    
    
    By:
    
    /s/ Kenneth W. Davidson

Kenneth W. Davidson,Chief Executive Officer(Principal Executive Officer)May 18, 2007

Date
    
    
    
    By:
    
    /s/ William W. Burke

William W. Burke,Executive Vice President and Chief Financial Officer(Principal Financial Officer and Principal Accounting Officer)
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