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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Commission File Number 001-16757

DJ ORTHOPEDICS, INC.
(Exact name of registrant as specified in charter)

        Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes ý    No o

        The number of shares of the Registrant's Common Stock outstanding at October 29, 2003 was 17,966,940 shares.

DJ ORTHOPEDICS, INC.
FORM 10-Q INDEX

EXPLANATORY NOTE

        This Form 10-Q is filed for dj Orthopedics, Inc. (dj Orthopedics), a Delaware corporation. It is also filed for dj Orthopedics, LLC (dj Ortho), a Delaware limited liability company, DJ Orthopedics Capital Corporation (DJ Capital), a Delaware corporation, and dj Orthopedics Development Corporation (dj Development) with respect to the 12⁵/8% Senior Subordinated Notes (the Notes) due in 2009 in an aggregate principal amount at maturity of $75 million that were co-issued by dj Ortho and DJ Capital and guaranteed by dj Orthopedics and dj Development. dj Orthopedics owns 100% of the equity interest of dj Ortho and does not otherwise own any material assets or business operations. The financial position and operating results of dj Orthopedics and dj Ortho are, therefore, substantially the same and are reflected in the consolidated financial information contained in this report. DJ Capital was formed solely to act as co-issuer of the Notes and does not hold any assets or conduct any business operations of its own. Financial information for DJ Capital would not be meaningful and is not included herein. dj Development was formed to conduct the Company's research and development activities and its principal assets consist of the Company's intellectual property.

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PART I. FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

DJ ORTHOPEDICS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

See accompanying notes.

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DJ ORTHOPEDICS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

See accompanying notes.

4

DJ ORTHOPEDICS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

See accompanying notes.

5

DJ ORTHOPEDICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

1.     General

Business and Organization

        dj Orthopedics, Inc. (dj Orthopedics), through its subsidiary, dj Orthopedics, LLC (dj Ortho), and dj Ortho's subsidiaries (collectively, the Company), is a global designer, manufacturer and marketer of products for the orthopedic sports medicine market.

Basis of Presentation

        The accompanying unaudited consolidated financial statements as of September 27, 2003 and for the three and nine months ended September 27, 2003 and September 28, 2002 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States for complete financial statements. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements of dj Orthopedics and the notes thereto included in dj Orthopedics' Annual Report on Form 10-K for the year ended December 31, 2002. The accompanying unaudited consolidated financial statements as of September 27, 2003 and for the three and nine months ended September 27, 2003 and September 28, 2002 have been prepared on the same basis as the audited consolidated financial statements and include all adjustments (consisting of normal recurring accruals) which, in the opinion of management, are necessary for a fair presentation of the financial position, operating results and cash flows for the interim date and interim periods presented. Results for the interim period ended September 27, 2003 are not necessarily indicative of the results to be achieved for the entire year or future periods.

        The accompanying unaudited consolidated financial statements present the historical financial position and results of operations of dj Orthopedics and include the accounts of dj Ortho, the accounts of dj Ortho's wholly owned subsidiaries, dj Orthopedics Development Corporation (dj Development) and DJ Orthopedics Capital Corporation (DJ Capital), the accounts of dj Ortho's wholly owned Mexican subsidiary that manufactures a majority of dj Ortho's products under Mexico's maquiladora program, the accounts of dj Ortho's wholly owned subsidiaries in Germany, the United Kingdom, Canada, and France (established September 2003) and for periods or dates prior to December 31, 2002, the accounts of dj Ortho's majority owned subsidiary in Australia (divested in December 2002). All intercompany accounts and transactions have been eliminated in consolidation.

        The preparation of these financial statements requires that the Company make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to contractual allowances, doubtful accounts, inventories, rebates, product returns, warranty obligations, income taxes, intangibles and investments. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

        The Company's fiscal year ends on December 31. Each quarter consists of one five-week and two four-week periods.

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Per Share Information

        Earnings per share are computed in accordance with Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. Basic earnings per share are computed using the weighted average number of common shares outstanding during each period. Diluted earnings per share include the dilutive effect of weighted average common share equivalents potentially issuable upon the exercise of stock options. For purposes of computing diluted earnings per share, weighted average common share equivalents (computed using the treasury stock method) do not include stock options with an exercise price that exceeds the average fair market value of the Company's common stock during the periods presented.

        The weighted average shares outstanding used to calculate basic and diluted share information consist of the following (in thousands):

Stock-Based Compensation

        The Company accounts for its employee stock option plans and employee stock purchase plan under recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and its related interpretations, and has adopted the disclosure only provisions of SFAS No. 123, Accounting for Stock-Based Compensation and its related interpretations. Accordingly, no compensation cost has been recognized for the fixed stock option plans or stock purchase plan. The following table illustrates the effect on net income (loss) and earnings (loss) per

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share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation (in thousands, except per share amounts):

Foreign Currency Translation

        The financial statements of the Company's international subsidiaries, for which the local currency is the functional currency, are translated into U.S. dollars using period-end exchange rates for assets and liabilities and average exchange rates during the period for revenues and expenses. Cumulative translation gains and losses are excluded from results of operations and recorded as a separate component of consolidated stockholders' equity. Gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity's local currency) are included in the consolidated statements of operations as either a component of costs of goods sold or other income or expense.

Reclassifications

        Effective in its Annual Report on Form 10-K for the year ended December 31, 2002, the Company reclassified certain amounts within its consolidated statements of operations. All statement of operations information included herein has been presented in accordance with the new classifications and all historical information has been reclassified for a consistent presentation.

Recent Accounting Pronouncements

        In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 clarifies the requirements of SFAS No. 5, "Accounting for Contingencies," relating to the guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. The disclosure provisions of FIN 45 are effective for annual periods ending after December 15, 2002. However, the provisions for initial recognition and measurement are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have an impact on the Company's consolidated financial statements.

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        In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. SFAS No. 148 amended SFAS No. 123 Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amended the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 was effective for fiscal years ending after December 15, 2002. The interim disclosure provisions were effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The Company has currently chosen not to adopt the voluntary change to the fair value based method of accounting for stock-based employee compensation. If the Company should choose to adopt such a method, its implementation pursuant to SFAS No. 148 could have a material effect on the Company's consolidated results of operations.

2.     Financial Statement Information

        Inventories consist of the following (in thousands):

3.     Comprehensive Income (Loss)

        Comprehensive income (loss) consists of the following components (in thousands):

4.     Accrued Performance Improvement and Restructuring Costs

        In August 2002, the Company commenced a company-wide performance improvement program with the objective of reducing both costs of goods sold and operating expenses as a percentage of net revenues beginning in 2003. Performance improvement and restructuring costs accrued in 2002 are

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reflected in the accompanying unaudited consolidated balance sheet at September 27, 2003, as follows (in thousands):

        As part of the performance improvement program, a portion of the Company's United States manufacturing facilities were vacated. In 2002, the Company estimated the future net rent that would be paid for the facilities, in excess of estimated sublease income. In the third quarter of 2003, the Company decided to retain the vacant space for future expansion and discontinued its efforts to sublease the vacant space. Accordingly, the remaining accrual for rent for the vacant space ($0.5 million) was reversed and credited to operating expenses.

5.     Purchase of Business

        In June 2003, the Company completed the purchase of specified assets and assumed certain liabilities of Dura*Kold Corporation (DuraKold) for an aggregate purchase price of $3.0 million, of which approximately $2.5 million was paid upon closing and the remainder will be paid in December 2003 subject to certain conditions. The assets acquired from DuraKold included tangible and intangible assets related to a line of proprietary cold wrap products for orthopedic and medical applications. The Company has sold the products manufactured by DuraKold since July 2001 under a distribution agreement. The DuraKold acquisition has been accounted for using the purchase method of accounting whereby the total purchase price has been allocated to tangible and intangible assets acquired and liabilities assumed based on their estimated fair market values, as follows:

        The other intangible assets include a covenant not to compete and the acquired customer base, which are being amortized over their estimated useful lives.

6.     Segment and Related Information

        The Company has four reportable segments, as defined by SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. The reportable segments reflect the Company's sales channels and are as follows:

•

DonJoy®, in which the Company's products are sold by approximately 40 independent sales agents, who employ or contract with over 250 sales representatives, to orthopedic surgeons, orthotic and prosthetic centers, hospitals and other sports medicine outlets. After a product

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order is received by a sales representative, the Company generally ships the product directly to the orthopedic professional and pays a sales commission to the agent based on sales of such products, which commissions are reflected in sales and marketing expense in the consolidated financial statements;

•

ProCare®, in which products are sold primarily to national third party distributors, regional medical supply dealers and medical product buying groups, generally at a discount from list prices. These distributors then resell these products to large hospital chains, hospital buying groups, primary care networks and orthopedic physicians for use by the patients;



•

OfficeCare®, in which the Company maintains an inventory of product on hand at orthopedic practices for immediate delivery to the patient and arranges billing to the patient or third party payer. Substantially all of these billings are performed for the Company by an independent third party contractor. As of September 27, 2003, the OfficeCare program was located at over 500 physician offices throughout the United States; and



•

International, in which the Company's products are sold in foreign countries through wholly owned subsidiaries or independent distributors. The Company markets its products in over 40 countries primarily in Europe, Canada and Japan.

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        Information regarding the Company's reportable segments is as follows (in thousands):

        The accounting policies of the reportable segments are the same as the accounting policies of the Company. The Company allocates resources and evaluates the performance of segments based on income from operations and therefore has not disclosed certain other items, such as interest, depreciation and amortization by segment as permitted by SFAS No. 131. The Company does not allocate assets to reportable segments because a significant portion of assets are shared by the segments.

        For the three and nine months ended September 27, 2003 and September 28, 2002, the Company had no individual customer or distributor within a segment that accounted for 10% or more of total annual revenues.

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        Net revenues, attributed to countries based on the location of the customer, were as follows (in thousands):

        Total assets by region were as follows (in thousands):

7.     Contingencies

        Several class action complaints were filed in the United States District Courts for the Southern District of New York and for the Southern District of California on behalf of purchasers of the Company's common stock alleging violations of the federal securities laws in connection with the Company's November 15, 2001 initial public offering. The Company is named as a defendant along with Leslie H. Cross, President and Chief Executive Officer, Cyril Talbot III, former Senior Vice President, Finance, Chief Financial Officer, and Secretary, Charles T. Orsatti, former Chairman of the Company's Board of Directors, and the underwriters of the Company's initial public offering. The complaints sought unspecified damages and alleged that defendants violated Sections 11, 12, and 15 of the Securities Act of 1933 by, among other things, misrepresenting and/or failing to disclose material facts in connection with the Company's registration statement and prospectus for the initial public offering. On February 25, 2002, plaintiffs agreed to dismiss the New York actions without prejudice. On February 28, 2002, a federal district court judge consolidated the Southern District of California actions into a single action, In re DJ Orthopedics, Inc. Securities Litigation, Case No. 01-CV-2238-K (LSP) (S.D. Cal.), and appointed Oracle Partners, L.P. as lead plaintiff. On May 3, 2002, the lead plaintiff filed its consolidated amended complaint, which alleges the same causes of action and adds the Company's outside directors Mitchell J. Blutt, M.D. and Kirby L. Cramer and former director Damion E. Wicker, M.D. as defendants. On June 17, 2002, the Company and the other defendants filed a motion to dismiss the consolidated complaint. On August 6, 2002, the Court granted in part and denied in part the motion to dismiss. The Court dismissed several categories of the misstatements and omissions alleged by plaintiffs. The remaining allegation pertains to a purported failure to disclose material intra-quarterly sales data in the registration statement and prospectus. On July 22, 2003, the Court appointed Louisiana School Employees' Retirement System as substitute lead plaintiff following the withdrawal of Oracle Partners L.P. as lead plaintiff. The Company believes the remaining claims are without merit and intends to defend the action vigorously. However, there can be no assurance that the Company will succeed in defending or settling this action. Additionally, there can be no assurance that the action will

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not have a material adverse effect on the Company's business, financial condition and results of operations.

        The Company is from time to time involved in lawsuits arising in the ordinary course of business. This includes patent and other intellectual property disputes between the Company and its various competitors. With respect to these matters, management believes that it has adequate legal defense, insurance and/or has provided adequate accruals for related costs. The Company is not aware of any pending lawsuits not mentioned above that could have a material adverse effect on the Company's business, financial condition and results of operations.

8.     Condensed Consolidating Financial Information

        dj Orthopedics and dj Development guarantee dj Ortho's bank borrowings and its obligations under the 12⁵/8% Senior Subordinated Notes (the Notes). DJ Capital was formed solely to act as a co-issuer (and as a joint and several obligor) with dj Ortho with respect to the Notes. dj Development was formed to conduct the Company's research and development activities and its principal assets consist of the Company's intellectual property.

        dj Ortho represents substantially all of the revenues, operating results and operating assets of dj Orthopedics. The guarantees of the Notes by dj Orthopedics and dj Development and any guarantee of the Notes by a future parent or wholly owned subsidiary guarantor are full and unconditional. dj Ortho, DJ Capital and dj Development comprise all the direct and indirect subsidiary guarantors of dj Orthopedics. dj Ortho's foreign subsidiaries are not guarantors of the Notes. The indenture governing the Notes (Indenture) and the Company's bank credit facility, as amended, contain certain covenants restricting the ability of dj Ortho and DJ Capital to, among other things, pay dividends or make other distributions (other than certain tax distributions) or loans or advances to dj Orthopedics unless certain financial tests are satisfied in the case of the Indenture or the consent of the lenders is obtained in the case of the bank credit facility, as amended. The Indenture and the bank credit facility, as amended, permit dj Ortho to make distributions to dj Orthopedics in amounts required by dj Orthopedics to pay federal, state and local income taxes to the extent such income taxes are attributable to the income of dj Ortho and its subsidiaries.

        The following supplemental condensed consolidating financial information presents the consolidating balance sheet as of September 27, 2003 and December 31, 2002, the consolidating statements of operations for the three and nine months ended September 27, 2003 and September 28, 2002 and consolidating statements of cash flows for the nine months ended September 27, 2003 and September 28, 2002. For purposes of the financial information below, "DJO, Inc." represents dj Orthopedics, "DJO, LLC" represents dj Ortho, "DJODC" represents dj Development (subsidiary guarantor), "Non-Guarantors" represents the Company's subsidiaries in Mexico, Germany, the United Kingdom, Canada, France (established September 2003) and Australia (divested in December 2002) (non-guarantor subsidiaries) and "Elims" represents the consolidating elimination entries recorded by the Company. No separate financial information has been provided herein for DJ Capital because management believes such information would not be meaningful as DJ Capital has no financial or other data to report in response to the requirements of Form 10-Q. The accompanying unaudited condensed consolidating financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. They have been prepared using the same basis as the Company's audited consolidated financial statements and include all adjustments (consisting of normal recurring accruals) which, in the opinion of management, are necessary for a fair presentation of the financial position, operating results and cash flows for the interim date and interim periods presented.

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Unaudited Condensed Consolidating Balance Sheet
September 27, 2003
(In thousands)

15

Unaudited Condensed Consolidating Balance Sheet
December 31, 2002
(In thousands)

16

Unaudited Condensed Consolidating Statement of Operations
For the Three Months Ended September 27, 2003
(In thousands)