Wright Medical Group Inc Annual Report 2009

FY2009 Annual Report · Wright Medical Group Inc

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2009 Annual Report Wright Medical Group, Inc.

(1) 2009 adjusted results presented above exclude $13.2 million ($9.3 million after tax eﬀect) of non-cash, stock-based compensation expense. The 2009 adjusted results presented above
also exclude $7.8 million ($5.1 million after tax eﬀect) of charges related to the ongoing U.S. governmental inquiries, $3.5 million ($275,000 after tax eﬀect) of restructuring charges associated
with the closure of our Toulon, France operations and Creteil, France operations, $2.6 million write oﬀ of the cumulative translation adjustment balances from certain subsidiaries following the
substantially complete liquidation of these entities, $5.6 million ($3.8 million after tax eﬀect) provision recorded in 2009 for potential losses related to the trade receivable balance of our stock-
ing distributor in Turkey, and $70,000 ($43,000 after tax eﬀect) of acquisition-related inventory step-up amortization.

(2) 2008 adjusted results presented above exclude $13.5 million ($9.8 million after tax eﬀect) of non-cash, stock-based compensation expense, $11.2 million tax provision associated with the
write-oﬀ of net operating losses in France, $7.6 million ($4.7 million after tax eﬀect) of charges related to the ongoing U.S. governmental inquiries, $6.7 million ($3.3 million after tax eﬀect)
of restructuring charges associated with the closure of our Toulon, France operations, $2.6 million ($1.6 million after tax eﬀect) for charges relating to an unfavorable appellate court decision
(including interest), $2.5 million of acquired in-process research and development costs, and $113,000 ($69,000 after tax eﬀect) of acquisition-related inventory step-up amortization.

(3) 2007 adjusted results presented above exclude $18.9 million ($12.5 million after tax eﬀect) of restructuring charges associated with the closure of our Toulon, France operations, $16.5 mil-
lion ($12.9 million after tax eﬀect) of non-cash, stock-based compensation expense, $3.9 million ($2.4 million after tax eﬀect) of charges related to an unfavorable arbitration ruling (including
interest), and $418,000 ($253,000 after tax eﬀect) of acquisition-related inventory step-up amortization.

(4) 2006 adjusted results presented above exclude $13.8 million ($10.9 million after tax eﬀect) of non-cash, stock-based compensation expense, a $1.5 million ($1.4 million after tax eﬀect) gain
on the sale of an investment, and a $1.1 million income tax beneﬁt.

(5) 2005 adjusted results presented above exclude $1.7 million ($1.2 million after tax eﬀect) of severance costs associated with management changes in our U.S. and European operations, $1.5
million ($1.0 million after tax eﬀect) of costs incurred to write down inventory to its net realizable value and $139,000 ($96,000 after tax eﬀect) of costs incurred to write down to net realizable
value surgical instrumentation related to this inventory due to the termination of an agreement to distribute certain third party spinal products in Europe, $694,000 ($476,000 after tax eﬀect) to
write down a long-lived asset to its fair value following its reclassiﬁcation to assets held-for-sale, and $467,000 ($287,000 after tax eﬀect) of non-cash, stock-based compensation.

2009 Annual Report Wright Medical Group, Inc. | 1

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“ . . . we have put ourselves in a better position to

face the challenges of tomorrow and to deliver

on our commitment to always do what’s right

for our patients, surgeons, healthcare customers,

shareholders and employees.”

Gary D. Henley, President and Chief Executive Oﬃcer

Letter To Our Stockholders
2009 . . . A Year of Challenge and Endurance

By most accounts 2009 was a year of unprecedented challenge
for businesses around the world. As the year started, the global
economy and ﬁnancial industries began experiencing the
greatest period of turmoil in recent history. Credit markets were
in disarray, unemployment rates were beginning to increase
sharply, the dollar weakened dramatically and healthcare reform
became the topic of the day. Those turbulent times were diﬃcult
for our industry in general and especially for Wright Medical as
a small market-share player. In response, we looked internally
and focused on the basics of our company. We identiﬁed and
implemented changes resulting in cost improvements, eﬃciency
in our manufacturing, operations and procedures, better speed
to market with our products, and signiﬁcant expansion and
enhanced performance of our global distribution network.

As we reﬂect on 2009, I am happy to say that we not only survived
that period of challenge, but we actually entered 2010 with a
more solid business than ever. As you will see in this letter to
our stockholders and throughout this annual report, we worked
hard to strengthen our foundation and ensure our ability to
remain a vibrant and competitive growth company in the global
orthopaedic marketplace.

Continuing Our Sound Financial Performance

From a ﬁnancial perspective, 2009 was a year of solid performance.
Our global revenues of $487.5M grew 5% over 2008 despite the
credit crisis and economic downturn. Our U.S. sales grew 6%
over prior year and was led by our extremities line of products,
which grew 25% over prior year. Our international business
grew at 2% year over year, led by continued good performance
by our Japanese subsidiary. Throughout 2009, we focused on
working capital management and that eﬀort produced a record
$34.6M free cash ﬂow for the year ($71.8M cash from operations

less $37.2M of capital expenditures), which is more than a
$100M improvement year over year. This cash generation
resulted in a year-ending cash and marketable securities
balance of $171M.

Building Growth and Leadership
in Extremities and Biologics

During 2009 we continued to execute our strategy to be
the leader in the high growth, high margin Extremities
and Biologics markets. Exiting 2009, we achieved 11
consecutive quarters of growth in U.S. extremities of 20%
or better on an ever-increasing base. This outstanding
performance is a result of our commitment to the strategy
we implemented in early 2007, which is founded on
building the following three components:

1. The most comprehensive product portfolio in the

industry;

2. The industry’s largest, most-focused and
highly-skilled distribution network; and

3. A very eﬀective and relevant Medical Education
Department.

As well as our overall Extremities and Biologics business
performed in 2009, it was our Foot & Ankle market segment
that played the leading role. Committed to our strategy,
we continued to expand our market-leading Foot & Ankle
product portfolio with the addition of key products,
including the CHARLOTTE™ LisFranc Reconstruction
System, G-FORCE® Foot and Ankle Tenodesis System,
BIOFOAM® Evans Foot and Ankle Wedge System, DART-
FIRE™ Compression Screws, ORTHOLOC™ Calcaneal
Fracture System, ORTHOLOC™ 2.0/2.4 Forefoot Plate
System, and the VALOR™ Hindfoot Fusion Nail System.

2009 Annual Report Wright Medical Group, Inc. | 3

These additions to our already robust portfolio give us, by a
wide margin, the most comprehensive product oﬀering of any
company in the Foot & Ankle market segment.

On the distribution front, we continued to expand our U.S. Foot
& Ankle sales force, ending 2009 with over 100 focused and
highly trained sales representatives. To achieve the geographic
sales coverage and market penetration we envision, we intend
to continue our Foot & Ankle sales force expansion throughout
the next two years, at least. I should also add that this sales force
specialization has had a positive eﬀect on the other market
segments of our business, as well. In general, we have found that
a focused sales force is a much more productive sales force.

With regard to medical education, we have a highly eﬀective
program driven by a world-class department of professionals.
In 2009, we increased the number of Foot & Ankle education
opportunities. As a result, we trained over 800 surgeons on our
products. And, we intend to further expand both the number
of events and the number of surgeons trained in 2010 and
beyond.

As we continue to bring focus to the upper extremities market
segment, we launched a number of new products in this portfolio.
The additions included a second generation MICRONAIL® II Distal
Radius Implant, the RAYHACK® Ulnar Shortening Osteotomy
System, the RAYHACK® Kienbock’s Radial Shortening Osteotomy
System, and the RAYHACK® Radial Malunion Distraction
Osteotomy System. The upper extremities segment continues
to be an area of interest to the company and we have plans to
expand our product oﬀering throughout 2010 and beyond.

On the biologics front, we introduced a number of new oﬀerings.
Innovations included the PRO-DENSE® Core Decompression
Kit, the ALLOPURE™ Wedge, PRO-STIM™ Bone Graft Substitute,
and our new xenograft soft tissue material, BIOTAPE® XM
Reinforcement Matrix. Our biologic products continue to grow
as stand-alone solutions and as supporting products in complex
implant procedures.

Expanding Solutions within Our Large Joint Line

First on the list of accomplishments in 2009 is the long-awaited
FDA “PMA” (or Pre-Market Approval) of our original design of

the CONSERVE® PLUS Hip Resurfacing System. We are excited
about the approval and launch of this fantastic product. Since
the inception of our original resurfacing innovation, there
have been signiﬁcant improvements. We plan to submit PMA
supplements to the FDA in the coming months in an eﬀort to
have those product advances cleared for marketing.

We are also very pleased to have launched the much-anticipated
DYNASTY® BIOFOAM™ Cancellous Titanium Acetabular Cup
System, which features our proprietary bone-like titanium foam
with a roughened texture that provides incredibly eﬀective
cementless ﬁxation. The BIOFOAM™ material is a unique and
valuable asset in our product portfolio and one that we intend
to utilize with other implants in the future.

We continued to add to our industry-leading PROFEMUR® hip
product line with the introduction of the PROFEMUR® L and
PROFEMUR® Z Revision stems and the PROFEMUR® FC Primary
stem. Additionally, we expanded our CONSERVE® family of
products by launching the CONSERVE® Press-Fit cup, which
oﬀers a cementless option of the CONSERVE® PLUS femoral
component.

On the knee side of the large joint implant market, we introduced
the PROPHECY® Pre-operative Navigational Guides for total knee
replacement. This internally-developed, proprietary technology
provides surgeons with a low-cost, customized, minimally-
invasive alternative to traditional sizing instrumentation and
expensive computer-aided navigation systems. The PROPHECY®
protocol has already resulted in a signiﬁcant impact in our knee
business and we expect even greater results as we increase our
internal capacity to meet demand. Although the PROPHECY®
technology is currently used only for total knee replacement,
it is envisioned to be applicable for various other implant
procedures, such as ankle, shoulder or hip replacement surgery
— all of which we intend to explore in the future.

large

joint research,
There are a number of additional
development and design projects underway in our R&D
Department that will come to fruition over the coming months
and years. Knowing the pioneering concepts that drive those
initiatives, I am very conﬁdent that we will continue to exhibit
the product and technology innovation that have helped make
Wright great.

4 | 2009 Annual Report Wright Medical Group, Inc.

Making the Right Choices for Infrastructure Growth

invest

in and

improve our

From an infrastructure perspective, we continued throughout
2009 to
internal capabilities.
Speciﬁc projects included expanding our Arlington, Tennessee
facilities, purchasing a new building that will become a world-
class distribution center, investing in Information Technology
upgrades, Lean Six Sigma initiatives, completing a remodel
and automation of our foundry to increase capacity and lower
costs, and focused eﬀorts in Europe to make our customer
service, logistics and distribution more eﬃcient. Through these
activities and many others, we have been focused on improving
our internal systems and capabilities to allow us to better serve
our customers and to be more competitive.

Throughout the year, we also continued our cooperation with
the U.S. Department of Justic, the Oﬃce of Inspector General
of the U.S. Department of Health & Human Services, and the
U.S. Securities and Exchange Commission in relation to their
ongoing investigations within our industry. Internally, the
addition of considerable I.T. and Human Resources has allowed
us to make great strides toward our objective of developing
and implementing a robust and eﬀective global compliance
department.

Optimizing Our Management Team’s Talent

At the end of 2009 and beginning of 2010, we made a number
of organizational changes that will allow our management
team to address the needs and demands of our dynamic
growth company. These changes were implemented as part
of our overall growth and succession plan and involved many
seasoned veterans within the company being challenged with
even larger roles. I have watched this team come together, grow
and perform over the past years and I am conﬁdent that they
can continue to execute our strategy and deliver on our plans
to keep Wright an innovative, competitive and exciting growth
company.

Doing What’s Right For the Community

Despite the challenging economic climate, I am proud to say that
we maintained a generous level of support within our community
in 2009. We strengthened our long-standing relationship with
the Arthritis Foundation by providing over $19,000 to our local

chapter throughout the year. We also continued our support of
an amazing outreach organization called Operation Walk, which
provides life-changing joint replacement surgery for people in
developing countries. Our involvement included the provision
of over $70,000 in orthopaedic implants and instrumentation
for a medical mission trip to Quito, Ecuador.

Throughout 2009, our employees joined in the community
support by donating over $10,000 to charitable organizations
through fundraisers hosted by Wright. They also frequently
shared their time as volunteers and participants in various
awareness events throughout the year. In total, over 30
organizations beneﬁted from our monetary support in 2009.

As the non-proﬁt sector was among the hardest hit during
last year’s sluggish economy, we were pleased to help many
organizations continue to work toward their respective
meaningful missions.

Continuing on the Right Path

2009 was indeed a year of unprecedented challenge. But we
responded to those challenges in the manner that you have
come to expect: we improved. Through strengthening our
infrastructure, continuing product introduction and technology
innovation, improving our overall ﬁnancial position, increasing
our leadership position in the Foot & Ankle market, and
reorganizing the management team, we have put ourselves
in a better position to face the challenges of tomorrow and to
deliver on our commitment to always do what’s right for our
patients, surgeons, healthcare customers, shareholders and
employees.

On behalf of all our dedicated employees located around the
world, I would like to say “thank you” for your trust and support
during a challenging time — and for the opportunity to make a
diﬀerence as part of this wonderful company.

Sincerely,

Gary D. Henley
President and Chief Executive Oﬃcer

2009 Annual Report Wright Medical Group, Inc. | 5

“The surgery was really nothing at all.”

Sheila is an energetic aerobics and fitness
instructor who competes in numerous
fitness shows each year. In addition to
her aerobics hobby, which keeps her very
busy, Sheila is an anesthesiologist who
works with Dr. Mark Warburton, the
co-inventor of the MICRONAIL® Distal
Radius Fixation System.

Over the summer, while attending a
three-day fitness conference, Sheila was
preparing to go onstage to perform a
choreographed routine when she lost
her balance on the stairs and put her left
hand out to catch herself. She missed the
railing and landed on her wrist.

At first Sheila did not think anything of
the fall and she continued her activities
at the show. Her wrist was a little sore,
but it did not limit or interfere with
her demonstrations. On the following

Monday, Sheila went to work at the
hospital as usual. During the day, as the
pain increased and her wrist swelled,
Sheila decided she should have an X-ray,
which confirmed that she had, in fact,
fractured her wrist. After consulting
with Dr. Warburton, he suggested that
she be treated with the MICRONAIL®
implant.

Sheila had wrist surgery on a Friday
and, by Monday morning, was already
back to work at the hospital. According
to Sheila, “The surgery was really
nothing at all.” And she was thrilled to
learn after the surgery that she did not
have to struggle with a cast, and could
resume normal activities as she felt able.
“The recovery process was very easy and
fast. I would say I was completely healed
six weeks after surgery.”

“Working for Wright is one of

the most fulfilling jobs around

because of the technology, the

product itself, and the intrinsic

value of helping to improve
someone’s quality of life.”

Phil, Sr. Director – Manufacturing

Wright. For You.

Phil is deﬁnitely a veteran of the medical device manufacturing industry. Twenty-ﬁve
years ago, he joined the Wright family as a second shift Machinist. Now he manages
numerous areas within the company’s ever-expanding manufacturing facilities,
including our upper extremity production groups. “We have an outstanding team of
manufacturing professionals. Many of them have been with this company for 20 years
or more,” says Phil.

He’s proud of Wright’s seasoned production staﬀ and knows what a tremendous asset
they are for our business and our customers. Wright’s highly-skilled manufacturing
professionals stay energized through their continual exposure to new technologies and
challenges; but they stay passionate because they know their jobs have a real impact
on people’s lives. As Phil explains, “Working for Wright is one of the most fulﬁlling jobs
around because of the technology, the product itself, and the intrinsic value of helping
to improve someone’s quality of life.”

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“I feared my recovery would be unbearable, but I felt no discomfort.”

Working on a golf course is seldom
considered a hazardous occupation, but
Ike, a 62-year-old golf ball diver, nearly
lost his life while diving on a golf course
in Florida. He was viciously attacked
by an 11-foot, 400 pound alligator while
diving at a Tampa golf course.

One fateful evening, Ike jumped into
the pond not realizing an alligator was
hiding down below the surface of the
murky water. Part way through his dive,
Ike felt a mind-numbing pain strike his
left shoulder as a set of alligator teeth
clamped down on his shoulder piercing
through his wetsuit all the way down
through the joint.

Ike jabbed his thumb deep into the
alligator’s eye, twisting it as he attempted
to set himself free. After a few more

struggles, Ike was able to break away
and call for help.

Once in the emergency room,
physicians discovered that the alligator
had shredded Ike’s entire rotator cuff
to pieces, completely dislocating his
shoulder. The on-call doctor that night
knew that he was not well-equipped
to repair the damage then but, was
able to stitch together Ike’s shoulder
enough to allow it to rest in a brace. He
urged Ike to see an orthopaedic surgeon
immediately.

Regenerative Tissue Matrix to augment
the repair of Ike’s shoulder because
of the high suture retention strength,
which was crucial for allowing Ike to
regain any function in his shoulder.

Ike feared his recovery would be
unbearable as his family and friends
warned him about the discomfort
associated with rotator cuff surgery.
However, Ike felt no pain or discomfort
during his entire recovery. In fact,
he took only aspirin to relieve any
tightening or swelling he felt.

Ike was recommended to Dr. Louis
Starace through an old friend. Upon
examining him, Dr. Starace knew that
there was only one application strong
enough to augment Ike’s shoulder.
He chose to use GRAFTJACKET®

A mere seven months after the alligator
attack, Ike’s shoulder completely healed,
returning his arm to full functionality. “I
couldn’t be happier with the results,” Ike
says. “I had a great surgeon who did the
right thing.”

2009 Annual Report Wright Medical Group, Inc. | 9

“Finding this treatment was a huge relief.”

When Barbara underwent a routine
surgery to remove a bone spur, her doctor
explained that she would probably need
about four to six weeks of recovery time.

During Barbara’s follow-up exam, her
doctor noticed that her incision was
not healing as quickly as it should. He
instructed her to keep the wound clean,
gave her medicated gauze to pack the
wound and ordered her to keep weight
off her foot in order to get the wound to
close. Eight weeks after her surgery, the
wound still did not close. “It was scary,
everything started snowballing,” Barbara
said.

Barbara returned to her podiatrist who
discovered that the cause of her healing
difficulties was neuropathy. Neuropathy
causes limited blood flow in the legs and

is a common side effect of diabetes.
After controlling her diabetes
successfully for more than 22 years,
Barbara was surprised to discover the
disease was causing her such trouble.

Dr. Popovici recommended Barbara try
a new medical technology from Wright
called GRAFTJACKET® Regenerative
Tissue Matrix, a biological grafting
material made from uniquely processed
human skin which allows the body to
rebuild areas of missing tissue.

GRAFTJACKET® Matrix was designed
to assist in wound closure and is often
used to treat chronic ulcers in the feet of
diabetic patients. Barbara agreed to try
this new treatment and, six weeks later,
Barbara’s wound had completely closed
and she was able to return to work.

“You always have to think,

‘What if my loved one was on

the operating table ...’ ”

Cora, Technician III – Biologics

Wright. For You.

Cora has worked with Wright for over 20 years and says it has never been boring. That’s
because she has often worked in areas of high growth, like biologics. She has been part
of Wright’s biologics production team since it began and that has given her constant
exposure to new challenges. When the company ﬁrst entered the biologics market,
the products were made from synthetic materials, like calcium sulfate. Cora says that
when the product line was expanded to include human tissue-based formulations, she
was intrigued. “Being in contact with the tissue-based products is really neat,” she says.
“I actually think I would like to be an organ donor now that I see what a diﬀerence it
can make.”

Cora also notes that everyone on the team is acutely aware of the responsibility for
quality that comes with processing product in the biologics area. As she explains, “You
always have to think, ‘What if my loved one was on the operating table and there was
a problem with the product the surgeon needed to use?’ We just can’t let that happen
– to anyone.”

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2009 Annual Report Wright Medical Group, Inc. | 11

“Each day is ﬁlled with so much promise.”

Craig was diagnosed with juvenile
rheumatoid arthritis at an early age.

Juvenile rheumatoid arthritis is an
autoimmune disease that damages and
eventually destroys the joints of the body.
It has no known cause. Joints, such as
the knee, suffer from inflammation that
causes pain, stiffness and swelling.

Treatment started at a young age for
Craig and, over the years, he wore splints
and braces and participated in tough
physical and water therapy sessions.
However, the disease progressed and,
eventually, Craig was confined to a
wheelchair.

At age 18, Craig graduated from high
school, which was a very proud day for
him and his family. However, graduating
also meant the loss of his social network
and support system. As a result, Craig
became depressed.

During the summer of 2008, Craig
and his mother met with orthopaedic
surgeon Dr. Timothy Krahn who
suggested a Wright ADVANCE® Medial-
Pivot implant for his knee replacement.
The results of his first knee surgery were
so incredible that within six months
Craig had his other knee replaced.

Since having double knee replacements,
Craig’s life has taken a 180 degree turn.
Instead of listening to his brother and
friends talk about their weekend plans,
Craig is participating in an active social
life. He is attending concerts, football
games and church; and he has assumed
responsibility for walking the family
dog. As he regained his independence,
his family noticed his depression lift and
the Craig they remembered gradually
reemerged.

“A surgeon wants to do the best

thing he can for the patient.

[This] technology allows a surgeon

to envision the results of a surgery

and deliver the best results.”

Alex, Director of Knee Marketing

Wright. For You.

Alex is an important part of the communication process between Wright and its
surgeons. As a member of Wright’s Knee Marketing team for over 10 years, he has
developed a keen sense for what surgeons need to make knee replacement surgery
more eﬃcient and more eﬀective for their patients. That is why he is so enthusiastic
about Wright’s new PROPHECY® Pre-operative Navigation technology for knee
procedures.

“When our engineers presented the idea for PROPHECY® technology, we realized that it
had incredible potential for surgeons, for their patients, for the hospitals and for Wright,”
Alex recalls. The technology allows surgeons to precisely plan sizing and alignment of
an implant in advance of the surgery. “A surgeon wants to do the best thing he can for
the patient,” Alex explains. “He wants to ﬁnd the perfect size and put the knee in the
best alignment to maximize use of the implant.” Wright’s PROPHECY® Pre-operative
Navigation can help surgeons achieve that outcome. As Alex explains, “The technology
allows a surgeon to envision the results of a surgery and deliver the best results.”

12 | 2009 Annual Report Wright Medical Group, Inc.

2009 Annual Report Wright Medical Group, Inc. | 13

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“I can’t believe how much my arthritic knee impacted my game.”

Rhonda always loved sports. As she grew
older and high impact sports became
more challenging, Rhonda started
playing more golf; playing an average of
3 days per week.

In 2006, Rhonda began feeling a pain in
her knee. At first, it didn’t impact her golf
game, but slowly she began feeling more
pain – and playing less and less golf.

She scheduled a consultation with
orthopaedic surgeon, Dr. Scott Corpe.
Upon a thorough examination of
Rhonda’s knee, Dr. Corpe suggested
Rhonda undergo a knee replacement.

After learning that knee replacement
technology had advanced so significantly,
Rhonda decided not to waste any more
time in pain. “I had two options, I could
continue to watch people play golf or I

could undergo knee replacement
surgery and get back on the golf course
myself.”

Rhonda underwent surgery and,
according to her, the results have been
fantastic. She awoke after surgery
without the throbbing, arthritic pain she
had grown accustomed to. She began
her physical therapy just one day after
surgery and was walking with a cane
within two weeks. With each passing
day, she felt stronger and healthier than
she had in several years.

Six weeks after surgery, Rhonda
returned to the golf course to practice
chipping and putting. She even hired
a golf coach to help improve her game
and, within ten weeks of her operation,
she was playing in the Georgia State
Amateur Golf Tournament.

Wright. For You.

Brooks knows ﬁrst-hand the importance of quality and attention to detail when it
comes to manufacturing medical devices. After an injury several years ago, he had
a plate implanted in his neck. “When you have an implant yourself, you feel a bit of
a connection with people who have to go through any type of surgery involving an
implant,” Brooks explains.

A valued member of Wright’s Manufacturing team, Brooks machines tibial inserts for
knee implants, which are made from a highly-durable, medical-grade plastic called
polyethylene. He notes that sometimes when he is machining or inspecting a part, he
thinks about the person who will eventually have it implanted. “Working with medical
devices is pretty demanding,” Brooks says, “but it’s very satisfying work because you
know that you are helping to make someone’s life better.”

“When you have an implant

yourself, you feel a bit of a

connection with people who have

to go through any type of surgery

involving an implant.”

Brooks, Machinist III – Knee Inserts

2009 Annual Report Wright Medical Group, Inc. | 15

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Wright. For You.

Kevin loves a good challenge. That’s why he is a Project Engineer with Wright’s
Extremities Product Development team. Since joining Wright in 2003, his involvement
with numerous development projects within our Foot and Ankle line has certainly
given him exposure to challenges. The smaller, more delicate structures of the foot
and ankle make product design for this anatomical area very complex. Products
designed for these applications not only have to meet the smaller size requirements,
but they must be durable enough to withstand the tremendous forces placed on
bones within the foot and ankle.

For Kevin, collaboration with surgeons in the foot and ankle specialty is key in
successfully addressing these needs. As Kevin explains, “Surgeon input is critical
because it ensures that we design great products that are easy to use, save time in
the O.R. and consistently provide good clinical outcomes that lead to better lives for
patients.”

“Surgeon input is critical

because it ensures that we

design great products that are

easy to use, save time in the

O.R. and consistently provide

good clinical outcomes . . .”

Kevin, Project Engineer –
Extremities Product Development

2009 Annual Report Wright Medical Group, Inc. | 17

“Now my range of motion is better than before.”

At 45 years old, Scott has participated
in bicycle races, backcountry skiing,
and cross-country skiing for more
than 20 years. However, because of a
genetic predisposition to arthritis, Scott
developed osteoarthritis in his left hip
in his early 30s. By the time he was 36,
his left hip joint was bone-on-bone. He
tried to remain as active as possible and,
although he had trouble driving and
walking, he still rode his bicycle.

Through an online community group,
Scott learned about hip resurfacing as a
possible treatment option and Wright’s
CONSERVE® PLUS Total Hip Resurfacing
clinical trial. During hip resurfacing, very
little bone is removed to insert the arti-
ficial metal femoral head over the top of

the femur, allowing patients to retain
as much healthy bone as possible. This
option seemed preferable to Scott, as
opposed to a total hip replacement,
because of his active lifestyle.

Scott remembers feeling an instant and
dramatic reduction in pain after the
surgery. In less than six weeks, he no
longer had to use crutches or a cane to
get around. And, in eight weeks, he was
back on his bike.

“After a year and a half, it was just about
fine-tuning,” he said. “Now, my range of
motion is better than ever before.”

Scott is grateful for the procedure and
says, “It was the only option to get my
life back.”

Wright. For You.

To be a great machinist, you must have an aptitude for complex machinery, math,
ﬁne details and problem solving. These are strengths that Lorenzo has exhibited
since childhood; and they are the strengths that led him to join the Wright family
just over 10 years ago. For six years now, he has shared his skills in the Superﬁnish
area of our hip manufacturing team. “The Superﬁnish process is pretty demanding.
It calls for extremely tight machining tolerances and a very controlled manufacturing
environment,” explains Lorenzo.

When he ﬁrst joined Wright, this area of manufacturing was very small, with only two
machines. Now, our product innovations using this technology are far too many to be
sustained by such a small shop; the area now has 9 times the ﬂoor space and 8 times
the number of machines. “New products are so important to a successful business.
This company deﬁnitely knows that,” says Lorenzo. But at Wright, it’s not just about
providing “new” products; it’s about commitment to making products that are better.
Lorenzo is part of that commitment to our customers, and he considers it a privilege.
“This is a great company and I can’t imagine working anywhere else,” he says.

“New products are so important to a successful business.”

Lorenzo, Machinist III – Hip Superﬁnish

18 | 2009 Annual Report Wright Medical Group, Inc.

2009 Annual Report Wright Medical Group, Inc. | 19

20 | 2009 Annual Report Wright Medical Group, Inc.

“You’re crazy if you DON’T do it!”

Ray, 72, has spent a significant amount
of time playing tennis, his lifetime hobby
and passion. He played singles and
doubles as often as four times a week.
However, for the past two years, he
has depended on pain killers to relieve
the acute pain in his left hip caused by
osteoarthritis. He finally decided to seek
medical attention.

Not knowing exactly where to start, Ray
searched for “hip replacement surgery”
on the Internet and was drawn to the
success stories of patients of Wright’s
CONSERVE® Total Hip with BFH®
Technology using the PATH® Tissue-
Preserving surgical technique.

Ray underwent the same procedure and
has, so far, experienced a remarkable

recovery. He was able to get out of bed
the very next day and reported very little
pain and stiffness as he walked around
the house without a cane. Although
his doctor recommended that he stay
off the court for at least six weeks, Ray
is keeping up with the sport by hitting
tennis balls against a backboard. He is
optimistic about his speedy recovery
and holds high expectations.

Besides playing tennis again, Ray is
looking forward to dancing, walking his
dog and playing with his grandchild. “I
am so utterly happy with the procedure,
it is like a miracle. Dr. Penenberg is my
hero now.” He already recommended
this new hip replacement technique to
two of his friends, saying, “You’re crazy
if you DON’T do it!”

Wright. For You.

In 1995, Sacksith joined the Wright Manufacturing team as a Metal Finisher. Over the
course of his 15 years with the company, he has had a ﬁrst-hand look at the evolution
of some of Wright’s most innovative products. He eventually transitioned to the
Quality team within production and it is here where Sacksith feels most connected to
the Wright vision. “Working in Quality gives me the opportunity to be part of a great
team, and to be part of ‘the solution.’”

Sacksith is keenly aware of the exact tolerances that are required to build quality into
Wright’s products. “In our business, ‘good enough’ is simply not enough,” Sacksith
explains. Through his years of experience in production and inspection, he has
developed not only a thorough knowledge of what it takes to build quality into our
products, but a passion for meeting exceptionally high standards for Wright every
day. “This company provides a culture of commitment to service excellence in which
I truly believe in as a supervisor,” he says. “We, as an organization, are committed to
getting the job done and doing it right.”

“In our business, ‘good enough’ is

simply not enough . . .

This company provides a culture of

commitment to service excellence

in which I truly believe in as a

supervisor.”

Sacksith, Quality Control Supervisor

2009 Annual Report Wright Medical Group, Inc. | 21

“It is heartwarming and

awe-inspiring to realize that we

have the ability and responsibility

to make a difference in the lives

of those patients.”

Sue, Sr. Custom Orthopaedics Specialist

Wright. For You.

Sue has been a member of the Wright family for 18 years. For over 16 of those years, she
has called our Custom Orthopaedics Department “home.” She is an integral part of the
Customs process, coordinating and tracking every aspect of each order – from receipt
of patient x-rays to shipment of the ﬁnal implant. “Just about the only thing I don’t do
is designing and engineering,” Sue laughs.

In 2009, Wright designed and manufactured 150 custom implants, and Sue was in-
timately involved in each order, from start to ﬁnish. Although managing the ﬁner
details of Wright’s Custom implant orders can be stressful, Sue’s dedication never
waivers. “Every patient is a special person with individual needs. Many of them are
children facing cancer,” she says. “It is heartwarming and awe-inspiring to realize that
we have the ability and responsibility to make a diﬀerence in the lives of those patients.
Sometimes, I feel as if I know them personally, so I am cheering for them all the way!”

22 | 2009 Annual Report Wright Medical Group, Inc.

2009 Annual Report Wright Medical Group, Inc. | 23

table of contents

Management's Discussion and Analysis of Financial

Condition and Results of Operations

The following management’s discussion and analysis of
financial condition and results of operations (MD&A) describes
the principal factors affecting the results of our operations,
financial condition, and changes in financial condition, as well
as our critical accounting estimates. MD&A is organized as
follows:

Executive overview. This section provides a general
description 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.

Results of operations. This section provides our analysis of
and outlook for the significant line items on our consolidated
statement of operations.

Seasonal Nature of Business. This section describes the
effects of seasonal fluctuations in our business.

Liquidity and capital resources. This section provides an
analysis of our liquidity and cash flow and a discussion of our
outstanding debt and commitments.

Critical accounting estimates. This section discusses the
accounting estimates that are considered important to our
financial condition and results of operations and require us to
exercise subjective or complex judgments in their
application. All of our significant accounting policies,
including our critical accounting estimates, are summarized
in Note 2 to our consolidated financial statements.

Quantitative & Qualitative Disclosures About Market Risk

Reports of Independent Registered Public Accounting Firm

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

Management’s Annual Report on Internal Control Over

Financial Reporting

Corporate Information

39
40

This annual report contains “forward-looking statements”
as defined under U.S. federal securities laws. These
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 subject to a number of
risks and uncertainties that could cause our actual results
to materially differ from those described in the
forward-looking statements. Such risks and uncertainties
include those discussed in our filings with the Securities
and Exchange Commission (including those described in
our Annual Report on Form 10-K for the year ended
December 31, 2009 within Item 1A). Readers should not
place undue reliance on forward-looking statements.
Such statements are made as of the date of this annual
report, and we undertake no obligation to update such
statements after this date.

Executive Overview

Company Description. Wright Medical Group, Inc., through Wright Medical Technology, Inc. and other operating subsidiaries are a
global orthopaedic medical device company specializing in the design, manufacture and marketing of devices and biologic

products for extremity, hip, and knee repair and reconstruction. We are a leading provider of surgical solutions for the foot and

ankle market. Reconstructive devices are used to replace or repair knee, hip and other joints and bones that have deteriorated or

have been damaged 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 foot and ankle and upper extremity markets, as well as on the integration of our

biologic products into reconstructive procedures and other orthopaedic applications. Additionally, in recent years we have focused

significant efforts in increasing our presence in the higher-growth extremities and biologics markets. Our extensive foot and ankle

product portfolio, our over 100 specialized foot and ankle sales representatives, and our increasing level of training of

extremities-focused surgeons has resulted in our company being a recognized leader in the foot and ankle market. 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 and podiatrists.

Our corporate headquarters and U.S. operations are located in Arlington, Tennessee, where we conduct research and

development, manufacturing, warehousing and administrative activities. Our domestic sales accounted for 61% of total revenue in

2009. 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 approximately 60 countries through a global distribution system that consists of a sales force of approximately

1,100 individuals who promote our products to orthopaedic surgeons and hospitals and other healthcare facilities. At the end of

2009, we had approximately 400 sales associates and independent sales distributors in the U.S., and approximately 700 sales

representatives internationally, who were employed through a combination of our stocking distribution partners and direct sales

offices.

Principal Products. We specialize in those products used by extremity focused surgeon specialists which include products for the
reconstruction, trauma and arthroscopy markets, hip and knee reconstructive joint devices and biologic products. Our biologics

sales encompass 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 extremities product line includes products for both the foot and ankle and the upper extremity markets. Our principal foot and
ankle portfolio includes the CHARLOTTE™ foot and ankle system, the DARCO® MFS, DARCO® MRS and DARCO® FRS locked plating
systems, the INBONE™ total ankle system, the SIDEKICK™ external fixation systems, and the SWANSON line of toe joint replacement
products. Our upper extremity portfolio includes the EVOLVE® radial head prosthesis for elbow fractures, the MICRONAIL®
intramedullary wrist fracture repair system, the RAYHACK® osteotomy system, and the SWANSON line of finger joint replacement
products.

Our biologic products focus on biological musculoskeletal repair and include synthetic and human tissue-based materials. Our
principal biologic products include the GRAFTJACKET® line of soft tissue repair and containment membranes, the ALLOMATRIX®
line of injectable tissue-based bone graft substitutes, the PRO-DENSE® injectable regenerative graft, the OSTEOSET® synthetic bone
graft substitute, and the CANCELLO-PURE™ wedge products.

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. Additionally, in April 2009 we launched our
PROPHECY™ pre-operative navigation guides for knee replacement, which enables surgeons to plan precise implant placement

and alignment before a procedure in order to increase accuracy and decrease surgery time.

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 reconstruction products include the CONSERVE® family of products,
the PROFEMUR® family of hip stems, the DYNASTY™ acetabular cup system, the ANCA-FIT™ hip system, the PERFECTA® hip system,
and the LINEAGE® acetabular system.

Significant Business Developments. Net sales grew 5% in 2009, totaling $487.5 million, compared to $465.5 million in 2008. Our
extremity product line contributed significantly to our performance in 2009, achieving a 21% growth rate. Additionally, our hip and
knee product lines grew by 4% and 2%, respectively, which were partially offset by a decline of 4% in our biologics product line.

Our domestic extremity business experienced year-over-year growth from 2008 to 2009 totaling 25%, as a result of the continued
success of our CHARLOTTE™ foot and ankle system and our DARCO® plating systems, as well as product sales from our 2008
acquisitions of the INBONE™ total ankle system, and the Rayhack® Osteotomy System. We anticipate that growth within our
domestic extremities business will continue to increase, as sales of our CHARLOTTE™, DARCO®, INBONE™ and Rayhack® products
continue to increase and as we continue to expand our extremity product offerings.

Our international sales increased by 2% during 2009 as compared to 2008. This increase was driven by growth in our Asian markets

and certain European markets, offset by continued declines in France, lower sales to our stocking distributor in Turkey and a $3.0

million unfavorable currency impact compared to 2008.

Our net income increased to $12.1 million in 2009, from $3.2 million in 2008, primarily due to the $11.2 million valuation allowance
recorded in 2008 associated with our French net operating losses (NOLs).

Opportunities and Challenges. Our results of operations can be substantially affected not only by global economic conditions, but
also by local operating and economic conditions, which can vary substantially by market. Unfavorable conditions can depress sales

in a given market and may result in actions that adversely affect our margins, constrain our operating flexibility, or result in charges

which are unusual or non-recurring. The current state of the global economy has negatively impacted industry growth rates in

both domestic and international markets during 2009, and we are unable to predict when these markets will return to historical
rates of growth.

In our domestic markets, we expect that an expansion of our sales force and product offerings will favorably impact our extremities

and biologics businesses in 2010. However, we continue to expect that our domestic hip and knee business will continue to be

unfavorably impacted by the economic downturn, and we therefore expect these businesses to grow slightly less than the market

growth rates in the latter part of 2010.

During 2010, we expect a relatively stable pricing environment internationally. Given that, combined with the anticipated impact

of our new Australian subsidiary, as well as the annualization of the lower levels of revenues from our international stocking

distributor in Turkey, we anticipate moderate levels of sales growth in our international business. This, however, could be impacted
by foreign currency translation due to strengthening of the U.S. dollar as compared with currencies such as the euro.

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 United States Food and Drug

Administration (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.

In December 2007, we received a subpoena from the U.S. Attorney's Office for the District of New Jersey 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 U.S. Department of Justice (DOJ) after being subjects of investigation

involving the same subject matter. We continue to cooperate fully with the investigation by the DOJ, and we anticipate that we
may continue to incur significant expenses related to this inquiry.

In June 2008, we received a letter from the U.S. Securities and Exchange Commission (SEC) informing us that it is conducting an

informal investigation regarding potential violations of the Foreign Corrupt Practices Act in the sale of medical devices in a number

of foreign countries by companies in the medical device industry. We understand that several other medical device companies
have received similar letters. We are cooperating fully with the SEC inquiry.

A detailed discussion of these and other factors is provided in our annual report on Form 10-K for the year ended December 31,
2009 within Item 1A.

Results of Operations

Comparison of the year ended December 31, 2009 to the year ended December 31, 2008

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
Restructuring charges
Acquired in-process research and development

Total operating expenses

Operating income

Interest expense, net
Other income, net

Income before income taxes

Provision for income taxes

Net income

Year Ended December 31,

2009

2008

Amount

% of Sales

Amount

% of Sales

487,508
148,715
338,793

270,456
35,691
5,151
3,544
-
314,842

23,951
5,466
2,873
15,612
3,481
12,131

100.0% $
30.5%
69.5%

55.5%
7.3%
1.1%
0.7%
0.0%
64.6%

4.9%
1.1%
0.6%
3.2%
0.7%
2.5% $

465,547
134,377
331,170

261,396
33,292
4,874
6,705
2,490
308,757

22,413
2,181
(1,338)
21,570
18,373
3,197

100.0%
28.9%
71.1%

56.1%
7.2%
1.0%
1.4%
0.5%
66.3%

4.8%
0.5%
(0.3%)
4.6%
3.9%
0.7%

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
Extremity products
Biologics products
Other
Total net sales

Year Ended
December 31,
2009

Year Ended
December 31,
2008

% Change

167,869
122,178
107,375
79,120
10,966
487,508

160,788
119,895
88,890
82,399
13,575
465,547

4.4%
1.9%
20.8%
(4.0%)
(19.2%)
4.7%

The following graphs illustrate our product line sales as a percentage of total net sales for the years ended December 31, 2009 and
2008:

2009

2008

Extremity
products
22.0%

Biologics
products
16.2%

Other
2.3%

Hip
products
34.4%

Extremity
products
19.1%

Hip
products
34.5%

Biologics
products
17.7%

Knee
products
25.1%

Other
2.9%

Knee
products
25.8%

Net sales. Our domestic net sales totaled $299.6 million in 2009 and $282.1 million in 2008, representing approximately 61% of
total net sales in each year and a 6% increase in 2009 over 2008. Our international net sales totaled $187.9 million in 2009, a 2%

increase as compared to net sales of $183.5 million in 2008. Our 2009 international net sales included an unfavorable foreign

currency impact of approximately $3.0 million when compared to 2008 net sales, principally resulting from the 2009 performance

of the Japanese yen and the euro against the U.S. dollar. The unfavorable currency impact, continued declines in France, and a

reduction in sales to our stocking distributor in Turkey were offset by an increase in international sales due to continued growth in

our Asian markets, primarily within our hip product lines, as well as certain of our European markets. 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 16

to the consolidated financial statements.

Our net sales growth in 2009 by product line was led by our extremities product line, which increased 21% over 2008, while our hip
and knee businesses increased 4% and 2%, respectively, and our biologic products declined 4%.

Our extremity product net sales increased to $107.4 million in 2009, representing growth of 21% over 2008. Our domestic

extremity product net sales increased 25%, primarily resulting from the continued success of our CHARLOTTE™ foot and ankle
system and our DARCO® plating systems, as well as sales related to our INBONE™ and Rayhack® products, which were acquired in
April 2008 and September 2008, respectively. International extremity sales growth in our European markets and Canada was
partially offset by an unfavorable currency impact of $830,000 compared to 2008.

Our hip product net sales totaled $167.9 million in 2009, representing a 4% increase over 2008. This increase was driven by
increased sales of our PROFEMUR® hip system, as well as higher levels of sales of our DYNASTY® acetabular cup system, which was
launched during the second quarter of 2008. Domestic hip sales were relatively flat in 2009 compared to 2008 with growth of 1%

year-over-year. Our international hip business increased in 2009 by 7% over 2008 primarily due to growth in our Asian markets.

International hip sales included a $160,000 favorable currency impact compared to 2008.

Net sales of our knee products totaled $122.2 million in 2009, representing growth of 2% over 2008. Year-over-year growth in our
ADVANCE® knee systems, primarily in our international markets, totaled 5%, which was partially offset by declines across our other,
more mature knee product offerings. Additionally, our international knee sales include an unfavorable currency impact of $680,000
compared to 2008.

Net sales of our biologic products totaled $79.1 million in 2009, which represents a 4% decrease as compared to 2008. Our
domestic net sales of biologics decreased 2% from 2008, resulting from lower levels of sales of our ALLOMATRIX® product line,
partially offset by increased sales of our PRO-DENSE® injectable regenerative graft and our GRAFTJACKET® tissue repair products.
Our international net sales of biologics decreased 15% over prior year, primarily the result of the suspension of biologics
distribution in Belgium and Turkey due to changes in reimbursement rates and a $650,000 unfavorable currency impact.

Cost of sales. Our cost of sales as a percentage of net sales increased from 28.9% in 2008 to 30.5% in 2009. This increase is primarily
attributable to higher levels of excess and obsolete inventory provisions, increased raw material and other manufacturing costs,

and unfavorable currency exchange rates. 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, levels of production volume and currency exchange rates.

Selling, general and administrative. Our selling, general and administrative expenses as a percentage of net sales totaled 55.5%

and 56.1% in 2009 and 2008, respectively. Selling, general and administrative expense for 2009 included $10.1 million of non-cash,

stock-based compensation expense (2.1% of net sales), $7.8 million of costs, primarily legal fees, associated with U.S. government

inquiries (1.6% of net sales), and a $5.6 million provision for potential losses associated with a trade receivable (1.1% of net sales).

During 2008, selling, general and administrative expense included $10.6 million of non-cash, stock-based compensation expense

(2.3% of net sales), $7.6 million of costs, primarily legal fees, associated with U.S. government inquiries (1.6% of net sales), and $2.3

million of expense due to an unfavorable appellate court decision (0.5% of net sales). The remaining expenses declined by 1.0

point as a percentage of net sales as a result of cost savings initiatives, primarily in our European subsidiaries, and lower levels of
cash incentive compensation, partially offset by increased expenses associated with global compliance efforts.

We anticipate that our selling, general and administrative expenses will increase in absolute dollars to the extent that 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. Further, in the near term, we anticipate that these expenses may increase as a percentage of net sales as

we make strategic investments to grow our business, as we continue to incur expenses associated with the U.S. government

inquiries, which we believe may continue to be significant, and as our spending related to the global compliance requirements of
our industry increases.

Research and development. Our investment in research and development activities represented 7.3% and 7.2% of net sales in
2009 and 2008, respectively. Our research and development expense included non-cash, stock-based compensation expense of

$1.8 million (0.4% of net sales) in 2009, compared to $1.6 million (0.3% of net sales) in 2008. The remaining expenses were relatively

flat as a percentage of net sales as increased spending on product development grew at the same rates as sales.

We anticipate that our research and development expenditures may increase as a percentage of net sales and will increase in

absolute dollars as we continue to increase our investment in product development initiatives and clinical studies to support

regulatory approvals and provide expanded proof of the efficacy of our products.

Amortization of intangible assets. Charges associated with amortization of intangible assets totaled $5.2 million in 2009, as
compared to $4.9 million in 2008. The increase is attributable to a full year of amortization during 2009 for intangible assets

associated with our 2008 acquisitions. Based on the intangible assets held at December 31, 2009, we expect to amortize
approximately $2.5 million in 2010, $2.3 million in 2011, $2.2 million in 2012, $1.9 million in 2013, and $1.7 million in 2014.

Acquired in-process research and development (IPRD). During 2008, upon our acquisition of Inbone Technologies, Inc., we
immediately recognized as expense $2.5 million in costs representing the estimated fair value of acquired IPRD that had not yet
reached technological feasibility and had no alternative future use.

The fair value was determined by estimating the costs to develop the acquired IPRD into commercially viable products, estimating

the resulting net cash flows from this project and discounting the net cash flows back to their present values. The resulting net

cash flows from the project were based on our management’s best estimates of revenue, cost of sales, research and development

costs, selling, general and administrative costs and income taxes from the project. A summary of the estimates used to calculate

the net cash flows for the project is as follows:

Year net cash in-flows

factor to account for

Acquired IPRD (in

Discount rate including

Project

expected to begin

uncertainty of success

thousands)

INBONE™ Calcaneal Stem Implant

2009

18%

2,490

The INBONE™ Calcaneal Stem implant (Calcaneal Stem) is an implant device designed to attach on the INBONE™ talar dome and

achieve bone implant stability by engaging the inside of the talar bone spanning into the calcaneal bone after the two bones have

been stabilized together. We expect this device to bring increased sales to the existing INBONE™ total ankle system. The product is

complete, but it has not yet received all the necessary FDA clearances to bring the product into a commercially viable product.

Prior to our acquisition, Inbone filed a 510(k) premarket notification for the Calcaneal Stem and had received questions from the

FDA. Subsequent to the acquisition, we received additional questions from the FDA. Due to the complexity of these additional

questions and the FDA's requirement for clinical data in support of the safety and efficacy of the Calcaneal Stem, we are currently

working on the development of an investigational device exemption protocol that will subsequently support a premarket

approval (PMA) filing for market approval. This protocol will require two year follow-ups of the enrolled patients; therefore market

approval is not expected prior to the end of 2012. We do not believe that this additional work will result in a material amount of
expenses.

We are continuously monitoring our research and development projects. We believe that the assumptions used in the valuation of

acquired IPRD represent a reasonably reliable estimate of the future benefits attributable to the acquired IPRD. No assurance can
be given that actual results will not deviate from those assumptions in future periods.

Interest expense (income), net. Interest expense (income), net, consists of interest expense of $6.5 million and $7.0 million in 2009
and 2008, respectively, primarily from our $200 million of convertible senior notes due 2014 issued in November 2007, our capital

lease agreements, and certain of our factoring agreements. This was partially offset by interest income of $1.0 million and $4.8

million during 2009 and 2008, respectively, generated by our invested cash balances and investments in marketable securities. The

decline in interest income is due to the overall decline in interest rates on our invested cash balances and investments in
marketable securities during 2009.

The amounts of interest income we realize in 2010 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 $2.9 million of expense during 2009 compared to $1.3 million
of income during 2008. During 2009, we recognized $2.6 million of expense related to the write-off of the CTA balances for certain

subsidiaries that have been substantially liquidated. During 2008, we recognized $900,000 of deferred gain associated with the
2007 disposition of our ADCON®-Gel assets.

Provision for income taxes. We recorded tax provisions of $3.5 million and $18.4 million in 2009 and 2008, respectively. Our
effective tax rate for 2009 and 2008 was 22.3% and 85.2% respectively. In 2009, we reduced our valuation allowance as a result of a

change in estimate regarding the jurisdiction where certain deductions would be recognized for tax purposes, which decreased

our effective tax rate by 6 percentage points. In 2008, we recognized a tax provision of $12.8 million to adjust our valuation

allowance, primarily to record a valuation allowance against all of our remaining deferred tax assets associated with net operating
losses in France, which increased our effective tax rate by 59 percentage points.

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ear ended Decem

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December 31, 200

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Restructuring c
rocess research an
Acquired in-pr
ating expenses
Total oper

tive

ets

nd development

Inte
Othe

Prov

Operating
rest expense (inco
er (income) expen
Income be
vision for income
Net incom

income
ome), net
nse, net
efore income taxe
taxes

Yea

ar Ended Decemb

ber 31,

2008

2007

ount

% of Sales
%

Amount

% of Sales
%

465,547
134,377
-
331,170

261,396
33,292
4,874
6,705
2,490
308,757

22,413
2,181
(1,338)
21,570
18,373
3,197

100.0%
28.9%
0.0%
71.1%

56.1%
7.2%
1.0%
1.4%
0.5%
66.3%

4.8%
0.5%
(0.3%)
4.6%
3.9%
0.7%

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

100.0%
28.0%
0.6%
71.4%

58.4%
7.3%
1.0%
4.3%
0.0%
71.0%

0.4%
(0.3%)
0.1%
0.6%
0.4%
0.2%

The
year

following table
r-over-year chang

ge:

sets forth our n

net sales by prod

duct line for the

periods indicate

ed (in thousands

s) and the percen

ntage of

Hip
Knee
Extre
Biolo
Othe
Tota

products
e products
emity products
ogics products
er
al net sales

Year Ended
December 31,
2008

Year Ende
December
2007

ed
r 31,

% Ch

hange

160,788
8
119,895
5
88,890
0
82,399
9
5
13,575
7
465,547

134
102
62
76
11
386

4,251
2,334
2,302
6,029
1,934
6,850

19.8%
17.2%
42.7%
8.4%
13.8%
20.3%

following graphs
The
7:
2007

s illustrate our pro

oduct line sales a

s a percentage of

f total net sales fo

or the years ended

d December 31, 2

2008 and

8
2008

2007

Net
tota

sales. Our dome
l net sales in each

estic net sales tot

taled $282.1 milli

ion in 2008 and $

$235.7 million in

2007, representi

ng approximately

y 61% of

h year and a 20%

increase over 20

07. Our internatio

onal net sales tota

aled $183.5 millio

on in 2008, a 21%

% increase

as co

ompared to net s

sales of $151.1 mi

llion in 2007. Our

r 2008 internation

nal net sales inclu

ded a favorable fo

foreign currency i

mpact of

app

roximately $7.9 m

million when com

mpared to 2007 ne

et sales, principall

y resulting from t

the 2008 perform

mance of the Japa

nese yen

and the euro against the U.S. dollar. The remaining increase in international sales is attributable to growth in our Asian and
European markets, primarily within our hip and knee product lines.

From a product line perspective, our net sales growth for 2008 was attributable to increases in sales across all four of our principal

product lines. For 2008, we experienced growth of 43%, 20%, 17%, and 8% in our extremity, hip, knee, and biologics, respectively.

During 2008, our extremity sales growth was attributable primarily to the continued success of our CHARLOTTE™ foot and ankle
system and increased sales of our DARCO® plating systems, as well as sales of our INBONE™ products acquired during the second
quarter of 2008. The increase in our hip product sales was driven by increased sales of our PROFEMUR® hip system, our CONSERVE®
family of products, our DYNASTY® acetabular cup system and sales of revision hip stems introduced during the second quarter
2008. Sales of our knee products increased in 2008 compared to the prior year as a result of growth in our ADVANCE® knee systems,
which was partially offset by declines across our other, more mature knee product offerings. The growth of our biologics business
in 2008 was primarily attributable to increased sales of our PRO-DENSE® injectable regenerative graft, our GRAFTJACKET® tissue
repair and containment membranes and our CANCELLOPURE™ wedge products.

Cost of sales. In 2008, our cost of sales as a percentage of net sales increased from 28.0% in 2007 to 28.9% in 2008. This increase
was primarily attributable to unfavorable shifts in our geographic and product line sales mix and increased raw material and other

manufacturing costs, which were partially offset by lower levels of non-cash stock-based compensation expense. Our cost of sales

included 0.3 percentage points and 0.5 percentage points of non-cash, stock-based compensation expense in 2008 and 2007,
respectively.

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 which were expensed as period costs in accordance with Financial Accounting Standards Board (FASB)

Accounting Standards Codification (ASC) Section 330, Inventory.

Operating expenses. Our total operating expenses decreased, as a percentage of net sales, by 4.7 percentage points to 66.3% in
2008. Operating expenses include selling, general and administrative expenses, research and development expenses, amortization

of intangibles and restructuring charges. The decrease in operating expenses was attributed primarily to decreased restructuring

expenses, as well as lower levels of expenses due to our restructuring efforts in Toulon, France, lower levels of professional fees,

decreased stock-based compensation, and the leveraging of fixed administrative fees, all of which were partially offset by costs
associated with the U.S. government inquiries and the 2008 charge for in-process research and development.

Provision for income taxes. Our effective tax rate for 2008 and 2007 was 85.2% and 58.8%, respectively. Our 2008 effective tax rate
includes a tax provision of $12.8 million to adjust our valuation allowance, primarily to record a valuation allowance against all of

our remaining deferred tax assets associated with net operating losses in France, which increased our effective tax rate by 59

percentage points.

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 during this period 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. 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.

Restructuring
Toulon, France

In 2007, we announced our plans to close our facilities in Toulon, France. This announcement came after a thorough evaluation in

which we 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 production now conducted solely in our existing manufacturing facility in Arlington, Tennessee and the distribution

activities being carried out from our European headquarters in Amsterdam, the Netherlands. We have estimated that total pre-tax

restructuring charges will be approximately $28 million to $30 million, of which we have recognized $27.0 million through

December 31, 2009. We anticipate that recording the remaining $1 million to $3 million of restructuring expenses could have a

material impact on our results of operations in the period incurred, however we do not expect that the restructuring will have a

material impact on our financial condition or liquidity. We began realizing the benefits from this restructuring within selling,

general and administrative expenses in 2008. While we began realizing the benefits from this restructuring within cost of sales in

2009, unfavorable currency exchange rates and increased raw material and other manufacturing costs have offset some of those

benefits. See Note 14 to our consolidated financial statements for further discussion of our restructuring charges.

Creteil, France

In October 2009, we announced plans to close our distribution and finance support office in Creteil, France, to migrate all relevant

French distribution and support functions into our European organization based out of our European headquarters in Amsterdam,

the Netherlands. Direct sales in France will continue and will be serviced by independent sales agents. We have estimated that

total pre-tax restructuring charges will be approximately $3 million to $4 million, of which we have recognized $2.1 million

through December 31, 2009. We anticipate that recording the remaining restructuring expenses may have a material impact on

our results of operations in the period incurred; however we do not expect that this restructuring will have a material impact on

our financial condition or liquidity. We will realize the benefits from this restructuring within selling, general and administrative

expenses beginning in 2010. See Note 14 to our consolidated financial statements 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
Marketable securities
Working capital
Line of credit availability

As of December 31,

2009

2008

84,409
86,819
421,647
100,000

87,865
57,614
401,406
100,000

During the first quarter of 2008, we liquidated our investments in auction rate securities into cash equivalents. For the remainder of

2008 and throughout 2009, we invested in treasury bills, government bonds, agency bonds and certificates of deposit with
maturities of less than 12 months. We have classified these marketable securities as available-for-sale.

Operating Activities. Cash provided by operating activities totaled $71.8 million in 2009, as compared to cash used by operating
activities of $3.6 million in 2008 and cash provided by operating activities of $24.4 million in 2007. The increase in cash provided by

operating activities in 2009 is primarily attributable to changes in working capital, as inventory balances decreased significantly

due to a focus on inventory management during 2009, and accounts receivable decreased as the result of diligent collection

efforts, which were partially offset by the 2008 liquidation of our investments in auction rate securities that were classified as
trading securities.

In 2008 compared to 2007, increased profitability was offset by changes in working capital. Accounts receivable increased due to

higher levels of sales in international markets that typically have longer collection terms. Inventories increased due to recent

acquisitions and distribution agreements, and to support higher levels of sales. Finally, in 2007, our accrued expenses increased

significantly, primarily associated with restructuring charges.

Investing Activities. Our capital expenditures totaled $37.2 million in 2009, $61.9 million in 2008 and $35.0 million in 2007. The
decrease in 2009 compared to 2008 is attributable to lower levels of expenditures related to the expansion of our Arlington,

Tennessee facilities ($5.9 million in 2009 and $16.9 million in 2008) as well as lower levels of investments in surgical

instrumentation related to acquired and new products. Our industry is capital intensive, particularly as it relates to surgical

instrumentation. Historically, our capital expenditures have consisted principally of purchased manufacturing equipment, research

and testing equipment, computer systems, office furniture and equipment and surgical instruments. We expect to incur capital

expenditures of approximately $40 million in 2010 for routine capital expenditures, as well as approximately $7 million for the
continued expansion of facilities in Arlington, Tennessee.

Financing Activities. During 2009, proceeds of $680,000 were generated from the issuance of common stock upon exercise of
stock options granted under our stock-based compensation plans and purchases under the employee stock purchase plan. These

proceeds were offset by $153,000 in principal payments related to our long-term capital lease obligations.

In early 2009, we terminated certain accounts receivable factoring agreements. While these factoring agreements were active, the

cash proceeds, net of the amount of factored receivables collected, were reflected as cash flows from financing activities in our

consolidated statements of cash flows. The proceeds received under these agreements during 2008 and 2007 were $6.6 million

and $3.6 million, respectively. These proceeds were offset by payments for factored receivables collected of $7.0 million and $7.1

million in 2008 and 2007, respectively. We recorded obligations of $54,000 for the amount of receivables factored under these

agreements as of December 31, 2008, which are included within “Accrued expenses and other current liabilities” in our
consolidated balance sheet.

In 2010, we will make continued payments under our long-term capital leases, including interest, of $352,000 and we will make
scheduled interest payments under our convertible senior notes of $5.3 million.

On December 31, 2009, our revolving credit facility had availability of $100 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 will bear interest at the sum of an annual base 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 3.25%. The term of the credit facility extends through June 30, 2011.

During 2007, we issued $200 million of Convertible Senior Notes due 2014, which generated net proceeds of $193.5 million. The

notes require us to 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 2010 related to the notes totaling $5.3 million.

Contractual Cash Obligations. At December 31, 2009, we had contractual cash obligations and commercial commitments as
follows (in thousands):

Total

2010

Payments Due by Periods
2011-2012

2013-2014

After 2014

Amounts reflected in consolidated balance sheet:
Capital lease obligations(1)
Convertible senior notes(2)
Contingent consideration
Amounts not reflected in consolidated balance sheet:
Operating leases
Interest on convertible senior notes(3)
Purchase obligations
Royalty and consulting agreements
Total contractual cash obligations

702
200,000
1,675

17,792
25,813
5,086
1,370
252,438

352
-
1,675

9,286
5,250
2,543
242
19,348

322
-
-

7,887
10,500
2,543
484
21,736

28
200,000
-

508
10,063
-
374
210,973

-
-
-

111
-
-
270
381

(1)
(2)

(3)

Payments include amounts representing interest.
Represents long-term debt payment provided holders of the Convertible Senior Notes due 2014 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 7 to our
consolidated financial statements.
Represents interest on Convertible Senior Notes due 2014 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, 2009. The minimum lease payments related to these leases are discussed further in
Note 7 to our consolidated financial statements.

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, 2009. These

future payments are subject to foreign currency exchange rate risk. In accordance with U.S. generally accepted accounting

principles, our operating leases are not recognized in our consolidated balance sheet; however, the minimum lease payments
related to these agreements are disclosed in Note 15 to our consolidated financial statements.

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, 2009. These

future payments are subject to foreign currency exchange rate risk. Our purchase obligations and royalty and consulting
agreements are disclosed in Note 15 to our consolidated financial statements.

Our contingent consideration obligations reflected in the table above consist of minimum guaranteed payments related to our

acquisition of Inbone Technologies, Inc. Additionally, cash payments of up to $12 million may be made related to this and certain
other of our acquisitions based upon future financial and operational performance of the acquired assets.

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 royalties earned based on
product sales.

Additionally, as of December 31, 2009, we had $2.8 million of unrecognized tax benefits recorded within “Other liabilities” in 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. 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 9 to our consolidated financial statements.

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 initial public offering 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

$84.4 million, our marketable securities balance of $86.8 million and our existing available credit line of $100 million will be

sufficient for the foreseeable future to fund our working capital requirements and operations, permit anticipated capital

expenditures in 2010 of approximately $47 million and meet our contractual cash obligations in 2010.

Critical Accounting Estimates
All of our significant accounting policies and estimates are described in Note 2 to our consolidated financial statements. 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 surgery centers, and
stocking distributors, with the majority of our revenue derived from sales to hospitals. Our products are sold through a network of

employee and 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 and surgery centers
when they take 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. Approximately $186,000 and $172,000 of sales related to these types of agreements were
deferred and not yet recognized as revenue as of December 31, 2009 and 2008, 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 $552,000 and $490,000 are included as a reduction of accounts receivable at

December 31, 2009 and 2008, 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 continued collection efforts.

We believe that the amount included in our allowance for doubtful accounts has been a historically appropriate 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, which would necessitate additional allowances in future periods. Our allowances

for doubtful accounts were $8.6 million and $4.0 million, at December 31, 2009 and 2008, respectively, which includes a $5.6
million provision recorded in 2009 for potential losses related to the trade receivable balance of our stocking distributor in Turkey.

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 24 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 $12.5 million, $8.7 million and $6.6 million for the years ended December

31, 2009, 2008 and 2007, respectively. 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 $53.9 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 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 2009 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 with the FASB ASC Section 360, Property, Plant and Equipment (FASB ASC 360).

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, if 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.

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 $1.1 million and $310,000 at December 31, 2009 and 2008, 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.

Our valuation allowance balances totaled $17.2 million and $18.5 million as of December 31, 2009 and 2008, 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. During the year ended December 31, 2008, we recognized a tax provision of $12.8 million to adjust our

valuation allowance, primarily to record a valuation allowance against all of our remaining deferred tax assets associated with net
operating losses in France.

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), effective January 1,

2007, which requires the tax effects of an income tax position to be recognized only if they are “more-likely-than-not” to be

sustained based solely on the technical merits as of the reporting date. Effective July 1, 2009, this standard was incorporated into

FASB ASC Section 740, Income Taxes. As a multinational corporation, we are subject to taxation in many jurisdictions and the

calculation of our tax liabilities 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. Our

liability for unrecognized tax benefits totaled $2.8 million and $1.8 million as of December 31, 2009 and 2008, respectively. See
Note 9 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 closing sales price 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, such

stock-based compensation expense in 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. A change in assumptions may also result
in a lack of comparability with other companies that use different models, methods and assumptions.

See Note 12 to our consolidated financial statements for further information regarding our stock-based compensation disclosures.

Purchase accounting. We accounted 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.

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.

Effective January 1, 2009, we adopted the provisions of Statements of Financial Accounting Standards No. 141R, Business

Combinations, which significantly changes the accounting for acquired businesses. Effective July 1, 2009, this standard was

incorporated into FASB ASC Section 805, Business Combinations (FASB ASC 805). Under this standard, an acquiring entity will be

required to recognize all assets acquired and liabilities assumed at the acquisition date fair value. Legal fees and other

transaction-related costs will be expensed as incurred and are no longer included in goodwill as a cost of acquiring the business.

FASB ASC 805 also requires, among other things, acquirers to estimate the acquisition-date fair value of any contingent

consideration and to recognize any subsequent changes in the fair value of contingent consideration in earnings. In addition,

restructuring costs the acquirer expected, but was not obligated to incur, will be recognized separately from the business
acquisition.

Restructuring charges. We evaluate impairment issues for long-lived assets under the provisions of FASB ASC 360. We record
severance-related expenses once they are both probable and estimable in accordance with the provisions of FASB ASC Section

712, Compensation-Nonretirement Postemployment 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 FASB ASC Section 420, Exit or Disposal Cost Obligations. 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.

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, 2009, we have invested short term cash and cash equivalents and marketable securities of approximately $156

million. Based on this level of investment, a decrease of 0.25% in interest rates would have a negative annual impact of $390,000 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% of our total net sales were denominated in foreign currencies during each of the years ended December 31,

2009 and 2008, 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. For sales

not denominated in U.S. dollars, an increase in the rate at which a foreign currency is exchanged for U.S. dollars 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 our competitors price their products in local currency, an increase in the relative strength of the U.S.
dollar could result in our prices not being competitive in a market where business is transacted in the local currency.

A substantial majority of our sales denominated in foreign currencies are derived from European Union countries, which are

denominated in the euro, from Japan, which are denominated in the Japanese yen, from the United Kingdom, which are

denominated in the British pound, and from Canada, which are denominated in the Canadian dollar. Additionally, we have

significant intercompany receivables from our foreign subsidiaries which are denominated in foreign currencies, principally the

euro, the yen, the British pound, and the Canadian dollar. Our principal exchange rate risk, therefore, exists between the U.S. dollar

and the euro, the U.S. dollar and the yen, the U.S. dollar and the British pound, and the U.S. dollar and the Canadian dollar.

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, 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.

39(cid:2)

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Wright Medical Group, Inc.:

We have audited the accompanying consolidated balance sheets of Wright Medical Group, Inc. and subsidiaries (the Company)

as of December 31, 2009 and 2008, 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, 2009. 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, 2009 and 2008, and the results of their operations and their cash flows for each of the years in

the three-year period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the

Company’s internal control over financial reporting as of December 31, 2009, 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 22, 2010 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial

reporting.

Memphis, Tennessee

February 22, 2010

40(cid:2)

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Wright Medical Group, Inc.:

We have audited the effectiveness of internal control over financial reporting of Wright Medical Group, Inc. and subsidiaries (the

Company) as of December 31, 2009, 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 based on the assessed risk. 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, 2009, 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, 2009 and 2008, 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, 2009, and our report dated February 22, 2010 expressed an unqualified opinion on those consolidated
financial statements.

Memphis, Tennessee

February 22, 2010

41(cid:2)

Wright Medical Group, Inc.
Consolidated Balance Sheets (In thousands, except share data)

Assets:
Current assets:

Cash and cash equivalents
Marketable securities
Accounts receivable, net
Inventories
Prepaid expenses
Deferred income taxes
Other current assets

Total current assets

Property, plant and equipment, net
Goodwill
Intangible assets, net
Deferred income taxes
Other assets

Total assets

Liabilities and Stockholders’ Equity:
Current liabilities:

Accounts payable
Accrued expenses and other current liabilities
Current portion of long-term obligations

Total current liabilities

Long-term debt and capital lease obligations
Deferred income taxes
Other liabilities

Total liabilities

Commitments and contingencies (Note 15)

Stockholders’ equity:

Common stock, $.01 par value,

authorized: 100,000,000 shares; issued and
outstanding: 38,668,882 shares at December 31, 2009 and
38,021,961 shares at December 31, 2008

Additional paid-in capital
Accumulated other comprehensive income
Retained earnings

Total stockholders’ equity
Total liabilities and stockholders’ equity

December 31,
2009

December 31,
2008

84,409
86,819
101,720
163,535
13,122
34,824
6,175
490,604

139,708
53,860
17,727
5,248
7,137
714,284

13,978
54,643
336
68,957

200,326
157
4,436
273,876

87,865
57,614
102,046
176,059
14,263
29,874
8,934
476,655

133,651
49,682
21,090
3,034
8,018
692,130

15,877
59,247
125
75,249

200,136
166
4,951
280,502

374
376,647
22,906
40,481
440,408
714,284

372
364,594
18,312
28,350
411,628
692,130

The accompanying notes are an integral part of these consolidated financial statements.

42(cid:2)

Wright Medical Group, Inc.
Consolidated Statements of Operations (In thousands, except per share data)

Net sales
Cost of sales 1
Cost of sales - restructuring

Gross profit

Operating expenses:

Selling, general and administrative 1
Research and development 1
Amortization of intangible assets
Restructuring charges (Note 14)
Acquired in-process research and development

Total operating expenses

Operating income
Interest expense (income), net
Other expense (income), net

Income before income taxes

Provision for income taxes

Net income

Net income per share (Note 10):

Basic

Diluted

Weighted-average number of shares outstanding-basic

Weighted-average number of shares outstanding-diluted

Year Ended December 31,
2008

2007

2009

487,508
148,715
-
338,793

270,456
35,691
5,151
3,544
-
314,842

23,951
5,466
2,873
15,612
3,481
12,131

0.32

37,366

37,443

465,547
134,377
-
331,170

261,396
33,292
4,874
6,705
2,490
308,757

22,413
2,181
(1,338)
21,570
18,373
3,197

0.09

36,933

37,401

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

0.03

35,812

36,483

_______________________
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,
2008

2007

2009

1,285
10,077
1,829

1,244
10,644
1,613

2,046
12,061
2,425

The accompanying notes are an integral part of these consolidated financial statements.

43(cid:2)

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 (used in) operating activities:

Depreciation
Stock-based compensation expense
Acquired in-process research and development costs
Amortization of intangible assets
Deferred income taxes
Non-cash write-off of cumulative translation adjustment

(CTA) balances (See Note 2)

Excess tax benefits from stock-based compensation

arrangements

Non-cash restructuring charges
Provision for losses on accounts receivable
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 (used in) operating activities
Investing activities:

Capital expenditures
Acquisition of businesses
Purchase of intangible assets
Proceeds from the maturity of available-for-sale marketable

securities

Investment in available-for-sale marketable securities
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 financing activities
Effect of exchange rates on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period

Year Ended December 31,
2008

2007

2009

12,131

3,197

961

32,717
13,191
-
5,151
(9,247)

26,462
13,501
2,490
4,874
18,325

23,522
16,532
-
3,782
(8,708 )

2,643

(63)
-
5,339
1,815

(4,003)
13,049
-
5,953
(1,950)
(4,975)
71,751

(37,190)
(6,785)
(1,037)

71,499
(101,443)
-
(74,956)

680
-
(58)
(153)
63
532
(783)
(3,456)
87,865
84,409

(1,278)
(63)
939
294

(18,729)
(57,797)
15,535
(6,666)
(5,009)
315
(3,610)

(61,936)
(28,914)
(3,418)

-
(57,037)
2,363
(148,942)

12,018
-
(605)
(285)
1,278
12,406
(1,015)
(141,161)
229,026
87,865

(3,633 )
5,295
2,339
(2,228 )

(9,831 )
(27,077 )
14,790
(6,103 )
1,889
12,894
24,424

(35,042 )
(27,758 )
(1,041 )

-
-
-
(63,841 )

17,292
193,492
(3,457 )
(1,063 )
3,633
209,897
607
171,087
57,939
229,026

The accompanying notes are an integral part of these consolidated financial statements.

44(cid:2)

Wright Medical Group, Inc.
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income
For the Years Ended December 31, 2007, 2008 and 2009 (In thousands, except share data)

Common Stock, Voting

Number of
Shares

Amount

Additional
Paid-in
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income

Total
Stockholders'
Equity

35,143,800

351 $

300,648 $

16,947

17,878 $

335,824

-
-

-
1,349,383

-
-

-
14

-
-

17,278

961
-

-
-

7,245
-

-
6,970

(225)
-

-
-

-
-
36,493,183

-
-
365 $

4,289
16,425
338,640 $

-
-
25,153

-
-
24,623 $

Balance at December 31, 2006
2007 Activity:
Net income
Foreign currency translation
Minimum pension liability

adjustment

Total comprehensive income
FIN 48 adjustment to opening

balance

Issuances of common stock
Tax effect of stock based
compensation activity
Stock-based compensation
Balance at December 31, 2007
2008 Activity:
Net income
Foreign currency translation
Unrealized gain on marketable

securities

Minimum pension liability

adjustment

Total comprehensive loss
Issuances of common stock
Issuance of previously granted

restricted stock

Grant of non-vested shares of

common stock

Cancellation of non-vested shares

of common stock
Tax effect of stock based
compensation activity
Stock-based compensation
Balance at December 31, 2008
2009 Activity:
Net income
Foreign currency translation
Unrealized loss on marketable

securities

Minimum pension liability

adjustment

Total comprehensive income
Write-off of cumulative translation
adjustment (CTA) balances (See
Note 2)

Issuances of common stock
Grant of non-vested shares of

common stock

Cancellation of non-vested shares

of common stock

Vesting of stock-settled phantom
stock units and non-vested
shares of common stock

Tax effect of stock based
compensation activity
Stock-based compensation
Balance at December 31, 2009

-
-

616,836

434,005

558,184

(80,247)

-
-

12,011

-
-
38,021,961

-
-
372 $

720
13,223
364,594 $

-
-

-
64,446

718,010

(147,971)

-
-

12,436

-
-

-
680

(2)

3,197
-

-
-
28,350

12,131
-

-
-

961
6,970

(225)
7,706

7,245
17,292

4,289
16,425
388,781

3,197
(6,781)

399

71
(3,114)
12,018

-
(6,781)

399

-
-
18,312 $

720
13,223
411,628

-
2,398

(438)

(9)

2,643
-

12,131
2,398

(438)

(9)
14,082

2,643
680

-
-
38,668,882

-
-
374 $

(1,892)
13,267
376,647

-
-
40,481

-
-
22,906

(1,892)
13,267
440,408

The accompanying notes are an integral part of these consolidated financial statements.

45(cid:2)

Notes to Consolidated Financial Statements

Wright Medical Group, Inc.

Organization and Description of Business

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 devices and biologic products for

extremity, hip and knee repair and reconstruction. We are a leading provider of surgical solutions for the foot and ankle market.

Our products are sold primarily through a network of employee sales representatives and 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 approximately 60 countries with principal markets in the U.S., Europe,

Canada, Australia and Japan. We are headquartered in Arlington, Tennessee.

Summary of Significant Accounting Policies

Principles of Consolidation. The accompanying consolidated financial statements include our accounts and those of our wholly
owned domestic and international subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates. The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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, income taxes, 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 2007 investment in marketable securities represented debt securities, which were classified as trading
securities in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Section 320,

Investments – Debt and Equity Securities (FASB ASC 320). For the year ended December 31, 2007, we did not incur any realized or

unrealized gains or losses related to these securities. During the first quarter of 2008, we liquidated all those investments into cash

equivalents. During the remainder of 2008 and throughout 2009, we invested in treasury bills, government and agency bonds, and

certificates of deposit with maturity dates of less than 12 months and certificates of deposit with maturity dates of six months or

less. Our investments in these marketable securities are classified as available-for-sale securities in accordance with FASB ASC 320.
These securities are carried at their fair value, and all unrealized gains and losses are recorded within other comprehensive income.

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 included in “Cost of sales” were
$12.5 million, $8.7 million, and $6.6 million for the years ended December 31, 2009, 2008, and 2007, respectively.

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, which were

expensed as period costs in accordance with FASB ASC Section 330, Inventory.

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 $1.1 million and $310,000 at December 31, 2009 and 2008, respectively. We are also involved in legal
proceedings involving contract, patent protection and other matters. (See Note 15).

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
46(cid:2)

Notes to Consolidated Financial Statements

Wright Medical Group, Inc.

annual impairment test is performed in the fourth quarter. Accordingly, during the fourth quarter of 2009, 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 FASB ASC Section 360, Property, Plant and

Equipment (FASB ASC 360). The weighted average amortization periods for completed technology, distribution channels,

trademarks, licenses, customer relationships and other are 9 years, 10 years, 7 years, 8 years, 11 years and 6 years, respectively. The

weighted average amortization period of our intangible assets on a combined basis is 9 years. Additionally, we have one trademark
intangible asset that has an indefinite life.

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 with FASB ASC 360. 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.

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 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 continued collection efforts. Our allowance

for doubtful accounts totaled $8.6 million and $4.0 million at December 31, 2009 and 2008, respectively, which includes a $5.6
million provision recorded in 2009 for potential losses related to the trade receivable balance of our stocking distributor in Turkey.

Concentration of Credit Risk. Financial instruments which potentially subject us to concentrations of credit risk consist principally
of accounts receivable. Management attempts to minimize credit risk by reviewing customers’ credit history before extending

credit and by monitoring credit exposure on a regular basis. An allowance for possible losses on accounts receivable is established

based upon factors surrounding the credit risk of specific customers, historical trends and other information. Collateral or other

security is generally not required for accounts receivable. As of December 31, 2009, one customer, our stocking distributor in

Turkey, accounted for more than 10% of our accounts receivable balance. As of December 31, 2009 and 2008, the balance due from

this customer was $10.7 million and $10.6 million, respectively. As of December 31, 2009, we have recorded a $5.6 million provision
for potential losses related to the trade receivable balance of our stocking distributor in Turkey.

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, stainless steel, various grades of

high density polyethylenes, 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 some of 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 biologic products, we depend on one supplier of demineralized bone matrix (DBM), cancellous bone matrix
(CBM) and soft tissue graft for BIOTAPE® XM. We rely on one supplier for our GRAFTJACKET® family of soft tissue repair and graft
containment products, and one supplier for our xenograph bone wedge product. We maintain adequate stock from these suppliers
in order to meet market demand.

Income Taxes. Income taxes are accounted for pursuant to the provisions of FASB ASC Section 740, Income Taxes (FASB ASC 740).
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 position 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.

47(cid:2)

Notes to Consolidated Financial Statements

Wright Medical Group, Inc.

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 surgery centers, and
stocking distributors, with the majority of our revenue derived from sales to hospitals. Our products are primarily sold through a

network of employee sales representatives and 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.

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 $186,000 and $172,000 of deferred revenue related to these types of
agreements was recorded at December 31, 2009 and 2008, 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 $551,000 and $490,000

is included as a reduction of accounts receivable at December 31, 2009 and 2008, 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 whose functional currency is the local
currency 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 in stockholders’ equity. Gains and losses resulting from transactions

denominated in a currency other than the local functional currency are included in “Other expense (income), net” in our

consolidated statement of operations.

In accordance with FASB ASC Section 830, Foreign Currency Matters, we are required to recognize the cumulative translation

adjustment (CTA) balance from stockholders’ equity upon the complete or substantially complete liquidation of a foreign

subsidiary. During 2009, we wrote-off approximately $2.6 million from the CTA balance for the substantially complete liquidation

of two of our French subsidiaries and our subsidiary in Spain. This net cumulative foreign currency loss is included in “Other
expense (income) net” in our consolidated statements 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 FASB ASC Section 715, Compensation – Retirement Benefits. 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 $1.6 million and $1.4 million as of December 31, 2009 and 2008,
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, adjustments to our minimum pension liability, and unrealized gains and losses on
our available-for-sale marketable securities.

Stock-Based Compensation. We account for stock-based compensation in accordance with FASB ASC Section 718, Compensation
– Stock Compensation (FASB ASC 718). Under the fair value recognition provisions of FASB ASC 718, 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-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.

48(cid:2)

Notes to Consolidated Financial Statements

Wright Medical Group, Inc.

We recorded $13.2 million, $13.5 million, and $16.5 million of stock-based compensation expense during the years ended

December 31, 2009, 2008, and 2007, respectively. See Note 12 for further information regarding our stock-based compensation

assumptions and expenses.

Fair Value of Financial Instruments. The carrying value of cash and cash equivalents, accounts receivable and accounts payable
approximates the fair value of these financial instruments at December 31, 2009 and 2008 due to their short maturities or variable
rates.

The fair value of our convertible senior notes was approximately $176 million and $155 million as of December 31, 2009 and 2008,

respectively, based on a quoted price in an active market (Level 1).

Effective January 1, 2008, we adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value

Measurements (SFAS 157), for financial assets and liabilities measured at fair value on a recurring basis. SFAS 157 applies to all

financial assets and liabilities that are being measured and reported on a fair value basis, and establishes a framework for measuring

the fair value of assets and liabilities and expands disclosures about fair value measurements. The adoption of SFAS 157 had no

impact to our consolidated financial statements. Effective July 1, 2009, this standard was incorporated into the FASB ASC Section

820, Fair Value Measurements and Disclosures (FASB ASC 820). FASB ASC 820 requires fair value measurements be classified and

disclosed in one of the following three categories:

Level 1:

Level 2:

Level 3:

Financial instruments with unadjusted, quoted prices listed on active market exchanges.

Financial instruments determined using prices for recently traded financial instruments with similar underlying
terms as well as directly or indirectly observable inputs, such as interest rates and yield curves that are observable
at commonly quoted intervals.

Financial instruments that are not actively traded on a market exchange. This category includes situations where
there is little, if any, market activity for the financial instrument. The prices are determined using significant
unobservable inputs or valuation techniques.

As of December 31, 2009, we have available-for-sale marketable securities totaling $86.8 million, consisting of investments in

treasury bills, government and agency bonds and certificates of deposits, all of which are valued at fair value using a market

approach. A total of $85.4 million of our available-for-sale marketable securities is valued based on quoted prices in active
exchange markets (Level 1). The remaining $1.4 million is valued at fair value using other observable inputs (Level 2).

Derivative Instruments. We account for derivative instruments and hedging activities under FASB ASC Section 815, Derivatives and

Hedging (FASB ASC 815). Accordingly, all of our derivative instruments are recorded in the accompanying consolidated balance

sheets 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 FASB ASC 815. 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 a net gain of $655,000 for the year ended December 31, 2009, and net losses of $1.5 million and $2.8 million for the

years ended December 31, 2008 and 2007, respectively, on foreign currency contracts, which are included in “Other expense

(income), net” in our consolidated statements of operations. These losses substantially offset translation gains recorded on our

intercompany receivable and payable balances, also included in “Other expense (income), net.” At December 31, 2009 and 2008,
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

2009
$ 5,492
$ 10,419

Year Ended December 31,
2008

2007

$ 5,963
$ 4,960

$ 1,898
$ 10,408

During 2008, we sold certain assets of our Toulon, France facility. As part of that sale, the buyer assumed our capital lease

obligations of approximately $700,000 for certain machinery and equipment located in that facility. We entered into insignificant
amounts of capital leases during 2007, 2008 and 2009.

Subsequent Events. We adopted the provisions of SFAS No. 165, Subsequent Events (SFAS 165) during the three-month period
ended June 30, 2009. Effective July 1, 2009, this standard was incorporated into the FASB ASC Section 855, Subsequent Events (FASB

ASC 855). FASB ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet

date but before financial statements are issued. The adoption of these standards did not impact our financial position or results of

operations. We evaluated all events or transactions that occurred after December 31, 2009 through February 22, 2010, the date we
issued these financial statements.

49(cid:2)

Notes to Consolidated Financial Statements

Wright Medical Group, Inc.

Inventories

Inventories consist of the following (in thousands):

Raw materials
Work-in-process
Finished goods

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,

2009

2008

8,606
23,766
131,163
163,535

9,502
34,811
131,746
176,059

December 31,

2009

2008

4,229
26,489
53,357
36,346
9,433
156,232
286,086
(146,378)
139,708 $

4,073
22,709
42,675
31,620
9,963
143,503
254,543
(120,892)
133,651

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,

2009

2008

1,448
469
466
2,383
(872)
1,511

1,448
357
13
1,818
(655 )
1,163

Depreciation expense approximated $32.7 million, $26.5 million, and $23.5 million for the years ended December 31, 2009, 2008,
and 2007, respectively, and included amortization of assets under capital leases.

Goodwill and Intangibles

Changes in the carrying amount of goodwill occurring during the year ended December 31, 2009, are as follows (in thousands):

Goodwill at December 31, 2008
Goodwill from contingent consideration associated with
acquisitions prior to 2009
Foreign currency translation
Goodwill at December 31, 2009

49,682

3,957
221
53,860

During 2009, we recognized contingent consideration of $2.1 million associated with our acquisition of Inbone Technologies, Inc.,

completed in 2008, $292,000 associated with the acquisition of the foot and ankle assets of A.M. Surgical, Inc., completed in 2008,

$877,000 associated with the acquisition of certain assets of R&R Medical, Inc., completed in 2007, $117,000 associated with the

acquisition of the subtalar implant assets of Koby Ventures Ltd., d/b/a Metasurg, completed in 2007, and $611,000 associated with

the acquisition of assets of Creative Medical Designs and Rayhack LLC, completed in 2008.

During 2009, we made payments for contingent consideration totaling $6.8 million, of which $3.1 million was accrued as of
December 31, 2008.

50(cid:2)

Notes to Consolidated Financial Statements

Wright Medical Group, Inc.

The components of our identifiable intangible assets are as follows (in thousands):

Distribution channels
Completed technology
Licenses
Customer relationships
Trademarks
Other

Less: Accumulated amortization
Intangible assets, net

December 31, 2009

December 31, 2008

Cost

Accumulated
Amortization

Cost

Accumulated
Amortization

22,207 $
12,537
7,245
3,750
2,733
2,620
51,092 $

(33,365)
17,727

22,025 $
5,213
3,777
720
570
1,060
33,365

21,625 $
12,163
6,301
3,650
2,733
3,360
49,832 $

(28,742)
21,090

19,316
4,006
3,504
371
373
1,172
28,742

Based on the intangible assets held at December 31, 2009, we expect to amortize approximately $2.5 million in 2010, $2.3 million in
2011, $2.2 million in 2012, $1.9 million in 2013, and $1.7 million in 2014.

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following (in thousands):

Employee benefits
Royalties
Taxes other than income
Commissions
Professional and legal fees
Contingent consideration
Restructuring liability (see Note 14)
Other

December 31,

2009

2008

11,327
5,900
5,084
5,738
5,124
1,912
6,781
12,777
54,643

13,324
6,336
6,154
6,092
7,155
3,065
4,950
12,171
59,247

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,
2009

December 31,
2008

662
200,000
200,662
(336)
200,326

261
200,000
200,261
(125)
200,136

In November 2007, we issued $200 million of Convertible Senior Notes due 2014. The notes will mature on December 1, 2014. The

notes pay interest semiannually at an annual rate of 2.625% and 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, 2009, our revolving credit facility had availability of $100 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 will bear interest at the sum of an annual base 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
3.25%. The term of the credit facility extends through June 30, 2011.

51(cid:2)

Notes to Consolidated Financial Statements

Wright Medical Group, Inc.

As discussed in Note 4, we have acquired certain property and equipment pursuant to capital leases. At December 31, 2009, future

minimum lease payments under capital lease obligations, together with the present value of the net minimum lease payments, are

as follows (in thousands):

2010
2011
2012
2013
2014
Total minimum payments
Less amount representing interest
Present value of minimum lease payments
Current portion
Long-term portion

Other Long-Term Liabilities

Other long-term liabilities consist of the following (in thousands):

Unrecognized tax benefits (See Note 9)
Other

352
277
45
20
8
702
(40)
662
(336)
326

December 31,

2009

2008

2,786
1,650
4,436

1,814
3,137
4,951

Income Taxes

The components of our income before income taxes are as follows (in thousands):

Domestic
Foreign
Income before income taxes

Year Ended December 31,
2008

2007

2009

9,062
6,550
15,612

3,036
18,534
21,570

10,981
(8,650)
2,331

The components of our provision for income taxes are as follows (in thousands):

Current provision (benefit):

Domestic:
Federal

State

Foreign

Deferred (benefit) provision:

Domestic:
Federal

State

Foreign

Total provision for income taxes

Year Ended December 31,
2008

2007

2009

10,229
1,003
1,453

(8,203)
(1,162)
161
3,481

3,192
(720)
(2,880)

(2,812)
(105)
21,698
18,373

7,590
660
1,397

(4,333)
(329)
(3,615)
1,370

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

Year Ended December 31,

2009

2008

2007

35.0 %
2.9
6.0
(6.0)
(4.2)
(9.8)
(1.6)
22.3 %

35.0 %
(4.4)
6.6
59.1
(8.5)
(5.6)
3.0
85.2 %

35.0 %
12.2
132.9
(3.6)
(51.2)
(70.0)
3.5
58.8 %

52(cid:2)

Notes to Consolidated Financial Statements

Wright Medical Group, Inc.

The significant components of our deferred income taxes as of December 31, 2009 and 2008 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
Intangible assets
Other

Total deferred tax liabilities
Net deferred tax assets

December 31,

2009

2008

20,623
1,581
26,170
8,097
611
15,411
(17,216)
55,277

7,357
3,186
4,836
15,379
39,898

22,667
1,854
23,640
7,464
2,056
13,699
(18,512)
52,868

9,121
4,237
6,794
20,152
32,716

Outside basis differences that have not been tax-effected in accordance with FASB ASC 740, 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 that are considered permanently reinvested. The determination of the amount of
unrecognized deferred tax liabilities is not practicable.

At December 31, 2009, we had net operating loss carryforwards for U.S. federal income tax purposes of approximately $10.7 million,

which begin to expire in 2017. Additionally, we had general business credit carryforwards of approximately $1.6 million, which

expire beginning in 2010 and extend through 2016. At December 31, 2009, we had foreign net operating loss carryforwards of
approximately $51.1 million, of which approximately $3.7 million expires beginning in 2010 and extending through 2015.

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 those net operating losses and tax credit carryforwards that we do not expect to utilize due to

these limitations and it is more likely than not that such tax benefits will not be realized. In 2008, we recognized a tax provision of

$12.8 million to record a valuation allowance, primarily for deferred tax assets associated with net operating losses in France.

During 2009, we reduced our valuation allowance as a result of a change in estimate regarding the jurisdiction where certain
deductions would be recognized for tax purposes.

Effective January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), which clarifies

the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109,

Accounting for Income Taxes, 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. Effective July 1, 2009, this standard was incorporated into
FASB ASC 740.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Balance at January 1, 2009
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, 2009

1,814
640
317
(27)
-
42
2,786

As of December 31, 2009, our liability for unrecognized tax benefits totaled $2.8 million and is recorded in our consolidated balance

sheet within “Other liabilities,” all of which, if recognized, would affect our effective tax rate. Management does not believe that it is
reasonably possible that our unrecognized tax benefits will significantly change within the next twelve months.

FASB ASC 740 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,

2009, accrued interest related to our unrecognized tax benefits totaled approximately $76,000 which is recorded in our
consolidated balance sheet within “Other liabilities.”

53(cid:2)

Notes to Consolidated Financial Statements

Wright Medical Group, Inc.

We file numerous consolidated and separate company income tax returns in the U.S. and in many foreign jurisdictions, with the

most significant foreign jurisdiction being France. We are no longer subject to foreign income tax examinations by tax authorities in

significant jurisdictions for years before 2004. With few exceptions, we are subject to U.S. federal, state and local income tax

examinations for years 2006 through 2008. However, tax authorities have the ability to review years prior to these to the extent that
we utilize tax attributes carried forward from those prior years.

10.

Earnings Per Share

FASB ASC Section 260, Earnings Per Share, requires the presentation of basic and diluted earnings per share. Basic earnings per share

is calculated based on the weighted-average number of 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, stock-settled phantom stock units, restricted stock units, and convertible debt.

The dilutive effect of the stock options, non-vested shares of common stock, stock-settled phantom stock units, and restricted stock

units is calculated using the treasury-stock method. The dilutive effect of convertible debt is calculated by applying the

“if-converted” method. This 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 years ended December 31, 2007, 2008, and 2009, the convertible debt
had an anti-dilutive effect on earnings per share and we therefore excluded it 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

2009

Year Ended December 31,
2008

2007

37,366
77

37,443

36,933
468

37,401

35,812
671

36,483

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, restricted stock units, and stock-settled

phantom stock units

Convertible debt

11.

Capital Stock

2009

Year Ended December 31,
2008

2007

3,872

1,151
6,126

2,604

502
6,126

3,328

43
6,126

We are authorized to issue up to 100,000,000 shares of voting common stock. We have 61,331,118 shares of voting common stock
available for future issuance at December 31, 2009.

12.

Stock-Based Compensation Plans

We have three stock-based compensation plans which are described below. Amounts recognized in the consolidated 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 in income
Impact to net income

Impact to basic earnings per share

Impact to diluted earnings per share

2009
13,267
(1,361)
1,285
13,191
(3,901)
9,290

0.25

Year Ended December 31,
2008

2007

13,223
(1,492)
1,770
13,501
(3,674)
9,827

0. 27

0. 26

16,425
(2,262)
2,369
16,532
(3,665)
12,867

0.36

0.35

As of December 31, 2009, we had $22.9 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 2.6
years.

54(cid:2)

Notes to Consolidated Financial Statements

Wright Medical Group, Inc.

Equity Incentive Plan. On December 7, 1999, we adopted the 1999 Equity Incentive Plan, which was subsequently amended and
restated on July 6, 2001, May 13, 2003, May 13, 2004, May 12, 2005 and May 14, 2008 and amended on October 23, 2008. The 1999

Equity Incentive Plan expired December 7, 2009. The 2009 Equity Incentive Plan (the Plan), was adopted on May 13, 2009. 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 11,217,051 shares of common stock, of which full value awards (such as non-vested shares) are limited to 2,029,555 shares.

Pursuant to award agreements, under the Plan, a majority of options to purchase common stock, non-vested shares of common

stock, restricted stock units, and stock settled phantom stock units under the 1999 Equity Incentive Plan generally are exercisable in

increments of 25% annually on each of the first through fourth anniversaries of the date of grant. These awards are recognized on a

straight-line basis over the requisite service period, which is generally four years. As of December 31, 2009, there were 1,024,485

shares available for future issuance under the Plan, of which full value awards are limited to 414,124 shares.

Stock options

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 2009, 2008, and 2007 was $6.23 per share,

$11.17 per share, and $11.30 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

2009
2.1% - 2.6%
6 years
39%

Year Ended December 31,
2008
2.0% - 3.4%
6 years
36%

2007
3.9% - 4.8%
6 years
39%

A summary of our stock option activity during 2009 is as follows:

Shares
(000’s)

Weighted-
Average Exercise
Price

Weighted-Average
Remaining
Contractual Life

Aggregate
Intrinsic Value*
($000’s)

Outstanding at December 31, 2008

Granted
Exercised
Forfeited or expired

Outstanding at December 31, 2009

Exercisable at December 31, 2009

______________________________________

4,046
295
(38)
(338)
3,965

2,934

24.32
15.72
8.14
24.77
23.79

24.32

5.9 years

2,228

5.1 years

1,233

The aggregate intrinsic value is calculated as the difference between the market value of our common stock as of December 31,
2009, and the exercise price of the shares. The market value as of December 31, 2009 is $18.94 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, 2009.

The total intrinsic value of options exercised during 2009, 2008, and 2007 was $371,000, $5.9 million, and $17.3 million, respectively.

A summary of our stock options outstanding and exercisable at December 31, 2009, is as follows (shares in thousands):

Range of Exercise
Prices
$
$
$
$

0.00 – $8.50
8.51 – $16.00
16.01 – $24.00
24.01 – $35.87

Options Outstanding

Options Exercisable

Number
Outstanding

Weighted-Average
Remaining
Contractual Life

Weighted-Average
Exercise Price

Number

Exercisable

Weighted-Average
Exercise Price

63
275
1,547
2,080
3,965

0.5 years $
8.7 years
6.0 years
5.6 years
5.9 years $

55(cid:2)

5.28
15.43
20.80
27.69
23.79

63
27
1,183
1,661
2,934

5.28
15.01
20.89
27.64
24.32

Notes to Consolidated Financial Statements

Wright Medical Group, Inc.

Non-vested shares
We calculate the grant date fair value of non-vested shares of common stock using the closing 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 700,000, 526,000, and 409,000 non-vested shares of common stock to employees with weighted-average grant-date fair

values of $15.56 per share, $28.15 per share, and $24.32 per share during 2009, 2008, and 2007, 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 both 2009 and 2008, we granted certain independent distributors and other non-employees non-vested shares of common

stock of 18,000 and 27,000 shares at a weighted-average grant date fair values of $16.76 per share and $26.49 per share, respectively.
A summary of our non-vested shares of common stock activity during 2009 is as follows:

Shares
(000’s)

Weighted-Average
Grant-Date
Fair Value

Aggregate Intrinsic Value*

($000’s)

Non-vested at December 31, 2008
Granted
Vested
Forfeited
Non-vested at December 31, 2009

______________________________________

796
718
(216)
(137)
1,161

26.75
15.59
26.54
25.42
20.07

$21,983

* The aggregate intrinsic value is calculated as the market value of our common stock as of December 31, 2009. The market value as of
December 31, 2009 is $18.94 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, 2009.

The total fair value of shares vested during 2009 and 2008 was $4.1 million and $2.6 million, respectively.

Stock settled phantom stock units and restricted stock units
We calculate the grant date fair value of stock settled phantom stock units and restricted stock units using the closing sale prices on

the trading day immediately prior to the grant date. We are required to estimate forfeitures at the time of the 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.

During 2009, we granted 86,000 stock settled phantom stock units and restricted stock units to employees with weighted-average fair

value of $15.44 per share. 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.
A summary of our non-vested shares of common stock activity during 2009 is as follows:

Shares
(000’s)

Weighted-Average
Grant-Date
Fair Value

Aggregate Intrinsic Value*
($000’s)

Stock settled phantom stock and restricted stock units

at December 31, 2008

Granted
Vested
Forfeited
Stock settled phantom stock and restricted stock units

at December 31, 2009

-
135
(12)
(13)

110

-
20.21
28.34
16.65

19.75

$2,078

______________________________________
The aggregate intrinsic value is calculated as the market value of our common stock as of December 31, 2009. The market
value as of December 31, 2009 is $18.94 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, 2009.

The total fair value of shares vested during 2009 was $236,000.

Employee Stock Purchase Plan. On May 30, 2002, 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 approximately 27,000, 15,000, and 11,000 shares in 2009, 2008, and 2007, respectively, with

weighted-average fair values of $5.76, $9.09, and $7.73 per share, respectively. As of December 31, 2009, there were 97,356 shares

available for future issuance under the ESPP. During 2009, 2008, and 2007, 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

56(cid:2)

Notes to Consolidated Financial Statements

Wright Medical Group, Inc.

assumptions:

Risk-free interest rate
Expected option life
Expected price volatility

13.

Employee Benefit Plans

Year Ended December 31,

2009
0.9% - 1.1 %
6 months
39%

2008
2.9% - 3.3%
6 months
36%

2007
4.6% - 4.8%
6 months
39%

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 $1.6 million, $1.4 million, and $1.2 million in
2009, 2008, and 2007, respectively.

14.

Restructuring

Toulon, France

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 production now conducted solely in our existing manufacturing facility in Arlington, Tennessee
and the distribution activities being carried out from our European headquarters in Amsterdam, the Netherlands.

Management estimates that the pre-tax restructuring charges will total approximately $28 million to $30 million. These charges
consist of the following estimates:

(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)

$14 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;
$3 million to $4 million of external legal and professional fees; and
$6 million to $7 million of other cash and non-cash charges (including employee litigation).

Charges associated with the restructuring are presented in the following table. All of the following amounts were recognized

within “Restructuring charges” in our consolidated statement of operations, with the exception of the inventory write-offs and

manufacturing period costs, which were recognized within “Cost of sales – restructuring.”

(in thousands)
Severance and other termination benefits
Employee litigation accrual
Asset impairment charges
Inventory write-offs and manufacturing period costs
Legal/professional fees
Other
Total restructuring charges

Year Ended

December 31, 2009
$

Cumulative
Charges as of
December 31,
2009

13,550
5,048
3,093
2,139
3,017
194
27,041

(43)
887
-
-
648
(29)
1,463

As a result of the plans to close the facilities in 2007, we performed an evaluation of the undiscounted future cash flows of the

related asset group and recorded an impairment charge in 2007 for the difference between the net book value of the assets and

their estimated fair values for those assets we intended to sell. In April 2008, these assets were sold. We also recorded an
impairment charge in 2007 for assets to be abandoned.

57(cid:2)

Notes to Consolidated Financial Statements

Wright Medical Group, Inc.

Activity in the restructuring liability for the year ended December 31, 2009 is presented in the following table (in thousands):

Beginning balance as of December 31, 2008
Charges:

Severance and other termination benefits
Litigation accrual
Legal/professional fees
Other

Total accruals

Payments:

Severance and other termination benefits
Litigation
Legal/professional fees
Other

Total payments

Changes in foreign currency translation
Restructuring liability at December 31, 2009

4,950

(43)
887
648
(29)
1,463

(738)
(181)
(604)
(44)
(1,567)
118
4,964

In connection with the closure of our Toulon, France facility, 103 of our former employees have filed claims to challenge the

economic justification for their dismissal. To date, we have received judgments for 86 of those claims, the substantial majority of

which were unfavorable to us. All of these judgments have been appealed, or are expected to be appealed, by both parties.

Management has estimated the probable liability upon the ultimate resolution of these 103 claims to be $4.6 million, and has

therefore recorded this amount as a liability within “Accrued expenses and other current liabilities” in our consolidated balance

sheet as of December 31, 2009.

Creteil, France

In October 2009, we announced plans to close our distribution and finance support office in Creteil, France, in order to migrate all

relevant French distribution and support functions into our European organization based out of our European headquarters in
Amsterdam, the Netherlands.

Management estimates that the pre-tax restructuring charges will total approximately $3 million to $4 million. These charges
consist of the following estimates:

(cid:2)
(cid:2)
(cid:2)
(cid:2)

$1.0 million to $1.5 million for severance and other termination benefits;
$1.0 million to $1.5 million for contract termination charges;
$0.5 million of external legal and professional fees; and
$0.5 million of other restructuring related costs.

Charges associated with the restructuring are presented in the following table. All of the following amounts were recognized

within “Restructuring charges” in our consolidated statement of operations.

(in thousands)
Severance and other termination benefits
Contract termination costs
Legal/professional fees
Total restructuring charges

Year Ended
December 31,
2009

824
995
262
2,081

Activity in the restructuring liability for the year ended December 31, 2009 is presented in the following table (in thousands):

Beginning balance as of December 31, 2008
Charges:

Severance and other termination benefits
Contract termination costs
Legal/professional fees
Total accruals

Payments:

Severance and other termination benefits
Contract termination costs
Legal/professional fees

Total payments

Restructuring liability at December 31, 2009

824
995
262
2,081

(137)
(9)
(118)
(264)

1,817

58(cid:2)

Notes to Consolidated Financial Statements

Wright Medical Group, Inc.

15.

Commitments and Contingencies

Operating Leases. We lease certain equipment and office space under non-cancelable operating leases. Rental expense under
operating leases approximated $11.0 million, $10.1 million, and $9.7 million for the years ended December 31, 2009, 2008, and

2007, 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, 2009 (in thousands):

2010
2011
2012
2013
2014
Thereafter

9,286
5,325
2,562
372
136
111
17,792

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 $238,000, $475,000, and $455,000 during the years ended December

31, 2009, 2008, and 2007, 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, 2009 (in thousands):

2010
2011
2012
2013
2014
Thereafter

242
242
242
187
187
270
1,370

Purchase Obligations. We have entered into certain supply agreements for our products, which include minimum purchase
obligations. During the years ended December 31, 2009, 2008, and 2007, we paid approximately $3.1 million, $4.5 million, and $2.3

million, respectively, under those supply agreements. Our remaining purchase obligations under those supply agreements are as
follows at December 31, 2009 (in thousands):

2010
2011

2,543
2,543
5,086

Portions of our payments for operating leases, royalty and consulting agreements are denominated in foreign currencies and were

translated in the tables above based on their respective U.S. dollar exchange rates at December 31, 2009. These future payments
are subject to foreign currency exchange rate risk.

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 (District Court) 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 District Court issued a Markman ruling on claim construction. Howmedica conceded to the District Court that,

if the claim construction as issued was applied to our knee product line, our products do not infringe their patent. Howmedica

appealed the Markman ruling. In September 2008, the U.S. Court of Appeals for the Federal Circuit (Federal Circuit) overturned the

District Court’s Markman ruling on claim construction. The case was remanded to the District Court for further proceedings on

alleged infringement and on our affirmative defenses, which include patent invalidity and unenforceability. In 2009, we received a

favorable ruling from the District Court ruling that Howmedica’s asserted patent is invalid. However, Howmedica has the right to

appeal the decision to the Federal Circuit. The judge has determined to also rule on our defense regarding patent unenforceability

before Howmedica will be allowed to appeal. No provision has been made for this contingency as of December 31, 2009. 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 we have

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, 2009.

In December 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 U.S. hip or knee joint replacement procedures or products. This
59(cid:2)

Notes to Consolidated Financial Statements

Wright Medical Group, Inc.

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 are cooperating fully with the DOJ’s investigation, and we anticipate that we

will continue to incur significant expenses related to this investigation. The conclusion of the investigation could result in sanctions

requiring the payment of criminal fines, civil fines, and/or settlement amounts. We cannot estimate what, if any, impact any results
from this investigation could have on our consolidated results of operations or financial position.

In June 2008, we received a letter from the Securities and Exchange Commission (SEC) informing us that it is conducting an

informal investigation regarding potential violations of the Foreign Corrupt Practices Act in the sale of medical devices in a number

of foreign countries by companies in the medical device industry. We understand that several other medical device companies

have received similar letters. We are cooperating fully with the SEC’s request. We cannot estimate what, if any, impact any results
from this inquiry could have on our consolidated results of operations or financial position.

One of our insurers has reserved the right to recover from us up to approximately $10.5 million paid by the insurer for the

settlements of 33 product liability lawsuits in West Virginia during 2009. We believe that an ultimate unfavorable resolution of this
matter is not probable; therefore, no provision has been made for any claim by our insurer as of the date of this report.

We have a dispute with a former distributor in Belgium claiming damages of approximately $12.6 million. The case was pleaded

during the first quarter of 2010. In January 2010, the former distributor was awarded approximately $80,000, for which have

included a provision in our consolidated balance sheet as of December 31, 2009. The former distributor does have the right to

appeal this decision. Management believes we have strong defenses against these claims and is vigorously contesting the

allegations; thus, we do not believe the results of this decision will have a material impact on the Company’s consolidated financial
position or results of operations.

Other. As of December 31, 2009, the trade receivable balance due from our stocking distributor in Turkey was $10.7 million, of

which a significant portion is past due. We have recorded a reserve of $5.6 million against this balance as of December 31, 2009. It is

possible that the future realization of this accounts receivable balance could be less than the remaining unreserved balance of $5.1
million.

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.

16.

Segment Data

We have one reportable segment, orthopaedic products, which includes the design, manufacture and marketing of devices and

biologic products for extremity, hip, and knee repair and reconstruction. Our geographic regions consist of the United States,

Europe (which includes the Middle East and Africa) and Other (which principally represents Latin America, 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):

Year Ended December 31,
2008

2009

2007

Net sales by product line:
Hip products
Knee products
Extremity products
Biologics products
Other
Total net sales

Net sales by geographic region:
United States
Europe
Other
Total

Operating income (loss) by geographic region:
United States
Europe
Other
Total

160,788
119,895
88,890
82,399
13,575
465,547

282,081
112,771
70,695
465,547

21,546
(14,909)
15,776
22,413

134,251
102,334
62,302
76,029
11,934
386,850

235,748
96,336
54,766
386,850

13,911
(22,835)
10,378
1,454

167,869 $
122,178
107,375
79,120
10,966
$

487,508

299,587
102,379
85,542
487,508

16,268
(11,683)
19,366
23,951

60(cid:2)

Notes to Consolidated Financial Statements

Wright Medical Group, Inc.

Long-lived assets:
United States
Europe
Other
Total

December 31,

2009

2008

108,389
17,510
13,809
139,708

104,058
18,192
11,401
133,651

No single foreign country accounted for more than 10% of our total net sales during 2009, 2008, or 2007; however, our subsidiary in
Japan represented approximately 10%, 8%, and 7% of our total net sales in 2009, 2008, and 2007, respectively.

During 2009, 2008 and 2007, our operating income included restructuring charges associated with the closure of our facility in

Toulon, France. During 2009 our operating income also included restructuring charges associated with the closure of our facility in

Creteil, France. Our U.S. region recognized $3.3 million, $1.6 million and $2.5 million of restructuring charges in 2009, 2008 and

2007, respectively, and our European region recognized $279,000, $5.1 million and $16.4 million of restructuring charges in 2009,

2008 and 2007, respectively. Additionally, in 2009 and 2008, our U.S. region recognized $7.8 million and $7.6 million of charges

related to the ongoing U.S. government inquiries. In 2009, our European region recognized a provision of $5.6 million related to the

trade receivable balance of our stocking distributor in Turkey. In 2008, our U.S. region recognized $2.5 million of acquired

in-process research and development costs related to our Inbone acquisition and $2.6 million related to an unfavorable appellate

court decision. In 2007, our U.S. region recognized a $3.3 million charge as a result of an unfavorable ruling under binding
arbitration.

17.

Quarterly Results of Operations (unaudited):

The following table presents a summary of our unaudited quarterly operating results for each of the four quarters in 2009 and

2008, 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.

61(cid:2)

Notes to Consolidated Financial Statements

Wright Medical Group, Inc.

First Quarter

Second
Quarter

Third Quarter

Fourth Quarter

2009

Net sales
Cost of sales

Gross profit

Operating expenses:

Selling, general and administrative
Research and development
Amortization of intangible assets
Restructuring charges

Total operating expenses

Operating income

Net income

Net income per share, basic

Net income per share, diluted

120,912
38,021
82,891

66,609
8,906
1,317
66
76,898

5,993

3,317

0.09

117,742
35,880
81,862

129,928
38,069
91,859

63,703
8,537
1,274
131
73,645

8,217

4,152

0.11

74,323
9,231
1,252
2,553
87,359

4,500

2,235

0.06

118,926
36,745
82,181

65,821
9,017
1,308
794
76,940

5,241

2,427

0.07

0.06

2008

Net sales
Cost of sales

Gross profit

Operating expenses:

Selling, general and administrative
Research and development
Amortization of intangible assets
Restructuring charges
Acquired in-process research and
development

Total operating expenses

Operating income

Net income

Net income per share, basic

Net income per share, diluted

First Quarter

Second
Quarter

Third Quarter

Fourth Quarter

115,865
32,438
83,427

118,477
34,811
83,666

111,096
32,038
79,058

120,109
35,090
85,019

66,589
7,999
1,041
1,815

-
77,444

5,983

4,058

0.11

68,875
8,378
1,276
3,095

2,490

84,114

61,897
8,338
1,287
685

-
72,207

(448) $

6,851

(2,357) $

4,187

(0.06) $

0.11

(0.06) $

0.11

64,035
8,577
1,270
1,110

-
74,992

10,027

(2,691)

(0.07)

Our operating income included charges related to the ongoing U.S. government inquiries, for which we recognized $4.1 million,

$2.0 million, and $1.6 million during the first, second, and third quarters of 2009, respectively. A minimal amount was recognized in

the fourth quarter of 2009. In addition, our operating income during the fourth quarter of 2009 included $2.1 million of

restructuring charges related to the closure of our office in Creteil, France, $2.6 million of charges related to the write-off of CTA

balances from three foreign subsidiaries following their substantially complete liquidation (see Note 2), and a $5.6 million provision

for the trade receivable balance from our stocking distributor in Turkey. Net income in 2009 included the after-tax effect of these
amounts.

Our operating income in 2008 included charges related to the ongoing U.S. government inquiries, for which we recognized $1.7

million, $1.5 million, $1.5 million and $2.9 million during the first, second, third and fourth quarters of 2008, respectively. In

addition, our operating income during the second quarter of 2008 included charges of $2.6 million related to an unfavorable

appellate court decision and $2.5 million of acquired in-process research and development costs related to our Inbone acquisition.

Net income in 2008 included the after-tax effect of these amounts. Additionally, our fourth quarter 2008 net income included a
$12.8 million charge for our valuation allowance, primarily for deferred tax assets associated with French net operating losses.

62(cid:2)

Management’s Annual Report on Internal Control Over Financial Reporting

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange

Act of 1934. Our disclosure controls and procedures are designed to ensure that material information relating to us, including our

consolidated subsidiaries, is made known to our principal executive officer and principal financial officer by others within our

organization. Under the supervision and with the participation of our management, including our principal executive officer and

principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of

December 31, 2009 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. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that

information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is

accumulated and communicated to our management, including our principal executive officer and principal financial officer as

appropriate, to allow timely decisions regarding required disclosure. 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, 2009.

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, 2009, 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, 2009. Our internal control over financial reporting as of December 31, 2009, 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 twelve months ended December 31, 2009, we implemented a new sales and inventory system within our Japanese

operations. This event represented a change that has materially affected our internal control over financial reporting. Accordingly,

under the supervision and with the participation of our management, including our principal executive officer and principal

financial officer, we conducted an evaluation of this change in internal control over financial reporting. Based on this evaluation,
our management concluded that this change did not diminish the design of our internal control over financial reporting.

63(cid:2)

corporate information

Transfer Agent and Registrar
American Stock Transfer & Trust Company, Inc. acts as
transfer agent and registrar for us and maintains all
stockholder records. Communications concerning stock
holdings, lost certificates, transfer of shares, duplicate
mailings or changes of address should be directed to:

Wright Medical Group, Inc.
c/o American Stock Transfer & Trust Company
6201 15th Avenue, Brooklyn, NY 11219
800.937.5449 info@amstock.com

Cash Dividend Policy
We have never declared or paid cash dividends on
common stock and do not anticipate a change in this
policy in the foreseeable future. We currently intend to
retain any future earnings for the operation and expansion
of our business.

Stock Prices and Trading Data
Our common stock is traded on the Nasdaq Global Select
Market under the symbol “WMGI.” Stock price quotations
are available in the investor relations section of our
website at www.wmt.com and are printed daily in major
newspapers, including The Wall Street Journal.

The ranges of high and low sale prices per share for our
common stock for 2009 and 2008 are set forth below. Price
data reflect actual transactions. In all cases, the prices
shown are inter-dealer prices and do not reflect markups,
markdowns, or commissions.

Stockholders
As of February 2, 2010, there were 689 stockholders of
record and an estimated 11,404 beneficial owners of our
common stock.

Independent Auditors
KPMG LLP
Memphis, Tennessee

Index), and an

Comparison of Total Stockholder Returns
The graph below compares the cumulative total stockholder
returns for the period from December 31, 2004 to December 31,
2009, for our common stock, an
index composed of U.S.
companies whose stock is listed on the Nasdaq Global Select
index
Market (the Nasdaq U.S. Companies
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, 2004, 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, 2004

Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
December 2009

(cid:2)

160.00

140.00

120.00

100.00

80.00

60.00

40.00

20.00

0.00

2004

2005

2006

2007

2008

2009

Wright Medical Group Inc.

NASDAQ Stock Market (US Companies)

NASDAQ Medical Equipment Index

Wright Medical Group, Inc.
Nasdaq U.S. Companies Index
Nasdaq Medical Equipment
Companies Index

12/31/2004
$100.00
100.00
100.00

12/31/2005
$71.58
102.13
109.81

12/31/2006
$81.67
112.18
115.73

12/31/2007
$102.33
121.67
147.16

12/31/2008
$71.68
58.64
79.25

12/31/2009
$66.46
79.70
108.49

2009 High*

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

$22.35

$16.97

$18.38

$19.40

Low*

$11.17

$12.03

$13.37

$15.32

2008 High*

Low*

$29.98

$31.49

$33.26

$30.71

$21.06

$23.53

$28.00

$15.18

*denotes high & low sale prices

Non-GAAP Financial Measures
We use non-GAAP financial measures, such as gross profit, as adjusted, operating income, as adjusted, net income, as adjusted, and net income,
as adjusted, per diluted share. Our management believes that the presentation of these measures provides useful information to investors.
These measures may assist investors in evaluating our operations, period over period. The measures exclude such items as business
development activities, including purchased in-process research and development, the financial impact of significant litigation, costs related to
the on-going U.S. governmental inquiries, restructuring charges and non-cash, stock-based expense, all of which may be highly variable, difficult
to predict and of a size that could have substantial impact on our reported results of operations for a period.

Management uses these measures internally for evaluation of the performance of the business, including the allocation of resources and the
evaluation of results relative to employee performance compensation targets. Investors should consider these non-GAAP measures only as a
supplement to, not as a substitute for or as superior to, measures of financial performance prepared in accordance with GAAP. This annual report
includes discussion of non-GAAP financial measures. Reference is made to the most directly comparable GAAP financial measures and the
reconciliation of the differences between the two financial measures, which is found on page 1 of this annual report and is otherwise available in
the “Corporate - Investor Information - Supplemental Financial Information” section of our website located at www.wmt.com.

64(cid:2)

Senior Management

Gary D. Henley
President & CEO

Lance A. Berry
SVP & Chief Financial Oﬃcer

Frank S. Bono
SVP & Chief Technology Oﬃcer

William L. Griﬃn
SVP, Global Operations

Edward A. Steiger
SVP, Human Resources

Timothy E. Davis
SVP, Corporate Development

William J. Flannery
VP, Logistics & Materials

Rhonda L. Fellows
SVP, Government Aﬀairs, National
Accounts & Reimbursements

Cary P. Hagan
SVP, Commercial Operations – EMEA

Karen L. Harris
SVP, Sales & Marketing –
Japan, Latin America & Paciﬁc Rim

Kyle M. Joines
VP, Manufacturing

Joyce B. Jones
VP & Treasurer

Lisa L. Michels
VP & Chief Compliance Oﬃcer

Alicia M. Napoli
VP, Clinical & Regulatory

Eric A. Stookey
SVP & Chief Commercial Oﬃcer

John T. Treace
SVP, Global Marketing & US Sales

Jennifer S. Walker
VP & Corporate Controller

Directors

Gary D. Blackford 1
President & CEO
Universal Hospital Services, Inc.
Director since 2008

Carmen L. Diersen 3
Chief Operating & Financial Oﬃcer
Spine Wave, Inc.
Director since 2009

Martin J. Emerson 1, 2
President and CEO
Galil Medical, Inc.
Director since 2006

committees of the Board of Directors

1 – audit committee
2 – compensation committee
3 – nominating, compliance and governance committee
* denotes chairman of the committee

Gary D. Henley
President & CEO
Wright Medical Group, Inc.
Director since 2006

Lawrence W. Hamilton2*
Formerly – SVP, HR
Tech Data Corporation
Director since 2007

John L. Miclot 3*
President and CEO
CCS Medical, Inc.
Director since 2007

Amy S. Paul 3
Formerly – Group VP, International
C.R. Bard, Inc.
Director since 2008

Robert J. Quillinan1*
Formerly - CFO
Coherent, Inc.
Director since 2006

David D. Stevens 2
Formerly – CEO
Accredo Health, Inc.
Chairman of the Board
Director since 2004

24 | 2009 Annual Report Wright Medical Group, Inc.

Corporate Information

Wright Medical Group, Inc. is a global orthopaedic medical device
company specializing in the design, manufacture and marketing of
devices and biologic products for extremity, hip and knee repair and
reconstruction. We are a leading provider of surgical solutions for the
foot and ankle market.

Our product oﬀerings include hardware for the foot, ankle, hand, wrist,
elbow and shoulder; biologic products using both biological tissue-based
and synthetic materials; and large joint implants for the hip and knee.

We participate in the worldwide orthopaedic market and distribute our
products through a combination of direct sales personnel and a network
of independent distributors and sales personnel.

Headquartered in Arlington, Tennessee, we have been in business
for 60 years and retain approximately 1,300 employees who provide
outstanding service and innovative products throughout the world.

Our common stock is traded on the Nasdaq Global Select Market under
the symbol “WMGI”.

Investor Relations Information

Stockholders, securities analysts, and investors
seeking more information can access the
following information via the internet at
www.wmt.com:

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events and sales and earnings results for
each quarter and the ﬁscal year.

(cid:116)(cid:1)(cid:1) (cid:34)(cid:79)(cid:79)(cid:86)(cid:66)(cid:77)(cid:13)(cid:1)(cid:50)(cid:86)(cid:66)(cid:83)(cid:85)(cid:70)(cid:83)(cid:77)(cid:90)(cid:13)(cid:1)(cid:66)(cid:79)(cid:69)(cid:1)(cid:36)(cid:86)(cid:83)(cid:83)(cid:70)(cid:79)(cid:85)(cid:1)(cid:51)(cid:70)(cid:81)(cid:80)(cid:83)(cid:85)(cid:84)(cid:1)(cid:1)
ﬁled with the Securities and Exchange
Commission describing our business and
ﬁnancial condition.

(cid:116)(cid:1)(cid:1) (cid:36)(cid:80)(cid:83)(cid:81)(cid:80)(cid:83)(cid:66)(cid:85)(cid:70)(cid:1)(cid:72)(cid:80)(cid:87)(cid:70)(cid:83)(cid:79)(cid:66)(cid:79)(cid:68)(cid:70)(cid:1)(cid:74)(cid:79)(cid:71)(cid:80)(cid:83)(cid:78)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79)(cid:1)(cid:84)(cid:86)(cid:68)(cid:73)(cid:1)(cid:66)(cid:84)(cid:1)
committee charters, code of business
conduct, etc.

In addition, investors are welcome to call,
write, or fax us to request the information
above – including a copy of our Annual Report
or Form 10-K, free of charge. Inquires should
be directed to:

Wright Medical Group, Inc.
Attn: Investor Relations
5677 Airline Road, Arlington, TN 38002
901.867.4113
901.867.4390 Fax

Annual Meeting

The annual meeting of our stockholders will
be held on May 13, 2010 beginning at 8:00 am
(Central Time) at the:

River Inn of Harbor Town
River Hall
50 Harbor Town Square
Memphis, TN 38103
901.260.3333

The Notice of Annual Meeting and Proxy
Statement are being mailed to stockholders
with this annual report.