FORM 10-K
WRIGHT MEDICAL GROUP INC - WMGI
Filed: February 20, 2004 (period: December 31, 2003)
Annual report which provides a comprehensive overview of the company for the past year
Table of Contents
10-K - WRIGHT MEDICAL GROUP, INC. - FORM 10-K
Part I
Item 1. Business 1
PART I
Item 1. Business.
Item 2. Properties.
Item 3. Legal Proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
PART II
Item 5. Market for Registrant s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
Item 6. Selected Financial Data.
Item 7. Management s Discussion and Analysis of Financial Condition and Results of
Operations.
Quantitative and Qualitative Disclosures About Market Risk.
Item
7A.
Item 8. Financial Statements and Supplementary Data.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure.
Controls and Procedures.
Item
9A.
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.
Item 13. Certain Relationships and Related Transactions.
Item 14. Principal Accountant Fees and Services.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
SIGNATURES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
EX-10.8 (EX-10.8 EMPLOYMENT AGREEMENT - F BARRY BAYS)
EX-10.9 (EX-10.9 EMPLOYMENT AGREEMENT - JOHN K. BAKEWELL)
EX-21 (EX-21 LIST OF SUBSIDIARIES)
EX-23.1 (EX-23.1 CONSENT OF KPMG LLP)
EX-23.2 (EX-23.2 INFORMATION REGARDING ARTHUR ANDERSEN)
EX-31.1 (EX-31.1 RULE CERTIFICATION OF THE CEO)
EX-31.2 (EX-31.2 RULE CERTIFICATION OF THE CFO)
EX-32 (EX-32 SECTION 1350 CERTIFICATION OF THE CEO CFO)
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
(Mark One)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
⌧ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
�
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 000-32833
WRIGHT MEDICAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
5677 Airline Road, Arlington, Tennessee
(Address of principal executive offices)
13-4088127
(I.R.S. Employer
Identification No.)
38002
(Zip Code)
Registrant’s telephone number, including area code: (901) 867-9971
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ⌧ Yes No
�
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. �
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). ⌧ Yes No �
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or
the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter was $346,927,311.
As of February 16, 2004, there were 33,044,326 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is incorporated by reference from portions of the definitive proxy statement to be filed within 120 days after December 31, 2003, pursuant to
Regulation 14A under the Securities Exchange Act of 1934 in connection with the annual meeting of stockholders to be held on May 13, 2004.
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
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
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
SIGNATURES
EX-10.8 EMPLOYMENT AGREEMENT - F BARRY BAYS
EX-10.9 EMPLOYMENT AGREEMENT - JOHN K. BAKEWELL
EX-21 LIST OF SUBSIDIARIES
EX-23.1 CONSENT OF KPMG LLP
EX-23.2 INFORMATION REGARDING ARTHUR ANDERSEN
EX-31.1 RULE CERTIFICATION OF THE CEO
EX-31.2 RULE CERTIFICATION OF THE CFO
EX-32 SECTION 1350 CERTIFICATION OF THE CEO & CFO
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
WRIGHT MEDICAL GROUP, INC.
ANNUAL REPORT ON FORM 10-K
Table of Contents
Part I
Item 1.
Item 2.
Item 3.
Item 4.
Part II
Item 5.
Item 6.
Item 7.
Item
7A.
Item 8.
Item 9.
Item
9A.
Part III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part IV
Item 15.
Signatures
Business
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Directors and Executive Officers of the Registrant
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions
Principal Accountant Fees and Services
Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Safe-Harbor Statement
Page
1
15
15
16
17
18
20
42
43
72
72
72
72
72
72
73
73
76
This annual report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements made in this annual report, other than statements of historical fact, are forward-looking statements. Forward-looking statements
reflect management’s current knowledge, assumptions, beliefs, estimates, and expectations and express management’s current views of future performance, results, and trends. We
wish to caution readers that actual results might differ materially from those described in the forward-looking statements. Forward-looking statements are subject to a number of
risks and uncertainties, including the factors discussed in our filings with the Securities and Exchange Commission (including those described in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Factors Affecting Future Operating Results” and elsewhere in this annual report), which could cause our actual
results to materially differ from those described in the forward-looking statements. Although we believe that the forward-looking statements are accurate, there can be no assurance
that any forward-looking statement will prove to be accurate. A forward-looking statement should not be regarded as a representation by us that the results described therein will be
achieved. We wish to caution readers not to place undue reliance on any forward-looking statement. The forward-looking statements are made as of the date of this annual report.
We assume no obligation to update any forward-looking statement after this date.
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
Item 1. Business.
Overview
PART I
Wright Medical Group, Inc. (“Wright”), through Wright Medical Technology, Inc. and other operating subsidiaries, is a global orthopaedic medical device company specializing in
the design, manufacture and marketing of reconstructive joint devices and biologics products. Reconstructive joint devices are used to replace knee, hip and other joints that have
deteriorated through disease or injury. Biologics are used to replace damaged or diseased bone, to stimulate bone growth, and to provide other biological solutions for surgeons and
their patients. Within these markets, we focus on the higher-growth sectors of advanced knee implants, bone-conserving hip implants, revision replacement implants and extremity
implants, as well as on the integration of our biologics products into reconstructive joint procedures and other orthopaedic applications. For our year ended December 31, 2003, we
had net sales of $248.9 million and net income of $17.4 million.
History
Wright was incorporated on November 23, 1999, as a Delaware corporation (previously named Wright Acquisition Holdings, Inc.) and had no operations until an investment group
led by Warburg, Pincus Equity Partners, L.P. (“Warburg”) acquired majority ownership of our predecessor, Wright Medical Technology, Inc. (the “Predecessor Company”) on
December 7, 1999. This transaction, which represented a recapitalization of the Predecessor Company and the inception of Wright in its present form, reduced our debt and
provided investment capital, thus allowing us to build on the Predecessor Company’s respected brand name and strong relationships with orthopaedic surgeons developed during
their fifty year history.
On December 22, 1999, we acquired Cremascoli Ortho Holding, S.A. (“Cremascoli”), based in Toulon, France, and shortly thereafter, a new management team was put in place.
This acquisition extended our product offerings, enhanced our product development capabilities, and expanded our European presence. As a result of combining Cremascoli’s
strength in hip reconstruction with the Predecessor Company’s historical expertise in knee reconstruction and biologics, we offer a broad range of reconstructive joint devices and
biologics to orthopaedic surgeons in over 50 countries.
On July 18, 2001, we completed our initial public offering (“IPO”) of 7,500,000 shares of voting common stock at a public offering price of $12.50 per share. The net proceeds of
$84.8 million, after deducting underwriting discounts and offering expenses, were used to repay debt.
On March 6, 2002, along with certain selling stockholders, we completed a secondary offering of 6,900,000 shares, including the over-allotment option of 900,000 shares, of
voting common stock at $15.40 per share. Of the 6,900,000 shares, we offered 3,450,000 shares in the secondary offering. The net proceeds of $49.5 million, after deducting
underwriting discounts and offering expenses, were invested in short-term, investment-grade securities.
Orthopaedic Industry
The worldwide orthopaedic industry was estimated to be approximately $14 billion in 2003, and we believe it will grow by approximately 7-9% annually over the next three to
four years. Six multinational companies currently dominate the orthopaedic industry, each with approximately $1 billion or more in annual sales. The size of these companies often
leads them to concentrate their marketing and research and development efforts on products that they believe will have a relatively high minimum threshold level of sales. As a
result, there is an opportunity for a mid-sized orthopaedic company, such as Wright, to focus on smaller higher-growth sectors of the orthopaedic market, while still offering a
comprehensive product line to address the needs of its customers.
Orthopaedic devices are commonly divided into several primary sectors corresponding to the major subspecialties within the orthopaedic field: reconstruction, trauma, arthroscopy,
spine and biologics. We specialize in reconstructive joint devices and biologics products.
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Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
Reconstructive Joint Device Market
Most reconstructive devices are used to replace or repair joints that have deteriorated as a result of disease or injury. Despite the availability of non-surgical treatment alternatives
such as oral medications, injections and joint fluid supplementation of the knee, severe cases of disease or injury often require reconstructive joint surgery. Reconstructive joint
surgery involves the modification of the bone area surrounding the affected joint and the insertion of one or more manufactured components, and may also involve the use of bone
cement.
The reconstructive joint market is generally divided into the areas of knees, hips and extremities. The reconstructive joint market is estimated at $6.2 billion worldwide, with hip
reconstruction and knee reconstruction representing two of the largest sectors.
Knee Reconstruction. The knee joint involves the surfaces of three distinct bones: the lower end of the femur, the upper end of the tibia or shin bone, and the patella or kneecap.
Cartilage on any of these surfaces can be damaged due to disease or injury, leading to pain and inflammation requiring knee reconstruction. Knee reconstruction was the largest
sector of the reconstructive joint market in 2003, with sales of approximately $3.2 billion worldwide.
Major trends in knee reconstruction include the use of alternative, better performing surface materials to extend the implant’s life and increase conservation of the patient’s bone to
minimize surgical trauma and accelerate recovery. Another significant trend in the knee industry is the use of more technologically advanced knees, called advanced kinematic
knees, which more closely resemble natural joint movement. Additionally, we believe that minimally invasive knee procedures, such as those for unicompartmental repair, which
replaces only one femoral condyle, are becoming more widely accepted.
Hip Reconstruction. The hip joint is a ball-and-socket joint which enables the wide range of motion that the hip joint performs in daily life. The hip joint is most commonly
replaced due to degeneration of the cartilage between the head of the femur (the ball) and the acetabulum or hollow portion of the pelvis (the socket). This degeneration causes
pain, stiffness and a reduction in hip mobility. Hip reconstruction was an approximately $3.1 billion market worldwide in 2003.
Similar to the knee market, major trends in hip replacement procedures and implants are to extend implant life and to preserve bone stock for possible future procedures. New
products have been developed that incorporate bearing surfaces other than the traditional polyethylene surface. Polyethylene surfaces may create wear debris that can lead to
potential loosening of the implant. These alternative bearing surfaces include metal-on-metal and ceramic-on-ceramic combinations, which exhibit improved wear characteristics
and lead to longer implant life. In February 2003, we became one of only two companies cleared by the United States Food and Drug Administration, (the “FDA”), to market
ceramic-on-ceramic hip systems in the United States (“U.S.”). Since then, one additional smaller competitor has entered the U.S. marketplace. In addition to advances in bearing
surfaces, implants that preserve more natural bone have been developed in order to minimize surgical trauma and recovery time for patients. These implants, known as
bone-conserving implants, leave more of the hip bone intact, which is beneficial given the likelihood of future revision replacement procedures as the average patient’s lifetime
increases. Bone-conserving procedures are intended to enable patients to delay their first total hip procedure and may significantly increase the time from the first procedure to the
time when a revision replacement implant is required.
Extremity Reconstruction. Extremity reconstruction involves implant of devices to replace or reconstruct injured or diseased joints. Reconstruction of the extremities consists of
implants for joints such as the finger, toe, wrist, elbow, foot, ankle and shoulder. The extremity reconstruction market was approximately $170 million worldwide in 2003. Major
trends in extremity reconstruction include separately designed implant stems for press-fit and cemented applications and a variety of geometries to more closely accommodate each
patient’s unique anatomy.
2
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
Biologics Market
The biologics market is one of the fastest growing sectors of the orthopaedic market. These materials use both biological tissue-based and synthetic materials to regenerate
damaged or diseased bone and to repair damaged tissue. The biologics sector includes products such as tissue-based bone grafts and bone graft substitute materials. These products
stimulate the body’s natural regenerative capabilities to minimize or delay the need for invasive implant surgery, replace damaged or diseased bone, and provide other biological
solutions for surgeons and their patients. These materials are used in spinal fusions, trauma fractures, joint replacements, and cranio-maxillofacial procedures. Currently, there are
three main types of biological bone grafting products: osteoconductive, osteoinductive and combined osteoconductive/osteoinductive. These types refer to the way in which the
materials affect bone growth. Osteoconductive materials serve as a scaffold that supports the formation of bone but does not trigger new bone growth, whereas osteoinductive
materials induce bone growth. Other biologic products enable the repair of tissue. These products provide favorable microenvironments for quick revascularization and cell
proliferation. The biologics market was approximately $425 million worldwide in 2003.
We believe there is an increasing acceptance of bone graft substitute materials for use in spinal fusions, trauma fractures, joint replacements, cranio-maxillofacial procedures and
other orthopaedic applications.
Government Regulation
United States
Numerous governmental authorities, principally the FDA, and corresponding state and foreign regulatory agencies, strictly regulate our products and research and development
activities. The Federal Food, Drug, and Cosmetic Act, or FDC Act, the regulations promulgated under this act, and other federal and state statutes and regulations, govern, among
other things, the pre-clinical and clinical testing, design, manufacture, safety, efficacy, labeling, storage, recordkeeping, advertising and promotion of medical devices.
Generally, before we can market a new medical device, marketing clearance must be obtained through a premarket notification under Section 510(k) of the FDC Act or approval of
a premarket approval, or PMA, application. The FDA typically grants a 510(k) clearance if the applicant can establish that the device is substantially equivalent to a predicate
device. It generally takes three months from the date of a 510(k) submission to obtain clearance, but it may take longer, particularly if a clinical trial is required. The FDA may find
that a 510(k) is not appropriate or that substantial equivalence has not been shown and, as a result, will require a PMA application.
A PMA application must be submitted if a proposed device does not qualify for a 510(k) premarket clearance procedure. PMA applications must be supported by valid scientific
evidence to demonstrate the safety and effectiveness of the device, typically including the results of clinical trials, bench tests and laboratory and animal studies. The PMA
application must also contain a complete description of the device and its components, and a detailed description of the methods, facilities and controls used to manufacture the
device. In addition, the submission must include the proposed labeling and any training materials. The PMA application process can be expensive, uncertain and lengthy, require
detailed and comprehensive data and generally take significantly longer than the 510(k) process. Additionally, the FDA may never approve the PMA application. Toward the end
of the PMA application review process, the FDA generally will conduct an inspection of the manufacturer’s facilities to ensure compliance with applicable quality system
regulation requirements, which include quality control testing, control documentation and other quality assurance procedures.
If human clinical trials of a device are required, either for a 510(k) submission or a PMA application, and the device presents a significant risk, the sponsor of the trial, usually the
manufacturer or the distributor of the device, must file an investigational device exemption, or an IDE, application prior to commencing human clinical trials. The IDE application
must be supported by data, typically including the results of animal and/or laboratory testing. If the IDE application is approved by the FDA and one or more institutional review
boards, or IRBs, human clinical trials may begin at a specific number of investigational sites with a specific number of patients, as approved by the FDA. If the device presents a
nonsignificant risk to the patient, a sponsor may begin the clinical trial after obtaining approval for the study by one or more IRBs without separate approval from the FDA.
Submission of an IDE does not give
3
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
assurance that the FDA will approve the IDE and, if it is approved, there can be no assurance the FDA will determine that the data derived from the studies support the safety and
efficacy of the device or warrant the continuation of clinical trials. An IDE supplement must be submitted to and approved by the FDA before a sponsor or investigator may make
a change to the investigational plan that may affect its scientific soundness, study indication or the rights, safety or welfare of human subjects. The study must also comply with the
FDA’s IDE regulations and informed consent must be obtained from each subject. If the FDA believes we are not in compliance with the law, it can institute proceedings to detain
or seize products, issue a recall, enjoin future violations and seek civil and criminal penalties against us and our officers and employees. If we fail to comply with these regulatory
requirements, our business, financial condition and results of operations could be harmed.
Most of our products are approved through the 510(k) premarket notification process. We have conducted clinical trials to support many of our regulatory approvals. Regulations
regarding the manufacture and sale of our products are subject to change. We cannot predict the effect, if any, that these changes might have on our business, financial condition
and results of operations. In particular, the FDA has statutory authority to regulate allograft-based products, processing and materials. The FDA has been working to establish a
more comprehensive regulatory framework for allograft-based products, which are principally derived from cadaveric tissue. The framework developed by the FDA establishes
criteria for determining whether a particular human tissue-based product will be classified as human tissue, a medical device or biologic drug requiring premarket clearance or
approval. All tissue-based products are subject to extensive FDA regulation, including a requirement that ensures that diseases are not transmitted to tissue recipients. The FDA has
also proposed extensive additional regulations that would govern the processing and distribution of all allograft products. Consent to use the donor’s tissue must also be obtained.
If a tissue-based product is considered tissue, it does not require FDA clearance or approval before being marketed. If it is considered a device, or a biologic drug, then FDA
clearance or approval may be required.
On April 11, 2001, the FDA sent us a “warning letter” stating that the FDA believed that ALLOMATRIX ® Injectable Putty was a medical device subject to premarket clearance. In
March 2002, the FDA officially notified us that it concluded that ALLOMATRIX ® Injectable Putty should be reviewed and regulated under the medical device premarket
notification provisions of the FDC Act. Also, in March 2002, the FDA notified all other known manufacturers of similar products of requirements for bringing such products into
compliance with the FDC Act. The FDA indicated that it would exercise enforcement discretion for a reasonable period of time while companies bring their devices into
compliance with the FDC Act. In response to the FDA determination, we promptly filed a premarket notification for ALLOMATRIX ® Injectable Putty under Section 510(k) of the
FDC Act. On April 24, 2002, the FDA notified us that the submission of our premarket notification for ALLOMATRIX ® Injectable Putty was an adequate response to the
“warning letter” and that the FDA considered the issues raised in the April 11, 2001 letter closed. Our premarket notification submission is still pending with the FDA. Our
ALLOMATRIX ® line of products continue to be marketed and sold pending the approval of the premarket notification submission. The FDA has not raised any objection to the
continued marketing and sale of our ALLOMATRIX ® line of products pending the approval of the premarket notification submission. There can be no assurance that the 510(k)
premarket notification will be cleared by the FDA in a timely manner or at all. The FDA could decide not to continue to exercise its enforcement discretion and decide to take
enforcement action which could include, but not be limited to, seizing product inventory, obtaining a court injunction against further marketing of the product, or assessing civil
money penalties. However, we believe that such punitive actions by the FDA against us are unlikely. Additionally, until such time that our initial 510(k) is approved, we are unable
to market any new ALLOMATRIX ® product offerings.
In addition to granting approvals for our products, the FDA and international regulatory authorities periodically inspect us for compliance with the host of regulatory requirements
that apply to medical devices marketed in the U.S. and internationally. These requirements include labeling regulations, manufacturing regulations, quality system regulations,
regulations governing unapproved or off-label uses, and medical device regulations. Medical device regulations require a manufacturer to report to the FDA serious adverse events
or certain types of malfunctions involving its products. The FDA periodically inspects device and drug manufacturing facilities in the U.S. in order to assure compliance with
applicable quality system regulations. The FDA last inspected our Arlington, Tennessee manufacturing facility in November 2003, and our Toulon, France manufacturing facility
in October 2003. We were found to be in compliance with the FDA quality system regulations.
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Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
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We believe our manufacturing facilities in the U.S. and France comply in all material respects with FDA requirements. We have also implemented comprehensive procedures to
ensure compliance with the FDA quality system regulations with a focus on comprehensive product design controls.
International
We obtain required regulatory approvals and comply with extensive regulations governing product safety, quality, manufacturing and reimbursement processes in order to market
our products in all major foreign markets. These regulations vary significantly from country to country and with respect to the nature of the particular medical device. The time
required to obtain these foreign approvals to market our products may be longer or shorter than that required in the U.S., and requirements for such approval may differ from FDA
requirements.
All of our products sold internationally are subject to certain foreign regulatory approvals. In order to market our product devices in the member countries of the European Union,
we are required to comply with the medical devices directive and obtain CE mark certification. CE mark certification is an international symbol of adherence to quality assurance
standards and compliance with applicable European medical device directives. Under the medical devices directive, all medical devices including active implants must qualify for
CE marking. We also comply with all other foreign regulations such as MHLW (Ministry of Health Labor and Welfare) approval in Japan, HPB (Health Protection Branch)
approval in Canada, and TGA (Therapeutic Goods Administration) approval in Australia as a few examples.
Our products are manufactured in ISO 9001 and EN 46001 compliant facilities.
Products
We operate as one reportable segment, offering products in four primary market sectors: knee reconstruction, hip reconstruction, extremity reconstruction, and biologics.
Knee Reconstruction
Our knee reconstruction product portfolio strategically positions us well in the areas of total knee reconstruction, revision replacement implants, and limb preservation products.
These products provide the surgeon with a continuum of treatment options for improving patient care. We differentiate our products through innovative design features that
reproduce movement and stability resulting in products that more closely resemble a healthy knee. Additionally, we provide a broad array of surgical instrumentation to
accommodate surgeon preference.
The ADVANCE ® Knee System is our most recent primary knee product line offering. There are several innovative product offerings within the ADVANCE ® Knee System
product line, one of which is the ADVANCE ® Medial Pivot Knee. The understanding of knee movement and function has advanced significantly over the past several years, and
we believe the ADVANCE ® Medial Pivot Knee is the first knee to be mass marketed that takes full advantage of the strides made in understanding the knee joint. The
ADVANCE ® Medial Pivot Knee is designed to approximate the movement and function of a healthy knee by using a unique spherical medial feature. Overall, we believe the
ADVANCE ® Medial Pivot Knee more closely approximates natural knee motion, improves clinical performance and provides excellent range of motion.
The ADVANCE ® Unicompartmental Knee System is an innovative system of implants and instruments that allows for single compartment replacement with a minimally invasive
surgical approach. This system is designed to reach the market for a unicompartmental knee that addresses injury or disease confined to the single compartment in the knee joint.
We believe the simplified instrumentation utilized by the ADVANCE ® Unicompartmental Knee System is a significant improvement over the instrumentation designs utilized in
other unicompartmental knee systems on the market today.
Our REPIPHYSIS® Technology allows for non-invasive expansion of any long bone where lengthening is needed. This technology, which we exclusively license, can be
incorporated into a prosthetic implant and subsequently adjusted non-invasively when lengthening of the implant is needed. The most common application of this breakthrough
technology is in the field of pediatric oncology, where growing children can have the bones
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Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
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attached to their hip or knee implant lengthened non-invasively, thus eliminating the need for more frequent surgeries and anesthesia.
Hip Reconstruction
We offer a comprehensive line of products for hip joint reconstruction. This product portfolio provides offerings in the areas of bone-conserving implants, total hip reconstruction,
revision replacement implants, and limb preservation. Additionally, our hip products offer a combination of unique, innovative modular designs, a complete portfolio of surface
bearing materials, including polyethylene, ceramic and metal components, and innovative technology in surface replacement implants. We are therefore able to offer surgeons and
their patients a full compliment of treatment options.
The CONSERVE ® family of products provides a conservative restoration, or bone conserving, alternative to conventional total hip reconstruction, and we believe it is becoming
the treatment of choice for avascular necrosis, or AVN, of the femoral head. AVN is a disease which causes bone to deteriorate and die. It is estimated that approximately 10% of
total hip replacement procedures performed annually are initially diagnosed as related to AVN. People who suffer from AVN are usually younger than the typical hip replacement
patient and need a solution that is less aggressive than conventional total hip replacement. With the CONSERVE ® Resurfacing Implant, only the surface of the femoral head is
replaced and the rest of the hip remains untouched. The CONSERVE ® Resurfacing Implant’s conservative restoration provides a better solution for the patient by leaving
maximum bone for future surgical procedures, if needed. Our CONSERVE ® Plus Resurfacing Implant is available outside the U.S. and is pending FDA clearance for the U.S.
market. With CONSERVE ® Plus, the surface of the patient’s femoral head and the acetabular surface are replaced with minimal bone loss in a minimally invasive procedure. The
CONSERVE ® Total Implant with BFH™ (Big Femoral Head) Technology addresses the problem of the post-operative dislocation by providing femoral head articulation in sizes
ranging from 36mm up to 56mm in diameter in 2mm increments. Wide range of sizes allows close matching of the patient’s natural femoral head, and this, in turn, leads to the
improved kinematics and higher resistance to dislocation. In addition, the system addresses the long-term wear problem by eliminating traditional polyethylene bearings and
utilizing metal-on-metal articulation instead.
The LINEAGE® Acetabular System provides the surgeon with the option to interchangeably use either ceramic, metal or polyethylene acetabular bearing surfaces for use with a
common metal acetabular shell, thus offering maximum flexibility to the surgeon while minimizing inventory levels. The standard for replacement of the acetabulum, or socket, in
the hip joint is a two-piece system consisting of a metal shell with a polyethylene liner. The polyethylene component serves as a bearing surface for the head of the femoral
component, or ball. Alternative hard bearing materials, such as metal-on-metal and ceramic-on-ceramic have been introduced in recent years. These options, ceramic-on-ceramic in
particular, significantly reduce wear debris from articulation and therefore provide an optimum solution to young and active patients.
The PERFECTA ® Hip System is the basic platform for our traditional hip stem product line. This system provides a full range of fixation options including press fit and cemented
versions, and offers a wide selection of geometries in order to meet the needs of the patient’s anatomical requirements as well as the surgeon’s preferences. This product allows
surgeons the flexibility to match the implant to each patient’s unique requirements. The PERFECTA ® Hip System has over ten years of clinical success worldwide, and we
continue to build upon the existing platform, as illustrated by the introduction of the PERFECTA ® Slim Neck in 2001. This product has a modified femoral neck that provides for a
greater range of motion and less potential for dislocation after being implanted.
The GUARDIAN® Limb Salvage System offers options for patients with significant bone loss due to cancer, trauma, or previous surgical procedures. This modular system, with
the array of options in a multitude of sizes, and complete inter-changeability, provides the surgeon with the ability to meet a variety of patient needs. The GUARDIAN ® Proximal
Tibial Implant was developed for the patients with the significant bone loss in the tibial bone. The GUARDIAN® Revision Hinge Implant, another of the products offered within
the system, was developed for use in revision surgeries where both bone loss and ligament deficiencies are present. The GUARDIAN® Total Femur is used in rare cases where the
entire femur must be replaced.
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The PROFEMUR® Modular Hip System addresses the market for modularity in revision replacement hip implant procedures. Our PROFEMUR® R product, designed in Europe, is
a revision replacement implant with a patented modular femoral neck component, which allows the surgeon to make final adjustments to the implant as the last step in the
procedure in order to accommodate each patient’s unique anatomy. The PROFEMUR ® system was expanded with additional implant choices and new instrumentation when
introduced in the U.S.
The PROFEMUR® Z Modular Hip system was introduced in the U.S. in the fourth quarter of 2002. This system utilizes the European philosophy of primary stem fixation and
features patented modular interchangeable necks for ultimate hip joint balancing.
The ANCA-FIT™ Hip System, a traditional hip replacement system designed in Europe, has received clinical acceptance in Europe for eight years. The ANCA-FIT™ Hip System
includes the femoral stem family of components as well as the acetabular shell family. The stem is a non-cemented, anatomical stem with HA, or hydroxylapatite, coating. It
features the patented modular interchangeable neck option found in other modular stems such as the PROFEMUR® Modular Hip System. The shell is a titanium porous coated
shell, designed to accept either ceramic or polyethylene liners.
Biologics
We offer an expanding number of biologics products that are used to replace damaged or diseased bone, to stimulate bone growth, and to provide other biological solutions for
surgeons and their patients. These products focus on biological musculoskeletal repair, including synthetic and human tissue-based materials. We were the first company to receive
FDA market clearance for the use of resorbable synthetic bone graft substitutes for the spine, currently the largest application for this product.
Our OSTEOSET® bone graft substitute is a synthetic bone graft substitute made of surgical grade calcium sulfate. Our OSTEOSET® bone graft substitute provides an attractive
alternative to autograft because it facilitates bone regeneration without requiring a painful, secondary, bone harvesting procedure. Additionally, being purely synthetic,
OSTEOSET® pellets are cleared for use in infected sites, an advantage over tissue based material. The human body resorbs the OSTEOSET® material at a rate close to the rate that
new bone grows. We also offer surgeons the option of custom-molding their own beads in the operating room using the OSTEOSET ® Resorbable Bead Kit, which is available in
mixable powder form. Our surgical grade calcium sulfate is manufactured using proprietary processes that consistently produce a high quality product.
ALLOMATRIX ® Injectable Putty combines a high content of demineralized bone matrix, or DBM, with our proprietary surgical grade calcium sulfate carrier. The combination
provides an injectable putty with the osteoinductive properties of DBM and exceptional handling qualities. This product has been well received by surgeons. Another combination
we offer is ALLOMATRIX ® C bone graft putty, which includes the addition of cancellous bone granules. The addition of the bone granules increases the stiffness of the material,
improves handling characteristics, increases osteoconductivity scaffold, and provides more structural support. In 2001, we introduced ALLOMATRIX ® Custom bone graft putty,
which allows the surgeon to customize the amount of bone granules to add to the putty based on its surgical application. Most recently, we introduced ALLOMATRIX ® DR Graft,
which is ALLOMATRIX ® putty that has been optimized for application in smaller fractures due to its smaller particle size of cancellous bone granules for optimized packing and
the application-specific volume in which it is marketed.
MIIG® 115 Minimally Invasive Injectable Graft is an injectable form of our surgical grade calcium sulfate paste that hardens in the body. The 115 in the product’s name refers to
the speed of the product application, which takes only one minute to mix, one minute to inject and five minutes to harden. This product combines the operative flexibility of an
injectable substance with the clinically proven osteoconductive properties of OSTEOSET® material. This product is ideally suited for use in non-loaded traumatic fractures such as
the distal radius and tibial plateau.
MIIG® X3 High Strength Injectable Graft is a recent addition to the family of MIIG® products for the minimally invasive treatment of bony defects. It is a newly formulated,
injectable calcium sulfate that hardens after placement, provides intraoperative support, and resorbs over time as it is replaced by new bone. Compared to the MIIG® 115
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graft, the principle advantages of the MIIG® X3 graft is that it has a 2.6 times greater compressive strength, easier injectability, and a longer working time. MIIG® X3 graft has
several competitive advantages over other injectable calcium phosphate products on the market, including the ability of MIIG® X3 graft to be drilled or tapped for the placement of
final hardware. Additionally, it poses less risks of extravasation (i.e., leakage), and is more quickly replaced by bone.
MIIG® X3 HiVisc graft is an advanced formulation of MIIG® X3 graft specially designed for management of complex compression fractures. The modified viscosity and extended
working time of MIIG® X3 HiVisc graft reduces potential for extravasation of material into joint spaces and provides greater operative flexibility to the surgeon.
IGNITE® ICS Injectable Cellular Scaffold is a bone repair stimulus that combines calcium sulfate, DBM and autologous bone marrow aspirate, or BMA, for the treatment of
problem fractures and delayed non-unions. This combination of materials provides the surgeon and patient with all three critical elements that a bone graft material can offer: an
osteoconductive scaffold with both osteoinductive and osteogenic capacity through the use of DBM and BMA, respectively. The IGNITE ® ICS kit also provides
specially-designed instrumentation both to procure BMA and to prepare the fracture site for the grafting procedure using minimally-invasive techniques.
GRAFTJACKET® Regenerative Tissue Matrix is an onlay for repair or replacement of periosteum. This product provides a favorable microenvironment for bone repair by
providing an environment for rapid revascularization, preventing scar tissue invasion into the bone graft area, and creating a protected environment for healing. In addition to bone
repair, GRAFTJACKET® Regenerative Tissue Matrix is also useful in soft tissue applications, specifically rotator cuff and tendon repair.
GRAFTJACKET® matrix for ulcer repair is designed to repair challenging diabetic ulcers of the foot, the primary cause of hospital admissions for all diabetics. More than
two-thirds of the amputations administered each year are performed on diabetics, often because of difficulties associated with diabetic foot ulcers. GRAFTJACKET® matrix for
ulcer repair appears to be the first chronic wound graft to demonstrate the ability to repair deep foot wounds, which have a much higher risk of leading to amputation. When
coupled with proper surgical technique and post operative follow-up, successful repair with GRAFTJACKET® matrix for ulcer repair is achieved within twelve weeks based on
clinical study results. The ulcer repair matrix integrates with the patient’s own living soft tissue, thus speeding up new tissue growth and treatment time. Unlike other tissue
engineered substitutes, GRAFTJACKET® matrix for ulcer repair generally requires only one application to treat the foot ulcer, reducing the time and cost associated with recovery.
Our biologics offerings in international markets include OSTEOSET® T medicated pellets, OSTEOSET® pellets containing DBM, and ALLOMATRIX ® Injectable Putty.
OSTEOSET® T medicated pellets, which contain tobramycin sulfate, are currently one of the very few resorbable bone void fillers available on the international market for the
treatment of osteomyelitis, an acute or chronic infection of the bone.
CELLPLEX™ TCP Synthetic Cancellous Bone represents a new platform of bone graft substitutes. It is an osteoconductive, resorbable tricalcium phosphate (“TCP”) provided in
granular form. It has been engineered with a highly porous, interconnected structure to facilitate the ingrowth of new bone throughout the implant. Compared to other
commercially available TCP products, its benefits include a superior compressive strength and physical characteristics that more closely resemble that of cancellous bone. It is an
excellent carrier of bone marrow aspirate with a demonstrated cellular affinity for mesenchymal stem cells. It is packaged in the INFILTRATE™ Marrow Infusion Chamber to
provide surgeons a simple option for combining bone marrow aspirate with the CELLPLEX™ TCP thereby adding an osteogenic component to the graft.
In March 2003, we completed the acquisition of certain assets from Gliatech Inc. (“Gliatech”) for $8.4 million in cash and a royalty contingent on future product sales. These assets
consist primarily of the ADCON® Gel technology assets needed to produce and commercialize ADCON®-L Gel and ADCON ®-T/N Gel anti-adhesion barrier gel products. The
ADCON® Gel products are designed to reduce adhesion formation following lumbar spine (ADCON®-L Gel) and peripheral tendon/nerve procedures (ADCON®-T/N Gel), which
cause post-operative pain.
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Both ADCON®-L Gel and ADCON ®-T/N Gel are commercially available internationally, but are currently not available for sale in the U.S. ADCON ®-L Gel had previously
received regulatory clearance with the FDA in mid-1998. In December 2000, the FDA determined that the provisions of the FDA Application Integrity Policy, or AIP, would be
applied to Gliatech due to violations of Good Clinical Practices in the conduct, analysis, and reporting of data specific to the U.S. Clinical Study of ADCON®-L Gel. In early 2003,
the FDA lifted the AIP status of Gliatech, which subsequently allowed us, as the new owner of the technology, to present the FDA with the clinical data intended to support the
return of ADCON®-L Gel to the U.S. market. The third and final module of our PMA application related to ADCON ®-L Gel was submitted to the FDA in December 2003. We are
currently awaiting the FDA’s review and response to that submission. We will be required to conduct a separate clinical study to enter the U.S. market with ADCON ®-T/N Gel.
Extremity Reconstruction
We offer extremity products for the hand, wrist, elbow, shoulder, foot and ankle in a number of markets worldwide. Our small joint orthopaedic implants have many years of
successful clinical history. We believe we are one of the recognized leaders in finger and toe implants. The Swanson Hinge Finger has been used by surgeons for over 30 years.
The ORTHOSPHERE® Carpometacarpal Implant for the repair of the basal thumb joint is constructed from implant-grade ceramic, which reduces wear and increases
biocompatibility compared to other implant materials. By providing an alternative to the harvesting of the patient’s own soft tissues as a spacer for the repaired joint, the
ORTHOSPHERE® Carpometacarpal Implant thereby reduces morbidity and operating time. We believe this product represents a significant improvement over conventional
techniques.
The OLYMPIA ® Total Shoulder System is a comprehensive system that offers the surgeon many choices in terms of fixation and implant stability. This system offers two fixation
options, including press-fit stems for cementless applications and stems that are optimized for cemented applications. Most systems now available do not offer this level of
versatility and surgeons must adjust their surgical technique to fit the available products. An additional advantage of this system is that the humeral head is modular and
asymmetric, allowing the surgeon to adjust joint tension as the final step of the surgical process.
Also addressing the market for modularity is our EVOLVE ® Modular Radial Head device. The EVOLVE ® Modular Radial Head device provides 150 different combinations of
heads and stems allowing the surgeon to choose implant heads and stems that accommodate the patient’s anatomy. The range of stem sizes permits minimal bone removal from the
radial neck, thereby preserving bone stock. The stem design allows for rotational motion at the implant/bone interface and radiocapitellar articulation, potentially reducing
capitellar wear. Additionally, the EVOLVE ® Modular Radial Head device is easier to insert compared to the single piece implants, when assembled in the patient.
The LOCON-T® Distal Radius Plating System provides surgeons with an anatomically designed, stainless steel plating system used in the repair of radial fractures. In designing
the LOCON-T® Distal Radius Plating System, we utilized thin, high-strength stainless steel with low profile screws in order to lessen tendon irritation and/or rupture, which are
complications known to result from this type of surgical repair. Thus, we believe this product offers distinct advantages over other currently marketed systems.
Our system of foot and ankle implants provide the components needed for performing various repair procedures. These products include various screws and staples that meet a
wide array of surgical challenges in the foot. During 2003, the HALLU® - Fix MTP Fusion System was introduced to treat trauma or arthritis of the MTP joint. These products are
the result of our exclusive North American distribution agreement with a French company that has developed an extensive line of products for foot and ankle procedures. These
new instruments and implants have contributed to the continued expansion of our position in the extremity market.
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Product Development
Our research and development staff focuses on developing new products in the knee, hip, extremity reconstruction and biologics material markets, and expanding the current
product offerings and the markets in which they are offered. Realizing that new product offerings are a key to future success, we are committed to a strong research and
development program. Research and development expenses totaled $16.2 million, $10.4 million and $10.1 million in 2003, 2002 and 2001, respectively. We are presently targeting
an overall level of research and development spending in the range of approximately 7% of net sales for 2004 and future years.
In the knee, hip and extremity reconstruction areas, our research and development activities focus on expanding the continuum of products that span the life of implant patients,
from early intervention, such as bone-conserving implants, to primary implants, revision replacement implants, and limb preservation implants. In the biologics area, we have a
variety of research and development projects that are designed to further expand our presence in this rapidly growing market. Such projects include developing materials for new
biologics applications as well as leveraging the use of biologic coatings to enhance fixation and performance in traditional orthopaedic implants.
New products, procedures and techniques introduced across all product lines since 2001 include, but are not limited to, the ADVANCE ® Unicompartmental Knee System,
REPIPHYSIS® Technology, the LINEAGE ® Acetabular System (including ceramic-on-ceramic components), the GUARDIAN® Revision Hinge System, the PROFEMUR®
Modular Hip System (including PROFEMUR® R, PROFEMUR® E, and PROFEMUR® Z), the OYLMPIA® Total Shoulder System, the LOCON-T ® Distal Radius Plating System,
OSTEOSET® bone graft substitute derivative products, extensions of the ALLOMATRIX ® bone graft putty line of products (including ALLOMATRIX ® C, ALLOMATRIX ®
Custom, and ALLOMATRIX ® DR Graft), MIIG® 115 Minimally Invasive Injectable Graft, MIIG® X3 High Strength Injectable Graft, IGNITE® ICS scaffold, the
GRAFTJACKET® Regenerative Tissue Matrix, the GRAFTJACKET® matrix for ulcer repair, the CELLPLEX™ TCP Synthetic Cancellous Bone, the LPT ® Great Toe Implant,
the CONSERVE ® Total Hip System, the HALLU ® - Fix MTP Fusion System, and the MIIG® X3 HiVisc graft.
We have established several surgeon advisory panels that provide advice on market trends and assist with the development and clinical testing of our products. We believe these
surgeon advisors are prominent in the field of orthopaedics. We also partner periodically with other industry participants, particularly in the biologics area, to develop new
products.
Sales and Marketing
Our sales and marketing staff targets orthopaedic surgeons, who typically are the decision-makers in orthopaedic device purchases. We have established several surgeon advisory
panels comprised of surgeons who we believe are leaders in their chosen orthopaedic specialties. We involve both these surgeons and our marketing personnel in all stages of
bringing a product to market – from initial product development to product launch. As a result, we have a well-educated, highly involved marketing staff and an established, global
base of well-respected surgeons, who serve as advocates to promote our products in the orthopaedic community.
We offer clinical symposia and seminars, publish advertisements and the results of clinical studies in industry publications, and offer surgeon-to-surgeon education on our new
products using the surgeon advisors in an instructional capacity. Additionally, approximately 16,000 practicing orthopaedic surgeons in the U.S. receive information on our latest
products through our distribution network and brochure mailings.
Our acquisition of Cremascoli provided an opportunity to cross-sell the Predecessor Company’s products and legacy Cremascoli products in Europe, North America, Japan and
certain other international markets. Because each market may have different product preferences, we believe that by utilizing our global sales and marketing teams’ understanding
of surgeon preferences in their local markets, we can effectively modify and cross-sell existing products throughout the worldwide markets in which we compete.
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Our business is seasonal in nature. Historically, demand for our products has been the highest in the first and fourth quarters. We traditionally experience lower sales volumes in
the third quarter months than throughout the rest of the year as a result of the European holiday schedule during the summer months.
In addition to the seasonality of our net sales, our first quarter selling, general and administrative expenses include additional expenses that we incur in connection with the annual
meeting held by the American Academy of Orthopaedic Surgeons. This meeting, which is the largest orthopaedic meeting in the world, features the presentation of scientific
papers and instructional courses for orthopaedic surgeons. During this 3-day event, we display our most recent and innovative products for these surgeons.
We sell our products in the U.S. through a sales force of approximately 300 people at December 31, 2003. This sales force primarily consists of independent, commission-based
sales representatives and distributors engaged principally in the business of supplying orthopaedic products to hospitals in their geographic areas. The aforementioned U.S. field
sales force is supported by our Tennessee-based sales and marketing organization. A Senior Vice President of Sales & Marketing, a Vice President of U.S. Sales, a National Sales
Manager, and four regional directors manage our domestic sales organization.
Our products are marketed internationally through a combination of direct sales offices in certain key international markets and distributors in other markets. We have sales offices
in France, Italy, the United Kingdom, Belgium, Japan, Canada, and Germany that employ direct sales employees and use independent sales representatives to sell our products into
their respective markets. Our products are sold into other countries in Europe, Asia, Africa, South America and Australia using stocking distribution partners and other distribution
arrangements. Stocking distributors purchase products directly from us for resale to their local customers, with product ownership generally passing to the distributor upon
shipment. As of December 31, 2003, we, through a combination of our aforementioned direct sales offices and approximately 45 stocking distribution partners, had approximately
300 sales representatives that sell in over 50 countries. Our international sales and marketing organization is led by a President of International and several sales and marketing
Vice-Presidents and senior directors. Some of these employees are based at our U.S. headquarters while others are based at the European headquarters or other international
locations.
Our new sales representatives receive formal product training. Additionally, we encourage each sales representative to attend periodic sales and product training updates.
Detailed information on our net sales and long-lived assets by geographic area can be found in Note 16 to the financial statements contained in Item 8 of this report.
Manufacturing and Supply
We operate manufacturing facilities in both Arlington, Tennessee and Toulon, France. These facilities primarily produce orthopaedic implants and some of the related surgical
instrumentation used to prepare the bone surfaces and cavities during the surgical procedure. The majority of our surgical instrumentation is produced to our specifications by
qualified subcontractors who serve medical device companies.
During the past year, we have continued to modernize both production facilities through changes to the physical appearance and layout, and additions of new production and
quality control equipment to meet the evolving needs of our product specifications and designs. In seeking to optimize our manufacturing operations, we have adopted many
sophisticated manufacturing practices, such as lean manufacturing and Six Sigma quality programs, which are designed to lower lead times, minimize waste and reduce inventory.
We have a wide breadth of manufacturing capabilities at both facilities, including skilled and semi-skilled manufacturing personnel.
We rely on a limited number of suppliers for the components used in our products. Our reconstructive joint devices are produced from various surgical grades of titanium, cobalt
chrome and stainless steel, various grades of high-density polyethylenes, silicone elastomer and ceramics. We rely on one supplier for the silicone elastomer used in our extremity
products. We are aware of only two suppliers of silicone elastomer to the medical device industry for permanent implant usage. Additionally, we rely on one supplier of ceramics
for use in our hip products. In addition to reconstructive joint devices, for our biologics products, we depend heavily on a limited number of sources of demineralized bone matrix
(“DBM”) and cancellous bone matrix (“CBM”). Two not-for-profit tissue banks supplied
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us with all of the DBM/CBM that we used in 2003 in our allograft products. Further, we rely on one supplier for our GRAFTJACKET® family of soft tissue repair and graft
containment products, as well as one supplier for our ADCON® Gel family of products.
We maintain a comprehensive quality assurance and quality control program, which includes documentation of all material specifications, operating procedures, equipment
maintenance and quality control methods. Our U.S. and European based quality systems are based on and in compliance with the requirements of ISO 9001/EN 46001 and the
applicable regulations imposed by the FDA on medical device manufacturers. We are accredited by the American Association of Tissue Banks, and we are an FDA registered
Tissue Bank. The FDA may audit our facilities at any time.
We believe that our manufacturing facilities have adequate room for current production requirements, however, in order to meet the needs of anticipated growth, these facilities
may be expanded in the near future.
Competition
Competition in the orthopaedic device industry is intense and is characterized by extensive research efforts and rapid technological progress. Competitors include major companies
in both the orthopaedic and biologics industries, as well as academic institutions and other public and private research organizations that continue to conduct research, seek patent
protection and establish arrangements for commercializing products in this market that will compete with our products.
The primary competitive factors facing us include: price, quality, innovative design and technical capability, breadth of product line, scale of operations and distribution
capabilities. Current and future competitors in this market may have greater resources, more widely accepted and innovative products, less-invasive therapies, greater technical
capabilities, and stronger name recognition than we do. Our ability to compete is affected by our ability to:
•
•
•
•
•
•
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develop new products and innovative technologies;
obtain regulatory clearance and compliance for our products;
manufacture and sell our products cost-effectively;
protect the proprietary technology of our products and manufacturing process;
market our products;
attract and retain skilled employees and sales representatives; and
maintain and establish distribution relationships.
Intellectual Property
We currently own or have licenses to more than 100 patents and pending patent applications throughout the world. We seek to aggressively protect technology, inventions and
improvements that are considered important through the use of patents and trade secrets in the U.S. and significant foreign markets. We manufacture and market the products both
under patents and license agreements with other parties.
Our knowledge and experience, creative product development, marketing staff, and trade secret information with respect to manufacturing processes, materials and product design,
are as important as our patents in maintaining our proprietary product lines. As a condition of employment, we require all employees to execute a confidentiality agreement with us
relating to proprietary information and patent rights.
There can be no assurances that our patents will provide competitive advantages for our products, or that competitors will not challenge or circumvent these rights. In addition,
there can be no assurances that the United States Patent and Trademark Office, or PTO, will issue any of our pending patent applications. The PTO may also deny or require
significant narrowing of claims in our pending patent applications, and patents issuing from the pending patent applications. Any patents issuing from the pending patent
applications may not provide us with
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significant commercial protection. We could incur substantial costs in proceedings before the PTO, including interference proceedings. These proceedings could result in adverse
decisions as to the priority of our inventions. Additionally, the laws of some of the countries in which our products are or may be sold may not protect our products and intellectual
property to the same extent as the laws in the U.S., or at all.
While we do not believe that any of our products infringe any valid claims of patents or other proprietary rights held by third parties, there can be no assurances that we do not
infringe any patents or other proprietary rights held by third parties. If our products were found to infringe any proprietary right of a third party, we could be required to pay
significant damages or license fees to the third party or cease production, marketing and distribution of those products. Litigation may also be necessary to enforce patent rights we
hold or to protect trade secrets or techniques we own. We are currently involved in an intellectual property lawsuit with Howmedica Osteonics Corp., a subsidiary of Stryker
Corporation. See Item 3 of this Form 10-K for further details.
We also rely on trade secrets and other unpatented proprietary technology. There can be no assurances that we can meaningfully protect our rights in our unpatented proprietary
technology or that others will not independently develop substantially equivalent proprietary products or processes or otherwise gain access to our proprietary technology. We seek
to protect our trade secrets and proprietary know-how, in part, with confidentiality agreements with employees and consultants. There can be no assurances, however, that the
agreements will not be breached, that adequate remedies for any breach would be available, or that competitors will not discover or independently develop our trade secrets.
Third-Party Reimbursement
In the U.S., as well as in foreign countries, government-funded or private insurance programs, commonly known as third-party payors, pay a significant portion of the cost of a
patient’s medical expenses. A uniform policy of reimbursement does not exist among all of these payors relative to payment of claims or enforcement of guidelines established by
The Centers for Medicare and Medicaid Services (CMS). Therefore, reimbursement can be quite different from payor to payor as well as one region of the country to another. We
believe that reimbursement is an important factor in the success of any medical device. Consequently, we seek to obtain reimbursement for all of our products.
Reimbursement in the U.S. depends on our ability to obtain FDA clearances and approvals to market our products. Reimbursement also depends on our ability to demonstrate the
short-term and long-term clinical and cost-effectiveness of our products from the results obtained from our clinical experience and formal clinical trials. We present these results at
major scientific and medical meetings and publish them in respected, peer-reviewed medical journals.
All U.S. and foreign third-party reimbursement programs, whether government funded or insured commercially, are developing increasingly sophisticated methods of controlling
health care costs through prospective reimbursement and capitation programs, group purchasing, redesign of benefits, second opinions required prior to major surgery, careful
review of bills, encouragement of healthier lifestyles and exploration of more cost-effective methods of delivering health care. These types of programs can potentially limit the
amount which health care providers may be willing to pay for medical devices.
CMS, formerly known as the Healthcare Financing Administration, or HCFA, has adopted prospective payment systems with respect to U.S. government funded patients for
services performed in hospital settings and all approved procedures performed in ambulatory surgery centers. These prospective payment systems reimburse hospitals according to
a system of groupings that classify patients into clinically cohesive groups based on similar diagnosis and consumption of hospital resources. The payment rate for each grouping is
established by CMS based on the national average cost associated with each category of treatment. The prospective payment is intended to reimburse the facility for all costs
associated with the patient’s care, including all medical devices.
The majority of non-government funded payors have adopted payment systems based on the prospective payment methodology established by CMS. In some cases, however,
particularly within the outpatient surgery center setting, providers continue to issue payments based on each component of the patient’s care. In these situations, facilities
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charge payors separately for any medical devices used during treatment. Reimbursement is typically based on the cost of the device plus a small administrative fee.
If adequate levels of reimbursement from third-party payors outside of the U.S. are not obtained, international sales of our products may decline. Outside of the U.S.,
reimbursement systems vary significantly by country. Many foreign markets have government-managed health care systems that govern reimbursement for new devices and
procedures. Canada, and some European and Asian countries, in particular France, Taiwan, and Korea, have tightened reimbursement rates. Additionally, some foreign
reimbursement systems provide for limited payments in a given period and therefore result in extended payment periods.
Employees
As of December 31, 2003, on a global basis, we employed directly and through our subsidiaries 845 people in the following areas: 359 in manufacturing, 265 in sales and
marketing, 137 in administration and 84 in research and development. We do not have any active organized labor unions. We believe we have an excellent relationship with our
employees.
Environmental
Our operations and properties are subject to extensive foreign, federal, state and local environmental protection and health and safety laws and regulations. These laws and
regulations govern, among other things, the generation, storage, handling, use and transportation of hazardous materials and the handling and disposal of hazardous waste
generated at our facilities. Under such laws and regulations, we are required to obtain permits from governmental authorities for some of our operations. If we violate or fail to
comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators. Under some environmental laws and regulations, we could also be held
responsible for all of the costs relating to any contamination at our past or present facilities and at third party waste disposal sites.
We believe our costs of complying with current and future environmental laws, and our liabilities arising from past or future releases of, or exposure to, hazardous substances will
not materially adversely affect our business, results of operations or financial condition, although there can be no assurances that they will not.
In 1999, groundwater contamination was detected at our Arlington, Tennessee facility. We have taken steps to investigate the nature and extent of the contamination. We believe
the contamination was caused by the former owner of the business, Dow Corning Corporation (DCC). We have requested indemnification from DCC in accordance with the 1993
asset purchase agreement by which we purchased certain assets from DCC. Although DCC is involved in bankruptcy proceedings, under the debtor’s proposed plan of
reorganization, environmental claims are not included in the bankruptcy. DCC may have factual and legal defenses to the claim and there can be no assurances that it will not
prevail. Furthermore, there can be no assurances that DCC will have the capacity to pay the claim even if we should prevail on the claim. We submitted a remediation plan to state
environmental authorities. The State of Tennessee Department of Environment and Conservation entered a Remediation Order based on the proposed remediation plan. The
remediation plan consists primarily of ongoing groundwater monitoring. We believe that the cost of addressing the contamination, without regard to indemnification from the
former owner of the business, will not materially adversely affect our business, results of operations or financial condition although there can be no assurances that it will not. At
December 31, 2003, approximately $176,000 was recorded within accrued expenses, which we believe is sufficient for any further expenses we may incur related to this matter.
Available Information
Our website is located at www.wmt.com. We make available free of charge through this website all of our Securities and Exchange Commission (“SEC”) filings, including our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, as soon as reasonably practicable after those
reports are electronically filed with the SEC.
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Item 2. Properties.
Our U.S. corporate headquarters include warehouse, administrative, and manufacturing facilities located in three buildings on 31 acres in Arlington, Tennessee. In early 2004, we
completed an expansion of our administrative facility, increasing the total size of our facilities to an aggregate of 184,500 square feet. We believe that our manufacturing facilities
have adequate room for current production requirements, however, in order to meet the needs of anticipated growth, these facilities may be expanded in the near future.
The majority of our products are manufactured in our 74,000 square foot manufacturing facility located in Arlington, Tennessee. This facility is leased from the Industrial
Development Board of the Town of Arlington. The lease has an automatic renewal through 2049. We may exercise a nominal purchase option at any time. Our administrative and
warehouse facilities are also leased from the Industrial Development Board of the City of Arlington. While we own the addition to the administrative facility, the original building
is under a lease that expires on July 8, 2005. We may exercise a $101,000 purchase option on that building at any time. We may exercise a nominal purchase option at any time on
the warehouse facility lease. It is an open-ended lease with no predetermined expiration date.
Our international operations include warehouse, research, administrative and manufacturing facilities located in several countries. Our primary international manufacturing facility
and warehouse are located in leased facilities in Toulon, France. Our primary international research and development facility is located in leased facilities in Milan, Italy. In
addition, our sales offices in France, Italy, the United Kingdom, Belgium, Japan, and Canada lease office and/or warehouse space.
Item 3. Legal Proceedings.
From time to time, we are subject to lawsuits and claims which arise out of our operations in the normal course of business. We are the plaintiff or defendant in various litigation
matters in the ordinary course of business, some of which involve claims for damages that are substantial in amount. We believe that the disposition of claims currently pending,
including the matter discussed below, will not have a material adverse effect on our financial position or results of operations.
Howmedica Osteonics Corp. v. Wright Medical Technology, Inc.
On March 28, 2000, Howmedica Osteonics Corp., a subsidiary of Stryker Corporation, filed a complaint in the United States District Court for the District of New Jersey alleging
that we infringed Howmedica’s U.S. Patent No. 5,824,100 related to our ADVANCE® Knee product line. Howmedica Osteonics Corp. is seeking an order of infringement,
unspecified damages and injunctive relief. If Howmedica Osteonics Corp. were to succeed in obtaining the relief it claims, the court could award damages to Howmedica
Osteonics Corp., could impose an injunction against further sales of our products and could rule that our patents are invalid or unenforceable. We are unable to quantify the
potential range of any damage award and no specific monetary damage was requested in Howmedica Osteonics Corp.’s complaint. A damage award could be significant. If a final
damage award is rendered against us, we may be forced to raise or borrow funds, as a supplement to any available insurance claim proceeds, to pay the damages award. We believe
that we have good defenses to this lawsuit and we intend to defend the lawsuit vigorously.
CERAbio, LLC and Phillips Plastics Corporation v. Wright Medical Technology, Inc.
In July 2002, pursuant to a purchase and royalty agreement with CERAbio LLC (“CERAbio”), we purchased assets consisting primarily of completed technology for $3.0 million,
and recorded this entire amount as an intangible asset. Of this purchase price, $1.5 million was paid upon signing the purchase agreement. The remaining $1.5 million is provided
for in accrued expenses and is due once certain conditions under the agreement are satisfied. The agreement also provides for specified future royalties contingent upon sales of
products related to the acquired technology. We, believing that the contractual obligations for payment had not been met, disputed whether the second payment and royalties had
been earned. In 2003, CERAbio and Phillips Plastics Corporation filed a lawsuit in United States District Court for the Western District of Wisconsin against us for payment of the
additional $1.5
15
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
million purchase price and the royalties earned to date. In November 2003, a jury returned a verdict in favor of CERAbio and ordered us to pay the remaining purchase price and
the royalties earned to date. The royalties earned to date have been recorded within “Accrued Expenses and Other Current Liabilities” in our consolidated balance sheet. We have
appealed the verdict to the United States Court of Appeals for the Seventh Circuit and the appeal is pending. We intend to vigorously defend our position in this case and, in the
opinion of management, do not believe that this claim will have a material adverse affect on our financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
16
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
On July 18, 2001, we completed our initial public offering, and issued 7,500,000 shares of voting common stock at $12.50 per share, which produced net proceeds of $84.8 million
after deducting underwriting discounts and offering expenses. We used the net proceeds of our initial public offering to repay debt. Simultaneous with the closing of the offering,
all of our outstanding mandatorily redeemable, convertible preferred stock, plus accrued dividends, was converted into 19,602,799 shares of common stock. Also in connection
with the offering, Warburg converted approximately $13.1 million of our senior subordinated notes into 1,125,000 shares of non-voting common stock.
On March 6, 2002, we, along with certain selling stockholders, completed a secondary offering of 6,900,000 shares, including the over-allotment option of 900,000 shares, of
voting common stock at $15.40 per share. Of the 6,900,000 shares, we offered 3,450,000 shares in the secondary offering. The net proceeds generated of $49.5 million, after
deducting underwriting discounts and offering expenses, have been invested in short-term, investment-grade securities. Following the closing of the secondary offering, Warburg
converted all of its shares of non-voting common stock into shares of voting common stock. Consequently, there are no outstanding shares of non-voting common stock.
Our common stock is traded on the Nasdaq National Market under the symbol “WMGI.” The following table sets forth, for the periods indicated, the high and low closing sales
prices per share of our common stock as reported on the Nasdaq National Market.
Fiscal Year 2002
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year 2003
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$20.09
$22.90
$21.82
$22.94
$17.70
$21.12
$26.20
$30.40
$15.42
$18.84
$15.15
$16.05
$14.03
$16.41
$19.43
$24.75
As of February 10, 2004, there were 155 stockholders of record and an estimated 3,611 beneficial stockholders. We have not had any recent sales of unregistered securities or
purchases of equity securities.
Dividend Policy
We have never declared or paid cash dividends on our common stock. We currently intend to retain all future earnings for the operation and expansion of our business. We do not
anticipate declaring or paying cash dividends on our common stock in the foreseeable future. Any payment of cash dividends on our common stock will be at the discretion of our
board of directors and will depend upon our results of operations, earnings, capital requirements, contractual restrictions and other factors deemed relevant by our board. In
addition, our current credit facility prohibits us from paying any cash dividends without the lenders’ consent.
17
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
Item 6. Selected Financial Data.
The following table sets forth certain selected consolidated financial data of Wright Medical Group, Inc. (the “Company”) and Wright Medical Technology, Inc., (the “Predecessor
Company”), for the periods indicated. The selected consolidated financial data as of December 31, 2003 and 2002 and for the years then ended, was derived from our consolidated
financial statements audited by KPMG LLP. The selected consolidated financial data as of December 31, 2001, 2000 and 1999, and for the years ended December 31, 2001 and
2000, the period from January 1, 1999 to December 7, 1999, and the period from December 8, 1999 to December 31, 1999 was derived from our and the Predecessor Company’s
consolidated financial statements audited by Arthur Andersen LLP. The audited consolidated financial statements as of December 31, 2003 and 2002 and for the years then ended,
are included elsewhere in this filing. The audited consolidated financial statements as of December 31, 2001, 2000 and 1999 and for the year ended December 31, 2000, the period
from January 1, 1999 to December 7, 1999, and the period from December 8, 1999 to December 31, 1999 are not included in this filing. Historical and pro forma results are not
necessarily indicative of the results to be expected for any future period.
In thousands, except per share data
Statement of Operations Data:
Net sales
Cost of sales(1)
Gross profit
Operating expenses:
Selling, general and administrative(2)
Research and development
Amortization of intangible assets(3)
Stock-based expense
Arbitration settlement award
Transaction and reorganization
Acquired in-process research and development costs
Consolidated Wright Medical Group, Inc.
Year Ended
December 31,
2003
Year Ended
December 31,
2002
Year Ended
December 31,
2001
Year Ended
December 31,
2000
Period from
December 8 to
December 31,
1999
Predecessor
Company
Period from
January 1 to
December 7,
1999
$ 157,552
80,370
$
7,976
4,997
$101,194
44,862
$248,932
67,815
$200,873
55,616
181,117
127,612
16,151
3,562
2,068
—
—
4,558
145,257
106,875
10,357
3,946
1,724
(4,200)
—
—
$172,921
51,351
121,570
95,556
10,108
5,349
1,996
—
—
—
77,182
82,813
8,390
5,586
5,029
—
—
—
2,979
4,837
508
466
—
—
3,385
11,731
20,927
(17,948)
1,909
67
(19,924)
(25)
56,332
47,547
5,857
2,334
523
—
6,525
—
62,786
(6,454)
13,196
616
(20,266)
190
Total operating expenses
153,951
118,702
113,009
101,818
Income (loss) from operations
Interest expense, net
Other (income) expense, net
Income (loss) before income taxes
Provision (benefit) for income taxes
27,166
1,107
(1,060)
27,119
9,722
26,555
938
(1,277)
26,894
1,834
8,561
7,809
685
67
1,574
(24,636)
12,446
870
(37,952)
1,541
Net income (loss)
$ 17,397
$ 25,060
$ (1,507)
$ (39,493)
$
(19,899)
$ (20,456)
Net income (loss) per share:(4)
Basic
Diluted
Weighted-average number of common shares outstanding - basic
Weighted-average number of common shares outstanding - diluted
Unaudited pro forma net income (loss) per share:(5)
Basic
Diluted
$
$
$
$
0.53
0.50
32,857
34,561
0.53
0.50
$
$
$
$
0.79
0.75
31,870
33,550
0.79
0.75
$
$
$
$
(0.31)
$(3,405.71)
$(27,918.17)
(0.31)
$(3,405.71)
$(27,918.17)
13,195
13,195
(0.06)
(0.06)
17
17
$
$
(2.29)
(2.29)
1
1
Weighted-average number of common shares outstanding - pro forma
basic(5)
32,857
31,870
23,544
17,260
Weighted-average number of common shares outstanding - pro forma
diluted(5)
34,561
33,550
23,544
17,260
18
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
In thousands
2003
2002
2001
2000
1999
Consolidated Wright Medical Group, Inc.
As of December 31,
Consolidated Balance Sheet Data:
Cash and cash equivalents
Working capital
Total assets
Long-term liabilities
Redeemable preferred stock
Stockholders’ equity (deficit)
In thousands
Other Data:
Cash flows provided by (used in) operating activities
Cash flows used in investing activities
Cash flows provided by (used in) financing activities
Depreciation
Amortization of intangible assets(3)
Capital expenditures
$ 66,571
147,255
322,103
20,516
—
$238,318
$ 51,373
127,557
276,370
25,939
—
$204,999
$
2,770
47,546
193,719
30,967
—
$117,300
$ 16,300
54,020
216,964
141,514
91,254
$ (76,976)
$
733
83,840
238,312
137,368
70,867
$ (22,834)
Consolidated Wright Medical Group, Inc.
Year Ended
December 31,
2003
Year Ended
December 31,
2002
Year Ended
December 31,
2001
Year Ended
December 31,
2000
Period from
December 8 to
December 31,
1999
$ 40,065
(25,844)
514
13,948
3,562
$ 18,116
$ 21,950
(22,430)
48,384
13,553
3,946
$ 17,974
$
818
(15,558)
1,372
10,096
5,349
$ 16,764
$ 18,151
(14,109)
6,028
11,008
5,586
$ 14,109
$(22,701)
(22,410)
51,844
489
466
11
$
Predecessor
Company
Period from
January 1 to
December 7,
1999
$ 8,914
(2,179)
(6,105)
6,236
2,334
$ 2,179
(1)
(2)
(3)
(4)
(5)
In connection with our recapitalization and acquisition of Cremascoli, we recorded inventory step-ups pursuant to Accounting Principles Board (APB) Opinion No. 16.
This accounting treatment required a $31.1 million step-up of inventories above manufacturing costs. The step-up was charged to cost of sales over the following twelve
months, reflecting the estimated period over which the inventory was sold. Cost of sales was charged $29.1 million in the year ended December 31, 2000, and $2.0 million
in the period from December 8 to December 31, 1999.
In accordance with the provisions of SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections,” our $1.6 million loss on early retirement of debt in 2001 does not meet the criteria to be classified as extraordinary. Consequently, pursuant to this newly
adopted standard, this amount has been reclassified to selling, general and administrative expense.
Amortization of intangible assets in 2003 and 2002 excludes amortization of goodwill in accordance with SFAS No. 142. See Note 6 to the financial statements contained
in Item 8 of this report.
Net income (loss) applicable to common stockholders includes preferred stock dividends of $2.5 million for the year ended December 31, 2001, preferred stock dividends
of $4.4 million and the beneficial conversion feature of the series C preferred stock of $13.1 million for the year ended December 31, 2000, and preferred stock dividends
of $230,000 for the period from December 8 to December 31, 1999.
In calculating the pro forma net income (loss) per share, we have given effect to the conversion of all of our outstanding mandatorily redeemable, convertible preferred
stock, plus accrued dividends, into common stock as if the conversion occurred at the beginning of the respective period. Therefore, pro forma net loss applicable to
common stockholders excludes preferred stock dividends of $2.5 million for the year ended December 31, 2001, and preferred stock dividends of $4.4 million and the
beneficial conversion feature of the series C preferred stock of $13.1 million for the year ended December 31, 2000.
19
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Introduction
Management’s discussion and analysis of financial condition and results of operations, or MD&A, is provided as a supplement to the accompanying consolidated financial
statements and footnotes contained in Item 8 of this report and to provide an understanding of our results of operations, financial condition, and changes in financial condition.
MD&A is organized as follows:
•
•
•
•
•
•
•
Executive summary. This section provides a general description and history of our business, a brief discussion of our product lines and the opportunities, challenges and
risks we focus on in the operation of our business.
Net sales and expense components. This section provides a description of each historical line item on our consolidated statement of operations.
Results of operations. This section provides our analysis and outlook for the significant line items on our consolidated statement of operations.
Seasonality. This section describes the effects of seasonality on our business.
Liquidity and capital resources. This section provides an analysis of our liquidity and cash flows, as well as a discussion of our outstanding debt and commitments, that
existed as of December 31, 2003.
Critical accounting policies and estimates. This section discusses those accounting policies that both are considered important to our financial condition and results of
operations, and require us to exercise subjective or complex judgments in their application. In addition, all of our significant accounting policies, including our critical
accounting policies, are summarized in Note 2 to our consolidated financial statements.
Factors affecting future operating results. This section discusses the most significant factors that could affect our future financial results. The factors discussed in this
section are in addition to factors that may be described in the MD&A captions discussed above and elsewhere in this report.
Executive Summary
Company Description. We are a global orthopaedic medical device company specializing in the design, manufacture and marketing of reconstructive joint devices and biologics
products. Reconstructive joint devices are used to replace knee, hip and other joints that have deteriorated through disease or injury. Biologics are used to replace damaged or
diseased bone, to stimulate bone growth, and to provide other biological solutions for surgeons and their patients. We have been in business for over fifty years and have built a
well-known and respected brand name and strong relationships with orthopaedic surgeons.
Our corporate headquarters and U.S. operations are located in Arlington, Tennessee, where we conduct our domestic manufacturing, warehousing, research and administrative
activities. Outside the U.S., we operate manufacturing and administrative facilities in Toulon, France; research, distribution and administrative facilities in Milan, Italy and sales
and distribution offices in Canada, Japan and across Europe. Our global distribution system consists of a sales force of approximately 600 individuals that market our products to
orthopaedic surgeons and hospitals. We have approximately 300 exclusive independent distributors and sales associates in the U.S., and approximately 300 sales representatives
internationally who are employed through a combination of our stocking distribution partners and direct sales offices.
In recent history, we have had several significant developments, including the following:
•
On December 7, 1999, an investment group led by Warburg, Pincus Equity Partners, L.P. (“Warburg”) acquired majority ownership of our predecessor company, Wright
Medical Technology, Inc., in a transaction that recapitalized our business.
•
On December 22, 1999, we acquired Cremascoli Ortho Holding, S.A. (“Cremascoli”), an orthopaedic device company based in Toulon, France.
20
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
•
•
On July 18, 2001, we completed our initial public offering (“IPO”), issuing 7,500,000 shares of voting common stock at $12.50 per share, the net proceeds of which were
$84.8 million after deducting underwriting discounts and offering expenses.
On March 6, 2002, we, along with certain selling stockholders, completed a secondary offering of 6,900,000 shares, including the over-allotment option of 900,000 shares,
of voting common stock at $15.40 per share. Of the 6,900,000 shares, we offered 3,450,000 shares in the secondary offering, the net proceeds of which were $49.5 million,
after deducting underwriting discounts and offering expenses.
Principle Products and Significant Business Trends. Our net sales primarily include sales of reconstructive joint devices and biologics products. Our reconstructive joint device
net sales are derived from three primary product lines: knees, hips and extremities. Our biologics sales encompass sales of products designed to stimulate and augment the natural
regenerative capabilities of the human body. Additionally, we generate other net sales from various orthopaedic products not considered to be part of our knee, hip, extremity or
biologics product lines.
During 2003, our business experienced significant growth. Net sales in 2003 increased to $248.9 million, compared to $200.9 million in 2002, representing growth of 24%. Our
biologics and extremity product lines, which have been significant contributors to our growth since our December 1999 reorganization, continued to contribute during 2003.
Additionally, in 2003 we experienced significant growth in our hip product line as a result of several new product introductions.
Our biologics products focus on biological musculoskeletal repair and include synthetic and human tissue-based materials. Our principle biologics products include our
ALLOMATRIX ® line of injectable tissue-based bone graft substitutes, our OSTEOSET® synthetic bone graft substitute, our MIIG® family of minimally invasive injectable
synthetic bone grafts, our GRAFTJACKET® tissue repair and containment membranes, and in our international markets, our ADCON® Gel anti-adhesion product. Our biologics
business grew 31% in 2003.
In 2004, within biologics, we will be focusing on two key regulatory initiatives. In 2002, the FDA officially notified us that our ALLOMATRIX ® line of products should be
reviewed and regulated under the medical device premarket notification provisions. In response, we promptly filed a 510(k) premarket notification for these products. The FDA
has exercised enforcement discretion during the review process, and therefore our ALLOMATRIX ® line continues to be marketed and sold in the U.S. while we work toward
ultimate approval.
In the fourth quarter of 2003, we submitted the final module of our premarket approval (“PMA”) application for ADCON® Gel to the FDA. We are currently awaiting the FDA’s
review and response to that submission. Our ADCON® Gel product is not currently available on the U.S. market.
We offer extremity products for the hand, wrist, elbow, shoulder, foot and ankle in a number of markets worldwide. Our principle extremity products include the Swanson line of
finger and toe joint replacement products, the ORTHOSPHERE® Carpometacarpal Implant for repair of the basal thumb joint, the EVOLVE ® Modular Radial Head device, the
LOCON-T® Distal Radius Plating System, and a comprehensive system of foot and ankle implants. We experienced sales growth of 26% in 2003 in the extremities product line,
principally the result of the continued success of our EVOLVE ® Modular Radial Head device and our foot and ankle products and pricing increases across our extremity product
offerings. We anticipate that EVOLVE ®, along with our foot and ankle products, will be the growth drivers of our extremity business in 2004.
Our hip joint reconstruction product portfolio provides offerings in the areas of bone-conserving implants, total hip reconstruction, revision replacement implants, and limb
preservation. Our hip joint products include the CONSERVE ® family of products, the LINEAGE® Acetabular System, the PERFECTA ® Hip System, the PROFEMUR® Modular
Hip System, and the ANCA-FIT™ Hip System. In early 2003, the FDA granted us approval to market our ceramic-on-ceramic bearing as part of the LINEAGE ® Acetabular
System, placing us among the first companies to market ceramic-on-ceramic total hip solutions in the U.S. Our hip product line, which offers surgeons low wear
ceramic-on-ceramic and metal-on-metal bearing surfaces, large diameter heads and our innovative modular necks, led to the 37% growth in our hip business in 2003. We anticipate
additional competition in ceramic-on-ceramic hip market in 2004; however, we believe that our position as one of the few early entrants into this market, combined with our full
continuum of successful hip products, will position us for continued
21
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
success in 2004. Our CONSERVE ® Plus Resurfacing Implant is available outside the U.S. and is pending FDA clearance for the U.S. market. With CONSERVE ® Plus, the surface
of the patient’s femoral head and the acetabular surface are replaced with minimal bone loss in a minimally invasive procedure.
Our knee reconstruction products position us well in the areas of total knee reconstruction, revision replacement implants, and limb preservation products. Our principle knee
products include the ADVANCE ® Knee System, and the ADVANCE ® Unicompartmental Knee System. Our knee business was impacted in late 2002 when we transitioned
certain domestic distributorships that did not fit with our long-term objectives or business philosophies. Due to these transitions, 2003 was a challenging year in the domestic
marketplace for our knee products. However, we steadily improved our domestic knee growth rate throughout 2003, bringing our overall worldwide growth rate to 9% for the year.
We anticipate that our newer products and the continued favorable impact of our distributor changes will enable us to experience overall growth rates in our knee business during
2004 that are consistent with the market’s overall procedure rate of growth.
Significant Industry Factors. Our industry is impacted by numerous competitive, regulatory and other significant factors. The growth of our business relies on our ability to
continue to develop new products and innovative technologies, obtain regulatory clearance and compliance for our products, protect the proprietary technology of our products and
our manufacturing processes, manufacture our products cost-effectively, and successfully market and distribute our products in a profitable manner. We, and the entire industry,
are subject to extensive government regulation, primarily by the FDA. Failure to comply with regulatory requirements could have a material adverse effect on our business.
Additionally, our industry is highly competitive and our success is dependent on our ability to compete successfully against our competitors. We devote significant resources to
assessing and analyzing competitive, regulatory and economic risks and opportunities. A detailed discussion of these and other factors is provided in the “Factors Affecting Future
Operating Results” section of our MD&A.
Net Sales and Expense Components
Net Sales. We derive our net sales primarily from the sale of reconstructive joint devices and biologics products. An overview of our principle product lines and significant trends
in our business is provided in the “Executive Summary” section of our MD&A.
Cost of Sales. Our cost of sales consists primarily of direct labor, allocated manufacturing overhead, raw materials and components, royalty expenses associated with licensing
technologies used in our products or processes and certain other period expenses.
Selling, General and Administrative. Our selling, general and administrative expenses consist primarily of salaries, sales commissions, royalty and consulting expenses associated
with our medical advisors, marketing costs, facility costs, other general business and administrative expenses, and depreciation expense associated with surgical instruments that
we loan to surgeons to use when implanting our products.
Research and Development. Research and development expense includes costs associated with the design, development, testing, deployment, enhancement and regulatory
approval of our products.
Amortization of Intangible Assets. Our intangible assets consist of purchased intangibles principally related to completed technology, distribution channels and trademarks
primarily resulting from our 1999 acquisition of Cremascoli. We amortize intangible assets over periods ranging from 3 months to 15 years.
Stock-based Expense. We incur stock-based expenses as a result of the amortization of non-cash deferred compensation that is recorded in accordance with Accounting Principles
Board (“APB”) Opinion No. 25. This deferred compensation resulted following the issuance of stock options to employees and the sale of equity securities when the estimated fair
value of the securities was deemed, for financial reporting purposes, to have exceed their respective exercise or sales price. Additionally, for stock-based incentives granted to
consultants, we defer and amortize the fair value of such grants as calculated pursuant to SFAS No. 123. Deferred compensation is amortized on a straight-line basis over the
respective vesting periods of the stock-based incentives, which is generally four years, and we immediately expense all stock-based compensation associated with the issuance of
22
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
equity where no vesting restrictions apply. The substantial majority of our stock-based expense relates to the issuance of shares and options prior to the completion of our IPO in
July 2001. Prior to our IPO, we generated approximately $11.9 million of deferred stock-based compensation related to stock grants, stock option grants and the sale of preferred
stock to employees.
Interest Expense, Net. Interest expense, net consists primarily of interest associated with borrowings outstanding under our senior credit facilities as well as non-cash expenses
associated with the amortization of deferred financing costs resulting from the origination of our senior credit facilities. These expenses are offset by income earned on our
invested cash balances.
Other (Income) Expense, Net. Other (income) expense consists primarily of net gains and losses resulting from foreign currency fluctuations.
Provision for Income Taxes. We record tax provisions for income taxes on earnings generated by both our domestic and international operations. Historically, our effective tax
rates have varied from our statutory tax rates primarily due to research and development credits and changes to our valuation allowance and prior to 2002, nondeductible goodwill
amortization.
Results of Operations
The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts (in thousands) and as percentages of net sales:
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Amortization of intangible assets
Stock-based expense
Acquired in-process research and
development costs
Arbitration settlement award
Total operating expenses
Income from operations
Interest expense, net
Other (income) expense, net
Income before income tax
Provision for income taxes
Year Ended December 31,
2003
2002
2001
Amount
$248,932
67,815
181,117
127,612
16,151
3,562
2,068
4,558
—
153,951
27,166
1,107
(1,060)
27,119
9,722
% of
Sales
Amount
% of
Sales
Amount
100.0%
27.2%
$200,873
55,616
100.0%
27.7%
$172,921
51,351
72.8%
145,257
72.3%
121,570
51.3%
6.5%
1.4%
0.8%
1.8%
—
61.8%
10.9%
0.4%
(0.4)%
10.9%
3.9%
106,875
10,357
3,946
1,724
—
(4,200)
118,702
26,555
938
(1,277)
26,894
1,834
53.2%
5.2%
2.0%
0.8%
—
(2.1)%
59.1%
13.2%
0.5%
(0.6)%
13.4%
0.9%
95,556
10,108
5,349
1,996
—
—
113,009
8,561
7,809
685
67
1,574
% of
Sales
100.0%
29.7%
70.3%
55.3%
5.8%
3.1%
1.2%
—
—
65.4%
5.0%
4.5%
0.4%
0.0%
0.9%
Net income (loss)
$ 17,397
7.0%
$ 25,060
12.5%
$ (1,507)
(0.9)%
23
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
Comparison of the Year Ended December 31, 2003 to the Year Ended December 31, 2002
Net Sales. The following table sets forth our net sales by product line for the periods indicated expressed as dollar amounts:
In thousands:
Knee products
Hip products
Biologics products
Extremity products
Other
Total net sales
Year Ended December 31,
2003
2002
2001
$ 78,338
78,071
50,056
31,876
10,591
$248,932
$ 72,058
56,945
38,347
25,367
8,156
$200,873
$ 68,238
48,589
26,810
20,989
8,295
$172,921
The following graphs illustrate our product line sales as a percentage of total net sales for 2003, 2002, and 2001:
Product Sales as a Percentage of Total Net Sales
Our net sales growth in 2003 was attributable to the continued success of our biologics and extremity product lines, as well as significant growth in our hip product line.
Geographically, our domestic net sales totaled $152.9 million in 2003 and $122.4 million in 2002, representing 61% of total net sales in both years and growth of 25%. Our
international sales totaled $96.1 million in 2003, increasing by 22% over sales of $78.5 million in 2002. Our 2003 international sales include a favorable currency impact of
approximately $11.9 million, principally resulting from the 2003 performance of the euro against the U.S. dollar. Our European and Japanese operations continue to be the
significant drivers of our sales growth in our international operations.
From a product line perspective, we experienced sales growth across all product lines in 2003. For 2003, our hip product sales totaled $78.1 million, representing a 37% increase.
This increase is primarily attributable to demand for our higher-priced CONSERVE ® Total Implant with BFH™ Technology, as well as our LINEAGE ® Acetabular System and
our PROFEMUR™ stem products, both of which were positively influenced by the launch of our
24
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
LINEAGE® ceramic-on-ceramic hip system in the first quarter 2003. Additionally, continued growth in sales of our PERFECTA ® hip system and growth of our ANCA-FIT™ Hip
System, which is sold in our international markets, contributed to our hip performance in 2003.
Sales in 2003 of our biologics products totaled $50.1 million, representing a year-over-year increase of 31%. Our increase in net sales of biologics products was attributable to
growth in all of our biologics product offerings. For 2003, we experienced the benefit of a full year of sales of our GRAFTJACKET® tissue repair and containment membranes,
which were introduced in the third quarter of 2002. Additionally, sales growth of our OSTEOSET ® Resorbable Bead Kits, our MIIG® (Minimally Invasive Injectable Graft) family
of products, and the growth of our ALLOMATRIX ® line of bone graft substitutes led to increased biologics performance in 2003. International sales of our ADCON® Gel
products, which we began selling in certain international markets in the second quarter of 2003, further contributed to our biologics performance in 2003.
Our extremity product sales increased to $31.9 million in 2003, representing growth of 26% over 2002. Increased sales of our higher priced extremity products, such as our
EVOLVE ® Modular Radial Head System and our foot and ankle products, as well as pricing increases across our extremity product offerings, were the most significant factors
contributing to our year over year growth.
Sales of our knee products totaled $78.3 million in 2003, representing growth of 9%. Our knee performance improved steadily throughout 2003. We attribute this increase to
growth experienced by our ADVANCE ® knee product line and the favorable impact of changes in our domestic distribution network. These increases were partially offset by
decreased sales of certain of our more mature knee products, primarily our ADVANTIM ® knee line.
Cost of Sales. Cost of sales as a percentage of net sales decreased slightly to 27.2% in 2003. This decrease is primarily a result of our ability to manage certain of our fixed
manufacturing costs while our business significantly expanded during 2003. Our cost of sales and corresponding gross profit percentages can be expected to fluctuate in future
periods depending upon changes in our product sales mix and prices, distribution channels and geographies, manufacturing yields, period expenses and levels of production
volume.
Selling, General and Administrative. As a percentage of net sales, our 2003 selling, general and administrative expenses decreased by 1.9 percentage points from 53.2% in 2002 to
51.3%. Within selling, general and administrative expenses, our expenses for sales commissions remained relatively flat versus prior year as a percentage of net sales. In 2003, we
experienced increases in our royalty expenses as a percentage of sales, however, 2002 royalty expense includes the favorable impact of the resolution of a royalty matter of
approximately $800,000. Excluding this favorable benefit, year over year royalty expense, as a percentage of net sales remained constant. On an overall basis, our reduction in
selling, general and administrative expenses as a percentage of net sales was a result of our ability to control discretionary spending associated with those expenses, while
significantly growing our business. The benefits we realized from controlling spending despite our sales growth were partially offset by increases in product liability insurance
expense. Product liability insurance costs have increased significantly in the past two years on an industry wide basis.
We anticipate that our selling, general and administrative expenses as a percentage of net sales will continue to decrease in future periods as we control the growth of our existing
infrastructure while continuing to expand our business. However, these expenses will increase in absolute dollars to the extent that any additional growth in net sales results in
increases in sales commissions and royalty expense associated with those sales and requires us to expand our infrastructure.
Research and Development. Our level of investment in research and development activities, as a percentage of net sales, increased by 1.3 percentage points to 6.5% in 2003. The
overall profitability of our business in 2003 enabled us to increase our investment in research and development activities. The 2003 increase in expense was attributable to
heightened levels of clinical evaluations for pre-market products and products already on the market, and continued investments in development opportunities for possible future
products. Our key product launches in 2003 included our ceramic-on-ceramic bearing for use in our LINEAGE® Acetabular System, our MIIG® X3 High-Strength Injectable Graft,
our CELLPLEX™ TCP Synthetic Cancellous Bone repair matrix and our GRAFTJACKET® matrix for ulcer repair.
25
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
For 2004, we anticipate that our research and development expenditures as a percentage of net sales will increase to approximately 7%. As our business continues to grow, we
expect our research and development expenditures to increase in absolute dollars and potentially as a percentage of sales as we continue to increase our investment in product
development initiatives and clinical studies.
Amortization of Intangible Assets. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” effective
January 1, 2002, we ceased amortizing goodwill and instead evaluate it at least annually for impairment in accordance with SFAS No. 142. We performed our annual evaluation of
goodwill for impairment during the fourth quarter of 2003 and determined that no impairment charges related to our recorded goodwill were required.
Based on the intangible assets held at December 31, 2003, we expect to amortize approximately $3.2 million in 2004, $3.0 million in 2005 and 2006, $2.6 million in 2007 and
$2.5 million in 2008.
Stock-based Expense. We recognized $2.1 million and $1.7 million of stock-based expense during 2003 and 2002, respectively, resulting from the amortization of our deferred
compensation. Based upon the stock-based awards outstanding at December 31, 2003, we expect to recognize stock-based expense totaling $1.6 million in 2004, $600,000 in 2005,
$300,000 in 2006 and a minimal amount in 2007.
In-Process Research and Development Cost. Upon consummation of the acquisition of certain ADCON® Gel technology assets from Gliatech Inc. (“Gliatech”), in March 2003,
we immediately recognized as expense approximately $4.6 million representing the estimated fair value of purchased in-process research and development (“IPRD”) that had not
yet reached technological feasibility and had no alternative future use (see Note 3 to our consolidated financial statements in Item 8 of this report). The value was determined by
estimating the costs to develop the purchased in-process research and development into commercially viable products, estimating the resulting net cash flows from this project, and
discounting the net cash flows back to their present values. An additional discount was applied to the project to take into account the uncertainty surrounding the successful
development and commercialization of the purchased in-process research and development.
The resulting net cash flows from the project were based on our management’s best estimates of revenue, cost of sales, research and development costs, selling, general and
administrative costs, and income taxes from the project.
A summary of the estimates used to calculate the net cash flows for the project is as follows:
Year net
cash
in-flows
expected
to begin
Discount rate
including
factor to
account for
uncertainty of
success
Project
Acquired IPRD
ADCON® Gel
2004
32.3%
$4,558,000
The ADCON® Gel products are designed to reduce adhesion formation following lumbar spine (ADCON®-L Gel) and peripheral tendon/nerve (ADCON®-T/N Gel) procedures,
thus reducing or eliminating post-operative pain.
Both ADCON®-L Gel and ADCON ®-T/N Gel are commercially available internationally, but are currently not available for sale in the U.S. The ADCON ®-L Gel product had
previously received regulatory clearance from the FDA in mid-1998. In December 2000, the FDA determined that the provisions of the FDA Application Integrity Policy (“AIP”)
would be applied to Gliatech due to violations of Good Clinical Practices in the conduct, analysis, and reporting of data specific to the U.S. Clinical Study of ADCON®-L Gel. In
early 2003, the FDA lifted the AIP status of Gliatech, which subsequently allowed us, as the new owner of the technology, to present the FDA with clinical data intended to
support the return of ADCON®-L Gel to the U.S. market. The third and final module of our PMA application related to ADCON ®-L Gel was submitted to the FDA in December of
2003. We are currently awaiting the FDA’s review and response to that submission. We will be required to conduct a separate clinical study to enter the U.S. market with
ADCON®-T/N Gel.
26
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
We anticipate that portions of our existing cash will be used to develop the purchased in-process research and development into commercially viable products. This development
consists primarily of the completion of all clinical evaluation testing activities and regulatory approvals that are necessary to establish the safety and efficacy of the product and to
market it in the U.S. Bringing the purchased in-process research and development to market also includes testing the products for compatibility and interoperability with
commercially viable products. Due to the history of the ADCON® Gel products with the FDA, we are unable to estimate the extent of research and development activities that will
be necessary to develop these products into commercially viable products. For ADCON®-L Gel, based on the timing of the submission of our PMA application, we anticipate that
ADCON®-L Gel will be available for sale in the U.S. market no sooner than the second half of 2004. We expect to pursue necessary clinical studies to allow FDA approval for
additional applications outside of the spine, such as the peripheral tendon/nerve. We are unable to estimate at this time when such additional FDA approvals would occur.
We are continuously monitoring our development projects. We believe that the assumptions used in the valuation of purchased in-process research and development represent a
reasonably reliable estimate of the future benefits attributable to the purchased in-process research and development. No assurance can be given that actual results will not deviate
from those assumptions in future periods.
Interest Expense, Net. As outlined in our “Net Sales and Expense Components” section of MD&A, interest expense, net consists primarily of interest associated with borrowings
outstanding under our senior credit facilities. Interest expense is partially offset by interest income generated on our invested cash balances of approximately $636,000 and
$769,000, in 2003 and 2002, respectively. Our net interest expense includes non-cash expense associated with the amortization of deferred financing costs resulting from the
origination of our senior credit facilities of $261,000 during both 2003 and 2002.
Other (Income) Expense, Net. As noted above, our other (income) expense consists of net gains resulting from foreign currency fluctuations totaling $1.2 million and $1.4 million
in 2003 and 2002, respectively, partially offset by other non-operating expenses. We expect other income and expense to fluctuate in future periods depending upon our relative
exposures to foreign currency risk and ultimate fluctuations in exchange rates.
Provision for Income Taxes. Our effective tax rate for 2003 was approximately 36% as compared to an effective tax rate of 7% for 2002. Prior to 2002, we provided a valuation
allowance against all of our net deferred tax assets for U.S. income tax purposes and a portion of our net deferred tax assets for foreign tax purposes, because, given our prior
history of operating losses, the realizability of those assets was uncertain. During 2002, our sustained history of profitability and the reduced debt burden following our July 2001
IPO, made the realization of certain deferred tax assets more likely than not, and we consequently reversed a significant portion of our valuation allowance against such net
deferred tax assets for U.S. income tax purposes. This reduction resulted in an $8.1 million non-cash benefit to our provision for income taxes recorded in 2002. Excluding this
benefit, our effective tax rate for 2002 would have been approximately 37%. We estimate that our combined applicable statutory rates were approximately 39.6% during both 2003
and 2002.
Excluding the benefit from the reduction of our valuation allowance in 2002, the decrease in our effective tax rate on a year over year basis, reflects the effect of certain tax saving
initiatives implemented in 2003. For 2004, we expect our effective tax rate to increase from our 2003 level to a range of 38% to 39%, absent any incremental tax saving
opportunities that might be identified and implemented.
At December 31, 2003, we have net operating loss carryforwards of approximately $25.3 million domestically, which expire in 2009 through 2021, and $23.5 million
internationally, which expire in 2004 through 2010. Additionally, we have domestic general business credit carryforwards for approximately $4.4 million, which expire in 2007
through 2016, and alternative minimum tax credits which do not expire. Our U.S. Federal net operating loss carryforwards are subject to certain annual limitations, and due to these
limitations, some of our net operating losses may expire unused. The valuation allowance remaining at December 31, 2003 is for a portion of our deferred tax assets for U.S.
income tax purposes and a portion of our deferred tax assets for foreign income tax purposes. We will continue to reassess the realization of the remainder of our deferred tax
assets and adjust the related valuation allowance as necessary.
27
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
Comparison of the Year Ended December 31, 2002 to the Year Ended December 31, 2001
Net Sales. Our net sales increased to $200.9 million for 2002, representing growth of 16% as compared to 2001. Our net sales growth in 2002 was attributable to the continued
success of our biologics and extremity product lines. Geographically, our domestic net sales totaled $122.4 million and $108.0 million, representing 61% and 62% of our total net
sales, in 2002 and 2001, respectively. This represents 2002 growth of 13.3%. Our international sales totaled $78.5 million in 2002, increasing by 21% over sales of $64.9 million in
2001. Our 2002 international sales include a positive currency impact of approximately $2.3 million, principally resulting from transactions denominated in the euro, when
compared to 2001. International sales performance in 2002 was driven by growth in sales in our core European business and our initiatives in Asia, particularly in Japan.
With respect to product sales in 2002, our net sales growth for 2002 was attributable to increases in sales across all of our product lines. For 2002, we experienced growth of 43%,
21%, 17% and 6%, in our biologics, extremity, hip and knee product lines, respectively. Our most significant growth drivers in 2002, were our biologics and extremities product
lines. During 2002, our 43% biologics sales growth was attributable primarily to the success of our ALLOMATRIX ® line of bone graft substitute products and the introduction of
our MIIG® 115 minimally invasive injectable graft system in the second quarter of 2002. Extremity sales growth of 21% in 2002 was primarily the result of sales volume growth in
our EVOLVE ® Modular Radial Head product and our foot and ankle products. Additionally, shifts to higher priced extremity product offerings contributed to the 2002 growth.
Cost of Sales. Our cost of sales as a percentage of net sales decreased 2 percentage points from 29.7% in 2001 to 27.7% in 2002. This decrease was primarily due to improved
margins resulting from moderate shifts in sales composition to higher margin product lines, such as biologics, and efficiency gains in our manufacturing process.
Operating Expenses. Our total operating expenses decreased, as a percentage of net sales, by 6.3 percentage points to 59.1% in 2002. Operating expenses include selling, general
and administrative expenses, research and development expenses, amortization of intangibles, stock-based expenses and for 2002, our $4.2 million arbitration settlement award.
The decrease from 2001 was primarily attributable to favorable selling, general and administrative expenses, reductions in the amortization of intangible assets, and the favorable
impact of the arbitration settlement award we received in 2002.
As a percentage of net sales, our selling, general and administrative expenses decreased by 2.1 percentage points to 53.2% in 2002. This decrease was primarily attributable to
favorable impacts of the resolution of a royalty matter of approximately $800,000 in the second quarter of 2002 and the resolution of a state business tax matter in the third quarter
of 2002. During 2002, commissions and sales and marketing expenses remained relatively constant as a percentage of net sales. Our 2001 selling, general and administrative
expenses were unfavorably impacted by a non-cash charge totaling approximately $1.6 million, principally related to unamortized loan costs following the repayment of our
euro-denominated senior credit facility.
Our non-cash charges associated with the amortization of intangible assets decreased as a percentage of sales by 1.1 percentage points in 2002. The decrease in amortization
expense was primarily the result of the cessation of amortization of goodwill as required by SFAS No. 142 which we implemented effective January 1, 2002.
During the first quarter of 2002, we received a favorable award totaling $4.2 million in a commercial arbitration proceeding with a former business services provider. The award
was recognized as operating income in the first quarter of 2002.
Interest Expense, Net. The significant decrease in our net interest expense from 2001 was the result of our use of the proceeds from our July 2001 IPO to repay our senior
subordinated notes and to reduce our outstanding bank borrowings. In addition, during the third quarter of 2001, we repaid amounts outstanding under our previous
euro-denominated senior credit facility and renegotiated the terms of our current senior credit facility. The renegotiation of our senior credit facility resulted in more favorable
terms with regards to the interest rate charged on borrowings under the senior credit facility. Net interest expense was favorably impacted in 2002 as we invested the proceeds of
our March 2002 secondary offering in interest-bearing, investment-grade securities resulting in the generation of additional interest income.
28
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
Provision for Income Taxes. Our effective tax rate for 2002 was 7% as compared to an effective tax rate of approximately 2350% for 2001. For 2002, our effective tax rate was
favorably impacted by our reduction of the valuation allowance against our deferred tax assets which resulted in the recognition of a non-cash benefit to the income tax provision
of $8.1 million. Our tax provisions in 2002 and 2001 resulted from taxes incurred related to earnings generated by certain of our international operations and changes to the
valuation allowance on foreign deferred tax assets. The differences between our effective tax rate and applicable statutory rates were primarily due to changes in the valuation
allowance related to our deferred tax assets and, in 2001, nondeductible goodwill.
Seasonality
Our business is seasonal in nature. Historically, demand for our products has been the highest in the first and fourth quarters. We traditionally experience lower sales volumes in
the third quarter months than throughout the rest of the year as a result of the European holiday schedule during the summer months.
In addition to the seasonality of our net sales, our first quarter selling, general and administrative expenses include additional expenses that we incur in connection with the annual
meeting held by the American Academy of Orthopaedic Surgeons. This meeting, which is the largest orthopaedic meeting in the world, features the presentation of scientific
papers and instructional courses for orthopaedic surgeons. During this 3-day event, we display our most recent and innovative products for these surgeons.
Liquidity and Capital Resources
(in thousands)
2003
2002
As of December 31,
Cash and cash equivalents
Working capital
Line of credit availability
$ 66,571
147,255
57,742
$ 51,373
127,557
57,642
Our cash and cash equivalents increased during 2003 by $15.2 million, compared to an increase of $48.6 million in 2002. Our 2003 increase in cash and cash equivalents and
working capital is primarily attributable to the generation of $40 million of cash from operating activities during 2003, partially offset by capital expenditures and the acquisition of
ADCON®-related assets. Our 2002 increase in cash and cash equivalents was primarily attributable to the $49.5 million of net proceeds from our March 2002 secondary offering,
as well as the generation of $22 million of cash in operating activities in 2002, partially offset by capital spending.
Operating Activities. Operating cash flows in 2003 benefited from the profitability of our business, as well as improved inventory management. These factors were partially offset
by a cash payment of $3.1 million for U.S. tax purposes related to alternative minimum tax. Operating cash flows for the year ended December 31, 2002 were favorably affected
by the receipt of a $4.2 million arbitration settlement award, and negatively affected by the payment of approximately $4.2 million of costs associated with certain international
distributorship transitions. Additionally, we made significant investments in new product inventory in 2002 which negatively impacted 2002 operating cash flows as compared to
2003. Cash generated from operating activities totaled approximately $800,000 in 2001.
Investing Activities. Our capital expenditures totaled approximately $18.1 million in 2003, $18.0 million in 2002, and $16.8 million in 2001. Our industry is capital intensive,
particularly as it relates to surgical instrumentation. Historically, our capital expenditures have consisted of purchased manufacturing equipment, research and testing equipment,
computer systems, office furniture and equipment, and surgical instruments. We expect to incur capital expenditures of approximately $24 million in total for 2004, approximately
$2 million of which we anticipate will be used in the continued implementation of our enterprise computer system and $22 million of which we anticipate will be used for routine
recurring capital expenditures, including surgical instruments.
In 2003, in addition to our routine capital expenditures, we paid $7.8 million to complete the purchase of in-process research and development, tangible assets, and intangible
assets from Gliatech, which were primarily related to the
29
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
ADCON® Gel technology. We are continuously evaluating opportunities to purchase technology and other forms of intellectual property, and are therefore unable to predict the
timing of future purchases.
Financing Activities. During 2003, we made $4 million in payments related to borrowings under our senior credit facility. Additionally, we made approximately $1.8 million in
payments related to our long term capital leases. Also in 2003, our operating subsidiary in Italy entered in to a new agreement to factor portions of its accounts receivable balances.
The cash proceeds received from this factoring agreement are reflected as cash flows from financing activities in our consolidated statements of cash flow. We recorded an
obligation for the amount of the proceeds received under this agreement as of December 31, 2003. This obligation is included within our “Accrued Expenses and Other Current
Liabilities” in our consolidated balance sheet. The net proceeds received under the agreement in 2003 totaled approximately $4.7 million.
In 2004, we anticipate our debt payments to increase to $4.5 million based on the terms of our senior credit facility. Additionally, we will make continued payments under our
long-term capital leases, including interest, of approximately $2 million. We anticipate that our factoring program in Italy will continue; however, the level and extent of the
amounts factored under the agreement and the ultimate amount of proceeds received under the program cannot be predicted. Therefore, we are unable to predict the ultimate
amount of proceeds that will be received in 2004 related to this factoring agreement.
Contractual Cash Obligations. At December 31, 2003 we had contractual cash obligations and commercial commitments as follows:
Amounts reflected in balance sheet:
Long-term debt
Capital lease obligations(1)
Amounts not reflected in balance sheet:
Operating leases
Purchase obligations
Royalty and consulting agreements
Payments Due by Periods
Total
2004
2005 - 2006
2007 - 2008
$13,250
5,023
9,843
5,394
5,834
$ 4,500
2,033
4,613
5,394
5,414
$ 8,750
2,114
4,769
—
420
$ —
728
443
—
—
After
2008
$ —
148
18
—
—
Total contractual cash obligations
$39,344
$21,954
$16,053
$1,171
$ 166
(1) Payments include amounts representing interest
Our senior credit facility, which we entered into on August 1, 2001, has a five-year term and consists of $20 million in term loans and a revolving loan facility of up to $60 million.
Borrowings under the senior credit facility are guaranteed by all of our subsidiaries and collateralized by all of the assets of Wright Medical Technology, Inc., our wholly-owned
subsidiary, and our other domestic subsidiaries. The credit facility contains customary covenants including, among other things, restrictions on our ability to pay cash dividends,
prepay debt, incur additional debt and sell assets. The credit facility also requires us to meet certain financial tests, including a consolidated leverage (or debt-to-equity) ratio test
and a consolidated fixed charge coverage ratio test. In the event that we violate these covenants, we would be required to repay the remaining balance of the debt. Additionally, we
would incur a charge to operating income for unamortized financing costs. At our option, borrowings under the credit facility bear interest either at a rate equal to a fixed base rate
plus a spread of .75% to 1.25% or at a rate equal to an adjusted LIBOR plus a spread of 1.75% to 2.25%, depending on our consolidated leverage ratio.
The amounts reflected in the table above for capital lease obligations represent future minimum lease payments under our capital lease agreements which are primarily for certain
property and equipment. The present value of the minimum lease payments are recorded in our balance sheet at December 31, 2003. The minimum lease payments related to these
leases are discussed further in Note 9 to the consolidated financial statements contained in Item 8 of this report.
30
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
The amounts reflected in the table above for operating leases represent future minimum lease payments under noncancellable operating leases primarily for certain office space,
computers and vehicles. Portions of these payments are denominated in foreign currencies and were translated in the tables above based on their respective U.S. dollar exchange
rates at December 31, 2003. These future payments are subject to foreign currency exchange rate risk. In accordance with accounting principles generally accepted in the U.S., our
operating leases are not recognized in our consolidated balance sheet; however, the minimum lease payments related to these agreements are disclosed in Note 15 to the
consolidated financial statements contained in Item 8 of this report, as well as in the table above.
Our purchase obligations consist of minimum purchase obligations related to certain supply agreements. The royalty and consulting agreements in the above table represent
minimum payments to consultants that are contingent upon future services. Portions of these payments are denominated in foreign currencies and were translated in the tables
above based on their respective U.S. dollar exchange rates at December 31, 2003. These future payments are subject to foreign currency exchange rate risk.
In addition to the contractual cash obligations discussed above, all of our domestic sales and a portion of our international sales are subject to commissions and a substantial
portion of our global sales are subject to other royalties. Further, under our factoring agreement in Italy, the cash proceeds received of $4.0 million may be subject to repayment
upon 15 days notice. None of these amounts are included in the table above.
Other Liquidity Information. We have funded our cash needs since 2000 through various equity and debt issuances and through cash flow from operations.
On July 18, 2001, we completed our IPO issuing 7,500,000 shares of voting common stock at $12.50 per share, the net proceeds of which were $84.8 million after deducting
underwriting discounts and offering expenses. We used the net proceeds of our IPO to repay debt, which at the time consisted of amounts outstanding under our euro-denominated
senior credit facility, amounts outstanding under a dollar-denominated senior credit facility, and subordinated notes plus accrued interest. Simultaneous with the closing of the IPO,
all of our outstanding mandatorily redeemable, convertible preferred stock, plus accrued dividends, was converted into 19,602,799 shares of common stock. Also in connection
with the IPO, senior subordinated notes totaling approximately $13.1 million aggregate principal amount, which were held by Warburg, were converted into 1,125,000 shares of
non-voting common stock.
On March 6, 2002, we, along with certain selling stockholders, completed a secondary offering of 6,900,000 shares, including the over-allotment option of 900,000 shares, of
voting common stock at $15.40 per share. Of these 6,900,000 shares, we offered 3,450,000, resulting in net proceeds of $49.5 million, after the underwriting discount and other
public offering expenses, which were invested in short-term, investment-grade securities.
Although it is difficult for us to predict future liquidity requirements, we believe that our current cash balance of approximately $66.6 million, our existing available credit line of
approximately $57.7 million, and our expected cash flows from our operating activities, which, in 2003 totaled approximately $40 million, will be sufficient for the foreseeable
future to fund our working capital requirements and operations, permit anticipated capital expenditures in 2004 of approximately $24 million, to meet our contractual cash
obligations in 2004 of approximately $22 million and to meet an anticipated increase in our estimated income tax payments.
Critical Accounting Policies and Estimates
All of our significant accounting policies are described in Note 2 to our consolidated financial statements. However, certain of our more critical accounting policies require the
application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an
inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, our observance of trends in the industry, information provided
by our customers, and information available from other outside sources, as appropriate. Different, reasonable estimates could have been used in the current period. Additionally,
changes in accounting estimates are reasonably likely to occur from period to period. Both of these factors could have a material impact on the presentation of our financial
condition, changes
31
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
in financial condition or results of operations. We believe that the following financial estimates are both important to the portrayal of our financial condition and results of
operations and require subjective or complex judgments. Further, we believe that the items discussed below are properly recorded in the financial statements for all periods
presented. Management has discussed the development, selection, and disclosure of our most critical financial estimates with the audit committee and our independent auditors.
The judgments about those financial estimates are based on information available as of the date of the financial statements. Those financial estimates include:
Allowances for doubtful accounts. We make estimates related to the ultimate collection of our accounts receivable. Specifically, we analyze our accounts receivable, historical bad
debt experience, customer concentrations, customer credit-worthiness, and current economic trends, when evaluating the adequacy of our allowance for doubtful accounts. Our
provision for uncollectible accounts receivable has been less than 1% of net sales for each of the years ended December 31, 2003, 2002 and 2001, respectively.
Our accounts receivable balance was $55.8 million and $39.6 million, net of allowances for doubtful accounts of $1.5 million, at both December 31, 2003 and 2002.
Excess and obsolete inventories. We value our inventory at the lower of the actual cost to purchase and/or manufacture the inventory or its net realizable value. We regularly
review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and production
requirements for the next twenty-four months. A significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. Additionally, our
industry is characterized by regular new product development that could result in an increase in the amount of obsolete inventory quantities on hand due to cannibalization of
existing products. Also, our estimates of future product demand may prove to be inaccurate, in which case we may be required to increase the provision needed for excess and
obsolete inventory. In the future, if additional inventory write-downs are required, we would recognize additional cost of goods sold at the time of such determination. Regardless
of changes in our estimates of future product demand, we do not increase the value of our inventory above its adjusted cost basis. Therefore, although we make every effort to
ensure the accuracy of our forecasts of future product demand, significant unanticipated decreases in demand or technological developments could have a significant impact on the
value of our inventory and our reported operating results.
Our provision for excess and obsolete inventory was $2.6 million, $2.8 million and $2.9 million, for the years ended December 31, 2003, 2002 and 2001, respectively.
Product liability claims. From time to time, claims arise involving the use of our products. We make provisions for claims specifically identified for which we believe the
likelihood of an unfavorable outcome is probable and estimable. We have recorded at least the minimum estimated liability related to those claims where a range of loss has been
established. Because of the uncertainties related to the likelihood and amount of loss on any other remaining pending claims, we are unable to make a reasonable estimate of the
liability that could result from an unfavorable outcome of those claims. As additional information becomes available, we reassess the estimated liability related to our pending
claims and make revisions as necessary. Future revisions in our estimates of the liability could materially impact our results of operation and financial position. We maintain
insurance coverage that limits the severity of any single claim as well as total amounts incurred per policy year, and we believe our insurance coverage is adequate. We make every
effort to use the best information available to us in determining the level of accrued product liabilities and we believe our accruals are adequate. For each of the years ended
December 31, 2003, 2002 and 2001, operating expenses were not materially affected by our estimates of product liability claims. Our accrual for product liability claims was
approximately $750,000 at December 31, 2003 and 2002.
Accounting for income taxes. As part of the process of preparing our consolidated financial statements we are required to determine our income taxes in each of the jurisdictions in
which we operate. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from differing recognition of items for
income tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess
the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we must establish a valuation
allowance. To the extent we establish a valuation allowance or increase this
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allowance in a period, we must reflect this increase as an expense within the tax provision in the statement of operations.
Management’s judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net
deferred tax assets. We have recorded a valuation allowance of $16.0 million and $13.5 million as of December 31, 2003 and 2002, respectively, due to uncertainties related to our
ability to utilize, before expiration, some of our deferred tax assets for both U.S. and foreign income tax purposes, primarily consisting of the carry forward of certain net operating
losses and general business tax credits. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our
deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to increase or
decrease our valuation allowance which could materially impact our financial position and results of operations.
The increase in the valuation allowance during 2003 is based on our current projection of the amount of deferred tax assets that are more likely than not to be realized in the future
based on operating results in recent years and our forecast of future operations. During 2003, certain deferred assets were created as a result of certain tax planning initiatives.
There are certain annual limitations related to the use of these assets. We do not currently believe that it is more likely than not that a portion of these assets will be utilized as a
result of these limitations, and therefore, we increased our valuation allowance by $1.2 million.
The decrease in the valuation allowance during 2002 was based on our projection of the amount of deferred tax assets that were more likely than not to be realized in the future
based on our operating results in recent years, our forecast of future operations, and our reduced debt burden following our IPO. Because a significant amount of our valuation
allowance was recorded during our recapitalization, the subsequent decrease in this portion of the valuation allowance first reduced goodwill and then other intangible assets. The
reduction in the valuation allowance recorded subsequent to the recapitalization reduced our income tax provision. As a result, for the year ended December 31, 2002, our
provision for income tax was reduced by $8.1 million, resulting in higher net income by this amount.
Management will continue to monitor the realizability of its deferred tax assets and adjust the valuation allowance accordingly. As of December 31, 2003, we had net deferred tax
assets totaling $27.6 million. As of December 31, 2002, we had net deferred tax assets totaling $30.7 million.
Factors Affecting Future Operating Results
In addition to the factors described above in this discussion and analysis, our future financial results could vary from period to period due to a variety of causes, including the
following factors:
We are subject to substantial government regulation that could have a material adverse effect on our business
The production and marketing of our products and our ongoing research and development, preclinical testing and clinical trial activities are subject to extensive regulation and
review by numerous governmental authorities both in the U.S. and abroad. See “Government Regulation” in Item 1 of this Form 10-K for further details on this process. U.S. and
foreign regulations govern the testing, marketing and registration of new medical devices, in addition to regulating manufacturing practices, reporting, labeling and record keeping
procedures. The regulatory process requires significant time, effort and expenditures to bring our products to market, and we cannot be assured that any of our products will be
approved. Our failure to comply with applicable regulatory requirements could result in these government authorities:
•
•
•
imposing fines and penalties on us;
preventing us from manufacturing or selling our products;
bringing civil or criminal charges against us;
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•
•
•
delaying the introduction of our new products into the market;
recalling or seizing our products; or
withdrawing or denying approvals or clearances for our products.
Even if regulatory approval or clearance of a product is granted, this could result in limitations on uses for which the product may be labeled and promoted. Further, for a marketed
product, its manufacturer and manufacturing facilities are subject to periodic review and inspection. Subsequent discovery of problems with a product, manufacturer or facility may
result in restrictions on the product, manufacturer or facility, including withdrawal of the product from the market or other enforcement actions.
We are currently conducting clinical studies of some of our products under an investigational device exemption (“IDE”). Clinical studies must be conducted in compliance with
FDA regulations, or the FDA may take enforcement action. The data collected from these clinical investigations will ultimately be used to support market clearance for these
products. There is no assurance that the FDA will accept the data from these clinical studies or that it will ultimately allow market clearance for these products.
Our biologics business is subject to emerging government regulations that can significantly impact our business
The FDA has statutory authority to regulate allograft-based products, processing and materials. The FDA has been working to establish a more comprehensive regulatory
framework for allograft-based products, which are principally derived from cadaveric tissue. The framework developed by the FDA establishes criteria for determining whether a
particular human tissue-based product will be classified as human tissue, a medical device or biologic drug requiring premarket clearance or approval. All tissue-based products are
subject to extensive FDA regulation, including a requirement that ensures that diseases are not transmitted to tissue recipients. The FDA has also proposed extensive additional
regulations that would govern the processing and distribution of all allograft products. Consent to use the donor’s tissue must also be obtained. The regulations for allograft-based
products are still developing. From time to time, the FDA reviews these products and may informally suggest to us how these products should be classified. If a tissue-based
product is considered tissue, it does not require FDA clearance or approval before being marketed. If it is considered a device or biologic drug, then FDA clearance or approval
may be required.
Additionally, our biologics business involves the procurement and transplantation of allograft tissue, which is subject to federal regulation under the National Organ Transplant
Act, or NOTA. NOTA is a criminal statute that prohibits the sale of human organs for valuable consideration within the meaning of the act, including bone and other tissue. NOTA
permits the payment of reasonable expenses associated with the transportation, processing, preservation, quality control and storage of human tissue. We currently charge our
customers for these expenses. In the future, if NOTA is amended or reinterpreted we may not be able to charge these expenses to our customers and, as a result, our business could
be adversely affected.
Our principal allograft-based biologics offerings include ALLOMATRIX ®, GRAFTJACKET®, and IGNITE® products.
We are currently pursuing FDA clearance of our ALLOMATRIX ® products
On April 11, 2001, the FDA sent us a “warning letter” stating that the FDA believed that ALLOMATRIX ® Injectable Putty was a medical device subject to premarket clearance. In
March 2002, the FDA officially notified us that it concluded that ALLOMATRIX ® Injectable Putty should be reviewed and regulated under the medical device premarket
notification provisions of the FDC Act. Also, in March 2002, the FDA notified all other known manufacturers of similar products of requirements for bringing such products into
compliance with the FDC Act. The FDA indicated that it would exercise enforcement discretion for a reasonable period of time while companies bring their devices into
compliance with the FDC Act. In response to the FDA determination, we promptly filed a premarket notification for ALLOMATRIX ® Injectable Putty under Section 510(k) of the
FDC Act. On April 24, 2002, the FDA notified us that the submission of our premarket notification for ALLOMATRIX ® Injectable Putty
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was an adequate response to the “warning letter” and that the FDA considered the issues raised in the April 11, 2001 letter closed. Our premarket notification submission is still
pending with the FDA. Our ALLOMATRIX ® line of products continue to be marketed and sold pending the approval of the premarket notification submission. The FDA has not
raised any objection to the continued marketing and sale of our ALLOMATRIX ® line of products pending the approval of the premarket notification submission. There can be no
assurance that the 510(k) premarket notification will be cleared by the FDA in a timely manner or at all. The FDA could decide not to continue to exercise its enforcement
discretion and decide to take enforcement action which could include, but not be limited to, seizing product inventory, obtaining a court injunction against further marketing of the
product, or assessing civil money penalties. Additionally, until such time that our initial 510(k) is approved, we are unable to market any new ALLOMATRIX ® product offerings.
For the years ended December 31, 2003 and 2002, our ALLOMATRIX ® products represented approximately 9% and 12% of our total net sales, respectively.
Modifications to our marketed devices may require FDA regulatory clearances or approvals or require us to cease marketing or recall the modified devices until such
clearances or approvals are obtained
When required, the products we market in the U.S. have obtained premarket notification under Section 510(k) or were exempt from the 510(k) clearance process. We have
modified some of our products and product labeling since obtaining 510(k) clearance but we do not believe these modifications require us to submit new 510(k) notifications.
However, if the FDA disagrees with us and requires us to submit a new 510(k) notification for modifications to our existing products, we may be the subject of enforcement
actions by the FDA and be required to stop marketing the products while the FDA reviews the 510(k) notification. If the FDA requires us to go through a lengthier, more rigorous
examination than we had expected, our product introductions or modifications could be delayed or canceled, which could cause our sales to decline. In addition, the FDA may
determine that future products will require the more costly, lengthy and uncertain PMA application process. Products that are approved through a PMA application generally need
FDA approval before they can be modified. See “Government Regulation” in Item 1 of this Form 10-K.
If we lose one of our key suppliers, we may be unable to meet customer orders for our products in a timely manner or within our budget
We rely on a limited number of suppliers for the components used in our products. Our reconstructive joint devices are produced from various surgical grades of titanium, cobalt
chrome and stainless steel, various grades of high-density polyethylenes, silicone elastomer and ceramics. We rely on one supplier for the silicone elastomer used in our extremity
products. We are aware of only two suppliers of silicone elastomer to the medical device industry for permanent implant usage. Additionally, we rely on one supplier of ceramics
for use in our hip products.
In addition to reconstructive joint devices, for our biologics products, we depend heavily upon a limited number of sources of demineralized bone matrix (DBM) and cancellous
bone matrix (CBM), and any failure to obtain DBM/CBM from these sources in a timely manner will interfere with our ability to process and distribute allograft products. Two
not-for-profit tissue banks supplied us with 100% of the DBM/CBM, a key component in the allograft products we currently produce, market and distribute, that we obtained in the
U.S. in 2003. We cannot be sure that our supply of DBM/CBM will continue to be available at current levels or will be sufficient to meet our needs, or that our suppliers of
DBM/CBM will be free from FDA regulatory action impacting their sale of DBM/CBM. Since there is a small number of suppliers, if we cannot continue to obtain DBM/CBM
from these sources in volume sufficient to meet our needs, we may not be able to locate replacement sources of DBM/CBM on commercially reasonable terms, if at all. This could
have the effect of interrupting our business, which could adversely affect our sales. Further, we rely on one supplier for our GRAFTJACKET ® family of soft tissue repair and graft
containment products, as well as one supplier for our ADCON® Gel family of products.
Suppliers of raw materials and components may decide, or be required, for reasons beyond our control to cease supplying raw materials and components to us. FDA regulations
may require additional testing of any raw materials or components from new suppliers prior to our use of these materials or components and in the case of a device with a PMA
application, we may be required to obtain prior FDA permission, either of which could delay or prevent our access or use of such raw materials or components.
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If we fail to compete successfully in the future against our existing or potential competitors, our sales and operating results may be negatively affected and we may not achieve
future growth
The markets for our products are highly competitive and dominated by a small number of large companies. We may not be able to meet the prices offered by our competitors, or
offer products similar to or more desirable than those offered by our competitors. See “Competition” in Item 1 of this Form 10-K for more information about our competitors.
If we are unable to continue to develop and market new products and technologies, we may experience a decrease in demand for our products or our products could become
obsolete, and our business would suffer
We are continually engaged in product development and improvement programs, and new products represent a significant component of our growth rate. We may be unable to
compete effectively with our competitors unless we can keep up with existing or new products and technologies in the orthopaedic implant market. If we do not continue to
introduce new products and technologies, or if those products and technologies are not accepted, we may not be successful. Additionally, our competitors’ new products and
technologies may beat our products to market, may be more effective or less expensive than our products or render our products obsolete. See “Competition” in Item 1 of this
Form 10-K for more information about our competitors.
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
We rely on patents, trade secrets, copyrights, know-how, trademarks, license agreements and contractual provisions to establish our intellectual property rights and protect our
products. These legal means, however, afford only limited protection and may not adequately protect our rights. In addition, we cannot be assured that any of our pending patent
applications will issue. The United States Patent and Trademark Office (the “PTO”) may deny or require significant narrowing of claims in our pending patent applications, and
patents issuing from the pending patent applications, if any, may not provide us with significant commercial protection. We could incur substantial costs in proceedings before the
PTO. These proceedings could result in adverse decisions as to the priority of our inventions and the narrowing or invalidation of claims in issued patents. In addition, the laws of
some of the countries in which our products are or may be sold may not protect our products and intellectual property to the same extent as U.S. laws, or at all. We may be unable
to protect our rights in trade secrets and unpatented proprietary technology in these countries.
In addition, we hold licenses from third parties that are necessary to utilize certain technologies used in the design and manufacturing of some of our products. The loss of such
licenses would prevent us from manufacturing, marketing and selling these products, which could harm our business.
We seek to protect our trade secrets, know-how and other unpatented proprietary technology, in part, with confidentiality agreements with our employees, independent distributors
and consultants. We cannot be assured, however, that the agreements will not be breached, that adequate remedies for any breach would be available, or that our trade secrets,
know-how, and other unpatented proprietary technology will not otherwise become known to or independently developed by our competitors.
If we lose any existing or future intellectual property lawsuits, a court could require us to pay significant damages or prevent us from selling our products
The medical device industry is litigious with respect to patents and other intellectual property rights. Companies in the medical device industry have used intellectual property
litigation to gain a competitive advantage. We are currently involved in an intellectual property lawsuit with Howmedica Osteonics Corp., a subsidiary of Stryker Corporation,
where it is alleged that our ADVANCE ® Knee product line infringes one of Howmedica’s patents. See “Legal Proceedings” in Item 3 of this Form 10-K for more specific
information regarding this lawsuit. If Howmedica Osteonics Corp. were to succeed in obtaining the relief it claims, the Court could award damages to Howmedica Osteonics Corp.,
and could impose an injunction against further sales of this product. If a final judgment is rendered against us, we may be forced to raise or borrow funds, as a supplement to any
available insurance claim proceeds, to pay the damages award.
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In the future, we may become a party to other lawsuits involving patents or other intellectual property. A legal proceeding, regardless of the outcome, could drain our financial
resources and divert the time and effort of our management. If we lose one of these proceedings, a court, or a similar foreign governing body, could require us to pay significant
damages to third parties, require us to seek licenses from third parties and pay ongoing royalties, require us to redesign our products or prevent us from manufacturing, using or
selling our products. In addition to being costly, protracted litigation to defend or prosecute our intellectual property rights could result in our customers or potential customers
deferring or limiting their purchase or use of the affected products until resolution of the litigation.
If product liability lawsuits are brought against us, our business may be harmed
The manufacture and sale of medical devices exposes us to significant risk of product liability claims. In the past, we have had a number of product liability claims relating to our
products, none of which either individually, or in the aggregate, have resulted in a material negative impact on our business. In the future, we may be subject to additional product
liability claims, some of which may have a negative impact on our business. Additionally, we could experience a material design or manufacturing failure in our products, a quality
system failure, other safety issues, or heightened regulatory scrutiny that would warrant a recall of some of our products. Our existing product liability insurance coverage may be
inadequate to protect us from any liabilities we might incur. If a product liability claim or series of claims is brought against us for uninsured liabilities or in excess of our
insurance coverage, our business could suffer. In addition, a recall of some of our products, whether or not the result of a product liability claim, could result in significant costs
and loss of customers.
If we cannot retain our key personnel, we will not be able to manage and operate successfully and we may not be able to meet our strategic objectives
Our continued success depends, in part, upon key managerial, scientific, sales and technical personnel, as well as our ability to continue to attract and retain additional highly
qualified personnel. We compete for such personnel with other companies, academic institutions, government entities and other organizations. There can be no assurance that we
will be successful in retaining our current personnel or in hiring or retaining qualified personnel in the future.
Many of our existing management personnel have been employed by the Company for five years or less, including our President and Chief Executive Officer, who joined us in
January 2000, and our Executive Vice President and Chief Financial Officer, who joined us in December 2000. Our future success depends to a significant extent on the ability of
our executive officers and other members of our management team to operate effectively, both individually and as a group. We cannot be certain that we will be able to
satisfactorily allocate responsibilities and that the new members of our executive team will succeed in their roles. Loss of key personnel or the inability to hire or retain qualified
personnel in the future could have a material adverse effect on our ability to operate successfully.
We derive a significant portion of our sales from operations in international markets that are subject to political, economic and social instability
We derive a significant portion of our sales from operations in international markets. Our international distribution system consists of 7 direct sales offices and approximately 45
stocking distribution partners, which combined, employ approximately 300 sales representatives who sell in over 50 countries. Most of these countries are, to some degree, subject
to political, social and/or economic instability. For both of the years ended December 31, 2003 and 2002, approximately 39% of our net sales were derived from our international
operations. Our international sales operations expose us and our representatives, agents and distributors to risks inherent in operating in foreign jurisdictions. These risks include:
•
the imposition of additional foreign governmental controls or regulations on orthopaedic implants and biologics products;
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•
•
•
•
•
•
•
•
•
new export license requirements particularly related to our biologics products;
economic instability, including currency risk between the U.S. dollar and foreign currencies, in our target markets;
a shortage of high-quality international salespeople and distributors;
loss of any key personnel that possess proprietary knowledge, or who are otherwise important to our success in certain international markets;
changes in third-party reimbursement policy that may require some of the patients who receive our implant products to directly absorb medical costs or that may necessitate
our reducing selling prices for our products;
changes in tariffs and other trade restrictions, particularly related to the exportation of our biologics products;
work stoppages or strikes in the health care industry, such as those that have previously affected our operations in France, Canada, Korea and Finland in the past;
a shortage of nurses in some of our target markets, particularly affecting our operations in France; and
exposure to different legal and political standards due to our conducting business in over 50 countries.
Accordingly, any material decrease in our foreign sales would negatively impact our profitability. Our international sales are predominately generated in Europe. In Europe, health
care regulation and reimbursement for medical devices vary significantly from country to country. This changing environment could adversely affect our ability to sell our
products in some European countries.
Our business could suffer if the medical community does not continue to accept allograft technology
New allograft products, technologies and enhancements may never achieve broad market acceptance due to numerous factors, including:
•
•
•
•
•
•
lack of clinical acceptance of allograft products and related technologies;
the introduction of competitive tissue repair treatment options that render allograft products and technologies too expensive and obsolete;
lack of available third-party reimbursement;
the inability to train surgeons in the use of allograft products and technologies;
the risk of disease transmission; and
ethical concerns about the commercial aspects of harvesting cadaveric tissue.
Market acceptance will also depend on the ability to demonstrate that existing and new allografts and technologies are attractive alternatives to existing tissue repair treatment
options. To demonstrate this, we rely upon surgeon evaluations of the clinical safety, efficacy, ease of use, reliability and cost effectiveness of our tissue repair options and
technologies. Recommendations and endorsements by influential surgeons are important to the commercial success of allograft products and technologies. In addition, several
countries, notably Japan, prohibit the use of allografts. If allograft products and technologies are not broadly accepted in the marketplace, we may not achieve a competitive
position in the market.
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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
In the U.S., health care providers that purchase our products generally rely on third-party payors, principally federal Medicare, state Medicaid and private health insurance plans, to
pay for all or a portion of the cost of joint reconstructive procedures and products utilized in those procedures. We may be unable to sell our products on a profitable basis if
third-party payors deny coverage or reduce their current levels of reimbursement. Our sales depend largely on government health care programs and private health insurers
reimbursing patients’ medical expenses. Surgeons, hospitals and other health care providers may not purchase our products if they do not receive satisfactory reimbursement from
these third-party payors for the cost of the procedures using our products. Payors continue to review their coverage policies carefully for existing and new therapies and can,
without notice, deny coverage for treatments that include the use of our products.
In addition, some health care providers in the U.S. have adopted or are considering a managed care system in which the providers contract to provide comprehensive heath care for
a fixed cost per person. Health care providers may attempt to control costs by authorizing fewer elective surgical procedures, including joint reconstructive surgeries, or by
requiring the use of the least expensive implant available.
If adequate levels of reimbursement from third-party payors outside of the U.S. are not obtained, international sales of our products may decline. Outside of the U.S.,
reimbursement systems vary significantly by country. Many foreign markets have government-managed health care systems that govern reimbursement for new devices and
procedures. Canada, and some European and Asian countries, in particular France, Taiwan, and Korea, have tightened reimbursement rates. Additionally, some foreign
reimbursement systems provide for limited payments in a given period and therefore result in extended payment periods. See “Third-Party Reimbursement” in Item 1 of this
Form 10-K for more information regarding reimbursement in the U.S. and abroad.
We will continue efforts to obtain market clearance for the re-launch of the ADCON ® Gel products and the launch of the CONSERVE® Plus implant in the U.S.
There can be no assurance that the sale of the ADCON® Gel products in the U.S. will be cleared by the FDA in a timely manner, or at all, which could have a significant impact on
the future growth of our biologics product line.
Our CONSERVE ® Plus Resurfacing Implant is available outside the U.S. and is pending FDA clearance for the U.S. market. There can be no assurance that the sale of our
CONSERVE ® Plus product in the U.S. will be cleared by the FDA in a timely manner, or at all, which could have a significant impact on the future growth of our hip product line.
If surgeons do not recommend and endorse our products, our sales may decline or we may be unable to increase our sales and profits
In order for us to sell our products, surgeons must recommend and endorse them. We may not obtain the necessary recommendations or endorsements from surgeons. Acceptance
of our products depends on educating the medical community as to the distinctive characteristics, perceived benefits, clinical efficacy and cost-effectiveness of our products
compared to products of our competitors, and on training surgeons in the proper application of our products.
If a natural or man-made disaster strikes our manufacturing facilities, we will be unable to manufacture our products for a substantial amount of time and our sales will
decline
We have relied to date principally on our manufacturing facilities in Arlington, Tennessee and Toulon, France. These facilities and the manufacturing equipment we use to produce
our products would be difficult to replace and could require substantial lead-time to repair or replace. Our facilities may be affected by natural or man-made disasters. In the event
one of our facilities was affected by a disaster, we would be forced to rely on third-party manufacturers or shift production to our other manufacturing facility. Although we believe
we possess adequate insurance for damage to our property and the disruption of our business from casualties, such insurance may not be
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sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all.
Our business plan relies on certain assumptions about the market for our products, which, if incorrect, may adversely affect our profitability
We believe that the aging of the general population and increasingly active lifestyles will continue and that these trends will increase the need for our orthopaedic implant products.
The projected demand for our products could materially differ from actual demand if our assumptions regarding these trends and acceptance of our products by the medical
community prove to be incorrect or do not materialize, or if non-surgical treatments gain more widespread acceptance as a viable alternative to orthopaedic implants.
Fluctuations in foreign currency exchange rates could result in declines in our reported sales and earnings
Since a majority of our international sales are denominated in local currencies and not in U.S. dollars, our reported sales and earnings are subject to fluctuations in foreign
exchange rates. Our international net sales were favorably affected by the impact of foreign currency fluctuations totaling $11.9 million in 2003 and $2.3 million in 2002. At
present, we do not engage in hedging transactions to protect against uncertainty in future exchange rates between particular foreign currencies and U.S. dollars.
Efforts to acquire and integrate other companies or product lines could adversely affect our operations and financial results
We may pursue acquisitions of other companies or product lines. Our ability to grow through acquisitions depends upon our ability to identify, negotiate, complete and integrate
suitable acquisitions and to obtain any necessary financing. Even if we complete acquisitions, we may also experience:
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difficulties in integrating any acquired companies, personnel and products into our existing business;
delays in realizing the benefits of the acquired company or products;
diversion of our management’s time and attention from other business concerns;
limited or no direct prior experience in new markets or countries we may enter;
higher costs of integration than we anticipated; or
difficulties in retaining key employees of the acquired business who are necessary to manage these acquisitions.
In addition, an acquisition could materially impair our operating results by causing us to incur debt or requiring us to amortize acquisition expenses and acquired assets.
Our quarterly operating results are subject to substantial fluctuations and you should not rely on them as an indication of our future results
Our quarterly operating results may vary significantly due to a combination of factors, many of which are beyond our control. These factors include:
•
•
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demand for products, which historically has been highest in the first and fourth quarters;
our ability to meet the demand for our products;
increased competition;
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the number, timing and significance of new products and product introductions and enhancements by us and 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 and our competitors;
changes in the treatment practices of our surgeon customers;
changes in distributor relationships and sales force composition;
the timing of material expense- or income-generating events and the related recognition of their associated financial impact;
the timing of significant orders and shipments;
availability of raw materials;
work stoppages or strikes in the health care industry;
changes in FDA regulatory policy; and
general economic factors.
We believe that quarterly sales and operating results may vary significantly in the future and that period-to-period comparisons of our results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance. We cannot assure you that our sales will increase or be sustained in future periods or that we will be
profitable in any future period. Any shortfalls in sales or earnings from levels expected by securities or industry analysts could have an immediate and significant adverse effect on
the trading price of our common stock in any given period.
We rely on our independent sales distributors and sales associates to market and sell our products
Our success depends largely upon marketing arrangements with independent sales distributors and sales associates, in particular their sales and service expertise and relationships
with the customers in the marketplace. Independent distributors and sales associates may terminate their relationship with us, or devote insufficient sales efforts to our products.
We do not control our independent distributors and they may not be successful in implementing our marketing plans. Our failure to maintain our existing relationship with our
independent distributors and sales associates could have an adverse effect on our operations. Similarly, our failure to recruit and retain additional skilled independent sales
distributors and sales associates could have an adverse effect on our operations. We have experienced turnover with some of our independent distributors in the past which
adversely affected short-term financial results while we transitioned to new independent distributors. While we believe these transitions have been managed effectively, similar
occurrences could happen in the future with different results which could have a greater adverse effect on our operations than we have previously experienced.
41
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
Our exposure to interest rate risk arises principally from the variable rates associated with our credit facility. On December 31, 2003, we had borrowings of $13.3 million under our
credit facility which are subject to a variable rate, with a current rate of 2.9%. The carrying value of these borrowings approximates fair value due to the variable rate. An adverse
change of 1.0% in the interest rate of all such borrowings outstanding would cause us to incur an increase in interest expense of approximately $133,000 on an annual basis. We
currently do not hedge our exposure to interest rate fluctuations, but may do so in the future.
Foreign Currency Rate Fluctuations
Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies could adversely affect our financial results. Approximately 33% and 31% of our total net sales
were denominated in foreign currencies during the years ended December 31, 2003 and 2002, respectively, and we expect that foreign currencies will continue to represent a
similarly significant percentage of our net sales in the future. Costs related to these sales are largely denominated in the same respective currencies, thereby limiting our transaction
risk exposures. However, for sales not denominated in U.S. dollars, if there is an increase in the rate at which a foreign currency is exchanged for U.S. dollars, it will require more
of the foreign currency to equal a specified amount of U.S. dollars than before the rate increase. In such cases, and if we price our products in the foreign currency, we will receive
less in U.S. dollars than we did before the rate increase went into effect. If we price our products in U.S. dollars and competitors price their products in local currency, an increase
in the relative strength of the U.S. dollar could result in our prices not being competitive in a market where business is transacted in the local currency.
A substantial majority of our sales denominated in foreign currencies are derived from European Union countries and are denominated in the euro. Additionally, we have
significant intercompany receivables from our foreign subsidiaries which are denominated in foreign currencies, principally the euro and the Japanese yen. Our principal exchange
rate risk therefore exists between the U.S. dollar and the euro and the U.S. dollar and the yen. Fluctuations from the beginning to the end of any given reporting period result in the
revaluation of our foreign currency-denominated intercompany receivables and payables, generating currency translation gains or losses that impact our non-operating
income/expense levels in the respective period. We do not currently hedge our exposure to foreign currency exchange rate fluctuations. We may, however, hedge such exposures in
the future. Based on our overall exposure for foreign currency at December 31, 2003, an adverse change of 10% in foreign currency rates would reduce our non-operating income
by approximately $675,000.
Product Liability Insurance Expense Fluctuations
Due to the nature of our industry, we incur significant product liability insurance premiums each year. In recent years, our industry has experienced significant increases in product
liability insurance premiums. In 2003, product liability insurance expense increased by $1.4 million to $3.3 million in comparison with 2002. If the costs of product liability
insurance increase significantly in the future, our future operating results could be adversely impacted. Based on our current levels of product liability insurance and the associated
premiums as of December 31, 2003, an adverse change of 10% in premium rates would reduce our operating income by approximately $365,000.
42
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
Item 8. Financial Statements and Supplementary Data.
Wright Medical Group, Inc.
Consolidated Financial Statements
for the Years Ended December 31, 2003, 2002 and 2001
Index to Financial Statements
INDEPENDENT AUDITORS’ REPORT
2001 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Stockholders’ Equity (Deficit), Comprehensive Income (Loss) and
Mandatorily Redeemable Convertible Preferred Stock
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
43
Page
44
45
46
47
48
49
52
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
The Board of Directors and Stockholders
Wright Medical Group, Inc.:
Independent Auditors’ Report
We have audited the accompanying consolidated balance sheets of Wright Medical Group, Inc. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated
statements of operations, changes in stockholders’ equity and comprehensive income, and cash flows for the years then ended. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The 2001 consolidated
financial statements of Wright Medical Group, Inc. were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial
statements, before the restatement described in Note 2 and the revision described in Note 6 to the financial statements, in their report dated February 22, 2002.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Wright Medical Group, Inc. and subsidiaries
as of December 31, 2003 and 2002, and the results of their operations and their cash flows for the years ended December 31, 2003 and 2002, in conformity with accounting
principles generally accepted in the United States of America.
As discussed above, the 2001 consolidated financial statements of Wright Medical Group, Inc. were audited by other auditors who have ceased operations. As described in Note 2,
these consolidated financial statements have been restated to conform to the presentation of losses from extinguishment of debt required by Statement of Financial Accounting
Standards (SFAS) No. 145, “Rescission of FASB Statements No. 4 and 64, Amendment of FASB No. 13, and Technical Corrections,” which was adopted by the Company on
January 1, 2003. We audited the adjustment described in Note 2 that was applied to restate the 2001 financial statements related to the adoption of SFAS No. 145. In our opinion,
such adjustment is appropriate and has been properly applied.
As described in Note 6, these financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142,
“Goodwill and Other Intangible Assets,” which was adopted by the Company as of January 1, 2002. In our opinion, the disclosures for 2001 in Note 6 related to the adoption of
SFAS 142 are appropriate.
We were not engaged to audit, review, or apply any procedures to the 2001 consolidated financial statements of Wright Medical Group, Inc. other than with respect to the
adjustment and disclosures referred to above and, accordingly, we do not express an opinion or any other form of assurance on the 2001 consolidated financial statements taken as
a whole.
(signed) KPMG LLP
Memphis, Tennessee
February 11, 2004
44
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
To the Stockholders of Wright Medical Group, Inc.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited the accompanying consolidated balance sheets of Wright Medical Group, Inc. and subsidiaries (a Delaware corporation, formerly known as Wright Acquisition
Holdings, Inc.) (the “Company”) as of December 31, 2000 and 2001 and the related consolidated statements of operations, cash flows and changes in stockholders’ equity (deficit),
comprehensive loss and mandatorily redeemable convertible preferred stock for the period from December 8, 1999 to December 31, 1999 and for the years ended December 31,
2000 and 2001. We have also audited the consolidated statements of operations, cash flows and changes in stockholders’ deficit, comprehensive loss and redeemable preferred
stock of Wright Medical Technology, Inc. and subsidiaries (a Delaware corporation, the “Predecessor Company”) for the period from January 1, 1999 to December 7, 1999. These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Wright Medical Group, Inc. and
subsidiaries as of December 31, 2000 and 2001 and the consolidated results of its operations and its cash flows for the period from December 8, 1999 to December 31, 1999 and
for the years ended December 31, 2000 and 2001 and the results of operations and cash flows of Wright Medical Technology, Inc. for the period from January 1, 1999 to
December 7, 1999, in conformity with accounting principles generally accepted in the United States.
As discussed in Note 2 to the consolidated financial statements, on December 8, 1999, the Company changed its method of accounting for surgical instruments.
Arthur Andersen LLP
Memphis, Tennessee
February 22, 2002
This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with Wright Medical Group, Inc.’s annual report on Form 10-K for the year
ended December 31, 2001. This audit report has not been reissued by Arthur Andersen LLP in connection with this annual report on Form 10-K. See Exhibit 23.2 for
further discussion. As described in Note 6, these consolidated financial statements have been revised to include the transitional disclosures required by Statement of
Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” which was adopted by the Company as of January 1, 2002. Additionally, as described
in Note 2, these consolidated financial statements have been revised to reclassify the loss on extinguishment of debt as required by Statement of Financial Accounting
Standards No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” which was adopted by the
Company as of January 1, 2003.
45
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
Wright Medical Group, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
Assets:
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories
Prepaid expenses
Deferred income taxes
Other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Intangible assets, net
Deferred income taxes
Other assets
Total assets
Liabilities and Stockholders’ Equity:
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Current portion of long-term obligations
Total current liabilities
Long-term obligations
Deferred income taxes
Other liabilities
Total liabilities
Commitments and contingencies (Note 15)
Stockholders’ equity:
Common stock, voting, $.01 par value, shares authorized - 70,000,000; shares
issued and outstanding – 33,040,747 in 2003, 32,712,374 in 2002
Additional paid-in capital
Deferred compensation
Accumulated other comprehensive income
Accumulated deficit
Total stockholders’ equity
December 31,
2003
2002
$ 66,571
55,821
64,204
5,046
15,591
3,291
210,524
66,915
11,248
18,646
13,398
1,372
$ 51,373
39,571
55,628
3,999
17,851
4,567
172,989
59,215
9,532
17,376
15,109
2,149
$322,103
$276,370
$ 14,227
42,814
6,228
63,269
11,096
1,203
8,217
83,785
330
263,455
(1,452)
15,675
(39,690)
$
9,878
29,878
5,676
45,432
16,586
2,243
7,110
71,371
327
260,640
(3,164)
4,283
(57,087)
238,318
204,999
$322,103
$276,370
The accompanying notes are an integral part of these consolidated financial statements.
46
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
Wright Medical Group, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Amortization of intangible assets
Stock-based expense
Acquired in-process research and development costs
Arbitration settlement award
Total operating expenses
Income from operations
Interest expense, net
Other (income) expense, net
Income before income taxes
Provision for income taxes
Net income (loss)
Net income (loss) per share (Note 8):
Net income (loss) applicable to common stockholders
Net income (loss) per common share, basic
Net income (loss) per common share, diluted
Weighted-average number of common shares outstanding – basic
Weighted-average number of common shares outstanding – diluted
Unaudited pro forma net income (loss) per share (Note 8):
Net income (loss) applicable to common stockholders
Net income (loss) per common share, basic
Net income (loss) per common share, diluted
Year Ended December 31,
2003
2002
2001
$248,932
67,815
$200,873
55,616
181,117
127,612
16,151
3,562
2,068
4,558
—
145,257
106,875
10,357
3,946
1,724
—
(4,200)
$172,921
51,351
121,570
95,556
10,108
5,349
1,996
—
—
153,951
118,702
113,009
27,166
1,107
(1,060)
27,119
9,722
26,555
938
(1,277)
26,894
1,834
8,561
7,809
685
67
1,574
$ 17,397
$ 25,060
$ (1,507)
$ 17,397
$ 25,060
$ (4,053)
$
$
0.53
0.50
32,857
34,561
$
$
0.79
0.75
31,870
33,550
$
$
(0.31)
(0.31)
13,195
13,195
$ 17,397
$ 25,060
$ (1,507)
$
$
0.53
0.50
$
$
0.79
0.75
$
$
(0.06)
(0.06)
Weighted-average number of common shares outstanding – pro forma
basic
32,857
31,870
23,544
Weighted-average number of common shares outstanding – pro forma
diluted
34,561
33,550
23,544
The accompanying notes are an integral part of these consolidated financial statements.
47
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
Wright Medical Group, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Operating activities:
Net income (loss)
Non-cash items included in net income (loss):
Depreciation
Amortization of deferred financing costs
Amortization of intangible assets
Deferred income taxes
Stock-based expenses
Acquired in-process research and development costs
Debt extinguishment
Other
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Other current assets
Accounts payable
Accrued expenses and other liabilities
Net cash provided by operating activities
Investing activities:
Capital expenditures
Purchase of tangible and intangible assets (Note 3)
Escrow release
Other
Net cash used in investing activities
Financing activities:
Issuance of common stock
Proceeds from bank and other financing
Payments of bank and other financing
Payments of senior subordinated notes
Issuance of preferred stock
Payment of deferred financing costs
Net cash provided by financing activities
Effect of exchange rates on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Year Ended December 31,
2003
2002
2001
$ 17,397
$ 25,060
$ (1,507)
13,948
261
3,562
4,565
2,068
4,558
—
275
(11,359)
(3,466)
(676)
3,153
5,779
40,065
(18,116)
(7,799)
—
71
(25,844)
1,678
4,680
(5,844)
—
—
—
514
463
15,198
51,373
13,553
261
3,946
946
1,724
—
—
900
(4,653)
(12,242)
(2,596)
509
(5,458)
21,950
(17,974)
(4,469)
—
13
10,096
522
5,349
1,047
1,996
—
1,589
(283)
(5,541)
(4,485)
(688)
964
(8,241)
818
(16,764)
(400)
1,208
398
(22,430)
(15,558)
52,347
—
(3,963)
—
—
—
48,384
699
48,603
2,770
85,279
21,854
(72,809)
(32,326)
158
(784)
1,372
(162)
(13,530)
16,300
Cash and cash equivalents, end of period
$ 66,571
$ 51,373
$ 2,770
The accompanying notes are an integral part of these consolidated financial statements.
48
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
Wright Medical Group, Inc.
Consolidated Statement of Changes in Stockholders’ Equity (Deficit), Comprehensive Loss and
Mandatorily Redeemable Convertible Preferred Stock
For the Year Ended December 31, 2001
(In thousands, except share data)
Series A, B and C
Mandatorily
Redeemable Convertible
Preferred Stock
Common Stock, Voting
Common Stock,
Non-voting
Number of
Shares
Amount
Number of
Shares
Amount
Number of
Shares
Amount
Balance at December 31, 2000
2001 Activity:
Net loss
Foreign currency translation
Total comprehensive loss
Issuance of common stock, net of costs
Series C preferred stock issuance
Preferred stock dividends
Conversion of preferred stock into
common stock
Conversion of senior subordinated notes
into common stock
Conversion of non-voting common stock
to voting common stock
Deferred stock-based compensation
Stock-based compensation
Balance at December 31, 2001
27,310,930
$ 91,254
47,599
$
1
—
—
—
114,997
—
—
—
—
181
—
—
—
7,770,729
—
—
—
—
78
—
—
—
—
—
—
—
—
(27,425,927)
(91,435)
13,604,455
136
5,998,344
—
—
—
—
—
—
—
—
—
—
$
—
—
1,125,000
1,834,749
—
—
18
—
—
(1,834,749)
—
—
$ —
—
—
—
—
—
60
11
(18)
—
—
23,257,532
$233
5,288,595
$ 53
[Additional columns below]
[Continued from above table, first column(s) repeated]
Balance at December 31, 2000
2001 Activity:
Net loss
Foreign currency translation
Total comprehensive loss
Issuance of common stock, net of costs
Series C preferred stock issuance
Preferred stock dividends
Conversion of preferred stock into common stock
Conversion of senior subordinated notes into common
stock
Conversion of non-voting common stock to voting
common stock
Deferred stock-based compensation
Stock-based compensation
Additional
Paid-in
Capital
$
4,769
—
—
85,999
362
—
98,418
14,051
—
3,598
—
Accumulated
Deficit
Deferred
Compensation
$(77,110)
(1,507)
—
—
—
(2,546)
—
(984)
—
—
—
$(2,834)
—
—
—
—
—
—
—
—
(3,598)
1,634
Accumulated
Other
Comprehensive
Income (Loss)
$(1,802)
—
(1,436)
—
—
—
—
—
—
—
—
Total
Stockholders’
(Deficit) Equity
$ (76,976)
(1,507)
(1,436)
(2,943)
86,077
362
(2,546)
98,614
13,078
—
—
1,634
Balance at December 31, 2001
$207,197
$(82,147)
$(4,798)
$(3,238)
$117,300
The accompanying notes are an integral part of these consolidated financial statements.
49
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
Wright Medical Group, Inc.
Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income (Loss)
For the Year Ended December 31, 2002
(In thousands, except share data)
Balance at December 31, 2001
2002 Activity:
Net income
Foreign currency translation
Total comprehensive income
Issuance of common stock, net of costs
Tax benefit of employee stock option exercises
Conversion of non-voting common stock to voting
common stock
Deferred stock-based compensation
Stock-based compensation
Common Stock, Voting
Common Stock,
Non-voting
Number of
Shares
23,257,532
—
—
4,166,247
—
5,288,595
—
—
Amount
Number of
Shares
Amount
Additional
Paid-in
Capital
$233
—
—
41
—
53
—
—
5,288,595
$ 53
$207,197
—
—
—
—
(5,288,595)
—
—
—
—
—
—
(53)
—
—
—
—
52,306
1,047
—
90
—
Balance at December 31, 2002
32,712,374
$327
—
—
$260,640
[Additional columns below]
[Continued from above table, first column(s) repeated]
Balance at December 31, 2001
2002 Activity:
Net income
Foreign currency translation
Total comprehensive income
Issuance of common stock, net of costs
Tax benefit of employee stock option exercises
Conversion of non-voting common stock to voting common
stock
Deferred stock-based compensation
Stock-based compensation
Accumulated
Deficit
Deferred
Compensation
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders’
Equity
$(82,147)
$(4,798)
$(3,238)
$117,300
25,060
—
—
—
—
—
—
—
—
—
—
—
(90)
1,724
—
7,521
—
—
—
—
—
25,060
7,521
32,581
52,347
1,047
—
—
1,724
Balance at December 31, 2002
$(57,087)
$(3,164)
$ 4,283
$204,999
The accompanying notes are an integral part of these consolidated financial statements.
50
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
Wright Medical Group, Inc.
Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income
For the Year Ended December 31, 2003
(In thousands, except share data)
Common Stock, Voting
Number of
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Deferred
Compensation
Comprehensive
Income
Total
Stockholders’
Equity
Balance at December 31, 2002
2003 Activity:
Net income
Foreign currency translation
Total comprehensive income
Issuance of common stock, net of costs
Tax benefit of employee stock option
exercises
Deferred stock-based compensation
Stock-based compensation
Forfeiture of stock options
32,712,374
$327
$260,640
$(57,087)
$(3,164)
$ 4,283
$204,999
—
—
—
—
—
—
17,397
—
328,373
3
1,675
—
—
—
—
—
—
—
—
784
593
—
(237)
—
—
—
—
—
—
—
—
—
(593)
2,068
237
—
11,392
—
—
—
—
—
17,397
11,392
28,789
1,678
784
—
2,068
—
Balance at December 31, 2003
33,040,747
$330
$263,455
$(39,690)
$(1,452)
$15,675
$238,318
The accompanying notes are an integral part of these consolidated financial statements.
51
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
1.
Organization and Description of Business:
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Wright Medical Group, Inc. (the “Company”), through Wright Medical Technology, Inc. and other operating subsidiaries, is a global medical device company specializing in the
design, manufacture and marketing of reconstructive joint devices and biologics products. The Company markets its products primarily through independent commission-based
sales representatives and distributors in the U.S. and through a combination of employee representatives, independent representatives and stocking distributors in its international
markets. The Company is headquartered in suburban Memphis, Tennessee.
The Company was incorporated on November 23, 1999 as a Delaware corporation (previously named Wright Acquisition Holdings, Inc.) and had no operations until an investment
group led by Warburg, Pincus Equity Partners, L.P. (“Warburg”) acquired majority ownership of the predecessor company, Wright Medical Technology, Inc. (the “Predecessor
Company”) on December 7, 1999. This transaction, which represents a recapitalization of the Predecessor Company and the inception of the Company in its present form, was
accounted for using the purchase method of accounting.
On December 22, 1999 the Company acquired all of the outstanding common stock of Cremascoli Ortho Holding S.A. (“Cremascoli”), an orthopaedic medical device company
headquartered in Toulon, France. The acquisition was accounted for using the purchase method of accounting and, accordingly, the results of operations of Cremascoli have been
included in the Company’s consolidated financial statements from the date of acquisition.
On July 18, 2001, the Company completed its initial public offering (the “IPO”), issuing 7,500,000 shares of voting common stock at $12.50 per share, the net proceeds of which
were $84.8 million after deducting underwriting discounts and offering expenses. The Company used the net proceeds from the IPO to repay debt.
On March 6, 2002, the Company and certain selling stockholders completed a secondary offering of 6,900,000 shares, including the over-allotment option of 900,000 shares, of
voting common stock at $15.40 per share. Of the 6,900,000 shares, the Company offered 3,450,000 shares in the secondary offering. Following the closing of the secondary
offering, Warburg converted all of its shares of non-voting common stock into shares of voting common stock. Consequently, there are no longer any outstanding shares of
non-voting common stock.
2.
Summary of Significant Accounting Policies:
Principles of Consolidation. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned domestic and international
subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S.”) requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The most
significant areas requiring the use of management estimates relate to the determination of allowances for doubtful accounts, excess and obsolete inventories, product liability
claims and the need for a valuation allowance on the Company’s deferred tax assets.
Cash and Cash Equivalents. Cash and cash equivalents include all cash balances and short-term investments with original maturities of three months or less.
Inventories. The Company’s inventories are valued at the lower of cost or market on a first-in, first-out (“FIFO”) basis. Inventory costs include material, labor costs and
manufacturing overhead. The Company regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on its estimated
forecast of product demand and production requirements for the next twenty-four months.
52
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Product Liability Claims. The Company makes provisions for claims specifically identified for which it believes the likelihood of an unfavorable outcome is probable and
estimable. The Company has recorded at least the minimum estimated liability related to those claims where a range of loss has been established.
Property, Plant and Equipment. The Company’s property, plant and equipment is stated at cost. Depreciation, which includes amortization of assets under capital lease, is provided
on a straight-line basis over estimated useful lives of: 15 to 25 years for land improvements, 10 to 40 years for buildings, 2 to 20 years for machinery and equipment and 2 to
14 years for furniture, fixtures and office equipment, or the term of the related lease, whichever is shorter. Expenditures for major renewals and betterments that extend the useful
life of the assets are capitalized. Maintenance and repair costs are charged to expense as incurred. Upon sale or retirement, the asset cost and related accumulated depreciation are
eliminated from the respective accounts and any resulting gain or loss is included in income.
Instruments used by surgeons during implant procedures of the Company’s products that are permanently held by the Company are included in property, plant and equipment and
are depreciated on a straight-line basis over five to six years.
Intangible Assets and Goodwill. Goodwill represents the excess of costs over fair value of assets of businesses acquired. The Company adopted the provisions of Statement of
Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” as of January 1, 2002. Goodwill and intangible assets acquired in a purchase business
combination that are determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS
No. 142. Unless circumstances otherwise dictate, we perform our annual impairment test in the fourth quarter. Accordingly, during the fourth quarter of 2003, the Company
evaluated goodwill for impairment and determined that the fair values of its reporting units exceeded their carrying values, indicating that goodwill was not impaired. Impairment
adjustments recognized after adoption, if any, generally are required to be recognized as operating expenses. SFAS No. 142 also requires that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144,
“Accounting for Impairment or Disposal of Long-Lived Assets.” The Company amortizes intangible assets on a straight line basis over their estimated useful lives of 7 to 13 years
for completed technology, 10 years for distribution channels and 8 to 15 years for trademarks.
Valuation of Long-Lived Assets. Management periodically evaluates carrying values of long-lived assets, including property, plant and equipment and intangible assets, when
events and circumstances indicate that these assets may have been impaired. On January 1, 2002, the Company adopted SFAS No. 144 which provides guidance for the evaluation
of impairment of long-lived assets. An asset is considered impaired when undiscounted cash flows to be realized from the use of such assets are less than its carrying value. In that
event, a loss is determined based on the amount the carrying value exceeds the fair market value of such asset.
Prior to the adoption of SFAS No. 144, the Company accounted for long-lived assets in accordance with SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of.”
Concentrations of Credit Risk and Supply of Raw Material. Concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of customers
and their dispersion across a number of geographic areas. However, essentially all of the Company’s trade receivables are concentrated in the hospital and health care sectors in the
U.S. and several other countries or with stocking distributors that operate in international markets and, accordingly, are exposed to their respective business, economic and
country-specific variables. Although the Company does not currently foresee a concentrated credit risk associated with these receivables, repayment is dependent upon the
financial stability of these industry sectors and the respective countries’ national economies and health care systems. At December 31, 2003 and 2002, the Company’s allowance
for doubtful accounts totaled $1.5 million.
53
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company relies on a limited number of suppliers for the components used in the Company’s products. The Company’s reconstructive joint devices are produced from various
surgical grades of titanium, cobalt chrome and stainless steel, various grades of high-density polyethylenes, silicone elastomer and ceramics. The Company relies on one supplier
for the silicone elastomer used in the Company’s extremity products. The Company is aware of only two suppliers of silicone elastomer to the medical device industry for
permanent implant usage. Additionally, the Company relies on one supplier of ceramics for use in the Company’s hip products. In addition to reconstructive joint devices, for the
Company’s biologics products, it depends heavily on a limited number of sources of demineralized bone matrix (“DBM”) and cancellous bone matrix (“CBM”). Two not-for-profit
tissue banks supplied the Company with all of the DBM/CBM that it used in 2003 in its allograft products. Further, the Company relies on one supplier for its GRAFTJACKET®
family of soft tissue repair and graft containment products, as well as one supplier for its ADCON® Gel family of products.
Income Taxes. Income taxes are accounted for pursuant to the provisions of SFAS No. 109, “Accounting for Income Taxes.” This statement requires the use of the liability method
of accounting for deferred income taxes. The provision for income taxes includes federal, foreign, and state income taxes currently payable and those deferred because of
temporary differences between the financial statement and tax bases of assets and liabilities. Provisions for federal income taxes are not made on the undistributed earnings of
foreign subsidiaries where the subsidiaries do not have the capability to remit earnings in the foreseeable future and when earnings are considered permanently invested. Deferred
taxes are not provided for temporary differences related to earnings of non-U.S. subsidiaries that are intended to be permanently reinvested. These earnings were $1.4 million for
2003 and were immaterial for 2002 and 2001. Computation of the potential deferred tax liability associated with these undistributed earnings is not practicable.
Revenue Recognition. The Company recognizes revenue upon shipment of product to end customers. For inventory held on consignment, revenue is recognized when evidence of
customer acceptance is obtained. The Company defers revenue under arrangements that provide for the Company to repurchase inventory from certain international stocking
distributors when certain conditions are met. Estimated returns are recorded as a reduction of sales when the revenue is recognized. An allowance for sales returns of $412,000 and
$987,000 is included as a reduction of accounts receivable at December 31, 2003 and 2002, respectively.
Research and Development Costs. Research and development costs are charged to expense as incurred.
Foreign Currency Translation. The financial statements of the Company’s international subsidiaries are translated into U.S. dollars using the exchange rate at the balance sheet
date for assets and liabilities and the weighted average exchange rate for the applicable period for revenues, expenses, gains and losses. Translation adjustments are recorded as a
separate component of comprehensive income (loss). Gains and losses resulting from transactions denominated in a currency other than the local functional currency are included
in other income (expense).
Comprehensive Income (Loss). Comprehensive income (loss) is defined as the change in equity during a period related to transactions and other events and circumstances from
non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The Company’s difference
between net income (loss) and comprehensive income (loss) is wholly attributable to foreign currency translation.
Stock-Based Compensation. At December 31, 2003, the Company has two stock-based employee compensation plans, which are described in Note 13. The Company accounts for
those plans under the intrinsic value method in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to
Employees.” Accordingly, compensation cost related to stock option grants to employees has been recognized only to the extent that the fair market value of the stock exceeds the
exercise price of the stock option at the date of the grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation. Nonemployee stock-based compensation is
accounted for in accordance with SFAS No. 123.
54
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Net income (loss), as reported
Add: Stock-based employee compensation cost
recognized under intrinsic value method, net of tax
effects
Less: Stock-based employee compensation expense
determined under fair value based method, net of
tax effects
Year Ended December 31,
2003
2002
2001
In thousands, except per share amounts
$17,397
$25,060
$(1,507)
920
998
1,537
(4,334)
(2,918)
(2,647)
Pro forma net income (loss)
$13,983
$23,140
$(2,617)
Income (loss) per share:
Basic, as reported
Basic, pro forma
Diluted, as reported
Diluted, pro forma
Pro forma income (loss) per share (unaudited)1:
Basic, as reported
Basic, pro forma
Diluted, as reported
Diluted, pro forma
$
$
$
$
$
$
$
$
0.53
0.43
0.50
0.41
0.53
0.43
0.50
0.41
$
$
$
$
$
$
$
$
0.79
0.73
0.75
0.69
0.79
0.73
0.75
0.69
$ (0.31)
$ (0.39)
$ (0.31)
$ (0.39)
$ (0.06)
$ (0.11)
$ (0.06)
$ (0.11)
1 Assuming conversion of preferred stock at the beginning of the respective period (see Note 8).
Amounts presented in stock-based expense include selling, general and administrative expenses of $2.0 million, $1.6 million, and $1.9 million for 2003, 2002, and 2001,
respectively, and research and development expenses of $86,000, $110,000, and $100,000 for 2003, 2002, and 2001, respectively.
Fair Value of Financial Instruments. The carrying value of cash and cash equivalents, accounts receivable, accounts payable and notes payable approximates the fair value of these
financial instruments at December 31, 2003 and 2002 due to their short maturities or variable rates.
Derivative Instruments and Hedging Activities. The Company accounts for derivative instruments and hedging activities under SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities” as amended by SFAS No. 138. Accordingly, all of the Company’s derivative instruments are recorded on the balance sheet as either an asset
or liability and measured at fair value. The changes in the derivative’s fair value are recognized currently in earnings unless specific hedge accounting criteria are met.
During 2002 and 2001, the Company’s principal derivative instruments represented certain foreign currency contracts denominated in British pounds sterling to manage currency
fluctuations on intercompany sales between certain foreign subsidiaries. As these contracts are not specifically designated as hedges, the change in value is recognized in the
accompanying consolidated statement of operations. For the years ended December 31, 2002 and 2001, the Company recorded $35,000 in losses and $146,000 in gains,
respectively, on these foreign currency contracts. At December 31, 2003, the Company did not have any outstanding foreign currency contracts.
55
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Supplemental Cash Flow Information. Cash paid for interest expense and income taxes was as follows (in thousands):
Interest
Income taxes
2003
$ 994
$4,411
December 31,
2002
$883
$359
2001
$11,071
894
$
During 2002, the Company released approximately $25.2 million of its valuation allowance against its deferred tax assets, resulting in a decrease in intangible assets of
approximately $7.9 million and a decrease in goodwill of approximately $10.7 million, net of associated deferred tax liabilities (see Note 11). Additionally, the Company entered
into capital leases of approximately $628,000 and $2.3 million in 2003 and 2002, respectively.
In July 2001, simultaneous with the closing of the Company’s IPO, the Company converted all of its outstanding mandatorily redeemable, convertible preferred stock, including
accrued dividends, totaling approximately $98.6 million, into common stock. Also in connection with the IPO, senior subordinated notes totaling approximately $13.1 million were
converted into 1,125,000 shares of non-voting common stock, resulting in an equity distribution of approximately $1.0 million. Additionally, the resolution of the Company’s
escrow liabilities resulted in an increase in goodwill of approximately $1.1 million.
Reclassifications. Certain prior year amounts have been reclassified to conform to the 2003 presentation.
Recent Pronouncements. The Company adopted SFAS No. 143, “Accounting for Asset Retirement Obligations,” effective January 1, 2003. SFAS No. 143 requires that the fair
value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The Company has applied
the provisions of SFAS No. 143 prospectively upon adoption. The adoption of SFAS No. 143 did not have a material impact on the Company’s financial position, results of
operations, or cash flows.
The Company adopted SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” effective January 1,
2003. SFAS No. 145, among other provisions, requires that all gains or losses on early extinguishment of debt must meet the requirements in APB Opinion No. 30 “Reporting the
Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” (“APB
30”) in order to be classified as an extraordinary item. The Company reviewed the requirements in APB 30 and determined that the loss on its early retirement of debt recognized
in the third quarter of 2001 does not meet the necessary criteria in order to be classified as an extraordinary item. Therefore, the Company’s $1.6 million loss on its early retirement
of debt was reclassified to selling, general and administrative expenses in the consolidated statement of operations for the year ended December 31, 2001.
The Company adopted SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” effective January 1, 2003. SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized and measured initially at its fair value in the period in which the liability is incurred. The Company has applied the
provisions of SFAS No. 146 prospectively upon adoption. The adoption of SFAS No. 146 did not have a material impact on the Company’s financial position, results of
operations, or cash flows.
The Company has applied the disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — An Amendment of FASB
Statement No. 123,” for the years ended December 31, 2003, 2002 and 2001. SFAS No. 148 amends 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, this Statement amends
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. As permitted by SFAS No. 148, the Company continues to account for stock options under APB
Opinion No. 25.
56
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company adopted SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” effective July 1, 2003. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities entered into
after June 30, 2003, under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The Company has applied the provisions of SFAS No. 149
prospectively upon adoption. The adoption of SFAS No. 149 did not have a material impact on the Company’s financial position, results of operations, or cash flows.
The Company adopted SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” effective July 1, 2003. SFAS No. 150
establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The adoption of SFAS No. 150 did
not have a material impact on the Company’s financial position, results of operations, or cash flows.
The Company adopted SFAS No. 132 (revised 2003), “Employer’s Disclosure about Pensions and Other Post Retirement Benefits,” (“SFAS No. 132(R)”) effective December 31,
2003. SFAS No. 132(R) amends SFAS No. 87, “Employers’ Accounting for Pensions,” SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits,” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” This Statement retains the
disclosure requirements contained in SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” which it replaces. It also requires additional
disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit
postretirement plans. The Company adopted the disclosure requirements of FAS 132(R) effective December 31, 2003.
In November 2002, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34.” Interpretation
No. 45 elaborates on the disclosures a guarantor must make in its interim and annual financial statements about its obligations under guarantees issued. Interpretation No. 45 also
clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement
provisions of Interpretation No. 45 apply to guarantees issued or modified after December 31, 2002. To date, the Company has not entered into or modified any such guarantees.
The Company adopted FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” effective February 1, 2003. Interpretation
No. 46 requires the primary beneficiary of a variable interest entity (“VIE”) to consolidate the VIE under certain circumstances. Interpretation No. 46 is effective for all new VIEs
created or acquired after January 31, 2003. For VIEs created or acquired prior to February 1, 2003, Interpretation No. 46 must be applied for the first interim or annual period
beginning after December 15, 2003. The adoption of Interpretation No. 46 did not have any impact on the Company’s financial position, results of operations, or cash flows.
57
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
3.
Acquisition of Assets:
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
On March 5, 2003, the Company completed an acquisition of certain assets from Gliatech Inc. related to its ADCON® Gel technology for $8.4 million in cash and a royalty
contingent upon future product sales. The Company paid $840,000 of the purchase price as a deposit in the fourth quarter of 2002, and $3.4 million in the first quarter of 2003. The
remaining $4.2 million was paid in the second quarter of 2003 upon final receipt of all assets. The following table summarizes the allocation of the purchase price (in thousands):
Inventories
Property, plant and equipment
Acquired in-process research and development
Intangible assets:
Completed Technology
Trademarks
Other
$1,312
160
4,558
1,575
554
286
$8,445
In connection with the acquisition of these assets, the Company engaged an independent third party to conduct a valuation of the intangible assets acquired. The value assigned to
acquired in-process research and development (“IPRD”) was $4.6 million of the purchase price. Accordingly, this amount was expensed in the first quarter of 2003. The value
assigned to IPRD was determined by estimating the costs to develop the IPRD into commercially viable products, estimating the resulting cash flows from such projects, and
discounting the net cash flows back to their present value. This discount rate reflects uncertainties surrounding the successful development of the IPRD.
4.
Inventories:
Inventories consist of the following (in thousands):
Raw materials
Work-in-process
Finished goods
5.
Property, Plant and Equipment:
Property, plant and equipment consist of the following (in thousands):
Land and land improvements
Buildings
Machinery and equipment
Furniture, fixtures and office equipment
Construction in progress
Surgical instruments
Less: Accumulated depreciation
2003
$ 2,816
9,827
51,561
$64,204
December 31,
2002
$ 2,507
8,899
44,222
$55,628
December 31,
$
2003
1,567
7,249
26,922
20,887
5,654
45,664
107,943
(41,028)
2002
$ 1,494
6,166
20,771
19,673
3,205
35,293
86,602
(27,387)
$ 66,915
$ 59,215
Depreciation expense approximated $13.9 million, $13.6 million and $10.1 million for the years ended December 31, 2003, 2002, and 2001, respectively.
58
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
6.
Goodwill and Intangible Assets:
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” which requires that goodwill no longer be amortized, but rather be
evaluated for impairment at the reporting unit level upon adoption and at least annually thereafter. Note 2 discusses the effect of the Company’s adoption of this statement.
Changes in the carrying amount of goodwill occurring during the year ended December 31, 2003, are as follows (in thousands):
Goodwill, net of accumulated amortization at December 31, 2002
Foreign currency translation
Goodwill at December 31, 2003
$ 9,532
1,716
$11,248
If the requirements of SFAS Nos. 141 and 142 had been applied in the year ended December 31, 2001, operating results for the year ended December 31, 2001 would have been as
follows (in thousands, except per share data):
Income from operations, as reported
Add: Goodwill amortization adjustment
Add: Workforce reclassification adjustment
Income from operations, as adjusted
Income before income taxes, as adjusted
Provision for income taxes
Year Ended December 31,
2003
2002
2001
$27,166
—
—
27,166
27,119
9,722
$26,555
—
—
26,555
26,894
1,834
$ 8,561
856
1,108
10,525
2,031
1,574
Net income, as adjusted
$17,397
$25,060
$
457
Basic income per pro forma share 1:
Income (loss) per share, as reported
Goodwill amortization
Workforce reclassification
$
0.53
—
—
$
0.79
—
—
$ (0.06)
0.04
0.05
Income per share, as adjusted
$
0.53
$
0.79
$
0.02
Diluted income per pro forma share1:
Income (loss) per share, as reported
Goodwill amortization
Workforce reclassification
$
0.50
—
—
$
0.75
—
—
$ (0.06)
0.04
0.04
Income per share, as adjusted
$
0.50
$
0.75
$
0.02
Weighted average number of common shares outstanding - pro forma
basic1
32,857
31,870
23,544
Weighted average number of common shares outstanding - pro forma
diluted1
34,561
33,550
25,799
1 Assuming conversion of preferred stock at the beginning of the respective period (see Note 8).
59
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The components of the Company’s identifiable intangible assets are as follows (in thousands):
Completed technology
Distribution channels
Trademarks
Other
Less: Accumulated amortization
Intangible assets, net
December 31, 2003
December 31, 2002
Cost
$ 5,288
19,296
657
4,345
29,586
(10,940)
$ 18,646
Accumulated
Amortization
$ 1,025
7,708
75
2,132
$10,940
Cost
$ 3,587
16,138
103
3,670
23,498
(6,122)
$17,376
Accumulated
Amortization
$ 343
4,816
10
953
$6,122
Based on the intangible assets held at December 31, 2003, the Company expects to recognize amortization expense of approximately $3.2 million in 2004, $3.0 million in 2005 and
2006, $2.6 million in 2007 and $2.5 million in 2008.
7.
Accrued Expenses and Other Current Liabilities:
Accrued expenses and other current liabilities consist of the following (in thousands):
Employee benefits
Royalties
Advances from factoring arrangement
Commissions
Taxes other than income
Professional fees
Purchased technology
Legal
Other
December 31,
2003
2002
$11,480
5,658
4,780
3,423
3,281
2,333
1,500
1,343
9,016
$ 8,645
3,654
—
2,358
3,225
1,641
1,500
1,241
7,614
$42,814
$29,878
8.
Earnings Per Share:
SFAS No. 128, “Earnings Per Share,” requires the presentation of basic and diluted earnings per share. Basic earnings per share is calculated based on the weighted-average
shares of common stock outstanding during the period. Diluted earnings per share is calculated to include any dilutive effect of the Company’s common stock equivalents, which
consists of stock options, warrants and, in 2001, convertible preferred stock. The dilutive effect of such instruments is calculated using the treasury-stock method.
For the year ended December 31, 2001, the Company’s computation of diluted earnings per share does not differ from basic earnings per share, as the effect of the Company’s
common stock equivalents was anti-dilutive. Common stock equivalents excluded from the calculation of diluted earnings per share totaled approximately 12,604,000 for the year
ended December 31, 2001.
60
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Net income (loss) applicable to common stockholders for basic and diluted earnings per share purposes is as follows (in thousands):
Net income (loss)
Accrued preferred stock dividends
Year Ended December 31,
2003
2002
2001
$17,397
—
$25,060
—
$ (1,507)
(2,546)
Net income (loss) applicable to common stockholders
$17,397
$25,060
$ (4,053)
Weighted-average number of common shares outstanding - basic
Common stock equivalents
Weighted-average number of common shares outstanding - diluted
32,857
1,704
34,561
31,870
1,680
33,550
13,195
—
13,195
For 2001, a reconciliation of net loss applicable to common stockholders and weighted-average number of common shares outstanding for unaudited pro forma basic and diluted
earnings per share is as follows (in thousands):
Net loss applicable to common stockholders shown above
Reversal of accrued preferred stock dividends
Pro forma net loss applicable to common stockholders
Weighted-average number of common shares outstanding
Weighted-average effect of assumed conversion of redeemable convertible preferred stock and related
dividends
Pro forma weighted-average number of common shares outstanding
$ (4,053)
2,546
$ (1,507)
13,195
10,349
23,544
The weighted-average effect of the conversion of redeemable convertible preferred stock and related dividends into common shares was computed as if such stock was converted
at the beginning of the period. The Company’s pro forma computation of diluted loss per share for the year ended December 31, 2001, does not differ from pro forma basic loss per
share, as the effect of the Company’s common stock equivalents was anti-dilutive.
9.
Long-Term Obligations:
Long-term obligations consist of the following (in thousands):
Notes payable
Capital lease obligations
Less: current portion
December 31,
2003
2002
$13,250
4,074
17,324
(6,228)
$17,250
5,012
22,262
(5,676)
$11,096
$16,586
In August 2001, the Company entered into a 5-year senior credit facility with a syndicate of commercial banks. This senior credit facility consists of $20 million in term loans and
a revolving loan facility of up to $60 million. Upon entering into the senior credit facility, the Company used the $20 million in term loan proceeds and existing cash balances to
repay all amounts outstanding plus accrued interest under the previous senior credit facility, totaling approximately $22.9 million. In connection with the replacement of the
Company’s debt as described, the Company incurred a non-cash charge of approximately $1.6 million, which was reclassified to selling, general and administrative expenses in the
consolidated statement of operations for the year ended December 31, 2001. The Company had borrowings outstanding under the term loans of $13.3 million and $17.3 million at
December 31, 2003 and 2002, respectively.
61
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Borrowings under the Company’s senior credit facility are guaranteed by the Company’s subsidiaries and collateralized by all of the assets of Wright Medical Technology, Inc. and
the other domestic subsidiaries. The credit facility contains customary covenants including, among other things, restrictions on the Company’s ability to pay cash dividends, prepay
debt, incur additional debt and sell assets. The credit facility also requires the Company to meet certain financial tests, including a consolidated leverage (or debt-to-equity) ratio
test and a consolidated fixed charge coverage ratio test. At the Company’s option, borrowings under the credit facility bear interest either at a rate equal to a fixed base rate plus a
spread of .75% to 1.25% or at a rate equal to an adjusted LIBOR plus a spread of 1.75% to 2.25%, depending on the Company’s consolidated leverage ratio, with a rate of 2.9% at
December 31, 2003.
At December 31, 2003, the Company had availability under committed credit facilities, after considering outstanding letters of credit, totaling $57.7 million.
Aggregate annual maturities of the Company’s long-term obligations at December 31, 2003, excluding capital lease obligations, are as follows (in thousands):
2004
2005
2006
$ 4,500
5,000
3,750
$13,250
The Company has acquired certain property and equipment pursuant to capital leases. These leases have various maturity dates ranging from one to seven years with interest rates
ranging from 2.81% to 10.69%. At December 31, 2003, future minimum lease payments under capital lease obligations, together with the present value of the net minimum lease
payments, are as follows (in thousands):
2004
2005
2006
2007
2008
Thereafter
Total minimum payments
Less amount representing interest
Present value of minimum lease payments
Current portion
Long-term portion
Amount
$ 2,033
1,171
943
493
235
148
5,023
(949)
4,074
(1,728)
$ 2,346
10.
Other Long-Term Liabilities:
Other long-term liabilities consist of the following (in thousands):
Foreign tax accruals
Other
December 31,
2003
$4,849
3,368
$8,217
2002
$4,216
2,894
$7,110
Foreign tax accruals represent amounts recorded for certain exposure items based on the Company’s assessment of the likelihood that certain taxes, as-filed, are not ultimately
accepted by the applicable tax authorities.
62
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
11.
Income Taxes:
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The components of the Company’s income before income taxes are as follows (in thousands):
Domestic
Foreign
Income before income taxes
Year Ended December 31,
2003
2002
$25,675
1,444
$27,119
$30,678
(3,784)
$26,894
2001
$ 334
(267)
$ 67
The components of the provision for income taxes for net income (loss) are as follows (in thousands):
Current provision:
Domestic:
Federal
State
Foreign
Deferred provision (benefit):
Domestic:
Federal
State
Foreign
Change in valuation allowance
Year Ended December 31,
2003
2002
2001
$3,080
203
1,404
3,115
1,098
(376)
1,198
$ —
—
819
9,446
1,841
(2,157)
(8,115)
$
29
—
225
41
5
989
285
Total
$9,722
$ 1,834
$1,574
A reconciliation of the statutory federal income tax provision to the Company’s actual income tax provision attributable to continuing operations is as follows:
Income tax provision at statutory rate
State tax provision
Change in valuation allowance
Goodwill amortization
Meals and entertainment limitation
Research and development credit
Other, net
Total
Year Ended December 31,
2003
2002
2001
35.0%
4.4%
4.5%
—
1.2%
(9.9%)
0.7%
35.0%
4.6%
(30.2%)
—
1.0%
(1.4%)
(2.2%)
34.0%
3.9%
1337.3%
510.4%
328.4%
—
135.8%
35.9%
6.8%
2349.8%
63
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The significant components of the Company’s deferred tax assets and liabilities as of December 31, 2003 and 2002 are as follows (in thousands):
Deferred tax assets:
Operating loss carryforwards
General business credit carryforward
Alternative minimum tax credits
Reserves and allowances
Amortization
Other
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Depreciation
Acquired intangible assets
Other
Total deferred tax liabilities
Net deferred tax assets
December 31,
2003
2002
$ 18,367
4,393
3,080
14,219
4,235
10,180
(16,039)
38,435
4,446
4,369
2,015
10,830
$ 26,839
1,799
—
14,380
4,033
6,885
(13,518)
40,418
3,469
4,331
1,961
9,761
$ 27,605
$ 30,657
During 2003, a portion of the Company’s deferred assets were created as a result of certain tax planning initiatives. There are annual limitations related to the use of these assets.
The Company does not currently believe that it is more likely than not that a portion of these assets will be utilized as a result of these limitations, and therefore, it increased its
valuation allowance by $1.2 million. The Company’s valuation allowance was also impacted in 2003 for changes in foreign currency translation. Prior to 2002, the Company
provided a valuation allowance against all of its net deferred tax assets for U.S. income tax purposes and a portion of its net deferred tax assets for foreign income tax purposes
because, given the Company’s history of operating losses, the realizability of these assets was uncertain. However, the Company had pre-tax income in 2002, which, combined
with its forecast of future operations and the reduced debt burden following the Company’s IPO, made the realizability of a portion of the Company’s deferred tax assets more
likely than not. Therefore, during 2002, the Company reversed $25.2 million of the valuation allowance against its deferred tax assets for U.S. federal income tax purposes. This
reversal first reduced $10.7 of goodwill and $7.9 of intangible assets, net of associated deferred tax liabilities, and then reduced the Company’s income tax provision by
$8.1 million. The Company’s valuation allowance was also impacted in 2002 for changes in foreign currency translation.
The Company’s net operating loss carryforwards are subject to certain limitations, and due to these limitations, some of the Company’s net operating losses may expire unused.
The valuation allowance remaining at December 31, 2003 is for a portion of its deferred tax assets for U.S. federal income tax purposes and a portion of its deferred tax assets for
foreign income tax purposes. The Company’s assessment of the need for a valuation allowance could change in the future based on the Company’s future operating results.
At December 31, 2003, the Company has net operating loss carryforwards for U.S. federal income tax purposes of approximately $25.3 million, which expire in 2009 through
2021. The use of some of these net operating loss carryforwards is subject to annual limitations. Additionally, the Company has general business credit carryforwards of
approximately $4.4 million, which expire in 2007 through 2016, and alternative minimum tax credits of approximately $3.1 million which do not expire.
At December 31, 2003, the Company has foreign net operating loss carryforwards of approximately $23.5 million, which expire in 2004 through 2010. The use of some of these
foreign net operating loss carryforwards is subject to annual limitations.
64
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
12.
Capital Stock:
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Common Stock. The Company is authorized to issue up to 70,000,000 shares of voting common stock and 30,000,000 shares of non-voting common stock. The Company has
36,959,253 shares of voting common stock and 30,000,000 shares of non-voting common stock available for future issuance at December 31, 2003.
Warrants. In connection with the December 1999 recapitalization, the Company issued warrants to stockholders and certain employees to purchase an aggregate of 727,276 shares
of the Company’s common stock at an exercise price of $4.35 per share. The fair value of these warrants at the time of the issuance was $420,000. This fair value was recorded as
additional paid-in-capital. The exercise price and the number of shares that can be acquired through the warrants are subject to adjustment in certain situations to prevent dilution
of the warrants. The warrants are exercisable at any time after issuance and, unless exercised, expire five years from the date of issuance. The warrants do not entitle the holders to
any voting rights. The holders of warrants are entitled to share in the assets of the Company in the event of reorganization, consolidation, merger, or sale of the Company’s assets
on the same basis as holders of common stock. In the case of certain consolidations or mergers of the Company, or the sale of all or substantially all of the assets of the Company,
each warrant shall be exercisable for the right to receive the same consideration to which such holder would have been entitled as a result of such consolidation, merger or sale had
the warrants been exercised immediately prior thereto. During the years ended December 31, 2003, 2002 and 2001, warrants for 6,691, 349,194 and 18,182 shares were exercised,
respectively. Warrants for the purchase of 353,209 shares remain outstanding at December 31, 2003.
13.
Stock Option Plans:
At December 31, 2003, the Company has two stock-based incentive plans, which are described below. As permitted by SFAS No. 123, “Accounting for Stock-Based
Compensation,” the Company applies APB Opinion No. 25 and related interpretations in accounting for its employee stock option plan. Accordingly, compensation cost related to
stock option grants to employees has been recognized only to the extent that the fair market value of the stock exceeds the exercise price of the stock option at the date of the grant.
For the years ended December 31, 2003, 2002, and 2001, the fair value of each option is estimated on the date of grant using the Black-Scholes methodology required by SFAS
No. 123 for publicly traded companies. The weighted-average fair value of the Company’s options granted in 2003, 2002 and 2001 was $12.96 per share, $11.78 per share and
$10.25 per share, respectively. In applying the Black-Scholes methodology to the option grants, the Company used the following assumptions:
Year Ended December 31,
2003
2002
2001
Risk-free interest rate
Expected option life
Expected price volatility
3.6% - 4.3%
7 years
54.3%
4.0% - 5.0%
6 – 7 years
54.3%
3.5% - 5.8%
7 years
67.3%
The assumed forfeiture rate was not material to the calculation. The Company does not assume a dividend yield as it has never declared or paid cash dividends on its common
stock.
Equity Incentive Plan
On December 7, 1999, the Company originally adopted the 1999 Equity Incentive Plan (the “Plan”), which was subsequently amended and restated on July 6, 2001, and May 13,
2003. The Plan authorizes the granting of options to purchase up to 6,767,051 shares of common stock. Under the Plan, options to purchase common stock generally are
exercisable in increments of 25% annually in each of the first through fourth anniversaries of the date of grant. Options to purchase Series A Preferred Stock that were outstanding
at the time the Company completed its IPO in
65
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
July 2001 became options to purchase the Company’s common stock. Those options were immediately exercisable upon their issuance. The options expire after ten years. A
summary of the Company’s stock option activity is as follows (shares in thousands):
Outstanding at December 31, 2000
Conversion of preferred stock options into common stock options
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2001
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2002
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2003
Common Stock
Weighted Avg.
Exercise Price
$ 4.35
$ 0.87
$ 8.32
$ 3.40
$ 4.86
$ 5.09
$18.09
$ 4.01
$ 9.30
$ 7.58
$21.80
$ 4.67
$ 7.25
$12.28
Shares
2,513
116
659
(114)
(47)
3,127
630
(374)
(95)
3,288
1,333
(309)
(78)
4,234
As of December 31, 2003, there were options for 1,688,324 shares of common stock exercisable at a weighted average price of $6.16 per share, and 1,613,478 options available for
future issuance.
In 2003, 2002, and 2001, the Company granted a group of independent distributors a total of 16,750, 15,850 and 12,518 common stock options, respectively, under the Plan. The
distributors were given options to purchase common stock, exercisable in 25% increments on the first through fourth anniversaries of the date of grant, at a weighted-average
exercise price of $16.31, $17.21 and $9.58 per share in 2003, 2002, and 2001, respectively. The options expire after ten years. In addition, a group of independent distributors were
granted a total of 22,842 shares of common stock in 2001 under the Plan.
In connection with the issuance of certain stock options to employees and distributors and the distributor stock grants discussed above, the Company incurred stock-based
compensation representing the fair value of the stock and stock options granted to distributors, and for employee stock options to the extent the fair value of the Company’s stock
exceeded the exercise price of the stock option at the date of the grant. The Company recognizes this stock-based compensation over the respective vesting period, as appropriate.
For the years ended December 31, 2003, 2002 and 2001, stock-based compensation expense of $2.1 million, $1.7 million, and $1.6 million, respectively, was recorded in the
accompanying statement of operations related to these stock options and stock grants.
66
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
A summary of the Company’s stock options outstanding and exercisable at December 31, 2003, is as follows (shares in thousands):
Options Outstanding
Options Exercisable
Range of Exercise Prices
Number
Outstanding
$ 0.00 - $ 8.50
$ 8.51 - $16.00
$16.01 - $24.00
$24.01 - $29.35
2,300
92
1,177
665
Weighted-
Average
Remaining
Contractual
Life
6.5
8.5
8.8
9.8
Weighted-
Average
Exercise
Price
$ 5.12
$15.25
$17.69
$27.07
Number
Exercisable
1,529
16
143
—
Weighted-
Average
Exercise
Price
$ 4.89
$15.42
$18.71
$ —
4,234
7.7
$12.28
1,688
$ 6.16
Employee Stock Purchase Plan
On May 30, 2002, the Company and its shareholders approved and adopted the 2002 Employee Stock Purchase Plan (the “ESPP”). The ESPP authorizes the Company to issue up
to 200,000 shares of common stock to its employees who work at least 20 hours per week. Under the ESPP, there are two six-month plan periods during each calendar year, one
beginning January 1 and ending on June 30, and the other beginning July 1 and ending on December 31. Under the terms of the ESPP, employees can choose each plan period to
have up to 5 percent of their annual base earnings limited to $5,000 withheld to purchase the Company’s common stock. The purchase price of the stock is 85 percent of the lower
of its beginning-of-period or end-of-period market price. Under the ESPP, the Company sold to employees 12,777 shares in 2003 and 5,682 shares in 2002. The weighted-average
fair value of those purchase rights granted was $5.27 in 2003 and $5.69 in 2002. As of December 31, 2003, there were 181,541 shares available for future issuance. In applying the
Black-Scholes methodology to the purchase rights granted, the Company used the following assumptions:
Risk-free interest rate
Expected option life
Expected price volatility
Year Ended December 31,
2003
2002
1.1% - 1.8%
6 months
54.3%
4.9%
6 months
54.3%
The assumed forfeiture rate was not material to the calculation. The Company does not assume a dividend yield as it has never declared or paid cash dividends on its common
stock.
14.
Employee Benefit Plans:
The Company sponsors a defined contribution plan under Section 401(k) of the Internal Revenue Code, which covers U.S. employees who are 21 years of age and over. Under this
plan, the Company matches voluntary employee contributions at a rate of 100% for the first 2% of an employee’s annual compensation and at a rate of 50% for the next 2% of an
employee’s annual compensation. Employees vest in the Company’s contributions after three years of service with the Company. The Company’s expense related to the plan was
$716,000, $677,000, and $609,000 in 2003, 2002, and 2001, respectively.
67
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
15.
Commitments and Contingencies:
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Operating Leases. The Company leases certain equipment under non-cancelable operating leases. Rental expense under operating leases approximated $5.0 million, $3.9 million
and $2.4 million for the years ended December 31, 2003, 2002, and 2001, respectively. Future minimum payments, by year and in the aggregate, under non-cancelable operating
leases with initial or remaining lease terms of one year or more, are as follows at December 31, 2003 (in thousands):
Year
Operating Leases
2004
2005
2006
2007
2008
Thereafter
$4,613
3,300
1,469
328
115
18
$9,843
Royalty and Consulting Agreements. The Company has entered into various royalty and other consulting agreements with third party consultants. The amounts in the table below
represent minimum payments to consultants that are contingent upon future services. Payments under these agreements for which the Company has not recorded a liability, are as
follows at December 31, 2003 (in thousands):
Year
2004
2005
2006
Amount
$5,414
332
88
$5,834
Portions of the Company’s payments for operating leases and royalty agreements are denominated in foreign currencies and were translated in the tables above based their
respective U.S. dollar exchange rates at December 31, 2003. These future payments are subject to foreign currency exchange rate risk.
Purchase Obligations. For 2004, the Company has purchase obligations of $5.4 million, which consist of minimum purchase obligations related to certain supply agreements for
its products. Portions of these payments are denominated in foreign currencies and were translated based their respective U.S. dollar exchange rates at December 31, 2003. These
future payments are subject to foreign currency exchange rate risk.
Legal Proceedings. On June 30, 1993, the Predecessor Company acquired substantially all the assets of the large joint orthopaedic implant business from Dow Corning
Corporation (DCC). DCC retains liability for matters arising from certain conduct of DCC prior to June 30, 1993. As such, DCC has agreed to indemnify the Predecessor
Company against all liability for all products manufactured prior to the acquisition except for products provided under the Predecessor Company’s 1993 agreement with DCC
pursuant to which the Predecessor Company purchased certain small joint orthopaedic implants for worldwide distribution.
The Predecessor Company was notified in May 1995 that DCC, which filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code, would no longer defend the
Predecessor Company in such matters until it received further direction from the bankruptcy court. Based on the most recent plan of reorganization submitted to the court, it
appears that the Predecessor Company would be considered an unsecured creditor and, under the terms of the plan, would receive 24% of any such claim as a cash payment with
the remainder to be paid by a senior note due within ten years. There are several appeals regarding the confirmed plan of reorganization pending before the U.S. District Court in
Detroit, Michigan, which have delayed implementation of the plan.
68
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
There can be no assurance that DCC will indemnify the Predecessor Company or the Company on any claims in the future. Although neither the Predecessor Company nor the
Company maintains insurance for claims arising on products sold by DCC, the Company does not believe the outcome of any of these matters will have a material adverse effect
on the Company’s financial position or results of operations.
In July 2002, the Company entered into a license agreement to resolve an intellectual property dispute that, among other things, provided for a payment of up to $1.25 million if a
particular patent re-issued by February 10, 2004, and certain other conditions, as defined in the license agreement, were satisfied. Prior to February 10, 2004, the patent in question
re-issued and the Company is currently evaluating whether all of the conditions specified in the license agreement were satisfied. Management believes that the satisfaction of the
required conditions and the consequential payment of any amount is not probable. Accordingly, no provision has been made for this contingency as of December 31, 2003.
In July 2002, pursuant to a purchase and royalty agreement with CERAbio LLC (“CERAbio”), the Company purchased assets consisting primarily of completed technology for
$3.0 million, and recorded this entire amount as an intangible asset. Of this purchase price, $1.5 million was paid upon signing the purchase agreement. The remaining $1.5 million
is provided for in accrued expenses and is due once certain conditions under the agreement are satisfied. The agreement also provides for specified future royalties contingent upon
sales of products related to the acquired technology. The Company, believing that the contractual obligations for payment had not been met, disputed whether the second payment
and royalties had been earned. In 2003, CERAbio and Phillips Plastics Corporation filed a lawsuit in United States District Court for the Western District of Wisconsin against the
Company for payment of the additional $1.5 million purchase price and the royalties earned to date. In November 2003, a jury returned a verdict in favor of CERAbio and ordered
the Company to pay the remaining purchase price and the royalties earned to date. The royalties earned to date have been recorded within “Accrued Expenses and Other Current
Liabilities” in our consolidated balance sheet. The Company has appealed the verdict to the United States Court of Appeals for the Seventh Circuit and the appeal is pending. The
Company intends to vigorously defend its position in this case and, in the opinion of management, does not believe that this claim will have a material adverse affect on its
financial position or results of operations.
In March 2000, Howmedica Osteonics Corp. served a lawsuit against the Company alleging patent infringement. The lawsuit seeks an order of infringement, injunctive relief,
unspecified damages and various other costs and relief. The claims could impact a substantial portion of our knee product line. The Company believes it has strong defenses
against this claim and intends to vigorously defend this lawsuit. The Company also believes this claim is, in part, covered pursuant to the Company’s patent infringement
insurance. Management does not believe that the outcome of this claim will have a material adverse effect on the Company’s financial position or results of operations.
The Company is subject to various legal proceedings, product liability claims and other matters which arise in the ordinary course of business. In the opinion of management, the
amount of liability, if any, with respect to these matters will not materially affect the results of operations or financial position of the Company.
Regulatory. On April 11, 2001, the FDA sent the Company a “warning letter” stating that the FDA believed that ALLOMATRIX ® Injectable Putty was a medical device subject to
premarket clearance. In March 2002, the FDA officially notified the Company that it concluded that ALLOMATRIX ® Injectable Putty should be reviewed and regulated under the
medical device premarket notification provisions of the Food, Drug, and Cosmetic Act (the “Act”). Also, in March 2002, the FDA notified all other known manufacturers of
similar products of requirements for bringing such products into compliance with the Act. The FDA indicated that it would exercise enforcement discretion for a reasonable period
of time while companies bring their devices into compliance with the Act. In response to the FDA determination, the Company promptly filed a premarket notification for
ALLOMATRIX ® Injectable Putty under Section 510(k) of the Act. On April 24, 2002, the FDA notified the Company that the submission of the Company’s premarket notification
for ALLOMATRIX ® Injectable Putty was an adequate response to the “warning letter” and that the FDA considered the issues raised in the April 11, 2001 letter closed. The
Company’s premarket notification submission is still pending with the FDA. The Company’s
69
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
ALLOMATRIX ® line of products continue to be marketed and sold pending the approval of the premarket notification submission. The FDA has not raised any objection to the
continued marketing and sale of the ALLOMATRIX ® products pending the approval of the premarket notification submission. There can be no assurance that the 510(k)
premarket notification will be cleared by the FDA in a timely manner or at all. The FDA could decide not to continue to exercise its enforcement discretion and decide to take
enforcement action which could include, but not be limited to, seizing product inventory, obtaining a court injunction against further marketing of the product, or assessing civil
money penalties. However, the Company believes that such punitive actions by the FDA against the Company are unlikely. In 2003, 2002 and 2001, ALLOMATRIX ® products
represented approximately 9%, 12% and 15% of the Company’s total net sales, respectively.
16.
Segment Data:
The Company has one reportable segment, orthopaedic products, which includes the design, manufacture and marketing of reconstructive joint devices and biologics products. The
Company’s geographic business units consist of operations in the United States, Europe and Other (which principally represents Canada and Japan since August 2001). Identifiable
assets are those assets used exclusively in the operations of each business unit. Revenues attributed to each geographic unit are based on the location in which the sale originated.
Net sales of orthopaedic products by category and information by geographic area are as follows (in thousands):
Net sales by product line:
Knees products
Hips products
Biologics products
Extremities products
Other
Total
Net sales by geographic business unit:
United States
Europe
Other
Total
Operating income by geographic business unit:
United States
Europe
Other
Total
Long-lived assets:
United States
Europe
Other
Total
Year Ended December 31,
2003
2002
2001
$ 78,338
78,071
50,056
31,876
10,591
$ 72,058
56,945
38,347
25,367
8,156
$ 68,238
48,589
26,810
20,989
8,295
$248,932
$200,873
$172,921
$168,138
61,075
19,719
$138,853
47,011
15,009
$123,869
42,268
6,784
$248,932
$200,873
$172,921
$ 19,472
3,912
3,782
$ 24,136
1,844
575
$
6,127
1,980
454
$ 27,166
$ 26,555
$
8,561
December 31,
2003
2002
$51,994
40,978
4,513
$97,485
$47,900
35,056
4,105
$87,061
70
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Sales to United States-based customers, aggregated $152.9 million, $122.4 million, and $108.0 million, for the years ended December 31, 2003, 2002, and 2001, respectively.
These sales along with United States export sales are included in United States sales in the above table. No single foreign country accounted for more than 10% of the Company’s
total net sales during 2003, 2002 or 2001; however, Italy and France together represented approximately 16% of the Company’s total net sales in 2003, 2002 and 2001.
17.
Quarterly Results of Operations:
The following table presents a summary of the Company’s unaudited quarterly operating results for each of the four quarters in 2003 and 2002, respectively. This information was
derived from unaudited interim financial statements that, in the opinion of management, have been prepared on a basis consistent with the financial statements contained elsewhere
in this filing and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of such information when read in conjunction with our
audited financial statements and related notes. The operating results for any quarter are not necessarily indicative of results for any future period.
In thousands
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Amortization of intangible assets
Stock-based expense
Acquired in-process research and development costs
Total operating expenses
2003 (unaudited)
First
Quarter
$58,622
15,540
43,082
30,305
3,535
804
409
4,558
39,611
Second
Quarter
$62,152
17,386
44,766
31,963
3,908
923
420
—
37,214
Third
Quarter
$59,268
15,453
43,815
32,292
4,397
900
482
—
38,071
Fourth
Quarter
$68,890
19,436
49,454
33,052
4,311
935
757
—
39,055
Income from operations
$ 3,471
$ 7,552
$ 5,744
$10,399
In thousands
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Amortization of intangible assets
Stock-based expense
Arbitration settlement award
Total operating expenses
2002 (unaudited)
First
Quarter
$51,706
14,758
36,948
26,955
2,561
853
440
(4,200)
26,609
Second
Quarter
$50,771
14,234
36,537
26,332
2,565
921
457
—
30,275
Third
Quarter
$46,086
11,976
34,110
26,338
2,763
1,076
419
—
30,596
Fourth
Quarter
$52,310
14,648
37,662
27,250
2,468
1,096
408
—
31,222
Income from operations
$10,339
$ 6,262
$ 3,514
$ 6,440
71
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
The Company engaged KPMG LLP as its new independent auditor to replace Arthur Andersen LLP effective May 10, 2002. For additional information, see the Company’s current
report on Form 8-K dated May 10, 2002.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period
covered by this report was carried out under the supervision and with the participation of our management, including our chief executive officer and chief financial officer. Based
on that evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective to ensure that material
information relating to us, including our consolidated subsidiaries, is made known to them by others within such entities, particularly during the period in which this report was
prepared, in order to allow timely decisions regarding required disclosure.
Change in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that occurred during our most recent
fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item is incorporated by reference from the definitive proxy statement to be filed within 120 days after December 31, 2003, pursuant to
Regulation 14A under the Securities Exchange Act of 1934 in connection with the annual meeting of stockholders to be held on May 13, 2004.
Item 11. Executive Compensation.
The information required by this item is incorporated by reference from the definitive proxy statement to be filed within 120 days after December 31, 2003, pursuant to
Regulation 14A under the Securities Exchange Act of 1934 in connection with the annual meeting of stockholders to be held on May 13, 2004.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item is incorporated by reference from the definitive proxy statement to be filed within 120 days after December 31, 2003, pursuant to
Regulation 14A under the Securities Exchange Act of 1934 in connection with the annual meeting of stockholders to be held on May 13, 2004.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference from the definitive proxy statement to be filed within 120 days after December 31, 2003, pursuant to
Regulation 14A under the Securities Exchange Act of 1934 in connection with the annual meeting of stockholders to be held on May 13, 2004.
72
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
Item 14. Principal Accountant Fees and Services.
The information required by this item is incorporated by reference from the definitive proxy statement to be filed within 120 days after December 31, 2003, pursuant to
Regulation 14A under the Securities Exchange Act of 1934 in connection with the annual meeting of stockholders to be held on May 13, 2004.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
PART IV
(a)
Exhibit
No.
2.1
2.2
3.1
3.2
4.1
4.2
4.3
4.4
4.5
10.1
(1)
(2)
(3)
Financial Statements
See Wright Medical Group, Inc. – Index to Consolidated Financial Statements in Item 8 of this report.
Financial Statement Schedule
See Wright Medical Group, Inc. – Schedule II-Valuation and Qualifying Accounts on page 77 of this report.
Index to Exhibits
Description
Amended and Restated Agreement and Plan of Merger, dated as of December 7, 1999, among Wright Medical Technology, Inc., Warburg Pincus Equity
Partners, LP, Wright Acquisition Corp., Inc. and Wright Medical Group, Inc.
(1)
Asset Purchase and Intellectual Property Assignment Agreement dated as of December 23, 2002, between Wright Medical Technology, Inc. and Gliatech Inc., as
amended by First Amendment to Asset Purchase and Intellectual Property Assignment Agreement dated as of December 31, 2002, between Wright Medical
Technology, Inc. and Gliatech Inc.
(2)
Fourth Amended and Restated Certificate of Incorporation of Wright Medical Group, Inc.
(1)
Amended and Restated Bylaws of Wright Medical Group, Inc.
(1)
Registration Rights Agreement, dated December 7, 1999, among the investors listed on Schedule I thereto and Wright Medical Group, Inc.
Investor Rights Agreement, dated December 22, 1999, among the investors listed on Schedule I thereto, Warburg, Pincus Equity Partners, L.P., and Wright
Medical Group, Inc.
(1)
(1)
Stockholders Agreement, dated December 7, 1999, among the stockholders, the investors listed on Schedule I thereto and Wright Medical Group, Inc., as
amended by Amendment No. 1 to the Stockholders Agreement, dated August 7, 2000.
(1)
Form of Common Stock certificate.
(1)
Form of Warrant.
(1)
Credit Agreement, dated as of August 1, 2001, among Wright Medical Group, Inc., Wright Medical Technology, Inc., the Lenders named therein, The Chase
Manhattan Bank (now named JPMorgan Chase Bank), as Administrative Agent, Collateral Agent and Issuing Bank, Credit Suisse First Boston, as
Co-Syndication Agent, and U.S. Bank National Association, as Co-Syndication Agent
July 31, 2002, among the parties thereto
to Credit Agreement dated as of September 11, 2003, among the parties thereto
, Amendment No. 2 to Credit Agreement dated as of May 23, 2003, among the parties thereto
, as amended by Amendment No. 1 to Credit Agreement dated as of
(3)
(5)
(4)
(4)
.
, and Amendment No. 3
73
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
Exhibit
No.
Description
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Second Amended and Restated 1999 Equity Incentive Plan (the “1999 Plan”).
(6) (7)
Form of Incentive Stock Option Agreement, as amended by form of Amendment No. 1 to Incentive Stock Option Agreement, pursuant to the 1999 Plan.
(1) (7)
Form of Non-Qualified Stock Option Agreement pursuant to the 1999 Plan.
(1) (7)
Form of Non-Employee Director Stock Option Agreement pursuant to the 1999 Plan.
(1) (7)
Form of Sales Representative Award Agreement pursuant to the 1999 Plan.
(1) (7)
Form of Indemnification Agreement between Wright Medical Group, Inc. and its directors and executive officers.
(1) (7)
Employment Agreement dated as of January 31, 2004, between Wright Medical Technology, Inc. and F. Barry Bays.
(7)
Employment Agreement dated as of December 11, 2003, between Wright Medical Technology, Inc. and John K. Bakewell.
(7)
10.10
Employment Agreement dated as of July 10, 2001, between Wright Medical Technology, Inc. and Brian T. Ennis.
(1) (7)
21
23.1
23.2
31.1
31.2
32
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Subsidiaries of Wright Medical Group, Inc.
Consent of KPMG LLP.
Information Regarding Consent of Arthur Andersen LLP.
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) Under the Securities Exchange Act of 1934.
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) Under the Securities Exchange Act of 1934.
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(b) Under the Securities Exchange Act of 1934 and Section 1350 of
Chapter 63 of Title 18 of the United States Code.
Incorporated by reference to the Company’s Registration Statement on Form S-1(Registration No. 333-59732), as amended.
Incorporated by reference to the Company’s annual report on Form 10-K for the year ended December 31, 2002.
Incorporated by reference to the Company’s current report on Form 8-K filed August 3, 2001.
Incorporated by reference to the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2003.
Incorporated by reference to the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2003.
Incorporated by reference to the Company’s definitive proxy statement filed with the Commission on April 11, 2003.
Management contract or compensatory plan or arrangement required to be filed as an exhibit to this report pursuant to Item 15(c) of Form 10-K.
74
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
(b)
Reports on Form 8-K.
During the quarter ended December 31, 2003, we filed with the SEC a current report on Form 8-K on October 28, 2003, regarding our earnings release for the
quarter ended September 30, 2003.
75
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
February 20, 2004
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Wright Medical Group, Inc.
By:
/s/ F. Barry Bays
F. Barry Bays
President and Chief Executive Officer
Signature
/s/ F. Barry Bays
F. Barry Bays
/s/ John K. Bakewell
John K. Bakewell
/s/ James T. Treace
James T. Treace
/s/ Richard B. Emmitt
Richard B. Emmitt
/s/ Laurence Y. Fairey
Laurence Y. Fairey
/s/ David D. Stevens
David D. Stevens
/s/ James E. Thomas
James E. Thomas
/s/ Thomas E. Timbie
Thomas E. Timbie
/s/ Elizabeth H. Weatherman
Elizabeth H. Weatherman
Title
President, Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
Date
February 20, 2004
February 20, 2004
Chairman of the Board
February 20, 2004
Director
Director
Director
Director
Director
Director
76
February 20, 2004
February 20, 2004
February 20, 2004
February 20, 2004
February 20, 2004
February 20, 2004
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
The Board of Directors and Stockholders
Wright Medical Group, Inc.:
Independent Auditors’ Report
Under date of February 11, 2004, we reported on the consolidated balance sheets of Wright Medical Group, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations, changes in stockholders’ equity and comprehensive income, and cash flows for the year ended December 31, 2003 and 2002, as
contained in the 2003 annual report to stockholders. These consolidated financial statements and our report thereon are included in the annual report on Form 10-K for the year
2003. In connection with our audit of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule for 2003 and
2002 on page 79. The financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statement
schedule based on our audit.
In our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
Memphis, Tennessee
February 11, 2004
(signed) KPMG LLP
77
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
To WRIGHT MEDICAL GROUP, INC.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Wright Medical Group, Inc. included in this Form 10-K for the
periods indicated in our report thereon. Our report on the financial statements includes an explanatory paragraph with respect to the change in the method of accounting for surgical
instruments as discussed in Note 2 to the financial statements. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The financial
statement schedule on page 79 of this Form 10-K is the responsibility of Wright Medical Group Inc.’s management, is presented for the purpose of complying with the Securities
and Exchange Commission’s rules and is not part of the basic financial statements. The financial statement schedule has been subjected to the auditing procedures applied in the
audit of the basic financial statements and in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial
statements taken as a whole.
Arthur Andersen LLP
Memphis, Tennessee
February 22, 2002
This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with Wright Medical Group, Inc.’s annual report on Form 10-K for the year
ended December 31, 2001. This audit report has not been reissued by Arthur Andersen LLP in connection with this annual report on Form 10-K. See Exhibit 23.2 for
further discussion.
78
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
Table of Contents
Schedule II-Valuation and Qualifying Accounts
Wright Medical Group, Inc.
(In thousands)
Description
Allowance for doubtful accounts:
For the period ended:
December 31, 2003
December 31, 2002
December 31, 2001
Sales returns and allowance:
For the period ended:
December 31, 2003
December 31, 2002
December 31, 2001
Balance at
Beginning
of Period
Charged to
Cost and
Expenses
Deductions
Balance at
End of
Period
$1,509
$ 87
$107
$1,489
$1,893
$ 515
$899
$1,509
$2,296
$ 152
$555
$1,893
$ 987
$(101)
$474
$ 412
$ 643
$ 344
$ —
$ 987
$ 885
$(242)
$ —
$ 643
79
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), effective as of January 31,
2004 (the "Effective Date"), is made between Wright Medical Technology, Inc., a
Delaware corporation (the "Company") and F. Barry Bays (the "Employee").
1. Employment. The Company hereby employs the Employee and the
Employee hereby accepts employment all upon the terms and conditions herein set
forth.
2. Duties. The Employee is engaged as the President and Chief
Executive Officer of the Company and hereby promises to perform and discharge
well and faithfully the duties which may be assigned to him from time to time by
the Board of Directors of the Company (the "Board") in connection with the
conduct of the Company's business.
3. Extent of Services. The Employee shall devote his entire time,
attention, and energies to the business of the Company and shall not without the
approval of the Company, during the term of this Agreement, be engaged in any
other business activity, regardless of whether such activity is pursued for
gain, profit or other pecuniary advantage; but this shall not be construed as
preventing the Employee from investing his personal assets in businesses which
do not compete with the Company in such form or manner as will not require any
services on the part of the Employee in the operation of the affairs of the
companies in which such investments are made and in which his participation is
solely that of an investor, and except that the Employee may purchase securities
in any corporation whose securities are regularly traded on NASDAQ, a national
or regional stock exchange or in the over-the-counter market provided such
purchase shall not result in his collectively owning beneficially at any one
time one percent (1%) or more of the equity securities of any corporation
engaged in a business competitive to that of the Company. Nothing in this
paragraph 3 shall prevent the Employee from serving on the Board of Directors of
any other company, so long as the Board shall approve each position held by the
Employee.
4. Compensation Matters.
(a) Base Salary. For services rendered under this Agreement, the
Company shall pay the Employee an aggregate salary of $270,000 per annum (the
"Base Salary"), payable (after deduction of applicable payroll taxes) in
accordance with the customary payroll practices of the Company, as may exist
from time to time.
(b) Annual Bonus. During the Employee's employment hereunder, in
addition to Base Salary, the Employee shall be eligible to receive an annual
performance bonus (the "Bonus") with a target of 50% of Base Salary for each
calendar year during Employee's employment; provided that, except as otherwise
provided in this Agreement, Employee must be employed on the last day of such
calendar year in order to receive the Bonus attributable thereto. The Employee's
entitlement to the Bonus for any particular calendar year shall be based on the
attainment of performance objectives established by the Compensation Committee
of the Company (the "Committee") and communicated to the Employee in writing at
the beginning of each calendar year. The Committee shall determine the
Employee's entitlement to the Bonus, based on the achievement of the performance
objectives of such year, as determined by the Committee and communicated to the
Employee, in good faith within sixty (60) days after the end of each such
calendar year, which shall be paid by the Company no later than ten (10 days
following such determination. The Employee shall also be eligible for and
participate in such fringe benefits as shall be generally provided to executives
of the Company, including medical insurance and retirement programs which may be
adopted from time to time during the term hereof by the Company. The Employee
shall be responsible for making any generally applicable employee contributions
required under such fringe benefit programs.
Bays Employment Agreement
January 31, 2004
Page 2
(c) Future Option Incentive Grants. During the term of this
Agreement, the Employee shall be eligible for participation in the Amended and
Restated Wright Medical Group, Inc. 1999 Equity Incentive Plan (the "Stock
Option Plan"), as may be amended from time to time, and any other stock option
plan administered by the Compensation Committee of the Board of Directors.
(d) The Committee shall review the Employee's Compensation at
least once per year and award such bonuses or make such increases to the Base
Salary as the Committee, in its sole discretion, determines are merited, based
upon the Employee's performance and consistent with compensation policies of the
Company.
5. Sick Leave and Vacation. During the term of this Agreement,
the Employee shall be entitled to annual vacation of at least five (5) weeks, or
such greater time period if permitted by Company policy, to be taken at his
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
discretion, in a manner consistent with his obligations to the Company under
this Agreement. The actual dates of such vacation periods shall be agreed upon
mutual discussions between the Company and Employee; provided, however, that the
Company shall have the ultimate decision with respect to the actual vacation
dates to be taken by Employee, which decision shall not be unreasonable. The
Employee shall also be entitled to sick leave consistent with Company policy.
6. Expenses: Relocation. During the term of this Agreement, the
Company shall reimburse the Employee for all reasonable out-of-pocket expenses
incurred by the Employee in connection with the business of the Company and in
performance of his duties under this Agreement upon the Employee's presentation
to the Company of an itemized accounting of such expenses with reasonable
supporting data.
7. Term.
(a) The Employee employment under this Agreement shall commence on
the Effective Date and shall expire on April 1, 2005. Notwithstanding the
foregoing, the Company may at its election, subject to paragraph 7(b) below,
terminate the obligations of the Company as follows:
(i) Upon 30 days' notice if the Employee becomes
physically or mentally incapacitated or is injured so that he is unable to
perform the services required of him hereunder and such inability to perform
continues for a period in excess of six (6) months and is continuing at the time
of such notice; or
(ii) For "Cause" upon notice of such termination
to the Employee. For purposes of this Agreement, the Company shall have "Cause"
to terminate its obligations hereunder upon (A) the determination by the Board
that the Employee has ceased to perform his duties hereunder (other than as a
result of his incapacity due to physical or mental illness or injury), which
failure amounts to an intentional and extended neglect of his duties hereunder,
(B) the Employee's death, (C) the determination of the Board that the Employee
has engaged or is about to engage in conduct materially injurious to the
Company, (D) the Employee's having been convicted of a felony, or (E) the
Employee's participation in activities proscribed by the provisions of
paragraphs 9 or 10 hereof or material breach of any of the other covenants
herein; or
(iii) Without Cause upon 30 days' notice of such
termination to the Employee.
(b) (i) If this Agreement is terminated pursuant to
paragraph 7(a)(i) above, the Employee shall receive salary continuation pay from
the date of such termination until April 1, 2005 at the rate of 100% of the Base
Salary, reduced by applicable payroll taxes and further reduced by the amount
received by the Employee during such period under any Company-maintained
disability insurance policy or plan or under Social Security or similar laws.
Such salary continuation payments shall be paid periodically to the Employee as
provided in paragraph 4(a) for the payment of the Base Salary.
Bays Employment Agreement
January 31,2004
Page 3
(ii) If this Agreement is terminated
pursuant 7(a)(ii) above, the Employee shall receive no salary continuation pay
or severance pay.
(iii) If this Agreement is terminated
pursuant to paragraph 7(a)(iii) above, the Employee shall receive salary
continuation pay for a period of twelve (12) months from and after the date of
such termination (the "Salary Continuation Period) equal to the Base Salary.
Such salary continuation payments (less applicable payroll taxes) shall be paid
periodically to the Employee as provided in paragraph 4(a) for the payment of
the Base Salary. During the Salary Continuation Period, the Employee shall also
be eligible to receive continued coverage under all of the Company's current
health benefit and life insurance programs at the same rates that were
applicable to the Employee prior to the commencement of the Salary Continuation
Period.
(c) During the Salary Continuation Period, the Employee
shall be under no obligation to mitigate any of the costs to the Company of the
salary continuation payments.
8. Representations. The Employee hereby represents to the Company
that (a) he is legally entitled to enter into this Agreement and to perform the
services contemplated herein, and (b) he has the full right, power and
authority, subject to no rights of third parties, to grant to the Company the
rights contemplated by paragraph 10 hereof.
9. Disclosure of Information. The Employee recognizes and
acknowledges that the Company's and its predecessors' trade secrets, know-how
and proprietary processes as they may exist from time to time are valuable,
special and unique assets of the Company's businesses, access to and knowledge
of which are essential to the performance of the Employee's duties hereunder.
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
The Employee will not, during or after the term of his employment by any of the
Company, in whole or in part, disclose such secrets, know-how or processes to
any person, firm, corporation, association or other entity for any reason or
purpose whatsoever, nor shall the Employee make use of any such property for his
own purposes or for the benefit of any person, firm, corporation or other entity
(except the Company) under any circumstances during or after the term of his
employment, provided that after the term of his employment these restrictions
shall not apply to such secrets, know-how and processes which are then in the
public domain (provided further that the Employee was not responsible, directly
or indirectly, for such secrets, know-how or processes entering the public
domain without the Company's consent).
10. Inventions. The Employee hereby sells, transfers and assigns
to the Company or to any person, or entity designated by the Company all of the
entire right, title and interest of the Employee in and to all inventions,
ideas, disclosures and improvements, whether patented or unpatented, and
copyrightable material, made or conceived by the Employee, solely or jointly,
during the term hereof which relate to methods, apparatus, designs, products,
processes or devices, sold, leased, used or under consideration or development
by the Company or any of its predecessors, or which otherwise relate to or
pertain to the business, functions or operations of the Company or any of its
predecessors or which arise from the efforts of the Employee during the course
of his employment for the Company or any of its predecessors. The Employee shall
communicate promptly and disclose to the Company, in such form as the Company
requests, all information, details and data pertaining to the aforementioned
inventions, ideas, disclosures and improvements; and the Employee shall execute
and deliver to the Company such formal transfers and assignments and such other
papers and documents as may be necessary or required of the Employee to permit
the Company or any person or entity designated by the Company to file and
prosecute the patent applications and, as to copyrightable material, to obtain
copyright thereof. Any invention relating to the business of the Company and
disclosed by the Employee within one year following the termination of this
Agreement shall be deemed to fall within the provisions of this paragraph unless
proved to have been first conceived and made following such termination.
Bays Employment Agreement
January 31, 2004
Page 4
11. Covenants Not To Compete or Interfere. During the term of this
Agreement, including any extensions, and for a period ending twelve (12) months
from and after the termination of the Employee's employment hereunder, the
Employee shall not (whether as an officer, director, owner, employee, partner or
other direct or indirect participant) engage in any in Competitive Business.
"Competitive Business" shall mean the manufacturing, supplying, producing,
selling, distributing or providing for sale of any orthopaedic product, device
or instrument manufactured or sold by the Company or its subsidiaries or in
clinical development sponsored by the Company or its subsidiaries, in each case,
as of the date of termination of the Employee's employment. For such period, the
Employee shall also not interfere with, disrupt or attempt to disrupt the
relationship, contractual or otherwise, between the Company or its subsidiaries
and any customer, supplier, lessor, lessee or employee of the Company or its
subsidiaries. It is the intent of the parties that the agreement set forth in
this paragraph 11 apply in all parts of the world.
Employee agrees that a monetary remedy for a breach of the agreement
set forth in this paragraph 11 will be inadequate and impracticable and further
agrees that such a breach would cause the Company irreparable harm, and that the
Company shall be entitled to temporary and permanent injunctive relief without
the necessity of proving actual damages. In the event of such a breach, Employee
agrees that the Company shall be entitled to such injunctive relief, including
temporary restraining orders, preliminary injunctions and permanent injunctions
as a court of competent jurisdiction shall determine.
It is the desire and intent of the parties that the provisions of this
paragraph 11 shall be enforced to the fullest extent permissible under the laws
and public policies applied in each jurisdiction in which enforcement is sought.
Accordingly, if any particular portion of this paragraph 11 shall be adjudicated
to be invalid or unenforceable, this paragraph 11 shall be deemed curtailed,
whether as to time or location, to the minimum extent required for its validity
under the applicable law and shall be binding and enforceable with respect to
the Employee as so curtailed, such curtailment to apply only with respect to the
operation of this paragraph in the particular jurisdiction in which such
adjudication is made. If a court in any jurisdiction, in adjudicating the
validity of this paragraph 11, imposes any additional terms or restrictions
which respect to the agreement set forth in this paragraph 11, this paragraph 11
shall be deemed amended to incorporate such additional terms or restrictions.
12. Injunctive Relief. If there is a breach or threatened breach
of the provisions of paragraphs 9, 10 or 11 of this Agreement, the Company shall
be entitled to an injunction restraining the Employee from such breach. Nothing
herein shall be construed as prohibiting the Company from pursuing any other
remedies for such breach or threatened breach.
13. [Reserved].
14. Car Allowance. The Employee shall be entitled to a monthly
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
allowance of $850.00, which the Employee may utilize to cover expenses relating
to the use of his personal automobile. The Company shall pay for all regularly
scheduled maintenance, insurance, repairs, and registration fees for such
automobile. The Company shall not be responsible for any costs, expenses, or
other obligations related to such automobile other than regularly scheduled
maintenance costs, insurance, repairs, registration fees, and the monthly
allowance payable hereunder.
15. Insurance. The Company may, at its election and for its
benefit, insure the Employee against accidental loss or death, and the Employee
shall submit to such physical examination and supply such information as may be
required in connection therewith.
Bays Employment Agreement
January 31,2004
Page 5
16. Notices. Any notice required or permitted to be given under
this Agreement shall be sufficient if in writing and if sent by registered mail
to 3044 Shea Road, Collierville, TN 38017, in the case of the Employee, or to
Wright Medical Technology, Inc., 5677 Airline Road, Arlington, TN 38002, Attn:
General Counsel, in the case of the Company, or to such other address as either
party shall notify the other.
17. Waiver of Breach. A waiver by the Company or Employee of a
breach of any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach of the other party.
18. Governing Law. This Agreement shall be governed by and
construed by and enforced in accordance with the laws of the state of Tennessee,
without reference to the conflicts of laws principles therein.
19. Assignment. This Agreement may be assigned, without the
consent of the Employee, by the Company to any person, partnership, corporation,
or other entity which has purchased substantially all the assets of such
Company, provided such assignee assumes all the liabilities of such Company
hereunder.
20. Entire Agreement. This instrument contains the entire
agreement of the parties with respect to the subject matter referred to herein
and supersedes any and all agreements, letters of intent or understandings
between the Employee and the Company, its subsidiaries, or any of the Company's
principal shareholders with respect thereto. These Agreements may be changed
only by an agreement or agreements in writing signed by a party against whom
enforcement of any waiver, change, modification, extension, or discharge is
sought.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Effective Date.
AGREED AND ACCEPTED:
WRIGHT MEDICAL TECHNOLOGY, INC. EMPLOYEE
By: /s/ James T. Treace /s/ F. Barry Bays
--------------------------- ------------------------
James T. Treace F. Barry Bays
Chairman of the Board of Directors
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), effective as of December 11,
2003 (the "Effective Date"), is made between Wright Medical Technology, Inc., a
Delaware corporation (the "Company") and John K. Bakewell (the "Employee").
1. Employment. The Company hereby employs the Employee and the
Employee hereby accepts employment all upon the terms and conditions herein set
forth.
2. Duties. The Employee is engaged as the Executive Vice
President and Chief Financial Officer of the Company and hereby promises to
perform and discharge well and faithfully the duties which may be assigned to
him from time to time by the President and Chief Executive Officer or the Board
of Directors of the Company (the "Board") in connection with the conduct of the
Company's business.
3. Extent of Services. The Employee shall devote his entire time,
attention, and energies to the business of the Company and shall not without the
approval of the Company, during the term of this Agreement, be engaged in any
other business activity, regardless of whether such activity is pursued for
gain, profit or other pecuniary advantage; but this shall not be construed as
preventing the Employee from investing his personal assets in businesses which
do not compete with the Company in such form or manner as will not require any
services on the part of the Employee in the operation of the affairs of the
companies in which such investments are made and in which his participation is
solely that of an investor, and except that the Employee may purchase securities
in any corporation whose securities are regularly traded on NASDAQ, a national
or regional stock exchange or in the over-the-counter market provided such
purchase shall not result in his collectively owning beneficially at any one
time one percent (1%) or more of the equity securities of any corporation
engaged in a business competitive to that of the Company. Nothing in this
paragraph 3 shall prevent the Employee from serving on the Board of Directors of
any other company, so long as the Board shall approve each position held by the
Employee.
4. Compensation Matters.
(a) Base Salary. For services rendered under this Agreement, the
Company shall pay the Employee an aggregate salary of $206,500 per annum (the
"Base Salary"), payable (after deduction of applicable payroll taxes) in
accordance with the customary payroll practices of the Company, as may exist
from time to time.
(b) Annual Bonus. During the Employee's employment hereunder, in
addition to Base Salary, the Employee shall be eligible to receive an annual
performance bonus (the "Bonus") with a target of 50% of Base Salary for each
calendar year during Employee's employment; provided that, except as otherwise
provided in this Agreement, Employee must be employed on the last day of such
calendar year in order to receive the Bonus attributable thereto. The Employee's
entitlement to the Bonus for any particular calendar year shall be based on the
attainment of performance objectives established by the Compensation Committee
of the Company (the "Committee") and communicated to the Employee in writing at
the beginning of each calendar year. The Committee shall determine the
Employee's entitlement to the Bonus, based on the achievement of the performance
objectives of such year, as determined by the Committee and communicated to the
Employee, in good faith within sixty (60) days after the end of each such
calendar year, which shall be paid by the Company no later than ten (10 days
following such determination. The Employee shall also be eligible for and
participate in such fringe benefits as shall be generally provided to executives
of the Company, including medical insurance and retirement programs which may be
adopted from time to time during the term hereof by the Company. The Employee
shall be responsible for making any generally applicable employee contributions
required under such fringe benefit programs.
Bakewell Employment Agreement
December 11, 2003
Page 2
(c) Future Option Incentive Grants. During the term of this
Agreement, the Employee shall be eligible for participation in the Amended and
Restated Wright Medical Group, Inc. 1999 Equity Incentive Plan (the "Stock
Option Plan"), as may be amended from time to time, and any other stock option
plan administered by the Compensation Committee of the Board of Directors.
(d) The Committee shall review the Employee's Compensation at
least once per year and award such bonuses or make such increases to the Base
Salary as the Committee, in its sole discretion, determines are merited, based
upon the Employee's performance and consistent with compensation policies of the
Company.
5. Sick Leave and Vacation. During the term of this Agreement,
the Employee shall be entitled to annual vacation of at least four (4) weeks, or
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
such greater time period if permitted by Company policy, to be taken at his
discretion, in a manner consistent with his obligations to the Company under
this Agreement. The actual dates of such vacation periods shall be agreed upon
mutual discussions between the Company and Employee; provided, however, that the
Company shall have the ultimate decision with respect to the actual vacation
dates to be taken by Employee, which decision shall not be unreasonable. The
Employee shall also be entitled to sick leave consistent with Company policy.
6. Expenses; Relocation. During the term of this Agreement, the
Company shall reimburse the Employee for all reasonable out-of-pocket expenses
incurred by the Employee in connection with the business of the Company and in
performance of his duties under this Agreement upon the Employee's presentation
to the Company of an itemized accounting of such expenses with reasonable
supporting data.
7. Term.
(a) The Employee employment under this Agreement shall commence on
the Effective Date and shall expire on April 1, 2005. Notwithstanding the
foregoing, the Company may at its election, subject to paragraph 7(b) below,
terminate the obligations of the Company as follows:
(i) Upon 30 days' notice if the Employee becomes
physically or mentally incapacitated or is injured so that he is unable to
perform the services required of him hereunder and such inability to perform
continues for a period in excess of six (6) months and is continuing at the time
of such notice; or
(ii) For "Cause" upon notice of such termination
to the Employee. For purposes of this Agreement, the Company shall have "Cause"
to terminate its obligations hereunder upon (A) the determination by the
President or Board that the Employee has ceased to perform his duties hereunder
(other than as a result of his incapacity due to physical or mental illness or
injury), which failure amounts to an intentional and extended neglect of his
duties hereunder, (B) the Employee's death, (C) the determination of the
President or Board that the Employee has engaged or is about to engage in
conduct materially injurious to the Company, (D) the Employee's having been
convicted of a felony, or (E) the Employee's participation in activities
proscribed by the provisions of paragraphs 9 or 10 hereof or material breach of
any of the other covenants herein; or
(iii) Without Cause upon 30 days' notice of such
termination to the Employee.
(b) (i) If this Agreement is terminated pursuant to
paragraph 7(a)(i) above, the Employee shall receive salary continuation pay from
the date of such termination until April 1, 2005 at the rate of 100% of the Base
Salary, reduced by applicable payroll taxes and further reduced by the amount
received by the Employee during such period under any Company-maintained
disability insurance policy or plan or under Social Security or similar laws.
Such salary continuation payments shall be paid periodically to the Employee as
provided in paragraph 4(a) for the payment of the Base Salary.
Bakewell Employment Agreement
December 11, 2003
Page 3
(ii) If this Agreement is terminated
pursuant 7(a)(ii) above, the Employee shall receive no salary continuation pay
or severance pay.
(iii) If this Agreement is terminated
pursuant to paragraph 7(a)(iii) above, the Employee shall receive salary
continuation pay for a period of twelve (12) months from and after the date of
such termination (the "Salary Continuation Period) equal to the Base Salary.
Such salary continuation payments (less applicable payroll taxes) shall be paid
periodically to the Employee as provided in paragraph 4(a) for the payment of
the Base Salary. During the Salary Continuation Period, the Employee shall also
be eligible to receive continued coverage under all of the Company's current
health benefit and life insurance programs at the same rates that were
applicable to the Employee prior to the commencement of the Salary Continuation
Period.
(c) During the Salary Continuation Period, the Employee
shall be under no obligation to mitigate any of the costs to the Company of the
salary continuation payments.
8. Representations. The Employee hereby represents to the Company
that (a) he is legally entitled to enter into this Agreement and to perform the
services contemplated herein, and (b) he has the full right, power and
authority, subject to no rights of third parties, to grant to the Company the
rights contemplated by paragraph 10 hereof.
9. Disclosure of Information. The Employee recognizes and
acknowledges that the Company's and its predecessors' trade secrets, know-how
and proprietary processes as they may exist from time to time are valuable,
special and unique assets of the Company's businesses, access to and knowledge
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
of which are essential to the performance of the Employee's duties hereunder.
The Employee will not, during or after the term of his employment by any of the
Company, in whole or in part, disclose such secrets, know-how or processes to
any person, firm, corporation, association or other entity for any reason or
purpose whatsoever, nor shall the Employee make use of any such property for his
own purposes or for the benefit of any person, firm, corporation or other entity
(except the Company) under any circumstances during or after the term of his
employment, provided that after the term of his employment these restrictions
shall not apply to such secrets, know-how and processes which are then in the
public domain (provided further that the Employee was not responsible, directly
or indirectly, for such secrets, know-how or processes entering the public
domain without the Company's consent).
10. Inventions. The Employee hereby sells, transfers and assigns
to the Company or to any person, or entity designated by the Company all of the
entire right, title and interest of the Employee in and to all inventions,
ideas, disclosures and improvements, whether patented or unpatented, and
copyrightable material, made or conceived by the Employee, solely or jointly,
during the term hereof which relate to methods, apparatus, designs, products,
processes or devices, sold, leased, used or under consideration or development
by the Company or any of its predecessors, or which otherwise relate to or
pertain to the business, functions or operations of the Company or any of its
predecessors or which arise from the efforts of the Employee during the course
of his employment for the Company or any of its predecessors. The Employee shall
communicate promptly and disclose to the Company, in such form as the Company
requests, all information, details and data pertaining to the aforementioned
inventions, ideas, disclosures and improvements; and the Employee shall execute
and deliver to the Company such formal transfers and assignments and such other
papers and documents as may be necessary or required of the Employee to permit
the Company or any person or entity designated by the Company to file and
prosecute the patent applications and, as to copyrightable material, to obtain
copyright thereof. Any invention relating to the business of the Company and
disclosed by the Employee within one year following the termination of this
Agreement shall be deemed to fall within the provisions of this paragraph unless
proved to have been first conceived and made following such termination.
Bakewell Employment Agreement
December 11, 2003
Page 4
11. Covenants Not To Compete or Interfere. During the term of this
Agreement, including any extensions, and for a period ending twelve (12) months
from and after the termination of the Employee's employment hereunder, the
Employee shall not (whether as an officer, director, owner, employee, partner or
other direct or indirect participant) engage in any in Competitive Business.
"Competitive Business" shall mean the manufacturing, supplying, producing,
selling, distributing or providing for sale of any orthopaedic product, device
or instrument manufactured or sold by the Company or its subsidiaries or in
clinical development sponsored by the Company or its subsidiaries, in each case,
as of the date of termination of the Employee's employment. For such period, the
Employee shall also not interfere with, disrupt or attempt to disrupt the
relationship, contractual or otherwise, between the Company or its subsidiaries
and any customer, supplier, lessor, lessee or employee of the Company or its
subsidiaries. It is the intent of the parties that the agreement set forth in
this paragraph 11 apply in all parts of the world.
Employee agrees that a monetary remedy for a breach of the agreement
set forth in this paragraph 11 will be inadequate and impracticable and further
agrees that such a breach would cause the Company irreparable harm, and that the
Company shall be entitled to temporary and permanent injunctive relief without
the necessity of proving actual damages. In the event of such a breach, Employee
agrees that the Company shall be entitled to such injunctive relief, including
temporary restraining orders, preliminary injunctions and permanent injunctions
as a court of competent jurisdiction shall determine.
It is the desire and intent of the parties that the provisions of this
paragraph 11 shall be enforced to the fullest extent permissible under the laws
and public policies applied in each jurisdiction in which enforcement is sought.
Accordingly, if any particular portion of this paragraph 11 shall be adjudicated
to be invalid or unenforceable, this paragraph 11 shall be deemed curtailed,
whether as to time or location, to the minimum extent required for its validity
under the applicable law and shall be binding and enforceable with respect to
the Employee as so curtailed, such curtailment to apply only with respect to the
operation of this paragraph in the particular jurisdiction in which such
adjudication is made. If a court in any jurisdiction, in adjudicating the
validity of this paragraph 11, imposes any additional terms or restrictions
which respect to the agreement set forth in this paragraph 11, this paragraph 11
shall be deemed amended to incorporate such additional terms or restrictions.
12. Injunctive Relief. If there is a breach or threatened breach
of the provisions of paragraphs 9, 10 or 11 of this Agreement, the Company shall
be entitled to an injunction restraining the Employee from such breach. Nothing
herein shall be construed as prohibiting the Company from pursuing any other
remedies for such breach or threatened breach.
13. [Reserved].
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
14. Car Allowance. The Employee shall be entitled to a monthly
allowance of $700.00, which Employee may utilize to cover expenses relating to
the use of his personal automobile.
15. Insurance. The Company may, at its election and for its
benefit, insure the Employee against accidental loss or death, and the Employee
shall submit to such physical examination and supply such information as may be
required in connection therewith.
16. Notices. Any notice required or permitted to be given under
this Agreement shall be sufficient if in writing and if sent by registered mail
to 1759 Nappier Woods Drive, Collierville, TN 38017, in the case of the
Employee, or to Wright Medical Technology, Inc., 5677 Airline Road, Arlington,
TN 38002, Attn: General Counsel, in the case of the Company, or to such other
address as either party shall notify the other.
17. Waiver of Breach. A waiver by the Company or Employee of a
breach of any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach of the other party.
Bakewell Employment Agreement
December 11, 2003
Page 5
18. Governing Law. This Agreement shall be governed by and
construed by and enforced in accordance with the laws of the state of Tennessee,
without reference to the conflicts of laws principles therein.
19. Assignment. This Agreement may be assigned, without the
consent of the Employee, by the Company to any person, partnership, corporation,
or other entity which has purchased substantially all the assets of such
Company, provided such assignee assumes all the liabilities of such Company
hereunder.
20. Entire Agreement. This instrument contains the entire
agreement of the parties with respect to the subject matter referred to herein
and supersedes any and all agreements, letters of intent or understandings
between the Employee and the Company, its subsidiaries, or any of the Company's
principal shareholders with respect thereto. These Agreements may be changed
only by an agreement or agreements in writing signed by a party against whom
enforcement of any waiver, change, modification, extension, or discharge is
sought.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Effective Date.
AGREED AND ACCEPTED:
WRIGHT MEDICAL TECHNOLOGY, INC. EMPLOYEE
By: /s/ F. Barry Bays /s/ John K. Bakewell
--------------------------- -------------------------------
John K. Bakewell
Title: PRESIDENT & CEO
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
EXHIBIT 21
WRIGHT MEDICAL GROUP, INC.
LIST OF SUBSIDIARIES
1. Wright Medical Technology, Inc. (USA)
2. Wright Medical Technology Canada Ltd. (Canada)
3. Wright Medical Japan, K.K. (Japan)
4. 2Hip Holdings SAS (France)
5. Wright Medical Europe SA (France)
6. Wright Cremascoli Ortho Trading SNC (France)
7. Wright Cremascoli Ortho SA (France)
8. Wright Cremascoli Ortho SpA (Italy)
9. Wright Cremascoli Orthotechnique SAS (France)
10. Wright Cremascoli Ortho Limited (UK)
11. Cremascoli Ortho GmbH (Germany)
12. Wright Cremascoli Ortho SA (Belgium)
13. Cremascoli Ortho SA (Spain)
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
EXHIBIT 23.1
Independent Auditors' Consent
The Board of Directors
Wright Medical Group, Inc.:
We consent to the incorporation by reference in the registration statements (No.
333-75176, 333-90024 and 333-108638) on Form S-8 of Wright Medical Group, Inc.
of our report dated February 11, 2004, with respect to the consolidated balance
sheets of Wright Medical Group, Inc. and subsidiaries as of December 31, 2003
and 2002, and the related consolidated statements of operations, stockholders'
equity and comprehensive income and cash flows for the years then ended, and all
related financial statement schedules, which report appears in the December 31,
2003, annual report on Form 10-K of Wright Medical Group, Inc.
Our report refers to our audit of the restatement adjustment to conform to the
presentation of losses from extinguishment of debt required by Statement of
Financial Accounting Standards (SFAS) No. 145, "Rescission of FASB Statements
No. 4 and 64, Amendment of FASB No. 13, and Technical Corrections," which was
adopted by the Company on January 1, 2003. We audited the adjustment described
in Note 2 that was applied to restate the 2001 financial statements related to
the adoption of SFAS No. 145. In our opinion, such adjustment is appropriate and
has been properly applied.
Our report also refers to the revisions to include transitional disclosures
required by Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets," which was adopted by the Company as of January 1,
2002, as more fully described in Note 6 to the consolidated financial
statements.
We were not engaged to audit, review, or apply any procedures to the 2001
consolidated financial statements of Wright Medical Group, Inc. other than with
respect to the adjustment and disclosures referred to above and, accordingly, we
do not express an opinion or any other form of assurance on the 2001
consolidated financial statements taken as a whole.
(Signed) KPMG LLP
Memphis, Tennessee
February 20, 2004
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
EXHIBIT 23.2
INFORMATION REGARDING CONSENT OF ARTHUR ANDERSEN LLP
Section 11(a) of the Securities Act of 1933, as amended (the "Securities Act"),
provides that if part of a registration statement at the time it becomes
effective contains an untrue statement of a material fact, or omits a material
fact required to be stated therein or necessary to make the statements therein
not misleading, any person acquiring a security pursuant to such registration
statement (unless it is proved that at the time of such acquisition such person
knew of such untruth or omission) may assert a claim against, among others, an
accountant who has consented to be named as having certified any part of the
registration statement or as having prepared any report for use in connection
with the registration statement.
Wright Medical Group, Inc. ("the Company") decided to no longer engage Arthur
Andersen LLP ("Andersen") as its independent auditors, effective May 10, 2002.
For additional information, see the Company's Current Report on Form 8-K dated
May 10, 2002. After reasonable efforts, the Company has been unable to obtain
Andersen's written consent to the incorporation by reference into the Company's
previously filed registration statements on Form S-8 (Registration Nos.
333-75176 and 333-90024) and their respective related prospectuses
(collectively, the "Registration Statements") of Andersen's audit report with
respect to the Company's consolidated financial statements as of December 31,
2001 and for the year in the period then ended.
Under these circumstances, Rule 437a under the Securities Act permits the
Company to file this annual report on Form 10-K, which is incorporated by
reference into the Registration Statements, without a written consent from
Andersen. As a result, with respect to transactions in the Company's securities
pursuant to the Registration Statements that occur subsequent to the date that
this annual report on Form 10-K is filed with the Securities and Exchange
Commission, Andersen will not have any liability under Section 11(a) of the
Securities Act for any untrue statements of a material fact contained in the
financial statements audited by Andersen or any omissions of a material fact
required to be stated therein. Accordingly, you would be unable to assert a
claim against Andersen under Section 11(a) of the Securities Act.
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(a) UNDER
THE SECURITIES EXCHANGE ACT OF 1934
I, F. Barry Bays, certify that:
I have reviewed this annual report on Form 10-K for the year ended December 31,
2003, of Wright Medical Group, Inc. (the "Company");
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the Company as of, and for,
the periods presented in this report;
The Company's other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) for the Company and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Company, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in
which this report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) disclosed in this report any change in the Company's internal control
over financial reporting that occurred during the Company's most
recent fiscal quarter (the Company's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over
financial reporting; and
The Company's other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the Company's
auditors and the audit committee of the Company's board of directors:
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the Company's ability to record,
process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
control over financial reporting.
Date: February 20, 2004
/s/ F. Barry Bays
---------------------------
F. Barry Bays
President and Chief Executive Officer
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(a) UNDER
THE SECURITIES EXCHANGE ACT OF 1934
I, John K. Bakewell, certify that:
I have reviewed this annual report on Form 10-K for the year ended December 31,
2003, of Wright Medical Group, Inc. (the "Company");
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the Company as of, and for,
the periods presented in this report;
The Company's other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) for the Company and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Company, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in
which this report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) disclosed in this report any change in the Company's internal control
over financial reporting that occurred during the Company's most
recent fiscal quarter (the Company's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over
financial reporting; and
The Company's other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the Company's
auditors and the audit committee of the Company's board of directors:
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the Company's ability to record,
process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
control over financial reporting.
Date: February 20, 2004
/s/ John K. Bakewell
--------------------------------
John K. Bakewell
Executive Vice President and
Chief Financial Officer
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004
EXHIBIT 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14(b) UNDER
THE SECURITIES EXCHANGE ACT OF 1934 AND SECTION 1350 OF
CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE
Each of the undersigned, F. Barry Bays and John K. Bakewell, certifies pursuant
to Rule 13a-14(b) under the Securities Exchange Act of 1934 (the "Exchange Act")
and Section 1350 of Chapter 63 of Title 18 of the United States Code, that (1)
this annual report on Form 10-K for the year ended December 31, 2003, of Wright
Medical Group, Inc. (the "Company") fully complies with the requirements of
Section 13(a) of the Exchange Act, and (2) the information contained in this
report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Date: February 20, 2004
/s/ F. Barry Bays
-----------------------------
F. Barry Bays
President and Chief Executive Officer
/s/ John K. Bakewell
-----------------------------
John K. Bakewell
Executive Vice President and
Chief Financial Officer
_______________________________________________
Created by 10KWizard www.10KWizard.com
Source: WRIGHT MEDICAL GROUP, 10-K, February 20, 2004