Wright Medical Group Inc
Annual Report 2014

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549FORM 10-K(Mark One)þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934For the fiscal year ended December 31, 2014ORo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934For the transition period from to Commission file number: 001-35823WRIGHT MEDICAL GROUP, INC.(Exact name of registrant as specified in its charter)Delaware 13-4088127(State or other jurisdictionof incorporation or organization) (I.R.S. EmployerIdentification No.)1023 Cherry Road, Memphis, Tennessee(Address of principal executive offices) 38117(Zip code)Registrant’s telephone number, including area code: (901) 867-9971Securities registered pursuant to Section 12(b) of the Act:Title of each class Name of each exchange on which registeredCommon Stock, par value $0.01 per share NASDAQ Global Select MarketContingent Value Rights NASDAQ Stock Market LLCSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.þ Yes o NoIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.o Yes þ NoNote — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act fromtheir obligations under those Sections.Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. þ Yes o NoIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required tobe submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).þ Yes o NoIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not becontained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.þIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.(Check one):Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o (Do not check if a smaller reportingcompany) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ NoThe aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the commonequity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed secondfiscal quarter was $1,578,389,672.As of February 18, 2015, there were 51,361,626 shares of common stock outstanding.DOCUMENTS INCORPORATED BY REFERENCEThe information required by Part III is incorporated by reference from portions of the definitive proxy statement to be filed within 120 days afterDecember 31, 2014, pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the Registrant's 2015 annual meeting ofstockholders. 1Table of ContentsWRIGHT MEDICAL GROUP, INC.ANNUAL REPORT ON FORM 10-KTable of Contents PagePart I Item 1. Business.1Item 1A. Risk Factors.12Item 1B. Unresolved Staff Comments.33Item 2. Properties.33Item 3. Legal Proceedings.33Item 4. Mine Safety Disclosures.35 Part II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.36Item 6. Selected Financial Data.38Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.41Item 7A. Quantitative and Qualitative Disclosures About Market Risk.61Item 8. Financial Statements and Supplementary Data.64Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.110Item 9A. Controls and Procedures.110Item 9B. Other Information.110 Part III Item 10. Directors, Executive Officers and Corporate Governance.111Item 11. Executive Compensation.111Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.111Item 13. Certain Relationships and Related Transactions, and Director Independence.111Item 14. Principal Accounting Fees and Services.111 Part IV Item 15. Exhibits, Financial Statement Schedules.112 Signatures119 EX-12 EX-21 EX-23 EX-31.1 EX-31.2 EX-32 EX-101 INSTANCE DOCUMENT EX-101 SCHEMA DOCUMENT EX-101 CALCULATION LINKBASE DOCUMENT EX-101 LABELS LINKBASE DOCUMENT EX-101 PRESENTATION LINKBASE DOCUMENT EX-101 DEFINITION LINKBASE DOCUMENT2Table of ContentsSAFE-HARBOR STATEMENTThis Annual Report may contain “forward-looking statements” as defined under U.S. federal securities laws. These statements reflect management's currentknowledge, assumptions, beliefs, estimates, and expectations and express management's current view of future performance, results, and trends. Forwardlooking statements may be identified by their use of terms such as anticipate, believe, could, estimate, expect, intend, may, plan, predict, project, will, andother similar terms. Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to materially differ fromthose described in the forward-looking statements. The reader should not place undue reliance on forward-looking statements. Such statements are made as ofthe date of this Annual Report, and we undertake no obligation to update such statements after this date. Risks and uncertainties that could cause our actualresults to materially differ from those described in forward-looking statements are discussed in our filings with the Securities and Exchange Commission(including those described in Item 1A of this Annual Report on Form 10-K). By way of example and without implied limitation, such risks and uncertaintiesinclude:•future actions of the SEC, the United States Attorney's office, the FDA, the Department of Health and Human Services or other U.S. or foreigngovernment authorities, including those resulting from increased scrutiny under the Foreign Corrupt Practices Act and similar laws, that could delay,limit or suspend our development, manufacturing, commercialization and sale of products, or result in seizures, injunctions, monetary sanctions orcriminal or civil liabilities;•completion of our proposed business combination with Tornier is subject to several closing conditions, including the expiration or termination ofthe waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, as amended (HSR Act). the failure of which could delay or preventcompletion or reduce anticipated benefits;•cash costs associated with our proposed business combination with Tornier may negatively impact our financial condition, operating results, andcash flow;•in connection with the proposed business combination with Tornier, our and Tornier’s business may not be combined successfully, or suchcombination may take longer, be more difficult, time-consuming or costly to accomplish than expected;•the proposed business combination with Tornier may not achieve the intended benefits or may disrupt our operations;•the shares issued to our stockholders in connection with the proposed business with Tornier are subject to a fixed exchange ratio, and will havedifferent rights and may be impacted by different factors as compared to the existing Wright shares;•continued liability for product liability claims on hip/knee (OrthoRecon) products sold prior to the divestiture of our OrthoRecon business;•failure to realize the anticipated benefits from our acquisitions or from the divestiture of our OrthoRecon business;•adverse outcomes in existing product liability litigation;•new product liability claims;•inadequate insurance coverage;•copycat claims against our modular hip systems resulting from a competitor's recall of its modular hip product;•failure or delay in obtaining FDA approval of Augment® Bone Graft for commercial sale in the United States;•challenges to our intellectual property rights or inability to defend our products against the intellectual property rights of others;•loss of key suppliers;•failures of, interruptions to, or unauthorized tampering with our information technology systems;•failure or delay in obtaining FDA or other regulatory approvals for our products;•any actual or alleged breach of the Corporate Integrity Agreement to which we are subject through September 2015, which could expose us tosignificant liability, including exclusion from Medicare, Medicaid and other federal healthcare programs, potential criminal prosecution, and civiland criminal fines or penalties;•the potentially negative effect of our ongoing compliance enhancements on our relationships with customers and on our ability to deliver timelyand effective medical education, clinical studies, and new products;•the possibility of private securities litigation or shareholder derivative suits;•insufficient demand for and market acceptance of our new and existing products;•recently enacted healthcare laws and changes in product reimbursements, which could generate downward pressure on our product pricing;•potentially burdensome tax measures;•lack of suitable business development opportunities;•inability to capitalize on business development opportunities;•product quality or patient safety issues;•geographic and product mix impact on our sales;•inability to retain key sales representatives, independent distributors and other personnel or to attract new talent;•inventory reductions or fluctuations in buying patterns by wholesalers or distributors;3Table of Contents•ability to generate sufficient cash flow to satisfy our existing debt, including the conversion feature of the 2017 Notes, or refinance our existing debtas it matures; and•the negative impact of the commercial and credit environment on us, our customers and our suppliers.4Table of ContentsPART IItem 1. Business.OverviewWright Medical Group, Inc., through Wright Medical Technology, Inc. (WMT) and other operating subsidiaries (Wright or we), is a global specialtyorthopaedic company, that provides extremity and biologic solutions that enable clinicians to alleviate pain and restore their patients’ lifestyles. We are arecognized leader of surgical solutions for the foot and ankle market, one of the fastest growing segments in medical technology, and market our products inover 60 countries worldwide.Our business includes products that are used in foot and ankle repair, upper extremity products, and biologics products, which are used to replace damaged ordiseased bone, to stimulate bone growth and to provide other biological solutions for surgeons and their patients. Extremity hardware includes implants andother devices to replace or reconstruct injured or diseased joints and bones of the foot, ankle, hand, wrist, fingers, toes, elbow and shoulder, which wegenerally refer to as either foot and ankle or upper extremity products. Our extensive foot and ankle product portfolio, our approximately 300 specializedfoot and ankle sales representatives, and our increasing level of training of foot and ankle surgeons has resulted in us being a recognized leader in the footand ankle market.Our corporate headquarters and United States (U.S.) operations are located in Memphis, Tennessee, where we conduct research and development, sales andmarketing administration, and administrative activities. Our manufacturing and warehousing operations are located in Arlington, Tennessee. Outside the U.S.,we have distribution and administrative facilities in the Netherlands, and sales and distribution offices in Canada, Australia, and throughout Europe.For the year ended December 31, 2014, we had net sales of $298 million and net loss from continuing operations of $240 million. As of December 31, 2014,we had total assets of $893 million. During the quarter ended March 31, 2014, our management began managing our operations as three operating businesssegments: U.S.; International; and BioMimetic, based on management's change to the way it monitors performance, aligns strategies, and allocates resourcesresults in a change in our reportable segments. Our U.S. and International segments represent the commercial, administrative and research & developmentactivities dedicated to the respective geographies. The BioMimetic segment represents the administrative and research & development activities of theacquired BioMimetic business (international sales and associated expenses for Augment® products are included within the International segment). Detailedinformation on our net sales by product line and our net sales, operating income and long-lived assets by segment can be found in Note 20 to theconsolidated financial statements contained in “Financial Statements and Supplementary Data.”On January 9, 2014, we completed the sale of our hip/knee (OrthoRecon) business to MicroPort Scientific Corporation (MicroPort) for approximately $283million in cash. As a result of the transaction, we recognized approximately $24.3 million as the gain on disposal of the OrthoRecon business, before theeffect of income taxes. As such, the financial results of our OrthoRecon business have been reflected within discontinued operations for all periods presentedand the discussion below is on a continuing operations basis. See Note 4 to our consolidated financial statements contained in “Financial Statements andSupplementary Data” for further information regarding this sale.On January 30, 2014, we completed our acquisition of Solana Surgical, LLC (Solana), and on February 5, 2014, we completed our acquisition of OrthoPro,L.L.C. (OrthoPro), both privately held, high-growth extremities companies. These acquisitions add complementary extremity product portfolios to furtheraccelerate growth opportunities in our global Extremities business.We acquired 100% of outstanding equity of Solana for approximately $48 million in cash and $41.4 million of our common stock. Under the terms of theagreement with OrthoPro, we acquired 100% of OrthoPro's outstanding equity for approximately $32.5 million paid at closing. See Note 3 to ourconsolidated financial statements contained in “Financial Statements and Supplementary Data” for further information regarding these acquisitions.On October 27, 2014, we entered into a definitive merger agreement with Tornier N.V. (Tornier) under which Wright and Tornier will combine in an all stocktransaction with a combined equity value of approximately $3.3 billion. Under the terms of the merger agreement, each outstanding share of our commonstock will be exchanged for 1.0309 ordinary shares of Tornier. Upon completion of the merger, Wright shareholders will own approximately 52% of theshares of the combined company on a fully diluted basis and Tornier shareholders will own approximately 48%. The transaction is subject to the customaryclosing conditions, including the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, as well as Wright and Tornier stockholder approval.Our merger with Tornier will create a mid-sized growth company uniquely positioned with leading technologies and specialized sales forces in three of thefastest growing areas of orthopaedics – Upper Extremities, Lower Extremities and Biologics.1Table of ContentsOrthopaedic IndustryThe total worldwide orthopaedic industry is estimated at approximately $37.5 billion in 2014. Six multinational companies currently dominate theorthopaedic industry, each with approximately $2 billion or more in annual sales. The size of these companies often allows them to concentrate theirmarketing and research and development efforts on products they believe will have a relatively high minimum threshold level of sales. As a result, there is anopportunity for a mid-sized orthopaedic company, such as Wright, to focus on less contested, higher-growth sectors of the orthopaedic market.In recent years, we focused our efforts into growing our position in the higher-growth extremities market, and we believe this market will continue to grow byapproximately 8-10% annually. We currently estimate the market for all surgical products used by extremity-focused surgeons to be over $3 billion in theU.S.Orthopaedic devices are commonly divided into several primary sectors corresponding to the major product categories within the orthopaedic field:reconstruction; trauma; arthroscopy; spine; and biologics. We specialize in those products used by extremity focused surgeon specialists, which includeproducts from the reconstruction, trauma and arthroscopy markets and biologic products.Extremity HardwareExtremity hardware includes implants and other devices to replace or reconstruct injured or diseased joints and bones of the foot, ankle, hand, wrist, fingers,toes, elbow and shoulder. Extremities hardware is one of the fastest growing market segments within orthopaedics with annual growth rates of 7-10%. Majortrends in extremity hardware include procedure-specific and anatomy-specific devices, locking plates and an increase in total ankle arthroplasty procedures.Foot and Ankle HardwareFoot and ankle reconstruction includes implants and other devices to replace or reconstruct injured or diseased joints and bones in the foot and ankle. A largesegment of the foot and ankle hardware market is comprised of plating and screw systems for reconstructing and fusing joints or repairing bones aftertraumatic injury. Major trends in foot and ankle hardware include the use of external fixation devices in diabetic patients, total ankle arthroplasty, andadvanced tissue fixation devices and biologics. According to various customer and market surveys, we are deemed the market leader in foot and anklesurgical products. New technologies have been introduced into the foot and ankle hardware market in recent years including next generation total anklereplacements. Many of these technologies currently have low levels of market penetration. We believe that market adoption of total ankle replacement,which currently represents approximately 6% of the Foot and Ankle market, will result in significant future growth in the foot and ankle hardware market. In2014, we expanded our Total Ankle portfolio with the INFINITY® Total Ankle System, which combines a low-profile implant design and seamlessintegration with PROPHECY® Pre-Operative Navigation Alignment Guides. It also features a distinctive talar resurfacing option for preservation of talar boneand a tibia design that is compatible with the Company’s existing INBONE® II System, which offers multiple implant options with different articulargeometry.In 2012, we launched our CLAW® II Polyaxial Compression and the ORTHOLOC® Plating Systems utilizing our 3Di polyaxial locking technology furtherexpanding our market leading Foot and Ankle portfolio. Also providing lateral, medial, and anterior approaches, the ORTHOLOC® 3Di Ankle Fusion Systemwas launched with great success in July of 2013. Following the foundational elements of the ORTHOLOC® 3Di technology, this system provides the optionsand strength needed to address the challenges of Ankle Fusion. In July of 2014, we further expanded the ORTHOLOC® 3Di portfolio with the launch of theFlatfoot module. This innovative plating solution brings speed, precision, and reproducibility to several difficult flatfoot procedures. With a view to thegrowing importance of Podiatry in Foot and Ankle surgery, we acquired two companies in early 2014, Solana and OrthoPro. Now integrated in our business,we are able to offer expanded solutions for bunionectomies, hammertoes and lesser toe deformities.Upper Extremity ReconstructionUpper extremity reconstruction involves implanting devices to replace, reconstruct, or fixate injured or diseased joints and bones in the hand, wrist, elbowand shoulder. It is estimated that approximately 60% of the upper extremity hardware market is in total shoulder replacement implants. Major trends in upperextremity hardware include minimally invasive fracture repair devices and next generation joint arthroplasty systems. We are the market leader in severalsegments of the upper extremity market including finger joints, radial head replacement, ulnar shortening systems and intramedullary wrist fracture repairdevices with our EVOLVE® Elbow Plating System and the market-leading EVOLVE® Modular Radial Head Prosthesis, and the new comprehensiveEVOLVE® TRIAD™ Fixation System designed as one system to manage complex “terrible triad” injuries to the elbow.Biologics Market. Biologic products use both biological tissue-based and synthetic materials to allow the body to regenerate damaged or diseased bone andto repair damaged or diseased soft tissue. These products aid the body's natural regenerative capabilities to heal itself, minimizing or delaying the need forinvasive implant surgery.Our biologic products are primarily used in extremity-related procedures as well as in trauma-induced voids of the long bones and some spine procedures.Biologic products provide a lower morbidity solution to “autografting,” a procedure that involves harvesting2Table of Contentsa patient's own bone or soft tissue and transplanting it to a different site. Following an autografting procedure, the patient typically has pain, and at times,complications result at the harvest site after surgery.Currently, there are three main types of biological bone grafting products: osteoconductive; osteoinductive; and osteogenic. Each category refers to the wayin which the materials affect bone growth. Osteoconductive materials serve as a scaffold that supports the formation of bone but do not “induce” or triggernew bone growth, whereas osteoinductive materials induce bone growth. Osteogenic materials combine the osteoinductive materials with a cell-basedcomponent. Our flagship, PRO-DENSE® injectable regenerative graft is an osteoconductive bone graft that provides the benefits of injectability, andhardness to support bone growth and predictable bone regeneration. Our PRO-STIM® osteoinductive bone graft substitute is a graft that is injected through asmall needle, hardens, and will be replaced by the patient's new bone over time. Products such as our GRAFTJACKET® regenerative tissue matrix, offer amarket-leading material for soft-tissue reinforcement for orthopaedic and podiatric soft-tissue reconstructive procedures.In March 2013, we acquired BioMimetic Therapeutics, Inc. (BioMimetic) to further accelerate our biologic growth opportunities in our extremities business.Specifically, BioMimetic's Augment® Bone Graft, if approved by the FDA, will provide us with a unique solution for hindfoot and ankle fusions. Augment®is based on recombinant human platelet-derived growth factor (rhPDGF-BB), a synthetic copy of one of the body's principal healing agents. In October 2014,we received an approvable letter from the FDA in response to our Pre-Market Approval application for Augment® Bone Graft for use as an alternative toautograft in hindfoot and ankle fusion procedures. The approvable letter indicates that FDA determined Augment® Bone Graft to be safe and effective as analternative to autograft for hindfoot and ankle fusion indications and is approvable subject to customary preapproval facilities inspections. We anticipatefinal approval from the FDA in the first half of 2015.Government RegulationUnited StatesOur products are strictly regulated by the FDA under the Food, Drug, and Cosmetic Act (FDC Act). Some of our products are also regulated by state agencies.FDA regulations and the requirements of the FDC Act affect the pre-clinical and clinical testing, design, manufacture, safety, efficacy, labeling, storage,recordkeeping, advertising and promotion of our medical device products. Our tissue-based products are subject to FDA regulations, the National OrganTransplant Act (NOTA) and various state agency regulations. We are an accredited member of the American Association of Tissue Banks (AATB) and an FDAregistered tissue establishment, which includes the packaging, processing, storage, labeling and distribution of tissue products regulated as medical devicesand the storage and distribution of tissue products regulated solely as human cell and tissue products. In addition, we maintain tissue bank licenses inFlorida, Maryland, New York, California and Oregon.Generally, before we can market a new medical device, marketing clearance from the FDA must be obtained through either a premarket notification underSection 510(k) of the FDC Act or the approval of a premarket approval (PMA) application. The FDA typically grants a 510(k) clearance if the applicant canestablish that the device is substantially equivalent to a predicate device. It usually takes about three months from the date of a 510(k) submission to obtainclearance, but it may take longer, particularly if a clinical trial is required. The FDA may find that a 510(k) is not appropriate or that substantial equivalencehas not been shown and, as a result, require a PMA application.PMA applications must be supported by valid scientific evidence to demonstrate the safety and effectiveness of the device, typically including the results ofhuman clinical trials, bench tests and laboratory and animal studies. The PMA application must also contain a complete description of the device and itscomponents, and a detailed description of the methods, facilities and controls used to manufacture the device. In addition, the submission must include theproposed labeling and any training materials. The PMA application process can be expensive and generally takes significantly longer than the 510(k)process. Additionally, the FDA may never approve the PMA application. As part of the PMA application review process, the FDA generally will conduct aninspection of the manufacturer's facilities to ensure compliance with applicable quality system regulatory requirements, which include quality controltesting, documentation control and other quality assurance procedures.If human clinical trials of a medical device are required and the device presents a significant risk, the sponsor of the trial must file an investigational deviceexemption (IDE) application prior to commencing human clinical trials. The IDE application must be supported by data, typically including the results ofanimal and/or laboratory testing. If the IDE application is approved by the FDA and one or more institutional review boards (IRBs), human clinical trials maybegin at a specific number of institutional investigational sites with the specific number of patients approved by the FDA. If the device presents a non-significant risk to the patient, a sponsor may begin the clinical trial after obtaining approval for the trial by one or more IRBs without separate approval fromthe FDA. Submission of an IDE does not give assurance that the FDA will approve the IDE. If it is approved, there can be no assurance the FDA will determinethat the data derived from the trials support the safety and effectiveness of the device or warrant the continuation of clinical trials. An IDE supplement mustbe submitted to and approved by the FDA before a sponsor or investigator may make a change to the investigational plan in such a way that may affect itsscientific soundness, study indication3Table of Contentsor the rights, safety or welfare of human subjects. The trial must also comply with the FDA's IDE regulations, and informed consent must be obtained fromeach subject.The FDA has statutory authority to regulate allograft-based products, processing and materials. The FDA and other international regulatory agencies havebeen working to establish more comprehensive regulatory frameworks for allograft-based tissue-containing products, which are principally derived fromhuman cadaveric tissue. The framework developed by the FDA establishes risk-based criteria for determining whether a particular human tissue-based productwill be classified as human tissue, a medical device or a biologic drug requiring premarket clearance or approval. All tissue-based products are subject toextensive FDA regulation, including establishment registration requirements, product listing requirements, good tissue practice requirements formanufacturing and screening requirements that ensure that diseases are not transmitted to tissue recipients. The FDA has also proposed extensive additionalrequirements that address sub-contracted tissue services, tracking to the recipient/patient and donor records review. If a tissue-based product is consideredhuman tissue, the FDA requirements focus on preventing the introduction, transmission and spread of communicable diseases to recipients. Neither clinicaldata nor review of safety and efficacy is required before the tissue can be marketed. However, if the tissue is considered a medical device or a biologic drug,then FDA clearance or approval is required.The FDA and international regulatory authorities periodically inspect us for compliance with regulatory requirements that apply to our operations. Theserequirements include labeling regulations, manufacturing regulations, quality system regulations, regulations governing unapproved or off-label uses andmedical device regulations. Medical device regulations require a manufacturer to report to the FDA serious adverse events or certain types of malfunctionsinvolving its products.Most of our products are FDA cleared through the 510(k) premarket notification process. We have conducted clinical trials to support some of our regulatoryapprovals. Regulations regarding the manufacture and sale of our products are subject to change. We cannot predict the effect, if any, that these changesmight have on our business, financial condition and results of operations. If the FDA believes that we are not in compliance with the FDC Act, it can instituteproceedings to detain or seize products, issue a market withdrawal, enjoin future violations and/or seek civil and criminal penalties against us and our officersand employees. If we fail to comply with these regulatory requirements, our business, financial condition and results of operations could be harmed.In 2010, WMT entered into a 12-month Deferred Prosecution Agreement (DPA) with the United States Attorney's Office for the District of New Jersey (USAO).This DPA was extended for another 12 months in 2011. WMT also entered into a five-year Corporate Integrity Agreement (CIA) with the Office of theInspector General of the United States Department of Health and Human Services (OIG-HHS). We are continuing to enhance our Corporate ComplianceProgram and are applying these enhancements on a global basis. We monitor our practices on an ongoing basis to ensure that we have proper controls inplace to comply with applicable laws in the jurisdictions in which we do business. Our failure to maintain compliance with United States healthcareregulatory laws could expose us to significant liability including, but not limited to, exclusion from federal healthcare program participation, includingMedicaid and Medicare, civil and criminal fines or penalties and additional litigation cost and expense.Further, we are subject to various federal and state laws concerning healthcare fraud and abuse, including false claims laws, anti-kickback laws and physicianself-referral laws. Violations of these laws can result in criminal and/or civil punishment, including fines, imprisonment and, in the United States, exclusionfrom participation in government healthcare reimbursement programs. If a governmental authority were to determine that we do not comply with these lawsand regulations, then we and our officers and employees could be subject to criminal and civil penalties.In March 2010, comprehensive health care reform legislation in the form of the Patient Protection and Affordable Care Act and the Health Care andEducation Reconciliation Act (the Affordable Care Act) was enacted. Among other provisions, these bills impose a 2.3% excise tax on U.S. sales of medicaldevices following December 31, 2012. In 2014 and 2013, we recognized approximately $3.5 million and $2.6 million, respectively, of costs for the medicaldevice excise tax. The Affordable Care Act also includes numerous provisions to limit Medicare spending through reductions in various fee schedulepayments and by instituting more sweeping payment reforms, such as bundled payments for episodes of care and the establishment of “accountable careorganizations” under which hospitals and physicians will be able to share savings that result from cost control efforts. Many of these provisions will beimplemented through the regulatory process, and policy details have not yet been finalized.InternationalAll of our products sold internationally are subject to certain foreign regulatory approvals. We must comply with extensive regulations governing productsafety, quality, manufacturing and reimbursement processes in order to market our products in all major foreign markets. These regulations vary significantlyfrom country to country and with respect to the nature of the particular medical device. The time required to obtain foreign approvals to market our productsmay be longer or shorter than the time required in the United States, and requirements for such approvals may differ from FDA requirements.To market our product devices in the member countries of the European Union (EU), we are required to comply with the European Medical Device Directivesand to obtain CE mark certification. CE mark certification is the European symbol of adherence to4Table of Contentsquality assurance standards and compliance with applicable European Medical Device Directives. Under the European Medical Device Directives, allmedical devices including active implants must qualify for CE marking. We also are required to comply with other foreign regulations, such as obtainingMinistry of Health Labor and Welfare (MHLW) approval in Japan, Health Protection Branch (HPB) approval in Canada and Therapeutic GoodsAdministration (TGA) approval in Australia.General initiatives sponsored by government agencies, legislative bodies and the private sector to limit the growth of healthcare expenses generally andhospital costs in particular, including price regulation and competitive pricing, are ongoing. It is not possible to predict the impact of such cost containmentmeasures on our future business.ProductsWe operate our business operations as three reportable segments: U.S.; International; and BioMimetic, and offer products in the extremity reconstruction andbiologics markets. Our business includes products that are used primarily in foot and ankle repair, upper extremity products, and biologics products, whichare used to replace damaged or diseased bone, to stimulate bone growth and to provide other biological solutions for surgeons and their patients. Sales ineach of these markets represent greater than 10% of our consolidated revenues from continuing operations. Detailed information on our net sales by productline can be found in Note 20 to the consolidated financial statements contained in “Financial Statements and Supplementary Data.”Extremity HardwareWe offer extremity products for the foot and ankle and upper extremities in a number of markets worldwide. Some of our extremity implants have over40 years of successful clinical history. We are a recognized leader in the United States and German markets for foot and ankle surgical products. Additionally,we hold significant positions in several segments of the upper extremity market such as radial head repair, finger joint replacements and intramedullary wristfracture implants.Foot and Ankle HardwareOur CHARLOTTE® foot and ankle system is an extensive offering of fixation products for foot and ankle surgery and includes products that feature advanceddesign elements for simplicity, versatility and high performance. The CHARLOTTE® portfolio includes the CLAW® Compression plate, the first ever lockingcompression plate designed for corrective foot surgeries. Originally introduced in 2007, the CLAW® Compression Plate system combined locked platingfixation with the stability of mechanical compression typical of compression staples.The CLAW® II Compression Plating system is the third-generation system to expand our plate and screw offering by introducing anatomic plates specificallydesigned for fusions of the midfoot. The CLAW® II Polyaxial Compression Plating system incorporates variable-angle locking screw technology.The DARCO® foot and ankle plating systems were designed to address the specific needs of reconstructive foot and ankle surgery. The DARCO® MFS andMRS plates were the first implants to incorporate fixed angle, locking screw technology into a comprehensive fixation set for foot surgery. Surgeons believethat surgical repairs are more stable with locking screw technology.Our INBONE® II total ankle system represents the third generation in ankle replacement implants, utilizing a patented intramedullary alignment mechanismfor more accurate placement of the implant. The unique modular nature of the implant allows the surgeon to tailor the fixation stems for the tibial and talarcomponents in order to maximize stability of the implant. Accuracy of placement and implant stability has been shown to be key factors impacting longevityof the implant. We believe the INBONE® system represents key advances in these critical arenas. Additionally, the INBONE® II implant system is the onlyankle replacement that offers surgeons multiple implant options with different articular geometry.In 2014, we introduced our INFINITY® Total Ankle System that was designed with PROPHECY® Pre-Operative Navigation in mind. This resulted in animplant system that is seamlessly integrated with this innovative technology to allow the surgeon to fully maximize the power of PROPHECY® and minimizethe learning curve typically associated with a brand new system. The combination and interchangeability of both the INBONE® and INFINITY® systemsprovide the surgeon with an implant continuum of care concept, allowing the surgeon to address a more bone conserving implant option with INFINITY® allthe way to addressing a more complex ankle deformity with INBONE®. We continue to be the only company with pre-operative navigation for the ankle,providing a competitive advantage in this rapidly expanding segment of orthopedics. Our ORTHOLOC® 3Di plating system provides foot and ankle surgeons with a comprehensive line of plates and screws to address most deformities of thefoot and ankle. This next generation system provides multiple screw options and includes our ORTHOLOC® 3Di polyaxial locking technology, whichenables the surgeon to adjust the screw trajectory to meet the anatomic requirements of the patient while providing a strong locking construct to promotebone fixation.The ORTHOLOC® 3Di Ankle Fracture system is a comprehensive single-tray ankle fracture solution designed to address a wide range of fracture types. Thissystem provides the surgeon with multiple anatomically-contoured plates and a comprehensive set of instrumentation. This technology coupled with thesingle tray design, decreases logistical complications in the operating room and enables the surgeon to match the appropriate implant construct with thepatient and fracture type.5Table of ContentsThe ORTHOLOC® 3Di Reconstruction Plating system includes a number of anatomical plates, screws and specialized surgical instrumentation used forfracture fixation, osteotomies, and fusions of the foot. The ORTHOLOC® 3Di Reconstruction System offers surgeons a wide range of plate designs to addresssome of the most common procedures performed by foot and ankle surgeons, including bunion reconstruction and fusions of the first toe.In November 2012, we expanded the ORTHOLOC® 3Di Reconstruction Plating System with the introduction of the ORTHOLOC® 3Di Midfoot PlatingSystem. This system provides surgeons with anatomic plates and instrumentation designed specifically for fusions of the midfoot.Providing lateral, medial, and anterior approaches, the ORTHOLOC® 3Di Ankle Fusion System was launched with great success in July 2013. Following thefoundational elements of the ORTHOLOC® 3Di technology, this system provides the options and strength needed to address the challenge of Ankle Fusion.In July 2014, we further expanded the ORTHOLOC® 3Di portfolio with the launch of the flatfoot module. This innovative plating solution brings speed,precision, and reproducibility to several difficult flatfoot procedures.The PRO-TOE® VO Hammertoe Fixation system is designed to offer a simple and efficient means to surgically repair the lesser toes following correction of ahammertoe deformity. While a sizeable proportion of these surgeries are treated conventionally with pins, the PRO-TOE® VO Hammertoe implant provides astable and efficient alternative surgical solution for the deformity. The system arrives in the operating room as a single, sterile-packed unit, which canincrease the efficiency of the procedure while removing costly cleaning and processing of a standard reusable instrument set. Additionally, the implant isfabricated from stainless steel, which simplifies the procedure by eliminating the freezer storage and special instruments required for other implantalternatives. The PRO-TOE® VO System provides surgeons with an array of implants to address the individual anatomic variations from patient to patient.With the acquisitions of Solana and OrthoPro in the quarter ended March 31, 2014, we added several complementary extremity products to the foot and ankleportfolio, to further accelerate growth opportunities in our global Extremities business. The Solana portfolio included the innovative CrossCheck® PlatingSystem, MDI Metatarsal Resurfacing Implant, and the unique TENFUSE® PIP and TENFUSE® Nail Allograft. The OrthoPro acquisition brought several keyproducts including the PhaLinx® Hammertoe Fixation System, the Total Compression Plate System, and several other foot reconstruction products. Theseproducts allow us to further penetrate the foot and ankle space, focusing on podiatry and several niche areas of the market.The BIOFOAM® Wedge System is designed for corrective osteotomies of the foot. The BIOFOAM® Cancellous Titanium material mimics the strength andflexibility of human bone, while providing an ideal environment for rapid bone in-growth and sustained rigid fixation. BIOFOAM® wedges are sizedspecifically for bone corrective procedures popular for treating patients with flatfoot deformity. The sterile BIOFOAM® wedges eliminate the risk of adverseimmune response associated with traditional allografts or the patient morbidity associated with autograft harvest - the current standard of care for theseprocedures. Additionally, with pre-configured implants and sizing trials, BIOFOAM® wedges eliminate the timely process of shaping traditional grafts forproper fit.The VALOR® TTC fusion nail provides surgeons with a solution for fusing the calcaneal, talar and tibial bones required in patients suffering from severeankle arthritis. In addition to the INBONE® total ankle replacement system, the VALOR® fusion nail provides foot and ankle surgeons with what we believeto be the most compelling portfolio for treating patients with varying degrees of ankle arthritis.Our SIDEKICK® line of external fixators is designed to facilitate compression or distraction of bones in the foot from “the outside in” and in a minimallyinvasive manner. In many cases, surgeons will opt for the minimally invasive nature of “external fixation” versus more invasive plate and screw “internalfixation.” One growing application of our SIDEKICK® external fixator is the preferred use of small incisions due to wound healing issues present with thesepatients.The SALVATION™ limb salvage portfolio is designed to address the unique demands of advanced midfoot reconstruction. This portfolio focuses on treatingcases such as neuropathic deformity requiring arthrodesis of the midfoot, with or without corrective osteotomies. Patients with poor quality, soft bone (e.g.Charcot), require implants specifically designed to deliver strength and maintain purchase in these difficult cases. The SALVATION™ portfolio is designed tospecifically address these patients, while providing easy to use instrumentation that assists in attaining reproducible results.Other products in our foot and ankle portfolio include our BIOARCH® subtalar arthroereisis implant, our line of AM™ Surgical foot and ankle endoscopictissue release products, and our line of Swanson toe joints.Upper Extremity HardwareOur EVOLVE® modular radial head replacement prosthesis addresses the need for modularity in the anatomically highly-variable joint of the elbow and isthe market leading radial head prosthesis. The EVOLVE® modular radial head device provides different combinations of heads and stems allowing thesurgeon to choose implant heads and stems to accommodate the unpredictable anatomy of each patient. The smooth stem design allows for rotational motionat the implant and bone interface and for6Table of Contentsradiocapitellar articulation. The EVOLVE® TRIAD™ radial head plating system is for surgeons who wish to repair rather than replace the damaged radialhead. The EVOLVE® TRIAD™ system includes anatomically contoured radial head and radial neck plates featuring the ORTHOLOC® 3Di Polyaxial LockingTechnology to enable optimal screw placement. With prostheses and plating, we have a comprehensive product offering for repair of radial head fractures.Our EVOLVE® Elbow Plating System (EPS) addresses fractures of the distal humerus and proximal ulna. Composed of polished stainless steel, the system wasdesigned to accurately match the patient anatomy to reduce the need for intra-operative bending while providing a low profile design to minimize post-operative irritation. All plates incorporate our advanced ORTHOLOC® 3Di Polyaxial Locking Technology, which allows the surgeon to place screws in thebest possible trajectory and then to solidly lock the screws to the plate providing greater stability.Our line of Swanson finger joints is used in finger joint replacement for patients suffering from rheumatoid arthritis of the hand. With nearly 40 years ofclinical success, Swanson digit implants are a foundation in our upper extremity business and are used by a loyal base of hand surgeons worldwide.Our MICRONAIL® II intramedullary wrist fracture repair system is a next-generation minimally invasive treatment for distal radius fractures that providesimmediate fracture stabilization with minimal soft tissue disruption. Also, as the nail is implanted within the bone, it has no external profile on top of thebone, thereby reducing the potential for tendon irritation or rupture, which is an appreciable problem with conventional plates designed to lie on top of thebone.Our RAYHACK® system is comprised of a series of precision cutting guides and procedure-specific plates for ulnar and radial shortening procedures and thesurgical treatment of radial malunions and Keinbock’s Disease.BiologicsWe offer a broad line of biologic products that are used to support treatment of damaged or diseased bone, tendons and soft tissues and other biologicalsolutions for surgeons and their patients. These products focus on supporting biological musculoskeletal repair by utilizing synthetic and human tissue-based materials. Internationally, we offer a bone graft product incorporating antibiotic delivery.GRAFTJACKET® matrix is a human-derived soft tissue graft designed for augmentation of tendon and ligament repairs such as those of the rotator cuff in theshoulder and achilles tendon in the foot and ankle. By augmenting the strength of the tendon repair and the body incorporating it biologically,GRAFTJACKET® regenerative tissue matrix may increase surgeons’ confidence in the surgical outcome. GRAFTJACKET® Maxforce Extreme is our thickestGRAFTJACKET® matrix, which provides excellent suture holding power for augmenting challenging tendon and ligament repairs. We procure ourGRAFTJACKET® product through an exclusive distribution agreement that expires December 31, 2018.We sell our PRO-DENSE® injectable graft in the United States and select international markets. PRO-DENSE® injectable graft is a composite graft of surgicalgrade calcium sulfate and calcium phosphate. In animal studies, this unique graft composite has demonstrated excellent bone regenerative characteristics,forming new bone that is over three times stronger than the natural surrounding bone at the 13-week time point. Beyond 13 weeks, the regenerated bonegradually remodels to natural bone strength. PRO-STIM® injectable inductive graft is built on the PRO-DENSE® material platform, but adds demineralizedbone matrix (DBM) for osteoinductive potential. PRO-STIM® graft has demonstrated accelerated healing compared to autograft in pre-clinical testing. Sincethe mechanism of action is different from PRO-DENSE® graft, PRO-STIM® graft will allow us to expand the applicable procedures for the material platform tomore challenging bone defects.FUSIONFLEX™ demineralized moldable scaffold is a novel form of allograft demineralized bone and is designed for use in conjunction with hardware in footand ankle fusion procedures as well as other orthopaedic bone grafting applications. Our FUSIONFLEX™ product is available through a supply anddistribution agreement with Allosource®. We began commercialization of AUGMATRIX® Biocomposite Bone Graft upon completion of the acquisition ofBioMimetic Therapeutics. AUGMATRIX® is provided through a supply agreement with Collagen Matrix, Inc.Our OSTEOSET® bone graft substitute is a synthetic bone graft substitute made of surgical grade calcium sulfate. As a pure synthetic, OSTEOSET® pellets arecleared for use in infected sites, an advantage over tissue-based material. The human body resorbs the OSTEOSET® material at a rate close to the rate that newbone grows. We offer surgeons the option of custom-molding their own beads in the operating room using the OSTEOSET® resorbable bead kit, which isavailable in mixable powder form. This bone graft, with a long clinical history provides an ideal combination of osteoinduction via osteoinductivedemineralized bone matrix (DBM) in OSTEOSET® DBM and osteoconduction for guided bone regeneration. Our surgical grade calcium sulfate ismanufactured using proprietary processes that consistently produce a high quality product. Our OSTEOSET® medicated pellets, which contain tobramycin,are currently one of the few resorbable bone void fillers used by physicians in international markets for the prevention and treatment of osteomyelitis, anacute or chronic infection of the bone.ALLOMATRIX® injectable putty combines a high content of DBM with our proprietary surgical grade calcium sulfate carrier. The combination provides aninjectable putty with the osteoinductive properties of DBM, as well as exceptional handling qualities.7Table of ContentsAnother combination we offer is ALLOMATRIX® C bone graft putty, which includes the addition of cancellous bone granules. The addition of the bonegranules increases the stiffness of the material and thereby improves handling characteristics, increases osteoconductivity scaffold and provides morestructural support. Our ALLOMATRIX® custom bone graft putty allows surgeons to customize the amount of bone granules to add to the putty based on itssurgical application. ALLOMATRIX® DR graft, which is ALLOMATRIX® putty that has been optimized for application in smaller fractures due to thesmaller particle size of its cancellous bone granules and the application-specific volume in which it is marketed.We have a supply agreement with RTI Biologics, Inc. to develop advanced implants for use in foot and ankle surgeries. Under this agreement, we offer ourCANCELLO-PURE® bone wedge line as well as the ALLOPURE® allograft bone wedges, which offer surgeons off-the-shelf, sterile grafts with appropriatehandling characteristics. The ease of use and time savings in the operating room have made this product line an attractive option to foot and ankle surgeonsand expand our offering in this key surgical area of need.The Augment® product line is based on recombinant human platelet-derived growth factor (rhPDGF-BB), a synthetic copy of one of the body’s principalhealing agents. The product is currently available for sale as an alternative to autograft in Canada for foot and ankle fusion indications and in Australia andNew Zealand for hindfoot and ankle fusion indications.Product DevelopmentOur research and development staff focuses on developing new products in the extremity hardware and biologics markets and on expanding our currentproduct offerings and the markets in which they are offered. In addition, we maintain close working relationships with physicians and medical personnel inhospitals and universities who assist in product research and development. Realizing that new product offerings are a key to future success, we are committedto a strong research and development program. In addition, we have clinical and regulatory departments devoted to verifying the safety and efficacy of ourproducts according to regulatory standards enforced by the FDA and other international regulatory bodies. Our research and development expenses totaled$25.0 million, $20.3 million and $13.9 million in 2014, 2013 and 2012, respectively. The increase in 2013 and 2014 is primarily attributable to increasedspending associated with the acquired BioMimetic activities, primarily related to the FDA approval of Augment® Bone Graft and ongoing clinical studies tosupport the safety and efficacy of Augment® Bone Graft.In the extremity hardware areas, our research and development activities focus on building upon our already comprehensive portfolios of surgical solutionsfor extremity focused surgeons, including procedure and anatomy specific products. With the ultimate goal of addressing unmet clinical needs, we oftenpursue multiple product solutions for a particular application in order to offer surgeons the ability either to use their preferred procedural technique or toprovide options and flexibility in the surgical setting with the understanding that one solution does not work for every case. A focus of our developmentefforts are treating ankle arthritis via total ankle replacement, as can be noted by our launch of the INFINITY® Total Ankle in 2014.In the biologics area, we have research and development projects underway that are designed to provide differentiation of our advanced materials in themarketplace. We are particularly focused on the integration of our biologic product platforms into extremity procedures.Manufacturing, Facilities and QualityWe operate a state of the art manufacturing facility in Arlington, Tennessee. We lease the manufacturing facility from the Industrial Development Board ofthe Town of Arlington. At this facility, we primarily produce orthopaedic implants and some related surgical instrumentation while utilizing leanmanufacturing philosophies. The majority of our surgical instrumentation is produced to our specifications by qualified subcontractors who serve medicaldevice companies. We recently completed the expansion of our manufacturing and distribution facilities and are operating at full capability. Our capacity issufficient to meet customer demand for the foreseeable future.We maintain a comprehensive quality system that is certified to the European standards ISO 9001 and ISO 13485 and to the Canadian Medical DevicesConformity Assessment System (CMDCAS). We are accredited by the AATB and have registrations with the FDA as a medical device establishment and as atissue establishment. These certifications and registrations require periodic audits and inspections by various global regulatory entities to determine if wehave systems in place to ensure our product is safe and effective for its intended use and that we are compliant with applicable regulatory requirements. Thequality system exists so that management has the proper oversight, designs are evaluated and tested, production processes are established and maintained andmonitoring activities are in place to ensure products are safe, effective and manufactured according to our specifications. Consequently, our quality systemprovides the way for us to ensure we design and build quality into our products while meeting global requirements. We are committed to meet or exceedcustomer needs as we improve patient outcomes.SupplyWe rely on a limited number of suppliers for the components used in our products. We rely on one supplier for the silicone elastomer used in certain of ourextremity products. We are aware of only two suppliers of silicone elastomer to the medical device industry8Table of Contentsfor permanent implant usage. For certain biologic products, we depend on one supplier of demineralized bone matrix (DBM), and cancellous bone matrix(CBM). We rely on one supplier for our GRAFTJACKET® family of soft tissue repair and graft containment products. We maintain adequate stock from thesesuppliers to meet market demand. We currently rely on one supplier for a key component of our Augment® Bone Graft. In December 2013, this suppliernotified us of their intent to terminate the supply agreement at the end of the current term, which is December 2015. Our supplier is contractually required tomeet our supply requirements until the termination date, and to use commercially reasonable efforts to assist us in identifying a new supplier and support thetransfer of technology and supporting documentation to produce this component. Our transition to a new supplier is well underway with full cooperationfrom the current as well as the new supplier. The current supplier has produced sufficient product to more than meet our production needs for the interimperiod until a new supplier is brought on line. See Item 1A, Risk Factors, for further information on our suppliers.Sales, Marketing, and Medical EducationOur sales and marketing efforts are focused primarily on orthopaedic, trauma, and podiatric surgeons. Orthopaedic surgeons focused on the extremities inmany instances have completed foot and ankle or upper extremity fellowship programs. Due to the nature of specialized training surrounding podiatric andorthopaedic surgeons focused on extremities, our target market is well defined. Historically, the surgeon is the primary decision-maker in orthopaedic devicepurchases.We offer clinical symposia and seminars, and publish advertisements and the results of clinical studies in industry publications. We also offer surgeon-to-surgeon education on our products using our surgeon advisors in an instructional capacity. We have contractual relationships with surgeon educators, whohelp us train other surgeons in the safe and effective use of our products and help other surgeons perfect new surgical techniques. Additionally,approximately 16,000 practicing orthopaedic surgeons in the U.S. receive information on our latest products through our distribution network, our websiteand brochure mailings.We sell our products in the U.S. through a sales force of approximately 370 people. This sales force primarily consists of direct sales representatives anddistributors/sales agents engaged principally in the business of supplying orthopaedic products to hospitals in their geographic areas. Approximately 80% ofour sales force is employed by us through a group of sales representatives in select locations throughout the U.S. We also have working relationships withhealthcare dealers, including group purchasing organizations, healthcare organizations, and integrated distribution networks. Our independent distributors,independent sales representatives and direct sales representatives are provided opportunities for product training throughout the year.We believe our success in every market sector is dependent upon having a robust and compelling product offering, and equally as important, a dedicated,highly trained, focused sales organization to service the customer. In 2014, we trained over 2,900 surgeons on our foot & ankle products, as well as over 70upper extremity surgeons.Our products are marketed internationally through a combination of direct sales offices (subsidiaries) in certain key international markets and distributors inother markets. We have subsidiaries in the United Kingdom, France, Germany, Italy, Canada and Australia that employ direct sales employees and in somecases use independent sales representatives to sell our products in their respective markets. Our products are sold in other countries in Europe, Asia, Africaand Latin America using stocking distribution partners. Stocking distributors purchase products directly from us for resale to their local customers, withproduct ownership generally passing to the distributor upon shipment.Seasonal Nature of BusinessWe traditionally experience lower sales volumes in the third quarter than throughout the rest of the year as many of our reconstructive products are used inelective procedures, which generally decline during the summer months, typically resulting in selling, general and administrative expenses and research anddevelopment 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 College of Footand Ankle Surgeons (ACFAS) and the American Academy of Orthopaedic Surgeons (AAOS). During these three-day events, we display our most recent andinnovative products in the foot and ankle market.CompetitionCompetition in the orthopaedic device industry is intense and is characterized by extensive research efforts and rapid technological progress. Competitorsinclude major companies in the orthopaedic and biologics industries, as well as academic institutions and other public and private research organizationsthat continue to conduct research, seek patent protection and establish arrangements for commercializing products that will compete with our products.The primary competitive factors facing us include price, quality, innovative design and technical capability, clinical results, breadth of product line, scale ofoperations and distribution capabilities. Our ability to compete is affected by our ability to accomplish the following:•Develop new products and innovative technologies;•Obtain and maintain regulatory clearance and reimbursement for our products;9Table of Contents•Manufacture and sell our products cost-effectively;•Meet all relevant quality standards for our products and their markets;•Respond to competitive pressures specific to each of our geographic markets, including our ability to enforce non-compete agreements;•Protect the proprietary technology of our products and manufacturing processes;•Market and promote our products;•Continue to maintain a high level of medical education for our surgeons on our products;•Attract and retain skilled employees and focused sales representatives; and•Support our technology and with clinically relevant studies.Intellectual PropertyWe currently own or have licenses to use more than 350 patents and pending patent applications throughout the world. We seek to aggressively protecttechnology, inventions and improvements that we consider important through the use of patents and trade secrets in the United States and significant foreignmarkets. We manufacture and market products under both patents and license agreements with other parties. These patents and license agreements have adefined life and expire from time to time.Our knowledge and experience, creative product development, marketing staff and trade secret information, with respect to manufacturing processes,materials and product design, are as important as our patents in maintaining our proprietary product lines. As a condition of employment, we require allemployees to execute a confidentiality agreement with us relating to proprietary information and patent rights.There can be no assurances that our patents will provide competitive advantages for our products or that competitors will not challenge or circumvent theserights. In addition, there can be no assurances that the United States Patent and Trademark Office (USPTO) will issue any of our pending patent applications.The USPTO may deny or require a significant narrowing of the claims in our pending patent applications and the patents issuing from such applications. Anypatents issuing from the pending patent applications may not provide us with significant commercial protection. We could incur substantial costs inproceedings before the USPTO. These proceedings could result in adverse decisions as to the priority of our inventions and the narrowing or invalidation ofclaims in issued patents. Additionally, the laws of some of the countries in which our products are or may be sold may not protect our intellectual property tothe same extent as the laws in the United States or at all.While we do not believe that any of our products infringe any valid claims of patents or other proprietary rights held by others, there can be no assurancesthat we do not infringe any patents or other proprietary rights held by them. If our products were found to infringe any proprietary right of another party, wecould be required to pay significant damages or license fees to such party and/or cease production, marketing and distribution of those products. Litigationmay also be necessary to defend infringement claims of third parties or to enforce patent rights we hold or to protect trade secrets or techniques we own.We also rely on trade secrets and other unpatented proprietary technology. There can be no assurances that we can meaningfully protect our rights in ourunpatented proprietary technology or that others will not independently develop substantially equivalent proprietary products or processes or otherwise gainaccess to our proprietary technology. We seek to protect our trade secrets and proprietary know-how, in part, with confidentiality agreements with employeesand consultants. There can be no assurances, however, that the agreements will not be breached, adequate remedies for any breach would be available, orcompetitors will not discover or independently develop our trade secrets.Third-Party ReimbursementReimbursement is an important factor in the success of any medical device. Reimbursement in the United States depends, in part, upon our ability to obtainFDA clearances and approvals to market our products, as well as obtain coverage and payment for our products. In the United States, as well as in foreigncountries, government-funded and/or private insurance programs, commonly known as third-party payors, pay a significant portion of the cost of a patient’smedical expenses. Health care reform initiatives, which may be implemented over the next several years, have the potential to impact the growth of sales inmedical devices as third-party payors look to control spending on health care. In the United States, a uniform policy of coverage does not exist across allthird-party payors relative to payment of claims for all products. Therefore, coverage and payment can be quite different from payor to payor, and from oneregion of the country to another. This is also true for foreign countries in that coverage and payment systems vary from country to country. Coverage alsodepends on our ability to demonstrate the short-term and long-term clinical effectiveness, and cost-effectiveness of our products. These supportive data areobtained from surgeon clinical experience, clinical trials, and literature reviews. We pursue and present these results at major scientific and medical meetings,and publish them in respected, peer-reviewed medical journals because data and evidence that can support coverage and payment are important to thesuccessful commercialization and market access of our products.All United States and foreign third-party payors continually develop increasingly sophisticated methods of controlling healthcare costs through healthcarereform measures including, government-managed healthcare systems, health technology assessments,10Table of Contentscoverage with evidence development processes, quality initiatives, pay-for-performance, comparative effectiveness research, capitation programs, grouppurchasing, redesign of benefit offerings, encouragement of healthier lifestyles, and exploration of more cost-effective methods of delivering care. All ofthese types of programs can potentially impact market access for, and pricing structures of our products, which in turn can impact future revenues.EmployeesAs of December 31, 2014, we employed approximately 1,180 people in the following areas: 200 in manufacturing; 450 in sales and marketing; 450 inadministration; and 80 in research and development. We believe that we have a good relationship with our employees.EnvironmentalOur operations and properties are subject to extensive federal, state, local and foreign environmental protection and health and safety laws and regulations.These laws and regulations govern, among other things, the generation, storage, handling, use and transportation of hazardous materials and the handling anddisposal of hazardous waste generated at our facilities. Under such laws and regulations, we are required to obtain permits from governmental authorities forsome of our operations. If we violate or fail to comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators. Undersome environmental laws and regulations, we could also be held responsible for all of the costs relating to any contamination at our past or present facilitiesand at third-party waste disposal sites.We believe our costs of complying with current and future environmental laws, regulations and permits and our liabilities arising from past or future releasesof, or exposure to, hazardous substances will not materially adversely affect our business, results of operations or financial condition, although there can beno assurances of this.Available InformationOur website is located at www.wmt.com. Reference to our website does not constitute incorporation by reference of the information contained on the site andshould not be considered part of this document. We make available, free of charge through this website, our annual reports on Form 10-K, quarterly reports onForm 10-Q, current reports on Form 8-K and amendments to those reports filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of theSecurities Exchange Act of 1934, as amended, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC.11Table of ContentsItem 1A. Risk Factors.Our business and its future performance may be affected by various factors, the most significant of which are discussed below.Risk Related to our BusinessWe are subject to substantial government regulation that could have a material adverse effect on our business.The production and marketing of our products and its ongoing research and development, pre-clinical testing and clinical trial activities are subject toextensive regulation and review by numerous governmental authorities both in the U.S. and abroad. U.S. and foreign regulations govern the testing,marketing and registration of new medical devices, in addition to regulating manufacturing practices, reporting, labeling, relationships with healthcareprofessionals and recordkeeping procedures. The regulatory process requires significant time, effort and expenditures to bring our products to market, and wecannot be assured that any of our products will be approved. Our failure to comply with applicable regulatory requirements could result in thesegovernmental authorities:•imposing fines and penalties on us;•preventing us from manufacturing or selling our products;•bringing civil or criminal charges against us;•delaying the introduction of our new products into the market;•recalling or seizing our products; or•withdrawing or denying approvals or clearances for our products.Even if regulatory approval or clearance of a product is granted, this could result in limitations on the uses for which the product may be labeled andpromoted. Further, for a marketed product, its manufacturer, said manufacturer's suppliers, and manufacturing facilities are subject to periodic review andinspection. Subsequent discovery of problems with a product, manufacturer or facility may result in restrictions on the product, manufacturer or facility,including withdrawal of the product from the market or other enforcement actions. Our products can only be marketed in accordance with their approvedlabeling. If we were to promote the use of our products in an “off-label” manner, we would be subject to civil and criminal sanctions.We are subject to various U.S. federal and state and foreign laws concerning healthcare fraud and abuse, including false claims laws, anti-kickback lawsand physician self-referral laws. Violations of these laws can result in criminal and/or civil punishment, including fines, imprisonment and, in the U.S.,exclusion from participation in government healthcare programs. Greater scrutiny of marketing practices in its industry has resulted in numerous governmentinvestigations by various government authorities and this industry-wide enforcement activity is expected to continue. If a governmental authority were todetermine that we do not comply with these laws and regulations, then we and our directors, officers and employees could be subject to criminal and civilpenalties, including exclusion from participation in federal healthcare reimbursement programs.In order to market our devices in the member countries of the European Union, we are required to comply with the European Medical Devices Directiveand obtain CE mark certification. CE mark certification is the European symbol of adherence to quality assurance standards and compliance with applicableEuropean Medical Device Directives. Under the European Medical Devices Directive, all medical devices including active implants must qualify for CEmarking.Although we divested our hip/knee (OrthoRecon) business, we remain responsible for liability claims on OrthoRecon products sold prior to closing, andmight still be sued on products sold after closing.Although OrthoRecon product liability expenses are accounted for under discontinued operations, our agreement with MicroPort requires we retainresponsibility for product liability claims on OrthoRecon products sold prior to closing, and for any resulting settlements, judgments or other costs.Moreover, even though MicroPort is responsible for liability claims on post-closing sales, there can be no assurance we will not be named as a defendant in alawsuit relating to such post-closing sales, or that MicroPort will have adequate resources to exonerate us from any resulting expenses or liabilities.We may never realize the expected benefits from divestiture of our OrthoRecon business.Divestiture of our OrthoRecon business is part of a strategy to transform ourselves into a profitable, high growth, pure play medical technologycompany, and command the market valuation typically accorded such companies. If we are unable to achieve our growth and profitability objectives due tocompetition, lack of acceptance of our products, failure to gain regulatory approvals, or other risks as described in this section, or due to other events, we willnot be successful in transforming our business and will12Table of Contentsnot be accorded the market valuation we seek. Moreover, our OrthoRecon business generated substantial revenue and cash flow, which we have not replaced.While over time we expect to replace our OrthoRecon revenue and cash flow by accelerating higher margin revenue streams from extremities and biologicproducts, there is a risk we will be unable to replace the revenue and cash flow that our OrthoRecon business generated, or that the cost of such will be higherthan expected. If we are unable to achieve our profit and growth objectives, such failure will be exacerbated by the loss of revenue and cash flow generatedby our OrthoRecon business, and could result in a decline in our stock price.We may never realize the expected benefits of our acquisitions.In addition to developing new products and growing our business internally, we have sought to grow through acquisition of complementarybusinesses. Examples include our acquisition of BioMimetic in early 2013, as well as the more recent acquisitions of Biotech International in November2013, Solana Surgical, LLC in January 2014, and OrthoPro, L.L.C. in February 2014. Acquiring new businesses involves myriad risks. Whenever a newbusiness is acquired, there is a risk we may fail to realize some or all of the anticipated benefits of the transaction. This can occur if integration of the acquiredbusiness proves to be more complicated than planned, resulting in failure to realize operational synergies and/or failure to mitigate operational dis-synergies,diversion of management attention, and loss of key personnel. It can also occur if the acquired business fails to meet our revenue projections, exposes us tounexpected liabilities, or if our pre-acquisition due diligence fails to uncover issues that negatively affect the value or cost structure of the acquiredenterprise. Although we carefully plan our acquisitions, there can be no assurance these and other risks will not prevent us from realizing the expectedbenefits of our acquisitions.Product liability lawsuits could harm our business.The manufacture and sale of medical devices exposes us to significant risk of product liability claims, and we remain responsible for claims associatedwith products sold before divesting our OrthoRecon business to MicroPort.We have received more than 1,500 claims and cases for personal injury associated with metal-on-metal hip replacement systems. We believe we havedata that supports the efficacy and safety of our metal-on-metal hip replacement systems, and have been vigorously defending these cases. While continuingto dispute liability, we have been participating in court supervised mediation in the multi-district federal court litigation presently pending in the NorthernDistrict of Georgia.Claims for personal injury have also been made against us associated with fractures of our PROFEMUR® long titanium modular neck product. Webelieve that the overall fracture rate for the product is low and the fractures appear, at least in part, to relate to patient demographics, and have beenvigorously defending these matters. While continuing to dispute liability, we have been open to settling these claims in circumstances where we believe thesettlement amount is reasonable relative to the risk and expense of litigation.Legal defenses are costly, regardless of the outcome. We may experience increased legal expenses as we defend our self in these matters, and we couldincur liabilities associated with adverse outcomes that exceed our products liability insurance coverage.In the future, we may be subject to additional product liability claims. Additionally, we could experience a material design or manufacturing failure inour products, a quality system failure, other safety issues, or heightened regulatory scrutiny that would warrant a recall of some of our products. Productliability lawsuits and claims, safety alerts and product recalls, regardless of their ultimate outcome, could have a material adverse effect on our business andreputation and on our ability to attract and retain customers.Our existing product liability insurance coverage may be inadequate to protect us from any liabilities we might incur.If the product liability claims brought against us involve uninsured liabilities or result in liabilities that exceed our insurance coverage, our business,financial condition and results of operations could be materially and adversely affected. Further, such product liability matters may negatively impact ourability to obtain insurance coverage or cost-effective insurance coverage in future periods. We are presently in litigation with certain of our insurance carriersconcerning the amount of coverage available to satisfy potential liabilities associated with metal-on metal hip claims. An unfavorable outcome in thislitigation could have an adverse effect on our financial condition and results of operations if we ultimately are subject to liabilities associated with theseclaims that exceed coverage amounts not in dispute.A competitor's recall of its modular hip systems, and the liability claims and adverse publicity which ensued, could generate copycat claims againstmodular hip systems we sold.On July 6, 2012, Stryker announced the voluntary recall of its Rejuvenate Modular and ABG II modular neck hip stems citing risks including thepotential for fretting and/or corrosion at or about the modular neck junction. Although Stryker's recalled modular neck hip stems differ in design and materialfrom the PROFEMUR® modular neck systems we sold before we divested13Table of Contentsour OrthoRecon business, we have previously noted the risk that Stryker's recall and the resultant publicity could negatively impact sales of modular necksystems of other manufacturers, including the PROFEMUR® system, and that Stryker's action has increased industry focus on the safety of cobalt chromemodular neck products. We have carefully monitored the clinical performance of the PROFEMUR® modular neck hip system, which combine a cobaltchrome modular neck and a titanium stem. With over 33,000 units sold since this version was introduced in 2009, and an extremely low complaint rate, weremain confident in the safety and efficacy of this product. Nevertheless, in light of Stryker's recall, the resulting product liability claims to which it has beensubject, and the general negative publicity surrounding “metal-on-metal” articulating surfaces (which do not involve modular hip stems), there remains a riskthat, even in the absence of clinical evidence, claims for personal injury relating to sales of these products before divestiture of our OrthoRecon businesscould increase.We must obtain regulatory approval from the FDA before we can market Augment® Bone Graft in the United States.Augment® Bone Graft is a product candidate that is regulated by the FDA. Augment® Bone Graft will require approval of a PMA application before itcan be marketed in the United States. On October 24, 2014, we received an Approvable Letter for Augment Bone Graft from the FDA, for use as an alternativeto autograph in hind foot and ankle fusion procedures. However, we have not yet received an Approval Letter from FDA. Until we receive an Approval Letter,we cannot market or sell Augment Bone Graft in the United States. While we believe our receipt of an Approvable Letter is a good indication we willultimately receive an Approval Letter, there are a number of factors, including vendor quality inspections, with which the FDA must be satisfied before it willissue an Approval Letter. If the FDA does not issue an Approval Letter for Augment Bone Graft, or if the there is a delay in obtaining same which, in turn,delays our ability to begin marketing and selling Augment Bone Graft in the United States, or if the FDA imposes labeling restrictions that reduce Augment®Bone Graft's market potential, this could have a material adverse effect on our financial condition and results of operations, and we may not realize anybenefits from our acquisition of BioMimetic, despite the substantial sums invested. In such event, our reputation and business would be harmed and our stockprice could decline further.A substantial portion of our business is conducted outside of the United States, which could subject us to increased scrutiny under the Foreign CorruptPractices Act.Our international operations expose us to legal and regulatory risks. These risks include the risk that our international distributors could engage inconduct violative of U.S. or local law, including the U.S. Foreign Corrupt Practices Act (FCPA). Recent investigations of companies in our industry by theSEC and the U.S. Department of Justice have focused on potential FCPA violations in connection with the sale of medical devices in foreign countries. Webelieve we have compliance systems, which enable us to prevent these behaviors. However, if despite our efforts we are not successful in mitigating theserisks, we could become the target of enforcement actions by U.S. or local authorities, and this could have a material adverse effect on our business, results ofoperations and cash flows.A significant portion of our product sales are made through independent distributors and sales agents who we do not control.A significant portion of our product sales are made through independent sales representatives and distributors. Because the independent distributoroften controls the customer relationships within its territory (and, in certain countries outside the U.S., the regulatory relationship), there is a risk that if ourrelationship with the distributor ends, our relationship with the customer will be lost (and, in certain countries outside the U.S., that we could experiencedelays in amending or transferring our product registrations). Also, because we do not control a distributor's field sales agents, there is a risk we will be unableto ensure that our sales processes, compliance and other priorities will be consistently communicated and executed by the distributor. If we fail to maintainrelationships with our key distributors, or fail to ensure that our distributors adhere to our sales processes, compliance and other priorities, this could have anadverse effect on our operations. In the past, we have experienced turnover within our independent distributor organization. This did adversely affect shortterm financial results as we transitioned to direct sales employees or new independent representatives. While we believe these transitions were managedeffectively, there is a risk that future transitions could have a greater adverse effect on our operations than we have previously experienced.Allegations of wrongdoing by the United States Department of Justice and OIG-HHS and related publicity could lead to further governmentalinvestigations or actions by other third parties.As a result of the allegations of wrongdoing made by the USAO and the publicity surrounding our recent settlement with the United States Departmentof Justice (DOJ) and OIG-HHS, and amendments to the DPA and CIA, other governmental agencies, including state authorities, could conduct investigationsor institute proceedings that are not precluded by the terms of settlements reflected in the DPA and the CIA. In August 2012, we received a subpoena from theUnited States Attorney's Office for the Western District of Tennessee requesting records and documentation relating to our PROFEMUR® series of hipreplacement devices for the period from January 1, 2000 to August 2, 2012. These interactions with the authorities could increase our exposure to lawsuits14Table of Contentsby potential whistleblowers, including under the federal false claims acts, based on new theories or allegations arising from the allegations made by theUSAO. The costs of defending or resolving any such investigations or proceedings could have a material adverse effect on our financial condition, results ofoperations and cash flows.If we lose any existing or future intellectual property lawsuits, a court could require us to pay significant damages or prevent us from selling our products.The medical device industry is litigious with respect to patents and other intellectual property rights. Companies in the medical device industry haveused intellectual property litigation to gain a competitive advantage.We are party to claims and lawsuits involving patents or other intellectual property. Legal proceedings, regardless of the outcome, could drain ourfinancial resources and divert the time and effort of our management. If we lose one of these proceedings, a court, or a similar foreign governing body, couldrequire us to pay significant damages to third parties, indemnify third parties from loss, require us to seek licenses from third parties, pay ongoing royalties,redesign our products, or prevent us from manufacturing, using or selling our products. In addition to being costly, protracted litigation to defend orprosecute our intellectual property rights could result in our customers or potential customers deferring or limiting their purchase or use of the affectedproducts until resolution of the litigation.If our patents and other intellectual property rights do not adequately protect our products, we may lose market share to our competitors and be unable tooperate our business profitably.We rely on patents, trade secrets, copyrights, know-how, trademarks, license agreements and contractual provisions to establish our intellectualproperty rights and protect our products. These legal means, however, afford only limited protection and may not completely protect our rights. In addition,we cannot be assured that any of our pending patent applications will issue. The USPTO may deny or require a significant narrowing of the claims in itspending patent applications and the patents issuing from such applications. Any patents issuing from the pending patent applications may not provide uswith significant commercial protection. We could incur substantial costs in proceedings before the USPTO. These proceedings could result in adversedecisions as to the priority of our inventions and the narrowing or invalidation of claims in issued patents. In addition, the laws of some of the countries inwhich our products are or may be sold may not protect our intellectual property to the same extent as U.S. laws or at all. We also may be unable to protect ourrights in trade secrets and unpatented proprietary technology in these countries.In addition, we hold licenses from third parties that are necessary to utilize certain technologies used in the design and manufacturing of some of ourproducts. The loss of such licenses would prevent us from manufacturing, marketing and selling these products, which could harm our business.We seek to protect our trade secrets, know-how and other unpatented proprietary technology, in part, with confidentiality agreements with ouremployees, independent distributors and consultants. We cannot be assured, however, that the agreements will not be breached, adequate remedies for anybreach would be available or our trade secrets, know-how, and other unpatented proprietary technology will not otherwise become known to orindependently developed by our competitors.If we lose one of our key suppliers, we may be unable to meet customer orders for our products in a timely manner or within our budget.We have relied on a limited number of suppliers for the components used in our products. Our reconstructive joint devices are produced from varioussurgical grades of titanium, cobalt chrome, stainless steel, various grades of high-density polyethylenes and ceramics. We have relied on one source to supplyus with a certain grade of cobalt chrome alloy, one supplier for the silicone elastomer used in some of our extremity products, and one supplier to provide akey ingredient of Augment® Bone Graft. The manufacture of our products is highly exacting and complex, and our business could suffer if a sole sourcesupply arrangement is unexpectedly terminated or interrupted, and we are unable to obtain an acceptable new source of supply in a timely fashion.In December 2013, we received written notice from Novartis of its intent to terminate, effective December 1, 2015, the exclusive supply agreementunder which we purchase from Novartis purified bulk recombinant human platelet-derived growth factor (rhPDGF-BB), which is a key component ofAugment® Bone Graft. Under the agreement, Novartis is obligated to cooperate with us in identifying a new supplier and in facilitating a technology transfer.We believe our existing inventory of rhPDGF-BB, together with our final purchases from Novartis, will leave us with an adequate supply of this product untila new supplier is brought on line. We are currently in the process of negotiating new agreements with, and completing a technology transfer to, a newsupplier.. However, if we are not successful in contracting,, qualifying, training and provisioning the new supplier before our available supply is exhausted,there is a risk our ability to supply Augment® Bone Graft could be interrupted.Our biologic product line includes a single sourced supplier for our GRAFTJACKET® family of soft tissue repair and graft containment products. Inaddition, certain biologic products depend upon a single supplier as our source for DBM and CBM, and15Table of Contentsany failure to obtain DBM and CBM from this source in a timely manner will deplete levels of on-hand raw materials inventory and could interfere with ourability to process and distribute allograft products. During 2013, we are expecting a single not-for-profit tissue bank to meet all of our DBM and CBM orderrequirements, a key component in the allograft products we currently produce, market and distribute. In addition, we rely on a single supplier of soft tissuegraft for BIOTAPE® XM.We cannot be sure that our supply of DBM, CBM and soft tissue graft for BIOTAPE® XM will continue to be available at current levels or will besufficient to meet our needs, or that future suppliers of DBM, CBM and soft tissue graft for BIOTAPE® XM will be free from FDA regulatory action impactingtheir sale of DBM, CBM and soft tissue graft for BIOTAPE® XM. As there are a small number of suppliers, if we cannot continue to obtain DBM, CBM andsoft tissue graft for BIOTAPE® XM from our current sources in volumes sufficient to meet our needs, we may not be able to locate replacement sources ofDBM, CBM and soft tissue graft for BIOTAPE® XM on commercially reasonable terms, if at all. This could interrupt our business, which could adverselyaffect our sales.Suppliers of raw materials and components may decide, or be required, for reasons beyond our control to cease supplying raw materials and componentsto us. FDA regulations may require additional testing of any raw materials or components from new suppliers prior to our use of these materials orcomponents and in the case of a device with a PMA application, we may be required to obtain prior FDA permission, either of which could delay or preventour access to or use of such raw materials or components.We are dependent on various information technology systems, and failures of, interruptions to, or unauthorized tampering of those systems could have amaterial adverse effect on our business.We rely extensively on information technology systems to conduct business. These systems include, but are not limited to, ordering and managingmaterials from suppliers, converting materials to finished products, shipping products to customers, processing transactions, summarizing and reportingresults of operations, complying with regulatory, legal or tax requirements, providing data security and other processes necessary to manage our business. Ifour systems are damaged or cease to function properly due to any number of causes, ranging from catastrophic events to power outages to security breaches,and our business continuity plans do not effectively compensate timely, we may suffer interruptions in our ability to manage operations.Fluctuations in insurance cost and availability could adversely affect our profitability or our risk management profile.We hold a number of insurance policies, including product liability insurance, directors' and officers' liability insurance, property insurance andworkers' compensation insurance. If the costs of maintaining adequate insurance coverage should increase significantly in the future, our operating resultscould be materially adversely impacted. Likewise, if the availability of any of our current insurance coverage should become unavailable to us or becomeeconomically impractical, we would be required to operate our business without indemnity from commercial insurance providers.Modifications to our marketed devices may require FDA regulatory clearances or approvals or require us to cease marketing or recall the modifieddevices until such additional clearances or approvals are obtained.The FDA requires device manufacturers to make a determination of whether or not a modification to a cleared and commercialized medical devicerequires a new approval or clearance. However, the FDA can review a manufacturer's decision not to submit for additional approvals or clearances. Anymodification to an FDA approved or cleared device that would significantly affect its safety or efficacy or that would constitute a major change in itsintended use would require a new premarket approval or 510(k) clearance and could be considered misbranded if the modified device is commercialized andsuch additional approval or clearance was not obtained. We cannot assure you that the FDA will agree with our decisions not to seek approvals or clearancesfor particular device modifications or that we will be successful in obtaining additional approvals or 510(k) clearances for modifications.We obtained 510(k) premarket clearance for certain devices we market or marketed in the United States. We have subsequently modified some of thosedevices or device labeling since obtaining 510(k) clearance under the view that these modifications did not significantly affect the safety or efficacy of thedevice, and did not require new approvals or clearances. If the FDA disagrees with our decisions and requires us to obtain additional premarket approvals or510(k) clearances for any modifications to our products and we fail to obtain such approvals or clearances or fails to secure approvals or clearances in atimely manner, we may be required to cease manufacturing and marketing the modified device or to recall such modified device until we obtain FDAapproval or clearance and we may be subject to significant regulatory fines or penalties.If we fail to comply with the terms of the Corporate Integrity Agreement, we may be subject to criminal prosecution and/or exclusion from federalhealthcare programs.16Table of ContentsAs previously reported, on September 29, 2010, our wholly-owned subsidiary, Wright Medical Technologies, Inc. (WMT) entered into a 12-monthDeferred Prosecution Agreement (DPA) with the United States Attorney's Office for the District of New Jersey, referred to as the USAO. WMT also entered intoa five-year Corporate Integrity Agreement (CIA) with the Inspector General of the United States Department of Health and Human Services, referred to as OIG-HHS. On September 15, 2011, WMT reached an agreement with the USAO and the OIG-HHS under which WMT voluntarily agreed to extend the term of itsDPA for 12 months. On October 4, 2012, the USAO issued a press release announcing that the amended DPA expired on September 29, 2012, that the USAOhad moved to dismiss the criminal complaint against WMT because WMT had fully complied with the terms of the DPA, and that the court had ordereddismissal of the complaint on October 4, 2012. WMT's obligations under the CIA expire as of September 29, 2015. The DPA imposed, and the CIA continuesto impose, certain obligations on WMT to maintain compliance with U.S. healthcare laws. Our failure to do so could expose us to significant liability,including, but not limited to, exclusion from federal healthcare program participation, including Medicaid and Medicare, which would have a materialadverse effect on our financial condition, results of operations and cash flows, potential prosecution, civil and criminal fines or penalties, and additionallitigation cost and expense.The CIA acknowledges the existence of our Corporate Compliance Program and provides for certain other compliance-related activities during the five-year term of the agreement. If we breach the CIA, the OIG-HHS may take further action against us, up to and including exclusion from participation in federalhealthcare programs, which exclusion would have a material adverse effect on our financial condition, results of operations and cash flows.Efforts to enhance our Corporate Compliance Program require the cooperation of many individuals and may divert resources from our other businessactivities and require substantial investment.We are committed to the continued enhancement of our Corporate Compliance Program. This requires additional financial and human resources.Successful implementation of our enhanced Corporate Compliance Program requires the full and sustained cooperation of our employees, distributors andsales agents, as well as the healthcare professionals with whom we interact. These efforts may require increased expenses and additional investments. We mayalso encounter inefficiencies in the implementation of our new compliance enhancements, including delays in medical education, research and developmentprojects, and clinical studies, which may unfavorably impact our business and our relationships with customers.The European Union and many of its world markets rely on the CE-Mark as the path to market our products.The European Medical Device Directive requires that many of our products that bear the CE-Mark be supported by post market clinical data. We are inthe process of implementing systems and procedures to control this activity in order to comply with these requirements, including establishing contractualrelationships with the HCP clinical study sites in accordance with our internal compliance requirements. We intend to obtain the needed clinical data tosupport our marketed products, but there can be no assurance that European regulators will accept the results. This could potentially impact businessperformance. In addition, changes to the certification and oversight responsibilities of notified bodies presently under consideration by the EuropeanCommission, if implemented, could result in more stringent notified body oversight requirements, require additional resources to maintain compliance, andincrease the risk of negative audit observations. In a recent notified body facility audit of our Biotech subsidiary in France, 14 negative auditnonconformities were recorded by the notified body auditors. If the notified body’s expected recertification process results in a more stringent oversightresulting in a failure to timely resolve the Biotech observations, or if Biotech’s responses are otherwise deemed unsatisfactory, this could cause aninterruption in our ability to market and sell Biotech products, which could have a material adverse effect on our business and results of operations.Our biologics business is subject to emerging governmental regulations that can significantly impact our business.The FDA has statutory authority to regulate allograft-based products, processing and materials. The FDA, European Union and Health Canada havebeen working to establish more comprehensive regulatory frameworks for allograft-based, tissue-containing products, which are principally derived fromcadaveric tissue. The framework developed by the FDA establishes risk-based criteria for determining whether a particular human tissue-based product will beclassified as human tissue, a medical device or biologic drug requiring 510(k) clearance or PMA approval. All tissue-based products are subject to extensiveFDA regulation, including establishment of registration requirements, product listing requirements, good tissue practice requirements for manufacturing andscreening requirements that ensure that diseases are not transmitted to tissue recipients. The FDA has also proposed extensive additional requirementsaddressing sub-contracted tissue services, traceability to the recipient/patient and donor records review. If a tissue-based product is considered human tissue,FDA requirements focus on preventing the introduction, transmission and spread of communicable diseases to recipients. Clinical data or review of safety andefficacy is not required before the tissue can be marketed. However, if tissue is considered a medical device or biologic drug, then FDA clearance or approvalis required.17Table of ContentsAdditionally, our biologics business involves the procurement and transplantation of allograft tissue, which is subject to federal regulation under theNational Organ Transplant Act (NOTA). NOTA prohibits the sale of human organs, including bone and other human tissue, for valuable consideration withinthe meaning of NOTA. NOTA permits the payment of reasonable expenses associated with the transportation, processing, preservation, quality control andstorage of human tissue. We currently charge our customers for these expenses. In the future, if NOTA is amended or reinterpreted, we may not be able tocharge these expenses to our customers, and, as a result, our business could be adversely affected.Our principal allograft-based biologics offerings include ALLOMATRIX®, GRAFTJACKET® and IGNITE® products.If we fail to compete successfully in the future against our existing or potential competitors, our sales and operating results may be negatively affected, andwe may not achieve future growth.The markets for our products are highly competitive. We may not be able to meet the prices offered by our competitors or to offer products similar to ormore desirable than those offered by our competitors.We operate in international markets that are subject to political, economic and social instability.We operate in in international markets. Our international sales operations expose us and our representatives, agents and distributors to risks inherent inoperating in foreign jurisdictions.These risks include:•the imposition of additional foreign governmental controls or regulations on orthopaedic implants and biologic products;•new export license requirements, particularly related to our biologic products;•economic instability, including currency risk between the U.S. dollar and foreign currencies, in our target markets;•a shortage of high-quality international salespeople and distributors;•loss of any key personnel who possess proprietary knowledge or are otherwise important to our success in international markets;•changes in third-party reimbursement policy that may require some of the patients who receive our implant products to directly absorb medical costsor that may necessitate our reducing selling prices for our products;•changes in tariffs and other trade restrictions, particularly related to the exportation of our biologic products;•work stoppages or strikes in the healthcare industry, such as those that have affected our operations in France, Canada, Korea and Finland in thepast;•a shortage of nurses in some of our target markets; and•exposure to different legal and political standards due to our conducting business in approximately 60 countries.As a U.S.-based company doing business in foreign jurisdictions, not only are we subject to the laws of other jurisdictions, we are also subject to U.S.laws governing our activities in foreign countries, such as the FCPA, as well as various import-export laws, regulations, and embargoes. If our businessactivities were determined to violate these laws, regulations or rules, we could suffer serious consequences.Healthcare regulation and reimbursement for medical devices vary significantly from country to country. This changing environment could adverselyaffect our ability to sell our products in some jurisdictions.We have a significant amount of indebtedness. We may not be able to generate enough cash flow from our operations to service our indebtedness, and wemay incur additional indebtedness in the future, which could adversely affect our business, financial condition and results of operations.We have a significant amount of indebtedness, including $300 million in aggregate principal with additional accrued interest under our 2.00%Convertible Senior Notes due 2017 (the [2017 Notes]), which was reduced to $60 million in aggregate principal with additional accrued interest followingthe completion of our repurchase of $240 million in aggregate principal amount of the 2017 Notes in connection with the [2020 Notes Offering] completedin February 2015, and $632.5 million in aggregate principal with additional accrued interest under our 2.00% Convertible Senior Notes due 2020 (the [2020Notes], together with the 2017 Notes, the [Notes]). Our ability to make payments on, and to refinance, our indebtedness, including the 2017 Notes, orTornier’s ability to make payments on, and to refinance the 2020 Notes, upon consummation of the Tornier merger transaction and its guarantee of the 2020Notes, and our ability to fund planned capital expenditures, research and development efforts, working18Table of Contentscapital, acquisitions and other general corporate purposes depends on our ability to generate cash in the future. This, to a certain extent, is subject to generaleconomic, financial, competitive, legislative, regulatory and other factors, some of which are beyond our control. If we do not generate sufficient cash flowfrom operations or if future borrowings are not available to us in an amount sufficient to pay our indebtedness, including payments of principal uponconversion of outstanding Notes or on their respective maturity dates or in connection with a transaction involving us that constitutes a fundamental changeunder the respective indenture governing the Notes, or to fund our liquidity needs, we may be forced to refinance all or a portion of our indebtedness,including the Notes, on or before the maturity dates thereof, sell assets, reduce or delay capital expenditures, seek to raise additional capital or take othersimilar actions. We may not be able to execute any of these actions on commercially reasonable terms or at all. Our ability to refinance our indebtedness willdepend on our financial condition at the time, the restrictions in the instruments governing our indebtedness and other factors, including market conditions.In addition, in the event of a default under the Notes, the holders and/or the trustee under the indentures governing the Notes may accelerate its paymentobligations under the Notes, which could have a material adverse effect on our business, financial condition and results of operations. Our inability togenerate sufficient cash flow to satisfy our debt service obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all,would likely have an adverse effect, which could be material, on our business, financial condition and results of operations.In addition, our significant indebtedness, combined with our other financial obligations and contractual commitments, could have other importantconsequences. For example, it could:•make us more vulnerable to adverse changes in general U.S. and worldwide economic, industry and competitive conditions and adverse changes ingovernment regulation;•limit our flexibility in planning for, or reacting to, changes in our business and our industry;•place us at a competitive disadvantage compared to our competitors who have less debt; and•limit our ability to borrow additional amounts for working capital, capital expenditures, research and development efforts, acquisitions, debt servicerequirements, execution of our business strategy or other purposes.Any of these factors could materially and adversely affect our business, financial condition and results of operations. In addition, if we incur additionalindebtedness, the risks related to our business and our ability to service our indebtedness would increase.In addition, under our Notes, we are required to offer to repurchase the Notes upon the occurrence of a fundamental change, which could include,among other things, any acquisition of ours for consideration other than publicly traded securities, but would not include the Tornier merger transaction tothe extent such transaction is a “permitted Tornier merger transaction” as defined in the indenture governing the 2020 Notes. The repurchase price must bepaid in cash, and this obligation may have the effect of discouraging, delaying or preventing an acquisition of ours that would otherwise be beneficial to oursecurity holders.Hedge and warrant transactions entered into in connection with the issuance of our Notes may affect the value of our common stock.In connection with the issuance of our 2020 Notes, we entered into hedge transactions with various financial institutions with the objective of reducingthe potential dilutive effect of issuing our common stock upon conversion of the 2020 Notes and the potential cash outlay from the cash conversion of the2020 Notes. We also entered into separate warrant transactions with the same financial institutions. These hedge and warrant transactions will be subject tocertain modifications upon consummation of the Tornier merger transaction.In connection with our hedge and warrant transactions associated with the 2020 Notes, these financial institutions purchased our common stock insecondary market transactions and entered into various over-the-counter derivative transactions with respect to our common stock. These entities or theiraffiliates are likely to modify their hedge positions from time to time prior to conversion or maturity of the 2020 Notes by purchasing and selling shares ofour common stock, other of our securities or other instruments they may wish to use in connection with such hedging. Any of these transactions and activitiescould adversely affect the value of our common stock and, as a result, the number of shares and the value of the common stock holders will receive uponconversion of the 2020 Notes. In addition, subject to movement in the price of our common stock, if the hedge transactions settle in our favor, we could beexposed to credit risk related to the other party with respect to the payment we are owed from such other party. If any of the participants in the hedgetransactions is unwilling or unable to perform its obligations for any reason, we would not be able to receive the benefit of such transaction. We cannotprovide any assurances as to the financial stability or viability of any of the participants in the hedge transactions.Cash payments we may be required to make upon conversion or maturity of our outstanding 2017 Notes would result in a reduction of our cash availableto fund business operations.19Table of ContentsWe have $60 million aggregate principal amount of cash convertible senior notes due 2017 outstanding. In August 2012, in connection with theissuance of our 2017 Notes, we entered into hedge and warrant transactions with various financial institutions designed to reduce our exposure to potentialcash payments in excess of the principal amount of these notes that we may be required to make upon conversion. These hedge and warrant transactions,however, were terminated in February 2015 when we repurchased $240 million aggregate principal amount of the 2017 Notes. Accordingly, if holdersconvert their 2017 Notes prior to maturity, we may be required to make cash payments to those holders in excess of the principal amount of the convertednotes. The conversion rate of the 2017 Notes is 39.3140 shares of common stock per $1,000 principal amount of notes (equivalent to a conversion price ofapproximately $25.44 per share of common stock), subject to adjustment in certain circumstances. The timing of any cash payments that we are required tomake upon conversion of the outstanding 2017 Notes is uncertain, and any such payments or payments we are required to make upon maturity of the 2017Notes will reduce the cash available to fund our business operations.Rating agencies may provide unsolicited ratings on our Notes that could reduce the market value or liquidity of our common stock.We have not requested a rating of our Notes from any rating agency and we do not anticipate that the Notes will be rated. However, if one or more ratingagencies independently elects to rate the Notes and assigns the Notes a rating lower than the rating expected by investors, or reduces such rating in the future,the market price or liquidity of our Notes and our common stock could be harmed. Should a decline in the market price of our Notes, as compared to the priceof our common stock occur, this may trigger the right of the holders of our Notes to convert such notes into cash and shares of our common stock, asapplicable.Turmoil in the credit markets and the financial services industry may negatively impact our business.The credit markets and the financial services industry have been experiencing a period of unprecedented turmoil and upheaval characterized by thebankruptcy, failure, collapse or sale of various financial institutions and an unprecedented level of intervention from the U.S. and foreign governments.While the ultimate outcome of these events cannot be predicted, they may have an adverse effect on our customers' ability to borrow money from theirexisting lenders or to obtain credit from other sources to purchase our products. In addition, the economic crisis could also adversely impact our suppliers'ability to provide us with materials and components, either of which may negatively impact our business.The collectability of our accounts receivable may be affected by general economic conditions.Our liquidity is dependent on, among other things, the collection of our accounts receivable. Collections of our receivables may be affected by generaleconomic conditions. Although current economic conditions have not had a material adverse effect on our ability to collect such receivables, we can makeno assurances regarding future economic conditions or their effect on our ability to collect our receivables, particularly from our international stockingdistributors.If we are unable to continue to develop and market new products and technologies, we may experience a decrease in demand for our products, or ourproducts could become obsolete, and our business would suffer.We are continually engaged in product development and improvement programs, and new products represent a significant component of our growthrate. We may be unable to compete effectively with our competitors unless we can keep up with existing or new products and technologies in the orthopaedicmarket. If we do not continue to introduce new products and technologies, or if those products and technologies are not accepted, we may not be successful.Additionally, our competitors' new products and technologies may beat our products to market, may be more effective or less expensive than our products ormay render our products obsolete.Our inability to maintain contractual relationships with healthcare professionals could have a negative impact on our research and development andmedical education programs.We maintain contractual relationships with respected physicians and medical personnel in hospitals and universities who assist in product research anddevelopment and in the training of surgeons on the safe and effective use of our products. We continue to place emphasis on the development of proprietaryproducts and product improvements to complement and expand our existing product lines as well as providing high quality training on those products. If weare unable to maintain these relationships, our ability to develop and market new and improved products and train on the use of those products coulddecrease, and future operating results could be unfavorably affected.Our business could suffer if the medical community does not continue to accept allograft technology.20Table of ContentsNew allograft products, technologies and enhancements may never achieve broad market acceptance due to numerous factors, including:•lack of clinical acceptance of allograft products and related technologies;•the introduction of competitive tissue repair treatment options that render allograft products and technologies too expensive and obsolete;•lack of available third-party reimbursement;•the inability to train surgeons in the use of allograft products and technologies;•the risk of disease transmission; and•ethical concerns about the commercial aspects of harvesting cadaveric tissue.Market acceptance will also depend on the ability to demonstrate that existing and new allograft products and technologies are attractive alternativesto existing tissue repair treatment options. To demonstrate this, we rely upon surgeon evaluations of the clinical safety, efficacy, ease of use, reliability andcost effectiveness of our tissue repair options and technologies. Recommendations and endorsements by influential surgeons are important to the commercialsuccess of allograft products and technologies. In addition, several countries, notably Japan, prohibit the use of allografts. If allograft products andtechnologies are not broadly accepted in the marketplace, we may not achieve a competitive position in the market.If adequate levels of reimbursement from third-party payors for our products are not obtained, surgeons and patients may be reluctant to use our productsand our sales may decline.In the United States, healthcare providers who purchase our products generally rely on third-party payors, principally federally-funded Medicare, state-funded Medicaid and private health insurance plans, to pay for all or a portion of the cost of joint reconstructive procedures and products utilized in thoseprocedures. We may be unable to sell our products on a profitable basis if third-party payors deny coverage or reduce their current levels of reimbursement.Our sales depend largely on governmental healthcare programs and private health insurers reimbursing patients' medical expenses. Surgeons, hospitals andother healthcare providers may not purchase our products if they do not receive appropriate reimbursement from third-party payors for procedures using ourproducts. In light of healthcare reform measures and the continued downturn in our economy, payors continue to review their coverage policies for existingand new therapies and may deny coverage for treatments that include the use of our products.In addition, some healthcare providers in the U.S. have adopted or are considering bundled payment methodologies and/or managed care systems inwhich the providers contract to provide comprehensive healthcare for a fixed cost per person. Healthcare providers may attempt to control costs byauthorizing fewer elective surgical procedures, including joint reconstructive surgeries, or by requiring the use of the least expensive implant available.Changes in reimbursement policies or healthcare cost containment initiatives that limit or restrict reimbursement for our products may cause our revenues todecline.If adequate levels of reimbursement from third-party payors outside of the U.S. are not obtained, international sales of our products may decline.Outside of the U.S., reimbursement systems vary significantly by country. Many foreign markets have government-managed healthcare systems that governreimbursement for medical devices and procedures. Canada, and some European and Asian countries, in particular France, Japan, Taiwan and Korea, havetightened reimbursement rates. Additionally, Brazil, China, Russia and the United Kingdom have recently begun landmark reforms that will significantlyalter their healthcare systems. Finally, some foreign reimbursement systems provide for limited payments in a given period and therefore result in extendedpayment periods.Our business could be significantly and adversely impacted by recently enacted healthcare reforms.In March 2010, comprehensive health care reform legislation in the form of the Patient Protection and Affordable Care Act and the Health Care andEducation Reconciliation Act (the Affordable Care Act) was enacted. Among other provisions, these bills impose a 2.3% excise tax on U.S. sales of medicaldevices following December 31, 2012. In 2014, we recognized approximately $3.4 million of costs for the medical device excise tax. The Affordable CareAct also includes numerous provisions to limit Medicare spending through reductions in various fee schedule payments and by instituting more sweepingpayment reforms, such as bundled payments for episodes of care and the establishment of “accountable care organizations” under which hospitals andphysicians will be able to share savings that result from cost control efforts. Many of these provisions will be implemented through the regulatory process,and policy details have not yet been finalized. Various healthcare reform proposals have also emerged at the state level. We cannot predict with certainty theimpact that these federal and state health reforms will have on us. However, an expansion in government's role in the U.S. healthcare industry may lowerreimbursements for its products, reduce medical procedure volumes, and adversely affect our business and results of operations, possibly materially.21Table of ContentsThere is an increasing trend for more criminal prosecutions and compliance enforcement activities for noncompliance with the Health InsurancePortability and Accountability Act (HIPAA) as well as for data breaches involving protected health information (PHI). In the ordinary course of our business,we may receive PHI. If we are unable to comply with HIPAA or experiences a data breach involving PHI, Wright could be subject to criminal and civilsanctions.If we cannot retain our key personnel, we will not be able to manage and operate successfully, and we may not be able to meet our strategic objectives.Our continued success depends, in part, upon key managerial, scientific, sales and technical personnel, as well as our ability to continue to attract andretain additional highly qualified personnel. We compete for such personnel with other companies, academic institutions, governmental entities and otherorganizations. There can be no assurance that we will be successful in retaining our current personnel or in hiring or retaining qualified personnel in thefuture. Loss of key personnel or the inability to hire or retain qualified personnel in the future could have a material adverse effect on our ability to operatesuccessfully. Further, any inability on our part to enforce non-compete arrangements related to key personnel who have left the business could have amaterial adverse effect on our business.If a natural or man-made disaster strikes our manufacturing facility, we could be unable to manufacture our products for a substantial amount of time,and our sales could be disrupted.We rely on a single manufacturing facility in Arlington, Tennessee, which is located near the New Madrid fault line. The Arlington facility and themanufacturing equipment we use to produce our products would be difficult to replace and could require substantial lead-time to repair or replace. Ourfacility may be affected by natural or man-made disasters. In the event our facility is affected by a disaster, we would be forced to rely on third-partymanufacturers. Although we believe we have adequate disaster recovery plans in place and we possess adequate insurance for damage to its property and thedisruption of our business from casualties, such plans and insurance may not cover such disasters and all of our potential losses and may not continue to beavailable to us on acceptable terms or at all.Our business plan relies on certain assumptions about the market for our products, which, if incorrect, may adversely affect our profitability.We believe that the aging of the general population and increasingly active lifestyles will continue and that these trends will increase the need for ourproducts. The projected demand for our products could materially differ from actual demand if our assumptions regarding these trends and acceptance of ourproducts by the medical community prove to be incorrect or do not materialize, or if non-surgical treatments gain more widespread acceptance as a viablealternative to orthopaedic implants.Fluctuations in foreign currency exchange rates could result in declines in our reported sales and earnings.Because a majority of our international sales are denominated in local currencies and not in U.S. dollars, our reported sales and earnings are subject tofluctuations in foreign exchange rates. Approximately 21%, 19% and 18% of its total net sales were denominated in foreign currencies during the yearsended December 31, 2014, 2013 and 2012, respectively, and we expect that foreign currencies will continue to represent a similarly significant percentage ofour net sales in the future. Our international net sales were unfavorably impacted by foreign currency fluctuations of approximately $0.6 million in 2014,compared to the unfavorable impact of $1.2 million in 2013 and $1.1 million in 2012. Operating costs related to these sales are largely denominated in thesame respective currencies, thereby partially limiting our transaction risk exposure. However, cost of sales related to these sales are primarily denominated inU.S. dollars; therefore, as the U.S. dollar strengthens, the gross margin associated with our sales denominated in foreign currencies experience declines.We currently employ a derivative program using 30-day foreign currency forward contracts to mitigate the risk of currency fluctuations on ourintercompany receivable and payable balances that are denominated in foreign currencies. These forward contracts are expected to offset the transactionalgains and losses on the related intercompany balances. These forward contracts are not designated as hedging instruments under Financial AccountingStandards Board (FASB) Accounting Standard Codification (ASC) Section 815, Derivatives and Hedging Activities. Accordingly, the changes in the fairvalue and the settlement of the contracts are recognized in the period incurred. We have not historically entered into hedging activities to mitigate the risk offoreign currency fluctuations in our statement of operations.Our quarterly operating results are subject to substantial fluctuations, and you should not rely on them as an indication of our future results.22Table of ContentsOur quarterly operating results may vary significantly due to a combination of factors, many of which are beyond our control. These factors include:•demand for products, which historically has been lowest in the third quarter;•our ability to meet the demand for our products;•increased competition;•the number, timing and significance of new products and product introductions and enhancements by us and our competitors;•our ability to develop, introduce and market new and enhanced versions of our products on a timely basis;•changes in pricing policies by us and our competitors;•changes in the treatment practices of orthopaedic surgeons;•changes in distributor relationships and sales force size and composition;•the timing of material expense- or income-generating events and the related recognition of their associated financial impact;•prevailing interest rates on our excess cash investments;•fluctuations in foreign currency rates;•the timing of significant orders and shipments;•ability to obtain reimbursement for our products;•availability of raw materials;•work stoppages or strikes in the healthcare industry;•changes in FDA and foreign governmental regulatory policies, requirements and enforcement practices;•changes in accounting policies, estimates and treatments;•restructuring charges, costs associated with our U.S. governmental inquiries and other charges;•variations in cost of sales due to the amount and timing of excess and obsolete inventory charges, commodity prices and manufacturing variances;•income tax fluctuations; and•general economic factors.We believe our quarterly sales and operating results may vary significantly in the future and period-to-period comparisons of our results of operationsare not necessarily meaningful and should not be relied upon as indications of future performance. We cannot assure you that our sales will increase or besustained in future periods or that we will be profitable in any future period. Any shortfalls in sales or earnings from levels expected by securities ororthopaedic industry analysts could have an immediate and significant adverse effect on the trading price of our common stock in any given period.Potential stockholder litigation may result in financial losses or harm our reputation and may divert management resources.It is possible that litigation could be brought by our stockholders, including private securities litigation and stockholder derivative suits, that ifinitiated, could divert management's attention, harm our business and/or reputation, and result in significant liabilities.Risk Related to Our Proposed Combination with TornierCompletion of our proposed combination with Tornier is subject to several closing conditions, the failure of which could delay or prevent completion orreduce anticipated benefits.Our merger with Tornier is subject to several closing conditions. If those conditions are not satisfied or waived, the transaction will not be completed.The market price of our common stock may reflect assumptions regarding completion of the transaction and its potential benefits. Accordingly, a delay incompleting the transaction or uncertainty about the closing may negatively impact our share price. Closing conditions include the approval of the mergeragreement by stockholders of both Wright and23Table of ContentsTornier and the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act. If clearance under the HSR Act isconditioned on divestitures or restrictions on operations, the closing of the transaction could be delayed, and anticipated benefits from the transaction maynot be achieved.Cash costs associated with our proposed business combination with Tornier may negatively impact our financial condition, operating results, and cashflow.We have incurred significant costs related to the proposed transaction that are payable whether or not the merger closes. In addition, if the merger closes,significant additional fees will be payable to advisors. If the merger agreement is terminated under specified circumstances, we would be required to pay toTornier a termination fee equal to $46 million. In addition, holders of our 2017 Notes would be entitled to convert notes during a 70 trading day windowaround a merger closing; a holder would be entitled to a cash amount equal to the market value of 39.3140 shares of our common stock per $1,000 principalamount of notes. While we currently do not expect significant conversions because the notes currently trade at a premium to the as-converted value, and aconverting holder would forego future interest payments, any conversions would reduce our cash resources.The proposed merger with Tornier may not achieve the intended benefits or may disrupt our operations.We may fail to successfully integrate the businesses of Wright and Tornier or otherwise fail to realize the expected benefits of the proposedtransaction. Anticipated synergies may not be achieved, integration may result in unforeseen expenses, and anticipated benefits of the integration plan maynot be realized. Our business may be negatively impacted following the merger if we are unable to effectively manage our expanded operations. Theintegration will require significant time and focus from management and may disrupt achievement of our strategic objectives.The pendency of the merger could cause:•our employees to experience uncertainty about their future roles, which might adversely affect our ability to retain and hire key personnel;•the attention of our management to be diverted from the day-to-day operations; and•distributors, independent sales agents, vendors, or suppliers may seek to modify or terminate their business relationships with us.These disruptions could be exacerbated by a delay in the completion of the merger and could have an adverse effect on our business, operatingresults or prospects.The exchange ratio is fixed and will not be adjusted in the event of any change in the price of either Wright shares or Tornier ordinary shares.Upon completion of the merger, each Wright share will be converted into the right to receive 1.0309 Tornier ordinary shares. This exchange ratio willnot be adjusted for changes in the market price of either Wright shares or Tornier ordinary shares between the date of signing the merger agreement andcompletion of the merger. Changes in the price of Tornier ordinary shares prior to the merger will affect the value of Tornier ordinary shares that Wrightshareholders will receive on the closing date. The exchange ratio will, however, be adjusted appropriately to fully reflect the effect of any reclassification,stock split, stock dividend or distribution, recapitalization or other similar transaction with respect to either the Wright shares or Tornier ordinary shares priorto the completion of the merger.The prices of Wright shares and Tornier ordinary shares on the date of the completion of the merger may vary from their prices on the date the mergeragreement was executed, on the date of this joint proxy statement/prospectus and on the date of each shareholder meeting. As a result, the value representedby the exchange ratio will also vary. These variations could result from changes in the business, operations or prospects of Wright or Tornier prior to orfollowing the completion of the merger, regulatory considerations, general market and economic conditions and other factors both within and beyond thecontrol of Wright or Tornier. At the time Wright shareholders are asked to vote on the merger, Wright shareholders will not know with certainty the value ofthe Tornier ordinary shares that they will receive upon completion of the merger.The obligation of Wright and Tornier to complete the merger is conditioned on, among other things, the expiration or termination of the applicablewaiting period under the HSR Act, which if delayed, not granted or granted with unacceptable conditions, may delay or jeopardize the consummation ofthe merger, result in additional expenditures of money and resources and/or reduce the anticipated benefits of the merger.The merger is subject to customary closing conditions, including the expiration or termination of the applicable waiting period under the HSR Act, andclearance under any applicable foreign antitrust laws. Wright and Tornier can provide no assurance24Table of Contentsthat clearance under the HSR Act and any applicable foreign antitrust laws will be obtained. Moreover, as a condition to their clearance of the transactionunder the HSR Act, the U.S. Federal Trade Commission or the Antitrust Division within the U.S. Department of Justice may impose requirements, limitationsor costs or require divestitures or place restrictions on the conduct of the business of the combined company after the closing. These requirements,limitations, costs, divestitures or restrictions could jeopardize or delay the effective time of the merger, adversely affect the timing and ability of thecombined company to integrate Wright’s and Tornier’s operations and/or reduce the anticipated benefits of the merger.Wright and Tornier may agree to material requirements, limitations, costs, restrictions, in the case of divestitures in order to obtain clearance under theHSR Act, any of which could result in a delay of, or a failure to consummate the merger, or have a material adverse effect on the business and operating resultsof the combined company. Pursuant to the merger agreement, Wright will control the terms of, and assets included in, any divestiture involving assets thatgenerated U.S. revenue less than $15 million during the twelve months ended September 30, 2014, subject to using commercially reasonable efforts tocontest any divestiture proposed by a governmental body. The parties must jointly agree on any more significant divestiture.The merger is subject to certain other conditions to closing that could result in the merger not being consummated or being delayed, any of which couldnegatively impact the share price and future business and operating results of Wright and Tornier.Consummation of the merger is subject to a number of customary conditions, other than expiration or termination of the applicable waiting periodunder the HSR Act and clearance under any applicable foreign antitrust laws, including, but not limited to, the approval of the merger agreement by theWright and Tornier shareholders. There is no assurance that Wright and Tornier will receive the necessary approvals or satisfy the other conditions necessaryfor the completion of the merger. If any conditions to the merger are not satisfied or, where waiver is permissible, not waived, the merger will not beconsummated.Failure to complete the merger would prevent Wright and Tornier from realizing the anticipated benefits of the merger. Wright and Tornier have alreadyand expect to continue to incur significant costs associated with transaction fees, professional services, taxes and other costs related to the merger. In theevent that the merger is not completed, Wright and Tornier, respectively, will remain liable for these costs and expenses. Further, if the merger is notcompleted and the merger agreement is terminated, under certain circumstances, either Wright or Tornier may be required to pay the other party a terminationfee of $46 million and/or pay expenses of the other party up to $5 million.In addition, the current market price of Wright shares and Tornier ordinary shares may reflect a market assumption that the merger will occur, and afailure to complete the merger could result in a negative perception by the market of Wright and Tornier generally and a resulting decline in the market priceof Wright shares and Tornier ordinary shares. Any delay in the consummation of the merger or any uncertainty about the consummation of the merger couldalso negatively impact the share price and future business and operating results of Wright and Tornier. Wright and Tornier cannot assure you that the mergerwill be consummated, that there will be no delay in the consummation of the merger or that the merger will be consummated on the terms contemplated bythe merger agreement.Wright and Tornier may waive one or more conditions to the merger without resoliciting shareholder approval for the merger.Certain conditions to Wright’s and Tornier’s obligations to complete the merger may be waived, in whole or in part, to the extent legally allowed,either unilaterally or by agreement of Wright and Tornier. In the event of a waiver of a condition, the boards of directors of Wright and Tornier will evaluatethe materiality of any such waiver to determine whether a supplement to this joint proxy statement/prospectus, an amendment to the registration statement ofwhich this joint proxy statement/prospectus is a part or a resolicitation of proxies is necessary. In the event that the board of directors of Wright or Tornierdetermines any such waiver is not significant enough to require resolicitation of shareholders, it will have the discretion to complete the merger withoutseeking further shareholder approval. The conditions requiring the approval of each company’s shareholders, however, cannot be waived.The merger agreement contains provisions that restrict Wright’s and Tornier’s ability to pursue alternatives to the merger and, in specified circumstances,could require Wright or Tornier to pay the other party a termination fee and expense reimbursement.Under the merger agreement, Wright and Tornier each agreed not to (1) take certain actions to solicit proposals relating to alternative businesscombination transactions or (2) subject to certain exceptions, including the receipt of a “superior proposal” (as such term is defined in the merger agreement),enter into discussions or an agreement concerning or provide confidential information in connection with any proposals for alternative business combinationtransactions. In certain specified circumstances, upon termination of the merger agreement, the breaching party would be required to pay the other party atermination fee of $46 million and reimburse the other party for its merger-related expenses in an amount not to exceed $5 million. These provisions coulddiscourage a third party that may have an interest in acquiring all or a significant part of Wright or Tornier from considering or proposing that acquisition,even if such third party were prepared to enter into a transaction that is more favorable to Wright, Tornier or their respective shareholders than the proposedmerger.25Table of ContentsWhether or not the merger is completed, the announcement and pendency of the merger could impact or cause disruptions in the businesses of Wright andTornier, which could have an adverse effect on the businesses and operating results of Wright and Tornier.Whether or not the merger is completed, the announcement and pendency of the merger could cause disruptions in or otherwise negatively impact thebusinesses and operating results of Wright and Tornier, including among others:•Wright and Tornier employees may experience uncertainty about their future roles with the combined company, which might adversely affectWright’s and Tornier’s ability to retain and hire key personnel and other employees;•the attention of Wright’s and Tornier’s management may be directed toward completion of the merger and transaction-related considerations andmay be diverted from the day-to-day operations and pursuit of other opportunities that could have been beneficial to the businesses of Wright andTornier; and•customers, distributors, independent sales agencies, vendors or suppliers may seek to modify or terminate their business relationships with Wright orTornier, or delay or defer decisions concerning Wright or Tornier.These disruptions could be exacerbated by a delay in the completion of the merger or termination of the merger agreement and could have an adverseeffect on the businesses, operating results or prospects of Wright and Tornier if the merger is not completed or the business, operating results or prospects ofthe combined company if the merger is completed.Current Wright and Tornier shareholders will have a reduced ownership and voting interest in the combined company after the merger.Upon completion of the merger, Wright shareholders will own approximately 52% of the combined company and Tornier shareholders will ownapproximately 48% of the combined company on a fully diluted basis. Wright and Tornier shareholders currently have the right to vote for their respectivedirectors and on other matters affecting their respective companies. When the merger occurs, each Wright shareholder who receives Tornier ordinary shares inthe merger will become a shareholder of the combined company with a percentage ownership of the combined company that will be smaller than theshareholder’s percentage ownership of Wright. Correspondingly, each Tornier shareholder will remain a shareholder of the combined company with apercentage ownership of the combined company that will be smaller than the shareholder’s percentage ownership of Tornier prior to the merger. As a result ofthese reduced ownership percentages, current Wright shareholders will have less voting power in the combined company than they now have with respect toWright, and current Tornier shareholders will have less voting power in the combined company than they now have with respect to Tornier.The Tornier ordinary shares to be received by Wright shareholders as a result of the merger will have different rights from Wright shares.Following completion of the merger, Wright shareholders will no longer be shareholders of Wright, but will be shareholders of Tornier, which will berenamed Wright Medical Group N.V. There are important differences between the rights as a Wright shareholder and the rights as a Tornier shareholder.Material differences between the rights of Wright shareholders and Tornier shareholders include:•Under Wright’s bylaws, nominations for election of directors may be made by the Wright board of directors or a committee appointed by the Board,or by any shareholder entitled to vote generally in the election of directors who complies with the advance notice procedure set forth in Wright’sbylaws. Members of the Tornier board of directors are appointed from binding nominations made by the Tornier board of directors, which may onlybe overridden by a resolution passed by two-thirds of the votes cast at the shareholders meeting representing more than one-half of Tornier’s issuedshare capital.•Under Wright’s bylaws, the holders of shares having a majority of the voting power of Wright common stock issued and outstanding and entitled tovote at the meeting of the shareholders constitute a quorum for the transaction of business, except as otherwise provided by law. Under Dutch law,there are no quorum requirements generally applicable to meetings of shareholders.•Dutch corporate law grants a shareholder of a non-surviving entity in a merger, in certain circumstances, the right to claim monetary compensationrights. For example, in cross border mergers within the European Economic Area, a shareholder of the non-surviving entity who has voted againstthe proposed merger may submit a request for compensation with the non-surviving entity. However, the merger between Wright and Tornier is notstructured as such a cross border merger and therefore no such rights will be available to Tornier shareholders in this transaction.26Table of ContentsThe opinions of Wright’s and Tornier’s financial advisors will not reflect changes in circumstances between the signing of the merger agreement andcompletion of the merger.Wright and Tornier do not expect to receive updated opinions from their respective financial advisors prior to completion of the merger. Changes in theoperations and prospects of Wright or Tornier, general market and economic conditions and other factors that may be beyond the control of Wright orTornier, and on which Wright’s and Tornier’s financial advisors’ opinions were based, may significantly alter the value of Wright or Tornier or the prices ofWright shares or Tornier ordinary shares by the time the merger is completed. The opinions do not speak as of the time the merger will be completed or as ofany date other than the date of such opinions. Because Wright’s and Tornier’s financial advisors will not be updating their opinions, the opinions will notaddress the fairness of the merger consideration from a financial point of view at the time the merger is completed.The directors and executive officers of Wright and Tornier have interests in the merger that may be different from, or in addition to, those of other Wrightand Tornier shareholders, which could have influenced their decisions to support or approve the merger.In considering whether to approve the proposals at the meetings, Wright and Tornier shareholders should recognize that the directors and executiveofficers of Wright and Tornier have interests in the merger that are in addition to their interests as shareholders of Wright or Tornier. These interests mayinclude, among others, continued service as a director or an executive officer of the combined company, accelerated vesting of certain equity-based awards orcertain severance benefits and payment of certain amounts in connection with the merger, as applicable. These interests, among others, may influence thedirectors and executive officers of Wright or the directors and executive officers of Tornier to support or approve the merger.If counterparties to certain agreements with Wright or Tornier do not consent to the merger, change of control rights under those agreements may betriggered as a result of the merger, which could cause the combined company to lose the benefit of such agreements and incur liabilities or replacementcosts.Wright and Tornier could be parties to agreements or possess permits that contain change of control provisions that will be triggered as a result of themerger. If the counterparties to these agreements or the authorities responsible for such permits do not consent to the merger, the counterparties or authoritiesmay have the ability to exercise certain rights (including termination rights), resulting in Wright or Tornier incurring liabilities as a consequence ofbreaching such agreements or operating without such permits, or causing Wright or Tornier to lose the benefit of such agreements or permits or incur costs inseeking replacement agreements or permits.The combined company likely will need additional financing to satisfy its anticipated liquidity challenges, which may not be available on favorable termsat the time it is needed and which could reduce the combined company’s operational and strategic flexibility.The combined company may face liquidity challenges during the next few years in light of significant contingent liabilities and financial obligationsand commitments, including, among others, acquisition-related contingent consideration payments and outstanding indebtedness, Tornier’s outstandingindebtedness in the amount of approximately $67.6 million that will be repaid upon completion of the merger, transaction-related expenses, and thecombined company’s anticipated operating losses for the next few years. In the likely event that the combined company will require additional workingcapital to fund future operations, the combined company could seek to acquire that through additional equity or debt financing arrangements, which may ormay not be available on favorable terms at such time. If the combined company raises additional funds by issuing equity securities, the combined company’sshareholders may experience dilution. Debt financing, if available, may involve covenants restricting the combined company’s operations or its ability toincur additional debt. Any debt financing or additional equity that the combined company raises may contain terms that are not favorable to the combinedcompany or its shareholders. If the combined company does not have, or is not able to obtain, sufficient funds, it may have to delay development orcommercialization of its products or license to third parties the rights to commercialize products or technologies that it would otherwise seek tocommercialize. The combined company also may have to reduce marketing, customer support or other resources devoted to its products or cease operations.Four class action lawsuits have been filed and additional lawsuits may be filed against Wright or Tornier, relating to the merger. An adverse ruling in anysuch lawsuit may prevent the merger from being consummated.On November 25, 2014, two purported Wright shareholders, Anthony Marks (as Trustee for Marks Clan Super) and Paul Parshall, filed class actioncomplaints challenging the merger in the Chancery Court of Shelby County Tennessee, for the Thirtieth Judicial District, at Memphis and the Court ofChancery of the state of Delaware, respectively. On November 26, 2014, a third purported Wright shareholder, City of Warwick Retirement System, filed aclass action complaint challenging the merger in the27Table of ContentsCircuit Court of Tennessee, for the Thirtieth Judicial District, at Memphis. On December 2, 2014, a fourth purported Wright shareholder, Paulette Jacques,filed a class action complaint challenging the merger in the Chancery Court of Shelby County Tennessee, for the Thirtieth Judicial District, at Memphis.The four complaints name as defendants, among others, Wright, Tornier, and the members of the board of directors of Wright. The complaints seek,among other relief, an order enjoining or rescinding the merger and an award of attorneys’ fees and costs on the grounds that the Wright board or directorsbreached their fiduciary duty in connection with entering into the merger agreement and approving the merger. The complaints further allege that Wright,Tornier, and certain of their respective subsidiaries aided and abetted the alleged breaches of fiduciary duties by the Wright board of directors. It is possiblethat these complaints will be amended to make additional claims and/or that additional lawsuits making similar or additional claims relating to the mergerwill be brought.One of the conditions to completion of the merger is the absence of any order being in effect that prohibits the consummation of the merger.Accordingly, if any of these plaintiffs or any future plaintiff is successful in obtaining an order enjoining consummation of the merger, then such order mayprevent the merger from being completed, or from being completed within the expected time frame.Risks Related to the Combined Company if the Merger is CompletedThe combined company may be unable to successfully integrate Wright’s and Tornier’s operations or realize the anticipated cost savings and otherpotential benefits of the merger in a timely manner or at all. As a result, the value of the combined company’s ordinary shares may be adversely affected.Wright and Tornier entered into the merger agreement because each company believed that the merger will be beneficial to its respective shareholders,other stakeholders and businesses. Achieving the anticipated potential benefits of the merger will depend in part upon whether the combined company isable to integrate Wright’s and Tornier’s operations in an efficient and effective manner. The integration process may not be completed smoothly orsuccessfully. The necessity of coordinating geographically separated organizations, systems and facilities and addressing possible differences in businessbackgrounds, corporate cultures and management philosophies may increase the difficulties of integration. Wright and Tornier operate numerous systems,including those involving management information, purchasing, accounting and finance, sales, billing, payroll, employee benefits and regulatorycompliance. Wright and Tornier may also have inconsistencies in standards, controls, procedures or policies that could affect the combined company’sability to maintain relationships with customers and employees after the merger or to achieve the anticipated benefits of the merger. The integration of certainoperations following the merger will require the dedication of significant management resources, which may temporarily distract management’s attentionfrom the combined company’s day-to-day business. Employee uncertainty and lack of focus during the integration process may also disrupt the combinedcompany’s business. Any inability of management to integrate successfully the operations of the two companies or to do so within a longer time frame thanexpected could have a material adverse effect on the combined company’s business and operating results. The combined company may not be able toachieve the anticipated operating and cost synergies or long-term strategic benefits of the merger. An inability to realize the full extent of, or any of, theanticipated benefits of the merger, as well as any delays encountered in the integration process, could have an adverse effect on the combined company’sbusiness and operating results, which may affect the value of the combined company’s ordinary shares after completion of the merger. The success of the combined company after the merger will depend in part upon the ability of Wright and Tornier to retain key employees of eachcompany. Competition for qualified personnel can be very intense. In addition, key employees may depart because of issues relating to the uncertainty ordifficulty of integration or a desire not to remain with the combined company. Accordingly, no assurance can be given that key employees will be retained.Wright and Tornier have not yet determined the exact nature of how the businesses and operations of the two companies will be combined after themerger. The actual integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized.The future results of the combined company will suffer if the combined company does not effectively manage its expanded operations following completionof the merger.Following completion of the merger, the size of the business of the combined company will increase significantly beyond the current size of eitherWright’s or Tornier’s business. The combined company’s future success depends, in part, upon its ability to manage this expanded business, which will posesubstantial challenges for management, including challenges related to the management and monitoring of new operations and associated increased costsand complexity. There can be no assurances that the combined company will be successful or that it will realize the expected operating efficiencies, costsavings and other benefits currently anticipated from the merger.28Table of ContentsWright and Tornier will incur direct and indirect costs as a result of the merger.Wright and Tornier will incur substantial expenses in connection with completing the merger, and over a period of time following completion of themerger, the combined company further expects to incur substantial expenses in connection with coordinating the businesses, operations, policies andprocedures of Wright and Tornier. While Wright and Tornier have assumed that a certain level of transaction and coordination expenses will be incurred,there are a number of factors beyond the combined company’s control that could affect the total amount or the timing of these transaction and coordinationexpenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately. These expenses may exceed the costs historicallyborne by Wright and Tornier.Wright’s and Tornier’s actual financial positions and results of operations may differ materially from the unaudited pro forma financial data included inthe parties’ joint proxy statement/prospectus.The pro forma financial information contained in the joint proxy statement/prospectus filed on December 19, 2014, and any amendments thereto, is orwill be presented for illustrative purposes only and may not be an indication of what the combined company’s financial position or results of operationswould have been had the transaction been completed on the dates indicated. The pro forma financial information has been derived from the audited andunaudited historical financial statements of Wright and Tornier and certain adjustments and assumptions have been made regarding the combined companyafter giving effect to the transaction. The assets and liabilities of Wright and Tornier have been measured at fair value based on various preliminary estimatesusing assumptions that management believes are reasonable utilizing information currently available. The process for estimating the fair value of acquiredassets and assumed liabilities requires the use of judgment in determining the appropriate assumptions and estimates. These estimates may be revised asadditional information becomes available and as additional analyses are performed. Differences between preliminary estimates in the pro forma financialinformation and the final acquisition accounting will occur and could have a material impact on the pro forma financial information and the combinedcompany’s financial position and future results of operations. In addition, the assumptions used in preparing the pro forma financial information may not prove to be accurate, and other factors may affect thecombined company’s financial condition or results of operations following the closing. Any potential decline in the combined company’s financialcondition or results of operations may cause significant variations in the share price of the combined company.The market price of the combined company’s ordinary shares after the merger may be affected by factors different from those currently affecting Wrightshares or Tornier ordinary shares.Upon completion of the merger, holders of Wright shares will become holders of Tornier ordinary shares. The business of Wright differs from that ofTornier in important respects and, accordingly, the results of operations of the combined company and the market price of the combined company’s ordinaryshares following the merger may be affected by factors different from those currently affecting the independent results of operations of Wright and Tornier.If goodwill or other intangible assets that the combined company records in connection with the merger become impaired, the combined company could berequired to take significant charges against earnings.In connection with the accounting for the merger, the combined company expects to record a significant amount of goodwill and other intangibleassets. Under U.S. GAAP, the combined company must assess, at least annually and potentially more frequently, whether the value of its goodwill and otherindefinite-lived intangible assets have been impaired. Amortizing intangible assets will be assessed for impairment in the event of an impairment indicator.Any reduction or impairment of the value of goodwill or other intangible assets will result in a charge against earnings, which could materially adverselyaffect the combined company’s results of operations and shareholders’ equity in future periods.The merger may not allow the combined company to maintain competitive global cash management and a competitive effective corporate tax rate.Wright and Tornier cannot give any assurance as to what the combined company’s effective tax rate will be after the merger, because of, among otherthings, uncertainty regarding the tax policies of the jurisdictions where the combined company will operate and uncertainty regarding the level of net incomethat the combined company will earn in those jurisdictions in the future. The combined company’s actual effective tax rate may vary from this expectationand that variance may be material. Additionally, the tax laws of the Netherlands and other jurisdictions in which the combined company operates couldchange in the future, and such changes could cause a material change in the combined company’s effective tax rate.29Table of ContentsThe combined company’s provision for income taxes will be based on certain estimates and assumptions made by management in consultation with itstax and other advisors. The combined company’s group income tax rate will be affected by, among other factors, the amount of net income earned in itsvarious operating jurisdictions, the availability of benefits under tax treaties, the rates of taxes payable in respect of that income, and withholding taxes ondividends paid from one jurisdiction to the next. The combined company will enter into many transactions and arrangements in the ordinary course ofbusiness in respect of which the tax treatment is not entirely certain. The combined company will therefore make estimates and judgments based on itsknowledge and understanding of applicable tax laws and tax treaties, and the application of those tax laws and tax treaties to its business, in determining itsconsolidated tax provision. For example, certain countries could seek to tax a greater share of income than will be provided for by the combined company.The final outcome of any audits of Wright and Tornier by taxation authorities may differ from the estimates and assumptions the combined company may usein determining its consolidated tax provisions and accruals. This could result in a material adverse effect on the combined company’s consolidated incometax provision, financial condition and the net income for the period in which such determinations are made.In particular, dividends, distributions and other intra-group payments from Wright or its U.S. affiliates to certain non-U.S. subsidiaries of the combinedcompany may be subject to U.S. withholding tax at a rate of 30% unless the entity receiving such payments can demonstrate that it qualifies for reduction orelimination of the U.S. withholding tax under the income tax treaty (if any) between the United States and the jurisdiction in which the entity is organized oris a tax resident. In certain cases, treaty qualification may depend on whether at least 50% of the ultimate beneficial owners of the combined company arequalified residents of the United States or the treaty jurisdiction within the meaning of the applicable treaty. There can be no assurance that the combinedcompany will satisfy this beneficial ownership requirement at the time when such dividends, distributions or other payments are made. Moreover, the U.S.Internal Revenue Service (which is referred to in this document as the “IRS”) may challenge the combined company’s determination that the beneficialownership requirement is satisfied. If the combined company does not satisfy the beneficial ownership requirement, such dividends, distributions or otherpayments may be subject to 30% U.S. withholding tax.The combined company may face potential limitations on the utilization of Wright’s and its U.S. affiliates’ U.S. tax attributes following the combination.Following the acquisition of a U.S. corporation by a non-U.S. corporation, Section 7874 of the Code can limit the ability of the acquired U.S.corporation and its U.S. affiliates to utilize U.S. tax attributes such as net operating losses and certain tax credits to offset U.S. taxable income resulting fromcertain transactions. Based on the limited guidance available, Wright currently expects that following the combination, this limitation likely will not applyand as a result, it and its U.S. affiliates likely will not be limited by Section 7874 of the Code in their ability to utilize their U.S. tax attributes to offset theirU.S. taxable income, if any, resulting from certain specified taxable transactions. However, no assurance can be given in this regard. If, however, Section 7874of the Code were to apply to the combination and if Wright or its U.S. affiliates engage in transactions that would generate U.S. taxable income subject to thislimitation in the future, it could take Wright longer to use its net operating losses and tax credits and thus Wright could pay U.S. federal income tax soonerthan it otherwise would have. Additionally, if the limitation were to apply and if Wright does not generate taxable income consistent with its expectations, itis possible that the limitation under Section 7874 on the utilization of U.S. tax attributes could prevent Wright and/or its U.S. affiliates from fully utilizingtheir U.S. tax attributes prior to their expiration.Future changes to U.S. tax laws could materially affect the combined company, including its status as a non-U.S. corporation.Under current U.S. federal income tax law, a corporation generally will be considered to be resident for U.S. federal income tax purposes in its place oforganization or incorporation. Accordingly, under the generally applicable U.S. federal income tax rules, the combined company, a Netherlands incorporatedentity, would be classified as a non-U.S. corporation (and, therefore, not a U.S. tax resident). Section 7874 of Code, however, contains specific rules (morefully discussed below) that can cause a non-U.S. corporation to be treated as a U.S. corporation for U.S. federal income tax purposes. These rules are complexand there is little or no guidance as to their application.We currently expect the combined company should be treated as a foreign corporation for U.S. federal tax purposes, however, it is possible that the IRScould disagree with that position and assert that Section 7874 applies to treat the combined company as a U.S. corporation following the combination. Inaddition, new statutory or regulatory provisions under Section 7874 or otherwise could be enacted or promulgated that adversely affect the combinedcompany’s status as a foreign corporation for U.S. federal tax purposes, and any such provisions could have retroactive application. If the combined companywere to be treated as a U.S. corporation for federal tax purposes, the combined company would be subject to U.S. corporate income tax on its worldwideincome, and the income of its foreign subsidiaries would be subject to U.S. tax when repatriated or when deemed recognized under the U.S. tax rules forcontrolled foreign subsidiaries. In such a case, the combined company would be subject to substantially greater U.S. tax liability than currentlycontemplated. Moreover, in such a case, a non-U.S. shareholder of the combined company would be subject to U.S. withholding tax on the gross amount ofany dividends paid by the combined company to such shareholder.30Table of ContentsAny such U.S. corporate income or withholding tax could be imposed in addition to, rather than in lieu of, any Dutch corporate income tax or withholdingtax that may apply.The combined company’s tax position may be adversely affected by changes in tax law relating to multinational corporations, or by increased scrutiny bytax authorities.Recent legislative proposals have aimed to expand the scope of U.S. corporate tax residence, limit the ability of foreign-owned corporations to deductinterest expense, and make other changes in the taxation of multinational corporations.Additionally, the U.S. Congress, government agencies in jurisdictions where the combined company and its affiliates do business, and the Organizationfor Economic Co-operation and Development have focused on issues related to the taxation of multinational corporations. One example is in the area of“base erosion and profit shifting,” where payments are made between affiliates from a jurisdiction with high tax rates to a jurisdiction with lower tax rates. Asa result, the tax laws in the U.S., the Netherlands and other countries in which the combined company and its affiliates do business could change on aprospective or retroactive basis, and any such changes could impact the expected tax treatment for the combined company and adversely affect the combinedcompany’s financial results.Moreover, U.S. and non-U.S. tax authorities may carefully scrutinize companies involved in cross-border business combinations, such as the combinedcompany, which may lead such authorities to assert that the combined company owes additional taxes.The exposure of the combined company to several tax jurisdictions may have an adverse effect on the combined company and this may increase theaggregate tax burden on the combined company and its shareholders.The combined company is subject to a large number of different tax laws and regulations in the various jurisdictions in which it operates. These lawsand regulations are often complex and are subject to varying interpretations. The combined effect of the application of tax laws, including the application ordisapplication of tax treaties of one or more of these jurisdictions and their interpretation by the relevant tax authorities could, under certain circumstances,produce contradictory results. The combined company often relies on generally available interpretations of tax laws and regulations to determine theexistence, scope and level of its liability to tax in the jurisdictions in which it operates. In addition, the combined company takes positions in the course ofits business with respect to various tax matters, including the compliance with the arm’s length principles in respect of transactions with related parties, thetax deductibility of interest and other costs, and the amount of depreciation or write-down of our assets that we can recognize for tax purposes. There is noassurance that the tax authorities in the relevant jurisdictions will agree with such interpretation of these laws and regulations or with the positions taken bythe combined company. If such tax positions are challenged by relevant tax authorities, the imposition of additional taxes could increase the effective taxrate and cost of operations of the combined company.Furthermore, because the combined company is incorporated under Dutch law, it will be treated for Dutch corporate income tax purposes as a residentof the Netherlands. Based on the currently contemplated management structure of the combined company and the current tax laws of the United States andthe Netherlands, as well as applicable income tax treaties and current interpretations thereof, the combined company expects to be a tax resident solely of theNetherlands. If the combined company were to be treated as a tax resident of a jurisdiction other than or in addition to the Netherlands, the combinedcompany could be subject to corporate income tax in that other jurisdiction, and could be required to withhold tax on dividends paid by the combinedcompany to its shareholders under the applicable laws of that jurisdiction.U.S. investors may not be able to enforce judgments obtained in U.S. courts in civil and commercial matters against the combined company or members ofits board of directors or officers.The combined company will be organized under the laws of the Netherlands, and, as such, the rights of holders of the combined company ordinaryshares and the civil liability of the combined company directors will be governed by the laws of the Netherlands and the combined company articles ofassociation. A substantial portion of the combined company’s assets will be located outside of the United States. In addition, certain members of thecombined company Board and certain officers of combined company, as well as certain experts named in this document, may reside outside the United States.As a result, it may be difficult for investors to effect service of process within the United States on the combined company or such individuals, or to enforceoutside the United States any judgments obtained against such persons in U.S. courts in any action, including actions predicated upon the civil liabilityprovisions of the U.S. federal securities laws. In addition, it may be difficult for investors to enforce rights predicated upon the U.S. federal securities laws inoriginal actions brought in courts in jurisdictions located outside the United States (including the Netherlands) or enforce claims for punitive damages.The United States and the Netherlands currently do not have a treaty providing for the reciprocal recognition and enforcement of judgments in civiland commercial matters (other than arbitral awards). A final judgment for the payment of money rendered31Table of Contentsby any federal or state court in the United States which is enforceable in the United States, whether or not predicated solely upon U.S. federal securities laws,would not automatically be recognized or enforceable in the Netherlands. In order to obtain a judgment which is enforceable in the Netherlands, the party inwhose favor a final and conclusive judgment of the U.S. court has been rendered will be required to file its claim with a court of competent jurisdiction in theNetherlands. Such party may submit to a Dutch court the final judgment rendered by the U.S. court. If and to the extent that the Dutch court finds that thejurisdiction of the U.S. court has been based on grounds which are internationally acceptable and that proper legal procedures have been observed, the Dutchcourt will generally tend to give binding effect to the judgment of the court of the United States without substantive re-examination or re-litigation on themerits of the subject matter, unless the judgment contravenes principles of public policy of the Netherlands.There can be no assurance that U.S. investors will be able to enforce against the combined company or members of its board of directors, officers orcertain experts named herein who are residents of the Netherlands or countries other than the United States any judgments obtained in U.S. courts in civil andcommercial matters, including judgments under the U.S. federal securities laws.As a Dutch public company with limited liability, the rights of our shareholders may be different from the rights of shareholders in companies governed bythe laws of Delaware.Tornier is a Dutch public company with limited liability (naamloze vennootschap). Tornier’s corporate affairs are governed by its articles of associationand by the laws governing companies incorporated in the Netherlands. The rights of shareholders and the responsibilities of members of its board of directorsmay be different from those in companies governed by the laws of U.S. jurisdictions.For example, resolutions of the general meeting of shareholders may be taken with majorities different from the majorities required for adoption ofequivalent resolutions in Delaware corporations. In addition, if a third party is liable to a Dutch company, under Dutch law shareholders generally do nothave the right to bring an action on behalf of the company or to bring an action on their own behalf to recover damages sustained as a result of a decrease invalue, or loss of an increase in value, of their ordinary shares. Only in the event that the cause of liability of such third party to the company also constitutes atortious act directly against such shareholder, may that shareholder have an individual right of action against such third party on its own behalf to recoverdamages. The Dutch Civil Code provides for the possibility to initiate such actions collectively. A foundation or an association whose objective, as stated inits articles of association, is to protect the rights of persons having similar interests may institute a collective action. The collective action cannot result in anorder for payment of monetary damages but may result in a declaratory judgment (verklaring voor recht), for example declaring that a party has actedwrongfully or has breached a fiduciary duty. The foundation or association and the defendant are permitted to reach (often on the basis of such declaratoryjudgment) a settlement which provides for monetary compensation for damages. A designated Dutch court may declare the settlement agreement bindingupon all the injured parties, whereby an individual injured party will have the choice to opt-out within the term set by the court (at least three months). Suchindividual injured party, may also individually institute a civil claim for damages within the before mentioned term.In the performance of its duties, the board of directors of the combined company will be required by Dutch law to act in the interest of the company andits affiliated business, and to consider the interests of our company, our shareholders, our employees and other stakeholders in all cases with reasonablenessand fairness. It is possible that some of these parties will have interests that are different from, or in addition to, interests of our shareholders.If any of the events described in “Risks Related to our Business” occur, or if events occur which adversely affect the business of Tornier, those events couldcause the potential benefits of the merger not to be realized.Following completion of the merger, the combined company will be susceptible to many of the risks described above as well as specific risksapplicable to their respective businesses. To the extent any of these risks occur, those events could cause the potential benefits of the merger not to berealized and the market price of the combined company’s ordinary shares to decline.32Table of ContentsItem 1B. Unresolved Staff Comments.None.Item 2. Properties.Our corporate headquarters are located in Memphis, Tennessee. We lease 92,000 square feet of office space with research and development facilities under alease agreement that is renewable through 2034. Our U.S. operations consist of a state of the art manufacturing facility in Arlington, Tennessee. We lease themanufacturing facility from the Industrial Development Board of the Town of Arlington. At this facility, we primarily produce orthopaedic implants andsome related surgical instrumentation while utilizing lean manufacturing philosophies. The majority of our surgical instrumentation is produced to ourspecifications by qualified subcontractors who serve medical device companies. We have recently completed the expansion of our manufacturing anddistribution facilities and are operating at full capability. Our capacity is sufficient to meet customer demand for the foreseeable future.Our international operations include warehouse, sales, and administrative facilities located in several countries. Our operations in France includemanufacturing, research and development, warehouse, sales and administrative space. We have an international research and development facility in CostaRica and sales office in the Netherlands. Our sales offices in the United Kingdom, Germany, Italy, Australia and Canada also include warehouse andadministrative space.Item 3. Legal Proceedings.From time to time, we are subject to lawsuits and claims that arise out of our operations in the normal course of business. We are the plaintiff or defendant invarious litigation matters in the ordinary course of business, some of which involve claims for damages that are substantial in amount.Governmental InquiriesOn September 29, 2010, we entered into a five year Corporate Integrity Agreement (CIA) with the Office of the Inspector General of the United StatesDepartment of Health and Human Services (OIG-HHS). The CIA was filed as Exhibit 10.2 to our current report on Form 8-K filed on September 30, 2010. TheCIA will expire on September 29, 2015.The CIA imposes on us certain obligations to maintain compliance with U.S. healthcare laws, regulations and other requirements. Our failure to do so couldexpose us to significant liability, including, but not limited to, exclusion from federal healthcare program participation, including Medicaid and Medicare,potential prosecution, civil and criminal fines or penalties, as well as additional litigation cost and expense.Both we and MicroPort, which completed the purchase of our OrthoRecon business in January 2014, will continue to be subject to the CIA.In addition to the U.S. Attorney's Office (USAO) and OIG-HHS, other governmental agencies, including state authorities, could conduct investigations orinstitute proceedings that are not precluded by the CIA. In addition, the matters which gave rise to the CIA could increase our exposure to lawsuits bypotential whistleblowers, including under the federal false claims acts, based on new theories or allegations arising from these matters.On August 3, 2012, we received a subpoena from the USAO for the Western District of Tennessee requesting records and documentation relating to ourPROFEMUR® series of hip replacement devices. The subpoena covers the period from January 1, 2000 to August 2, 2012. We continue to respond to thesubpoena.Patent LitigationIn 2011, Howmedica Osteonics Corp. and Stryker Ireland, Ltd. (collectively, Stryker), each a subsidiary of Stryker Corporation, filed a lawsuit against WMTin the United States District Court for the District of New Jersey (District Court) alleging that we infringed Stryker's U.S. Patent No. 6,475,243 related to ourLINEAGE® Acetabular Cup System and DYNASTY® Acetabular Cup System. The lawsuit seeks an order of infringement, injunctive relief, unspecifieddamages, and various other costs and relief. On July 9, 2013, the Court issued a claim construction ruling. Under the court's claim construction ruling, we donot believe these hip products infringe the asserted patents. In filings with the Court, Stryker has conceded that under the Court’s claim construction rulingsit can no longer pursue its infringement claims. Stryker has asked the Court to dismiss the case so it may pursue an appeal. On November 25 2014, the Courtentered judgment of non-infringement in our favor. On January 7, 2015, Howmedica and Stryker filed a notice of appeal to the Court of Appeals for theFederal Circuit.In 2012, Bonutti Skeletal Innovations, LLC (Bonutti) filed a patent infringement lawsuit against us in the United States Court for the District of Delaware. InJanuary 2014, we filed a request with the U.S. Patent and Trademark Office for Inter Partes Review (IPR) of the Bonutti patents. On April 7, 2014, the Courtstayed the case pending outcome of the IPR. Bonutti originally alleged33Table of Contentsthat the Link Sled Prosthesis infringes U.S. Patent 6,702,821. The Link Sled Prosthesis is a product we distributed under a distribution agreement withLinkBio Corp, which expired on December 31, 2013. In January 2013, Bonutti amended its complaint, alleging that the ADVANCE® knee system, includingODYSSEY® instrumentation, infringes U.S. Patent 8,133,229, and that the ADVANCE® knee system, including ODYSSEY® instrumentation andPROPHECY® guides, infringes U.S. Patent 7,806,896, which was issued on October 5, 2010. All of the claims of the asserted patents are directed to surgicalmethods for minimally invasive surgery. As a result of the arguments submitted in the IPR, Bonutti abandoned the claims subject to the IPR from U.S. Patent8,133,229, leaving one claim from U.S. Patent 7,806,896 still pending before the Patent Office Board that administers IPR’s. On February 18, 2015, the PatentOffice Board held that remaining claim invalid.In June 2013, Orthophoenix filed a patent lawsuit against us in the United States District Court for the District of Delaware alleging that surgical methodsusing the X-REAM® product infringe two patents. In June 2014, we filed a request for IPR with the U.S. Patent and Trademark Office. In October 2014, theCourt stayed the case pending outcome of the IPR. On December 16, 2014, the Patent Office Board denied our petitions requesting IPR. As a result, theDistrict Court will lift the stay, and we will continue with our defense.In June 2013, Anglefix filed suit in the United States District Court for the Western District of Tennessee, alleging that our ORTHOLOC® products infringeAnglefix’s asserted patent. On April 14, 2014 we filed a request for IPR with the U.S. Patent and Trademark Office. In October 2014, the Court stayed the casepending outcome of the IPR.In September 2013, ConforMIS, Inc. filed suit against us in the United States District Court for the District of Massachusetts, alleging that our PROPHECY®knee and ankle systems infringe four ConforMIS’ patents. On February 19, 2014, ConforMIS filed an amended complaint asserting four additional patentsagainst us relating to alleged infringement by our PROPHECY® knee and ankle systems and naming MicroPort Orthopedics as an additional defendant. OnOctober 9, 2014, the parties jointly advised the Court that they had reached an agreement in principle to resolve the matter. In connection with the reportedsettlement, we recorded expenses of $0.9 million in continuing operations and $13.8 million in discontinued operations. In addition, we recorded a $4.6million asset in connection with the fully paid non-exclusive foot and ankle license contemplated by the reported settlement. $10.7 million of the $13.8million recorded in discontinued operations reflects estimated royalty payments based on future sales by MicroPort Orthopedics, which will be paid through2026. The parties are now in the process of finalizing the settlement documentation.In February 2014, Biomedical Enterprises, Inc. filed suit against Solana Surgical, LLC in the United States District Court for the Western District of Texasalleging Solana's FuseForce Fixation system infringes U.S. Patent No. 8,584,853 entitled “Method and Apparatus for an Orthopedic Fixation System.” OnFebruary 20, 2015 we filed a request for IPR with the U.S. Patent and Trademark Office.On September 23, 2014, Spineology filed a patent infringement lawsuit, Case No. 0:14-cv-03767, in the U.S. District Court in Minnesota, alleging thatWright’s X-REAM® bone reamer infringes U.S. Patent No. RE42,757 entitled “EXPANDABLE REAMER.” Plaintiff has not yet served the complaint. OnJanuary 28, 2015, Spineology filed a new complaint, Case No. 0:15-cv-00180-MJD-FLN, in the U.S. District Court in Minnesota, just prior to its firstcomplaint expiring. The new complaint adds claims of willful infringement. Spineology has not yet served the new complaint.Subject to the provisions of the asset purchase agreement with MicroPort for the sale of our OrthoRecon business, we will continue to be responsible fordefense of pre-existing patent infringement cases relating to our OrthoRecon business, and for resulting liabilities, if any.Product LiabilityWMT has been named as a defendant, in some cases with multiple other defendants, in lawsuits in which it is alleged that as yet unspecified defects in thedesign, manufacture or labeling of certain metal-on-metal hip replacement products rendered the products defective. The lawsuits generally employ similarallegations that use of the products resulted in excessive metal ions and particulate in the patients into whom the devices were implanted, in most casesresulting in revision surgery. We anticipate that additional lawsuits relating to metal on metal hip replacement products may be brought. Because of the similar nature of the allegations made by several plaintiffs whose cases were pending in federal courts, upon motion of one plaintiff, Danny L.James, Sr., the United States Judicial Panel on Multidistrict Litigation in February 2012 transferred certain actions pending in the federal court system relatedto metal on metal hip replacement products to the United States District Court for the Northern District of Georgia, for consolidated pre-trial management ofthe cases before a single United States District Court Judge (the MDL). The consolidated matter is known as In re: Wright Medical Technology, Inc. ConserveHip Implant Products Liability Litigation. Certain plaintiffs have elected to file their lawsuits in state courts in California. In doing so, most of those plaintiffs have named a surgeon involved in thedesign of the allegedly defective products as a defendant in the actions, along with his personal corporation. Pursuant to contractual obligations, WrightMedical has agreed to indemnify and defend the surgeon in those actions. Similar to34Table of Contentsthe MDL proceeding in federal court, because the lawsuits generally employ similar allegations, certain of those pending lawsuits in California wereconsolidated for pretrial handling on May 14, 2012 pursuant to procedures of California state Judicial Counsel Coordinated Proceedings. The consolidatedmatter is known as In re: Wright Hip Systems Cases, Judicial Counsel Coordination Proceeding No. 4710.There are other individual lawsuits related to metal on metal hip products pending in various state courts.Additionally, as of February 15, 2015, we are a defendant in 34 lawsuits in various state and federal courts involving claims for damages for personal injuryassociated with fractures of our PROFEMUR® long titanium modular neck product.Insurance LitigationIn June 2014, St. Paul Surplus Lines Insurance Company (“Travelers”), which was an excess carrier in our coverage towers across multiple policy years, filed adeclaratory judgment action in Tennessee state court naming us and certain of our other insurance carriers as defendants and asking the court to rule on therights and responsibilities of the parties with regard to the CONSERVE® Claims. Among other things, Travelers appears to dispute our contention that theCONSERVE® Claims arise out of more than a single occurrence thereby triggering multiple policy periods of coverage. Travelers further seeks adetermination as to the applicable policy period triggered by the alleged single occurrence. We filed a separate lawsuit in state court in California fordeclaratory judgment against certain carriers and breach of contract against the primary carrier, and have moved to dismiss or stay the Tennessee action on anumber of grounds, including that California is the most appropriate jurisdiction. During the third quarter of 2014, the California Court granted Travelers'motion to stay our California action.Employment LitigationIn 2012, two former employees, Frank Bono and Alicia Napoli, each filed separate lawsuits against WMT in the Chancery Court of Shelby County,Tennessee, which asserted claims for retaliatory discharge and breach of contract based upon his or her respective separation pay agreement. In addition, Mr.Bono and Ms. Napoli each asserted a claim for defamation related to the press release issued at the time of their terminations and a wrongful discharge claimalleging violation of the Tennessee Public Protection Act. Mr. Bono and Ms. Napoli each claimed that he or she was entitled to attorney fees in addition toother unspecified damages. On October 23, 2013, Ms. Napoli moved to voluntary dismiss her lawsuit, without prejudice. On April 4, 2014, Ms. Napoli refiledher case in the United States District Court for the Eastern District of Missouri. In July 2014, we were successful in having the case that was refiled in Missouritransferred to the U.S. District Court for the Western District of Tennessee.Shareholder LitigationOn November 25, 2014, two purported Wright shareholders, Anthony Marks (as Trustee for Marks Clan Super) and Paul Parshall, filed class action complaintschallenging the proposed merger with Tornier in the Chancery Court of Shelby County Tennessee, for the Thirtieth Judicial District, at Memphis and theCourt of Chancery of the state of Delaware, respectively. On November 26, 2014, a third purported Wright shareholder, City of Warwick Retirement System,filed a class action complaint challenging the merger in the Circuit Court of Tennessee, for the Thirtieth Judicial District, at Memphis. On December 2, 2014,a fourth purported Wright shareholder, Paulette Jacques, filed a class action complaint challenging the merger in the Chancery Court of Shelby CountyTennessee, for the Thirtieth Judicial District, at Memphis.The four complaints name as defendants, among others, Wright, Tornier, and the members of the board of directors of Wright. The complaints seek, amongother relief, an order enjoining or rescinding the merger and an award of attorneys’ fees and costs on the grounds that the Wright board or directors breachedtheir fiduciary duty in connection with entering into the merger agreement and approving the merger. The complaints further allege that Wright, Tornier, andcertain of their respective subsidiaries aided and abetted the alleged breaches of fiduciary duties by the Wright board of directors. It is possible that thesecomplaints will be amended to make additional claims and/or that additional lawsuits making similar or additional claims relating to the merger will bebrought.Item 4. Mine Safety Disclosures.Not applicable.35Table of ContentsPART IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.Market InformationOur common stock is traded on the Nasdaq Global Select Market under the symbol “WMGI.” The following table sets forth, for the periods indicated, thehigh and low sales prices per share of our common stock as reported on the Nasdaq Global Select Market. High LowFiscal Year 2013 First Quarter$24.58 $20.69Second Quarter$27.47 $22.34Third Quarter$28.41 $23.70Fourth Quarter$30.87 $26.06Fiscal Year 2014 First Quarter$33.80 $29.26Second Quarter$32.52 $26.76Third Quarter$32.57 $28.70Fourth Quarter$32.65 $26.07HoldersAs of February 18, 2015, there were 511 stockholders of record. As of February 11, 2015, there were an estimated 10,908 beneficial owners of our commonstock.Dividend PolicyWe have never declared or paid cash dividends on our common stock. We currently intend to retain all future earnings for the operation and expansion of ourbusiness. We do not anticipate declaring or paying cash dividends on our common stock in the foreseeable future. Any payment of cash dividends on ourcommon stock will be at the discretion of our board of directors and will depend upon our results of operations, earnings, capital requirements, contractualrestrictions and other factors deemed relevant by our board of directors. In addition, our current credit facility prohibits us from paying any cash dividendswithout the lenders’ consent.Equity Compensation Plan InformationThe table below sets forth information regarding the number of securities to be issued upon the exercise of the outstanding stock options granted under ourequity compensation plans and the shares of common stock remaining available for future issuance under our equity compensation plans as of December 31,2014 (in thousands):Plan Category Number of securitiesto be issued uponexercise ofoutstanding options (in thousands) Weighted-averageexercise price ofoutstanding options Number of securitiesremaining availableforfuture issuance underequity compensationplans(in thousands)Equity compensation plans approved by security holders 3,517 $24.22 2,690Equity compensation plans not approved by security holders1 890 17.20 —Total 4,407 $22.80 2,690_________________________________1 On occasion, we grant stock options under an inducement stock option agreements, in order to induce candidates to commence employment with us as amember of our executive management team. These options vest over a service period ranging from three to four years.Comparison of Total Stockholder ReturnsThe graph below compares the cumulative total stockholder returns for the period from December 31, 2009 to December 31, 2014, for our common stock, anindex composed of U.S. companies whose stock is listed on the Nasdaq Global Select Market (the36Table of ContentsNasdaq U.S. Companies Index), and an index consisting of Nasdaq-listed companies in the surgical, medical, and dental instruments and supplies industry(the Nasdaq Medical Equipment Companies Index). The graph assumes that $100.00 was invested on December 31, 2009, in our common stock, the NasdaqU.S. Companies Index, and the Nasdaq Medical Equipment Companies Index, and that all dividends were reinvested. Total returns for the two Nasdaq indicesare weighted based on the market capitalization of the companies included therein. Historic stock price performance is not indicative of future stock priceperformance. We do not make or endorse any prediction as to future stock price performance.Cumulative Total Stockholder ReturnsBased on Reinvestment of $100.00 Beginning on December 31, 2009 12/31/2009 12/31/2010 12/31/2011 12/31/2012 12/31/2013 12/31/2014Wright Medical Group, Inc.$100.00 $82.00 $87.12 $110.82 $162.14 $141.87Nasdaq U.S. Companies Index100.00 118.37 118.98 140.70 196.11 226.12Nasdaq Medical Equipment Companies Index100.00 106.64 122.52 136.39 159.86 185.44SIC Code 384 - Surgical, Medical, and DentalInstruments and Supplies100.00 104.18 105.86 124.72 151.70 186.72Copyright 2014 CRSP Center for Research in Security Prices, University of Chicago, Graduate School of Business. Zacks Investment Research, Inc. Used with permission. All rights reserved.37Table of ContentsItem 6. Selected Financial Data.The following tables set forth certain of our selected consolidated financial data as of the dates and for the years indicated. Historical results are notnecessarily indicative of the results to be expected for any future period. These tables are presented in thousands, except per share data. Year Ended December 31, 2014 2013 2012 2011 2010Statement of Operations: Net sales$298,027 $242,330 $214,105 $210,753 $208,489Cost of sales (1)73,223 59,721 48,239 56,762 55,928Cost of sales — restructuring (2)— — — 667 —Gross profit224,804 182,609 165,866 153,324 152,561Operating expenses: Selling, general and administrative (1) (6)289,620 230,785 150,296 131,611 124,704Research and development (1)24,963 20,305 13,905 15,422 17,008 Amortization of intangible assets10,027 7,476 4,417 2,412 2,397BioMimetic impairment charges— 206,249 — — —Gain on sale of intellectual property (3)— — (15,000) — —Restructuring charges (2)— — 431 4,613 60Total operating expenses324,610 464,815 154,049 154,058 144,169Operating (loss) income (5)(99,806) (282,206) 11,817 (734) 8,392Interest expense, net17,398 16,040 10,113 6,381 6,090Other (income) expense, net (6)129,626 (67,843) 5,089 4,241 119(Loss) Income before income taxes(246,830) (230,403) (3,385) (11,356) 2,183Provision (benefits) for income taxes(7)(6,334) 49,765 2 (3,961) 624Net (loss) income from continuing operations$(240,496) $(280,168) $(3,387) $(7,395) $1,559(Loss) income from discontinued operations, net of tax$(19,187) $6,223 $8,671 $2,252 $16,282Net (loss) income$(259,683) $(273,945) $5,284 $(5,143) $17,841Net (loss) income from continuing operations per share: Basic$(4.83) $(6.19) $(0.09) $(0.19) $0.04Diluted$(4.83) $(6.19) $(0.09) $(0.19) $0.04Weighted-average number of common shares outstanding — basic49,758 45,265 38,769 38,279 37,802Weighted-average number of common shares outstanding — diluted49,758 45,265 39,086 38,279 37,96138Table of Contents As of December 31, 2014 2013 2012 2011 2010Consolidated Balance Sheet Data: Cash and cash equivalents$227,326 $168,534 $320,360 $153,642 $153,261Marketable securities2,575 14,548 12,646 18,099 36,345Working capital252,805 385,890 575,713 424,543 426,286Total assets892,676 1,007,451 953,453 754,580 755,239Long-term liabilities426,222 428,312 353,580 210,126 212,963Stockholders’ equity278,803 459,714 523,441 468,464 470,972 Year Ended December 31, 2014 2013 2012 2011 2010Other Data: Cash flow provided by (used in) operating activities$(116,002) $(36,601) $68,822 $61,441 $73,194Cash flow provided by (used in) investing activities145,630 (121,317) (1,048) (30,560) (4,173)Cash flow provided by (used in) financing activities33,051 6,257 98,721 (30,050) (198)Depreciation18,582 26,296 38,275 40,227 35,559Stock-based compensation expense11,487 15,368 10,974 9,108 13,177Capital expenditures(4)48,603 37,530 19,323 46,957 49,038______________________________________(1)These line items include the following amounts of non-cash, stock-based compensation expense for the periods indicated: Year Ended December 31, 2014 2013 2012 2011 2010Cost of sales$254 $503 $704 $735 $705Selling, general and administrative10,149 10,675 6,767 4,875 7,808Research and development1,084 780 368 320 1,631Discontinued operations— 3,410 3,135 3,178 3,034(2)During the years ended December 31, 2012 and 2011, we recorded pre-tax charges associated with the cost improvement restructuring efforts totaling$0.4 million and $5.3 million. During the years ended December 31, 2010, we recorded pre-tax charges associated with the restructuring of our facilitiesin Toulon and Creteil, France, totaling $0.1 million.(3)During the year ended December 31, 2012, we recorded income of $15 million related to a sale and license back transaction for intellectual property.(4)During the year ended December 31, 2014, our capital expenditures included approximately $9.4 million related to the expansion of our manufacturingfacility in Arlington, Tennessee. During the year ended December 31, 2010, our capital expenditures included approximately $6.0 million related to theexpansion of our Arlington, Tennessee facilities.(5)During the year ended December 31, 2014, we recognized $2.1 million in costs associated with distributor conversions and non-competes. In addition,we recognized $14.1 million in costs for due diligence, transaction and transition costs related to the Biotech, Solana and OrthoPro acquisitions, and$11.9 million in Tornier merger costs. We recognized $5.9 million for transition costs for the OrthoRecon divestiture, $1.2 million in costs associatedwith management changes and $0.9 million in costs associated with a patent dispute settlement. During the year ended December 31, 2013, werecognized $3.7 million in costs associated with distributor conversions and non-competes. In addition, we recognized $12.9 million in costs for duediligence and transaction costs related to the BioMimetic & Biotech acquisitions and $21.6 million for transaction costs for the OrthoRecon divestiture.Additionally, we recorded charges of $206.2 million for BioMimetic impairment charges.(6)During the year ended December 31, 2014, we recognized approximately $125 million from mark-to-market adjustments on the Contingent Value Rights(CVRs) issued in connection with the acquisition of BioMimetic, $2.0 million of charges for the mark to market adjustment of our derivative instrumentsand $1.8 million of charges due to the fair value adjustment to contingent consideration associated with our acquisition of WG Healthcare. During theyear ended December 31, 2013, we recognized a gain of approximately $7.8 million related to the previously held investment in BioMimetic. During theyear ended December 31, 2012, we recognized approximately $2.7 million for the write-off of unamortized deferred financing39Table of Contentsfees associated with the termination of our Senior Credit facility and the redemption of approximately $25 million of our 2014 Convertible Notes.Additionally, we recognized approximately $1.1 million of charges for the mark to market adjustment of our derivative instruments. During the yearended December 31, 2011, we recognized approximately $4.1 million for the write off of pro-rata unamortized deferred financing fees and transactioncosts associated with the tender offer for our convertible notes completed during the first quarter of 2011.(7)During the year ended December 31, 2013, we recognized a $119.6 million tax valuation allowance recorded against deferred tax assets in our U.S.jurisdiction due to recent operating losses.40Table of ContentsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.The following management's discussion and analysis of financial condition and results of operations describes the principal factors affecting the results of ouroperations, financial condition and changes in financial condition, as well as our critical accounting estimates.On January 9, 2014, we completed the sale of our hip and knee reconstruction (OrthoRecon) business to MicroPort Scientific Corporation (MicroPort). Wedetermined that this transaction meets the criteria for classification as discontinued operations. As such, the financial results of our OrthoRecon business havebeen reflected within discontinued operations for all periods presented and, unless otherwise noted, the discussion below is on a continuing operations basis.Executive OverviewCompany Description. We are a global, specialty orthopaedic medical device company that provides solutions that enable clinicians to alleviate pain andrestore their patients' lifestyles. We are a recognized leader of surgical solutions for the foot and ankle market and sell our products in over 60 countriesworldwide.Our business includes products that are used in foot and ankle repair, upper extremity products, and biologics products, which are used to replace damaged ordiseased bone, to stimulate bone growth and to provide other biological solutions for surgeons and their patients. Extremity hardware includes implants andother devices to replace or reconstruct injured or diseased joints and bones of the foot, ankle, hand, wrist, fingers, toes, elbow and shoulder, which wegenerally refer to as either foot and ankle or upper extremity products. We are a leading provider of surgical solutions for the foot and ankle market. Ourextensive foot and ankle product portfolio, our approximately 300 direct sales representatives, and our increasing level of training of foot and ankle surgeonshas resulted in our being a recognized leader in the foot and ankle market. Biologics are used to repair or replace damaged or diseased bone, to stimulatebone growth and to provide other biological solutions for surgeons and their patients.We have been in business for over 60 years and have built a well-known, respected brand name.Following the sale of our OrthoRecon business on January 9, 2014, we moved our corporate headquarters and U.S. operations from Arlington, Tennessee toMemphis, Tennessee, where we conduct research and development, sales and marketing administration and administrative activities. Our manufacturing andwarehousing activities continue to be located in Arlington, Tennessee. Our U.S. sales accounted for 71% of total revenue in 2014. Our products are soldprimarily through a network of employee sales representatives and independent sales representatives in the U.S. and by a combination of employee salesrepresentatives, independent sales representatives and stocking distributors outside the U.S. We promote our products in approximately 60 countries withprincipal markets in the U.S., Europe, Asia, Canada, Australia, and Latin America.Principal Products. We specialize in extremity and biologic products used by extremity focused surgeon specialists for the reconstruction, trauma andarthroscopy markets. Our biologics sales encompass a broad portfolio of products designed to stimulate and augment the natural regenerative capabilities ofthe human body. We also sell orthopaedic products not considered to be part of our extremity or biologic 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 includesthe INBONE® and INFINITY® Total Ankle Replacement Systems, the CLAW® II Polyaxial Compression Plating System, the ORTHOLOC® 3DiReconstruction Plating System, the PhaLinx® System used for hammertoe indications, which we acquired in our acquisition of OrthoPro, L.L.C., PRO-TOE®VO Hammertoe System, the DARCO® family of locked plating systems, the VALOR® ankle fusion nail system, and the Swanson line of toe joint replacementproducts. Our upper extremity portfolio includes the EVOLVE® radial head prosthesis for elbow fractures, the EVOLVE® Elbow Plating System, RAYHACK®osteotomy system, and the MICRONAIL® intramedullary wrist fracture repair system.Our biologic products focus on biological musculoskeletal repair and include synthetic and human tissue-based materials. Our principal biologic productsinclude the GRAFTJACKET® line of soft tissue repair and containment membranes, the ALLOMATRIX® line of injectable tissue-based bone graftsubstitutes, the PRO-DENSE® injectable regenerative graft, the OSTEOSET® synthetic bone graft substitute, and the PRO-STIM® injectable inductive graft.Significant Business Developments. On January 9, 2014, we completed the sale of our OrthoRecon business to MicroPort. The financial results of ourOrthoRecon business have been reflected within discontinued operations for all periods presented and, unless otherwise noted, the discussion below is on acontinuing operations basis. With the divestiture of our OrthoRecon business, our transition to a high-growth global Extremities and Biologics company iscomplete.On January 30, 2014, we completed our acquisition of Solana, and on February 5, 2014, we completed our acquisition of OrthoPro, both privately held, highgrowth extremities companies. These acquisitions add complementary extremity product portfolios to further accelerate growth opportunities in our globalExtremities business.41Table of ContentsWe acquired 100% of outstanding equity of Solana for approximately $48 million in cash and $41.4 million of Wright common stock. We acquired 100% ofOrthoPro's outstanding equity for approximately $32.5 million paid at closing.On June 16, 2014, we announced the full U.S. commercial launch of our INFINITY® Total Ankle Replacement System. The system complements our existingankle portfolio and allows us to offer a total ankle replacement system that addresses the continuum of care for end-stage ankle arthritis patients.On October 27, 2014, we received an Approvable Letter from the FDA for our PMA for Augment® Bone Graft. The approvable letter indicates the FDAdetermined Augment® Bone Graft to be safe and effective as an alternative to autograft for ankle and/or hindfoot fusion indications and is approvable subjectto customary preapproval facilities inspections. We currently anticipate that we will be able to sell Augment® Bone Graft in the United States beginning inthe first half of 2015.On October 27, 2014, we entered into a definitive merger agreement with Tornier under which Wright and Tornier will combine in an all stock transactionwith a combined equity value of approximately $3.3 billion as of the date of the announcement. Under the terms of the merger agreement, each outstandingshare of our common stock will be exchanged for 1.0309 ordinary shares of Tornier. Upon completion of the merger, our shareholders will own approximately52% of the shares of the combined company on a fully diluted basis and Tornier shareholders will own approximately 48%. The transaction is subject to thecustomary closing conditions, including the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, as well as Wright and Tornier stockholderapproval.Following the closing of the transaction, the combined company will conduct business as Wright Medical Group N.V. and will leverage the global strengthsof both product brands as a pure play Extremities-Biologics business. The combined company will have its U.S. headquarters in Memphis, Tennessee, whereour current headquarters is located. Wright Medical Group N.V. will be led by Robert Palmisano, who will become president and chief executive officer of thecombined company. David Mowry, Tornier’s president and chief executive officer, will become executive vice president and chief operating officer of thecombined company. Wright Medical Group N.V.’s board of directors will be comprised of five representatives from Wright’s existing board and fiverepresentatives from Tornier’s existing board, including Robert Palmisano and David Mowry. The merger of Wright and Tornier will create a mid-sizedgrowth company uniquely positioned with leading technologies and specialized sales forces in three of the fastest growing areas of orthopaedics - UpperExtremities, Lower Extremities and Biologics. The highly complementary nature of the two businesses will give the combined company significant diversityand scale across a range of geographies and product categories.In 2014, net sales increased 23%, totaling $298.0 million, compared to $242.3 million in 2013, driven by growth in our foot and ankle business.Our 2014 domestic sales increased 19% as compared to 2013, as a 29% increase in our U.S. foot and ankle sales more than offset a 12% decline in our upperextremity sales. Our international sales increased 33% during 2014 as compared to 2013 primarily due to the Biotech acquisition in the fourth quarter of2013. The remaining growth was driven primarily by our market focus in Asia and the United Kingdom.In 2014, our net loss from continuing operations totaled $240.5 million, compared to a net loss from continuing operations of $280.2 million in 2013. Thedecrease in net loss from continuing operations was driven by:•$208.5 million ($172.3 million net of taxes) of impairment and other charges recorded in 2013 related to assets acquired from BioMimetic,including $2.3 million of charges recorded within Cost of Sales to write down inventory to its net realizable value;•$119.6 million tax valuation allowance recorded in 2013 against deferred tax assets in our U.S. jurisdiction; and•$14.5 million ($3.4 million net of taxes) decrease in transition costs associated with the sale of our OrthoRecon business and the acquisition ofbusinesses.Those favorable impacts were mostly offset by items unfavorably impacting the net loss in 2014 that included:•$186.2 million ($186.2 million net of taxes) year-over-year unfavorability from mark-to-market adjustments on the Contingent Value Rights (CVRs)issued in connection with the acquisition of BioMimetic;•$11.9 million ($11.9 million net of taxes) of expenses in 2014 associated with the pending Tornier merger;•$1.2 million ($1.2 million net of taxes) of expenses associated with executive management changes in 2014;•$1.7 million ($1.7 million net of taxes) of charges due to the fair value adjustment to contingent consideration associated with our acquisition ofWG Healthcare;•incremental selling, general and administrative expenses primarily driven by expense dis-synergies following the sale of our OrthoRecon business,investment in international growth opportunities and short-term expense dis-synergies associated with the acquired Solana and OrthoPro businesses;and•the inability to record tax benefit in our U.S. jurisdiction due to the full valuation allowance.42Table of ContentsOpportunities and Challenges. Following the sale of the OrthoRecon business, we are well positioned and committed to accelerating growth in our foot andankle business and increasing U.S. foot and ankle sales productivity. We have made changes to attempt to realize these opportunities, including aggressivelyconverting a portion of our U.S. independent distributor foot and ankle territories to direct employee sales representation, and substantially increasing ourinvestment in foot and ankle medical education to drive market adoption of new products and technologies.Business continuity, investments in innovation, and a seamless customer experience are top priorities, and we are highly focused on ensuring that nobusiness momentum is lost during the transition period. As such, we have had inefficiencies following the sale of the OrthoRecon business, but will have anexcellent opportunity to improve efficiency and leverage fixed costs in the business going forward. Additionally, there have been expense dis-synergies as aresult of the transaction, and we have had short-term revenue dis-synergies as we work through the separation of some of the remaining full-line distributionboth in the U.S. and outside the U.S.Following the sale of the OrthoRecon business, we are a high growth business. However, we do anticipate having operating losses until we are able to growour revenue to a sufficient level to support our current cost structure, including the inherent infrastructure costs of our industry.Significant Industry Factors. Our industry is affected by numerous competitive, regulatory, and other significant factors. The growth of our business relies onour ability to continue to develop new products and innovative technologies, obtain regulatory clearance and maintain compliance for our products, protectthe proprietary technology of our products and our manufacturing processes, manufacture our products cost-effectively, respond to competitive pressuresspecific to each of our geographic markets, including our ability to enforce non-compete agreements, and successfully market and distribute our products in aprofitable manner. We, and the entire industry, are subject to extensive governmental regulation, primarily by the FDA. Failure to comply with regulatoryrequirements could have a material adverse effect on our business.Results of OperationsComparison of the year ended December 31, 2014 to the year ended December 31, 2013The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts (in thousands) and as percentages of net sales: Year Ended December 31, 2014 2013 Amount% of Sales Amount% of SalesNet sales$298,027100.0 % $242,330100.0 %Cost of sales173,22324.6 % 59,72124.6 %Gross profit224,80475.4 % 182,60975.4 %Operating expenses: Selling, general and administrative1289,62097.2 % 230,78595.2 %Research and development124,9638.4 % 20,3058.4 %Amortization of intangible assets10,0273.4 % 7,4763.1 %BioMimetic impairment charges—— % 206,24985.1 %Total operating expenses324,610108.9 % 464,815191.8 %Operating loss(99,806)(33.5)% (282,206)(116.5)%Interest expense, net17,3985.8 % 16,0406.6 %Other expense (income), net129,62643.5 % (67,843)(28.0)%Loss from continuing operations before income taxes(246,830)(82.8)% (230,403)(95.1)%(Benefit) provision for income taxes(6,334)(2.1)% 49,76520.5 %Net loss from continuing operations$(240,496)(80.7)% $(280,168)(115.6)%(Loss) income from discontinued operations, net of tax 1(19,187) 6,223 Net loss$(259,683) $(273,945) ___________________________43Table of Contents1These line items include the following amounts of non-cash, stock-based compensation expense for the periods indicated: Year Ended December 31, 2014% of Sales 2013% of SalesCost of sales$2540.1% $5030.2%Selling, general and administrative10,1493.4% 10,6754.4%Research and development1,0840.4% 7800.3%Income from discontinued operations, net of tax—n/a 3,410n/aThe following table sets forth our net sales by product line for the periods indicated (in thousands) and the percentage of year-over-year change: Year Ended December 31, 2014 2013 % ChangeU.S. Foot and Ankle148,631 115,642 28.5 %Upper Extremity15,311 17,423 (12.1)%Biologics45,494 42,561 6.9 %Other2,641 2,022 30.6 %Total U.S.212,077 177,648 19.4 % International Foot and Ankle47,001 35,020 34.2 %Upper Extremity11,312 7,240 56.2 %Biologics20,590 17,231 19.5 %Other7,047 5,191 35.8 %Total International85,950 64,682 32.9 % Total Sales298,027 242,330 23.0 %Net salesU.S. Segment. Net sales in our U.S. segment totaled $212.1 million in 2014, a 19% increase from $177.6 million in 2013, representing approximately 71% oftotal net sales in 2014 and 73% of total net sales in 2013. Sales from products acquired from Solana and OrthoPro contributed sales of $22.4 million in 2014.Our U.S. foot and ankle net sales increased to $148.6 million in 2014, representing growth of 29% over 2013. The increase was driven by sales of $20.8million from products acquired from Solana and OrthoPro, as well as continued growth of our Total Ankle Replacement products. The U.S. foot and anklesales growth includes the impact of the addition of Solana and OrthoPro's products into our existing direct sales force, offset by some cannibalization ofproduct sales.Our U.S. biologics sales totaled $45.5 million in 2014, representing a 7% increase over 2013, driven primarily by an increase in the sales of our PRO-DENSE® and ALLOPURE® line of products.Our U.S. upper extremities sales were impacted by dis-synergies in our U.S. sales channel following the sale of our OrthoRecon business.International Segment. Net sales in our International segment totaled $86.0 million in 2014, a 33% increase as compared to net sales of $64.7 million in2013. Sales from products acquired from Biotech contributed sales of $13.7 million in 2014.Our international foot and ankle sales increased 34% to $47.0 million in 2014, driven by sales of $8.2 million from foot and ankle products acquired fromBiotech and increases in other geographic regions as a result of our focus on international market expansion focus.Our international biologics sales increased 19% as the result of a 33% increase in Asia as the result of the addition of a new distribution partner in China inthe second quarter of 2013, and a 21% increase of sales in Australia, primarily related to sales of Augment® Bone Graft acquired from the BioMimeticacquisition in the first quarter of 2013.Our 2014 international net sales included a unfavorable foreign currency impact of approximately $0.6 million when compared to 2013 net sales.44Table of ContentsCost of salesOur cost of sales were flat as a percentage of net sales, totaling $73.2 million or 24.6% of sales in 2014, compared to $59.7 million or 24.6% of sales in 2013,as dis-synergies associated with fixed overhead manufacturing costs following the sale of our OrthoRecon business and increased inventory step-upamortization associated with recent acquisitions, were offset by lower levels of provisions for excess and obsolete inventory.Our cost of sales and corresponding gross profit percentages can be expected to fluctuate in future periods depending upon changes in our product sales mixand prices, distribution channels and geographies, manufacturing yields, period expenses, levels of production volume and currency exchange rates.Selling, general and administrativeAs a percentage of net sales, selling, general and administrative expenses increased to 97.2% in 2014, as compared to 95.2% in 2013. For 2014, selling,general and administrative expense included $14.1 million transition and transaction costs associated with acquired businesses (4.7% of net sales), $11.9million of Tornier merger costs (4.0% of net sales), $5.8 million of transition costs associated with the sale of the OrthoRecon business (2.0% of net sales),$1.2 million of costs connected to management changes (0.4% of net sales) and $0.9 million of costs related to a patent dispute settlement (0.3% of net sales).For 2013, Selling, general and administrative expense included $21.6 million of transition costs associated with the sale of our OrthoRecon business (8.9% ofnet sales), $12.9 million of due diligence, transition and transaction costs related to our acquisitions of BioMimetic and Biotech (5.3% of net sales), and $0.9million of cost related to distributor transition agreements (0.4% of net sales). The remaining increase in selling, general and administrative expenses as apercentage of sales was driven by investment in international growth opportunities, dis-synergies as a result of the sale of the OrthoRecon business in certaincorporate and international expenses, and short-term expense dis-synergies associated with the acquired Solana and OrthoPro businesses, which werepartially offset by lower levels of expense for cash incentive compensation. The dis-synergies as a result of the sale of the OrthoRecon business includeexpenses associated with our information technology support, a new corporate headquarters, and international employees and facilities.We anticipate that our selling, general and administrative expenses will increase in 2015 for transaction and transition costs associated with the pendingTornier merger.Research and developmentOur investment in research and development activities represented 8.4% of net sales in both 2014 and 2013. Research and development costs as a percentageof net sales were flat in 2014 as compared to 2013 primarily attributable to increased sales levels, partially offset by dis-synergies in certain shared functionsas a result of the sale of the OrthoRecon business.Amortization of intangible assetsCharges associated with amortization of intangible assets totaled $10.0 million in 2014, as compared to $7.5 million in 2013. The increase is driven byintangible assets acquired during the quarter ended March 31, 2014 and the fourth quarter of 2013 (see Note 3 to our consolidated financial statements). Theincrease is partially offset by a decrease in amortization expense associated with certain distributor non-compete agreements that became fully amortizedduring 2014. Based on the intangible assets held at December 31, 2014, we expect to amortize approximately $10.1 million in 2015, $7.7 million in 2016,$7.1 million in 2017, $5.5 million in 2018, and $5.1 million in 2019.BioMimetic impairment chargesThere were no BioMimetic impairment charges in 2014. During the quarter ended September 30, 2013, we recorded charges of approximately $206.2 millionassociated with the BioMimetic business acquired in the first quarter of 2013. On August 7, 2013, we received a not approvable letter from the FDA inresponse to our Pre-PMA application for Augment® Bone Graft for use as an alternative to autograft in hindfoot and ankle fusion procedures, and we wererequired to evaluate assets associated with the BioMimetic acquisition for impairment. As a result of this evaluation, we recorded an intangible impairmentcharge of approximately $88.1 million and a goodwill impairment charge of $115.0 million, as well as the recognition of a $3.2 million charge fornoncancelable inventory commitments for the raw materials used in the manufacture of Augment® Bone Graft, which we estimated would expire unused.Interest expense, netInterest expense, net, consists of interest expense of $17.7 million in 2014 and $16.4 million in 2013, offset by interest income of $0.3 million in both 2014and 2013. Our interest expense relates primarily to non-cash interest expense associated with the amortization of the discount on our 2017 Notes of $9.3million and $8.7 million in 2014 and 2013, respectively, and non-cash interest expense related to the amortization of deferred financing costs of $1.7 millionand $1.6 million in 2014 and 2013, respectively, as well as cash interest expense on our 2017 Notes totaling $6.0 million in both 2014 and 2013.45Table of ContentsOur interest income is generated by our invested cash balances and investments in marketable securities. The amounts of interest income we expect to realizein 2015 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.We expect that interest expense will increase in 2015 due to the incremental debt outstanding following the issuance of the 2020 Notes in February 2015 (seeNote 22 to our consolidated financial statements).Other expense (income), netOther expense (income), net was $129.6 million of expense in 2014, compared to $67.8 million of income in 2013. For 2014, other expense, net includes anunrealized loss of $125.0 million for the mark-to-market adjustment on CVRs issued in connection with the acquisition of BioMimetic, $1.8 million for thefair value adjustment for contingent consideration associated with the WG Healthcare acquisition and an unrealized loss of $2.0 million for net mark-to-market adjustments on our derivative asset and liability. For 2013, other expense (income), net includes a $61.1 million unrealized gain on CVRs issued inconnection with the acquisition of BioMimetic and a $7.8 million realized gain on our previously held investment in BioMimetic, partially offset by anunrealized loss of $1.0 million for net mark-to-market adjustments on our derivative asset and liability.Benefit (provision) for income taxesWe recorded a tax benefit of $6.3 million in 2014 and tax expense of $49.8 million in 2013. During 2014, our effective tax rate was approximately 2.6% ascompared to (21.6)% in the first nine months of 2013. Our relatively low effective tax rate in 2014 is primarily related to the valuation allowance on our U.S.net deferred tax assets, resulting in the inability to recognize a tax benefit for pre-tax losses in the U.S., except to the extent to which we recognize a gain indiscontinued operations. Our 2014 tax benefit therefore included $5.5 million of benefit recorded in continuing operations as a result of the gain realized indiscontinued operations. Our 2013 tax expense included a $119.6 million provision to record a valuation allowance against our deferred tax assets primarily associated with netoperating losses in the U.S. as a result of recent cumulative operating losses in the U.S. tax jurisdiction, which had an unfavorable 51.9 percentage pointimpact on our 2013 effective tax rate.Loss (Income) from Discontinued Operations, Net of TaxLoss (Income) from discontinued operations, net of tax, consists of the operations of the OrthoRecon business that was sold to MicroPort. For 2014, net lossfrom discontinued operations includes operations from January 1 through January 9, 2014, which was the closing date of the transaction, costs associatedwith external legal defense fees and changes to any contingent liabilities associated with the OrthoRecon business, as well as the $24.3 million gain on thesale of the OrthoRecon business.For 2013, income from discontinued operations includes twelve months of activity of the OrthoRecon business.Reportable Segments.The following table sets forth, for the periods indicated, sales gross profit and operating income of our reportable segments expressed as dollar amounts (inthousands) and as a percentage of net sales: Twelve Months Ended December 31, U.S. International BioMimetic(1) 20142013 20142013 20142013Net Sales$212,077$177,648 $85,950$64,682 $—$—Gross Profit172,035146,541 54,55839,630 ——Gross Profit as a percent of net sales81.1%82.5% 63.5 %61.3% N/AN/AOperating Income (Loss)$23,074$26,268 $(5,366)$4,761 $(12,033)$(12,741)Operating Income as a percent of net sales10.9%14.8% (6.2)%7.4% N/AN/A(1) The acquisition of the BioMimetic reportable segment occurred on March 01, 2013.U.S. Segment - Gross profit as a percent of net sales decreased primarily due to dis-synergies associated with fixed manufacturing overhead costs followingthe sale of our OrthoRecon business and increased inventory step-up amortization associated with recent acquisitions. Operating income decreased due toinvestments in sales and marketing and distribution initiatives and short-term expense dis-synergies associated with the acquired Solana and OrthoProbusinesses, mostly offset by increased gross profit due to higher sales.International Segment - The increase in gross profit as a percent of net sales is due to favorable geographic and product mix. The decline in operatingprofitability is due to dis-synergies for the replacement of certain employee-related and facility expenses as a result of the sale of the OrthoRecon business.46Table of ContentsBioMimetic Segment - Operating loss was relatively flat as higher costs in 2014 associated with the appeal of the not approvable letter was offset by decreasedadministrative expenses as a result of integration of certain functions from the BioMimetic business to the U.S. business.Comparison of the year ended December 31, 2013 to the year ended December 31, 2012The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts (in thousands) and as percentages of net sales: Year Ended December 31, 2013 2012 Amount% of Sales Amount% of SalesNet sales$242,330100.0 % $214,105100.0 %Cost of sales159,72124.6 % $48,23922.5 %Gross profit182,60975.4 % 165,86677.5 %Operating expenses: Selling, general and administrative1230,78595.2 % 150,29670.2 %Research and development120,3058.4 % 13,9056.5 %Amortization of intangible assets7,4763.1 % 4,4172.1 %Gain on sale of intellectual property—— % (15,000)(7.0)%Restructuring charges—— % 4310.2 %Total operating expenses258,566106.7 % 154,04972.0 %Operating income(282,206)(116.5)% 11,8175.5 %Interest expense, net16,0406.6 % 10,1134.7 %Other expense, net(67,843)(28.0)% 5,0892.4 %(Loss) income from continuing operations before income taxes(230,403)(95.1)% (3,385)(1.6)%Provision for income taxes49,76520.5 % 20.0 %Net loss from continuing operations$(280,168)(115.6)% $(3,387)(1.6)%Income from discontinued operations, net of tax 16,223 8,671 Net income (loss)$(273,945) $5,284 ___________________________1These line items include the following amounts of non-cash, stock-based compensation expense for the periods indicated: Year Ended December 31, 2013% of Sales 2012% of SalesCost of sales$5030.2% $7040.3%Selling, general and administrative10,6754.4% 6,7673.2%Research and development7800.3% 3680.2%Loss from discontinued operations, net of tax3,410n/a 3,135n/a47Table of ContentsThe following table sets forth our net sales by product line for the periods indicated (in thousands) and the percentage of year-over-year change: Year Ended December 31, 2013 2012 % ChangeU.S. Foot and Ankle115,642 99,403 16.3 %Upper Extremity17,423 17,170 1.5 %Biologics42,561 47,459 (10.3)%Other2,022 2,079 (2.7)%Total U.S.177,648 166,111 6.9 % International Foot and Ankle35,020 23,493 49.1 %Upper Extremity7,240 7,808 (7.3)%Biologics17,231 13,036 32.2 %Other5,191 3,657 41.9 %Total International64,682 47,994 34.8 % Total Sales242,330 214,105 13.2 %Net salesU.S. Segment. Net sales is our U.S. segment totaled $177.6 million in 2013, a 7% increase from $166.1 million in 2012, representing approximately 73% oftotal net sales in 2013 and 78% of total net sales in 2012.Our U.S. foot and ankle sales increased 16%, driven by the success of our ORTHOLOC® 3Di Reconstruction Plating System, as well as continued growth ofour INBONE® Total Ankle Arthroplasty products.Our U.S. upper extremity sales increased to $17.4 million in 2013, representing a 2% increase from 2012.Our U.S. biologics sales decreased 10% to $42.6 million in 2013, compared to $47.5 million in 2012, as result of lower sales volume.International Segment. Net Sales in our international segment totaled $64.7 million in 2013, a 35% increase as compared to net sales of $48.0 million in2012, primarily due to a 40% increase in Europe as the result of the WG Healthcare acquisition in the first quarter of 2013 and the acquisition of Biotechduring the fourth quarter of 2013, a 90% increase in Asia due to the addition of a new distribution partner in China during the quarter ended June 30, 2013,and an 80% increase in Australia driven by sales of Augment® Bone Graft. Our 2013 international net sales included a favorable foreign currency impact ofapproximately $1.2 million when compared to 2012 net sales.Our international foot and ankle sales grew 49%, driven by growth in our European markets due to the acquisition of WG Healthcare and Biotech, and growthin our Asian markets due to the addition of a new distribution partner during 2013.Our international upper extremity net sales decreased to $7.2 million in 2013, representing a 7% decline from 2012, driven by a $0.4 million of unfavorableforeign currency impact.Our international biologics sales grew 32%, driven by a $2.8 million increase in sales in Australia, primarily related to sales of Augment® Bone Graft.Cost of salesOur cost of sales as a percentage of net sales increased in 2013 compared to 2012 from 22.5% to 24.6% . For 2013, cost of sales included $2.3 million (1.0%of net sales) of charges associated with the write down of inventory acquired from BioMimetic to net realizable value. The remaining increase in cost of salesas a percentage of sales is primarily driven by increased provisions for excess, obsolete and lost inventory and amortization of acquired inventory step-up tofair value, partially offset by favorable manufacturing expenses.Our cost of sales and corresponding gross profit percentages can be expected to fluctuate in future periods depending upon changes in our product sales mixand prices, distribution channels and geographies, manufacturing yields, period expenses, levels of production volume and currency exchange rates.48Table of ContentsSelling, general and administrativeOur selling, general and administrative expenses as a percentage of net sales totaled 95.2% and 70.2% in 2013 and 2012, respectively. For 2013, selling,general and administrative expense included $21.6 million (8.9% of net sales) of transition costs associated with the sale of our OrthoRecon business, $12.9million (5.3% of net sales) in due diligence, transition and transactions costs associated with our acquisitions in 2013, and $0.9 million (0.4% of net sales) ofcosts associated with U.S. distributor conversions. Selling, general and administrative expense for 2012 included $1.8 million (0.8% of net sales) of duediligence and transition costs associated with our acquisition of BioMimetic, and $1.0 million (0.5% of net sales) of costs associated with U.S. distributorconversions. The remaining increase in selling, general and administrative expense was driven by $7.7 million of expenses associated with the ongoingoperations of the acquired BioMimetic business and legal and other spending associated with our appeal of the not approvable letter from the FDA (3.2% ofnet sales), $2.8 million of taxes related to the enacted 2.3% excise tax on U.S. sales of medical devices (1.2% of net sales), increased sales and marketing costsas a result of our initiative to convert a substantial portion of our U.S. foot and ankle sales force to direct employees, and increased spending on internationalgrowth initiatives.Research and developmentOur investment in research and development activities represented 8.4% and 6.5% of net sales in 2013 and 2012, respectively. The increase in research anddevelopment costs as a percentage of sales is attributable to spending associated with the acquired BioMimetic business.Amortization of intangible assetsCharges associated with amortization of intangible assets totaled $7.5 million in 2013, as compared to $4.4 million in 2012. During 2013, we recorded $2.8million of amortization expense associated with distributor non-compete agreements compared to $1.9 million in 2012. In addition, during 2013 werecognized approximately $1.0 million of impairment charges associated with certain intangible assets acquired in prior periods. The remaining increase isdriven by intangible assets acquired during 2013 (see Note 3 to our consolidated financial statements).BioMimetic Impairment ChargesDuring 2013, we recorded charges of approximately $206.2 million associated with the BioMimetic business acquired in the first quarter of 2013. On August7, 2013, we received a not approvable letter from the FDA in response to our Pre-PMA application for Augment® Bone Graft for use as an alternative toautograft in hindfoot and ankle fusion procedures. We have filed an appeal with the FDA regarding its decision. On October 31, 2013, the FDA notified us ithas elected to convene a Dispute Resolution Panel to consider the scientific issues in dispute before making a decision on our appeal. While we believe ourappeal has strong merits, we were required to evaluate assets associated with the BioMimetic acquisition for impairment. As a result of this evaluation, werecorded an intangible impairment charge of approximately $88.1 million and a goodwill impairment charge of $115.0 million, as well as the recognition ofa $3.2 million charge for non-cancelable minimum inventory purchase commitments for the raw materials used in the manufacture of Augment® Bone Graft,which we estimated would expire unused.Gain on Sale of Intellectual PropertyDuring 2012, we recognized a gain of $15.0 million related to the sale of certain intellectual property associated with biomaterial used in products marketedand sold by us as bone graft substitutes. In connection with the sale, we entered into a license agreement with the purchaser pursuant to which we obtained anexclusive, worldwide, fully paid license to use the transferred intellectual property in our fields of use.Interest expense, netInterest expense, net, consists of interest expense of $16.5 million in 2013 and $10.6 million in 2012, consisting primarily of:•non-cash expense related to the amortization of the discount on our 2017 Convertible Senior Notes of $8.7 million and $2.8 million in 2013 and2012, respectively;•non-cash expense related to the amortization of deferred financing costs of $1.6 million and $0.5 million in 2013 and 2012, respectively; and•cash interest expense related to our 2017 Convertible Senior Notes of $6.0 million and $2.0 million in 2013 and 2012, respectively.The increase in interest expense amounts during 2013 is due to the issuance of the 2017 Convertible Senior Notes in the second half of 2012. The remaininginterest expense in 2012 relates to cash interest expense associated with 2014 Notes and cash interest on our borrowings under our Senior Credit Facility,which was repaid during the second half of 2012. Interest income of $0.4 million was recognized during 2013 and 2012, generated by our invested cashbalances and investments in marketable securities.49Table of ContentsOther expense, netFor 2013, other expense, net includes an unrealized gain of $61.1 million on CVRs issued in connection with our acquisition of BioMimetic, a $7.8 milliongain on our previously held investment in BioMimetic, offset by a $1.0 million unrealized loss for mark-to-market adjustments on our derivative assets andderivative liabilities. For 2012, other expense, net includes a $1.8 million loss on the early termination of an interest rate swap, $2.7 million related to thewrite off of deferred financing costs associated with our terminated Senior Credit Facility and the portion of our 2014 Notes that were repurchased, and a netunrealized loss of $1.1 million for mark-to-market adjustments on our derivative assets and derivative liabilities.Provision (benefit) for income taxesWe recorded tax expense of $49.8 million in 2013 and a negligible amount of tax expense in 2012. Our effective tax rate for 2013 and 2012 was (21.6)% and(0.1)%, respectively. Our 2013 tax expense included a $119.6 million provision to record a valuation allowance against our deferred tax assets primarilyassociated with net operating losses in the U.S. as a result of recent cumulative operating losses in the U.S. tax jurisdiction, which had an unfavorable 51.9percentage point impact on our 2013 effective tax rate. Our 2012 tax expense was unfavorably impacted by non-deductible expenses associated withacquisitions announced in 2013, which had an unfavorable 21.2 percentage point impact on the 2012 effective tax rate due to the relatively small loss beforeincome taxes.Income from Discontinued Operations, Net of TaxIncome from discontinued operations, net of tax, consists of our OrthoRecon business, which was sold to MicroPort effective January 9, 2014. Costsassociated with corporate employees and infrastructure being transferred as a part of the sale have been included in discontinued operations.Net sales of our OrthoRecon business decreased 14% to $231.9 million in 2013 compared to $269.7 million in 2012, driven by a 16.5% decline in hip salesand a 10.4% decline in knee sales.Income from discontinued operations, net of tax, was $6.2 million in 2013, as compared to $8.7 million in 2012. The decrease in net income was primarilydriven by the decrease in sales year over year, the after tax impact of $10.9 million of legal and professional fees associated with the MicroPort transaction,and $1.7 million of taxes related to the enacted 2.3% excise tax on U.S. sales of medical devices, partially offset by the after tax impact of a $3.7 milliondecrease in expenses associated with the deferred prosecution agreement and U.S. governmental inquiries, and the after tax impact of a $10 million decreasein depreciation and amortization expense on long lived assets that were classified as held for sale in June 2013.Costs associated with legal defense, income associated with product liability insurance recoveries, and changes to any contingent liabilities associated ourOrthoRecon business have been reflected within results of discontinued operations, and we will continue to reflect these within results of discontinuedoperations in future periods.Reportable Segments.The following table sets forth, for the periods indicated, sales gross profit and operating income of our reportable segments expressed as dollar amounts (inthousands) and as a percentage of net sales: Twelve Months Ended December 31, U.S. International BioMimetic(1) 20132012 20132012 20132012Net Sales$177,648$166,111 $64,682$47,994 $—N/AGross Profit146,541135,823 39,63030,907 —N/AGross Profit as a percent of net sales82.5%81.8% 61.3%64.4% N/AN/AOperating Income (Loss)$26,268$39,810 $4,761$8,467 $(12,741)N/AOperating Income as a percent of net sales14.8%24.0% 7.4%17.6% N/AN/A(1) The acquisition of the BioMimetic reportable segment occurred on March 01, 2013.U.S. Segment - Gross profit as a percent of net sales increased primarily due to favorable manufacturing expenses, partially offset by increased provisions forexcess and obsolete inventory. Operating income declined, as increased gross profit due to higher sales was more than offset by $2.8 million of taxes relatedto the enacted 2.3% excise tax on U.S. sales of medical devices and increased sales and marketing costs as a result of our initiative to convert a substantialportion of our U.S. foot and ankle sales force to direct employees.50Table of ContentsInternational Segment - The decrease in gross profit as a percent of net sales is due to unfavorable geographic mix. The decline in operating profitability isdue to increased spending on international growth initiatives and increased amortization expense associated with international acquisitions.Seasonal Nature of BusinessWe traditionally experience lower sales volumes in the third quarter than throughout the rest of the year as many of our reconstructive products are used inelective procedures, which generally decline during the summer months, typically resulting in selling, general and administrative expenses and research anddevelopment 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 meetings held by the American College of Footand Ankle Surgeons and the American Academy of Orthopaedic Surgeons. During these three-day events, we display our most recent and innovative productsin the foot and ankle market.Liquidity and Capital ResourcesThe following table sets forth, for the periods indicated, certain liquidity measures (in thousands): As of December 31, 2014 2013Cash and cash equivalents$227,326 $168,534Short-term marketable securities2,575 6,898Long-term marketable securities— 7,650Working capital252,805 385,890Operating Activities. Cash (used in) provided by operating activities totaled ($116.0 million), ($36.6 million), and $68.8 million in 2014, 2013 and 2012,respectively. The increase in cash used in operating activities in 2014 as compared to 2013 was driven by decreased cash profitability, primarily due to costsassociated with the sale of our OrthoRecon business and integration of our recent acquisitions, expense dis-synergies following the sale of the OrthoReconbusiness in certain corporate and international expenses and short-term expense dis-synergies associated with the acquired Solana and OrthoPro businesses.In 2013, compared to 2012, the increase in cash used in operating activities was driven by decreased cash profitability, primarily due to costs associated withthe sale of our OrthoRecon business, costs associated with the acquisitions of BioMimetic and Biotech, and operating expenses associated with the acquiredBioMimetic business.Investing Activities. Our capital expenditures totaled $48.6 million in 2014, $37.5 million in 2013, and $19.3 million in 2012. The increase in 2014,compared to 2013, is primarily attributable to spending on the expansion of our manufacturing facility in Arlington, Tennessee, and the completion of ourcorporate headquarters. The increase in 2013, compared to 2012, is primarily attributable to spending on our new corporate headquarters due to the sale ofour existing headquarters as part of the sale of our OrthoRecon business. Historically, our capital expenditures have consisted principally of purchasedmanufacturing equipment, research and testing equipment, computer systems, office furniture and equipment and surgical instruments. We expect to incurcapital expenditures in 2015 of approximately $37 million for routine capital expenditures.During 2014, we paid $81 million cash, net of cash acquired, for the Solana and OrthoPro acquisitions. Refer to Note 3 of our consolidated financialstatements contained in “Financial Statements and Supplementary Data” for additional information regarding these acquisitions.Financing Activities. During 2014, cash provided by financing activities totaled $33.1 million, compared to $6.3 million in 2013 and $98.7 million in 2012.During 2014, we received $37.2 million of cash in connection with the issuance of shares in connection with our stock-based compensation plan as comparedto $6.3 million in 2013. This increase was driven primarily by stock option exercises of former employees transferred to MicroPort following the sale of theOrthoRecon business.During 2012, cash provided by financing activities consisted primarily of $300.0 million of proceeds from the issuance of our 2017 Convertible SeniorNotes, offset by payments on our Term Loan of $144.4 million and $56.2 million of cash used to purchase hedge options on our 2017 Convertible SeniorNotes. During 2011, cash used in financing activities consisted of the purchase of $170.9 million of our 2014 Notes tendered in the tender offer, mostly offsetby the cash proceeds from a $150 million borrowing under the Term Loan.On August 22, 2012, we issued $300 million of the 2017 Convertible Senior Notes, which generated net proceeds of $290.8 million. In connection with theoffering of the 2017 Convertible Senior Notes, we entered into convertible note hedging transactions with three counterparties (the Option Counterparties).We also entered into warrant transactions in which we sold warrants for an51Table of Contentsaggregate of 11,794,200 shares of our common stock to the Option Counterparties. As of December 31, 2014, $300.0 million aggregate principal amount ofthe 2017 Convertible Senior Notes remained outstanding.In November 2007, we issued $200 million of 2.625% Convertible Senior Notes maturing on December 1, 2014. On February 10, 2011, we announced thecommencement of a tender offer to purchase for cash any and all of our outstanding 2014 Notes. Upon expiration on March 11, 2011, we purchased $170.9million aggregate principal amount of the 2014 Notes. On August 22, 2012, we purchased $25.3 million aggregate principal amount of the 2014 Notes. OnDecember 1, 2014, the 2014 Notes matured and the remaining $3.8 million aggregate principal amount was paid.See Note 9 to our consolidated financial statements contained in “Financial Statements and Supplementary Data” for further discussion of these financingactivities.As of December 31, 2014, we had less than 15% of our consolidated cash and cash equivalents held in jurisdictions outside of the U.S., which are expected tobe indefinitely reinvested for continued use in foreign operations. Repatriation of these assets to the U.S. would have negative tax consequences. We do notintend to repatriate these funds.Discontinued Operations. Cash flows from discontinued operations are combined with cash flows from continuing operations in the CondensedConsolidated Statement of Cash Flows. During 2014, cash inflows from discontinued operations was approximately $250.5 million, driven by the cashreceived from the sale of the OrthoRecon business, compared to $29 million in 2013 and $44 million in 2012. We do not expect that the absence of cashflows from discontinued operations will have an impact on our ability to meet contractual cash obligations, fund our working capital requirements,operations, and anticipated capital expenditures.Contractual Cash Obligations. At December 31, 2014, we had contractual cash obligations and commercial commitments as follows (in thousands): Payments Due by Periods Total 2015 2016-2017 2018-2019 After 2019Amounts reflected in consolidated balance sheet: Capital lease obligations(1)$10,444 $1,012 $2,175 $2,130 $5,1272017 Convertible Senior Notes(2)300,000 — 300,000 — — Amounts not reflected in consolidated balance sheet: Operating leases13,145 6,819 5,667 479 180Interest on 2017 Convertible Senior Notes(3)16,000 6,000 10,000 — — Total contractual cash obligations$339,589 $13,831 $317,842 $2,609 $5,307_______________________________(1)Payments include amounts representing interest.(2)Our 2017 Convertible Senior Notes are discussed further in Note 9 to our consolidated financial statements contained in “Financial Statements andSupplementary Data.”(3)Represents interest on the 2017 Convertible Senior Notes payable semiannually with an annual interest rate of 2.000%.Portions of these payments are denominated in foreign currencies and were translated in the table above based on their respective U.S. dollar exchange ratesat December 31, 2014. These future payments are subject to foreign currency exchange rate risk.The amounts reflected in the table above for capital lease obligations represent future minimum lease payments under our capital lease agreements, which areprimarily for certain property and equipment. The present value of the minimum lease payments are recorded in our balance sheet at December 31, 2014. Theminimum lease payments related to these leases are discussed further in Note 9 to our consolidated financial statements contained in “Financial Statementsand Supplementary Data.”The amounts reflected in the table above for operating leases represent future minimum lease payments under non-cancelable operating leases primarily forcertain equipment and office space. In accordance with U.S. generally accepted accounting principles, our operating leases are not recognized in ourconsolidated balance sheet; however, the minimum lease payments related to these agreements are disclosed in Note 19 to our consolidated financialstatements contained in “Financial Statements and Supplementary Data.”The amounts reflected in the table above for 2017 Convertible Senior Notes and Interest on 2017 Convertible Senior Notes do not consider the repurchase of$240 million of outstanding debt in February 2015. Further, the table above does not reflect the issuance of $632.5 million of 2020 Convertible Senior notesin February 2015. Additionally, the table above does not include the 2017 Notes Conversion Derivative for the remaining approximately $60 millionoutstanding principal, which following the52Table of ContentsFebruary 2015 transactions, is not hedged (see Item 7A for quantitative analysis on possible cash obligations upon maturity at various assumed stock prices).See Note 22 to our consolidated financial statements for further discussion of these transactions that occurred in February 2015, following the date of ourbalance sheet.Contingent consideration of up to $182.2 million may be paid upon receipt of FDA approval of Augment® Bone Graft and upon achieving certain revenuemilestones associated with the BioMimetic acquisition. Additionally, payment of $2.0 million may be paid upon achieving revenue milestones related to theacquisitions of WG Healthcare. Contingent consideration of up to $200,000 may be paid related to the acquisition of certain assets associated with the EZConcept Surgical Device Corporation (EZ Frame™). The potential additional cash payments are based on the future financial performance of the acquiredassets. Additionally, in accordance with the October 2011 CCI acquisition, we will pay royalties based on sales of the acquired product. The estimated fairvalue of these liabilities has been recorded on our consolidated balance sheet within Accrued expenses and other current liabilities and Other long-termliabilities.In addition to the contractual cash obligations discussed above, all of our U.S. sales and a portion of our international sales are subject to commissions basedon net sales. A substantial portion of our global sales are subject to royalties earned based on product sales.Additionally, as of December 31, 2014, we had $4.4 million of unrecognized tax benefits recorded in our consolidated balance sheet. This represents the taxbenefits associated with various tax positions taken, or expected to be taken, on U.S. and international tax returns that have not been recognized in ourfinancial statements due to uncertainty regarding their resolution. We are unable to make a reliable estimate of the eventual cash flows by period that may berequired 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 14 to our consolidated financial statements contained in “Financial Statementsand Supplementary Data.”Other Liquidity Information. We have funded our cash needs since 2000 through various equity and debt issuances and through cash flow from operations.In February 2015, we issued $632.5 million of the 2020 Convertible Senior Notes, which generated net proceeds of approximately $613 million. Inconnection with the offering of the 2020 Convertible Senior Notes, we entered into convertible note hedging transactions with three counterparties (theOption Counterparties). We also entered into warrant transactions in which we sold warrants for an aggregate of 20,489,142 shares of our common stock tothe Option Counterparties. We used approximately $58 million of the net proceeds from the offering to pay the cost of the convertible note hedgingtransactions (after such cost was partially offset by the proceeds we received from the sale of the warrants). We also used approximately $292 million of thenet proceeds from the offering to repurchase approximately $240 million aggregate principal amount of our outstanding 2017 Convertible Senior Notes inprivately negotiated transactions.Although it is difficult for us to predict our future liquidity requirements, we believe that our current cash balance of approximately $227.3 million and ourmarketable securities balance of $2.6 million, plus incremental $263 million cash from the convertible debt refinancing in February 2015, will be sufficientfor the foreseeable future to fund our working capital requirements and operations, permit anticipated capital expenditures in 2015 of approximately $37million, and meet our contractual cash obligations in 2015. Furthermore, we intend to use our cash and marketable securities balance to fund transaction andtransition costs associated with the pending Tornier merger, and to meet our contractual cash obligations underlying the CVRs associated with theBioMimetic acquisition (including approximately $98 million which will be payable shortly after receipt of final approval from the FDA for Augment® bonegraft), fund growth opportunities for our Extremities and Biologics business and pay certain retained liabilities of the OrthoRecon business.In process research and development. In connection with our BioMimetic acquisition, we acquired in-process research and development (IPRD) technologyrelated to projects that had not yet reached technological feasibility as of the acquisition date, which included Augment® Bone Graft, which was undergoingthe FDA approval process, and Augment® Injectable Bone Graft. The acquisition date fair values of the IPRD technology was $61.2 million for Augment®Bone Graft and $27.1 million for Augment® Injectable Bone Graft. The fair value of the IPRD technology was $4.3 million as of December 31, 2014, whichreflects the impairment charges recognized in 2013 after receipt of the not approvable letter from the FDA in response to our PMA application for Augment®Bone Graft for use as an alternative to autograft in hindfoot and ankle fusion procedures. The fair value of the research and development projects wasdetermined using the income approach, which discounts expected future cash flows from the acquired in-process technology to present value. The discountrate applied to the expected future cash flows included a premium to the base required rate of return, in consideration of the risks associated with the FDAapproval process.On March 10, 2014, we reached an agreement with the Office of Device Evaluation (ODE) of the FDA under which ODE will accept a further amendment tothe PMA for Augment® Bone Graft in lieu of proceeding with the Dispute Resolution Panel (DRP) that was scheduled for the week of May 19, 2014.53Table of ContentsOn October 27, 2014, we received an Approvable Letter from the FDA for its PMA for Augment® Bone Graft. The approvable letter indicates that FDAdetermined Augment® Bone Graft to be safe and effective as an alternative to autograft for ankle and/or hindfoot fusion indications and is approvable subjectto customary preapproval facilities inspections.The IPRD projects acquired are as follows:•Augment® Bone Graft (Augment) is based on our platform regenerative technology, which combines an engineered version of rhPDGF-BB, one ofthe principal wound healing and tissue repair stimulators in the body, with tissue specific matrices, when appropriate. This product is intended tooffer physicians advanced biological solutions to actively stimulate the body’s natural tissue regenerative process. Augment is targeted to be used inthe open (surgical) treatment of fusions. Additionally, Augment may be useful in the future to be used in open fractures. We have evaluatedAugment in several open clinical applications, including foot and ankle fusions and distal radius fractures. We believe we have demonstrated thatour technology is safe and effective in stimulating bone regeneration with the Canadian regulatory approval of Augment in 2009 and the Australianand New Zealand regulatory clearance of Augment in 2011. A PMA application for the use of Augment in the U.S. as an alternative to autograft inhindfoot and ankle fusion procedures was submitted to the FDA prior to this acquisition. In October 2014, we received an Approvable Letter fromthe FDA in regard to our Augment PMA. The approvable letter indicates the FDA determined Augment to be safe and effective as an alternative toautograft for ankle and/or hindfoot fusion indications and is approvable subject to customary preapproval facilities inspections. We have incurredexpenses of approximately $13.6 million for Augment since the date of acquisition and approximately $8.3 million in the year ended December 31,2014. We do not expect material additional spending to obtain FDA approval for Augment.•Augment® Injectable Bone Graft (Augment Injectable) combines rhPDGF-BB with an injectable bone matrix, and is targeted to be used in eitheropen (surgical) treatment of fusions and fractures or closed (non-surgical) or minimally invasive treatment of fractures. Augment Injectable can beinjected into a fusion or fracture site during an open surgical procedure, or it can be injected through the skin into a fracture site, in either caselocally delivering rhPDGF-BB to promote fusion or fracture repair. Our initial clinical development program for Augment Injectable has focused onsecuring regulatory approval for open indications in the United States and in several markets outside the U.S. Recently, we have focused our effortson securing FDA approval of Augment. The amount of time and cost to complete the Augment Injectable project depends upon the nature of theapproval we ultimately receive for Augment, but we currently estimate it could take one to three years. We’ve incurred expenses of approximately$2.5 million for Augment Injectable since the date of acquisition and approximately $0.6 million in the year ended December 31, 2014. We arecurrently evaluating future costs related to Augment Injectable following the recent Approvable Letter from the FDA on the Augment PMA.Critical Accounting EstimatesAll of our significant accounting policies and estimates are described in Note 2 to our consolidated financial statements contained in “Financial Statementsand Supplementary Data.” Certain of our more critical accounting estimates require the application of significant judgment by management in selecting theappropriate assumptions in determining the estimate. By their nature, these judgments are subject to an inherent degree of uncertainty. We develop thesejudgments based on our historical experience, terms of existing contracts, our observance of trends in the industry, information provided by our customersand 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 presentationof 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 requiresubjective or complex judgments. Further, we believe that the items discussed below are properly recorded in the financial statements for all periodspresented. Our management has discussed the development, selection and disclosure of our most critical financial estimates with the audit committee of ourboard of directors and with our independent auditors. The judgments about those financial estimates are based on information available as of the date of thefinancial statements. Those financial estimates include:Discontinued Operations. On January 9, 2014, we competed the sale of our OrthoRecon business, which consists of hip and knee product implants, toMicroPort. We determined that this transaction meets the criteria for classification as discontinued operations under the provisions of FASB ASC 205-20. Assuch, all historical operating results for our OrthoRecon business are reflected within discontinued operations in the consolidated statements of operations. Inaddition, costs associated with corporate employees and infrastructure transferred as a part of the sale have been included in discontinued operations. Further,all assets and associated liabilities transferred to MicroPort were classified as assets and liabilities held for sale on our consolidated balance sheet, inaccordance with FASB ASC 360.54Table of ContentsRevenue recognition. Our revenues are primarily generated through two types of customers, hospitals and surgery centers and stocking distributors, with themajority of our revenue derived from sales to hospitals and surgery centers. Our products are sold through a network of employee and independent salesrepresentatives in the U.S. and by a combination of employee sales representatives, independent sales representatives and stocking distributors outside theU.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 surgicallyimplanted 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 theproducts to their customers, take title to the products and assume all risks of ownership. Our distributors are obligated to pay us within specified termsregardless 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, wehave repurchase agreements with certain stocking distributors. Those certain agreements require us to repurchase a specified percentage of the inventorypurchased by the distributor within a specified period of time prior to the expiration of the contract. During those specified periods, we defer the applicablepercentage of the sales. An insignificant amount of sales related to these types of agreements were deferred and not yet recognized as revenue as ofDecember 31, 2014 and 2013.We must make estimates of potential future product returns related to current period product revenue. To do so, we analyze our historical experience relatedto product returns when evaluating the adequacy of the allowance for sales returns. Judgment must be used and estimates made in connection withestablishing the allowance for product returns in any accounting period. Our allowances for product returns of approximately $0.3 million are included as areduction of accounts receivable at December 31, 2014 and 2013. Should actual future returns vary significantly from our historical averages, our operatingresults could be affected.In 2011, we entered into a trademark license agreement (License Agreement) with KCI Medical Resources, a subsidiary of Kinetic Concepts, Inc. (KCI). Inexchange for $8.5 million, of which $5.5 million was received immediately and $3 million was received in January 2012, the License Agreement providesKCI with a non-transferable license to use our trademarks associated with our GRAFTJACKET® line of products in connection with the marketing anddistribution of KCI's soft tissue graft containment products used in the wound care field, subject to certain exceptions. License revenue is being recognizedover 12 years on a straight line basis.Allowances for doubtful accounts. We experience credit losses on our accounts receivable and accordingly, we must make estimates related to the ultimatecollection of our accounts receivable. Specifically, we analyze our accounts receivable, historical bad debt experience, customer concentrations, customercreditworthiness 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 ofcustomer has been favorable. Historically, we have experienced minimal bad debts from our hospital customers and more significant bad debts from certaininternational stocking distributors, typically as a result of specific financial difficulty or geo-political factors. We write off accounts receivable when wedetermine that the accounts receivable are uncollectible, typically upon customer bankruptcy or the customer’s non-response to repeated collection efforts.We believe that the amount included in our allowance for doubtful accounts has been a historically appropriate estimate of the amount of accountsreceivable that are ultimately not collected. While we believe that our allowance for doubtful accounts is adequate, the financial condition of our customersand the geo-political factors that impact reimbursement under individual countries’ healthcare systems can change rapidly, which would necessitateadditional allowances in future periods. Our allowances for doubtful accounts were $0.9 million and $0.3 million, at December 31, 2014 and 2013.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 ourforecast of product demand and production requirements for the next 24 months. A significant decrease in demand could result in an increase in the amountof excess inventory quantities on hand. Additionally, our industry is characterized by regular new product development that could result in an increase in theamount of obsolete inventory quantities on hand due to cannibalization of existing products. Also, our estimates of future product demand may prove to beinaccurate in which case we may be required to incur charges for excess and obsolete inventory. In the future, if additional inventory write-downs arerequired, we would recognize additional cost of goods sold at the time of such determination. Regardless of changes in our estimates of future productdemand, 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 ourforecasts of future product demand, significant unanticipated decreases in demand or technological developments could have a significant impact on thevalue of our inventory and our reported operating results.Charges recognized for excess and obsolete inventory within our results of continuing operations were $4.0 million, $4.7 million and $3.2 million for theyears ended December 31, 2014, 2013 and 2012, respectively.55Table of ContentsGoodwill and long-lived assets. As of December 31, 2014, we have approximately $191.0 million of goodwill recorded as a result of the acquisition ofbusinesses. Goodwill is tested for impairment annually, or more frequently if changes in circumstances or the occurrence of events suggest that impairmentexists. The annual evaluation of goodwill impairment may require the use of estimates and assumptions to determine the fair value of our reporting unitsusing projections of future cash flows. Unless circumstances otherwise dictate, the annual impairment test is performed in the fourth quarter.During the quarter ended March 31, 2014, our management, including our chief executive officer, who is our chief operating decision maker, beganmanaging our operations as three operating segments: U.S.; International; and BioMimetic (international sales and associated expenses for Augment®products are included within the International segment), based on management's change to the way it monitors performance, aligns strategies, and allocatesresources. We determined that each of these operating segments represented a reportable segment. This change in segment reporting also resulted in a changein reporting units for goodwill impairment measurement purposes. We determined that each operating segment represents a reporting unit, and wesubsequently performed a goodwill impairment analysis, resulting in the reallocation of goodwill of $92.1 million, $24.7 million and $1.4 million to theU.S., International and BioMimetic reporting units, respectively. The goodwill allocated to each reporting unit was based on the relative fair value of each ofour reporting units as of the date of impairment analysis (January 31, 2014). Upon completion of this analysis, we determined that the fair value of ourreporting units exceeded their carrying values and, therefore, no impairment charge was necessary.During the quarter ended December 31, 2014, we performed a qualitative assessment of goodwill for impairment and determined that it is not more likelythan not that the respective carrying values of our U.S., International and BioMimetic reporting units exceeded their fair value, indicating that goodwill wasnot impaired.Our business is capital intensive, particularly as it relates to surgical instrumentation. We depreciate our property, plant and equipment and amortize ourintangible 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 aboutfuture events, such as product life cycles, new product development, product cannibalization and technological obsolescence, as well as other competitivefactors beyond our control. We account for the impairment of finite, long-lived assets in accordance with the FASB ASC Section 360, Property, Plant andEquipment. 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 wedetermine 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 thefair market value is not readily determinable, reducing income in that period.Valuation of In-Process Research and Development. The estimated fair value attributed to IPRD represents an estimate of the fair value of purchased in-process technology for research programs that have not reached technological feasibility and have no alternative future use. Only those research programsthat had advanced to a stage of development where management believed reasonable net future cash flow forecasts could be prepared and a reasonablepossibility of technical success existed were included in the estimated fair value.IPRD is recorded as an indefinite-lived intangible asset until completion or abandonment of the associated research and development projects. Accordingly,no amortization expense is reflected in the results of operations. If a project is completed, the carrying value of the related intangible asset will be amortizedover the remaining estimated life of the asset beginning with the period in which the project is completed. If a project becomes impaired or is abandoned, thecarrying value of the related intangible asset will be written down to its fair value and an impairment charge will be taken in the period the impairmentoccurs. These intangible assets are tested for impairment on an annual basis, or earlier if impairment indicators are present.Product liability claims, product liability insurance recoveries and other litigation. Periodically, claims arise involving the use of our products. We makeprovisions for claims specifically identified for which we believe the likelihood of an unfavorable outcome is probable and an estimate of the amount of losshas been developed. As additional information becomes available, we reassess the estimated liability related to our pending claims and make revisions asnecessary.Product liability claims associated with hip and knee products we sold prior to the sale of our OrthoRecon business will not be assumed by MicroPort.Estimated liabilities, if any, for such claims, and accrued legal defense costs for fees that have been incurred to date, are excluded from liabilities held for sale.Concomitant receivables associated with product liability insurance recoveries are excluded from assets held for sale. MicroPort will be responsible forproduct liability claims associated with products it sells after the closing.In the third quarter of 2011, as a result of an increase in the number and monetary amount of claims associated with fractures of our long PROFEMUR®titanium modular necks (PROFEMUR® Claims), management recorded a provision for current and future claims associated with fractures of this product. SeeNote 19 to our consolidated financial statements for further description of this provision. Future revisions in our estimates of the liability could materiallyimpact our results of operation and financial position. We maintain insurance coverage that limits the severity of any single claim as well as total amountsincurred per policy56Table of Contentsyear, 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 PROFEMUR® Claims was $16.0 million and $16.8 million as of December 31, 2014 andDecember 31, 2013, respectively.We have maintained product liability insurance coverage on a claims-made basis. During the quarter ended March 31, 2013, we received a customaryreservation of rights from our primary product liability insurance carrier asserting that present and future claims related to fractures of our PROFEMUR®titanium modular neck hip products and which allege certain types of injury (Modular Neck Claims) would be covered as a single occurrence under thepolicy year the first such claim was asserted. The effect of this coverage position would be to place Modular Neck Claims into a single prior policy year inwhich applicable claims-made coverage was available, subject to the overall policy limits then in effect. Management agrees with the assertion that theModular Neck Claims should be treated as a single occurrence, but notified the carrier that it disputed the carrier's selection of available policy years. Duringthe second quarter of 2013, we received confirmation from the primary carrier confirming their agreement with our policy year determination. Based on ourinsurer's treatment of Modular Neck Claims as a single occurrence, we increased our estimate of the total probable insurance recovery related to ModularNeck Claims by $19.4 million, and recognized such additional recovery as a reduction to our selling, general and administrative expenses for the three-months ended March 31, 2013, within results of discontinued operations. During 2013, we received payment from the primary insurance carrier and the nextinsurance carrier in the tower, totaling $15 million. As of December 31, 2014, our insurance receivable related to Modular Neck Claims totals $25 million,which consists of $22 million probable recovery for cash spending associated with defense and settlement costs and $3 million associated with the probablerecovery of our recorded liability for current and future Modular Neck Claims outstanding, reflecting in total the remaining amount of insurance in thispolicy year. See Note 19 to our consolidated financial statements contained in “Financial Statements and Supplementary Data” for further description of ourinsurance coverage.Our accrual for other product liability claims was $1.5 million and $0.7 million at December 31, 2014 and December 31, 2013, respectively.Claims for personal injury have also been made against us associated with our metal-on-metal hip products (primarily our CONSERVE® product line). Thepre-trial management of certain of these claims has been consolidated in the federal court system under multi-district litigation, and certain other claims instate courts in California, collectively the “Consolidated Metal-on-Metal Claims,” as further discussed in Part I Item 3 of this Annual Report. The number ofthese lawsuits presently exceeds 1,000. We have also entered into an excess of 600 so called "tolling agreements" with potential claimants who have not yetfiled suit. We believe we have data that supports the efficacy and safety of our metal-on-metal hip products. While continuing to dispute liability, we areparticipating in court supervised non-binding mediation in the multi-district federal court litigation. This mediation is continuing. The supervising judges inthe federal and California state consolidated proceedings have set bellwether trial dates in March and November 2015 respectively, although the March 2015trial date was recently extended by the Court to a date to be announced.We have maintained product liability insurance coverage on a claims-made basis. During the quarter ended September 30, 2012, we received a customaryreservation of rights from our primary product liability insurance carrier asserting that certain present and future claims which allege certain types of injuryrelated to our CONSERVE® metal-on-metal hip products (CONSERVE® Claims) would be covered as a single occurrence under the policy year the first suchclaim was asserted. The effect of this coverage position would be to place CONSERVE® Claims into a single prior policy year in which applicable claims-made coverage was available, subject to the overall policy limits then in effect. Management agrees that there is insurance coverage for theCONSERVE® Claims, but has notified the carrier that it disputes the carrier's characterization of the CONSERVE® Claims as a single occurrence.Management has recorded an insurance receivable for the probable recovery of spending in excess of our retention for a single occurrence. As of December31, 2014, this receivable totaled $13.8 million, and is solely related to defense costs incurred through December 31, 2014. However, the amount weultimately receive may differ depending on the final conclusion of the insurance policy year or years and the number of occurrences. We believe ourcontracts with the insurance carriers are enforceable for these claims and, therefore, we believe it is probable that we will receive recoveries from our insurancecarriers. However, our insurance carriers could still ultimately deny coverage for some or all of our insurance claims.Every metal-on-metal hip case involves fundamental issues of science and medicine that often are uncertain, that continue to evolve, and which presentcontested facts and issues that can differ significantly from case to case. Such contested facts and issues include medical causation, individual patientcharacteristics, surgery specific factors, and the existence of actual, provable injury. Given these complexities, a loss is not probable and cannot bereasonably estimated. Although we continue to contest liability, based upon currently available information, we estimate a reasonably possible range ofliability for the Consolidated Metal-on-Metal Claims, before insurance recoveries, averaging from zero to $250,000 per case.Based upon the information we have at this time, we do not believe our liabilities, if any, in connection with these matters will exceed our availableinsurance. However, as described below, we are currently litigating coverage issues with certain of our carriers. As the litigation moves forward andcircumstances continue to develop, our belief we will be able to resolve the Consolidated57Table of ContentsMetal-on-Metal Claims within available insurance coverage could change, which could materially impact our results of operations and financial position.Further, and notwithstanding our present belief we will be able to resolve these Claims within available insurance proceeds, we would consider contributing alimited amount to the funding of an acceptable, comprehensive, mediated settlement among claimants and insurers. To this end, we have indicated awillingness to contribute up to $30 million to achieve such a comprehensive settlement. Due to continuing uncertainty around (i) whether a multi-partycomprehensive settlement can be achieved, (ii) the outcome of our coverage litigation with insurers which could impact the ability to reach a settlement and(iii) the case by case outcomes of any Metal-on-Metal claims ultimately litigated (and which we expect to contest vigorously), we do not believe a loss isprobable or estimable and, therefore, no amounts have been accrued.In June 2014, St. Paul Surplus Lines Insurance Company (“Travelers”), which was an excess carrier in our coverage towers across multiple policy years, filed adeclaratory judgment action in Tennessee state court naming us and certain of our other insurance carriers as defendants and asking the court to rule on therights and responsibilities of the parties with regard to the CONSERVE® Claims. Among other things, Travelers appears to dispute our contention that theCONSERVE® Claims arise out of more than a single occurrence thereby triggering multiple policy periods of coverage. Travelers further seeks adetermination as to the applicable policy period triggered by the alleged single occurrence. We filed a separate lawsuit in state court in California fordeclaratory judgment against certain carriers and breach of contract against the primary carrier, and have moved to dismiss or stay the Tennessee action on anumber of grounds, including that California is the most appropriate jurisdiction. During the third quarter of 2014, the California Court granted Travelers'motion to stay our California action.In February 2014, Biomet, Inc., (Biomet) announced it had reached a settlement in the multi-district litigation involving its own metal-on-metal hip products.The terms announced by Biomet include: (i) an expected base settlement amount of $200,000, (ii) an expected minimum settlement amount of $20,000 (iii)no payments to plaintiffs who did not undergo a revision surgery and (iv) a total settlement amount expected to be within Biomet’s aggregate insurancecoverage. We believe our situation involves facts and circumstances which differ significantly from the Biomet cases. We therefore do not consider theBiomet situation sufficiently analogous to provide a reasonable basis for estimate, and deem it unlikely that any settlement of our cases will occur at an basesettlement level as high as Biomet’s expected average settlement amount.In addition to the Consolidated Metal-on-Metal Claims discussed above, there are currently certain other pending claims related to our metal-on-metal hipproducts for which we are accounting in accordance with our standard product liability accrual methodology on a case by case basis.We are also involved in legal proceedings involving contract, patent protection and other matters. We make provisions for claims specifically identified forwhich 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, valuation allowances, statutory rates and tax saving initiativesavailable to us in the various jurisdictions in which we operate. Significant judgment is required in determining our effective tax rate and evaluating our taxpositions. This process includes assessing temporary differences resulting from differing recognition of items for income tax and accounting purposes. Thesedifferences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. Realization of deferred tax assets in eachtaxable jurisdiction is dependent on our ability to generate future taxable income sufficient to realize the benefits. Management evaluates deferred tax assetson 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 $171.4 million and $134.3 million as of December 31, 2014 and 2013, respectively, due to uncertainties related toour ability to realize, before expiration, certain of our deferred tax assets for both U.S. and foreign income tax purposes. During 2013, we recognized a $119.6million valuation allowance against our U.S. deferred tax assets due to recent operating losses in the U.S. tax jurisdiction, which resulted in the determinationthat our U.S. deferred tax assets were not more likely than not to be utilized in the foreseeable future. These deferred tax assets primarily consist of thecarryforward of certain tax basis net operating losses and general business tax credits. See Note 14 to our consolidated financial statements for furtherdiscussion of our deferred tax assets and the associated valuation allowance.In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), effective January 1, 2007, which requiresthe 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 thereporting date. Effective July 1, 2009, this standard was incorporated into FASB ASC Section 740, Income Taxes. As a multinational corporation, we aresubject to taxation in many jurisdictions and the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax lawsand regulations in various taxing jurisdictions. If we ultimately determine that the payment of these liabilities will be unnecessary, we will reverse theliability and recognize a tax benefit in the period in which we determine the liability no longer applies. Conversely, we record additional tax charges in aperiod in which we determine that a recorded tax liability is less than we expect the ultimate assessment to be. Our unrecognized tax benefits totaled $4.4million and $4.7 million as of December 31, 2014 and 2013, respectively. See58Table of ContentsNote 14 to our consolidated financial statements contained in “Financial Statements and Supplementary Data” for further discussion of our unrecognized taxbenefits.We operate within numerous taxing jurisdictions. We are subject to regulatory review or audit in virtually all of those jurisdictions, and those reviews andaudits may require extended periods of time to resolve. Management makes use of all available information and makes reasoned judgments regarding mattersrequiring interpretation in establishing tax expense, liabilities and reserves. We believe adequate provisions exist for income taxes for all periods andjurisdictions 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 thegrant date. We use the Black-Scholes option pricing model to determine the fair value of stock options and employee stock purchase plan shares. Thedetermination 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 wellas assumptions regarding a number of complex and subjective variables, which include the expected life of the award, the expected stock price volatility overthe expected life of the awards, expected dividend yield and risk-free interest rate.We estimate the expected life of options evaluating the historical activity as required by FASB ASC Topic 718, Compensation — Stock Compensation. Weestimate the expected stock price volatility based upon historical volatility of our common stock. The risk-free interest rate is determined using U.S. Treasuryrates 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 andhave 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 fullytransferable, 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 thatour 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 theexercise, expiration, early termination or forfeiture of those stock-based payments in the future. Certain stock-based payments, such as employee stockoptions, may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported inour financial statements. Alternatively, value may be realized from these instruments that is significantly higher than the fair values originally estimated onthe grant date and reported in our financial statements. There is not currently a market-based mechanism or other practical application to verify the reliabilityand 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. Weuse 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 compensationexpense in future periods may differ significantly from what we have recorded in the current period and could materially affect our operating income, netincome 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 17 to our consolidated financial statements contained in “Financial Statements and Supplementary Data” for further information regarding ourstock-based compensation disclosures.Acquisition method accounting. In accordance with FASB ASC Section 805, Business Combinations (FASB ASC 805), an acquiring entity is required torecognize all assets acquired and liabilities assumed at the acquisition date fair value. Legal fees and other transaction-related costs are expensed as incurredand are no longer included in goodwill as a cost of acquiring the business. FASB ASC 805 also requires acquirers, among other things, to estimate theacquisition-date fair value of any contingent consideration and to recognize any subsequent changes in the fair value of contingent consideration inearnings. In addition, restructuring costs the acquirer expects, but is 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 expensesonce they are both probable and estimable in accordance with the provisions of FASB ASC Section 712, Compensation-Nonretirement PostemploymentBenefits, for severance provided under an ongoing benefit arrangement. One-time termination benefit arrangements and other costs associated with exitactivities are accounted for under the provisions of FASB ASC Section 420, Exit or Disposal Cost Obligations. We estimated the expense for ourrestructuring initiatives 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 representedmanagement’s best estimates, which were evaluated periodically to determine if an adjustment was required.Recent accounting pronouncements. On May 28, 2014, the FASB issued Accounting Standard Update (ASU) No. 2014-09, Revenue from Contracts withCustomers, which supersedes virtually all existing revenue recognition guidance under U.S. generally accepted accounting principles (GAAP). The ASUprovides a five-step model for revenue recognition that companies will apply59Table of Contentsto recognize revenue in a manner that reflects the timing of the transfer of services to customers and the amount of revenue recognized reflects theconsideration that a company expects to receive for the goods and services provided. The ASU will be effective for us beginning January 1, 2017. We are inthe initial phases of our adoption plans and, accordingly, we are unable to estimate any effect this may have on our revenue recognition practices.60Table of ContentsItem 7A. Quantitative and Qualitative Disclosures About Market Risk.Interest Rate RiskOur exposure to interest rate risk arises principally from the interest rates associated with our invested cash balances. On December 31, 2014, we haveinvested short term cash and cash equivalents and marketable securities of approximately $141 million. We believe that a 10 basis point change in interestrates is reasonably possible in the near term. Based on our current level of investment, an increase or decrease of 10 basis points in interest rates would havean annual impact of approximately $141,000 to our interest income.Equity Price RiskOur 2017 Notes includes conversion and settlement provisions that are based on the price of our common stock at conversion or at maturity of the notes. Inaddition, the hedges and warrants associated with these convertible notes also include settlement provisions that are based on the price of our common stock.The amount of cash we may be required to pay, or the number of shares we may be required to provide to note holders at conversion or maturity of thesenotes, is determined by the price of our common stock. The amount of cash that we may receive from hedge counterparties in connection with the relatedhedges and the number of shares that we may be required to provide warrant counterparties in connection with the related warrants are also determined by theprice of our common stock.Upon the expiration of our warrants, we will issue shares of common stock to the purchasers of the warrants to the extent our stock price exceeds the warrantstrike price of $29.925 at that time. The following table shows the number of shares that we would issue to warrant counterparties at expiration of the warrantsassuming various closing stock prices on the date of warrant expiration:Stock Price Shares (inthousands)$32.92(10% greater than strike price)1,072$35.91(20% greater than strike price)1,966$38.90(30% greater than strike price)2,722$41.90(40% greater than strike price)3,370$44.89(50% greater than strike price)3,931The fair value of our 2017 Notes Conversion Derivative and our 2017 Notes Hedge is directly impacted by the price of our common stock. We entered intothe 2017 Notes Hedges in connection with the issuance of our 2017 Notes with the Option Counterparties. The 2017 Notes Hedges, which are cash-settled,are intended to reduce our exposure to potential cash payments that we are required to make upon conversion of our 2017 Notes in excess of the principalamount of converted notes if our common stock price exceeds the conversion price. The following table presents the fair values of our 2017 NotesConversion Derivative and 2017 Notes Hedge as a result of a hypothetical 10% increase and decrease in the price of our common stock. We believe that a10% change in the stock price is reasonably possible in the near term:(in thousands) Fair Value of SecurityGiven a 10% decrease instock priceFair Value ofSecurity as ofDecember 31, 2014Fair Value of SecurityGiven a 10% increase instock price2017 Notes Hedges (Asset)60,00080,000102,0002017 Notes Conversion Derivative (Liability)57,00076,00097,000In February 2015, we issued $632.5 million of the 2020 Convertible Senior Notes, which generated net proceeds of approximately $613 million. We usedapproximately $292 million of the net proceeds from the offering to repurchase approximately $240 million aggregate principal amount of our outstanding2017 Notes in privately negotiated transactions. We also settled all of the 2017 Notes Hedges and repurchased all of the warrants associated with the 2017Notes, generating net proceeds of approximately $10 million. Following these activities, we have approximately $60 million outstanding debt under the2017 Notes. The following table shows the amount of cash that we would be required to provide holders of the 2017 Notes at upon maturity assuming variousclosing stock prices at the date of maturity: 61Table of ContentsStock Price Cash payment inexcess of principal(in thousands)$27.98(10% greater than conversion price)$6,001$30.53(20% greater than conversion price)$12,002$33.07(30% greater than conversion price)$18,003$35.62(40% greater than conversion price)$24,004$38.16(50% greater than conversion price)$30,004In connection with the 2020 Convertible Senior Notes, we entered into privately negotiated cash convertible note hedge transactions and warranttransactions with certain financial institutions (the “option counterparties”) in order to reduce the net amount of cash payments that we may be required tomake upon conversion of the notes to the extent that such cash payments exceed the principal amount of converted notes. We also entered into separateprivately negotiated warrant transactions with the option counterparties, and the warrants have a strike price of $40, or approximately 59% higher than thelast reported sale price per share of the Company's common stock on February 9, 2015.Upon the expiration of our new warrants issued in 2015, we will issue shares of common stock to the purchasers of the warrants to the extent our stock priceexceeds the warrant strike price of $40.00 at that time. The following table shows the number of shares that we would issue to warrant counterparties atexpiration of the warrants assuming various closing stock prices on the date of warrant expiration:Stock Price Shares (inthousands)$44.00(10% greater than strike price)1,863$48.00(20% greater than strike price)3,415$52.00(30% greater than strike price)4,728$56.00(40% greater than strike price)5,854$60.00(50% greater than strike price)6,830See Note 22 for further discussion of these transactions that happened subsequent to the December 31, 2014, balance sheet date.Foreign Currency Exchange Rate FluctuationsFluctuations in the rate of exchange between the U.S. dollar and foreign currencies could adversely affect our financial results. Approximately 21% and 19%of our net sales from our continuing operations were denominated in foreign currencies during the years ended December 31, 2014 and 2013, respectively,and we expect that foreign currencies will continue to represent a similarly significant percentage of our net sales in the future. Cost of sales related to thesesales 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 isexchanged 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, ifwe 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 productsin 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 notbeing competitive in a market where business is transacted in the local currency.A substantial majority of our net sales denominated in foreign currencies are derived from European Union countries, which are denominated in the euro;from the United Kingdom, which are denominated in the British pound; and from Canada, which are denominated in the Canadian dollar. Additionally, wehave significant intercompany receivables from our foreign subsidiaries that are denominated in foreign currencies, principally the euro, the yen, the Britishpound, 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 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 foreigncurrency-denominated intercompany receivables and payables, generating currency translation gains or losses that impact our non-operating income andexpense levels in the respective period.As discussed in Note 11 to the consolidated financial statements contained in “Financial Statements and Supplementary Data,” we enter into certain short-term derivative financial instruments in the form of foreign currency forward contracts. These forward contracts are designed to mitigate our exposure tocurrency fluctuations in our intercompany balances denominated currently in euros, British pounds and Canadian dollars. Any change in the fair value ofthese 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.62Table of ContentsA uniform 10% strengthening in the value of the U.S. dollar relative to the currencies in which our transactions are denominated would have resulted in adecrease in operating income of approximately $1.2 million for the year ended December 31, 2014. This hypothetical calculation assumes that eachexchange rate would change in the same direction relative to the U.S. dollar. This sensitivity analysis of the effects of changes in foreign currency exchangerates does not factor in a potential change in sales levels or local currency prices, which can be also be affected by the change in exchange rates.OtherAs of December 31, 2014, we have outstanding $300 million principal amount of our 2017 Notes. We carry this instrument at face value less unamortizeddiscount on our consolidated balance sheets. Since this instruments bears interest at a fixed rate, we have no financial statement risk associated with changesin interest rates. However, the fair value of these instruments fluctuates when interest rates change, and in the case of our 2017 Notes, when the market price ofour stock fluctuates. We do not carry the 2017 Notes at fair value, but present the fair value of the principal amount of our 2017 Notes for disclosure purposes.63Table of ContentsItem 8. Financial Statements and Supplementary Data.Wright Medical Group, Inc.Consolidated Financial Statementsfor the Years Ended December 31, 2014, 2013 and 2012Index to Financial Statements PageREPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM65CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets67Consolidated Statements of Operations68Consolidated Statements of Comprehensive Income69Consolidated Statements of Cash Flows70Consolidated Statements of Changes in Stockholders’ Equity72Notes to Consolidated Financial Statements7464Table of ContentsReport of Independent Registered Public Accounting FirmThe Board of Directors and StockholdersWright Medical Group, Inc.:We have audited the accompanying consolidated balance sheets of Wright Medical Group, Inc. and subsidiaries (the Company) as of December 31, 2014 and2013, and the related consolidated statements of operations, changes in stockholders’ equity, comprehensive income, and cash flows for each of the years inthe three-year period ended December 31, 2014. These consolidated financial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on theseconsolidated 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 thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditsprovide 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 ofDecember 31, 2014 and 2013, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2014, inconformity 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 controlover financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 25, 2015 expressed an unqualified opinion on theeffectiveness of the Company’s internal control over financial reporting.(signed) KPMG LLPMemphis, TennesseeFebruary 25, 201565Table of ContentsReport of Independent Registered Public Accounting FirmThe Board of Directors and StockholdersWright Medical Group, Inc.:We have audited Wright Medical Group, Inc's. and subsidiaries(the Company) internal control over financial reporting as of December 31, 2014, based oncriteria established in Internal Control—Integrated Framework (1992) 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 theeffectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over FinancialReporting. Our responsibility is to express an opinion on 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 thatwe plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, andtesting and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such otherprocedures 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 reportingand the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company’s internalcontrol over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accuratelyand fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessaryto permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the companyare being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financialstatements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith 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, 2014, based on criteriaestablished in Internal Control–Integrated Framework (1992) 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 sheetsof the Company as of December 31, 2014 and 2013, and the related consolidated statements of operations, changes in stockholders’ equity, comprehensiveincome, and cash flows for each of the years in the three-year period ended December 31, 2014, and our report dated February 25, 2015 expressed anunqualified opinion on those consolidated financialstatements.(signed) KPMG LLPMemphis, TennesseeFebruary 25, 201566Table of ContentsWright Medical Group, Inc.Consolidated Balance Sheets(In thousands, except share data) December 31, 2014 December 31, 2013Assets: Current assets: Cash and cash equivalents$227,326 $168,534Marketable securities2,575 6,898Accounts receivable, net57,190 45,817Inventories88,412 72,443Prepaid expenses11,161 6,508Deferred income taxes3,437 10,749Current assets held for sale (Note 4)— 142,015Other current assets50,355 52,351Total current assets440,456 505,315 Property, plant and equipment, net104,235 70,515Goodwill190,966 118,263Intangible assets, net69,025 39,420Marketable securities— 7,650Deferred income taxes815 1,632Other assets held for sale (Note 4)— 132,443Other assets87,179 132,213Total assets$892,676 $1,007,451Liabilities and Stockholders’ Equity: Current liabilities: Accounts payable$16,729 $3,913Accrued expenses and other current liabilities170,204 80,117Current portion of long-term obligations718 4,174Current liabilities held for sale (Note 4)— 31,221Total current liabilities187,651 119,425 Long-term debt and capital lease obligations280,612 271,227Deferred income taxes11,566 20,620Other liabilities held for sale (Note 4)— 1,399Other liabilities134,044 135,066Total liabilities613,873 547,737Commitments and contingencies (Note 19) Stockholders’ equity: Common stock, $.01 par value, authorized: 100,000,000 shares; issued and outstanding: 51,326,696 shares atDecember 31, 2014 and 47,993,765 shares at December 31, 2013509 473Additional paid-in capital751,061 656,770Accumulated other comprehensive income2,398 17,953Accumulated deficit(475,165) (215,482)Total stockholders’ equity278,803 459,714Total liabilities and stockholders’ equity$892,676 $1,007,451The accompanying notes are an integral part of these consolidated financial statements.67Table of ContentsWright Medical Group, Inc.Consolidated Statements of Operations(In thousands, except per share data) Year ended December 31, 2014 2013 2012Net sales$298,027 $242,330 $214,105Cost of sales 173,223 59,721 48,239Gross profit224,804 182,609 165,866Operating expenses: Selling, general and administrative 1289,620 230,785 150,296Research and development 124,963 20,305 13,905Amortization of intangible assets10,027 7,476 4,417BioMimetic impairment charges— 206,249 —Gain on sale of intellectual property— — (15,000)Restructuring charges— — 431Total operating expenses324,610 464,815 154,049 Operating (loss) income(99,806) (282,206) 11,817Interest expense, net17,398 16,040 10,113Other expense (income), net129,626 (67,843) 5,089Loss from continuing operations before income taxes(246,830) (230,403) (3,385)(Benefit) provision for income taxes(6,334) 49,765 2Net loss from continuing operations$(240,496) $(280,168) $(3,387)(Loss) income from discontinued operations, net of tax1$(19,187) $6,223 $8,671Net (loss) income$(259,683) $(273,945) $5,284 Net loss from continuing operations per share (Note 15): Basic$(4.83) $(6.19) $(0.09)Diluted$(4.83) $(6.19) $(0.09) Net (loss) income per share (Note 15): Basic$(5.22) $(6.05) $0.14Diluted$(5.22) $(6.05) $0.14 Weighted-average number of shares outstanding-basic49,758 45,265 38,769Weighted-average number of shares outstanding-diluted49,758 45,265 39,086___________________________1These line items include the following amounts of non-cash, stock-based compensation expense for the periods indicated: Year Ended December 31, 2014 2013 2012Cost of sales$254 $503 $704Selling, general and administrative10,149 10,675 6,767Research and development1,084 780 368Discontinued operations— 3,410 3,135The accompanying notes are an integral part of these consolidated financial statements.68WRIGHT MEDICAL GROUP, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(In thousands) Year ended December 31, 2014 2013 2012 Net (loss) income $(259,683) $(273,945) $5,284 Other comprehensive income (loss), net of tax: Changes in foreign currency translation (17,840) (1,381) (1,301)Unrealized loss on derivative instruments, net of taxes $42 — — (65)Termination of interest rate swap, net of taxes $690 — — 1,079Reclassification of gain on equity securities, net of taxes $1 and $3,041, respectively 1 (4,757) —Unrealized gain (loss) on marketable securities, net of taxes $987 and $2,054, respectively — 1,543 3,210Reclassification of currency translation adjustment (CTA) write-off to earnings related toliquidation of Japanese subsidiary 2,628 — —Reclassification of minimum pension liability to earnings (344) 14 550Other comprehensive (loss) income (15,555) (4,581) 3,473 Comprehensive (loss) income $(275,238) $(278,526) $8,757The accompanying notes are an integral part of these consolidated financial statements.Table of ContentsWright Medical Group, Inc.Consolidated Statements of Cash Flows(In thousands) Year Ended December 31, 2014 2013 2012Operating activities: Net (loss) income$(259,683) $(273,945) $5,284Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation18,582 26,296 38,275Stock-based compensation expense11,487 15,368 10,974Amortization of intangible assets10,027 8,345 5,772Amortization of deferred financing costs and debt discount10,969 10,288 3,853Deferred income taxes (Note 14)(396) 51,958 3,786Write off of deferred financing costs— — 2,721Excess tax benefit from stock-based compensation arrangements(59) (804) (507)Non-cash restructuring charges— — 657Non-cash adjustment to derivative fair value2,000 1,000 1,142Gain on sale of intellectual property— — (15,000)Non-cash realized gain on BioMimetic stock (Note 3)— (7,798) —Gain on sale of OrthoRecon business(24,277) — —BioMimetic goodwill and intangible impairment charge— 203,081 —Mark-to-market adjustment for CVRs (Note 2)125,012 (61,151) —Other2,582 (2,788) 2,232Changes in assets and liabilities (net of acquisitions): Accounts receivable(11,970) (3,477) (717)Inventories(21,350) 7,374 20,622Prepaid expenses and other current assets30,531 (21,945) (15,498)Accounts payable12,907 (1,334) (1,315)Accrued expenses and other liabilities(22,364) 12,931 6,541Net cash (used in) provided by operating activities(116,002) (36,601) 68,822Investing activities: Capital expenditures(48,603) (37,530) (19,323)Acquisition of businesses(80,556) (95,409) —Purchase of intangible assets(11,693) (4,291) (4,112)Maturities of held-to-maturity marketable securities— — —Sales and maturities of available-for-sale marketable securities11,795 27,332 13,565Investment in available-for-sale marketable securities— (20,719) (2,878)Proceeds from sale of assets274,687 9,300 11,700Net cash provided (used in) investing activities145,630 (121,317) (1,048)Financing activities: Issuance of common stock37,201 6,328 1,944Payments of long term borrowings— — (144,375)Proceeds from sale of warrants— — 34,595Payment for bond hedge options— — (56,195)Maturity/redemption of 2014 convertible senior notes(3,768) — (25,343)Proceeds from long term borrowings— — —Payments of deferred financing costs and equity issuance costs— (16) (9,637)Proceeds from 2017 convertible senior notes— — 300,000Payment for loss on interest rate swap termination— — (1,769)Payments of capital leases(441) (859) (1,006)Excess tax benefit from stock-based compensation arrangements59 804 507Net cash provided by (used in) financing activities33,051 6,257 98,721 Effect of exchange rates on cash and cash equivalents(4,088) 36 223 Net increase (decrease) in cash and cash equivalents58,591 (151,625) 166,718 70Table of ContentsWright Medical Group, Inc.Consolidated Statements of Cash Flows (Continued)(In thousands)Cash and cash equivalents, beginning of year168,735 320,360 153,642 Cash and cash equivalents, end of year$227,326 $168,735 $320,360The accompanying notes are an integral part of these consolidated financial statements.71Table of ContentsWright Medical Group, Inc.Consolidated Statements of Changes in Stockholders’ EquityFor the Years Ended December 31, 2012, 2013 and 2014(In thousands, except share data) Common Stock, Voting Additional Paid-in Capital RetainedEarnings/(AccumulatedDeficit) Accumulated OtherComprehensiveIncome TotalStockholders'Equity Number ofShares Amount Balance at December 31, 201139,306,118 $384 $395,840 $53,179 $19,061 $468,4642012 Activity: Net income— — — 5,284 — 5,284Foreign currency translation— — — — (1,301) (1,301)Unrealized loss on derivative instruments,net of $42 taxes— — — — (65) (65)Loss on early termination of interest rateswap, net of taxes of $690— — — — 1,079 1,079Unrealized gain (loss) on marketablesecurities, net of taxes $2,054— — — — 3,210 3,210Minimum pension liability adjustment— — — — 550 550Issuances of common stock113,470 1 1,948 — — 1,949Grant of non-vested shares of commonstock269,535 — — — — —Forfeitures of non-vested shares ofcommon stock(32,797) — — — — —Vesting of stock-settled phantom stockand restricted stock units47,032 4 (4) — — —Tax deficits realized from stock basedcompensation arrangements, net— — (116) — — (116)Stock-based compensation— — 10,932 — — 10,932Equity issuance costs associated withBioMimetic acquisition— — (290) — — (290)Issuance of stock warrants, net of equityissuance costs— — 33,745 — — 33,745Balance at December 31, 201239,703,358 $389 $442,055 $58,463 $22,534 $523,4412013 Activity: Net loss— — — (273,945) — (273,945)Foreign currency translation— — — — (1,381) (1,381)Reclassification of gain on equitysecurities, net of taxes $3,041— — — — (4,757) (4,757)Unrealized gain (loss) on marketablesecurities, net of taxes $987— — — — 1,543 1,543Minimum pension liability adjustment— — — — 14 14Issuances of common stock307,572 3 6,325 — — 6,328Common stock issued in connection withBioMimetic acquisition6,956,880 70 168,691 — — 168,761Common stock issued in connection withBiotech acquisition742,115 7 20,957 — — 20,964Grant of non-vested shares of commonstock281,496 — — — — —Forfeitures of non-vested shares ofcommon stock(39,482) — — — — —Vesting of stock-settled phantom stockand restricted stock units41,826 4 (4) — — —72Table of ContentsWright Medical Group, Inc.Consolidated Statements of Changes in Stockholders’ Equity (Continued)For the Years Ended December 31, 2012, 2013 and 2014(In thousands, except share data)Tax deficits realized from stock basedcompensation arrangements, net— — (1,045) — — (1,045)Stock-based compensation— — 19,687 — — 19,687Equity issuance costs associated withBioMimetic acquisition— — 104 — — 104Balance at December 31, 201347,993,765 $473 $656,770 $(215,482) $17,953 $459,7142014 Activity: Net loss— — — (259,683) — (259,683)Foreign currency translation— — — — (17,840) (17,840)Reclassification of gain on equitysecurities, net of taxes $1— — — — 1 1Minimum pension liability adjustment 1— — — — (344) (344)Currency translation adjustment (CTA)write-off to earnings related to liquidationof Japanese subsidiary 1— — — — 2,628 2,628Issuances of common stock1,666,178 17 37,183 — — 37,200Common stock issued in connection withSolana acquisition1,364,632 14 41,430 — — 41,444Grant of non-vested shares of commonstock244,912 — — — — —Forfeitures of non-vested shares of commonstock(23,334) — — — — —Vesting of stock-settled phantom stock andrestricted stock units80,543 5 (5) — — —Stock-based compensation— — 15,683 — — 15,683Balance at December 31, 201451,326,696 $509 $751,061 $(475,165) $2,398 $278,803 1 The balances of CTA and minimum pension liability adjustment within AOCI were written-off following the liquidation of our former Japanesesubsidiary as part of the sale of our OrthoRecon business. This was recorded within the gain on the sale of the OrthoRecon business within results ofdiscontinued operations.The accompanying notes are an integral part of these consolidated financial statements.73Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. Organization and Description of BusinessWright Medical Group, Inc., through Wright Medical Technology, Inc. and other operating subsidiaries (Wright or we), is a global, specialty orthopaediccompany that provides extremity and biologic solutions that enable clinicians to alleviate pain and restore their patient's lifestyles. We are a leading providerof surgical solutions for the foot and ankle market. Our products are sold primarily through a network of employee sales representatives and independentsales representatives in the United States (U.S.) and by a combination of employee sales representatives, independent sales representatives and stockingdistributors outside the U.S. We promote our products in approximately 60 countries with principal markets in the U.S., Europe, Asia, Canada, Australia, andLatin America. We are headquartered in Memphis, Tennessee.2. Summary of Significant Accounting PoliciesPrinciples of Consolidation. The accompanying consolidated financial statements include our accounts and those of our wholly owned U.S. andinternational 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 (GAAP) requires management tomake estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from thoseestimates. The most significant areas requiring the use of management estimates relate to discontinued operations, revenue recognition, the determination ofallowances for doubtful accounts and excess and obsolete inventories, the evaluation of goodwill and long-lived assets, product liability claims and otherlitigation, income taxes, stock-based compensation, accounting for business combinations, and accounting for restructuring charges.Discontinued Operations. On January 9, 2014, pursuant to the previously disclosed Asset Purchase Agreement, dated as of June 18, 2013 (the PurchaseAgreement), by and among us, MicroPort Scientific Corporation (MicroPort), we completed our divesture and sale of our business operations operating underthe OrthoRecon operating segment (the OrthoRecon Business) to MicroPort. Pursuant to the terms of the Purchase Agreement, the purchase price (as definedin the Purchase Agreement) for the OrthoRecon Business was approximately $283 million (including a working capital adjustment), which MicroPort paid incash.All historical operating results for the OrthoRecon business are reflected within discontinued operations in the consolidated statements of operations. Inaddition, costs associated with corporate employees and infrastructure transferred as a part of the sale have been included in discontinued operations. Further,all assets and associated liabilities to be transferred to MicroPort were classified as assets and liabilities held for sale on our consolidated balance sheet as ofDecember 31, 2013. See Note 4 for further discussion of discontinued operations. Other than Note 4, unless otherwise stated, all discussion of assets andliabilities in these Notes to the Financial Statements reflect the assets and liabilities held and used in our continuing operations, and all discussion ofrevenues and expenses reflect those associated with our continuing operations.Cash and Cash Equivalents. Cash and cash equivalents include all cash balances and short-term investments with original maturities of three months or less.Any such investments are readily convertible into known amounts of cash, and are so near their maturity that they present insignificant risk of changes invalue because of interest rate variation.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 andmanufacturing overhead. We regularly review inventory quantities on hand for excess and obsolete inventory and, when circumstances indicate, we incurcharges to write down inventories to their net realizable value. Our review of inventory for excess and obsolete quantities is based primarily on our estimatedforecast of product demand and production requirements for the next twenty-four months. Charges incurred to write down excess and obsolete inventory tonet realizable value included in “Cost of sales” were approximately $4.0 million, $4.7 million, and $3.2 million for the years ended December 31, 2014,2013, and 2012, respectively.Product Liability Claims, Product Liability Insurance Recoveries, and Other Litigation. We are involved in legal proceedings involving product liabilityclaims as well as contract, patent protection and other matters. See Note 19 for additional information regarding product liability claims, product liabilityinsurance recoveries and other litigation.We make provisions for claims specifically identified for which we believe the likelihood of an unfavorable outcome is probable and the amount of loss canbe estimated. For unresolved contingencies with potentially material exposure that are deemed reasonably possible, we evaluate whether a potential loss orrange of loss can be reasonably estimated. Our evaluation of these matters is the result of a comprehensive process designed to ensure that recognition of aloss or disclosure of these contingencies is made in a74Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)timely manner. In determining whether a loss should be accrued or a loss contingency disclosed, we evaluate a number of factors including: the proceduralstatus of each lawsuit; any opportunities for dismissal of the lawsuit before trial; the amount of time remaining before trial date; the status of discovery; thestatus of settlement; arbitration or mediation proceedings; and management’s estimate of the likelihood of success prior to or at trial. The estimates used toestablish a range of loss and the amounts to accrue are based on previous settlement experience, consultation with legal counsel, and management’ssettlement strategies. If the estimate of a probable loss is in a range and no amount within the range is more likely, we accrue the minimum amount of therange. We recognize legal fees as an expense in the period incurred.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 15to25yearsBuildings 10to25yearsMachinery and equipment 3to14yearsFurniture, fixtures and office equipment 1to14yearsSurgical instruments 6yearsExpenditures for major renewals and betterments, including leasehold improvements, that extend the useful life of the assets are capitalized and depreciatedover 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 assetcost 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. FASBASC 350-30-35-18 requires companies to evaluate for impairment intangible assets not subject to amortization, such as our IPRD assets, if events or changesin circumstances indicate than an asset might be impaired. Further, FASB ASC 350-20-35-30 requires companies to evaluate goodwill and intangibles notsubject to amortization for impairment between annual impairment tests if an event occurs or circumstances change that would more likely than not reducethe fair value of a reporting unit below its carrying amount. Unless circumstances otherwise dictate, the annual impairment test is performed in the fourthquarter.As a result of our change in reportable segments during the quarter ended March 31, 2014, which also resulted in a change in reporting units for goodwillimpairment measurement purposes, we performed a goodwill impairment analysis as of January 31, 2014 and determined that the fair values of our reportingunits exceeded their carrying values, indicating that goodwill had not been impaired. See Note 12 for additional information regarding goodwill. During thequarter ended December 31, 2014, we performed a qualitative assessment of goodwill for impairment and determined that it is not more likely than not thatthe carrying values of our U.S., International and BioMimetic reporting units exceeded their respective fair values, indicating that goodwill was not impaired.Our intangible assets with estimable useful lives are amortized on a straight line basis over their respective estimated useful lives to their estimated residualvalues. This method of amortization approximates the expected future cash flow generated from their use. Finite lived intangibles are reviewed forimpairment in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Section 360, Property, Plant andEquipment (FASB ASC 360). The weighted average amortization periods for completed technology, distribution channels, trademarks, licenses, customerrelationships, non-compete agreements and other intangible assets are 10 years, 10 years, 4 years, 13 years, 12 years, 3 years and 7 years, respectively. Theweighted average amortization period of our intangible assets on a combined basis is 10 years. Additionally, we have four indefinite lived trademark assetsand one in-process research and development (IPRD) intangible asset. These indefinite lived intangible assets are not amortized, but are instead tested forimpairment at least annually in accordance with the provisions of FASB ASC Section 350, Intangibles - Goodwill and Other.Valuation of Long-Lived Assets. Management periodically evaluates carrying values of long-lived assets, including property, plant and equipment andintangible assets, when events and circumstances indicate that these assets may have been impaired. We account for the impairment of long-lived assets inaccordance with FASB ASC 360. Accordingly, we evaluate impairment of our property, plant and equipment based upon an analysis of estimatedundiscounted future cash flows. If it is determined that a change is required in the useful life of an asset, future depreciation and amortization is adjustedaccordingly. Alternatively, should we determine that an asset is impaired, an adjustment would be charged to income based on the difference between theasset’s fair market value and the asset's carrying value.75Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)Allowances for Doubtful Accounts. We experience credit losses on our accounts receivable and, accordingly, we must make estimates related to the ultimatecollection 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 ofcustomer has been favorable. Historically, we have experienced minimal bad debts from our hospital customers and more significant bad debts from certaininternational stocking distributors, typically as a result of specific financial difficulty or geo-political factors. We write off accounts receivable when wedetermine 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 $0.9 million and 0.3 million at December 31, 2014 and 2013, respectively.Concentration of Credit Risk. Financial instruments that 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 regularbasis. An allowance for possible losses on accounts receivable is established based upon factors surrounding the credit risk of specific customers, historicaltrends and other information. Collateral or other security is generally not required for accounts receivable.Concentrations of Supply of Raw Material. We rely on a limited number of suppliers for the components used in our products. For certain human biologicproducts, we depend on one supplier of demineralized bone matrix (DBM) and cancellous bone matrix (CBM). We rely on one supplier for ourGRAFTJACKET® family of soft tissue repair and graft containment products. We maintain adequate stock from these suppliers in order to meet marketdemand. We currently rely on one supplier for a key component of our Augment® Bone Graft. In December 2013, this supplier notified us of their intent toterminate the supply agreement at the end of the current term, which is December 2015. They are contractually required to meet our supply requirements untilthe termination date, and to use commercially reasonable efforts to assist us in identifying a new supplier and support the transfer of technology andsupporting documentation to produce this component. Our transition to a new supplier is underway with full cooperation from both the current and the newsupplier. The current supplier has produced sufficient product to more than meet our production needs for the interim period until the new supplier is on line.See Item 1A, Risk Factors, for further information on our suppliers.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 isbased on income by tax jurisdiction, statutory rates and tax saving initiatives available to us in the various jurisdictions in which we operate. Significantjudgment is required in determining our effective tax rate and evaluating our tax positions. This process includes assessing temporary differences resultingfrom differing recognition of items for income tax and financial accounting purposes. These differences result in deferred tax assets and liabilities, which areincluded within our consolidated balance sheet. The measurement of deferred tax assets is reduced by a valuation allowance if, based upon availableevidence, it is more likely than not that some or all of the deferred tax assets will not be realized. See Note 14 for further discussion of our consolidateddeferred tax assets and liabilities, and the associated valuation allowance.We provide for unrecognized tax benefits based upon our assessment of whether a tax position is “more-likely-than-not” to be sustained upon examinationby 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 probabilityanalysis of the amount that is more-likely-than-not to be realized upon ultimate settlement or disposition of the underlying tax position.Other Taxes. Taxes assessed by a governmental authority that are imposed concurrent with our revenue transactions with customers are presented on a netbasis 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 themajority of our revenue derived from sales to hospitals. Our products are primarily sold through a network of employee sales representatives and independentsales representatives in the U.S. and by a combination of employee sales representatives, independent sales representatives, and stocking distributors outsidethe U.S. Revenues from sales to hospitals are recorded when the hospital takes title to the product, which is generally when the product is surgicallyimplanted 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 sellthe products to their customers, take title to the products and assume all risks of ownership. Our distributors are obligated to pay within specified termsregardless 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, wehave repurchase agreements with certain stocking distributors. Those certain agreements require us to repurchase a specified percentage of the inventorypurchased by the distributor within a specified period of time prior to the expiration of the contract. During those specified periods, we defer the applicable76Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)percentage of the sales. An insignificant amount of deferred revenue related to these types of agreements was recorded at December 31, 2014 and 2013,respectively.We must make estimates of potential future product returns related to current period product revenue. We develop these estimates by analyzing historicalexperience related to product returns. Judgment must be used and estimates made in connection with establishing the allowance for sales returns in anyaccounting period. Our allowances for product returns of approximately $0.3 million are included as a reduction of accounts receivable at December 31, 2014and 2013.Shipping and Handling Costs. We incur shipping and handling costs associated with the shipment of goods to customers, independent distributors and oursubsidiaries. Amounts billed to customers for shipping and handling of products are included in net sales. Costs incurred related to shipping and handling ofproducts to customers are included in selling, general and administrative expenses. All other shipping and handling costs are included in cost of sales.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 intoU.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 forrevenues, expenses, gains and losses. Translation adjustments are recorded as a separate component of comprehensive income in stockholders’ equity. Gainsand losses resulting from transactions denominated in a currency other than the local functional currency are included in “Other expense, net” in ourconsolidated statement of operations.Comprehensive Income. Comprehensive income is defined as the change in equity during a period related to transactions and other events and circumstancesfrom non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Thedifference between our net income and our comprehensive income is attributable to foreign currency translation, unrealized gains and losses (net of taxes) onour interest rate derivative instrument held in 2012, adjustments to our minimum pension liability, and unrealized gains and losses on our available-for-salemarketable 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 thefair 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 determinationof 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 asassumptions regarding a number of complex and subjective variables, which include the expected life of the award, the expected stock price volatility overthe expected life of the awards, expected dividend yield and risk-free interest rate.We recorded stock-based compensation expense of $11.5 million, $12.0 million, and $7.8 million during the years ended December 31, 2014, 2013 and2012, respectively, within results of continuing operations. See Note 17 for further information regarding our stock-based compensation assumptions andexpenses.Fair Value of Financial Instruments. The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximates the fair valueof these financial instruments at December 31, 2014 and 2013 due to their short maturities or variable rates.The outstanding $300 million of our 2.00% Convertible Senior Notes maturing in 2017 (2017 Notes) are carried at cost, net of unamortized discount. Theestimated fair value of the 2017 Notes was approximately $361 million at December 31, 2014, based on a quoted price in an active market (Level 1).FASB ASC Section 820, Fair Value Measurements and Disclosures requires fair value measurements be classified and disclosed in one of the following threecategories:Level 1:Financial instruments with unadjusted, quoted prices listed on active market exchanges.Level 2:Financial instruments determined using prices for recently traded financial instruments with similar underlying terms as well asdirectly or indirectly observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals.Level 3:Financial instruments that are not actively traded on a market exchange. This category includes situations where there is little, ifany, market activity for the financial instrument. The prices are determined using significant unobservable inputs or valuationtechniques.77Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)We classify our investment in U.S. Treasury bills and bonds and corporate equity securities as Level 1 based upon quoted prices in active markets. All othermarketable securities are classified as Level 2 based upon the other than quoted prices with observable market data. These include U.S. agency debtsecurities, certificates of deposit, commercial paper, and corporate debt securities. We use a third-party provider to determine fair values of our available-for-sale debt securities. The third-party provider receives market prices for each marketable security from a variety of industry standard data providers, securitymaster files from large financial institutions and other third-party sources with reasonable levels of price transparency. The third-party provider uses thesemultiple prices as inputs into a pricing model to determine a weighted average price for each security. We have controls in place to review the third partyprovider's qualifications and procedures used to determine fair values and to validate the prices used in their determination of fair value.During the third quarter of 2012, we issued $300 million of our 2017 Notes, and we have recorded a derivative liability for the conversion feature (2017Notes Conversion Derivative) of such 2017 Notes. Additionally, we entered into convertible notes hedging transactions (2017 Notes Hedges) in connectionwith the issuance of our 2017 Notes. The 2017 Notes Hedges and the 2017 Notes Conversion Derivative are measured at fair value using Level 3 inputs.These instruments are not actively traded and are valued using an option pricing model that uses observable and unobservable market data for inputs.To determine the fair value of the embedded conversion option in the 2017 Notes Conversion Derivative, a binomial lattice model was used. A binomialstock price lattice generates two probable outcomes of stock price - one up and another down. This lattice generates a distribution of stock price at thematurity date. Using this stock price lattice, a conversion option lattice was created where the value of the embedded conversion option was estimated. Theconversion option lattice first calculates the possible conversion option values at the maturity date using the distribution of stock price, which equals to themaximum of (x) zero, if stock price is below the strike price, or (y) stock price less the strike price, if the stock price is higher than the strike price. The valueof the 2017 Notes Conversion Derivative at the valuation date was estimated using the conversion option values at the maturity date by moving back in timeon the lattice. Specifically, at each node, if our 2017 Notes are eligible for early conversion, the value at this node is the maximum of (i) the early conversionvalue, which is the stock price less the strike price, and (ii) the discounted and probability-weighted value from the two probable outcomes in the future. Ifour 2017 Notes are not eligible for early conversion, the value of the conversion option at this node equals to (ii). In the conversion option lattice, creditadjustment was applied in the model as the embedded conversion option is settled with cash instead of shares.To estimate the fair value of the 2017 Notes Hedges, we used the Black-Scholes formula combined with credit adjustments, as the bank counterparties havecredit risk and the call options are cash settled. We assumed that the call options will be exercised at the maturity since our common stock does not pay anydividends and management does not expect to declare dividends in the near term.The following assumptions were used in the fair market valuations of the 2017 Notes Hedges and 2017 Notes Conversion Derivative as of December 31,2014: 2017 Notes ConversionDerivative2017 Notes HedgeStock Price Volatility (1)35%35%Credit Spread for Wright (2)2.8%N/ACredit Spread for Bank of America, N.A. (3)N/A0.4%Credit Spread for Deutsche Bank AG (3)N/A0.5%Credit Spread for Wells Fargo Securities, LLC (3)N/A0.2%(1)Volatility selected based on historical and implied volatility of common shares of Wright Medical Group, Inc.(2)Credit spread was estimated based on BVAL price from Bloomberg as of valuation date.(3)Credit spread of each bank is estimated using CDS curves. Source: Bloomberg.As part of the acquisitions of EZ Concepts Surgical Device Corporation, d/b/a EZ Frame™, and CCI® Evolution Mobile Bearing Total Ankle Replacementsystem (CCI acquisition), completed in 2010 and 2011, respectively, we have recorded $0.2 million of contingent liabilities for potential future cashpayments related to these transactions as of December 31, 2014.As part of the acquisition of WG Healthcare on January 7, 2013, we may be obligated to pay contingent consideration upon the achievement of certainrevenue milestones; therefore, we have recorded the estimated fair value of future contingent consideration of approximately $1.5 million as of December 31,2014. The fair value of the contingent consideration as of December 31, 2014,78Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)was determined using a discounted cash flow model and probability adjusted estimates of the future earnings and is classified in Level 3. Changes in the fairvalue of contingent consideration are recorded in “Other (income) expense, net” in our consolidated statements of operations.On March 1, 2013, as part of the acquisition of BioMimetic Therapeutics, Inc. (BioMimetic), we issued Contingent Value Rights (CVRs) as part of the mergerconsideration. Each CVR entitles its holder to receive additional cash payments of up to $6.50 per share, which are payable upon receipt of FDA approval ofAugment® Bone Graft and upon achieving certain revenue milestones. The fair value of the CVRs outstanding at December 31, 2014 and December 31, 2013of $134 million and $9.0 million was determined using the closing price of the security in the active market (Level 1). For the years ended December 31,2014 and December 31, 2013, the change in the value of the CVR resulted in $125.0 million of expense and $61.2 million of income, respectively, whichwas recorded in Other expense (income) in the consolidated statements of operations.The following table summarizes the valuation of our financial instruments (in thousands): TotalQuoted Pricesin ActiveMarkets(Level 1)Prices withOtherObservableInputs(Level 2)Prices withUnobservableInputs(Level 3)At December 31, 2014 Assets Cash and cash equivalents$227,326$227,326$—$—Available-for-sale marketable securities U.S. agency debt securities————Certificate of deposit————Corporate debt securities566566—U.S. government debt securities2,0092,009——Total available-for-sale marketable securities2,5752,009566— 2017 Notes Hedges80,000——80,000 Total$309,901$229,335$566$80,000 Liabilities 2017 Notes Conversion Derivative$76,000$—$—$76,000Contingent consideration1,705——1,705Contingent consideration (CVRs)133,981$133,981$——Total$211,686$133,981$—$77,70579Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued) TotalQuoted Pricesin ActiveMarkets(Level 1)Prices withOtherObservableInputs(Level 2)Prices withUnobservableInputs(Level 3)At December 31, 2013 Assets Cash and cash equivalents$168,534$168,534$—$—Available-for-sale marketable securities U.S. agency debt securities4,998—4,998—Certificates of deposits245—245—Corporate debt securities5,188—5,188—U.S. government debt securities4,1174,117——Total available-for-sale marketable securities14,5484,11710,431— 2017 Notes Hedges118,000$—$—118,000Total$301,082$172,651$10,431$118,000 Liabilities 2017 Notes Conversion Derivative$112,000$—$—$112,000Contingent consideration6,237——6,237Contingent consideration (CVRs)8,969$8,969$—$—Total$127,206$8,969$—$118,237The following is a roll forward of our assets and liabilities measured at fair value on a recurring basis using unobservable inputs (Level 3): Balance atDecember 31, 2013Transfersinto Level 3Gain/(Loss)included inEarningsSettlementsCurrencyAcquisitionMeasurementPeriod Adjustment(See Note 3)Balance atDecember 31,2014 2017 Notes Hedges 118,000—(38,000)———80,000 2017 Notes Conversion Derivative (112,000)—36,000———(76,000) Contingent Consideration (6,236)—(1,969)2,0506563,794(1,705)Derivative Instruments. We account for derivative instruments and hedging activities under FASB ASC Section 815, Derivatives and Hedging (FASB ASC815). Accordingly, all of our derivative instruments are recorded in the accompanying consolidated balance sheets as either an asset or liability and measuredat 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 intercompanyreceivable and payable balances that are denominated in foreign currencies. These forward contracts are expected to offset the transactional gains and losseson the related intercompany balances. These forward contracts are not designated as hedging instruments under FASB ASC 815. Accordingly, the changes inthe 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 loss of approximately $0.4 million on our foreign currency contracts for the year ended December 31, 2014. For December 31, 2013 werecorded a net gain of approximately $0.6 million and a net loss of approximately $0.4 million for 2012, on foreign currency contracts, which are included in“Other (income) expense, net” in our consolidated statements of operations. These gains and losses substantially offset translation losses and gains recordedon our intercompany receivable and payable balances, also included in “Other (income) expense, net.” At December 31, 2014 and 2013, we had no foreigncurrency contracts outstanding.On August 31, 2012, we issued the 2017 Notes. The 2017 Notes Conversion Derivative requires bifurcation from the 2017 Notes in accordance with ASCTopic 815, and is accounted for as a derivative liability. We also entered into 2017 Notes Hedges in80Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)connection with the issuance of the 2017 Notes with three counterparties. The 2017 Notes Hedges, which are cash-settled, are intended to reduce ourexposure to potential cash payments that we are required to make upon conversion of the 2017 Notes in excess of the principal amount of converted notes ifour common stock price exceeds the conversion price. The 2017 Notes Hedges is accounted for as a derivative asset in accordance with ASC Topic 815.Reclassifications. Certain prior year amounts in the notes to consolidated financial statements have been reclassified to conform to the current yearpresentation.Supplemental Cash Flow Information. Cash paid for interest and income taxes was as follows (in thousands): Year Ended December 31, 2014 2013 2012Interest$6,518 $5,904 $4,639Income taxes$1,525 $1,634 $4,973Recent accounting pronouncements. In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax CreditCarryforward Exist” (ASU 2013-11). ASU 2013-11 reduces diversity in practice by providing guidance on the presentation of unrecognized tax benefits andis intended to better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from thedisallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. We adopted ASU 2013-11 effectiveJanuary 1, 2014, which resulted in an immaterial balance sheet reclassification to conform to the required “net” presentation.On May 28, 2014, the FASB issued Accounting Standard Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which supersedes virtually allexisting revenue recognition guidance under GAAP. The ASU provides a five-step model for revenue recognition that companies will apply to recognizerevenue in a manner that reflects the timing of the transfer of services to customers and the amount of revenue recognized reflects the consideration that acompany expects to receive for the goods and services provided. The ASU will be effective for us beginning January 1, 2017. We are in the initial phases ofour adoption plans and, accordingly, we are unable to estimate any effect this may have on our revenue recognition practices.3. AcquisitionSolana Surgical, LLCOn January 30, 2014, we acquired 100% of the outstanding equity of Solana Surgical, LLC (Solana), a privately held Memphis, Tennessee orthopaediccompany, for approximately $48.0 million in cash and $41.4 million of our common stock. The transaction enables us to add Solana's complementaryextremity product portfolio to further accelerate growth opportunities in our global extremities business. The operating results from this acquisition areincluded in the condensed consolidated financial statements from the acquisition date.The acquisition was recorded by allocating the costs of the assets acquired based on their estimated fair values at the acquisition date. The excess of the costof the acquisition over the fair value of the assets acquired is recorded as goodwill within our U.S. segment. The following is a summary of the estimated fairvalues of the assets acquired (in thousands):Cash and cash equivalents $416Accounts receivable 2,366Inventory 2,244Prepaid and other current assets 372Property, plant and equipment 360Intangible assets 21,584Accounts payable and accrued liabilities (2,196)Total net assets acquired $25,146 Goodwill 64,326 Total purchase consideration $89,47281Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)The purchase price allocation was adjusted in the quarter ended June 30, 2014 for the finalization of the valuation of the acquired intangible assets.Intangible assets decreased $0.5 million during the quarter ended June 30, 2014. During the quarter ended September 30, 2014 the purchase price allocationwas adjusted to record certain tax related liabilities existing at the date of acquisition. Accrued liabilities increased $0.2 million during the quarter endedSeptember 30, 2014. The purchase price allocation is now considered final.The goodwill is primarily attributable to strategic opportunities that arose from the acquisition of Solana. The goodwill is expected to be deductible for taxpurposes.Of the $21.6 million of acquired intangible assets, $11.7 million was assigned to purchased technology (10 year life), $9.3 million was assigned to customerrelationships (12 year life), and $0.6 million was assigned to trademarks (2 year life).The acquired business contributed revenues of $14.3 million and operating income of $1.3 million, which excludes transaction and transition costs, to ourconsolidated results from the date of acquisition through December 31, 2014. Our consolidated results include $7.2 million of transaction and transitionexpenses recognized in the twelve months ended December 31, 2014.Our consolidated results of operations would not have been materially different than reported results had the Solana acquisition occurred at the beginning of2013 and therefore, pro forma financial information has not been presented.OrthoPro, L.L.C.On February 5, 2014, we acquired 100% of the outstanding equity of OrthoPro, a privately held Salt Lake City, Utah orthopaedic company, forapproximately $32.5 million in cash at closing, subject to a working capital adjustment, plus contingent consideration to be paid upon the achievement ofcertain revenue milestones in 2014 and 2015 (estimated fair value of contingent consideration is $0). The transaction enables us to add OrthoPro'scomplementary extremity product portfolio to further accelerate growth opportunities in our global extremities business. The operating results from thisacquisition are included in the condensed consolidated financial statements from the acquisition date.During the quarter ended June 30, 2014, we finalized the calculation of the acquisition date fair value of contingent consideration, which was reduced by$2.9 million at that time.The acquisition was recorded by allocating the costs of the assets acquired based on their estimated fair values at the acquisition date. The excess of the costof the acquisition over the fair value of the assets acquired is recorded as goodwill within our U.S. segment. The following is a summary of the estimated fairvalues of the assets acquired (in thousands):Cash and cash equivalents $98Accounts receivable 1,308Inventory 2,156Prepaid and other current assets 49Property, plant and equipment 1,801Intangible assets 7,772Accounts payable and accrued liabilities (949)Total net assets acquired $12,235 Goodwill 20,801 Total purchase consideration $33,036The purchase price allocation was adjusted in the quarter ended June 30, 2014 for the finalization of the valuation of acquired intangible assets. Intangibleassets decreased $1.8 million during the quarter ended June 30, 2014. The purchase price allocation was adjusted in the quarter ended September 30, 2014 torecord certain tax related liabilities that existed at the date of acquisition. Accrued liabilities increased $0.4 million during the quarter ended September 30,2014. The purchase price allocation is now considered final.The goodwill is primarily attributable to strategic opportunities that arose from the acquisition of OrthoPro. The goodwill is expected to be deductible for taxpurposes.Of the $7.8 million of acquired intangible assets, $4.2 million was assigned to customer relationships (12 year life), $3.4 million was assigned to purchasedtechnology (10 year life), and $0.2 million was assigned to trademarks (2 year life).82Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)The acquired business contributed revenues of $8.1 million and operating income of $0.5 million, which excludes transaction and transition costs, to ourconsolidated results from the date of acquisition through December 31, 2014. Our consolidated results include $5.1 million of transaction and transitionexpenses recognized in the twelve months ended December 31, 2014.Our consolidated results of operations would not have been materially different than reported results had the OrthoPro acquisition occurred at the beginningof 2013 and therefore, pro forma financial information has not been presented.Biotech InternationalOn November 15, 2013, we acquired 100% of the outstanding equity shares of Biotech International (Biotech), a leading, privately held French orthopaedicextremities company, for approximately $55.0 million in cash and $21.0 million of our common stock, plus additional contingent consideration to be paidupon the achievement of certain revenue milestones in 2014 and 2015 (estimated fair value of contingent consideration is $0). All of our common stockissued in connection with the transaction is subject to a lockup period of one year. The transaction will significantly expand our direct sales channel inFrance and international distribution network and add Biotech’s complementary extremity product portfolio to further accelerate growth opportunities in ourglobal extremities business. The operating results from this acquisition are included in the consolidated financial statements from the acquisition date.During the quarter ended September 30, 2014, we finalized the calculation of the acquisition date fair value of contingent consideration, which was reducedby $4.2 million at that time.The acquisition was recorded by allocating the costs of the assets and liabilities acquired based on their estimated fair values at the acquisition date. Theexcess of the cost of the acquisition over the fair value of the net assets and liabilities acquired is recorded as goodwill. The following is a summary of theestimated fair values of the assets acquired (in thousands):Cash and cash equivalents$252Accounts receivable4,364Inventory5,188Prepaid and other current assets303Deferred tax asset - current501Property, plant and equipment2,573Intangible assets17,800Accounts payable and accrued liabilities(2,552)Deferred tax liability - noncurrent(4,228) Net assets acquired24,201 Goodwill51,836Total purchase consideration$76,037The purchase price allocation was adjusted in 2014 for the finalization of the valuation of acquired intangible assets, to record certain tax-related liabilities,and to adjust accounts receivable and inventory to acquisition date fair value. Intangible assets, net of tax, increased $1.5 million, tax liabilities increased$0.5 million, accounts receivable decreased $0.7 million, inventory decreased $0.4 million, and deferred tax assets increased$0.5 million during 2014. Thepurchase price allocation is now considered final.The goodwill is attributable to the workforce of the acquired business and strategic opportunities that arose from the acquisition of Biotech. The goodwill isnot expected to be deductible for tax purposes.Of the estimated $17.8 million of acquired intangible assets, $10.1 million was assigned to customer relationships (12 year life), $7.1 million was assigned topurchased technology (10 year life), and $0.6 million was assigned to trademarks (2 year life).The acquired business contributed revenues of $13.7 million and operating loss of $5.3 million, which excludes transaction and transition costs, to ourconsolidated results during 2014. Our consolidated results include $1.5 million of transition expenses recognized in the twelve months ended December 31,2014.Our consolidated results of operations would not have been materially different than reported results had the Biotech acquisition occurred at the beginning of2013 and therefore, pro forma financial information has not been presented. 83Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)4. Discontinued OperationsOn January 9, 2014, pursuant to the Purchase Agreement, we completed our divesture and sale of the OrthoRecon Business to MicroPort. Pursuant to theterms of the Purchase Agreement, the purchase price (as defined in the Purchase Agreement) for the OrthoRecon Business was approximately $283 million(including a working capital adjustment), which MicroPort paid in cash. As a result of the transaction, we recognized approximately $24.3 million as the gainon disposal of the OrthoRecon business, before the effect of income taxes.All current and historical operating results for the OrthoRecon segment are reflected within discontinued operations in the consolidated financial statements.In addition, costs associated with corporate employees and infrastructure being transferred as a part of the sale have been included in discontinuedoperations. The following table summarizes the results of discontinued operations (in thousands): Twelve Months Ended December 31, 2014 2013 2012Revenue$3,056 $231,865 $269,671(Loss) income before tax(13,521) 9,489 11,946Income tax provision5,666 3,266 3,275(Loss) income from discontinued operations, net of tax(19,187) 6,223 8,671All assets and associated liabilities to be transferred to MicroPort have been classified as assets and liabilities held for sale on our consolidated balance sheet.The following table summarizes the assets and liabilities held for sale (in thousands): December 31, 2014 December 31, 2013Assets Cash $— $201Accounts receivable — 59,172Inventories, net — 74,807Property, plant & equipment, net — 92,436Goodwill — 25,802Intangible assets, net — 1,738Deferred income taxes — 1,197Other current and long-term assets — 19,105Assets held for sale $— $274,458 Liabilities Accounts payable $— $9,553Other current liabilities — 21,668Other long-term liabilities — 1,399Liabilities held for sale $— $32,620Certain liabilities associated with the OrthoRecon business, including product liability claims associated with hip and knee products sold prior to theclosing, were not assumed by MicroPort. Charges associated with these product liability claims, including legal defense, settlements and judgments, incomeassociated with product liability insurance recoveries, and changes to any contingent liabilities associated with the OrthoRecon business have been reflectedwithin results of discontinued operations, and we will continue to reflect these within results of discontinued operations in future periods. We will incurcontinuing cash outflows associated with legal defense costs and the ultimate resolution of these contingent liabilities, net of insurance proceeds, until theseliabilities are resolved. During the twelve months ended December 31, 2014, we recorded expense of $13.8 million in discontinued operations in connectionto the reported settlement associated with the ConforMIS matter. See Note 19 of the condensed consolidated financial statements for additional informationregarding the ConforMIS matter.84Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)5. InventoriesInventories consist of the following (in thousands): December 31, 2014 2013Raw materials$6,910 $2,693Work-in-process13,849 6,950Finished goods67,653 62,800 $88,412 $72,4436. Marketable SecuritiesOur investments in marketable securities are classified as available-for-sale securities in accordance with FASB ASC Topic 320, Investments — Debt andEquity Securities. These securities are carried at their fair value, and all unrealized gains and losses are recorded within other comprehensive income.Marketable securities are classified as current for those expected to mature or be sold within 12 months and the remaining portion is classified as non-current.The cost of investment securities sold is determined by the specific identification method.As of December 31, 2014 and 2013, we had current marketable securities totaling $2.6 million and $6.9 million, respectively, consisting of investments incorporate and government bonds, and certificates of deposits, all of which are valued at fair value using a market approach. In addition, we had non-currentmarketable securities totaling $7.7 million as of December 31, 2013, consisting of investments in corporate, government, and agency bonds, all of which arevalued at fair value using a market approach.The following tables present a summary of our marketable securities (in thousands): AmortizedCost GrossUnrealizedGains GrossUnrealized(Losses) EstimatedFair ValueAt December 31, 2014 Available-for-sale marketable securities Corporate debt securities566 — — 566U.S. government debt securities2,009 — — 2,009Total available-for-sale marketable securities$2,575 $— $— $2,575 AmortizedCost GrossUnrealizedGains GrossUnrealized(Losses) EstimatedFair ValueAt December 31, 2013 Available-for-sale marketable securities U.S. agency debt securities5,002 — (4) $4,998Certificate of deposit245 — — 245Corporate debt securities5,186 2 — 5,188U.S. government debt securities4,116 1 — 4,117Total available-for-sale marketable securities$14,549 $3 $(4) $14,548The maturities of available-for-sale debt securities at December 31, 2014 are as follows: Available-for-Sale Cost BasisFair ValueDue in one year or less$2,575$2,575Due after one year—— 2,5752,57585Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)7. Property, Plant and EquipmentProperty, plant and equipment, net consists of the following (in thousands): December 31, 2014 2013Land and land improvements$520 $31Buildings26,887 13,026Machinery and equipment24,265 14,274Furniture, fixtures and office equipment59,885 47,364Construction in progress14,178 13,997Surgical instruments65,359 52,893 191,094 141,585Less: Accumulated depreciation(86,859) (71,070) $104,235 $70,515The components of property, plant and equipment recorded under capital leases consist of the following (in thousands): December 31, 2014 2013Buildings$8,471 $8,192Machinery and equipment477 —Furniture, fixtures and office equipment59 59 9,007 8,251Less: Accumulated depreciation(862) (48) $8,145 $8,203Depreciation expense recognized within results of continuing operations approximated $18.5 million, $14.4 million, and $14.8 million for the years endedDecember 31, 2014, 2013, and 2012, respectively, and included depreciation of assets under capital leases.We entered into a capital lease for our corporate headquarters building as of December 31, 2013. Total capitalized costs associated with this capital lease willbe depreciated over the lease term, which is 10 years expiring in 2024.8. Accrued Expenses and Other Current LiabilitiesAccrued expenses and other current liabilities consist of the following (in thousands): December 31 2014 2013Employee bonus$2,557 $10,250Other employee benefits5,968 13,740Royalties3,220 2,669Taxes other than income5,782 4,722Commissions6,857 4,336Professional and legal fees13,822 7,054Contingent consideration99,137 12,324Product liability10,262 7,710Distributor payments89 1,253Other22,510 16,059 $170,204 $80,11786Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)9. Long-Term Debt and Capital Lease ObligationsLong-term debt and capital lease obligations consist of the following (in thousands): December 31,2014 December 31,2013Capital lease obligations$8,678 $8,2382017 Notes272,652263,3952014 Notes (1)— 3,768 281,330 275,401Less: current portion(718) (4,174) $280,612 $271,227___________________________1The 2014 Notes matured on December 1, 20142017 NotesOn August 31, 2012, we issued $300 million aggregate principal amount of the 2017 Notes pursuant to an indenture, dated as of August 31, 2012 between usand The Bank of New York Mellon Trust Company, N.A., as Trustee. The 2017 Notes will mature on August 15, 2017, and we pay interest on the 2017 Notessemi-annually on each February 15 and August 15 at an annual rate of 2.00%. We may not redeem the 2017 Notes prior to the maturity date, and no “sinkingfund” is available for the 2017 Notes, which means that we are not required to redeem or retire the 2017 Notes periodically. The 2017 Notes are convertible atthe option of the holder, during certain periods and subject to certain conditions as described below, solely into cash at an initial conversion rate of 39.3140shares per $1,000 principal amount of the 2017 Notes, subject to adjustment upon the occurrence of specified events, which represents an initial conversionprice of $25.44 per share. The holder of the 2017 Notes may convert their notes at any time prior to February 15, 2017 only under the followingcircumstances: (1) during any calendar quarter commencing after the calendar quarter ending December 31, 2012 (and only during such calendar quarter), ifthe last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading daysending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicabletrading day; (2) during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount ofnotes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversionrate on each such trading day; or (3) upon the occurrence of specified corporate events, including during the period beginning 35 scheduled trading daysprior to the anticipated effective date of our proposed merger with Tornier N.V. and ending 35 trading days after the actual effective date of such merger.While we currently do not expect significant conversions because the notes currently trade at a premium to the as-converted value, and a converting holderwould forego future interest payments, any conversions would reduce our cash resources. On or after February 15, 2017 until the close of business on thesecond scheduled trading day immediately preceding the maturity date, holders may convert their 2017 Notes solely into cash, regardless of the foregoingcircumstances. Upon conversion, a holder will receive an amount in cash, per $1,000 principal amount of the 2017 Notes, equal to the settlement amount ascalculated under the indenture relating to the 2017 Notes. If we undergo a fundamental change, as defined in the indenture relating to the 2017 Notes, subjectto certain conditions, holders of the 2017 Notes will have the option to require us to repurchase for cash all or a portion of their notes at a purchase priceequal to 100% of the principal amount of the 2017 Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental changerepurchase date, as defined in the indenture relating to the 2017 Notes. In addition, following certain corporate transactions, we, under certain circumstances,will pay a cash make-whole premium by increasing the applicable conversion rate for a holder that elects to convert its 2017 Notes in connection with suchcorporate transaction. The 2017 Notes are senior unsecured obligations that rank: (i) senior in right of payment to any of our indebtedness that is expresslysubordinated in right of payment to the 2017 Notes; (ii) equal in right of payment to any of our unsecured indebtedness that is not so subordinated; (iii)effectively junior in right of payment to any secured indebtedness to the extent of the value of the assets securing such indebtedness; and (iv) structurallyjunior to all indebtedness and other liabilities (including trade payables) of our subsidiaries. As a result of this transaction, we recognized deferred financingcharges of approximately $8.8 million, which are being amortized over the term of the 2017 Notes using the effective interest method.The 2017 Notes Conversion Derivative requires bifurcation from the 2017 Notes in accordance with ASC Topic 815, Derivatives and Hedging, and isaccounted for as a derivative liability. The fair value of the 2017 Notes Conversion Derivative at the time of issuance of the 2017 Notes was $48.1 millionand was recorded as original debt discount for purposes of accounting for the debt component of the 2017 Notes. This discount is amortized as interestexpense using the effective interest method over the term of the 2017 Notes. For the year ended December 31, 2014 the Company recorded $9.3 million ofinterest expense related to the amortization of the debt discount based upon an effective rate of 6.47%.87Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)The components of the 2017 Notes were as follows (in thousands): December 31,2014December 31,2013Principal amount of 2017 Notes$300,000$300,000Unamortized debt discount(27,348)(36,605)Net carrying amount of 2017 Notes$272,652$263,395We entered into 2017 Notes Hedges in connection with the issuance of the 2017 Notes with three counterparties (the Option Counterparties). The 2017 NotesHedges, which are cash-settled, are intended to reduce our exposure to potential cash payments that we would be required to make if holders elect to convertthe 2017 Notes at a time when our stock price exceeds the conversion price. However, in connection with certain events, including a merger such as ourproposed merger with Tornier N.V., the Option Counterparties have the discretion to make certain adjustments to the 2017 Note Hedges and warranttransactions, which may reduce the effectiveness of the 2017 Note Hedges or increase our obligations under the warrant transactions. The aggregate cost ofthe 2017 Notes Hedges was $56.2 million and is accounted for as a derivative asset in accordance with ASC Topic 815. See Note 11 of the condensedconsolidated financial statements for additional information regarding the 2017 Notes Hedges and the 2017 Notes Conversion Derivative.We also entered into warrant transactions in which we sold warrants for an aggregate of 11.8 million shares of our common stock to the OptionCounterparties, subject to adjustment. The strike price of the warrants was initially $29.925 per share, which was 50% above the last reported sale price of ourcommon stock on August 22, 2012. The warrants are net-share settled and are exercisable over the 100 trading day period beginning on November 15, 2017.The warrant transactions will have a dilutive effect to the extent that the market value per share of our common stock during such period exceeds theapplicable strike price of the warrants.Aside from the initial payment of the $56.2 million premium to the Option Counterparties, we do not expect to be required to make any cash payments to theOption Counterparties under the 2017 Notes Hedges and expect to be entitled to receive from the Option Counterparties cash, generally equal to the amountby which the market price per share of common stock exceeds the strike price of the convertible note hedging transactions during the relevant valuationperiod, subject to the discretion of the Option Counterparties to make adjustments in connection with our proposed merger as described above. The strikeprice under the 2017 Notes Hedges is equal to the conversion price of the 2017 Notes. Additionally, if the market value per share of our common stockexceeds the strike price on any day during the 100 trading day measurement period under the warrant transaction, we will be obligated to issue to the OptionCounterparties a number of shares equal in value to one percent of the amount by which the then-current market value of one share of our common stockexceeds the then-effective strike price of each warrant, multiplied by the number of shares of common stock into which the 2017 Notes are then convertible ator following maturity. We will not receive any additional proceeds if warrants are exercised. If the 2017 Note Hedges and warrant transactions are terminatedin connection with our proposed merger with Tornier N.V. and we do not enter into new hedging and warrant transactions with respect to the 2017 Notes, wewould have exposure to potential cash payments that we would be required to make if holders elect to convert the 2017 Notes at a time when our stock priceexceeds the conversion price. In such event, the amount of cash payments that we could be required to make to holders of the 2017 Notes could besignificantly in excess of the amount of any cash received by us from the Option Counterparties in connection with the termination of the 2017 Note Hedgesand warrant transactions.In February 2015, we issued $632.5 million of the 2020 Convertible Senior Notes, which generated net proceeds of approximately $613 million. We usedapproximately $292 million of the net proceeds from the offering to repurchase approximately $240 million aggregate principal amount of our outstanding2017 Convertible Senior Notes in privately negotiated transactions. See Note 22 for further discussion of these transactions that happened subsequent to theDecember 31, 2014, balance sheet date.88Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)MaturitiesAggregate annual maturities of our long-term obligations at December 31, 2014, excluding capital lease obligations, are as follows (in thousands):2015$—2016—2017300,00020182019— $300,000As discussed in Note 7, we have acquired certain property and equipment pursuant to capital leases. At December 31, 2014, future minimum lease paymentsunder capital lease obligations, together with the present value of the net minimum lease payments, are as follows (in thousands):2015$1,01220161,13620171,03920181,04720191,083Thereafter5,127Total minimum payments10,444Less amount representing interest(1,766)Present value of minimum lease payments8,678Current portion(718)Long-term portion$7,96010. Other Long-Term LiabilitiesOther long-term liabilities consist of the following (in thousands): December 31 2014 2013Product liability (See Note 19)6,050 9,7842017 Notes Conversion Derivative (See Note 11)76,000 112,000Deferred license revenue (See Note 2)3,689 4,210Contingent consideration36,549 2,882Other11,756 6,190 $134,044 $135,06611. Derivative Instruments and Hedging ActivitiesWe account for derivatives in accordance with FASB ASC 815, which establishes accounting and reporting standards requiring that derivative instruments berecorded on the balance sheet as either an asset or liability measured at fair value. Additionally, changes in the derivative’s fair value shall be recognizedcurrently in earnings unless specific hedge accounting criteria are met.Conversion Derivative and Notes HedgingOn August 31, 2012, we issued the 2017 Notes. The 2017 Notes Conversion Derivative requires bifurcation from the 2017 Notes in accordance with ASCTopic 815, and is accounted for as a derivative liability. The fair value of the 2017 Notes Conversion Derivative at the time of issuance of the 2017 Notes was$48.1 million. See Note 9 of the consolidated financial statements for additional information regarding the 2017 Notes.We also entered into the 2017 Notes Hedges in connection with the issuance of the 2017 Notes with the Option Counterparties. The 2017 Notes Hedges,which are cash-settled, are intended to reduce our exposure to potential cash payments that we are required to make upon conversion of the 2017 Notes inexcess of the principal amount of converted notes if our common stock price exceeds89Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)the conversion price. The aggregate cost of the 2017 Notes Hedges was $56.2 million and is accounted for as a derivative asset in accordance with ASC Topic815.The following table summarizes the fair value and the presentation in the consolidated balance sheet (in thousands): Location on consolidatedbalance sheetDecember 31, 2014December 31, 20132017 Notes HedgesOther assets$80,000$118,0002017 Notes Conversion DerivativeOther liabilities$76,000$112,000Neither the 2017 Notes Conversion Derivative nor the 2017 Notes Hedges qualify for hedge accounting, thus any change in the fair value of the derivativesis recognized immediately in the consolidated statements of operations. The following table summarizes the gain (loss) on changes in fair value (inthousands): Twelve MonthsEndedTwelve MonthsEnded December 31,December 31, 201420132017 Notes Hedges$(38,000)$56,0002017 Notes Conversion Derivative36,000(57,000)Net loss on changes in fair value$(2,000)$(1,000)In connection with the 2020 Notes Offering completed in February 2015, we issued $632.5 million of the 2020 Convertible Senior Notes, which generatednet proceeds of approximately $613 million. We used approximately $292 million of the net proceeds from the offering to repurchase approximately $240million aggregate principal amount of our outstanding 2017 Notes in privately negotiated transactions. We also settled all of the 2017 Notes Hedges andrepurchased all of the warrants associated with the 2017 Notes, generating net proceeds of approximately $10 million. Following these activities, we haveapproximately $60 million outstanding debt under the 2017 Notes. See Note 22 for further discussion of these transactions that happened subsequent to theDecember 31, 2014, balance sheet date.Derivatives not Designated as Hedging InstrumentsWe employ a derivative program using 30-day foreign currency forward contracts to mitigate the risk of currency fluctuations on our intercompanyreceivable and payable balances that are denominated in foreign currencies. These forward contracts are expected to offset the transactional gains and losseson the related intercompany balances. These forward contracts are not designated as hedging instruments under FASB ASC Topic 815. Accordingly, thechanges in the fair value and the settlement of the contracts are recognized in the period incurred in the accompanying consolidated statements of operations.At December 31, 2014 and 2013, we had no foreign currency contracts outstanding.12. Goodwill and IntangiblesChanges in the carrying amount of goodwill occurring during the year ended December 31, 2014, are as follows (in thousands): U.S.InternationalBioMimeticTotalGoodwill at December 31, 2013$92,134$24,746$1,383$118,263Biotech purchase prices allocation adjustment(3,672)(989)(47)$(4,708)Goodwill associated with 2014 acquisitions85,127——$85,127Foreign currency translation—(7,716)—$(7,716)Goodwill at December 31, 2014$173,589$16,041$1,336$190,966Goodwill 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 forimpairment at least annually. During the fourth quarter of 2014, we performed a qualitative assessment of goodwill for impairment and determined that it isnot more likely than not that the carrying value of our U.S., International and BioMimetic reporting units exceeded their respective fair values, indicatingthat goodwill was not impaired.During the quarter ended March 31, 2014, our management, including our chief executive officer, who is our chief operating decision maker, beganmanaging our operations as three operating segments: U.S.; International; and BioMimetic (international sales and associated expenses for Augment®products are included within the International segment), based on management's change to the way it monitors performance, aligns strategies, and allocatesresources. We determined that each of these operating segments represented a reportable segment. This change in segment reporting has also resulted in achange in reporting units for goodwill impairment measurement purposes. We determined that each operating segment represents a reporting unit, and we90Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)subsequently performed a goodwill impairment analysis, resulting in the reallocation of goodwill of $92.1 million, $24.7 million and $1.4 million to theU.S., International and BioMimetic reporting units, respectively. The goodwill allocated to each reporting unit was based on the relative fair value of each ofour reporting units as of the date of impairment analysis (January 31, 2014). Upon completion of this analysis, we determined that the fair value of ourreporting units exceeded their carrying values and, therefore, no impairment charge was necessary.During 2014, the purchase price allocation for Biotech was adjusted for the finalization of acquisition date fair value of intangible assets, contingentconsideration, accounts receivable and inventory, and the recognition of certain tax-related liabilities existing at the date of acquisition, which resulted in achange to the preliminary value of goodwill determined as of December 31, 2013. These adjustments to goodwill were allocated to each of the reporting unitsbased on the relative fair value of each reporting unit as of the date of impairment analysis.The components of our identifiable intangible assets, net are as follows (in thousands): December 31, 2014 December 31, 2013 Cost AccumulatedAmortization Cost AccumulatedAmortizationIndefinite life intangibles: IPRD technology$4,266 $4,266 Trademarks4,004 4,121 Total indefinite life intangibles8,270 8,387 Finite life intangibles: Distribution channels250 $194 250 $233 Completed technology33,253 9,185 16,714 5,702 Licenses8,234 1,637 3,633 1,303 Customer relationships27,946 4,636 15,578 2,371 Trademarks2,798 1,850 2,364 1,098 Non-compete agreements8,508 3,397 5,660 3,155 Other771 106 771 75Total finite life intangibles81,760 $21,005 44,970 $13,937 Total intangibles90,030 53,357 Less: Accumulated amortization(21,005) (13,937) Intangible assets, net$69,025 $39,420 Based on the total finite life intangible assets held at December 31, 2014, we expect to amortize approximately $10.1 million in 2015, $7.7 million in 2016,$7.1 million in 2017, $5.5 million in 2018, and $5.1 million in 2019.13. Accumulated Other Comprehensive Income (AOCI)Other comprehensive income (OCI) includes certain gains and losses that under GAAP are included in comprehensive income but are excluded from netincome as these amounts are initially recorded as an adjustment to stockholders’ equity. Amounts in OCI may be reclassified to net income upon theoccurrence of certain events.Our OCI is comprised of foreign currency translation adjustments, unrealized gains and losses on available-for-sale securities, and adjustments to ourminimum pension liability. Foreign currency translation adjustments are reclassified to net income upon sale or upon a complete or substantially completeliquidation of an investment in a foreign entity. Unrealized gains and losses on available-for-sale securities are reclassified to net income if we sell thesecurity before maturity or if the unrealized loss in a security is considered to be other-than-temporary.91Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)Changes in and reclassifications out of AOCI, net of tax, for the twelve months ended December 31, 2014 were as follows (in thousands): Currency TranslationAdjustment UnrealizedGain (loss) onMarketable Securities MinimumPensionLiabilityAdjustment TotalBalance December 31, 2013$17,610 $(1) $344 $17,953Other comprehensive income (loss), net of tax(17,840) 1 — (17,839)Reclassification to CTA and minimum pension liabilityadjustment 12,628 — (344) 2,284Balance December 31, 2014$2,398 $— $— $2,398 1 The balances of CTA and minimum pension liability adjustment within AOCI were written-off following the liquidation of our former Japanesesubsidiary as part of the sale of our OrthoRecon business. This was recorded within the gain on the sale of the OrthoRecon business within results ofdiscontinued operations.14. Income TaxesThe components of our income (loss) before income taxes are as follows (in thousands): Year Ended December 31, 2014 2013 2012U.S.$(242,998) $(230,975) $(4,043)Foreign(3,832) 572 658Income (loss) before income taxes$(246,830) $(230,403) $(3,385)The components of our provision (benefit) for income taxes are as follows (in thousands): Year Ended December 31, 2014 2013 2012Current (benefit) provision: U.S.: Federal$(48) $296 $(5,480)State198 85 (34)Foreign1,674 180 337Total current (benefit) provision1,824 561 (5,177)Deferred provision (benefit): U.S.: Federal(3,164) 48,257 5,179State(1,411) 884 (98)Foreign(3,583) 63 98Total deferred provision (benefit)(8,158) 49,204 5,179Total provision (benefit) for income taxes$(6,334) $49,765 $2 92Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)A reconciliation of the statutory U.S. federal income tax rate to our effective income tax rate is as follows: Year Ended December 31, 2014 2013 2012Income tax provision at statutory rate35.0 % 35.0 % 35.0 %State income taxes1.8 % 3.2 % 3.8 %Change in valuation allowance(15.9)% (51.9)% (19.7)%Foreign income tax rate differences0.2 % — % 12.9 %Other non-deductible expenses(0.2)% (0.1)% (6.1)%Transaction costs(1.1)% (0.8)% (21.2)%CVR Fair Market Value Adjustment(17.7)% 9.3 % — %Goodwill Impairment— % (17.5)% — %Other, net0.5 % 1.2 % (4.8)%Total2.6 % (21.6)% (0.1)%The significant components of our deferred income taxes as of December 31, 2014 and 2013 are as follows (in thousands): December 31, 2014 2013Deferred tax assets: Net operating loss carryforwards$131,986 $100,361General business credit carryforward3,696 3,181Reserves and allowances27,334 40,789Stock-based compensation expense7,942 7,852Convertible debt notes and conversion option31,491 46,100Other7,418 6,070Valuation allowance(171,392) (134,263) Total deferred tax assets38,475 70,090 Deferred tax liabilities: Depreciation1,915 13,863Intangible assets9,977 9,071Convertible note bond hedge31,200 46,020Other3,287 10,136 Total deferred tax liabilities46,379 79,090 Net deferred tax liabilities$(7,904) $(9,000)At December 31, 2014, we had net operating loss carryforwards for U.S. federal income tax purposes of approximately $315.2 million, of whichapproximately $7.2 million related to equity compensation deductions, for which when realized, the resulting benefit will be credited to stockholder’sequity. The federal net operating losses begin to expire in 2017 and extend through 2034. State net operating losses carryforwards at December 31, 2014totaled approximately $196.2 million, which begin to expire in 2017 and extend through 2034. Additionally, we had general business credit carryforwards ofapproximately $3.7 million, which begin to expire in 2017 and extend through 2034. At December 31, 2014, we had foreign net operating loss carryforwardsof approximately $42.0 million, the majority of which do not expire.We recognized income tax expense for valuation allowance increase of $38.8 million during the year ended December 31, 2014, primarily related toadditional net operating losses incurred in the U.S. At December 31, 2014 and December 31, 2013, we had a valuation allowance of $171.4 million and$134.3 million, respectively, related to certain U.S. and foreign deferred tax assets. Management believes it is more likely than not that the remainingdeferred tax assets will be fully realized.It is our current practice and intention to reinvest the earnings of our non-U.S. subsidiaries in those operations. Therefore, we do not provide for deferred taxeson the excess of the financial reporting over the tax basis in our investments in foreign subsidiaries that are essentially permanent in duration. We wouldrecognize a deferred income tax liability if we were to determine that such earnings are no longer indefinitely reinvested. At December 31, 2014,undistributed earnings of our foreign subsidiaries amounted93Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)to approximately $16 million. The determination of the amount of unrecognized deferred tax liability on these undistributed earnings is not practicable.As of December 31, 2014, our unrecognized tax benefits totaled $4.4 million. The total amount of net unrecognized tax benefits that, if recognized, wouldaffect the tax rate was $3.0 million at December 31, 2014. Our U.S. federal income taxes represent the substantial majority of our income taxes, and our 2009,2010, and 2011 U.S. federal income tax returns are currently under examination by the Internal Revenue Service. While we believe that we are adequatelyaccrued for possible adjustments, the final resolution of this examination cannot be determined at this time and could result in a final settlement that differsfrom current estimates. It is therefore possible that our unrecognized tax benefits could change in the next twelve months.A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:Balance at January 1, 2014$4,702Additions for tax positions related to current year354Additions for tax positions of prior years2,362Reductions for tax positions of prior years(2,700)Settlements(30)Foreign currency translation(249)Balance at December 31, 2014$4,439We accrue interest required to be paid by the tax law for the underpayment of taxes on the difference between the amount claimed or expected to be claimedon the tax return and the tax benefit recognized in the financial statements. Management has made the policy election to record this interest as interestexpense and penalties, if incurred, would be recognized as penalty expense. As of December 31, 2014, accrued interest and penalties related to ourunrecognized tax benefits totaled approximately $0.8 million.We file numerous consolidated and separate company income tax returns in the U.S. and in many foreign jurisdictions. We are no longer subject to foreignincome tax examinations by tax authorities in significant jurisdictions for years before 2007. With few exceptions, we are subject to U.S. federal, state andlocal income tax examinations for years 2011 through 2013. However, tax authorities have the ability to review years prior to these to the extent that weutilize tax attributes carried forward from those prior years.15. Earnings Per ShareFASB ASC Topic 260, Earnings Per Share, requires the presentation of basic and diluted earnings per share. Basic earnings per share is calculated based onthe weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is calculated to include any dilutive effectof our common stock equivalents. Our common stock equivalents consist of stock options, non-vested shares of common stock, stock-settled phantom stockunits, restricted stock units, 2014 Notes, and warrants. The dilutive effect of the stock options, non-vested shares of common stock, stock-settled phantomstock units, restricted stock units, and warrants is calculated using the treasury-stock method. The dilutive effect of the 2014 Notes is calculated by applyingthe “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 theperiod. The 2014 Notes matured on December 1, 2014, see Note 9. During the years ended December 31, 2013 and 2012, the 2014 Notes had an anti-dilutiveeffect on earnings per share and we therefore excluded from the dilutive shares calculation. In addition, approximately 1.3 million, 0.8 million, and 0.3million common stock equivalents have been excluded from the computation of diluted net loss per share for the years ended December 31, 2014, 2013, and2012, respectively, because their effect is anti-dilutive as a result of our net loss from continuing operations in those periods. During the years endedDecember 31, 2013 and 2012, the warrants were excluded from diluted shares outstanding because the exercise price exceeded the average market price ofour common stock.The weighted-average number of common shares outstanding for basic and diluted earnings per share purposes is as follows (in thousands): Year Ended December 31, 2014 2013 2012Weighted-average number of common shares outstanding — basic49,758 45,265 38,769Common stock equivalents— — 317Weighted-average number of common shares outstanding — diluted49,758 45,265 39,08694Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)The following potential common shares were excluded from the computation of diluted earnings per share, as their effect would have been anti-dilutive (inthousands): Year Ended December 31, 2014 2013 2012Stock options672 2,763 2,854Non-vested shares, restricted stock units, and stock-settled phantom stock units9 197 2902014 Notes— 115 633Warrants— 11,794 11,79416. Capital StockWe are authorized to issue up to 100,000,000 shares of voting common stock. We have 48,673,304 shares of voting common stock available for futureissuance at December 31, 2014.17. Stock-Based Compensation PlansWe have three stock-based compensation plans, which are described below. Amounts recognized in the consolidated financial statements with respect tothese plans are as follows: Year Ended December 31, 2014 2013 2012Total cost of share-based payment plans$11,287 $11,912 $7,811Amounts capitalized as inventory(66) (467) (689)Amortization of capitalized amounts266 513 717Charged against income before income taxes11,487 11,958 7,839Amount of related income tax benefit recognized in income— (3,945) (2,940)Impact to net loss from continuing operations$11,487 $8,013 $4,899Impact to net income from discontinued operations8,845 2,320 2,308Impact to net (loss) income$20,332 $10,333 $7,207Impact to basic earnings per share, continuing operations$0.23 $0.18 $0.13Impact to basic earnings per share$0.41 $0.23 $0.19Impact to diluted earnings per share, continuing operations$0.23 $0.18 $0.13Impact to diluted earnings per share$0.41 $0.23 $0.18During 2013, in connection with the BioMimetic acquisition, we recognized $2.2 million of stock-based compensation expense related to the incrementalfair value of replacement awards attributed to precombination service.As of December 31, 2014, we had $19.8 million of total unrecognized compensation cost related to unvested stock-based compensation arrangementsgranted to employees retained following the sale of the OrthoRecon business. This cost is expected to be recognized over a weighted-average period of 2.7 years.Equity Incentive PlansOn 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 EquityIncentive Plan (the Plan) was adopted on May 13, 2009, which was subsequently amended and restated on May 13, 2010 and May 14, 2013. The Planauthorizes us to grant stock options and other stock-based awards, such as non-vested shares of common stock, with respect to up to 15,417,051 shares ofcommon stock, of which full value awards (such as non-vested shares) are limited to 3,754,555 shares. Under the Plan, stock based compensation awardsgenerally are exercisable in increments of 25% annually on each of the first through fourth anniversaries of the date of grant. All of the options issued underthe plan expire after 10 years. These awards are recognized on a straight-line basis over the requisite service period, which is generally 4 years. As ofDecember 31, 2014, there were 2,517,651 shares available for future issuance under the Plan, of which full value awards are limited to 1,258,825 shares.95Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)Stock optionsWe estimate the fair value of stock options using the Black-Scholes valuation model. The Black-Scholes option-pricing model requires the input ofestimates, including the expected life of stock options, expected stock price volatility, the risk-free interest rate and the expected dividend yield. Theexpected life of options is estimated based on historical option exercise and employee termination data. The expected stock price volatility assumption wasestimated based upon historical volatility of our common stock. The risk-free interest rate was determined using U.S. Treasury rates where the term isconsistent 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 doingso 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 fromthose estimates. We use historical data to estimate pre-vesting forfeitures and record stock-based compensation expense only for those awards that areexpected to vest. The fair value of stock options is amortized on a straight-line basis over the respective requisite service period, which is generally thevesting period.The weighted-average grant date fair value of stock options granted to employees in 2014, 2013, and 2012 was $9.98 per share, $8.60 per share, and $7.89per share, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option valuation model using thefollowing assumptions: Year Ended December 31, 2014 2013 2012Risk-free interest rate1.5% - 1.8% 0.1% - 1.4% 0.5% - 1.0%Expected option life6 years 6 years 6 yearsExpected price volatility31% 36% 40%A summary of our stock option activity during 2014 for employees retained following the sale of the OrthoRecon business is as follows: Shares(000’s) Weighted-AverageExercisePrice Weighted-AverageRemainingContractual Life Aggregate IntrinsicValue*($000’s)Outstanding at December 31, 20133,369 $22.36 Granted853 30.15 Exercised(538) 21.16 Forfeited or expired(167) 26.76 Outstanding at December 31, 20143,517 $24.22 6.85 $12,632Exercisable at December 31, 20141,709 $22.03 4.98 $8,899________________________________*The aggregate intrinsic value is calculated as the difference between the market value of our common stock as of December 31, 2014, and the exerciseprice of the shares. The market value as of December 31, 2014 is $26.87 per share, which is the closing sale price of our common stock reported fortransactions effected on the Nasdaq Global Select Market on December 31, 2014.The total intrinsic value of options exercised during 2014, 2013, and 2012 was $5.3 million, $1.4 million, and $0.2 million, respectively.A summary of our stock options outstanding and exercisable at December 31, 2014, for employees retained following the sale of the OrthoRecon business isas follows (shares in thousands): Options Outstanding Options ExercisableRange of Exercise Prices NumberOutstanding Weighted-AverageRemainingContractual Life Weighted-AverageExercise Price Number Exercisable Weighted-AverageExercise Price$2.00 — $16.00 287 5.9 $13.62 241 $13.37$16.01 — $24.00 1,213 5.8 21.17 821 20.91$24.01 — $35.87 2,017 7.6 27.56 647 26.69 3,517 6.9 $24.22 1,709 $22.0396Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)Inducement Stock Options.On occasion, we grant stock options under an inducement stock option agreement, in order to induce candidates to commence employment with us as amember of our executive management team. These options vest over a service period ranging from three to four years.A summary of our inducement grant stock option activity during 2014 is as follows: Shares(000’s) Weighted-AverageExercisePrice Weighted-AverageRemainingContractual Life Aggregate IntrinsicValue*($000’s)Outstanding at December 31, 2013940 $17.21 Granted— — Exercised(25) 17.35 Forfeited or expired(25) 17.35 Outstanding at December 31, 2014890 $17.20 6.99 $8,599Exercisable at December 31, 2014774 $16.73 6.88 $7,843________________________________*The aggregate intrinsic value is calculated as the difference between the market value of our common stock as of December 31, 2014, and the exerciseprice of the shares. The market value as of December 31, 2014 is $26.87 per share, which is the closing sale price of our common stock reported fortransactions effected on the Nasdaq Global Select Market on December 31, 2014.A summary of our stock options outstanding and exercisable at December 31, 2014, is as follows (shares in thousands): Options Outstanding Options ExercisableRange of Exercise Prices NumberOutstanding Weighted-AverageRemainingContractual Life Weighted-AverageExercise Price Number Exercisable Weighted-AverageExercise Price$2.00 — $16.00 287 5.9 $13.62 241 $13.37$16.01 — $24.00 2,103 6.3 19.49 1,594 18.88$24.01 — $35.87 2,017 7.6 27.56 647 26.69 4,407 6.9 $22.80 2,482 $20.38Non-vested shares and stock settled phantom stock units and restricted stock unitsWe calculate the grant date fair value of non-vested shares of common stock, stock settled phantom stock units and restricted stock units using the closingsale 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 insubsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting forfeitures and record stock-basedcompensation expense only for those awards that are expected to vest.Under the Plan, we granted 264,000, 223,000, and 216,000 non-vested shares of common stock, stock settled phantom stock units and restricted stock unitsto employees with weighted-average grant-date fair values of $30.04 per share, $24.66 per share, and $21.22 per share during 2014, 2013, and 2012,respectively. The fair value of these shares will be recognized on a straight-line basis over the respective requisite service period, which is generally thevesting period.During 2014, 2013, and 2012, we granted a negligible amount of non-vested shares to non-employees.97Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)A summary of our non-vested shares of common stock activity during 2014 is as follows: Shares(000’s) Weighted-AverageGrant-DateFair Value AggregateIntrinsic Value*($000’s)Non-vested at December 31, 2013456 $21.69 Granted264 30.04 Vested(204) 21.23 Forfeited(23) 24.41 Non-vested at December 31, 2014493 $26.23 $13,237___________________*The aggregate intrinsic value is calculated as the market value of our common stock as of December 31, 2014. The market value as of December 31, 2014is $26.87 per share, which is the closing sale price of our common stock reported for transactions effected on the Nasdaq Global Select Market onDecember 31, 2014.The total fair value of shares vested during 2014, 2013, and 2012 was $5.4 million, $6.5 million, and $5.6 million, respectively.Stock compensation held by employees that transferred on the sale of OrthoRecon businessAs part of the divestiture of our OrthoRecon business to MicroPort, we modified stock compensation awards held by employees assigned to MicroPort toaccelerate vesting for unvested stock compensation awards, as an incentive to induce each employee to accept and continue employment with MicroPort,contingent upon the closing of the sale. On January 12, 2014, all unvested stock compensation awards held by these former 65 employees were vested, whichwas comprised of approximately 500,000 non-vested options with a weighted-average exercise price of $22.50, and 266,000 non-vested shares. Theincremental cost associated with the modified stock compensation totaled $8.8 million, and was recognized as a reduction to our gain realized on the sale ofthe OrthoRecon business in the first quarter of 2014. There were no outstanding stock options held by these former employees as of December 31, 2014.Employee Stock Purchase PlanOn May 30, 2002, our shareholders approved and adopted the 2002 Employee Stock Purchase Plan, which was subsequently amended and restated on May14, 2013 (the ESPP). The ESPP authorizes us to issue up to 400,000 shares of common stock to our employees who work at least 20 hours per week. Under theESPP, 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 andending 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% of the lower of its beginning-of-period or end-of-period market price.Under the ESPP, we sold to employees approximately 22,000, 23,000, and 25,000 shares in 2014, 2013, and 2012, respectively, with weighted-average fairvalues of $8.18, $6.81, and $5.93 per share, respectively. As of December 31, 2014, there were 172,800 shares available for future issuance under the ESPP.During 2014, 2013, and 2012, we recorded nominal amounts of non-cash, stock-based compensation expense related to the ESPP.In applying the Black-Scholes methodology to the purchase rights granted under the ESPP, we used the following assumptions: Year Ended December 31, 2014 2013 2012Risk-free interest rate0.3% - 0.6% 0.1% - 0.4% 0.1% - 0.2%Expected option life6 months 6 months 6 monthsExpected price volatility31% 36% 40%18. Employee Benefit PlansWe 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% forthe next 2% of an employee’s annual compensation. Employees vest in our contributions after three years of service. Our expense related to the planrecognized within results of continuing operations was $1.6 million in 2014, $1.2 million in 2013, and 1.0 million in 2012.98Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)19. Commitments and ContingenciesOperating LeasesWe lease certain equipment and office space under non-cancelable operating leases. Rental expense under operating leases approximated $7.1 million, $8.0million, and $5.7 million for the years ended December 31, 2014, 2013, and 2012, 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, 2014 (in thousands):2015$6,81920164,827201784020183612019118Thereafter180 $13,145Portions of our payments for operating leases are denominated in foreign currencies and were translated in the tables above based on their respective U.S.dollar exchange rates at December 31, 2014. These future payments are subject to foreign currency exchange rate risk.Purchase ObligationsWe have entered into certain supply agreements for our products, which include minimum purchase obligations. We paid approximately $2.0 million and$3.5 million during the years ended December 31, 2014 and 2013, respectively, under those supply agreements. As of December 31, 2014, we are notobligated under any supply agreements for minimum purchase obligations.Legal ContingenciesAs described below, our business is subject to various contingencies, including patent and other litigation, product liability claims and a governmentinquiry. These contingencies could result in losses, including damages, fines, or penalties, any of which could be substantial, as well as criminalcharges. Although such matters are inherently unpredictable, and negative outcomes or verdicts can occur, we believe we have significant defenses in all ofthem, are vigorously defending all of them, and do not believe any of them will have a material adverse effect on our financial position. However, we couldincur judgments, pay settlements, or revise our expectations regarding the outcome of any matter. Such developments, if any, could have a material adverseeffect on our results of operations in the period in which applicable amounts are accrued, or on our cash flows in the period in which amounts are paid.Our contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss or the measurement of a loss can be complex.We have accrued for losses that are both probable and reasonably estimable. Unless otherwise indicated, we are unable to estimate the range of reasonablypossible loss in excess of amounts accrued. Our assessment process relies on estimates and assumptions that may prove to be incomplete or inaccurate.Unanticipated events and circumstances may occur that could cause us to change our estimates and assumptions.Governmental InquiriesOn September 29, 2010, we entered into a five year Corporate Integrity Agreement (CIA) with the Office of the Inspector General of the United StatesDepartment of Health and Human Services (OIG-HHS). The CIA was filed as Exhibit 10.2 to our current report on Form 8-K filed on September 30, 2010. TheCIA will expire on September 29, 2015.The CIA imposes on us certain obligations to maintain compliance with U.S. healthcare laws, regulations and other requirements. Our failure to do so couldexpose us to significant liability, including, but not limited to, exclusion from federal healthcare program participation, including Medicaid and Medicare,potential prosecution, civil and criminal fines or penalties, as well as additional litigation cost and expense.Both we and MicroPort, who purchased our OrthoRecon business in January 2014, will continue to be subject to the CIA.In addition to the U.S. Attorney's Office (USAO) and OIG-HHS, other governmental agencies, including state authorities, could conduct investigations orinstitute proceedings that are not precluded by the CIA. In addition, the matters that gave rise to the CIA could increase our exposure to lawsuits by potentialwhistleblowers, including under the federal false claims acts, based on new theories or allegations arising from these matters.99Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)On August 3, 2012, we received a subpoena from the USAO for the Western District of Tennessee requesting records and documentation relating to ourPROFEMUR® series of hip replacement devices. The subpoena covers the period from January 1, 2000 to August 2, 2012. We continue to respond to thesubpoena.Patent LitigationIn 2011, Howmedica Osteonics Corp. and Stryker Ireland, Ltd. (collectively, “Stryker”), each a subsidiary of Stryker Corporation, filed a lawsuit againstWright Medical Technology, Inc. (WMT) in the United States District Court for the District of New Jersey alleging that we infringed Stryker's U.S. Patent No.6,475,243 related to our LINEAGE® Acetabular Cup System and DYNASTY® Acetabular Cup System. The lawsuit seeks an order of infringement, injunctiverelief, unspecified damages, and various other costs and relief. On July 9, 2013, the Court issued a claim construction ruling. Under the Court's claimconstruction ruling, we do not believe these hip products infringe the asserted patents. In filings with the Court, Stryker has conceded that under the court’sclaim construction rulings it can no longer pursue its infringement claims. Stryker has asked the court to dismiss the case so it may pursue an appeal. OnNovember 25 2014, the Court entered judgment of non-infringement in our favor. On January 7, 2015, Howmedica and Stryker filed a notice of appeal to theCourt of Appeals for the Federal Circuit.In 2012, Bonutti Skeletal Innovations, LLC (Bonutti) filed a patent infringement lawsuit against us in the United States Court for the District of Delaware. InJanuary 2014, we filed a request with the U.S. Patent and Trademark Office for Inter Partes Review (IPR) of the Bonutti patents. On April 7, 2014, the Courtstayed the case pending outcome of the IPR. Bonutti originally alleged that the Link Sled Prosthesis infringes U.S. Patent 6,702,821. The Link SledProsthesis is a product we distributed under a distribution agreement with LinkBio Corp, which expired on December 31, 2013. In January 2013, Bonuttiamended its complaint, alleging that the ADVANCE® knee system, including ODYSSEY® instrumentation, infringes U.S. Patent 8,133,229, and that theADVANCE® knee system, including ODYSSEY® instrumentation and PROPHECY® guides, infringes U.S. Patent 7,806,896, which was issued on October 5,2010. All of the claims of the asserted patents are directed to surgical methods for minimally invasive surgery. As a result of the arguments submitted in theIPR, Bonutti abandoned the claims subject to the IPR from U.S. Patent 8,133,229, leaving one claim from U.S. Patent 7,806,896 still pending before thePatent Office Board that administers IPR’s. On February 18, 2015, the Patent Office Board held that remaining claim invalid.In June 2013, Orthophoenix filed a patent lawsuit against us in the United States District Court for the District of Delaware alleging that surgical methodsusing the X-REAM® product infringe two patents. In June 2014, we filed a request for IPR with the U.S. Patent and Trademark Office. In October 2014, theCourt stayed the case pending outcome of the IPR. On December 16, 2014, the Patent Office Board denied our petitions requesting IPR. As a result, theDistrict Court will lift the stay, and we will continue with our defense.In June 2013, Anglefix filed suit in the United States District Court for the Western District of Tennessee, alleging that our ORTHOLOC® products infringeAnglefix’s asserted patent. On April 14, 2014, we filed a request for IPR with the U.S. Patent and Trademark Office. In October 2014, the Court stayed the casepending outcome of the IPR.In September 2013, ConforMIS, Inc. filed suit against us in the United States District Court for the District of Massachusetts, alleging that our PROPHECY®knee and ankle systems infringe four ConforMIS’ patents. On February 19, 2014, ConforMIS filed an amended complaint asserting four additional patentsagainst us relating to alleged infringement by our PROPHECY® knee and ankle systems and naming MicroPort Orthopedics as an additional defendant. OnOctober 9, 2014, the parties jointly advised the Court that they had reached an agreement in principle to settle the matter. In connection with the reportedsettlement, we recorded expenses of $0.9 million in continuing operations and $13.8 million in discontinued operations. In addition, we recorded a $4.6million asset in connection with the fully paid non-exclusive foot and ankle license as part of the reported settlement. $10.7 million of the $13.8 millionrecorded in discontinued operations reflects estimated royalty payments based on future sales by MicroPort Orthopedics, which will be paid through 2026.The parties are now in the process of finalizing the settlement documentation.In February 2014, Biomedical Enterprises, Inc. filed suit against Solana Surgical, LLC in the United States District Court for the Western District of Texasalleging Solana's FuseForce Fixation system infringes U.S. Patent No. 8,584,853 entitled “Method and Apparatus for an Orthopedic Fixation System.” OnFebruary 20, 2015 we filed a request for IPR with the U.S. Patent and Trademark Office.On September 23, 2014, Spineology filed a patent infringement lawsuit, Case No. 0:14-cv-03767, in the U.S. District Court in Minnesota, alleging thatWright’s X-REAM® bone reamer infringes U.S. Patent No. RE42,757 entitled “EXPANDABLE REAMER.” Plaintiff has not yet served the complaint. InJanuary 2015, Spineology filed a new complaint just prior to its first complaint expiring. The new complaint adds claims of willful infringement. Spineologyhas not yet served the new complaint.100Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)On January 13, 2015, we received a notice from Corin Limited claiming a portion of the INFINITY® Total Ankle System infringes their patent rights inFrance, Germany, Italy, Spain, the Netherlands, and the United Kingdom. We are currently investigating the merits of this claim. Subject to the provisions of the asset purchase agreement with MicroPort for the sale of our OrthoRecon business, we will continue to be responsible fordefense of pre-existing patent infringement cases relating to our OrthoRecon business, and for resulting liabilities, if any.Product LiabilityWe have received claims for personal injury against us associated with fractures of our PROFEMUR® long titanium modular neck product (PROFEMUR®Claims). The overall fracture rate for the product is low and the fractures appear, at least in part, to relate to patient demographics. Beginning in 2009, webegan offering a cobalt-chrome version of our PROFEMUR® modular neck, which has greater strength characteristics than the alternative titanium version.Historically, we have reflected our liability for these claims as part of our standard product liability accruals on a case-by-case basis. However, during thequarter ended September 30, 2011, as a result of an increase in the number and monetary amount of these claims, management estimated our liability topatients in North America who have previously required a revision following a fracture of a PROFEMUR® long titanium modular neck, or who may require arevision in the future. Management has estimated that this aggregate liability ranges from approximately $16 million to $26 million. Any claims associatedwith this product outside of North America, or for any other products, will be managed as part of our standard product liability accruals.Due to the uncertainty within our aggregate range of loss resulting from the estimation of the number of claims and related monetary payments, we haverecorded a liability of $16 million, which represents the low-end of our estimated aggregate range of loss. We have classified $10 million of this liability ascurrent in “Accrued expenses and other current liabilities” and $6.0 million as non-current in “Other liabilities” on our consolidated balance sheet. Weexpect to pay the majority of these claims within the next 3 years.We have maintained product liability insurance coverage on a claims-made basis. During the quarter ended March 31, 2013, we received a customaryreservation of rights from our primary product liability insurance carrier asserting that present and future claims related to fractures of our PROFEMUR®titanium modular neck hip products and which allege certain types of injury (Modular Neck Claims) would be covered as a single occurrence under thepolicy year the first such claim was asserted. The effect of this coverage position would be to place Modular Neck Claims into a single prior policy year inwhich applicable claims-made coverage was available, subject to the overall policy limits then in effect. Management agrees with the assertion that theModular Neck Claims should be treated as a single occurrence, but notified the carrier that it disputed the carrier's selection of available policy years. Duringthe second quarter of 2013, we received confirmation from the primary carrier confirming their agreement with our policy year determination. Based on ourinsurer's treatment of Modular Neck Claims as a single occurrence, we increased our estimate of the total probable insurance recovery related to ModularNeck Claims by $19.4 million, and recognized such additional recovery as a reduction to our selling, general and administrative expenses for the three-months ended March 31, 2013, within results of discontinued operations. In the quarter ended June 30, 2013, we received payment from the primaryinsurance carrier of $5 million. In the quarter ended September 30, 2013, we received payment of $10 million from the next insurance carrier in the tower. Asof December 31, 2014 our insurance receivable related to Modular Neck Claims totals $25 million, which consists of $3 million associated with our recordedliability for current and future Modular Neck Claims outstanding, and $22 million for cash spending to date associated with defense and settlement costs. Wehave classified $25 million within current receivables. We have requested, but not yet received, payment of this amount from the third insurance carrier in thetower for that policy period.During the quarter ended September 30, 2013, we reached the maximum insurance coverage for Modular Neck Claims of $40 million, when previousspending on legal defense costs and claim settlements are combined with our estimated product liability for future settlements. As a result, we recognizedapproximately $11 million of expense within results from discontinued operations for 2014 for legal expenses and adjustments to our estimated liabilities forfuture settlements recognized in excess of the $40 million insurance recovery limit. Future expenses associated with defense costs and revisions to ourestimated product liability will be recognized as incurred within the results of discontinued operations. As noted above, our insurance receivable for cashspending is $22 million out of the remaining $25 million insurance receivable. We anticipate actual cash spending may exceed this maximum within thenext year.Claims for personal injury have also been made against us associated with our metal-on-metal hip products (primarily our CONSERVE® product line). Thepre-trial management of certain of these claims has been consolidated in the federal court system under multi-district litigation, and certain other claims instate courts in California, collectively the “Consolidated Metal-on-Metal Claims,” as further discussed in Part I Item 3 of this Annual Report. The number ofthese lawsuits presently exceeds 1,000. We101Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)have also entered into an excess of 600 so called "tolling agreements" with potential claimants who have not yet filed suit. We believe we have data thatsupports the efficacy and safety of our metal-on-metal hip products. While continuing to dispute liability, we are participating in court supervised non-binding mediation in the multi-district federal court litigation. This mediation is continuing. The supervising judges in the federal and California stateconsolidated proceedings have set bellwether trial dates in March and November 2015 respectively, although the March 2015 trial date was recentlyextended by the Court to a date to be announced.We have maintained product liability insurance coverage on a claims-made basis. During the quarter ended September 30, 2012, we received a customaryreservation of rights from our primary product liability insurance carrier asserting that certain present and future claims which allege certain types of injuryrelated to our CONSERVE® metal-on-metal hip products (CONSERVE® Claims) would be covered as a single occurrence under the policy year the first suchclaim was asserted. The effect of this coverage position would be to place CONSERVE® Claims into a single prior policy year in which applicable claims-made coverage was available, subject to the overall policy limits then in effect. Management agrees that there is insurance coverage for theCONSERVE® Claims, but has notified the carrier that it disputes the carrier's characterization of the CONSERVE® Claims as a single occurrence.Management has recorded an insurance receivable for the probable recovery of spending in excess of our retention for a single occurrence. As ofDecember 31, 2014, this receivable totaled $13.8 million, and is solely related to defense costs incurred through December 31, 2014. However, the amountwe ultimately receive may differ depending on the final conclusion of the insurance policy year or years and the number of occurrences. We believe ourcontracts with the insurance carriers are enforceable for these claims and, therefore, we believe it is probable that we will receive recoveries from our insurancecarriers. However, our insurance carriers could still ultimately deny coverage for some or all of our insurance claims.Every metal-on-metal hip case involves fundamental issues of science and medicine that often are uncertain, that continue to evolve, and which presentcontested facts and issues that can differ significantly from case to case. Such contested facts and issues include medical causation, individual patientcharacteristics, surgery specific factors, and the existence of actual, provable injury. Given these complexities, we do not believe a loss is probable. Althoughwe continue to contest liability, based upon currently available information, we estimate a reasonably possible range of liability for the Consolidated Metal-on-Metal Claims, before insurance recoveries, averaging from zero to $250,000 per case.Based upon the information we have at this time, we do not believe our liabilities, if any, in connection with these matters will exceed our availableinsurance. However, as described below, we are currently litigating coverage issues with certain of our carriers. As the litigation moves forward andcircumstances continue to develop, our belief we will be able to resolve the Consolidated Metal-on-Metal Claims within available insurance coverage couldchange, which could materially impact our results of operations and financial position. Further, and notwithstanding our present belief we will be able toresolve these Claims within available insurance proceeds, we would consider contributing a limited amount to the funding of an acceptable, comprehensive,mediated settlement among claimants and insurers. To this end, we have indicated a willingness to contribute up to $30 million to achieve such acomprehensive settlement. Due to continuing uncertainty around (i) whether a multi-party comprehensive settlement can be achieved, (ii) the outcome of ourcoverage litigation with insurers which could impact the ability to reach a settlement and (iii) the case by case outcomes of any Metal-on-Metal claimsultimately litigated (and which we expect to contest vigorously), we do not believe a loss is probable and, therefore, no amounts have been accrued.In June 2014, St. Paul Surplus Lines Insurance Company (“Travelers”), which was an excess carrier in our coverage towers across multiple policy years, filed adeclaratory judgment action in Tennessee state court naming us and certain of our other insurance carriers as defendants and asking the court to rule on therights and responsibilities of the parties with regard to the CONSERVE® Claims. Among other things, Travelers appears to dispute our contention that theCONSERVE® Claims arise out of more than a single occurrence thereby triggering multiple policy periods of coverage. Travelers further seeks adetermination as to the applicable policy period triggered by the alleged single occurrence. We filed a separate lawsuit in state court in California fordeclaratory judgment against certain carriers and breach of contract against the primary carrier, and have moved to dismiss or stay the Tennessee action on anumber of grounds, including that California is the most appropriate jurisdiction. During the third quarter of 2014, the California Court granted Travelers'motion to stay our California action.In February 2014, Biomet, Inc. (Biomet) announced it had reached a settlement in the multi-district litigation involving its own metal-on-metal hip products.The terms announced by Biomet include: (i) an expected base settlement amount of $200,000; (ii) an expected minimum settlement amount of $20,000; (iii)no payments to plaintiffs who did not undergo a revision surgery; and102Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)(iv) a total settlement amount expected to be within Biomet’s aggregate insurance coverage. We believe our situation involves facts and circumstances thatdiffer significantly from the Biomet cases.In addition to the Consolidated Metal-on-Metal Claims discussed above, there are currently certain other pending claims related to our metal-on-metal hipproducts for which we are accounting in accordance with our standard product liability accrual methodology on a case by case basis.Certain liabilities associated with the OrthoRecon business, including product liability claims associated with hip and knee products sold prior to theclosing, were not assumed by MicroPort. Liabilities associated with these product liability claims, including legal defense, settlements and judgments,income associated with product liability insurance recoveries, and changes to any contingent liabilities associated with the OrthoRecon business have beenreflected within results of discontinued operations, and we will continue to reflect these within results of discontinued operations in future periods. MicroPortis responsible for product liability claims associated with products it sells after the closing.Employment LitigationIn 2012, two former employees, Frank Bono and Alicia Napoli, each filed separate lawsuits against WMT in the Chancery Court of Shelby County,Tennessee, which asserted claims for retaliatory discharge and breach of contract based upon his or her respective separation pay agreement. In addition, Mr.Bono and Ms. Napoli each asserted a claim for defamation related to the press release issued at the time of their terminations and a wrongful discharge claimalleging violation of the Tennessee Public Protection Act. Mr. Bono and Ms. Napoli each claimed that he or she was entitled to attorney fees in addition toother unspecified damages. On October 23, 2013, Ms. Napoli moved to voluntary dismiss her lawsuit, without prejudice. On April 4, 2014, Ms. Napoli refiledher case in the United States District Court for the Eastern District of Missouri. In July 2014, we were successful in having the case that was refiled in Missouritransferred to the U.S. District Court for the Western District of Tennessee.OtherIn addition to those noted above, we are subject to various other legal proceedings, product liability claims, corporate governance, and other matters whicharise in the ordinary course of business.20. Segment DataDuring the quarter ended March 31, 2014, our management, including our chief executive officer, who is our chief operating decision maker, beganmanaging our operations as three operating business segments: U.S.; International; and BioMimetic, based on management's change to the way it monitorsperformance, aligns strategies, and allocates resources results in a change in our reportable segments. We determined that each of these operating segmentsrepresented a reportable segment.Our U.S. and International segments represent the commercial, administrative and research & development activities dedicated to the respective geographies.The BioMimetic segment represents the administrative and research & development activities of the acquired BioMimetic business (international sales andassociated expenses for Augment® products are included within the International segment). The Corporate category shown in the table below primarilyreflects general and administrative expenses not specifically associated with the U.S., International or BioMimetic segments. These non-allocated corporateexpenses relate to global administrative expenses that support all segments, including salaries and benefits of executive officers and expenses such as:information technology administration and support; corporate headquarters; legal, compliance, and corporate finance functions; insurance; and all stock-based compensation.Management measures segment profitability using an internal operating performance measure that excludes the impact of inventory step-up amortization,charges associated with distributor conversions and related non-competes, and due diligence, transaction and transition costs associated with acquisitions.Net sales by product line and by geographic region are as follows (in thousands):103Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued) Year Ended December 31, 2014 2013 2012U.S. Foot and Ankle148,631 115,642 99,403Upper Extremity15,311 17,423 17,170Biologics45,494 42,561 47,459Other2,641 2,022 2,079Total U.S.212,077 177,648 166,111 International Foot and Ankle47,001 35,020 23,493Upper Extremity11,312 7,240 7,808Biologics20,590 17,231 13,036Other7,047 5,191 3,657Total International85,950 64,682 47,994 Total Sales$298,027 $242,330 $214,105Our principal geographic regions consist of the United States, Europe (which includes the Middle East and Africa), and Other (which principally representsAsia, Australia, Canada, and Latin America). The following table presents net sales by geographic area for the twelve months ended December 31, 2014 and2013 (in thousands): Year Ended December 31, 2014 2013 2012Net sales by geographic region: United States$212,077 $177,648 $166,111Europe48,991 31,210 22,044Other36,959 33,472 25,950Total$298,027 $242,330 $214,105No single foreign country accounted for more than 10% of our total net sales during 2014, 2013, or 2012.Assets in the U.S., International and BioMimetic segments are those assets used exclusively in the operations of each business segment or allocated whenused jointly. Assets in the Corporate category are principally cash and cash equivalents, marketable securities, derivative asset, property, plant andequipment associated with our corporate headquarters, assets associated with OrthoRecon insurance receivables, and assets associated with income taxes.Total assets by business segment as of December 31, 2014 are as follows (in thousands): Year Ended December 31, U.S.InternationalBioMimeticCorporateTotalTotal assets$450,055$17,924$94,412$330,285$892,676104Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)Selected financial information related to our segments is presented below for the twelve months ended December 31, 2014, 2013 and 2012 (in thousands): Year ended December 31, 2014 U.S.InternationalBioMimeticCorporateTotalSales$212,077$85,950$—$—$298,027Depreciation expense9,7073,0464325,27118,456Amortization expense5,6562,17830718,142Segment operating income (loss)23,074(5,366)(12,033)(67,908)(62,233)Other: Inventory step-up amortization 1,535Distributor conversion and non-compete charges 2,071Patent Dispute settlement 900Management changes 1,203Acquisition due diligence, transaction and transition expenses 19,964Tornier merger costs 11,900Operating loss (99,806)Interest expense, net 17,398Other (income) expense, net 129,626Loss before income taxes (246,830)Capital expenditures25,8136,4866716,23748,603 Year ended December 31, 2013 U.S.InternationalBioMimeticCorporateTotalSales$177,648$64,682$—$—$242,330Depreciation expense8,8382,3643942,78814,384Amortization expense3,507644523—4,674Segment operating income (loss)26,2684,761(12,741)(52,949)(34,661)Other: Inventory step-up amortization 777Distributor conversion and non-compete charges 3,734BioMimetic impairment 208,529Acquisition due diligence, transaction and transition expenses 34,505Operating loss (282,206)Interest expense, net 16,040Other (income) expense, net (67,843)Loss before income taxes (230,403)Capital expenditures(1)18,3162,143—5,33125,790(1) For the year-ended December 31, 2013, total capital expenditures does not include $11.7 million related to discontinued operations.105Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued) Year Ended December 31, 2012 U.S.InternationalBioMimeticCorporateTotalSales$166,111$47,994$—$—$214,105Depreciation expense9,6221,764—3,42914,815Amortization expense2,471———2,471Segment operating income39,8108,467—(46,099)2,178Other: Inventory step-up amortization 160Distributor conversion and non-compete charges 2,973Gain on sale of intellectual property (15,000)Restructuring charges 430Acquisition due diligence, transaction and transition expenses 1,798Operating Income 11,817Interest expense, net 10,113Other expense, net 5,089Loss before income taxes (3,385)Capital expenditures(1)5,3942,083—3,64111,118(1) For the year-ended December 31, 2012, total capital expenditures does not include $8.2 million related to discontinued operations.21. Quarterly Results of Operations (unaudited):The following table presents a summary of our unaudited quarterly operating results for each of the four quarters in 2014 and 2013, respectively (inthousands). This information was derived from unaudited interim financial statements that, in the opinion of management, have been prepared on a basisconsistent 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 forany quarter are not necessarily indicative of results for any future period.106Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued) 2014 FirstQuarter SecondQuarter ThirdQuarter FourthQuarterNet sales$71,062 $72,364 $71,307 $83,294Cost of sales17,417 20,006 16,703 19,097Gross profit53,645 52,358 54,604 64,197Operating expenses: Selling, general and administrative68,648 72,055 66,926 81,991Research and development5,856 6,799 5,948 6,360Amortization of intangible assets2,187 2,675 2,379 2,786Total operating expenses76,691 81,529 75,253 91,137Operating loss$(23,046) $(29,171) $(20,649) $(26,940)Net loss from continuing operations, net of tax$(30,298) $(53,583) $(49,647) $(106,968)Income (loss) from discontinued operations, net of tax$(122) $(2,643) $(12,160) $(4,262)Net income (loss)$(30,420) $(56,226) $(61,807) $(111,230)Net loss, continuing operations per share, basic(0.62) (1.08) (0.99) (2.11)Net loss, continuing operations per share, diluted(0.62) (1.08) (0.99) (2.11)Net income (loss) per share, basic$(0.63) $(1.13) $(1.24) $(2.19)Net income (loss) per share, diluted$(0.63) $(1.13) $(1.24) $(2.19)Our 2014 operating loss included the following:•costs associated with distributor conversions and non-competes, for which we recognized $0.5 million, $0.7 million, $0.5 million and $0.4 millionduring the first, second, third and fourth quarters of 2014, respectively;•costs associated with due diligence, transaction and transition costs related to the Biotech, Solana and OrthoPro acquisitions totaling $5.2 million,$4.6 million, $1.9 million and $2.5 million during the first, second, third and fourth quarters of 2014, respectively;•costs associated with a patent dispute settlement and management changes totaled $0.9 million and $1.2 million, respectively, in the third quarter of2014;•transition costs associated with the divestiture of the OrthoRecon business totaling $2.2 million, $1.3 million, $0.9 million, and $1.4 million duringthe first, second, third and fourth quarters of 2014, respectively; and•Tornier merger costs totaled $11.9 million in the fourth quarter of 2014.Our 2014 net loss from continuing operations included the following:•the after-tax effect of the above amounts;•the after-tax effects of our mark-to-market adjustments on derivative assets and liabilities totaling a $1.0 million loss recognized in the first and thirdquarters of 2014, respectively;•the after-tax effects of our CVR mark-to-market adjustments of $14.3 million unrealized loss, $18.5 million unrealized loss, $18.5 million unrealizedloss, and $73.7 million unrealized loss recognized in the first, second, third, and fourth quarters of 2014, respectively; and•the after-tax effects of charges due to the fair value adjustment to contingent consideration associated with our acquisition of WG Healthcare totaled$1.8 million and $0.1 million in the third and fourth quarter of 2014, respectively.In addition to those noted above, our 2014 net loss included a$24.3 million gain, on the sale of the OrthoRecon business recognized in the first quarter of2014 within discontinued operations.107Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued) 2013 FirstQuarter SecondQuarter ThirdQuarter FourthQuarterNet sales$56,293 $60,572 $57,641 $67,824Cost of sales13,697 14,564 14,037 17,423Gross profit42,596 46,008 43,604 50,401Operating expenses: Selling, general and administrative50,709 50,543 63,054 66,479Research and development3,507 5,868 5,518 5,412Amortization of intangible assets1,606 2,778 1,342 1,750BioMimetic impairment charges— — 206,249 —Total operating expenses55,822 59,189 276,163 73,641Operating income (loss)$(13,226) $(13,181) $(232,559) $(23,240)Net income (loss), continuing operations, net of tax$(4,918) $(15,539) $(124,500) $(135,211)Net income (loss), discontinued operations, net of tax$13,353 $(1,792) $(5,520) $182Net income (loss)$8,435 $(17,331) $(130,020) $(135,029)Net income (loss), continuing operations per share, basic$(0.12) $(0.34) $(2.68) $(2.88)Net income (loss), continuing operations per share, diluted$(0.12) $(0.34) $(2.68) $(2.88)Net income (loss) per share, basic$0.20 $(0.37) $(2.80) $(2.88)Net income (loss) per share, diluted$0.20 $(0.37) $(2.80) $(2.88)Our 2013 operating loss included the following:•costs associated with distributor conversions and non-competes, for which we recognized $1.2 million, $1.1 million, $0.7 million and $0.8 millionduring the first, second, third and fourth quarters of 2013, respectively;•costs associated with due diligence and transaction expenses for our acquisitions of WG Healthcare, BioMimetic and Biotech totaling $7.5 million,$1.4 million, $1.7 million and $2.3 million during the first, second, third and fourth quarters of 2013, respectively;•transition costs associated with the divestiture of the OrthoRecon business totaling $2.6 million, $11.2 million and $7.7 million during the second,third and fourth quarters of 2013, respectively;•charges associated with the write-down of BioMimetic inventory to net realizable value totaling $1.0 million and $1.3 million during the third andfourth quarters of 2013, respectively; and•charges associated with the impairment of intangible assets and goodwill acquired from our BioMimetic acquisition, as well as the recognition of a$3.2 million charge for noncancelable inventory commitments for the raw materials used in the manufacture of Augment® Bone Graft, which weestimated would expire unused, totaling $206.2 million which was recognized in the third quarter of 2013.Our 2013 net loss from continuing operations included the following:•the after-tax effect of the above amounts;•the after-tax effects of mark-to-market adjustments on derivative assets and liabilities netting to a $2.0 million loss, a $1.0 million gain, a $2.0million loss and a $2.0 million gain recognized in the first, second, third and fourth quarters of 2013, respectively;•the after-tax effects of CVR mark-to-market adjustments of $5.8 million unrealized loss, $66.1 million unrealized gain, and $0.8 million unrealizedgain recognized in the second, third and fourth quarters of 2013, respectively;•the after-tax effect of a $7.8 million gain on our previously held investment in BioMimetic recognized in the first quarter of 2013; and•a charge to record a valuation allowance against our U.S. deferred tax assets of $119.6 million recognized in the fourth quarter of 2013.108Table of ContentsWRIGHT MEDICAL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)In addition to those noted above, our 2013 net loss included the following associated with our discontinued operations:•the after-tax impacts of $1.1 million, $0.7 million, $0.5 million and $0.6 million of U.S governmental inquiries and DPA costs during the first,second, third and fourth quarters of 2013, respectively;•the after-tax impacts of costs associated with amortization of distributor conversions and non-competes, for which we recognized $0.5 million, $0.4million, $0.3 million and $0.3 million during the first, second, third and fourth quarters of 2013, respectively;•the after-tax impacts of costs associated with the sale of our OrthoRecon business of $2.8 million, $5.2 million and $2.9 million recognized duringthe second, third and fourth quarters of 2013, respectively; and•the after-tax impact of a gain of $19.4 million for estimated product liability insurance recoveries during the first quarter of 2013.Additionally, in conjunction with preparing our financial statements for the year ended December 31, 2013, an immaterial error was identified in thepreviously reported loss from discontinued operations for the quarter ended September 30, 2013. The error related primarily to depreciation and amortizationcharges recorded on assets held for sale, and totaled approximately $2.7 million, net of tax. Management has concluded that this error was not material to theinterim financial information taken as a whole and recorded an adjustment of $2.7 million, net of tax, to income from discontinued operations in the fourthquarter of 2013.22. Subsequent EventOn February 13, 2015, we announced the closing of our offering of $632.5 million aggregate principal amount of cash convertible senior notes due 2020(2020 Notes). The notes bear interest at a rate of 2.00% per year and are payable semiannually in arrears on February 15 and August 15 of each year,beginning on August 15, 2015. Prior to August 15, 2019, the notes will be convertible into cash at the option of the holder under certain conditions and,thereafter until the close of business on the business day immediately preceding the maturity date, at any time. The notes mature on February 15, 2020. Theinitial conversion rate for the notes is 32.3939 shares of the Company’s common stock per $1,000 principal amount of the notes. The notes would be subjectto modifications if our pending merger with Tornier N.V. (“Tornier,” which will be known as Wright Medical Group N.V. (“Wright N.V.”) at and after theeffective time of the Tornier merger) is consummated, including that upon consummation of the merger, Wright N.V. would fully and unconditionallyguarantee our obligations under the indenture and the notes on a senior unsecured basis, and calculations and other determinations with respect to the notesrelating to our common stock would instead be calculated or determined by reference to Wright N.V.’s ordinary shares.In connection with the sale of the notes, we entered into privately negotiated cash convertible note hedge transactions with certain financial institutions (the“option counterparties”) in order to reduce the net amount of cash payments that we may be required to make upon conversion of the notes to the extent thatsuch cash payments exceed the principal amount of converted notes. We also entered into separate privately negotiated warrant transactions with the optioncounterparties, and the warrants have a strike price of $40, or approximately 59% higher than the last reported sale price per share of the Company's commonstock on February 9, 2015. The net proceeds from the offering were approximately $613 million after deducting the initial purchasers’ discounts and commissions and estimated offeringexpenses. We used approximately $145 million to pay the cost of the cash convertible note hedge transactions, offset by $86 million of proceeds from thesale of the warrants. We also used approximately $292 million of the net proceeds from the offering to repurchase approximately $240 million aggregateprincipal amount of the Company’s outstanding 2.00% cash convertible senior notes due 2017 in privately negotiated transactions, and settled all of the2017 Notes Hedges (receiving $70 million) and repurchased all of the warrants (paying $60 million) associated with the 2017 Notes.109Table of ContentsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.Not applicable.Item 9A. Controls and Procedures.Evaluation of Disclosure Controls and ProceduresWe have established disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Our disclosurecontrols and procedures are designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to ourprincipal executive officer and principal financial officer by others within our organization. Under the supervision and with the participation of ourmanagement, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosurecontrols and procedures as of December 31, 2014 to ensure that the information required to be disclosed by us in the reports that we file or submit under theSecurities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosurecontrols and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reportsthat we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executiveofficer and principal financial officer as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our principalexecutive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2014.Management’s Annual Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision and with theparticipation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness ofour internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control — Integrated Framework (1992)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, our management concluded that ourinternal control over financial reporting was effective as of December 31, 2014. Our internal control over financial reporting as of December 31, 2014, hasbeen 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 ReportingDuring the three months ended December 31, 2014, there were no changes in our internal control over financial reporting that materially affected, or that arereasonably likely to materially affect, our internal control over financial reporting.Item 9B. Other Information.Not applicable.110Table of ContentsPART IIIItem 10. Directors, Executive Officers and Corporate Governance.The information required by this item is incorporated by reference from the definitive proxy statement to be filed within 120 days after December 31, 2014,pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with our 2015 annual meeting of stockholders.Item 11. Executive Compensation.The information required by this item is incorporated by reference from the definitive proxy statement to be filed within 120 days after December 31, 2014,pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with our 2015 annual meeting of stockholders.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.The information required by this item is incorporated by reference from the definitive proxy statement to be filed within 120 days after December 31, 2014,pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with our 2015 annual meeting of stockholders.Item 13. Certain Relationships and Related Transactions, and Director Independence.The information required by this item is incorporated by reference from the definitive proxy statement to be filed within 120 days after December 31, 2014,pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with our 2015 annual meeting of stockholders.Item 14. Principal Accounting Fees and Services.The information required by this item is incorporated by reference from the definitive proxy statement to be filed within 120 days after December 31, 2014,pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with our 2015 annual meeting of stockholders.111Table of ContentsPART IVItem 15. Exhibits, Financial Statement Schedules.Financial StatementsSee Index to Consolidated Financial Statements in “Financial Statements and Supplementary Data.”Financial Statement SchedulesSee Schedule II — Valuation and Qualifying Accounts on page S-1 of this report.Index to ExhibitsExhibitNo. Description2.1 Agreement and Plan of Merger, dated as of October 27, 2014, by and among Tornier N.V., Trooper Holdings Inc., Trooper Merger Sub Inc. andWright Medical Group, Inc. (47) 3.1 Fourth Amended and Restated Certificate of Incorporation of Wright Medical Group, Inc., (1) as amended by Certificate of Amendment of FourthAmended and Restated Certificate of Incorporation of Wright Medical Group, Inc. (2) and Certificate of Amendment for Fourth Amended andRestated Certificate of Incorporation of Wright Medical Group, Inc. (3) 3.2 Third Amended and Restated By-laws of Wright Medical Group, Inc. (4) 4.1 Form of Common Stock certificate. (1) 4.2 Indenture, dated as of November 26, 2007, between Wright Medical Group, Inc. and The Bank of New York as trustee (including form of2.625% Convertible Senior Notes due 2014). (5) 4.3 Underwriting Agreement, dated as of November 19, 2007, among Wright Medical Group, Inc. and J.P. Morgan Securities Inc., Piper Jaffray &Co. and Wachovia Capital Markets, LLC. (5) 4.4 Indenture, dated as of August 31, 2012, between Wright Medical Group, Inc. and The Bank of New York, as trustee (including form of 2.000%Cash Convertible Senior Notes due 2017).(23) 4.5 Purchase Agreement, dated as of August 22, 2012, among Wright Medical Group, Inc. and J.P. Morgan Securities LLC, as Representative of theInitial Purchasers. (22) 10.1 Credit Agreement dated as of February 10, 2011, among Wright Medical Group, Inc., as the Borrower; the U.S. subsidiaries of the Borrower, asthe Guarantors; the Lenders named therein; Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer; SunTrust Bankand Wells Fargo Bank, N.A., as Co-Syndication Agents; and US Bank National Association, as Documentation Agent. (17) 10.2* Fifth Amended and Restated 1999 Equity Incentive Plan (the 1999 Plan), (7) as amended by First Amendment to the 1999 Plan. (8) 10.3* Second Amended and Restated 2009 Equity Incentive Plan (2009 Plan) (9) 10.4* Form of Executive Stock Option Agreement pursuant to the 2009 Plan.(26) 10.5* Form of Non-US Employee Stock Option Agreement pursuant to the 2009 Plan.(26) 10.6* Form of Non-Employee Director Stock Option Agreement (one year vesting) pursuant to the 2009 Plan.(26) 10.7* Form of Non-Employee Director Stock Option Agreement (four year vesting) pursuant to the 2009 Plan.(26) 10.8* Form of Executive Restricted Stock Grant Agreement pursuant to the 2009 Plan.(44) 10.9* Form of Non-Employee Director Restricted Stock Grant Agreement (one year vesting) pursuant to the 2009 Plan.(26) 10.10* Form of Non-Employee Director Restricted Stock Grant Agreement (four year vesting) pursuant to the 2009 Plan.(26) 10.11* Form of Non-US Employee Restricted Stock Unit Grant Agreement pursuant to the 2009 Plan.(26) 10.12* Form of Executive Stock Option Agreement pursuant to the 1999 Plan. (10) 10.13* Form of Non-US Employee Stock Option Agreement pursuant to the 1999 Plan. (10) 10.14* Form of Non-Employee Director Stock Option Agreement (one year vesting) pursuant to the 1999 Plan. (10) 112Table of Contents10.15* Form of Non-Employee Director Stock Option Agreement (four year vesting) pursuant to the 1999 Plan. (10) 10.16* Form of Executive Restricted Stock Grant Agreement pursuant to the 1999 Plan. (10) 10.17* Form of Non-US Employee Phantom Stock Unit Grant Agreement pursuant to the 1999 Plan. (10) 10.18* Form of Non-Employee Director Restricted Stock Grant Agreement (four year vesting) pursuant to the 1999 Plan.(11) 10.19* Wright Medical Group, Inc. Executive Performance Incentive Plan. (12) 10.20* Wright Medical Group, Inc. 2010 Executive Performance Incentive Plan. (13) 10.21* Form of Indemnification Agreement between Wright Medical Group, Inc. and its directors and executive officers. (14) 10.22* Separation Pay Agreement dated as of November 6, 2012 between Wright Medical Technology, Inc. and Lance A. Berry. (15) 10.23* Separation Pay Agreement dated as of November 6, 2012 between Wright Medical Technology, Inc. and William L. Griffin, Jr. (15) 10.24* Separation Pay Agreement dated as of November 6, 2012 between Wright Medical Technology, Inc. and Eric A. Stookey.(15) 10.25* Separation Pay Agreement dated as of November 6, 2012 between Wright Medical Technology, Inc. and Daniel J. Garen.(26) 10.26* Employment Agreement dated as of September 17, 2011 between Wright Medical Technology, Inc. and Robert J. Palmisano. (20) 10.27* Separation Pay Agreement dated as of January 1, 2014 between Wright Medical Technology, Inc. and Peter S. Cooke. (45) 10.28* Separation Pay Agreement dated as of November 29, 2012 between Wright Medical Technology, Inc. and Pascal E.R. Girin.(26) 10.29* Inducement Stock Option Grant Agreement dated as of September 17, 2011 between Wright Medical Technology, Inc. and Robert J. Palmisano.(20) 10.30* Inducement Stock Option Grant Agreement between the Registrant and Julie D. Tracy dated October 17, 2011. (21) 10.31* Inducement Stock Option Grant Agreement between Registrant and James A. Lightman dated December 29, 2011(21) 10.32* Inducement Stock Option Grant Agreement between Registrant and Daniel Garen dated January 30, 2012. (21) 10.33* Inducement Stock Option Grant Agreement between Registrant and Pascal E.R. Girin dated November 26, 2012.(26) 10.34 Settlement Agreement dated September 29, 2010, among the United States of America, acting through the United States Department of Justiceand on behalf of the Office of Inspector General of the Department of Health and Human Services, and Wright Medical Technology, Inc. (16) 10.35 Corporate Integrity Agreement dated September 29, 2010, between Wright Medical Technology, Inc. and the Office of Inspector General of theDepartment of Health and Human Services. (16) 10.36 Deferred Prosecution Agreement dated September 29, 2010, between Wright Medical Technology, Inc. and the United States Attorney's Officefor the District of New Jersey. (16) 10.37 Amendment to the Corporate Integrity Agreement dated September 14, 2011, between Wright Medical Technology, Inc. and the Office ofInspector General of the Department of Health and Human Services. (19) 10.38 Addendum and Amendment to the Deferred Prosecution Agreement dated September 15, 2011, between Wright Medical Technology, Inc. andthe United States Attorney's Office for the District of New Jersey. (19) 10.39† Amended and Restated Supply and Development Agreement dated January 28, 2011 between Wright Medical Technology, Inc. and LifeCellCorporation. (18) 10.40† Trademark License Agreement dated January 28, 2011 between Wright Medical Technology, Inc. and KCI Medical Records. (18) 113Table of Contents10.41 Base Call Option Transaction Confirmation, dated as of August 23, 2012, between Wright Medical Group, Inc. and Bank of America, N.A. (22) 10.42 Base Call Option Transaction Confirmation, dated as of August 23, 2012, between Wright Medical Group, Inc. and Deutsche Bank AG, LondonBranch, through its agent Deutsche Bank Securities Inc. (22) 10.43 Base Call Option Transaction Confirmation, dated as of August 23, 2012, between Wright Medical Group, Inc., and Wells Fargo Bank, NationalAssociation through its agent Wells Fargo Securities, LLC (22) 10.44 Base Warrants Confirmation, dated as of August 23, 2012, between Wright Medical Group, Inc. and Bank of America, N.A. (22) 10.45 Base Warrants Confirmation, dated as of August 23, 2012, between Wright Medical Group, Inc. and Deutsche Bank AG, London Branch,through its agent Deutsche Bank Securities Inc. (22) 10.46 Base Warrants Confirmation, dated as of August 23, 2012, between Wright Medical Group, Inc. and Wells Fargo Bank, National Associationthrough its agent Wells Fargo Securities, LLC (22) 10.47 Additional Call Option Transaction Confirmation, dated as of August 28, 2012, between Wright Medical Group, Inc. and Bank of America, N.A.(23) 10.48 Additional Call Option Transaction Confirmation, dated as of August 28, 2012, between Wright Medical Group, Inc. and Deutsche Bank AG,London Branch, through its agent Deutsche Bank Securities Inc. (23) 10.49 Additional Call Option Transaction Confirmation, dated as of August 28, 2012, between Wright Medical Group, Inc. and Wells Fargo Bank,National Association through its agent Wells Fargo Securities, LLC (23) 10.50 Additional Warrants Confirmation, dated as of August 28, 2012, between Wright Medical Group, Inc. and Bank of America, N.A. (23) 10.51 Additional Warrants Confirmation, dated as of August 28, 2012, between Wright Medical Group, Inc. and Deutsche Bank AG, London Branch,through its agent Deutsche Bank Securities Inc. (23) 10.52 Additional Warrants Confirmation, dated as of August 28, 2012, between Wright Medical Group, Inc. and Wells Fargo Bank, NationalAssociation through its agent Wells Fargo Securities, LLC (23) 10.53† Agreement and Plan of Merger by and among BioMimetic Therapeutics, Inc., Wright Medical Group, Inc., Achilles Merger Subsidiary, Inc. andAchilles Acquisition Subsidiary, LLC, dated as of November 19, 2012 (24) 10.54† Contingent Value Rights Agreement by and between Wright Medical Group, Inc. and American Stock Transfer & Trust Company, LLC, dated asof March 1, 2013 (25) 10.55† Supply Agreement, dated as of November 2, 2012, by and between Wright Medical Technologies, Inc. and Orchid MPS Holdings, LLC.(23) 10.56 Asset Purchase Agreement by and among MicroPort Medical B.V., MicroPort Scientific Corporation and Wright Medical Group, Inc., dated asof June 18, 2013 (27) 10.57† License Agreement between BioMimetic Therapeutics, Inc. and President and Fellows of Harvard College, dated as of April 10, 2001. (28) 10.58† Exclusive Patent License Agreement between BioMimetic Therapeutics, Inc. and ZymoGenetics, Inc., dated as of March 28, 2001. (28) 10.59† Second Exclusive Patent License Agreement between BioMimetic Therapeutics, Inc. and ZymoGenetics, Inc., dated as of January 21, 2003. (28) 10.60† Letter Agreement between BioMimetic Therapeutics, Inc. and ZymoGenetics, Inc., dated October 17, 2005. (28) 10.61† Supply Agreement between BioMimetic Therapeutics, Inc. and Orthovita, Inc. dated as of August 2, 2002. (28) 10.62† Development, Manufacturing and Supply Agreement between BioMimetic Therapeutics, Inc. and Kensey Nash Corporation, dated as of June28, 2005. (28) 10.63† Patent Purchase Agreement by and among BioMimetic Therapeutics, Inc. and Institute of Molecular Biology, Inc. dated November 4, 2005. (28) 10.64 Amendment No. 1 to Exclusive Sublicense Agreement between BioMimetic Therapeutics, Inc. and Luitpold Pharmaceuticals, Inc. dated as ofDecember 21, 2005. (28) 10.65 Amendment No. 1 to Manufacturing and Supply Agreement between BioMimetic Therapeutics, Inc. and Luitpold Pharmaceuticals, Inc. dated asof December 21, 2005. (28)114Table of Contents 10.66† Letter Agreement between BioMimetic Therapeutics, Inc. and Luitpold Pharmaceuticals, Inc. dated as of December 21, 2005. (28) 10.67 Lease Agreement between BioMimetic Therapeutics, Inc. and Noblegene Development, LLC effective January 1, 2007. (29) 10.68 Lease Agreement between BioMimetic Therapeutics, Inc. and Noblegene Development, LLC dated August 17, 2007. (30) 10.69† Asset Purchase Agreement between BioMimetic Therapeutics, Inc. and Luitpold Pharmaceuticals, Inc. dated December 14, 2007. (31) 10.70† Amended and Restated Exclusive Sublicense Agreement between BioMimetic Therapeutics, Inc. and Luitpold Pharmaceuticals, Inc. datedJanuary 4, 2008. (31) 10.71† Exclusive License Agreement between BioMimetic Therapeutics, Inc. and Luitpold Pharmaceuticals, Inc. dated January 4, 2008. (31) 10.72† Supply Agreement between BioMimetic Therapeutics, Inc. and Luitpold Pharmaceuticals, Inc. dated January 4, 2008. (31) 10.73 Agreement Terminating Research, Development and Marketing Agreement between BioMimetic Therapeutics, Inc. and LuitpoldPharmaceuticals, Inc. dated January 4, 2008. (31) 10.74 Agreement Terminating Manufacturing and Supply Agreement between BioMimetic Therapeutics, Inc. and Luitpold Pharmaceuticals, Inc.dated January 4, 2008. (31) 10.75 Amendment and Waiver Agreement with respect to Asset Purchase Agreement between BioMimetic Therapeutics, Inc. and LuitpoldPharmaceuticals, Inc. dated January 4, 2008. (31) 10.76 Amendment to Lease Agreement between BioMimetic Therapeutics, Inc. and Noblegene Development, LLC dated January 22, 2008. (32) 10.77† Distribution Agreement between BioMimetic Therapeutics, Inc. and Joint Solutions Alliance Corporation dated April 18, 2008. (33) 10.78 Second Amendment to Lease Agreement between BioMimetic Therapeutics, Inc. and Noblegene Development, LLC dated January 9, 2009. (34) 10.79† Release and Settlement Agreement, effective as of December 21, 2009, between BioMimetic Therapeutics, Inc. and Deutsche Bank Securities,Inc. (35) 10.80† Amended and Restated Manufacturing and Supply Agreement, effective as of December 1, 2009, between BioMimetic Therapeutics, Inc. andNovartis Vaccines and Diagnostics, Inc. (35) 10.81† First Amendment to Development, Manufacturing and Supply Agreement, effective August 15, 2006, between BioMimetic Therapeutics, Inc.and Kensey Nash Corporation. (36) 10.82† Second Amendment to Development, Manufacturing and Supply Agreement, effective November 1, 2006, between BioMimetic Therapeutics,Inc. and Kensey Nash Corporation. (36) 10.83† Third Amendment to Development, Manufacturing and Supply Agreement, effective April 2, 2008, between BioMimetic Therapeutics, Inc. andKensey Nash Corporation. (36) 10.84† Fourth Amendment to Development, Manufacturing and Supply Agreement, effective September 30, 2010, between BioMimetic Therapeutics,Inc. and Kensey Nash Corporation. (37) 10.85 Amendment No. 1 to Amended and Restated Exclusive Sublicense Agreement between BioMimetic Therapeutics, Inc. and LuitpoldPharmaceuticals, Inc. dated November 1, 2010. (38) 10.86 Amendment No. 1 to Asset Purchase Agreement between BioMimetic Therapeutics, Inc. and Luitpold Pharmaceuticals, Inc. dated November 1,2010. (38) 10.87 Amendment No. 1 to Agreement Terminating Research, Development and Marketing Agreement between BioMimetic Therapeutics, Inc. andLuitpold Pharmaceuticals, Inc. dated November 1, 2010. (38) 10.88 Logistical Support Agreement between BioMimetic Therapeutics, Inc. and Joint Solutions Alliance Corporation dated November 3, 2010. (37) 10.89† Supply Agreement between BioMimetic Therapeutics, Inc. and Integra LifeSciences Corporation dated July 15, 2010. (37)115Table of Contents 10.90 Third Amendment to Lease Agreement between BioMimetic Therapeutics, Inc. and Noblegene Development, LLC dated April 8, 2011. (39) 10.91 Amendment to Patent License Agreements between BioMimetic Therapeutics, Inc. and Bristol-Myers Squibb Company dated June 30, 2011.(40) 10.92† Amendment to Amended and Restated Manufacturing and Supply Agreement, effective as of January 1, 2012, between BioMimeticTherapeutics, Inc. and Novartis Vaccines and Diagnostics, Inc. (41) 10.93 Sales and Purchase Agreement between Upperside SA, Naxicap Rendement 2018, and Banque Populaire Developpement as Sellers and WrightMedical Group, Inc. as Purchaser, dated as of October 16, 2013.(42)10.94 Agreement of Lease, dated December 28, 2013, by and between Wright Medical Technology, Inc. and RBM Cherry Road Partners. (44) 10.95 Agreement and Plan of Merger, dated as of January 30, 2014, by and among Wright Medical Group, Inc., WMMS, LLC, OrthoPro, L.L.C. and OPCHA, Inc., as Company Holders’ Agent. (43) 10.96 Agreement and Plan of Merger, dated as of January 30, 2014, by and among Wright Medical Group, Inc., Winter Solstice LLC, Solana Surgical,LLC, and Alan Taylor, as Members’ Representative. (43) 10.97 Consulting Agreement, dated as of August 20, 2014, by and between Wright Medical Group, Inc. and Eric Stookey. (46) 10.98† Third Amendment to Amended and Restated Manufacturing and Supply Agreement, dated as of September 1, 2014, by and between NovartisVaccines and Diagnostics, Inc. and BioMimetic Therapeutics, LLC. (46) 10.99† Technology Transfer Agreement, dated as of September 1, 2014, by and between Novartis Vaccines and Diagnostics, Inc. and BioMimeticTherapeutics, LLC. (46) 10.100† Amendment No. 2 to the Supply Agreement, dated as of September 1 2014, by and between Luitpold Pharmaceuticals, Inc. and BioMimeticTherapeutics, LLC. (46) 10.101† Amendment No. 3 to the Supply Agreement, dated as of September 1 2014, by and between Luitpold Pharmaceuticals, Inc. and BioMimeticTherapeutics, LLC. (46) 10.102 Voting and Support Agreement, dated October 27, 2014, among Wright Medical Group, Inc. and TMG Holdings Coӧperatief U.A. (47) 11 Computation of earnings per share (included in Note 15 of the Notes to Consolidated Financial Statements in Financial Statements andSupplementary Data). 14 Code of Business conduct (6) 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) Under the Securities Exchange Act of 1934. 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) Under the Securities Exchange Act of 1934. 32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(b) Under the Securities Exchange Act of 1934 andSection 1350 of Chapter 63 of Title 18 of the United States Code. 101 The following materials from Wright Medical Group, Inc. Annual Report on Form 10-K for the year ended December 31, 2014 formatted inXBRL (Extensible Business Reporting Language): (1) the Consolidated Balance Sheets; (2) Parenthetical Data to the Consolidated BalanceSheets; (3) the Consolidated Statements of Operations; (4) Parenthetical Data to the Consolidated Statements of Operations; (5) theConsolidated Statements of Comprehensive Income; (6) Parenthetical Data to the Consolidated Statements of Comprehensive Income; (7) theConsolidated Statements of Cash Flows; (8) the Consolidated Statements of Changes in Stockholders’ Equity; and (9) Notes to ConsolidatedFinancial Statements._________________________________(1)Incorporated by reference to our Registration Statement on Form S-1 (Registration No. 333-59732), as amended.(2)Incorporated by reference to our Registration Statement on Form S-8 (Registration No. 333-115541) filed on May 14, 2004.(3)Incorporated by reference to our current report on Form 8-K filed on May 17, 2013 (Commission file number 001-35823).(4)Incorporated by reference to our current report on Form 8-K filed on February 20, 2014 (Commission file number 000-32883).(5)Incorporated by reference to our current report on Form 8-K filed on November 26, 2007 (Commission file number 000-32883).(6)Incorporated by reference to our current report on Form 8-K filed July 8, 2011 (Commission file number 000-32883).116Table of Contents(7)Incorporated by reference to our definitive Proxy Statement filed on April 14, 2008 (Commission file number 000-32883).(8)Incorporated by reference to our quarterly report on Form 10-Q for the quarter ended September 30, 2008 (Commission file number 000-32883).(9)Incorporated by reference to our definitive Proxy Statement filed on April 4, 2013 (Commission file number 000-35823).(10)Incorporated by reference to our quarterly report on Form 10-Q for the quarter ended June 30, 2009 (Commission file number 000-32883).(11)Incorporated by reference to our Registration Statement on Form S-8 (Registration No. 333-151756) filed on June 18, 2008.(12)Incorporated by reference to our current report on Form 8-K filed on February 10, 2005 (Commission file number 000-32883).(13)Incorporated by reference to our current report on Form 8-K filed on March 25, 2010 (Commission file number 000-32883).(14)Incorporated by reference to our current report on Form 8-K filed on April 7, 2009 (Commission file number 000-32883).(15)Incorporated by reference to our current report on Form 8-K filed on November 6, 2012 (Commission file number 000-32883).(16)Incorporated by reference to our current report on Form 8-K filed on September 30, 2010 (Commission file number 000-32883).(17)Incorporated by reference to our annual report on Form 10-K for the fiscal year ended December 31, 2010 (Commission file number 000-32883).(18)Incorporated by reference to our current report on Form 8-K/A filed on May 18, 2011 (Commission file number 000-32883).(19)Incorporated by reference to our current report on Form 8-K filed September 15, 2011 (Commission file number 000-32883).(20)Incorporated by reference to our current report on Form 8-K filed on September 22, 2011 (Commission file number 000-32883).(21)Incorporated by reference to our annual report on Form 10-K for the fiscal year ended December 31, 2011 (Commission file number 000-32883).(22)Incorporated by reference to our current report on Form 8-K filed on August 28, 2012 (Commission file number 000-32883).(23)Incorporated by reference to our current report on Form 8-K filed on September 4, 2012 (Commission file number 000-32883).(24)Incorporated by reference to our current report on Form 8-K filed on November 19, 2012 (Commission file number 000-32883).(25)Incorporated by reference to our current report on Form 8-K filed on March 1, 2013 (Commission file number 000-32883).(26)Incorporated by reference to our annual report on Form 10-K for the fiscal year ended December 31, 2012 (Commission file number 000-32883).(27)Incorporated by reference to our current report on Form 8-K filed on June 21, 2013 (Commission file number 001-35823).(28)Incorporated by reference to BioMimetic Therapeutics, Inc.'s Registration Statement on Form S-1 (Registration No. 333-131718), as amended.117Table of Contents(29)Incorporated by reference to BioMimetic Therapeutics, Inc.'s current report on Form 8-K filed on May 7, 2007 (Commission file number 000-51934).(30)Incorporated by reference to BioMimetic Therapeutics, Inc.'s current report on Form 8-K filed on August 21, 2007 (Commission file number 000-51934).(31)Incorporated by reference to BioMimetic Therapeutics, Inc.'s annual report on Form 10-K for the fiscal year ended December 31, 2007 (Commissionfile number 000-51934).(32)Incorporated by reference to BioMimetic Therapeutics, Inc.'s current report on Form 8-K file on January 25, 2008 (Commission file number 000-51934).(33)Incorporated by reference to BioMimetic Therapeutics, Inc.'s quarterly report on Form 10-Q for the quarter ended June 30, 2008 (Commission filenumber 000-51934).(34)Incorporated by reference to BioMimetic Therapeutics, Inc.'s annual report on Form 10-K for the fiscal year ended December 31, 2008 (Commissionfile number 000-51934).(35)Incorporated by reference to BioMimetic Therapeutics, Inc.'s annual report on Form 10-K for the fiscal year ended December 31, 2009 (Commissionfile number 000-51934).(36)Incorporated by reference to BioMimetic Therapeutics, Inc.'s annual report on Form 10-K/A for the fiscal year ended December 31, 2009(Commission file number 000-51934).(37)Incorporated by reference to BioMimetic Therapeutics, Inc.'s annual report on Form 10-K for the fiscal year ended December 31, 2010 (Commissionfile number 000-51934).(38)Incorporated by reference to BioMimetic Therapeutics, Inc.'s current report on Form 8-K filed on November 19, 2010 (Commission file number 000-51934).(39)Incorporated by reference to BioMimetic Therapeutics, Inc.'s current report on Form 8-K filed on April 14, 2011 (Commission file number 000-51934).(40)Incorporated by reference to BioMimetic Therapeutics, Inc.'s current report on Form 8-K filed on July 1, 2011 (Commission file number 000-51934).(41)Incorporated by reference to BioMimetic Therapeutics, Inc.'s current report on Form 8-K filed on February 27, 2012 (Commission file number 000-51934).(42)Incorporated by reference to our current report on Form 8-K filed October 18, 2013 (Commission file number 001-35823).(43)Incorporated by reference to our current report on Form 8-K filed January 31, 2014 (Commission file number 001-35823).(44)Incorporated by reference to our annual report on Form 10-K filed February 26, 2014 (Commission file number 001-35823).(45)Incorporated by reference to our quarterly report on Form 10-Q filed April 30, 2014 (Commission file number 001-35823).(46)Incorporated by reference to our quarterly report on Form 10-Q filed November 6, 2014 (Commission file number 001-35823).(47)Incorporated by reference to our current report on Form 8-K filed October 27, 2014 (Commission file number 001-35823).*Denotes management contract or compensatory plan or arrangement.†Confidential treatment granted under 17 CFR 24b-2. The confidential portions of this exhibit have been omitted and are marked accordingly. Theconfidential portions have been filed separately with the Securities and Exchange Commission pursuant to the Confidential Treatment Request.118Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.February 25, 2015Wright Medical Group, Inc. By: /s/ Robert J. Palmisano Robert J. Palmisano President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant and in the capacity and on the dates indicated.Signature Title Date /s/ Robert J. Palmisano Robert J. Palmisano President, Chief Executive Officer and Director(Principal Executive Officer) February 25, 2015 /s/ Lance A. Berry Lance A. Berry Chief Financial Officer(Principal Financial Officer ) February 25, 2015 /s/ Julie B. Andrews Julie B. Andrews Chief Accounting Officer(Principal Accounting Officer ) February 25, 2015 /s/ David D. Stevens David D. Stevens Director February 25, 2015 /s/ Gary D. Blackford Gary D. Blackford Director February 25, 2015 /s/ Martin J. Emerson Martin J. Emerson Director February 25, 2015 /s/ Lawrence W. Hamilton Lawrence W. Hamilton Director February 25, 2015 /s/ Ronald K. Labrum Ronald K. Labrum Director February 25, 2015 /s/ John L. Miclot John L. Miclot Director February 25, 2015 /s/ Amy S. Paul Amy S. Paul Director February 25, 2015 /s/ Robert J. Quillinan Robert J. Quillinan Director February 25, 2015 /s/ Douglas G. WatsonDouglas G. Watson Director February 25, 2015119Table of ContentsReport of Independent Registered Public Accounting FirmThe Board of Directors and StockholdersWright Medical Group, Inc.:Under date of February 25, 2015, we reported on the consolidated balance sheets of Wright Medical Group, Inc. and subsidiaries (the Company) as ofDecember 31, 2014 and 2013, and the related consolidated statements of operations, changes in stockholders’ equity, comprehensive income, and cash flowsfor each of the years in the three-year period ended December 31, 2014. These consolidated financial statements, and our report thereon, are included in theannual report on Form 10–K for the year ended December 31, 2014. In connection with our audits of the aforementioned consolidated financial statements,we also audited the related financial statement schedule listed in Item 15 in the annual report on Form 10-K. The financial statement schedule is theresponsibility of the Company’s management. Our responsibility is to express an opinion on the financial statement schedule based on our audits.In our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly,in all material respects, the information set forth therein.(signed) KPMG LLPMemphis, TennesseeFebruary 25, 2015120Table of ContentsWright Medical Group, Inc.Schedule II-Valuation and Qualifying Accounts(In thousands) Balance atBeginning of Period Charged to CostandExpenses Deductionsand Other Balance at End ofPeriodAllowance for doubtful accounts: For the period ended: December 31, 2014$272 $(684) $1,342 $930December 31, 2013$291 $(66) $47 $272December 31, 2012$293 $(2) $— $291Sales returns and allowance: For the period ended: December 31, 2014$282 $(216) $66December 31, 2013$298 $(16) $— $282December 31, 2012$313 $(15) $— $298S-1Exhibit 12Wright Medical Group, Inc.Ratio of Earnings to Fixed ChargesThe following table presents our historical ratios of earnings to fixed charges for the years ended December 31 of the years indicated. We compute this ratioby dividing the sum of earnings before income taxes and fixed charges by fixed charges. Fixed charges represent interest expense, amortization of debtissuance costs, and the interest factor of all rentals, consisting of an appropriate interest factor on operating leases. Year ended December 31, 2014(1) 2013(1) 2012(1) 2011(1) 2010Ratio of earnings to fixed charges(11.30) (11.56) 0.71 (0.45) 1.29(1)Earnings were inadequate to cover fixed charges for the years ended December 31, 2014, 2013, 2012, 2011 by $246.8 million, $230.4 million, $3.4million, and $11.4 million, respectively.Exhibit 21WRIGHT MEDICAL GROUP, INC.LIST OF SUBSIDIARIES1.Wright Medical Technology, Inc. (USA)2.Wright Medical Capital, Inc. (USA)3.Wright International, Inc. (USA)4.White Box Orthopedics, LLC (USA)5.KHC-WDM, LLC (USA)6.Wright Medical Technology Canada Ltd. (Canada)7.Wright Medical Japan, K.K. (Japan)8.2Hip Holdings SAS (France)9.Wright Medical Europe SAS (France)10.Wright Medical Europe Manufacturing SA (France)11.Wright Medical France SAS (France)12.Wright Medical Italy Srl (Italy)13.Wright Medical UK Limited (UK)14.Wright Medical Instruments Limited (UK)15.Wright Medical Deutschland GmbH (Germany)16.Wright Medical Belgium NV (Belgium)17.Wright Medical Netherlands, B.V. (Netherlands)18.Wright Medical EMEA, B.V. (Netherlands)19.Wright Medical Europe, C.V. (Netherlands)20.INBONE Technologies, Inc. (USA)21.Wright Medical Australia Pty Ltd. (Australia)22.Wright Medical Costa Rica S.A. (Costa Rica)23.Wright Medical Brasil Ltda (Brazil)24.TMW Insurance, Inc. (USA)25.WG Healthcare UK Limited (UK)26.BioMimetic Therapeutics, LLC (USA)27.BioMimetic Therapeutics, Ltd (UK)28.BioMimetic Therapeutics, Pty Ltd (Australia)29.BioMimetic Therapeutics USA, Inc. (USA)30.BioMimetic Therapeutics Canada, Inc. (Canada)31.Biotech International (France)32.Biotech Ortho (France)33.Biotech Benelux SPRL (Belgium)34.Biotech CH (Switzerland)35.TriMed Biotech, Inc. (USA)36.TriMed Biotech SAS (France)37.TriMed Hellas S.A (Greece)38.Wright PacRim, Inc. (USA)39.Solana Surgical, LLC (USA)40.OrthoPro, LLC (USA)41.Wright Medical Group Intellectual Property, Inc. (USA)42.Industrial Properties Acquisition Fund, LLC (USA)43.Wright Medical Device (Shanghai) Co., Ltd (China)Exhibit 23Consent of Independent Registered Public Accounting FirmThe Board of DirectorsWright Medical Group, Inc.:We consent to the incorporation by reference in the registration statement (No. 333-147487 and 333-193940) on Form S-3 and the registration statements(Nos. 333-75176, 333-90024, 333-108638, 333-115541, 333-125231, 333-151756, 333-159227, 333-167682, 333-18359, 333-189012, and 333-189018)on Form S-8 of Wright Medical Group, Inc. of our reports dated February 25, 2015, with respect to the consolidated balance sheets of Wright Medical Group,Inc. and subsidiaries (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of operations, changes in stockholders’equity, comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2014, and the financial statement schedule,and the effectiveness of internal control over financial reporting as of December 31, 2014, which reports appear in the December 31, 2014 annual report onForm 10‑K of Wright Medical Group, Inc. (signed) KPMG LLPMemphis, TennesseeFebruary 25, 2015EXHIBIT 31.1CERTIFICATION OF CHIEF EXECUTIVE OFFICERPURSUANT TO RULE 13a-14(a) UNDERTHE SECURITIES EXCHANGE ACT OF 1934I, Robert J. Palmisano, certify that:1.I have reviewed this annual report on Form 10-K for the year ended December 31, 2014, of Wright Medical Group, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Date: February 25, 2015 /s/ Robert J. Palmisano Robert J. Palmisano President and Chief Executive Officer EXHIBIT 31.2CERTIFICATION OF CHIEF FINANCIAL OFFICERPURSUANT TO RULE 13a-14(a) UNDERTHE SECURITIES EXCHANGE ACT OF 1934I, Lance A. Berry, certify that:1.I have reviewed this annual report on Form 10-K for the year ended December 31, 2014, of Wright Medical Group, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Date: February 25, 2015 /s/ Lance A. Berry Lance A. Berry Senior Vice President and Chief Financial Officer EXHIBIT 32CERTIFICATION OF CHIEF EXECUTIVE OFFICER ANDCHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14(b) UNDERTHE SECURITIES EXCHANGE ACT OF 1934 AND SECTION 1350 OFCHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODEEach of the undersigned, Robert J. Palmisano and Lance A. Berry, certifies pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 (theExchange Act) and Section 1350 of Chapter 63 of Title 18 of the United States Code, that (1) this Annual Report on Form 10-K for the year endedDecember 31, 2014 (the Report) of Wright Medical Group, Inc. (the Company) fully complies with the requirements of Section 13(a) or 15(d) of the ExchangeAct, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.Date: February 25, 2015 /s/ Robert J. Palmisano Robert J. Palmisano President and Chief Executive Officer /s/ Lance A. Berry Lance A. Berry Senior Vice President and Chief Financial Officer 

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