FORM 10-K
WRIGHT MEDICAL GROUP INC - WMGI
Filed: March 01, 2005 (period: December 31, 2004)
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.
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.
Item 9B. Other Information.
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 and Financial Statement Schedules.
SIGNATURES
EX-10.14 (EX-10.14 EMPLOYMENT AGREEMENT JEFFREY G. ROBERTS)
EX-23 (EX-23 CONSENT OF KPMG LLP)
EX-31.1 (EX-31.1 RULE 13A-14(A) CERTIFICATION OF THE CEO)
EX-31.2 (EX-31.2 RULE 13A-14(A) CERTIFICATION OF THE CFO)
EX-32 (EX-32 SECTION 1350 CERTIFICATIONS OF THE CEO CFO)
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
(Mark One)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
�
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
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: 000-32883
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 $1,001,982,256.
As of February 22, 2005, there were 33,854,778 shares of common stock outstanding.
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
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, 2004, pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the
annual meeting of stockholders to be held on May 12, 2005.
WRIGHT MEDICAL GROUP, INC.
ANNUAL REPORT ON FORM 10-K
Table of Contents
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Part I
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
Item 9B. Other Information
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
Item 15. Exhibits and Financial Statement Schedules
Part IV
Signatures
Safe-Harbor Statement
Page
1
14
15
15
16
17
19
43
44
71
71
71
72
72
72
72
72
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 differ materially 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, and we assume no obligation to update any forward-looking statement after this date.
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
Item 1. Business.
Overview
PART I
Wright Medical Group, Inc., 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 the orthopaedic industry, such as advanced bearing
surfaces, modular necks, and bone conserving implants within the hip market, as well as on the integration of our biologics products
into reconstructive joint procedures and other orthopaedic applications. For the year ended December 31, 2004, we had net sales of
$297.5 million and net income of $24.0 million.
History
We were 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. acquired majority ownership of our
predecessor company, Wright Medical Technology, Inc., on December 7, 1999. This transaction, which represented a recapitalization
of our 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 its 50 year history.
On December 22, 1999, we acquired Cremascoli Ortho Holding, S.A., based in Toulon, France, and shortly thereafter put a new
management team 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 60 countries.
In 2001, we sold 7,500,000 shares of common stock in our initial public offering, which generated $84.8 million in net proceeds. In
2002, we completed a secondary offering of 3,450,000 shares of common stock which generated $49.5 million in net proceeds.
Orthopaedic Industry
It is estimated that the worldwide orthopaedic industry generated sales of approximately $19 billion in 2004. We believe this figure
will grow by 7% to 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.
1
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
Reconstructive Joint Device Market
Most reconstructive joint 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 device market is generally divided into the areas of knees, hips and extremities. It is estimated that the
worldwide reconstructive joint device market had sales of approximately $8 billion in 2004, 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 device
market in 2004, with estimated sales of approximately $4.0 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
reconstruction 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, as well as minimally invasive surgical techniques and
instrumentation 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 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. It is
estimated that the worldwide hip reconstruction market had sales of approximately $3.7 billion in 2004.
Similar to the knee reconstruction 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 advances in bearing surfaces
from 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, cross-linked polyethylene 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 (FDA) to market ceramic-on-ceramic hip systems in the United States.
Since then, two additional competitors have 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 head 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 implanting devices to replace or reconstruct injured or diseased joints
such as the finger, toe, wrist, elbow, foot, ankle and shoulder. It is estimated that the extremity reconstruction market had sales of
approximately $317 million worldwide in 2004. Major trends in extremity reconstruction include unique distal radius (wrist) and foot
and ankle fixation devices.
2
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
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 and represent an alternative solution to autograft, a procedure that involves harvesting a patient’s
own bone or soft tissue. Currently, there are three main types of biological bone grafting products, which are osteoconductive,
osteoinductive and combined osteoconductive/osteoinductive, that 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 biologics products enable the repair of tissue. These products provide favorable
microenvironments for quick revascularization and cell proliferation. It is estimated that the biologics market generated sales of
approximately $750 million worldwide in 2004.
Government Regulation
United States
Our products are strictly regulated by the FDA under the Food, Drug, and Cosmetic Act (FDC Act). Some of our products are also
regulated by state agencies. FDA regulations and the requirements of the FDC Act affect pre-clinical and clinical testing of our
products, the manner of design, manufacture, safety, efficacy, labeling, storage, recordkeeping, advertising and promotion of our
medical device products. Our tissue-based products are subject to FDA regulations, the National Organ Transplant Act (NOTA),
accreditation from the American Association of Tissue Banks (AATB) and various state agency regulations.
Generally, before we can market a new medical device, marketing clearance from the FDA must be obtained through a premarket
notification under Section 510(k) of the FDC Act or the FDA’s approval of a premarket approval (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.
PMA applications must be supported by valid scientific evidence to demonstrate the safety and effectiveness of the device, typically
including the results of human 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 and generally takes significantly longer than the 510(k) process. Additionally, the FDA may
never approve the PMA application. As part 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 medical 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 (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 (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
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 effectiveness of the device or warrant the
3
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
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
market withdrawal, 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 human 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.
In addition to granting approvals for our products, the FDA and international regulatory authorities periodically inspect us for
compliance with 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.
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 the European 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 are required to comply with other foreign regulations such as obtaining 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.
Products
We operate as one reportable segment, offering products in four primary market sectors: knee reconstruction, hip reconstruction,
extremity reconstruction, and biologics.
4
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
Knee Reconstruction
Our knee reconstruction product portfolio strategically positions us 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 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 ADVANCE ® Double High Knee Tibial Insert design addresses an adverse phenomenon, known as paradoxical motion, that often
occurs with other posterior cruciate ligament (“PCL”) retaining knee systems. In general, total knee systems are designed to be used
either with or without the patient’s PCL. Most knee implant designs used with the PCL are based on the theory that the ligament will
provide stability and increased flexion. Due to the phenomenon of paradoxical motion, however, small amounts of uncontrolled
sliding can occur between the replaced femoral and tibial surfaces. This movement prevents the prosthetic knee from flexing in a
stable, consistent manner like a normal knee and can result in abnormal gait and reduced flexion. The ADVANCE ® Double-High
Knee component can minimize paradoxical motion through an articulation designed to provide stability and maximize PCL function.
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 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 advanced surface bearing materials,
including ceramic and metal components, and innovative technology in surface replacement implants. We are therefore able to offer
surgeons and their patients a full continuum of treatment options.
Our hip product portfolio includes our LIFETIME SOLUTIONS™ plan, a three-tiered lifetime solution for the surgical treatment of
hip pain that incorporates our CONSERVE® family of products. Our CONSERVE® family of products work together to provide
bone-conserving, minimally invasive approaches to hip resurfacing and hip replacement. The first offering in our LIFETIME
SOLUTIONS™ plan is a partial hip resurfacing procedure performed with the CONSERVE® Partial Resurfacing Implant. This
procedure preserves the femoral head and neck
5
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
and does not invade the femoral canal. In addition, the acetabulum is left completely intact. The CONSERVE ® Partial Resurfacing
Implant’s conservative restoration provides a better solution for the patient by leaving maximum bone for future surgical procedures.
The second offering in our LIFETIME SOLUTIONS™ plan is a total hip resurfacing procedure using the CONSERVE ® Plus
Resurfacing Implant. By retaining the femoral head and neck and not invading the femoral canal, this procedure helps preserve the
patient’s natural motion in the joint. Our CONSERVE ® Plus Resurfacing Implant is available outside the U.S., but is pending FDA
approval for the U.S. market.
The third offering within LIFETIME SOLUTIONS™ is a primary total hip replacement. The CONSERVE ® Total Implant with
BFH™ Technology mimics the natural kinematics of the hip by replacing the natural femoral head with a large diameter femoral head
implant. The result of this increased femoral head diameter is a significant reduction in the potential for dislocation.
In our hip replacement product lines, 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 optimal solution for young and active patients.
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 femoral 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® Hip System. The acetabular shell is a titanium
porous coated shell, designed to accept either ceramic or polyethylene liners.
The PROFEMUR® Hip System provides surgeons with modularity in hip implant procedures. Our PROFEMUR® Hip System, which
was designed in Europe, features a patented modular femoral neck, 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 ® Hip System is offered
with a variety of femoral stem designs to provide a comprehensive implant system to appeal to any physician’s preference in implant
selection. Our principal PROFEMUR® stem offerings include our PROFEMUR® Z, PROFEMUR® Plasma Z, PROFEMUR® S and
PROFEMUR® T stems.
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.
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 an 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 patients
with 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.
6
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
Biologics
We offer a broad line 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 by
utilizing 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 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. OSTEOSET® 2 DBM graft is a unique bone graft substitute incorporating
demineralized bone matrix (DBM) into OSTEOSET® surgical-grade calcium sulfate pellets. These two bone graft materials, each
with a long clinical history, provide an ideal combination of osteoinduction and osteoconduction for guided bone regeneration. Our
surgical grade calcium sulfate is manufactured using proprietary processes that consistently produce a high quality product. Our
OSTEOSET® T medicated pellets, which contain tobramycin sulfate, are currently one of the few resorbable bone void fillers
available in international markets for the treatment of osteomyelitis, an acute or chronic infection of the bone.
ALLOMATRIX ® Injectable Putty combines a high content of DBM with our proprietary surgical grade calcium sulfate carrier. The
combination provides an injectable putty with the osteoinductive properties of DBM as well as 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 and thereby
improves handling characteristics, increases osteoconductivity scaffold, and provides more structural support. Our ALLOMATRIX ®
Custom bone graft putty allows surgeons 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 the smaller particle size of its cancellous bone granules 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. MIIG® 115 graft combines the operative flexibility of an injectable substance with the clinically
proven osteoconductive properties of OSTEOSET® material. MIIG® 115 graft 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
bone 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 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 injectable calcium phosphate products on the market, including its ability to be drilled or tapped for the
placement of final hardware. Additionally, it poses less risk of extravasation (i.e., leakage).
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 the 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 (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
7
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
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 individuals with diabetes. More than two-thirds of the amputations administered each year are performed on
individuals with diabetes, 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. In January 2005, we received stand-alone reimbursement codes for the use of our
GRAFTJACKET® matrix in the repair of diabetes-related foot ulcers and other complex wounds. We believe that this development
presents a significant opportunity for us, which we are pursuing aggressively.
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 BMA 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 BMA with the CELLPLEX™ TCP, thereby adding an
osteogenic component to the graft.
ADCON® Gel products are designed to reduce adhesion formation following lumbar spine (ADCON®-L Gel) and peripheral
tendon/nerve (ADCON®-T/N Gel) procedures, which may cause 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. Our ADCON ®-L Gel had previously
received regulatory clearance with the FDA in 1998. In 2000, the FDA determined that the provisions of its Application Integrity
Policy (AIP) would be applied to the prior owner of the ADCON® Gel technology due to its 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 2003, the FDA lifted the AIP
status of the prior owner, which subsequently allowed us, as the new owner of the ADCON ® Gel technology, to present the FDA with
the clinical data intended to support the return of ADCON®-L Gel to the U.S. market. Since the submission of our ADCON ®-L Gel
PMA application to the FDA in December 2003, we have been working to satisfy additional requirements necessary to obtain FDA
approval to market ADCON®-L Gel in the U.S. 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
8
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
providing an alternative to the harvesting of the patient’s own soft tissues as a spacer for the repaired joint, the ORTHOSPHERE ®
Carpometacarpal Implant reduces morbidity and operating time. We believe this product represents a significant improvement over
conventional techniques.
Our EVOLVE ® Modular Radial Head device addresses the market for modularity. 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 single piece implants when
assembled in patients.
The LOCON-T® and LOCON-D® Distal Radius Plating Systems provide surgeons with anatomically designed, stainless steel plating
systems used in the repair of radial fractures. In designing both plating systems, we utilized thin, high-strength stainless steel with low
profile screws in order to lessen tendon irritation and/or rupture, which are complications that result from this type of surgical repair.
Our MICRONAIL™ intramedullary wrist fracture repair system is a next-generation, minimally invasive solution that provides
immediate fracture stabilization utilizing fixed-angle locking screws. The MICRONAIL™ system is targeted to become a viable
alternative for many wrist fracture patients currently treated with a cast and is a patented and exclusively licensed product unique to
the market.
In mid-February 2005, we launched our CHARLOTTE™ Foot and Ankle System, a comprehensive offering of next-generation
fixation products for foot and ankle surgery. The CHARLOTTE™ Foot and Ankle System includes six products that feature advanced
design elements for simplicity, versatility, and high performance. The CHARLOTTE™ Foot and Ankle System offers a complete
range of options for the most common foot and ankle surgical needs. The CHARLOTTE™ Foot and Ankle System replaces products
supplied by a third party vendor pursuant to a distribution agreement that expired in the first quarter of 2005.
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 the OLYMPIA ® Total Shoulder 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.
Product Development
Our research and development staff focuses on developing new products in the knee, hip and extremity reconstruction and biologics
markets and on expanding our 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 $18.4 million, $16.2 million and $10.4 million in 2004, 2003 and 2002, respectively. We are presently targeting an
overall level of research and development spending in the range of 6% to 7% of net sales for 2005 and future years.
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.
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. We continue to explore and develop advanced bearing surfaces that improve
the clinical performance of reconstructive devices, including highly cross-linked polyethylene and low-wear metal-on-metal surfaces.
Further, we provide minimally
9
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
invasive tissue sparing techniques that allow patients to quickly return to work and resume their daily activities. In 2004, we
introduced the ODYSSEY™ Tissue Preserving Initiative, which is a minimally invasive surgery program for hip, knee, and total joint
resurfacing procedures. The first phase of this program combines a minimally invasive technique and instrumentation with our
PROFEMUR® Hip System, which features our modular neck technology and is specially suited for use with a smaller surgical
incision. In 2005, we anticipate that we will continue to focus on additional minimally invasive techniques and instrumentation for
further surgical applications including the knee. Further, we announced in late 2004 a major initiative for the development of a
next-generation knee that will build on the proprietary advanced kinematic features of our ADVANCE ® Medial Pivot Knee as well as
other significant technological improvements.
In the biologics area, we have a variety of research and development projects underway 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 the
integration of biologics products into reconstructive joint procedures and other orthopaedic applications. Additionally, in 2005 we plan
to continue exploring investments in high-performance synthetic bone graft substitutes for opportunities within the trauma and spine
segments of the orthopaedic market.
New products, procedures and techniques that we introduced across all product lines since 2003 include, but are not limited to, the
MIIG® X3 High Strength Injectable Graft, the GRAFTJACKET® matrix for ulcer repair, the CELLPLEX™ TCP Synthetic
Cancellous Bone, the LPT® Great Toe Implant, the CONSERVE ® Total Implant with BFH ™ Technology, the MIIG ® X3 HiVisc
graft, OSTEOSET® DBM Pellets, the ADVANCE ® Double-High Knee Tibial Insert, the MICRONAIL ™ intramedullary distal
radius implant, the ODYSSEY™ Tissue Preserving Initiative for Hip and Knee procedures, the PROFEMUR® Tapered Stem Total
Hip System, and the CHARLOTTE™ Foot and Ankle System.
Manufacturing and Supply
We operate manufacturing facilities in 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 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, for our biologics products, we depend on a limited number of sources of DBM and cancellous
bone matrix (CBM). Two not-for-profit tissue banks supplied us with all of the DBM and CBM that we used in 2004 in our allograft
products. Further, we rely on one supplier for our GRAFTJACKET® family of soft tissue repair and graft containment products and
one supplier for our ADCON® Gel 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 quality systems are
based on the requirements of ISO 9001/ISO13485 and the applicable regulations imposed by the FDA on medical device
manufacturers. We are accredited by the AATB, and we are an FDA-registered Tissue Bank. The FDA may audit our facilities at any
time.
10
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
We believe that our manufacturing facilities have adequate room for our current production requirements. See “Properties” for an
additional discussion of our facilities.
Sales and Marketing
Our sales and marketing efforts are focused on orthopaedic surgeons, who typically are the decision-makers in orthopaedic device
purchases. We have established several surgeon advisory panels consisting of surgeons who we believe are leaders in their chosen
orthopaedic specialties. We involve 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 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 our 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.
We sell our products in the U.S. through a sales force of 318 people as of December 31, 2004. 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. Our U.S. field sales force is supported by our Tennessee-based sales and marketing
organization. Our independent distributors and sales representatives are provided opportunities for product training throughout the
year.
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 in their respective markets. Our products
are sold in 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, 2004, through a combination of our direct sales
offices and 89 stocking distribution partners, we had approximately 400 international sales representatives that sell our products in
over 60 countries.
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.
Seasonal Nature of Business
Our business is seasonal in nature. 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, 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.
11
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
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 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. Our current and future competitors 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:
• develop new products and innovative technologies;
• obtain regulatory clearance and compliance for our products;
• manufacture and sell our products cost-effectively;
• meet all relevant quality standards for our products and their markets;
•
respond to competitive pressures specific to each of our geographic markets, including our ability to enforce non-compete
agreements;
• protect the proprietary technology of our products and manufacturing processes;
• market our products;
• attract and retain skilled employees and sales representatives; and
• maintain and establish distribution relationships.
Intellectual Property
We currently own or have licenses to use 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
(USPTO) will issue any of our pending patent applications. The USPTO may deny or require a significant narrowing of the claims in
our pending patent applications and the patents issuing from such applications. Any patents issuing from the pending patent
applications may not provide us with significant commercial protection. We could incur substantial costs in proceedings before the
USPTO. These proceedings could result in adverse decisions as to the priority of our inventions and the narrowing or invalidation of
claims in issued patents. Additionally, the laws of some of the countries in which our products are or may be sold may not protect our
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 others, there
can be no assurances that we do not infringe any patents or other proprietary rights held by them. If our products were found to
infringe any proprietary right of another party, we could be required to pay significant damages or license fees to such party or cease
production, marketing and distribution of those products. Litigation
12
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
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 “Legal Proceedings” for an
additional discussion of this lawsuit.
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, adequate remedies for any breach would be available, or 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 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 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 medical devices and procedures. Canada and some
European and Asian countries, in particular France, Japan, 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.
13
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
Employees
As of December 31, 2004, we employed 899 people in the following areas: 368 in manufacturing, 292 in sales and marketing, 138 in
administration and 101 in research and development. We do not have any active organized labor unions. We believe that we have an
excellent relationship with our employees.
Environmental
Our operations and properties are subject to extensive federal, state, local and foreign 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, regulations and permits, 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.
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 they are electronically filed with the SEC.
Item 2. Properties.
Our corporate headquarters and U.S. operations consist of a 74,000 square foot manufacturing facility, a 40,000 square foot
warehouse, and a 60,000 square foot administration building located on 31 acres in Arlington, Tennessee. We lease the manufacturing
facility from the Industrial Development Board of the Town of Arlington (IDB) under a lease agreement which is automatically
renewable through 2049. We may exercise an option to purchase the manufacturing facility from the IDB at a nominal price at any
time during the lease term. We lease the warehouse from the IDB under a lease agreement which has no predetermined expiration
date. We may exercise an option to purchase the warehouse from the IDB at a nominal price at any time during the lease term. We
lease the original portion of the administration building from the IDB under a lease agreement which expires on July 8, 2005. We may
exercise an option to purchase the original portion of the administration building from the IDB at a price of $101,000 at any time
during the lease term. In 2004, we completed a 16,000 square foot expansion of the administration building which we own.
We believe that our U.S. manufacturing facility has adequate room to meet our current production requirements. However, based on
our anticipated future needs for space at our corporate headquarters, we are currently conducting an analysis of our facility needs,
which could result in potential relocation in the Memphis metropolitan area or an expansion of our facilities at the current location.
This relocation or expansion may include construction of new facilities.
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. Our sales offices in France, Italy, the
United Kingdom, Belgium, Japan, and Canada also include warehouse and administrative space.
14
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
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 matters 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.
In 2000, Howmedica Osteonics Corp., a subsidiary of Stryker Corporation, filed a lawsuit against us 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. The lawsuit seeks an order of infringement, injunctive relief, unspecified damages and various other costs and
relief. The claims in this case could impact a substantial portion of our knee product line. We believe, however, that we have strong
defenses against the claims, and that the claims are, in part, covered by our patent infringement insurance. In 2004, a Markman
hearing was held regarding interpretation of the patent claims that have been asserted by Howmedica in this lawsuit. The court has
taken the issue of claim interpretation under advisement and both parties await the decision of the court on this issue. We are unable to
estimate the potential liability, if any, with respect to the claims, and accordingly, no provision has been made for this contingency as
of December 31, 2004. However, we do not believe that the outcome of this lawsuit will have a material adverse effect on our
financial position or results of operations.
CERAbio, LLC and Phillips Plastics Corporation v. Wright Medical Technology, Inc.
In July 2002, pursuant to a purchase and royalty agreement with CERAbio LLC, 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 against
us in the United States District Court for the Western District of Wisconsin for payment of the remaining $1.5 million of the purchase
price and the royalties earned to date. In November 2003, the trial court ruled 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. In 2004, we appealed the trial court’s judgment to the United States
Court of Appeals for the Seventh Circuit, briefs and oral arguments were submitted, and the appeal is pending. We do not believe that
the outcome of this lawsuit 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.
15
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
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 bid prices per share of our common stock as reported on the Nasdaq National Market.
Fiscal Year 2004
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year 2003
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Holders
High
Low
$ 35.53
$ 36.99
$ 36.08
$ 30.10
$ 17.85
$ 21.77
$ 26.75
$ 30.51
$ 29.24
$ 29.56
$ 22.90
$ 20.75
$ 14.02
$ 16.24
$ 18.80
$ 24.50
As of February 23, 2005, there were 172 stockholders of record and an estimated 9,834 beneficial stockholders.
Unregistered Sales of Equity Securities
In 2004, we issued a total of 295,797 shares of common stock under warrants which were issued in connection with our 1999
recapitalization. Of this amount, we sold 7,754 shares of common stock to nine warrant holders upon the exercise of their warrants,
and we received an aggregate of $33,759 in cash from such sales. We issued another 288,043 shares of common stock to one warrant
holder who elected to receive such lesser number of shares in lieu of paying the purchase price for the 345,455 shares that it was
entitled to purchase. We did not register these transactions under the Securities Act of 1933 in reliance on the exemption from
registration provided by Section 4(2) thereof. These transactions did not involve any public offering of common stock, and the warrant
holders had adequate access to information about the Company through our public filings with the Securities and Exchange
Commission.
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 of Directors. In addition, our current credit facility prohibits us from paying any cash dividends without the lenders’ consent.
16
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
Item 6. Selected Financial Data.
The following tables set forth certain selected consolidated financial data of Wright Medical Group, Inc. for the periods indicated. The
selected consolidated financial data as of December 31, 2004, 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 and 2000,
and for the years then ended, was derived from our consolidated financial statements audited by Arthur Andersen LLP. The audited
consolidated financial statements as of December 31, 2004, 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 and 2000 and for the years then ended are not included
in this filing. Historical results are not necessarily indicative of the results to be expected for any future period. These tables are
presented in thousands, except per share data.
Statement of Operations:
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 (4)
Acquired in-process research and development costs
Arbitration settlement award
Total operating expenses
Operating income (loss)
Interest expense, net
Other (income) expense, net
Income (loss) before income taxes
Provision for income taxes
Net income (loss)
Net income (loss) per share: (5)
Basic
Diluted
2004
Year Ended December 31,
2002
2001
2003
2000
$297,539
84,183
213,356
$248,932
67,815
181,117
$200,873
55,616
145,257
$172,921
51,351
121,570
$ 157,552
80,370
77,182
151,144
18,421
3,889
1,489
—
—
174,943
38,413
1,064
(74)
37,423
13,401
$ 24,022
127,612
16,151
3,562
2,068
4,558
—
153,951
27,166
1,107
(1,060)
27,119
9,722
$ 17,397
106,875
10,357
3,946
1,724
—
(4,200)
118,702
26,555
938
(1,277)
26,894
1,834
$ 25,060
95,556
10,108
5,349
1,996
—
—
113,009
8,561
7,809
685
67
1,574
$ (1,507)
82,813
8,390
5,586
5,029
—
—
101,818
(24,636)
12,446
870
(37,952)
1,541
$ (39,493)
$
$
0.72
0.68
$
$
0.53
0.50
$
$
0.79
0.75
$
$
(0.31)
(0.31)
$ (3,405.71)
$ (3,405.71)
Weighted-average number of common shares outstanding -
basic
$ 33,391
32,857
31,870
13,195
Weighted-average number of common shares outstanding -
diluted
$ 35,317
34,561
33,550
13,195
17
17
Consolidated Balance Sheet Data:
Cash and cash equivalents
Working capital
Total assets
Long-term liabilities
Redeemable preferred stock
Stockholders’ equity (deficit)
2004
2003
As of December 31,
2002
2001
2000
$ 83,470
189,466
361,158
19,533
—
$276,069
$ 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)
17
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
Other Data:
Cash flow provided by operating activities
Cash flow used in investing activities
Cash flow (used in) provided by financing activities
Depreciation
Amortization of intangible assets (3)
Capital expenditures
2004
$ 37,365
(18,428)
(2,305)
17,278
3,889
$ 18,316
Year Ended December 31,
2002
2003
2001
$ 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
2000
$ 18,151
(14,109)
6,028
11,008
5,586
$ 14,109
(1)
(2)
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.
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, which was originally
presented as an extraordinary loss on debt extinguishment, 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.
(3) Amortization of intangible assets in 2004, 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.
(4) Amounts presented as stock-based expense consist of; cost of sales totaling $68, $107, $108, $89 and $8 for the years ended
December 31, 2004, 2003, 2002, 2001 and 2000, respectively; selling, general and administrative expenses of $1,364, $1,875,
$1,506, $1,807 and $4,901 for the years ended December 31, 2004, 2003, 2002, 2001 and 2000, respectively; and research and
development expenses of $57, $86, $110, $100 and $120 for the years ended December 31, 2004, 2003, 2002, 2001 and 2000,
respectively.
(5) 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.
18
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following management’s discussion and analysis of financial condition and results of operations, (MD&A), describes the
principal factors affecting the results of our operations, financial condition, and changes in financial condition, as well as our critical
accounting estimates. MD&A is organized as follows:
• Executive overview. This section provides a general description and history of our business, a brief discussion of our principal
product lines, significant developments in our business, 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 the significant line items on our consolidated statement
of operations.
• Results of operations. This section provides our analysis of and outlook for the significant line items on our consolidated
statement of operations.
• Seasonal Nature of Business. This section describes the effects of seasonal fluctuations in our business.
• Liquidity and capital resources. This section provides an analysis of our liquidity and cash flow and a discussion of our
outstanding debt and commitments.
• Critical accounting estimates. This section discusses the accounting estimates that are considered important to our financial
condition and results of operations and require us to exercise subjective or complex judgments in their application. All of our
significant accounting policies, including our critical accounting estimates, are summarized in Note 2 to our consolidated financial
statements in Item 8 of this report.
• 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 the factors that are described in the MD&A captions discussed
above and elsewhere in this report.
Executive Overview
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 50 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 research and
development, manufacturing, warehousing, and administrative activities. Outside the U.S., we have research and development,
manufacturing, and administrative facilities in Toulon, France; research, distribution and administrative facilities in Milan, Italy; and
sales and distribution offices in Canada, Japan and Europe. We market our products in over 60 countries through a global distribution
system that consists of a sales force of approximately 700 individuals who promote our products to orthopaedic surgeons and
hospitals. At the end of 2004, we have 318 exclusive independent distributors and sales associates in the U.S., and approximately 400
sales representatives internationally who are employed through a combination of our stocking distribution partners and direct sales
offices.
Company History. We were incorporated in November 1999 as a Delaware corporation, and had no operations until December 7,
1999, when we were reorganized by an investment group through the acquisition of our predecessor company, Wright Medical
Technology, Inc. This transaction represented a recapitalization of our predecessor company and the inception of Wright in its present
form. On December 22, 1999, we acquired Cremascoli Ortho Holding, S.A., an orthopaedic medical device company headquartered in
Toulon, France. In 2001, we completed our IPO of 7,500,000 shares of common stock, which generated $84.8 million in net proceeds.
In 2002, we completed a secondary offering of 3,450,000 shares of common stock which generated $49.5 million in net proceeds.
Principal Products. We primarily sell reconstructive joint devices and biologics products. Our reconstructive joint device sales are
derived from three primary product lines: knees, hips and extremities. Our biologics sales
19
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
encompass a broad portfolio of products designed to stimulate and augment the natural regenerative capabilities of the human body.
We also sell various orthopaedic products not considered to be part of our knee, hip, extremity or biologics product lines.
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
PROFEMUR® Hip System, the LINEAGE® Acetabular System, the ANCA-FIT™ Hip System, and the PERFECTA ® Hip System.
In 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 biologics products focus on biological musculoskeletal repair and include synthetic and human tissue-based materials. Our
principal biologics products include the ALLOMATRIX ® line of injectable tissue-based bone graft substitutes, the GRAFTJACKET®
tissue repair and containment membranes, the OSTEOSET® synthetic bone graft substitute, the MIIG® family of minimally invasive
injectable synthetic bone grafts, and in our international markets, the ADCON® Gel anti-adhesion product.
We offer extremity products for the hand, wrist, elbow, shoulder, foot and ankle in a number of markets worldwide. Our principal
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, the MICRONAIL™ intramedullary wrist fracture repair system, and the CHARLOTTE™ Foot and Ankle System, a line of
comprehensive foot and ankle implants.
Our knee reconstruction products position us well in the areas of total knee reconstruction, revision replacement implants, and limb
preservation products. Our principal knee products include the ADVANCE ® Knee System and the ADVANCE ® Unicompartmental
Knee System.
Significant Business Developments. The significant growth of our business that we experienced in 2003 continued into 2004, with
considerable expansion of all of our principal product line sales. Net sales grew 20% in 2004, totaling $297.5 million, compared to
$248.9 million in 2003. Our focus on the high growth sectors of the orthopaedic industry, such as advanced bearing surfaces, modular
necks and bone conserving implants within the hip market and the integration of biologics products into reconstructive joint
procedures and other orthopaedic applications, combined with new product development focused on specific surgical issues, continues
to drive our success. Our hip and biologics product lines contributed significantly to our performance in 2004, achieving 27% and
24% growth rates, respectively.
A significant development in the hip market over the past two years has been advances in bearing surfaces, including
ceramic-on-ceramic. In 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. While we
encountered additional competition in the ceramic-on-ceramic hip market in 2004, we sustained a considerable growth rate throughout
the year, ending 2004 with an overall growth rate of 27%. We anticipate further competition in the ceramic-on-ceramic hip market in
2005; however, we believe that our full continuum of hip products will position us for continued success in 2005.
In March 2004, our PMA application for our CONSERVE ® Plus Hip System was accepted for filing by the FDA. Our CONSERVE®
Plus Resurfacing Implant is available outside the U.S. and is pending FDA clearance for the U.S. market. With our CONSERVE ®
Plus Resurfacing Implant, the surface of the patient’s femoral head and the acetabular surface are replaced with minimal bone loss. In
May 2004, we received a warning letter from the FDA regarding the CONSERVE ® Plus Resurfacing Implant investigational device
exemption. We responded in June 2004, addressing the issues cited in the warning letter, and in reply, the FDA informed us that our
corrective actions had been accepted. We continue to work with the FDA as it reviews this PMA.
In March 2004, we received marketing clearance from the FDA for our ALLOMATRIX ® Injectable Putty. This clearance was
obtained based on satisfaction of the FDA’s requirements pursuant to a 510(k) premarket notification process that began with our
submission of a 510(k) in March 2002. This submission was in response to the FDA’s
20
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
clarification to all allograft putty providers, including us, that such products should be regulated under the medical device premarket
notification provisions of the Food, Drug, and Cosmetic Act. Further, in July 2004, we received marketing clearance from the FDA for
our ALLOMATRIX ® C, ALLOMATRIX ® Custom and ALLOMATRIX ® DR putty products following our submission of a 510(k)
in April 2004, completing the clearance process for our entire ALLOMATRIX ® family of products.
In August 2004, we introduced our MICRONAIL™ intramedullary wrist fracture repair system, a next-generation, minimally invasive
solution that provides immediate fracture stabilization utilizing fixed-angle locking screws. The MICRONAIL™ system is targeted to
become a viable alternative for many wrist fracture patients currently treated with a cast and is the only one of its kind on the market.
In September 2004, we announced a voluntary market withdrawal of a limited number of metal acetabular hip cups intended for use in
our CONSERVE® hip systems, as these components may not have met our product specifications due to the presence of a small ridge
on the cup’s non-articulating inside bearing surface. We notified the FDA of this action and removed from commercial availability all
unused components covered by the market withdrawal. In connection with this market withdrawal, we incurred approximately
$800,000 of expenses for probable costs related to the market withdrawal. We did not experience any supply issues as a result of this
market withdrawal, and this market withdrawal has not had a significant impact on our sales. Further discussion of our voluntary
market withdrawal is included in Note 15 to our consolidated financial statements in Item 8 of this report.
During the fourth quarter of 2004, we incurred approximately $2.9 million of costs as a result of the transition from certain of our foot
and ankle implant offerings to an innovative, next-generation line of internally developed products, collectively referred to as the
CHARLOTTE™ Foot and Ankle System, replacing products supplied by a third party vendor pursuant to a distribution agreement
that expired in the first quarter of 2005. These charges resulted from the write down of our distributed foot and ankle implant
inventory to its estimated net realizable value and accelerated depreciation on the related surgical instrumentation. We launched our
CHARLOTTE™ Foot and Ankle System in mid-February 2005.
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, respond to competitive pressures specific to each of our geographic markets, including our ability to enforce
non-compete agreements, and successfully market and distribute our products in a profitable manner. We, and the entire industry, are
subject to extensive governmental 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 under the heading, “Factors Affecting
Future Operating Results,” within 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
principal product lines is provided under the heading, “Executive Overview,” within MD&A.
Cost of sales. Our cost of sales consists primarily of direct labor, allocated manufacturing overhead, raw materials and components,
charges incurred for excess and obsolete inventories, 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, legal costs, other general
business and administrative expenses, and depreciation expense associated with surgical instruments required by 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.
21
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
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, as well as distribution and product
licenses. We amortize intangible assets over periods ranging from 1 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 exceeded their respective exercise or sales price. The substantial majority of our stock-based
expense relates to the issuance of shares and options prior to the completion of our IPO in 2001. Additionally, for stock-based
incentives granted to consultants, we defer and amortize the fair value of such grants as calculated pursuant to Statement of Financial
Accounting Standards (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 equity where no vesting restrictions apply.
Interest expense, net. Interest expense, net, consists primarily of interest on borrowings outstanding under our senior credit facility
and certain of our factoring agreements, as well as non-cash expenses associated with the amortization of deferred financing costs
resulting from the origination of our senior credit facility. These expenses are offset by income earned on our invested cash balances.
Provision for income taxes. We record 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 in estimates related to our valuation allowances recorded against our net deferred tax assets.
Results of Operations
Introduction. 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
2004
Year Ended December 31,
2003
2002
Amount
$297,539
84,183
213,356
151,144
18,421
3,889
1,489
% of
Sales
100.0%
28.3%
71.7%
Amount
$248,932
67,815
181,117
% of
Sales
100.0%
27.2%
72.8%
Amount
$200,873
55,616
145,257
% of
Sales
100.0%
27.7%
72.3%
50.8%
6.2%
1.3%
0.5%
127,612
16,151
3,562
2,068
51.3%
6.5%
1.4%
0.8%
106,875
10,357
3,946
1,724
53.2%
5.2%
2.0%
0.8%
—
—
174,943
—
—
58.8%
4,558
—
153,951
1.8%
—
61.8%
—
(4,200)
118,702
—
(2.1)%
59.1%
Operating income
38,413
12.9%
27,166
10.9%
26,555
13.2%
Interest expense, net
Other income, net
Income before income taxes
Provision for income taxes
Net income
1,064
(74)
37,423
13,401
$ 24,022
0.4%
0.0%
12.6%
4.5%
8.1%
1,107
(1,060)
27,119
9,722
$ 17,397
0.4%
(0.4)%
10.9%
3.9%
7.0%
938
(1,277)
26,894
1,834
$ 25,060
0.5%
(0.6)%
13.4%
0.9%
12.5%
22
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
The following table sets forth our net sales by product line for the periods indicated (in thousands), and the percentage of
year-over-year change:
Hip products
Knee products
Biologics products
Extremity products
Other
Total net sales
Year
Ended
December
31,
2004
$ 99,133
87,408
62,070
36,433
12,495
$297,539
Year
Ended
December
31,
2003
$ 78,071
78,338
50,056
31,876
10,591
$248,932
2004 vs.
2003
%
Change
27.0%
11.6%
24.0%
14.3%
18.0%
19.5%
Year
Ended
December
31,
2002
$ 56,945
72,058
38,347
25,367
8,156
$200,873
2003 vs.
2002
%
Change
37.1%
8.7%
30.5%
25.7%
29.9%
23.9%
The following graphs illustrate our product line sales as a percentage of total net sales for the years ended December 31, 2004, 2003,
and 2002:
Comparison of the year ended December 31, 2004 to the year ended December 31, 2003
Net sales. Net sales growth in 2004 was attributable to strong demand across all of our principal products lines, with significant
contributions from hips and biologics which grew by 27% and 24%, respectively, and solid growth in our extremity and knee business
which grew by 14% and 12%, respectively. Geographically, our domestic net sales totaled $180.4 million in 2004 and $152.9 million
in 2003, representing approximately 61% of total net sales in both years and growth of 18%. Our international net sales totaled
$117.2 million in 2004, a 22% increase as compared to net sales of $96.1 million in 2003. Our 2004 international net sales include a
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
favorable currency impact of approximately $8.1 million, principally resulting from the 2004 performance of the euro against the U.S.
dollar. Our international growth was primarily driven by increased sales in our European and Asian markets, with expansion across all
product lines.
23
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
Our hip product sales totaled $99.1 million in 2004, representing a 27% increase. Growth in our hip business in 2004 is attributable to
continued success in domestic markets, where total hip procedures grew by 20%, driven by our CONSERVE® Total Implant with
BFH™ Technology and our PROFEMUR® line of primary stems featuring our innovative neck modularity. Additionally, a favorable
shift in our sales mix to premium priced hard bearing procedures, which includes our ceramic-on-ceramic and metal-on-metal
products, contributed to our domestic growth. Our percentage of hard bearing surgeries grew from 57% of total domestic hip surgeries
in 2003 to 66% in 2004. In our international markets, unit sales growth of our CONSERVE® Plus Resurfacing Implant and a
favorable currency impact of $4 million both impacted the year over year sales increase. We believe that our hip product portfolio,
which focuses on innovative solutions including bone-conserving implants, advanced bearing surfaces and modular neck technology,
will position us for continued success in 2005.
Sales of our biologics products in 2004 totaled $62.1 million, representing an increase of 24%. The growth of our biologics business in
2004 is primarily attributable to the continued favorable performance, in domestic markets, of our GRAFTJACKET® tissue repair and
containment membranes combined with the performance of our ADCON® Gel product in international markets. Domestically, total
biologics procedures grew by 4%, as significant growth of our GRAFTJACKET® product line, combined with growth of our
OSTEOSET® family of products and our MIIG® (Minimally Invasive Injectable Graft) family of products, was offset by declines in
our DBM (demineralized bone matrix) containing ALLOMATRIX ® family of products. During 2004, competitive pressures in the
mature market for DBM containing products had a negative impact on the performance of our ALLOMATRIX ® products. From an
international perspective, unit sales growth of our ADCON® Gel product and a favorable currency impact of approximately $400,000
contributed to our biologics growth in 2004. As we move into 2005, significant investment in high performance synthetic bone graft
substitutes should enable us to take advantage of longer-term opportunities within the trauma and spine segments of the orthopaedic
market.
Our extremity product sales increased to $36.4 million in 2004, representing growth of 14% over 2003. Increased unit sales of our
higher priced extremity products, such as our foot and ankle products and our EVOLVE ® Modular Radial Head System, combined
with pricing increases across our entire extremity product platform, were the most significant factors contributing to our year over year
growth. For 2005, we anticipate that our extremity line of business will continue to benefit from our EVOLVE ® Modular Radial Head
System, as well as the 2004 launch of our MICRONAIL™ system and our mid-February 2005 launch of our CHARLOTTE™ Foot
and Ankle System, a next-generation line of internally developed foot and ankle products.
Sales of our knee products totaled $87.4 million in 2004, representing growth of 12%. Our domestic knee performance is attributable
to a combination of increased unit sales and increased prices. Our international knee growth is attributable to a combination of
increased unit sales and a favorable currency impact of approximately $2.4 million. In the latter half of 2004, we introduced our
minimally invasive surgical instrumentation for knee procedures to certain key customers. As we move into 2005, we anticipate
further success in our knee product line as we are able to more fully penetrate the U.S. market with this instrumentation.
Cost of sales. Cost of sales as a percentage of net sales increased to 28.3% in 2004 from 27.2% in 2003. Approximately 0.8 percentage
points of this increase is attributable to $2.4 million of costs incurred during the fourth quarter of 2004 to write down certain foot and
ankle implant inventory to its net realizable value as a result of the transition of this product line to our CHARLOTTE™ Foot and
Ankle System. The remaining increase as a percentage of sales is primarily attributable to higher levels of charges incurred for excess
and obsolete inventories. 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. Our selling, general and administrative expenses as a percentage of net sales totaled 50.8% in
2004, a 0.5 percentage point decrease from 51.3% in 2003. This decrease is attributable to decreased royalty expenses as a percentage
of net sales, decreased commission expense as a percentage of net sales due to shifts in our geographic sales mix to higher levels of
international sales which generally incur a lower commission rate, and our ability to control other discretionary costs while continuing
to significantly expand our business. These decreases were offset by approximately $1.2 million of incremental costs related to
corporate governance, approximately $700,000 resulting from our limited market withdrawal of certain CONSERVE® hip
24
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
components, approximately $500,000 of accelerated depreciation expense related to surgical instrumentation for certain foot and ankle
products that will be transitioned out of our product offerings during the first quarter of 2005, and additional legal costs related to the
on-going transition of certain management and distribution personnel in Southern Europe.
We anticipate that our selling, general and administrative expenses as a percentage of net sales will continue to decrease in future
periods as we manage the growth of our existing infrastructure while continuing to expand our business. During the first half of 2005,
we expect our selling, general and administrative expenses to be impacted by additional costs associated with the transition of certain
management and distribution personnel in Southern Europe and additional accelerated depreciation on surgical instrumentation.
Additionally, selling, general and administrative 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.
Research and development. Our investment in research and development activities represented approximately 6.2% of net sales in
2004, as compared to 6.5% in 2003. In absolute dollars, research and development expenditures increased to $18.4 million in 2004
from $16.2 million in 2003. This increase can be attributed to increased spending on product development and clinical evaluations for
pre-market products and products already on the market. Our key product launches in 2004 included our OSTEOSET® DBM Pellets,
our ADVANCE ® Double-High Knee design, our MICRONAIL™ intramedullary distal radius implant, our ODYSSEY™ Tissue
Preserving Initiative for Hip and Knee procedures, and our PROFEMUR® Tapered Stem Total Hip System.
For 2005, we anticipate that our research and development expenditures as a percentage of net sales will be in the range of 6% to 7%.
As our business continues to grow, we expect our research and development expenditures to increase in absolute dollars, and may
increase as a percentage of net sales as we continue to increase our investment in product development initiatives and clinical studies.
Amortization of intangible assets. Our amortization expense during 2004 was consistent with 2003, totaling $3.9 million in 2004 as
compared to $3.6 million in 2003. Based on the intangible assets held at December 31, 2004, we expect to amortize approximately
$4.0 million in 2005, $3.5 million in 2006, $2.9 million in 2007, $2.7 million in 2008 and $2.5 million in 2009.
Stock-based expense. We recognized $1.5 million and $2.1 million of stock-based expense during 2004 and 2003, respectively,
primarily resulting from the amortization of our deferred compensation. In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123 (Revised 2004), “Share Based Payment” (SFAS No. 123R), which requires the recognition of
compensation expense for the fair value of share-based transactions. The fair value must be determined as of the date of grant using a
valuation model such as Black-Scholes or a lattice model. The resulting compensation expense will be recognized over the service
period. We will adopt SFAS No. 123R effective July 1, 2005. We anticipate that we will record material amounts of incremental
non-cash stock-based expense in future periods following the adoption of SFAS No. 123R. However, the exact amount cannot be
determined until management’s evaluation of SFAS No. 123R is complete and an appropriate valuation model has been selected and
applied to determine the fair value of our stock options outstanding. The effect of expensing stock options on our historical results of
operations using the Black-Scholes model is presented in the table in Note 2 to our consolidated financial statements in Item 8 of this
report.
In-process research and development cost. Upon consummation of our acquisition of certain ADCON® Gel technology assets from
Gliatech Inc. in March 2003, we immediately recognized as expense approximately $4.6 million in costs representing the estimated
fair value of acquired 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).
We engaged an independent third party to conduct a valuation of the intangible assets acquired. The value was determined by
estimating the costs to develop the acquired IPRD 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 take into account the
uncertainty surrounding the successful development and commercialization of the acquired IPRD. The resulting net cash flows from
the project were based on our
25
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
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:
Project
ADCON® Gel
Year net
cash
in-flows
expected to
begin
2004
Discount rate
including
factor to
account for
uncertainty of
success
32.3%
Acquired
IPRD
$4,558,000
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. Our ADCON ®-L
Gel product had previously received regulatory clearance from the FDA in 1998. In 2000, the FDA determined that the provisions of
its 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 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. Since the submission of our ADCON ®-L Gel PMA application to the FDA
in December 2003, we have been working to satisfy additional requirements necessary to obtain FDA approval to market ADCON ®-L
Gel in the U.S. We will be required to conduct a separate clinical study to enter the U.S. market with ADCON ®-T/N Gel.
Our original estimate for receipt of net cash flows associated with this project was in 2004; however, we now anticipate that
ADCON®-L Gel will be available for sale in the U.S. market no sooner than 2006. This delay in the estimated completion date has not
had a significant impact on our results of operations or financial condition. 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 anticipate that portions of our existing cash will be used to continue to develop the acquired IPRD 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 products and to market them in the U.S. Bringing the acquired IPRD 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.
We are continuously monitoring our research and development projects. We believe that the assumptions used in the valuation of
acquired IPRD represent a reasonably reliable estimate of the future benefits attributable to the acquired IPRD. No assurance can be
given that actual results will not deviate from those assumptions in future periods.
Interest expense, net. Our interest expense, net, consists primarily of interest on borrowings outstanding under our senior credit
facility and certain of our factoring agreements and is partially offset by interest income of approximately $815,000 and $636,000 in
2004 and 2003, respectively, from our invested cash balances. Our net interest expense also includes non-cash expense associated with
the amortization of deferred financing costs resulting from the origination of our senior credit facility of approximately $261,000
during both 2004 and 2003.
Other income, net. Other income, net, primarily consists of gains and losses resulting from foreign currency fluctuations, offset in the
second half of 2004 by the impact of gains and losses resulting from certain foreign currency forward contracts. These contracts are
discussed further in Note 2 to our consolidated financial statements in Item 8 of this report. Primarily as a result of these forward
contracts, our other income, net, decreased from $1.1 million in 2003 to a nominal amount in 2004.
26
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
Provision for income taxes. We recorded tax provisions of $13.4 million and $9.7 million in 2004 and 2003, respectively. Our
effective tax rate for both 2004 and 2003 was approximately 36%, which reflects the impact of certain tax saving initiatives, including
research and development credits and changes in estimates related to the valuation allowances recorded against our deferred tax assets.
During 2004, the American Jobs Creation Act of 2004 (Jobs Creation Act) was signed into law. Beginning in 2005, the Jobs Creation
Act includes relief for domestic manufacturers by providing a tax deduction up to 9% of the lesser of qualified production activities
income or taxable income. In addition, the Jobs Creation Act also provides for a one-time tax deduction of 85% of certain foreign
earnings that are repatriated. Based on our assessment of the repatriation deduction, we have determined to continue our current policy
of permanently reinvesting all foreign earnings. With respect to the tax deduction provided for domestic manufacturers, we are in the
process of evaluating the potential impact of this portion of the Jobs Creation Act to our business. The transition issues related to this
deduction are complex and little interpretative guidance has been issued to date. Accordingly, management has not determined, what,
if any, the impact of this tax deduction will have to on our effective tax rate in future periods. Excluding any favorable impact of the
Jobs Creation Act, for 2005, we expect our effective tax rate to increase from 2004 to a range of 38% to 39%; however, the actual rate
will depend on a number of factors, including the amount of pre-tax income by jurisdiction, any incremental tax saving initiatives that
might be identified and implemented and the ultimate impact, if any, of the Jobs Creation Act.
Comparison of the year ended December 31, 2003 to the year ended December 31, 2002
Net sales. Our net sales grew 24% in 2003, totaling $248.9 million. This was attributable to the 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 net sales
totaled $96.1 million in 2003, increasing by 22% over net sales of $78.5 million in 2002. Our 2003 international net sales included a
favorable currency impact of approximately $11.9 million, principally resulting from the 2003 performance of the euro against the
U.S. dollar, when compared to 2002. Our European and Japanese operations were the significant drivers of our sales growth in our
international operations in 2003.
From a product line perspective, our net sales growth for 2003 was attributable to increases in sales across all of our principal product
lines. For 2003, we experienced growth of 37%, 31%, 26% and 9%, in our hip, biologics, extremity, and knee product lines,
respectively. Our most significant growth drivers in 2003 were our hip and biologics product lines. During 2003, our 37% hip sales
growth was attributable primarily 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 LINEAGE® ceramic-on-ceramic hip system in the first quarter 2003. Our biologics sales growth of 31% in 2003 was primarily
the result of strong growth across all of our biologics product offerings.
Cost of sales. Our cost of sales as a percentage of net sales decreased slightly to 27.2% in 2003 from 27.7% in 2002. This decrease is
primarily a result of our ability to manage certain of our fixed manufacturing costs while our business significantly expanded during
2003.
Operating expenses. Our total operating expenses increased, as a percentage of net sales, by 2.7 percentage points to 61.8% in 2003.
Operating expenses include selling, general and administrative expenses, research and development expenses, amortization of
intangibles, and stock-based expenses. Additionally, operating expenses included approximately $4.6 million of acquired IPRD costs
in 2003 and the favorable impact of our $4.2 million arbitration settlement award in 2002. These two items were the primary drivers of
the increase in operating expenses. These amounts were partially offset by favorable selling, general and administrative expenses,
resulting from our ability to control our discretionary spending while significantly growing our business, and reductions in
amortization of intangible assets.
27
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
Provision for income taxes. Our effective tax rate for 2003 was approximately 36% as compared to an effective tax rate of 7% for
2002. Our 2002 effective tax rate was favorably impacted by the reduction of the valuation allowance against our deferred tax assets,
which resulted in an $8.1 million non-cash benefit to our provision for income taxes. Excluding this benefit, our effective tax rate for
2002 would have been approximately 37%. The decrease in our effective tax rate in 2003, excluding this benefit, reflected the effect of
certain tax savings initiatives that were implemented in 2003.
Seasonal Nature of Business
Our business is seasonal in nature. 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, 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
The following table sets forth, for the periods indicated, certain liquidity measures (in thousands):
Cash and cash equivalents
Working capital
Line of credit availability
As of December 31,
2004
$ 83,470
189,466
59,708
2003
$ 66,571
147,255
57,742
Our cash and cash equivalents increased during 2004 by $16.9 million, compared to an increase of $15.2 million in 2003. Our 2004
increase in cash and cash equivalents is primarily attributable to the generation of $37 million of cash from operating activities during
2004, partially offset by routine capital expenditures. 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® Gel technology assets.
Operating Activities. Operating cash flow in 2004 benefited from the profitability of our business and working capital management,
which resulted primarily from improved collection of our outstanding receivables during 2004. The improvement in our collections
was offset by increased investments in new product inventory during 2004 in order to prepare for anticipated product launches, as well
as an increase of approximately $3.9 million in cash tax payments. Operating cash flow in 2003 benefited from the profitability of our
business, as well as improved inventory management. Cash generated from operating activities in 2002 totaled approximately
$22 million and included the favorable $4.2 million arbitration settlement award, which was partially offset by significant investments
in new product inventory
Investing Activities. Our capital expenditures totaled approximately $18.3 million in 2004, $18.1 million in 2003, and $18.0 million in
2002. 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 $30 million in total for 2005 for routine capital
expenditures. The increase in anticipated capital spending from 2004 is expected to be primarily attributable to increased investments
in surgical instrumentation for new products. Furthermore, as mentioned under the heading, “Properties,” in Item 2 of this report, we
are evaluating our long-term facility needs in the U.S. in response to our anticipated growth. We cannot estimate the amount of capital
spending, if any, that will be incurred in 2005 should we expand or construct new facilities.
28
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
In 2003, in addition to our routine capital expenditures, we paid $7.8 million to complete the purchase of IPRD, tangible assets, and
intangible assets from Gliatech, which were primarily related to the 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 2004, we made $4.5 million in scheduled payments related to borrowings under our senior credit facility
and approximately $1.8 million in payments related to our long-term capital leases. In the fourth quarter of 2003, our operating
subsidiary in Italy began factoring portions of its accounts receivable balances under a new agreement, which is considered a
financing transaction for financial reporting purposes. The cash proceeds received from this factoring agreement, net of the amount of
factored receivables collected, are reflected as cash flow from financing activities in our consolidated statements of cash flows. In
2004, the net activity under this agreement was consistent as the amount of cash received approximated the receivables collected. We
recorded an obligation of $5.2 million and $4.8 million for the amount of receivables factored under this agreement as of
December 31, 2004 and 2003, respectively, which is included within “Accrued expenses and other current liabilities” in our
consolidated balance sheet. The proceeds received under the agreement in 2004 and 2003 totaled approximately $10.7 million and
$4.7 million, respectively. Additionally, we received cash proceeds of $4.1 million from the exercise of stock options and warrants
during 2004.
In 2005, our debt payments will increase to $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 $1.6 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 2005 related to this factoring agreement.
Contractual Cash Obligations. At December 31, 2004, we had contractual cash obligations and commercial commitments as follows
(in thousands):
Amounts reflected in balance sheet:
Notes payable
Capital lease obligations (1)
Amounts not reflected in balance sheet:
Operating leases
Purchase obligations
Royalty and consulting agreements
Total contractual cash obligations
Payments Due by Periods
Total
2005
2006-2007
2008 -
2009
After
2009
$ 8,750
5,032
$ 5,000
1,642
$ 3,750
2,193
$ —
864
$ —
333
16,150
11,872
15,167
$56,971
6,532
6,609
6,266
$26,049
7,152
5,263
2,903
$21,261
1,004
—
1,998
$ 3,866
1,462
—
4,000
$ 5,795
(1) Payments include amounts representing interest
Our senior credit facility, which we entered into in August 2001, has a five-year term and consists of $20 million in term loans, with
an unpaid balance of approximately $8.8 million at December 31, 2004, 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. 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 maintain certain financial covenants, including a specified consolidated leverage (or debt-to-equity) ratio and a specified
consolidated fixed charge coverage ratio. In the event that we violate any covenants, we could be required to repay the remaining
balance of the debt. Additionally, should we be required to repay the loan before its scheduled maturity, 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, with a current annual rate of 3.625%.
29
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
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, 2004. The minimum lease payments related to these leases are discussed further in Note 9 to our
consolidated financial statements contained in Item 8 of this report.
The amounts reflected in the table above for operating leases represent future minimum lease payments under noncancellable
operating leases primarily for certain equipment and office space. Portions of these payments are denominated in foreign currencies
and were translated in the table above based on their respective U.S. dollar exchange rates at December 31, 2004. 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 our consolidated financial statements contained in Item 8 of this report.
Our purchase obligations reflected in the table above 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 table above based on their
respective U.S. dollar exchange rates at December 31, 2004. These future payments are subject to foreign currency exchange rate risk.
Our purchase obligations and royalty and consulting agreements are disclosed in Note 15 to our consolidated financial statements
contained in Item 8 of this report.
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 based on net sales, and a substantial portion of our global sales are subject to other royalties earned based on
product sales. Further, under our factoring agreement in Italy, our liability for cash proceeds received of $5.2 million discussed under
the heading, “Financing Activities,” 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. In 2001, we completed our IPO of 7,500,000 shares of common stock which generated $84.8 million in net
proceeds. In 2002, we completed a secondary offering of 3,450,000 shares of common stock which generated $49.5 million in net
proceeds.
Although it is difficult for us to predict our future liquidity requirements, we believe that our current cash balance of approximately
$83.5 million, our existing available credit line of approximately $59.7 million, and our expected cash flow from our operating
activities, which in 2004 totaled approximately $37.4 million, will be sufficient for the foreseeable future to fund our working capital
requirements and operations, permit anticipated capital expenditures in 2005 of approximately $30 million, meet our contractual cash
obligations in 2005, and fund any potential expansion of our current facilities or the construction of new facilities.
Critical Accounting Estimates
All of our significant accounting policies and estimates are described in Note 2 to our consolidated financial statements contained in
Item 8 of this report. However, certain of our more critical accounting estimates require the application of significant judgment by
management in selecting the appropriate assumptions in determining the estimate. By their nature, these judgments are subject to an
inherent degree of uncertainty. We develop these judgments 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 in financial condition or results of operations.
30
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
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. Our management has discussed the development, selection, and disclosure of our
most critical financial estimates with the audit committee of our Board of Directors and with 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:
Revenue recognition. Our revenues are generated through two types of customers, hospitals and stocking distributors, with the
majority of our revenue derived from sales to hospitals. Our products are sold through a network of independent sales representatives
in the U.S. and by a combination of employee sales representatives, independent sales representatives, and stocking distributors
outside the U.S. We record revenues from sales to hospitals when the hospital takes title to the product, which is when the product is
surgically implanted in a patient and a purchase order is received from the hospital. We view the receipt of a purchase order as the
evidence of customer acceptance of the product.
We record revenues from sales to our stocking distributors at the time the product is shipped to the distributor. Our stocking
distributors, who sell the products to their customers, take title to the products and assume all risks of ownership. Our distributors are
obligated to pay us within specified terms regardless of when, if ever, they sell the products. In general, our distributors do not have
any rights of return or exchange; however, in limited situations we have repurchase agreements with certain stocking distributors.
Those certain agreements require us to repurchase a specified percentage of the inventory purchased by the distributor within a
specified period of time prior to the expiration of the contract. During those specified periods, we defer the applicable percentage of
the sales. Approximately $87,000 and $247,000 of deferred revenue related to these types of agreements was recorded at
December 31, 2004 and 2003, respectively.
We must make estimates of potential future product returns related to current period product revenue. To do so, we analyze our
historical experience related to product returns when evaluating the adequacy of the allowance for sales returns. Judgment must be
used and estimates made in connection with establishing the allowance for product returns in any accounting period. Our allowances
for product returns of $395,000 and $412,000 are included as a reduction of accounts receivable at December 31, 2004 and 2003,
respectively. Should actual future returns vary significantly from our historical averages, our operating results could be affected.
Allowances for doubtful accounts. We experience some credit loss on our accounts receivable and accordingly we must make
estimates related to the ultimate collection of our accounts receivable. Specifically, we analyze our accounts receivable, historical bad
debt experience, customer concentrations, customer creditworthiness, and current economic trends when evaluating the adequacy of
our allowance for doubtful accounts.
The majority of our receivables are from hospitals, many of which are government funded. Accordingly, our collection history with
these customers has been favorable. Historically, we have experienced minimal bad debts from our hospital customers and more
significant bad debts from certain international distributors, typically as a result of specific financial difficulty or geo-political factors.
In 2003 and 2004, the increases in our accounts receivable balance have related almost exclusively to our hospital customers. As the
historical bad debt experience with this class of customer is minimal, our allowance has not increased proportionately to the increase
in our accounts receivable balance. We write off receivables when we determine that the receivable is uncollectible, typically upon
customer bankruptcy or the customer’s non-response to collection efforts.
We believe that the amount included in our allowance for doubtful accounts has been a historically accurate estimate of the amount of
accounts receivable that are ultimately collected. While we believe that our allowance for doubtful accounts is adequate, the financial
condition of our customers and the geo-political factors that impact reimbursement under individual countries’ healthcare systems can
change rapidly and as such, additional allowances may be required in future periods. Our accounts receivable balance was
$61.7 million and $55.8 million, net of allowances for doubtful accounts of $1.8 million and $1.5 million, at December 31, 2004 and
2003, respectively.
31
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
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 for excess and obsolete inventory and, when
circumstances indicate, we incur charges to write down inventories to their net realizable value. Our review of inventory for excess
and obsolete quantities is 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 incur charges 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.
Charges incurred for excess and obsolete inventory were $5.8 million, $2.6 million and $2.8 million for the years ended December 31,
2004, 2003 and 2002, respectively. In 2004, charges incurred for excess and obsolete inventory included $2.4 million recorded to
write down certain foot and ankle implant inventory to its net realizable value as a result of our transition to our CHARLOTTE™ Foot
and Ankle System.
Goodwill and long-lived assets. We have approximately $8.8 million of goodwill recorded as a result of acquisition of businesses.
Goodwill is tested for impairment annually, or more frequently if changes in circumstances or the occurrence of events suggest that
impairment exists. We have two reporting units for purposes of evaluating goodwill for impairment, Wright Medical Technology, Inc.
(WMT) and Wright Medical Europe (WME). WMT consists of our U.S., Canadian, and Japanese subsidiaries and is primarily
consistent with our predecessor company prior its recapitalization. WME consists of our European subsidiaries and is primarily
consistent with the former Cremascoli operations prior to its acquisition by us. The annual evaluation of goodwill impairment requires
the use of estimates and assumptions to determine the fair value of our reporting units using projections of future cash flows. Our
estimates of future sales growth rates and operating margin can significantly affect the outcome of the impairment test. We performed
our annual impairment test during the fourth quarter of 2004 and determined that the fair value of our reporting units exceeded the
carrying value of those units and, therefore, no impairment charge was necessary.
Our business is capital intensive, particularly as it relates to surgical instrumentation. We depreciate our property, plant and equipment
and amortize our intangible assets based upon our estimate of the respective asset’s useful life. Our estimate of the useful life of an
asset requires us to make judgments about future events, such as product life cycles, new product development, product
cannibalization and technological obsolescence, as well as other competitive factors beyond our control. We account for the
impairment of long-lived assets in accordance SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
Accordingly, we evaluate impairments of our property, plant and equipment based upon an analysis of estimated undiscounted future
cash flows. If we determine that a change is required in the useful life of an asset, future depreciation/amortization is adjusted
accordingly. Alternatively, should we determine that an asset has been impaired, an adjustment would be charged to income based on
its fair market value, or discounted cash flows if the fair market value is not readily determinable, reducing income in that period.
During 2004, based on our decision to transition to a new line of internally developed foot and ankle products in the first quarter of
2005, we reviewed for impairment our instrumentation related to foot and ankle products sold under a distribution agreement. The
projected undiscounted cash flows for these instruments exceeded the carrying value of the instruments and accordingly, no
impairment charge was necessary. However, based on our transition to a new product line in the first quarter of 2005, we revised the
estimated useful life of these instruments and recorded accelerated depreciation during the fourth quarter of 2004 of approximately
$500,000. We expect to record additional accelerated depreciation of approximately $500,000 in the first quarter of 2005.
32
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
Product liability claims. Periodically, 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 an estimate of the amount of loss has been
developed. We have recorded at least the minimum estimated liability related to those claims where a range of loss has been
established. 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 use the best information available to us in determining the level of accrued
product liabilities and we believe our accruals are adequate. During 2004, we recorded $500,000 in product liability reserves for
probable losses following our announcement of a voluntary market withdrawal of a limited number of metal acetabular hip cups
intended for use in our CONSERVE® hip systems. Management developed this estimate and believes that the amount recorded is
appropriate based on assumptions with respect to estimated patient claims related to the market withdrawal and the acceptance of such
claims by our insurer. The nature of a market withdrawal and the associated claims are such that the claims will occur over an
extended period of time. Our estimate includes an assumption for unasserted claims based on management’s industry experience with
similar circumstances. While we believe that the amount recorded related to the market withdrawal is appropriate, it is possible that
changes in assumptions related to potential claims or insurance coverage could have an adverse effect on our estimate.
For the years ended December 31, 2003 and 2002, operating expenses were not materially affected by our estimates of product
liability claims. Our accrual for product liability claims was approximately $1.0 million and $750,000 at December 31, 2004 and
2003, respectively.
Accounting for income taxes. Our effective tax rate is based on income by tax jurisdiction, statutory rates and tax saving initiatives
available to us in the various jurisdictions in which we operate. Significant judgment is required in determining our effective tax rate
and evaluating our tax positions. This process includes 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 establish valuation allowances when the amount of future taxable income is not likely to support the
recovery of the deferred tax asset. To the extent that we establish a valuation allowance or increase the allowance in a period, we
reflect the increase as expense within the tax provision in our statement of operations. In addition to establishing valuation allowances
for deferred tax assets, we establish accruals for tax contingencies for certain tax jurisdictions, when, despite our belief that our tax
return positions are fully supportable, we believe that certain positions may be challenged and that we may not prevail upon review.
We adjust these accruals for tax contingencies in light of changing facts and circumstances, such as the progress of a tax audit. Our tax
provision reflects the impact of establishing these accruals for tax contingencies and any subsequent adjustments.
We have recorded valuation allowances of $5.9 million and $16.0 million as of December 31, 2004 and 2003, respectively, due to
uncertainties related to our ability to realize, before expiration, some of our deferred tax assets for both U.S. and foreign income tax
purposes. These deferred tax assets primarily consist of the carry forward of certain net operating losses and general business tax
credits. We established these valuation allowances 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.
We have recorded accruals for tax contingencies of $13.0 million and $7.8 million as of December 31, 2004 and 2003, respectively,
for certain exposure items. We established these accruals for tax jurisdictions where we believe that certain positions may be
challenged and the likelihood of a favorable outcome upon review is less than probable.
During 2004, we completed certain tax studies. These studies indicated that a revision to our original estimates of the limitations on
the utilization of our net operating losses and tax credit carryforwards was required. Accordingly, the completion of the studies
resulted in a reduction of approximately $10.7 million in the valuation allowance for these deferred tax assets as the deferred tax assets
were more likely than not to be realized in the future. Additionally, these studies indicated that approximately $8.5 million of tax
exposure existed as a result of the tax filing positions taken with respect to these net operating losses and tax credit carryforwards.
Based on these findings, we reclassified
33
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
approximately $8.5 million of the valuation allowance to our accruals for tax contingencies. The remaining reduction in our valuation
allowance was released through the income tax provision or was a result of currency fluctuations on the portion of our valuation
allowances recorded in foreign currencies.
Additionally, in 2004, we favorably resolved certain tax contingencies associated with our December 1999 acquisition of Cremascoli.
The favorable resolution of these matters resulted in a reduction of our previously recorded accrual for tax contingencies and goodwill
of approximately $3.0 million. Our accruals for tax contingencies are included within “Other liabilities” on our consolidated balance
sheet. Additional discussion of our accounting for income taxes is included in Notes 6, 10 and 11 to our consolidated financial
statements contained in Item 8 of this report.
Impact of Recently Issued Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R, which requires the recognition of compensation expense for the fair value of
share-based transactions. We further describe this pronouncement and its anticipated impact on our results of operations under the
heading, “Stock based expense” within the “Results of Operations” section of MD&A.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs—An Amendment of ARB No. 43, Chapter 4” (SFAS No. 151).
SFAS No. 151 will no longer allow companies to capitalize inventory costs on their balance sheet when the production defect rate
varies significantly from the expected rate. All abnormal freight, handling and material waste will be treated as period expenses.
Additionally, SFAS No. 151 requires that a facility’s fixed production overhead be charged to inventory based on a range of “normal”
capacity. If the production level is abnormally low or high, unallocated overhead should be charged to current period expense. SFAS
No. 151 is required to be adopted for annual periods beginning after June 15, 2005; accordingly, we will adopt SFAS No. 151
effective January 1, 2006. We are evaluating the impact of this standard on our results of operations and financial statements.
In December 2004, the FASB issued two FASB Staff Positions (FSP) in response to the Jobs Creation Act related to accounting and
disclosures associated with the provisions of the Jobs Creation Act. We further describe the Jobs Creation Act and our evaluation of its
impact within the “Results of Operations” section of MD&A. FSP 109-1 requires the deduction for qualified domestic production
activities to be accounted for as a special deduction under SFAS No. 109, not as a tax-rate deduction. We will comply with the
provisions of FSP 109-1 effective January 1, 2005, should this deduction become available to us. FSP 109-2 allows for additional time
for companies to determine whether any foreign earnings will be repatriated under the Jobs Creation Act’s one-time deduction for
repatriated earnings. Companies that take the additional time are required to provide disclosures about the status of their evaluation.
Based on management’s assessment of the repatriation deduction, we have determined to continue our current policy of permanently
reinvesting all foreign earnings. Therefore, the provisions of FSP 109-2 are not applicable to us.
Factors Affecting Future Operating Results
In addition to the factors described above in MD&A and elsewhere in this report, 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
“Business – Government Regulation” 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 recordkeeping
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
governmental authorities:
34
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
•
imposing fines and penalties on us;
• preventing us from manufacturing or selling our products;
• bringing civil or criminal charges against us;
• 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 the 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 IDE. Clinical studies must be conducted in compliance
with FDA regulations, or the FDA may take enforcement action. The data collected from these clinical studies 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 governmental 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 human
tissue-based product is considered human tissue, it does not require FDA clearance or approval before being marketed. If it is
considered a medical 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 NOTA. NOTA prohibits the sale of human organs, including bone and other human tissue, for valuable consideration
within the meaning of NOTA. 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.
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) of the FDC Act 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)
35
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
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 “Business – Government
Regulation.”
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, for our biologics products, we depend upon a limited number of sources of DBM and CBM, and any failure to obtain
DBM and 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 and CBM, a key component in the allograft products we currently
produce, market and distribute, that we obtained in the U.S. in 2004. We cannot be sure that our supply of DBM and CBM will
continue to be available at current levels or will be sufficient to meet our needs, or that our suppliers of DBM and CBM will be free
from FDA regulatory action impacting their sale of DBM and CBM. Since there is a small number of suppliers, if we cannot continue
to obtain DBM and CBM from these sources in volumes sufficient to meet our needs, we may not be able to locate replacement
sources of DBM and 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 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 to or use of such raw materials or components.
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
“Business – Competition.”
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 may render our products
obsolete. See “Business – Competition.”
36
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
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. See “Business – Intellectual Property.” 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 USPTO may deny or require a significant narrowing of the claims in our pending patent applications and
the patents issuing from such applications. Any patents issuing from the pending patent applications may not provide us with
significant commercial protection. We could incur substantial costs in proceedings before the USPTO. 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 intellectual property to the same extent as
U.S. laws or at all. We also 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, adequate remedies for any breach would be available, or 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” for more information regarding this lawsuit. If
Howmedica were to succeed in obtaining the relief it claims, the court could award damages to Howmedica and impose an injunction
against further sales of our product. If a monetary 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.
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
37
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
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.
Fluctuations in insurance expense could adversely affect our profitability
We hold a number of insurance policies, including product liability insurance, directors’ and officers’ liability insurance, property
insurance and workers’ compensation insurance. In recent years, our industry has experienced significant increases in product liability
insurance premiums. If the costs of maintaining adequate insurance coverage should increase significantly in the future, our operating
results could be materially adversely impacted.
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, governmental 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. 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. Further, our ability to
enforce non-compete arrangements related to key personnel who have left the business could have a material adverse effect on our
business.
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 89 stocking distribution partners, which combined employ approximately 400 sales representatives who sell
in over 60 countries. Most of these countries are, to some degree, subject to political, social and economic instability. For the years
ended December 31, 2004 and 2003, 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;
• 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 who possess proprietary knowledge or are otherwise important to our success in 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 60 countries.
38
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
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.
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 governmental 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 medical devices and procedures. Canada, and some
European and Asian countries, in particular France, Japan, 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 “Business – Third-Party Reimbursement” for more information regarding reimbursement in the U.S. and abroad.
39
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
If market clearance is not obtained for the re-launch of the ADCON ® Gel products and the launch of the CONSERVE ® Plus
implant in the U.S., growth of our biologics and hip product lines could be impacted
Our ADCON® Gel products and our CONSERVE® Plus Resurfacing Implant are available outside the U.S. and are pending FDA
clearance for the U.S. market. There can be no assurance that the sale of our ADCON® Gel or CONSERVE® Plus 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 and hip product lines, respectively.
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 could be unable to manufacture our products for a
substantial amount of time and our sales could 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 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 $8.1 million in 2004 and $11.9 million in 2003. During the second half of 2004, we began a derivative
program using 30-day foreign currency forward contracts to mitigate the risk of currency fluctuations on our intercompany receivable
and payable balances that are denominated in foreign currencies. These forward contracts are expected to offset the transactional gains
and losses on the related intercompany balances. These forward contracts are not designated as hedging instruments under SFAS
No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Accordingly, the changes in the fair value and the
settlement of the contracts are recognized in the period incurred.
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:
40
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
• 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:
• demand for products, which historically has been lowest in the third quarter;
• our ability to meet the demand for our products;
•
increased competition;
•
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 orthopaedic surgeons;
• changes in distributor relationships and sales force size and 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 and foreign governmental regulatory policies, requirements and enforcement practices;
• changes in accounting policies, estimates, and treatments; and
• general economic factors.
41
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
We believe that our 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 orthopaedic 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 representatives to market and sell our products
Our success depends largely upon marketing arrangements with independent sales distributors and sales representatives, in particular
their sales and service expertise and relationships with the customers in the marketplace. Independent distributors and sales
representatives may terminate their relationships 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
relationships with our independent distributors and sales representatives could have an adverse effect on our operations. Similarly, our
failure to recruit and retain additional skilled independent sales distributors and sales representatives 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.
42
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
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, 2004,
we had borrowings of $8.8 million under our credit facility which are subject to a variable interest rate, with a current annual rate of
3.625%. The carrying value of these borrowings approximates fair value due to the variable rate. Based on this debt level, a 10%
increase in the interest rate of all such borrowings would cause us to incur an increase in interest expense of approximately $32,000 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% of our total net sales were denominated in foreign currencies during the year ended December 31, 2004. 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, 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. As discussed in Note 2 to our consolidated
financial statements in Item 8 of this report, during the second half of 2004, we entered into certain short-term derivative financial
instruments in the form of foreign currency forward contracts. These forward contracts are designed to mitigate our exposure to
currency fluctuations in our intercompany balances denominated in euros, Japanese yen and Canadian dollars. Any change in the fair
value of these forward contracts as a result of a fluctuation in a currency exchange rate is expected to be offset by a change in the
value of the intercompany balance. These contracts are effectively closed at the end of each reporting period.
43
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
Item 8. Financial Statements and Supplementary Data.
Wright Medical Group, Inc.
Consolidated Financial Statements
for the Years Ended December 31, 2004, 2003 and 2002
Index to Financial Statements
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
44
Page
45
47
48
49
50
52
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Wright Medical Group, Inc.:
We have audited the accompanying consolidated balance sheets of Wright Medical Group, Inc. and subsidiaries as of December 31,
2004 and 2003, and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive income, and
cash flows for each of the years in the three-year period ended December 31, 2004. 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.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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 financial position of
Wright Medical Group, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
effectiveness of the internal control over financial reporting of Wright Medical Group, Inc. and subsidiaries as of December 31, 2004,
based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated February 21, 2005 expressed an unqualified opinion on management’s
assessment of, and the effective operation of, internal control over financial reporting.
(signed) KPMG LLP
Memphis, Tennessee
February 21, 2005
45
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Wright Medical Group, Inc.:
We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control Over
Financial Reporting, that Wright Medical Group, Inc. and subsidiaries maintained effective internal control over financial reporting as
of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the
Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Wright Medical Group, Inc. and subsidiaries maintained effective internal control over
financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also,
in our opinion, Wright Medical Group, Inc. and subsidiaries maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Wright Medical Group, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of operations, changes in stockholders’ equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 2004, and our report dated February 21, 2005 expressed an unqualified opinion on
those consolidated financial statements.
(signed) KPMG LLP
Memphis, Tennessee
February 21, 2005
46
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Wright Medical Group, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
Table of Contents
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 - 100,000,000; shares issued and outstanding
– 33,850,202 in 2004, 33,040,747 in 2003
Additional paid-in capital
Deferred compensation
Accumulated other comprehensive income
Accumulated deficit
Total stockholders’ equity
December 31,
2004
2003
$ 83,470
61,662
76,269
4,822
24,082
4,717
255,022
70,207
8,845
17,140
8,873
1,071
$361,158
$ 66,571
55,821
64,204
5,046
15,591
3,291
210,524
66,915
11,248
18,646
13,398
1,372
$322,103
$ 13,969
45,256
6,331
65,556
5,952
26
13,555
85,089
$ 14,227
42,814
6,228
63,269
11,096
1,203
8,217
83,785
339
269,944
(188)
21,642
(15,668)
276,069
$361,158
330
263,455
(1,452)
15,675
(39,690)
238,318
$322,103
The accompanying notes are an integral part of these consolidated financial statements.
47
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
Net sales
Cost of sales
Gross profit
Operating expenses:
Wright Medical Group, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
2004
$297,539
84,183
213,356
Year Ended December 31,
2003
$248,932
67,815
181,117
2002
$200,873
55,616
145,257
Selling, general and administrative
Research and development
Amortization of intangible assets
Stock-based expense1
Acquired in-process research and development costs
Arbitration settlement award
Total operating expenses
Operating income
Interest expense, net
Other income, net
Income before income taxes
Provision for income taxes
Net income
Net income per share (Note 8):
Basic
Diluted
Weighted-average number of common shares outstanding – basic
Weighted-average number of common shares outstanding – diluted
151,144
18,421
3,889
1,489
—
—
174,943
38,413
1,064
(74)
37,423
13,401
$ 24,022
$
0.72
0.68
$
33,391
35,317
127,612
16,151
3,562
2,068
4,558
—
153,951
27,166
1,107
(1,060)
27,119
9,722
$ 17,397
$
0.53
0.50
$
32,857
34,561
106,875
10,357
3,946
1,724
—
(4,200)
118,702
26,555
938
(1,277)
26,894
1,834
$ 25,060
$
0.79
0.75
$
31,870
33,550
1 Amounts presented as stock-based expense consist of; cost of sales totaling $68, $107, and $108 for the years ended December 31,
2004, 2003, and 2002 respectively; selling, general and administrative expenses of $1,364, $1,875, and $1,506 for the years ended
December 31, 2004, 2003, and 2002, respectively; and research and development expenses of $57, $86, and $110 for the years
ended December 31, 2004, 2003, and 2002, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
48
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
Wright Medical Group, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
Amortization of deferred financing costs
Amortization of intangible assets
Deferred income taxes
Stock-based expenses
In-process research and development costs
Other
Changes in assets and liabilities, net of acquisitions:
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)
Other
Net cash used in investing activities
Financing activities:
Issuance of common stock
Financing under factoring agreements, net
Payments of bank and other financing
Net cash (used in) provided by financing activities
Year Ended December 31,
2003
2004
2002
$ 24,022
$ 17,397
$ 25,060
17,278
261
3,889
5,068
1,489
—
623
(3,811)
(7,861)
(3,223)
(849)
479
13,948
261
3,562
4,565
2,068
4,558
275
(11,359)
(3,466)
(676)
3,153
5,779
13,553
261
3,946
946
1,724
—
900
(4,653)
(12,242)
(2,596)
509
(5,458)
37,365
40,065
21,950
(18,316)
(161)
49
(18,116)
(7,799)
71
(17,974)
(4,469)
13
(18,428)
(25,844)
(22,430)
4,056
(29)
(6,332)
1,678
4,680
(5,844)
52,347
—
(3,963)
(2,305)
514
48,384
Effect of exchange rates on cash and cash equivalents
267
463
699
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
16,899
15,198
48,603
66,571
51,373
2,770
$ 83,470
$ 66,571
$ 51,373
The accompanying notes are an integral part of these consolidated financial statements.
49
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
Wright Medical Group, Inc.
Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income
For the Year Ended December 31, 2002
(In thousands, except share data)
Common Stock, Voting
Common Stock,
Non-voting
Number of
Number of
Paid-in Accumulated Deferred Comprehensive Stockholders’
Shares
Amount
Shares
Amount
Capital
Deficit
Compensation
Income
(Loss)
Equity
Additional
Accumulated
Other
Total
23,257,532 $233
5,288,595 $ 53 $207,197 $(82,147) $(4,798) $(3,238) $117,300
—
—
—
—
—
25,060
—
—
25,060
—
—
—
—
—
—
—
7,521
7,521
32,581
Balance at December 31,
2001
2002 Activity:
Net income
Foreign currency
translation
Total comprehensive
income
Issuance of common stock,
net of costs
4,166,247
41
—
—
52,306
—
—
—
52,347
Tax benefit of employee
stock option exercises
Conversion of non-voting
common stock to voting
common stock
Deferred stock-based
compensation
Stock-based compensation
Balance at December 31,
—
—
—
—
1,047
—
—
—
1,047
5,288,595
53
(5,288,595)
(53)
—
—
—
—
—
—
—
—
—
90
—
—
—
—
—
—
—
(90)
1,724
—
—
—
1,724
2002
32,712,374 $327
—
— $260,640 $(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, March 01, 2005
Table of Contents
Wright Medical Group, Inc.
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income
For the Years Ended December 31, 2003 and 2004
(In thousands, except share data)
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
Balance at December 31, 2003
2004 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
Balance at December 31, 2004
Common Stock, Voting
Number of
Shares
32,712,374
Amount
327
$
Additional
Paid-in Accumulated
Capital
$260,640
Deficit
$(57,087)
Accumulated
Other
Deferred Comprehensive Stockholders’
Equity
Income
$204,999
$ 4,283
Compensation
$ (3,164)
Total
—
—
—
—
—
—
17,397
—
—
—
—
11,392
17,397
11,392
28,789
328,373
3
1,675
—
—
—
1,678
—
—
—
—
33,040,747
—
—
—
—
330
$
784
593
—
(237)
$263,455
—
—
—
—
$(39,690)
—
(593)
2,068
237
$ (1,452)
—
—
—
—
$15,675
—
—
—
—
—
—
24,022
—
—
—
—
5,967
784
—
2,068
—
$238,318
24,022
5,967
29,989
809,455
9
4,047
—
—
—
4,056
—
—
—
—
33,850,202
—
—
—
—
339
$
2,217
331
—
(106)
$269,944
—
—
—
—
$(15,668)
—
(331)
1,489
106
$ (188)
—
—
—
—
$21,642
2,217
—
1,489
—
$276,069
The accompanying notes are an integral part of these consolidated financial statements.
51
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Description of Business:
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’s products are sold through a network of independent sales representatives in the U.S. and by a combination of
employee sales representatives, independent sales representatives, and stocking distributors outside the U.S. The Company promotes
its products in over 60 countries with principal markets of the U.S., Europe, and Japan. 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 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 common stock which
generated net proceeds of $84.8 million. On March 6, 2002, the Company and certain selling stockholders completed a secondary
offering which generated net proceeds of $49.5 million.
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 revenue recognition, the determination of allowances for doubtful accounts, excess and obsolete inventories,
accounting for goodwill and long-lived assets, product liability claims and accounting for income taxes.
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 for
excess and obsolete inventory and, when circumstances indicate, the Company incurs charges to write down inventories to their net
realizable value. The Company’s review of inventory for excess and obsolete quantities is based primarily on its estimated forecast of
product demand and production requirements for the next twenty-four months. Charges incurred for excess and obsolete inventory
were $5.8 million, $2.6 million and $2.8 million for the years ended December 31, 2004, 2003 and 2002, respectively. In 2004,
charges incurred for excess and obsolete inventory included $2.4 million recorded to write down certain foot and ankle implant
inventory to its net realizable value, as a result of the Company’s transition to the CHARLOTTE™ Foot and Ankle System.
52
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
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 an estimate of the amount of loss has been developed. The Company has recorded at least the
minimum estimated liability related to those claims where a range of loss has been established. The Company’s accrual for product
liability claims was approximately $1.0 million and $750,000 at December 31, 2004 and 2003, respectively.
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 the estimated useful lives based on the following
categories:
Land improvements
Buildings
Machinery and equipment
Furniture, fixtures and office equipment
Instruments
15 to 25 years
10 to 45 years
3 to 20 years
1 to 14 years
5 to 6 years
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.
Intangible Assets and Goodwill. Goodwill is recognized for the excess of the purchase price over the fair value of assets of businesses
acquired. Goodwill is required to be tested for impairment at least annually. Unless circumstances otherwise dictate, we perform our
annual impairment test in the fourth quarter. Accordingly, during the fourth quarter of 2004, 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. The Company has two reporting units for purposes of evaluating goodwill for impairment, Wright Medical Technology, Inc.
(“WMT”) and Wright Medical Europe (“WME”). WMT consists of the Company’s U.S., Canadian, and Japanese subsidiaries, and is
primarily consistent with the Predecessor Company prior its recapitalization. WME consists of the Company’s European subsidiaries
and is primarily consistent with the former Cremascoli operations prior to its acquisition by the Company.
The Company’s intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their
estimated residual values, and are reviewed for impairment in accordance with Statement of Financial Accounting Standards
(“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. The weighted average amortization periods for completed technology, distribution
channels, trademarks and licenses are 8 years, 10 years, 9 years, and 5 years, respectively. The weighted average amortization period
of the Company’s intangible assets on a combined basis is 9 years.
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. The Company
accounts for the impairment of long-lived assets in accordance SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets.” Accordingly, the Company evaluates impairment of its property, plant and equipment based upon an analysis of
estimated undiscounted future cash flows. If it is determined that a change is required in the useful life of an asset, future
depreciation/amortization is adjusted accordingly. Alternatively, should the Company determine that an asset is impaired, an
adjustment would be charged to income based on its fair market value, or discounted cash flows if the fair market value is not readily
determinable, reducing income in that period.
Allowances for Doubtful Accounts. The Company experiences some credit loss on its accounts receivable and accordingly it must
make estimates related to the ultimate collection of its accounts receivable. Specifically,
53
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
management analyzes the Company’s accounts receivable, historical bad debt experience, customer concentrations, customer
credit-worthiness, and current economic trends, when evaluating the adequacy of its allowance for doubtful accounts.
The majority of the Company’s receivables are from hospitals, many of which are government funded. Accordingly, the Company’s
collection history with this class of customer has been favorable. Historically, the Company has experienced minimal bad debts from
its hospital customers and more significant bad debts from certain international distributors, typically as a result of specific financial
difficulty or geo-political factors. In 2003 and 2004, the increases in the Company’s accounts receivable balance have related almost
exclusively to its hospital customers. As the historical bad debt experience with this class of customer is minimal, the allowance has
not increased proportionately to the increase in the accounts receivable balance. The Company writes off receivables when it
determines that the receivables are uncollectible, typically upon customer bankruptcy or the customer’s non-response to collection
efforts. The Company’s allowance for doubtful accounts totaled $1.8 million and $1.5 million at December 31, 2004 and 2003,
respectively.
Concentrations of Supply of Raw Material. 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. Further, the Company relies on one supplier of ceramics for use
in the Company’s hip products. In addition, for the Company’s biologics products, it depends 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 and CBM that it used in 2004 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 products.
Income Taxes. Income taxes are accounted for pursuant to the provisions of SFAS No. 109, "Accounting for Income Taxes” (“SFAS
No. 109”). The Company’s effective tax rate is based on income by tax jurisdiction, statutory rates and tax saving initiatives available
to it in the various jurisdictions in which it operates. Significant judgment is required in determining the Company’s effective tax rate
and evaluating its tax positions. This process includes 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 the
Company’s consolidated balance sheet.
Revenue Recognition. The Company’s revenues are generated through two types of customers, hospitals and stocking distributors,
with the majority of the Company’s revenue derived from sales to hospitals. The Company’s products are sold through a network of
independent sales representatives in the U.S. and by a combination of employee sales representatives, independent sales
representatives, and stocking distributors outside the U.S. Revenues from sales to hospitals are recorded when the hospital takes title
to the product, which is when the product is surgically implanted in a patient and a purchase order is received from the hospital. The
Company views the receipt of a purchase order as the evidence of customer acceptance of the product.
The Company records revenues from sales to its stocking distributors outside the U.S. at the time the product is shipped to the
distributor. Stocking distributors, who sell the products to their customers, take title to the products and assume all risks of ownership.
The Company’s distributors are obligated to pay within specified terms regardless of when, if ever, they sell the products. In general,
the distributors do not have any rights of return or exchange; however, in limited situations the Company has repurchase agreements
with certain stocking distributors. Those certain agreements require the Company to repurchase a specified percentage of the inventory
purchased by the distributor within a specified period of time prior to the expiration of the contract. During those specified periods, the
Company defers the applicable percentage of the sales. Approximately $87,000 and $247,000 of deferred revenue related to these
types of agreements was recorded at December 31, 2004 and 2003, respectively.
54
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company must make estimates of potential future product returns related to current period product revenue. The Company
develops these estimates by analyzing historical experience related to product returns. Judgment must be used and estimates made in
connection with establishing the allowance for sales returns in any accounting period. An allowance for sales returns of $395,000 and
$412,000 is included as a reduction of accounts receivable at December 31, 2004 and 2003, respectively.
Shipping and Handling Costs. The Company incurs shipping and handling costs associated with the shipment of goods to customers,
independent distributors and its subsidiaries. All shipping and handling amounts billed to customers are included in net sales. All
shipping and handling costs associated with the shipment of goods to customers are included in cost of sales. All other shipping and
handling costs are included in selling, general and administrative expenses.
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. Gains and losses resulting from transactions denominated in a currency other than the local functional currency are included
in other income.
Comprehensive Income. Comprehensive income 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 difference between the Company’s net income and its comprehensive income
is wholly attributable to foreign currency translation.
Stock-Based Compensation. At December 31, 2004, 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. Nonemployee stock-based compensation is accounted for in accordance with
SFAS No. 123.
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 (in thousands,
except per share amounts):
55
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Net income, 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
Pro forma net income
Net income per share:
Basic, as reported
Basic, pro forma
Diluted, as reported
Diluted, pro forma
Year Ended December 31,
2003
$17,397
2004
$24,022
2002
$25,060
681
920
998
(8,626)
$16,077
(4,334)
$13,983
(2,918)
$23,140
$
$
$
$
0.72
0.48
0.68
0.47
$
$
$
$
0.53
0.43
0.50
0.41
$
$
$
$
0.79
0.73
0.75
0.69
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (Revised 2004), “Share Based
Payment,” (“SFAS No. 123R”), effective for interim or annual reporting periods beginning after June 15, 2005. SFAS No. 123R
requires the recognition of compensation expense for the fair value of share-based transactions. The fair value must be determined as
of the date of grant using a valuation model such as Black-Scholes or a binomial lattice model. The Company has begun the process to
evaluate and select an appropriate model for the valuation of its stock options. Until this evaluation is complete, the exact amount of
the impact of SFAS No. 123R cannot be determined. The effect of expensing the fair value of the Company’s stock options using the
Black-Scholes model is presented in the table above.
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, 2004 and 2003 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 the second half of 2004, the Company began a derivative program using 30-day foreign currency forward contracts to mitigate
the risk of currency fluctuations on its intercompany receivable and payable balances that are denominated in foreign currencies.
These forward contracts are expected to offset the transactional gains and losses on the related intercompany balances. These forward
contracts are not designated as hedging instruments under SFAS No. 133. Accordingly, the changes in the fair value and the
settlement of the contracts are recognized in the period incurred in the accompanying consolidated statement of operations.
For the year ended December 31, 2004, the Company recorded approximately $790,000 in losses on foreign currency contracts, which
are included in “Other income, net” in the Company’s consolidated statement of operations. These losses offset translation gains
recorded on the Company’s intercompany receivable and payable balances. At December 31, 2004 and 2003, the Company did not
have any outstanding foreign currency contracts.
56
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
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
Year Ended December 31,
2003
2004
2002
717
$
$ 8,289
994
$
$ 4,411
$
$
883
359
During 2004, the Company favorably resolved certain income tax contingencies associated with the Company’s acquisition of
Cremascoli, resulting in a decrease in goodwill of approximately $3.0 million. See Note 6 for further discussion of this matter.
Additionally, the Company entered into capital leases of approximately $1.1 million and $628,000 during 2004 and 2003,
respectively.
Reclassifications. Certain prior year amounts have been reclassified to conform to the 2004 presentation.
Recent Pronouncements. In November 2004, the FASB issued SFAS No. 151, Inventory Costs—An Amendment of ARB No. 43,
Chapter 4 (“SFAS No. 151”). SFAS No. 151 will no longer allow companies to capitalize inventory costs on their balance sheet when
the production defect rate varies significantly from the expected rate. All abnormal freight, handling and material waste will be treated
as period expenses. Additionally, SFAS No. 151 requires that a facility’s fixed production overhead be charged to inventory based on
a range of “normal” capacity. If the production level is abnormally low or high, unallocated overhead should be charged to current
period expense. SFAS No. 151 is required to be adopted for annual periods beginning after June 15, 2005. Accordingly, the Company
will adopt the provisions of SFAS No. 151 effective January 1, 2006. Management is evaluating the impact of this standard on its
results of operations and financial statements.
In December 2004, the FASB issued two FASB Staff Positions (“FSP”) in response to the American Jobs Creation Act of 2004 (the
“Jobs Creation Act”) related to accounting and disclosures associated with certain provisions of the Jobs Creation Act. (The Jobs
Creation Act and management’s evaluation of its impact is further described within the “Results of Operations” section of Item 7 of
this report.) FSP 109-1 requires the deduction for qualified domestic production activities to be accounted for as a special deduction
under SFAS No. 109, not as a tax-rate deduction. The Company will comply with the provisions of FSP 109-1 effective January 1,
2005, should this deduction become available to the Company. FSP 109-2 allows for additional time for companies to determine
whether any foreign earnings will be repatriated under the Jobs Creation Act’s one-time deduction for repatriated earnings. Companies
that take the additional time are required to provide disclosures about the status of their evaluation. Based on management’s
assessment of the repatriation deduction, the Company has determined to continue its current policy of permanently reinvesting all
foreign earnings and therefore, the provisions of FSP 109-2 are not applicable to the Company.
3. Acquisition of Assets:
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. Additionally, the Company entered into a royalty agreement that requires the Company to pay a royalty on
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):
57
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 using a 32% risk adjusted discount rate. This discount rate reflected uncertainties surrounding the
successful development of the IPRD.
December 31,
2004
$ 3,373
14,306
58,590
$76,269
2003
$ 2,816
9,827
51,561
$64,204
December 31,
$
2004
1,944
8,773
31,849
25,444
2,284
56,963
127,257
(57,050)
$ 70,207
$
2003
1,567
7,249
26,922
20,887
5,654
45,664
107,943
(41,028)
$ 66,915
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 consists 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
58
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of property, plant and equipment recorded under capital leases consist of the following (in thousands):
Land and land improvements
Buildings
Machinery and equipment
Furniture, fixtures and office equipment
Less: Accumulated depreciation
December 31,
2004
269
$
3,247
8,103
2,135
13,754
(5,940)
$ 7,814
2003
249
$
3,116
6,826
1,873
12,064
(4,117)
$ 7,947
Depreciation expense approximated $17.3 million, $13.9 million, and $13.6 million for the years ended December 31, 2004, 2003, and
2002, respectively, and included amortization of assets under capital leases.
6. Goodwill and Intangible Assets:
Changes in the carrying amount of goodwill occurring during the year ended December 31, 2004 are as follows (in thousands):
Goodwill, at December 31, 2003
Less: Resolution of pre-acquisition foreign income tax contingencies
Foreign currency translation
Goodwill, at December 31, 2004
$11,248
(2,978)
575
$ 8,845
During 2004, the Company favorably resolved certain foreign income tax contingencies associated with its December 1999
acquisition of Cremascoli. These amounts were established as an accrued liability in the purchase accounting associated with the
acquisition of Cremascoli. Due to the favorable resolution of these matters, the Company reduced the previously recorded goodwill
and associated accrued liabilities, which were recorded in “Other liabilities” in the Company’s consolidated balance sheet.
The components of the Company’s identifiable intangible assets are as follows (in thousands):
Distribution channels
Completed technology
Licenses
Trademarks
Other
Less: Accumulated amortization
Intangible assets, net
December 31, 2004
December 31, 2003
Accumulated
Amortization
$10,399
1,733
1,538
152
1,826
$15,648
Cost
$ 20,797
5,348
2,683
657
3,303
32,788
(15,648)
$ 17,140
Accumulated
Amortization
$ 7,708
1,025
983
75
1,149
$10,940
Cost
$ 19,296
5,288
2,593
657
1,752
29,586
(10,940)
$ 18,646
Based on the intangible assets held at December 31, 2004, we expect to amortize approximately $4.0 million in 2005, $3.5 million in
2006, $2.9 million in 2007, $2.7 million in 2008 and $2.5 million in 2009.
59
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
7. Accrued Expenses and Other Current Liabilities:
Accrued expenses and other current liabilities consist of the following (in thousands):
Employee benefits
Advances from factoring arrangement
Royalties
Taxes other than income
Commissions
Professional fees
Purchased technology
Legal
Other
8. Earnings Per Share:
December 31,
2004
$11,813
5,242
4,664
4,120
3,818
3,129
1,500
1,153
9,817
$45,256
2003
$11,480
4,780
5,658
3,281
3,423
2,333
1,500
1,343
9,016
$42,814
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 consist of stock options and warrants.
The dilutive effect of such instruments is calculated using the treasury-stock method.
The weighted-average number of common shares outstanding for basic and diluted earnings per share purposes is as follows (in
thousands):
Weighted-average number of common shares outstanding — basic
Common stock equivalents
Weighted-average number of common shares outstanding — diluted
Year Ended December 31,
2003
32,857
1,704
34,561
2004
33,391
1,926
35,317
2002
31,870
1,680
33,550
For the years ended December 31, 2004, 2003 and 2002, options to purchase approximately 1.7 million, 671,000 and 447,000,
respectively, shares of the Company’s common stock were excluded from the calculation of diluted earnings per share because the
effect was antidilutive. These stock options were antidilutive because the exercise price of the options was greater than the average
market price of common stock for the respective period.
9. Long-Term Obligations:
Long-term obligations consist of the following (in thousands):
Notes payable
Capital lease obligations
Less: current portion
60
December 31,
2004
$ 8,750
3,533
12,283
(6,331)
$ 5,952
2003
$13,250
4,074
17,324
(6,228)
$11,096
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In August 2001, the Company entered into a five-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. The Company had borrowings
outstanding under the term loans of $8.8 million and $13.3 million at December 31, 2004 and 2003, respectively.
Borrowings under the senior credit facility are guaranteed by all of the Company’s subsidiaries and collateralized by all of the assets
of Wright Medical Technology, Inc., the Company’s wholly-owned subsidiary. The credit facility contains customary covenants
including, among other things, restrictions on the ability to pay cash dividends, prepay debt, incur additional debt and sell assets. The
credit facility also requires the Company to maintain certain financial covenants, including a specified consolidated leverage (or
debt-to-equity) ratio and a specified consolidated fixed charge coverage ratio. In the event that the Company violates any covenants, it
could be required to repay the remaining balance of the debt. Additionally, should the Company be required to repay the loan before
its scheduled maturity, a charge to operating income for unamortized financing costs would be incurred. 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 consolidated leverage ratio, with a current annual rate
of 3.625%.
At December 31, 2004, the Company had availability under committed credit facilities, after considering outstanding letters of credit,
totaling $59.7 million.
Aggregate annual maturities of the Company’s long-term obligations at December 31, 2004, excluding capital lease obligations, are as
follows (in thousands):
2005
2006
$ 5,000
3,750
$ 8,750
As discussed in Note 5, the Company has acquired certain property and equipment pursuant to capital leases. These leases have
various maturity dates ranging from one to six years with interest rates ranging from 2.81% to 10.14%. At December 31, 2004, future
minimum lease payments under capital lease obligations, together with the present value of the net minimum lease payments, are as
follows (in thousands):
2005
2006
2007
2008
2009
Thereafter
Total minimum payments
Less amount representing interest
Present value of minimum lease payments
Current portion
Long-term portion
61
$ 1,642
1,403
790
496
368
333
5,032
(1,499)
3,533
(1,331)
$ 2,202
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
10. 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
The components of the Company’s provision for income taxes are as follows (in thousands):
Year Ended December 31,
2003
$25,675
1,444
$27,119
2004
$40,437
(3,014)
$37,423
2002
$30,678
(3,784)
$26,894
Current provision:
Domestic:
Federal
State
Foreign
Deferred provision (benefit):
Domestic:
Federal
State
Foreign
Total provision for income taxes
Year Ended December 31,
2003
2004
2002
$12,815
811
4,401
$ 3,080
203
1,404
$ —
—
819
(197)
803
(5,232)
$13,401
4,313
1,098
(376)
$ 9,722
1,331
1,841
(2,157)
$ 1,834
A reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate is as follows:
Income tax provision at statutory rate
State tax provision
Change in valuation allowance
Meals and entertainment limitation
Research and development credit
Other, net
Total
Year Ended December 31,
2004
2003
2002
35.0%
4.8%
(3.1%)
1.0%
(2.6%)
0.7%
35.8%
35.0%
4.4%
4.5%
1.2%
(9.9%)
0.7%
35.9%
35.0%
4.6%
(30.2%)
1.0%
(1.4%)
(2.2%)
6.8%
The significant components of the Company’s deferred tax assets and liabilities as of December 31, 2004 and 2003 are as follows (in
thousands):
62
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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,
2004
2003
$12,832
2,309
621
19,399
5,660
11,718
(5,897)
46,642
4,523
3,767
5,570
13,860
$32,782
$ 18,367
4,393
3,080
14,219
4,235
10,180
(16,039)
38,435
4,446
4,369
2,015
10,830
$ 27,605
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.
At December 31, 2004, the Company did not have undistributed earnings of foreign subsidiaries, as total earnings from these
subsidiaries have been offset by losses.
At December 31, 2004, the Company had net operating loss carryforwards for U.S. federal income tax purposes of approximately
$16.7 million, which expire in 2017 and 2018. Additionally, the Company had general business credit carryforwards of approximately
$2.3 million, which expire beginning in 2007 and extending through 2016, and alternative minimum tax credits of approximately
$600,000, which do not expire. At December 31, 2004, the Company had foreign net operating loss carryforwards of approximately
$20.2 million, of which $2.6 million expire beginning in 2004 and extending through 2010.
Certain of the Company’s U.S. and foreign net operating losses and general business credit carryforwards are subject to various
limitations. The Company maintains valuation allowances for these net operating losses and tax credit carryforwards that will expire
unused due to these limitations.
During 2004, the Company completed certain tax studies. These studies indicated that a revision to the Company’s original estimates
of the limitations on the utilization of its net operating losses and tax credit carryforwards was required. Accordingly, the completion
of the studies resulted in a reduction of approximately $10.7 million in the valuation allowance for these deferred tax assets as the
deferred tax assets were more likely than not to be realized in the future. Additionally, these studies indicated that approximately
$8.5 million of tax exposure exists as a result of the tax filing positions taken with respect to these net operating losses and tax credit
carryforwards. Based on these findings, the Company reclassified approximately $8.5 million of the valuation allowance to its
accruals for tax contingencies. The remaining reduction in the Company’s valuation allowance was released through the income tax
provision or was a result of currency fluctuations on the portion of its valuation allowances recorded in foreign currencies.
11. Other Long-Term Liabilities:
Other long-term liabilities consist of the following (in thousands):
Accruals for tax contingencies
Other
December 31,
2004
$12,951
604
$13,555
2003
$ 7,788
429
$ 8,217
The Company establishes accruals for tax contingencies, when, despite its belief that tax return positions are fully supportable, certain
of these positions may be challenged and the Company may not prevail upon review. During 2004, as discussed in Note 10,
approximately $8.5 million of the Company’s valuation allowance for deferred tax assets was reclassified to accruals for tax
contingencies. Additionally, as discussed in Note 6, the Company favorably resolved certain foreign tax contingencies associated with
its December 1999 acquisition of Cremascoli.
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
63
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The favorable resolution of these matters resulted in a reduction of the Company’s previously recorded accrual for tax contingencies
and goodwill of approximately $3.0 million.
12. Capital Stock:
Common Stock. The Company is authorized to issue up to 100,000,000 shares of voting common stock. The Company has 66,149,798
shares of voting common stock available for future issuance at December 31, 2004.
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. No
warrants remain outstanding at December 31, 2004. The warrants were exercisable at any time after issuance and, unless exercised,
expired five years from the date of issuance. During the years ended December 31, 2004, 2003 and 2002, warrants for 353,209, 6,691
and 349,194 shares were exercised, respectively.
13. Stock Option Plans:
At December 31, 2004, 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.
Equity Incentive Plan
On December 7, 1999, the Company adopted the 1999 Equity Incentive Plan (the “Plan”), which was subsequently amended and
restated on July 6, 2001, May 13, 2003 and May 13, 2004. The Plan authorizes the Company to grant options to purchase up to
8,267,051 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 July 2001 became options to purchase the Company’s common stock.
Those options were immediately exercisable upon their issuance. All the options issued under the plan expire after ten years.
The weighted-average fair value of the Company’s options granted in 2004, 2003 and 2002 was $17.39 per share, $12.96 per share
and $11.78 per share, respectively. The fair value of these options is estimated on the date of grant using the Black-Scholes
methodology required by SFAS No. 123 for publicly traded companies. In applying the Black-Scholes methodology to the option
grants, the Company used the following assumptions:
Risk-free interest rate
Expected option life
Expected price volatility
2004
4.0% - 4.8%
7 years
50.1%
Year Ended December 31,
2003
3.6% - 4.3%
7 years
54.3%
2002
4.0% - 5.0%
6 – 7 years
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.
64
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the Company’s stock option activity is as follows (shares in thousands):
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
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2004
Common Stock
Weighted
Avg.
Exercise
Price
$ 5.09
18.09
4.01
9.30
$ 7.58
21.80
4.67
7.25
$ 12.28
30.61
7.53
24.34
Shares
3,127
630
(374)
(95)
3,288
1,333
(309)
(78)
4,234
2,458
(505)
(359)
5,828
$ 19.68
As of December 31, 2004, there were 1,014,744 options available for future issuance.
In 2004, 2003, and 2002, the Company granted certain independent distributors a total of 19,900, 16,750 and 15,850 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 $32.56, $16.31 and $17.21 per
share in 2004, 2003, and 2002, respectively. The options expire after ten years.
In connection with the distributor stock grants discussed above and the issuance of certain stock options to employees and distributors,
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, 2004, 2003 and 2002, stock-based expense of $1.5 million, $2.1 million, and $1.7 million, respectively,
was recorded in the accompanying statement of operations related to these stock options and stock grants.
A summary of the Company’s stock options outstanding and exercisable at December 31, 2004, is as follows (shares in thousands):
Options Outstanding
Weighted-Average
Remaining Weighted-Average
Contractual
Life
Exercise
Price
Options Exercisable
Number Weighted-Average
5.5
7.6
8.0
9.2
9.5
7.8
$
5.12
15.26
18.26
28.39
35.36
$ 19.68
Exercisable
1,746
31
340
151
—
2,268
Exercise
Price
$
4.95
15.31
18.09
27.03
—
8.53
$
Range of Exercise
Prices
$0.00 – $8.50
$8.51 – $16.00
$16.01 – $24.00
$24.01 – $32.00
$32.01 – $35.87
Number
Outstanding
1,872
80
1,125
2,003
748
5,828
65
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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% 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 8,792, 12,777, and 5,682 shares in 2004, 2003, and 2002, respectively. The weighted-average fair value
of those purchase rights granted in 2004, 2003, and 2002 was $9.04 per share, $5.27 per share, and $5.69 per share, respectively. As of
December 31, 2004, there were 172,749 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,
2004
1.9% - 2.8%
6 months
50.1%
2003
1.1% - 1.8%
6 months
54.3%
2002
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 $831,000, $716,000, and $677,000 in 2004, 2003, and 2002, respectively.
15. Commitments and Contingencies:
Operating Leases. The Company leases certain equipment and office space under non-cancelable operating leases. Rental expense
under operating leases approximated $6.2 million, $5.0 million and $3.9 million for the years ended December 31, 2004, 2003, and
2002, 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, 2004 (in thousands):
2005
2006
2007
2008
2009
Thereafter
$ 6,532
4,626
2,526
556
448
1,462
$16,150
66
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Royalty and Consulting Agreements. The Company has entered into various royalty and other consulting agreements with third party
consultants. The Company incurred royalty and consulting expenses of $6.2 million, $5.0 million and $4.5 million during the years
ended December 31, 2004, 2003, and 2002, respectively, under minimum contractual obligations that were contingent upon services.
The amounts in the table below represent minimum payments to consultants that are contingent upon future services. These fees are
accrued when it is deemed probable that the performance thresholds are met. Payments under these agreements for which the
Company has not recorded a liability, are as follows at December 31, 2004 (in thousands):
2005
2006
2007
2008
2009
Thereafter
$ 6,266
1,668
1,235
1,041
957
4,000
$15,167
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 on their respective U.S. dollar exchange rates at December 31, 2004. These future payments are
subject to foreign currency exchange rate risk.
Purchase Obligations. The Company has entered into certain supply agreements for its products, which include minimum purchase
obligations. During the years ended December 31, 2004, 2003, and 2002, the Company paid approximately $6.4 million, $6.8 million,
and $2.3 million, respectively, under those supply agreements. The amounts in the table below represent the Company’s purchase
obligations in future years under those supply agreements:
2005
2006
$ 6,609
5,263
$11,872
Portions of these payments are denominated in foreign currencies and were translated based on their respective U.S. dollar exchange
rates at December 31, 2004. These future payments are subject to foreign currency exchange rate risk.
Legal Proceedings. On June 30, 1993, prior to the December 1999 recapitalization and inception of the Company in its present form,
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.
67
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
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 2000, Howmedica Osteonics Corp. (“Howmedica”) filed 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 in this case could
impact a substantial portion of our knee product line. The Company believes, however, that it has strong defenses against the claims
and that the claims are, in part, covered by the Company’s patent infringement insurance. In 2004, a Markman hearing was held
regarding interpretation of the patent claims that have been asserted by Howmedica in this lawsuit. The court has taken the issue of
claim interpretation under advisement and both parties await the decision of the court on this issue. Management is unable to estimate
the potential liability, if any, with respect to the claims and accordingly, no provision has been made for this contingency as of
December 31, 2004. However, management does not believe that the outcome of this lawsuit 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. While the patent in question re-issued prior to February 10, 2004, based on its
assessment, the Company has concluded that the other required conditions were not satisfied upon re-issuance and the consequential
payment of any amount is not probable. Accordingly, no provision has been made for this contingency as of December 31, 2004.
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 recorded in “Accrued expenses and
other current liabilities” in the consolidated balance sheet 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 against the Company in United States District
Court for the Western District of Wisconsin for payment of the remaining $1.5 million of the purchase price and the royalties earned
to date. In November 2003, the trial court ruled 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 the consolidated balance sheet. In 2004, the Company appealed the trial court’s judgment to the United States Court of
Appeals for the Seventh Circuit, briefs and oral arguments were submitted, and the appeal is pending. The Company does not believe
that the outcome of this lawsuit will have a material adverse affect on its financial position or results of operations.
In September 2004, the Company announced a voluntary market withdrawal of a limited number of metal acetabular hip cups that are
intended for use in the Company’s CONSERVE ® hip systems. In connection with this market withdrawal, the Company recorded
$500,000 in product liability reserves for probable losses related to the market withdrawal. Management developed this estimate and
believes that the amount recorded is appropriate based on assumptions with respect to estimated patient claims related to the market
withdrawal and the acceptance of such claims by our insurer. The nature of a market withdrawal and the associated claims are such
that the claims will occur over an extended period of time. The Company’s loss estimate includes an assumption for unasserted claims
based on management’s industry experience with similar circumstances. While the Company believes that the amount recorded related
to the market withdrawal is appropriate, it is possible that changes in assumptions related to potential claims or insurance coverage
could have an adverse effect on the Company’s estimate.
The Company is currently involved in separate disputes, in Italy, with a former agent and two former employees. No lawsuits have
been filed by a party in any of these matters. Management believes that is has meritorious defenses
68
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
should any claim arise and that the payment of any amount is not probable and cannot be estimated at this time. Accordingly, no
provisions have been made for these matters as of December 31, 2004.
In addition to those noted above, the Company is subject to various other 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.
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). 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:
Hips products
Knee products
Biologics products
Extremity 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
2004
2002
$ 99,133
87,408
62,070
36,433
12,495
$297,539
$ 78,071
78,338
50,056
31,876
10,591
$248,932
$ 56,945
72,058
38,347
25,367
8,156
$200,873
$200,500
74,292
22,747
$297,539
$168,138
61,075
19,719
$248,932
$138,853
47,011
15,009
$200,873
$ 33,102
(433)
5,744
$ 38,413
$ 19,472
3,912
3,782
$ 27,166
$ 24,136
1,844
575
$ 26,555
December 31,
2004
2003
$45,905
18,012
6,290
$70,207
$44,863
18,688
3,364
$66,915
Sales to United States-based customers, aggregated $180.4 million, $152.9 million, and $122.4 million, for the years ended
December 31, 2004, 2003, and 2002, respectively. These sales, along with United States export sales, are
69
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 2004, 2003 or 2002; however, Italy and France together represented approximately 16% of the Company’s total net sales
in each of 2004, 2003 and 2002.
17. Quarterly Results of Operations (unaudited):
The following table presents a summary of the Company’s unaudited quarterly operating results for each of the four quarters in 2004
and 2003, respectively (in thousands). 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.
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Amortization of intangible assets
Stock-based expense
Total operating expenses
Operating income
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
Operating income
70
2004
First
Quarter
$74,917
20,386
54,531
37,134
4,982
942
424
Second
Quarter
$75,616
21,383
54,233
37,714
4,524
928
465
Third
Quarter
$69,299
19,998
49,301
36,611
4,302
975
271
Fourth
Quarter
$77,707
22,416
55,291
39,685
4,613
1,044
329
43,482
43,631
42,159
45,671
$11,049
$10,602
$ 7,142
$ 9,620
2003
First
Quarter
$58,622
15,540
43,082
30,305
3,535
804
409
4,558
Second
Quarter
$62,152
17,386
44,766
31,963
3,908
923
420
—
Third
Quarter
$59,268
15,453
43,815
32,292
4,397
900
482
—
Fourth
Quarter
$68,890
19,436
49,454
33,052
4,311
935
757
—
39,611
37,214
38,071
39,055
$ 3,471
$ 7,552
$ 5,744
$10,399
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act
of 1934. Our disclosure controls and procedures are designed to ensure that material information relating to us, including our
consolidated subsidiaries, is made known to our principal executive officer and principal financial officer by others within our
organization. Under the supervision and with the participation of our management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of
December 31, 2004. Based on this evaluation, our principal executive officer and principal financial officer concluded that our
disclosure controls and procedures were effective as of December 31, 2004, to ensure that the information required to be disclosed by
us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s rules and forms.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of our
management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness
of our internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this
evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2004. Our
management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004, has been
audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Item 9B. Other Information.
Not applicable.
71
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
Item 10. Directors and Executive Officers of the Registrant.
PART III
The information required by this item is incorporated by reference from the definitive proxy statement to be filed within 120 days after
December 31, 2004, pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the annual meeting of
stockholders to be held on May 12, 2005.
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, 2004, pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the annual meeting of
stockholders to be held on May 12, 2005.
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, 2004, pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the annual meeting of
stockholders to be held on May 12, 2005.
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, 2004, pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the annual meeting of
stockholders to be held on May 12, 2005.
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, 2004, pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the annual meeting of
stockholders to be held on May 12, 2005.
72
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
PART IV
Item 15. Exhibits and Financial Statement Schedules.
Financial Statements
See Index to Consolidated Financial Statements in Item 8 of this report.
Financial Statement Schedules
See Schedule II - Valuation and Qualifying Accounts on page S-2 of this report.
Index to Exhibits
Exhibit No.
2.1
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)
Description
2.2
3.1
3.2
4.1
4.2
4.3
4.4
4.5
10.1
ADCON 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) as amended by Certificate
of Amendment of Fourth Amended and Restated Certificate of Incorporation of Wright Medical Group, Inc. (3)
Amended and Restated By-laws of Wright Medical Group, Inc. (4)
Registration Rights Agreement, dated December 7, 1999, among the investors listed on Schedule I thereto and Wright
Medical Group, Inc. (1)
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)
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, (5) as amended by Amendment No. 1 to Credit Agreement dated as of July 31,
2002, among the parties thereto, (6) Amendment No. 2 to Credit Agreement dated as of May 23, 2003, among the parties
thereto, (6) and Amendment No. 3 to Credit Agreement dated as of September 11, 2003, among the parties thereto, (7)
and Amendment No. 4 to Credit Agreement dated as of December 3, 2004, among the parties thereto. (8)
10.2
Third Amended and Restated 1999 Equity Incentive Plan (the “1999 Plan”). (9) (10)
10.3
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) (10)
73
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
Exhibit No.
10.4
Form of Non-Qualified Stock Option Agreement pursuant to the 1999 Plan. (1) (10)
Description
10.5
Form of Non-Employee Director Stock Option Agreement pursuant to the 1999 Plan. (1) (10)
10.6
Form of Executive Stock Option Agreement pursuant to the 1999 Plan. (3) (10)
10.7
Form of Sales Representative Award Agreement pursuant to the 1999 Plan. (1) (10)
10.8
Wright Medical Group, Inc. Executive Performance Incentive Plan. (10) (11)
10.9
10.10
Form of Indemnification Agreement between Wright Medical Group, Inc. and its directors and executive officers. (1)
(10)
Employment Agreement dated as of July 1, 2004, between Wright Medical Technology, Inc. and Laurence Y. Fairey.
(10) (12)
10.11
Employment Agreement dated as of July 1, 2004, between Wright Medical Technology, Inc. and F. Barry Bays. (10) (12)
10.12
10.13
10.14
10.15
10.16
10.17
21
23
Employment Agreement dated as of December 11, 2003, between Wright Medical Technology, Inc. and John K.
Bakewell. (10) (13)
Employment Agreement dated as of January 1, 2004, between Wright Medical Technology, Inc. and R. Glen Coleman.
(10) (12)
Employment Agreement dated as of April 1, 2004, between Wright Medical Technology, Inc. and Jeffrey G. Roberts.
(10)
Employment Agreement dated as of February 8, 2005, between Wright Medical Technology, Inc. and Brian T. Ennis.
(10) (11)
Severance and Release Agreement dated as of August 31, 2004, between Wright Medical Technology, Inc. and Jack E.
Parr. (10) (14)
Severance and Release Agreement dated as of October 31, 2004, between Wright Medical Technology, Inc. and Robert
W. Churinetz. (10) (15)
Subsidiaries of Wright Medical Group, Inc.(13)
Consent of KPMG LLP.
31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) Under the Securities Exchange Act of 1934.
31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) Under the Securities Exchange Act of 1934.
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.
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 Registration Statement on Form S-8 filed May 14, 2004.
Incorporated by reference to the Company’s current report on Form 8-K filed March 31, 2004.
Incorporated by reference to the Company’s current report on Form 8-K filed August 3, 2001.
74
(1)
(2)
(3)
(4)
(5)
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
(6)
(7)
(8)
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 current report on Form 8-K filed December 7, 2004.
(9)
Incorporated by reference to the Company’s definitive proxy statement filed April 7, 2004.
(10) 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 .
(11)
(12)
(13)
(14)
(15)
Incorporated by reference to the Company’s current report on Form 8-K filed February 10, 2005.
Incorporated by reference to the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2004.
Incorporated by reference to the Company’s annual report on Form 10-K for the year ended December 31, 2003.
Incorporated by reference to the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2004.
Incorporated by reference to the Company’s current report on Form 8-K filed November 18, 2004.
75
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
SIGNATURES
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.
March 1, 2005
WRIGHT MEDICAL GROUP, INC.
By:
/s/ Laurence Y. Fairey
Laurence Y. Fairey
President and Chief Executive Officer
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.
Signature
/s/ Laurence Y. Fairey
Laurence Y. Fairey
/s/ John K. Bakewell
John K. Bakewell
Title
President, Chief Executive Officer and
Director (Principal Executive Officer)
Date
March 1, 2005
Chief Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
March 1, 2005
/s/ F. Barry Bays
Executive Chairman of the Board
March 1, 2005
F. Barry Bays
/s/ Richard B. Emmitt
Director
March 1, 2005
Richard B. Emmitt
/s/ David D. Stevens
Director
March 1, 2005
David D. Stevens
/s/ James E. Thomas
Director
March 1, 2005
James E. Thomas
/s/ Thomas E. Timbie
Director
March 1, 2005
Thomas E. Timbie
/s/ James T. Treace
Director
March 1, 2005
James T. Treace
/s/ Elizabeth H. Weatherman
Director
March 1, 2005
Elizabeth H. Weatherman
76
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Wright Medical Group, Inc.:
Under date of February 21, 2005, we reported on the consolidated balance sheets of Wright Medical Group, Inc. and subsidiaries as of
December 31, 2004 and 2003, and the related consolidated statements of operations, changes in stockholders’ equity and
comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2004. These consolidated
financial statements, and our report thereon, are included in the annual report on Form 10-K for the year 2004. In connection with our
audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule
listed in Item 15 in the annual report on Form 10-K. 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.
(signed) KPMG LLP
Memphis, Tennessee
February 21, 2005
S-1
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
Table of Contents
Wright Medical Group, Inc.
Schedule II-Valuation and Qualifying Accounts
(In thousands)
Allowance for doubtful accounts:
For the period ended:
December 31, 2004
December 31, 2003
December 31, 2002
Sales returns and allowance:
For the period ended:
December 31, 2004
December 31, 2003
December 31, 2002
Balance
at
Beginning
of Period
Charged
to
Cost and
Expenses
Deductions
and Other
Balance
at
End of
Period
$ 1,489
$ 1,509
$ 1,893
$
$
$
268
87
515
$
$
$
(63)
$ 1,820
107
$ 1,489
899
$ 1,509
$
$
$
412
$
(17)
$ —
987
$ (101)
$
474
643
$
344
$ —
$
$
$
395
412
987
S-2
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
EXHIBIT 10.14
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), effective as of April 1, 2004
(the "Effective Date"), is made between Wright Medical Technology, Inc., a
Delaware corporation (the "Company") and Jeffrey G. Roberts (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 Vice President, Research and
Development 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 anyone 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 $207,100 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 45% 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.
Roberts Employment Agreement
April 1, 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 three (3) weeks, or
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
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
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.
Roberts Employment Agreement
April 1, 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. 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
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
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.
11. Covenants Not To Compete or Interfere. During the term of this
Agreement, including any
Roberts Employment Agreement
April 1, 2004
Page 4
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. [Reserved].
15. Insurance. The Company may, at its election and for its benefit,
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
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
9470 Johnson Road Extd., Germantown, TN 38139, 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
Roberts Employment Agreement
April 1, 2004
Page 5
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/ Jeffrey G. Roberts
----------------- -----------------------
Title: President & CEO Jeffrey G. Roberts
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Wright Medical Group, Inc.:
We consent to the incorporation by reference in the registration statements
(Nos. 333-75176, 333-90024, 333-108638, and 333-115541) on Form S-8 of Wright
Medical Group, Inc. of our reports dated February 21, 2005, with respect to the
consolidated balance sheets of Wright Medical Group, Inc. as of December 31,
2004 and 2003, and the related consolidated statements of operations, changes in
stockholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 2004, and the financial
statement schedule, management's assessment of the effectiveness of internal
control over financial reporting as of December 31, 2004 and the effectiveness
of internal control over financial reporting as of December 31, 2004, which
reports appear in the December 31, 2004 annual report on Form 10-K of Wright
Medical Group, Inc.
(signed) KPMG LLP
Memphis, Tennessee
February 25, 2005
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(a) UNDER
THE SECURITIES EXCHANGE ACT OF 1934
I, Laurence Y. Fairey, certify that:
1. I have reviewed this annual report on Form 10-K for the year ended
December 31, 2004, of Wright Medical Group, Inc. (the "Company");
2. 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;
3. 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;
4. 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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
(c) 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
(d) 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
5. 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: March 1, 2005
/s/ Laurence Y. Fairey
---------------------------------------
Laurence Y. Fairey
President and Chief Executive Officer
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
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:
1. I have reviewed this annual report on Form 10-K for the year ended
December 31, 2004, of Wright Medical Group, Inc. (the "Company");
2. 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;
3. 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;
4. 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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
(c) 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
(d) 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
5. 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: March 1, 2005
/s/ John K. Bakewell
---------------------------------------
John K. Bakewell
Executive Vice President and Chief
Financial Officer
Source: WRIGHT MEDICAL GROUP, 10-K, March 01, 2005
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, Laurence Y. Fairey 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,
2004, 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: March 1, 2005
/s/ Laurence Y. Fairey
-------------------------------------
Laurence Y. Fairey
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, March 01, 2005