FORM 10-K
WRIGHT MEDICAL GROUP INC - WMGI
Filed: February 26, 2008 (period: December 31, 2007)
Annual report which provides a comprehensive overview of the company for the past year
Table of Contents
10-K - WRIGHT MEDICAL GROUP, INC.
PART I
Risk Factors.
Item 1. Business.
Item
1A.
Item 1B. Unresolved Staff Comments.
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, Executive Officers, and Corporate Governance.
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, and Director Independence.
Item 14. Principal Accountant Fees and Services.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
SIGNATURES
EX-12 (EX-12 RATIO OF EARNINGS TO FIXED CHARGES)
EX-23 (EX-23 CONSENT OF KPMG LLP)
EX-31.1 (EX-31.1 SECTION 302 CERTIFICATION OF THE CEO)
EX-31.2 (EX-31.2 SECTION 302 CERTIFICATION OF THE CFO)
EX-32 (EX-32 SECTION 906 CERTIFICATION OF THE CEO CFO)
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
�
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. � Yes � No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
� Yes � No
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the
Exchange Act from their obligations under those Sections.
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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer �
Accelerated filer �
Non-accelerated filer �
Smaller reporting company �
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). � Yes � No
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
The aggregate market value of the voting and non-voting common equity held by nonaffiliates 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 $859,773,006.
As of February 20, 2008, there were 36,637,662 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is incorporated by reference from portions of the definitive proxy statement to be filed within
120 days after December 31, 2007, pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the
annual meeting of stockholders to be held on May 14, 2008.
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
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WRIGHT MEDICAL GROUP, INC.
ANNUAL REPORT ON FORM 10-K
Table of Contents
Part I
Business.
Risk Factors.
Unresolved Staff Comments.
Properties.
Legal Proceedings.
Submission of Matters to a Vote of Security Holders.
Part II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Selected Financial Data.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Quantitative and Qualitative Disclosures About Market Risk.
Item 6.
Item 7.
Item 7A.
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9.
Item 9A.
Controls and Procedures.
Item 9A(T). Controls and Procedures.
Item 9B.
Financial Statements and Supplementary Data.
Other Information.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers, and Corporate Governance.
Executive Compensation.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Certain Relationships and Related Transactions, and Director Independence.
Principal Accountant Fees and Services.
Part III
Item 15.
Exhibits and Financial Statement Schedules.
Part IV
Signatures
Ex-12 Ratio of Earnings to Fixed Charges
Ex-23 Consent of KPMG LLP
Ex-31.1 Section 302 Certification of the CEO
Ex-31.2 Section 302 Certification of the CFO
Ex-32 Section 906 Certification of the CEO & CFO
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
Safe-Harbor Statement
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. 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 and may be identified by their use of terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,”
“may,” “plan,” “predict,” “project,” “will,” and other similar terms. Forward-looking statements are contained in the section entitled
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of this quarterly report.
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 Item 1A and elsewhere in this report), which could cause our actual results to materially differ from
those described in the forward-looking statements. Although we believe that the forward-looking statements are accurate, there can be
no assurance that any forward-looking statement will prove to be accurate. A forward-looking statement should not be regarded as a
representation by us that the results described therein will be achieved. Readers should not place undue reliance on any
forward-looking statement. The forward-looking statements are made as of the date of this quarterly report, and we assume no
obligation to update any forward-looking statement after this date.
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
Item 1. Business.
Overview
PART I
Wright Medical Group, Inc., through Wright Medical Technology, Inc. and other operating subsidiaries (Wright), 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, 2007, we had net sales of $386.9 million and net income of $961,000. As of December 31, 2007, we
had total assets of $670 million. Detailed information on our net sales by product line and our net sales, operating income and
long-lived assets by geographic region can be found in Note 18 to the consolidated financial statements contained in “Financial
Statements and Supplementary Data.”
History
We were incorporated in November 1999 as a Delaware corporation and began operations in December 1999 when we acquired
majority ownership of our predecessor company, Wright Medical Technology, Inc., in a recapitalization transaction, and immediately
thereafter acquired Cremascoli Ortho Holding, S.A., based in Toulon, France. The Cremascoli 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 sold 3,450,000 shares of common stock in a secondary offering, which generated $49.5 million in net proceeds. In 2007, we
issued $200 million of convertible senior notes, which generated net proceeds of $193.5 million.
Orthopaedic Industry
It is estimated that the worldwide orthopaedic industry generated sales of approximately $26 billion in 2007. We believe this figure
will grow by approximately 8% annually over the next three years. Seven multinational companies currently dominate the orthopaedic
industry, each with approximately $1.7 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 us, 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.
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.
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Table of Contents
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 $10.5 billion in 2007, with hip reconstruction and knee
reconstruction representing 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 2007, with estimated sales of approximately $5.3 billion worldwide.
One of the major trends in knee reconstruction includes the use of alternative surface materials to extend the implant’s life and
increase conservation of the patient’s bone to minimize surgical trauma and accelerate recovery. Our BIOFOAM™ material is a 70%
porous material which provides a trabecular structure that acts as an interface for bone ingrowth. The microstructure of our
BIOFOAM™ material is designed to allow rigid fixation for faster biological attachment. This material made its debut on the
ADVANCE ® BIOFOAM™ Tibial Base, and will eventually be incorporated into a number of our products spanning from hip
arthroplasty to foot and ankle reconstruction.
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 $4.7 billion in 2007.
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. 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 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 bones 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 $530 million worldwide in 2007. Major trends in extremity reconstruction include unique distal radius (wrist) and foot
and ankle fixation devices.
Biologics Market
The biologics market is one of the fastest growing sectors of the orthopaedic market. Biologics products use both biological
tissue-based and synthetic materials to regenerate damaged or diseased bone and to repair damaged tissue. 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.
Biologics products 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, referring to the way in which the
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Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
materials affect bone growth. Osteoconductive materials serve as a scaffold that supports the formation of bone but do not trigger new
bone growth, whereas osteoinductive materials induce bone growth. Other biologics products enable the repair of soft tissue. These
products provide favorable microenvironments for quick revascularization and cell proliferation. Excluding viscosupplements, tissue
processing services and bonemorphogenic protein, it is estimated that the biologics market generated sales of $1.7 billion worldwide
in 2007.
Government Regulation
United States
Our products are strictly regulated by the United States Food and Drug Administration (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 the pre-clinical and clinical testing, 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), and various state agency regulations. We are an accredited member of the American Association of Tissue Banks
(AATB).
Generally, before we can market a new medical device, marketing clearance from the FDA must be obtained through either a
premarket notification under Section 510(k) of the FDC Act or the 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 approximately 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 regulatory requirements, which include quality
control testing, control documentation and other quality assurance procedures.
If human clinical trials of a medical device are required and the device presents a significant risk, the sponsor of the trial 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 trial 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 trials support the safety and effectiveness of the device or warrant the continuation of clinical trials. An
IDE supplement must be submitted to and approved by the FDA before a sponsor or investigator may make a change to the
investigational plan that may affect its scientific soundness, study indication or the rights, safety or welfare of human subjects. The
trial 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.
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Table of Contents
Most of our products are FDA cleared through the 510(k) premarket notification process. We have conducted clinical trials to support
some 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, European Union, and Health
Canada have been working to establish more comprehensive regulatory frameworks for allograft-based tissue-containing products,
which are principally derived from human cadaveric tissue. The framework developed by the FDA establishes risk-based criteria for
determining whether a particular human tissue-based product will be classified as human tissue, a medical device or a biologic drug
requiring premarket clearance or approval. All tissue-based products are subject to extensive FDA regulation, including establishment
registration requirements, product listing requirements, good tissue practice requirements for manufacturing, and screening
requirements that ensure that diseases are not transmitted to tissue recipients. The FDA has also proposed extensive additional
requirements that address sub-contracted tissue services, tracking to the recipient/patient, and donor records review. If a tissue-based
product is considered human tissue, the FDA requirements focus on preventing the introduction, transmission, or spread of
communicable diseases to recipients. Clinical data or review of safety and efficacy are not required before the tissue can be marketed.
However, if it is considered a medical device, or a biologic drug, then FDA clearance or approval is 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 our operations. 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.
Further, we are subject to various federal and state laws concerning health care fraud and abuse, including false claims laws,
anti-kickback laws and physician self-referral laws. Violations of these laws can result in criminal and/or civil punishment, including
fines, imprisonment and, in the U.S., exclusion from participation in government health care programs. The scope of these laws and
related regulations are expanding and their interpretation is evolving. There is very little precedent related to these laws and
regulations. Increased funding for enforcement of these laws and regulations has resulted in greater scrutiny of marketing practices in
our industry and resulted in several government investigations by various government authorities. If a governmental authority were to
determine that we do not comply with these laws and regulations, then we and our officers and employees, could be subject to
criminal and civil sanctions, including exclusion from participation in federal health care reimbursement programs.
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 (EU), we are required to comply with the European Medical Devices Directives and
obtain CE mark certification. CE mark certification is the European symbol of adherence to quality assurance standards and
compliance with applicable European Medical Devices Directives. Under the European Medical Devices Directives, all medical
devices including active implants must qualify for CE marking. We also are required to comply with other foreign regulations, such as
obtaining Ministry of Health Labor and Welfare (MHLW) approval in Japan, Health Protection Branch (HPB) approval in Canada,
and Therapeutic Goods Administration (TGA) approval in Australia.
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Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
Products
We operate as one reportable segment, offering products in four primary market sectors: knee reconstruction, hip reconstruction,
extremity reconstruction and biologics. Sales in each of these markets represent greater than 15% of our consolidated revenue.
Detailed information on our net sales by product line can be found in Note 18 to the consolidated financial statements contained in
“Financial Statements and Supplementary Data.”
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 and patient preference for both open surgery and minimally invasive surgery (MIS). MIS or less invasive
surgery has gained momentum recently due to the smaller incision and minimal disruption of soft tissues, which can significantly
reduce recovery times. Faster recovery and rehabilitation times are important to the growing market of younger, more active patients
who want a quick return to their active lifestyles. The MIS surgical instrumentation is not only tissue sparing but more accurate and
can be used to perform traditional/open surgery procedures as well. This is important for surgeons because not every patient clinically
qualifies for the MIS surgical technique and they can standardize with one set of instruments regardless of open surgery or MIS
surgical technique. Additionally, due to the difficulties of cementing techniques in small incisions, cementless implants have also
gained momentum in MIS. We are utilizing our cementless implant history and expertise to provide surgical solutions for this growing
opportunity.
Recently, certain industry participants have heightened their focus on providing knee product offerings that offer better size-specificity
to patients, with the intent of improving patient outcomes longer-term as a result of improved implant fit. During 2007, we expanded
the number of sizing options for our primary knee product line as part of a stature-specific approach to patient treatment. Our
ADVANCE ® STATURE ™ femoral components are designed to accommodate those male or female femora with a larger front to
back dimension than side to side. This helps ensure that patients will receive the best implant fit possible.
During 2008, we anticipate the full launch of our ADVANCE ® BIOFOAM™ Cancellous Titanium Tibial Base, which features
proprietary bone-like titanium with a roughened texture for cementless fixation of the implant. BIOFOAM™ titanium also features a
trabecular structure intended to mimic bone and contribute to bone in-growth. Cementless fixation is a growing trend in knee
reconstruction due to younger patients resulting from active lifestyles and increased body weight. Cementless knees may have longer
survivorship than cemented designs. One of the most important requirements to achieving solid bone in-growth in a cementless knee is
immediate, rigid fixation of the implant to the bone. The rough surface of BIOFOAM™ titanium is designed to “bite” into bone and
enhance fixation.
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.
Our ADVANCE ® double-high knee tibial insert is designed to address the needs of surgeons who desire to retain the posterior
cruciate ligament (PCL) and maintain medial-pivoting kinematics. The insert design addresses an adverse phenomenon, known as
paradoxical motion that often occurs with other 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
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Table of Contents
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, like the ADVANCE ® medial-pivot, is
designed to prevent paradoxical motion through medial-pivoting articulation designed to provide stability and maximize PCL
function.
Our REPIPHYSIS® technology product grows with growing children without an operation. The non-invasive expansion can be
utilized for 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-on-ceramic and metal-on-metal articulations, and innovative technology in surface replacement implants. We are
therefore able to offer surgeons and their patients a full continuum of treatment options.
The CONSERVE® family of products incorporates anatomically-replicating large diameter bearings, led recently by the A-CLASS®
advanced metal technology. This new patent-pending metal-on-metal articulation has undergone extensive laboratory tests which
suggest that over the life of the implant, this advanced surface technology will result in significantly less wear than traditional
metal-on-metal hip implants. This new innovation is coupled with our BFH® technology, which is designed to reduce rates of
post-operative hip dislocation.
We continue to invest in pioneering approaches to tissue sparing hip replacement. The PATH ® MIS technique offers patients quicker
recovery due to a decrease of intraoperative soft tissue trauma. The decreased soft tissue trauma results in less pain and blood loss for
the patient, as well as a lower risk of dislocation.
The PROFEMUR® patented modular neck systems allow surgeons to carefully adjust and fine-tune implant positioning during
surgery. If a surgeon requires a change in leg length, offset or version, the PROFEMUR ® hip system conveniently allows these
options, as all of these options can be changed after the hip stem is in place. Our principal PROFEMUR® stem offerings which
provide this innovative modularity include our PROFEMUR® Z, PROFEMUR® Plasma Z, PROFEMUR® LX, PROFEMUR®
Tapered, PROFEMUR® RAZ, PROFEMUR® TL and the PROFEMUR® RENAISSANCE® stems. These stems represent the vast
majority of popular stem philosophies in the current marketplace.
The DYNASTY® Acetabular System offers surgeons the benefit of our BFH ® technology both in metal-on-metal and
metal-on-cross-linked poly options with the added benefit of screw fixation. Screw fixation of sockets is sometimes needed in the case
of poor bone quality. The DYNASTY® system is based on the long track record of the LINEAGE® Acetabular System, which offers
ceramic, metal and cross-linked poly bearings.
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.
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Extremity Reconstruction
We offer extremity products for foot and ankle and upper extremity in a number of markets worldwide. Some of our extremity
implants have many years of successful clinical history. We believe we are one of the recognized leaders in foot and ankle surgical
products, radial head repair, finger and toe implants and minimally invasive wrist fracture fixation.
Our CHARLOTTE™ foot and ankle system is a comprehensive offering of fixation products for foot and ankle surgery, and includes
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. Adding to the CHARLOTTE™
portfolio, in 2006, we introduced the first ever locking compressing plate designed for corrective foot surgeries. The CLAW ® plate
allows surgeons to dial in the length of screw and amount of compression to the fusion site, a strong advantage over traditional staples.
Our DARCO® plating systems were designed to address the specific needs of reconstructive foot and ankle surgery. The DARCO ®
MFS plating system for the forefoot and the DARCO® MRS plating system for the rearfoot have been designed to take advantage of
the many benefits of fixed-angle, locked screw fixation. Every screw hole in every plate may receive either a locked or a non-locked
screw, at the surgeon’s discretion. The holes are aligned to provide optimal screw purchase through screw convergence, and the
individual plate geometries vary to suit specific surgical indications.
Our EVOLVE ® modular radial head replacement prosthesis addresses the need for modularity in this anatomically highly-variable
joint, and is the market leading radial head prosthesis. The EVOLVE ® modular radial head device provides 150 different
combinations of heads and stems allowing the surgeon to choose implant heads and stems to accommodate the unpredictable anatomy
of each patient. The smooth stem design allows for rotational motion at the implant/bone interface and radiocapitellar articulation,
potentially reducing capitellar wear. In the first quarter of 2005, we released our EVOLVE ® radial head plating system for surgeons
who wish to repair rather than replace the damaged radial head. With prosthesis and plating, we believe we have become the vendor of
choice for repair of radial head fractures. Further strengthening our position in the radial head market, in the first quarter of 2007, we
introduced our EVOLVE ® Proline system, which adds additional size offerings and in-situ locking of the implant, a favorable feature
for surgeons treating patients with intact elbow ligaments.
The LOCON-T® and LOCON®-VLS distal radius plating systems provide surgeons with anatomically designed, stainless steel plates
used in the repair of distal radial fractures. In designing both plating systems, we utilized thin, high-strength stainless steel with low
profile screws, which have been demonstrated clinically to lessen potential for tendon irritation and/or rupture, which are
complications that historically have resulted from this type of surgical repair.
Our MICRONAIL® intramedullary wrist fracture repair system is a next-generation MIS treatment for distal radius fractures that
provides immediate fracture stabilization with minimal soft tissue disruption. The result is rapid recovery of hand and wrist functions.
Also, as the product is implanted within the bone, it has no profile, thereby removing the potential for tendon irritation or rupture.
The ORTHOSPHERE® carpometacarpal implant for the repair of the basal thumb joint is constructed from implant-grade ceramic,
which reduces wear and has favorable biocompatibility compared to other implant materials. By providing an alternative to the
harvesting of the patient’s own soft tissues as a spacer for the repaired carpometacarpal joint, the ORTHOSPHERE ® carpometacarpal
implant reduces morbidity and operating time in appropriately selected patients. We have received FDA 510(k) clearance to also
market this device in foot and ankle procedures such as the tarso-metatarsal joint.
Biologics
We offer a broad line of biologics products that are used to replace and repair damaged or diseased bone, tendons and soft tissues, and
other biological solutions for surgeons and their patients. These products focus on biological
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musculoskeletal repair by utilizing synthetic and human tissue-based materials. Internationally, we offer bone graft products
incorporating antibiotic delivery.
GRAFTJACKET® is a soft tissue graft designed for augmentation of tendon and ligament repairs such as those of the rotator cuff
(shoulder) and Achilles tendon in the ankle. By augmenting the strength of the tendon repair and incorporating biologically,
GRAFTJACKET® regenerative tissue matrix increases surgeons’ confidence in the surgical outcome. GRAFTJACKET ® Maxforce
Extreme is a high strength form of GRAFTJACKET® matrix, which provides maximum suture holding power for the most
challenging of tendon and ligament repairs.
GRAFTJACKET® ulcer repair matrix 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® ulcer repair matrix has
the ability to reliably repair deep foot wounds, which have a much higher risk of leading to amputation. Unlike some other diabetic
foot ulcer products, GRAFTJACKET® ulcer repair matrix generally requires only one application to treat the foot ulcer, reducing the
time and cost of treatment.
Our OSTEOSET® bone graft substitute is a synthetic bone graft substitute made of surgical grade calcium sulfate. OSTEOSET® bone
graft 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 (via osteoinductive DBM in OSTEOSET® DBM) 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, are currently one of
the few resorbable bone void fillers available in international markets for the prevention and 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. 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 graft is an injectable form of our surgical grade calcium sulfate paste that hardens in the body. MIIG ® 115 graft combines
the operative flexibility of an injectable substance with the clinically proven osteoconductive properties of our 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 part of the family of MIIG® products for the MIS treatment of bone defects. It is an
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 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 damage to the joint cartilage upon extravasation (i.e., leakage into the joint space).
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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 for very challenging fractures.
PRO-DENSE® injectable graft launched in the U.S. and select international markets in the third quarter of 2007. PRO-DENSE®
injectable graft is a composite graft of surgical grade calcium sulfate and calcium phosphate. In animal studies, this unique graft
composite has demonstrated excellent bone regenerative characteristics, forming new bone that is three times stronger than the natural
surrounding bone at a 13-week time point. Beyond thirteen weeks, the regenerated bone gradually remodels to natural bone strength.
IGNITE® Power Mix kit is a bone repair stimulus that combines calcium sulfate, DBM and autologous bone marrow aspirate
(BMA) for the treatment of problem fractures. This combination of materials provides the surgeon and patient with all three critical
elements that a bone graft material can offer — an osteoconductive scaffold with both osteoinductive and osteogenic capacity through
the use of DBM and BMA, respectively. The IGNITE ® Power Mix kit also provides specially-designed instrumentation both to
procure BMA and to prepare the fracture site for the grafting procedure using a minimally invasive technique. In 2006, we introduced
a mini-Ignite® product for stimulating repair of challenging small bone fractures, such as those of the fifth metatarsal in the foot. We
believe this product to be highly synergistic with our CHARLOTTE™ fixation product line.
In early 2007, we announced that we had signed a supply agreement with Regeneration Technologies, Inc., to develop advanced
xenograft implants for use in foot and ankle surgeries. We subsequently launched our CANCELLO-PURE™ foot and ankle implant,
which provides foot and ankle surgeons with an off-the-shelf, sterile graft that has handling characteristics superior to allograft.
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 $28.4 million, $25.6 million and $22.3 million in 2007, 2006 and 2005, respectively.
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 and fixation surfaces that
improve the clinical performance of reconstructive devices, including ceramic-on-ceramic and low-wear metal-on-metal surfaces.
Further, we provide minimally invasive, tissue sparing techniques that allow patients to quickly return to work and resume their daily
activities.
In 2007, we launched the GLADIATOR ® bipolar acetabular system. This system is a significant evolution in the field of bipolar hip
implant designs, featuring a unique cross-linked polyethylene bearing surface with an enhanced lock detail. Additionally, the
DYNASTY® acetabular cup system was launched in 2007, complementing our CONSERVE® acetabular components. Our
DYNASTYTM system is one of the few systems on the market which accepts metal and cross-linked polyethylene bearing surfaces,
providing intraoperative flexibility. In the biologics area, we have a variety of research and development projects underway that are
designed to further expand our presence in this 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. In 2007, we
launched PRO-DENSE® injectable regenerative graft, a progressive new bone graft substitute that has demonstrated unique and
highly favorable metaphyseal bone healing properties compared to autograft in pre-clinical studies. As it relates to our extremities line
of products, in 2007, we launched the CAROLINATM Jones fracture system for foot and ankle surgery and the CHARLOTTETM
7mm multi-use compression (MUC) screw system. The CAROLINATM system is the first major product designed specifically for
treatment of Jones fractures of the fifth metatarsal of the foot. The 7mm MUC screw is a “headless” design capable of producing
increased compression values over traditional, headed screw designs.
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New products, procedures and techniques that we introduced across all product lines since 2005 include, but are not limited to, the
MIIG® HV procedure kit, the GRAFTJACKET® regenerative tissue matrix Maxforce Extreme, the ODYSSEY® minimally invasive
knee instruments, the CONSERVE® Total A-CLASS ® advanced metal with BFH® technology hip system, the PROFEMUR®
RENAISSANCE® hip stem, the CHARLOTTE™ CLAW™ plate, and the A-CLASS ® polyethylene liner for the LINEAGE®
acetabular hip system, the ADVANCE ® STATURE™ femoral components, the GLADIATOR™ bipolar system, the DYNASTY ®
acetabular cup system, the PROFEMUR® TL stem, the EVOLVE ® Proline system, the DARCO® reconstructive foot portfolio, the
CHARLOTTE™ 7mm multi-use compression (MUC) screw system, the PRO-DENSE® injectable regenerative graft, the X-REAM™
expandable reamer and the GRAFTJACKET® MAXSTRIP regenerative tissue matrix.
Manufacturing and Quality
We operate a manufacturing facility in Arlington, Tennessee. This facility primarily produces orthopaedic implants and some of the
related surgical instrumentation. The majority of our biologics products and surgical instrumentation are produced to our
specifications by qualified subcontractors who serve medical device companies.
During 2007, we consolidated our manufacturing operations into one facility and ceased manufacturing operations in Toulon, France.
Our production facilities in Arlington are adequate for our present needs, and an expansion is in process in order to meet our needs in
the future as our business continues to grow.
We maintain a comprehensive quality system that is certified to the European standards ISO 9001 and ISO 13485 and to the Canadian
Medical Devices Assessment System (CMDCAS). We are accredited by the AATB and have registrations with the FDA as a medical
device establishment and as a tissue establishment. These certifications and registrations require periodic audits and inspections by
various regulatory entities to determine if we have systems in place to ensure our product is safe and effective for its intended use and
that we are compliant with applicable regulatory requirements. The quality system exists so that management has the proper oversight,
designs are evaluated and tested, production processes are established and maintained and monitoring activities are in place to ensure
products are safe, effective and manufactured according to our specifications. Consequently, the quality system provides the way for
us to ensure we design and build quality into our products while meeting global requirements.
Supply
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, stainless steel, various grades of high density polyethylenes, silicone elastomer and
ceramics. We rely on one source to supply us with a certain grade of cobalt chrome alloy and 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. For certain biologics products, we
depend on one supplier of DBM and cancellous bone matrix (CBM). We rely on one supplier for our GRAFTJACKET ® family of
soft tissue repair and graft containment products. We maintain adequate stock from these suppliers in order to meet production
requirements.
Sales and Marketing
Our sales and marketing efforts are focused primarily on orthopaedic surgeons, who typically are the decision-makers in orthopaedic
device purchases. We have established relationships with surgeons, who we believe are leaders in their chosen orthopaedic specialties.
These surgeons help us design products to solve some of the most challenging problems facing orthopaedic surgeons today. They also
help us train other surgeons in the safe and effective use of our products and help other surgeons perfect new surgical techniques.
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 products using our surgeon advisors in an instructional
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capacity. Additionally, approximately 16,000 practicing orthopaedic surgeons in the U.S. receive information on our latest products
through our distribution network, our website and brochure mailings.
We sell our products in the U.S. through a sales force of approximately 370 people as of December 31, 2007. 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.
We believe that our success in every market sector is dependent upon having a robust and compelling product offering, and equally as
important, a dedicated, highly trained, focused sales organization to deliver it to the customer. In early 2007, we began an initiative to
separate and focus our independent sales representatives in the U.S. as either large joints and upper extremities specialists or foot and
ankle specialists, with biologics being sold in all areas.
Our products are marketed internationally through a combination of direct sales offices (subsidiaries) in certain key international
markets and distributors in other markets. We have sales offices in France, Italy, the United Kingdom, Belgium, Germany, the
Netherlands, Japan and Canada that employ direct sales employees and in some cases use independent sales representatives to sell our
products in their respective markets. Our products are sold in other countries in Europe, Asia, Africa, Latin 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, 2007,
through a combination of our direct sales offices and approximately 85 stocking distribution partners, we have approximately 660
international sales representatives that sell our products in over 60 countries.
Seasonal Nature of Business
We traditionally experience lower sales volumes in the third quarter than throughout the rest of the year as many of our products are
used in elective procedures, which generally decline during the summer months, typically resulting in selling, general and
administrative expenses and research and development expenses as a percentage of sales that are higher than throughout the rest of the
year. 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 (AAOS). 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 three-day event, we display our most recent and innovative products for these surgeons.
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 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 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;
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•
•
•
•
•
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 focused sales representatives; and
maintain and establish distribution relationships.
Intellectual Property
We currently own or have licenses to use more than 200 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 products both under patents and license agreements
with other parties. These patents have a defined life, and expire from time to time.
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 and/or
cease production, marketing and distribution of those products. Litigation may also be necessary to enforce patent rights we hold or to
protect trade secrets or techniques we own. We are currently involved in an intellectual property lawsuit with Howmedica Osteonics
Corp., a subsidiary of Stryker Corporation. See “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. Therefore, reimbursement can be quite different from payor to payor as well as from one
region of the country to another. We believe that
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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, in part, upon 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 pursue and 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 government-managed health care systems, coverage with
evidence development processes, health savings accounts, prospective reimbursement and capitation programs, group purchasing,
redesign of benefits, encouragement of healthier lifestyles and exploration of more cost-effective methods of delivering health care.
These types of programs can potentially impact pricing structures and reimbursement for medical devices.
Employees
As of December 31, 2007, we employed approximately 1,050 people in the following areas: 400 in manufacturing, 370 in sales and
marketing, 150 in administration and 130 in research and development. 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 our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed with or furnished to the
Securities and Exchange Commission (SEC) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended,
as soon as reasonably practicable after they are electronically filed with or furnished to the SEC.
Item 1A. Risk Factors.
Our business and its future performance may be affected by various factors, the most significant of which are discussed below.
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, pre-clinical testing and clinical trial
activities are subject to extensive regulation and review by numerous governmental authorities both in
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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:
• 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 investigational device exemption (IDE). Clinical studies
must be conducted in compliance with FDA regulations, or the FDA may take enforcement action. The data collected from these
clinical 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.
We are subject to various federal and state laws concerning health care fraud and abuse, including false claims laws, anti-kickback
laws and physician self-referral laws. Violations of these laws can result in criminal and/or civil punishment, including fines,
imprisonment and, in the U.S., exclusion from participation in government health care programs. The scope of these laws and related
regulations are expanding and their interpretation is evolving. There is very little precedent related to these laws and regulations.
Increased funding for enforcement of these laws and regulations has resulted in greater scrutiny of marketing practices in our industry
and resulted in several government investigations by various government authorities. If a governmental authority were to determine
that we do not comply with these laws and regulations, then we and our officers and employees, could be subject to criminal and civil
sanctions, including exclusion from participation in federal health care reimbursement programs.
During the third quarter of 2007, as a result of a two year government investigation regarding potential financial inducements paid to
surgeons, five of our competitors entered into deferred prosecution or non-prosecution agreements with the U.S. Department of Justice
(DOJ), and four of those companies entered into settlement agreements with the U.S. Department of Health and Human Services,
Office of the Inspector General.
During the fourth quarter of 2007, we received a subpoena from the DOJ through the U.S. Attorney for the District of New Jersey
requesting documents for the period January 1998 through the present related to any consulting and professional service agreements
with orthopaedic surgeons in connection with hip or knee joint replacement procedures or products. We are cooperating fully with
federal authorities with regard to this subpoena. If, as a result of these investigations, we are found to have violated one or more
applicable laws, our business, financial condition and results of operations could be materially adversely affected. If some of our
existing business practices are challenged as unlawful, we would have to change those practices, which could have a material adverse
effect on our business, financial condition and results of operations.
In order to market our product devices in the member countries of the European Union (EU), we are required to comply with the
European Medical Devices Directive and obtain CE mark certification. CE mark certification is the
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European symbol of adherence to quality assurance standards and compliance with applicable European Medical Device Directives.
Under the European Medical Devices Directive, all medical devices including active implants must qualify for CE marking. In
August 2005, a European Medical Devices Directive changed the classification of hip, knee, and shoulder implants from class IIb to
class III. The transition period for these changes began September 1, 2007. Upon reclassification to class III, manufacturers will be
required to assemble significantly more documentation and submit it to their Notified Body for formal approval prior to affixing the
CE mark to their product and packaging. We intend to comply with the European Medical Devices Directive for all of our products
manufactured and sold in the EU. However, there can be no assurance that our products will be approved for CE marking in a timely
manner or at all.
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.
We obtained premarket clearance under Section 510(k) of the FDC Act for products we market in the U.S as required. We modified
some of our products and product labeling since obtaining 510(k) clearance, but we do not believe these modifications require us to
submit new 510(k) notifications. However, if the FDA disagrees with us and requires us to submit a new 510(k) notification for
modifications to our existing products, we may be the subject of enforcement actions by the FDA and be required to stop marketing
the products while the FDA reviews the 510(k) modification. 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 source to supply us with a certain grade of cobalt chrome alloy and 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 presently depend upon a single supplier as our source for DBM and CBM, and any failure
to obtain DBM and CBM from this source in a timely manner will deplete levels of on-hand raw materials inventory and could
interfere with our ability to process and distribute allograft products. During 2008, we are expecting a single not-for-profit tissue bank
to meet all of our DBM and CBM order requirements, a key component in the allograft products we currently produce, market and
distribute. 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 future 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 our current source 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. Sales of our
GRAFTJACKET® family of soft tissue repair products have grown to represent a significant portion of our total consolidated net
sales. In 2007, a dispute arose between us and the supplier of our GRAFTJACKET® family of soft tissue repair and graft containment
products. In this dispute, we asserted our contractual rights to xenograft products that are not currently part of our product offering.
The dispute was subject to binding arbitration, and in arbitration it was ruled that we did not have rights to distribute the xenograft
product, as this was a future product not covered as part of our supply agreement. These future products may be competitive to our
current products, and if so, could impact the future growth of our biologics product line.
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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.
Recent restructuring efforts could adversely affect our operations and financial results.
In June 2007, we announced plans to close our manufacturing, distribution, and administrative facility located in Toulon, France. The
facility’s closure affected approximately 130 Toulon-based employees. The majority of our restructuring activities were complete by
the end of 2007, with Toulon’s production being transferred to our existing manufacturing facility in Arlington, Tennessee and its
distribution activities being transferred to our European headquarters in Amsterdam, the Netherlands. With respect to the restructuring
activities in process, we may experience:
• higher costs of restructuring than we anticipated;
• difficulties in transferring Toulon’s production to Arlington, including receiving all required regulatory approvals;
• difficulties in completing all restructuring activities within the budgeted time;
• diversion of our management’s time and attention from other business concerns; or
• supply chain difficulties during the transition of the distribution activities from the Toulon facility to our Amsterdam facilities.
If market clearance is not obtained for launch of the CONSERVE® Plus implant in the U.S., growth of our hip product line could
be impacted.
Our CONSERVE® Plus resurfacing implant is available outside the U.S. There can be no assurance that the sale of our CONSERVE ®
Plus product in the U.S. will be cleared by the FDA in a timely manner or at all, which could have a significant impact on the future
growth of our hip product line.
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, European Union, and
Health Canada have been working to establish more comprehensive regulatory frameworks for allograft-based tissue-containing
products, which are principally derived from cadaveric tissue. The framework developed by the FDA establishes risk-based 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 establishment
registration requirements, product listing requirements, good tissue practice requirements for manufacturing, and screening
requirements that ensure that diseases are not transmitted to tissue recipients. The FDA has also proposed extensive additional
requirements that address sub-contracted tissue services, tracking to the recipient/patient, and donor records review. If a tissue-based
product is considered human tissue, the FDA requirements focus on preventing the introduction, transmission, or spread of
communicable diseases to recipients. Clinical data or review of safety and efficacy are not required before the tissue can be marketed.
However, if it is considered a medical device or biologic drug, then FDA clearance or approval is required.
Additionally, our biologics business involves the procurement and transplantation of allograft tissue, which is subject to federal
regulation under the National Organ Transplant Act (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
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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.
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.”
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
eight direct sales offices and approximately 85 stocking distribution partners, which combined employ approximately 660 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 year ended December 31, 2007 and the year ended December 31, 2006, 39% and 38%, respectively, 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 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.
As a U.S. based company doing business in foreign jurisdictions, not only are we subject to the laws of other jurisdictions, we are also
subject to U.S. laws governing our activities in foreign countries, such as the Foreign Corrupt Practices Act, as well as various
import-export laws, regulations, and embargoes. If our business activities were determined to violate these laws, regulations, or rules,
we could suffer serious consequences.
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.
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Recent acquisitions and efforts to acquire and integrate other companies or product lines could adversely affect our operations and
financial results.
In April 2007, we announced the completion of the acquisition of the foot and ankle reconstruction assets of Darco International, Inc.
and the external fixation assets of R&R Medical, Inc. Additionally, in October 2007, we announced the acquisition of the subtalar
implant product assets of Koby Ventures Ltd. d/b/a MetaSurg. 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. With respect to the acquisitions completed or other future acquisitions, we may also experience:
• 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, any future acquisitions could materially impair our operating results by causing us to incur debt or requiring us to amortize
acquisition expenses and acquired assets.
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
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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, pay ongoing royalties, or redesign our products, or prevent us from manufacturing, using or selling
our products. In addition to being costly, protracted litigation to defend or prosecute our intellectual property rights could result in our
customers or potential customers deferring or limiting their purchase or use of the affected products until resolution of the litigation.
If product liability lawsuits are brought against us, our business may be harmed.
The manufacture and sale of medical devices exposes us to significant risk of product liability claims. In the past, we have had a
number of product liability claims relating to our products, none of which either individually, or in the aggregate, have resulted in a
material negative impact on our business. In the future, we may be subject to additional product liability claims, some of which may
have a negative impact on our business. Additionally, we could experience a material design or manufacturing failure in our products,
a quality system failure, other safety issues, or heightened regulatory scrutiny that would warrant a recall of some of our products. Our
existing product liability insurance coverage may be inadequate to protect us from any liabilities we might incur. If a product liability
claim or series of claims is brought against us for uninsured liabilities or in excess of our insurance coverage, our business could
suffer. In addition, a recall of some of our products, whether or not the result of a product liability claim, could result in significant
costs and loss of customers.
Further, in 1993, our predecessor company, Wright Medical Technology, Inc. (the Predecessor Company), acquired substantially all of
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 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. 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. There can be no assurance that DCC will indemnify the
Predecessor Company or Wright on any claims in the future. Further, neither the Predecessor Company nor Wright maintains
insurance for claims arising on products sold by DCC.
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.”
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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 who 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.
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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.
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 sales distributors in the past, which adversely affected
short-term financial results while we transitioned to new independent sales 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.
Fluctuations in insurance cost and availability could adversely affect our profitability or our risk management profile.
We hold a number of insurance policies, including product liability insurance, directors’ and officers’ liability insurance, property
insurance and workers’ compensation insurance. If the costs of maintaining adequate insurance coverage should increase significantly
in the future, our operating results could be materially adversely impacted. Likewise, if the availability of any of our current insurance
coverage should become unavailable to us or become economically impractical, we would be required to operate our business without
indemnity from commercial insurance providers.
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, any inability on
our part to enforce non-compete arrangements related to key personnel who have left the business could have a material adverse effect
on our business.
If a natural or man-made disaster strikes our manufacturing facility, we could be unable to manufacture our products for a
substantial amount of time and our sales could decline.
We have principally relied to date on our manufacturing facilities in Arlington, Tennessee, and Toulon, France. During the past year,
we have consolidated our manufacturing operations into one facility and ceased operations in Toulon, France. The Arlington facility
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 facility may be affected by natural or man-made disasters. In the event our facility is affected by a disaster,
we would be forced to rely on third-party manufacturers. 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.
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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.
Because 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 approximately $6.1 million in 2007 and unfavorably impacted by $300,000 in 2006. We
currently employ 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 Statement of Financial Accounting Standards (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.
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;
• prevailing interest rates on our excess cash investments;
• 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.
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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.
Conversion of our convertible senior notes into common stock could result in dilution to our stockholders.
Our convertible senior notes are convertible at the option of the holder (subject to certain conditions) into shares of our common stock
at an initial conversion price of approximately $32.65 per share, subject to adjustment, at any time before close of business on the
business day preceeding the maturity date of the notes. Beginning December 6, 2011, we may redeem the notes for cash, in whole or
in part, at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus any accrued and unpaid interest,
if the closing sales price of our common stock has exceeded 140% of the conversion price for at least 20 trading days in any 30-day
trading period. In addition, if we experience a fundamental change event, as defined in the note agreement, we may be required to
purchase for cash all or a portion of the notes, at a price equal to 100% of the principal amount of the notes plus any unpaid and
accrued interest. Additionally, if upon a fundamental change event a holder elects to convert its notes, we may, under certain
circumstances, increase the conversion rate for the notes surrendered. All of the above rights are subject to certain limitations imposed
by our credit facility. Any issuance of shares as a result of the conversion of the notes would result in dilution to our stockholders.
We may be prohibited from paying the convertible senior notes when they are due, or be unable to raise the funds necessary to
repay the notes when due or finance a fundamental change purchase.
At maturity, the entire outstanding principal amount of our convertible senior notes will become due and payable. In addition, upon
the occurrence of a fundamental change event, holders of notes may require us to purchase their notes. However, we may not have
sufficient funds to repay the notes at maturity or to make the required purchase of the notes.
In addition, our ability to pay the notes at maturity or to purchase the notes upon a fundamental change event may be limited by the
terms of other agreements relating to our debt outstanding at the time, including our revolving credit facility, which limits our ability
to purchase the notes for cash in certain circumstances. Our revolving credit facility prohibits us from making any cash payments for
the purchase of the notes upon the occurrence of a fundamental change event, and hence we may not be able to purchase the notes for
cash upon the occurrence of a fundamental change event unless the revolving credit facility is amended to eliminate these restrictions
or is no longer outstanding at the time of such required payment. Any of our future debt agreements may contain similar restrictions.
Our failure to purchase tendered notes at a time when the purchase is required by the indenture would constitute a default under the
indenture, which in turn would constitute an event of default under our revolving credit facility or under the other future agreements
governing our indebtedness at such time. If the repayment of the related indebtedness were to be accelerated after any applicable
notice or grace periods, we may not have sufficient funds to repay the indebtedness or purchase the notes.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our corporate headquarters and U.S. operations consist of a manufacturing facility, a warehouse, and an administration building with
research and development facilities located on more than 50 acres in Arlington, Tennessee. We lease the manufacturing facility from
the Industrial Development Board of the Town of Arlington (IDB) under a lease agreement that 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
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option to purchase the warehouse from the IDB at a nominal price at any time during the lease term. We lease a portion of the
administration building from the IDB under a lease agreement that expires on July 8, 2008. We may exercise an option to purchase the
leased portion of the administration building from the IDB at a price of $101,000, which we have prepaid, at any time during the lease
term. We own another portion of the administrative building that was built in 2004.
Our production facilities are adequate for our current requirements, but we anticipate the need for an expansion of our Arlington,
Tennessee, facilities in the future as we continue to introduce new products and processes and grow our business.
Our international operations include warehouse, sales, research and development and administrative facilities located in several
countries. Our primary international warehouse is located in a leased facility in the Netherlands. Our primary international research
and development facility is located in leased facilities in Milan, Italy. Our sales offices in France, Italy, the United Kingdom,
Germany, Belgium, Japan and Canada also include warehouse and administrative space.
We currently own manufacturing, warehouse and administrative facilities in Toulon, France, which are classified as assets held for
sale at December 31, 2007. We expect to sell these facilities within the next 12 months.
Item 3. Legal Proceedings.
From time to time, we are subject to lawsuits and claims that 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 ongoing results of operations.
Howmedica Osteonics Corp. v. Wright Medical Technology, Inc.
In 2000, Howmedica Osteonics Corp. (Howmedica), 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 and could impact a substantial portion of our knee product line. We believe, however, that we have strong defenses
against Howmedica’s claims and are vigorously defending this lawsuit. In November 2005, the court issued a Markman ruling on
claim construction. Howmedica has conceded to the court that, if the claim construction as issued was applied to our knee product
line, our products do not infringe their patent. Howmedica has appealed the Markman ruling, and this matter is now on appeal to the
U.S. Federal Circuit Court of Appeals. No trial date has been set in this matter. 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, 2007.
These claims are covered in part by our patent infringement insurance. Management does not believe that the outcome of this lawsuit
will have a material adverse effect on our consolidated financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
24
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
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 Global Select Market under the symbol “WMGI.” The following table sets forth, for the
periods indicated, the high and low sales prices per share of our common stock as reported on the Nasdaq Global Select Market.
Fiscal Year 2007
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year 2006
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Holders
High
$23.49
$25.79
$28.51
$31.80
$22.69
$24.80
$24.79
$25.09
Low
$20.97
$21.82
$23.50
$24.80
$18.54
$19.17
$20.20
$22.47
As of February 15, 2008, there were 198 stockholders of record and an estimated 9,047 beneficial owners of our common stock.
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.
Equity Compensation Plan Information
The table below sets forth information regarding the number of securities to be issued upon the exercise of the outstanding stock
options granted under our equity compensation plans and the shares of common stock remaining available for future issuance under
our equity compensation plans as of December 31, 2007 (in thousands):
Number of
securities
to be issued
upon
exercise
of
outstanding
options
(in
Number
of
securities
remaining
available
for future
issuance
under
equity
Weighted-average
exercise
price of
outstanding
options
$ 23.51
—
$ 23.51
compensation
plans
(in
thousands)
1,068
—
1,068
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
25
thousands)
4,428
—
4,428
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
Comparison of Total Stockholder Returns
The graph below compares the cumulative total stockholder returns for the period from December 31, 2002 to December 31, 2007, for
our common stock, an index composed of U.S. companies whose stock is listed on the Nasdaq Global Select Market (the Nasdaq U.S.
Companies Index), and an index consisting of Nasdaq-listed companies in the surgical, medical, and dental instruments and supplies
industry (the Nasdaq Medical Equipment Companies Index). The graph assumes that $100.00 was invested on December 31, 2002, in
our common stock, the Nasdaq U.S. Companies Index, and the Nasdaq Medical Equipment Companies Index, and that all dividends
were reinvested. Total returns for the two Nasdaq indices are weighted based on the market capitalization of the companies included
therein. Historic stock price performance is not indicative of future stock price performance. We do not make or endorse any
prediction as to future stock price performance.
Cumulative Total Stockholder Returns
Based on Reinvestment of $100.00 Beginning on December 31, 2002
Prepared by CRSP (www.crsp.uchicago.edu), Center for Research in Security Prices, Graduate School of Business, The University of
Chicago. Used with permission. All rights reserved.
26
© Copyright 2008
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
Item 6. Selected Financial Data.
The following tables set forth certain of our selected consolidated financial data as of the dates and for the years indicated. The
selected consolidated financial data as of December 31, 2007, 2006, 2005, 2004 and 2003, and for the years then ended, was derived
from our consolidated financial statements audited by KPMG LLP. The audited consolidated financial statements as of December 31,
2007, 2006, and 2005, and for the years then ended, are included elsewhere in this annual report. The audited consolidated financial
statements as of December 31, 2004 and 2003, 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)
Cost of sales — restructuring (2)
Gross profit
Operating expenses:
Selling, general and administrative (1)
Research and development (1)
Amortization of intangible assets
Restructuring charges (2)
Acquired in-process research and development
costs
Total operating expenses
Operating income
Interest (income) expense, net
Other expense (income), net (3)
Income before income taxes
Provision for income taxes
Net income
Net income per share:
Basic
Diluted
Weighted-average number of common shares
outstanding — basic
Weighted-average number of common shares
outstanding — diluted
2007
$386,850
108,407
2,139
276,304
225,929
28,405
3,782
16,734
—
274,850
1,454
(1,252)
375
2,331
1,370
961
$
2006
Year Ended December 31,
2005
2004
2003
$338,938
97,234
—
241,704
192,573
25,551
4,149
—
—
222,273
19,431
(1,127)
(1,643)
22,201
7,790
$ 14,411
$319,137
91,752
—
227,385
167,365
22,289
4,250
—
—
193,904
33,481
(176)
237
33,420
12,355
$ 21,065
$297,539
84,251
—
213,288
152,508
18,478
3,889
—
—
174,875
38,413
1,064
(74)
37,423
13,401
$ 24,022
$248,932
67,922
—
181,010
129,487
16,237
3,562
—
4,558
153,844
27,166
1,107
(1,060)
27,119
9,722
$ 17,397
$
$
0.03
0.03
$
$
0.42
0.41
$
$
0.62
0.60
$
$
0.72
0.68
$
$
0.53
0.50
35,812
34,434
33,959
33,391
32,857
36,483
27
35,439
35,199
35,317
34,561
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
2007
$ 2,046
12,061
2,425
Table of Contents
Consolidated Balance Sheet Data:
Cash and cash equivalents
Marketable securities
Working capital
Total assets
Long-term liabilities
Stockholders’ equity
Other Data:
Cash flow provided by operating
activities
Cash flow used in investing activities
Cash flow provided by (used in)
financing activities
Depreciation
Stock-based compensation expense (4)
Amortization of intangible assets
Capital expenditures
2007
2006
As of December 31,
2005
2004
2003
$229,026
15,535
417,817
669,985
207,820
$388,781
$ 57,939
30,325
220,306
409,402
14,162
$335,824
$ 51,277
25,000
196,126
371,810
15,547
$292,008
$ 83,470
—
189,803
361,158
19,870
$276,069
$ 66,571
—
147,255
322,103
20,516
$238,318
2007
2006
Year Ended December 31,
2005
2004
2003
$ 24,424
(63,841)
209,897
23,522
16,532
3,782
$ 35,042
$ 29,975
(28,349)
4,646
21,361
13,840
4,149
$ 29,643
$ 5,291
(31,583)
(5,379)
17,895
467
4,250
$ 30,356
$ 37,365
(18,428)
(2,305)
17,278
1,489
3,889
$ 18,316
$ 40,065
(25,844)
514
13,948
2,068
3,562
$ 18,116
(1) These line items include the following amounts of non-cash stock-based compensation expense for the periods indicated:
Year Ended December 31,
2006
2004
Cost of sales
Selling, general and administrative
Research and development
(2) During the year ended December 31, 2007, we recorded pre-tax charges associated with the restructuring of our facilities in
$
854
10,766
2,220
$
68
1,364
57
Toulon, France, totaling $18.9 million. See Note 16 to our consolidated financial statements contained in “Financial Statements
and Supplementary Data” for a detailed discussion of these activities and the associated charges.
(3) During the year ended December 31, 2006, we recognized a $1.5 million gain related to the sale of an investment.
(4) Effective January 1, 2006, we adopted SFAS No. 123 (Revised 2004), Share-Based Payment (SFAS123R), which requires
stock-based compensation costs to be measured using the grant date fair value and recognized as expense over the related service
period. We elected the modified prospective method of transition, under which prior periods are not revised for comparative
purposes. As a result, 2007 and 2006 amounts are not comparable to prior years.
28
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
2003
$ 107
1,875
86
2005
$ 12
449
6
Table of Contents
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following management 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 in our consolidated statement
of operations.
Results of operations. This section provides our analysis of and outlook for the significant line items in our consolidated
statement of operations.
Seasonal nature of business. This section describes the effects of seasonal fluctuations in our business.
Restructuring. This section discusses our restructuring activities and the future impact to 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 “Financial Statements and Supplementary Data.”
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 research and development,
manufacturing, warehousing and administrative activities. Outside the U.S., we have research, distribution and administrative facilities
in Milan, Italy; distribution and administrative facilities in Amsterdam, the Netherlands; and sales and distribution offices in Canada,
Japan and throughout Europe. We market our products in over 60 countries through a global distribution system that consists of a sales
force of approximately 1,030 individuals who promote our products to orthopaedic surgeons and hospitals. At the end of 2007, we had
approximately 370 independent sales distributors and sales associates in the U.S., and approximately 660 sales representatives
internationally, who were 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 began operations in December 1999,
when we acquired majority ownership of our predecessor company, Wright Medical Technology, Inc. in a recapitalization, and
immediately thereafter acquired Cremascoli Ortho Holding, S.A., an orthopaedic medical device company headquartered in Toulon,
France.
In 2001, we sold 7,500,000 shares of common stock in our initial public stock offering (IPO), which generated $84.8 million in net
proceeds. In 2002, we sold 3,450,000 shares of common stock in a secondary offering, which generated $49.5 million in net proceeds.
In 2007, we issued $200 million of Convertible Senior Notes due 2014, which generated net proceeds totaling $193.5 million.
29
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
Principal Products. We primarily sell reconstructive joint devices and biologics products. Our reconstructive joint device sales are
derived from three primary product lines: knees and hips, collectively referred to as our reconstructive large joint business, and
extremities. Our biologics sales are derived from a broad portfolio of products designed to stimulate and augment the natural
regenerative capabilities of the human body. We also sell orthopaedic products not considered to be part of our knee, hip, extremity or
biologics product lines.
Our knee reconstruction products position us well in the areas of total knee reconstruction, revision replacement implants and limb
preservation products. Our principal knee product is the ADVANCE ® Knee System.
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, the PERFECTA ® hip system and the
DYNASTYTM acetabular cup system.
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 EVOLVE ® modular radial head system, the CHARLOTTE™ foot and ankle system, the DARCO®
MFS, DARCO® MRS, and DARCO® FRS locked plating systems, the LOCON-T® and LOCON-VLS® distal radius plating systems
and the MICRONAIL® intramedullary wrist fracture repair system. We also sell the SWANSON line of finger and toe joint
replacement products and the ORTHOSPHERE® carpometacarpal implant for repair of the basal thumb joint.
Our biologics products focus on biological musculoskeletal repair and include synthetic and human tissue-based materials. Our
principal biologics products include the GRAFTJACKET® line of soft tissue repair and containment membranes, the
ALLOMATRIX ® line of injectable tissue-based bone graft substitutes, the OSTEOSET® synthetic bone graft substitute, the MIIG®
family of minimally invasive, injectable, synthetic bone grafts, and the PRO-DENSE® injectable regenerative graft.
Significant Business Developments. Net sales grew 14% in 2007, totaling $386.9 million, compared to $338.9 million in 2006. Our
knee, hip, biologics, and extremity product lines each contributed significantly to our performance in 2007, achieving 9%, 10%, 16%
and 38% growth rates, respectively. Our net income decreased to $1.0 million in 2007 from $14.4 million in 2006, primarily as a
result of the recognition of $18.9 million ($12.5 million net of taxes) of restructuring charges related to the closure of our Toulon,
France operations and the $3.9 million ($2.4 million net of taxes) charge associated with an unfavorable arbitration ruling received in
2007.
In April 2007, we announced the acquisition of the foot and ankle reconstruction assets of Darco International, Inc. (Darco) and the
external fixation assets of R&R Medical, Inc. (R&R). In October 2007, we announced the acquisition of the subtalar implant product
assets of Koby Ventures Ltd. d/b/a MetaSurg (BIOARCH TM). Each of these acquisitions adds key products to our extremities
business. See Note 3 to our consolidated financial statements for further discussion of our acquisitions.
In June 2007, we announced our plans to close our facilities in Toulon, France. During 2007, we recognized $18.9 million of
restructuring charges related to this closure, primarily for the impairment of long-lived assets and severance and other termination
benefits. See Note 16 to our consolidated financial statements for further discussion of our restructuring charges.
In November 2007, we issued $200 million of Convertible Senior Notes due 2014, which pay interest semiannually at an annual rate
of 2.625%. The notes are convertible into shares of our common stock at an initial conversion rate of 30.6279 shares per $1,000
principal amount of the notes, which represents a conversion price of $32.65 per share. We intend to use the net proceeds of $193.5
million for general corporate purposes, including for acquisitions from time to time.
In November 2007, we received a ruling in a binding arbitration involving a dispute with a former consultant. The arbitrator awarded
the former consultant $3.3 million plus interest of $665,000. A detailed discussion of this matter is provided in Note 17 to our
consolidated financial statements.
30
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
In December 2007, we received a subpoena from the U.S. Department of Justice (DOJ) requesting certain documents related to
consulting agreements with orthopaedic surgeons. This subpoena was served shortly after several of our knee and hip competitors
agreed to resolutions with the DOJ after being subjects of investigation involving the same subject matter. We intend to cooperate
fully with the investigation of the DOJ. We anticipate that we may incur significant expenses related to this inquiry. A detailed
discussion of this matter is provided in “Risk Factors” as well as Note 17 to our consolidated financial statements in “Financial
Statements and Supplementary Data.”
During 2007, our domestic extremity business experienced year-over-year growth, totaling 31% for the full year, as a result of the
continued success of our CHARLOTTE™ foot and ankle system and the product sales from our acquisitions noted above. We
anticipate that growth within our domestic extremities business will continue to increase, as sales of our CHARLOTTE™ and
DARCO® products continue to increase and as we continue to expand our extremity product offerings.
Our international sales increased by 18% during 2007 as compared to 2006. Increased sales are attributable to growth in Japan and
certain geographic regions within our European operations, most significantly in Germany, due to the Darco acquisition, and the
Middle East and Africa regions. Additionally, our 2007 international sales included a $6.1 million favorable currency impact
compared to 2006.
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 has recently experienced increased
pricing pressures, specifically in the areas of reconstructive joints. We devote significant resources to assessing and analyzing
competitive, regulatory and economic risks and opportunities.
A detailed discussion of these and other factors is provided in “Risk Factors.”
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 in “MD&A — Executive Overview.”
Cost of sales. Our cost of sales consists primarily of direct labor, allocated manufacturing overhead, raw materials and components,
non-cash stock-based compensation, charges incurred for excess and obsolete inventories, royalty expenses associated with licensing
technologies used in our products or processes and certain other period expenses.
Cost of sales — restructuring. These expenses primarily consist of in-process inventories in our Toulon, France, manufacturing
facility that were written off, as well as other unfavorable manufacturing expenses in the Toulon facility that were expensed as period
costs in accordance with FASB Statement No. 151, Inventory Costs, an Amendment of ARB No. 43, Chapter 4.
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 settlements and judgments
and the related costs, non-cash stock-based compensation, other general business and administrative expenses and depreciation
expense associated with reusable surgical instruments that are used to implant 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.
31
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
Amortization of intangible assets. Our intangible assets consist of purchased intangibles related to completed technology, distribution
channels, trademarks, product licenses, customer relationships and non-compete agreements. We amortize intangible assets over
periods ranging from one to 15 years.
Interest income, net. Interest income, net, consists primarily of income generated by our invested cash balances and investments in
marketable securities, offset by interest expense on our recently issued convertible senior notes, borrowings outstanding under our
previous senior credit facility, capital lease agreements 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 current and previous senior credit
facilities.
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, changes in estimates related to our valuation allowances recorded against our net deferred tax assets, and, beginning in 2006,
the recognition of non-cash stock-based compensation expense, a significant portion of which may not be deductible under U.S. and
foreign tax regulations.
Results of Operations
Comparison of the year ended December 31, 2007 to the year ended December 31, 2006
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
Cost of sales — restructuring
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Amortization of intangible assets
Restructuring charges
Total operating expenses
Operating income
Interest income, net
Other expense (income), net
Income before income taxes
Provision for income taxes
Net income
Year Ended December 31,
2007
2006
Amount
$386,850
108,407
2,139
276,304
225,929
28,405
3,782
16,734
274,850
% of
Sales
100.0%
28.0%
0.6%
71.4%
58.4%
7.3%
1.0%
4.3%
71.0%
Amount
$338,938
97,234
—
241,704
192,573
25,551
4,149
—
222,273
1,454
0.4%
19,431
(1,252)
375
2,331
1,370
961
(0.3)%
0.1%
0.6%
0.4%
0.2%
(1,127)
(1,643)
22,201
7,790
$ 14,411
$
32
% of
Sales
100.0%
28.7%
—
71.3%
56.8%
7.5%
1.2%
—
65.6%
5.7%
(0.3)%
(0.5)%
6.6%
2.3%
4.3%
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
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,
2007
$134,251
102,334
76,029
62,302
11,934
$386,850
Year
Ended
December
31,
2006
$122,073
94,079
65,455
45,044
12,287
$338,938
%
Change
10.0%
8.8%
16.2%
38.3%
(2.9)%
14.1%
The following graphs illustrate our product line sales as a percentage of total net sales for the years ended December 31, 2007 and
2006:
2007
2006
Net sales. Our net sales growth in 2007 was attributable to the growth in each of our primary product lines, led by our extremities
product line, which increased by 38% over 2006. Geographically, our domestic net sales totaled $235.7 million in 2007 and
$211.0 million in 2006, representing approximately 61% and 62% of total net sales in each year, respectively, and a 12% increase over
2006. Our international net sales totaled $151.1 million in 2007, an 18% increase as compared to net sales of $127.9 million in 2006.
Our 2007 international net sales included a favorable foreign currency impact of approximately $6.1 million when compared to 2006
net sales, principally resulting from the 2007 performance of the euro against the U.S. dollar. The remaining increase in international
sales is attributable to continued growth in Asia and certain European markets, which were partially offset by declines in France and
Italy.
Our hip product sales totaled $134.3 million in 2007, representing a 10% increase over 2006. Our international markets were the
primary driver of this growth, posting an 18% increase over 2006, led by sales in our Asian markets, most notably in Japan. Further
contributing to the international sales increase is our European business, particularly in those markets where we launched market
expansion initiatives in 2006. Domestic hip sales increased 3% in 2007, driven by increased unit sales of our PROFEMUR® line of
primary stems featuring our innovative neck modularity and our CONSERVE® Total Implant with BFH® Technology. Our
international hip sales include a $2.7 million favorable currency impact compared to 2006.
Sales of our knee products totaled $102.3 million in 2007, representing growth of 9% over 2006. Year-over-year growth in our
ADVANCE ® knee systems in both our international and domestic markets, which totaled 19% and 11%, respectively, was partially
offset by declines across our other, more mature knee product offerings. Our international knee sales include a $1.4 million favorable
currency impact compared to 2006.
33
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
Net sales of our biologics products totaled $76.0 million in 2007, which represents a 16% increase over 2006. Domestic biologics
sales increased 15% in 2007 as compared to prior year, primarily driven by our GRAFTJACKET® tissue repair and containment
membranes, which increased in both unit sales and average selling price. Additionally, sales of our PRO-DENSE ® injectable
regenerative graft, which was launched during the third quarter of 2007, further contributed to this increase. International biologics
sales increased by 22% over prior year, primarily attributable to the continued success of our market expansion initiatives in certain
European regions.
Our extremity product sales increased to $62.3 million in 2007, representing growth of 38% over 2006. This year-over-year growth
was primarily driven by the continued success of our CHARLOTTE™ Foot and Ankle system and sales of our DARCO® plating
systems after the second quarter acquisition. Our domestic and international extremity product sales increased 31% and 69%,
respectively, over 2006. Product sales from the 2007 acquisitions contributed approximately 15 and 41 percentage points of growth to
domestic and international extremity net sales, respectively, in 2007.
Looking ahead to 2008, we anticipate growth in both our international markets and our domestic business, as we continue to see the
positive results of our 2007 acquisitions and as the strength of our current product portfolio combines with our anticipated product
launches in 2008.
Cost of sales. In 2007, our cost of sales as a percentage of net sales decreased from 28.7% in 2006 to 28.0% in 2007. This decrease is
attributable to manufacturing efficiencies in 2007, which were partially offset by unfavorable shifts in our sales mix. Our cost of sales
included 0.5 percentage points and 0.3 percentage points of non-cash, stock-based compensation expense in 2007 and 2006,
respectively. Additionally, our 2007 cost of sales included 0.1 percentage points of non-cash inventory step-up amortization associated
with our acquisitions in 2007. 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.
Cost of sales — restructuring. In 2007, we recorded $2.1 million (0.6% of net sales) of charges associated with the closure of our
manufacturing facility in Toulon, France, for inventory write-offs and manufacturing costs incurred during a period of abnormal
production capacity.
Selling, general and administrative. Our selling, general and administrative expenses as a percentage of net sales totaled 58.4% in
2007, a 1.6 percentage point increase from 56.8% in 2006. Our 2007 selling, general and administrative expenses include
approximately $3.3 million (0.8% of net sales) of charges associated with an unfavorable arbitration ruling related to a dispute with a
former consultant. In addition, we recognized $12.1 million (3.1% of net sales) of non-cash, stock-based compensation expense
compared to $10.8 million (3.2% of net sales) in 2006. The remaining increase in selling, general and administrative expenses in 2007
is attributable to increased investments in sales and marketing initiatives, higher levels of cash incentive compensation, expenses
associated with our 2007 acquisitions and increased depreciation expense.
We anticipate that our 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 and requires us to expand
our infrastructure. However, we expect our selling, general and administrative expenses as a percentage of net sales will decrease in
future periods as we manage the growth of our existing infrastructure while continuing to expand our business.
Research and development. Our investment in research and development activities represented 7.3% of net sales in 2007, as
compared to 7.5% in 2006. Non-cash, stock-based compensation expense of $2.4 million (0.6% of net sales) was recorded in 2007
compared to $2.2 million (0.7% of net sales) recorded in 2006. Although our investment increased in absolute dollars for higher levels
of spending in product development and clinical, regulatory and pre-clinical studies, our business expanded at a higher rate.
We anticipate that our research and development expenditures may increase as a percentage of net sales and will increase in absolute
dollars as we increase our product development initiatives and clinical studies to support regulatory approvals and provide expanded
proof of the efficacy of our products.
34
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
Amortization of intangible assets. Non-cash charges associated with amortization of intangible assets totaled $3.8 million in 2007, as
compared to $4.1 million in 2006. The decrease is attributable to assets which became fully amortized, mostly offset by amortization
for intangible assets associated with our 2007 acquisitions. Based on the intangible assets held at December 31, 2007, we expect to
amortize approximately $3.8 million in 2008, $3.3 million in 2009, $750,000 in 2010, $710,000 in 2011 and $580,000 in 2012.
Interest income, net. Interest income, net, totaled $1.3 million and $1.1 million during 2007 and 2006, respectively. Interest income,
net, consisted of interest expense of $1.8 million during both 2007 and 2006. This interest expense was offset by interest income of
$3.1 million and $2.9 million during 2007 and 2006, respectively, generated by our invested cash balances and investments in
marketable securities.
We anticipate increased interest expense in 2008 due to our November 2007 issuance of $200 million of convertible senior notes,
which may be offset by additional interest income from the portion of net proceeds which are currently invested in interest-bearing
accounts. The amounts of interest income we realize in 2008 and beyond are subject to variability, dependent upon both the rate of
invested returns we realize and the amount of excess cash balances on hand.
Other expense (income), net. Other expense (income), net, totaled $375,000 of expense during 2007 compared to $1.6 million of
income during 2006. Other income for 2006 includes a gain of $1.5 million related to the sale of an investment.
Provision for income taxes. We recorded tax provisions of $1.4 million and $7.8 million in 2007 and 2006, respectively. Our effective
tax rate for 2007 and 2006 was 58.8% and 35.1%, respectively. Our effective tax rate in both 2007 and 2006 includes the unfavorable
impact of non-cash, stock-based compensation expenses recorded under the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123 (Revised 2004), Share-Based Payment (SFAS 123R), a significant portion of which may not be deductible
under U.S. and foreign tax regulations and therefore, does not benefit our current period tax provision. Our 2007 effective tax rate
includes the impact of the discrete tax effect of the restructuring charges, which increased our effective tax rate by 22 percentage
points. Our 2006 effective tax rate includes a $1.1 million benefit that was realized upon the resolution of certain foreign tax matters.
Comparison of the year ended December 31, 2006 to the year ended December 31, 2005
Introduction. Effective January 1, 2006, we adopted the provisions of SFAS 123R. We elected the modified-prospective method of
transition, under which prior periods are not revised for comparative purposes. As a result, our results of operations during 2006 are
not comparable to our 2005 results. We recorded approximately $13.8 million ($10.9 million net of taxes) of non-cash, stock-based
compensation expense during the year ended December 31, 2006. See Note 14 to our consolidated financial statements in “Financial
Statements and Supplementary Data” for further information regarding our stock-based compensation assumptions and expenses,
including pro forma disclosures for 2005 as if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation expense. We also discuss the effect of stock-based compensation on certain individual line items in our
consolidated statement of operations below.
35
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
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
Total operating expenses
Operating income
Interest income, net
Other (income) expense, net
Income before income taxes
Provision for income taxes
Net income
Year Ended December 31,
2006
2005
Amount
$338,938
97,234
241,704
192,573
25,551
4,149
222,273
% of
Sales
100.0%
28.7%
71.3%
56.8%
7.5%
1.2%
65.6%
Amount
$319,137
91,752
227,385
167,365
22,289
4,250
193,904
19,431
5.7%
33,481
(1,127)
(1,643)
22,201
7,790
$ 14,411
(0.3)%
(0.5)%
6.6%
2.3%
4.3%
(176)
237
33,420
12,355
$ 21,065
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,
2006
$122,073
94,079
65,455
45,044
12,287
$338,938
Year
Ended
December
31,
2005
$109,267
94,073
62,358
40,594
12,845
$319,137
% of
Sales
100.0%
28.8%
71.2%
52.4%
7.0%
1.3%
60.8%
10.5%
(0.1)%
0.1%
10.5%
3.9%
6.6%
%
Change
11.7%
0.0%
5.0%
11.0%
(4.3)%
6.2%
The following graphs illustrate our product line sales as a percentage of total net sales for the years ended December 31, 2006 and
2005:
2006
2005
36
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
Net sales. Our net sales growth in 2006 was primarily attributable to the continued growth in our hip product line, which grew 12%
over 2005, as well as increases in our extremities and biologics product lines, which grew 11% and 5%, respectively. Geographically,
our domestic net sales totaled $211.0 million in 2006 and $197.5 million in 2005, representing approximately 62% of total net sales in
both years, and growth of 7%. Our international net sales totaled $127.9 million in 2006, a 5% increase as compared to net sales of
$121.6 million in 2005. This increase in international sales is attributable to increased sales in Japan and market expansion initiatives
launched in certain regions within our European operations during 2006, which were partially offset by declines in France.
From a product line perspective, our net sales growth for 2006 was attributable to increases in sales across three of our four principal
product lines. For 2006, we experienced growth of 12%, 11% and 5% in our hip, extremity and biologics product lines, respectively.
Our knee product line sales were flat in 2006 as compared to 2005. During 2006, our hip sales growth was attributable primarily to
success in domestic markets, specifically driven by our CONSERVE® total implant with BFH® technology and our PROFEMUR®
line of primary stems featuring our innovative neck modularity. The growth of our extremity business in 2006 was primarily
attributable to increased unit sales of our CHARLOTTE™ foot and ankle system and our MICRONAIL® intramedullary wrist
fracture repair system. The increase in our biologics business was primarily driven by performance in our international business,
specifically where we launched our market expansion initiatives in our European operations.
Cost of sales. Our cost of sales as a percentage of net sales decreased from 28.8% in 2005 to 28.7% in 2006. Cost of sales in 2006
included approximately 0.3 percentage points of non-cash, stock-based compensation expense, while cost of sales in 2005 included
$1.5 million (0.5% of net sales) of charges to write down inventory to its net realizable value due to the termination of an agreement to
distribute certain third party spinal products in Europe.
Operating expenses. Our total operating expenses increased, as a percentage of net sales, by 4.8 percentage points to 65.6% in 2006.
Operating expenses include selling, general and administrative expenses, research and development expenses and amortization of
intangibles. The increase in operating expenses was attributed primarily to the recognition of non-cash, stock-based compensation in
accordance with SFAS 123R. We recorded $13.0 million (3.8% of net sales) of non-cash, stock-based compensation expense within
operating expenses, as compared to $455,000 (0.1% of net sales) in 2005. Further contributing to this increase was increased
investments in sales and marketing initiatives, higher levels of cash incentive compensation and increased depreciation expense.
Interest income, net. Interest income, net, totaled approximately $1.1 million and $176,000 during 2006 and 2005, respectively. This
increase was mostly due to higher levels of interest income generated from our investment in marketable securities, as 2006 included a
full year of those investments.
Provision for income taxes. Our effective tax rate for 2006 and 2005 was 35.1% and 37.0%, respectively, which reflects the impact of
the resolution of certain foreign tax matters in 2006, offset by the unfavorable impact of non-cash, stock-based compensation expenses
recorded under the provisions of SFAS 123R, a significant portion of which may not be deductible under U.S. and foreign tax
regulations and therefore does not benefit our current period tax provision. The remaining decrease was driven by increased interest
income generated from our tax-free investments.
Seasonal Nature of Business
We traditionally experience lower sales volumes in the third quarter than throughout the rest of the year as many of our products are
used in elective procedures, which generally decline during the summer months, typically resulting in selling, general and
administrative expenses and research and development expenses as a percentage of sales that are higher than throughout the rest of the
year. 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 (AAOS). 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 three-day event, we display our most recent and innovative products to these surgeons.
37
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
Restructuring
In June 2007, we announced our plans to close our facilities in Toulon, France. This announcement came after a thorough evaluation
in which it was determined that we had excess manufacturing capacity and redundant distribution and administrative resources that
would be best eliminated through the closure of this facility. The majority of our restructuring activities were complete by the end of
2007, with Toulon’s production being transferred to our existing manufacturing facility in Arlington, Tennessee and its distribution
activities being transferred to our European headquarters in Amsterdam, the Netherlands. We have estimated that total pre-tax
restructuring charges will be approximately $23 million to $25 million, of which we have recognized $18.9 million during 2007. We
believe that we will see the benefits from this restructuring within selling, general and administrative expenses beginning in 2008 and
within cost of sales beginning in 2009. See Note 16 to our consolidated financial statements in “Financial Statements and
Supplementary Data” for further discussion of our restructuring charges.
Liquidity and Capital Resources
The following table sets forth, for the periods indicated, certain liquidity measures (in thousands):
Cash and cash equivalents
Short-term marketable securities
Working capital
Line of credit availability
As of December 31,
2007
$229,026
15,535
417,817
97,100
2006
$ 57,939
30,325
220,306
100,000
At December 31, 2007, we have invested $15.5 million of our excess cash balance in short-term marketable debt securities in order to
increase our rate of return. Specifically, our investments in marketable securities at December 31, 2007, are available for redemption
through an auction process every 21 or 49 days from initial purchase, and are considered trading securities. While these investments
are not considered cash equivalents for financial reporting purposes, due to the short-term nature of these investments, we do not
believe that these investments will have an impact on our overall liquidity position. As of the date of filing, we have liquidated all of
these investments into cash equivalents.
Operating Activities. Cash provided by operating activities totaled $24.4 million in 2007, as compared to $30.0 million in 2006 and
$5.3 million in 2005. The decrease in cash provided by operating activities in 2007, compared to 2006, is primarily attributable to
lower levels of profitability in the current year due to restructuring charges, which was partially offset by changes in working capital,
as explained below.
Our investment in marketable securities decreased during 2007, as a portion of the invested balance was used to pay for our recent
acquisitions. Accrued expenses increased, primarily due to liabilities recorded associated with our restructuring charges. Our inventory
balance has increased due to safety stock that was built in connection with the announcement of our plans to close our Toulon, France
manufacturing facilities, as well as inventory built in preparation for product launches and to support higher levels of sales. Finally,
the increase of our accounts receivable balance is attributable to higher levels of sales in international markets that typically have
longer collection terms.
The increase in cash provided by operating activities in 2006 compared to 2005 is primarily attributable to $25 million of cash used as
a result of net changes in our marketable securities balances during 2005, as compared to $5.3 million used in 2006. Lower levels of
cash tax payments for U.S. federal income taxes further contributed to the increase in operating cash flow for 2006 compared to 2005.
Investing Activities. Our capital expenditures totaled $35.0 million in 2007, $29.6 million in 2006 and $30.4 million in 2005. 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
38
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
approximately $40 million for 2008 for routine capital expenditures, as well as approximately $18 million for the planned expansion
of facilities in Arlington, Tennessee.
We invested $28.8 million in acquisitions of businesses and intellectual property during 2007. 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 2007, we issued $200 million of Convertible Senior Notes due 2014, which generated net proceeds of
$193.5 million. The notes pay interest semiannually at an annual rate of 2.625%. The notes are convertible into shares of our common
stock at an initial conversion rate of 30.6279 shares per $1,000 principal amount of the notes, which represents a conversion price of
$32.65 per share. We will make scheduled interest payments in 2008 related to the notes totaling $5.3 million.
Additionally, proceeds of $17.3 million were generated from the issuance of common stock under our stock-based compensation
plans.
During 2007, we made approximately $1.1 million in principal payments related to our long-term capital lease obligations. In addition,
our operating subsidiary in Italy continues to factor portions of its accounts receivable balances under factoring agreements, which are
considered financing transactions for financial reporting. The cash proceeds received from these factoring agreements, net of the
amount of factored receivables collected, are reflected as cash flows from financing activities in our consolidated statements of cash
flows. The proceeds received under these agreements in 2007, 2006 and 2005 totaled $3.6 million, $5.6 million and $8.0 million,
respectively. These proceeds were offset by payments for factored receivables collected of $7.1 million, $5.7 million and $9.2 million
in 2007, 2006 and 2005, respectively. We recorded obligations of $674,000 and $3.9 million for the amount of receivables factored
under these agreements as of December 31, 2007 and 2006, respectively, which are included within “Accrued expenses and other
current liabilities” in our consolidated balance sheet.
In 2008, we will make continued payments under our long-term capital leases, including interest, of $592,000, and we will make
scheduled interest payments under our convertible senior notes of $5.3 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.
On December 31, 2007, after considering outstanding letters of credit, our revolving credit facility had available borrowing capacity of
$97.1 million, which can be increased by up to an additional $50 million at our request and subject to the agreement of the lenders.
We currently have no borrowings outstanding under the credit facility. Borrowings under the credit facility bear interest at the sum of
a base annual rate plus an applicable annual rate that ranges from 0.0% to 1.75% depending on the type of loan and our consolidated
leverage ratio, with a current annual base rate of 7.25%.
39
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
Contractual Cash Obligations. At December 31, 2007, we had contractual cash obligations and commercial commitments as follows
(in thousands):
Amounts reflected in balance sheet:
Capital lease obligations(1)
Convertible senior notes(2)
Amounts not reflected in balance sheet:
Operating leases
Interest on convertible senior notes(3)
Purchase obligations
Royalty and consulting agreements
Total contractual cash obligations
Total
2008
Payments Due by Periods
2009 -
2010
2011 -
2012
After 2012
$
1,065
200,000
$
592
—
$
465
—
$
8
—
$
—
200,000
17,996
36,750
3,087
4,470
$263,368
8,052
5,250
—
692
$14,586
7,218
10,500
2,058
1,184
$21,425
1,733
10,500
1,029
1,084
$14,354
993
10,500
—
1,510
$213,003
(1) Payments include amounts representing interest.
(2) Represents long-term debt payment provided holders of the convertible senior notes do not exercise the option to convert each
$1,000 note into 30.6279 shares of our common stock. Our convertible senior notes are discussed further in Note 9 to our
consolidated financial statements contained in “Financial Statements and Supplementary Data.”
(3) Represents interest on convertible senior notes payable semiannually with an annual interest rate of 2.625%.
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, 2007. The minimum lease payments related to these leases are discussed further in Note 9 to our
consolidated financial statements contained in “Financial Statements and Supplementary Data.”
The amounts reflected in the table above for operating leases represent future minimum lease payments under non-cancelable
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, 2007. 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 17 to our consolidated financial statements contained in “Financial Statements and Supplementary
Data.”
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 under non-cancelable contracts with
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, 2007. These future payments are
subject to foreign currency exchange rate risk. Our purchase obligations and royalty and consulting agreements are disclosed in Note
17 to our consolidated financial statements contained in “Financial Statements and Supplementary Data.”
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. A substantial portion of our global sales are subject to other royalties earned based on
product sales. Additionally, additional cash payments of up to $4 million may be made related to our R&R and BIOARCH™
acquisitions based upon future financial performance of the acquired assets. Further, under our factoring agreement in Italy, our
liability for cash proceeds received of $674,000 discussed in “Financing Activities” may be subject to repayment upon 15 days notice.
None of these amounts are included in the table above.
40
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
Additionally, as of December 31, 2007, we had $6.2 million of unrecognized tax benefits recorded within “Other liabilities” on our
consolidated balance sheet. This represents the tax benefits associated with various tax positions taken, or expected to be taken, on
domestic and international tax returns that have not been recognized in our financial statements due to uncertainty regarding their
resolution. We are unable to make a reliable estimate of the eventual cash flows by period that may be required to settle these matters.
In addition, certain of these matters may not require cash settlement due to the existence of net operating loss carryforwards.
Therefore, our unrecognized tax benefits are not included in the table above. See Note 11 to our consolidated financial statements
contained in “Financial Statements and Supplementary Data.”
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. In 2007, we issued $200 million of Convertible Senior Notes due 2014, which generated net proceeds totaling
$193.5 million.
Although it is difficult for us to predict our future liquidity requirements, we believe that our current cash balance of approximately
$229.0 million, our marketable securities balance of $15.5 million and our existing available credit line of $97.1 million will be
sufficient for the foreseeable future to fund our working capital requirements and operations, permit anticipated capital expenditures in
2008 of approximately $58 million and meet our contractual cash obligations in 2008.
Critical Accounting Estimates
All of our significant accounting policies and estimates are described in Note 2 to our consolidated financial statements contained in
“Financial Statements and Supplementary Data.” 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.
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 primarily generated through two types of customers, hospitals and stocking distributors, with
the majority of our revenue derived from sales to hospitals. Our products are primarily 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 generally
when the product is surgically implanted in a patient.
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.
41
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
Approximately $252,000 and $175,000 of sales related to these types of agreements were deferred and not yet recognized as revenue
as of December 31, 2007 and 2006, 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 approximately $560,000 and $350,000 are included as a reduction of accounts receivable at December 31, 2007
and 2006, respectively. Should actual future returns vary significantly from our historical averages, our operating results could be
affected.
Allowances for doubtful accounts. We experience credit losses 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 accounts receivable are from hospitals, many of which are government funded. Accordingly, our collection
history with this class of customer has been favorable. Historically, we have experienced minimal bad debts from our hospital
customers and more significant bad debts from certain international stocking distributors, typically as a result of specific financial
difficulty or geo-political factors. We write off accounts receivable when we determine that the accounts receivable are uncollectible,
typically upon customer bankruptcy or the customer’s non-response to continuous 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 not 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
$83.8 million and $72.5 million, net of allowances for doubtful accounts of $5.2 million and $2.9 million, at December 31, 2007 and
2006, respectively.
Excess and obsolete inventories. We value our inventory at the lower of the actual cost to purchase and/or manufacture the inventory
on a first-in, first-out (FIFO) basis 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 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 $6.6 million, $6.5 million and $6.9 million for the years ended December 31,
2007, 2006 and 2005, respectively. In 2005, we incurred approximately $1.5 million in charges within cost of sales to write down
inventory to its net realizable value due to the termination of an agreement to distribute certain third party spinal products in Europe.
Additionally, in 2007, we recorded charges of $2.1 million associated with the closure of our manufacturing facility in Toulon, France
for inventory write-offs and manufacturing costs incurred during a period of abnormal production capacity.
Goodwill and long-lived assets. We have approximately $28.2 million of goodwill recorded as a result of the acquisition of
businesses. Goodwill is tested for impairment annually or more frequently if changes in circumstances
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Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
or the occurrence of events suggest that impairment exists. Based on our single business approach to decision-making, planning and
resource allocation, we have determined that we have only one reporting unit for purposes of evaluating goodwill for impairment. The
annual evaluation of goodwill impairment may require the use of estimates and assumptions to determine the fair value of our
reporting unit using projections of future cash flows. We performed our annual impairment test during the fourth quarter of 2007 and
determined that the fair value of our reporting unit exceeded its carrying value 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 and amortization is adjusted
accordingly. Alternatively, should we determine that an asset has been impaired, an adjustment would be charged to income based on
the asset’s fair market value, or discounted cash flows if the fair market value is not readily determinable, reducing income in that
period.
In 2007, we recognized an impairment charge of $3.2 million for our property, plant, and equipment at our Toulon, France facilities.
This impairment charge consisted of the write-down of assets held for sale to their estimated selling price less costs to sell, as well as
the abandonment of the remaining assets that are no longer in use.
Product liability claims and other litigation. 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. Our accrual for product liability claims was approximately
$610,000 and $330,000 at December 31, 2007 and 2006, respectively.
We are also involved in legal proceedings involving contract, patent protection and other matters. 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
can be developed.
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. Realization of deferred tax assets in each taxable jurisdiction is dependent on our ability to generate future
taxable income sufficient to realize the benefits. Management evaluates deferred tax assets on an ongoing basis and provides valuation
allowances to reduce net deferred tax assets to the amount that is more likely than not to be realized.
We have recorded valuation allowances of $6.0 million and $5.7 million as of December 31, 2007 and 2006, 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 carryforward of certain tax basis net operating losses and general business
tax credits.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), effective
January 1, 2007, which requires that the tax effects of an income tax position to be recognized only if it is “more-likely-than-not” to be
sustained based solely on the technical merits as of the reporting date. As a multinational corporation, we are subject to taxation in
many jurisdictions and the calculation of our tax liabilities
43
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
involves dealing with uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions. If we
ultimately determine that the payment of these liabilities will be unnecessary, we will reverse the liability and recognize a tax benefit
in the period in which we determine the liability no longer applies. Conversely, we record additional tax charges in a period in which
we determine that a recorded tax liability is less than we expect the ultimate assessment to be. We recorded a liability for
unrecognized tax benefits of $6.2 million and $12.7 million as of December 31, 2007 and 2006, respectively. Upon adoption of FIN
48, we recorded a $7.2 million reduction to our liability for unrecognized tax benefits as an adjustment to the 2007 opening balance of
retained earnings. See Note 11 to our consolidated financial statements for further discussion of our unrecognized tax benefits.
We operate within numerous taxing jurisdictions. We are subject to regulatory review or audit in virtually all of those jurisdictions and
those reviews and audits may require extended periods of time to resolve. Management makes use of all available information and
makes reasoned judgments regarding matters requiring interpretation in establishing tax expense, liabilities and reserves. We believe
adequate provisions exist for income taxes for all periods and jurisdictions subject to review or audit.
Stock-Based Compensation. We calculate the grant date fair value of non-vested shares as the average of the highest and lowest
reported sales prices on the trading day immediately prior to the grant date. We use the Black-Scholes option pricing model to
determine the fair value of stock options and employee stock purchase plan shares. The determination of the fair value of these
stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions
regarding a number of complex and subjective variables, which include the expected life of the award, the expected stock price
volatility over the expected life of the awards, expected dividend yield and risk-free interest rate.
We estimate the expected life of options by calculating the average of the vesting period and the contractual term of the option, as
allowed by SEC Staff Accounting Bulletin No. 107. We estimate the expected stock price volatility based upon historical volatility of
our common stock. The risk-free interest rate is determined using U.S. Treasury rates where the term is consistent with the expected
life of the stock options. Expected dividend yield is not considered as we have never paid dividends and have no plans of doing so in
the future.
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable, characteristics not present in our option grants and employee stock purchase plan shares.
Existing valuation models, including the Black-Scholes and lattice binomial models, may not provide reliable measures of the fair
values of our stock-based compensation. Consequently, there is a risk that our estimates of the fair values of our stock-based
compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration, early
termination or forfeiture of those stock-based payments in the future. Certain stock-based payments, such as employee stock options,
may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date
and reported in our financial statements. Alternatively, value may be realized from these instruments that is significantly higher than
the fair values originally estimated on the grant date and reported in our financial statements. There is not currently a market-based
mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models.
We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ
from those estimates. We use historical data to estimate pre-vesting forfeitures and record stock-based compensation expense only for
those awards that are expected to vest. All stock-based awards are amortized on a straight-line basis over their respective requisite
service periods, which are generally the vesting periods.
If factors change and we employ different assumptions for estimating stock-based compensation expense in future periods, the future
periods may differ significantly from what we have recorded in the current period and could materially affect our operating income,
net income and net income per share. It may also result in a lack of comparability with other companies that use different models,
methods and assumptions.
See Note 14 to our consolidated financial statements contained in “Financial Statements and Supplementary Data” for further
information regarding our SFAS 123R disclosures.
44
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
Purchase Accounting. We account for acquired businesses using the purchase method of accounting which requires that the assets
acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Our consolidated financial
statements and results of operations reflect an acquired business after the completion of the acquisition. The cost to acquire a business,
including transaction costs, is allocated to the underlying net assets of the acquired business in proportion to their respective fair
values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. To assist in
determining the value of any intangible assets, a third party valuation is typically obtained as of the acquisition date.
The amount of the purchase price allocated to intangible assets is determined by estimating the future cash flows associated with the
asset and discounting the net cash flows back to their present values. The discount rate used is determined at the time of the
acquisition in accordance with standard valuation methods. The estimates of future cash flows include forecasted revenues, which are
inherently difficult to predict. Significant judgments and assumptions are required in the forecast of future operating results used in the
preparation of the estimated future cash flows, including profit margins, long-term forecasts of the amounts and timing of overall
market growth and our percentage of that market, discount rates and terminal growth rates.
Restructuring Charges. We evaluate impairment issues for long-lived assets under the provisions of SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. We record severance-related expenses once they are both probable and estimable in
accordance with the provisions of SFAS No. 112, Employer’s Accounting for Post-Employment Benefits, for severance provided under
an ongoing benefit arrangement. One-time termination benefit arrangements and other costs associated with exit activities are
accounted for under the provisions of SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. We have
estimated the expense for our restructuring initiative by accumulating detailed estimates of costs, including the estimated costs of
employee severance and related termination benefits, impairment of property, plant and equipment, contract termination payments for
leases and any other qualifying exit costs. Such costs represent management’s best estimates, which are evaluated periodically to
determine if an adjustment is required.
Impact of Recently Issued Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements (SFAS 157).
This standard defines fair value, establishes a framework for measuring fair value in accordance with U.S. generally accepted
accounting principles and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective for us on
January 1, 2008. The adoption of SFAS 157 is not expected to have a material impact on our consolidated financial position, results of
operations, or cash flows.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159).
This standard expands the standards under SFAS 157 to provide entities the one-time election to measure financial instruments and
certain other items at fair value. SFAS 159 was effective for us on January 1, 2008. We did not elect the fair value option for any of
our existing financial instruments on the effective date and have not determined whether or not we will elect this option for any
eligible financial instruments we acquire in the future.
In June 2007, the FASB issued EITF Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be
Used in Future Research and Development Activities (EITF 07-3). EITF 07-3 states that nonrefundable advance payments for future
research and development activities should be deferred and capitalized. These amounts should be recognized as an expense as the
related goods are delivered or the related services are performed. The provisions of EITF 07-3 are effective for us on January 1, 2008.
We do not expect the adoption of EITF 07-3 to have a material impact on our consolidated financial position, results of operations, or
cash flows.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (SFAS 141R) and SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51 (SFAS 160). SFAS 141(R) and SFAS
160 significantly change the accounting for and reporting of business combination transactions and noncontrolling (minority) interests.
Under SFAS 141R, an acquiring entity will be required to recognize all the assets and liabilities assumed in a transaction at the
acquisition date fair value. In addition, SFAS 141R includes a substantial number of additional disclosure requirements. SFAS 160
changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and
45
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
classified as a component of equity. We will apply the provisions of SFAS 141R and SFAS 160 prospectively effective January 1,
2009.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
Our exposure to interest rate risk arises principally from the interest rates associated with our invested cash balances. On
December 31, 2007, we had short term cash investments and marketable securities totaling approximately $210 million. Based on this
level of investment, a decrease of 0.25% in interest rates would have a negative impact of $525,000 to our interest income. We
currently do not hedge our exposure to interest rate fluctuations, but may do so in the future.
Foreign Currency Exchange Rate Fluctuations
Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies could adversely affect our financial results.
Approximately 28% and 30% of our total net sales were denominated in foreign currencies during the years ended December 31, 2007
and 2006, respectively, and we expect that foreign currencies will continue to represent a similarly significant percentage of our net
sales in the future. Cost of sales related to these sales are primarily denominated in U.S. dollars; however, operating costs related to
these sales are largely denominated in the same respective currencies, thereby partially limiting our transaction risk exposure.
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 EU countries, which are denominated in the
euro, and from Japan, which are denominated in the Japanese yen. Additionally, we have significant intercompany receivables from
our foreign subsidiaries which are denominated in foreign currencies, principally the euro and the 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 and expense levels in the respective period.
As discussed in Note 2 to our consolidated financial statements in “Financial Statements and Supplementary Data,” we enter 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, British
pounds 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.
46
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
Item 8. Financial Statements and Supplementary Data.
Wright Medical Group, Inc.
Consolidated Financial Statements
for the Years Ended December 31, 2007, 2006, and 2005
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
47
Page
48
50
51
52
53
54
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
The Board of Directors and Stockholders
Wright Medical Group, Inc.:
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of Wright Medical Group, Inc. and subsidiaries (the Company) as of
December 31, 2007 and 2006, 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, 2007. 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
the Company as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.
As discussed in Notes 2 and 11 to the consolidated financial statements, effective January 1, 2007, the Company changed its method
of accounting for uncertainty in income taxes as required by FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes. Also as discussed in Notes 2 and 14 to the consolidated financial statements, effective January 1, 2006, the Company adopted
the fair value method of accounting for stock-based compensation as required by Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment, and as discussed in Note 2 to the consolidated financial statements, the Company
changed its method of quantifying errors in 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
effectiveness of internal control over financial reporting of the Company as of December 31, 2007, 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 26, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting.
Memphis, Tennessee
February 26, 2008
(signed) KPMG LLP
48
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
The Board of Directors and Stockholders
Wright Medical Group, Inc.:
Report of Independent Registered Public Accounting Firm
We have audited the effectiveness of internal control over financial reporting of Wright Medical Group, Inc. and subsidiaries (the
Company) as of December 31, 2007, 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 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, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness
of internal control. Our audit also included 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 U.S. 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 U.S. 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, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2007, 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 the Company as of December 31, 2007 and 2006, 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, 2007, and our report dated February 26, 2008 expressed an unqualified opinion on those consolidated financial
statements.
Memphis, Tennessee
February 26, 2008
(signed) KPMG LLP
49
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Wright Medical Group, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
Table of Contents
Assets:
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable, net
Inventories
Prepaid expenses
Deferred income taxes
Assets held for sale
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 debt and capital lease obligations
Deferred income taxes
Other liabilities
Total liabilities
Commitments and contingencies (Note 17)
Stockholders’ equity:
Common stock, voting, $.01 par value, shares authorized — 100,000,000; shares issued and
outstanding — 36,493,183 in 2007 and 35,143,800 in 2006
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
Total stockholders’ equity
December 31,
2007
2006
$229,026
15,535
83,801
115,290
13,757
24,015
2,207
7,570
491,201
99,037
28,233
11,187
30,556
9,771
$669,985
$ 19,764
53,069
551
73,384
200,455
159
7,206
281,204
$ 57,939
30,325
72,476
86,157
6,646
21,871
—
4,308
279,722
86,265
8,486
9,309
22,732
2,888
$409,402
$ 17,049
41,366
1,001
59,416
723
6
13,433
73,578
365
338,640
24,623
25,153
388,781
$669,985
351
300,648
17,878
16,947
335,824
$409,402
The accompanying notes are an integral part of these consolidated financial statements.
50
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Wright Medical Group, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
Table of Contents
Net sales
Cost of sales1
Cost of sales — restructuring
Gross profit
Operating expenses:
Selling, general and administrative1
Research and development 1
Amortization of intangible assets
Restructuring charges (Note 16)
Total operating expenses
Operating income
Interest income, net
Other expense (income), net
Income before income taxes
Provision for income taxes
Net income
Net income per share (Note 12):
Basic
Diluted
Weighted-average number of shares outstanding — basic
Weighted-average number of shares outstanding — diluted
2007
$386,850
108,407
2,139
276,304
Year Ended December 31,
2006
$338,938
97,234
—
241,704
225,929
28,405
3,782
16,734
274,850
1,454
(1,252)
375
2,331
1,370
961
$
$
0.03
0.03
$
35,812
36,483
192,573
25,551
4,149
—
222,273
19,431
(1,127)
(1,643)
22,201
7,790
$ 14,411
$
0.42
0.41
$
34,434
35,439
2005
$319,137
91,752
—
227,385
167,365
22,289
4,250
—
193,904
33,481
(176)
237
33,420
12,355
$ 21,065
$
0.62
0.60
$
33,959
35,199
1
These line items include the following amounts of non-cash, stock-based compensation expense for the periods indicated:
Cost of sales
Selling, general and administrative
Research and development
Year Ended December 31,
2007
$ 2,046
12,061
2,425
2006
854
$
10,766
2,220
2005
$ 12
449
6
The accompanying notes are an integral part of these consolidated financial statements.
51
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
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
Stock-based compensation expense
Amortization of intangible assets
Deferred income taxes
Gain on sale of investment
Excess tax benefits from stock-based compensation arrangements
Non-cash restructuring charges
Other
Changes in assets and liabilities:
Accounts receivable
Inventories
Marketable securities
Prepaid expenses and other current assets
Accounts payable
Accrued expenses and other liabilities
Net cash provided by operating activities
Investing activities:
Capital expenditures
Purchase of intangible assets
Acquisition of businesses (Note 3)
Proceeds from sale of investment
Other
Net cash used in investing activities
Financing activities:
Issuance of common stock
Proceeds from issuance of convertible senior notes
Financing under factoring agreements, net
Principal payments of bank and other financing
Excess tax benefits from stock-based compensation arrangements
Net cash provided by (used in) financing activities
Effect of exchange rates on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
2007
Year Ended December 31,
2006
2005
$
961
$ 14,411
$ 21,065
23,522
16,532
3,782
(8,708)
—
(3,633)
5,295
111
(9,831)
(27,077)
14,790
(6,103)
1,889
12,894
24,424
(35,042)
(1,041)
(27,758)
—
—
(63,841)
17,292
193,492
(3,457)
(1,063)
3,633
209,897
607
171,087
57,939
$229,026
21,361
13,840
4,149
(8,852)
(1,499)
(4,908)
—
1,340
(8,555)
(867)
(5,325)
4,600
2,504
(2,224)
29,975
(29,643)
(705)
—
1,499
500
(28,349)
5,915
—
(54)
(6,123)
4,908
4,646
390
6,662
51,277
$ 57,939
17,895
467
4,250
(329)
—
—
—
1,648
(5,177)
(9,364)
(25,000)
(6,062)
647
5,251
5,291
(30,356)
(1,227)
—
—
—
(31,583)
2,930
—
(1,208)
(7,101)
—
(5,379)
(522)
(32,193)
83,470
$ 51,277
The accompanying notes are an integral part of these consolidated financial statements.
52
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
Wright Medical Group, Inc.
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income
For the Years Ended December 31, 2005, 2006 and 2007
(In thousands, except share data)
Common Stock, Voting
Number of
Shares
Amount
Additional
Paid-in
Capital
Retained
Earnings
(Accumulated
Deficit)
Accumulated
Other
Deferred Comprehensive
Income
Compensation
Total
Stockholders’
Equity
Balance at December 31,
2004
2005 Activity:
Net income
Foreign currency translation
Total comprehensive income
Issuances of common stock
Tax benefit of employee
stock option exercises
Stock-based compensation
Forfeiture of stock options
Balance at December 31,
33,850,202
$
339
$269,944
$(15,668)
$ (188)
$21,642
$276,069
—
—
—
—
—
—
21,065
—
—
—
—
(9,685)
325,494
3
2,927
—
—
—
—
—
—
—
—
1,162
288
(9)
—
—
—
—
179
9
—
—
—
—
21,065
(9,685)
11,380
2,930
1,162
467
—
2005
34,175,696
$
342
$274,312
$ 5,397
$ —
$11,957
$292,008
2006 Activity:
Net income
Foreign currency translation
Total comprehensive income
SAB 108 adjustment to
opening balance (Note 2)
Issuances of common stock
Tax benefit of employee
stock option exercises
Stock-based compensation
Balance at December 31,
—
—
—
—
—
—
—
14,411
—
—
—
—
—
—
5,921
—
14,411
5,921
20,332
—
968,104
—
9
—
5,906
(2,861)
—
—
—
—
—
—
—
5,585
14,845
—
—
—
—
—
—
—
—
(2,861)
5,915
5,585
14,845
2006
35,143,800
$
351
$300,648
$ 16,947
$ —
$17,878
$335,824
2007 Activity:
Net income
Foreign currency translation
Minimum pension liability
adjustment
Total comprehensive income
FIN 48 adjustment to
opening balance (Note
11)
Issuances of common stock
Tax benefit of employee
stock option exercises
Stock-based compensation
Balance at December 31,
—
—
—
—
—
—
—
—
—
—
961
—
—
—
—
6,970
—
—
—
—
(225)
—
961
6,970
(225)
7,706
—
1,349,383
—
14
—
17,278
7,245
—
—
—
—
—
—
—
4,289
16,425
—
—
—
—
—
—
—
—
7,245
17,292
4,289
16,425
2007
36,493,183
$
365
$338,640
$ 25,153
$ —
$24,623
$388,781
The accompanying notes are an integral part of these consolidated financial statements.
53
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Description of Business:
Wright Medical Group, Inc. (Wright), through Wright Medical Technology, Inc. and other operating subsidiaries, is a global
orthopaedic medical device company specializing in the design, manufacture and marketing of reconstructive joint devices and
biologics products. Our products are sold primarily through a network of independent sales representatives in the United States (U.S.)
and by a combination of employee sales representatives, independent sales representatives and stocking distributors outside the U.S.
We promote our products in over 60 countries with principal markets in the U.S., Europe, and Japan. We are headquartered in
suburban Memphis, Tennessee.
During 2001, we completed our initial public offering (IPO), issuing 7,500,000 shares of common stock which generated net proceeds
of $84.8 million. During 2002, we and certain selling stockholders completed a secondary offering which generated net proceeds to us
of $49.5 million. During 2007, we issued $200 million of convertible senior notes which generated net proceeds of $193.5 million.
2. Summary of Significant Accounting Policies:
Principles of Consolidation. The accompanying consolidated financial statements include the accounts of Wright and our 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 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 and excess and obsolete inventories, the
evaluation of goodwill and long-lived assets, product liability claims and other litigation, accounting for income taxes, accounting for
stock-based compensation, purchase accounting for business combinations and accounting for restructuring charges.
Cash and Cash Equivalents. Cash and cash equivalents include all cash balances and short-term investments with original maturities
of three months or less.
Marketable Securities. Our investment in marketable securities represents debt securities, which are classified as trading securities in
accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and
Equity Securities. We recognize realized and unrealized gains or losses on the purchase or sale of these securities in the period
incurred in the accompanying consolidated statement of operations. For the years ended December 31, 2007 and 2006, we did not
incur any realized or unrealized gains or losses related to these securities. As of the date of filing, we have liquidated all of these
investments into cash equivalents.
Inventories. Our 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. 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. Charges incurred for excess and obsolete inventory were $6.6 million, $6.5 million and $6.9 million for the
years ended December 31, 2007, 2006 and 2005, respectively. In 2005, charges incurred for excess and obsolete inventory included
$1.5 million recorded to write down certain inventory to its net realizable value due to the termination of an agreement to distribute
certain third party spinal products in Europe.
54
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Additionally, in 2007, we recorded charges of $2.1 million associated with the closure of our manufacturing facility in Toulon, France
for inventory write-offs and manufacturing costs incurred during a period of abnormal production capacity.
Product Liability Claims and Other Litigation. 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. Our accrual for product liability
claims was $610,000 and $330,000 at December 31, 2007 and 2006, respectively.
Property, Plant and Equipment. Our property, plant and equipment is stated at cost. Depreciation, which includes amortization of
assets under capital lease, is generally provided on a straight-line basis over the estimated useful lives generally based on the
following categories:
Land improvements
Buildings
Machinery and equipment
Furniture, fixtures and office equipment
Surgical instruments
15 to 25 years
10 to 45 years
3 to 12 years
1 to 14 years
6 years
Expenditures for major renewals and betterments, including leasehold improvements, that extend the useful life of the assets are
capitalized and depreciated over the remaining life of the asset or lease term, if shorter. 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 net assets of
businesses acquired. Goodwill is required to be tested for impairment at least annually. Unless circumstances otherwise dictate, the
annual impairment test is performed in the fourth quarter. Accordingly, during the fourth quarter of 2007, we evaluated goodwill for
impairment and determined that the fair value of our reporting unit exceeded its carrying value, indicating that goodwill was not
impaired. Based on our single business approach to decision-making, planning and resource allocation, management has determined
that we have only one reporting unit for purposes of evaluating goodwill for impairment.
Our intangible assets with estimable useful lives are amortized on a straight line basis over their respective estimated useful lives to
their estimated residual values, and are reviewed for impairment in accordance with SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets (SFAS 144). The weighted average amortization periods for completed technology, distribution
channels, trademarks and licenses are 9 years, 10 years, 6 years and 5 years, respectively. The weighted average amortization period
of our 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. We account for
the impairment of long-lived assets in accordance SFAS 144. Accordingly, we evaluate impairment of our 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 and amortization is adjusted accordingly. Alternatively, should we determine that an asset is
impaired, an adjustment would be charged to income based on the asset’s fair market value or discounted cash flows if the fair market
value is not readily determinable, reducing income in that period.
In 2007, we recognized an impairment charge of $3.2 million for our property, plant, and equipment at our Toulon, France facilities.
This impairment charge consisted of the write-down of assets held for sale to their estimated selling
55
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
price less costs to sell, as well as the abandonment of the remaining assets that are no longer in use. See Note 16 for further discussion
of our restructuring charges.
Allowances for Doubtful Accounts. We experience credit losses on our accounts receivable and, accordingly, we must make estimates
related to the ultimate collection of our accounts receivable. Specifically, management analyzes our accounts receivable, historical bad
debt experience, customer concentrations, customer credit-worthiness and current economic trends, when evaluating the adequacy of
our allowance for doubtful accounts.
The majority of our accounts receivable are from hospitals, many of which are government funded. Accordingly, our collection
history with this class of customer 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. We write off accounts receivable when we determine that the accounts receivable are uncollectible, typically
upon customer bankruptcy or the customer’s non-response to continued collection efforts. Our allowance for doubtful accounts totaled
$5.2 million and $2.9 million at December 31, 2007 and 2006, respectively.
Concentrations of Supply of Raw Material. 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 source for a certain grade of cobalt chrome alloy and one
supplier for the silicone elastomer used in certain of our extremity products. We are aware of only two suppliers of silicone elastomer
to the medical device industry for permanent implant usage. Further, we rely on one supplier of ceramics for use in our hip products.
In addition, our biologics products depend on a single source for demineralized bone matrix (DBM) and cancellous bone matrix
(CBM) materials. We rely on one supplier for our GRAFTJACKET ® family of soft tissue repair and graft containment products.
Income Taxes. Income taxes are accounted for pursuant to the provisions of SFAS No. 109, Accounting for Income Taxes, and FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 (FIN 48). 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
financial accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our
consolidated balance sheet. The measurement of deferred tax assets is reduced by a valuation allowance if, based upon available
evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
We provide for unrecognized tax benefits based upon our assessment of whether a tax benefit is “more-likely-than-not” to be
sustained upon examination by the tax authorities. If a tax position meets the more-likely-than-not standard, then the related tax
benefit is measured based on a cumulative probability analysis of the amount that is more-likely-than-not to be realized upon ultimate
settlement or disposition of the underlying tax position.
Other Taxes. Taxes assessed by a governmental authority that are imposed concurrent with our revenue transactions with customers
are presented on a net basis in our consolidated statement of operations.
Revenue Recognition. Our revenues are primarily generated through two types of customers, hospitals and stocking distributors, with
the majority of our revenue derived from sales to hospitals. Our products are primarily 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
generally when the product is surgically implanted in a patient.
56
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
We record revenues from sales to our 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. Our
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 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 $252,000 and $175,000 of deferred revenue related to these types of agreements was recorded
at December 31, 2007 and 2006, respectively.
We must make estimates of potential future product returns related to current period product revenue. We develop 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 $560,000 and $350,000 is included as a
reduction of accounts receivable at December 31, 2007 and 2006, respectively.
Shipping and Handling Costs. We incur shipping and handling costs associated with the shipment of goods to customers, independent
distributors and our 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 our 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
expense (income), net” on our consolidated statement of operations.
Pension Benefits. Our subsidiary in Japan provides benefits to employees under a plan that we account for as a defined benefit plan in
accordance with SFAS No. 87, Employers’ Accounting for Pensions, and SFAS No. 158, Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R). This plan is unfunded, and
determining the minimum pension liability requires the use of assumptions and estimates, including discount rates and mortality rates,
and actuarial methods. Our minimum pension liability totaled $970,000 and $520,000 as of December 31, 2007 and 2006,
respectively.
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 our net income and our comprehensive income is
attributable to foreign currency translation and, in 2007, an adjustment to our minimum pension liability.
Stock-Based Compensation. Effective January 1, 2006, we adopted the provisions of, and account for stock-based compensation in
accordance with, SFAS No. 123 (Revised 2004), Share-Based Payment (SFAS 123R), which replaced SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees. Under the fair value recognition provisions of SFAS 123R, stock-based compensation cost is measured at the grant date
based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the
vesting period. The determination of the fair value of stock-based payment awards, such as options, on the date of grant using an
option-
57
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
pricing model is affected by our stock price, as well as assumptions regarding a number of complex and subjective variables, which
include the expected life of the award, the expected stock price volatility over the expected life of the awards, expected dividend yield
and risk-free interest rate. We elected the modified prospective method of transition, under which prior periods are not revised for
comparative purposes.
We recorded $16.5 million and $13.8 million of stock-based compensation expense during the years ended December 31, 2007 and
2006, respectively. See Note 14 for further information regarding our stock-based compensation assumptions and expenses, including
pro forma disclosures for the year ended December 31, 2005, as if we had applied the fair value recognition provisions of SFAS
No. 123 to non-cash, stock-based employee compensation expense.
Fair Value of Financial Instruments. The carrying value of cash and cash equivalents, marketable securities, accounts receivable, and
accounts payable approximates the fair value of these financial instruments at December 31, 2007 and 2006 due to their short
maturities or variable rates.
The fair value of our convertible senior notes was approximately $216 million as of December 31, 2007.
Derivative Instruments. We account for derivative instruments and hedging activities under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended. Accordingly, all of our derivative instruments are recorded in the accompanying
consolidated 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.
We employ 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. Accordingly, the changes in the fair value and the settlement of the contracts are recognized in the
period incurred in the accompanying consolidated statements of operations.
We recorded net losses of $2.8 million and $1.9 million, and a net gain of $1.5 million, for the years ended December 31, 2007, 2006,
and 2005, respectively, on foreign currency contracts, which are included in “Other expense (income), net” in our consolidated
statements of operations. These losses and gains substantially offset translation gains and losses recorded on our intercompany
receivable and payable balances, also included in “Other expense (income), net.” At December 31, 2007 and 2006, we had no foreign
currency contracts outstanding.
Supplemental Cash Flow Information. Cash paid for interest and income taxes was as follows (in thousands):
Interest
Income taxes
2007
$ 1,898
$10,408
Year Ended December 31,
2006
$1,298
$9,663
2005
$ 1,420
$17,057
During 2006, we favorably resolved certain income tax contingencies associated with a prior acquisition, resulting in a decrease in
goodwill of $140,000. Additionally, we entered into capital leases of approximately $1.6 million during 2005. We entered into
insignificant amounts of capital leases during 2006 and 2007.
Adoption of SAB 108. In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108), to address diversity in practice in
quantifying financial statement misstatements. SAB 108 requires registrants to consider both the “rollover” method which focuses on
the income statement impact of misstatements and the
58
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
“iron curtain” method which focuses on the balance sheet impact of misstatements to define materiality. The transition provisions of
SAB 108 allow a registrant to adjust opening retained earnings for the cumulative effect of immaterial errors relating to prior years.
We adopted SAB 108 during the year ended December 31, 2006.
During 2006, we concluded there was an error in our method of calculating depreciation expense for our surgical instruments,
resulting in an understatement of depreciation expense for the years 2000 through 2005. Under SAB 108, we assessed materiality of
errors originating in prior years using both the rollover method and the iron-curtain method. Management concluded that the impact of
this error was immaterial for each of the prior years under the rollover method, which was the method we used prior to the adoption of
SAB 108. However, under the iron-curtain method, the cumulative effect of the balance sheet adjustment was material to our 2006
statement of operations. Therefore, an adjustment was recorded to 2006 opening retained earnings in accordance with the
implementation guidance in SAB 108. The total cumulative impact was as follows:
Accumulated depreciation
Deferred tax asset
Retained earnings
Increase/
(Decrease)
$ 4,721
1,860
(2,861)
Recently Issued Accounting Pronouncements. In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS
No. 157, Fair Value Measurements (SFAS 157). This standard defines fair value, establishes a framework for measuring fair value in
accordance with U.S. generally accepted accounting principles and expands disclosures about fair value measurements. The provisions
of SFAS 157 are effective for us on January 1, 2008. The adoption of SFAS 157 is not expected to have a material impact on our
consolidated financial position, results of operations, or cash flows.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159).
This standard expands the standards under SFAS 157 to provide entities the one-time election to measure financial instruments and
certain other items at fair value. SFAS 159 is effective for us on January 1, 2008. We did not elect the fair value option for any of our
existing financial instruments on the effective date and have not determined whether or not we will elect this option for any eligible
financial instruments we acquire in the future.
In June 2007, the FASB issued EITF Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be
Used in Future Research and Development Activities (EITF 07-3). EITF 07-3 states that nonrefundable advance payments for future
research and development activities should be deferred and capitalized. These amounts should be recognized as an expense as the
related goods are delivered or the related services are performed. The provisions of EITF 07-3 are effective for us on January 1, 2008.
We do not expect the adoption of EITF 07-3 to have a material impact on our consolidated financial position, results of operations, or
cash flows.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (SFAS 141R) and SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51 (SFAS 160). SFAS 141(R) and SFAS
160 significantly change the accounting for and reporting of business combination transactions and noncontrolling (minority) interests.
Under SFAS 141R, an acquiring entity will be required to recognize all the assets and liabilities assumed in a transaction at the
acquisition date fair value. In addition, SFAS 141R includes a substantial number of additional disclosure requirements. SFAS 160
changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as
a component of equity. We will apply the provisions of SFAS 141R and SFAS 160 prospectively effective January 1, 2009.
59
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
3. Acquisitions and Dispositions
DARCO International, Inc. On April 5, 2007, we completed the acquisition of substantially all the assets of Darco International, Inc.’s
(Darco) reconstructive foot surgery line of business for a cash payment of $17.1 million. This reconstructive product line consists of a
broad offering of procedure-specific plating systems designed with leading foot surgeons, including the DARCO® MRS (Modular
Rearfoot), DARCO® MFS (Modular Forefoot) and DARCO® FRS (Forefoot Reconstructive) Systems.
The operating results from this acquisition are included in the consolidated financial statements from the acquisition date.
The acquisition was recorded by allocating the costs of the assets acquired based on their estimated fair values at the acquisition date.
The excess of the cost of the acquisition over the net of amounts assigned to the fair value of the assets acquired is recorded as
goodwill. The following is a summary of the estimated fair values of the assets acquired, which includes transaction costs (in
thousands):
Inventories
Property, plant and equipment
Intangible assets
Goodwill
Other current liabilities
Net assets acquired
$ 2,532
988
2,170
11,637
(111)
$17,216
Of the $2.2 million of acquired intangible assets, $1.1 million was assigned to customer relationships (ten-year useful life), $540,000
was assigned to trademarks (five-year useful life), $250,000 was assigned to distribution channels (ten-year useful life), and $290,000
to other assets (five-year useful life).
R&R Medical, Inc. On April 16, 2007, we acquired certain assets of R&R Medical, Inc. (R&R), a Pennsylvania-based company
focused on providing external fixation devices to the foot and ankle and trauma markets. The purchase consisted of an initial cash
payment of $8.0 million and potential additional cash payments of up to $3 million based upon future financial performance of the
acquired assets. Assets acquired include the R&R external fixation product line, which consists of an array of foot- and ankle-focused
external fixation devices, including the CIRCULAR FREEDOM™ frame, the HOLLAWELL TOMAHAWK™ mini-fixator, the
PATRIOT™ mini-fixator, and the STEALTH™ fusion system. These products address those external fixation procedures most
commonly performed by foot and ankle surgeons and surgical podiatrists. The R&R product line is complementary to our rapidly
expanding line of reconstructive and biologic products for foot surgery.
The operating results from this acquisition are included in the consolidated financial statements from the acquisition date.
The acquisition was recorded by allocating the costs of the assets acquired based on their estimated fair values at the acquisition date.
The excess of the cost of the acquisition over the net of amounts assigned to the fair value of the assets acquired is recorded as
goodwill. Additionally, additional cash payments, if made, will be recorded as an increase to the purchase price of the acquisition and,
therefore, increase goodwill. The following is a summary of the estimated fair values of the assets acquired, which includes
transaction costs (in thousands):
Accounts receivable
Inventories
Intangible assets
Goodwill
Total assets acquired
60
$
150
429
1,060
6,383
$ 8,022
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Of the $1.1 million of acquired intangible assets, $400,000 was assigned to customer relationships (ten-year useful life), $120,000 was
assigned to registered trademarks (two-year useful life), and $540,000 was assigned to other assets (ten-year useful life).
Koby Ventures Ltd. d/b/a MetaSurg (BIOARCH TM). On October 18, 2007, we acquired certain assets of Koby Ventures Ltd. d/b/a
MetaSurg (BIOARCHTM), a Texas-based company focused on development and marketing of surgical fixation and implant devices
for foot and ankle surgery. The purchase consisted of an initial cash payment of $2.5 million and potential additional cash payments of
up to $1 million based upon future financial performance of the acquired assets. Assets acquired are specific to Metasurg’s
BIOARCHTM subtalar implant, which is used in surgical treatment of flatfoot deformity. The BIOARCH TM implant is innovatively
designed to provide improved patient tolerance versus conventional implant designs and can be inserted in a fast, accurate and
minimally invasive manner.
The operating results from this acquisition are included in the consolidated financial statements from the acquisition date.
The acquisition was recorded by allocating the costs of the assets acquired based on their estimated fair values at the acquisition date.
The excess of the cost of the acquisition over the net of amounts assigned to the fair value of the assets acquired is recorded as
goodwill. Additionally, additional cash payments, if made, will be recorded as an increase to the purchase price of the acquisition and
therefore, increase goodwill. The following is a summary of the estimated fair values of the assets acquired, which includes
transaction costs (in thousands):
Intangible assets
Goodwill
Total assets acquired
$ 1,670
850
$ 2,520
Of the $1.7 million of acquired intangible assets, $110,000 was assigned to trademarks (ten-year useful life), $1.4 million was
assigned to completed technology (ten-year useful life) and $130,000 was assigned to other assets (three-year useful life).
Our consolidated results of operations would not have been materially different than reported results had the Darco, R&R and
BIOARCH™ acquisitions occurred at the beginning of 2007 or 2006, respectively.
ADCON®-Gel. In August 2007, we sold our ADCON ®-Gel related assets for $4.6 million plus a potential earnout based upon future
financial performance of those assets. A deferred gain of $1.5 million has been recorded in our consolidated balance sheet as of
December 31, 2007, and will be recognized over a two-year period as installment payments of the purchase price are received.
4. Inventories:
Inventories consist of the following (in thousands):
Raw materials
Work-in-process
Finished goods
61
December 31,
2007
$
7,020
21,482
86,788
$115,290
2006
$ 4,204
12,078
69,875
$86,157
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
5. Assets Held for Sale:
Assets held for sale consists of the following (in thousands):
Land and buildings
Machinery and equipment
December 31,
2007
$ 1,766
441
$ 2,207
2006
$ —
—
$ —
The balances in 2007 are related to the closing of our Toulon, France facility. We expect to sell these assets within the next 12 months.
An asset impairment charge of $1.3 million related to these assets held for sale was recorded within “Restructuring charges” in our
consolidated statement of operations for the year ended December 31, 2007, to write down such assets to their estimated fair value less
costs to sell (see Note 16).
6. 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
December 31,
2007
$
4,050
7,272
35,534
30,424
5,931
116,699
199,910
(100,873)
$ 99,037
$
2006
3,882
8,992
35,557
33,003
4,573
90,092
176,099
(89,834)
$ 86,265
The components of property, plant and equipment recorded under capital leases consist of the following (in thousands):
Buildings
Machinery and equipment
Furniture, fixtures and office equipment
Less: Accumulated depreciation
December 31,
2007
$ 1,448
197
834
2,479
(1,374)
$ 1,105
2006
$ 1,448
4,789
1,909
8,146
(5,553)
$ 2,593
Depreciation expense approximated $23.5 million, $21.4 million and $17.9 million for the years ended December 31, 2007, 2006 and
2005, respectively, and included amortization of assets under capital leases.
62
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
7. Goodwill and Intangibles
Changes in the carrying amount of goodwill occurring during the year ended December 31, 2007, are as follows (in thousands):
Goodwill, at December 31, 2006
Goodwill from acquisitions (see Note 3)
Foreign currency translation
Goodwill, at December 31, 2007
The components of our identifiable intangible assets are as follows (in thousands):
$ 8,486
18,870
877
$28,233
Distribution channels
Completed technology
Licenses
Trademarks
Other
Less: Accumulated amortization
Intangible assets, net
December 31, 2007
December 31, 2006
Accumulated
Amortization
$18,082
2,896
2,561
164
1,357
$25,060
Cost
$ 22,793
5,180
3,598
862
3,814
36,247
(25,060)
$ 11,187
Accumulated
Amortization
$14,185
3,076
2,314
307
3,899
$23,781
Cost
$ 20,241
5,233
2,741
657
4,218
33,090
(23,781)
$ 9,309
Based on the intangible assets held at December 31, 2007, we expect to amortize approximately $3.8 million in 2008, $3.3 million in
2009, $750,000 in 2010, $710,000 in 2011 and $580,000 in 2012.
8. 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 and legal fees
Restructuring liability (see Note 16)
Other
63
December 31,
2007
$10,994
674
5,930
5,320
5,628
6,239
6,966
11,318
$53,069
2006
$ 9,661
3,912
5,203
3,612
4,096
5,744
—
9,138
$41,366
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
9. Long-Term Debt and Capital Lease Obligations:
Long-term debt and capital lease obligations consist of the following (in thousands):
Capital lease obligations
Convertible senior notes
Less: current portion
December 31,
2007
$
1,006
200,000
201,006
(551)
$200,455
2006
$ 1,724
—
1,724
(1,001)
723
$
On November 26, 2007, we issued $200 million of Convertible Senior Notes due 2014. The notes will mature on December 1, 2014,
unless earlier redeemed, purchased, or converted. The notes pay interest semiannually at an annual rate of 2.625%. The notes are
convertible into shares of our common stock at an initial conversion rate of 30.6279 shares per $1,000 principal amount of the notes,
which represents a conversion price of $32.65 per share. The holder of the notes may convert at any time on or prior to the close of
business on the business day immediately preceding the maturity date of notes. Beginning on December 6, 2011, we may redeem the
notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the notes, plus accrued and unpaid interest,
if the closing price of our common stock has exceeded 140% of the conversion price for at least 20 days during any consecutive
30-day trading period. Additionally, if we experience a fundamental change event, as defined in the note agreement, the holders may
require us to purchase for cash all or a portion of the notes, for 100% of the principal amount of the notes, plus accrued and unpaid
interest. If upon a fundamental change event, a holder elects to convert its notes, we may, under certain circumstances, increase the
conversion rate for the notes surrendered. The notes are unsecured obligations and are subordinated to all existing and future secured
debt, our revolving credit facility, and all liabilities of our subsidiaries.
On December 31, 2007, after considering outstanding letters of credit, our revolving credit facility had available borrowing capacity of
$97.1 million, which can be increased by up to an additional $50 million at our request and subject to the agreement of the lenders.
We currently have no borrowings outstanding under the credit facility. Borrowings under the credit facility bear interest at the sum of
a base annual rate plus an applicable annual rate that ranges from 0% to 1.75% depending on the type of loan and our consolidated
leverage ratio, with a current annual base rate of 7.25%. The term of the credit facility extends through June 30, 2011.
As discussed in Note 6, we have acquired certain property and equipment pursuant to capital leases. These leases have various terms
ranging from two to seven years with interest rates ranging from 2.9% to 6.8%. At December 31, 2007, future minimum lease
payments under capital lease obligations, together with the present value of the net minimum lease payments, are as follows (in
thousands):
$
592
313
152
8
1,065
(59)
1,006
(551)
455
$
2008
2009
2010
2011
Total minimum payments
Less amount representing interest
Present value of minimum lease payments
Current portion
Long-term portion
64
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
10. Other Long-Term Liabilities:
Other long-term liabilities consist of the following (in thousands):
Unrecognized tax benefits (see Note 11)
Other
December 31,
2007
$ 6,154
1,052
$ 7,206
2006
$12,663
770
$13,433
Effective January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation
of FASB Statement No. 109 (FIN 48). Upon adoption of FIN 48, we recorded a $7.2 million reduction to our liability for unrecognized
tax benefits as an adjustment to the 2007 opening balance of retained earnings. See Note 11 for further discussion of our unrecognized
tax benefits.
11. Income Taxes:
The components of our income before income taxes are as follows (in thousands):
Domestic
Foreign
Income before income taxes
The components of our provision for income taxes are as follows (in thousands):
Current provision:
Domestic:
Federal
State
Foreign
Deferred (benefit) provision:
Domestic:
Federal
State
Foreign
Total provision for income taxes
65
2007
$10,981
(8,650)
$ 2,331
Year Ended December 31,
2006
$ 34,624
(12,423)
$ 22,201
2005
$ 43,588
(10,168)
$ 33,420
Year Ended December 31,
2006
2007
2005
$ 7,590
660
1,397
$13,257
1,841
2,234
$ 9,777
1,709
1,385
(4,333)
(329)
(3,615)
$ 1,370
(2,915)
(361)
(6,266)
$ 7,790
3,013
605
(4,134)
$12,355
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
A reconciliation of the statutory U.S. federal income tax rate to our effective income tax rate is as follows:
Income tax provision at statutory rate
State income taxes
Stock-based compensation expense
Change in valuation allowance
Research and development credit
Foreign income tax rate differences
Non-taxable differences and other, net
Total
2007
35.0%
12.2%
132.9%
(3.6)%
(51.2)%
(70.0)%
3.5%
58.8%
Year Ended December 31,
2006
35.0%
5.3%
11.3%
(2.8)%
(4.2)%
(4.5)%
(5.0)%
35.1%
2005
35.0%
5.3%
0.2%
(1.2)%
(2.8)%
(2.5)%
3.0%
37.0%
The significant components of our deferred income taxes as of December 31, 2007 and 2006 are as follows (in thousands):
Deferred tax assets:
Net operating loss carryforwards
General business credit carryforward
Reserves and allowances
Stock-based compensation expense
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,
2007
2006
$32,255
2,262
20,537
5,907
3,956
14,116
(6,026)
73,007
6,140
1,715
10,778
18,633
$54,374
$23,140
2,262
16,551
4,624
5,484
10,337
(5,738)
56,660
3,845
2,252
5,966
12,063
$44,597
Outside basis differences that have not been tax-effected in accordance with the provisions of APB Opinion No. 23, Accounting for
Income Taxes — Special Areas, as amended by SFAS No. 109, are primarily related to undistributed earnings of certain of our foreign
subsidiaries. Deferred tax liabilities for U.S. federal income taxes are not provided on the undistributed earnings of our foreign
subsidiaries when earnings are considered permanently reinvested. The determination of the amount of unrecognized deferred tax
liability is not practicable.
At December 31, 2007, we had net operating loss carryforwards for U.S. federal income tax purposes of approximately $13.8 million,
which expire in 2017 and 2018. Additionally, we had general business credit carryforwards of approximately $2.3 million, which
expire beginning in 2008 and extending through 2016. At December 31, 2007, we had foreign net operating loss carryforwards of
approximately $81.9 million, of which $5.6 million expires beginning in 2009 and extending through 2015.
66
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Certain of our U.S. and foreign net operating losses and general business credit carryforwards are subject to various limitations. We
maintain valuation allowances for these net operating losses and tax credit carryforwards that are expected to expire unused due to
these limitations.
Effective January 1, 2007, we adopted FIN 48, which clarifies the accounting for uncertainty in income taxes recognized in a
company’s financial statements in accordance with SFAS No. 109 by defining the criterion that an individual tax position must meet
in order to be recognized in the financial statements. FIN 48 requires that the tax effects of a position be recognized only if it is
“more-likely-than-not” to be sustained based solely on the technical merits as of the reporting date. Upon adoption of FIN 48, we
recorded a $7.2 million reduction to our liability for unrecognized tax benefits as an adjustment to the 2007 opening balance of
retained earnings.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Balance at January 1, 2007
Additions for tax positions related to current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Settlements
Foreign currency translation
Balance at December 31, 2007
$ 5,418
199
395
—
(428)
570
$ 6,154
As of January 1, 2007, our liability for unrecognized tax benefits totaled $5.4 million, of which $428,000 was recognized as an income
tax benefit during the three months ended March 31, 2007, upon the effective settlement of a tax examination. As of December 31,
2007, our liability for unrecognized tax benefits totaled $6.2 million and is recorded in our consolidated balance sheet within “Other
liabilities,” all of which, if recognized, would affect our effective tax rate. Our operations in Belgium and France are currently under
audit. As such, management believes that it is reasonably possible that $4.7 million of our unrecognized tax benefits related to those
jurisdictions may significantly change within the next twelve months.
FIN 48 further requires that interest required to be paid by the tax law on the underpayment of taxes should be accrued on the
difference between the amount claimed or expected to be claimed on the tax return and the tax benefit recognized in the financial
statements. Management has made the policy election to record this interest as interest expense. As of December 31, 2007, accrued
interest related to our unrecognized tax benefits totaled $80,000, which is recorded in our consolidated balance sheet within “Other
liabilities.”
We file numerous consolidated and separate company income tax returns in the U.S. federal jurisdiction and in many U.S. state and
foreign jurisdictions, with the most significant foreign jurisdiction being France. We are no longer subject to foreign income tax
examinations by tax authorities for years before 2000. With few exceptions, we are subject to U.S. federal, state, and local income tax
examinations for years 2004-2006. However, tax authorities have the ability to review years prior to these to the extent that we utilized
tax attributes carried forward from those prior years.
12. Earnings Per Share:
SFAS No. 128, Earnings Per Share, requires the presentation of basic and diluted earnings per share. Basic earnings per share is
calculated based on the weighted-average shares of common stock outstanding during the period. Diluted earnings per share is
calculated to include any dilutive effect of our common stock equivalents. Our common stock equivalents consist of stock options,
non-vested shares of common stock, and convertible debt. The dilutive effect of the stock options and non-vested shares of common
stock is calculated using the treasury-stock
67
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
method. The dilutive effect of convertible debt is calculated by applying the “if-converted” method. This method assumes an add-back
of interest, net of income taxes, to net income as if the securities were converted at the beginning of the period. We determined that for
the twelve month period ended December 31, 2007, the convertible debt had an anti-dilutive effect on earnings per share and therefore
excluded them from the dilutive shares calculation.
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
2007
35,812
671
36,483
Year Ended December 31,
2006
34,434
1,005
35,439
2005
33,959
1,240
35,199
The following potential common shares were excluded from the computation of diluted earnings per share as their effect would have
been anti-dilutive (in thousands):
Stock options
Non-vested shares
Convertible debt
13. Capital Stock:
2007
3,328
43
6,126
Year Ended December 31,
2006
4,446
—
—
2005
2,662
—
—
We are authorized to issue up to 100,000,000 shares of voting common stock. We have 63,506,817 shares of voting common stock
available for future issuance at December 31, 2007.
We have granted 434,005 shares of non-vested common stock that had not been issued as of December 31, 2007. The unvested shares
have the same voting rights that are available to common stockholders.
14. Stock-Based Compensation Plans:
Effective January 1, 2006, we adopted SFAS 123R, which replaced SFAS No. 123 and supersedes APB Opinion No. 25. SFAS 123R
requires recognition of the fair value of an award of equity instruments granted in exchange for employee services as a cost of those
services. Prior to the adoption of SFAS 123R, as permitted by SFAS No. 123, we accounted for similar transactions in accordance
with APB Opinion No. 25, which employed the intrinsic value method of measuring compensation cost. Accordingly, compensation
cost related to stock option grants to employees was recognized only to the extent that the fair market value of the stock exceeded the
exercise price of the stock option at the date of grant.
We adopted SFAS 123R using the modified prospective method. Accordingly, prior year amounts have not been restated. Under the
modified prospective method, the provisions of SFAS 123R are to be applied to new awards granted after January 1, 2006. For
unvested options granted prior to January 1, 2006, we are required to recognize, over the remaining vesting period, non-cash
stock-based compensation expense for the grant date fair value of the options. SFAS 123R did not change the accounting for non-cash,
stock-based compensation related to non-employees with equity-based incentive arrangements.
68
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
We have two stock-based compensation plans which are described below. Amounts recognized in the financial statements with respect
to these plans are as follows:
Total cost of share-based payment plans
Amounts capitalized as inventory and intangible assets
Amortization of capitalized amounts
Charged against income before income taxes
Amount of related income tax benefit recognized income
Impact to net income
Impact to basic earnings per share
Impact to diluted earnings per share
2007
$16,425
(2,262)
2,369
16,532
(3,665)
$12,867
0.36
$
0.35
$
Year Ended December 31,
2006
$14,845
(1,918)
913
13,840
(2,957)
$10,883
0.32
$
0.31
$
2005
$
467
—
—
467
(180)
$
287
$ 0.01
$ 0.01
The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions
of SFAS No. 123 to stock-based employee compensation in 2005 (in thousands, except per share amounts):
Net income, as reported
Add: Stock-based employee compensation cost recognized under intrinsic value method, net of tax
Less: Stock-based employee compensation expense determined under fair value based method, net of tax
Pro forma net income
Income per share:
Basic, as reported
Basic, pro forma
Diluted, as reported
Diluted, pro forma
Year
Ended
December
31,
2005
$ 21,065
151
(12,972)
$ 8,244
$
$
$
$
0.62
0.24
0.60
0.24
As of December 31, 2007, we had $25.4 million of total unrecognized compensation cost related to unvested stock-based
compensation arrangements granted to employees. That cost is expected to be recognized over a weighted-average period of 2.5 years.
Equity Incentive Plan. On December 7, 1999, we adopted the 1999 Equity Incentive Plan (the Plan), which was subsequently amended
and restated on July 6, 2001, May 13, 2003, May 13, 2004 and May 12, 2005. The Plan authorizes us to grant stock options and other
stock-based awards, such as non-vested shares of common stock, with respect to up to 9,767,051 shares of common stock. Under the
Plan, options to purchase common stock generally are exercisable in increments of 25% annually on 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 we completed our
IPO in July 2001 became options to purchase our common stock. Those options were immediately exercisable upon their issuance. All
of the options issued under the Plan expire after ten years. Non-vested shares of common stock are generally vested in increments of
25% annually on each of the first through fourth anniversaries of the date of grant. As of December 31, 2007, there were 929,218
shares available for future issuance under the Plan.
69
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
Stock options
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
We estimate the fair value of stock options using the Black-Scholes valuation model. The Black-Scholes option-pricing model
requires the input of estimates, including the expected life of stock options, expected stock price volatility, the risk-free interest rate,
and the expected dividend yield. The expected life of options is estimated by calculating the average of the vesting term and the
contractual term of the option, as allowed in SEC Staff Accounting Bulletin No. 107. The expected stock price volatility assumption
was estimated based upon historical volatility of our common stock. The risk-free interest rate was determined using U.S. Treasury
rates where the term is consistent with the expected life of the stock options. Expected dividend yield is not considered as we have
never paid dividends and have no plans of doing so in the future. We are required to estimate forfeitures at the time of grant and revise
those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting
forfeitures and record stock-based compensation expense only for those awards that are expected to vest. The fair value of stock
options is amortized on a straight-line basis over the respective requisite service period, which is generally the vesting period.
The weighted-average grant date fair value of stock options granted to employees in 2007, 2006 and 2005 was $11.30 per share, $9.97
per share and $11.62 per share, respectively. The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option valuation model using the following assumptions:
Risk-free interest rate
Expected option life
Expected price volatility
2007
Year Ended December 31,
2006
3.9% — 4.8%
4.3% — 5.1%
6 years
39%
6 years
40%
2005
4.0% — 4.5%
7 years
40%
During 2006 and 2005, we granted certain independent distributors stock options of 66,700 and 41,900 shares, respectively, under the
Plan. These options are exercisable in 25% increments on the first through fourth anniversaries of the date of grant at a
weighted-average exercise price of $22.43 per share and $25.08 per share, respectively. The options expire after ten years.
A summary of our stock option activity during 2007 is as follows:
Outstanding at December 31, 2006
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2007
Shares
(000’s)
5,711
324
(1,338)
(269)
4,428
Weighted-
Average
Exercise
Price
$ 21.00
24.42
12.75
24.72
$ 23.51
Weighted-
Average
Remaining
Contractual
Life
Aggregate
Intrinsic
Value*
($000’s)
6.9 years
$26,091
Exercisable at December 31, 2007
2,576
$ 23.45
6.0 years
$15,514
*
The aggregate intrinsic value is calculated as the difference between the market value of our common stock as of December 31,
2007, and the exercise price of the shares. The market value as of December 31, 2007 is $29.17 per share, which is the closing
sale price of our common stock reported for transactions effected on the Nasdaq Global Select Market on December 31, 2007.
The total intrinsic value of options exercised during 2007, 2006 and 2005 was $17.3 million, $15.2 million and $4.3 million,
respectively.
70
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
A summary of our stock options outstanding and exercisable at December 31, 2007, is as follows (shares in thousands):
Range of Exercise Prices
$0.00 — $8.50
$8.51 — $16.00
$16.01 — $24.00
$24.01 — $32.00
$32.01 — $35.87
Non-vested shares
Options Outstanding
Options Exercisable
Weighted-Average
Number
Outstanding
168
55
1,959
2,169
77
4,428
Remaining
Contractual
Life
2.5 years
4.7 years
7.5 years
6.7 years
6.4 years
6.9 years
Weighted-
Average
Exercise
Price
$ 4.88
15.16
20.70
27.32
34.05
$ 23.51
Number
Exercisable
168
55
907
1,388
58
2,576
Weighted-
Average
Exercise
Price
$ 4.88
15.16
19.99
27.84
34.05
$ 23.45
We calculate the grant date fair value of non-vested shares of common stock as the average of the highest and lowest reported sale
prices on the trading day immediately prior to the grant date. We are required to estimate forfeitures at the time of grant and revise
those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting
forfeitures and record stock-based compensation expense only for those awards that are expected to vest.
We granted 409,000 and 7,000 non-vested shares of common stock to employees with a weighted-average fair value of $24.32 per
share and $23.37 per share during 2007 and 2006, respectively. The fair value of these shares will be recognized on a straight-line
basis over the respective requisite service period, which is generally the vesting period.
During 2007, we granted certain independent distributors non-vested shares of common stock of 27,000 shares under the Plan at a
weighted-average grant date fair value of $22.83 per share.
During 2006, we issued 50,000 non-vested shares of common stock with a grant date fair value of $22.44 per share to a third party
in exchange for certain rights and services. The expense related to those shares will be recognized over 28 months, the life of the
contract. The forfeiture restrictions lapsed on 16,667 of these shares on the grant date, and on 16,667 of these shares on January 1,
2007. The forfeiture restrictions on the remaining shares lapse on January 1, 2008.
A summary of our non-vested shares of common stock activity during 2007 is as follows:
Non-vested at December 31, 2006
Granted
Vested
Forfeited
Non-vested at December 31, 2007
Shares
(000’s)
41
436
(19)
(9)
449
Weighted-
Average
Grant-Date
Fair
Value
$ 19.19
24.23
21.08
23.85
$ 23.91
Aggregate
Intrinsic
Value*
($000’s)
$13,093
*
The aggregate intrinsic value is calculated as the market value of our common stock as of December 31, 2007. The market value
as of December 31, 2007 is $29.17 per share, which is the closing sale price of our common stock reported for transactions
effected on the Nasdaq Global Select Market on December 31, 2007.
71
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The total fair value of shares vested during 2007 and 2006 was $436,000 and $374,000, respectively.
Employee Stock Purchase Plan. On May 30, 2002, we and our shareholders approved and adopted the 2002 Employee Stock Purchase
Plan (the ESPP). The ESPP authorizes us to issue up to 200,000 shares of common stock to our 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 our 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, we sold to employees
11,032, 11,465 and 11,530 shares in 2007, 2006 and 2005, respectively, with weighted-average fair values of $7.73, $6.88 and $6.93
per share, respectively. As of December 31, 2007, there were 138,722 shares available for future issuance under the ESPP. During
2007, 2006 and 2005, we recorded nominal amounts of non-cash stock-based compensation expense related to the ESPP.
In applying the Black-Scholes methodology to the purchase rights granted under the ESPP, we used the following assumptions:
Risk-free interest rate
Expected option life
Expected price volatility
15. Employee Benefit Plans:
2007
Year Ended December 31,
2006
4.6% — 4.8%
6 months
4.6% — 4.8%
6 months
39%
40%
2005
3.0% — 3.6%
6 months
40%
We sponsor 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, we match 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 our
contributions after three years of service. Our expense related to the plan was $1.2 million, $1.0 million and $940,000 in 2007, 2006
and 2005, respectively.
16. Restructuring
On June 14, 2007, we announced plans to close our manufacturing, distribution and administrative facility located in Toulon, France.
The facility’s closure affected approximately 130 Toulon-based employees. The majority of our restructuring activities were complete
by the end of 2007, with Toulon’s production being transferred to our existing manufacturing facility in Arlington, Tennessee and its
distribution activities being transferred to our European headquarters in Amsterdam, the Netherlands.
Management estimates that the pre-tax restructuring charges will total approximately $23 million to $25 million. These charges
consist of the following estimates:
•
•
•
•
•
$13 million for severance and other termination benefits;
$3 million of non-cash asset impairments of property, plant and equipment;
$2 million of inventory write-offs and manufacturing period costs;
$2 million to $3 million of external legal and professional fees; and
$3 million to $4 million of other cash and non-cash charges.
Charges associated with the restructuring recognized during the year ended December 31, 2007 are presented in the following table.
All of the following amounts were recognized within “Restructuring charges” in our consolidated
72
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
statement of operations, with the exception of the inventory write-offs and manufacturing period costs, which were recognized with
“Cost of sales — restructuring.”
(in thousands)
Severance and other termination benefits
Asset impairment charges
Inventory write-offs and manufacturing period costs
Legal/professional fees
Other
Total restructuring charges
Year
Ended
December
31, 2007
$ 11,675
3,156
2,139
1,547
356
$ 18,873
As a result of the plans to close the facility, we performed an evaluation of the undiscounted future cash flows of the related asset
group and recorded an impairment charge for the difference between the net book value of the assets and their estimated fair values.
As of December 31, 2007, we have recorded these assets as “Assets held for sale” on our consolidated balance sheet at their estimated
selling price less costs to sell.
Activity in the restructuring liability for the year ended December 31, 2007 is presented in the following table (in thousands):
Beginning balance
Charges:
Severance and other termination benefits
Legal/professional fees
Other
Payments:
Severance and other termination benefits
Legal/professional fees
Other
Foreign currency translation
Restructuring liability at December 31, 2007
$ —
12,145
1,547
356
$14,048
(6,307)
(1,371)
(36)
$ (7,714)
632
$ 6,966
Under French law, our terminated employees have the right to pursue additional compensation through litigation. While significant
litigation has not commenced as of December 31, 2007, management has estimated that it has incurred a liability in the range of
$320,000 to $560,000. Therefore, we have recorded a liability of $320,000 within “Accrued expenses and other current liabilities” in
our consolidated balance sheet as of December 31, 2007.
73
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
17. Commitments and Contingencies:
Operating Leases. We lease certain equipment and office space under non-cancelable operating leases. Rental expense under
operating leases approximated $9.7 million, $8.5 million and $7.7 million for the years ended December 31, 2007, 2006 and 2005,
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, 2007 (in thousands):
2008
2009
2010
2011
2012
Thereafter
$ 8,052
4,809
2,409
1,002
731
993
$17,996
Royalty and Consulting Agreements. We have entered into various royalty and other consulting agreements with third party
consultants. We incurred royalty and consulting expenses of $855,000, $1.0 million and $3.2 million during the years ended
December 31, 2007, 2006 and 2005, respectively, under non-cancelable contracts with minimum 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. Future minimum payments under these
agreements for which we have not recorded a liability, are as follows at December 31, 2007 (in thousands):
2008
2009
2010
2011
2012
Thereafter
$
692
642
542
542
542
1,510
$ 4,470
Purchase Obligations. We have entered into certain supply agreements for our products, which include minimum purchase
obligations. During the years ended December 31, 2007, 2006 and 2005, we paid approximately $2.3 million, $3.8 million and
$6.4 million, respectively, under those supply agreements. Our remaining purchase obligations under those supply agreements are as
follows at December 31, 2007 (in thousands):
2008
2009
2010
2011
$ —
1,029
1,029
1,029
$ 3,087
Portions of our payments for operating leases, royalty and consulting agreements, and purchase obligations are denominated in foreign
currencies and were translated in the tables above based on their respective U.S. dollar exchange rates at December 31, 2007. These
future payments are subject to foreign currency exchange rate risk.
74
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Legal Proceedings. In 2000, Howmedica Osteonics Corp. (Howmedica), 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 and could impact a substantial portion of our knee product line. We believe, however, that we have
strong defenses against Howmedica’s claims and are vigorously defending this lawsuit. In November 2005, the court issued a
Markman ruling on claim construction. Howmedica has conceded to the court that, if the claim construction as issued was applied to
our knee product line, our products do not infringe their patent. Howmedica has appealed the Markman ruling, and this matter is now
on appeal to the U.S. Federal Circuit Court of Appeals. No trial date has been set in this matter. 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, 2007. These claims are covered in part by our patent infringement insurance. Management does not believe that the
outcome of this lawsuit will have a material adverse effect on our consolidated financial position or results of operations.
We are involved in separate disputes in Italy with a former agent and two former employees. Management believes that it has
meritorious defenses to the claims related to these disputes. The payment of any amount related to these disputes is not probable and
cannot be estimated at this time. Accordingly, no provisions have been made for these matters as of December 31, 2007.
We are involved in a dispute with a former consultant who is demanding payment of royalties on the sales of certain knee products.
We contend that the plaintiff breached his agreement, and therefore we owe no royalties to the plaintiff. In April 2006, the U.S.
District Court for the Eastern District of Massachusetts granted partial summary judgment in favor of the plaintiff, ruling that the
plaintiff did not breach his contract. A damages hearing was held in March 2007 and damages were set at $2.5 million plus interest of
approximately $140,000. Both parties have the right to appeal this ruling, and we have appealed the portion of the judgment issued in
favor of the plaintiff. We believe that we will prevail upon appeal and that an ultimate unfavorable resolution of this matter is not
probable; therefore, we have not accrued any amounts related to this matter as of December 31, 2007.
In November 2007, we received a ruling under binding arbitration involving a dispute with a former consultant who demanded
approximately $3.6 million for consulting payments under a contract that we terminated in 2005, as well as current and future royalties
for certain of our products. The consultant claimed that we wrongfully terminated our development contract. The arbitrator awarded
the former consultant $3.3 million plus interest at ten percent from December 17, 2005 until the award was paid; denied the
consultant’s claim for punitive damages; cancelled a related consulting agreement between the parties; and denied the consultant’s
claims for royalties for certain of our products. We recognized the $3.3 million award within “Selling, general, and administrative
expenses” and $665,000 within “Interest income, net” in our consolidated statement of operations during the year ended December 31,
2007.
On December 11, 2007, we received a subpoena from the U.S. Department of Justice (DOJ) through the U.S. Attorney for the District
of New Jersey requesting documents for the period January 1998 through the present related to any consulting and professional
service agreements with orthopaedic surgeons in connection with hip or knee joint replacement procedures or products. We are
cooperating fully with the DOJ request. We cannot estimate what, if any, impact this inquiry and any results from this inquiry could
have on our consolidated results of operations or financial position. We have not accrued any amounts related to this matter as of
December 31, 2007.
In addition to those noted above, we are 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 our consolidated results of operations or financial position.
75
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
18. Segment Data:
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
We have one reportable segment, orthopaedic products, which includes the design, manufacture and marketing of reconstructive joint
devices and biologics products. Our geographic regions consist of the United States, Europe (which includes the Middle East and
Africa) and Other (which principally represents Asia and Canada). Long-lived assets are those assets located in each region. Revenues
attributed to each region are based on the location in which the products were sold.
Net sales of orthopaedic products by product line and information by geographic region are as follows (in thousands):
Net sales by product line:
Hip products
Knee products
Biologics products
Extremity products
Other
Total
Net sales by geographic region:
United States
Europe
Other
Total
Operating income (loss) by geographic region:
United States
Europe
Other
Total
Long-lived assets:
United States
Europe
Other
Total
2007
Year Ended December 31,
2006
2005
$134,251
102,334
76,029
62,302
11,934
$386,850
$122,073
94,079
65,455
45,044
12,287
$338,938
$235,748
96,336
54,766
$386,850
$211,015
82,197
45,726
$338,938
$109,267
94,073
62,358
40,594
12,845
$319,137
$197,548
80,374
41,215
$319,137
$ 13,911
(22,835)
10,378
1,454
$
$ 18,752
(7,563)
8,242
$ 19,431
$ 32,464
(5,633)
6,650
$ 33,481
December 31,
2007
2006
$71,764
18,605
8,668
$99,037
$59,709
20,055
6,501
$86,265
No single foreign country accounted for more than 10% of our total net sales during 2007, 2006 or 2005; however, the largest single
foreign country represented approximately 7%, 7% and 6% of our total net sales in 2007, 2006 and 2005, respectively.
76
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
During 2007, we recognized restructuring charges associated with the closure of our facility in Toulon, France. Our U.S. region
recognized $2.5 million of restructuring charges in 2007 and our European region recognized $16.4 million of restructuring charges in
2007. Additionally, our U.S. region recognized a $3.3 million charge in 2007 as a result of an unfavorable ruling under binding
arbitration, as described in Note 17.
Effective January 1, 2006, we adopted SFAS 123R, which replaced SFAS No. 123 and supersedes APB Opinion No. 25, and requires
recognition of the fair value of an award of equity instruments granted in exchange for employee services as a cost of those services.
We elected the modified prospective method of transition, under which prior periods are not revised for comparative purposes. As a
result, 2007 and 2006 amounts are not comparable to prior years. Our U.S. region recognized non-cash, stock-based compensation
expense within operating income of $14.2 million in 2007 and $11.7 million in 2006, compared to $467,000 in 2005. Our European
geographic region recognized $1.9 million in 2007 and $1.4 million in 2006 of non-cash, stock-based compensation expense within
operating income. Stock-based compensation expense was not recognized in our European geographic region in 2005.
During the year ended December 31, 2005, our European geographic region incurred charges of approximately $1.5 million related to
the write down of certain inventory due to the termination of an agreement to distribute certain third party spinal products in Europe,
charges of approximately $1.5 million associated with a European distributor transition and the associated legal dispute, and charges
of approximately $800,000 for severance costs associated with management changes.
19. Quarterly Results of Operations (unaudited):
The following table presents a summary of our unaudited quarterly operating results for each of the four quarters in 2007 and 2006,
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
Cost of sales — restructuring
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Amortization of intangible assets
Restructuring charges
Total operating expenses
Operating income (loss)
Net income (loss)
Net income (loss) per share, basic
Net income (loss) per share, diluted
First
Quarter
$94,287
26,965
—
67,322
53,926
8,102
855
—
62,883
$ 4,439
$ 3,189
0.09
$
0.09
$
2007
Second
Quarter
$98,008
28,770
—
69,238
56,307
6,853
970
7,539
71,669
$ (2,431)
$ (2,090)
$ (0.06)
$ (0.06)
Third
Quarter
$91,399
24,268
—
67,131
54,573
7,151
968
6,966
69,658
$ (2,527)
$ (1,522)
$ (0.04)
$ (0.04)
Fourth
Quarter
$103,156
28,404
2,139
72,613
61,123
6,299
989
2,229
70,640
1,973
$
1,384
$
0.04
$
0.04
$
77
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Amortization of intangible assets
Total operating expenses
Operating income
Net income
Net income per share, basic
Net income per share, diluted
First
Quarter
$86,256
23,393
62,863
49,486
7,343
1,146
57,975
$ 4,888
$ 2,309
0.07
$
0.07
$
2006
Second
Quarter
$87,492
26,335
61,157
48,416
6,476
1,121
56,013
$ 5,144
$ 2,750
0.08
$
0.08
$
Third
Quarter
$78,637
22,517
56,120
45,494
6,175
987
52,656
$ 3,464
$ 3,605
0.10
$
0.10
$
Fourth
Quarter
$86,553
24,989
61,564
49,177
5,557
895
55,629
$ 5,935
$ 5,747
0.16
$
0.16
$
We incurred the after-tax effect of $18.9 million of charges associated with our restructuring activities during the year ended
December 31, 2007, of which we recognized $7.5 million, $7.0 million and $4.4 million during the second, third and fourth quarters of
2007, respectively. See Note 16 for further information regarding these restructuring charges.
Our operating income for the fourth quarter of 2007 included a $3.3 million charge resulting from an unfavorable ruling under binding
arbitration. Our net income for the fourth quarter of 2007 included the after-tax effect of this amount plus $665,000 of interest. See
Note 17 for further information regarding this judgment.
Our net income for the third quarter of 2006 included a $1.5 million gain recognized on the sale of an investment and our net income
for the fourth quarter of 2006 included a $1.4 million tax benefit recognized upon the resolution of foreign tax circumstances.
78
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
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 that 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 to allow timely decisions regarding required disclosure. 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, 2007. 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, 2007, 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 SEC’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. 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, 2007, 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, 2007. Our internal control over financial reporting as of December 31, 2007, has been
audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Changes in Internal Control Over Financial Reporting
During the three months ended December 31, 2007, there were no significant changes in our internal control over financial reporting
that materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
Item 9A(T). Controls and Procedures.
Not applicable.
Item 9B. Other Information.
Not applicable.
79
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
Item 10. Directors, Executive Officers, and Corporate Governance.
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, 2007, pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the annual meeting of
stockholders to be held on May 14, 2008.
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, 2007, pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the annual meeting of
stockholders to be held on May 14, 2008.
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, 2007, pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the annual meeting of
stockholders to be held on May 14, 2008.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is incorporated by reference from the definitive proxy statement to be filed within 120 days after
December 31, 2007, pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the annual meeting of
stockholders to be held on May 14, 2008.
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, 2007, pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the annual meeting of
stockholders to be held on May 14, 2008.
80
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
Item 15. Exhibits and Financial Statement Schedules.
Financial Statements
See Index to Consolidated Financial Statements in “Financial Statements and Supplementary Data.”
PART IV
Financial Statement Schedules
See Schedule II — Valuation and Qualifying Accounts on page S-2 of this report.
Index to Exhibits
Exhibit
No.
3.1
3.2
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
Description
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. (2)
Second Amended and Restated By-laws of Wright Medical Group, Inc. (3)
Form of Common Stock certificate. (1)
Indenture, dated as of November 26, 2007, between Wright Medical Group, Inc. and The Bank of New York as trustee
(including form of 2.625% Convertible Senior Notes due 2014). (4)
Underwriting Agreement, dated as of November 19, 2007, among Wright Medical Group, Inc. and J.P. Morgan
Securities Inc., Piper Jaffray & Co., and Wachovia Capital Markets, LLC. (4)
Credit Agreement dated as of June 30, 2006, among Wright Medical Group, Inc., its domestic subsidiaries, the lenders
named therein, Bank of America, N.A., and SunTrust Bank., (5) as amended by First Amendment to Credit Agreement
dated as of November 16, 2007. (6)
Fourth Amended and Restated 1999 Equity Incentive Plan (the 1999 Plan). (7)
Form of Incentive Stock Option Agreement, as amended by form of Amendment No. 1 to Incentive Stock Option
Agreement, pursuant to the 1999 Plan. (1)
Form of Non-Qualified Stock Option Agreement pursuant to the 1999 Plan. (1)
Form of Executive Stock Option Agreement pursuant to the 1999 Plan. (8)
Form of Non-Employee Director Stock Option Agreement pursuant to the 1999 Plan. (8)
Wright Medical Group, Inc. Executive Performance Incentive Plan. (9)
Form of Indemnification Agreement between Wright Medical Group, Inc. and its directors and executive officers. (1)
Employment Agreement dated as of July 1, 2004, between Wright Medical Technology, Inc. and Laurence Y. Fairey,
(10) as amended by First Amendment to Employment Agreement dated as of April 4, 2005. (11)
Employment Agreement dated as of November 22, 2005, between Wright Medical Technology, Inc. and F. Barry
Bays,(12) as amended by Employment Agreement Amendment dated as of March 31, 2007. (13)
Employment Agreement dated as of November 22, 2005, between Wright Medical Technology, Inc. and Jeffrey G.
Roberts. (12)
Employment Agreement dated as of November 22, 2005, between Wright Medical Technology, Inc. and John K.
Bakewell,(12) as amended by Employment Agreement Amendment dated as of March 31, 2007. (13)
10.13
Employment Agreement dated as of April 1, 2007, between Wright Medical Technology, Inc. and John R. Treace. (13)
10.14
Employment Agreement dated as of November 22, 2005, between Wright Medical Technology, Inc. and Jason P.
Hood,(14) as amended by Employment Agreement Amendment dated as of March 31, 2007. (13)
10.15
Employment Agreement dated as of April 4, 2006, between Wright Medical Technology, Inc. and Gary D. Henley. (15)
10.16
Severance and Release Agreement dated as of October 5, 2005, between Wright Medical Technology, Inc. and Laurence
Y. Fairey. (16)
81
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
Exhibit
No.
10.17
11
12
14
21
23
Description
Severance and Release Agreement dated as of March 31, 2007, between Wright Medical Technology, Inc. and Jeffrey G.
Roberts. (13)
Computation of earnings per share (included in Note 12 of the Notes to Consolidated Financial Statements in “Financial
Statements and Supplementary Data”).
Ratio of Earnings to Fixed Charges
Code of Ethics. (17)
Subsidiaries of Wright Medical Group, Inc. (18)
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.
(1) Incorporated by reference to our Registration Statement on Form S-1 (Registration No. 333-59732), as amended.
(2) Incorporated by reference to our Registration Statement on Form S-8 filed on May 14, 2004.
(3) Incorporated by reference to our current report on Form 8-K filed on February 19, 2008.
(4) Incorporated by reference to our current report on Form 8-K filed on November 26, 2007.
(5) Incorporated by reference to our current report on Form 8-K filed on July 7, 2006.
(6) Incorporated by reference to our current report on Form 8-K filed on November 21, 2007.
(7) Incorporated by reference to our definitive Proxy Statement filed on April 13, 2005.
(8) Incorporated by reference to our current report on Form 8-K filed on April 27, 2005.
(9) Incorporated by reference to our current report on Form 8-K filed on February 10, 2005.
(10) Incorporated by reference to our quarterly report on Form 10-Q for the quarter ended June 30, 2004.
(11) Incorporated by reference to our current report on Form 8-K filed on April 7, 2005.
(12) Incorporated by reference to our current report on Form 8-K filed on November 22, 2005.
(13) Incorporated by reference to our current report on Form 8-K filed on April 5, 2007.
(14) Incorporated by reference to our quarterly report on Form 10-Q filed on May 2, 2006.
(15) Incorporated by reference to our current report on Form 8-K filed on March 22, 2006.
(16) Incorporated by reference to our current report on Form 8-K filed on October 6, 2005.
(17) Incorporated by reference to our current report on Form 8-K filed on March 31, 2004.
(18) Incorporated by reference to our annual report on Form 10-K for the year ended December 31, 2006.
82
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
February 26, 2008
SIGNATURES
WRIGHT MEDICAL GROUP, INC.
By:
/s/ Gary D. Henley
Gary D. Henley
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 capacity and on the dates indicated.
Signature
/s/ Gary D. Henley
Gary D. Henley
/s/ John K. Bakewell
John K. Bakewell
/s/ F. Barry Bays
F. Barry Bays
/s/ Martin J. Emerson
Martin J. Emerson
/s/ Lawrence W. Hamilton
Lawrence W. Hamilton
/s/ John L. Miclot
John L. Miclot
/s/ Robert J. Quillinan
Robert J. Quillinan
/s/ David D. Stevens
David D. Stevens
/s/ Thomas E. Timbie
Thomas E. Timbie
/s/ James T. Treace
James T. Treace
Title
Date
President, Chief Executive Officer and Director
(Principal Executive Officer)
February 26, 2008
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
Executive Chairman of the Board and Former
President and Chief Executive Office
Director
Director
Director
Director
Director
Director
Director
83
February 26, 2008
February 26, 2008
February 26, 2008
February 26, 2008
February 26, 2008
February 26, 2008
February 26, 2008
February 26, 2008
February 26, 2008
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
The Board of Directors and Stockholders
Wright Medical Group, Inc.:
Report of Independent Registered Public Accounting Firm
Under date of February 26, 2008, we reported on the consolidated balance sheets of Wright Medical Group, Inc. and subsidiaries (the
Company) as of December 31, 2007 and 2006, 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, 2007. These
consolidated financial statements, and our report thereon, are included in the annual report on Form 10-K for the year ended
December 31, 2007. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related
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.
As discussed in Notes 2 and 11 to the consolidated financial statements, effective January 1, 2007, the Company changed its method
of accounting for uncertainty in income taxes as required by FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes. Also as discussed in Notes 2 and 14 to the consolidated financial statements, effective January 1, 2006, the Company adopted
the fair value method of accounting for stock-based compensation as required by Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment, and as discussed in Note 2 to the consolidated financial statements, the Company
changed its method of quantifying errors in 2006.
Memphis, Tennessee
February 26, 2008
(signed) KPMG LLP
S-1
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Table of Contents
Allowance for doubtful accounts:
For the period ended:
December 31, 2007
December 31, 2006
December 31, 2005
Sales returns and allowance:
For the period ended:
December 31, 2007
December 31, 2006
December 31, 2005
Wright Medical Group, Inc.
Schedule II-Valuation and Qualifying Accounts
(In thousands)
Balance at
Beginning
of Period
Charged to
Cost and
Deductions
Balance
at End of
Expenses
and Other
Period
$ 2,850
$ 1,997
$ 1,820
$ 2,339
820
$
510
$
12
$
$
33
$ (333)
$ 5,201
$ 2,850
$ 1,997
$
$
$
350
434
395
$
$
$
214
(84)
39
$ —
$ —
$ —
$
$
$
564
350
434
S-2
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
EXHIBIT 12
Wright Medical Group, Inc.
Ratio of Earnings to Fixed Charges
The following table presents our historical ratios of earnings to fixed charges for the years ended December 31 of the years indicated.
We compute this ratio by dividing the sum of earnings before income taxes and fixed charges by fixed charges. Fixed charges
represent interest expense, amortization of debt issuance costs and the interest factor of all rentals, consisting of an appropriate interest
factor on operating leases.
Ratio of earnings to fixed charges
2007(1),(2)
1.8
2006(2)
9.6
2005
13.9
2004
15.9
2003
13.9
Year Ended December 31,
(1) In June 2007, we announced our plans to close our facilities in Toulon, France. During the year ended December 31, 2007, we
recognized $18.9 million of restructuring charges related to this closure. For further discussion of our restructuring charges, see
Note 16 to our consolidated financial statements in “Financial Statements and Supplementary Data.”
(2) Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based
Payment, which requires stock-based compensation costs to be measured using the grant date fair value and recognized as
expense over the vesting period. We elected the modified prospective method of transition, under which prior periods are not
revised for comparative purposes. As a result, 2007 and 2006 amounts are not comparable to prior years.
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
EXHIBIT 23
The Board of Directors
Wright Medical Group, Inc.:
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the registration statements (No. 333-147487) on Form S-3 and (Nos. 333-75176,
333-90024, 333-108638, 333-115541, and 333-125231) on Form S-8 of Wright Medical Group, Inc. of our reports dated February 26,
2008, with respect to the consolidated balance sheets of Wright Medical Group, Inc. and subsidiaries as of December 31, 2007 and
2006, 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, 2007, and the financial statement schedule, and the
effectiveness of internal control over financial reporting as of December 31, 2007, which reports appear in the December 31, 2007
annual report on Form 10-K of Wright Medical Group, Inc.
As discussed in Notes 2 and 11 to the consolidated financial statements, effective January 1, 2007, the Company changed its method
of accounting for uncertainty in income taxes as required by FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes. Also as discussed in Notes 2 and 14 to the consolidated financial statements, effective January 1, 2006, the Company adopted
the fair value method of accounting for stock-based compensation as required by Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment, and as discussed in Note 2 to the consolidated financial statements, the Company
changed its method of quantifying errors in 2006.
(signed) KPMG LLP
Memphis, Tennessee
February 26, 2008
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(a) UNDER
THE SECURITIES EXCHANGE ACT OF 1934
I, Gary D. Henley, certify that:
1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2007, 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: February 26, 2008
/s/ Gary D. Henley
Gary D. Henley
President and Chief Executive Officer
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
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, 2007, 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: February 26, 2008
/s/ John K. Bakewell
John K. Bakewell
Executive Vice President and Chief Financial Officer
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008
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, Gary D. Henley 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, 2007, of Wright Medical Group, Inc. (the Company) fully complies with the
requirements of Section 13(a) of the Exchange Act, and (2) the information contained in this report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: February 26, 2008
/s/ Gary D. Henley
Gary D. Henley
President and Chief Executive Officer
/s/ John K. Bakewell
John K. Bakewell
Executive Vice President and Chief Financial Officer
_______________________________________________
Created by 10KWizard www.10KWizard.com
Source: WRIGHT MEDICAL GROUP, 10-K, February 26, 2008