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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 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: 0-26538
 ENCORE MEDICAL CORPORATION
  DELAWARE
    
    65-0572565(State or other jurisdiction of
incorporation or organization)9800 METRIC BLVD.
AUSTIN, TEXAS
(Address of principal executive offices)
    
    (I.R.S. Employer
Identification No.)78758
(Zip code)
 512-832-9500
    
  o þ
  o þ
 þ o
 o
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ENCORE MEDICAL CORPORATION
Annual Report on Form 10-K
For the year ended December 31, 2005
 TABLE OF CONTENTS
 PagePART I.Item 1. Business
    
    
    4Item 1A. Risk Factors
    
    
    16Item 1B. Unresolved Staff Comments
    
    
    31Item 2. Properties
    
    
    31Item 3. Legal Proceedings
    
    
    31Item 4. Submission of Matters to a Vote of Security Holders
    
    
    32PART II.Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    33Item 6. Selected Financial Data
    
    
    34Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    35Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    46Item 8. Financial Statements and Supplementary Data
    
    
    46Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    78Item 9A. Controls and Procedures
    
    
    78PART III.Item 10. Directors and Executive Officers of the Registrant
    
    
    80Item 11. Executive Compensation
    
    
    80Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    80Item 13. Certain Relationships and Related Transactions
    
    
    80Item 14. Principal Accountant Fees and Services
    
    
    81PART IV.Item 15. Exhibits, Financial Statement Schedules
    
    
    82Signatures
    
    
    86Computation of Ratio of Earnings to Fixed ChargesSubsidiariesConsent of KPMG LLPCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
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NOTE ON INCORPORATION BY REFERENCE
  FORWARD-LOOKING STATEMENTS
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PART I.
 
 Item 1. Business
 Overview
  
    
    Orthopedic Rehabilitation Division.Our Orthopedic Rehabilitation Division
offers non-invasive medical products that are used before and after surgery to
assist in the repair and rehabilitation of soft tissue and bone, and to protect
against further injury; electrotherapy, patient care and continuous passive motion
devices and accessories used to treat pain and restore muscle function;
iontophoretic devices and accessories used to deliver medication; clinical therapy
tables and traction equipment; physical therapy traction and treatment tables,
chiropractic treatment tables and orthotics devices used to treat joint and spine
conditions.
    
    Surgical Implant Division.Our Surgical Implant Division offers a comprehensive
product offering comprised of reconstructive joint products and spinal implants.
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Industry Background
 Our Market Opportunity
  
    
    Favorable demographics.An aging population is driving growth in the
orthopedic products market. For example, a majority of reconstructive implants are
performed on patients who are aged 65 and over. As a result of the aging of the baby
boomer generation, the percentage of the U.S. population aged 65 and over is expected to
grow from 12.4% in 2000 to 13.0% in 2010 and 19.7% by 2030, representing an increase of
5.2 and 36.5 million people, respectively, during these periods according to a 2005 U.S.
Census Bureau projection. In addition, according to the National Center for Health
Statistics of the Center for Disease Control in its publication Health, United States,
2005; the average life expectancy in the United States increased from 75.4 years in 1990
to 77.6 years in 2003. As people continue to live longer lives, we believe the number of
injuries requiring orthopedic rehabilitation and reconstructive implants will continue to
increase.
    
    Increasing awareness and use of non-invasive devices for treatment and
rehabilitation.We believe the growing awareness and clinical acceptance by healthcare
professionals and patients of the benefits of non-invasive treatment and rehabilitation
products will continue to drive demand for our products. We believe that growth in sales
of electrotherapy and iontophoretic devices solutions, for example, will be driven by
increased awareness of the benefits of non-invasive drug delivery products over invasive
delivery systems for certain joint inflammation, anesthesia delivery applications and
other pain control solutions.
    
    Cost containment initiatives by third-party payors.With the cost of
healthcare rising in the United States and internationally, third-party payors are
challenged to seek more cost-effective therapies without reducing the quality of care. We
believe that some of our orthopedic rehabilitation products offer lower-cost alternatives
to surgery and traditional forms of physical therapy and pain management.
    
    Shift toward at-home physical therapy.We believe the physical
rehabilitation market is shifting toward home treatment alternatives. This shift has
been driven by several factors, including payor cost containment efforts that seek to
reduce clinic visits and to accommodate patients preference for therapies that can be
conveniently administered at home. We believe that because many of our orthopedic
rehabilitative products are designed for at-home use with an emphasis on quality, cost-
effectiveness and convenience, we will be able to capitalize on this shift toward at-home
physical therapy. We believe that currently only a small portion of physical therapy
products are designed for at-home use and that there remains significant growth potential
for the at-home physical therapy market.
    
    Improving technologies for orthopedic products.Advances in technologies and
procedures have expanded the scope and applications of products competing in the
orthopedic products market. For example, joint reconstruction historically has been
reserved for older patients who tend to be less active and who typically place less
stress on their implants. However, with new technologies that prolong the expected life
of orthopedic implants and conserve patients existing bone, surgeons are increasingly
able to perform joint reconstruction on younger and more active patients.
    
    Increased orthopedic surgical volume results in increased need for
rehabilitation.The combination of factors such as an aging population, increased
sports-related injuries and improvements in orthopedic surgical technologies has led to
increases in the number of orthopedic surgeries performed. An increase in orthopedic
surgical volume is expected to result in an increased need for rehabilitative therapy and
orthopedic rehabilitation products to recover from such surgeries.
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Our Competitive Strengths
  
    
    Leading market positions.We have a leadership position in many of the
markets in which we compete and we believe that our products have recognized brand names
with a reputation for quality, durability and reliability among healthcare professionals.
Both Empi and Chattanooga Group, Inc. (Chattanooga), a company we acquired in 2002,
which together now comprise our Orthopedic Rehabilitation Division, have been marketing
physical therapy products for over 25 years. We believe that we have a leading market
share in the clinical electrotherapy, transcutaneous electrical nerve stimulation (TENS),
iontophoresis, neuromuscular electrical stimulation (NMES), and orthotics markets in the
United States and the continuous passive motion (CPM) device markets in the United States
and Germany.
    
    Comprehensive range of orthopedic rehabilitation and surgical implant
products.We offer a comprehensive range of orthopedic devices, sports medicine equipment
and other related products to orthopedic specialists servicing a variety of treatment
settings. The breadth of our product line enables us to provide orthopedic surgeons,
physical and occupational therapists, other orthopedic healthcare professionals and their
patients a wide range of products to address their requirements and preferences.
    
    New product development capabilities.We have an experienced research and
development team with proven expertise in the design and development of new products as
well as in the enhancement of existing products with the latest technology and updated
designs. We seek to develop new technologies to improve durability, performance and
usability of existing products. In addition to our own research and development, we
acquire, license and commercialize technologies and new product ideas from orthopedic
surgeons and other orthopedic specialists. The Orthopedic Rehabilitation Division
introduced seven new products in 2005, including the Vectra Genysis
Laser System, Intelect Mobile Electrical Stimulation System and
OptiFlex 3 Continuous Passive Motion System. The Surgical Implant
Division introduced nine new products in 2005, including the Reverse Shoulder System, M.I.K.A. Minimally Invasive Knee
Arthroplasty Instruments and MIS Hip Instruments.
    
    Extensive and diverse distribution network.We use multiple distribution
channels to bring our products to market. For our orthopedic rehabilitation products,
because of the diverse nature of our customers, we use dealers, a direct sales force, and
national supply chains. As a result of the Empi acquisition, we believe that our
distribution network is one of the largest in the orthopedic rehabilitation products
market and provides us with a significant competitive advantage with respect to sales of
our existing products and the introduction of our new orthopedic rehabilitation products.
For our surgical implant products, we utilize a network of independent sales
representatives in the United States and distributor relationships outside the United
States.
    
    Proprietary third-party billing system.Empi has developed a third-party
billing system that manages over 40,000 payor profiles including 600 national payors,
which allows access to over 110 million patient lives. This billing system reduces
payment cycles, improves relationships with payors, such as insurance companies and
managed care organizations, and tracks patients to improve quality of care and create
subsequent selling opportunities.
    
    Strong relationships with managed care organizations and national
rehabilitation providers.Our market positions in our core orthopedic rehabilitation
product lines and the breadth of our orthopedic rehabilitation product offerings have
enabled us to secure important preferred provider and managed care contracts. We
currently have contracts with over 325 managed care providers, including over 45 preferred
provider arrangements with regional and national operators of physical therapy clinics.
    
    Experienced management team.Our senior management team has extensive
experience in the medical device industry, with previous employers including Maxxim
Medical, Stryker Corporation, Johnson & Johnson Corporation, Centerpulse Ltd., and
Cholestech Corporation. Members of our senior management team have significant previous
experience in identifying, completing and integrating acquired companies and business
lines.
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Our Strategy
  
    
    Integrate strategic acquisitions.We will continue to seek to identify and capitalize
upon opportunities similar to
those presented to us by our prior acquisitions, such as Empi, to further penetrate the
orthopedic market, reduce
operating costs and improve operating efficiencies in our company through the integration of
our strategic
acquisitions.
    
    Develop and launch new products.We plan to continue to develop and launch new
products through both internal development and acquisitions. In our Orthopedic
Rehabilitation Division, we intend to maintain our leadership position through continued
innovation and development of our electrotherapy, patient care, physical therapy and
chiropractic treatment table and continuous passive motion and other product offerings.
In our Surgical Implant Division, we intend to continue to emphasize our reconstructive
joint and spinal products and technology to continue to meet the needs of orthopedic
surgeons and to cover additional types of surgical procedures.
    
    Expand our distribution channels.We intend to continue to actively recruit
new sales representatives who have
established relationships with orthopedic surgeons to increase market penetration and
geographic coverage in the orthopedic rehabilitation and surgical implant product markets.
A network of over 6,000 dealers supports our clinical orthopedic rehabilitation products. A
direct sales force of 160 field representatives in the United States and 25 international
sales representatives support our home therapy orthopedic rehabilitation products. An
internal sales force of 225 domestic and international representatives work with patients
to handle insurance and third-party reimbursement. We utilize domestic independent sales
representatives for our surgical implant products. The combination of a direct sales
force, independent sales representatives, and dealers will allow us to deepen our
penetration into our existing markets as well as to expand our domestic and international
geographic reach.
    
    Pursue strategic acquisitions.We will continue to pursue selective
acquisitions of complementary businesses,
technologies or product lines in the orthopedic products market that enhance, or are
complementary with or related
to, our product mix, sales and distribution, or manufacturing capabilities.
 Our Products
  Orthopedic Rehabilitation Division
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Product Segment
    
    Description
    
    Brand NamePatient Care
    
    Dry heat therapy
    
    FluidotherapyHot/cold therapy
    
    HydrocollatorParaffin wax therapy
    
    Para-careContinuous passive motion
    
    OptiflexArtromotMoist heat therapy
    
    TherathermCompression therapy
    
    PresSsionAdvance dynamic ROMBracing
    
    ArtrocareArtrocastLumbostarArtromaxxSoft Bracing/bandages
    
    ArtroskinDynamic splint
    
    AdvanceHyaluronan acid
    
    Hya-ject, ArtrojectNutritional supplement
    
    ArtrostarClinical Electrotherapy
    
    Electrotherapy/ultrasound
    
    IntelectIntelect vetVectraVitalstimCPSInfinity plusElectrodes
    
    Dura-stickValutrodeHome Electrotherapy Devices
    
    Transcutaneous electrical nerve stimulation (TENS)
    
    EpixEasyTENSInfinityNeuromuscular electrical stimulation (NMES)
    
    Focus300PVIontophoresis
    
    Non-invasive drug delivery
    
    DupelDupel B.L.U.E.ActionpatchPhysical Therapy Tables andTraction Products
    
    Treatment tables
    
    TritonAdaptaTraction
    
    txTritonCervical traction
    
    Tru-trac
PronexSaunders cervicalHometracLumbar traction
    
    Saunders lumbar hometracChiropractic
    
    Treatment tables
    
    ErgostyleErgo waveErgobasicES2000DTS
 Surgical Implant Division
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Product Segment
    
    Description
    
    Brand NameKnees
    
    Primary total joint replacement
    
    Foundation3DKnee systemMobile bearing knee*MJS total knee systemRevision total joint replacement
    
    Foundation revision knee systemUnicondylar joint replacement
    
    Epik Unicondylar KneeHips
    
    Primary replacement stem
    
    FoundationLinearRevelationR120Alfa IIAlfaCLP IIICLPAcetabular cup system
    
    FMPMetal-on-metal acetabular cupKeramosRevision joint replacement
    
    KeystoneShoulders
    
    Primary total joint replacement
    
    FoundationRS1Fracture repair system
    
    FoundationRevision total joint replacement
    
    FoundationSpine
    
    Anterior Cervical Plating
    
    Cyclone anterior cervical plateInterbody Fusion
    
    Varilift**Screws, Rods, Hooks
    
    VarifixMAPSX StopCorpectomy Systems
    
    MEH4 mesh
 
 ***
    
    Currently not approved for sale within the U.S.
 Currently not approved as an interbody device within the U.S. Research and Development
   Marketing and Sales
  Orthopedic Rehabilitation Division
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Surgical Implant Division
   Manufacturing
  Orthopedic Rehabilitation Division
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Surgical Implant Division
  Intellectual Property
     Competition
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Orthopedic Rehabilitation Division
  Surgical Implant Division
   
    
    Develop new products and innovative technologies;
    
    Obtain regulatory clearance and compliance for our products;
    
    Manufacture and sell our products cost-effectively;
    
    Meet all relevant quality standards for our products and their markets;
    
    Respond to competitive pressures specific to each of our geographic markets, including
our ability to enforce non-compete agreements;
    
    Protect the proprietary technology of our products and manufacturing processes;
    
    Market our products;
    
    Attract and retain skilled employees and sales representatives; and
    
    Maintain and establish distribution relationships.
 Government Regulation
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Third-Party Reimbursement
    Fraud and Abuse
  Anti-Kickback and Fraud Laws
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Physician Self-Referral Laws
  False Claims Laws
  Governmental Audits
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Federal Privacy and Transaction Law and Regulations
  Employees
  Segment and geographic information
  Available Information
 www.encoremed.com, www.sec.gov
  
 Item 1A. Risk Factors
  Our substantial level of indebtedness could adversely affect our financial condition and prevent us
from fulfilling our obligations.
 3 4
 
    
    limiting our ability to fund working capital, capital expenditures,
acquisitions or other general corporate purposes;
    
    requiring us to use a substantial portion of our cash flow from operations to
pay interest and principal on our indebtedness, which will reduce the
funds available to us for purposes such as potential acquisitions, capital expenditures,
marketing, development and other general corporate purposes;
    
    vulnerability to fluctuations in interest rates, as a substantial portion of
our indebtedness bears variable rates of interest, including interest rate swap
agreements;
    
    placing us at a competitive disadvantage compared to some of our competitors
who may be less highly leveraged than us;
    
    reducing our flexibility in planning for, or responding to, changing conditions in our business and our industry;
    
    limiting our ability to borrow additional funds; and
    
    making us more vulnerable to general economic downturns and adverse developments in our business.
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We will require a significant amount of cash to service our indebtedness. Our ability to generate
cash depends on many factors beyond our control.
   The indenture related to our notes and our senior credit facility imposes significant operating and
financial restrictions on us, which may prevent us from capitalizing on business opportunities and
taking some corporate actions.
  
    
    incur or guarantee additional indebtedness or issue preferred stock;
    
    pay dividends or make other distributions;
    
    repurchase our stock;
    
    make investments;
    
    sell or otherwise dispose of assets, including capital stock of subsidiaries;
    
    create liens;
    
    prepay, redeem or repurchase debt;
    
    enter into agreements restricting our subsidiaries ability to pay dividends;
    
    enter into transactions with affiliates; and
    
    consolidate, merge or sell all of our assets.
  If we are not successful in integrating Compex, the anticipated benefits of the transaction may not
be realized.
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Our integration of the acquisition of Empi is ongoing and we may incur substantial costs to
achieve, and may not be able to realize, the anticipated cost savings, synergies or revenue
enhancements from integrating Empis operations with our current business and with Compex.
  
    
    demands on management related to the significant increase in the size of the business for which they are responsible;
    
    diversion of managements attention from the management of daily operations to the integration of operations;
    
    difficulties in the assimilation of different corporate cultures, practices and sales and
distribution methodologies, as well as in the assimilation and retention of extensive and
geographically dispersed operations and personnel;
    
    larger international operations and increased exposure to risks relating to business
operations outside the United States;
    
    difficulties and unanticipated expenses related to the integration of departments,
information technology systems, including accounting systems, technologies, books and
records and procedures, as well as in maintaining uniform standards, including internal
accounting controls, procedures and policies; and
    
    costs and expenses associated with any undisclosed or potential liabilities.
  
    
    our ability to eliminate effectively duplicative back office overhead and overlapping and
redundant selling, general and administrative functions, rationalize manufacturing capacity
and shift production to more economical facilities;
    
    the use of more cash resources on integration and implementation activities than we
currently expect, could offset any such savings and other synergies resulting from the Empi
acquisition;
    
    increases in other expenses, operating losses or problems unrelated to the acquisition,
which may offset the cost savings and other synergies from the acquisition or divert
resources intended to be used in the integration; and
    
    our ability to avoid labor disruption in connection with the integration.
 Future acquisitions could entail risks of their own, in addition to risks we otherwise face.
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If adequate levels of reimbursement from third-party payors for our products are not obtained,
surgeons and patients may be reluctant to use our products, and our sales may decline.
      Recent changes in coverage and reimbursement policies for our products by Medicare or reductions in
reimbursement rates for our products could adversely affect our business and results of operations.
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Our international operations expose us to risks related to conducting business in multiple
jurisdictions outside the United States.
  
    
    imposition of or an increase of investment and other restrictions by foreign
governments;
    
    potential adverse tax consequences, including the imposition or increase of
withholding and other taxes on remittances and other payments by foreign subsidiaries and
exposure to adverse tax regimes;
    
    the imposition of additional foreign governmental controls or regulations on the sale of our products;
    
    changes in political and economic conditions;
    
    fluctuations in currency exchange rates;
    
    difficulties in attracting high-quality management, sales and marketing personnel to staff our foreign operations;
    
    import restrictions and controls, tariffs and other trade barriers;
    
    exposure to different legal, regulatory and political standards in multiple countries; and
    
    acts of terrorism and acts of war.
  Changes in international regulations regarding coverage and reimbursement for our products could
adversely affect our business and results of operations.
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Product liability claims may harm our business if our insurance proves inadequate or the number of
claims increases significantly.
   We operate in a highly competitive business environment and our inability to compete effectively
could adversely affect our business prospects and results of operations.
  
    
    greater financial and other resources;
    
    more widely accepted products;
    
    a larger number of endorsements from healthcare professionals;
    
    a larger product portfolio;
    
    superior ability to maintain new product flow;
    
    greater research and development and technical capabilities;
    
    patent portfolios that may present an obstacle to our conduct of business;
    
    stronger name recognition;
    
    larger sales and distribution networks; and/or
    
    international manufacturing facilities that enable them to avoid the
transportation costs and foreign import duties associated with shipping our products
manufactured in the United States to international customers.
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If we are unable to develop or license new and innovative products or product enhancements or find
new applications for our existing products, we will not remain competitive.
   We rely on our own direct distribution network for certain of our products, which may result in
higher fixed costs and may slow our ability to reduce costs in the face of a sudden decline in
demand for our products.
  If we fail to establish new sales and distribution relationships or maintain our existing
relationships, or if our independent sales agents and third-party distributors fail to commit
sufficient time and effort or are otherwise ineffective in selling our products, our results of
operations and future growth will be adversely impacted.
   Our quarterly operating results are subject to substantial fluctuations, and you should not rely on
them as an indication of our future results.
  
    
    demand for our products and our ability to meet the demand for our products;
    
    increased competition;
    
    the number, significance and timing of introduction of new products and enhancements by us or our competitors;
    
    our ability to develop, introduce and market new and enhanced versions of our products on a timely basis;
    
    changes in pricing policies by us or our competitors;
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
    
    changes in the treatment practices of our surgeon customers;
    
    the loss of preferred provider status with managed care programs or buying groups;
    
    impact of acquisitions;
    
    impact of litigation, regulatory and other legal proceedings;
    
    impact of new accounting regulations, standards or policies;
    
    the timing of significant orders and shipments;
    
    availability of raw materials;
    
    recalls of our products;
    
    work stoppages or strikes in the healthcare industry; and
    
    general economic factors.
   Our reported results may be adversely affected by increases in reserves for uncollectible accounts
receivable, sales allowances, product returns, rental credits and inventory.
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The success of our surgical implant products depends on our relationships with leading surgeons who
assist with the development and testing of our products.
  The success of all of our products depends heavily on our relationships with healthcare
professionals who prescribe and recommend our products, and our failure to maintain these
relationships could adversely affect our businesses.
  Our products are subject to recalls even after receiving FDA or foreign regulatory clearance or
approval. Recalls could harm our reputation and business.
  If we lose one of our key suppliers or one of our contract manufacturers stops making our products,
we may be unable to meet customer orders for our products in a timely manner or within our budget.
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If a natural or man-made disaster strikes our manufacturing facilities, we may be unable to
manufacture our products for a substantial amount of time, which could cause our sales to decline.
  Our business plan relies on certain assumptions concerning demographic and other trends that impact
the market for our products, which, if incorrect, may adversely affect our expected results of
operations.
  The loss of the services of our key management and personnel could adversely affect our ability to
operate our business.
   We may be liable for contamination or other harm caused by hazardous materials that we use.
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Fluctuations in foreign exchange rates may adversely affect our financial position and results of
operations.
   If our patents and other intellectual property rights do not adequately protect our products, we
may lose market share to our competitors and be unable to operate our business profitably.
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Our operating results and financial condition could be adversely affected if we become involved in
litigation regarding our patents or other intellectual property rights.
   We may expand into new markets and products and our expansion may not be successful.
  Consolidation in the healthcare industry could have an adverse effect on our revenues and results
of operations.
  Our failure to comply with regulatory requirements or receive regulatory clearance or approval for
our products or operations in the United States or abroad could adversely affect our business.
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Our marketing and sales practices may contain certain risks with respect to the manner in which
these practices were historically conducted that could have a material adverse effect on us.
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Audits or denials of our claims by government agencies could reduce our revenues or profits.
  Healthcare reform, managed care and buying groups have put downward pressure on the prices of our
products.
    If a significant number of shares of our common stock are sold into the market, the market price of
our common stock could significantly decline, even if our business is doing well.
  Our certificate of incorporation, our bylaws and Delaware law contain provisions that could
discourage, delay or prevent a takeover attempt.
  Our stock price may be volatile and your continued investment in our common stock could suffer a
decline in value.
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
    
    actual or anticipated fluctuations in our operating results;
    
    our announcements or our competitors announcements of technological innovations or new
products;
    
    clinical trial results;
    
    changes in our growth rates or our competitors growth rates;
    
    developments regarding our patents or other intellectual property rights, or those of our
competitors;
    
    FDA and international actions with respect to the government regulation of medical devices
and third-party
reimbursement matters;
    
    public concern as to the safety of our products;
    
    changes in U.S. or international healthcare policies;
    
    conditions in the financial markets in general or changes in general economic conditions;
    
    our inability to raise any additional required capital;
    
    conditions of other medical device companies or the medical device industry generally; and
    
    changes in stock market analyst recommendations regarding our common stock, other comparable
companies or the
medical device industry generally.
 Our executive officers, directors and significant stockholders may be able to influence matters
requiring stockholder approval.
  We do not expect to pay dividends for the foreseeable future.
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Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
   Owned/
    
    Lease
    
    Size inLocation
    
    Use
    
    Leased
    
    Termination Date
    
    Square FeetAustin, Texas
    
    Corporate Headquarters, Surgical ImplantDivision Operations and Manufacturing
     Facility, Warehouse, Research and
     Development
    
  Leased
    
    March 2012(1)
    
    
    70,000Chattanooga, Tennessee
    
    Orthopedic Rehabilitation DivisionOperations, Manufacturing Facility,
Research      and Development
    

    Owned
    
    n/a
    
    
    160,000Chattanooga, Tennessee
    
    Manufacturing Facility
    
    Owned
    
    n/a
    
    
    60,000Chattanooga, Tennessee
    
    Distribution Center for RME Products
    
    Leased
    
    July 2008
    
    
    50,000Clear Lake, South Dakota
    
    Manufacturing Facility
    
    Owned
    
    n/a
    
    
    34,000Clear Lake, South Dakota
    
    Distribution Center
    
    Owned
    
    n/a
    
    
    10,000Clear Lake, South Dakota
    
    Warehouse
    
    Leased
    
    March 2006
    
    
    1,500St. Paul, Minnesota
    
    Orthopedic Rehabilitation DivisionOperations, Research and Development
    
    Leased

    
    October 2011(2)

    
    
    93,666Freiburg, Germany
    
    European Headquarters, Warehouse and     Distribution Facility, Research and      Development
    
    Leased
    
    December 2014
    
    
    39,547Australia
    
    Warehouse
    
    Leased
    
    July 2007(3)
    
    
    1,700Herentals, Belgium
    
    Warehouse
    
    Leased
    
    December 2013(4)
    
    
    25,800Umkirch, Germany
    
    Administrative Facility(5)
    
    Leased
    
    August 2007(6)
    
    
    5,000Umkirch, Germany
    
    CPM Manufacturing Facility, Researchand Development (5)
    
    Leased

    
    August 2009

    
    
    6,500
 
 (1)
    
    Renewable, at our option, for two additional five-year terms.(2)
    
    Renewable, at our option, for one additional five-year term.(3)
    
    Renewable, at our option, for one additional three-year term.(4)
    
    Renewable, at our option, for one additional three-year term.(5)
    
    These facilities are leased by Medireha, which is 50% owned by us.(6)
    
    Renewable, at our option, for one additional seven-year term. 
 Item 3. Legal Proceedings
   31




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Item 4. Submission of Matters to a Vote of Security Holders
  32




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##### Table of Contents



Part II.
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities
  High
    
    
    Low2005First Quarter
    
    $
    6.86
    
    
    $
    4.49Second Quarter
    
    $
    5.98
    
    
    $
    3.86Third Quarter
    
    $
    6.15
    
    
    $
    4.46Fourth Quarter
    
    $
    5.56
    
    
    $
    4.412004First Quarter
    
    $
    9.45
    
    
    $
    7.37Second Quarter
    
    $
    8.79
    
    
    $
    5.99Third Quarter
    
    $
    6.46
    
    
    $
    3.80Fourth Quarter
    
    $
    7.18
    
    
    $
    4.40
   33




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##### Table of Contents



Item 6. Selected Financial Data
  Year Ended December 31,(in thousands, except per share data)
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Statement of Operations Data:Net sales
    
    $
    293,726
    
    
    $
    148,081
    
    
    $
    93,029
    
    
    $
    78,034
    
    
    $
    33,732Gross margin
    
    
    178,946
    
    
    
    82,139
    
    
    
    48,766
    
    
    
    40,648
    
    
    
    21,814Income (loss) from continuing operations
    
    
    9,347
    
    
    
    5,128
    
    
    
    (1,769
    )
    
    
    655
    
    
    
    318
    1Net income (loss)
    
    
    12,330
    
    
    
    5,527
    
    
    
    (2,517
    )
    
    
    6
    
    
    
    548Beneficial conversion feature related to Series A
Preferred Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,706
    )Net income (loss) attributable to common stock
    
    $
    12,330
    
    
    $
    5,527
    
    
    $
    (2,517
    )
    
    $
    6
    
    
    $
    (3,158
    )Basic earnings (loss) per share
    
    $
    0.24
    
    
    $
    0.12
    
    
    $
    (0.12
    )
    
    $
    0.00
    
    
    $
    (0.34
    )Diluted earnings (loss) per share
    
    $
    0.24
    
    
    $
    0.12
    
    
    $
    (0.12
    )
    
    $
    0.00
    
    
    $
    (0.34
    )Weighted average number of common shares outstanding:Basic
    
    
    51,766
    
    
    
    44,936
    
    
    
    20,848
    
    
    
    10,429
    
    
    
    9,355Diluted
    
    
    52,393
    
    
    
    46,281
    
    
    
    20,848
    
    
    
    26,477
    
    
    
    9,355Balance Sheet DataTotal assets
    
    $
    552,037
    
    
    $
    552,139
    
    
    $
    136,380
    
    
    $
    93,755
    
    
    $
    51,662Long-term debt, including current portion
    
    
    315,081
    
    
    
    315,553
    
    
    
    6,471
    
    
    
    36,821
    
    
    
    10,344Stockholders equity
    
    
    167,107
    
    
    
    160,317
    
    
    
    113,109
    
    
    
    41,029
    
    
    
    32,177
 
 1
   34




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Introduction
  
    
    Overview of Business and 2005 Results
    
    Key Industry Trends, Events and Uncertainties
    
    Results of Operations
    
    Critical Accounting Policies and Estimates
    
    Recent Accounting Pronouncements
    
    Significant Demands
    
    Liquidity and Capital Resources
    
    Contractual Obligations, Commercial Commitments and Leases
  Overview of Business and 2005 Results
  
    
    Orthopedic Rehabilitation Division.Our Orthopedic Rehabilitation Division
offers non-invasive medical products that are used before and after surgery to
assist in the repair and rehabilitation of soft tissue and bone, and to protect
against further injury; electrotherapy, patient care and continuous passive motion
devices and accessories used to treat pain and restore muscle function;
iontophoretic devices and accessories used to deliver medication; clinical therapy
tables and traction equipment; physical therapy traction and treatment tables,
chiropractic treatment tables and orthotics devices used to treat joint and spine
conditions.
    
    Surgical Implant Division.Our Surgical Implant Division offers a comprehensive
product offering comprised of reconstructive joint products and spinal implants.
     35




---



##### Table of Contents



Key Industry Trends, Events and Uncertainties
  Results of Operations
  Year Ended December 31,2005
    
    
    2004
    
    
    2003Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    39.1
    
    
    
    44.5
    
    
    
    47.6Gross margin
    
    
    60.9
    
    
    
    55.5
    
    
    
    52.4Operating expenses:Selling, general and administrative
    
    
    42.8
    
    
    
    40.8
    
    
    
    36.4Research and development
    
    
    3.2
    
    
    
    4.9
    
    
    
    5.3Operating income
    
    
    14.9
    
    
    
    9.8
    
    
    
    10.7Other income (expense):Interest income
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.2Interest expense
    
    
    (9.7
    )
    
    
    (4.8
    )
    
    
    (5.7
    )Loss on early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    (8.2
    )Other income, net
    
    
    
    
    
    
    0.4
    
    
    
    0.6Income (loss) from continuing operations
before income taxes and minority interests
    
    
    5.3
    
    
    
    5.7
    
    
    
    (2.4
    )Provision (benefit) for income taxes
    
    
    2.1
    
    
    
    2.2
    
    
    
    (0.5
    )Minority interests
    
    
    
    
    
    
    0.1
    
    
    
    Income (loss) from continuing operations
    
    
    3.2
    
    
    
    3.4
    
    
    
    (1.9
    )Discontinued operations:Gain on disposal of discontinued operations
    
    
    0.8
    
    
    
    
    
    
    
    Income (loss) from discontinued operations (net
of income tax expense (benefit))
    
    
    0.2
    
    
    
    0.3
    
    
    
    (0.8
    )Net income (loss)
    
    
    4.2
    %
    
    
    3.7
    %
    
    
    (2.7
    )%
 36




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##### Table of Contents



Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
 Net Sales.
  Domestic
    
    
    International
    
    
    Total%
    
    
    
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    
    
    
    %(In thousands, except %)
    
    2005
    
    
    2004
    
    
    Growth
    
    
    2005
    
    
    2004
    
    
    Growth
    
    
    2005
    
    
    2004
    
    
    GrowthOrthopedic
Rehabilitation
Division
    
    $
    185,510
    
    
    $
    86,471
    
    
    
    115
    %
    
    $
    53,751
    
    
    $
    18,053
    
    
    
    198
    %
    
    $
    239,261
    
    
    $
    104,524
    
    
    
    129
    %Surgical Implant
Division
    
    
    44,927
    
    
    
    37,945
    
    
    
    18
    %
    
    
    9,538
    
    
    
    5,612
    
    
    
    70
    %
    
    
    54,465
    
    
    
    43,557
    
    
    
    25
    %Total
    
    $
    230,437
    
    
    $
    124,416
    
    
    
    85
    %
    
    $
    63,289
    
    
    $
    23,665
    
    
    
    167
    %
    
    $
    293,726
    
    
    $
    148,081
    
    
    
    98
    %
    Gross margin.
 Selling, General and Administrative.
 Research and Development.
 Operating Income.
 37




---



##### Table of Contents



Interest Expense.
 Discontinued Operations.
 Net Income.
 Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
 Net Sales.
  Domestic
    
    
    International
    
    
    Total%
    
    
    
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    
    
    
    %(In thousands, except %)
    
    2004
    
    
    2003
    
    
    Growth
    
    
    2004
    
    
    2003
    
    
    Growth
    
    
    2004
    
    
    2003
    
    
    GrowthOrthopedic
Rehabilitation
Division
    
    $
    86,471
    
    
    $
    51,221
    
    
    
    69
    %
    
    $
    18,053
    
    
    $
    6,311
    
    
    
    186
    %
    
    $
    104,524
    
    
    $
    57,532
    
    
    
    82
    %Surgical Implant
Division
    
    
    37,945
    
    
    
    29,754
    
    
    
    28
    %
    
    
    5,612
    
    
    
    5,743
    
    
    
    (2
    )%
    
    
    43,557
    
    
    
    35,497
    
    
    
    23
    %Total
    
    $
    124,416
    
    
    $
    80,975
    
    
    
    54
    %
    
    $
    23,665
    
    
    $
    12,054
    
    
    
    96
    %
    
    $
    148,081
    
    
    $
    93,029
    
    
    
    59
    %
    Gross margin.
 38




---



##### Table of Contents



Selling, General and Administrative.
 Research and Development.
 Operating Income.
 Interest Expense.
 Discontinued Operations.
 Net Income.
 Critical Accounting Policies and Estimates
  Revenue Recognition
   39




---



##### Table of Contents



Reserves for Sales Allowances, Product Returns and Rental Credits
    Reserve for Uncollectible Accounts Receivable.
 Goodwill and Intangible Assets
  40




---



##### Table of Contents



Goodwill
    
    
    Intangibles, netOrthopedic Rehabilitation Division
    
    $
    280,473
    
    
    $
    78,818Surgical Implant Division
    
    
    9,782
    
    
    
    3,560Total
    
    $
    290,255
    
    
    $
    82,378
 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
  41




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##### Table of Contents



Significant Demands
 Accounts Receivable
  Inventory
  Debt Service
  Research and Development
  42




---



##### Table of Contents



Liquidity and Capital Resources
      3 4 3 4
    43




---



##### Table of Contents



Contractual Obligations, Commercial Commitments, and Leases
  Payment due by periodTotal
    
    
    <1 year
    
    

    13 years
    

    
    3-5 years
    

    
    >5 yearsLong-term debt obligations
    
    $
    314,712
    
    
    $
    7,144
    
    
    $
    21,870
    
    
    $
    121,706
    
    
    $
    163,992Capital lease obligations
    
    
    369
    
    
    
    143
    
    
    
    132
    
    
    
    94
    
    
    
    Operating lease obligations
    
    
    13,277
    
    
    
    2,261
    
    
    
    4,428
    
    
    
    3,818
    
    
    
    2,770Purchase obligations
    
    
    24,849
    
    
    
    22,313
    
    
    
    2,536
    
    
    
    
    
    
    
    Total
    
    $
    353,207
    
    
    $
    31,861
    
    
    $
    28,966
    
    
    $
    125,618
    
    
    $
    166,762
  Related Party Transactions
    44




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##### Table of Contents



Forward Looking Statements
  Recent Developments
      45




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##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
      
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 PageReport of Independent Registered Public Accounting Firm
    
    
    47Consolidated Balance Sheets at December 31, 2005 and 2004
    
    
    48Consolidated Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003
    
    
    49Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income for the Years Ended December 31, 2005, 2004 and 2003
    
    
    50Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003
    
    
    51Notes to Consolidated Financial Statements
    
    
    52
 46




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
     KPMG LLP
 
 47




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##### Table of Contents



ENCORE MEDICAL CORPORATION AND SUBSIDIARIES
 Consolidated Balance Sheets
(in thousands, except share and per share data)
 December 31,2005
    
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    17,200
    
    
    $
    19,889Accounts receivable, net
    
    
    53,809
    
    
    
    56,852Inventories, net
    
    
    58,163
    
    
    
    45,621Deferred tax assets
    
    
    9,538
    
    
    
    8,464Prepaid expenses and other current assets
    
    
    4,613
    
    
    
    2,589Assets of discontinued operations
    
    
    14
    
    
    
    7,367Total current assets
    
    
    143,337
    
    
    
    140,782Property and equipment, net
    
    
    25,012
    
    
    
    26,440Goodwill
    
    
    290,255
    
    
    
    286,231Intangible assets, net
    
    
    82,378
    
    
    
    86,489Other assets
    
    
    11,055
    
    
    
    12,197Total assets
    
    $
    552,037
    
    
    $
    552,139Liabilities, Minority Interests and Stockholders EquityCurrent liabilities:Current portion of long-term debt and capital leases
    
    $
    7,287
    
    
    $
    8,346Accounts payable
    
    
    11,820
    
    
    
    10,278Accrued expenses
    
    
    26,941
    
    
    
    28,729Liabilities of discontinued operations
    
    
    295
    
    
    
    563Total current liabilities
    
    
    46,343
    
    
    
    47,916Long-term debt, net of current portion
    
    
    307,794
    
    
    
    307,207Deferred tax liabilities
    
    
    29,663
    
    
    
    35,011Other non-current liabilities
    
    
    460
    
    
    
    867Total liabilities
    
    
    384,260
    
    
    
    391,001Minority interests
    
    
    670
    
    
    
    821Stockholders equity:Common stock, $0.001 par value, 100,000,000 shares authorized;
52,365,000 and 52,204,000 shares issued, respectively
    
    
    52
    
    
    
    52Additional paid-in capital
    
    
    155,399
    
    
    
    154,894Notes received for sale of common stock
    
    
    (846
    )
    
    
    (948
    )Retained earnings
    
    
    15,906
    
    
    
    3,576Accumulated other comprehensive (loss) income
    
    
    (1,757
    )
    
    
    4,390Less cost of repurchased stock (512,000 shares)
    
    
    (1,647
    )
    
    
    (1,647
    )Total stockholders equity
    
    
    167,107
    
    
    
    160,317Total liabilities, minority interests and stockholders equity
    
    $
    552,037
    
    
    $
    552,139
  48




---



##### Table of Contents



ENCORE MEDICAL CORPORATION AND SUBSIDIARIES
 Consolidated Statements of Operations
(in thousands, except per share amounts)
 Year Ended December 31,2005
    
    
    2004
    
    
    2003Net sales
    
    $
    293,726
    
    
    $
    148,081
    
    
    $
    93,029Cost of sales
    
    
    114,780
    
    
    
    65,942
    
    
    
    44,263Gross margin
    
    
    178,946
    
    
    
    82,139
    
    
    
    48,766Operating expenses:Selling, general and administrative
    
    
    125,682
    
    
    
    60,296
    
    
    
    33,902Research and development
    
    
    9,577
    
    
    
    7,276
    
    
    
    4,920Operating income
    
    
    43,687
    
    
    
    14,567
    
    
    
    9,944Other income (expense):Interest income
    
    
    393
    
    
    
    429
    
    
    
    142Interest expense
    
    
    (28,509
    )
    
    
    (7,068
    )
    
    
    (5,287
    )Loss on early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    (7,674
    )Other income (expense), net
    
    
    (23
    )
    
    
    574
    
    
    
    598Income (loss) from continuing operations before income taxes and
minority interests
    
    
    15,548
    
    
    
    8,502
    
    
    
    (2,277
    )Provision (benefit) for income taxes
    
    
    6,061
    
    
    
    3,279
    
    
    
    (508
    )Minority interests
    
    
    140
    
    
    
    95
    
    
    
    Income (loss) from continuing operations
    
    
    9,347
    
    
    
    5,128
    
    
    
    (1,769
    )Discontinued operations:Gain on disposal of discontinued operations (net of income tax expense of $1,563)
    
    
    2,445
    
    
    
    
    
    
    
    Income (loss) from discontinued operations (net of income tax
expense (benefit) of $341, $250 and $(458), respectively)
    
    
    538
    
    
    
    399
    
    
    
    (748
    )Net income (loss)
    
    $
    12,330
    
    
    $
    5,527
    
    
    $
    (2,517
    )Earnings (loss) per share  basic:Income (loss) from continuing operations
    
    $
    0.18
    
    
    $
    0.11
    
    
    $
    (0.08
    )Income (loss) from discontinued operations
    
    
    0.06
    
    
    
    0.01
    
    
    
    (0.04
    )Net income (loss)
    
    $
    0.24
    
    
    $
    0.12
    
    
    $
    (0.12
    )Earnings (loss) per share  diluted:Income (loss) from continuing operations
    
    $
    0.18
    
    
    $
    0.11
    
    
    $
    (0.08
    )Income (loss) from discontinued operations
    
    
    0.06
    
    
    
    0.01
    
    
    
    (0.04
    )Net income (loss)
    
    $
    0.24
    
    
    $
    0.12
    
    
    $
    (0.12
    )Weighted average number of common shares outstanding:Basic
    
    
    51,766
    
    
    
    44,936
    
    
    
    20,848Diluted
    
    
    52,393
    
    
    
    46,281
    
    
    
    20,848
  49




---



##### Table of Contents



ENCORE MEDICAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income
(in thousands)
 Accum.Notes
    
    
    
    
    
    
    
    
    
    
    OtherReceived
    
    
    
    
    
    
    Retained
    
    
    Comprehen
    
    
    Cost of
    
    
    TotalAdditional
    
    
    for Sale of
    
    
    
    
    
    
    Earnings
    
    
    -sive
    
    
    Repurchased
    
    
    Stock-Preferred Stock
    
    
    Common Stock
    
    
    Paid-In
    
    
    Common
    
    
    Deferred
    
    
    (Accum.
    
    
    (Loss)
    
    
    Stock
    
    
    holdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Stock
    
    
    Compensation
    
    
    Deficit)
    
    
    Income
    
    
    Shares
    
    
    Amount
    
    
    EquityBalances at December 31, 2002
    
    
    132
    
    
    $
    12,840
    
    
    
    11,609
    
    
    $
    12
    
    
    $
    30,420
    
    
    $
    (1,164
    )
    
    $
    (14
    )
    
    $
    566
    
    
    
    
    
    
    
    (509
    )
    
    $
    (1,631
    )
    
    $
    41,029Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,517
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,517
    )Issuance of common stock,
net of offering costs of
$6.6 million, and exercise
of options
    
    
    
    
    
    
    
    
    
    
    16,778
    
    
    
    17
    
    
    
    74,205
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74,222Equity awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    141
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    141Amortization of deferred
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14Conversion of preferred
stock to common stock
    
    
    (132
    )
    
    
    (12,840
    )
    
    
    13,235
    
    
    
    13
    
    
    
    12,827
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of common stock
warrants
    
    
    
    
    
    
    
    
    
    
    1,649
    
    
    
    1
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    (16
    )
    
    
    Tax benefit associated with
stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    156
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    156Note payments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64Balances at December 31, 2003
    
    
    
    
    
    
    
    
    
    
    43,271
    
    
    
    43
    
    
    
    117,764
    
    
    
    (1,100
    )
    
    
    
    
    
    
    (1,951
    )
    
    
    
    
    
    
    (512
    )
    
    
    (1,647
    )
    
    
    113,109Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,527
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,527Foreign currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,560
    
    
    
    
    
    
    
    
    
    
    
    4,560Change in hedging gains and
losses, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (170
    )
    
    
    
    
    
    
    
    
    
    
    (170
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,917Issuance of common stock in
connection with the Empi
acquisition
    
    
    
    
    
    
    
    
    
    
    8,000
    
    
    
    8
    
    
    
    35,080
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,088Equity awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    378
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    378Exercise of common stock
warrants
    
    
    
    
    
    
    
    
    
    
    550
    
    
    
    1
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6Refund of short swing profits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    288
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    288Exercise of common stock
options
    
    
    
    
    
    
    
    
    
    
    383
    
    
    
    
    
    
    
    1,002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,002Tax benefit associated with
stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    377
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    377Note payments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    152
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    152Balances at December 31, 2004
    
    
    
    
    
    
    
    
    
    
    52,204
    
    
    
    52
    
    
    
    154,894
    
    
    
    (948
    )
    
    
    
    
    
    
    3,576
    
    
    
    4,390
    
    
    
    (512
    )
    
    
    (1,647
    )
    
    
    160,317Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,330
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,330Foreign currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,781
    )
    
    
    
    
    
    
    
    
    
    
    (6,781
    )Change in hedging gains and
losses, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    634
    
    
    
    
    
    
    
    
    
    
    
    634Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,183Equity awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105Exercise of common stock
options
    
    
    
    
    
    
    
    
    
    
    161
    
    
    
    
    
    
    
    355
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    355Tax benefit associated with
stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45Note payments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102Balances at December 31, 2005
    
    
    
    
    
    $
    
    
    
    
    52,365
    
    
    $
    52
    
    
    $
    155,399
    
    
    $
    (846
    )
    
    $
    
    
    
    $
    15,906
    
    
    $
    (1,757
    )
    
    
    (512
    )
    
    $
    (1,647
    )
    
    $
    167,107
  50




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##### Table of Contents



ENCORE MEDICAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flow
(in thousands)
 Year Ended December 31,2005
    
    
    2004
    
    
    2003OPERATING ACTIVITIES:Net income (loss)
    
    $
    12,330
    
    
    $
    5,527
    
    
    $
    (2,517
    )Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation
    
    
    8,696
    
    
    
    4,404
    
    
    
    2,656Amortization of intangibles
    
    
    5,053
    
    
    
    1,623
    
    
    
    812Amortization of debt issuance costs and loss on early extinguishment of debt
    
    
    2,177
    
    
    
    708
    
    
    
    7,547Non-cash interest expense
    
    
    100
    
    
    
    24
    
    
    
    474Stock-based compensation
    
    
    160
    
    
    
    135
    
    
    
    155Loss on disposal of assets
    
    
    1,375
    
    
    
    368
    
    
    
    10Gain on disposal of discontinued operations
    
    
    (4,008
    )
    
    
    
    
    
    
    Deferred income taxes
    
    
    (2,930
    )
    
    
    (1,568
    )
    
    
    242Provision for bad debt expense and sales returns
    
    
    6,108
    
    
    
    2,401
    
    
    
    228Inventory reserves
    
    
    4,810
    
    
    
    4,591
    
    
    
    2,374Minority interests
    
    
    140
    
    
    
    95
    
    
    
    Tax benefit associated with stock options
    
    
    45
    
    
    
    377
    
    
    
    156Net effect of discontinued operations
    
    
    1,626
    
    
    
    538
    
    
    
    1,793Changes in operating assets and liabilities, net of acquired assets and liabilities:Accounts receivable
    
    
    (4,123
    )
    
    
    (8,984
    )
    
    
    178Inventories
    
    
    (12,570
    )
    
    
    (9,306
    )
    
    
    (4,636
    )Prepaid expenses, other assets and liabilities
    
    
    (1,803
    )
    
    
    105
    
    
    
    (92
    )Accounts payable and accrued expenses
    
    
    2,374
    
    
    
    (744
    )
    
    
    1,549Net cash provided by operating activities
    
    
    19,560
    
    
    
    294
    
    
    
    10,929INVESTING ACTIVITIES:Acquisition of businesses
    
    
    (21,648
    )
    
    
    (316,837
    )
    
    
    Acquisition of intangibles
    
    
    
    
    
    
    (826
    )
    
    
    Proceeds from sale of discontinued operations
    
    
    9,291
    
    
    
    
    
    
    
    Purchases of property and equipment
    
    
    (8,010
    )
    
    
    (5,752
    )
    
    
    (2,827
    )Proceeds from sale of assets
    
    
    8
    
    
    
    177
    
    
    
    17Purchase of held-to-maturity investments
    
    
    
    
    
    
    
    
    
    
    (35,013
    )Maturity of held-to-maturity investments
    
    
    
    
    
    
    35,013
    
    
    
    Net effect of discontinued operations
    
    
    (5
    )
    
    
    (66
    )
    
    
    Net cash used in investing activities
    
    
    (20,364
    )
    
    
    (288,291
    )
    
    
    (37,823
    )FINANCING ACTIVITIES:Proceeds from issuance of common stock
    
    
    355
    
    
    
    1,008
    
    
    
    74,222Proceeds from notes received for sale of common stock
    
    
    102
    
    
    
    152
    
    
    
    64Proceeds from short-swing profit
    
    
    
    
    
    
    288
    
    
    
    Proceeds from long-term obligations
    
    
    14,700
    
    
    
    313,892
    
    
    
    5,000Payments on long-term obligations
    
    
    (15,555
    )
    
    
    (6,109
    )
    
    
    (41,657
    )Payment of debt issuance costs
    
    
    (642
    )
    
    
    (11,783
    )
    
    
    Dividend paid to minority interests
    
    
    (198
    )
    
    
    
    
    
    
    Net effect of discontinued operations
    
    
    
    
    
    
    
    
    
    
    (914
    )Net cash (used in) provided by financing activities
    
    
    (1,238
    )
    
    
    297,448
    
    
    
    36,715Effect of exchange rate on cash and cash equivalents
    
    
    (647
    )
    
    
    364
    
    
    
    Net increase (decrease) in cash and cash equivalents
    
    
    (2,689
    )
    
    
    9,815
    
    
    
    9,821Cash and cash equivalents at beginning of year
    
    
    19,889
    
    
    
    10,074
    
    
    
    253Cash and cash equivalents at end of year
    
    $
    17,200
    
    
    $
    19,889
    
    
    $
    10,074Supplemental disclosures of cash flow information:Cash paid for interest
    
    $
    25,476
    
    
    $
    1,849
    
    
    $
    3,907Cash paid for income taxes
    
    
    12,377
    
    
    
    3,871
    
    
    
    31Non-cash investing and financing activities:Issuance of common stock in connection with acquisition of businesses
    
    $
    
    
    
    $
    35,088
    
    
    $
    Purchase of technology through the issuance of notes payable
    
    
    
    
    
    
    250
    
    
    
    Capital lease obligations related to equipment leases
    
    
    255
    
    
    
    
    
    
    
    270
  51




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##### Table of Contents



ENCORE MEDICAL CORPORATION AND SUBSIDIARIES
 Notes to Consolidated Financial Statements
 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
 Basis of Presentation and Description of Business
    Principles of Consolidation
  Use of Estimates
  Cash and Cash Equivalents
  Allowance for Doubtful Accounts
  Sales Returns and Allowances
  Inventories
  52




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##### Table of Contents



Property and Equipment
  Capitalized Software
  Impairment of Long-Lived Assets
  Goodwill and Intangible Assets
  Shipping and Handling Costs
  Revenue Recognition
    53




---



##### Table of Contents



Warranty Costs
   Year ended December 31,2005
    
    
    2004
    
    
    2003Beginning balance
    
    $
    370
    
    
    $
    419
    
    
    $
    402Amount charged to expense
    
    
    1,079
    
    
    
    501
    
    
    
    697Deductions
    
    
    (806
    )
    
    
    (550
    )
    
    
    (680
    )Ending balance
    
    $
    643
    
    
    $
    370
    
    
    $
    419
 Advertising Costs
  Research and Development
  Income Taxes
  Earnings (Loss) Per Share
  Foreign Currency Translation
  Derivatives and Hedging Activities
  Reclassifications
  54




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##### Table of Contents



Fair Value of Financial Instruments
  Stock-based Compensation Plans
   Year Ended December 31,2005
    
    
    2004
    
    
    2003Net income (loss)
    
    As reported
    
    $
    12,330
    
    
    $
    5,527
    
    
    $
    (2,517
    )Deduct: Total
stock-based employee
compensation expense
determined under fair
value-based method for
all awards, net of
related tax effects
    
    
    
    
    
    
    (1,291
    )
    
    
    (4,231
    )
    
    
    (420
    )Net income (loss)
    
    Pro forma
    
    $
    11,039
    
    
    $
    1,296
    
    
    $
    (2,937
    )Earnings (loss) per share:Basic:
    
    As reported
    
    $
    0.24
    
    
    $
    0.12
    
    
    $
    (0.12
    )Pro forma
    
    $
    0.21
    
    
    $
    0.03
    
    
    $
    (0.14
    )Diluted:
    
    As reported
    
    $
    0.24
    
    
    $
    0.12
    
    
    $
    (0.12
    )Pro forma
    
    $
    0.21
    
    
    $
    0.03
    
    
    $
    (0.14
    )
  2005
    
    
    2004
    
    
    2003Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    
    77.2
    %
    
    
    90.4
    %
    
    
    86.4
    %Risk-free interest rate
    
    
    4.1
    %
    
    
    3.4
    %
    
    
    2.7
    %Expected life
    
    4 years
    
    4 years
    
    4 years
 Comprehensive Income (Loss)
  Recent Accounting Pronouncements
  55




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##### Table of Contents



2. ACCOUNTS RECEIVABLE
  Year Ended December 31,2005
    
    
    2004
    
    
    2003Balance, beginning of year
    
    $
    2,735
    
    
    $
    440
    
    
    $
    213Provision
    
    
    6,108
    
    
    
    2,401
    
    
    
    228Write-off charges and recoveries
    
    
    (4,827
    )
    
    
    (106
    )
    
    
    (1
    )Balance, end of year
    
    $
    4,016
    
    
    $
    2,735
    
    
    $
    440
  3. INVENTORIES
  December 31,2005
    
    
    2004Components and raw materials
    
    $
    13,697
    
    
    $
    12,126Work in process
    
    
    5,516
    
    
    
    3,087Finished goods
    
    
    32,044
    
    
    
    22,676Inventory held on consignment
    
    
    14,303
    
    
    
    12,72565,560
    
    
    
    50,614Less  inventory reserves
    
    
    (7,397
    )
    
    
    (4,993
    )$
    58,163
    
    
    $
    45,621
  Year Ended December 31,2005
    
    
    2004
    
    
    2003Balance, beginning of year
    
    $
    4,993
    
    
    $
    1,887
    
    
    $
    2,649Provision charged to cost of sales
    
    
    4,810
    
    
    
    4,591
    
    
    
    2,374Write-offs charged to reserve
    
    
    (2,406
    )
    
    
    (1,485
    )
    
    
    (3,136
    )Balance, end of year
    
    $
    7,397
    
    
    $
    4,993
    
    
    $
    1,887
  56




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##### Table of Contents



4. PROPERTY AND EQUIPMENT
  December 31,2005
    
    
    2004Land
    
    $
    1,164
    
    
    $
    1,164Buildings and improvements
    
    
    6,687
    
    
    
    6,363Equipment
    
    
    16,218
    
    
    
    14,625Software
    
    
    8,369
    
    
    
    7,519Furniture and fixtures
    
    
    4,388
    
    
    
    3,774Surgical implant instrumentation
    
    
    13,581
    
    
    
    11,19150,407
    
    
    
    44,636Less  accumulated depreciation and amortization
    
    
    (25,395
    )
    
    
    (18,196
    )$
    25,012
    
    
    $
    26,440
  Buildings and improvements
    
    
    5 to 25Equipment
    
    
    3 to 8Software
    
    
    3 to 5Furniture and fixtures
    
    
    3 to 8Surgical implant instrumentation
    
    
    3 to 5
  5. GOODWILL AND INTANGIBLE ASSETS
  Year Ended December 31,2005
    
    
    2004Balance, beginning of year
    
    $
    286,231
    
    
    $
    18,146Adjustment related to resolution of contingencies
    
    
    5,958
    
    
    
    (275
    )Goodwill associated with the acquisition
of Empi, Inc. (Empi)
    
    
    
    
    
    
    262,820Goodwill associated with the acquisition
of Osteoimplant Technology, Inc. (OTI)
    
    
    6,360
    
    
    
    Foreign currency translation
    
    
    (8,294
    )
    
    
    5,540Balance, end of year
    
    $
    290,255
    
    
    $
    286,231
  Goodwill
    
    
    Intangibles, netOrthopedic Rehabilitation Division
    
    $
    280,473
    
    
    $
    78,818Surgical Implant Division
    
    
    9,782
    
    
    
    3,560Total
    
    $
    290,255
    
    
    $
    82,378
  57




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##### Table of Contents



Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Intangibles, NetAmortizable intangible assets:Technology-based
    
    $
    10,552
    
    
    $
    (2,281
    )
    
    $
    8,271Customer-based
    
    
    48,011
    
    
    
    (4,956
    )
    
    
    43,055$
    58,563
    
    
    $
    (7,237
    )
    
    
    51,326Unamortizable intangible assets:Trademarks
    
    
    
    
    
    
    
    
    
    
    31,768Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    (716
    )Total intangible assets
    
    
    
    
    
    
    
    
    
    $
    82,378
  Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Intangibles, NetAmortizable intangible assets:Technology-based
    
    $
    10,398
    
    
    $
    (1,380
    )
    
    $
    9,018Customer-based
    
    
    46,613
    
    
    
    (2,736
    )
    
    
    43,877$
    57,011
    
    
    $
    (4,116
    )
    
    
    52,895Unamortizable intangible assets:Trademarks
    
    
    
    
    
    
    
    
    
    
    31,768Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    1,826Total intangible assets
    
    
    
    
    
    
    
    
    
    $
    86,489
     Year Ending December 31,2006
    
    $
    4,8332007
    
    
    4,5092008
    
    
    4,2182009
    
    
    3,9802010
    
    
    3,308
 6. ACCRUED EXPENSES
  December 31,2005
    
    
    2004Accrued wages and related expenses
    
    $
    8,913
    
    
    $
    7,949Accrued commissions
    
    
    3,595
    
    
    
    2,794Accrued royalties
    
    
    762
    
    
    
    515Accrued warranties
    
    
    643
    
    
    
    370Accrued taxes
    
    
    1,602
    
    
    
    6,673Accrued professional fees
    
    
    1,786
    
    
    
    3,456Accrued interest
    
    
    5,346
    
    
    
    4,567Accrued sales programs
    
    
    
    
    
    
    400Deferred revenue
    
    
    540
    
    
    
    617Other accrued liabilities
    
    
    3,754
    
    
    
    1,388$
    26,941
    
    
    $
    28,729
 58




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7. LONG-TERM DEBT AND LEASES
  December 31,2005
    
    
    2004$180 million senior credit facility to a syndicate of
financial institutions; composed of a $150 million six-year
term loan and a five-year $30 million revolving credit
facility; collateralized by all domestic assets of Encore and
pledge of 66% of the stock of foreign subsidiaries of Encore;
interest rate at Bank of Americas base rate or the London
Interbank Offered Rate (LIBOR), plus an applicable margin
determined by, among other things, the ratio of total debt to
earnings before interest, taxes, depreciation and amortization
(EBITDA); $15.3 million available under the revolving credit
facility as of December 31, 2005; term loan subject to
quarterly principal installments of (a) $1.8 million each of
the next 8 quarters, (b) $3.6 million each of the following 8
quarters, and (c) $23.2 million each of the last 4 quarters
with the last payment due October 2010; interest rate of 7.22%
and 5.35% at December 31, 2005 and 2004, respectively.
    
    $
    150,241
    
    
    $
    150,000$165 million senior subordinated notes payable to
institutional investors issued at 99.314% of principal amount;
less unamortized discount of $1,008 and $1,108 at December 31,
2005 and 2004, respectively; interest at 9.75%; interest
payable semi-annually on April 1 and October 1 of each year
through October 1, 2012; junior and subordinate to senior
credit facility; prepayable at a premium commencing October 1,
2008.
    
    
    163,992
    
    
    
    163,8924% note payable to a corporation in connection with the
acquisition of a technology license in 2004, payable in
varying quarterly installments through March 2009.
    
    
    
    
    
    
    250Note 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; 50% payable in each of
July 2005 and July 2008; interest at higher of 5% or prime on
the first business day of each calendar quarter; interest rate
of 6.75% and 5.00% at December 31, 2005 and 2004,
respectively.
    
    
    469
    
    
    
    938European bank loans to finance European working capital;
monthly payments through March 2006, variable interest at
5.25% at December 31, 2005 and 2004.
    
    
    10
    
    
    
    938.9% unsecured note payable to individuals in connection with
the acquisition of Biodynamic Technologies, Inc. in 1999,
payable in varying quarterly installments through March 2005.
    
    
    
    
    
    
    208Capital lease obligations, collateralized by related equipment.
    
    
    369
    
    
    
    172315,081
    
    
    
    315,553Less  current portion
    
    
    (7,287
    )
    
    
    (8,346
    )$
    307,794
    
    
    $
    307,207
    59




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##### Table of Contents



Year Ending December 31,2006
    
    $
    7,2872007
    
    
    7,1992008
    
    
    14,8032009
    
    
    14,3232010
    
    
    107,477Thereafter
    
    
    163,992
 Leases
  OperatingYear Ending December 31,
    
    Leases2006
    
    $
    2,2612007
    
    
    2,2862008
    
    
    2,1422009
    
    
    1,9502010
    
    
    1,868Thereafter
    
    
    2,770$
    13,277
   December 31,2005
    
    
    2004Equipment
    
    $
    647
    
    
    $
    292Less  accumulated amortization
    
    
    (285
    )
    
    
    (117
    )$
    362
    
    
    $
    175
 8. CAPITAL STOCK
 Preferred Stock
   60




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##### Table of Contents



Common Stock
    Stock Option Plans
      Year Ended December 31,2005
    
    
    2004
    
    
    2003Weighted-
    
    
    
    
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceEmployee OptionsOutstanding, beginning of year
    
    
    3,444,335
    
    
    $
    4.97
    
    
    
    1,170,691
    
    
    $
    2.88
    
    
    
    1,077,942
    
    
    $
    2.45Granted at market
    
    
    900,500
    
    
    
    5.32
    
    
    
    2,461,000
    
    
    
    5.79
    
    
    
    280,000
    
    
    
    3.13Exercised
    
    
    (71,645
    )
    
    
    3.16
    
    
    
    (114,155
    )
    
    
    2.04
    
    
    
    (123,261
    )
    
    
    2.49Canceled
    
    
    (458,885
    )
    
    
    5.28
    
    
    
    (73,201
    )
    
    
    5.08
    
    
    
    (63,990
    )
    
    
    3.08Outstanding, end of year
    
    
    3,814,305
    
    
    
    5.05
    
    
    
    3,444,335
    
    
    
    5.39
    
    
    
    1,170,691
    
    
    
    2.88
 61




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##### Table of Contents



Year Ended December 31,2005
    
    
    2004
    
    
    2003Weighted-
    
    
    
    
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOptions exercisable at year end
    
    
    2,177,327
    
    
    
    5.17
    
    
    
    1,590,342
    
    
    
    5.39
    
    
    
    646,429
    
    
    
    2.74Weighted-average fair value of
options granted during the
year
    
    
    
    
    
    $
    5.32
    
    
    
    
    
    
    $
    5.77
    
    
    
    
    
    
    $
    2.68Other Than Employee OptionsOutstanding, beginning of year
    
    
    503,930
    
    
    $
    3.91
    
    
    
    728,212
    
    
    $
    3.58
    
    
    
    863,485
    
    
    $
    3.75Granted at market
    
    
    50,000
    
    
    
    6.45
    
    
    
    79,000
    
    
    
    6.97
    
    
    
    20,000
    
    
    
    3.00Exercised
    
    
    (89,441
    )
    
    
    1.47
    
    
    
    (268,637
    )
    
    
    3.45
    
    
    
    (16,436
    )
    
    
    3.37Canceled
    
    
    (260,489
    )
    
    
    4.75
    
    
    
    (34,645
    )
    
    
    4.55
    
    
    
    (138,837
    )
    
    
    3.15Outstanding, end of year
    
    
    204,000
    
    
    
    4.53
    
    
    
    503,930
    
    
    
    3.89
    
    
    
    728,212
    
    
    
    3.58Options exercisable at year end
    
    
    154,000
    
    
    
    3.86
    
    
    
    503,930
    
    
    
    3.89
    
    
    
    703,212
    
    
    
    3.67Weighted-average fair value of
options granted during the
year
    
    
    
    
    
    $
    6.08
    
    
    
    
    
    
    $
    7.13
    
    
    
    
    
    
    $
    2.56
  Options Outstanding
    
    Options ExercisableWeighted-AverageRemaining
    
    Weighted-
    
    
    
    
    
    Weighted-Range of
    
    
    
    
    
    Contractual
    
    Average
    
    
    
    
    
    AverageExercise Prices
    
    Number
    
    Life
    
    Price
    
    Number
    
    Price(Years)$1.40 to $2.96
    
    
    575,450
    
    
    
    5.06
    
    
    $
    2.44
    
    
    
    542,117
    
    
    $
    2.42$3.00 to $3.90
    
    
    897,355
    
    
    
    7.32
    
    
    $
    3.63
    
    
    
    589,023
    
    
    $
    3.57$4.37 to $4.93
    
    
    499,000
    
    
    
    8.90
    
    
    $
    4.68
    
    
    
    131,001
    
    
    $
    4.50$5.01 to $5.88
    
    
    1,083,000
    
    
    
    9.23
    
    
    $
    5.36
    
    
    
    149,686
    
    
    $
    5.19$6.48 to $8.66
    
    
    963,500
    
    
    
    8.01
    
    
    $
    7.65
    
    
    
    919,500
    
    
    $
    7.704,018,305
    
    
    
    
    
    
    
    
    
    
    
    2,331,327
 Warrants
  Issuance of Common Stock for Recourse Notes Payable
  9. SEGMENT AND GEOGRAPHIC INFORMATION
  62




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Year Ended December 31,2005
    
    
    2004
    
    
    2003Net sales:Surgical Implant Division
    
    $
    54,465
    
    
    $
    43,557
    
    
    $
    35,497Orthopedic Rehabilitation Division
    
    
    239,261
    
    
    
    104,524
    
    
    
    57,532Consolidated net sales
    
    $
    293,726
    
    
    $
    148,081
    
    
    $
    93,029Gross margin:Surgical Implant Division
    
    $
    42,889
    
    
    $
    29,988
    
    
    $
    24,848Orthopedic Rehabilitation Division
    
    
    136,057
    
    
    
    52,151
    
    
    
    23,918Consolidated gross margin
    
    $
    178,946
    
    
    $
    82,139
    
    
    $
    48,766
  Geographic Area
   Year Ended December 31,2005
    
    
    2004
    
    
    2003Net sales:United States
    
    $
    230,437
    
    
    $
    124,416
    
    
    $
    80,975Germany
    
    
    41,161
    
    
    
    10,324
    
    
    
    665Other Europe, Middle East, & Africa
    
    
    8,675
    
    
    
    5,297
    
    
    
    3,340Asia Pacific
    
    
    10,338
    
    
    
    4,873
    
    
    
    5,477Other
    
    
    3,115
    
    
    
    3,171
    
    
    
    2,572$
    293,726
    
    
    $
    148,081
    
    
    $
    93,029
  December 31,2005
    
    
    2004United States
    
    $
    336,323
    
    
    $
    322,949Europe
    
    
    72,377
    
    
    
    88,408$
    408,700
    
    
    $
    411,357
 10. INCOME TAXES
  Year Ended December 31,2005
    
    
    2004
    
    
    2003U.S. operations
    
    $
    10,788
    
    
    $
    7,173
    
    
    $
    (2,277
    )Foreign operations
    
    
    4,760
    
    
    
    1,329
    
    
    
    $
    15,548
    
    
    $
    8,502
    
    
    $
    (2,277
    )
 63




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##### Table of Contents



Year Ended December 31,2005
    
    
    2004
    
    
    2003Current income taxes:U.S. Federal and State
    
    $
    6,816
    
    
    $
    4,318
    
    
    $
    664Foreign
    
    
    2,175
    
    
    
    529
    
    
    
    Deferred income taxes:U.S. Federal and State
    
    
    (2,724
    )
    
    
    (1,518
    )
    
    
    (1,172
    )Foreign
    
    
    (206
    )
    
    
    (50
    )
    
    
    $
    6,061
    
    
    $
    3,279
    
    
    $
    (508
    )
  Year Ended December 31,2005
    
    
    2004
    
    
    2003Expense (benefit) derived by applying the
Federal statutory income tax rate to
income (loss) before income taxes
    
    $
    5,442
    
    
    $
    2,976
    
    
    $
    (774
    )Add (deduct) the effect of:State tax provision (benefit), net
    
    
    453
    
    
    
    253
    
    
    
    (68
    )State tax rate increase
    
    
    
    
    
    
    
    
    
    
    212Permanent differences and other, net
    
    
    166
    
    
    
    50
    
    
    
    122$
    6,061
    
    
    $
    3,279
    
    
    $
    (508
    )
  December 31,2005
    
    
    2004Current deferred tax assets (liabilities):Contribution carryforward
    
    $
    
    
    
    $
    251Inventory
    
    
    3,002
    
    
    
    2,485Receivables
    
    
    5,214
    
    
    
    4,778Accrued compensation
    
    
    650
    
    
    
    670Other
    
    
    672
    
    
    
    280Gross current deferred tax assets
    
    
    9,538
    
    
    
    8,464Non-current deferred tax assets (liabilities):Property and equipment
    
    
    (1,267
    )
    
    
    (1,793
    )Intangible assets
    
    
    (29,996
    )
    
    
    (31,607
    )Net operating loss carryforwards
    
    
    882
    
    
    
    880Foreign currency translation
    
    
    1,422
    
    
    
    (2,761
    )Other
    
    
    152
    
    
    
    270Valuation allowance
    
    
    (856
    )
    
    
    Gross non-current deferred tax liabilities
    
    
    (29,663
    )
    
    
    (35,011
    )Net deferred tax liabilities
    
    $
    (20,125
    )
    
    $
    (26,547
    )
   64




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##### Table of Contents



11. EARNINGS PER SHARE
  Year Ended December 31,2005
    
    
    2004
    
    
    2003Income (loss) from continuing operations
    
    $
    9,347
    
    
    $
    5,128
    
    
    $
    (1,769
    )Income (loss) from discontinued operations
    
    
    2,983
    
    
    
    399
    
    
    
    (748
    )Net income (loss)
    
    $
    12,330
    
    
    $
    5,527
    
    
    $
    (2,517
    )Shares used in computing basic earnings per share
    
    
    51,766
    
    
    
    44,936
    
    
    
    20,848Incremental shares from assumed conversions
    
    
    627
    
    
    
    1,345
    
    
    
    Shares used in computing diluted earnings per share
    
    
    52,393
    
    
    
    46,281
    
    
    
    20,848Earnings per share  basic:Income (loss) from continuing operations
    
    $
    0.18
    
    
    $
    0.11
    
    
    $
    (0.08
    )Income (loss) from discontinued operations
    
    
    0.06
    
    
    
    0.01
    
    
    
    (0.04
    )Net income (loss)
    
    $
    0.24
    
    
    $
    0.12
    
    
    $
    (0.12
    )Earnings per share  diluted:Income (loss) from continuing operations
    
    $
    0.18
    
    
    $
    0.11
    
    
    $
    (0.08
    )Income (loss) from discontinued operations
    
    
    0.06
    
    
    
    0.01
    
    
    
    (0.04
    )Net income (loss)
    
    $
    0.24
    
    
    $
    0.12
    
    
    $
    (0.12
    )
  12. ACQUISITION OF EMPI
    65




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##### Table of Contents



Current assets
    
    $
    78,786Tangible and other non-current assets
    
    
    14,367Liabilities assumed
    
    
    (58,632
    )Identifiable intangible assets
    
    
    72,421Goodwill
    
    
    268,778$
    375,720
  Asset Class
    
    Fair Value
    
    
    Wtd. Avg. Useful LifeTechnology-based
    
    $
    6,979
    
    
    9 yearsMarketing-based
    
    
    4,345
    
    
    5 yearsCustomer-based
    
    
    35,749
    
    
    20 yearsTrademarks
    
    
    25,348
    
    
    IndefiniteGoodwill
    
    
    268,778$
    341,199
   13. ACQUISITION OF OTI
   Current assets
    
    $
    4,101Tangible and other noncurrent assets
    
    
    1,297Liabilities assumed
    
    
    (163
    )Intangible assets
    
    
    4,094Goodwill
    
    
    6,360$
    15,689
 66




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##### Table of Contents



Asset class
    
    Fair value
    
    
    Wtd. Avg. Useful life(in thousands)Technology-based
    
    $
    1,263
    
    
    6 yearsCustomer-based
    
    
    2,831
    
    
    7 yearsGoodwill
    
    
    6,360$
    10,454
  14. DERIVATIVE INSTRUMENTS
     67




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##### Table of Contents



15. UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA
 Three Months EndedApr 2,
    
    
    Jul 2,
    
    
    Oct 1,
    
    
    Dec 31,2005
    
    
    2005
    
    
    2005
    
    
    2005(in thousands, except per share data)Net sales
    
    $
    71,559
    
    
    $
    74,429
    
    
    $
    72,726
    
    
    $
    75,012Gross margin
    
    
    42,528
    
    
    
    45,211
    
    
    
    44,917
    
    
    
    46,290Operating income
    
    
    9,070
    
    
    
    10,600
    
    
    
    11,570
    
    
    
    12,447Net income
    
    
    1,593
    
    
    
    2,440
    
    
    
    5,106
    
    
    
    3,191Earnings per share  basic
    
    $
    0.03
    
    
    $
    0.05
    
    
    $
    0.10
    
    
    $
    0.06Earnings per share  diluted
    
    $
    0.03
    
    
    $
    0.05
    
    
    $
    0.10
    
    
    $
    0.06Weighted average number of
common shares outstanding:Basic
    
    
    51,700
    
    
    
    51,744
    
    
    
    51,791
    
    
    
    51,837Diluted
    
    
    52,432
    
    
    
    52,289
    
    
    
    52,491
    
    
    
    52,405
 Three Months EndedApr 3,
    
    
    Jul 3,
    
    
    Oct 2,
    
    
    Dec 31,2004
    
    
    2004
    
    
    2004
    
    
    2004(in thousands, except per share data)Net sales
    
    $
    27,103
    
    
    $
    25,773
    
    
    $
    26,801
    
    
    $
    68,404Gross margin
    
    
    14,557
    
    
    
    13,773
    
    
    
    14,492
    
    
    
    39,317Operating income
    
    
    2,443
    
    
    
    2,610
    
    
    
    1,710
    
    
    
    7,804Net income
    
    
    1,553
    
    
    
    1,658
    
    
    
    1,282
    
    
    
    1,034Earnings per share  basic
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    0.03
    
    
    $
    0.02Earnings per share  diluted
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    0.03
    
    
    $
    0.02Weighted average number of
common shares outstanding:Basic
    
    
    42,723
    
    
    
    42,875
    
    
    
    42,916
    
    
    
    51,140Diluted
    
    
    44,334
    
    
    
    44,261
    
    
    
    44,035
    
    
    
    52,179
   16. RELATED PARTY TRANSACTIONS
    68




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##### Table of Contents



17. DISCONTINUED OPERATIONS
    Years Ended December 31,2005
    
    
    2004
    
    
    2003Net sales
    
    $
    8,709
    
    
    $
    15,457
    
    
    $
    15,030Income (loss) from operations
    
    
    1,142
    
    
    
    1,129
    
    
    
    (729
    )Income (loss) before income taxes from discontinued
operations
    
    
    879
    
    
    
    649
    
    
    
    (1,206
    )Income tax expense (benefit)
    
    
    341
    
    
    
    250
    
    
    
    (458
    )
  December 31,2005
    
    
    2004Current assets
    
    $
    14
    
    
    $
    5,713Property and equipment, net
    
    
    
    
    
    
    446Other non-current assets
    
    
    
    
    
    
    1,208Current liabilities
    
    
    (295
    )
    
    
    (563
    )Net assets (liabilities)
    
    $
    (281
    )
    
    $
    6,804
  18. COMMITMENTS AND CONTINGENCIES
    69




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Year Ending December 31,2006
    
    $
    22,3132007
    
    
    2,536
  19. EMPLOYEE BENEFIT PLANS
  20. GUARANTOR / NON-GUARANTOR COMPANIES OF THE 93/4% SENIOR SUBORDINATED NOTES DUE 2012
 3 4
 
    
    incur or guarantee additional indebtedness or issue preferred stock;
    
    pay dividends or make other distributions;
    
    repurchase our stock;
    
    make investments;
    
    sell or otherwise dispose of assets, including capital stock of subsidiaries;
    
    create liens;
    
    prepay, redeem or repurchase debt;
    
    enter into agreements restricting our subsidiaries ability to pay dividends;
    
    enter into transactions with affiliates; and
    
    consolidate, merge or sell all of our assets.
 70




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##### Table of Contents



ENCORE MEDICAL CORPORATION AND SUBSIDIARIES
 Condensed Consolidating Balance Sheet
As of December 31, 2005
(in thousands)
 Encore
    
    
    EncoreMedical
    
    
    Medical
    
    
    Other
    
    
    Non-
    
    
    Elim-Corporation
    
    
    IHC, Inc.
    
    
    Guarantors
    
    
    guarantors
    
    
    inations
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    308
    
    
    $
    
    
    
    $
    13,588
    
    
    $
    3,304
    
    
    $
    
    
    
    $
    17,200Accounts receivable, net
    
    
    
    
    
    
    
    
    
    
    48,589
    
    
    
    5,220
    
    
    
    
    
    
    
    53,809Inventories, net
    
    
    
    
    
    
    
    
    
    
    55,398
    
    
    
    2,719
    
    
    
    46
    
    
    
    58,163Deferred tax assets
    
    
    
    
    
    
    
    
    
    
    9,538
    
    
    
    
    
    
    
    
    
    
    
    9,538Prepaid expenses and other current assets
    
    
    1,108
    
    
    
    351
    
    
    
    2,994
    
    
    
    160
    
    
    
    
    
    
    
    4,613Assets of discontinued operations
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    14Total current assets
    
    
    1,416
    
    
    
    351
    
    
    
    130,121
    
    
    
    11,403
    
    
    
    46
    
    
    
    143,337Property and equipment, net
    
    
    
    
    
    
    
    
    
    
    21,383
    
    
    
    5,952
    
    
    
    (2,323
    )
    
    
    25,012Goodwill
    
    
    
    
    
    
    
    
    
    
    236,892
    
    
    
    53,363
    
    
    
    
    
    
    
    290,255Intangible assets, net
    
    
    
    
    
    
    
    
    
    
    67,047
    
    
    
    15,331
    
    
    
    
    
    
    
    82,378Investment in subsidiaries
    
    
    55,078
    
    
    
    206,453
    
    
    
    41,182
    
    
    
    
    
    
    
    (302,713
    )
    
    
    Intercompany receivable
    
    
    110,924
    
    
    
    157,393
    
    
    
    
    
    
    
    
    
    
    
    (268,317
    )
    
    
    Other assets
    
    
    
    
    
    
    10,458
    
    
    
    597
    
    
    
    
    
    
    
    
    
    
    
    11,055Total assets
    
    $
    167,418
    
    
    $
    374,655
    
    
    $
    497,222
    
    
    $
    86,049
    
    
    $
    (573,307
    )
    
    $
    552,037Liabilities, Minority Interests and
Stockholders EquityCurrent liabilities:Current portion of long-term debt and
capital
leases
    
    $
    
    
    
    $
    7,134
    
    
    $
    143
    
    
    $
    10
    
    
    $
    
    
    
    $
    7,287Accounts payable
    
    
    82
    
    
    
    
    
    
    
    10,718
    
    
    
    1,020
    
    
    
    
    
    
    
    11,820Accrued expenses
    
    
    
    
    
    
    5,346
    
    
    
    16,707
    
    
    
    4,888
    
    
    
    
    
    
    
    26,941Liabilities of discontinued operations
    
    
    
    
    
    
    
    
    
    
    295
    
    
    
    
    
    
    
    
    
    
    
    295Total current liabilities
    
    
    82
    
    
    
    12,480
    
    
    
    27,863
    
    
    
    5,918
    
    
    
    
    
    
    
    46,343Long-term debt, net of current portion
    
    
    
    
    
    
    307,099
    
    
    
    695
    
    
    
    
    
    
    
    
    
    
    
    307,794Deferred tax liabilities
    
    
    
    
    
    
    
    
    
    
    23,426
    
    
    
    6,150
    
    
    
    87
    
    
    
    29,663Intercompany payable
    
    
    
    
    
    
    
    
    
    
    188,047
    
    
    
    80,270
    
    
    
    (268,317
    )
    
    
    Other non-current liabilities
    
    
    
    
    
    
    
    
    
    
    460
    
    
    
    
    
    
    
    
    
    
    
    460Total liabilities
    
    
    82
    
    
    
    319,579
    
    
    
    240,491
    
    
    
    92,338
    
    
    
    (268,230
    )
    
    
    384,260Minority interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    670
    
    
    
    
    
    
    
    670Stockholders equity
    
    
    167,336
    
    
    
    55,076
    
    
    
    256,731
    
    
    
    (6,959
    )
    
    
    (305,077
    )
    
    
    167,107Total liabilities, minority interests and
stockholders equity
    
    $
    167,418
    
    
    $
    374,655
    
    
    $
    497,222
    
    
    $
    86,049
    
    
    $
    (573,307
    )
    
    $
    552,037
 71




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##### Table of Contents



ENCORE MEDICAL CORPORATION AND SUBSIDIARIES
 Condensed Consolidating Balance Sheet
As of December 31, 2004
(in thousands)
 Encore
    
    
    EncoreMedical
    
    
    Medical
    
    
    Other
    
    
    Non-
    
    
    Elim-Corporation
    
    
    IHC, Inc.
    
    
    Guarantors
    
    
    guarantors
    
    
    inations
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    739
    
    
    $
    
    
    
    $
    15,223
    
    
    $
    3,927
    
    
    $
    
    
    
    $
    19,889Accounts receivable, net
    
    
    
    
    
    
    
    
    
    
    49,814
    
    
    
    7,038
    
    
    
    
    
    
    
    56,852Inventories, net
    
    
    
    
    
    
    
    
    
    
    43,234
    
    
    
    2,573
    
    
    
    (186
    )
    
    
    45,621Deferred tax assets
    
    
    
    
    
    
    
    
    
    
    8,464
    
    
    
    
    
    
    
    
    
    
    
    8,464Prepaid expenses and other current
assets
    
    
    7
    
    
    
    
    
    
    
    2,130
    
    
    
    452
    
    
    
    
    
    
    
    2,589Assets of discontinued operations
    
    
    
    
    
    
    
    
    
    
    7,367
    
    
    
    
    
    
    
    
    
    
    
    7,367Total current assets
    
    
    746
    
    
    
    
    
    
    
    126,232
    
    
    
    13,990
    
    
    
    (186
    )
    
    
    140,782Property and equipment, net
    
    
    
    
    
    
    
    
    
    
    18,716
    
    
    
    7,724
    
    
    
    
    
    
    
    26,440Goodwill
    
    
    
    
    
    
    
    
    
    
    225,637
    
    
    
    60,594
    
    
    
    
    
    
    
    286,231Intangible assets, net
    
    
    
    
    
    
    
    
    
    
    66,512
    
    
    
    19,977
    
    
    
    
    
    
    
    86,489Investment in subsidiaries
    
    
    49,299
    
    
    
    393,096
    
    
    
    73,292
    
    
    
    
    
    
    
    (515,687
    )
    
    
    Intercompany receivable
    
    
    111,300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (111,300
    )
    
    
    Other assets
    
    
    
    
    
    
    11,527
    
    
    
    557
    
    
    
    113
    
    
    
    
    
    
    
    12,197Total assets
    
    $
    161,345
    
    
    $
    404,623
    
    
    $
    510,946
    
    
    $
    102,398
    
    
    $
    (627,173
    )
    
    $
    552,139Liabilities, Minority Interests and Stockholders EquityCurrent liabilities:Current portion of long-term debt and
capital leases
    
    $
    
    
    
    $
    7,500
    
    
    $
    805
    
    
    $
    41
    
    
    $
    
    
    
    $
    8,346Accounts payable
    
    
    
    
    
    
    
    
    
    
    8,538
    
    
    
    1,740
    
    
    
    
    
    
    
    10,278Accrued expenses
    
    
    
    
    
    
    4,484
    
    
    
    17,959
    
    
    
    6,356
    
    
    
    (70
    )
    
    
    28,729Liabilities of discontinued operations
    
    
    
    
    
    
    
    
    
    
    563
    
    
    
    
    
    
    
    
    
    
    
    563Total current liabilities
    
    
    
    
    
    
    11,984
    
    
    
    27,865
    
    
    
    8,137
    
    
    
    (70
    )
    
    
    47,916Long-term debt, net of current portion
    
    
    
    
    
    
    306,392
    
    
    
    763
    
    
    
    52
    
    
    
    
    
    
    
    307,207Deferred tax
liabilities
    
    
    
    
    
    
    
    
    
    
    33,373
    
    
    
    1,638
    
    
    
    
    
    
    
    35,011Intercompany payable
    
    
    
    
    
    
    39,200
    
    
    
    58,951
    
    
    
    13,149
    
    
    
    (111,300
    )
    
    
    Other non-current liabilities
    
    
    
    
    
    
    269
    
    
    
    598
    
    
    
    
    
    
    
    
    
    
    
    867Total liabilities
    
    
    
    
    
    
    357,845
    
    
    
    121,550
    
    
    
    22,976
    
    
    
    (111,370
    )
    
    
    391,001Minority interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    821
    
    
    
    
    
    
    
    821Stockholders equity
    
    
    161,345
    
    
    
    46,778
    
    
    
    389,396
    
    
    
    78,601
    
    
    
    (515,803
    )
    
    
    160,317Total liabilities, minority interests
and stockholders equity
    
    $
    161,345
    
    
    $
    404,623
    
    
    $
    510,946
    
    
    $
    102,398
    
    
    $
    (627,173
    )
    
    $
    552,139
 72




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##### Table of Contents



ENCORE MEDICAL CORPORATION AND SUBSIDIARIES
 Condensed Consolidating Statement of Operations
Year Ended December 31, 2005
(in thousands)
 Encore
    
    
    EncoreMedical
    
    
    Medical
    
    
    Other
    
    
    Non-
    
    
    Elim-Corporation
    
    
    IHC, Inc.
    
    
    Guarantors
    
    
    guarantors
    
    
    inations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    
    
    
    $
    261,487
    
    
    $
    41,002
    
    
    $
    (8,763
    )
    
    $
    293,726Cost of sales
    
    
    
    
    
    
    
    
    
    
    104,669
    
    
    
    18,839
    
    
    
    (8,728
    )
    
    
    114,780Gross margin
    
    
    
    
    
    
    
    
    
    
    156,818
    
    
    
    22,163
    
    
    
    (35
    )
    
    
    178,946Operating expenses:Selling, general and administrative
    
    
    
    
    
    
    
    
    
    
    110,276
    
    
    
    15,406
    
    
    
    
    
    
    
    125,682Research and development
    
    
    
    
    
    
    
    
    
    
    8,497
    
    
    
    1,080
    
    
    
    
    
    
    
    9,577Operating income
    
    
    
    
    
    
    
    
    
    
    38,045
    
    
    
    5,677
    
    
    
    (35
    )
    
    
    43,687Other income (expense):Interest income
    
    
    2
    
    
    
    18,878
    
    
    
    1,987
    
    
    
    124
    
    
    
    (20,598
    )
    
    
    393Interest expense
    
    
    
    
    
    
    (28,708
    )
    
    
    (20,399
    )
    
    
    
    
    
    
    20,598
    
    
    
    (28,509
    )Other income (expense), net
    
    
    12,558
    
    
    
    22,386
    
    
    
    9,516
    
    
    
    (1,041
    )
    
    
    (43,442
    )
    
    
    (23
    )Income from continuing operations
before income taxes and minority
interests
    
    
    12,560
    
    
    
    12,556
    
    
    
    29,149
    
    
    
    4,760
    
    
    
    (43,477
    )
    
    
    15,548Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    4,032
    
    
    
    1,956
    
    
    
    73
    
    
    
    6,061Minority interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    140
    
    
    
    
    
    
    
    140Income (loss) from continuing operations
    
    
    12,560
    
    
    
    12,556
    
    
    
    25,117
    
    
    
    2,664
    
    
    
    (43,550
    )
    
    
    9,347Discontinued operations:Gain on disposal of discontinued
operations, net of tax
    
    
    
    
    
    
    
    
    
    
    2,445
    
    
    
    
    
    
    
    
    
    
    
    2,445Income from discontinued
operations, net of tax
    
    
    
    
    
    
    
    
    
    
    538
    
    
    
    
    
    
    
    
    
    
    
    538Net income
    
    $
    12,560
    
    
    $
    12,556
    
    
    $
    28,100
    
    
    $
    2,664
    
    
    $
    (43,550
    )
    
    $
    12,330
 73




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##### Table of Contents



ENCORE MEDICAL CORPORATION AND SUBSIDIARIES
 Condensed Consolidating Statement of Operations
Year Ended December 31, 2004
(in thousands)
 Encore
    
    
    EncoreMedical
    
    
    Medical
    
    
    Other
    
    
    Non-
    
    
    Elim-Corporation
    
    
    IHC, Inc.
    
    
    Guarantors
    
    
    guarantors
    
    
    inations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    
    
    
    $
    138,779
    
    
    $
    11,372
    
    
    $
    (2,070
    )
    
    $
    148,081Cost of sales
    
    
    
    
    
    
    
    
    
    
    61,957
    
    
    
    5,869
    
    
    
    (1,884
    )
    
    
    65,942Gross margin
    
    
    
    
    
    
    
    
    
    
    76,822
    
    
    
    5,503
    
    
    
    (186
    )
    
    
    82,139Operating expenses:Selling, general and administrative
    
    
    3
    
    
    
    
    
    
    
    56,580
    
    
    
    3,713
    
    
    
    
    
    
    
    60,296Research and development
    
    
    
    
    
    
    
    
    
    
    6,974
    
    
    
    302
    
    
    
    
    
    
    
    7,276Operating income
    
    
    (3
    )
    
    
    
    
    
    
    13,268
    
    
    
    1,488
    
    
    
    (186
    )
    
    
    14,567Other income (expense):Interest income
    
    
    240
    
    
    
    
    
    
    
    189
    
    
    
    
    
    
    
    
    
    
    
    429Interest expense
    
    
    
    
    
    
    (6,402
    )
    
    
    (491
    )
    
    
    (175
    )
    
    
    
    
    
    
    (7,068
    )Other income (expense), net
    
    
    10,709
    
    
    
    10,500
    
    
    
    103
    
    
    
    16
    
    
    
    (20,754
    )
    
    
    574Income from continuing operations
before income taxes and minority
interests
    
    
    10,946
    
    
    
    4,098
    
    
    
    13,069
    
    
    
    1,329
    
    
    
    (20,940
    )
    
    
    8,502Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    2,860
    
    
    
    489
    
    
    
    (70
    )
    
    
    3,279Minority interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    95
    
    
    
    
    
    
    
    95Net income from continuing operations
    
    
    10,946
    
    
    
    4,098
    
    
    
    10,209
    
    
    
    745
    
    
    
    (20,870
    )
    
    
    5,128Discontinued operations:Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    399
    
    
    
    
    
    
    
    
    
    
    
    399Net income
    
    $
    10,946
    
    
    $
    4,098
    
    
    $
    10,608
    
    
    $
    745
    
    
    $
    (20,870
    )
    
    $
    5,527
 74




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##### Table of Contents



ENCORE MEDICAL CORPORATION AND SUBSIDIARIES
 Condensed Consolidating Statement of Cash Flows
Year Ended December 31, 2005
(in thousands)
 Encore
    
    
    EncoreMedical
    
    
    Medical
    
    
    Other
    
    
    Non
    
    
    Elim-Corporation
    
    
    IHC, Inc.
    
    
    Guarantors
    
    
    guarantors
    
    
    inations
    
    
    ConsolidatedOPERATING ACTIVITIES:Net income
    
    $
    12,560
    
    
    $
    12,556
    
    
    $
    28,100
    
    
    $
    2,664
    
    
    $
    (43,550
    )
    
    $
    12,330Adjustments to reconcile net income to
net cash provided by operating activities:Depreciation
    
    
    
    
    
    
    
    
    
    
    6,586
    
    
    
    3,019
    
    
    
    (909
    )
    
    
    8,696Amortization of intangibles
    
    
    
    
    
    
    
    
    
    
    3,378
    
    
    
    1,675
    
    
    
    
    
    
    
    5,053Amortization of debt issuance costs
    
    
    
    
    
    
    2,177
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,177Non-cash interest expense
    
    
    
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100Stock-based compensation
    
    
    30
    
    
    
    
    
    
    
    140
    
    
    
    (10
    )
    
    
    
    
    
    
    160Loss on disposal of assets
    
    
    
    
    
    
    
    
    
    
    522
    
    
    
    1,181
    
    
    
    (328
    )
    
    
    1,375Gain on disposal of discontinued operations
    
    
    
    
    
    
    
    
    
    
    (4,008
    )
    
    
    
    
    
    
    
    
    
    
    (4,008
    )Deferred income taxes
    
    
    
    
    
    
    1,422
    
    
    
    (3,675
    )
    
    
    (764
    )
    
    
    87
    
    
    
    (2,930
    )Earnings from subsidiaries
    
    
    (12,555
    )
    
    
    (22,386
    )
    
    
    (8,501
    )
    
    
    
    
    
    
    43,442
    
    
    
    Provision for bad debt expense and sales returns
    
    
    
    
    
    
    
    
    
    
    5,708
    
    
    
    400
    
    
    
    
    
    
    
    6,108Inventory reserves
    
    
    
    
    
    
    
    
    
    
    4,687
    
    
    
    123
    
    
    
    
    
    
    
    4,810Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    140
    
    
    
    
    
    
    
    140Tax provision associated with stock options
    
    
    45
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45Net effect of discontinued operations
    
    
    
    
    
    
    
    
    
    
    1,626
    
    
    
    
    
    
    
    
    
    
    
    1,626Changes in operating assets and liabilities, net of
acquired assets and liabilities:Accounts receivable
    
    
    
    
    
    
    
    
    
    
    (6,219
    )
    
    
    2,096
    
    
    
    
    
    
    
    (4,123
    )Inventories
    
    
    
    
    
    
    
    
    
    
    (11,722
    )
    
    
    (616
    )
    
    
    (232
    )
    
    
    (12,570
    )Prepaid expenses, other assets and liabilities
    
    
    (1,101
    )
    
    
    (56
    )
    
    
    (836
    )
    
    
    190
    
    
    
    
    
    
    
    (1,803
    )Accounts payable and accrued expenses
    
    
    80
    
    
    
    1,945
    
    
    
    1,755
    
    
    
    (1,476
    )
    
    
    70
    
    
    
    2,374Net cash provided by operating activities
    
    
    (941
    )
    
    
    (4,242
    )
    
    
    17,541
    
    
    
    8,622
    
    
    
    (1,420
    )
    
    
    19,560INVESTING ACTIVITIES:Acquisition of businesses
    
    
    
    
    
    
    (5,958
    )
    
    
    (15,690
    )
    
    
    
    
    
    
    
    
    
    
    (21,648
    )Proceeds from sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    9,291
    
    
    
    
    
    
    
    
    
    
    
    9,291Purchases of property and equipment
    
    
    
    
    
    
    
    
    
    
    (8,175
    )
    
    
    (3,395
    )
    
    
    3,560
    
    
    
    (8,010
    )Proceeds from sale of assets
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    8Net effect of discontinued operations
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    (5
    )Net cash used in investing activities
    
    
    
    
    
    
    (5,958
    )
    
    
    (14,571
    )
    
    
    (3,395
    )
    
    
    3,560
    
    
    
    (20,364
    )FINANCING ACTIVITIES:Proceeds from issuance of common stock
    
    
    355
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    355Proceeds from notes received for sale of common
stock
    
    
    102
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102Intercompany
    
    
    53
    
    
    
    10,601
    
    
    
    (8,137
    )
    
    
    (377
    )
    
    
    (2,140
    )
    
    
    Intercompany cash dividends
    
    
    
    
    
    
    
    
    
    
    4,554
    
    
    
    (4,554
    )
    
    
    
    
    
    
    Proceeds from long-term obligations
    
    
    
    
    
    
    14,700
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,700Payments on long-term obligations
    
    
    
    
    
    
    (14,459
    )
    
    
    (1,022
    )
    
    
    (74
    )
    
    
    
    
    
    
    (15,555
    )Payment of debt issuance costs
    
    
    
    
    
    
    (642
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (642
    )Dividends paid to minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (198
    )
    
    
    
    
    
    
    (198
    )Net cash used in financing activities
    
    
    510
    
    
    
    10,200
    
    
    
    (4,605
    )
    
    
    (5,203
    )
    
    
    (2,140
    )
    
    
    (1,238
    )Effect of exchange rate changes on cash and cash
equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (647
    )
    
    
    
    
    
    
    (647
    )Net decrease in cash and cash equivalents
    
    
    (431
    )
    
    
    
    
    
    
    (1,635
    )
    
    
    (623
    )
    
    
    
    
    
    
    (2,689
    )Cash and cash equivalents at beginning of year
    
    
    739
    
    
    
    
    
    
    
    15,223
    
    
    
    3,927
    
    
    
    
    
    
    
    19,889Cash and cash equivalents at end of year
    
    $
    308
    
    
    $
    
    
    
    $
    13,588
    
    
    $
    3,304
    
    
    $
    
    
    
    $
    17,200
 75




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##### Table of Contents



ENCORE MEDICAL CORPORATION AND SUBSIDIARIES
 Condensed Consolidating Statement of Cash Flows
Year Ended December 31, 2004
(in thousands)
 Encore
    
    
    EncoreMedical
    
    
    Medical
    
    
    Other
    
    
    Non
    
    
    Elim-Corporation
    
    
    IHC, Inc.
    
    
    Guarantors
    
    
    guarantors
    
    
    inations
    
    
    ConsolidatedOPERATING ACTIVITIES:Net income
    
    $
    10,946
    
    
    $
    4,098
    
    
    $
    10,608
    
    
    $
    745
    
    
    $
    (20,870
    )
    
    $
    5,527Adjustments to reconcile net income to
net cash provided by (used in) operating activities:Depreciation
    
    
    
    
    
    
    
    
    
    
    3,692
    
    
    
    712
    
    
    
    
    
    
    
    4,404Amortization of intangibles
    
    
    
    
    
    
    
    
    
    
    1,623
    
    
    
    
    
    
    
    
    
    
    
    1,623Amortization of debt issuance costs
    
    
    
    
    
    
    565
    
    
    
    143
    
    
    
    
    
    
    
    
    
    
    
    708Non-cash interest expense
    
    
    
    
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    135
    
    
    
    
    
    
    
    
    
    
    
    135Loss on disposal of assets
    
    
    
    
    
    
    
    
    
    
    368
    
    
    
    
    
    
    
    
    
    
    
    368Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    (1,518
    )
    
    
    (50
    )
    
    
    
    
    
    
    (1,568
    )Provision for bad debt expense and sales returns
    
    
    
    
    
    
    
    
    
    
    2,551
    
    
    
    (150
    )
    
    
    
    
    
    
    2,401Inventory reserves
    
    
    
    
    
    
    
    
    
    
    4,591
    
    
    
    
    
    
    
    
    
    
    
    4,591Minority
interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    95
    
    
    
    
    
    
    
    95Tax benefit associated with stock options
    
    
    377
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    377Net effect of discontinued operations
    
    
    
    
    
    
    
    
    
    
    538
    
    
    
    
    
    
    
    
    
    
    
    538Changes in operating assets and liabilities, net of
acquired assets and liabilities:Accounts receivable
    
    
    
    
    
    
    
    
    
    
    (8,699
    )
    
    
    (285
    )
    
    
    
    
    
    
    (8,984
    )Inventories
    
    
    
    
    
    
    
    
    
    
    (9,828
    )
    
    
    522
    
    
    
    
    
    
    
    (9,306
    )Prepaid expenses, other assets and liabilities
    
    
    (4
    )
    
    
    
    
    
    
    47
    
    
    
    62
    
    
    
    
    
    
    
    105Accounts payable and accrued expenses
    
    
    2
    
    
    
    4,460
    
    
    
    (4,277
    )
    
    
    (929
    )
    
    
    
    
    
    
    (744
    )Net cash provided by operating activities
    
    
    11,321
    
    
    
    9,147
    
    
    
    (26
    )
    
    
    722
    
    
    
    (20,870
    )
    
    
    294INVESTING ACTIVITIES:Acquisition of businesses
    
    
    (254,662
    )
    
    
    (85,474
    )
    
    
    
    
    
    
    
    
    
    
    23,299
    
    
    
    (316,837
    )Investment in subsidiaries
    
    
    (10,708
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,708
    
    
    
    Acquisition of intangibles
    
    
    
    
    
    
    
    
    
    
    (826
    )
    
    
    
    
    
    
    
    
    
    
    (826
    )Purchases of property and equipment
    
    
    
    
    
    
    
    
    
    
    (5,594
    )
    
    
    (158
    )
    
    
    
    
    
    
    (5,752
    )Proceeds from sale of assets
    
    
    
    
    
    
    
    
    
    
    177
    
    
    
    
    
    
    
    
    
    
    
    177Maturity of held-to-maturity investments
    
    
    35,013
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,013Net effect of discontinued operations
    
    
    
    
    
    
    
    
    
    
    (66
    )
    
    
    
    
    
    
    
    
    
    
    (66
    )Net cash used in investing activities
    
    
    (230,357
    )
    
    
    (85,474
    )
    
    
    (6,309
    )
    
    
    (158
    )
    
    
    34,007
    
    
    
    (288,291
    )FINANCING ACTIVITIES:Proceeds from issuance of common stock
    
    
    1,303
    
    
    
    42,850
    
    
    
    
    
    
    
    
    
    
    
    (43,145
    )
    
    
    1,008Proceeds from notes received for sale of common
stock
    
    
    152
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    152Proceeds from short-swing profit
    
    
    288
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    288Intercompany
    
    
    214,221
    
    
    
    (268,632
    )
    
    
    24,524
    
    
    
    (121
    )
    
    
    30,008
    
    
    
    Proceeds from long-term obligations
    
    
    
    
    
    
    313,892
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    313,892Payments on long-term obligations
    
    
    
    
    
    
    
    
    
    
    (6,092
    )
    
    
    (17
    )
    
    
    
    
    
    
    (6,109
    )Payment of debt issuance costs
    
    
    
    
    
    
    (11,783
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,783
    )Net cash provided by financing activities
    
    
    215,964
    
    
    
    76,327
    
    
    
    18,432
    
    
    
    (138
    )
    
    
    (13,137
    )
    
    
    297,448Effect of exchange rate changes on cash and cash
equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    364
    
    
    
    
    
    
    
    364Net increase (decrease) in cash and cash
equivalents
    
    
    (3,072
    )
    
    
    
    
    
    
    12,097
    
    
    
    790
    
    
    
    
    
    
    
    9,815Cash and cash equivalents at beginning of year
    
    
    3,811
    
    
    
    
    
    
    
    3,127
    
    
    
    3,136
    
    
    
    
    
    
    
    10,074Cash and cash equivalents at end of year
    
    $
    739
    
    
    $
    
    
    
    $
    15,224
    
    
    $
    3,926
    
    
    $
    
    
    
    $
    19,889
  76




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##### Table of Contents



21. SUBSEQUENT EVENTS
      77




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##### Table of Contents



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 Managements Evaluation of Disclosure Controls and Procedures
       Managements Report on Internal Control over Financial Reporting
     78




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
 ,
       
 79




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##### Table of Contents



Part III.
 
 Item 10. Directors and Executive Officers of the Registrant
  
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
   
    
    the 1996 Incentive Stock Plan;
    
    the 1997 Distributor Advisory Panel Stock Option Plan;
    
    the 1997 Surgeon Advisory Panel Stock Option Plan;
    
    the 2000 Non-Employee Director Stock Option Plan; and
    
    the 2004 Grants to Empi Employees.
 Number of securitiesremainingNumber of securities
    
    
    
    
    
    
    available for futureto be issued upon
    
    
    Weighted-average
    
    issuance underexercise
    
    
    exercise price of
    
    equity compensationof outstanding
    
    
    outstanding
    
    plans (excludingoptions,
    
    
    options,
    
    securities reflected inPlan Category
    
    warrants and rights
    
    
    warrants and rights
    
    column (a))Equity compensation plans
approved by security holders
    
    
    3,429,305
    
    
    $
    5.06
    
    
    
    1,451,893Equity compensation plans not
approved by security holders
    
    
    589,000
    
    
    $
    4.80
    
    
    
    161,0004,018,305
    
    
    $
    5.02
    
    
    
    1,612,893
  
 Item 13. Certain Relationships and Related Transactions
  80




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##### Table of Contents



Item 14. Principal Accountant Fees and Services
  81




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##### Table of Contents



Part IV.
 
 Item 15. Exhibits, Financial Statement Schedules
 (a)
    
    Financial Statements
          (b)
    
    Financial Statement Schedules
   (c)
    
    Exhibits:
 ExhibitNo.
    
    Description2.1
    
    Agreement and Plan of Merger dated August 8, 2004 among Encore Medical Corporation, Encore Medical Merger Sub,
Inc., Empi, Inc., MPI Holdings, LLC, and principal shareholders of Empi, Inc. (1)2.2
    
    Agreement and Plan of Merger dated November 11, 2005, by and among Encore Medical Corporation, Compex
Technologies, Inc. and Encore-Snow Acquisition Corp. (2)3.1
    
    Certificate of Incorporation of Encore, as amended, including Certificate of Designations, Preferences and
Limitations of Series A Preferred Stock (3)3.2
    
    Bylaws of Encore (3)4.1
    
    Investors Rights Agreement between Encore and the Initiating Holders dated June 12, 2001(4)4.2
    
    Amendment No. 1 dated February 8, 2002 to Investors Rights Agreement between Encore and the Initiating Holders
dated June 12, 2001(5)4.3
    
    Credit Agreement among Encore Medical IHC, Inc., Encore Medical Corporation, Bank of America, N.A., Banc of
America Securities LLC, and a syndicate of banks, financial institutions and other institutional lenders party
thereto, dated as of October 4, 2004 (6)4.4
    
    Indenture dated October 4, 2004 among Encore Medical IHC, Inc., as issuer, its domestic subsidiaries and Encore
Medical Corporation, as guarantors, and Wells Fargo Bank, N.A., as trustee (1)4.5
    
    Investor Rights Agreement among Encore Medical Corporation and certain Empi principal shareholders dated October
4, 2004.(7)4.6
    
    Amendment No. 1 and Waiver No. 4 dated December 20, 2005 to Credit Agreement among Encore Medical IHC, Inc.,
Encore Medical Corporation, Bank of America, N.A., Banc of America Securities LLC, and a syndicate of banks,
financial institutions and other institutional lenders party thereto, dated as of October 4, 2004 (8)10.1*
    
    Encore Medical Corporation 1996 Incentive Stock Plan, as amended (6)10.2*
    
    Form of Stock Option Agreement  1996 Incentive Stock Plan Agreement (6)10.3*
    
    Encore Medical Corporation Amended and Restated 1997 Distributor Advisory Panel Stock Option Plan (9)10.4*
    
    Form of Stock Option Agreement  1997 Distributor Advisory Panel Stock Option Plan Agreement (6)
 82




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##### Table of Contents



ExhibitNo.
    
    Description10.5*
    
    Encore Medical Corporation 1997 Surgeon Advisory Panel Stock Option Plan, as amended (15)10.6*
    
    Form of Stock Option Agreement  1997 Surgeon Advisory Panel Stock Option Plan Agreement (6)10.7*
    
    Encore Medical Corporation 2000 Non-Employee Director Stock Option Plan, as amended (15)10.8*
    
    Form of Stock Option Agreement  2000 Non-Employee Director Stock Option Plan Agreement (6)10.9*
    
    Form of Stock Option Agreement with respect to stock options granted to former employees of Empi, Inc. on October
4, 2004 (15)10.10*
    
    Employment Agreement between Encore Medical Corporation and Kenneth W. Davidson dated October 1, 2003
(13)10.11*
    
    Employment Agreement between Encore Medical Corporation and Paul Chapman dated February 8, 2002 (10)10.11.1*
    
    Amendment to Employment Agreement between Encore and Paul Chapman dated November 15, 2003 (15)10.12*
    
    Employment Agreement between Encore Medical Corporation and William W. Burke dated August 30, 2004 (6)10.13*
    
    Employment Agreement between Encore Medical Corporation and Harry L. Zimmerman dated June 12, 2001(11)10.13.1*
    
    Amendment to Employment Agreement between Encore and Harry L. Zimmerman dated November 15, 2003 (15)10.14*
    
    Employment Agreement between Encore Medical Corporation and Jack Cahill dated June 12, 2001 (11)10.14.1*
    
    Amendment to Employment Agreement between Encore and Jack Cahill dated November 15, 2003 (15)10.15*
    
    Employment Agreement between Encore and Scott Klosterman dated June 2, 2003 (12)10.15.1*
    
    Amendment to Employment Agreement between Encore and Scott Klosterman dated November 15, 2003 (15)10.16*
    
    Restricted Stock Agreement between Encore Medical Corporation and Kenneth W. Davidson dated June 12, 2001
(11)10.17*
    
    Restricted Stock Agreement between Encore Medical Corporation and Harry L. Zimmerman dated June 12, 2001
(11)10.18
    
    Exclusive Distribution Agreement between Medireha GmbH and Ormed GmbH dated effective July 1, 1998 (12)12.1
    
    Computation of Ratio of Earnings to Fixed Charges**21.1
    
    Schedule of Subsidiaries of Encore Medical Corporation **23.1
    
    Consent of KPMG LLP **31.1
    
    Certification by Chief Executive Officer (pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002) **31.2
    
    Certification by Chief Financial Officer (pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002) **32.1
    
    Section 1350  Certification by Chief Executive Officer (pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002) **32.2
    
    Section 1350  Certification by Chief Financial Officer (pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002) **
 
 *
    
    =
    
    constitutes management contract or compensatory arrangement**
    
    =
    
    filed herewith
 (1)
    
    Filed as an exhibit to Encores Form 8-K filed with the SEC on October 8, 2004 and
incorporated by reference herein(2)
    
    Filed as an exhibit to Encores Form S-4 filed with the SEC on December 20, 2005 (No.
333-130533) and incorporated by reference herein(3)
    
    Filed as an exhibit to Encores Form 8-K filed with the SEC on July 19, 2004 and incorporated
by reference herein(4)
    
    Filed as an exhibit to Encores Form S-4/A filed with the SEC on February 24, 2005 (No.
333-121780-08) and incorporated by reference herein(5)
    
    Filed as an exhibit to Encores Form 8-K filed with the SEC on February 25, 2002 and
incorporated by reference herein(6)
    
    Filed as an exhibit to Encores Form 10-Q filed with the SEC on November 15, 2004 and
incorporated by reference herein(7)
    
    Filed as an exhibit to Encores Form S-4 filed with the SEC on December 30, 2004 (No.
333-121780-08) and incorporated by reference herein(8)
    
    Filed as an exhibit to Encores Form S-4/A filed with the SEC on January 19, 2006 (No.
333-130533) and incorporated by reference herein
 83




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##### Table of Contents



(9)
    
    Filed as an exhibit to Encores Form 8-K filed with the SEC on December 17, 2003 and
incorporated by reference herein(10)
    
    Filed as an exhibit to Encores Form 10-K filed with the SEC on March 28, 2003 and
incorporated by reference herein(11)
    
    Filed as an exhibit to Encores Form 10-K filed with the SEC on March 29, 2002 and
incorporated by reference herein(12)
    
    Filed as an exhibit to Empi, Inc.s Amendment No. 2 to Form S-1 filed with the SEC on July 7,
2004 (No. 333-113915) and incorporated by reference herein(13)
    
    Filed as an exhibit to Encores Form 8-K filed with the SEC on December 17, 2003 and
incorporated by reference herein(14)
    
    Filed as an exhibit to TC Group LLCs Schedule 13D/A filed October 15,
2004 and incorporated
by reference herein(15)
    
    Filed as an exhibit to Encores Form 10-K filed with the SEC on March 16, 2005 and
incorporated by reference herein
 84




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##### Table of Contents



PART IV
 SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS
(in thousands)
 Allowance forAllowance for
    
    
    Allowance
    
    
    SalesDoubtful
    
    
    for Sales
    
    
    Discounts andYear ended December 31,
    
    Accounts
    
    
    Returns
    
    
    Other Allowances
    
    12003Balance, beginning of year
    
    $
    213
    
    
    $
    
    
    
    $
    Provision
    
    
    103
    
    
    
    125
    
    
    
    22Write-off charges and recoveries
    
    
    (1
    )
    
    
    
    
    
    
    Balance, end of year
    
    $
    315
    
    
    $
    125
    
    
    $
    222004Balance, beginning of year
    
    $
    315
    
    
    $
    125
    
    
    $
    22Provision
    
    
    2,382
    
    
    
    19
    
    
    
    7,902Write-off charges and recoveries
    
    
    (106
    )
    
    
    
    
    
    
    802Balance, end of year
    
    $
    2,591
    
    
    $
    144
    
    
    $
    8,7262005Balance, beginning of year
    
    $
    2,591
    
    
    $
    144
    
    
    $
    8,726Provision
    
    
    5,900
    
    
    
    208
    
    
    
    49,752Write-off charges and recoveries
    
    
    (4,827
    )
    
    
    
    
    
    
    (48,158
    )Balance, end of year
    
    $
    3,664
    
    
    $
    352
    
    
    $
    10,320
 
 1
    
    Amounts are excluded from the provisions included in the consolidated statements
of cash flows as the inclusion would not
provide meaningful information.
 85




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##### Table of Contents



SIGNATURES
  ENCORE MEDICAL CORPORATIONMarch 14, 2006
    
    By:
    
    /s/ Kenneth W. DavidsonDate
    
    
    
    Kenneth W. Davidson, Chairman of the Board and Chief Executive Officer
  March 14, 2006
    
    By:
    
    /s/ Kenneth W. DavidsonDate
    
    
    
    Kenneth W. Davidson, Chairman of the Board and Chief Executive Officer(Principal Executive Officer)March 14, 2006
    
    By:
    
    /s/ William W. BurkeDate
    
    
    
    William W. Burke, Executive Vice President and Chief Financial Officer(Principal Financial Officer and Principal Accounting Officer)
 March 14, 2006
    
    By:
    
    /s/ Alastair ClemowDate
    
    
    
    Alastair Clemow, DirectorMarch 14, 2006
    
    By:
    
    /s/ Joel KanterDate
    
    
    
    Joel Kanter, DirectorMarch 14, 2006
    
    By:
    
    /s/ Richard MartinDate
    
    
    
    Richard Martin, DirectorMarch 14, 2006
    
    By:
    
    /s/ Karen OsarDate
    
    
    
    Karen Osar, DirectorMarch 14, 2006
    
    By:
    
    /s/ Zubeen ShroffDate
    
    
    
    Zubeen Shroff, DirectorMarch 14, 2006
    
    By:
    
    /s/ Bruce F. WessonDate
    
    
    
    Bruce F. Wesson, Director
 86