AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 13, 2002
REGISTRATION NO. 333-81618
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--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
WRIGHT MEDICAL GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 3842 13-4088127
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
5677 AIRLINE ROAD
ARLINGTON, TENNESSEE 38002
(901) 867-9971
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
F. BARRY BAYS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
WRIGHT MEDICAL GROUP, INC.
5677 AIRLINE ROAD
ARLINGTON, TENNESSEE 38002
(901) 867-9971
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
COPIES TO:
JEFFREY R. POSS, ESQ. ARNOLD B. PEINADO, III, ESQ.
Willkie Farr & Gallagher Milbank, Tweed, Hadley & McCloy LLP
787 Seventh Avenue 1 Chase Manhattan Plaza
New York, New York 10019 New York, New York 10005
(212) 728-8000 (212) 530-5000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. / /
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration number of the earlier effective registration
statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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The information contained in this preliminary prospectus is not complete and may
be changed. We may not offer or sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any jurisdiction where the offer or sale is not
permitted.
Subject to Completion, Dated February 13, 2002
PROSPECTUS
6,000,000 SHARES
[LOGO]
COMMON STOCK
Wright Medical Group, Inc. is offering 3,000,000 shares of common stock. Selling
stockholders are offering an additional 3,000,000 shares. We will not receive
any of the proceeds from the sale of shares being sold by the selling
stockholders.
Our common stock is listed on the Nasdaq National Market under the symbol
"WMGI." The last reported sale price for the common stock on February 12, 2002
was $16.70 per share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. PLEASE READ "RISK FACTORS"
BEGINNING ON PAGE 7.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Public Offering Underwriting Proceeds to Wright Proceeds to Selling
Price Discount Medical Group, Inc. Stockholders
------------------------------------------------------------------------------------------------------------------
Per Share $ $ $ $
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Total $ $ $ $
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Wright Medical Group, Inc. and one of our stockholders have granted the
underwriters a 30-day option to purchase from each of them up to 450,000
additional shares of common stock to cover over-allotments, if any. We will not
receive any proceeds from the sale of shares by the selling stockholders.
JPMorgan
Credit Suisse First Boston
U.S. Bancorp Piper Jaffray
Lehman Brothers
Thomas Weisel Partners LLC
, 2002
Table of Contents
PAGE
Prospectus Summary.......................... 1
The Offering................................ 4
Summary Financial Data...................... 5
Risk Factors................................ 7
Special Note Regarding Forward-Looking
Statements................................ 17
Use of Proceeds............................. 18
Price Range of Common Stock................. 18
Dividend Policy............................. 18
Capitalization.............................. 19
Selected Financial Data..................... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 22
PAGE
Business.................................... 36
Certain Transactions........................ 61
Principal and Selling Stockholders.......... 64
Description of Capital Stock................ 66
Shares Eligible For Future Sale............. 69
Underwriting................................ 70
Legal Matters............................... 71
Experts..................................... 72
Change in Independent Accountants........... 72
Where You Can Find More Information......... 72
Index to Financial Statements............... F-1
------------------------
You should rely only on the information contained in this prospectus. We have
not, and the underwriters have not, authorized any other person to provide you
with different information. This prospectus is not an offer to sell, nor is it
seeking an offer to buy, the securities in any state where the offer or sale is
not permitted. The information in this prospectus is complete and accurate as of
the date on the front cover, but the information may have changed since that
date.
Prospectus Summary
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THE PROSPECTUS. THIS
SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD CONSIDER BEFORE
BUYING SHARES OF OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS
CAREFULLY.
Wright Medical Group, Inc.
Overview of Our Company
We are a global orthopaedic device company specializing in the design,
manufacture and marketing of reconstructive joint devices and bio-orthopaedic
materials. Reconstructive joint devices are used to replace knee, hip and other
joints that have deteriorated through disease or injury. Bio-orthopaedic
materials are used to replace damaged or diseased bone and to stimulate natural
bone growth. Within these markets, we focus on the higher-growth sectors of
advanced knee implants, bone-conserving hip implants, revision replacement
implants and extremity implants, as well as on the integration of our
bio-orthopaedic products into reconstructive joint procedures and other
orthopaedic applications. In 2000, we had net sales of $157.6 million and a net
loss of $39.5 million. For the nine months ended September 30, 2001, we had net
sales of $126.8 million and a net loss of $3.7 million. Our Adjusted EBITDA, or
earnings before interest, taxes, depreciation, amortization and other non-cash
charges, was $25.2 million for 2000 and $19.2 million for the nine months ended
September 30, 2001.
We have been in business for over fifty years and have built a well-known,
respected brand name and strong relationships with orthopaedic surgeons. In
December 1999, Warburg, Pincus Equity Partners, L.P. and a group of investors
acquired control of our company and led a recapitalization financing that both
reduced our debt and provided us with investment capital. Shortly thereafter, a
new management team was put in place and we acquired Cremascoli Ortho Group,
based in Toulon, France. This acquisition extended our product offerings,
enhanced our product development capabilities and expanded our European
presence. We believe that by combining Cremascoli's strength in hip
reconstruction with Wright's historical expertise in knee reconstruction and
bio-orthopaedic materials, we now offer orthopaedic surgeons a broad range of
reconstructive joint devices and bio-orthopaedic materials in over 40 countries.
Orthopaedic Industry
The worldwide orthopaedic industry was estimated to be approximately
$11.0 billion in 2000, and we believe it will grow at approximately 6-8%
annually over the next three to four years. The knee and hip reconstruction
markets are two of the largest sectors of the orthopaedic market, together
accounting for over $4.0 billion of implant and related product sales in 2000.
Some of the key growth drivers of these markets include:
- an elderly population growing at a higher growth rate than that of the
general population in industrialized countries;
- an aging "baby boomer" population with high expectations of maintaining
their active lifestyles;
- improving technologies in orthopaedic implants and surgical techniques,
which have made reconstruction procedures a viable option for younger
patients; and
- increasing acceptance of bio-orthopaedic materials for use in
reconstructive joint procedures and other orthopaedic applications.
The orthopaedic industry is currently dominated by six multinational companies,
each with approximately $1.0 billion in annual sales. The size of these
companies often leads them to concentrate their marketing and research and
development efforts on products that they believe will have a relatively high
minimum threshold level of sales. As a result, there is an opportunity for a
mid-sized orthopaedic company, such as Wright, to focus on smaller,
higher-growth sectors of the orthopaedic market. We believe that our global
distribution system, which consists of a sales force of approximately 450
people, offers significant opportunities to access markets that may not be
addressed by the larger multinationals.
Our Products
The ADVANCE-Registered Trademark- Knee System is our principal knee
reconstruction product line and is intended to represent the next generation in
total knee reconstruction. It offers patients a greater range of motion than
traditional knee systems. We believe that our knee reconstruction products are
differentiated by their unique design, brand recognition and innovative
instrumentation. Our knee reconstruction product line had net sales of
$62.9 million in 2000 and $50.2 million for the nine months ended September 30,
2001, representing approximately 40% of our total net sales in both periods.
1
The PERFECTA-Registered Trademark- Hip System is our principal hip
reconstruction product line and has enjoyed over ten years of proven clinical
success. One of our most recent product offerings in our hip reconstruction
product line is the CONSERVE-Registered Trademark- Hip System, which we believe
provides a better solution to many patients by conserving existing bone for
future surgical procedures, if necessary. We believe that our hip reconstruction
product line is differentiated by a range of offerings that accommodates a
continuum of patient care from early intervention bone-conserving procedures to
difficult revision replacement implants. Our hip reconstruction product line had
net sales of $47.7 million in 2000 and $35.7 million for the nine months ended
September 30, 2001, representing approximately 30% and 28%, respectively, of our
total net sales.
We offer extremity reconstruction products for the hand, wrist, elbow, shoulder,
foot and ankle. We believe that we are one of the recognized leaders in finger
and toe implants. Our small joint orthopaedic implants have many years of
successful clinical history, including our Swanson Hinge Finger, which has been
used by surgeons for over 30 years. Our extremity product line had net sales of
$17.3 million in 2000 and $15.3 million for the nine months ended September 30,
2001, representing approximately 11% and 12%, respectively, of our total net
sales.
OSTEOSET-Registered Trademark- bone graft substitute and ALLOMATRIX-TM-
injectable putty are our main bio-orthopaedic product offerings. We are the
first company to receive U.S. Food and Drug Administration, or FDA, market
clearance for use of resorbable synthetic bone graft substitutes in the spine
with our OSTEOSET-Registered Trademark- pellets. We are rapidly expanding our
product lines in the emerging markets of biological musculoskeletal repair,
including synthetic and human tissue-based bone grafting materials.
Bio-orthopaedic materials is our fastest growing product line with net sales of
$21.0 million in 2000 and $19.3 million for the nine months ended September 30,
2001, representing approximately 13% and 15%, respectively, of our total net
sales.
Our Strategy
Our management team has increased our focus and spending on research and
development, significantly raised the efficiency of our manufacturing processes
and improved our sales force productivity. These efforts in 2000, along with our
December 1999 acquisition of Cremascoli, reversed a three year trend of flat or
declining sales in our principal product lines and improved operating margins.
We believe that there is still significant opportunity to improve our financial
performance and continue our growth by:
- targeting high-growth, high-margin market sectors that may be underserved
by larger orthopaedic companies;
- offering a comprehensive set of implants and related products in the
markets we serve to span the lives of patients;
- focusing our research and development efforts to accelerate delivery of
new products and technologies; and
- leveraging our global infrastructure for increased growth and
profitability.
Financial Overview
Our net sales for 2000 were $157.6 million, an increase of 44% over net sales of
$109.2 million in 1999. Approximately $34.2 million of this increase, or 31% of
net sales, is attributable to the inclusion of a full year of net sales of
Cremascoli. Our growth in net sales for 2000 as compared to 1999, excluding
sales from product lines acquired from our purchase of Cremascoli in
December 1999, was $14.2 million, or 13%. We reported net losses of
$39.5 million in 2000 and $40.4 million in 1999. These amounts include one-time
costs associated with our recapitalization and acquisition of Cremascoli. For
the nine months ended September 30, 2001, we had net sales of $126.8 million and
a net loss of $3.7 million. Our Adjusted EBITDA, or earnings before interest,
taxes, depreciation, amortization and other non-cash charges, for the nine
months ended September 30, 2001 was $19.2 million, as compared to $19.6 million
for the nine months ended September 30, 2000, and $25.2 million in 2000 as
compared to $8.6 million in 1999, excluding non-recurring transaction and
reorganization costs. Approximately 37% of our net sales for the nine months
ended September 30, 2001 and approximately 40% of our 2000 net sales were
generated internationally.
Recent Developments
On February 12, 2002, we announced our results of operations for our fiscal
quarter and year ended December 31, 2001. Net sales for the fourth quarter of
2001 totaled $46.2 million, representing a 16% increase over net sales of
$39.8 million in the fourth quarter of 2000. Excluding the impact of foreign
currency, net sales increased 15% during the fourth quarter of 2001. Net income
for the fourth quarter of 2001 increased to $2.2 million, compared to a net loss
of $8.0 million in the same quarter of 2000. Our Adjusted EBITDA for the three
months ended December 31, 2001 was $7.7 million, as compared to $5.6 million for
the three months ended December 31, 2000.
2
For the full year 2001, our net sales totaled $172.9 million, representing a 10%
increase over net sales of $157.6 million in 2000. Excluding the impact of
foreign currency and discontinued products, net sales increased 11% during 2001.
For the full year 2001, we achieved net income of $104,000, before the effect of
our extraordinary debt retirement charge incurred during the third quarter,
compared to a net loss of $39.5 million for the full year 2000. Our Adjusted
EBITDA for the year ended December 31, 2001 was $26.9 million, as compared to
$25.2 million for the year ended December 31, 2000.
Corporate Information
We founded our business in 1950. Our principal executive offices are located at
5677 Airline Road, Arlington, Tennessee 38002, and our telephone number is
(901) 867-9971. Our website is located at www.wmt.com. Our website is not
intended to be part of this prospectus.
This prospectus contains references to our trademarks
ADVANCE-Registered Trademark-, ADVANTIM-Registered Trademark-, ALLOMATRIX-TM-,
ANCA FIT-TM-, AXIOM-Registered Trademark-, CONSERVE-Registered Trademark-,
EVOLVE-Registered Trademark-, EVOLUTION-Registered Trademark-,
GUARDIAN-Registered Trademark-, LINEAGE-TM-, LOCON-T-TM-, MIIG-TM-, OLYMPIA-TM-,
ORTHOSPHERE-Registered Trademark-, OSTEOSET-Registered Trademark-,
PER-Q-GRAFT-TM-, PERFECTA-Registered Trademark-, PROFEMUR-TM-, REPIPHYSIS-TM-
and S.O.S-Registered Trademark-, among others. All other trademarks or trade
names referred to in this prospectus are the property of their respective
owners.
3
The Offering
Common stock offered:
BY WRIGHT MEDICAL GROUP, INC.................... 3,000,000 shares
BY THE SELLING STOCKHOLDERS..................... 3,000,000 shares
COMMON STOCK OUTSTANDING AFTER THE OFFERING..... 31,546,127 shares
USE OF PROCEEDS................................. We intend to use the proceeds from the offering
for general
corporate purposes, including to fund our
working capital, future product development and
acquisition of technologies, products and
companies. See "Use of Proceeds."
NASDAQ NATIONAL MARKET SYMBOL................... "WMGI"
Except as otherwise noted, the outstanding share information in this prospectus
excludes:
- 3,127,155 shares of our common stock that we may issue upon the exercise of
outstanding options as of December 31, 2001 at a weighted average exercise
price of $5.09 per share;
- 1,608,745 shares of our common stock available for future issuance under our
1999 Equity Incentive Plan as of December 31, 2001;
- shares of common stock issued upon exercise of stock options subsequent to
December 31, 2001; and
- 709,094 shares of common stock that we may issue upon the exercise of
outstanding warrants as of December 31, 2001 at an exercise price of $4.35 per
share.
Except as otherwise noted, all information in this prospectus:
- assumes a public offering price of $16.70 per share; and
- assumes no exercise of the underwriters' over-allotment option.
4
Summary Financial Data
The following table provides summary consolidated financial data of Wright
Medical Technology, Inc., our predecessor company, and WMG for the periods
indicated. You should read the summary consolidated financial data set forth
below in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and with our consolidated financial
statements and related notes appearing elsewhere in this prospectus. The
historical and pro forma results presented here are not necessarily indicative
of future results.
-------------------------- -------------------------------------------------------
PREDECESSOR COMPANY CONSOLIDATED WRIGHT MEDICAL GROUP, INC.
-------------------------- -------------------------------------------------------
PERIOD FROM PERIOD FROM NINE MONTHS ENDED
JANUARY 1 DECEMBER 8 SEPTEMBER 30,
YEAR ENDED TO TO YEAR ENDED -------------------------
DECEMBER 31, DECEMBER 7, DECEMBER 31, DECEMBER 31, 2000 2001
1998 1999 1999 2000 (UNAUDITED) (UNAUDITED)
IN THOUSANDS, EXCEPT PER SHARE DATA ------------ ----------- ------------ ------------ ----------- -----------
STATEMENT OF OPERATIONS DATA:
Net sales.......................... $106,972 $101,194 $ 7,976 $ 157,552 $ 117,714 $126,764
Cost of sales(1)................... 46,981 44,862 4,997 80,370 63,562 37,967
-------- -------- ----------- ---------- ---------- --------
Gross profit..................... 59,991 56,332 2,979 77,182 54,152 88,797
Operating expenses:
Selling, general and
administrative................. 55,974 47,547 4,837 82,813 61,063 69,784
Research and development......... 7,855 5,857 508 8,390 6,074 6,842
Amortization of intangible
assets......................... 2,748 2,334 466 5,586 4,190 4,024
Stock-based expense.............. 176 523 -- 5,029 2,914 1,587
Transaction and reorganization... -- 6,525 3,385 -- -- --
Acquired in-process research and
development costs.............. -- -- 11,731 -- -- --
Losses of equity method
investment..................... 1,979 -- -- -- -- --
-------- -------- ----------- ---------- ---------- --------
Total operating expenses....... 68,732 62,786 20,927 101,818 74,241 82,237
-------- -------- ----------- ---------- ---------- --------
Income (loss) from operations.... (8,741) (6,454) (17,948) (24,636) (20,089) 6,560
Interest expense, net.............. 14,284 13,196 1,909 12,446 9,223 7,365
Other expense, net................. 1,044 616 67 870 1,191 178
-------- -------- ----------- ---------- ---------- --------
Loss before income taxes and
extraordinary item............. (24,069) (20,266) (19,924) (37,952) (30,503) (983)
Provision (benefit) for income
taxes............................ 102 190 (25) 1,541 1,030 1,089
-------- -------- ----------- ---------- ---------- --------
Loss before extraordinary item... (24,171) (20,456) (19,899) (39,493) (31,533) (2,072)
Extraordinary loss on early
retirement of debt, net of
taxes............................ -- -- -- -- -- (1,611)
-------- -------- ----------- ---------- ---------- --------
Net loss....................... $(24,171) $(20,456) $ (19,899) $ (39,493) $ (31,533) $ (3,683)
======== ======== =========== ========== ========== ========
Net loss per common share, basic
and diluted(2):
Loss before extraordinary
item......................... $(27,918.17) $(3,405.71) $(7,516.63) $ (0.57)
Extraordinary charge........... -- -- -- $ (0.20)
----------- ---------- ---------- --------
$(27,918.17) $(3,405.71) $(7,516.63) $ (0.77)
=========== ========== ========== ========
Weighted-average number of common
shares outstanding............. 1 17 6 8,037
=========== ========== ========== ========
Pro forma basic and diluted net
loss per common share
(unaudited)(3):
Loss before extraordinary
item......................... $ (2.29) $ (.09)
Extraordinary charge........... -- (.07)
---------- --------
$ (2.29) $ (.17)
========== ========
Pro forma weighted-average number
of common shares outstanding
used in pro forma per share
calculation, basic and diluted
(unaudited)(3)................. 17,260 21,873
========== ========
5
In the as adjusted column of the consolidated balance sheet data below, we have
adjusted the balance sheet data as of September 30, 2001 to give effect to our
receipt of the estimated net proceeds of $46.8 million from the sale of
3,000,000 shares of common stock we are offering for sale under this prospectus
at the assumed public offering price of $16.70 per share and the application of
these proceeds as set forth under the caption "Use of Proceeds."
----------------------
AS OF SEPTEMBER 30,
2001
(UNAUDITED)
----------------------
ACTUAL AS ADJUSTED
IN THOUSANDS -------- -----------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 2,957 $ 49,727
Working capital............................................. 48,802 95,572
Total assets................................................ 201,382 248,152
Long-term liabilities....................................... 34,980 34,980
Stockholders' equity........................................ $115,258 $162,028
-------------------------- -------------------------------------------------------
Predecessor Company Consolidated Wright Medical Group, Inc.
-------------------------- -------------------------------------------------------
Period from Period from Nine Months Ended
January 1 December 8 September 30,
Year Ended to to Year Ended -------------------------
December 31, December 7, December 31, December 31, 2000 2001
1998 1999 1999 2000 (unaudited) (unaudited)
IN THOUSANDS ------------ ----------- ------------ ------------ ----------- -----------
OTHER DATA:
Cash flows provided by (used in)
operating activities.............. $ 4,402 $ 8,914 $(22,701) $ 18,151 $ 9,490 $ (1,481)
Cash flows used in investing
activities........................ (3,179) (2,179) (22,410) (14,109) (10,235) (13,012)
Cash flows provided by (used in)
financing activities.............. (1,110) (6,105) 51,844 6,028 6,530 1,204
Adjusted EBITDA(4).................. $ 2,352 $ 2,023 $ (3,327) $ 25,198 $ 19,609 $ 19,221
--------------------------
(1) In connection with our recapitalization and our acquisition of Cremascoli,
we recorded inventory step-ups pursuant to Accounting Principles Board (APB)
opinion No. 16. This accounting treatment required a $31.1 million step-up
of inventories above manufacturing costs. The step-up was charged to cost of
sales over the following twelve months, reflecting the estimated period over
which the inventory was sold. Cost of sales was charged $2.0 million in the
period from December 8 to December 31, 1999, $29.1 million in the year ended
December 31, 2000 of which $25.1 million was charged in the nine months
ended September 30, 2000.
(2) Net loss applicable to common stockholders includes preferred stock
dividends of $230,000 for the period from December 8 to December 31, 1999,
preferred stock dividends of $4.4 million and $13.1 million of deemed
dividends on the series C preferred stock for the year ended December 31,
2000, preferred stock dividends of $3.2 million and $13.1 million of deemed
dividends on the series C preferred stock for the nine months ended
September 30, 2000, and preferred stock dividends of $2.5 million for the
nine months ended September 30, 2001.
(3) In calculating the pro forma net loss per share, we have given effect to the
conversion of all of our outstanding preferred stock, plus accrued dividends
into common stock as if the conversion occurred at the beginning of the
respective period.
(4) Adjusted EBITDA consists of net income (loss) excluding net interest, taxes,
depreciation, amortization, stock based expenses, non-cash charges related
to acquired inventory, the in-process research and development write-off and
the extraordinary loss on early retirement of debt. Adjusted EBITDA is
provided because it is a measure of financial performance commonly used as
an indicator of a company's historical ability to service debt. We have
presented Adjusted EBITDA to enhance your understanding of our operating
results. You should not construe it as an alternative to operating income as
an indicator of operating performance. It should also not be construed as an
alternative to cash flows from operating activities as a measure of
liquidity determined in accordance with GAAP. We may calculate Adjusted
EBITDA differently from other companies. For further information, see our
consolidated financial statements and related notes elsewhere in this
prospectus.
6
Risk Factors
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING OUR COMMON STOCK.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK AND YOU MAY LOSE
PART OR ALL OF YOUR INVESTMENT IN THESE SHARES. PLEASE READ "SPECIAL NOTE
REGARDING FORWARD-LOOKING STATEMENTS."
Risks Related To Our Business
OUR FUTURE PROFITABILITY DEPENDS ON THE SUCCESS OF OUR PRINCIPAL PRODUCT LINES
Sales of our knee and hip implant products accounted for approximately 68% of
our net sales for the nine months ended September 30, 2001. We expect our sales
to continue to be based largely on sales of these principal product lines and
specifically our ADVANCE-Registered Trademark- knee system and
PERFECTA-Registered Trademark- total hip system. Introduction of competitive
products by third parties, adverse rulings by regulatory authorities, product
liability lawsuits or other adverse publicity for these principal product lines
may significantly and adversely affect our sales of these products and, as a
result, would adversely affect our business, financial condition and results of
operations.
IF WE FAIL TO COMPETE SUCCESSFULLY IN THE FUTURE AGAINST OUR EXISTING OR
POTENTIAL COMPETITORS, OUR SALES AND OPERATING RESULTS MAY BE NEGATIVELY
AFFECTED AND WE MAY NOT ACHIEVE FUTURE GROWTH
The markets for our products are highly competitive and dominated by a small
number of large companies. We may not be able to meet the prices offered by our
competitors, or offer products similar to or more desirable than those offered
by our competitors. Many of our competitors in the orthopaedic implant market
have:
- greater financial and other resources;
- more widely accepted products;
- greater technical capabilities;
- superior ability to maintain new product flow;
- patent portfolios that may present an obstacle to our conduct of business;
- stronger name recognition; and
- larger distribution networks.
IF WE ARE UNABLE TO CONTINUE TO DEVELOP AND MARKET NEW PRODUCTS AND
TECHNOLOGIES, WE MAY EXPERIENCE A DECREASE IN DEMAND FOR OUR PRODUCTS OR OUR
PRODUCTS COULD BECOME OBSOLETE, AND OUR BUSINESS WOULD SUFFER
We are continually engaged in product development and improvement programs. We
may be unable to compete effectively with our competitors unless we can keep up
with existing or new products and technologies in the orthopaedic implant
market. Our competitors' new products and technologies may beat our products to
market, may be more effective or less expensive than our products or render our
products obsolete. See "Business-Competition" for more information about our
competitors.
IF SURGEONS DO NOT RECOMMEND AND ENDORSE OUR PRODUCTS, OUR SALES MAY DECLINE OR
WE MAY BE UNABLE TO INCREASE OUR SALES AND PROFITS
In order for us to sell our products, surgeons must recommend and endorse them.
We may not obtain the necessary recommendations or endorsements from surgeons.
Acceptance of our products depends on educating the medical community as to the
distinctive characteristics, perceived benefits, clinical efficacy and
cost-effectiveness of our products compared to products of our competitors, and
on training surgeons in the proper application of our products.
7
OUR BUSINESS PLAN RELIES ON CERTAIN ASSUMPTIONS ABOUT THE MARKET FOR OUR
PRODUCTS, WHICH, IF INCORRECT, MAY ADVERSELY AFFECT OUR PROFITABILITY
We believe that the aging of the general population and increasingly active
lifestyles will continue and that these trends will increase the need for our
orthopaedic implant products. The projected demand for our products could
materially differ from actual demand if our assumptions regarding these trends
and acceptance of our products by the medical community prove to be incorrect or
do not materialize or if non-surgical treatments gain more widespread acceptance
as a viable alternative to orthopaedic implants.
WE ARE SUBJECT TO SUBSTANTIAL GOVERNMENT REGULATION THAT COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS
The production and marketing of our products and our ongoing research and
development, preclinical testing and clinical trial activities are subject to
extensive regulation and review by numerous governmental authorities both in the
U.S. and abroad. In the U.S., most of the medical devices we develop must
undergo rigorous preclinical and clinical testing and an extensive regulatory
approval process administered by the U.S. Food and Drug Administration, or FDA.
In particular, in order for us to market our products for clinical use in the
U.S., we must obtain clearance from the FDA through a Section 510(k) Premarket
Notification, or 510(k), or a more extensive submission known as a Premarket
Approval application, or PMA. Products distributed outside of the U.S. are
subject to foreign government regulations, which vary by country. In the
European Community, in order for a medical device to be commercially
distributed, it must bear a CE conformity marking, indicating that it conforms
to the essential requirements of the applicable European medical devices
directive. U.S. and foreign regulations govern the testing, marketing and
registration of new medical devices, in addition to regulating manufacturing
practices, reporting, labeling and record keeping procedures. The regulatory
process requires significant time, effort and expenditures to bring our products
to market, and we cannot assure you that any of our products will be approved.
Our failure to comply with applicable regulatory requirements could result in
these government authorities:
- imposing fines and penalties on us;
- preventing us from manufacturing or selling our products;
- bringing civil or criminal charges against us;
- delaying the introduction of our new products into the market;
- recalling or seizing our products; or
- withdrawing or denying approvals or clearances for our products.
Even if regulatory approval or clearance of a product is granted, this could
result in limitations on uses for which the product may be labeled and promoted.
Further, for a marketed product, its manufacturer and manufacturing facilities
are subject to periodic review and inspection. Later discovery of problems with
a product, manufacturer or facility may result in restrictions on the product,
manufacturer or facility, including withdrawal of the product from the market or
other enforcement actions.
We are currently conducting clinical studies of some of our products under an
FDA Investigational Device Exemption, or IDE. Clinical studies must be conducted
in compliance with FDA regulations, or the FDA may take enforcement action. The
data collected from these clinical investigations will ultimately be used to
support market clearance for these products. There is no assurance that the FDA
will accept the data from these clinical studies or that it will ultimately
allow market clearance for these products.
MODIFICATIONS TO OUR MARKETED DEVICES MAY REQUIRE FDA REGULATORY CLEARANCES OR
APPROVALS OR REQUIRE US TO CEASE MARKETING OR RECALL THE MODIFIED DEVICES UNTIL
SUCH CLEARANCES OR APPROVALS ARE OBTAINED
When required, the products we market in the U.S. have obtained premarket
notification under Section 510(k) or were exempt from the 510(k) clearance
process. We have modified some of our products and product labeling since
obtaining 510(k) clearance but we do not believe these modifications require us
to submit new 510(k) notifications. However, if the FDA disagrees with us and
requires us to submit a new 510(k) notification for modifications to our
existing products, we may be the subject of enforcement actions by the FDA and
be required to stop marketing the products while the FDA reviews the 510(k)
notification. If the FDA requires us to go through a lengthier, more rigorous
examination than we had expected, our product introductions or modifications
could be delayed or canceled, which could cause our sales to decline. In
addition, the FDA may determine that future products
8
will require the more costly, lengthy and uncertain Premarket Approval, or PMA,
process. Products that are approved through a PMA generally need FDA approval
before they can be modified. See "Business-Government Regulation."
OUR BIO-ORTHOPAEDICS BUSINESS IS SUBJECT TO EMERGING GOVERNMENT REGULATIONS THAT
CAN SIGNIFICANTLY IMPACT OUR BUSINESS
The FDA regulates allograft-based products, processing and materials. The FDA
has been working to establish a more comprehensive regulatory framework for
allograft-based products, which are principally derived from cadaveric tissue.
The framework developed by the FDA establishes criteria for determining whether
a particular human tissue-based product will be classified as human tissue, a
medical device or biologic drug requiring premarket clearance or approval. All
tissue-based products are subject to extensive FDA regulation, including
requirements designed to ensure that diseases are not transmitted to tissue
recipients. The FDA has also proposed extensive additional regulations that
would govern the processing and distribution of all allograft products. Consent
to use the donor's tissue must also be obtained. If a tissue-based product is
considered tissue, it does not require FDA clearance before being marketed. If
it is considered a device or biologic drug, then FDA clearance may be required.
Additionally, our bio-orthopaedics business involves the procurement and
transplantation of allograft tissue, which is subject to federal regulation
under the National Organ Transplant Act, or NOTA. NOTA is a criminal statute
that prohibits the sale of human organs for valuable consideration within the
meaning of the act, including bone and other tissue. NOTA permits the payment of
reasonable expenses associated with the transportation, processing,
preservation, quality control and storage of human tissue. We currently charge
our customers for these expenses. In the future, if NOTA is amended or
reinterpreted we may not be able to charge these expenses to our customers and,
as a result, our business could be adversely affected.
THE FDA HAS CHALLENGED THE REGULATORY STATUS OF OUR ALLOMATRIX-TM- PRODUCTS
On April 11, 2001, the FDA sent us a "warning letter" stating that the FDA
believes ALLOMATRIX-TM- Injectable Putty is a medical device that is subject to
the premarket notification requirement. We believe that ALLOMATRIX-TM-
Injectable Putty and some of our other allograft-based products are human tissue
and therefore are not subject to FDA approval as medical devices. We asked the
FDA to designate ALLOMATRIX-TM- Injectable Putty as a product regulated solely
as a tissue. The FDA has orally advised us that after reviewing our designation
request, it has decided to regulate ALLOMATRIX-TM- Injectable Putty as a medical
device. Upon official notification of this decision, we will submit a 510(k)
premarket notification for the product. We have continued to market
ALLOMATRIX-TM- Injectable Putty after receiving the warning letter, and we
intend to continue marketing and selling ALLOMATRIX-TM- Injectable Putty. The
FDA has not raised any objection to our continued marketing and sale of
ALLOMATRIX-TM- Injectable Putty pending submission of the premarket
notification. There can be no assurance that the 510(k) premarket notification
that we intend to submit will be cleared by the FDA in a timely manner or at
all. Also, the FDA may take enforcement action against us, including requiring
us to modify or cease distribution of ALLOMATRIX-TM- Injectable Putty, detaining
or seizing our inventory of ALLOMATRIX-TM- Injectable Putty, requiring us to
recall ALLOMATRIX-TM- Injectable Putty, enjoining future violations and seeking
criminal and civil penalties against us and our officers and directors, any of
which could adversely affect our financial condition and results of operations.
In 2000 and the first nine months of 2001, our ALLOMATRIX-TM- products
represented approximately 9% and 11% of our total net sales, respectively.
OUR BUSINESS COULD SUFFER IF THE MEDICAL COMMUNITY DOES NOT CONTINUE TO ACCEPT
ALLOGRAFT TECHNOLOGY
New allograft products, technologies and enhancements may never achieve broad
market acceptance due to numerous factors, including:
- lack of clinical acceptance of allograft products and related technologies;
- the introduction of competitive tissue repair treatment options that render
allograft products and technologies too expensive and obsolete;
- lack of available third-party reimbursement;
- the inability to train surgeons in the use of allograft products and
technologies;
- the risk of disease transmission; and
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- ethical concerns about the commercial aspects of harvesting cadaveric tissue.
Market acceptance will also depend on the ability to demonstrate that existing
and new allografts and technologies are attractive alternatives to existing
tissue repair treatment options. To demonstrate this, we rely upon surgeon
evaluations of the clinical safety, efficacy, ease of use, reliability and cost
effectiveness of our tissue repair options and technologies. Recommendations and
endorsements by influential surgeons are important to the commercial success of
allograft products and technologies. In addition, several countries, notably
Japan, prohibit the use of allografts. If allograft products and technologies
are not broadly accepted in the marketplace, we may not achieve a competitive
position in the market.
WE DEPEND HEAVILY UPON A LIMITED NUMBER OF SOURCES OF DEMINERALIZED BONE MATRIX
AND ANY FAILURE TO OBTAIN DBM FROM THESE SOURCES IN A TIMELY MANNER WILL
INTERFERE WITH OUR ABILITY TO PROCESS AND DISTRIBUTE ALLOGRAFT PRODUCTS
Two not-for-profit tissue banks supplied us with 100% of the demineralized bone
matrix, or DBM, a key component in the allograft products we currently produce,
market and distribute, that we obtained in the United States in 2001. We cannot
be sure that our supply of DBM will continue to be available at current levels
or will be sufficient to meet our needs, or that our suppliers of DBM will be
free from FDA regulatory action impacting their sale of DBM. Since there is a
small number of suppliers, if we cannot continue to obtain DBM from these
sources in volume sufficient to meet our needs, we may not be able to locate
replacement sources of DBM on commercially reasonable terms, if at all. This
could have the effect of interrupting our business, which could adversely affect
our sales.
IF ADEQUATE LEVELS OF REIMBURSEMENT FROM THIRD-PARTY PAYORS FOR OUR PRODUCTS ARE
NOT OBTAINED, SURGEONS AND PATIENTS MAY BE RELUCTANT TO USE OUR PRODUCTS AND OUR
SALES MAY DECLINE
In the U.S., health care providers that purchase our products generally rely on
third-party payors, principally federal Medicare, state Medicaid and private
health insurance plans, to pay for all or a portion of the cost of joint
reconstructive procedures and products utilized in those procedures. We may be
unable to sell our products on a profitable basis if third-party payors deny
coverage or reduce their current levels of reimbursement. Our sales depend
largely on government health care programs and private health insurers
reimbursing patients' medical expenses. Surgeons, hospitals and other health
care providers may not purchase our products if they do not receive satisfactory
reimbursement from these third-party payors for the cost of the procedures using
our products. Payors continue to review their coverage policies carefully for
existing and new therapies and can, without notice, deny coverage for treatments
that include the use of our products.
In addition, some health care providers in the U.S. have adopted or are
considering a managed care system in which the providers contract to provide
comprehensive heath care for a fixed cost per person. Health care providers may
attempt to control costs by authorizing fewer elective surgical procedures,
including joint reconstructive surgeries, or by requiring the use of the least
expensive implant available.
If adequate levels of reimbursement from third-party payors outside of the
United States are not obtained, international sales of our products may decline.
Outside of the United States, reimbursement systems vary significantly by
country. Many foreign markets have government-managed health care systems that
govern reimbursement for new devices and procedures. Canada and some European
countries, in particular France, have tightened reimbursement rates. See
"Business-Third-Party Reimbursement" for more information regarding
reimbursement in the U.S. and abroad.
WE DERIVE A SIGNIFICANT PORTION OF OUR SALES FROM OPERATIONS IN INTERNATIONAL
MARKETS THAT ARE SUBJECT TO POLITICAL, ECONOMIC AND SOCIAL INSTABILITY
We derive a significant portion of our sales from operations in international
markets. We operate directly in a total of seven major international markets,
namely Japan, Italy, France, the United Kingdom, Belgium, Germany and Canada. We
operate through independent distributors in approximately 30 other international
markets. Some of these markets are, to some degree, subject to political, social
and/or economic instability. Approximately 40% of our net sales in 2000 and 37%
of our net sales for the nine months ended September 30, 2001 were derived from
our international operations. Our international sales operations expose us and
our representatives, agents and distributors to risks inherent in operating in
foreign jurisdictions. These risks include:
- the imposition of additional foreign governmental controls or regulations on
orthopaedic implants and bio-orthopaedic products;
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- new export license requirements particularly related to our bio-orthopaedic
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;
- changes in third-party reimbursement policy that may require some of the
patients who receive our implant products to directly absorb medical costs;
- changes in tariffs and other trade restrictions, particularly related to the
exportation of our bio-orthopaedic products;
- work stoppages or strikes in the health care industry, which have affected our
operations in France, Canada, Korea and Finland in the last twelve months;
- a shortage of nurses in some of our target markets, particularly affecting our
operations in France; and
- exposure to different legal and political standards due to our operating in
over 40 countries.
Accordingly, any material decrease in our foreign sales would negatively impact
our profitability. Our international sales are predominately generated in
Europe. In Europe, health care regulation and reimbursement for medical devices
vary significantly from country to country. This changing environment could
adversely affect our ability to sell our products in some European countries.
FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES COULD RESULT IN DECLINES IN OUR
REPORTED SALES AND EARNINGS
Since our international sales are denominated in local currencies and not in
U.S. dollars, our reported sales and earnings are subject to fluctuations in
foreign exchange rates. Our international net sales were adversely affected by
the impact of currency fluctuations of $6.3 million in 2000 and $1.8 million for
the nine months ended September 30, 2001. At present, we do not engage in
hedging transactions to protect against uncertainty in future exchange rates
between particular foreign currencies and U.S. dollars.
IF WE LOSE ONE OF OUR KEY SUPPLIERS, WE MAY BE UNABLE TO MEET CUSTOMER ORDERS
FOR OUR PRODUCTS IN A TIMELY MANNER OR WITHIN OUR BUDGET
We rely on a limited number of suppliers for the components used in our
products. We rely on one supplier for the silicone elastomer used in our
extremity products. We are aware of only two suppliers of silicone elastomer to
the medical device industry for permanent implant usage. In addition, some of
our new products under development use materials that are available only from
limited sources.
Suppliers of raw materials and components may decide for reasons beyond our
control to cease supplying raw materials and components to us. FDA regulations
may require additional testing of any raw materials or components from new
suppliers prior to our use of these materials or components and in the case of a
device with a Premarket Approval, we may be required to obtain prior FDA
permission, either of which could delay or prevent our access or use of such raw
materials or components.
If we are unable to obtain materials we need from our key suppliers and we
cannot obtain these materials from other sources, we may be unable to
manufacture our products for a period of time or within our manufacturing
budget, which could negatively impact our profitability.
IF OUR PATENTS AND OTHER INTELLECTUAL PROPERTY RIGHTS DO NOT ADEQUATELY PROTECT
OUR PRODUCTS, WE MAY LOSE MARKET SHARE TO OUR COMPETITORS AND BE UNABLE TO
OPERATE OUR BUSINESS PROFITABLY
We rely on patents, trade secrets, copyrights, know-how, trademarks, license
agreements and contractual provisions to establish our intellectual property
rights and protect our products. These legal means, however, afford only limited
protection and may not adequately protect our rights. In addition, we cannot
assure you that any of our pending patent applications will issue. The U.S.
Patent and Trademark Office, or the PTO, may deny or require significant
narrowing of claims in our pending patent applications, and patents issuing from
the pending patent applications, if any, may not provide us with significant
commercial protection. We could incur substantial costs in proceedings before
the PTO. These proceedings could result in adverse decisions as to the priority
of our inventions and the narrowing or invalidation of claims in issued patents.
In addition, the laws of some of the countries in which our products are or may
be sold may not protect our products and intellectual property to the same
extent as U.S. laws, or at all. We may be unable to protect our rights in trade
secrets and unpatented proprietary technology in these countries.
In addition, we hold licenses from third parties that are necessary to utilize
certain technologies used in the design and manufacturing of some of our
products. The loss of such licenses would prevent us from manufacturing,
marketing and selling these products, which could harm our business.
11
We seek to protect our trade secrets, know-how and other unpatented proprietary
technology, in part, with confidentiality agreements with our employees,
independent distributors and consultants. We cannot assure you, however, that:
- these agreements will not be breached;
- we will have adequate remedies for any breach; or
- trade secrets, know-how and other unpatented proprietary technology will not
otherwise become known to or independently developed by our competitors.
IF WE LOSE ANY EXISTING OR FUTURE INTELLECTUAL PROPERTY LAWSUITS, A COURT COULD
REQUIRE US TO PAY SIGNIFICANT DAMAGES OR PREVENT US FROM SELLING OUR PRODUCTS
The medical device industry is litigious with respect to patents and other
intellectual property rights. Companies in the medical device industry have used
intellectual property litigation to gain a competitive advantage. We are
currently involved in an intellectual property lawsuit with Howmedica Osteonics
Corp., a subsidiary of Stryker Corporation, where it is alleged that our
ADVANCE-Registered Trademark- Knee product line infringes one of Howmedica's
patents. In 2000, approximately 9% of our total net sales were derived from
products that are the subject of this litigation. If Howmedica Osteonics Corp.
were to succeed in obtaining the relief it claims, the Court could award damages
to Howmedica Osteonics Corp., and could impose an injunction against further
sales of this product. If a final judgment is rendered against us, we may be
forced to raise or borrow funds, as a supplement to any available insurance
claim proceeds, to pay the damages award. In a separate matter, a judgment was
rendered against us for approximately $14 million in connection with litigation
against a former employee, relating to the former employee's alleged
misappropriation of trade secrets. The Tennessee Court of Appeals reversed the
trial court's findings, in part, including the $14 million judgment against us.
The Court of Appeals modified the trial court's judgment rendered against us to
$500,000 in damages. Either party could seek permission to appeal the case to
the Tennessee Supreme Court. If the Tennessee Supreme Court reverses the Court
of Appeal's findings, we may be forced to raise or borrow the money to pay any
damages award. See "Business--Legal Proceedings" for more specific information
regarding these lawsuits.
In the future, we may become a party to other lawsuits involving patents or
other intellectual property. A legal proceeding, regardless of the outcome,
could drain our financial resources and divert the time and effort of our
management. If we lose one of these proceedings, a court, or a similar foreign
governing body, could require us to pay significant damages to third parties,
require us to seek licenses from third parties and pay ongoing royalties,
require us to redesign our products or prevent us from manufacturing, using or
selling our products. In addition to being costly, protracted litigation to
defend or prosecute our intellectual property rights could result in our
customers or potential customers deferring or limiting their purchase or use of
the affected products until resolution of the litigation.
IF PRODUCT LIABILITY LAWSUITS ARE BROUGHT AGAINST US, OUR BUSINESS MAY BE HARMED
The manufacture and sale of medical devices exposes us to significant risk of
product liability claims. In the past, we have had a number of product liability
claims relating to our products. In the future, we may be subject to additional
product liability claims, some of which may have a negative impact on our
business. Our existing product liability insurance coverage may be inadequate to
protect us from any liabilities we might incur. If a product liability claim or
series of claims is brought against us for uninsured liabilities or in excess of
our insurance coverage, our business could suffer. In addition, as a result of a
product liability claim, we may have to recall some of our products, which could
result in significant costs to us.
WE MAY BE LIABLE FOR CONTAMINATION OR OTHER HARM CAUSED BY HAZARDOUS MATERIALS
THAT WE USE
Our research and development and manufacturing processes involve the use of
hazardous materials. We are subject to federal, state and local regulation
governing the use, manufacture, handling, storage and disposal of hazardous
materials. We cannot completely eliminate the risk of contamination or injury
resulting from hazardous materials and we may incur liability as a result of any
contamination or injury. In addition, under some environmental laws and
regulations, we could also be held responsible for all of the costs relating to
any contamination at our past or present facilities and at third-party waste
disposal sites. Although we have incurred immaterial costs to date relating to
environmental consulting and monitoring fees, we may incur more significant
expenses in the future relating to compliance with environmental laws. Such
future expenses or liability could have a significant negative impact on our
financial condition. See "Business--Environmental."
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EFFORTS TO ACQUIRE OTHER COMPANIES OR PRODUCT LINES COULD ADVERSELY AFFECT OUR
OPERATIONS AND FINANCIAL RESULTS
We may pursue acquisitions of other companies or product lines. Our ability to
grow through acquisitions depends upon our ability to identify, negotiate,
complete and integrate suitable acquisitions and to obtain any necessary
financing. Even if we complete acquisitions, we may also experience:
- difficulties in integrating any acquired companies, personnel and products
into our existing business;
- delays in realizing the benefits of the acquired company or products;
- diversion of our management's time and attention from other business concerns;
- limited or no direct prior experience in new markets or countries we may
enter;
- higher costs of integration than we anticipated; or
- difficulties in retaining key employees of the acquired business who are
necessary to manage these acquisitions.
In addition, an acquisition could materially impair our operating results by
causing us to incur debt or requiring us to amortize acquisition expenses and
acquired assets.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO SUBSTANTIAL FLUCTUATIONS AND YOU
SHOULD NOT RELY ON THEM AS AN INDICATION OF OUR FUTURE RESULTS
Our quarterly operating results may vary significantly due to a combination of
factors, many of which are beyond our control. These factors include:
- demand for products, which historically has been highest in the first and
fourth quarters;
- 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 our surgeon customers;
- the timing of significant orders and shipments;
- availability of raw materials;
- work stoppages or strikes in the health care industry; and
- general economic factors.
Our acquisition of Cremascoli may make it more difficult for us to evaluate and
predict our future operating performance. Our historical results of operations
as a combined entity are limited and only give effect to the operations of
Cremascoli since we acquired it in December 1999. Consequently, our historical
results of operations may not give you an accurate indication of how we,
together with Cremascoli, will perform in the future.
We believe that quarterly sales and operating results may vary significantly in
the future and that period-to-period comparisons of our results of operations
are not necessarily meaningful and should not be relied upon as indications of
future performance. We cannot assure you that our sales will increase or be
sustained in future periods or that we will be profitable in any future period.
Any shortfalls in sales or earnings from levels expected by securities or
industry analysts could have an immediate and significant adverse effect on the
trading price of our common stock in any given period.
13
WE RELY ON OUR INDEPENDENT SALES DISTRIBUTORS AND SALES ASSOCIATES TO MARKET AND
SELL OUR PRODUCTS
Our success depends largely upon marketing arrangements with independent sales
distributors and sales associates, in particular their sales and service
expertise and relationships with the customers in the marketplace. Independent
distributors and sales associates may terminate their relationship with us, or
devote insufficient sales efforts to our products. We do not control our
independent distributors and they may not be successful in implementing our
marketing plans. Our failure to attract and retain skilled independent sales
distributors and sales associates could have an adverse effect on our
operations. Our Australian distributor informed us that it intends to terminate
our agreement when it expires in February 2002. We have appointed a new
distributor to distribute our products in Australia beginning March 1, 2002. We
may experience reduced sales in Australia as a result of the transition from one
distributor to another.
IF A NATURAL OR MAN-MADE DISASTER STRIKES OUR MANUFACTURING FACILITIES, WE WILL
BE UNABLE TO MANUFACTURE OUR PRODUCTS FOR A SUBSTANTIAL AMOUNT OF TIME AND OUR
SALES WILL DECLINE
We have relied to date principally on our manufacturing facilities in Arlington,
Tennessee and Toulon, France. These facilities and the manufacturing equipment
we use to produce our products would be difficult to replace and could require
substantial lead-time to repair or replace. Our facilities may be affected by
natural or man-made disasters. In the event one of our facilities was affected
by a disaster, we would be forced to rely on third-party manufacturers or shift
production to our other manufacturing facility. Although we believe we possess
adequate insurance for damage to our property and the disruption of our business
from casualties, such insurance may not be sufficient to cover all of our
potential losses and may not continue to be available to us on acceptable terms,
or at all.
WE HAVE A HISTORY OF NET LOSSES AND MAY NOT BE PROFITABLE IN THE FUTURE
We have had a history of net losses and there can be no assurances that we will
not continue to report net losses for the foreseeable future, which could cause
our stock price to decline and adversely affect our ability to finance our
business in the future. We reported net losses of $24.2 million in 1998,
$40.4 million in 1999, $39.5 million in 2000 and $3.7 million for the nine
months ended September 30, 2001. Our net loss in 2000 was primarily attributable
to interest costs on borrowed money and non-cash expenses associated with the
inventory step-ups charged to cost of sales, the amortization of acquired
intangibles and stock-based compensation. Our net loss in the first nine months
of 2001 was primarily attributable to interest costs on borrowed money and the
non-cash extraordinary charge related to the write-off of unamortized loan costs
associated with our past credit facilities. For additional information, you
should read the discussion under "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
included elsewhere in this prospectus.
OUR ABILITY TO USE OUR NET OPERATING LOSS CARRYFORWARDS COULD BE LIMITED
Our ability to use our net operating loss carryforwards is limited. At
December 31, 2000, we had net operating loss carryforwards totaling
approximately $62.8 million domestically, and $15.2 million internationally,
available to reduce our future federal income tax liabilities. Our ability to
use these net operating loss carryforwards to reduce our future federal income
tax liabilities is subject to annual limitations. In addition, any net operating
loss carryforwards generated after our December 1999 recapitalization could also
be limited if we were to experience another greater-than 50% change in ownership
over any three-year period, all as defined and governed by section 382 of the
Internal Revenue Code. For purposes of determining if a 50% change in ownership
occurs within any three-year period, any public stock offerings during that
period (including this offering) are taken into account in accordance with
applicable regulations. The limitation of our net operating loss carryforwards
accumulated through December 1999 and any future limitation of net operating
loss carryforwards generated since then could result in a material adverse
effect on our ability to realize these tax benefits and adversely effect our
liquidity.
IF WE CANNOT RETAIN OUR KEY PERSONNEL, WE WILL NOT BE ABLE TO MANAGE AND OPERATE
SUCCESSFULLY AND WE MAY NOT BE ABLE TO MEET OUR STRATEGIC OBJECTIVES
Our continued success depends, in part, upon key managerial, scientific, sales
and technical personnel, as well as our ability to continue to attract and
retain additional highly qualified personnel. We compete for such personnel with
other companies, academic institutions, government entities and other
organizations. There can be no assurance that we will be successful in retaining
our current personnel or in hiring or retaining qualified personnel in the
future.
14
Many of our existing management personnel have been employed by WMG for two
years or less, including our President and Chief Executive Officer, who joined
us in January 2000, and our Executive Vice President and Chief Financial
Officer, who joined us in December 2000. Our future success depends to a
significant extent on the ability of our executive officers and other members of
our management team to operate effectively, both individually and as a group. We
cannot be certain that we will be able to satisfactorily allocate
responsibilities and that the new members of our executive team will succeed in
their roles. Loss of key personnel or the inability to hire or retain qualified
personnel in the future could have a material adverse effect on our ability to
operate successfully.
Risks Related to this Offering
IF A SIGNIFICANT NUMBER OF SHARES OF OUR COMMON STOCK IS SOLD INTO THE MARKET
FOLLOWING THE OFFERING, THE MARKET PRICE OF OUR COMMON STOCK COULD SIGNIFICANTLY
DECLINE, EVEN IF OUR BUSINESS IS DOING WELL
Many of our stockholders will have an opportunity to sell their stock following
the offering. Also, many of our employees, directors, officers, sales
representatives and distributors may exercise their stock options in order to
sell the stock underlying their options in the market under a registration
statement we have filed with the SEC. Sales of a substantial number of shares of
our common stock in the public market after the offering could depress the
market price of our common stock and impair our ability to raise capital through
the sale of additional equity securities. Officers, directors and our principal
stockholders owning an aggregate of approximately 18,809,049 shares of our
common stock have agreed that they will not, without the prior written consent
of the underwriters, directly or indirectly sell any of these restricted shares,
or any of the 894,378 shares of our common stock that we may issue upon the
exercise of outstanding options or warrants held by our officers, directors and
principal stockholders, for 90 days after the date of this prospectus. For a
more detailed description, see "Shares Eligible for Future Sale" and
"Underwriting."
OUR CERTIFICATE OF INCORPORATION, OUR BYLAWS AND DELAWARE LAW CONTAIN PROVISIONS
THAT COULD DISCOURAGE, DELAY OR PREVENT A TAKEOVER OF WMG
Provisions of our certificate of incorporation, bylaws and Delaware law may
discourage, delay or prevent a merger with, or acquisition of, WMG that you may
consider favorable. See "Management--Board Composition" and
"Management--Executive Compensation" and "Description of Capital
Stock--Undesignated Preferred Stock", "Description of Capital Stock--Charter and
By-Laws Anti-Takeover Provisions" and "Description of Capital
Stock--Anti-Takeover Provisions of Delaware Law" for more information on the
specific provisions of our certificate of incorporation, our bylaws and Delaware
law that could discourage, delay or prevent a change of control of WMG.
OUR STOCK PRICE MAY BE VOLATILE AND YOUR INVESTMENT IN OUR COMMON STOCK COULD
SUFFER A DECLINE IN VALUE
While there is currently a public market for our common stock, trading may not
continue. You may be unable to resell the common stock you buy at or above the
public offering price. We will establish the public offering price through our
negotiations with the representatives of the underwriters. You should not view
the price they and we establish as any indication of prices that will prevail in
the trading market. With the current uncertainty about health care policy,
reimbursement and coverage in the United States, there has been significant
volatility in the market price and trading volume of securities of medical
device and other health care companies unrelated to the performance of these
companies. These broad market fluctuations may negatively affect the market
price of our common stock. Some specific factors that may have a significant
effect on our common stock market price include:
- actual or anticipated fluctuations in our operating results;
- our announcements or our competitors' announcements of technological
innovations or new products;
- clinical trial results;
- changes in our growth rates or our competitors' growth rates;
- developments regarding our patents or proprietary rights, or those of our
competitors;
- FDA and international actions with respect to the government regulation of
medical devices and third-party reimbursement matters;
- public concern as to the safety of our products;
15
- changes in health care policy in the United States and internationally;
- conditions in the financial markets in general or changes in general economic
conditions;
- our inability to raise additional capital;
- conditions of other medical device companies or the medical device industry
generally; and
- changes in stock market analyst recommendations regarding our common stock,
other comparable companies or the medical device industry generally.
OUR EXECUTIVE OFFICERS, DIRECTORS AND SIGNIFICANT STOCKHOLDERS MAY BE ABLE TO
INFLUENCE MATTERS REQUIRING STOCKHOLDER APPROVAL
Our executive officers and directors (including stockholders with which
directors are affiliated) after the offering will beneficially own approximately
52% of our outstanding voting common stock. Immediately after the offering,
Warburg Pincus and its affiliates will own approximately 41% of our voting
common stock. Our amended and restated certificate of incorporation contains
restrictions that prohibit Warburg Pincus from owning more than 49% of our
voting securities. We anticipate that following the closing of the offering,
Warburg Pincus will convert all of its shares of non-voting common stock into
shares of voting common stock such that Warburg Pincus will own approximately
46% of our outstanding shares of voting common stock. Additionally, following
the closing of this offering and the conversion by Warburg Pincus, there will be
no shares of our non-voting common stock outstanding. See "Principal and Selling
Stockholders." This concentration of ownership may have the effect of delaying,
preventing or deterring a change in control of our company, could deprive our
stockholders of an opportunity to receive a premium for their common stock as
part of a sale or merger of WMG and may negatively affect the market price of
our common stock. Upon the completion of the offering, Warburg Pincus will
continue to have the right under our stockholders agreement to designate two
persons to our board of directors. As a result of this share ownership and
minority representation on our board of directors, our current stockholders, in
particular Warburg Pincus, will be able to influence all affairs and actions of
our company, including matters requiring stockholder approval such as the
election of directors and approval of significant corporate transactions. The
interests of our executive officers, directors and principal stockholders may
differ from the interests of the other stockholders.
16
Special Note Regarding Forward-Looking Statements
This prospectus contains forward-looking statements, principally in the sections
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." Generally, you can identify these
statements because they use words like "anticipates," "believes," "expects,"
"future," "intends," "plans," and similar terms. These statements are only our
current expectations. Although we do not make forward-looking statements unless
we believe we have a reasonable basis for doing so, we cannot guarantee their
accuracy, and actual results may differ materially from those we anticipated due
to a number of uncertainties, many of which are unforeseen, including, among
others, the risks we face as described on the previous pages and elsewhere in
this prospectus. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this prospectus.
We believe it is important to communicate our expectations to our investors.
There may be events in the future, however, that we are unable to predict
accurately or over which we have no control. The risk factors listed on the
previous pages, as well as any cautionary language in this prospectus, provide
examples of risks, uncertainties and events that may cause our actual results to
differ materially from the expectations we describe in our forward-looking
statements. Before you invest in our common stock, you should be aware that the
occurrence of the events described in the previous risk factors and elsewhere in
this prospectus could negatively impact our business, operating results,
financial condition and stock price.
17
Use of Proceeds
We estimate that the net proceeds from the sale of the 3,000,000 shares of
common stock that we are offering under this prospectus at an assumed public
offering price of $16.70 per share will be approximately $46.8 million after
deducting the underwriting discounts and estimated offering expenses. We will
not receive any proceeds from the sale of common stock by the selling
stockholders.
We plan to use the net proceeds of the offering for general corporate purposes,
including to fund working capital, expansion of our current product offerings
through research and development and acquisitions of technologies, products and
companies. We have no present understandings, commitments or agreements with
respect to any acquisitions. We anticipate our spending on research and
development to remain consistent as a percentage of net sales with our past
levels of spending.
Pending the uses described above, we intend to invest the net proceeds of the
offering in short-term, investment-grade, interest-bearing securities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" for additional information
regarding our sources and uses of capital.
Price Range of Common Stock
Our common stock began trading on the Nasdaq National Market System on July 13,
2001 under the symbol "WMGI". Before that date, no public market for our common
stock existed. The following table sets forth, for the periods indicated, the
high and low closing sales prices per share of our common stock as reported on
the Nasdaq National Market.
-------------------
HIGH LOW
-------- --------
FISCAL YEAR 2001
Third Quarter (since July 13, 2001)......................... $18.50 $14.65
Fourth Quarter.............................................. $18.05 $14.00
FISCAL YEAR 2002
First Quarter (through February 12, 2002)................... $18.25 $16.00
On February 12, 2002, the last reported sales price of our common stock on the
Nasdaq National Market was $16.70 per share. As of January 25, 2002, there were
66 stockholders of record and an estimated 3,400 beneficial stockholders.
Dividend Policy
We have never declared or paid cash dividends on our common stock. We currently
intend to retain all future earnings for the operation and expansion of our
business. We do not anticipate declaring or paying cash dividends on our common
stock in the foreseeable future. Any payment of cash dividends on our common
stock will be at the discretion of our board of directors and will depend upon
our results of operations, earnings, capital requirements, contractual
restrictions and other factors deemed relevant by our board. In addition, our
current credit facility prohibits us from paying any cash dividends without our
lenders' consent.
18
Capitalization
The following table sets forth our consolidated cash and cash equivalents and
capitalization as of September 30, 2001.
In the as adjusted column, we have made adjustments to give effect to our
receipt of the estimated net proceeds of $46.8 million from the sale of
3,000,000 shares of common stock we are offering for sale under this prospectus
at an assumed public offering price of $16.70 per share, and the application of
these proceeds as set forth under the caption "Use of Proceeds."
You should read this table in conjunction with our consolidated financial
statements and their notes contained elsewhere in this prospectus. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Use of Proceeds," "Description of Capital Stock" and the notes to
our consolidated financial statements included elsewhere in this prospectus for
additional information.
The outstanding share information in the table below is based on the number of
shares outstanding as of September 30, 2001. The table below excludes:
- 3,244,606 shares of our common stock that we may issue upon the exercise of
outstanding options at a weighted average exercise price of $4.92 per share;
- 1,522,451 shares of our common stock available for future issuances under our
1999 Equity Incentive Plan; and
- 727,276 shares of common stock that we may issue upon the exercise of
outstanding warrants at an exercise price of $4.35 per share.
-----------------------
As of September 30,
2001 (unaudited)
-----------------------
Actual As Adjusted
IN THOUSANDS, EXCEPT SHARE DATA --------- -----------
Cash and cash equivalents................................... $ 2,957 $ 49,727
======== ========
Notes payable and capitalized lease obligations, including
current portion........................................... $ 23,530 $ 23,530
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; no shares issued and outstanding actual; no
shares issued and outstanding as adjusted................. -- --
Common stock, voting, $.01 par value, 70,000,000 shares
authorized; 23,009,647 shares issued and outstanding
actual; 26,009,647 shares issued and outstanding as
adjusted.................................................. 230 260
Common stock, non-voting, $.01 par value, 30,000,000 shares
authorized, 5,288,595 shares issued and outstanding actual
and as adjusted........................................... 53 53
Additional paid-in capital.................................. 206,210 252,950
Deferred compensation....................................... (5,171) (5,171)
Accumulated other comprehensive loss........................ (1,741) (1,741)
Accumulated deficit......................................... (84,323) (84,323)
-------- --------
Total stockholders' equity.................................. 115,258 162,028
--------
Total capitalization........................................ $138,788 $185,558
======== ========
19
Selected Financial Data
The following table sets forth certain selected consolidated financial data of
Wright Medical Group, Inc. and Wright Medical Technology, Inc., our predecessor
company, for the periods indicated. We derived our selected consolidated
financial data as of December 31, 2000, 1999, 1997 and 1996 and for the year
ended December 31, 2000, the period from January 1, 1999 to December 7, 1999,
the period from December 8, 1999 to December 31, 1999 and for the years ended
December 31, 1997 and 1996 from our consolidated financial statements audited by
Arthur Andersen LLP. We derived our selected consolidated financial data as of
December 31, 1998 and for the year then ended from our consolidated financial
statements audited by BDO Seidman, LLP. The audited consolidated financial
statements as of December 31, 2000 and 1999 and for the year ended December 31,
2000, for the period January 1, 1999 to December 7, 1999, for the period
December 8, 1999 through December 31, 1999 and for the year ended December 31,
1998 are included elsewhere in this prospectus. The audited consolidated
financial statements as of December 31, 1998, 1997 and 1996 and for each of the
two years ended December 31, 1997 and 1996 are not included in this prospectus.
The selected consolidated financial data for the nine months ended
September 30, 2000 and 2001 has been derived from our unaudited consolidated
financial statements which, in the opinion of management, include all
adjustments, consisting solely of normal recurring adjustments, necessary for a
fair presentation of the consolidated financial information shown on these
statements. The results for the nine months ended September 30, 2001 are not
necessarily indicative of the results to be expected for the full year or any
future period.
-----------------------------------------------
Predecessor Company
-----------------------------------------------
Period from
January 1
Year Ended December 31, to
------------------------------ December 7,
1996 1997 1998 1999
-------- -------- -------- --------------
IN THOUSANDS, EXCEPT PER SHARE DATA
STATEMENT OF OPERATIONS DATA:
Net sales.............................. $121,868 $122,397 $106,972 $101,194
Cost of sales(1)....................... 44,433 46,687 46,981 44,862
-------- -------- -------- --------
Gross profit....................... 77,435 75,710 59,991 56,332
Operating expenses:
Selling, general and
administrative....................... 63,528 67,753 55,974 47,547
Research and development............. 13,196 11,609 7,855 5,857
Amortization of intangible assets.... 3,266 3,364 2,748 2,334
Stock-based expense.................. -- -- 176 523
Transaction and reorganization....... -- -- -- 6,525
Acquired in-process research and
development costs.................. -- -- -- --
Losses of equity method investment... 500 1,217 1,979 --
-------- -------- -------- --------
Total operating expenses............. 80,490 83,943 68,732 62,786
-------- -------- -------- --------
Income (loss) from operations...... (3,055) (8,233) (8,741) (6,454)
Interest expense, net.................. 11,947 13,062 14,284 13,196
Other expense, net..................... (413) 1,277 1,044 616
-------- -------- -------- --------
Loss before income taxes and
extraordinary item................... (14,589) (22,572) (24,069) (20,266)
Provision (benefit) for income taxes... -- -- 102 190
-------- -------- -------- --------
Loss before extraordinary item......... -- -- (24,171) (20,456)
Extraordinary loss on early retirement
of debt, net of taxes................ -- -- -- --
-------- -------- -------- --------
Net loss......................... $(14,589) $(22,572) $(24,171) $(20,456)
======== ======== ======== ========
Net loss per common share, basic and
diluted(2):
Loss before extraordinary item.......
Extraordinary charge.................
Weighted-average number of common
shares outstanding...................
Pro forma basic and diluted net loss
per common share (unaudited)(3):
Loss before extraordinary item...
Extraordinary charge.............
Pro forma weighted-average number of
common shares outstanding, basic and
diluted (unaudited)(3)...............
----------------------------------------------------------
Consolidated Wright Medical Group, Inc.
----------------------------------------------------------
Period from Nine Months Ended
December 8 September 30,
to Year Ended -------------------------
December 31, December 31,
1999 2000 2000 2001
--------------- ------------ (unaudited) (unaudited)
IN THOUSANDS, EXCEPT PER SHARE DATA ----------- -----------
STATEMENT OF OPERATIONS DATA:
Net sales.............................. $ 7,976 $ 157,552 $ 117,714 $126,764
Cost of sales(1)....................... 4,997 80,370 63,562 37,967
----------- ---------- ---------- --------
Gross profit....................... 2,979 77,182 54,152 88,797
Operating expenses:
Selling, general and
administrative....................... 4,837 82,813 61,063 69,784
Research and development............. 508 8,390 6,074 6,842
Amortization of intangible assets.... 466 5,586 4,190 4,024
Stock-based expense.................. -- 5,029 2,914 1,587
Transaction and reorganization....... 3,385 -- -- --
Acquired in-process research and
development costs.................. 11,731 -- -- --
Losses of equity method investment... -- -- -- --
----------- ---------- ---------- --------
Total operating expenses............. 20,927 101,818 74,241 82,237
----------- ---------- ---------- --------
Income (loss) from operations...... (17,948) (24,636) (20,089) 6,560
Interest expense, net.................. 1,909 12,446 9,223 7,365
Other expense, net..................... 67 870 1,191 178
----------- ---------- ---------- --------
Loss before income taxes and
extraordinary item................... (19,924) (37,952) (30,503) (983)
Provision (benefit) for income taxes... (25) 1,541 1,030 1,089
----------- ---------- ---------- --------
Loss before extraordinary item......... (19,899) (39,493) (31,533) (2,072)
Extraordinary loss on early retirement
of debt, net of taxes................ -- -- -- (1,611)
----------- ---------- ---------- --------
Net loss......................... $ (19,899) $ (39,493) $ (31,533) $ (3,683)
=========== ========== ========== ========
Net loss per common share, basic and
diluted(2):
Loss before extraordinary item....... $(27,918.17) $(3,405.71) $(7,516.63) $ (0.57)
Extraordinary charge................. -- -- -- (0.20)
----------- ---------- ---------- --------
$(27,918.17) $(3,405.71) $(7,516.63) $ (0.77)
=========== ========== ========== ========
Weighted-average number of common
shares outstanding................... 1 17 6 8,037
=========== ========== ========== ========
Pro forma basic and diluted net loss
per common share (unaudited)(3):
Loss before extraordinary item... $ (2.29) $ (.09)
Extraordinary charge............. -- (.07)
---------- --------
$ (2.29) $ (.17)
========== ========
Pro forma weighted-average number of
common shares outstanding, basic and
diluted (unaudited)(3)............... 17,260 21,873
========== ========
20
------------------------------- -----------------------------------------
Predecessor Company Consolidated Wright Medical Group, Inc.
------------------------------- -----------------------------------------
As of December 31, As of December 31, As of September 30,
------------------------------- ------------------- 2001
1996 1997 1998 1999 2000 (unaudited)
IN THOUSANDS -------- -------- --------- -------- -------- -------------------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 910 $ 466 $ 579 $ 6,733 $ 16,300 $ 2,957
Working capital.................................. 50,472 40,366 27,409 83,840 54,020 48,802
Total assets..................................... 166,326 153,083 129,897 238,312 216,964 201,382
Long-term liabilities............................ 106,834 108,361 113,432 137,368 141,514 34,980
Redeemable preferred stock....................... 84,954 99,953 106,470 70,867 91,254 --
Stockholders' equity (deficit)................... $(58,506) $(97,010) $(132,045) $(22,834) $(76,976) $115,258
---------------------------------------------
Predecessor Company
---------------------------------------------
Period from
January 1
to
December 7,
1996 1997 1998 1999
-------- -------- -------- ------------
IN THOUSANDS
OTHER DATA:
Cash flows provided by (used in)
operating activities............ $ (565) $(1,539) $ 4,402 $ 8,914
Cash flows used in investing
activities...................... (4,662) (5,528) (3,179) (2,179)
Cash flows provided by (used in)
financing activities............ 5,011 6,623 (1,110) (6,105)
Adjusted EBITDA(4)................ 11,896 6,780 2,352 2,023
Depreciation...................... 11,272 12,926 9,213 6,236
Amortization of intangible
assets............................ 3,266 3,364 2,748 2,334
Capital expenditures.............. $ 3,778 $ 6,015 $ 3,147 $ 2,179
--------------------------------------------------------
Consolidated Wright Medical Group, Inc.
--------------------------------------------------------
Period from Nine Months Ended
December 8 September 30,
to Year Ended -------------------------
December 31, December 31,
1999 2000 2000 2001
------------- ------------ (unaudited) (unaudited)
IN THOUSANDS ----------- -----------
OTHER DATA:
Cash flows provided by (used in)
operating activities............ $ (22,701) $ 18,151 $ 9,490 $ (1,481)
Cash flows used in investing
activities...................... (22,410) (14,109) (10,235) (13,012)
Cash flows provided by (used in)
financing activities............ 51,844 6,028 6,530 1,204
Adjusted EBITDA(4)................ (3,327) 25,198 19,609 19,221
Depreciation...................... 489 11,008 8,708 7,228
Amortization of intangible
assets............................ 466 5,586 4,190 4,024
Capital expenditures.............. $ 11 $ 14,109 $ 10,235 $ 13,235
--------------------------
(1) In connection with our recapitalization and our acquisition of Cremascoli,
we recorded inventory step-ups pursuant to APB No. 16. This accounting
treatment required a $31.1 million step-up of inventories above
manufacturing costs. The step-up was charged to cost of sales over the
following twelve months, reflecting the estimated period over which the
inventory was sold. Cost of sales was charged $2.0 million in the period
from December 8 to December 31, 1999, $29.1 million in the year ended
December 31, 2000 of which $25.1 million was charged in the nine months
ended September 30, 2000.
(2) Net loss applicable to common stockholders includes preferred stock
dividends of $230,000 for the period from December 8, to December 31, 1999,
preferred stock dividends of $4.4 million and $13.1 million of deemed
dividends on the series C preferred stock for the year ended December 31,
2000, preferred stock dividends of $3.2 million and $13.1 million of deemed
dividends on the series C preferred stock for the nine months ended
September 30, 2000, and preferred stock dividends of $2.5 million for the
nine months ended September 30, 2001.
(3) In calculating the pro forma net loss per share, we have given effect to the
conversion of all of our outstanding preferred stock, plus accrued dividends
into common stock as if the conversion occurred at the beginning of the
respective period.
(4) Adjusted EBITDA consists of net income (loss) excluding net interest, taxes,
depreciation, amortization, stock based expenses, non-cash charges related
to acquired inventory, the in-process research and development write-off and
the extraordinary loss on early retirement of debt. Adjusted EBITDA is
provided because it is a measure of financial performance commonly used as
an indicator of a company's historical ability to service debt. We have
presented Adjusted EBITDA to enhance your understanding of our operating
results. You should not construe it as an alternative to operating income as
an indicator of operating performance. It should also not be construed as an
alternative to cash flows from operating activities as a measure of
liquidity determined in accordance with GAAP. We may calculate Adjusted
EBITDA differently from other companies. For further information, see our
consolidated financial statements and related notes elsewhere in this
prospectus.
21
Management's Discussion and Analysis of
Financial Condition and Results of Operations
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE "SELECTED FINANCIAL DATA" AND
OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN
THIS PROSPECTUS. THIS DISCUSSION AND ANALYSIS CONTAINS FORWARD-LOOKING
STATEMENTS BASED ON OUR CURRENT EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND
PROJECTIONS. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES.
OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE INDICATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY
DESCRIBED UNDER THE HEADING "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
Overview
We are a global orthopaedic device company specializing in the design,
manufacture and marketing of reconstructive joint devices and bio-orthopaedic
materials. Reconstructive joint devices are used to replace knee, hip and other
joints that have deteriorated through disease or injury. Bio-orthopaedic
materials are used to replace damaged or diseased bone and to stimulate bone
growth. We have been in business for over fifty years and have built a
well-known and respected brand name and strong relationships with orthopaedic
surgeons.
Our corporate headquarters and U.S. operations are located in Arlington,
Tennessee, where we conduct our domestic manufacturing, warehousing, research
and administrative activities. Outside the U.S., we operate manufacturing and
administrative facilities in Toulon, France, research, distribution and
administrative facilities in Milan, Italy and sales and distribution offices in
Canada, Japan and across Europe. Our global distribution system consists of a
sales force of approximately 450 persons that market our products to orthopaedic
surgeons and hospitals. We have approximately 200 exclusive independent
distributors and sales associates in the U.S. and approximately 250 distributors
and sales associates internationally. In addition, we sell our products to
stocking distributors in certain international markets, who resell the products
to third-party customers.
In December 1999, an investment group led by Warburg Pincus acquired majority
ownership of our predecessor company, Wright Medical Technology, Inc., in a
transaction that recapitalized our business. Our recapitalization was accounted
for using the purchase method of accounting and generated intangible assets
totaling $34.6 million, of which $10.0 million was allocated to goodwill. In
addition, we recorded a $24.0 million inventory step-up in accordance with APB
No. 16. The step-up was subsequently charged to cost of sales over the
twelve-month period during which these inventories were estimated to be sold,
totaling $2.0 million during the period from December 8 to December 31, 1999 and
$22.0 million during 2000. Also in connection with our recapitalization in 1999,
we recorded a one-time write-off of purchased in-process research and
development costs totaling $11.7 million.
In December 1999, immediately following our recapitalization, we acquired
Cremascoli Ortho Group, an orthopaedic device company based in Toulon, France.
As a result of this acquisition, we enhanced our product development
capabilities, expanded our presence in Europe and extended our product
offerings.
The acquisition, which was accounted for using the purchase method of
accounting, generated intangible assets totaling $24.9 million, of which
$8.2 million was allocated to goodwill. In addition, we recorded an inventory
step-up totaling $7.1 million. The step-up was subsequently charged to cost of
sales over the nine-month period from January 1, 2000 to September 30, 2000,
during which these inventories were estimated to be sold. No in-process research
and development was identified related to this acquisition. The acquisition of
Cremascoli accounted for approximately $34.2 million of the increase in our
total net sales for the year 2000 as compared to 1999.
Net sales in our international markets totaled $29.4 million, or approximately
27% of our total net sales in 1998, $29.6 million, or approximately 27% of our
total net sales in 1999, $62.6 million, or approximately 40% of our total net
sales in 2000 and $46.8 million, or approximately 37% of our total net sales in
the first nine months of 2001. No single foreign country accounted for more than
10% of our total net sales during 1999 or 2000; however, Italy and France
together represented approximately 17% of our total net sales in 2000 and 16% in
the first nine months of 2001.
In August 2001, we began selling our products in Japan through our newly formed
wholly-owned Japanese subsidiary. In Japan, we have transitioned from a
distributor-based sales network to a direct sales initiative. We view this
direct sales initiative as a positive event in the long-term growth of our
international business.
22
During the mid- and late-1990s, we experienced operating difficulties resulting
from several successive years of flat or declining net sales, an expense
infrastructure that reduced our profit generating capability and debt service
and repayment requirements that became difficult to meet. Following our
December 1999 recapitalization, a new management team was put in place. This
management team implemented a turnaround strategy that increased our focus and
spending on research and development, significantly raised the efficiency of our
manufacturing processes and improved our sales force productivity. Since then,
we have experienced growth in net sales across our primary product lines,
improved our operating efficiencies and renewed our ability to meet our debt
service and repayment obligations.
Net Sales and Expense Components
NET SALES
We derive our net sales primarily from the sale of reconstructive joint devices
and bio-orthopaedic materials. Our reconstructive joint device net sales are
derived from three primary product lines: knees, hips and extremities. Of our
total net sales in 2000, our knee product lines represented approximately 40%,
our hip product lines represented approximately 30% and our extremities product
lines represented approximately 11%. Sales of our bio-orthopaedic materials
represented approximately 13% of our total net sales in 2000. In the first nine
months of 2001, our knee, hip, extremity and bio-orthopaedic product lines
represented approximately 40%, 28%, 12% and 15%, respectively, of our total net
sales.
Other product sales totaled approximately 6% of our total net sales in 2000 and
5% in the first nine months of 2001, consisting of various orthopaedic products
not considered to be part of our knee, hip, extremity or bio-orthopaedic product
lines that we manufactured directly or distributed for others. A substantial
majority of our other product sales consisted of products added as a result of
our acquisition of Cremascoli. We anticipate that other product sales will
decline in the future, both in amount and as a percentage of total net sales, as
we continue to focus our resources on our reconstructive joint device and
bio-orthopaedic product lines.
Net sales consist of product sales less provisions for sales returns, which are
established at the time of the sale. We recognize revenue upon shipment of a
product to customers or, for inventory held on consignment, when evidence of
customer acceptance is obtained. In limited circumstances, we have agreed to
repurchase inventory from certain international stocking distributors if this
inventory is not acquired by a third-party customer. In these instances, revenue
recognition is deferred until evidence is obtained that the inventory has been
sold to a third-party customer.
23
Our total net sales were $107.0 million in 1998, $109.2 million in 1999,
$157.6 million in 2000 and $126.8 million for the nine months ended
September 30, 2001. The following table sets forth our net sales by product line
for 1998, 1999, 2000 and for the nine months ended September 30, 2000 and 2001,
respectively:
----------------------------------------------------------
CONSOLIDATED WRIGHT MEDICAL GROUP, INC.
----------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000
(UNAUDITED)
--------------------------- ---------
PREDECESSOR COMPANY
---------------------------
PERIOD FROM
YEAR ENDED JANUARY 1 PERIOD FROM
DECEMBER TO DECEMBER DECEMBER 8 YEAR ENDED
31, 7, TO DECEMBER 31, DECEMBER 31, 2001
IN THOUSANDS: 1998 1999 1999 2000 (UNAUDITED)
----------- ------------- --------------- ------------- ---------
Knee products.......... $56,116 $52,753 $ 3,448 $62,889 $47,247 $50,164
Hip products........... 28,330 23,596 1,912 47,690 35,855 35,692
Extremity products..... 13,675 13,774 836 17,271 12,839 15,349
Bio-orthopaedic
materials............ 4,869 7,367 896 20,996 15,065 19,280
Other.................. 3,982 3,704 884 8,706 6,708 6,279
----------- ------------- --------------- ------------- --------- ---------
Total net sales...... $106,972 $101,194 $7,976 $157,552 $117,714 $126,764
=========== ============= =============== ============= ========= =========
AS A PERCENTAGE OF
TOTAL NET SALES:
Knee products.......... 52.5% 52.1% 43.2% 39.9% 40.1% 39.6%
Hip products........... 26.5% 23.3% 24.0% 30.3% 30.5% 28.2%
Extremity products..... 12.8% 13.6% 10.5% 11.0% 10.9% 12.1%
Bio-orthopaedic
materials............ 4.6% 7.3% 11.2% 13.3% 12.8% 15.2%
Other.................. 3.6% 3.7% 11.1% 5.5% 5.7% 4.9%
----------- ------------- --------------- ------------- --------- ---------
Total net sales...... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
=========== ============= =============== ============= ========= =========
EXPENSES
COST OF SALES. Cost of sales consists primarily of direct labor, allocated
manufacturing overhead, raw materials and components, royalty expenses
associated with licensing technologies used in our products or processes and
certain other period expenses. Cost of sales and corresponding gross profit
percentages can be expected to fluctuate in future periods depending upon
changes in our product sales mix and prices, distribution channels and
geographies, manufacturing yields, period expenses and levels of production
volume.
Our costs of sales for the period from December 8 to December 31, 1999 and the
year ended December 31, 2000 are not comparable to those of prior periods
because (a) under U.S. generally accepted accounting principles, we were
required to step-up our inventories in connection with our recapitalization and
the acquisition of Cremascoli, in the amount of $31.1 million and (b) we changed
our method of accounting for surgical instruments effective December 8, 1999,
which discontinued the practice of charging related expenses to cost of sales.
The following table sets forth our cost of sales expressed as a percentage of
sales for 1998, 1999, 2000 and for the nine month periods ended September 30,
2000 and 2001, respectively, adjusted to exclude the cost of sales associated
with our inventory step-ups and the costs associated with surgical instruments
historically carried in inventories:
-------------------------- ---------------------------------------------------------
PREDECESSOR COMPANY CONSOLIDATED WRIGHT MEDICAL GROUP, INC.
-------------------------- ---------------------------------------------------------
PERIOD FROM NINE MONTHS ENDED
YEAR ENDED JANUARY 1 PERIOD FROM SEPTEMBER 30,
DECEMBER TO DECEMBER DECEMBER 8 TO YEAR ENDED -------------------------
31, 7, DECEMBER 31, DECEMBER 31, 2001
1998 1999 1999 2000 (UNAUDITED)
----------- ------------ ------------- ------------- 2000 -----------
(UNAUDITED)
-----------
Cost of sales............ 43.9% 44.3% 62.7% 51.0% 54.0% 30.0%
Effect of acquisition
costs assigned to
inventory.............. -- -- (25.1)% (18.5)% (21.3)% --
Surgical instrument
expenses included in
cost of sales prior to
change in method of
accounting............. (4.1)% (2.9)% -- -- -- --
-------- -------- --------- --------- -------- --------
Adjusted cost of
sales................ 39.8% 41.4% 37.6% 32.5% 32.7% 30.0%
======== ======== ========= ========= ======== ========
24
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense consists primarily of salaries, sales commissions, royalty expenses
associated with our key surgeons, marketing costs, facility costs, other general
business and administrative expenses and, beginning on December 8, 1999,
depreciation expense associated with surgical instruments that we loan to
surgeons to use when implanting our products. These surgical instruments are
depreciated over their useful life of 1 to 6 years. We expect that our selling,
general and administrative expenses will increase in absolute dollars in future
periods to the extent that any further growth in net sales drives commissions
and royalties, and as we continue to add infrastructure to support our expected
business growth and public company requirements.
RESEARCH AND DEVELOPMENT. Research and development expense includes costs
associated with the design, development, testing, deployment, enhancement and
regulatory approval of our products. We anticipate that our research and
development expenditures will increase in absolute dollars in future periods as
we continue to increase our investment in product development initiatives;
however, we expect these expenses to be relatively consistent as a historical
percentage of net sales.
AMORTIZATION OF INTANGIBLES. Amortization of intangible assets is primarily
related to our recapitalization and our acquisition of Cremascoli. Intangible
assets consist of goodwill and purchased intangibles principally related to
completed technology, workforce, distribution channels and trademarks. Goodwill
is amortized on a straight-line basis over 20 years, and purchased intangibles
are amortized over periods ranging from three months to 15 years.
At December 31, 2000 and September 30, 2001, we had net intangible assets
totaling $54.7 million and $50.0 million, respectively. We expect to amortize
approximately $5.4 million in 2001. This amortization gives effect to the
settlement of $3.1 million of Cremascoli acquisition consideration remaining in
escrow as of September 30, 2001. This matter was in arbitration and was settled
in October 2001. Accordingly, we recorded additional goodwill of approximately
$1.1 million for the portion of the escrow released to the sellers.
STOCK-BASED EXPENSE. Stock-based expense includes the amortization of non-cash
deferred compensation recorded in connection with the issuance of stock options,
stock-based incentives and the sale of equity securities when the estimated fair
market value of the securities is deemed for financial reporting purposes to
exceed their respective exercise or sales price. Additionally, for stock-based
incentives granted to consultants, we defer and amortize the fair value of such
grants as calculated pursuant to Statement of Financial Accounting Standards
(SFAS) No. 123. We amortize deferred compensation on a straight-line basis over
the respective vesting periods of the stock-based incentives, which is generally
four years, and we immediately expense all stock-based compensation associated
with the issuance of equity where no vesting restrictions apply.
We issued stock options and stock-based incentives and sold equity securities
generating approximately $7.9 million of stock-based compensation for the year
ended December 31, 2000 and we recognized $5.0 million of this amount during
2000 as compensation expense. In the first nine months of 2001, we incurred
approximately $3.6 million of additional deferred compensation related to option
grants, and we recognized stock-based compensation expense totaling
$1.6 million. Based on the stock-based compensation we incurred through
September 30, 2001, we expect that $2.0 million in 2001, $1.7 million in 2002,
$1.7 million in 2003, $1.5 million in 2004 and $200,000 in 2005 will be
recognized as non-cash stock-based expense.
INTEREST EXPENSE, NET. Interest expense consists primarily of interest
associated with borrowings outstanding under our senior credit facilities and
our subordinated notes, offset partially by interest income on invested cash
balances. Interest expense includes $457,000 and $339,000 for the first nine
months of 2001 and 2000, respectively, of non-cash expense associated with the
amortization of deferred financing costs resulting from the origination of our
senior credit facilities. In July 2001, we repaid amounts outstanding under our
Euro-denominated senior credit facility, and in August 2001, we renegotiated the
terms of our dollar-denominated senior credit facility. Accordingly, we estimate
the amortization of deferred financing costs to be approximately $255,000
annually over the remaining term of our new senior credit facility.
We used the net proceeds from our initial public offering completed on July 18,
2001 to repay our senior subordinated notes and reduce our outstanding bank
borrowings. As a result, we expect that net interest expense will decrease in
periods following our initial public offering as compared to prior periods.
Based on interest rates in effect at September 30, 2001, we expect that our
repayment of debt in connection with our initial public offering will reduce our
net interest expense by approximately $7.8 million annually.
OTHER (INCOME)/EXPENSE, NET. Other (income)/expense consists primarily of net
gains and losses resulting from foreign currency fluctuations. We expect other
expense and income to fluctuate in future periods depending upon our relative
exposures to foreign currency risk and ultimate fluctuations in exchange rates.
25
PROVISION/(BENEFIT) FOR INCOME TAXES. Our payment of income taxes has generally
been limited to earnings generated by certain of our foreign operations,
principally in Europe. Domestically, we have incurred no tax liability in recent
years. At December 31, 2000, we had net operating loss carryforwards of
approximately $62.8 million domestically, which expire in 2010 through 2020, and
$15.2 million internationally, which expire in 2003 through 2006. Generally, we
are limited in the amount of net operating loss carryforwards which can be
utilized in any given year. Additionally, we have domestic tax credit
carryforwards of approximately $1.1 million, which expire through 2012.
In light of our historical operating performance, we have established a
valuation allowance against both our domestic and international net operating
loss carryforwards. We will continue to reassess the realization of our net
operating loss carryforwards and adjust the related valuation allowance as
necessary.
EXTRAORDINARY LOSS ON EARLY RETIREMENT OF DEBT. We used the proceeds of our
initial public offering to repay amounts outstanding under our Euro-denominated
senior credit facility, and renegotiated the terms of our dollar-denominated
senior credit facility. Accordingly, we incurred an extraordinary non-cash
charge totaling approximately $1.6 million principally related to unamortized
loan costs relating to that debt.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. Upon consummation of the
recapitalization, we charged to income approximately $11.7 million, representing
the estimated fair value of purchased in-process research and development, or
IPRD, that had not yet reached technological feasibility and had no alternative
future use (see Note 3 to our consolidated financial statements). The value was
determined by estimating the costs to develop the purchased in process research
and development into commercially viable products, estimating the resulting net
cash flows from such projects, and discounting the net cash flows back to their
present values. A discount rate and likelihood of success factor were applied to
each project to take into account the uncertainty surrounding the successful
development and commercialization of the purchased in process research and
development.
The resulting net cash flows from such projects were based on our management's
best estimates of revenue, cost of sales, research and development costs,
selling, general and administrative costs, and income taxes from such projects,
and the net cash flows reflect the assumptions that would be used by market
participants.
A summary of the projects is as follows:
----------------------------------------------------------
YEAR WHEN
MATERIAL NET CASH
IN-FLOWS ESTIMATED
EXPECTED LIKELIHOOD OF DISCOUNT ACQUIRED
PROJECT TO BEGIN SUCCESS RATE IPRD
---------------------------------------------------------- ----------------- ------------- ----------- --------
GUARDIAN-Registered Trademark-
(S.O.S.-Registered Trademark- Project).................. 2000 85% 22% $ 954
OSTEOSET-Registered Trademark- Derivatives................ 2000 60 22 3,195
New Shoulder (OLYMPIA-TM-)................................ 2002 95 22 1,088
Fat Pad Augmentation Material............................. 2003 50 22 892
Structural Resorbable Bone Graft Substitute............... 2005 50 22 3,340
Other Orthopaedic Projects................................ -- -- 22 2,262
-------
Total............................................... $11,731
=======
GUARDIAN-REGISTERED TRADEMARK- (S.O.S.-REGISTERED TRADEMARK- PROJECT)
The objective of the Segmented Orthopaedic System, or
S.O.S.-Registered Trademark-, was to develop an adjustable prosthesis to be used
in limb salvage for adolescents.
We expected development efforts to be completed by July 2000 with an estimated
completion cost of $217,000 and projected first year revenues of $1.9 million.
We deemed the technical and commercialization risks to be low because this
product is considered a line extension and some of the products do not require
FDA approval because they are minor modifications to existing products.
Development efforts were completed in May 2000 at a total cost of $63,000 and
first year revenues were $346,000. The reduction in first year revenues was
primarily due to the delay in commercialization of the
S.O.S.-Registered Trademark- Adjustable product line. The delay in completion of
this portion of the S.O.S-Registered Trademark- development project was due to
negotiation efforts with a third-party developer, which have now been completed.
Commercialization of this product was completed in January 2002 and first year
revenues are expected to be $930,000 with no additional development costs
expected to be incurred.
26
OSTEOSET-REGISTERED TRADEMARK- DERIVATIVES
The objective of these products was to develop bone substitute products to be
used to repair bone defects.
At the date of our recapitalization, we expected development efforts to be
completed by April 2001 with estimated completion costs of $3.6 million and
first year revenues projected at $1.0 million. Although this product must pass
regulatory qualifications, we deemed the technical and commercialization risks
to be moderate.
We are currently pursuing an evaluation and a pre-clinical study. We expect
development efforts to be completed by July 2002 with first year revenues of
$1.0 million. Full commercialization of this product could be delayed pending
the FDA's final conclusion on whether to categorize this product as a tissue or
a device for regulatory clearance purposes.
NEW SHOULDER (OLYMPIA-TM-)
The objective of this project was to develop a product for replacement of
arthritic shoulders and for repairing shoulder fractures.
At the date of the recapitalization, $314,000 had been spent on this project
with additional expenditures of $70,000 anticipated through completion. We
initially expected development efforts to be completed by the end of 2000 with
projected first year revenues of $800,000. We deemed the technical and
commercialization risks to be low because similar competitive products are
already in the market.
Following a successful evaluation period, development was completed in
December 2001 with first year revenue expectations of $1.5 million in 2002.
Revenue expectations have been increased from original estimates primarily due
to customer responses received from our clinical evaluations and field sales
force enthusiasm for this product.
FAT PAD AUGMENTATION MATERIAL
The objective of this product was to develop a product for the treatment and
prevention of certain diabetic foot ulcers.
At the date of our recapitalization, we anticipated a completion date of
January 2003 with estimated completion costs of $170,000 and first year revenues
of $1.5 million in 2005. We deemed the technical and commercialization risks to
be high because this product required certain testing to meet regulatory
approval.
Due to the costly and lengthy process of identifying an appropriate material and
receiving regulatory approval, we terminated this project in May 2001.
STRUCTURAL RESORBABLE BONE GRAFT SUBSTITUTE
We intended this product to be a bone putty product that would provide
structural support to correct bone defects.
At the date of our recapitalization, we expected development efforts to be
completed by the end of 2004 with projected first year revenues of $274,000 in
2005 and estimated completion costs of $5.9 million. We deemed the technical and
commercialization risks to be moderate. While this product has to pass certain
regulatory qualifications, we believe the worldwide market for such a new and
innovative product is very large.
We are continuing development efforts on this product. We expect development
efforts to be completed in 2002 with first year revenues of $500,000 expected in
2003.
There were eleven additional projects included in the valuation of purchased in
process research and development. In total, these projects represented 19% of
the valuation, although, none individually represented more than 6% of the total
valuation. These projects related to a variety of orthopaedic medical device
products.
We plan to use our existing cash to develop the purchased in process research
and development related to our recapitalization into commercially viable
products. This development consists primarily of the completion of all planning,
designing, clinical evaluation testing activities and regulatory approvals,
where applicable, that are necessary to establish that a product can be
successfully developed. Bringing the purchased in process research and
development to market also includes testing the product for compatibility and
interoperability with commercially viable products. As of the date of our
recapitalization, we estimated the costs to be incurred to develop the purchased
in-process technology into commercially viable products to be approximately
$13.7 million.
27
If these projects are not successfully developed, our revenue may be adversely
affected in future periods. Additionally, the value of other intangible assets
acquired may become impaired. We are continuously monitoring our development
projects. We believe that the assumptions used in the valuation of purchased in
process research and development represent a reasonably reliable estimate of the
future benefits attributable to the purchased in process research and
development. We cannot be certain that actual results will not deviate from our
assumptions in future periods.
Results of Operations
The following table sets forth, for the periods indicated, certain financial
data expressed as a percentage of net sales (in thousands):
---------------------------------------------------
CONSOLIDATED WRIGHT MEDICAL GROUP, INC.
---------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
(UNAUDITED)
-------------------
2000
--------
--------------------------
PREDECESSOR COMPANY
--------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED JANUARY 1 DECEMBER 7,
DECEMBER TO DECEMBER TO YEAR ENDED
31, 7, DECEMBER 31, DECEMBER 31,
1998 1999 1999 2000 2001
----------- ------------ ------------- ------------- --------
Net sales........................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales....................... 43.9 44.3 62.7 51.0 54.0 30.0
--------- --------- ---------- ---------- ------- -------
Gross profit...................... 56.1 55.7 37.3 49.0 46.0 70.0
Operating expenses:
Selling, general and
administrative.................. 52.3 47.0 60.6 52.6 51.9 55.0
Research and development.......... 7.3 5.8 6.4 5.3 5.1 5.4
Amortization of intangible
assets.......................... 2.6 2.3 5.8 3.5 3.6 3.2
Stock-based expense............... .2 .5 -- 3.2 2.5 1.3
Transaction and reorganization.... -- 6.5 42.4 -- -- --
Acquired in-process research and
development..................... -- -- 147.1 -- -- --
Losses of equity method
investment...................... 1.9 -- -- -- -- --
--------- --------- ---------- ---------- ------- -------
Total operating expenses........ 64.3 62.1 262.3 64.6 63.1 64.9
--------- --------- ---------- ---------- ------- -------
Income (loss) from operations... (8.2) (6.4) (225.0) (15.6) (17.1) 5.1
Interest expense, net............... 13.3 13.0 23.9 7.9 7.8 5.8
Other (income) expense, net......... 1.0 .6 .9 .6 1.0 .1
--------- --------- ---------- ---------- ------- -------
Loss before income taxes and
extraordinary item.............. (22.5) (20.0) (249.8) (24.1) (25.9) (.8)
Provision / (benefit) for income
taxes............................. .1 .2 (.3) 1.0 .9 .8
--------- --------- ---------- ---------- ------- -------
Loss before extraordinary item...... (22.6) (20.2) (249.5) (25.1) (26.8) (1.6)
Extraordinary loss on early
retirement of debt, net of
taxes............................. -- -- -- -- -- (1.3)
--------- --------- ---------- ---------- ------- -------
Net loss........................ (22.6)% (20.2)% (249.5)% (25.1)% (26.8)% (2.9)%
========= ========= ========== ========== ======= =======
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2001 TO NINE MONTHS ENDED
SEPTEMBER 30, 2000
NET SALES. Net sales totaled $126.8 million in the nine months ended
September 30, 2001, compared to $117.7 million in the nine months ended
September 30, 2000, representing an increase of $9.1 million, or 8%. Excluding
the negative impact of foreign exchange rate fluctuations, net sales would have
increased 9% when compared with the prior year comparable period. The increase
resulted primarily from unit sales growth in our knee, extremity and
bio-orthopaedic product lines.
Knee sales increased $2.9 million, or 6%, in the nine months ended
September 30, 2001 compared to the corresponding period in 2000 due to the
continued growth of our ADVANCE-Registered Trademark- knee system, which was
partially offset by decreased sales of some of our more mature knee products.
Extremity sales increased $2.5 million, or 20%, in the nine months ended
September 30, 2001 compared to the corresponding period in 2000 due to the
introduction of our new LOCON-T-TM-, EVOLVE-Registered Trademark- and
NEWDEAL-TM- products and continued sales growth for our core extremity products.
Bio-orthopaedic product sales increased $4.2 million, or 28%,
28
and hip sales remained relatively constant for the nine months ended
September 30, 2001 when compared to the corresponding 2000 period. The increase
in bio-orthopaedic product sales was primarily due to the continued success of
our ALLOMATRIX-TM- line of bone graft substitute products. Continued growth of
our CONSERVE-Registered Trademark- and PROFEMUR-TM- hip systems coupled with the
second quarter 2001 introduction of our LINEAGE-Registered Trademark- hip system
was offset by reduced levels of block-purchase sales, or large volume
contractual agreements, for other hip products in certain international markets
during the nine months ended September 30, 2001 compared to the corresponding
2000 period.
Domestic net sales totaled $80.0 million in the nine months ended September 30,
2001, representing 63% of our total net sales, compared to $71.0 million in the
corresponding period of 2000, which represented 60% of total net sales.
International sales, net of negative currency impact, totaled $46.8 million in
the nine months ended September 30, 2001 and $46.7 million in the nine months
ended September 30, 2000.
COST OF SALES. Cost of sales as a percentage of net sales decreased from 54%
for the nine months ended September 30, 2000 to 30% in the corresponding period
of 2001. Cost of sales was negatively impacted during the 2000 period by
$25.1 million of non-cash expense associated with inventory step-ups related to
our recapitalization and the Cremascoli acquisition. Excluding this non-cash
expense, cost of sales as a percentage of sales decreased from 33% during the
first nine months of 2000 to 30% in the first nine months of 2001. This decrease
was primarily due to improved margins resulting from efficiency gains and from
moderate shifts in sales composition to the United States market and to higher
margin product lines, such as bio-orthopaedics.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense, exclusive of stock-based expense, increased $8.7 million, or 14%, from
$61.1 million in the nine months ended September 30, 2000, to $69.8 million in
the nine months ended September 30, 2001. The increase was primarily
attributable to increased commissions and royalties resulting from domestic
sales growth, infrastructure additions to support our Japanese direct sales
initiative, costs associated with senior management additions, and expenses
related to enhancing our systems and administrative capabilities.
RESEARCH AND DEVELOPMENT. Research and development expenses, exclusive of
stock-based expense, increased $768,000, or 13%, from $6.1 million in the nine
months ended September 30, 2000 to $6.8 million in the corresponding period of
2001. The majority of this increase was due to additional personnel costs and
professional fees associated with increased product development efforts in the
2001 period.
AMORTIZATION OF INTANGIBLE ASSETS. Non-cash charges associated with the
amortization of intangible assets decreased $166,000, or 4%, for the nine months
ended September 30, 2000 compared to the nine months ended September 30, 2001.
Amortization for both the 2000 and 2001 periods was primarily attributable to
intangible assets resulting from our recapitalization and subsequent acquisition
of Cremascoli in December 1999.
STOCK-BASED EXPENSE. Stock-based expense totaled approximately $1.6 million in
the first nine months of 2001, consisting of non-cash charges of $1.2 million in
connection with the amortization of deferred compensation associated with
employee stock option grants issued below fair market value, $315,000 resulting
from the sale of equity securities below fair market value and $101,000 of other
stock-based expenses. Stock-based expense totaled $2.9 million in the nine
months ended September 30, 2000, consisting of non-cash charges of $1.9 million
resulting from the sale of equity securities below fair market value, $907,000
for stock awards to non-employees, and $107,000 in amortization of deferred
compensation associated with employee stock option grants issued below fair
market value.
INTEREST EXPENSE, NET. Interest expense, net, totaled $7.4 million and
$9.2 million in the first nine months of 2001 and 2000, respectively. The
significant decrease in net interest expense is the result of our use of the
proceeds from our initial public offering in July 2001 to repay our senior
subordinated notes, to significantly reduce our outstanding bank borrowings and
to increase our invested cash balances. Additionally, we were able to negotiate
more favorable terms with regards to the interest rate charged on borrowings
under our new senior credit facility.
OTHER (INCOME)/EXPENSE, NET. Other expense, net totaled $178,000 and
$1.2 million in the first nine months of 2001 and 2000, respectively, and
consisted primarily of net losses resulting from foreign currency fluctuations.
PROVISION/(BENEFIT) FOR INCOME TAXES. We recorded a tax provision of
$1.1 million and $1.0 million in the first nine months of 2001 and 2000,
respectively. The tax provision in both periods primarily resulted from taxes
incurred related to earnings generated by our international operations. The
differences between our effective tax rate and applicable statutory rates are
primarily due to changes in the valuation allowance related to our net operating
loss carryforwards.
29
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2000, 1999 (INCLUDING THE PERIODS
FROM JANUARY 1 TO DECEMBER 7, 1999 AND FROM DECEMBER 8 TO DECEMBER 31, 1999) AND
1998.
NET SALES. Net sales totaled $157.6 million for 2000, compared to
$109.2 million for 1999, representing an increase of $48.4 million, or 44%. Of
this increase, approximately $34.2 million, or 31%, is attributable to the
inclusion of a full year of net sales of Cremascoli. The remainder of the
increase, totaling $14.2 million, or 13%, resulted primarily from unit sales
growth across our knee, hip, extremity and bio-orthopaedic product lines.
Unfavorable exchange rates negatively impacted net sales by approximately 4%
during 2000.
Knee sales increased $6.7 million, or 12%, in 2000 compared to 1999, of which
$8.0 million was attributable to increased knee sales related to the Cremascoli
acquisition, offset by a decrease of $1.3 million in sales of existing knee
products. A decrease in sales of certain of our more mature knee systems was
offset by a significant increase in our ADVANCE-Registered Trademark- knee
system. Hip sales increased $22.2 million, or 87%, in 2000 compared to 1999, of
which $19.4 million was attributable to a full year of net sales by Cremascoli.
Increased sales of PERFECTA-Registered Trademark- and
CONSERVE-Registered Trademark- hip products accounted for the substantial
remainder of this growth. Extremity sales increased $2.7 million, or 18%, in
2000 compared to 1999, and bio-orthopaedic products increased $12.7 million, or
154%, in 2000 compared to 1999. The substantial majority of the increase in
bio-orthopaedic product sales was due to ALLOMATRIX-TM- injectable putty, which
was launched in late 1999.
Net sales in the United States totaled $95.0 million in 2000, representing 60%
of our total net sales. International sales totaled $62.6 million in 2000, net
of a negative currency impact of $6.3 million.
Net sales totaled $109.2 million for 1999, compared to $107.0 million for 1998,
representing an increase of $2.2 million, or 2%. We acquired Cremascoli in
December 1999, resulting in a net sales increase of $330,000. The remainder of
our 1999 net sales growth resulted primarily from increases in our
bio-orthopaedic products that were partially offset by decreases in our hip
product sales. Bio-orthopaedic product sales increased by $3.4 million, or 70%,
due to continued growth of our OSTEOSET-TM- synthetic bone graft substitute and
the introduction of ALLOMATRIX-TM- injectable putty in late 1999. Knee products
as a group increased slightly in 1999 as compared to 1998, resulting from an
increase in sales of our ADVANCE-Registered Trademark- knee system, offset by
decreases in sales of our ADVANTIM-Registered Trademark- Knee System and
AXIOM-Registered Trademark- Knee System. Hip sales decreased by $2.8 million, or
10%, as a result of declines in sales across our hip system product lines.
Extremity products increased slightly in 1999 compared to 1998 due to growth
across the product line. The impact of foreign exchange rate fluctuations was
not significant in 1999 or 1998.
COST OF SALES. Cost of sales as a percentage of net sales increased from 44% in
the period from January 1 to December 7, 1999 to 63% during the period
December 8 to December 31, 1999 and decreased to 51% in 2000. Cost of sales was
negatively impacted beginning in December 1999 due to inventory step-ups
totaling $31.1 million related to our recapitalization and subsequent
acquisition of Cremascoli. These step-ups were taken as non-cash charges to cost
of sales over twelve- and nine-month periods, respectively, beginning in
December 1999, representing an estimate of the period over which such
inventories were sold. Excluding the charges associated with our inventory
revaluations and the costs associated with surgical instruments prior to our
change in accounting method, cost of sales as a percentage of sales decreased
from 41% in 1999 to 33% in 2000, representing a net improvement in gross margin
of 8% of net sales. Improved manufacturing efficiencies, resulting principally
from our lean manufacturing initiative, improved gross margin by 1% of net
sales, while shifts in our sales composition toward higher-margin product lines,
principally bio-orthopaedics, improved gross margin by approximately 6% of net
sales. Lean manufacturing initiatives refer to the process of identifying
manufacturing operations that add value to the customer and eliminating those
that do not. This results in a product that is manufactured with less human
effort, equipment, time and space. The substantial remainder of our gross margin
improvement was due to slightly more favorable net pricing changes within our
product lines.
Cost of sales as a percentage of sales increased from 44% in 1998 to 46% during
the combined period from January 1 to December 31, 1999. The resulting decrease
in gross margin was related to the strategic decision to discontinue and
liquidate our domestic spine and trauma product lines during 1999, which
negatively impacted cost of sales by approximately $1.2 million, or 1% of net
sales, and by the $2.0 million charge to cost of sales associated with inventory
step-ups, or 2% of net sales, which was partially offset by improved margins
that resulted from a shift in our sales composition toward bio-orthopaedic
products.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense, excluding stock-based expense, increased $30.4 million, or 58%, from
$52.4 million in 1999 to $82.8 million in 2000. Approximately $18.7 million of
this increase was attributable to a full year of expense for Cremascoli and
$4.6 million of the remaining increase was due to the increased depreciation
expense resulting from our change in accounting method in 2000 for surgical
instruments that we loan to surgeons. The remaining increase was attributable
primarily to increased commissions and royalties resulting from net sales
growth. As a percentage of net sales, selling, general and administrative
expenses increased from 48% in 1999 to 53% in 2000. Excluding the instrument
depreciation,
30
selling, general and administrative expenses as a percentage of net sales,
increased slightly from 48% in 1999 to 50% in 2000. Including stock-based
expense, selling, general and administrative expense increased $34.9 million, or
66%, from $52.8 million in 1999 to $87.7 million in 2000. Of this increase,
$4.4 million was due to increased levels of stock-based expense.
Selling, general and administrative expense, excluding stock-based expense,
decreased $3.6 million, or 6%, from $56.0 million in 1998 to $52.4 million in
1999, reflecting the effect of staffing reductions, reduced professional
services fees and other efficiency enhancements in our domestic operations that
were mostly offset by the addition of selling and administrative expenses
totaling $416,000, resulting from our December 1999 acquisition of Cremascoli,
and increased legal fees in our domestic operations. Including stock-based
expense, selling, general and administrative expense decreased $3.3 million, or
6%, from $56.2 million in 1998 to $52.8 million in 1999. This decrease was
offset, partially, by increased levels of stock-based expense totaling $289,000.
RESEARCH AND DEVELOPMENT. Research and development expenses, excluding
stock-based expense, increased $2.0 million, or 32%, from $6.4 million in 1999
to $8.4 million in 2000. Approximately $1.1 million of this increase was due to
a full year of expense for Cremascoli. The remaining increase of $900,000 was
due to additional personnel costs and professional fees associated with product
development efforts during 2000. Including stock-based expense, research and
development expenses increased $2.1 million, or 32%, from $6.4 million in 1999
to $8.5 million in 2000. Of this increase, $61,000 was due to increased levels
of stock-based expense.
Research and development, excluding stock-based expense, decreased
$1.5 million, or 19%, from $7.9 million in 1998 to $6.4 million in 1999. This
decrease was attributable to a reduction of personnel, consulting fees and
clinical activities from 1998 to 1999 in response to the need to reduce overall
operating expenses, partially offset by the addition of research and development
expenses totaling $31,000 as a result of our December 1999 acquisition of
Cremascoli. Including stock-based expense, research and development expenses
decreased $1.4 million, or 18%, from $7.9 million in 1998 to $6.4 million in
1999. This decrease was offset partially by increased levels of stock-based
expense totaling $58,000.
AMORTIZATION OF INTANGIBLES AND ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
COSTS. Non-cash charges associated with the amortization of intangible assets
increased by $2.8 million, or 100%, from $2.8 million in 1999 to $5.6 million in
2000. Amortization during 2000 was attributable exclusively to intangible assets
resulting from our recapitalization and subsequent acquisition of Cremascoli.
Amounts for 1999 included amortization totaling $2.3 million related to the
intangible assets of our predecessor company prior to our recapitalization and
$466,000 resulting from our recapitalization and acquisition of Cremascoli.
Amortization totaled $2.7 million during 1998 and related exclusively to the
intangible assets of our predecessor company. Acquired in-process research and
development expense totaled $11.7 million in 1999 and related entirely to our
recapitalization.
STOCK-BASED EXPENSE. Stock-based expense totaled $5.0 million in 2000,
consisting of non-cash charges of $297,000 in connection with the amortization
of deferred compensation associated with employee stock option grants issued
below fair market value, $3.8 million resulting from the sale of equity
securities below fair market value and $907,000 in connection with the
amortization of deferred compensation associated with equity incentives granted
to certain consultants. Stock-based expense was not significant in 1999 or 1998.
TRANSACTION AND REORGANIZATION. Our predecessor company recorded approximately
$6.5 million of transaction and reorganization expenses during the period from
January 1, 1999 to December 7, 1999. These costs consisted primarily of
$4.8 million of investment banking, consulting and advisory fees incurred by our
predecessor company to identify and pursue financing alternatives leading up to
our December 1999 recapitalization by Warburg Pincus and $1.3 million of
management compensation costs where no ongoing service obligations existed.
We recorded approximately $3.4 million of transaction and reorganization
expenses during the period from December 8, 1999 to December 31, 1999. These
amounts were largely attributable to $1.9 million of distributor close out costs
incurred to eliminate duplicate distributors upon integrating the Wright and
Cremascoli distribution channels and $1.1 million incurred by us for recruitment
and employee termination expenses based on an assessment of senior management
personnel needs following our recapitalization and the Cremascoli acquisition.
INTEREST EXPENSE, NET. Interest expense, net totaled $12.4 million in 2000,
$15.1 million in 1999 and $14.3 million in 1998. Interest expense, net during
2000 consisted entirely of interest associated with borrowings outstanding under
our senior credit facilities, our subordinated notes and a non-cash expense for
the amortization of deferred financing costs resulting from the origination of
our senior credit facilities, offset partially by interest income on invested
cash balances. Amounts for 1999 and 1998 are primarily related to debt
obligations that existed prior to our recapitalization.
OTHER EXPENSE, NET. Other expense, net totaled $870,000 in 2000, $683,000 in
1999 and $1.0 million in 1998. For each of these periods, other expense, net
consisted primarily of net losses resulting from foreign currency fluctuations.
31
PROVISION (BENEFIT) FOR INCOME TAXES. We recorded a tax benefit of $25,000
during the period from December 8 to December 31, 1999 and a tax provision of
$1.5 million for the year ended December 31, 2000. The tax provision in 2000
primarily resulted from taxes incurred internationally, principally related to
Cremascoli. The primary differences between our income tax provision (benefit)
and that which would have resulted based upon the applicable statutory rates was
the impact of the write-off of acquired in process research and development and
nondeductible goodwill amortization in 1999 and the impact of changes in the
valuation allowance in 2000.
Unaudited Pro Forma Financial Information
The following table sets forth our results for the years ended December 31, 1998
and 1999 on a pro forma basis as if both our December 1999 recapitalization and
our acquisition of Cremascoli occurred on each of January 1, 1998 and
January 1, 1999. We summarized this information from unaudited disclosures
appearing in Note 3 of our audited consolidated financial statements that appear
elsewhere in this prospectus. The pro forma financial information does not
purport to be indicative of what would have occurred had the recapitalization
and acquisition been made as of those dates or the results that may occur in the
future. Pro forma adjustments included reducing the 1999 cost of sales by
$2.0 million for inventory step-up charges and the elimination of the
$11.7 million expense in 1999 related to the one-time write-off of acquired
in-process research and development.
-------------------
1998 1999
IN THOUSANDS -------- --------
Net sales................................................... $140,503 $141,523
Cost of sales............................................... 53,662 55,476
-------- --------
Gross profit............................................ 86,841 86,047
-------- --------
Operating expenses:
Selling, general and administrative....................... 74,720 73,077
Research and development.................................. 8,574 7,539
Amortization of intangible assets......................... 5,112 5,112
Stock-based expense....................................... 176 523
Transaction and reorganization............................ -- 9,910
Losses of equity method investment........................ 1,979 --
-------- --------
Total operating expenses................................ 90,561 96,161
Loss from operations.................................... $(3,720) $(10,114)
======== ========
Quarterly Results of Operations
The following table presents a summary of our unaudited quarterly operating
results for each of the four quarters in 2000 and the first three quarters of
2001. We derived this information from unaudited interim financial statements
that, in the opinion of management, have been prepared on a basis consistent
with the financial statements contained elsewhere in this prospectus and include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair statement of such information when
32
read in conjunction with our audited financial statements and related notes. The
operating results for any quarter are not necessarily indicative of results for
any future period.
----------------------------------------- ------------------------------
2000 2001
(UNAUDITED) (UNAUDITED)
----------------------------------------- ------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
IN THOUSANDS -------- -------- -------- -------- -------- -------- --------
Net sales.................................. $41,899 $39,260 $ 36,555 $39,838 $45,333 $42,369 $ 39,062
Cost of sales.............................. 22,231 21,064 20,267 16,808 13,672 12,981 11,314
------- ------- -------- ------- ------- ------- --------
Gross profit........................... 19,668 18,196 16,288 23,030 31,661 29,388 27,748
------- ------- -------- ------- ------- ------- --------
Operating expenses:
Selling, general and administrative...... 21,150 20,469 19,444 21,750 23,305 23,246 23,233
Research and development................. 1,789 2,258 2,027 2,316 2,114 2,486 2,242
Amortization of intangible assets........ 1,397 1,397 1,396 1,396 1,297 1,355 1,372
Stock-based expense...................... 2 19 2,893 2,115 658 443 486
------- ------- -------- ------- ------- ------- --------
Total operating expenses................... 24,338 24,143 25,760 27,577 27,374 27,530 27,333
------- ------- -------- ------- ------- ------- --------
Income (loss) from operations.......... $(4,670) $(5,947) $ (9,472) $(4,547) $ 4,287 $ 1,858 $ 415
======= ======= ======== ======= ======= ======= ========
Seasonality
Our net sales are subject to seasonality. We traditionally experience lower
sales volumes in the summer months than throughout the rest of the year.
Liquidity and Capital Resources
We have funded our cash needs since 1998 through various equity and debt
issuances and through cash flow from operations.
In December 1999, an investment group led by Warburg Pincus acquired our
predecessor company in a recapitalization that provided us with proceeds from
new equity and subordinated debt issuances totaling $70.0 million and advances
from a new senior credit facility totaling $60.0 million. Together, these funds
were used to provide us with working capital for operations, to retire
then-outstanding debt obligations and accrued interest totaling $110.0 million,
as partial consideration for the acquisition of the former stockholders' equity
interests for $9.2 million, to pay transaction and reorganization costs of
$9.9 million and to pay acquisition costs of $2.9 million.
We financed our acquisition of Cremascoli by issuing equity and subordinated
debt in exchange for cash proceeds totaling $32.0 million and by adding a second
senior credit facility to provide additional advances totaling $17.7 million.
Subsequently, we issued additional equity and subordinated debt in exchange for
cash proceeds totaling $11.5 million during 2000 and $250,000 during the first
three months of 2001.
On July 18, 2001, we completed our initial public offering, issuing 7,500,000
shares of voting common stock at $12.50 per share, the net proceeds of which
were $84.8 million after deducting underwriting discounts and offering expenses.
We have used the net proceeds of our initial public offering to repay our
subordinated notes plus accrued interest, totaling $39.4 million, all of our
Euro-denominated senior credit facility plus interest, totaling approximately
$14.0 million, and approximately $31.4 million of our dollar-denominated senior
credit facility. Simultaneous with the closing of the offering, all of our
outstanding mandatorily redeemable, convertible preferred stock, plus accrued
dividends, was converted into 19,602,799 shares of common stock. Also in
connection with the offering, the remaining senior subordinated notes totaling
approximately $13.1 million aggregate principal amount, which were held by
Warburg Pincus, were converted into 1,125,000 shares of non-voting common stock.
On August 1, 2001, a syndicate of commercial banks entered into a new senior
credit facility with us on more favorable terms than our prior senior credit
facilities. The new senior credit facility consists of $20 million in term loans
and an unused revolving loan facility of up to $60 million. Upon entering into
the new senior credit facility, we used $20 million in term loan proceeds from
the new facility and existing cash balances to repay all remaining amounts
outstanding plus accrued interest, totaling approximately $22.5 million, under
our previous dollar-denominated senior credit facility. Thus, following our
initial public offering, the use of
33
proceeds and related transactions as described above, we have approximately
$20 million of debt outstanding, excluding capitalized lease obligations.
Borrowings under the new senior credit facility are guaranteed by all of our
subsidiaries and collateralized by all of the assets of Wright Medical
Technology, Inc., our wholly-owned subsidiary, and our other domestic
subsidiaries. The new credit facility contains customary covenants including,
among other things, restrictions on our ability to pay dividends, prepay debt,
incur additional debt and sell assets. The new credit facility also requires us
to meet certain financial tests, including a consolidated leverage (or
debt-to-equity) ratio test and a consolidated fixed charge coverage ratio test.
At our option, borrowings under the new credit facility bear interest either at
a rate equal to a fixed base rate plus a spread of .75% to 1.25% or at a rate
equal to an adjusted LIBOR plus a spread of 1.75% to 2.25%, depending on our
consolidated leverage ratio. A copy of the credit facility agreement is filed as
an exhibit to the registration statement of which this prospectus is a part.
At September 30, 2001 we had cash and equivalents totaling approximately
$3.0 million, working capital totaling $48.8 million and unused availability
under committed credit facilities, after considering outstanding letters of
credit, totaling $57.4 million. We used $1.5 million of cash in operating
activities during the first nine months of 2001 compared to $9.5 million of cash
generated by operating activities during the same period in 2000. However,
operating cash flows for the first nine months of 2001 were negatively affected
by the payment of approximately $7.0 million in accrued interest on the senior
subordinated notes paid off as a result of our initial public offering, and
$4.0 million of unrestricted cash used in an intellectual property license
settlement as described further in Note 15 to our consolidated financial
statements included elsewhere in this prospectus. Cash generated by operating
activities totaled $18.2 milllion in 2000 compared to cash used in operations of
$13.8 million for 1999 and cash generated by operating activities of
$4.4 million for 1998. Cash generated by operating activities was positively
impacted in 2000 due to improvements in earnings before non-cash expenses and
was negatively impacted in 1999 due to one-time transaction and reorganization
costs totaling $9.9 million related to our recapitalization, our acquisition of
Cremascoli and the termination or modification of certain international
distribution arrangements.
Capital expenditures totaled approximately $13.2 million for the nine months
ended September 30, 2001, $14.1 million for the full year in 2000, $2.2 million
in 1999 and $3.1 million in 1998. Historically, our capital expenditures have
consisted primarily of purchased manufacturing equipment, research and testing
equipment, computer systems and office furniture and equipment and surgical
instruments. We expect to incur capital expenditures of approximately
$19.0 million in total for 2001, approximately $3.3 million of which we
anticipate will be used for the implementation of a new enterprise computer
system and $15.7 million of which we anticipate will be used for routine
recurring capital expenditures, including instruments.
During 2000, our borrowings under our old senior credit facilities and our then
outstanding subordinated notes resulted in interest expense that was
approximately $2.4 million lower than the interest expense associated with the
debt outstanding prior to our December 1999 recapitalization. Additionally, we
retired outstanding debt obligations in connection with our recapitalization
that would otherwise have come due during 2000.
Although it is difficult for us to predict future liquidity requirements, we
believe that our current cash balances, our existing credit lines and other
available sources of liquidity, and expected cash flows from our operating
activities, will be sufficient for the foreseeable future to fund our working
capital requirements and operations, permit anticipated capital expenditures and
make required payments of principal and interest on our debt.
Quantitative and Qualitative Disclosures About Market Risk
INTEREST RATE RISK
Our exposure to interest rate risk arises principally from the variable rates
associated with our credit facilities. On September 30, 2001, we had borrowings
of $20.0 million under our credit facility which are subject to a variable rate,
with a current rate of 5.66%. Based on this, an adverse change of 1.0% in the
interest rate of all such borrowings outstanding would cause us to incur an
increase in interest expense of approximately $200,000 on an annual basis. We
currently do not hedge our exposure to interest rate fluctuations, but may do so
in the future.
FOREIGN CURRENCY RATE FLUCTUATIONS
Fluctuations in the rate of exchange between the U.S. dollar and foreign
currencies could adversely affect our financial results. Approximately 28% and
27% of our total net sales were denominated in foreign currencies during 2000
and the nine months ended September 30, 2001, respectively, and we expect that
foreign currencies will continue to represent a similarly significant
34
percentage of our net sales in the future. Costs related to these sales are
largely denominated in the same respective currencies, thereby limiting our
transaction risk exposures. However, for sales not denominated in U.S. dollars,
if there is an increase in the rate at which a foreign currency is exchanged for
U.S. dollars, it will require more of the foreign currency to equal a specified
amount of U.S. dollars than before the rate increase. In such cases, and if we
price our products in the foreign currency, we will receive less in U.S. dollars
than we did before the rate increase went into effect. If we price our products
in U.S. dollars and competitors price their products in local currency, an
increase in the relative strength of the U.S. dollar could result in our prices
not being competitive in a market where business is transacted in the local
currency.
A substantial majority of our sales denominated in foreign currencies are
derived from European Union countries and are denominated in local currencies
indexed to the Euro. Our principal exchange rate risk therefore exists between
the U.S. dollar and the Euro. Except for limited rate stabilization activities
between the British pound, which is not yet indexed, and the Euro, we do not
currently hedge our exposure to foreign currency exchange rate fluctuations. We
may, however, hedge such exposures in the future.
INFLATION
We do not believe that inflation has had a material effect on our results of
operations in recent years and periods. There can be no assurance, however, that
our business will not be adversely affected by inflation in the future.
Impact of Recently Issued Accounting Pronouncements
On June 30, 2001, the Financial Accounting Standards Board ("FASB") issued two
new pronouncements: Statement of Financial Accounting Standards ("SFAS")
No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other
Intangible Assets". The two statements modify the method of accounting for
business combinations initiated after June 30, 2001 and address the accounting
for intangible assets. SFAS 141 is effective immediately and SFAS 142 became
effective for the Company on January 1, 2002. Upon adoption of SFAS 142, we will
no longer amortize goodwill, but will evaluate it for impairment at least
annually. Accordingly, we expect our amortization of intangible assets to be
approximately $2.0 million less in 2002 than it would have been had SFAS 142 not
been issued. We are currently evaluating the impact of SFAS 142 as it relates to
goodwill impairment and the classification of our intangible assets.
In July and August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", and SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made.
SFAS 144 addresses financial accounting and reporting for the impairment of
long-lived assets and for long-lived assets to be disposed of. The Company is
required to implement SFAS 143 and 144 as of January 1, 2002. Management
believes the adoption of SFAS 143 and 144 will not have a material impact on the
Company's financial position, results of operations, or cash flows.
Factors Affecting Future Operating Results
In addition to the factors described above in this discussion and analysis, our
future financial results could vary from period to period due to a variety of
causes, including expenditures and timing relating to acquisition and
integration of businesses or products, the introduction of new products by us or
our competitors, changes in the treatment practices of our surgeon customers,
changes in the costs of manufacturing our products, supply interruptions, the
availability and cost of raw materials, our mix of products sold, changes in our
marketing and sales expenditures, changes affecting our methods of distributing
products, market acceptance of our products, competitive pricing pressures,
changes in regulations affecting our business, general economic and industry
conditions that affect customer demand, our level of research and development
activities, changes in our administrative infrastructure, foreign currency
fluctuations, changes in assets and liabilities subject to interest rate
variability and changes in related interest rates, and the effect of domestic
and international income taxes and the utilization of related net operating loss
carryforwards.
35
Business
Overview
We are a global orthopaedic device company specializing in the design,
manufacture and marketing of reconstructive joint devices and bio-orthopaedic
materials. Reconstructive joint devices are used to replace knee, hip and other
joints that have deteriorated through disease or injury. Bio-orthopaedic
materials are used to replace damaged or diseased bone and to stimulate natural
bone growth. Within these markets, we focus on the higher-growth sectors of
advanced knee implants, bone-conserving hip implants, revision replacement
implants and extremity implants, as well as on the integration of our
bio-orthopaedic products into reconstructive joint procedures and other
orthopaedic applications. In 2000, we had net sales of $157.6 million and a net
loss of $39.5 million. For the nine months ended September 30, 2001, we had net
sales of $126.8 million and a net loss of $3.7 million.
History
We have been in business for over fifty years and have built a well-known,
respected brand name and strong relationships with orthopaedic surgeons. In
December 1999, Warburg, Pincus Equity Partners, L.P. and a group of investors
acquired control of our company and led a recapitalization financing that both
reduced our debt and provided us with investment capital. Shortly thereafter, a
new management team was put in place and we acquired Cremascoli Ortho Group,
based in Toulon, France. This acquisition extended our product offerings,
enhanced our product development capabilities and expanded our European
presence. We believe that by combining Cremascoli's strength in hip
reconstruction with Wright's historical expertise in knee reconstruction and
bio-orthopaedic materials, we now offer orthopaedic surgeons a broad range of
reconstructive joint devices and bio-orthopaedic materials in over 40 countries.
In January 2000, our management team implemented several initiatives, which:
- increased our focus and spending on research and development;
- significantly raised the efficiency of our manufacturing process; and
- improved sales force productivity, leading to an increase in average sales
revenue per sales representative in the U.S. of over 29%.
In July 2001, we completed our initial public offering of 7,500,000 shares of
our common stock at a public offering price of $12.50 per share, which generated
net proceeds of $84.8 million, after deducting the underwriting discounts and
offering expenses. The proceeds of the offering were used to repay our then
outstanding subordinated notes and accrued interest and outstanding indebtedness
under our former senior credit facilities.
Orthopaedic Industry
The worldwide orthopaedic industry was estimated to be approximately
$11.0 billion in 2000 and we believe it will grow at 6-8% annually over the next
three to four years. Orthopaedic devices are commonly divided into several
primary sectors corresponding to the major subspecialties within the orthopaedic
field: reconstruction, trauma, arthroscopy, spine and bio-orthopaedic materials.
The orthopaedic industry is currently dominated by six multinational companies,
each with approximately $1.0 billion or more in annual sales. The size of these
companies leads them to concentrate their marketing and research and development
efforts on products that they believe will have a relatively high minimum
threshold level of sales. As a result, there is an opportunity for a mid-sized
orthopaedic company, such as Wright, to focus on smaller higher-growth sectors
of the orthopaedic market, while still offering a comprehensive product line to
address the needs of its customers.
RECONSTRUCTIVE JOINT DEVICE MARKET
Most reconstructive devices are used to replace or repair joints that have
deteriorated as a result of disease or injury. Despite the availability of
non-surgical treatment alternatives such as oral medications, injections and
joint fluid supplementation of the knee, severe cases of disease or injury often
require reconstructive joint surgery. Reconstructive joint surgery involves the
modification of the bone area surrounding the affected joint and the insertion
of one or more manufactured components, and may also involve the
36
use of bone cement. The reconstructive joint market is estimated at
$4.8 billion worldwide, with hip reconstruction and knee reconstruction
representing two of the largest sectors. Some of the key growth drivers of these
markets include:
- AN ELDERLY POPULATION GROWING AT A HIGHER GROWTH RATE THAN THAT OF THE GENERAL
POPULATION IN INDUSTRIALIZED COUNTRIES. In 2000, the 65 and over population in
the United States numbered approximately 34 million or 12.4% of the total
population, while growing at a higher growth rate than the overall U.S.
population. In the United States, 70% of hip fractures occur in patients 65
and over.
- AN AGING "BABY BOOMER" POPULATION WITH HIGH EXPECTATIONS OF MAINTAINING THEIR
ACTIVE LIFESTYLES. Baby boomers, on average, exercise more frequently and live
more active lifestyles than the average American. As baby boomers age, their
more active lifestyle, combined with their strong desire to maintain the
quality of life to which they are accustomed, make baby boomers increasingly
likely to suffer injuries and undergo joint reconstruction procedures.
- IMPROVING TECHNOLOGIES IN ORTHOPAEDIC IMPLANTS AND SURGICAL TECHNIQUES, WHICH
HAVE MADE RECONSTRUCTION PROCEDURES A VIABLE OPTION FOR YOUNGER PATIENTS.
Historically, joint reconstruction was reserved for older patients who tend to
be less active and who typically place less stress on their implants. However,
with advancing technologies that prolong the life of the implant and conserve
patients' existing bone, surgeons are able to accommodate younger and more
active patients.
- INCREASING UTILIZATION OF PREMIUM-PRICED REVISION REPLACEMENT IMPLANTS. The
lifespan of many reconstructive joint implants is typically 15 to 20 years,
after which time revision replacement devices must be implanted. These
revision replacement devices represent a growing proportion of reconstruction
procedures, as the first large group of patients received reconstructive joint
devices in the 1980's and these patients are outliving their initial implants.
Replacing an implant is typically more difficult than performing an initial
implant and as a result, revision replacement implants tend to be higher
priced.
The reconstructive joint market is generally divided into the areas of knees,
hips and extremities.
[GRAPHIC] [GRAPHIC]
KNEE RECONSTRUCTION. The knee joint involves the surfaces of three distinct
bones: the lower end of the femur, the upper end of the tibia or shin bone, and
the patella or kneecap. Cartilage on any of these surfaces can be damaged due to
disease or injury, leading to pain and inflammation requiring knee
reconstruction. Knee reconstruction was the largest sector of the reconstructive
joint market in 2000, accounting for sales of approximately $2.2 billion
worldwide.
A typical knee replacement uses a metal femoral component, a polyethylene or
polyethylene and metal tibial component, and a polyethylene patella component.
The femoral component is attached to the femur and is typically constructed of
cobalt chrome. The femoral components come in different types of stem textures
and are commonly referred to as "cemented" or "cementless" implants. A
cementless, or press fit, implant has a textured and/or porous surface and
allows surrounding bone tissue to grow into the implant for fixation, whereas
cemented implants use bone cement for fixation. Cementless implants have a
potential for longer life and are generally used on younger, more active
patients, but may take a longer time to fixate and tend to cost more than
cemented implants. The attachment of the tibial component requires reshaping the
top of the tibia to create a flat surface. A metal
37
tray, with a "V" shaped peg on the bottom, is inserted into the tibia, and a
polyethylene implant, with a contoured top, is locked onto the metal tray. The
metal femoral component moves against the polyethylene surface. A patella
component may be used to replace a knee cap.
Major trends in knee reconstruction include the use of alternative, better
performing surface materials to extend the implant's life and increase
conservation of the patient's bone to minimize surgical trauma and accelerate
recovery. Another significant trend in the knee industry is the use of more
technologically advanced knees, called advanced kinematic knees, which more
closely resemble natural joint movement. Additionally, we believe the minimally
invasive unicompartmental knee procedure, which replaces only one femoral
condyle, is becoming more widely accepted.
[GRAPHIC] [GRAPHIC]
HIP RECONSTRUCTION. The hip joint is a ball-and-socket joint which enables the
wide range of motion that the hip joint performs in daily life. The hip joint is
most commonly replaced due to degeneration of the cartilage between the head of
the femur (the ball) and the acetabulum or hollow portion of the pelvis (the
socket), which causes pain, stiffness and a reduction in hip mobility. Hip
reconstruction was an approximately $2.1 billion market worldwide in 2000.
Traditional total hip replacement, or dual surface replacement, surgery involves
a metal ball replacement for the head of the femur and a metal socket with a
polyethylene (high-grade plastic) insert. The metal socket is secured into the
acetabulum and the metal ball portion is affixed to the end of the femur using a
metal stem that is inserted into the femoral canal. These metal stems come in
different textures, and similar to our knee products, may be cemented or
cementless and have similar advantages and disadvantages as the femoral
components used in knee procedures. Some patients only require the replacement
of the head of the femur, a procedure known as a single surface replacement.
Similar to the knee market, major trends in hip replacement procedures and
implants are to extend implant life and to minimize surgical trauma and recovery
time for patients. New products have been developed that incorporate bearing
surfaces other than the traditional polyethylene surface, which may create
debris due to wear that can lead to potential loosening of the implant. These
alternative bearing surfaces include metal-on-metal and ceramic-on-ceramic
combinations, which may exhibit better wear characteristics and lead to longer
implant life. In addition, in order to minimize surgical trauma and recovery
time for patients, implants that preserve more natural bone have been developed.
These implants, known as bone-conserving implants, leave more of the hip bone
intact which is beneficial given the likelihood of future revision replacement
procedures as the average patient's lifetime increases. In addition,
bone-conserving procedures often allow patients to delay their first total hip
procedure and may significantly increase the time from the first procedure to
the time when a revision replacement implant is required.
Patients with a severely diseased or injured joint may need a reconstructive
joint device that restores much more function and stability than an implant used
in initial or even revision replacement procedures. This type of procedure is
known as limb preservation.
38
[GRAPHIC] [GRAPHIC]
EXTREMITY RECONSTRUCTION. Extremity reconstruction involves the implant of a
device to replace or reconstruct injured or diseased joints. Reconstruction of
the extremities consists of implants for joints such as the finger, toe, wrist,
foot, ankle and shoulder. The extremity reconstruction market was approximately
$250 million worldwide in 2000.
Major trends in extremity reconstruction include separately designed implant
stems for press-fit and cemented applications and a variety of geometries to
more closely accommodate each patient's unique anatomy. In addition, patients
and physicians are increasingly recognizing extremity reconstruction as a viable
treatment alternative to traditional treatment options.
BIO-ORTHOPAEDIC MARKET
The bio-orthopaedic materials market is one of the fastest growing sectors of
the orthopaedic market. These materials use both biological tissue-based and
synthetic materials to regenerate damaged or diseased bone. The bio-orthopaedic
materials sector includes products such as tissue-based bone grafts and bone
graft substitutes. These products stimulate the body's natural regenerative
capabilities to minimize or delay the need for invasive implant surgery. These
materials are used in spinal fusions, trauma fractures, joint replacements and
cranio-maxillofacial procedures. Currently, there are three main types of
bio-orthopaedic products: osteoconductive, osteoinductive and combined
osteoconductive/osteoinductive. These types refer to the way in which the
materials affect bone growth. Osteoconductive materials serve as a scaffold that
supports the formation of bone but do not trigger new bone growth, whereas
osteoinductive materials induce bone growth.
Current bone graft options available to surgeons and patients are autografts,
allografts and synthetic graft substitutes.
- AUTOGRAFT. Autograft is bone tissue harvested from the patient's own body.
Autograft was used in approximately one-half of bone replacement procedures
performed in the United States in 2000. The advantages of autograft use
include the elimination of the risk of infection and the acceptance of the
graft by the patient's body because it is the patient's own tissue. In
addition, autograft bone can have both osteoconductive and osteoinductive
properties. The disadvantages to autograft use include the pain associated
with extracting the tissue, the time-consuming nature of the harvesting
procedure, the additional recovery time required, the limited amount of
autograft available and the cost associated with the additional procedure and
recovery time. In addition, some portion of patients experience complications
with the harvesting procedure.
- ALLOGRAFT. Allograft is donated bone tissue derived principally from cadaveric
tissue, and was used in approximately 40% of bone replacement procedures
performed in the United States in 2000. The advantages of allograft use
include the elimination of an additional invasive procedure required to
harvest autograft bone and avoidance of any associated complications.
Allograft can also have osteoconductive and osteoinductive properties. The
disadvantages of allograft use include the risk of disease transmission and
potential regulatory and ethical concerns about the commercial aspects of
harvesting cadaveric tissue. In addition, allograft supply is currently
limited.
- SYNTHETIC BONE GRAFT SUBSTITUTES. Synthetic bone graft substitutes have been
developed to replace or supplement autograft and allograft, and are currently
used in a small percentage of bone replacement procedures. The advantages of
synthetics include that they cause no secondary pain, they do not give rise to
the issues surrounding allograft tissue, and their supply is not limited.
While synthetic materials have osteoconductive properties, the primary
limitations of most synthetic grafts are the material's lack of osteoinductive
properties and their limitations for use in weight-bearing applications unless
combined with other weight-bearing implants.
39
We believe there is an increasing acceptance of bone graft substitute materials
for use in spinal fusions, trauma fractures, joint replacements,
cranio-maxillofacial procedures and other orthopaedic applications.
Our Business Strategy
Our goal is to enhance our market position and to grow our business by pursuing
a strategy with the following key elements:
- TARGETING HIGHER-GROWTH, HIGHER-MARGIN MARKET SECTORS THAT MAY BE UNDERSERVED
BY LARGER ORTHOPAEDIC DEVICE COMPANIES. An important part of our strategy is
to concentrate our sales and marketing efforts on serving higher-growth,
higher-margin market sectors, such as bone-conserving and revision replacement
hip implants, advanced kinematic knees, extremities and bio-orthopaedic
materials. We believe that the larger orthopaedic companies may not
effectively service the sectors that we target, which provides us with a
significant market opportunity.
- OFFERING A COMPREHENSIVE SET OF IMPLANTS AND RELATED PRODUCTS IN THE MARKETS
WE SERVE TO SPAN THE LIVES OF PATIENTS. We believe that our broad range of
product offerings is an important competitive advantage because it allows us
to offer surgeons a comprehensive set of surgical solutions with which they
can provide a continuum of patient care. We believe there is an increasing
number of patients who receive orthopaedic implants and expect to continue to
live the active lifestyle they had prior to their procedures. We offer implant
products for conservative restoration procedures for first-time implant
patients. These early intervention procedures are designed to preserve as much
of the patient's existing bone as possible to enhance the feasibility of
future implant procedures. Additionally, we are a leading provider of revision
replacement implants that are used to replace failed or worn out implants, and
are designed to be complementary with our bone-conserving and initial
implants.
- LEVERAGING OUR GLOBAL INFRASTRUCTURE FOR INCREASED GROWTH AND PROFITABILITY.
We are organizing our worldwide operations to respond to the needs of local
markets, improve efficiencies, sell our full line of products and develop
marketing and reimbursement strategies on a country-by-country basis. We
believe our existing global sales and manufacturing infrastructure can support
increased product offerings and sales. To that end, we may pursue acquisitions
that further enhance our product portfolio and leverage our global
distribution infrastructure.
- FOCUSING OUR RESEARCH AND DEVELOPMENT EFFORTS TO ACCELERATE DELIVERY OF NEW
PRODUCTS AND TECHNOLOGIES. We plan to continue our commitment to product
development with an emphasis on product innovations within the markets in
which we compete by integrating novel technologies with traditional
orthopaedic products in a variety of clinical settings. For example, we
believe the bio-orthopaedic materials market represents not only an attractive
growth opportunity for our company, but also a technology platform with which
we can enhance our position in the reconstructive joint device market.
Our Products
We offer products in four primary market sectors: knees reconstruction, hip
reconstruction and extremity reconstruction, and bio-orthopaedic materials.
KNEE RECONSTRUCTION
Our knee reconstruction product portfolio strategically positions us in the
areas of total knee reconstruction, revision replacement implants and limb
preservation procedures. These products provide the surgeon with a continuum of
treatment options for improving patient care. Our products are differentiated by
innovative design features that reproduce movement and stability more closely
resembling a healthy knee, and by a broad array of surgical instrumentation to
accommodate surgeon preference. Knee products generated $62.9 million of net
sales in 2000, representing 40% of our total net sales.
The ADVANCE-Registered Trademark- Knee System is our most recent knee product
line offering. One of the most innovative products in the
ADVANCE-Registered Trademark- Knee System product line is the
ADVANCE-Registered Trademark- Medial Pivot Knee. The understanding of knee
motions and functions has advanced significantly over the past several years,
and we believe the ADVANCE-Registered Trademark- Medial Pivot Knee is the first
knee to be mass marketed that takes full advantage of the strides made in
understanding the knee joint. The ADVANCE-Registered Trademark- Medial Pivot
Knee is designed to approximate the motion of a healthy knee by using an unique
spherical medial feature. Overall, we believe the ADVANCE-Registered Trademark-
Medial Pivot Knee more closely approximates natural knee motion, improves
clinical wear and provides a better range of motion. Our
ADVANCE-Registered Trademark- Knee System is CE marked for sale in Europe. We
recently introduced the ADVANCE-Registered Trademark- product line into some of
our international markets and it has received some initial success. We believe
that international markets present a significant opportunity for our
ADVANCE-Registered Trademark- Knee System.
40
The ADVANTIM-Registered Trademark- Knee System, one of our early flagship
products, was developed to meet the needs of patients with special stability
requirements and has over 19 years of successful clinical history. The
ADVANTIM-Registered Trademark- Knee System continues to be popular with surgeons
because of its specialized instrumentation and successful clinical history.
HIP RECONSTRUCTION
We offer a comprehensive line of products for hip joint reconstruction. Our
product portfolio, which was strengthened by the Cremascoli acquisition,
provides offerings in the areas of bone-conserving implants, total hip
reconstruction, revision replacement implants and limb preservation.
Additionally, our hip products offer a combination of innovative modular
designs, a complete portfolio of surface bearing materials, including
polyethylene, ceramic and metal components, and innovative technology in single
surface replacement implants. We are therefore able to offer surgeons and their
patients a continuum of treatment options. Hip products generated approximately
$47.7 million of net sales in 2000, representing approximately 30% of our total
net sales.
The CONSERVE-Registered Trademark- Hip System provides a conservative
restoration, or bone conserving, alternative to conventional total hip
reconstruction, and we believe it is becoming the treatment of choice for
avascular necrosis, or AVN, of the femoral head. AVN is a disease which causes
bone to die and deteriorate. It is estimated that approximately 10% of total hip
replacement procedures performed annually are initially diagnosed as related to
AVN. People who suffer from AVN are usually younger than the typical hip
replacement patient and need a solution that is less invasive than conventional
total hip replacement. With the CONSERVE-Registered Trademark- resurfacing
system, only the surface of the femoral head is replaced and the rest of the hip
remains untouched. This early intervention alternative allows the patient to
live with less pain and avoid extensive bone loss at a young age. The
CONSERVE-Registered Trademark- Hip System's conservative restoration provides a
better solution for the patient by leaving maximum bone for future surgical
procedures, if needed.
The LINEAGE-TM- Acetabular System, our newest hip product, which was introduced
during the third quarter of 2001, is one of the first hip systems to reach the
market that provides the surgeon with the option to interchangeably use either
polyethylene, ceramic or metal acetabular bearing surfaces for use with a common
metal acetabular shell, thus offering maximum flexibility to the surgeon while
minimizing inventory levels. The standard for replacement of the acetabulum, or
socket, in the hip joint is a two-piece system consisting of a metal shell with
a polyethylene liner. The polyethylene component serves as a bearing surface for
the head of the femoral component, or ball. Alternative bearing materials, such
as metal in the domestic market and metal and ceramic in the international
market, have recently been introduced in their respective markets. We anticipate
offering the ceramic option in the United States in the near future.
The PERFECTA-Registered Trademark- Hip System is the basic platform for our more
traditional hip stem product line. This system provides a full range of fixation
options including press fit and cemented versions, and offers a wide selection
of geometries in order to meet the needs of the patient's anatomical
requirements as well as the surgeon's preferences. This product allows surgeons
the flexibility to match the implant to each patient's unique requirements. The
PERFECTA-Registered Trademark- Hip System has over ten years of proven clinical
success worldwide, and we continue to build upon the existing platform, as
illustrated by the introduction of the PERFECTA-Registered Trademark- Slim Neck
during the third quarter of 2001. This product has a slimmer neck that provides
for greater range of motion after being implanted.
Through our acquisition of Cremascoli, we acquired several hip implant products
designed for the European market, including the ANCA FIT-TM- Hip System and
PROFEMUR-TM- R Hip System. The ANCA FIT-TM- Hip System, a traditional hip
replacement system, has received clinical acceptance in Europe for seven years.
The PROFEMUR-TM- R hip stem is a revision replacement implant with a patented
modular femoral neck component, which allows the surgeon to make final
adjustments to the implant as the last step in the procedure in order to
accommodate each patient's unique anatomy.
EXTREMITY RECONSTRUCTION
We offer extremity products for the hand, wrist, elbow, shoulder, foot and ankle
in a number of markets worldwide. Our small joint orthopaedic implants have many
years of successful clinical history. We believe we are one of the recognized
leaders in finger and toe implants. Our Swanson Hinge Finger has been used by
surgeons for over 30 years. Extremity products generated $17.3 million in net
sales in 2000, representing approximately 11% of our total net sales.
41
The ORTHOSPHERE-Registered Trademark- implant for the repair of the basal thumb
joint is constructed from ceramic biomaterials, which reduce wear and increase
biocompatibility compared to polyethylene implants. This product provides an
alternative to harvesting the patient's own soft tissues as a spacer for the
repaired joint, thereby reducing the length of the surgical procedure and
morbidity. As a result, we believe this represents a significant improvement
over conventional techniques.
The LOCON-T-TM- Distal Radius Plating System, which was introduced during the
first quarter of 2001, provides surgeons with an anatomically designed,
stainless steel plating system used in the repair of radial fractures. In
designing the LOCON-T-TM- Distal Radius Plating System, we utilized thin,
high-strength stainless steel with low profile screws in order to avoid tendon
irritation and/or rupture, which are complications known to result from this
type of surgical repair. We believe this product offers distinct advantages over
other currently marketed systems.
In May 2000, we introduced the EVOLVE-Registered Trademark- Modular Radial Head
elbow device. The EVOLVE-Registered Trademark- Modular Radial Head offers two
primary benefits over its predecessors: the surgeon may choose implant heads and
stems that accommodate the patient's anatomy, and it is easier to insert
compared to the single piece implants when assembled in the patient.
Our NEWDEAL-TM- foot and ankle implants provide a system of components for
performing various repair procedures in the foot and ankle. These products
include various screws and staples that meet a wide array of surgical challenges
in the foot. These products are the result of our exclusive U.S. distribution
agreement, entered into in the second half of 2000, with Newdeal, S.A., a French
company that has developed an extensive line of products for foot and ankle
procedures. These new instruments and implants have allowed us to continue to
expand our dominant position in the extremity market.
BIO-ORTHOPAEDIC MATERIALS
We offer an expanding number of bio-orthopaedic products that stimulate the
natural regenerative capabilities of the human body. These products focus on
biological musculoskeletal repair, including synthetic and human tissue-based
bone grafting materials. We were one of the first companies to receive FDA
market clearance for the use of resorbable synthetic bone graft substitutes for
the spine, currently the largest application for this product. Bio-orthopaedic
products generated approximately $21 million, representing about 13% of our
total net sales in 2000.
In 1996, we introduced OSTEOSET-Registered Trademark- bone graft substitute, a
synthetic bone graft substitute made of surgical grade calcium sulfate.
OSTEOSET-Registered Trademark- bone graft substitute provides an attractive
alternative to autograft because it facilitates bone regeneration without
requiring a painful, secondary bone harvesting procedure. Additionally, being
purely synthetic, OSTEOSET-Registered Trademark- pellets are cleared for use in
infected sites, an advantage over tissue based material. The human body resorbs
the OSTEOSET-Registered Trademark- material at a rate close to the rate that new
bone grows. We also offer surgeons the option of custom-molding their own beads
in the operating room using our OSTEOSET-Registered Trademark- Resorbable Bead
Kit, which is available in mixable powder form. Our surgical grade calcium
sulfate is manufactured internally using a patented and proprietary process that
consistently produces a high quality product.
In late 1999, we introduced ALLOMATRIX-TM- Injectable Putty. This product
combines a high content of demineralized bone matrix, or DBM, a type of
allograft, with our proprietary surgical grade calcium sulfate carrier. The
combination provides an injectable putty with the bone growth inducing
properties of DBM and exceptional handling qualities. This product has been well
received by surgeons. Another combination we offer is ALLOMATRIX-TM- C bone
graft putty, which includes the addition of bone chips. The addition of the bone
chips increases the stiffness of the material, improves handling characteristics
and provides more structural support. In the third quarter of 2001, we
introduced ALLOMATRIX-TM- Custom bone graft putty, which allows the surgeon to
customize the amount of bone to add to the putty based on its surgical
application.
Our bio-orthopaedic offerings in international markets include
OSTEOSET-Registered Trademark- T medicated pellets and
OSTEOSET-Registered Trademark- pellets containing DBM.
OSTEOSET-Registered Trademark- T medicated pellets are currently the only
synthetic resorbable bone void filler available on the international market for
the treatment of osteomyelitis, an acute or chronic inflammation of bone.
Product Development
Our research and development staff focuses on developing new products in the
knee, hip, extremity reconstruction and bio-orthopaedic material markets and
expanding our current product offerings and the markets in which they are
offered. We believe a commitment to a strong research and development program is
one of the keys to our future success. Research and development expenses were
$8.4 million in 2000 and we plan to increase research and development expenses
by more than 20% in 2001 to approximately $10 million. We believe this level of
spending will produce a steady stream of innovative, new product introductions
in coming years.
42
We have established several surgeon advisory panels that advise us on market
trends and assist us with the development and clinical testing of our products.
We believe these surgeon advisors are prominent in the field of orthopaedics. We
also partner periodically with other industry participants, particularly in the
bio-orthopaedic materials area, to develop new products.
In the knee, hip and extremity reconstruction areas, our research and
development focus is on expanding our continuum of products that span the life
of implant patients, from early intervention, such as bone-conserving implants,
to primary implants to revision replacement implants to limb preservation
implant. In the bio-orthopaedic materials area, we have a variety of research
and development projects that are designed to further expand our entry into this
rapidly growing market. These projects include developing materials for new
bio-orthopaedic applications as well as leveraging the use of biologic coatings
to enhance fixation and performance in traditional orthopaedic implants.
We continue to explore and develop alternative bearing surfaces that improve the
clinical performance of our reconstructive joint devices. Active programs in
cross-linked polyethylene, alternative bearing materials and other proprietary
substitutes are currently expected to be incorporated into some of our product
designs during 2002.
Following is a brief description of products under development in each of our
principal market sectors:
KNEES
-------------------------------------------------------------------------------------------------------------------
Products Under Development Description of Product Regulatory Clearance Status
-------------------------- ---------------------- ---------------------------
ADVANCE-Registered Trademark- Stemmed A femoral implant that accepts Cleared
Medial Pivot Knee modular stems and augmentation wedges
for more complex knee replacement
situations.
ADVANCE-Registered Trademark- A minimally invasive replacement for Cleared
Unicompartmental Knee System the medial compartment of a knee.
ADVANCE-Registered Trademark- A modification option to the Cleared
Spiked Tibial Base ADVANCE-Registered Trademark- Medial
Pivot Knee which allows for optimal
stability and fixation.
The ADVANCE-Registered Trademark- Stemmed Medial Pivot Knee is a new extension
of our successful ADVANCE-Registered Trademark- Total Knee System. Surgeons are
often confronted with significant challenges when replacing a knee joint, such
as bone loss that compromises implant fixation. The
ADVANCE-Registered Trademark- Stemmed Medial Pivot Knee offers the surgeon the
ability to implant a stemmed version in cases requiring additional implant
fixation and stability in a primary surgery. This system also accepts
augmentation wedges to replace areas of deficient bone. With this system, the
surgeon will have more options for treating patients requiring additional
stability without resorting to total knee replacement products, which remove
more bone. This design conserves bone as compared to other posterior stabilized
products while providing a higher degree of fixation and implant stability.
There is growing interest in the market for a unicompartmental knee that
addresses injury or disease in the medial head in the base of the femur. In
response to that interest, we have developed the ADVANCE-Registered Trademark-
Unicompartmental Knee System, a unique system of implants and instruments that
allows for medial compartment replacement with a minimally invasive surgical
approach. We believe the simplified instrumentation utilized by the
ADVANCE-Registered Trademark- Unicompartmental Knee System is a significant
improvement over the cumbersome or poorly designed instrumentation utilized in
unicompartmental knee systems on the market today.
The ADVANCE-Registered Trademark- Spiked Tibial Base is a fixation modification
option for the ADVANCE-Registered Trademark- Medial Pivot Knee whereby a spiked
tibial base is used with the implant, which allows for less bone removal while
providing optimal stability and fixation. It is available in porous and
non-porous options that accept ADVANTIM-Registered Trademark- style tibial stem
extensions. Thus, it bridges the superior movement qualities of the
ADVANCE-Registered Trademark- Medial Pivot Knee with the optimal fixation
qualities of the ADVANTIM-Registered Trademark- knee system.
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HIPS
-------------------------------------------------------------------------------------------------------------------
Products Under Development Description of Product Regulatory Clearance Status
-------------------------- ---------------------- ---------------------------
PROFEMUR-TM- Modular hip replacement system that Cleared
USA Modular Hip allows multiple size combinations.
REPIPHYSIS-TM- Allows for non-invasive expansion of Pending
Technology any long bone where lengthening is
needed.
GUARDIAN-Registered Trademark- A modular component system of knee Cleared
Limb Salvage and hip products ideal for cases
System--Proximal Tibia Implants, and where extensive femoral and tibial
Revision Hinge Implants bone loss has occurred as a result of
cancer, trauma, etc.
CONSERVE-Registered Trademark- Plus Hip replacement that resurfaces both IDE clinical investigation in
Resurfacing Hip System the femoral and acetabular articular progress; CE marked
surfaces of the hip.
Modular hip systems are growing in popularity, especially in revision
replacement hip implant procedures. The PROFEMUR-TM- R was designed by
Cremascoli for the European market. Although we are currently selling this
product in the U.S., we are also developing a modified version and
instrumentation to address the needs of U.S. surgeons. The new system, the
PROFEMUR-TM- USA Modular Hip, will capitalize on the successful clinical history
of the current PROFEMUR-TM- R product while incorporating new technology into
the design.
REPIPHYSIS-TM- Technology can be used in any long bone where growth potential is
needed. This technology, which we license from the inventor, can be inserted
into a bone implant and subsequently adjusted non-invasively when lengthening of
the bone is needed. The most common application of this breakthrough technology
is in the field of children's oncology, where growing children can have the
bones attached to their hip or knee implant lengthened non-invasively, thus
eliminating the need for more frequent surgeries and anesthesia.
The GUARDIAN-Registered Trademark- Limb Salvage System is ideal for cases when
proximal or distal femur replacement can no longer be achieved due to extensive
femoral and tibial bone loss as a result of cancer, trauma, or failed hip and
knee arthroplasty. The GUARDIAN-Registered Trademark- Proximal Tibia Implants,
one of the products offered in this modular component system, allows for very
small femoral bone resection and is available in a wide range of sizes that
promote optimal prosthesis fit. The constrained design precludes the need for a
patellar component. GUARDIAN-Registered Trademark- Revision Hinge Implants,
another of the products offered within the system, is similar to the
GUARDIAN-Registered Trademark- Proximal Tibia Implants, but its prosthesis
includes a tibia sleeve and an optional tibia stem extension instead of a
proximal tibia, optional midsection, and tibia stem.
The CONSERVE-Registered Trademark- Plus Resurfacing Hip System offers a unique
hip replacement system that requires minimal bone removal. With this system,
only the surfaces of the hip are replaced, as opposed to the significant bone
removal that is typical in most conventional total hip systems on the market
today. The CONSERVE-Registered Trademark- Plus Resurfacing Hip System allows for
the replacement of both the femoral and acetabular articular surfaces, while the
CONSERVE-Registered Trademark- System allows for the replacement of the femoral
head which moves directly against the natural acetabular cartilage.
EXTREMITIES
-------------------------------------------------------------------------------------------------------------------
Products Under Development Description of Product Regulatory Clearance Status
-------------------------- ---------------------- ---------------------------
OLYMPIA-TM- Total Shoulder System A modular shoulder system that offers Cleared
surgeons flexibility to meet their
patient's needs.
Modular Ulnar Head System Modular replacement for the distal Pending
ulnar head.
The OLYMPIA-TM- Total Shoulder System is a comprehensive system that offers the
surgeon many choices in terms of fixation and implant stability. This system
offers two fixation options, including patented press-fit stems for cementless
applications and stems that are optimized for cemented applications. Most
systems now available do not offer this level of versatility and surgeons must
44
adjust their surgical technique to fit the available products. An additional
advantage of the system is that the humeral head is modular and asymmetric,
allowing the surgeon to adjust joint tension as the final step of the surgical
process.
Following the success of the EVOLVE-Registered Trademark- Modular Radial Head,
we are developing a modular replacement system for the distal ulna, a small
forearm bone. This new system will continue our expansion into new markets in
the extremity area.
BIO-ORTHOPAEDIC MATERIALS
-------------------------------------------------------------------------------------------------------------------
Products Under Development Description of Product Regulatory Clearance Status
-------------------------- ---------------------- ---------------------------
ALLOMATRIX-TM- DR Graft ALLOMATRIX-TM- Putty optimized for None required
small fractures such as in the distal
radius.
MIIG -TM-(Minimally Invasive Injectable form of surgical grade Cleared
Injectable Graft) calcium sulfate that hardens in the
body.
OSTEOSET-Registered Trademark- DBM OSTEOSET-Registered Trademark- Pending
Pellets material combined with demineralized
bone in pellet form.
The latest offering in our ALLOMATRIX-TM- family of products is ALLOMATRIX-TM-
C Putty. We recently launched ALLOMATRIX-TM- C Putty in the U.S. and hope to
soon offer the product internationally, pending receipt of necessary regulatory
clearance. For additional information, see also "Risk Factors--Our
bio-orthopaedics business is subject to emerging government regulations that can
significantly impact our business," and "--the FDA has challenged the regulatory
status of our ALLOMATRIX-TM- products."
ALLOMATRIX-TM- DR Graft is ALLOMATRIX-TM- putty that has been optimized for
application in smaller fractures. The properties of this graft that make it
ideal for such application include its semi-structural consistency, smaller
particle size for optimized packing, and the application-specific volume in
which it is marketed.
MIIG-TM- (Minimally Invasive Injectable Graft) paste is an injectable form of
our surgical grade calcium sulfate paste that hardens in the body. This product
combines the operative flexibility of an injectable substance with the
clinically proven osteoconductive properties of OSTEOSET-Registered Trademark-
material. This product is targeted for application to traumatic fractures of the
distal radius and tibial plateau.
OSTEOSET-Registered Trademark- DBM Pellets combine
OSTEOSET-Registered Trademark- material with demineralized bone in pellet form,
thereby providing both osteoconductive and osteoinductive properties.
Sales and Marketing
Our sales and marketing staff targets orthopaedic surgeons, who typically are
the decision-makers in orthopaedic device purchases. We have established several
surgeon advisory panels comprised of surgeons who we believe are leaders in
their chosen orthopaedic specialties and involve both these surgeons and our
marketing personnel in all stages of bringing a product to market, from initial
product development to product launch. As a result, we believe we benefit from
having a well-educated, highly involved marketing staff and an installed base of
well-respected surgeons who serve as advocates to promote our products in the
orthopaedic community.
We offer clinical symposia and seminars, publish advertisements and the results
of clinical studies in industry publications, and offer surgeon-to-surgeon
education on our new products using our surgeon advisors in an instructional
capacity. Additionally, we inform the approximately 16,000 practicing
orthopaedic surgeons in the U.S. of our latest products through frequent
catalogue and brochure mailings.
Our acquisition of Cremascoli has given us an opportunity to cross-sell legacy
Wright products and legacy Cremascoli products in Europe and North America,
respectively. Because North American and European orthopaedic surgeons have
different product preferences, we believe that by utilizing our European and
North American sales and marketing teams' understanding of surgeon preferences
in their local markets we can effectively modify and cross-sell existing
products throughout the worldwide markets in which we compete.
We sell our products in the United States through a sales force of approximately
200 people, consisting of 44 independent commission-based sales representatives
or distributors and approximately 161 independent sales associates and 3
employee sales associates engaged principally in the business of supplying
orthopaedic products to hospitals in their geographic areas. These independent
distributors have formal contracts with us, which allow us to manage the
distributor based on performance criteria. The U.S. field sales organization is
supported by our Tennessee-based sales and marketing organization. A Vice
President of U.S. Sales, a national sales manager and four regional directors
manage our domestic sales organization.
45
We market our products internationally through a combination of direct sales
offices in certain key international markets and exclusive distributors in other
markets. We have sales offices in France, Italy, the United Kingdom, Belgium,
Japan, Canada and Germany that employ direct sales employees and use independent
sales representatives to sell our products into their respective markets. We
sell our products into other countries in Europe. Asia, Africa, South America
and Australia using stocking distribution partners. Stocking distributors
purchase products directly from us for resale directly to their local customers,
with product ownership generally passing to the distributor upon shipment. In
total, our international distribution system consists of approximately 250
distributors and sales associates who sell in over 40 countries. Our President
of International and our Vice President of International Sales and Distribution
manage our international sales organization.
Our new sales representatives receive formal product training and are then
typically given one product to sell for a period of time, which allows our
representatives to establish relationships within the orthopaedic community. The
sales representatives gradually add additional products until they carry all of
our product lines. This process typically takes three years. In addition, we
require each sales representative to attend periodic sales and product training.
Manufacturing and Supply
At both our Arlington, Tennessee and Toulon, France facilities, we primarily
produce orthopaedic implants for use by our customers and some of the related
surgical instrumentation used to prepare the bone surfaces and cavities during
the surgical procedure. The majority of our surgical instrumentation is produced
to our specifications and designs by qualified subcontractors who serve medical
device companies.
During the past year, we have continued to modernize both of our production
facilities through changes to the physical appearance and layout and have added
new production and quality control equipment to meet the evolving needs of our
product specifications and designs. In seeking to optimize our manufacturing
operations, we have adopted many sophisticated manufacturing practices, such as
lean manufacturing, which are designed to lower lead times, minimize waste and
reduce inventory. We have a wide breadth of manufacturing capabilities at both
facilities, including skilled and semi-skilled manufacturing personnel.
Our reconstructive joint devices are produced from various surgical grades of
titanium, cobalt chrome and stainless steel, various surgical grades of
high-density polyethylenes, silicone elastomer and ceramics. We are aware of
only two suppliers of medical grade silicone elastomer and we primarily use only
one of these vendors. We currently rely on two suppliers of DBM for use in our
bio-orthopaedic products. Our other raw material supplies come from multiple
suppliers that supply products to our specifications and purchase order
requirements.
We maintain a comprehensive quality assurance and quality control program, which
includes documentation of all material specifications, operating procedures,
equipment maintenance and quality control methods. Our U.S. and European based
quality systems are based on and in compliance with the requirements of ISO
9001/EN 46001 and the applicable regulations imposed by the FDA on medical
device manufacturers.
We believe that our two production facilities can continue to meet our
anticipated business needs for the foreseeable future.
Competition
Competition in the orthopaedic device industry is intense and is characterized
by extensive research efforts and rapid technological progress. Major companies
in this industry include DePuy, Inc., a subsidiary of Johnson & Johnson; Stryker
Corporation; Zimmer Holdings, Inc.; Sulzer Orthopedics, Inc., a division of
Sulzer Medica; Smith & Nephew, Inc.; and Biomet, Inc. Our competitors also
include academic institutions and other public and private research
organizations that continue to conduct research, seek patent protection and
establish arrangements for commercializing products in this market that will
compete with our products.
We believe that the primary competitive factors we face include: price, quality,
technical capability, breadth of product line and distribution capabilities. Our
current and future competitors in this market may have greater resources, more
widely accepted products, less-invasive therapies, greater technical
capabilities and stronger name recognition than we do. Our ability to compete is
affected by our ability to:
- develop new products and innovative technologies;
- obtain regulatory clearance and compliance for our products;
- protect the proprietary technology of our products and manufacturing process;
46
- market our products;
- attract and retain skilled employees and sales representatives; and
- maintain and establish distribution relationships.
Intellectual Property
We currently own or have exclusive licenses to more than 108 patents and pending
patent applications throughout the world. We seek to aggressively protect
technology, inventions and improvements that we consider important through the
use of patents and trade secrets in the United States and significant foreign
markets. We manufacture and market our products both under our own patents and
under our license agreements with other parties.
Although we believe our patents are valuable, our knowledge and experience, our
creative product development and marketing staff and our trade secret
information with respect to manufacturing processes, materials and product
design, have been equally important in maintaining our proprietary product
lines. As a condition of employment, we require all employees to execute a
confidentiality agreement relating to proprietary information and assigning
patent rights to us.
We cannot assure you that our patents will provide competitive advantages for
our products, or that our competitors will not challenge or circumvent these
rights. In addition, we cannot assure you that the United States Patent and
Trademark Office, or PTO, will issue any of our pending patent applications. The
PTO may also deny or require significant narrowing of claims in our pending
patent applications, and patents issuing from the pending patent applications.
Any patents issuing from our pending patent applications may not provide us with
significant commercial protection. We could incur substantial costs in
proceedings before the PTO, including interference proceedings. These
proceedings could result in adverse decisions as to the priority of our
inventions. Additionally, the laws of some of the countries in which our
products are or may be sold may not protect our products and intellectual
property to the same extent as the laws in the 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 third parties, we cannot assure you
that we do not infringe any patents or other proprietary rights held by third
parties. If our products were found to infringe any proprietary right of a third
party, we could be required to pay significant damages or license fees to the
third party or cease production, marketing and distribution of those products.
Litigation may also be necessary to enforce patent rights we hold or to protect
trade secrets or techniques we own. We are currently involved in an intellectual
property lawsuit with Howmedica Osteonics Corp., a subsidiary of Stryker
Corporation. See "Business-Legal Proceedings" for more specific information
regarding the Howmedica Osteonics lawsuit. We were contacted in August 1996 by
Tranquil Prospects, Ltd. claiming that our EVOLUTION-Registered Trademark- Hip
infringed its patents. We have had occasional contact with Tranquil since that
time. We believe that neither this former product of ours nor any of our
existing products infringes Tranquil's patents.
We also rely on trade secrets and other unpatented proprietary technology. We
cannot assure you that we can meaningfully protect our rights in our unpatented
proprietary technology or that others will not independently develop
substantially equivalent proprietary products or processes or otherwise gain
access to our proprietary technology. We seek to protect our trade secrets and
proprietary know-how, in part, with confidentiality agreements with employees
and consultants. We cannot assure you, however, that the agreements will not be
breached, that we will have adequate remedies for any breach or that our
competitors will not discover or independently develop our trade secrets.
Government Regulation
UNITED STATES
Numerous governmental authorities, principally the FDA and corresponding state
and foreign regulatory agencies, strictly regulate our products and research and
development activities. The Federal Food, Drug, and Cosmetic Act, or FDC Act,
the regulations promulgated under this act, and other federal and state statutes
and regulations, govern, among other things, the pre-clinical and clinical
testing, design, manufacture, safety, efficacy, labeling, storage, record
keeping, advertising and promotion of medical devices.
Generally, before we can market a new medical device, we must obtain marketing
clearance through a 510(k) premarket notification or approval of a premarket
approval application, or PMA. The FDA will typically grant a 510(k) clearance if
the applicant can establish that the device is substantially equivalent to a
predicate device. It generally takes a number of months from the date of a
47
510(k) submission to obtain clearance, but it may take longer, particularly if a
clinical trial is required. The FDA may find that a 510(k) is not appropriate or
that substantial equivalence has not been shown and as a result will require a
PMA.
A PMA application must be submitted if a proposed device does not qualify for a
510(k) premarket clearance procedure. PMA applications must be supported by
valid scientific evidence to demonstrate the safety and effectiveness of the
device, typically including the results of clinical trials, bench tests and
laboratory and animal studies. The PMA must also contain a complete description
of the device and its components, and a detailed description of the methods,
facilities and controls used to manufacture the device. In addition, the
submission must include the proposed labeling and any training materials. The
PMA process can be expensive, uncertain and lengthy, requires detailed and
comprehensive data and generally takes significantly longer than the 510(k)
process. Additionally, the FDA may never approve the PMA. Toward the end of the
PMA review process, the FDA generally will conduct an inspection of the
manufacturer's facilities to ensure compliance with applicable quality system
regulation requirements which include quality control testing, control
documentation and other quality assurance procedures.
If human clinical trials of a device are required, either for a 510(k)
submission or a PMA application, and the device presents a significant risk, the
sponsor of the trial, usually the manufacturer or the distributor of the device,
must file an investigational device exemption, or an IDE, application prior to
commencing human clinical trials. The IDE application must be supported by data,
typically including the results of animal and/or laboratory testing. If the IDE
application is approved by the FDA and one or more institutional review boards,
or IRBs, human clinical trials may begin at a specific number of investigational
sites with a specific number of patients, as approved by the FDA. If the device
presents a nonsignificant risk to the patient, a sponsor may begin the clinical
trial after obtaining approval for the study by one or more IRBs without
separate approval from the FDA. Submission of an IDE does not give assurance
that the FDA will approve the IDE and, if it is approved, there can be no
assurance the FDA will determine that the data derived from the studies support
the safety and efficacy of the device or warrant the continuation of clinical
trials. An IDE supplement must be submitted to and approved by the FDA before a
sponsor or investigator may make a change to the investigational plan that may
affect its scientific soundness, study indication or the rights, safety or
welfare of human subjects. The study must also comply with the FDA's IDE
regulations and informed consent must be obtained from each subject. If the FDA
believes we are not in compliance with law, it can institute proceedings to
detain or seize products, issue a recall, enjoin future violations and seek
civil and criminal penalties against us and our officers and employees. If we
fail to comply with these regulatory requirements, our business, financial
condition and results of operations could be harmed.
Most of our products are approved through the 510(k) premarket notification
process. We have conducted clinical trials to support many of our regulatory
approvals. Regulations regarding the manufacture and sale of our products are
subject to change. We cannot predict the effect, if any, that these changes
might have on our business, financial condition and results of operations. In
particular, the FDA has statutory authority to regulate allograft-based
products, processing and materials. The FDA has been working to establish a more
comprehensive regulatory framework for allograft-based products, which are
principally derived from cadaveric tissue. The framework developed by the FDA
establishes criteria for determining whether a particular human tissue-based
product will be classified as human tissue, a medical device or biologic drug
requiring premarket clearance or approval. All tissue-based products are subject
to extensive FDA regulation, including a requirement that ensures that diseases
are not transmitted to tissue recipients. The FDA has also proposed extensive
additional regulations that would govern the processing and distribution of all
allograft products. Consent to use the donor's tissue must also be obtained. If
a tissue-based product is considered tissue, it does not require FDA clearance
or approval before being marketed. If it is considered a device, or a biologic
drug, then FDA clearance approval may be required.
On April 11, 2001, the FDA sent us a "warning letter" stating that the FDA
believes ALLOMATRIX-TM- Injectable Putty is a medical device that is subject to
the premarket notification requirement. We believe that ALLOMATRIX-TM-
Injectable Putty and certain of our other allograft-based products are human
tissue and therefore are not subject to FDA clearance or approval as a medical
device. We asked the FDA to designate ALLOMATRIX-TM- Injectable Putty as a
product regulated solely as a tissue. The FDA has orally advised us that after
reviewing our designation request, it has decided to regulate ALLOMATRIX-TM-
Injectable Putty as a medical device. Upon official nofification of this
decision, we will submit a 510(k) premarket notification for the product. We
have continued to market ALLOMATRIX-TM- Injectable Putty after receiving the
warning letter, and we intend to continue marketing and selling ALLOMATRIX-TM-
Injectable Putty. The FDA has not raised any objection to our continued
marketing and sale of ALLOMATRIX-TM- Injectable Putty pending submission of the
premarket notification. There can be no assurance that the 510(k) premarket
notification that we intend to submit will be cleared by the FDA in a timely
manner or at all. Also, the FDA may take enforcement action against us,
including requiring us to modify or cease distributing ALLOMATRIX-TM- Injectable
Putty, detaining or seizing our inventory of ALLOMATRIX-TM- Injectable Putty,
requiring us to recall ALLOMATRIX-TM- Injectable Putty, enjoining future
48
violations and seeking criminal and civil penalties against us and our officers
and employees, any of which could adversely affect our financial condition and
results of operations.
In addition to granting approvals for our products, the FDA and international
regulatory authorities periodically inspect our company. We must comply with the
host of regulatory requirements that apply to medical devices marketed in the
United States and internationally. These requirements include labeling
regulations, manufacturing regulations, quality system regulations, regulations
governing unapproved or off-label uses, and medical device regulations. Medical
device regulations require a manufacturer to report to the FDA serious adverse
events or certain types of malfunctions involving its products. The FDA
periodically inspects device and drug manufacturing facilities in the United
States in order to assure compliance with applicable quality system regulations.
The FDA last inspected our Arlington, Tennessee manufacturing facility in
January 2002. We were found to be in compliance with the Quality System
Regulations with only one minor observation, which has already been corrected
and confirmed by the FDA.
We believe our U.S. manufacturing facility complies in all material respects
with FDA requirements. We have also implemented comprehensive procedures to
ensure compliance with the FDA quality system regulations with a focus on
comprehensive product design controls.
INTERNATIONAL
We must obtain required regulatory approvals and comply with extensive
regulations governing product safety, quality and manufacturing processes in
order to market our products in European and other foreign countries. These
regulations vary significantly from country to country and with respect to the
nature of the particular medical device. The time required to obtain these
foreign approvals to market our products may be longer or shorter than that
required in the United States, and requirements for such approval may differ
from FDA requirements.
In order to market our products in the member countries of the European Union,
we are required to comply with the medical devices directive and obtain CE mark
certification. CE mark certification is an international symbol of adherence to
quality assurance standards and compliance with applicable European medical
device directives. Under the medical devices directives, all medical devices
including active implants must qualify for CE marking.
All our products sold internationally are subject to appropriate foreign
regulatory approvals, such as CE marking for the European Union. Our products
are manufactured in ISO 9001 compliant facilities. Our manufacturing facility in
France was ISO 9001 and EN 46001 certified in October 1996 by SGS, an English
certified body. This facility is also registered as a medical device
manufacturing facility with the FDA. The FDA may audit this facility at any
time.
Third-Party Reimbursement
In the United States, as well as in foreign countries, government-funded or
private insurance programs, commonly known as third-party payors, pay a
significant portion of the cost of a patient's medical expenses. A uniform
policy of reimbursement does not exist among all these payors. Therefore,
reimbursement can be quite different from payor to payor. We believe that
reimbursement is an important factor in the success of any medical device.
Consequently, we seek to obtain reimbursement for all of our products.
Reimbursement in the United States depends on our ability to obtain FDA
clearances and approvals to market these products. Reimbursement also depends on
our ability to demonstrate the short-term and long-term clinical and
cost-effectiveness of our products from the results we obtain from clinical
experience and formal clinical trials. We present these results at major
scientific and medical meetings and publish them in respected, peer-reviewed
medical journals.
All U.S. and foreign third-party reimbursement programs, whether government
funded or insured commercially, are developing increasingly sophisticated
methods of controlling health care costs through prospective reimbursement and
capitation programs, group purchasing, redesign of benefits, second opinions
required prior to major surgery, careful review of bills, encouragement of
healthier lifestyles and exploration of more cost-effective methods of
delivering health care. These types of programs can potentially limit the amount
which health care providers may be willing to pay for medical devices.
HCFA issued a Final Rule on its Prospective Payment System For Outpatient
Services on April 7, 2000. We estimate that 25% of the procedures using our
extremity products are used in an outpatient hospital setting. This rule
provides for a new system to reimburse Medicare outpatient surgical services
provided in a hospital made up of two parts: payment to the hospital for the
procedure costs and a separate payment, known as a pass-through payment,
intended to cover the cost of medical devices used
49
during the procedure that are more than 25% of the total procedure cost. Some
medical devices that do not fit the pass-through criteria may be reimbursed by a
separate payor known as New Technology Ambulatory Payment Classification. This
rule became effective on August 1, 2000. On July 26, 2000, HCFA published a list
of pharmaceuticals and medical devices that are eligible for pass-through
payments. HCFA currently intends only to provide payment for the products on
this list. HCFA has stated that it will update this list on a quarterly basis.
Employees
As of September 30, 2001, we employed directly and through our subsidiaries 736
people in the following areas: 347 in manufacturing, 207 in sales and marketing,
115 in administration and 67 in research and development. We do not have any
active organized labor unions. We believe we have an excellent relationship with
our employees.
Facilities
Our U.S. corporate headquarters include warehouse, administrative and
manufacturing facilities located in three buildings on 31 acres in Arlington,
Tennessee with an aggregate of 168,000 square feet. Our manufacturing facilities
have additional capacity, which will allow us to expand production of our
current product lines.
The majority of our products are manufactured in our 74,000 square foot
manufacturing facility located in Arlington, Tennessee. This facility is leased
from the Industrial Development Board of the City of Arlington. The lease has an
automatic renewal through 2049. We may exercise a nominal purchase option at any
time. Our office and warehouse facilities are also leased from the Industrial
Development Board of the City of Arlington. The office facility lease expires
July 8, 2005; however, we may exercise a $101,000 purchase option at any time.
We may exercise a nominal purchase option at any time on the warehouse facility
lease. It is an open-ended lease with no predetermined expiration date.
Our international operations include warehouse, research, administrative and
manufacturing facilities located in several countries. Our primary international
manufacturing facility and warehouse are located in leased facilities in Toulon,
France. Our primary international research and development facility is located
in leased facilities in Milan, Italy. In addition, we lease office space in
France, Belgium and Italy and warehouse space in Belgium and Italy.
Environmental
Our operations and properties are subject to extensive foreign, federal, state
and local environmental protection and health and safety laws and regulations.
These laws and regulations govern, among other things, the generation, storage,
handling, use and transportation of hazardous materials and the handling and
disposal of hazardous waste generated at our facilities. Under such laws and
regulations, we are required to obtain permits from governmental authorities for
some of our operations. If we violate or fail to comply with these laws,
regulations or permits, we could be fined or otherwise sanctioned by regulators.
Under some environmental laws and regulations, we could also be held responsible
for all of the costs relating to any contamination at our past or present
facilities and at third party waste disposal sites.
Although we believe that our costs of complying with current and future
environmental laws, and our liabilities arising from past or future releases of,
or exposure to, hazardous substances will not materially adversely affect our
business, results of operations or financial condition, we cannot assure you
that they will not do so.
In 1999, groundwater contamination was detected at our Arlington, Tennessee
facility. We have taken steps to investigate the nature and extent of the
contamination and, in connection with a state administrative proceeding, we are
presently negotiating a Remedation Order with state environmental officials that
will specify the terms of further investigation and, if necessary, remediation.
We believe the contamination was caused by the former owner of the business and
have requested that it indemnify us in accordance with the 1993 purchase
agreement by which we acquired the business. The former owner may have factual
and legal defenses to the claim and we cannot assure you that the former owner
will not prevail. Additionally, the former owner is currently involved in
bankruptcy proceedings, and while we believe that the bankruptcy will not affect
our ability to pursue the claim under the indemnification, we cannot assure you
that it will not. Further, we cannot assure you that, even if we should prevail
on the claim, the former owner will have the capacity to pay the claim.
While we do not believe that the cost of addressing the contamination will
materially adversely affect our business, results of operations or financial
condition, we cannot assure you that it will not do so.
50
Legal Proceedings
From time to time, we are subject to lawsuits and claims which arise out of our
operations in the normal course of business. We are plaintiffs or defendants in
various litigation matters in the ordinary course of business, some of which
involve claims for damages that are substantial in amount. We believe that the
disposition of claims currently pending will not have a material adverse effect
on our financial position or results of operations. With respect to the matters
discussed below, although we are currently unable to predict the outcome, we do
not believe the disposition of these matters will have a material adverse effect
on our financial position or results of operations.
HOWMEDICA OSTEONICS CORP. V. WRIGHT MEDICAL GROUP, INC.
On March 28, 2000, Howmedica Osteonics Corp., a subsidiary of Stryker
Corporation, filed a complaint in the United States District Court in New Jersey
alleging that we infringed Howmedica's U.S. Patent No. 5,824,100 related to our
ADVANCE-Registered Trademark- Knee product line. Howmedica Osteonics Corp. is
seeking an order of infringement, treble compensatory damages and injunctive
relief. If Howmedica Osteonics Corp. were to succeed in obtaining the relief it
claims, the Court could award damages to Howmedica Osteonics Corp., could impose
an injunction against further sales of our products and could rule that our
patents are invalid or unenforceable. We are unable to quantify the potential
range of any damage award and no specific monetary damage was requested in
Howmedica Osteonics Corp.'s complaint. A damage award could be significant. If a
final damage award is rendered against us, we may be forced to raise or borrow
funds, as a supplement to any available insurance claim proceeds, to pay the
damages award. We believe that we have good defenses to this lawsuit and intend
to defend it vigorously.
WRIGHT MEDICAL TECHNOLOGY, INC. V. GRISONI
We filed an action against a former employee on March 31, 1998, regarding the
use of intellectual property and trade secrets. We alleged the former employee
violated a "trade secrets" provision of his employment contract by developing a
calcium sulfate bone void filler product to compete against our similar product.
Initially, the trial court granted us a temporary restraining order and later
granted us a temporary injunction. Seven months later, the former employee filed
a motion to dissolve the injunction. Our former employee claimed that the
injunction was improperly granted and alleged damages as a result of the
issuance of the injunction. On May 3, 2000, the trial court found us "guilty of
malicious prosecution" and awarded the former employee a judgment of
$4.8 million, plus $408,000 per month for twelve months or until a final
resolution of the case, whichever is earlier, and $4.8 million in punitive
damages. We appealed the judgment and agreed to suspend the injunction pending
the outcome of the appeal. In connection with the appeal we were required to
post a $5.0 million bond.
The Tennessee Court of Appeals issued its decision on our appeal on
December 18, 2001. The Court of Appeals concluded that the evidence neither
established malice nor lack of probable cause. Accordingly, the trial court's
finding that we were liable for malicious prosecution was reversed. Since the
Court of Appeals reversed the finding of malicious prosecution, the Court of
Appeals stated that the award of punitive damages was not warranted and it
reversed the award of punitive damages. The Court of Appeals, however, affirmed
the dissolution of the injunction. Since the finding of liability for malicious
prosecution was reversed, the damages to Grisoni were limited to the amount of
the injunction bond of $500,000 and Grisoni was thus entitled to recover
compensatory damages for the wrongful injunction in the amount of $500,000. The
trial court's award of damages was modified to that amount. Grisoni appealed the
trial court's decision not to award damages for our alleged misappropriation of
material from Grisoni. The Court of Appeals affirmed the trial court and found
that the preponderance of the evidence supported the trial court's finding that
we did not use Grisoni's information.
Either party could seek permission to appeal the case to the Tennessee Supreme
Court. The parties have sixty (60) days from the date of the Court of Appeals
decision to seek permission to appeal. If this case is accepted by the Tennessee
Supreme Court and the damages reversed by the Court of Appeals are reinstated,
we may be required to raise or borrow the money to pay all or a portion of the
damages award.
51
Management
Executive Officers, Directors and Key Employees
Set forth below is certain information concerning our executive officers,
directors and key employees, including their age, as of December 31, 2001:
--------------------------------------------------------------------------------------------------------------------------
NAME AGE POSITION(S)
------------------------------------------------------- -------- ------------------------------------------------------
F. Barry Bays (1)...................................... 54 President, Chief Executive Officer and Director
James T. Treace (1)(3)................................. 55 Chairman of the Board
John K. Bakewell....................................... 40 Executive Vice President and Chief Financial Officer
Jack E. Parr, Ph.D..................................... 62 Executive Vice President and Chief Scientific Officer
Robert W. Churinetz.................................... 50 Senior Vice President of Global Operations
R. Glen Coleman........................................ 47 Senior Vice President of Marketing
Brian T. Ennis......................................... 47 President, International
Warren O. Haggard, Ph.D................................ 45 Vice President, Research
Karen L. Harris........................................ 40 Vice President, International Sales and Distribution
Jason P. Hood, J.D..................................... 36 General Counsel and Secretary
Joyce B. Jones......................................... 48 Vice President, Finance and Controller
Jeffrey G. Roberts..................................... 42 Vice President, Research and Development
Carl M. Stamp.......................................... 39 Vice President, Business Development
John R. Treace......................................... 57 Vice President, U.S. Sales
Richard B. Emmitt (1)(2)............................... 56 Director
James E. Thomas (2)(3)................................. 41 Director
Thomas E. Timbie (2)................................... 43 Director
Elizabeth H. Weatherman (1)(3)......................... 41 Director
------------------------
(1) Member of the executive committee.
(2) Member of the audit committee.
(3) Member of the compensation committee.
F. BARRY BAYS has served as our President, Chief Executive Officer and Director
since January 2000. Mr. Bays has 35 years of experience in the medical device
industry. From April 1996 to January 2000 he served as the Senior Vice President
and Chief Operating Officer of Medtronic Xomed, Inc. and its predecessor, Xomed
Surgical Products, Inc., the leader in the market for surgical products used by
ear, nose and throat surgeons. From 1993 to April 1996, Mr. Bays served as Vice
President and Chief Operating Officer and a Director of TreBay Medical Corp.
From 1990 to 1993, Mr. Bays served as Executive Vice President and Chief
Operating Officer of Linvatec Corporation. From 1981 to 1990, Mr. Bays was the
Senior Vice President and Chief Operating Officer of Concept, Inc.
JAMES T. TREACE has served as our Chairman of the Board since December 1999. He
is currently President of the J & A Group, LLC, an investment and consulting
business he founded in November 2000. From November 1999 until October 2000,
Mr. Treace was President of Medtronic Xomed, Inc. From April 1996 until its
acquisition by Medtronic, Inc. in November 1999, Mr. Treace served as Chief
Executive Officer, President and Chairman of the Board of Xomed Surgical
Products, Inc., the leader in the market for surgical products used by ear, nose
and throat surgeons. From 1993 to April 1996, Mr. Treace served as Chairman,
President and Chief Executive Officer and a Director of TreBay Medical Corp.
From 1990 to 1993, Mr. Treace served as President of Linvatec Corporation. From
1998 until January 2002, Mr. Treace served as a director of American Medical
Systems Holdings, Inc., which is publicly held. Mr. Treace is currently a
director of Kyphon Inc., which is privately held. From 1981 to 1990, Mr. Treace
served as President and Chief Executive Officer of Concept, Inc. Mr. Treace is
the brother of our Vice President, U.S. Sales, John R. Treace.
JOHN K. BAKEWELL has served as our Executive Vice President and Chief Financial
Officer since December 2000. From July 1998 until December 2000, Mr. Bakewell
served as Chief Financial Officer and Vice President of Finance and
Administration with Altra Energy Technologies, Inc., a software and e-commerce
solutions provider to the energy industry. From May 1993 to July 1998,
Mr. Bakewell held the position of Vice President of Finance and Administration
and Chief Financial Officer of Cyberonics, Inc., a publicly-held medical device
manufacturer. From October 1990 to May 1993, Mr. Bakewell held the position of
Chief Financial
52
Officer with ZEOS International Ltd., a publicly-held manufacturer and direct
marketer of personal computers and related products. Mr. Bakewell is a certified
public accountant.
JACK E. PARR, PH.D. has served as our Executive Vice President and Chief
Scientific Officer since January 1998. Dr. Parr has 22 years of experience in
the orthopaedic medical device industry. He joined us in September 1993 as Vice
President of Research and Development. Dr. Parr is a member of the American
Academy of Orthopaedic Surgeons. He is a member of the Society of Biomaterials
board of directors and a past president of the Society. Dr. Parr is a member of
the American Society for Testing and Materials board of directors and several
other professional associations. He holds 16 U.S. patents.
ROBERT W. CHURINETZ has served as our Senior Vice President of Global Operations
since April 1, 2001. Mr. Churinetz has 25 years of experience in the medical
device industry. He joined us in September 1993 as Vice President of Quality and
Regulatory Affairs, was promoted to Vice President of Operations in November of
1998, and to Vice President of Global Operations in September 2000. Prior to
joining us, Mr. Churinetz spent 17 years with United States Surgical Corporation
in various positions of increasing responsibility, ultimately serving as Senior
Director of Corporate Quality Functions.
R. GLEN COLEMAN joined us as Senior Vice President of Marketing in March 2001.
Mr. Coleman was Vice President of Marketing of Medtronic Xomed, Inc. and its
predecessor, Xomed Surgical Products, Inc., from August 1996 until
November 2000. From January 1983 to August 1996, Mr. Coleman held several
management positions at Linvatec Corporation, including Vice President of Global
Marketing from June 1996 to July 1996, Vice President of Sales from
October 1993 to June 1996, Vice President and General Manager of its Concept
Division from May 1991 to October 1993 and Vice President of Research and
Development earlier.
BRIAN T. ENNIS has served as our President of International since July 2001.
Mr. Ennis has more than 19 years of experience in the medical device industry.
From 1989 through 2000, Mr. Ennis served the Stryker Corporation as a Director
of Marketing for Stryker Medical Division, Vice President/General Manager for
Stryker Medical Europe, Vice President/General Manager for Stryker United
Kingdom and Vice President of MedSurg Marketing for Stryker Europe, Africa, and
Middle East. From 1982 through 1988, Mr. Ennis served the C.R. Bard Corporation
in progressive sales and marketing positions culminating as a Group Product
Manager for the Bard Urological Division.
WARREN O. HAGGARD, PH.D. has served as our Vice President, Research since
November 1998. Dr. Haggard joined Dow Corning Wright, a predecessor company, in
May 1985 as a Product Development Engineer and has held various positions of
increasing responsibility in the product development and research departments.
In 1996 he was promoted to Director of Advance Technology and Biologics. From
January 1982 to May 1985, Dr. Haggard worked at Union Carbide Corporation.
KAREN L. HARRIS has served as our Vice President, International Sales and
Distribution since January 1998. Ms. Harris joined us in February 1997 as Vice
President of European Business Development. For the seven years prior to joining
us, Ms. Harris was employed by MicroAire Surgical Instruments, Inc., a private
company owned by the Marmon Group, Inc., where she held various positions and
ultimately was Director of International Sales and Marketing.
JASON P. HOOD, J.D. has served as our General Counsel and Secretary since
August 1998. From February 1998 to August 1998 he served as our Corporate
Counsel. Prior to joining us, Mr. Hood was an attorney for the international
employee benefits consulting firm Sedgwick Noble Lowndes, a division of
Sedgwick, Inc., which is currently part of Marsh & McLennan Companies Inc. From
1994 to 1997, Mr. Hood was associated with the law firm of Glankler Brown, PLLC
where he concentrated his practice in employment law and general civil
litigation. Mr. Hood is licensed to practice law in the State of Tennessee.
JOYCE B. JONES has served as our Vice President, Finance and Controller since
January 1998. Ms. Jones joined us in 1989 as Manager of General Accounting and
was promoted to various positions of increasing responsibility in accounting and
finance. She has over 16 years of experience in the medical device industry.
Prior to joining us, Ms. Jones served as the Corporate Controller for Insituform
Technologies, Inc., a publicly traded company.
JEFFREY G. ROBERTS serves as our Vice President, Research and Development. He
joined us in March 2000 as Vice President of Product Development. Mr. Roberts
has over 17 years of experience in the medical device industry and has been
involved in the design, development and manufacture of many orthopaedic devices,
implants and instruments for both total joint and arthroscopic applications.
CARL M. STAMP has served as our Vice President, Business Development since
March 2001. From June 1996 to March 2001 Mr. Stamp served as our Vice President
of Marketing. Mr. Stamp has 15 years of experience in the orthopaedic medical
device industry. He joined us following our acquisition of Orthomet, Inc. in
1994. As an engineer, Mr. Stamp spent five years in Product Development with Dow
Corning Wright and holds several patents.
53
JOHN R. TREACE has served as our Vice President, U.S. Sales since
September 2000. Mr. Treace formerly served as Vice President of U.S. Sales for
Medtronic Xomed, Inc., and its predecessor, Xomed Surgical Products, Inc., from
June 1994 until June 30, 2000. From 1995 to April 1996, Mr. Treace served as
Vice President of Sales and Marketing of TreBay Medical Corp. Mr. Treace is the
brother of our Chairman of the Board, James T. Treace.
RICHARD B. EMMITT has served as one of our directors since December 1999. Since
1989, Mr. Emmitt has been a Managing Director of The Vertical Group Inc., an
investment management and venture capital firm focused on the medical device
industry. He currently serves on the board of directors of American Medical
Systems Holdings, Inc., a publicly held company, and A-Med Systems, Inc.,
EndiCOR Medical, Inc., SURx, Inc., and Velocimed, Inc., all privately held
companies. He served as a director of Xomed Surgical Products, Inc. from
April 1994 to November 1999.
JAMES E. THOMAS has served as one of our directors since August 2000. He
previously served as one of our directors from December 1999 to March 2000, as a
designee of Warburg Pincus under our stockholders agreement. Mr. Thomas is
Managing Partner of Thomas, McNerney & Partners, LLC, a health care private
equity investment partnership. From January 1989 to June 2000, Mr. Thomas was
with Warburg Pincus LLC, a private investment firm, where he served as a
Managing Director. Mr. Thomas serves as a director of Transkaryotic
Therapies, Inc. and The Medicines Company, Inc., both publicly held companies.
He served as a director of Xomed Surgical Products, Inc. from April 1994 to
November 1999.
THOMAS E. TIMBIE has served as one of our directors since August 2000. He is the
President of Timbie and Company, LLC, a financial consulting firm he founded in
2000. Formerly he was Interim Vice President and Chief Financial Officer of
e-dr. Network, Inc, a business-to-business exchange in the optical device market
from January 2000 to October 2000. From April 1996 to December 1999, Mr. Timbie
was the Vice President and Chief Financial Officer of Xomed Surgical
Products, Inc.
ELIZABETH H. WEATHERMAN has served as one of our directors since December 1999.
She is a Managing Director of Warburg Pincus LLC where she has been a member of
the health care group since 1988. She is responsible for Warburg Pincus' medical
device investment activities. Ms. Weatherman currently also serves on the board
of directors of American Medical Systems Holdings, Inc. and Micro
Therapeutics, Inc., publicly held companies, and Kyphon Inc., SURx, Inc., and
ev3, Inc., all privately held companies. She served as a director of Xomed
Surgical Products, Inc. from April 1994 to November 1999.
Board Composition
According to our stockholders agreement, Warburg Pincus has the right to
designate two persons to our board of directors. Currently, Warburg Pincus has
designated Elizabeth H. Weatherman as one of its representatives under this
agreement. To date, Warburg Pincus has not informed us that they intend to
nominate a second representative to our board of directors. See "Certain
Transactions" for more information about our stockholders agreement, in
particular what rights certain of our current stockholders have under this
agreement. Elizabeth H. Weatherman is currently a partner of Warburg, Pincus &
Co., which is the sole general partner of Warburg, Pincus Equity Partners, L.P.,
our principal stockholder.
Director Compensation
We compensate each of our non-employee and non-stockholder representative
directors $12,000 per year. Non-employee directors are directors who are neither
our employees nor representatives of one of our stockholders. We compensate the
Chairman of our audit committee an additional $18,000 per year and the Chairman
of our board of directors an additional $38,000 per year. In addition, we
reimburse each member of our board of directors for out-of-pocket expenses
incurred in connection with attending our board meetings. We do not compensate
employee directors.
Board Committees
The board of directors has established an audit committee, compensation
committee and executive committee.
The executive committee has the authority to exercise all powers of the board of
directors during the intervals between meetings of the board of directors
subject to restrictions or limitations as the board of directors may from time
to time specify, or as limited by the Delaware General Corporation Law. This
committee currently consists of James T. Treace (Chairman), F. Barry Bays,
Richard B. Emmitt and Elizabeth H. Weatherman.
The audit committee provides assistance to the board in satisfying its fiduciary
responsibilities relating to accounting, auditing, operating and reporting
practices, and reviews the annual financial statements, the selection and work
of our independent auditors,
54
the scope of the annual audits, the fees to be paid to the auditors and the
adequacy of internal controls for compliance with corporate policies and
directives. This committee currently consists of Thomas E. Timbie (Chairman),
Richard B. Emmitt and James E. Thomas. James E. Thomas was appointed to the
audit committee pursuant to the exception contained in Nasdaq Stock Market
Rule 4350(d)(2)(B), relating to exceptional circumstances for appointing persons
to a corporation's audit committee who might not otherwise meet the independence
requirement of NASDAQ. Mr. Thomas does not currently satisfy the NASDAQ
independence requirement due to his past affiliation with Warburg Pincus. Our
board of directors found it in our best interests and in the best interests of
our stockholders that James E. Thomas serve as a member of our audit committee
due to his accounting and financial experience.
The compensation committee reviews general programs of compensation and benefits
for all employees and makes recommendations to our board of directors concerning
executive officer and director compensation. This committee currently consists
of James T. Treace (chairman), James E. Thomas and Elizabeth H. Weatherman.
Compensation Committee Interlocks and Insider Participation
James T. Treace, James E. Thomas and Elizabeth H. Weatherman, each of whom is a
member of our board of directors, are members of the board's compensation
committee. No executive officer of ours serves as a member of the board of
directors or compensation committee of any entity that has an executive officer
serving as a member of our board of directors or compensation committee.
Ms. Weatherman is a managing director of Warburg Pincus LLC. Mr. Thomas was a
managing director of Warburg Pincus LLC from January 1989 to June 2000,
including at the time of our recapitalization, but was no longer affiliated with
Warburg Pincus when he joined our board of directors in August 2000. Warburg
Pincus is managed by Warburg Pincus LLC. Warburg Pincus and a group of private
investors acquired control of our company in December 1999 and led a
recapitalization financing that both reduced our debt and provided us with
investment capital. In connection with our recapitalization and the subsequent
funding of our Cremascoli acquisition, Warburg Pincus purchased 572 shares of
common stock, 11,510,374 shares of our series A preferred stock, 7,889,626
shares of our series B preferred stock and warrants to purchase 345,455 shares
of common stock and $35,570,762 of our subordinated notes for a total
consideration of $97,000,000. In August 2000, we sold Warburg Pincus 9 shares of
our common stock, 1,200,010 shares of our series C preferred and $1,100,111
aggregate principal amount of subordinated notes for a total consideration of
$3,000,000. In July 2001, in connection with the closing of our initial public
offering, approximately $13.1 million of our subordinated notes held by Warburg
Pincus were converted into 1,125,000 shares of our non-voting common stock. Upon
the exercise of the underwriters' over-allotment option, 1,125,000 shares of our
voting common stock were sold by Warburg Pincus at the initial public offering
price less underwriting discounts. Warburg Pincus has granted the underwriters
the right to purchase up to an additional 450,000 shares of our voting common
stock to cover over-allotments, if any.
55
Executive Compensation
The following table sets forth summary information concerning the compensation
awarded to or earned by our Chief Executive Officer and by each of our four
other most highly compensated executive officers (the "named executive
officers") who earned in excess of $100,000 in cash compensation during the year
ended December 31, 2001.
SUMMARY COMPENSATION TABLE
------------------------------------------------------------------------------------------------------------------------
Long-Term
Annual Compensation Compensation
------------------- ------------------
Securities All Other
Name and Principal Position Year Salary Bonus Underlying Options Compensation
--------------------------- -------- -------- -------- ------------------ ------------
F. Barry Bays....................................... 2001 $270,000 $109,158 109,091 $240,300(1)
President, Chief Executive Officer and Director 2000 248,571 116,765 618,182 94,194(2)
John K. Bakewell(3)................................. 2001 190,000 59,089 -- 45,294(4)
Executive Vice President and Chief Financial 2000 11,310 -- 109,091 --
Officer
Jack E. Parr, Ph.D.................................. 2001 183,450 74,069 23,636 8,805(5)
Executive Vice President and Chief Scientific 2000 176,750 94,509 30,328 7,930(6)
Officer
Robert W. Churinetz................................. 2001 189,000 80,585 18,182 5,100(7)
Senior Vice President, Global Operations 2000 180,600 48,851 43,273 5,100(7)
Karen L. Harris..................................... 2001 171,000 72,569 5,455 5,325(8)
Vice President, International Sales and 2000 161,033 45,053 43,273 4,831(9)
Distribution
------------------------
(1) Represents $225,000 to cover loss of the excise tax and gross-up
reimbursement from previous employer, $5,100 we paid under our 401(k) plan
and $10,200 in perquisites.
(2) Consists of $84,844 to cover the loss of a performance bonus from a previous
employer and $9,350 in perquisites.
(3) Mr. Bakewell's first day of employment with us was December 11, 2000.
(4) Represents $5,100 we paid under our 401(k) plan and $40,194 in perquisites.
(5) Represents $5,100 we paid under our 401(k) plan and $3,705 in perquisites.
(6) Consists of $5,100 we paid under our 401(k) plan and $2,830 in perquisites.
(7) Represents $5,100 we paid under our 401(k) plan.
(8) Represents $5,100 we paid under our 401(k) plan and $225 in perquisites.
(9) Represents $4,831 we paid under our 401(k) plan.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning stock options
granted during fiscal year 2001 to each of our named executive officers.
-----------------------------------------------------------------------------------------------------------------------------
Individual Grants (1) Potential Realizable Value at
----------------------------------------------- Assumed Annual Rates of
Number of Percent of Total Stock Price Appreciation for
Securities Options Granted Exercise Option Term(2)
Underlying to Employees in Price Per Expiration -----------------------------
Name Options Granted Fiscal Year 2001 Share(3) Date 5% 10%
---- --------------- ---------------- ---------- ---------- ------------- -------------
F. Barry Bays.................. 109,091 16.54% $8.25 03/28/11 $2,280,788 $4,164,875
John K. Bakewell............... -- -- -- -- -- --
Robert W. Churinetz............ 18,182 2.76 8.25 03/28/11 380,135 694,152
Karen L. Harris................ 5,455 .83 8.25 03/28/11 114,049 208,261
Jack E. Parr, Ph.D............. 23,636 3.58 8.25 03/28/11 494,163 902,375
------------------------
(1) All of the options granted to the named executive officers were granted
under our 1999 Equity Incentive Plan. See "Management-1999 Equity Incentive
Plan" for a summary of the material terms of the options granted under this
plan.
(2) In accordance with the rules of the SEC, the amounts shown on this table
represent hypothetical gains that could be achieved for the respective
options if exercised at the end of the option term. These gains are based on
assumed rates of stock
56
appreciation of 5% and 10% compounded annually from the date the respective
options were granted to their expiration date and do not reflect our
estimates or projections of our future common stock prices. The gains shown
are net of the option price, but do not include deductions for taxes or
other expenses associated with the exercise. Actual gains, if any, on stock
option exercises will depend upon the future performance of our common
stock, the executive's continued employment with us or our subsidiaries and
the date on which the options are exercised. The amounts represented in this
table might not necessarily be achieved.
(3) The exercise price per share was equal to the fair market value of our
common stock on the dates of grants of all options granted to the named
executive officers.
FISCAL YEAR-END OPTION VALUES
None of our named executive officers exercised any stock options in fiscal year
2001. The following table sets forth information concerning stock options held
by our named executive officers at December 31, 2001.
-----------------------------------------------------------------------------------------------------------------------
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-The-Money Options at
December 31, 2001 December 31, 2001 (1)
--------------------------- ---------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
F. Barry Bays............................................... 309,091 418,182 $4,187,009 $5,239,737
John K. Bakewell............................................ 27,272 81,819 369,432 1,108,337
Jack E. Parr, Ph.D.......................................... 18,228 46,382 284,008 536,209
Robert W. Churinetz......................................... 15,472 50,638 225,802 615,112
Karen L. Harris............................................. 15,472 37,911 225,802 492,296
------------------------
(1) Represents the difference between the market value (closing price on the
Nasdaq National Market) of our common stock on December 31, 2001 ($17.90)
and the exercise price of in-the-money options, before payment of applicable
income taxes.
Employment Agreements
We entered into an employment agreement with F. Barry Bays on January 31, 2000.
Mr. Bays is currently serving as our President and Chief Executive Officer. The
current term of this agreement expires on January 31, 2003. We currently pay
Mr. Bays an annual base salary of $270,000. Mr. Bays is eligible to receive an
annual bonus based upon certain performance criteria established by our board of
directors. Mr. Bays is also entitled to receive a one-time payment equal to
$225,000 to cover the loss of an excise tax and gross-up reimbursement from his
former employer. Under this agreement, we granted Mr. Bays an option to purchase
618,182 shares of our common stock at an exercise price of $4.35, of which
309,091 shares vested on January 31, 2001, 105,091 shares of which vest on
January 31, 2002 and 102,000 shares of which vest on each of January 31, 2003
and 2004. We have also agreed to reimburse Mr. Bays' reasonable business
expenses. See "Certain Transactions-Sales of Securities" for information
regarding sales of our securities to Mr. Bays. This agreement also entitles
Mr. Bays to participate in our other standard benefit programs and contains
customary confidentiality and competition provisions.
We entered into an employment agreement with John K. Bakewell on December 11,
2000. Mr. Bakewell is currently serving as our Executive Vice President and
Chief Financial Officer. The current term of this agreement expires on
December 11, 2003. We currently pay Mr. Bakewell an annual base salary of
$190,000. Under the agreement, Mr. Bakewell also received a one-time payment
equal to $52,500 on February 28, 2001. Mr. Bakewell is eligible to receive an
annual bonus based upon certain performance criteria established by our board of
directors. Under this agreement, we granted Mr. Bakewell an option to purchase
109,091 shares of our common stock at an exercise price of $4.35, of which
27,272 shares vested on December 11, 2001, and 27,273 shares vest on each of
December 11, 2002, 2003 and 2004. We have also agreed to reimburse
Mr. Bakewell's reasonable business expenses. See "Certain Transactions-Sales of
Securities" for information regarding sales of our securities to Mr. Bakewell.
This agreement also entitles Mr. Bakewell to participate in our other standard
benefit programs and contains customary confidentiality and competition
provisions.
We entered into an employment agreement with John R. Treace on September 5,
2000. Mr. Treace is currently serving as our Vice President, U.S. Sales. The
current term of this agreement expires on September 5, 2003. We currently pay
Mr. Treace an annual base salary of $175,000. Mr. Treace is eligible to receive
an annual bonus based upon certain performance criteria established by our board
of directors. Under this agreement, we granted Mr. Treace an option to purchase
54,545 shares of our common stock at an exercise price of $4.35, of which 27,273
shares vested on September 5, 2001, and 13,636 shares vest on each of
September 5, 2002 and 2003. See "Certain Transactions-Sales of Securities" for
information regarding sales of our securities to Mr. Treace. This agreement also
entitles Mr. Treace to participate in our other standard benefit programs and
contains customary confidentiality and competition provisions.
57
We entered into an employment agreement with R. Glen Coleman on March 7, 2001.
Mr. Coleman is currently serving as our Senior Vice President of Marketing. The
current term of this agreement expires on March 7, 2004. We currently pay
Mr. Coleman an annual base salary of $177,500. Mr. Coleman is eligible to
receive an annual bonus based upon certain performance criteria established by
our board of directors. Under this agreement, we granted Mr. Coleman an option
to purchase 54,545 shares of our common stock at an exercise price of $4.35, of
which 13,636 shares vest on each of March 7, 2002, 2003, 2004 and 2005. See
"Certain Transactions-Sales of Securities" for information regarding sales of
our securities to Mr. Coleman. This agreement also entitles Mr. Coleman to
participate in our other standard benefit programs and contains customary
confidentiality and competition provisions.
We entered into an employment agreement with Brian T. Ennis on July 10, 2001.
Mr. Ennis is currently serving as our President, International. The current term
of this agreement expires on July 10, 2004. We currently pay Mr. Ennis an annual
base salary of $200,000. Mr. Ennis is eligible to receive an annual bonus based
upon certain performance criteria established by our board of directors. Under
this agreement, we granted Mr. Ennis an option to purchase 75,000 shares of our
common stock at an exercise price of $8.25, of which 18,750 shares vest on each
of July 10, 2002, 2003, 2004 and 2005. We have also agreed to reimburse
Mr. Ennis for transitional expenses associated with relocation costs not to
exceed $25,000. See "Certain Transactions-Sales of Securities" for information
regarding sales of our securities to Mr. Ennis. This agreement also entitles
Mr. Ennis to participate in our other standard benefit programs and contains
customary confidentiality and competition provisions.
Each of the above agreements includes the following termination benefits:
- If the employee becomes disabled while employed by us, he will be entitled to
receive all amounts and benefits that he would be entitled to receive under
the agreement if he had not become disabled.
- If the employee dies or we terminate the employee for "cause," as defined in
the employment agreement, he will receive no additional compensation or
termination benefits. For purposes of the employment agreements, we would have
"cause" to terminate the employment agreement upon:
- the determination by our board that the employee has intentionally
neglected his duties for an extended period of time;
- the employee's death;
- the determination by our board that the employee has engaged or may engage
in conduct that may materially injure us;
- the employee's conviction of a felony;
- the employee's improper disclosure of our or our predecessor company's
trade secrets, know-how or proprietary processes;
- the employee's failure to follow guidelines regarding the treatment of
inventions, ideas, disclosures and improvements during the course of
employment; or
- the employee's material breaches of any covenant contained in the
employment agreement.
- If we terminate the employee without cause, he will be entitled to receive his
salary and to receive continued coverage under our benefit plans, for a period
of twenty-four months, in the case of Mr. Bays, and twelve months in the case
of each of Mr. Bakewell, Mr. Treace, Mr. Coleman and Mr. Ennis, following the
date of termination. All of the employee's unvested shares subject to the
option granted him under this agreement will immediately vest and be
exercisable for a period of one year following the date of termination.
- Upon a "change of control," as defined in the agreement, all of the employee's
unvested shares subject to the options shall immediately vest and be fully
exercisable. For purposes of the employment agreements, a change in control of
WMG will be deemed to have occurred, among other events, upon:
- the acquisition of beneficial ownership of 50% or more of either our
outstanding shares of common stock or our combined voting power to elect
our board, unless the acquisition:
- is pursuant to an initial public offering; or
- is transacted by us or one of our affiliates.
- a reorganization, merger, consolidation or disposition of all or
substantially all of our assets, unless:
- all or substantially all of the individuals and entities who
beneficially owned our outstanding common stock and outstanding voting
securities immediately prior to the transaction continue to
beneficially own 60% of the outstanding
58
common stock and outstanding voting securities in substantially the
same proportions of ownership after the transaction;
- an unrelated party does not own, directly or indirectly, 50% or more of
the outstanding common stock of the new entity, including shares that
could be issued upon the exercise of outstanding common stock options
or warrants, the conversion of convertible stock or debt, and the
exercise of any similar right to acquire our common stock, or 50% or
more of the combined voting power of the new entity;
- at least a majority of the members of the board of the new entity are
members of our board at the time of the transaction; and
- our employee maintains his position with the new entity.
- the sale of at least 80% of our assets to an unrelated party or completion
of a transaction having a similar effect;
- the approval by our stockholders of a complete liquidation or dissolution
of our company; or
- the current members of our board, or future members of our board who are
approved by at least two-thirds of our current board, cease to constitute
at least a majority of the board.
Employee Benefit Plans
1999 EQUITY INCENTIVE PLAN
Our board of directors and stockholders approved our 1999 Equity Incentive Plan
on December 7, 1999 and its subsequent amendment and restatement on July 6,
2001. As of December 31, 2001, we have a total of 1,608,745 shares of our common
stock reserved for issuance under the plan. As of December 31, 2001, we have
outstanding options to purchase an aggregate of 3,127,155 shares of our common
stock at a weighted average exercise price of $5.09 per share.
The plan provides for the grant to eligible persons of: options to purchase our
common stock that qualify as incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended; options to
purchase our common stock that do not qualify as incentive stock options under
the Code; restricted stock awards, which are subject to certain forfeiture and
transferability restrictions that lapse after specified employment periods; and
awards of unrestricted shares of common stock in the form of stock bonuses,
stock appreciation rights, phantom stock and performance share units.
Our U.S.-based employees, directors and consultants are eligible to participate
in the plan. Under present law, incentive stock options may only be granted to
employees. Our board, or a committee of the board, may administer the plan, and
has the authority to: select plan participants; determine the nature and extent
of the awards made to each plan participant; determine whether awards will be
paid in shares, options or cash, representing the fair market value of the
shares granted; determine when awards will be made to plan participants;
determine the duration of the period and vesting schedule for each award;
determine any payment conditions of the awards; prescribe the form of agreements
evidencing awards made under the plan; and make all other decisions relating to
the administration of the plan.
Under the plan, the administrator also determines the exercise price at the time
of grant. Except in the case of any incentive stock options, the exercise price
may be less than 100% of the fair market value of a share of our common stock on
the day the administrator grants the option. The options are generally granted
for a ten-year term, but may terminate earlier if the participant's employment
with us terminates before the end of the ten-year period. If a plan participant
who holds an incentive stock option also owns, or is deemed to own, more than
10% of the combined voting power of all of our classes of stock, the option
period shall not exceed five years and the exercise price of the option may not
be less than 110% of the fair market value on the grant date.
Under our standard agreement covering stock option grants, if we undergo a
change in control, then without any action by the administrator of the plan, all
outstanding options may become immediately exercisable in full.
For purposes of the plan, a change in control of WMG will be deemed to have
occurred, among other events, upon:
- a reorganization, merger, consolidation or disposition of all or substantially
all of our assets, unless:
- we or our affiliates control the new entity resulting from the
transaction;
- an unrelated party does not own, directly or indirectly, 50% or more of
the outstanding common stock of the new entity, including shares that
could be issued upon the exercise of outstanding stock options or
warrants, the conversion of
59
convertible stock or debt, and the exercise of any similar right to
acquire our common stock, or 50% or more of the combined voting power of
the new entity; or
- at least a majority of the members of the board of the new entity are
members of our board at the time of the transaction.
- the sale of at least 80% of our assets to an unrelated party or completion of
a transaction having a similar effect;
- the approval by our stockholders of a complete liquidation or dissolution of
our company;
- the purchase by an unrelated party of 50% or more of our then outstanding
shares of common stock, taking into account shares that may be issued upon the
exercise of outstanding stock options or warrants, the conversion of
convertible stock or debt, and the exercise of any similar right to acquire
our common stock, or 50% or more of the combined voting power of our then
outstanding securities ordinarily having the right to vote at the election of
directors; or
- the current members of our board, or future members of our board who are
approved by at least two-thirds of our current board, cease to constitute at
least a majority of the board.
Under our standard agreement covering stock options, if we terminate an employee
for cause, we have the right to repurchase any stock issued upon exercise of an
option at the lesser of the fair market value of each of the repurchased shares
or the exercise price of the option. Also, if an employee voluntarily terminates
employment with us or we terminate an employee for cause, all options not
exercised are cancelled.
WMG SAVINGS AND INVESTMENT PLAN--401(K) PLAN
We have established a tax-qualified employee savings and retirement plan for all
of U.S.-based employees who satisfy certain eligibility requirements, including
requirements relating to age and length of service. Under our 401(k) plan,
employees may elect to reduce their current compensation by up to 15% or the
statutory limit, $11,000 in 2002, whichever is less, and have us contribute the
amount of this reduction to the 401(k) plan. In addition, we match a percentage
of an employee's contribution that we establish from time to time. As of
December 31, 2001, we had 501 employees eligible for participation in our 401(k)
plan. We made matching contributions of $549,540 in 2000.
We intend for the 401(k) plan to qualify under Section 401 of the Internal
Revenue Code so that contributions by employees or by us to the 401(k) plan, and
income earned on plan contributions, are not taxable to employees until
withdrawn from the 401(k) plan. Our contributions, if any, will be deducted by
us when made.
WMG 2001 MANAGEMENT INCENTIVE PLAN
We have established a management incentive plan based on the achievement of
certain quarterly and annual corporate objectives, including our global sales,
operating profit and inventory and manufacturing efficiency. All WMG active
management employees are eligible to participate under this incentive plan. The
employee must be an active employee at the time bonuses are recorded in order to
qualify for the bonus. Each employee's bonus is calculated by multiplying their
base pay by the plan's bonus percentage. Our Chief Executive Officer, Chief
Financial Officer and board of directors must approve all bonus payments under
the plan.
2001 EMPLOYEE INCENTIVE PLAN
We have established an employee incentive plan based on the achievement of
certain quarterly and annual corporate objectives, including our domestic sales,
operating profit and inventory and manufacturing efficiency. All WMT active
employees are eligible to participate under this incentive plan. The employee
must be an active employee at the time bonuses are recorded in order to qualify
for the bonus. Each employee's bonus is calculated by multiplying their base pay
by the plan's bonus percentage. Our Chief Executive Officer, Chief Financial
Officer and board of directors must approve all bonus payments under the plan.
2001 CREMASCOLI MANAGEMENT INCENTIVE PLAN
We have established a management incentive plan based on the achievement of
certain quarterly and annual corporate objectives, including Wright Medical
Europe and WMG global sales and global operating profit. All active Cremascoli
management employees are eligible to participate under this incentive plan. The
employee must be an active employee at the time bonuses are recorded in order to
qualify for the bonus. Each employee's bonus is calculated by multiplying their
base pay by the plan's bonus percentage. Our Chief Executive Officer, Chief
Financial Officer and board of directors must approve all bonus payments under
the plan.
60
Certain Transactions
Recapitalization
In November 1999, Warburg Pincus led a group of private investors to form Wright
Acquisition Holdings, Inc., or WAH, to acquire WMT, our predecessor company. On
December 7, 1999, WAH, Wright Acquisition Corp., Inc., a wholly owned subsidiary
of WAH, and WMT entered into an Amended and Restated Agreement and Plan of
Merger, setting forth the terms and conditions upon which WMT would be
recapitalized through a merger of Wright Acquisition Corp. with and into WMT.
The recapitalization agreement was negotiated on an arm's-length basis among our
predecessor company, its former management and stockholders and the investment
group led by Warburg Pincus. The recapitalization agreement was approved by our
predecessor company's board of directors and by stockholders representing a
majority of our predecessor company's common stock and each class of its
preferred stock. On December 7, 1999, the recapitalization was completed.
Pursuant to the terms of the recapitalization agreement, holders of our
predecessor company's series A preferred stock received $275,936 in cash and
holders of our predecessor company's common stock received $324,064 in cash in
exchange for their shares. Holders of our predecessor company's series B
preferred stock and series C preferred stock received $8.6 million in cash,
$3.4 million in subordinated notes and a 17% ownership in our recapitalized
company in the form of our series A preferred stock valued at $3.17 per share
and common stock valued at $.01 per share. Our predecessor company's Series A
preferred stock was held by Kidd Kamm Equity Partners, L.P., Herbert W.
Korthoff, Barbara Korthoff, Lewis H. Ferguson, Jeffries & Co. and certain
distributors of our predecessor company's products. Our predecessor company's
series B preferred stock was held by the California Public Employees' Retirement
System and the series C preferred stock was held by PGI Investments Limited,
Princes Gate Investors, L.P., PGI Sweden AB and Marinbeach United S.A.
Upon completion of the recapitalization, the investment group led by Warburg
Pincus was issued preferred stock, common stock and preferred warrants, together
representing approximately 83% of our equity ownership and subordinated notes in
exchange for cash totaling $70.0 million. In addition, a banking syndicate
extended a senior credit facility that provided us with advances totaling
$60.0 million. Together, these funds were used to provide us with working
capital for operations, to retire then-outstanding debt obligations, including
$95.8 million of our predecessor company's 12.25% senior secured step-up notes
and accrued interest and $14.3 million outstanding under our predecessor
company's line of credit, and to repurchase $9.2 million of our predecessor
company's then-outstanding common and preferred equity. Additionally, accrued
dividends on all three classes of our predecessor company's preferred stock,
totaling $39.5 million, were discharged in connection with the recapitalization.
As a result of the recapitalization, our predecessor company became a
wholly-owned subsidiary of WAH. On December 20, 1999, all of the outstanding
senior secured step-up notes were defeased in full and subsequently retired on
January 2, 2000. On August 7, 2000, WAH changed its name to Wright Medical
Group, Inc.
In connection with our recapitalization, Warburg Pincus, Vertical Fund
Associates, L.P., the California Public Employees' Retirement System, PGI
Investments Limited, Princes Gate Investors, L.P., PGI Sweden AB, Marinbeach
S.A. and members of management of our predecessor company who retained an
interest in us following the recapitalization, paid an effective price of $4.04
per share of our common stock. The initial public offering price of our common
stock was $12.50 per share.
Cremascoli Acquisition
In December 1999, WAH acquired Cremascoli Ortho Group through the merger of an
indirect wholly-owned subsidiary of WAH with and into Cremascoli. On
December 22, 1999, WAH completed its acquisition of Cremascoli and as a result
of this transaction, the former stockholders of Cremascoli became stockholders
of WAH and Cremascoli became an indirect wholly-owned subsidiary of WAH. We paid
the former Cremascoli stockholders $4.2 million of cash and issued shares of
preferred stock and subordinated notes valued at $400,000. Additional
consideration of $14.1 million was placed in escrow in the form of cash, shares
of preferred stock and subordinated notes. In 2001, the escrowed funds and
shares were released. To finance this acquisition, an investment group led by
Warburg Pincus purchased additional shares of our preferred stock in exchange
for cash totaling $20.3 million and purchased an additional $11.7 million
principal amount of our subordinated notes. In addition, our banking syndicate
extended a second senior credit facility that provided us with advances totaling
approximately E17.5 million, or $17.7 million. Upon completion of this
acquisition, we retired $27.8 million of Cremascoli's previously-outstanding
debt obligations.
61
Sales of Securities
In connection with our recapitalization and our acquisition of Cremascoli in
December 1999, we issued capital stock to two institutional investors and to the
former stockholders of WMT and Cremascoli. The following information reflects
the two-for-one common stock split that occurred on August 8, 2000, immediately
preceding our initial issuance of Series C preferred stock, and the 1 for 2.75
reverse common stock split that occurred in July 2001.
Of the shares issued,
- Warburg Pincus, an affiliate of Elizabeth H. Weatherman, one of our directors,
purchased 572 shares of common stock at $.01 per share, 11,510,374 shares of
our series A preferred stock at $3.17 per share, 7,889,626 shares of our
series B preferred stock at $3.17 per share, warrants to purchase 345,455
shares of common stock and $35,570,762 principal amount of our subordinated
notes for a total purchase price of $97,000,000; and
- Vertical Fund Associates, L.P., an affiliate of Richard B. Emmitt, one of our
directors, purchased 28 shares of our common stock at $.01 per share,
1,000,000 shares of our series A preferred stock at $3.17 per share, warrants
to purchase 18,182 shares of our common stock and $1,833,544 principal amount
of our subordinated notes for a total purchase price of $5,000,000.
In August 2000, we completed a private placement to certain members of our board
of directors and affiliates of our directors, in which we sold:
- Warburg Pincus, an affiliate of Elizabeth H. Weatherman, one of our directors,
9 shares of our common stock at $.01 per share, 1,200,010 shares of our
series C preferred stock at $1.58 per share and $1,100,111 aggregate principal
amount of our subordinated notes, for a total purchase price of $3,000,000 in
cash.
- Vertical Fund Associates, L.P. an affiliate of Richard B. Emmitt, one of our
directors, 4 shares of our common stock at $.01 per share, 600,005 shares of
our series C preferred stock at $1.58 per share and $550,055 aggregate
principal amount of our subordinated notes, for a total purchase price of
$1,500,000 in cash.
- James T. Treace, the Chairman of our board of directors (and the brother of
John R. Treace, our Vice President, U.S. Sales), and Angeline G. Treace, James
T. Treace's wife, 6 shares of our common stock at $.01 per share, 800,007
shares of our series C preferred stock at $1.58 per share and $733,407
aggregate principal amount of our subordinated notes, for a total purchase
price of $2,000,000 in cash. Of these shares and notes owned, on October 3,
2000, Mr. Treace and his wife transferred 3 shares of common stock at $.01 per
share, 400,000 shares of series C preferred stock at $3.17 per share and
$350,000 aggregate principal amount of subordinated notes to the J & A Group,
LLC, a private investment business controlled by Mr. and Mrs. Treace.
- F. Barry Bays, our President, Chief Executive Officer and one of our
directors, 3 shares of our common stock at $.01 per share, 400,003 shares of
our series C preferred stock at $1.58 per share and $366,704 aggregate
principal amount of our subordinated notes, for a total purchase price of
$1,000,000 in cash.
- Thomas E. Timbie, one of our directors, 1 share of our common stock at $.01
per share, 200,002 shares of our series C preferred stock at $1.58 per share
and $183,352 aggregate principal amount of our subordinated notes, for a total
purchase price of $500,000 in cash.
- James E. Thomas, one of our directors, 4 shares of our common stock at $.01
per share, 600,005 shares of our series C preferred stock at $1.58 per share
and $550,055 aggregate principal amount of our subordinated notes, for a total
purchase price of $1,500,000 in cash.
- John R. Treace, our Vice President, U.S. Sales and the brother of James T.
Treace, 1 share of our common stock at $.01 per share, 200,002 shares of our
series C preferred stock at $1.58 per share and $183,352 aggregate principal
amount of subordinated notes, for a total purchase price of $500,000 in cash.
In December 2000, we issued an aggregate of 4 shares of common stock, 610,001
shares of our series C preferred stock and $559,219 aggregate principal amount
of our subordinated notes to certain of our employees, including the sale to:
- John K. Bakewell, our Executive Vice President and Chief Financial Officer, of
1 share of our common stock at $.01 per share, 120,001 shares of our series C
preferred stock at $1.58 per share and $110,011 aggregate principal amount of
our subordinated notes, for a total purchase price of $300,000 in cash.
62
In March 2001, we issued R. Glen Coleman, our Senior Vice President of
Marketing, 100,001 shares of our series C preferred stock at $1.58 per share, 1
share of our common stock and $91,676 aggregate principal amount of our
subordinated notes, for a total purchase price of $250,000.
In July 2001, we issued 7,500,000 shares of our common stock in our initial
public offering at an initial public offering price of $12.50 per share. Upon
completion of our initial public offering, all of our outstanding shares of our
series of preferred stock, plus accrued dividends, were converted into
19,602,799 shares of our common stock, including 5,998,344 shares of our
non-voting common stock, at a conversion price of $4.35 per share. The value of
shares resulting from the conversion of accrued stock dividends on shares of our
preferred stock held by our directors, officers and principal stockholders was
approximately $16.6 million based on our initial public offering price of $12.50
per share. Additionally, upon the completion of the offering approximately
$13.1 million aggregate principal amount of our subordinated notes, which were
held by Warburg Pincus, were converted into 1,125,000 shares of our non-voting
common stock resulting in a gain to Warburg Pincus of approximately $984,000, or
$.875 per share. Upon the exercise of the underwriters' over-allotment option,
1,125,000 shares of our voting common stock were sold by Warburg Pincus at the
initial public offering price less the underwriting discounts, which discounts
equaled approximately $984,000 based on the initial public offering price of
$12.50 per share. Warburg Pincus owns all of the outstanding shares of our
non-voting common stock.
The outstanding principal of our subordinated notes, other than the
approximately $13.1 million of subordinated notes which was converted into
shares of non-voting common stock, and accrued interest on all of our
subordinated notes was repaid with the proceeds of our initial public offering
and there was no gain to the subordinated noteholders, as they were only paid
the principal and interest related to the subordinated notes.
Additionally, upon completion of our initial public offering all of our
outstanding options to purchase shares of our preferred stock were converted
into options to purchase shares of our common stock.
Following the closing of this offering, Warburg Pincus will convert all of its
shares of non-voting common stock into shares of voting common stock such that
Warburg Pincus will own approximately 46% of our outstanding shares of voting
common stock. Additionally, following the closing of this offering and the
conversion by Warburg Pincus, there will be no shares of our non-voting common
stock outstanding.
We have granted certain holders of our common stock registration rights with
respect to all shares of common stock owned by those stockholders. See
"Description of Capital Stock-Registration Rights."
Stockholders Agreement
On December 7, 1999, we entered into a stockholders agreement with Warburg
Pincus and all of our then existing stockholders. As long as Warburg Pincus
beneficially owns at least 20% of our outstanding shares of capital stock, we
are obligated to nominate and use our best efforts to have two individuals
designated by Warburg Pincus elected to our board of directors. We are also
obligated to nominate and use our best efforts to have one individual designated
by Warburg Pincus, if Warburg Pincus beneficially owns at least 10% of our
outstanding shares of capital stock, elected to our board of directors.
Accordingly, upon the completion of the offering, Warburg Pincus will continue
to have the right under this stockholders agreement to designate two persons to
our board of directors, one of whom is Elizabeth H. Weatherman. To date, Warburg
Pincus has not informed us that they intend to designate a second representative
to our board of directors.
Senior Credit Facility
We have a 5-year fully secured credit facility consisting of a term loan, a
revolving line of credit and letters of credit which expire in August 2006. In
July 2001, with the proceeds of our initial public offering we repaid our prior
euro-denominated credit facility and in August 2001, we refinanced our prior
dollar-denominated credit facility. The new secured credit facility consists of
a $20 million term loan and a revolving loan facility of up to $60 million. The
secured credit facility bears interest at the bank's prime rate (or Federal
Funds Effective Rate, if greater) plus a varying margin of 0.75% to 1.25% or at
LIBOR plus a varying margin of 1.75% to 2.25%. In each case, the margin varies
based on our Consolidated Leverage Ratio (as such term is defined in the Credit
Agreement). The senior credit facility contains restrictions concerning paying
dividends and repurchasing stock, selling or transferring assets, making certain
investments and incurring additional indebtedness and liens.
63
Principal and Selling Stockholders
The table below sets forth information regarding beneficial ownership of our
common stock as of December 31, 2001, and as adjusted to reflect the sale of
shares of common stock in the offering, for:
- each stockholder who we know owns beneficially more than 5% of the outstanding
shares of our common stock;
- each of our directors;
- each of our named executive officers and certain of our key executive
officers;
- all of our directors and executive officers as a group; and
- the selling stockholders.
Beneficial ownership is determined in accordance with the rules and regulations
of the SEC. For the purpose of calculating the percentage beneficially owned,
the number of shares of common stock deemed outstanding "Before Offering"
includes:
- 28,546,127 shares of common stock outstanding as of December 31, 2001; and
- shares of common stock subject to options and warrants held by the person or
group that are currently exercisable or exercisable within 60 days from
December 31, 2001.
The number of shares of common stock outstanding "After Offering" includes an
additional 3,000,000 shares offered by us in this offering. Except as indicated
in the footnotes to this table and subject to applicable community property
laws, the persons named in the table have sole voting and investment power with
respect to all shares of common stock listed as beneficially owned by them. The
address for each of our named executive officers and other key executive
officers is 5677 Airline Road, Arlington, Tennessee 38002.
------------------------------------------------------------------------------
PERCENTAGE OF COMMON STOCK
TOTAL SHARES NUMBER OF NUMBER OF SHARES BENEFICIALLY OWNED
BENEFICIALLY SHARES OFFERED IN OVER- --------------------------------
NAME OF BENEFICIAL OWNER OWNED OFFERED ALLOTMENT OPTION BEFORE OFFERING AFTER OFFERING
------------------------ ------------ --------- ---------------- --------------- --------------
Warburg, Pincus Equity Partners,
L.P.(1)(2)............................... 16,269,805 1,477,196 450,000 56.31% 46.38%
California Public Employees' Retirement
System(3)................................ 1,522,804 1,522,804 -- 5.32 --
Vertical Fund Associates, L.P.(4).......... 1,175,723 -- -- 3.68 3.73
F. Barry Bays(5)........................... 462,714 -- -- 1.63 1.45
James T. Treace(6)......................... 308,156 -- -- 1.26 *
John K. Bakewell........................... 72,430 -- -- * *
Robert W. Churinetz(7)..................... 16,336 -- -- * *
Brian T. Ennis............................. 0 -- -- * *
Karen L. Harris(8)......................... 16,636 -- -- * *
Jack E. Parr, Ph.D.(9)..................... 24,653 -- -- * *
Carl M. Stamp(10).......................... 16,636 -- -- * *
John R. Treace............................. 102,535 -- -- * *
Richard B. Emmitt(11)...................... 1,175,723 -- -- 3.68 3.73
James E. Thomas(12)........................ 181,343 -- -- * *
Thomas E. Timbie(13)....................... 67,720 -- -- * *
Elizabeth H. Weatherman(14)................ 16,269,805 1,477,196 450,000 56.31 46.38
All directors and executive officers as a
group (18 persons)(15)................... 18,809,049 3,000,000 450,000 57.98% 53.43%
------------------------
* Less than one percent of the outstanding shares of common stock
(1) Warburg, Pincus Equity Partners, L.P., referred to as Warburg Pincus,
includes three affiliated partnerships. Warburg, Pincus & Co., referred to
as WP, is the sole general partner of Warburg Pincus. Warburg Pincus is
managed by Warburg Pincus LLC. Lionel I. Pincus is the managing partner of
WP and the managing member of Warburg Pincus LLC and may be deemed to
control both entities. Lionel I. Pincus does not own any shares individually
and he disclaims beneficial ownership of all shares owned by the Warburg
Pincus entities. The address of the Warburg Pincus entities is 466 Lexington
Avenue, New York, New York 10017. The number of shares beneficially owned
includes 5,288,595 shares of non-voting common stock. The number of shares
beneficially owned also includes warrants to purchase 345,455 shares that
Warburg Pincus has the right to acquire
64
within 60 days of December 31, 2001. Our amended and restated certificate of
incorporation prevents Warburg Pincus from converting its non-voting common
stock into voting common stock if it would own more than 49% of our voting
common stock. We anticipate that following the closing of the offering,
Warburg Pincus will convert all of its shares of non-voting common stock
into shares of voting common stock such that Warburg Pincus will own
approximately 46% of our outstanding shares of voting common stock.
Following the closing of this offering and the conversion by Warburg Pincus,
there will be no shares of our non-voting common stock outstanding.
(2) Assumes no exercise of the underwriters' over-allotment option. Warburg
Pincus has granted the underwriters a 30-day option to purchase up to
450,000 shares of voting common stock it holds solely to cover
over-allotments, if any. In the event the over-allotment option is exercised
in full, Warburg Pincus will beneficially own 14,342,609 shares, or 44% of
the common stock after the offering.
(3) The address of California Public Employees' Retirement System, or CalPERs,
is Lincoln Plaza, 400 P Street, Sacramento, California 95814. The number of
shares beneficially owned includes warrants to purchase 282,691 shares that
CalPERs has the right to acquire within 60 days of December 31, 2001.
(4) The number of shares beneficially owned includes 60,000 shares Vertical Fund
Associates, L.P. has agreed to acquire upon the closing of the offering from
James E. Thomas, one of our directors, 20,000 shares Vertical Fund
Associates, L.P. has agreed to acquire upon the closing of the offering from
Thomas E. Timbie, one of our directors and 50,000 shares Vertical Fund
Associates, L.P. has agreed to acquire upon the closing of the offering from
James T. Treace, the chairman of our board of directors, all at a purchase
price per share of 97.35% of the public offering price of the shares offered
hereby.
(5) The number of shares beneficially owned includes options to acquire 309,091
shares that Mr. Bays has the right to acquire within 60 days of
December 31, 2001.
(6) On October 3, 2000, Mr. Treace and his wife transferred 3 shares of common
stock, 400,000 shares of series C preferred stock and $350,000 aggregate
principal amount of subordinated notes to the J&A Group, LLC, a private
investment business controlled by Mr. and Mrs. Treace. The number of shares
beneficially owned does not include 50,000 shares that Mr. Treace has agreed
to sell to Vertical Fund Associates, L.P. upon the closing of the offering
at a purchase price per share equal to 97.35% of the public offering price
of the shares offered hereby.
(7) The number of shares beneficially owned includes options and warrants to
acquire 16,636 shares that Mr. Churinetz has the right to acquire within
60 days of December 31, 2001.
(8) The number of shares beneficially owned includes options and warrants to
acquire 16,636 shares that Ms. Harris has the right to acquire within
60 days of December 31, 2001.
(9) The number of shares beneficially owned includes options and warrants to
acquire 20,890 shares that Dr. Parr has the right to acquire within 60 days
of December 31, 2001.
(10) The number of shares beneficially owned includes options and warrants to
acquire 16,636 shares that Mr. Stamp has the right to acquire within
60 days of December 31, 2001.
(11) Mr. Emmitt is one of our directors, is a Managing Director of The Vertical
Group Inc., and a General Partner of The Vertical Group, L.P. The Vertical
Group, L.P. is the general partner of Vertical Fund Associates, L.P., one of
our stockholders. The number of shares beneficially owned includes 60,000
shares Vertical Fund Associates, L.P. has agreed to acquire upon the closing
of the offering from James E. Thomas, one of our directors, 20,000 shares
Vertical Fund Associates, L.P. has agreed to acquire upon the closing of the
offering from Thomas E. Timbie, one of our directors and 50,000 shares
Vertical Fund Associates, L.P. has agreed to acquire upon the closing of the
offering from James T. Treace, the chairman of our board of directors, all
at a purchase price per share of 97.35% of the public offering price of the
shares offered hereby. All shares indicated as owned by Mr. Emmitt are
included because of his affiliation with The Vertical Group, L.P. The
address of Vertical Fund Associates, L.P. is 18 Bank Street, Summit, New
Jersey 07901. Mr. Emmitt does not own any shares individually.
(12) The number of shares beneficially owned does not include 60,000 shares that
Mr. Thomas has agreed to sell upon the closing of the offering to Vertical
Fund Associates, L.P. at a purchase price per share equal to 97.35% of the
public offering price of the shares offered hereby.
(13) The number of shares beneficially owned does not include 20,000 shares that
Mr. Timbie has agreed to sell upon the closing of the offering to Vertical
Fund Associates, L.P. at a purchase price per share equal to 97.35% of the
public offering price of the shares offered hereby.
(14) Ms. Weatherman, one of our directors, is a partner of WP and a Managing
Director of EMWP. All shares indicated as owned by Ms. Weatherman are
included because of her affiliation with the Warburg Pincus entities.
Ms. Weatherman does not own any shares individually and she disclaims
beneficial ownership of all shares owned by the Warburg Pincus entities.
(15) The number of shares beneficially owned includes 17,445,528 shares
beneficially owned before the offering collectively by Mr. Emmitt and
Ms. Weatherman. See footnotes 11 and 14 above.
65
Description of Capital Stock
The following summary describes the material terms of our capital stock.
However, you should refer to the actual terms of the capital stock contained in
our amended and restated certificate of incorporation referenced below and
applicable law. A copy of our amended and restated certificate of incorporation
is currently on file with the SEC.
Our amended and restated certificate of incorporation provides that our
authorized capital stock consists of 70,000,000 shares of voting common stock,
$.01 par value, 30,000,000 shares of non-voting common stock, $.01 par value and
5,000,000 shares of preferred stock, $.01 par value, that are undesignated as to
series.
As of December 31, 2001, we had 23,257,532 shares of voting common stock,
5,288,595 shares of non-voting common stock and no shares of preferred stock
outstanding. Warburg Pincus owns all of the shares of non-voting common stock.
We anticipate that following the closing of the offering, Warburg Pincus will
convert all of its shares of non-voting common stock into shares of voting
common stock such that Warburg Pincus will own approximately 46% of our
outstanding shares of voting common stock. Following the closing of this
offering and the conversion by Warburg Pincus, there will be no shares of our
non-voting common stock outstanding.
Common Stock
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders and are not entitled
to cumulate votes. The holders of common stock are entitled to receive ratably
dividends as may be declared by our board of directors out of legally available
funds. Upon our liquidation, dissolution or winding up, the holders of common
stock are entitled to share ratably in all assets that are legally available for
distribution after payment of all debts and other liabilities, subject to the
prior rights of any holders of preferred stock then outstanding. The holders of
common stock have no other preemptive, subscription, redemption, sinking fund or
conversion rights. All outstanding shares of common stock are fully paid and
nonassessable. The shares of common stock to be issued upon completion of the
offering will also be fully paid and nonassessable. The rights, preferences and
privileges of holders of common stock are subject to, and may be negatively
impacted by, the rights of the holders of shares of any series of preferred
stock which we may designate and issue in the future.
Non-Voting Common Stock
Our non-voting common stock is identical to our voting common stock except in
two respects. First, our non-voting common stock is not entitled to any voting
rights, except as required by law and under situations where we repeal or
negatively impact the holders' rights with respect to liquidation or dividend
preferences or voting rights as they relate to common stock. Second, holders of
our non-voting common stock may, at their option, convert their shares into
fully paid and non-assessable shares of voting common stock on a share-for-share
basis upon the occurrence of a sale of our company meeting specific conditions
or a public sale of our securities, except that if the holder is Warburg Pincus,
our amended and restated certificate of incorporation provides that Warburg
Pincus may only convert if it would own no more than an aggregate of 49% of our
outstanding voting common stock following any such conversion.
Undesignated Preferred Stock
We do not have any shares of preferred stock outstanding. Under our amended and
restated certificate of incorporation, our board of directors has the authority,
without action by our stockholders, to designate and issue any authorized but
unissued shares of preferred stock in one or more series and to designate the
rights, preferences and privileges of each series, any or all of which may be
greater than the rights of our common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of our voting common stock or non-voting common stock until our board
determines the specific rights of the holders of preferred stock. However, the
effects might include, among other things, restricting dividends on the common
stock, diluting the voting power of the common stock, impairing the liquidation
rights of the common stock and delaying or preventing a change in control of our
common stock without further action by our stockholders. We have no present
plans to issue any shares of preferred stock.
Options and Warrants
As of December 31, 2001, we had outstanding options to purchase an aggregate of
3,127,155 shares of common stock at a weighted average exercise price of $5.09
per share under our 1999 Equity Incentive Plan. We also have outstanding
warrants to
66
purchase 709,094 shares of our common stock as of the date of this prospectus at
an exercise price of $4.35 per share. All outstanding options and warrants
provide for anti-dilution adjustments in the event of certain mergers,
consolidations, reorganizations, recapitalizations, stock dividends, stock
splits or other changes in our corporate structure. The warrants are exercisable
by their respective holders at any time prior to December 7, 2004.
Registration Rights
Under a registration rights agreement we entered into in December 1999, we
granted registration rights with respect to 17,315,258 shares of common stock as
of December 31, 2001. These registration rights also extend to any shares of our
capital stock thereafter acquired by these investors, including an additional
818,449 shares issuable upon exercise of currently exercisable warrants and
418,807 shares issuable upon exercise of unvested options to purchase common
stock.
Under a registration rights agreement, investors holding outstanding registrable
securities may demand that we file a registration statement under the Securities
Act covering some or all of the investors' registrable securities. We are not
required to effect more than three demand registrations nor are we required to
effect a registration if the requested registration would have an aggregate
offering price to the public of less than $15 million. In an underwritten
offering, the managing underwriter of any such offering has the right, subject
to certain conditions, to limit the number of registrable securities.
In addition, the investors party to the registration rights agreement have
"piggyback" registration rights. If we propose to register any of our equity
securities under the Securities Act other than pursuant to the investors' demand
registration right noted above or certain excluded registrations, the investors
may require us to include all or a portion of their registrable securities in
the registration and in any related underwriting. In an underwritten offering,
the managing underwriter, if any, of any such offering has the right, subject to
certain conditions, to limit the number of registrable securities. These rights
are being waived in connection with this offering for a period of 90 days after
the date of the final prospectus relating to this offering.
Further, if we are eligible to effect a registration on Form S-3, the investors
may demand that we file a registration statement on Form S-3 covering all or a
portion of the investors' registrable securities, provided that the registration
has an aggregate offering price of $5 million and that we are not required to
effect more than three such registrations at the investors' request.
In general, we will bear all fees, costs and expenses of such registrations,
other than underwriting discounts and commissions.
The selling stockholders are selling shares of common stock in this offering
pursuant to the exercise of piggyback registration rights.
Anti-Takeover Provisions of Delaware Law
We are subject to Section 203 of the Delaware General Corporation Law. In
general, Section 203 prohibits a publicly held Delaware corporation from
engaging in a business combination with an interested stockholder for a period
of three years following the date the person became an interested stockholder,
unless the business combination or the transaction in which the person became an
interested stockholder is approved in a prescribed manner. Generally, a business
combination includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder. Generally, an
interested stockholder is a person who, together with affiliates and associates,
owns or, in the case of affiliates or associates of the corporation, within
three years prior to the determination of interested stockholder status, did own
15% or more of a corporation's voting stock. The existence of this provision
could have anti-takeover effects with respect to transactions not approved in
advance by the board of directors, such as discouraging takeover attempts that
might result in a premium over the market price of the common stock.
Stockholders will not be entitled to cumulative voting in the election of
directors. The authorization of undesignated preferred stock will make it
possible for our board of directors to issue preferred stock with voting or
other rights or preferences that could impede the success of any attempt to
effect a change of control of our company. The foregoing provisions of our
amended and restated certificate of incorporation and the Delaware General
Corporation Law may have the effect of deterring or discouraging hostile
takeovers or delaying changes in control of our company.
Charter and Bylaws Anti-Takeover Provisions
Our restated certificate of incorporation provides that amendment of our bylaws
by stockholders requires a vote of at least two-thirds of the shares entitled to
vote for the election of directors or by a majority vote of our entire board of
directors. This supermajority restriction makes it more difficult for
stockholders to require an amendment of the bylaws and enhances the board's
67
power with respect to matters of corporate governance that are governed by the
bylaws. Our bylaws establish an advance notice procedure for stockholders to
bring matters before special stockholder meetings, including proposed
nominations of persons for election to the board of directors and bringing
business matters or stockholder proposals before a special meeting. These
procedures specify the information stockholders must include in their notice and
the timeframe in which they must give us notice. At a special stockholder
meeting, stockholders may only consider nominations or proposals specified in
the notice of meeting. A special stockholder meeting for any purpose may only be
called by our board of directors, our Chairman or our Chief Executive Officer
and President, and will be called by our Chief Executive Officer and President
at the request of the holders of a majority of our outstanding shares of common
stock.
The bylaws do not give the board of directors the power to approve or disapprove
stockholder nominations of candidates or proposals regarding other business to
be conducted at a meeting. However, our bylaws may have the effect of precluding
the conduct of that item of business at a meeting if the proper procedures are
not followed. These provisions may discourage or deter a potential third party
from conducting a solicitation of proxies to elect their own slate of directors
or otherwise attempting to obtain control of us.
Limitation on Liability of Directors and Indemnification
Our amended and restated certificate of incorporation limits our directors'
liability to the fullest extent permitted under Delaware corporate law.
Specifically, our directors are not liable to us or our stockholders for
monetary damages for any breach of fiduciary duty by a director, except for
liability for:
- any breach of the director's duty of loyalty to us or our stockholders;
- acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law;
- dividends or other distributions of our corporate assets that are in
contravention of restrictions in Delaware law, our amended and restated
certificate of incorporation, bylaws or any agreement to which we are a party;
and
- any transaction from which a director derives an improper personal benefit.
This provision will generally not limit liability under state or federal
securities laws.
Delaware law, and our amended and restated certificate of incorporation, provide
that we will, in certain situations, indemnify any person made or threatened to
be made a party to a proceeding by reason of that person's former or present
official capacity with our company against judgments, penalties, fines,
settlements and reasonable expenses including reasonable attorney's fees. Any
person is also entitled, subject to certain limitations, to payment or
reimbursement of reasonable expenses in advance of the final disposition of the
proceeding.
Transfer Agent and Registrar
American Stock Transfer & Trust Company is our transfer agent and registrar.
Nasdaq National Market Listing
The shares of common stock of Wright Medical Group, Inc. trade on the Nasdaq
National Market under the symbol "WMGI".
68
Shares Eligible For Future Sale
When the offering is completed, we will have a total of 31,546,127 shares of
common stock outstanding. Of these shares, the 8,625,000 shares sold in our
initial public offering are, and the shares proposed to be sold in this offering
will be, freely tradeable unless our affiliates, as defined in Rule 144 under
the Securities Act of 1933, as amended, purchase them. The remaining shares
outstanding upon completion of this offering are "restricted," which means they
were originally sold in offerings that were not subject to a registration
statement filed with the SEC. These restricted shares may be resold only through
registration under the Securities Act or under an available exemption from
registration, such as Rule 144.
Lock-Up Agreements
Our officers, directors, and certain of our stockholders have agreed to a 90-day
"lock-up" with respect to 18,809,049 shares of our outstanding common stock. In
addition, the "lock-up" will apply with respect to all shares of our common
stock acquired by such persons during this 90-day period upon exercise of
presently outstanding options and warrants to acquire our capital stock. This
generally means that they cannot sell these shares during the 90 days following
the date of this prospectus. After the 90-day lock-up period, these shares may
only be sold in accordance with an available exemption from registration, such
as Rule 144.
Rule 144
In general, under Rule 144, a person or persons whose shares are aggregated, who
has beneficially owned restricted securities for at least one year, including
the holding period of any holder who is not an affiliate, is entitled to sell
within any three-month period a number of our shares of common stock that does
not exceed the greater of:
- 1% of the then outstanding shares of our common stock, which will equal
approximately 315,461 shares upon completion of the offering; or
- the average weekly trading volume of our common stock on the Nasdaq National
Market during the four calendar weeks preceding the date on which notice of
sale is filed with the SEC.
Sales under Rule 144 are subject to restrictions relating to manner of sale,
notice and the availability of current public information about us.
Rule 144(k)
A person who is not deemed an affiliate of ours at any time during the 90 days
preceding a sale and who has beneficially owned shares for at least two years,
including the holding period of any prior owner who is not an affiliate, would
be entitled to sell shares following the offering under Rule 144(k) without
regard to the volume limitations, manner of sale provisions, public information
or notice requirements of Rule 144.
Stock Options
As of December 31, 2001, we have issued options to purchase 3,127,155 shares of
common stock, of which 1,216,486 shares are fully vested. Upon the expiration of
the lock-up agreements described above, at least 894,378 shares of common stock
will be subject to vested options, based on the number of options outstanding
immediately prior to the consummation of this offering. Subject to vesting
provisions and Rule 144 volume limitations applicable to our affiliates, the
shares of our common stock underlying those options are available for sale in
the open market immediately after the lock-up agreements expire.
69
Underwriting
Subject to the terms and conditions contained in an underwriting agreement dated
, 2002, the underwriters named below have severally agreed to
purchase from us and the selling stockholders the respective number of shares of
common stock set forth opposite their names below:
-------------
NUMBER OF
UNDERWRITER SHARES
----------- -------------
J.P. Morgan Securities Inc..................................
Credit Suisse First Boston Corporation......................
Lehman Brothers Inc.........................................
Thomas Weisel Partners LLC..................................
U.S. Bancorp Piper Jaffray Inc..............................
---------
Total..................................................... 6,000,000
=========
The underwriting agreement provides that the obligations of the underwriters are
subject to customary conditions precedent, including the absence of any material
adverse change in our business and the receipt of certificates, opinions and
letters from us, and the selling stockholders, our respective counsel and the
independent auditors. The underwriters are obligated to purchase all of the
shares of common stock offered by us and the selling stockholders (other than
those covered by the over-allotment option described below) if they purchase any
shares.
The following table shows the per share and total underwriting discounts and
commissions we and the selling stockholders will pay to the underwriters. Such
amounts are shown assuming both no exercise and full exercise of the
underwriters' over-allotment option to purchase additional shares.
---------------------------
WITH WITHOUT
OVER- OVER-
ALLOTMENT ALLOTMENT
EXERCISE EXERCISE
---------- ----------
Per Share................................................... $ $
Total..................................................... $ $
We estimate that the total expenses of this offering, excluding underwriting
discounts and commissions, will be approximately $700,000.
The underwriters propose to offer the shares of common stock directly to the
public at the public offering price set forth on the cover page of this
prospectus and to dealers at that price less a concession not in excess of $
per share. The underwriters may allow and the dealers may reallow a concession
not in excess of $ per share to other dealers. After the public offering of
the shares, the offering price and other selling terms may be changed by the
underwriters. The representatives have advised us that the underwriters do not
intend to confirm discretionary sales in excess of 5% of the shares of common
stock offered hereby.
We have granted to the underwriters a 30-day option to purchase up to 450,000
additional shares of voting common stock and Warburg Pincus, one of the selling
stockholders, has granted to the underwriters a 30-day option to purchase up to
450,000 additional shares of voting common stock, at the public offering price,
less the underwriting discounts set forth on the cover page of this prospectus.
To the extent that the underwriters exercise this option, each of the
underwriters will have a firm commitment to purchase approximately the same
percentage thereof which the number of shares of common stock to be purchased by
it shown in the above table bears to the total number of shares of common stock
offered hereby. We and Warburg Pincus will be obligated, pursuant to the option,
to sell shares to the underwriters to the extent the option is exercised. The
underwriters may exercise this option only to cover over-allotments, if any,
made in connection with the sale of shares of common stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by the
underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
70
We and the selling stockholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act. We
and the selling stockholders have also agreed to contribute to payments the
underwriters may be required to make in respect of these liabilities.
Certain of our security-holders who hold more than 1% of our securities,
including Warburg Pincus and Vertical Fund Associates, L.P., and certain of our
officers and directors have agreed that they will not, without the prior written
consent of J.P. Morgan Securities Inc. or its successors, sell, offer, contract
to sell, transfer the economic risk of ownership in, make any short sale, pledge
or otherwise dispose of any shares of capital stock, options or warrants to
acquire shares of capital stock or securities exchangeable for or convertible
into shares of our capital stock for a period of 90 days following the date of
this prospectus. Subject to certain exceptions, we have agreed that we will not,
without the prior written consent of J.P. Morgan Securities Inc. or its
successors, offer, contract to sell, transfer the economic risk of ownership in,
make any short sale, pledge or otherwise dispose of any shares of capital stock,
options or warrants to acquire shares of capital stock or securities
exchangeable for or convertible into shares of capital stock for a period of
90 days following the date of this prospectus.
The representatives have advised us that, on behalf of the underwriters, they
may make short sales our common stock in connection with this offering,
resulting in the sale by the underwriters of a greater number of shares than
they are required to purchase pursuant to the underwriting agreement. The short
position resulting from those short sales will be deemed a "covered" short
position to the extent that it does not exceed the 900,000 shares subject to the
underwriters' over-allotment option and will be deemed a "naked" short position
to the extent that it exceeds that number. A naked short position is more likely
to be created if the underwriters are concerned that there may be downward
pressure on the trading price of the common stock in the open market that could
adversely affect investors who purchase shares in this offering. The
underwriters may reduce or close out their covered short position either by
exercising the over-allotment option or by purchasing shares in the open market.
In determining which of these alternatives to pursue, the underwriters will
consider the price at which shares are available for purchase in the open market
as compared to the price at which they may purchase shares through the
over-allotment option. Any "naked" short position will be closed out by
purchasing shares in the open market. Similar to the other stabilizing
transactions described below, open market purchases made by the underwriters to
cover all or a portion of their short position may have the effect of preventing
or retarding a decline in the market price of our common stock following this
offering. As a result, our common stock may trade at a price that is higher than
the price that otherwise might prevail in the open market.
The representatives have advised us that, pursuant to Regulation M under the
Securities Act of 1933, they may engage in transactions, including stabilizing
bids or the imposition of penalty bids, that may have the effect of stabilizing
or maintaining the market price of the shares of common stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of shares of common stock on behalf of the underwriters
for the purpose of fixing or maintaining the price of the common stock. A
"penalty bid" is an arrangement permitting the representatives to claim the
selling concession otherwise accruing to an underwriter or syndicate member in
connection with the offering if the common stock originally sold by that
underwriter or syndicate member is purchased by the representatives in the open
market pursuant to a stabilizing bid or to cover all or part of a syndicate
short position. The representatives have advised us that stabilizing bids and
open market purchases may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise and, if commenced, may be discontinued at
any time.
Certain of the underwriters and their representative affiliates have from time
to time performed and may in the future perform various financial advisory,
commercial banking and investment banking services for us in the ordinary course
of business, for which they received or will receive customary fees. One or more
members of the underwriting selling group may make copies of the preliminary
prospectus available over the Internet to customers or though its or their
websites.
Legal Matters
Willkie Farr & Gallagher, New York, New York will pass on the validity of the
common stock offered by this prospectus for us and the Selling Stockholders.
Milbank, Tweed, Hadley & McCloy LLP, New York, New York will pass on legal
matters relating to the offering for the underwriters. Willkie Farr & Gallagher
has in the past performed, and may continue to perform, legal services for us
and Warburg Pincus, our principal stockholder.
71
Experts
The financial statements and schedules included in this prospectus, to the
extent and for the periods indicated in their report, have been audited by
Arthur Andersen LLP, independent public accountants, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
Reference is made to said report, which includes an explanatory paragraph with
respect to the change in method of accounting for surgical instruments as
discussed in Note 2 to the financial statements.
The financial statements and schedules of our predecessor company included
elsewhere in this prospectus have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their reports appearing elsewhere herein, and are included in reliance upon such
reports given upon the authority of said firm as experts in auditing and
accounting.
Change In Independent Accountants
In August 2000 we engaged Arthur Andersen LLP as our independent accountants.
The decision to engage Arthur Andersen LLP as our independent accountants was
approved by the audit committee of our board of directors. Prior to
August 2000, we had not consulted with Arthur Andersen LLP on items that
involved accounting principles or the form of audit opinion to be issued on our
financial statements, although our predecessor company retained Arthur Andersen
LLP as its independent accountants for 1996 and 1997.
From December 1999 to August 2000, we retained Ernst & Young LLP as our
principal accountants. Ernst & Young LLP audited the financial statements of
Wright Medical Technology, Inc. for the period January 1, 1999 through
December 7, 1999. Ernst & Young LLP also audited the financial statements of
Wright Acquisition Holdings, Inc. for the period November 23, 1999 (inception)
through December 31, 1999. The audit reports of Ernst & Young LLP did not
contain an adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles. We did not
have any disagreement with Ernst & Young LLP on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope and
procedures, with respect to the financial statements they audited, which
disagreement, if not resolved to the satisfaction of Ernst & Young LLP would
have caused Ernst & Young LLP to make reference to the matter of the
disagreement in their reports.
From November 1998 to December 1999, we retained BDO Seidman, LLP as our
principal accountants. BDO Seidman, LLP audited the financial statements of
Wright Medical Technology, Inc. for the year ended December 31, 1998. The audit
reports of BDO Seidman, LLP did not contain an adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principles. We did not have any disagreement with BDO Seidman, LLP on
any matters of accounting principles or practices, financial statement
disclosure, or auditing scope and procedures, with respect to the financial
statements they audited, which disagreement, if not resolved to the satisfaction
of BDO Seidman, LLP would have caused BDO Seidman, LLP to make reference to the
matter of the disagreement in their reports.
72
Where You Can Find More Information
We have filed a registration statement on Form S-1 with the SEC for the stock we
are offering by this prospectus. You should refer to the registration statement
and its exhibits for additional information that is not contained in this
prospectus. Whenever we make reference in this prospectus to any of our
contracts, agreements or other documents, you should refer to the exhibits
attached to the registration statement for copies of the actual contract,
agreement or other document. We are required to file annual, quarterly and
special reports, proxy statements and other information with the SEC.
You can read our SEC filings, including this registration statement, over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and copy
any documents we file with the SEC at its public reference facility at 450 Fifth
Street, N.W., Washington D.C. 20549. You may also obtain copies of the documents
at prescribed rates by writing to the Public Reference Section of the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
facilities. Our SEC filings are also available at the office of the Nasdaq
National Market. For further information on obtaining copies of our public
filings at the Nasdaq National Market, you should call 212-656-5060.
73
WRIGHT MEDICAL GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998,
FOR THE PERIOD FROM JANUARY 1 TO DECEMBER 7, 1999,
FOR THE PERIOD FROM DECEMBER 8 TO DECEMBER 31, 1999,
FOR THE YEAR ENDED DECEMBER 31, 2000, AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001
INDEX TO FINANCIAL STATEMENTS
PAGE
--------
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS................... F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets............................... F-5
Consolidated Statements of Operations..................... F-6
Consolidated Statements of Cash Flows..................... F-7
Consolidated Statements of Changes in Stockholders'
Deficit, Comprehensive Loss and Mandatorily Redeemable
Convertible Preferred Stock............................. F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-13
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To WRIGHT MEDICAL GROUP, INC.
We have audited the accompanying consolidated balance sheets of WRIGHT MEDICAL
GROUP, INC. and subsidiaries (a Delaware corporation, formerly known as Wright
Acquisition Holdings, Inc.) (the "Company") as of December 31, 1999 and 2000 and
the related consolidated statements of operations, cash flows and changes in
stockholders' deficit, comprehensive loss and mandatorily redeemable convertible
preferred stock for the period from December 8, 1999 to December 31, 1999 and
for the year ended December 31, 2000. We have also audited the consolidated
statements of operations, cash flows and changes in stockholders' deficit,
comprehensive loss and mandatorily redeemable preferred stock of Wright Medical
Technology, Inc. (a Delaware corporation, the "Predecessor Company") for the
period from January 1, 1999 to December 7, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly in all material respects the consolidated financial position of Wright
Medical Group, Inc. and subsidiaries as of December 31, 1999 and 2000 and the
consolidated results of its operations and its cash flows for the period from
December 8, 1999 to December 31, 1999 and for the year ended December 31, 2000
and the results of operations and cash flows of Wright Medical Technology, Inc.
for the period from January 1, 1999 to December 7, 1999, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 2 to the consolidated financial statements, on December 8,
1999, the Company changed its method of accounting for surgical instruments.
Arthur Andersen LLP
Memphis, Tennessee,
July 9, 2001
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
Wright Medical Technology, Inc.
We have audited the accompanying consolidated statements of operations, cash
flows and changes in stockholders' deficit, comprehensive loss and redeemable
preferred stock of Wright Medical Technology, Inc. (a Delaware corporation) (the
"Company") and subsidiaries for the year ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
of Wright Medical Technology, Inc. for the year ended December 31, 1998, in
conformity with accounting principles generally accepted in the United States.
BDO Seidman, LLP
Memphis, Tennessee,
April 26, 1999
F-3
WRIGHT MEDICAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
-------------------------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30,
------------------- 2001
1999 2000 (UNAUDITED)
ASSETS -------- -------- -------------
Current Assets:
Cash and cash equivalents................................. $ 6,733 $ 16,300 $ 2,957
Restricted cash........................................... 16,481 15,483 6,689
Accounts receivable, net.................................. 25,572 27,381 29,767
Inventories............................................... 71,066 37,894 40,676
Prepaid expenses.......................................... 3,045 2,052 3,809
Deferred income taxes..................................... 9,602 13,259 12,299
Other current assets...................................... 4,252 2,823 3,749
-------- -------- --------
Total current assets.................................... 136,751 115,192 99,946
-------- -------- --------
Property, plant and equipment, net.......................... 39,950 45,083 50,233
Intangible assets, net...................................... 60,487 54,681 49,953
Other assets................................................ 1,124 2,008 1,250
-------- -------- --------
$238,312 $216,964 $201,382
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable.......................................... $ 10,049 $ 7,936 $ 8,975
Accrued expenses and other current liabilities............ 36,409 44,840 40,465
Short-term bank borrowings................................ 1,000 -- --
Current portion of long-term obligations.................. 5,453 8,396 1,704
-------- -------- --------
Total current liabilities............................... 52,911 61,172 51,144
-------- -------- --------
Long-term obligations....................................... 117,177 112,283 21,826
Preferred stock dividends................................... 230 4,631 --
Deferred income taxes....................................... 8,071 12,939 12,036
Other liabilities........................................... 11,890 11,661 1,118
-------- -------- --------
Total liabilities....................................... 190,279 202,686 86,124
-------- -------- --------
Commitments and contingencies (Note 15)
Mandatorily redeemable convertible preferred stock, $.01 par
value, shares authorized -- 100,000, shares issued and
outstanding -- 22,324 in 1999, 27,311 in 2000, aggregate
preferential distribution of $82,798 at December 31,
2000...................................................... 70,867 91,254 --
Stockholders' equity (deficit):
Common stock, voting, $.01 par value, shares authorized --
70,000, shares issued and outstanding -- 1 in 1999, 47
in 2000, 23,010 in 2001................................. -- 1 230
Common stock, non-voting, $.01 par value, shares
authorized -- 30,000; shares issued and outstanding --
5,289 in 2001........................................... -- -- 53
Additional paid-in capital................................ (2,784) 4,769 206,210
Deferred compensation..................................... -- (2,834) (5,171)
Accumulated other comprehensive income (loss)............. 79 (1,802) (1,741)
Accumulated deficit....................................... (20,129) (77,110) (84,323)
-------- -------- --------
Total stockholders' equity (deficit).................... (22,834) (76,976) 115,258
-------- -------- --------
$238,312 $216,964 $201,382
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
Wright Medical Group, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
-------------------------------------------------------------------------------------
PREDECESSOR COMPANY
--------------------------- WRIGHT MEDICAL GROUP, INC.
PERIOD FROM ----------------------------- NINE MONTHS ENDED
JANUARY 1 PERIOD FROM SEPTEMBER 30,
YEAR ENDED TO DECEMBER 8 TO YEAR ENDED -----------------------
DECEMBER 31, DECEMBER 7, DECEMBER 31, DECEMBER 31, 2000 2001
1998 1999 1999 2000 (UNAUDITED) (UNAUDITED)
------------- ----------- ------------- ------------- ---------- ----------
Net sales................................ $106,972 $101,194 $ 7,976 $157,552 $117,714 $126,764
Cost of sales............................ 46,981 44,862 4,997 80,370 63,562 37,967
-------- -------- ----------- -------- -------- --------
Gross profit........................... 59,991 56,332 2,979 77,182 54,152 88,797
Operating Expenses:
Selling, general and
administrative(a).................... 55,974 47,547 4,837 82,813 61,063 69,784
Research and development(b)............ 7,855 5,857 508 8,390 6,074 6,842
Amortization of intangible assets...... 2,748 2,334 466 5,586 4,190 4,024
Stock-based expense.................... 176 523 -- 5,029 2,914 1,587
Transaction and reorganization......... -- 6,525 3,385 -- -- --
Acquired in-process research and
development costs.................... -- -- 11,731 -- -- --
Losses of equity method investment..... 1,979 -- -- -- -- --
-------- -------- ----------- -------- -------- --------
Total operating expenses............. 68,732 62,786 20,927 101,818 74,241 82,237
-------- -------- ----------- -------- -------- --------
Income (loss) from operations........ (8,741) (6,454) (17,948) (24,636) (20,089) 6,560
Interest expense, net.................... 14,284 13,196 1,909 12,446 9,223 7,365
Other expense, net....................... 1,044 616 67 870 1,191 178
-------- -------- ----------- -------- -------- --------
Income (loss) before income taxes and
extraordinary item................. (24,069) (20,266) (19,924) (37,952) (30,503) (983)
Provision (benefit) for income taxes..... 102 190 (25) 1,541 1,030 1,089
-------- -------- ----------- -------- -------- --------
Loss before extraordinary item....... (24,171) (20,456) (19,899) (39,493) (31,533) (2,072)
Extraordinary loss on early retirement of
debt, net of taxes..................... -- -- -- -- -- (1,611)
-------- -------- ----------- -------- -------- --------
Net loss............................. $(24,171) $(20,456) $ (19,899) $(39,493) $(31,533) $ (3,683)
======== ======== =========== ======== ======== ========
Net loss per share (Note 9):
Net loss................................ $ (19,899) $ (39,493) $ (31,533) $ (3,683)
Accrued preferred stock dividends....... (230) (4,401) (3,248) (2,546)
Deemed preferred stock dividends on
beneficial conversion feature......... -- (13,087) (13,087) --
----------- ---------- ----------- ----------
Net loss applicable to common
stockholders.......................... $ (20,129) $ (56,981) $ (47,868) $ (6,229)
=========== ========== =========== ==========
Net loss per common share, basic &
diluted:
Loss before extraordinary item.......... $(27,918.17) $(3,405.71) $ (7,516.63) $ (0.57)
Extraordinary charge.................... -- -- -- (0.20)
----------- ---------- ----------- ----------
$(27,918.17) $(3,405.71) $ (7,516.63) $ (0.77)
=========== ========== =========== ==========
Weighted-average number of common shares
outstanding............................. 1 17 6 8,037
=========== ========== =========== ==========
Unaudited pro forma net loss per share
(Notes 9 and 17):
Net loss applicable to common
stockholders.......................... $ (39,493) $ (3,683)
========== ==========
Net loss per common share, basic &
diluted:
Loss before extraordinary item.......... $ (2.29) $ (0.09)
Extraordinary charge.................... -- (0.07)
---------- ----------
$ (2.29) $ (0.17)
========== ==========
Weighted-average number of common shares
outstanding........................... 17,260 21,873
========== ==========
------------------------------
(a) Amounts presented are exclusive of $176, $465, $4,909, $2,912, and $1,515 in
stock-based expense for 1998, 1999, 2000, and the nine months ended
September 30, 2000 and 2001, respectively.
(b) Amounts presented are exclusive of $58, $120, $2 and $72 in stock-based
expense for 1999, 2000 and the nine months ended September 30, 2000 and
2001, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
Wright Medical Group, Inc.
Consolidated Statements of Cash Flows
(In thousands)
----------------------------------------------------------------------------------
PREDECESSOR COMPANY WRIGHT MEDICAL GROUP, INC.
-------------------------- -----------------------------------------------------
PERIOD FROM PERIOD FROM NINE MONTHS ENDED
JANUARY 1 DECEMBER 8 SEPTEMBER 30,
YEAR ENDED TO TO YEAR ENDED -----------------------
DECEMBER 31, DECEMBER 7, DECEMBER 31, DECEMBER 31, 2000 2001
1998 1999 1999 2000 (UNAUDITED) (UNAUDITED)
------------ ----------- ------------ ------------ ---------- ----------
Cash flow from operating activities:
Net income (loss).......................... $(24,171) $(20,456) $(19,899) $(39,493) $(31,533) $(3,683)
Non-cash items included in net loss:
Depreciation........................... 9,213 6,236 489 11,008 8,708 7,228
Amortization of deferred financing
costs................................ 1,387 1,040 30 457 339 457
Amortization of intangible assets...... 2,748 2,334 466 5,586 4,190 4,024
Provision for inventory reserves....... 10,311 8,098 680 4,479 4,007 2,996
Inventory step-ups expensed in cost of
sales................................ -- -- 2,002 29,081 25,077 --
Acquired in-process research and
development costs.................... -- -- 11,731 -- -- --
Deferred income taxes.................. -- -- -- 1,087 374 500
Stock-based expenses................... 176 523 -- 5,029 2,914 1,587
Decrease in equity method investment... 2,380 -- -- -- -- --
Debt extinguishment.................... -- -- -- -- -- 1,589
Other.................................. 656 542 (841) (457) (25) (52)
Changes in operating assets and
liabilities:
Accounts receivable.................... 4,758 (3,340) (701) (4,305) (5,276) (2,208)
Inventories............................ (3,397) (2,396) (140) (4,092) (3,882) (5,666)
Other current assets................... 1,093 93 (2,943) 2,079 2,028 6,303
Accounts payable....................... (988) 250 (3,188) (955) (774) 1,245
Accrued expenses and other
liabilities.......................... 236 15,990 (10,387) 8,647 3,343 (15,801)
-------- -------- -------- -------- -------- -------
Net cash provided by (used in) operating
activities................................. 4,402 8,914 (22,701) 18,151 9,490 (1,481)
-------- -------- -------- -------- -------- -------
Cash flow from investing activities:
Capital expenditures....................... (3,147) (2,179) (11) (14,109) (10,235) (13,235)
Business acquisitions including escrowed
funds, net of cash acquired.............. -- -- (22,399) -- -- --
Other...................................... (32) -- -- -- -- 223
-------- -------- -------- -------- -------- -------
Net cash used in investing activities........ (3,179) (2,179) (22,410) (14,109) (10,235) (13,012)
-------- -------- -------- -------- -------- -------
Cash flow from financing activities:
Issuance of common stock................... -- -- -- -- -- 84,828
Proceeds from bank and other financing..... 850 -- 79,172 -- -- 21,854
Payments of bank and other borrowings...... (1,960) (6,105) (126,217) (5,498) (3,470) (72,537)
Issuance (payments) of senior subordinated
notes.................................... -- -- 37,404 4,226 3,667 (32,326)
Issuance of preferred shares............... -- -- 64,596 7,300 6,333 158
Payment of deferred financing costs........ -- -- (3,111) -- -- (773)
-------- -------- -------- -------- -------- -------
Net cash (used in) provided by financing
activities................................. (1,110) (6,105) 51,844 6,028 6,530 1,204
-------- -------- -------- -------- -------- -------
Effect of exchange rates on cash and cash
equivalents................................ -- -- -- (503) (515) (54)
-------- -------- -------- -------- -------- -------
Net increase (decrease) in cash and cash
equivalents................................ 113 630 6,733 9,567 5,270 (13,343)
Cash and cash equivalents, beginning of
period..................................... 466 579 -- 6,733 6,733 16,300
-------- -------- -------- -------- -------- -------
Cash and cash equivalents, end of period..... $ 579 $ 1,209 $ 6,733 $ 16,300 $ 12,003 $ 2,957
======== ======== ======== ======== ======== =======
Supplemental disclosure of cash flow
information:
Cash paid for interest..................... $ 12,544 $ 7,217 $ 15,128 $ 7,952 $ 5,860 $10,561
-------- -------- -------- -------- -------- -------
Cash paid for income taxes................. $ 4 $ 92 $ 12 $ 737 $ 300 $ 502
======== ======== ======== ======== ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
WRIGHT MEDICAL TECHNOLOGY INC.
(PREDECESSOR COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT, COMPREHENSIVE LOSS
AND REDEEMABLE PREFERRED STOCK
FOR THE YEAR ENDED DECEMBER 31, 1998
(In thousands, except share data)
SERIES B AND C SERIES A
REDEEMABLE PREFERRED PREFERRED STOCK
STOCK ------------------- COMMON STOCK ACCUMULATED
-------------------- NUMBER --------------------- ADDITIONAL OTHER
NUMBER OF NUMBER PAID-IN ACCUMULATED COMPREHENSIVE
OF SHARES AMOUNT SHARES AMOUNT OF SHARES AMOUNT CAPITAL DEFICIT INCOME(LOSS)
--------- -------- -------- -------- ---------- -------- -------- ---------- -----------
Balance at December 31,
1997................. 1,150,000 $ 99,952 915,325 $9 10,585,200 $11 $57,545 $(153,025) $(509)
Net loss............... -- -- -- -- -- -- -- (24,171) --
Foreign currency
translation
adjustment........... -- -- -- -- -- -- -- 3 458
Total comprehensive
loss............... -- -- -- -- -- -- -- -- --
Issuance of common
stock................ -- -- -- -- 99,880 -- (117) -- --
Preferred stock
dividends............ -- -- -- -- -- -- -- (4,965) --
Payments on stockholder
notes receivable..... -- -- -- -- -- -- -- -- --
Accretion of preferred
stock discount....... -- 6,518 -- -- -- -- -- (6,518) --
--------- -------- ------- -- ---------- --- ------- --------- -----
Balance at December 31,
1998................. 1,150,000 $106,470 915,325 $9 10,685,080 $11 $57,428 $(188,676) $ (51)
========= ======== ======= == ========== === ======= ========= =====
NOTES
RECEIVABLE TOTAL
FROM TREASURY STOCKHOLDERS'
STOCKHOLDERS STOCK DEFICIT
---------- -------- ----------
Balance at December 31,
1997................. $(1,039) $(2) $ (97,010)
Net loss............... -- -- (24,171)
Foreign currency
translation
adjustment........... -- -- 461
---------
Total comprehensive
loss............... -- -- (23,710)
Issuance of common
stock................ -- -- (117)
Preferred stock
dividends............ -- -- (4,965)
Payments on stockholder
notes receivable..... 275 -- 275
Accretion of preferred
stock discount....... -- -- (6,518)
------- --- ---------
Balance at December 31,
1998................. $ (764) $(2) $(132,045)
======= === =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
WRIGHT MEDICAL TECHNOLOGY, INC.
(PREDECESSOR COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT, COMPREHENSIVE LOSS
AND REDEEMABLE PREFERRED STOCK
FOR THE PERIOD FROM JANUARY 1, 1999 TO DECEMBER 7, 1999
(In thousands, except share data)
SERIES B AND C SERIES A
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------------- -------------------- --------------------- ADDITIONAL
NUMBER OF NUMBER OF NUMBER OF PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
---------- -------- --------- -------- ---------- -------- ---------- -----------
Balance at December 31,
1998................. 1,150,000 $106,467 915,325 $9 10,685,080 $11 $57,428 $(188,676)
Net loss............... -- -- -- -- -- -- -- (20,456)
Foreign currency
translation
adjustment........... -- -- -- -- -- -- -- --
Total comprehensive
loss............. -- -- -- -- -- -- -- --
Issuance of common
stock................ -- -- -- -- 3,000 -- 216 --
Preferred stock
dividends............ -- -- -- -- -- -- -- (13,236)
Write-off of notes
receivable from
stockholders......... -- -- -- -- -- -- (743) --
Accretion of preferred
stock discount....... -- 5,975 -- -- -- -- -- (5,975)
---------- -------- -------- -- ---------- --- ------- ---------
Balance at December 7,
1999 (prior to
acquisition)......... 1,150,000 $112,442 915,325 $9 10,688,080 $11 $56,901 $(228,343)
========== ======== ======== == ========== === ======= =========
ACCUMULATED NOTES
OTHER RECEIVABLE TOTAL
COMPREHENSIVE FROM TREASURY STOCKHOLDERS'
INCOME (LOSS) STOCKHOLDERS STOCK DEFICIT
------------- ------------ -------- -------------
Balance at December 31,
1998................. $ (51) $(764) $(2) $(132,045)
Net loss............... -- -- -- (20,456)
Foreign currency
translation
adjustment........... (1,089) -- -- (1,089)
---------
Total comprehensive
loss............. -- -- -- (21,545)
Issuance of common
stock................ -- -- -- 216
Preferred stock
dividends............ -- -- -- (13,236)
Write-off of notes
receivable from
stockholders......... -- 743 -- --
Accretion of preferred
stock discount....... -- -- -- (5,975)
------- ----- --- ---------
Balance at December 7,
1999 (prior to
acquisition)......... $(1,140) $ (21) $(2) $(172,585)
======= ===== === =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
WRIGHT MEDICAL GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT, COMPREHENSIVE LOSS
AND
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
FOR THE PERIOD FROM DECEMBER 8, 1999 TO DECEMBER 31, 1999
(In thousands, except share data)
SERIES A, B AND C
MANDATORILY
REDEEMABLE CONVERTIBLE
PREFERRED STOCK COMMON STOCK ACCUMULATED
----------------------- --------------------- ADDITIONAL OTHER
NUMBER OF NUMBER OF PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS)
----------- --------- --------- --------- ---------- ----------- -------------
Initial capitalization and
acquisition of predecessor
company.......................... 15,840,000 $50,333 721 $ -- $(2,784) $ -- $ --
Net loss........................... -- -- -- -- -- (19,899) --
Foreign currency translation
adjustment....................... -- -- -- -- -- -- 79
Total comprehensive loss......... -- -- -- -- -- -- --
Series A preferred stock
issuance......................... 3,564,401 11,289 -- -- -- -- --
Series B preferred stock
issuance......................... 2,919,626 9,245 -- -- -- -- --
Preferred stock dividends.......... -- -- -- -- -- (230)
---------- ------- --- --------- ------- -------- --------
Balance at December 31, 1999....... 22,324,027 $70,867 721 $ -- $(2,784) $(20,129) $ 79
========== ======= === ========= ======= ======== ========
TOTAL
STOCKHOLDERS'
DEFICIT
-------------
Initial capitalization and
acquisition of predecessor
company.......................... $ (2,784)
Net loss........................... (19,899)
Foreign currency translation
adjustment....................... 79
--------
Total comprehensive loss......... (19,820)
Series A preferred stock
issuance......................... --
Series B preferred stock
issuance......................... --
Preferred stock dividends.......... (230)
--------
Balance at December 31, 1999....... $(22,834)
========
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
WRIGHT MEDICAL GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT, COMPREHENSIVE LOSS
AND
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
FOR THE YEAR ENDED DECEMBER 31, 2000
(In thousands, except share data)
SERIES A, B AND C
MANDATORILY
REDEEMABLE
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
--------------------- --------------------- ADDITIONAL
NUMBER OF NUMBER OF PAID-IN ACCUMULATED DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMPENSATION
---------------------------------------------------------------------------------------
Balance at December 31, 1999....... 22,324,027 $70,867 721 $ -- $(2,784) $(20,129) $ --
Net loss........................... -- -- -- -- -- (39,493) --
Foreign currency translation
adjustment....................... -- -- -- -- -- -- --
Total comprehensive loss.........
Issuance of common stock........... -- -- 46,878 1 609 -- --
Series B preferred stock
exchange......................... (376,868) (1,193) -- -- -- -- --
Series C preferred stock
issuance......................... 5,363,771 8,493 -- -- 3,812 -- --
Beneficial conversion feature of
Series C preferred stock......... -- 13,087 -- -- -- (13,087) --
Preferred stock dividends.......... -- -- -- -- -- (4,401) --
Deferred stock-based
compensation..................... -- -- -- -- 3,132 -- (3,132)
Stock-based compensation........... -- -- -- -- -- -- 298
---------- ------- ------ --------- ------- -------- -------
Balance at December 31, 2000....... 27,310,930 $91,254 47,599 $ 1 $ 4,769 $(77,110) $(2,834)
========== ======= ====== ========= ======= ======== =======
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
INCOME (LOSS) DEFICIT
-----------------------------
Balance at December 31, 1999....... $ 79 $(22,834)
Net loss........................... -- (39,493)
Foreign currency translation
adjustment....................... (1,881) (1,881)
--------
Total comprehensive loss......... (41,374)
Issuance of common stock........... -- 610
Series B preferred stock
exchange......................... --
Series C preferred stock
issuance......................... -- 3,812
Beneficial conversion feature of
Series C preferred stock......... -- (13,087)
Preferred stock dividends.......... -- (4,401)
Deferred stock-based
compensation..................... -- --
Stock-based compensation........... -- 298
-------- --------
Balance at December 31, 2000....... $ (1,802) $(76,976)
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
WRIGHT MEDICAL GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT, COMPREHENSIVE LOSS
AND
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(In thousands, except share data)
(unaudited)
SERIES A, B AND C
MANDATORILY
REDEEMABLE
CONVERTIBLE COMMON STOCK, COMMON STOCK,
PREFERRED STOCK VOTING NON-VOTING
---------------------- --------------------- -------------------- ADDITIONAL
NUMBER OF NUMBER OF NUMBER OF PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
----------------------------------------------------------------------------------
Balance at December 31, 2000......... 27,310,930 $ 91,254 47,599 $ 1 -- -- $ 4,769
2001 Activity:
Net Loss............................. -- -- -- -- -- -- --
Foreign currency translation......... -- -- -- -- -- -- --
Total comprehensive loss........... -- -- -- -- -- -- --
Issuance of common stock, net of
costs.............................. -- -- 7,522,844 75 -- -- 85,049
Series C preferred stock issuance.... 114,997 181 -- -- -- -- 362
Preferred stock dividends............ -- -- -- -- -- -- --
Conversion of preferred stock into
common stock....................... (27,425,927) (91,435) 13,604,455 136 5,998,344 60 98,418
Conversion of senior subordinated
notes into common stock............ -- -- 1,125,000 11 -- -- 14,051
Conversion of non-voting common stock
to voting common stock............. -- -- 709,749 7 (709,749) (7) --
Deferred stock-based compensation.... -- -- -- -- -- -- 3,561
Stock-based compensation............. -- -- -- -- -- -- --
----------- -------- ---------- ---- --------- --- --------
Balance at September 30, 2001........ -- -- 23,009,647 $230 5,288,595 $53 $206,210
=========== ======== ========== ==== ========= === ========
ACCUMULATED TOTAL
OTHER STOCKHOLDERS'
ACCUMULATED DEFERRED COMPREHENSIVE EQUITY
DEFICIT COMPENSATION INCOME (LOSS) (DEFICIT)
----------------------------------------------------------
Balance at December 31, 2000......... $(77,110) $(2,834) $(1,802) $(76,976)
2001 Activity:
Net Loss............................. (3,683) -- -- (3,683)
Foreign currency translation......... -- -- 61 61
--------
Total comprehensive loss........... -- -- -- (3,622)
Issuance of common stock, net of
costs.............................. -- -- -- 85,124
Series C preferred stock issuance.... -- -- -- 362
Preferred stock dividends............ (2,546) -- -- (2,546)
Conversion of preferred stock into
common stock....................... -- -- -- 98,614
Conversion of senior subordinated
notes into common stock............ (984) -- -- 13,078
Conversion of non-voting common stock
to voting common stock............. -- -- -- --
Deferred stock-based compensation.... -- (3,561) -- --
Stock-based compensation............. -- 1,224 -- 1,224
-------- ------- ------- --------
Balance at September 30, 2001........ $(84,323) $(5,171) $(1,741) $115,258
======== ======= ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
Wright Medical Group, Inc.
Notes to Consolidated Financial Statements
1. Organization and Description of Business:
Wright Medical Group, Inc. (the "Company") is a global medical device company
specializing in the design, manufacture and marketing of orthopaedic implants
and bio-orthopaedic materials used in joint reconstruction and bone
regeneration. The Company is focused on the reconstructive joint device and
bio-orthopaedic materials sectors of the orthopaedic industry. The Company
markets its products through independent representatives in the United States
and through a combination of employee representatives, independent
representatives and stocking distributors in its international markets. The
Company is headquartered in suburban Memphis, Tennessee.
The Company was incorporated on November 23, 1999 as a Delaware corporation
(previously named Wright Acquisition Holdings, Inc.) and had no operations until
an investment group led by Warburg, Pincus Equity Partners, L.P. ("Warburg")
acquired majority ownership of the predecessor company, Wright Medical
Technology, Inc. ("Wright" or the "Predecessor Company"). As more fully
described in Note 3, this transaction, which represents a recapitalization of
Wright and the inception of the Company in its present form, was accounted for
using the purchase method of accounting. The financial statements and
accompanying notes present the historical cost basis results of the Predecessor
Company for the year ended December 31, 1998 and for the period from January 1,
1999 through its acquisition on December 7, 1999, and the results of the
Company, as successor to Wright, for periods thereafter.
As more fully described in Note 3, on December 22, 1999 the Company acquired all
of the outstanding common stock of Cremascoli Ortho Holding S.A. ("Cremascoli"),
an orthopaedic medical device company headquartered in Toulon, France. The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the results of operations of Cremascoli have been included in the
Company's consolidated financial statements from the date of acquisition.
The Company's future success is dependent upon a number of factors which
include, among others, the success of its principal product lines, its ability
to compete with other orthopaedic medical product companies, continued
development of new products and technologies, continued recommendation and
endorsement of its products by key surgeons, compliance with government
regulations, maintaining adequate levels of reimbursement for its products,
operating successfully in international markets, maintaining adequate access to
materials supply, enforcing and defending its claims to intellectual property,
the performance of its independent distributor network, reliance on key
personnel, and the ability to obtain adequate financing to support its future
growth. The Company's activities to date have been financed primarily through
private placements of equity and debt securities, principally preferred stock
and subordinated debt issuances, cash from operations and bank borrowings. The
Company is seeking additional capital through the issuance of equity securities
(see Note 17).
UNAUDITED UPDATE:
On July 18, 2001, the Company completed its initial public offering ("IPO") of
7.5 million shares of voting common stock at $12.50 per share. Simultaneous with
the closing of the offering, all of the Company's outstanding mandatorily
redeemable, convertible preferred stock, plus accrued dividends, were converted
into common stock. Also in connection with the offering, senior subordinated
notes held by Warburg totaling approximately $13.1 million, were converted into
1,125,000 shares of non-voting common stock. Subsequently, Warburg sold
1,125,000 shares of voting common stock when the underwriters exercised their
overallotment option.
2. Summary of Significant Accounting Policies:
PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned domestic and
international subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates. The most significant areas requiring the use of
F-12
Wright Medical Group, Inc.
Notes to Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies: (Continued)
management estimates relate to the determination of allowances for doubtful
accounts and sales returns, excess and obsolete inventories, product liability
claims and the need for a valuation allowance on deferred tax assets.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include all cash balances
and short-term investments with original maturities of three months or less.
ALLOWANCE FOR SALES RETURNS. The Company maintains an allowance for anticipated
future returns of products by customers, which is established at the time of
sale. An allowance for sales returns of $681,000 and $885,000 is included as a
reduction of trade receivables at December 31, 1999 and 2000, respectively.
INVENTORIES. The Company's inventories are valued at the lower of cost or
market on a first-in, first-out ("FIFO") basis. Inventory costs include
material, labor costs and manufacturing overhead. Inventory reserves are
established to reduce the carrying amount of obsolete and excess inventory to
its net realizable value. The Company principally follows an inventory reserve
formula that reserves inventory balances based on historic and forecasted sales.
PROPERTY, PLANT AND EQUIPMENT. The Company's property, plant and equipment is
stated at cost. Depreciation, which includes amortization of assets held under
capital leases, is provided on a straight-line basis over estimated useful lives
of 15 to 20 years for land improvements, 10 to 45 years for buildings, 3 to
11 years for machinery and equipment and 4 to 14 years for furniture, fixtures
and office equipment, or term of related lease, whichever is shorter.
Expenditures for major renewals and betterments that extend the useful life of
the assets are capitalized. Maintenance and repair costs are charged to expense
as incurred. Upon sale or retirement, the asset cost and related accumulated
depreciation are eliminated from the respective accounts and any resulting gain
or loss is included in income.
Instruments used by surgeons during implant procedures of the Company's products
that are permanently held by the Company are included in property, plant and
equipment and are depreciated on a straight-line basis over periods not to
exceed six years (see "Change in Accounting Policy").
CHANGE IN ACCOUNTING POLICY. On December 8, 1999, the Company changed its
accounting policy for surgical instruments. Prior to this change in accounting
policy, the Predecessor Company principally classified surgical instruments as
inventory as these instruments were held for sale to independent distributors
and surgeons. However, beginning on December 8, 1999, the Company has classified
these surgical instruments as a component of property, plant and equipment as
the Company will principally loan these instruments to surgeons or in some cases
rent these instruments to distributors who subsequently loan them to surgeons
for the implantation of the Company's products.
The surgical instruments reclassified to property, plant and equipment will be
amortized over a period of one to five years based upon an assessment of the
instrument's remaining useful life. At December 8, 1999, the effect of this
change in accounting policy resulted in a reclassification of $11.9 million in
surgical instruments from inventories to property, plant and equipment. There
was not a material cumulative impact on the Company's statement of operations
related to this change.
INTANGIBLE ASSETS. Intangible assets consist of goodwill and purchased
intangibles amortized on a straight-line basis over 10 to 13 years for completed
technology, 5 years for workforce, 10 years for distribution channels, 15 years
for trademarks and 20 years for goodwill. The Company continually evaluates the
periods of amortization to determine whether events and circumstances, such as
effects of competition, obsolescence and other economic factors, warrant
revision of useful lives.
VALUATION OF LONG-LIVED ASSETS. Management periodically evaluates carrying
values of long-lived assets, including property, plant and equipment, and
intangible assets, when events and circumstances indicate that these assets may
have been impaired. An asset is considered impaired when undiscounted cash flows
to be realized from the use of such assets are less than its carrying value. In
that event, a loss is determined based on the amount the carrying value exceeds
the fair market value of such asset.
F-13
Wright Medical Group, Inc.
Notes to Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies: (Continued)
CONCENTRATIONS OF CREDIT RISK. Concentrations of credit risk with respect to
trade accounts receivable are limited due to the large number of customers and
their dispersion across a number of geographic areas. However, essentially all
trade receivables are concentrated in the hospital and health care sectors in
the United States and several other countries or with stocking distributors that
operate in international markets and, accordingly, are exposed to their
respective business, economic and country-specific variables. Although the
Company does not currently foresee a concentrated credit risk associated with
these receivables, repayment is dependent upon the financial stability of these
industry sectors and the respective countries' national economies and health
care systems.
At December 31, 1999 and 2000, the Company's allowance for doubtful accounts
totaled $1.6 million and $2.3 million, respectively.
INCOME TAXES. Income taxes are accounted for pursuant to the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." This statement requires the use of the liability method of
accounting for deferred income taxes. The provision for income taxes includes
federal, foreign, and state income taxes currently payable and those deferred
because of temporary differences between the financial statement and tax bases
of assets and liabilities. Provisions for federal income taxes are not made on
the undistributed earnings of foreign subsidiaries where the subsidiaries do not
have the capability to remit earnings in the foreseeable future and when
earnings are considered permanently invested. Deferred taxes on these
undistributed earnings of foreign subsidiaries at December 31, 1999 and 2000 are
not material to the Company's financial position.
REVENUE RECOGNITION. The Company recognizes revenue upon shipment of product to
customers. For inventory held on consignment, revenue is recognized when
evidence of customer acceptance is obtained. In limited instances, the Company
has agreed to repurchase inventory from certain international stocking
distributors if such inventory is not acquired by a third party customer. In
these instances, revenue is deferred until evidence is obtained that such
inventory has been sold to a third party customer. At December 31, 1999 and
2000, deferred revenue related to those arrangements totaled $1.9 million and
$2.2 million, respectively.
ADVERTISING COSTS. Advertising costs are expensed as incurred. Advertising
costs were not material for the year ended December 31, 1998, for the period
from January 1, 1999 through December 7, 1999, for the period from December 8,
1999 through December 31, 1999 or for the year ended December 31, 2000.
RESEARCH AND DEVELOPMENT COSTS. Research and development costs are charged to
expense as incurred. In-process research and development activities of
$11.7 million acquired in connection with the Wright acquisition were expensed
immediately upon consummation of the acquisition (see Note 3).
FOREIGN CURRENCY TRANSLATION. The financial statements of the Company's
international subsidiaries are translated into U.S. dollars using the end of
period exchange rate at the balance sheet date for assets and liabilities and
the weighted average exchange rate for the applicable period for revenues,
expenses, gains and losses. Translation adjustments are recorded as a separate
component of comprehensive income (loss). Gains and losses resulting from
transactions denominated in a currency other than the local functional currency
are included in other income (expense).
STOCK-BASED COMPENSATION. The Company accounts for stock-based compensation in
accordance with SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION." As
permitted in that standard, the Company has chosen to account for employee
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion (APB) No. 25, "ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES" and related Interpretations. Nonemployee stock-based compensation
is accounted for in accordance with SFAS No. 123 and, when applicable, EITF
96-18.
COMPREHENSIVE INCOME (LOSS). Comprehensive income (loss) is defined as the
change in equity during a period related to transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during a
period except
F-14
Wright Medical Group, Inc.
Notes to Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies: (Continued)
those resulting from investments by owners and distributions to owners. The
difference between the Company's net income (loss) and comprehensive income
(loss) is principally attributable to foreign currency translation.
STOCK SPLIT. In August 2000, the Company's certificate of incorporation was
amended increasing its authorized shares for each class of stock and the Board
of Directors authorized that all classes of the Company's common stock be split
two for one. In June 2001, the Company's Board of Directors approved a
resolution whereby, upon successful completion of the public offering described
in Note 17, the Company's common shares will be reverse-split 1 for 2.75. All
share and per share information in the consolidated financial statements for the
Company have been restated to give effect to these adjustments.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying value of cash and cash
equivalents approximates fair value because of the short maturities of the cash
equivalents.
The carrying value of accounts receivable, accounts payable and notes payable
approximates fair value of these financial instruments at December 31, 1999 and
2000 due to their short maturities or variable rates.
The carrying value of the Company's subordinated notes approximates fair value,
evidenced by the issuance of additional subordinated notes in December 2000 with
terms substantially similar to the previously issued subordinated notes.
The Company's Series A, Series B and Series C Preferred Stock described in
Note 11 are specialized instruments with various terms and preferential
treatment which render it impractical to determine the current fair value.
SUPPLEMENTAL NON-CASH DISCLOSURES. During the period from December 8 to
December 31, 1999, the Company issued Series A preferred stock, common stock,
warrants and senior subordinated debt totaling $9.8 million as a portion of the
total consideration paid to the Wright and Cremascoli shareholders in exchange
for all of the outstanding common and preferred stock of Wright and Cremascoli
(see Note 3). During 2000, the Company issued Warburg 753,736 shares of
Series C voting preferred stock in exchange for 274,086 shares of Series B
non-voting preferred stock. Both the Series C shares received and the Series B
shares exchanged are convertible into 376,868 shares of common stock.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to conform
to the 2000 presentation.
RECENT PRONOUNCEMENTS. In June 1998, the Financial Accounting Standards Board
(FASB) issued SFAS No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES." SFAS No. 133 establishes accounting and reporting standards that
require all derivative instruments to be recorded on the balance sheet as either
an asset or liability and measured at fair value. The statement requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allow a derivative's gains and losses to offset related
results on the hedged item in the statement of operations, and requires
companies to formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. This statement was amended by SFAS
No. 137 in June 1999 to change the effective date of implementation to fiscal
years beginning after June 15, 2000. It was amended again in June 2000 by SFAS
No. 138 to address certain implementation issues.
On January 1, 2000, the Company adopted SFAS No. 133, as amended. Currently, the
Company is in the process of developing a risk management policy to assist in
managing its exposure to foreign currency fluctuations. During 2000, its
principal derivative instruments represented certain foreign currency contracts
denominated in British pounds sterling to manage currency fluctuations on
intercompany sales between certain Cremascoli subsidiaries. As these contracts
are not specifically designated as hedges, the change in value is recognized in
the accompanying consolidated statement of operations. For the year ended
December 31, 2000, the Company recorded $154,000 in gains on these foreign
currency contracts. These contracts did not exist prior to 2000 and, thus, had
no impact on the Company's or Predecessor Company's operations. At December 31,
2000, foreign currency futures contracts with an aggregate notional amount of
L5.0 ($7.4 million) had a fair market value of $267,000 at the adoption date.
The Company does not anticipate entering into additional foreign currency
contracts until a formalized risk management policy is developed.
F-15
Wright Medical Group, Inc.
Notes to Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies: (Continued)
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "REVENUE RECOGNITION IN FINANCIAL
STATEMENTS." SAB No. 101 addresses revenue recognition for transactions not
addressed by existing rules and the basic criteria that must be met before
registrants can record revenue under existing rules. The Company's accounting
policies are in compliance with the provisions of SAB No. 101.
In March 2000, the FASB issued FASB Interpretation Number (FIN) 44, "ACCOUNTING
FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION." The interpretation
provides guidance for certain issues that arose in the application of APB
Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES." This interpretation
clarifies (a) the definition of "employee" for purposes of applying Opinion
No. 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequences of various modifications
to the terms of a previously fixed stock option or award and (d) the accounting
for an exchange of stock compensation awards in a business combination. This
interpretation became effective July 1, 2000 but certain conclusions in this
interpretation cover specific events that occur after either December 15, 1998
or January 12, 2000. The adoption of FIN 44 did not have a material effect on
the Company's financial position and results of operations.
In October 2000, the FASB issued SFAS No. 140, "ACCOUNTING FOR TRANSFERS AND
SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES", a replacement
of FASB Statement No. 125. SFAS No. 140 revises the standard for accounting for
securitizations, other financial asset transfers and collateral, and introduces
new disclosures. The new disclosure requirements must be implemented for fiscal
years ending after December 15, 2000. The other provisions of SFAS No. 140 apply
prospectively to the transfer of financial assets and extinguishments of
liabilities occurring after March 31, 2001. SFAS No. 140 carries forward most of
the provisions of SFAS No. 125 without amendment. We do not believe that this
pronouncement will have a material impact on our results of operations, cash
flows or financial position.
UNAUDITED UPDATE:
The adoption of SFAS No. 140 did not have a material effect on our results of
operations, cash flows or financial position.
On June 30, 2001, the Financial Accounting Standards Board ("FASB") issued two
new pronouncements, Statement of Financial Accounting Standards ("SFAS")
No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other
Intangible Assets". The two statements modify the method of accounting for
business combinations initiated after June 30, 2001 and address the accounting
for intangible assets. SFAS 141 is effective immediately and SFAS 142 became
effective for the Company on January 1, 2002. Upon adoption of SFAS 142, we will
no longer amortize goodwill, but will evaluate it for impairment at least
annually. Accordingly, we expect our amortization of intangible assets to be
approximately $2.0 million less in 2002 than it would have been had SFAS 142 not
been issued. We are currently evaluating the impact of SFAS 142 as it relates to
goodwill impairment and the classification of intangibles.
In July and August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", and SFAS No. 144, "Accounting for the Impairment of
Disposal of Long-Lived Assets." SFAS 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made.
SFAS 144 addresses financial accounting and reporting for the impairment of
long-lived assets and for long-lived assets to be disposed of. The Company will
adopt SFAS 143 and 144 on January 1, 2002. Management believes the adoption of
SFAS 143 and 144 will not have a material impact on the Company's financial
position, results of operations, or cash flows.
3. Acquisitions:
On December 7, 1999, the investment group led by Warburg received from the
Company Series A preferred stock, common stock and senior subordinated debt in
exchange for $70.0 million in cash. Concurrently, the Company acquired all of
the outstanding shares of common and preferred stock of Wright for $9.2 million
in cash, of which $3.5 million was placed in escrow (see Note 15), and the
issuance of 1,840,000 shares of the Company's Series A preferred stock valued at
$5.8 million, 121 shares of common stock valued at $529, 334,545 warrants valued
at $193,000 and senior subordinated debt valued at $3.4 million. In
F-16
Wright Medical Group, Inc.
Notes to Consolidated Financial Statements (Continued)
3. Acquisitions: (Continued)
addition, the Company borrowed approximately $60.0 million under a term loan as
further described in Note 10. This recapitalization and related acquisition was
accounted for using the purchase method of accounting and represents the
inception of the Company in its present form.
Former Wright shareholders retained a 17% voting interest in the Company after
the acquisition. The equity interest of former Wright shareholders that became
shareholders of the Company was recorded at its carryover basis. Accordingly,
the assets acquired and liabilities assumed in connection with the acquisition
were recorded at 17% of their historical carrying value and 83% of their fair
value at the date of acquisition. Total consideration paid for the outstanding
preferred and common stock of Wright was $21.5 million, including acquisition
costs of $2.9 million, and has been allocated as follows (in thousands):
----------------------------------------------------------------------------------
Current assets, excluding inventory......................... $ 23,509
Inventories................................................. 57,969
Acquired in-process research and development................ 11,731
Identifiable intangible assets:
Completed technology...................................... 11,008
Workforce................................................. 4,825
Distribution channels..................................... 5,442
Trademarks................................................ 2,372
Other..................................................... 915
------
Total identifiable intangible assets........................ 24,562
Other assets................................................ 34,601
Goodwill.................................................... 9,988
Accounts payable and accrued expenses....................... (30,466)
Debt........................................................ (100,376)
Other liabilities........................................... (10,044)
---------
$ 21,474
=========
On December 22, 1999, the Company acquired all of the equity ownership of
Cremascoli. The Company paid the Cremascoli stockholders $4.2 million in cash
and issued 84,027 shares of its Series A preferred stock valued at $266,000 and
senior subordinated debt valued at $166,000. Additionally, the Company placed
$14.1 million in escrow consisting of 230,306 shares of Series A preferred stock
($700,000) and senior subordinated debt of $422,000 and the remainder in the
form of cash related to this acquisition. These escrowed funds will be released
to the Cremascoli stockholders or, in some cases, remitted to the Company or
other third parties, pending the completion of a final evaluation of
Cremascoli's net assets and the resolution of potential income tax liabilities
and environmental matters. None of the escrows had been released as of
December 31, 2000. Concurrent with the acquisition of Cremascoli, the investment
group led by Warburg contributed cash of $32.0 million to the Company in
exchange for the Company's Series A and B preferred stock and senior
subordinated debt. In addition, the Company borrowed approximately
$17.7 million (E17.5 million) under a term loan as further described in
Note 10.
F-17
Wright Medical Group, Inc.
Notes to Consolidated Financial Statements (Continued)
3. Acquisitions: (Continued)
The Cremascoli acquisition was accounted for using the purchase method of
accounting. Total consideration paid for the outstanding preferred and common
stock of Cremascoli was $16.2 million, including acquisition costs of
$0.6 million, and has been allocated as follows:
---------------------------------------------------------------------------------
Current assets, excluding inventory......................... $ 15,065
Inventories................................................. 15,914
Identifiable intangible assets:
Completed technology...................................... 608
Workforce................................................. 818
Distribution channels..................................... 15,298
--------
Total identifiable intangible assets........................ 16,724
Other assets................................................ 13,027
Goodwill.................................................... 8,218
Accounts payable and accrued expenses....................... (18,491)
Debt........................................................ (27,693)
Other liabilities........................................... (6,590)
--------
$ 16,174
========
In connection with the acquisitions of Wright and Cremascoli, the Company
conducted a valuation of the intangible assets acquired. The value assigned to
purchased in-process research and development ("IPRD") was $11.7 million of the
purchase price for Wright. There was no IPRD identified for Cremascoli. IPRD
represented IPRD that had not yet reached technological feasibility and had no
alternative future use. Accordingly, these amounts were expensed in the period
from December 8, 1999 to December 31, 1999 following consummation of the
acquisition of Wright. The value assigned to IPRD was determined by identifying
research projects in areas for which technological feasibility had not been
achieved. The value was determined by estimating the costs to develop the IPRD
into commercially viable products, estimating the resulting cash flows from such
projects, and discounting the net cash flows back to their present value.
The Company estimated costs required to obtain regulatory approvals and has
assumed the approvals will be received. Costs related to manufacturing,
distribution, and marketing of the products are included in the projections. The
resulting cash flows from such projects are based on management's estimates of
revenues, cost of sales, research and development costs, sales and marketing,
general and administrative, and the anticipated income tax effect. The Company
does not expect gross margins or expense levels to significantly change
following introduction of these products.
The discount rate utilized in discounting the net cash flows from IPRD was 22%
for Wright products. This discount rate reflects uncertainties surrounding the
successful development of the IPRD.
The forecast data employed in the analyses was based upon internal product level
forecast information. The forecast data and assumptions are inherently uncertain
and unpredictable. However, based upon the information available at the time of
valuation, management believes the forecast data and assumptions to be
reasonable. These assumptions may be incomplete or inaccurate, and no assurance
can be given that unanticipated events and circumstances will not occur.
As both the Wright and Cremascoli acquisitions were accounted for using the
purchase method of accounting, the results of operations of the acquired
businesses are included in the consolidated financial statements of the Company
from their respective acquisition dates.
The following unaudited pro forma financial information for the years ended
December 31, 1998 and 1999 represents the consolidated results of operations of
the Company as if the acquisition of Wright and Cremascoli had occurred on
January 1, 1998 and January 1, 1999, respectively. The pro forma financial
information excludes the $31.1 million charge to cost of sales related to
F-18
Wright Medical Group, Inc.
Notes to Consolidated Financial Statements (Continued)
3. Acquisitions: (Continued)
the step-up of inventory in connection with the Wright and Cremascoli
acquisitions (see Note 5) and the charge to operations of $11.7 million related
to the purchased IPRD in connection with the Wright acquisition. The pro forma
financial information does not purport to be indicative of what would have
occurred had the acquisitions been made as of those dates or the results that
may occur in the future (in thousands).
---------------------------------------------------------------------------------
1998 1999
-------- --------
Net sales................................................... $140,503 $141,523
Cost of sales............................................... 53,662 55,476
-------- --------
Gross margin................................................ 86,841 86,047
Selling, general and administrative......................... 74,720 73,077
Research and development.................................... 8,574 7,539
Other....................................................... 7,267 15,545
-------- --------
Operating loss.............................................. $ (3,720) $(10,114)
======== ========
Net loss.................................................... $(19,215) $(18,091)
======== ========
Net loss per share amounts have not been shown as they are not meaningful for
comparative purposes to the Company.
4. Transaction and Reorganization Expenses:
Predecessor Company recorded approximately $6.5 million of transaction and
reorganization expenses during the period from January 1, 1999 to December 7,
1999. These costs consisted primarily of $4.8 million of investment banking,
consulting and advisory fees incurred by the Predecessor Company to identify and
pursue financing alternatives leading up to its December 1999 recapitalization
and $1.3 million of management compensation costs where no ongoing service
obligations existed.
The Company recorded approximately $3.4 million of transaction and
reorganization expenses during the period from December 8, 1999 to December 31,
1999. These amounts were largely attributable to $1.9 million of distributor
close out costs incurred to eliminate duplicate distributors upon integrating
the Wright and Cremascoli distribution channels and $1.1 million incurred by the
Company for recruitment and employee termination expenses based on an assessment
of senior management personnel needs following the recapitalization and
Cremascoli acquisition.
Costs incurred by the Company that were directly associated with consummating
the December 1999 recapitalization and subsequent acquisition of Cremascoli have
been included in those respective purchase prices and, accordingly, are not
included in transaction and reorganization expenses. As described in Note 3, the
Wright and Cremascoli purchase prices include direct acquisition costs of
$2.9 million and $600,000, respectively.
5. Inventories:
Inventories, net of reserves, consist of the following (in thousands):
-------------------------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30,
------------------- 2001
1999 2000 (UNAUDITED)
-------- -------- --------------
Raw materials.............................................. $ 1,716 $ 1,486 $ 1,762
Work-in-process............................................ 20,042 6,384 5,561
Finished goods............................................. 49,308 30,024 33,353
-------- -------- ---------
$ 71,066 $ 37,894 $ 40,676
======== ======== =========
F-19
Wright Medical Group, Inc.
Notes to Consolidated Financial Statements (Continued)
5. Inventories: (Continued)
At the dates the Company acquired Wright and Cremascoli (see Note 3),
inventories were recorded at stepped-up values pursuant to APB No. 16 requiring
an aggregate $31.1 million step-up. This step-up was charged to the statements
of operations over a one-year period, representing an estimate of the period
over which such inventories were sold. Cost of sales was charged $2.0 million
for the period from December 8, 1999 to December 31, 1999 and $29.1 million for
the year ended December 31, 2000.
6. Property, Plant and Equipment:
Property, plant and equipment consist of the following (in thousands):
------------------------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30,
------------------- 2001
1999 2000 (UNAUDITED)
-------- -------- -------------
Land and land improvements................................. $ 1,512 $ 1,463 1,460
Buildings.................................................. 4,801 5,207 5,584
Machinery and equipment.................................... 12,921 14,702 17,210
Furniture, fixtures and office equipment................... 3,642 4,278 5,675
Construction in progress................................... 429 2,419 5,282
Loaner instruments......................................... 16,879 27,006 30,448
------- ------- -----------
40,184 55,075 65,660
Less: Accumulated depreciation............................. (234) (9,992) (15,427)
------- ------- -----------
$39,950 $45,083 $50,233
======= ======= ===========
Depreciation expense approximated $9.2 million for the year ended December 31,
1998, $6.2 million for the period from January 1, 1999 through December 7, 1999,
$489,000 for the period from December 8, 1999 through December 31, 1999 and
$11.0 million for the year ended December 31, 2000.
7. Intangible Assets:
Intangible assets, which principally result from the recapitalization and
acquisition of Cremascoli, consist of the following (in thousands):
---------------------------------------------------------------------------------
DECEMBER 31,
-------------------
1999 2000
-------- --------
Completed technology........................................ $11,616 $11,570
Workforce................................................... 5,643 5,580
Distribution channels....................................... 20,740 19,563
Trademarks.................................................. 2,372 2,372
Goodwill.................................................... 16,583 17,649
Other....................................................... 3,999 4,434
------- -------
60,953 61,168
Less: Accumulated amortization.............................. (466) (6,487)
------- -------
$60,487 $54,681
======= =======
Included in accumulated amortization above was $46,000 and $932,000 related to
goodwill at December 31, 1999 and 2000, respectively.
F-20
Wright Medical Group, Inc.
Notes to Consolidated Financial Statements (Continued)
8. Accrued Expenses and Other Current Liabilities:
Accrued expenses and other current liabilities consist of the following (in
thousands):
------------------------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30,
------------------- 2001
1999 2000 (UNAUDITED)
-------- -------- -------------
Interest................................................... $ 425 $ 4,519 532
Employee benefits.......................................... 6,354 8,585 6,566
Settlement and release accrual (See Note 15)............... 7,500 7,500 --
Commissions................................................ 1,752 1,860 1,856
Taxes other than income.................................... 2,343 2,964 3,857
Royalties.................................................. 2,367 4,510 3,864
Professional fees.......................................... 1,595 1,503 770
Transaction and reorganization costs....................... 5,165 1,401 731
Deferred revenue........................................... 1,864 2,177 1,241
Distributor transition agreement........................... -- -- 2,848
Other...................................................... 7,044 9,821 18,200
------- ------- -----------
$36,409 $44,840 $ 40,465
======= ======= ===========
9. Earnings Per Share:
Basic earnings per share is calculated based on the weighted-average shares of
common stock outstanding during the period. Diluted earnings per share gives
effect to the dilutive effect of common stock equivalents consisting of stock
options, warrants and convertible preferred stock (calculated using the treasury
stock method). During the period from December 8, 1999 to December 31, 1999, and
for the year ended December 31, 2000, diluted earnings per share is not
presented as the effect of the Company's common stock equivalents was
anti-dilutive, accordingly the computation of weighted average shares for the
period December 8 to December 31, 1999 and for the year-ended December 31, 2000
excludes 14,199 and 18,920, respectively, of common share equivalents,
consisting of common stock options, warrants and convertible preferred stock due
to its anti-dilutive nature.
Net loss applicable to common stockholders for basic and diluted earnings per
share purposes is as follows (in thousands):
--------------------------------------------------------------------------------------------------
FOR THE PERIOD
FROM NINE MONTHS
DECEMBER 8 YEAR ENDED ENDED SEPTEMBER 30,
TO DECEMBER 31, DECEMBER 31, 2001
1999 2000 (UNAUDITED)
--------------- ------------ -------------------
Net loss.................................... $ (19,899) $ (39,493) $ (3,683)
Accrued preferred stock dividends........... (230) (4,401) (2,546)
Deemed preferred stock dividend on
beneficial conversion feature (Note 11)... -- (13,087) --
---------- ---------- ---------
Net loss applicable to common
stockholders........................ $ (20,129) $ (56,981) $ (6,229)
========== ========== =========
No earnings per share data is presented for the Predecessor Company as it is
considered not meaningful for comparative purposes.
The computation of unaudited pro forma net loss per share includes shares
issuable upon the conversion of outstanding shares of convertible preferred
stock and related dividends as if such stock was converted at the beginning of
the respective period or the date of original issuance, if later (see Notes 11
and 17).
F-21
Wright Medical Group, Inc.
Notes to Consolidated Financial Statements (Continued)
9. Earnings Per Share: (Continued)
A reconciliation of shares and net income (loss) applicable to common
stockholders for unaudited pro forma basic and diluted earnings per share is as
follows (in thousands):
------------------------------------------------------------------------------------------------
NINE MONTHS
YEAR ENDED ENDED SEPTEMBER 30,
DECEMBER 31, 2001
2000 (UNAUDITED)
------------ -------------------
Weighted-average number of common shares outstanding........ 17 8,037
Weighted-average effect of assumed conversion of redeemable
convertible preferred stock and related dividends......... 17,243 13,836
---------- ----------------
Pro-forma weighted-average number of common shares
outstanding............................................... 17,260 21,873
========== ================
Net loss applicable to common stockholders shown above...... $ (56,981) $ (6,229)
Reversal of accrued preferred stock dividends............... 4,401 2,546
Reversal of deemed preferred stock dividend on beneficial
conversion
feature (Note 11)......................................... 13,087 --
---------- ----------------
$ (39,493) $ (3,683)
========== ================
UNAUDITED UPDATE:
On February 13, 2002, the Company amended its Quarterly Report on Form 10-Q for
the quarter ended September 30, 2001 to include a deemed preferred stock
dividend of $13.1 million (see Note 11) recorded in the third quarter of 2000 in
the corresponding calculation of net loss applicable to common shareholders for
the three months and nine months ended September 30, 2000 (unaudited),
respectively. This revision had the effect of increasing the net loss per common
share, basic and diluted, from ($804.59) and ($5,461.60) for three and nine
months ended September 30, 2000 (unaudited), respectively, to ($1,550.69) and
($7,516.63) for the three and nine months ended September 30, 2000 (unaudited),
respectively. The as corrected net loss per common share, basic and diluted, for
the nine months months ended September 30, 2000 has been reflected on the
accompanying consolidated statement of operations.
10. Debt:
Long-term obligations consist of the following (in thousands):
---------------------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30,
------------------- 2001
1999 2000 (UNAUDITED)
-------- -------- ----------------
Notes payable........................................ $ 78,172 $ 72,876 $ 20,000
Senior subordinated notes............................ 41,225 45,451
Capitalized lease obligations........................ 3,233 2,352 3,530
-------- -------- ----------------
122,630 120,679 23,530
Less: current portion................................ (5,453) (8,396) (1,704)
-------- -------- ----------------
$117,177 $112,283 $ 21,826
======== ======== ================
On December 7, 1999, the Company entered into a credit agreement with a
syndicate of banks (the "Credit Agreement") for a $60.0 million term loan. The
term loan bears interest at the Euro rate plus 3.25% (9.44% and 9.69% at
December 31, 1999 and 2000, respectively). The loan is due in semi-annual
installments beginning June 30, 2000 through the maturity date of December 7,
2005. Under the Credit Agreement, the Company also has available to it a
$5.0 million revolving line of credit. Borrowings under the revolving line of
credit bear interest at the Alternative Base Rate plus 2.25% (10.75% and 11.75%
at December 31, 1999 and 2000, respectively). There was no outstanding balance
on the revolving line of credit as of December 31, 2000. During 2000, the
average amount outstanding under the revolving line of credit was approximately
$13,000 and the maximum amount outstanding during this period was $1.0 million.
The balance outstanding on the revolving line of credit was
F-22
Wright Medical Group, Inc.
Notes to Consolidated Financial Statements (Continued)
10. Debt: (Continued)
$1.0 million at December 31, 1999. A commitment fee of 0.5% is charged on the
unused portion of the revolving line of credit. All borrowings under the Credit
Agreement are collateralized by the accounts receivable, fixed assets,
intangible assets and inventories of the Company. A fronting fee of 0.25% per
year and a letter of credit fee of 3.25% per year is required on any related
letter of credit guarantees. At December 31, 1999 and 2000, the Company had
$2.2 million and $1.9 million, respectively, of letters of credit issued
pursuant to this revolving line of credit.
On December 22, 1999, the Company entered into a second credit agreement with
the same syndicate of banks (the "Second Credit Agreement") for a E17.5 million
term loan ($17.7 million at December 22, 1999). The term loan bears interest at
the Euribo rate plus 0.25% (3.72% and 5.10% at December 31, 1999 and 2000,
respectively) and matures November 21, 2005. All borrowings under the Second
Credit Agreement are secured by certain assets of Cremascoli, primarily
receivables and cash. The loan has a principal balance of $17.7 million and
$15.6 million at December 31, 1999 and 2000, respectively. The loan requires
that a specified percentage of the loan principal be paid every June 30 and
December 31 until maturity on November 21, 2005. Under the Second Credit
Agreement, the Company also has available to it a 5.0 million Euros revolving
line of credit agreement. No amounts have been borrowed under this revolving
line of credit since its issuance.
The Second Credit Agreement also required the Company to establish an
irrevocable letter of credit of $25.0 million as additional security. This
letter of credit agreement requires a 0.25% fronting fee, a 0.5% commitment fee
and a 3.25% credit fee. The letter of credit amount established under this
arrangement has been reduced to $24.6 million at December 31, 2000.
Letter of credit fees expensed by the Company approximated $27,000 for the
period from December 8, 1999 to December 31, 1999 and $947,000 for the year
ended December 31, 2000.
The Credit Agreement and Second Credit Agreement place various restrictions on
the Company which limit, among other things, additional indebtedness,
acquisitions, consolidations, mergers, sales of all or substantially all of the
Company's assets, and transactions with affiliates. Additionally, the Company
must comply on a quarterly basis with specific financial ratios set forth in the
Credit Agreement.
In connection with the acquisitions of Wright and Cremascoli discussed in
Note 3, the Company issued $41.2 million in Senior Subordinated Notes (the
"Notes"). The Notes, which are due December 2006, bear interest at 10%. Interest
on the Notes is payable quarterly beginning April 1, 2000. At the option of the
Company, the amount of interest due and payable April 1, 2000 and each quarter
thereafter may be added to the unpaid principal of the Notes. The Company, at
its option, may prepay the Notes in whole or in part at any time without premium
or penalty. The Notes are subordinated in right of payment to amounts due under
the Credit Agreement and the Second Credit Agreement. During 2000, the Company
issued an additional $4.3 million of Notes to certain stockholders and members
of management. At December 31, 1999 and 2000, the Company has accrued, but not
paid, interest of $226,000 and $4.5 million, respectively, related to these
Notes.
At December 7, 1999, the Predecessor Company had outstanding $85.0 million of
Series D Senior Secured Step-Up Notes (the "Step-Up Notes"). The Step-Up Notes
bore interest at 12.25% and were scheduled to mature on July 1, 2000. At
December 7, 1999, the Predecessor Company also had available a revolving line of
credit agreement with Foothill Capital Corporation ("Foothill") that provided
for borrowing of up to $30.0 million and bore interest at prime plus 1.5%. The
balance outstanding under the Foothill line of credit was approximately
$14.3 million at December 7, 1999. As a result of the Predecessor Company's
failure to make its coupon interest payment due on the Step-Up Notes on July 1,
1999, the Predecessor Company was in default on both the Step-Up Notes and the
Foothill line of credit. The Predecessor Company entered into a number of
forbearance agreements with its lenders. The Predecessor Company paid and
expensed fees totaling $200,000 in connection with these forbearance agreements
during the period from January 1, 1999 to December 7, 1999. No action was taken
against the Predecessor Company with respect to the defaulted Step-Up Notes. In
connection with the acquisition of the Predecessor Company on December 7, 1999,
the Company paid off the balance outstanding on the Foothill line of credit. In
addition, in December 1999, the Company irrevocably placed funds totaling
$95.8 million in an escrow account to defease the Step-Up Notes and pay the
interest due on the Step-Up Notes. Accordingly, the Company no longer recognized
the Step-Up Notes as a liability in the accompanying consolidated balance sheet
as of December 31, 1999. The Step-Up Notes and related interest due were
subsequently paid on January 2, 2000 out of the funds held in the escrow
account.
F-23
Wright Medical Group, Inc.
Notes to Consolidated Financial Statements (Continued)
10. Debt: (Continued)
The Company has acquired certain property and equipment pursuant to capital
leases. These leases have various maturity dates ranging from one to seven years
with interest rates ranging from 4.14% to 8.98%. At December 31, 2000, future
minimum lease payments under capital lease obligations, together with the
present value of the net minimum lease payments, is as follows (in thousands):
----------------------------------------------------------------------
AMOUNT
------
2001........................................................ $ 850
2002........................................................ 621
2003........................................................ 600
2004........................................................ 534
2005........................................................ 165
Thereafter.................................................. 136
------
Total minimum payments...................................... 2,906
Less amount representing interest........................... (554)
------
Present value of minimum lease payments..................... 2,352
Current portion............................................. (671)
------
Long-term portion........................................... $1,681
======
Aggregate annual maturities of the Company's long-term obligations at
December 31, 2000, excluding capitalized leases, are as follows (in thousands):
----------------------------------------------------------------------
2001........................................................ $ 7,725
2002........................................................ 11,129
2003........................................................ 14,829
2004........................................................ 19,243
2005........................................................ 19,950
Thereafter.................................................. 45,451
--------
$118,327
========
Interest expense totaled $14.3 million for the year ended December 31, 1998,
$13.2 million for the period from January 1, 1999 to December 7, 1999,
$2.1 million for the period from December 8, 1999 to December 31, 1999 and
$12.9 million for the year ended December 31, 2000.
UNAUDITED UPDATE:
On July 18, 2001, we completed our initial public offering, issuing 7,500,000
shares of voting common stock at $12.50 per share, the net proceeds of which
were $84.8 million after deducting underwriting discounts and offering expenses.
The Company used the net proceeds of the initial public offering to repay its
subordinated notes plus accrued interest, totaling $39.4 million, all of its
Euro-denominated senior credit facility plus interest, totaling approximately
$14.0 million, and approximately $31.4 million of its dollar-denominated senior
credit facility. Simultaneous with the closing of the offering, all of the
Company's outstanding mandatorily redeemable, convertible preferred stock, plus
accrued dividends, was converted into 19,602,799 shares of common stock. Also in
connection with the offering, the remaining senior subordinated notes totaling
approximately $13.1 million aggregate principal amount, which were held by
Warburg Pincus, were converted into 1,125,000 shares of non-voting common stock.
On August 1, 2001, the Company entered into a new senior credit facility with a
syndicate of commercial banks. The new senior credit facility consists of
$20 million in term loans and an unused revolving loan facility of up to
$60 million. Upon entering into
F-24
Wright Medical Group, Inc.
Notes to Consolidated Financial Statements (Continued)
10. Debt: (Continued)
the new senior credit facility, the Company used $20 million in term loan
proceeds from the new facility and existing cash balances to repay all remaining
amounts outstanding plus accrued interest, totaling approximately
$22.9 million, under the previous dollar-denominated senior credit facility.
Thus, following the initial public offering, the use of proceeds and related
transactions as described above, the Company has $20 million of debt
outstanding, excluding capitalized lease obligations.
Borrowings under the new senior credit facility are guaranteed by the Company's
subsidiaries and collateralized by all of the assets of Wright Medical
Technology, Inc. and the other domestic subsidiaries. The new credit facility
contains customary covenants including, among other things, restrictions on the
Company's ability to pay dividends, prepay debt, incur additional debt and sell
assets. The new credit facility also requires the Company to meet certain
financial tests, including a consolidated leverage (or debt-to-equity) ratio
test and a consolidated fixed charge coverage ratio test. At the Company's
option, borrowings under the new credit facility bear interest either at a rate
equal to a fixed base rate plus a spread of .75% to 1.25% or at a rate equal to
an adjusted LIBOR plus a spread of 1.75% to 2.25%, depending on the Company's
consolidated leverage ratio.
In connection with the replacement of the Company's debt as described above, the
Company incurred an extraordinary charge of approximately $1.6 million
principally related to unamortized loan costs relating to that debt.
11. Capital Stock:
COMMON STOCK. The Company is authorized to issue up to 100,000,000 shares of
Common Stock. The Company has 70,586,072 shares of Common Stock available for
future issuance at December 31, 2000.
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK. Convertible preferred stock
outstanding consists of the following (in thousands except par value):
---------------------------------------------------------------------------------
DECEMBER 31,
-------------------
1999 2000
-------- --------
Series A convertible, mandatorily redeemable preferred
stock, $.01 par value (shares authorized -- 50,000, issued
and outstanding -- 14,434 in 1999 and 14,434 in 2000)..... $45,885 $45,885
Series B convertible, mandatorily redeemable preferred
stock, $.01 par value (shares authorized -- 30,000, issued
and outstanding -- 7,890 in 1999 and 7,513 in 2000)....... 24,982 23,789
Series C convertible, mandatorily redeemable preferred
stock, $.01 par value (shares authorized -- 20,000, issued
and outstanding -- none in 1999 and 5,364 in 2000)........ -- 21,580
------- -------
$70,867 $91,254
======= =======
The Company is authorized to issue up to 50,000,000 shares of Series A
Convertible Preferred Stock (the Series A Preferred Stock). The holders of
Series A Preferred Stock are entitled to the number of votes equal to the number
of shares of Common Stock into which each such share of Series A Preferred Stock
is convertible. Each share of Series A Preferred Stock may be converted at any
time at the option of the holder into shares of Common Stock at the Series A
Conversion Rate, as defined, in the Company's Certificate of Incorporation. The
Series A Preferred Stock is mandatorily convertible into shares of Common Stock
at the Series A Conversion Price at any time upon the closing of an underwritten
public offering. The Company is required to redeem one third of the then
outstanding shares of Series A Preferred Stock on the 8th day of December of
each of the years 2006 through 2008 at a price equal to the Series A Conversion
Price ($4.35 per share), plus accrued but unpaid dividends. Series A Preferred
stockholders are entitled to receive dividends at 6% per year. The dividends are
cumulative and compound quarterly. In the event of any liquidation, dissolution
or winding up of the Company, the holders of Series A Preferred Stock are
entitled to a preferential distribution to be paid out of the assets of the
Company available for distribution after payment of all debts and liabilities of
the Company. At December 31, 2000, the aggregate preferential distribution for
the Series A Preferred Stock approximates $48.8 million, including accrued and
unpaid dividends of approximately $2.9 million.
F-25
Wright Medical Group, Inc.
Notes to Consolidated Financial Statements (Continued)
11. Capital Stock: (Continued)
The Company is authorized to issue up to 30,000,000 shares of Series B
Non-Voting Convertible Preferred Stock (the Series B Preferred Stock). Each
share of Series B Preferred Stock may be converted at any time at the option of
the holder into shares of Common Stock at the Series B Conversion Rate, as
defined, in the Company's Certificate of Incorporation. The Company is required
to redeem one third of the then outstanding shares of Series B Preferred Stock
on the 8th day of December of each of the years 2006 through 2008 at a price
equal to the Series B Conversion Price ($4.35 per share), plus accrued but
unpaid dividends. Series B Preferred stockholders are entitled to receive
dividends at 6% per year. The dividends are cumulative and compound quarterly.
In the event of any liquidation, dissolution or winding up of the Company, the
holders of Series B Preferred Stock are entitled to a preferential distribution
to be paid out of the assets of the Company available for distribution after
payment of all debts and liabilities of the Company. At December 31, 2000, the
aggregate preferential distribution for the Series B Preferred Stock
approximates $25.3 million, including accrued and unpaid dividends of
approximately $1.5 million.
The Company is authorized to issue up to 20,000,000 shares of Series C
Convertible Preferred Stock (the Series C Preferred Stock). Each share of
Series C Preferred Stock may be converted at any time at the option of the
holder into shares of Common Stock at the Series C Conversion Rate, as defined,
in the Company's Certificate of Incorporation. The Company is required to redeem
one third of the then outstanding shares of Series C Preferred Stock on the 8th
day of December of each of the years 2006 through 2008 at a price equal to the
Series C Conversion Price ($4.35 per share), plus accrued but unpaid dividends.
Series C Preferred stockholders are entitled to receive dividends at 6% per
year. The dividends are cumulative and compound quarterly. In the event of any
liquidation, dissolution or winding up of the Company, the holders of Series C
Preferred Stock are entitled to a preferential distribution to be paid out of
the assets of the Company available for distribution after payment of all debts
and liabilities of the Company. At December 31, 2000, the aggregate preferential
distribution for the Series C Preferred Stock approximates $8.7 million,
including accrued and unpaid dividends of approximately $178,000.
During 2000, the Company issued Series C Preferred Stock to both management and
existing investors. The issuance of this stock to management resulted in a stock
based compensation expense of $3.8 million for the difference between the deemed
fair value of the stock for accounting purposes and the issuance price of the
Series C Preferred Stock. Additionally, a deemed preferred stock dividend of
$13.1 million was incurred by the Company for the issuance of this stock to the
existing investors.
Currently, dividend rights pursuant to each series of preferred stock are
restricted by the Company's senior indebtedness (See Note 10).
UNAUDITED UPDATE:
In July 2001, in connection with the Company's initial public offering all then
outstanding shares of the Company's preferred stock were converted into shares
of common stock at a conversion price of $4.35 per share.
WARRANTS. In connection with the December 1999 recapitalization, the Company
issued warrants to stockholders to purchase an aggregate of 727,273 shares of
the Company's Common Stock at an exercise price of $4.35 per share. The fair
value of these warrants at the time of the issuance of $420,000 was recorded as
additional paid-in-capital. The exercise price and the number of shares that can
be acquired through the warrants are subject to adjustment in certain situations
to prevent dilution of the warrants. The warrants are exercisable at any time
after issuance and, unless exercised, expire ten years from the date of
issuance. The warrants do not entitle the holders to any voting rights. The
holders of warrants are entitled to share in the assets of the Company in the
event of reorganization, consolidation, merger, or sale of the Company's assets
on the same basis as holders of Common Stock. In the case of certain
consolidations or mergers of the Company, or the sale of all or substantially
all of the assets of the Company, each warrant shall be exercisable for the
right to receive the same consideration to which such holder would have been
entitled as a result of such consolidation, merger or sale had the warrants been
exercised immediately prior thereto. No warrants were exercised during the
period from December 8, 1999 to December 31, 1999 and the year ended
December 31, 2000.
The Predecessor Company had two classes of common stock and three classes of
preferred stock authorized for issuance. The preferred stock accumulated
dividends at rates ranging from 11% to 24.97% during the year ended
December 31, 1998 and for the period from January 1, 1999 to December 7, 1999.
Dividend amounts accrued but not paid during the year ended December 31,
F-26
Wright Medical Group, Inc.
Notes to Consolidated Financial Statements (Continued)
11. Capital Stock: (Continued)
1998 and for the period from January 1, 1999 to December 7, 1999 were
$13.9 million and $14.1 million, respectively. In connection with the Company's
acquisition of the Predecessor Company's common and preferred stock, all accrued
and unpaid preferred stock dividends approximating $39.5 million were
discharged.
12. Stock Option Plan:
During 1998 and the period from January 1, 1999 to December 7, 1999, the
Predecessor Company had two fixed stock option plans for employees, two stock
option plans for non-employees, which principally included the distributors of
the Predecessor Company's products, and a distributor stock purchase plan.
Generally, Wright's stock option plans granted options to purchase Common Stock
and, in certain instances, Wright's Series A Preferred Stock. Under these two
fixed stock option plans, options generally became exercisable in installments
of 25% annually in each of the first through fourth anniversaries of the grant
date and had a maximum term of ten years. Under the fixed stock option plans,
the exercise price of each option equaled the market price, as internally
determined based on certain factors, of Wright's respective stock on the date of
grant. During the year ended December 31, 1998 and for the period from
January 1, 1999 to December 7, 1999, the Predecessor Company expensed $176,000
and $523,000, respectively, related to the non-employee stock option plans.
Effective with the acquisition of Wright by the Company, the stock option plans
and distributor purchase plan were terminated.
On December 7, 1999, the Company approved and adopted the 1999 Equity Incentive
Plan (the "Plan"). The Plan authorizes the granting of options to purchase up to
4,500,000 shares of Common Stock and 160,000 shares of Series A Preferred Stock.
Under the Plan, options to purchase Common Stock generally are exercisable in
increments of 25% annually in each of the first through fourth anniversaries of
the date of grant. Options to purchase Series A Preferred Stock are immediately
exercisable upon issuance. The options expire after ten years.
A summary of the Company's stock option activity is as follows (shares in
thousands):
----------------------------------------------------------------------------------------------------
COMMON STOCK PREFERRED STOCK
---------------------- ----------------------
WEIGHTED WEIGHTED
AVG. AVG.
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
-------- ----------- -------- -----------
Balance, December 7, 1999.......................... -- -- -- --
Granted............................................ 291 $ 4.35 116 $ 0.87
Exercised.......................................... -- -- -- --
Forfeited or expired............................... -- -- -- --
----- ----------- -------- -----------
Outstanding at December 31, 1999................... 291 $ 4.35 116 $ 0.87
Granted............................................ 2,521 $ 4.35 -- --
Exercised.......................................... -- -- -- --
Forfeited or expired............................... (299) $ 4.35 -- --
----- ----------- -------- -----------
Outstanding at December 31, 2000................... 2,513 $ 4.35 116 $ 0.87
===== =========== ======== ===========
As of December 31, 2000, there were options for 72,734 shares of Common Stock
exercisable at a weighted average price of $4.35 per share. All of the options
to purchase Series A Preferred Stock are exercisable at December 31, 2000. The
weighted average remaining contractual life for all options to purchase Common
Stock and Series A Preferred Stock is 9.2 years.
As permitted by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the
Company applies APB Opinion 25 and related interpretations in accounting for its
stock option plan. Accordingly, compensation cost has been recognized only to
the extent that the fair market value of the stock exceeds the exercise price of
the stock option at the date of the grant. Had compensation cost for the
Company's stock-based compensation plans been determined based on the fair value
of the stock options at the grant dates for awards under those plans consistent
with SFAS No. 123, the Company's net loss for the period December 8, 1999 to
December 31,
F-27
Wright Medical Group, Inc.
Notes to Consolidated Financial Statements (Continued)
12. Stock Option Plan: (Continued)
1999 and the year ended December 31, 2000 would have been increased to the
following pro forma amounts (in thousands, except per share amounts):
----------------------------------------------------------------------------------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED JANUARY 1 TO DECEMBER 8 TO YEAR ENDED
DECEMBER 31, DECEMBER 7, DECEMBER 31, DECEMBER 31,
1998 1999 1999 2000
------------ ------------ ------------- ------------
Net loss:
As reported................................. $ (24,171) $ (20,456) $ (19,899) $ (39,493)
Pro forma................................... $ (24,932) $ (20,820) $ (19,930) $ (40,408)
Basic and diluted net loss per share:
As reported................................. $(27,918.17) $ (3,405.71)
Pro forma................................... $(27,961.17) $ (3,460.40)
Pro forma basic and diluted net loss per share
(unaudited):
As reported................................. $ (2.29)
Pro forma................................... $ (2.34)
The fair value of each option is estimated on the date of grant using the
minimum value methodology promulgated by SFAS No. 123. This methodology is used
as the Company's shares are not presently publicly traded. The weighted average
fair value in excess of intrinsic value of the Company's options was $3.14 per
share for the period from December 8, 1999 to December 31, 1999 and $2.41 per
share at December 31, 2000. In applying the minimum value methodology, the
Company used a risk free interest rate of 3.38% for 1998, 4.25% for the period
from December 8, 1999 to December 31, 1999 and rates between 4.25% and 6.5% in
2000 with an expected option life of 10 years for 1998 and 7 years for the 1999
and 2000 periods. Additionally, the Company assumed a dividend yield of zero
percent and a volatility of zero percent. The Predecessor Company did not grant
options in the period from January 1 to December 7, 1999. Upon completion of the
Company's initial public offering, the value of the options will be calculated
using the Black Scholes method in accordance with SFAS 123.
DISTRIBUTOR STOCK PURCHASE PLAN. In September 2000, a group of independent
distributors for the Company was granted a total of 21,182 Common Stock options
under the Plan. The distributors were given options to purchase Common Stock,
exercisable in 25% increments on the first through fourth anniversaries of the
date of grant, at $4.35 per share. The options expire after ten years. In
addition, a group of independent distributors was granted a total of 46,846
shares of Common Stock under the Plan.
In connection with the issuance of certain stock options to employees and the
distributor stock grant discussed above, the Company incurred a stock-based
compensation liability in the aggregate amount of $4.0 million representing the
difference between the deemed fair value of the Company's Common Stock for
accounting purposes and the exercise price of stock or stock options at the date
of grant. The Company will recognize this stock-based compensation over the
respective vesting period. For the year ended December 31, 2000, stock-based
compensation expense of $1.2 million was recorded in the accompanying statement
of operations related to these stock options and stock grants. As of
December 31, 2000, the remaining stock-based compensation will be recognized as
follows: $919,000 in 2001, $783,000 in 2002, $706,000 in 2003 and $426,000 in
2004. The amount of the remaining stock-based compensation expense to be
recorded in future periods could decrease if the related options are forfeited.
F-28
Wright Medical Group, Inc.
Notes to Consolidated Financial Statements (Continued)
13. Income Taxes:
The components of the Company's loss before income taxes are as follows (in
thousands):
-----------------------------------------------------------------------------------------------------
PREDECESSOR COMPANY COMPANY
------------------------------------ -------------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED JANUARY 1 TO DECEMBER 8 TO YEAR ENDED
DECEMBER 31, 1998 DECEMBER 7, 1999 DECEMBER 31, 1999 DECEMBER 31, 2000
----------------- ---------------- ----------------- -----------------
Domestic............... $(23,839) $(21,654) $(17,619) $(29,608)
Foreign................ (230) 1,388 (2,305) (8,344)
-------- -------- -------- --------
Loss before income
taxes................ $(24,069) $(20,266) $(19,924) $(37,952)
======== ======== ======== ========
The components of the provision (benefit) for income taxes are as follows (in
thousands):
----------------------------------------------------------------------------------------------------------
PREDECESSOR COMPANY COMPANY
------------------------------------ -------------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED JANUARY 1 TO DECEMBER 8 TO YEAR ENDED
DECEMBER 31, 1998 DECEMBER 7, 1999 DECEMBER 31, 1999 DECEMBER 31, 2000
----------------- ---------------- ----------------- -----------------
Current provision (benefit):
Domestic:
Federal................. $ -- $(2,482) $ (173) $ (376)
State................... -- (304) (22) (46)
Foreign................... (35) 190 (723) 392
Deferred provision
(benefit):
Domestic:
Federal................. (6,363) (3,544) (1,738) (9,050)
State................... (780) (434) (212) (1,109)
Foreign................... (1,394) -- (122) (3,354)
Adjustment to valuation
allowance................. 8,674 6,764 2,965 15,084
------- ------- ------- --------
Total....................... $ 102 $ 190 $ (25) $ 1,541
======= ======= ======= ========
F-29
Wright Medical Group, Inc.
Notes to Consolidated Financial Statements (Continued)
13. Income Taxes: (Continued)
A reconciliation of the statutory federal income tax provision (benefit) to the
Company's actual income tax provision (benefit) is as follows (in thousands):
-----------------------------------------------------------------------------------------------------
PREDECESSOR COMPANY COMPANY
------------------------------------ -------------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED JANUARY 1 TO DECEMBER 8 TO YEAR ENDED
DECEMBER 31, 1998 DECEMBER 7, 1999 DECEMBER 31, 1999 DECEMBER 31, 2000
----------------- ---------------- ----------------- -----------------
Income tax benefit at
statutory rate....... $ (8,218) $ (6,890) $ (6,774) $(12,904)
State tax benefit...... (958) (527) (518) (987)
Change in valuation
allowance............ 8,674 6,764 2,965 15,084
Write-off of acquired
in-process research
and development...... -- -- 3,989 --
Goodwill
amortization......... 556 510 14 300
Other, net............. 48 333 299 48
-------- -------- -------- --------
Total.................. $ 102 $ 190 $ (25) $ 1,541
======== ======== ======== ========
The significant components of the Company's deferred tax assets and liabilities
as of December 31, 1999 and 2000 are as follows (in thousands):
-----------------------------------------------------------------------------------------------
DECEMBER 31, 1999 DECEMBER 31, 2000
----------------- -----------------
Deferred tax assets:
Operating loss carryforwards............................ $29,593 $29,447
Reserves and allowances................................. 12,900 14,095
Amortization............................................ 10,342 8,841
Other................................................... 5,970 7,523
Valuation allowance..................................... (25,285) (40,369)
------- -------
Total deferred tax assets............................... 33,520 19,537
======= =======
Deferred tax liabilities:
Depreciation............................................ 1,742 2,137
Inventory write-up...................................... 11,232 --
Acquired intangible assets.............................. 15,597 13,425
Other................................................... 3,418 3,655
------- -------
Total deferred tax liabilities.......................... 31,989 19,217
------- -------
Net deferred tax assets................................. $ 1,531 $ 320
======= =======
The Company has provided a valuation allowance against all of its net deferred
tax assets for United States federal income tax purposes and a portion of its
net deferred tax assets for foreign income tax purposes because, given the
Company's history of operating losses, the realizability of these assets is
uncertain. The Company's assessment of the need for a valuation allowance could
change in the future based on the Company's future operating results.
At December 31, 2000, the Company has net operating loss carryforwards for U.S.
federal income tax purposes of approximately $57.7 million, which expires in
2010 through 2018. Additionally, the Company has credit carryforwards of
approximately $1.1 million, which expire through 2010. The use of the net
operating loss carryforwards and credit carryforwards is subject to annual
limitations.
F-30
Wright Medical Group, Inc.
Notes to Consolidated Financial Statements (Continued)
13. Income Taxes: (Continued)
At December 31, 2000, the Company has foreign net operating loss carryforwards
of approximately $19.5 million, which expire in 2003 through 2006. The use of
the net operating loss carryforwards is subject to annual limitations.
14. Employee Benefit Plans:
The Company sponsors a defined contribution plan under Section 401(k) of the
Internal Revenue Code, which covers employees who are 21 years of age and over.
Under this plan, the Company matches voluntary employee contributions at a rate
of 100% for the first 2% of an employee's annual compensation and at a rate of
50% for the next 2% of an employee's annual compensation. Employees vest in the
Company's contributions after five years of service with the Company. The
Company's expense related to the plan was $550,000 in 2000. The Company's
expense related to the plan was not material for the period from December 8,
1999 to December 31, 1999.
Prior to its acquisition by the Company, the Predecessor Company sponsored a
defined contribution plan under Section 401(k) of the Internal Revenue Code,
which covered employees who were 21 years of age and over. The Predecessor
Company had the option to contribute annually to the plan shares of the
Predecessor Company's stock as determined by the Board of Directors and matched
employee's voluntary contributions at rates of 100% of the first 2% of an
employee's annual compensation, and 50% of the next 2% of an employee's annual
compensation. Employees vested in the Predecessor Company's contributions after
five years. The Predecessor Company's expense related to this plan was
approximately $548,000 for the year ended December 31, 1998 and $500,000 for the
period from January 1, 1999 to December 7, 1999.
15. Commitments and Contingencies:
The Company leases certain equipment under non-cancelable operating leases.
Rental expense under operating leases approximated $1.3 million for the year
ended December 31, 1998, $1.0 million for the period from January 1, 1999 to
December 7, 1999, $56,000 for the period from December 8, 1999 to December 31,
1999 and $1.7 million for the year ended December 31, 2000. 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, 2000 (in thousands):
-----------------------------------------------------------------------
OPERATING
YEAR LEASES
---- ---------
2001........................................................ $1,668
2002........................................................ 1,387
2003........................................................ 759
2004........................................................ 387
2005........................................................ 240
Thereafter.................................................. 134
------
$4,575
======
On June 30, 1993, the Predecessor Company acquired substantially all the assets
of the large joint orthopaedic implant business from Dow Corning Corporation
(DCC). DCC retains liability for matters arising from certain conduct of DCC
prior to June 30, 1993. As such, DCC has agreed to indemnify the Predecessor
Company against all liability for all products manufactured prior to the
acquisition except for products provided under the Predecessor Company's 1993
agreement with DCC pursuant to which the Predecessor Company purchased certain
small joint orthopaedic implants for worldwide distribution.
F-31
Wright Medical Group, Inc.
Notes to Consolidated Financial Statements (Continued)
15. Commitments and Contingencies: (Continued)
The Predecessor Company was notified in May 1995 that DCC, which filed for
reorganization under Chapter 11 of the U.S. Bankruptcy Code, would no longer
defend the Predecessor Company in such matters until it received further
direction from the bankruptcy court. Based on the most recent plan of
reorganization submitted to the court, it appears that the Predecessor Company
would be considered an unsecured creditor and, under the terms of the plan,
would receive 24% of any such claim as a cash payment with the remainder to be
paid by a senior note due within ten years. There are several appeals regarding
the confirmed plan of reorganization pending before the U.S. District Court in
Detroit, Michigan, which have delayed implementation of the plan.
There can be no assurance that DCC will indemnify the Predecessor Company or the
Company on any claims in the future. Although neither the Predecessor Company
nor the Company maintains insurance for claims arising on products sold by DCC,
the Company does not believe the outcome of any of these matters will have a
material adverse effect on the Company's financial position or results of
operations.
In January 1996, the Predecessor Company entered into an agreement with a
licensor of intellectual property (the "Licensor") to acquire an option to
purchase rights to patents, ideas and designs related to certain spinal product
designs. In January 1997, the Predecessor Company entered into an additional
agreement with the same Licensor to purchase rights to patents, ideas and
designs related to additional spinal product designs. Both agreements required
guaranteed royalties to be paid to the Licensor over a period of years.
In January 1999, the Predecessor Company entered into an exclusive license
agreement with a third party orthopaedic company whereby the Predecessor Company
sold its rights related to these spinal product designs for an up front
$3.5 million license fee and royalties based upon future product sales. The
Licensor filed a complaint in the United States District Court against the
Predecessor Company alleging breach of contract and other charges related to the
licensing of these spinal product designs to this third party. As this licensing
arrangement was contested by the Licensor, the Predecessor Company deferred
revenue on the $3.5 million license fee it had received.
As of December 31, 1999 and 2000, the Company had recorded a liability of
$7.5 million for the estimated amount of settlement, which included the
reclassification of the $3.5 million deferred license fee, in accrued expenses
and other current liabilities in the accompanying balance sheet. In
January 2001, the Company and the Licensor executed a settlement and release
agreement (the "S & R Agreement"). The Licensor and the Company agreed to
irrevocably release and discharge the other party from any previous claims
related to these spinal product designs. By February 28, 2001, the Company had
fully paid its obligation to the Licensor. A portion of the proceeds
($3.5 million) to settle this liability came from the escrow established in
connection with the acquisition of Wright (see Note 3).
During March 1998, the Company filed a complaint for injunctive relief in the
Chancery Court of Shelby County, Tennessee, against a former employee of the
Company. In the complaint, the Company alleged that this former employee
violated a "trade secrets" employment contract provision and had developed a
calcium sulfate bone void filler product to compete against the Company's
similar product. The court initially granted a temporary injunction barring the
defendant from participating in direct competition against the Company in the
calcium sulfate bone void filler market.
During 1999, the court set aside the temporary injunction and, in March 2000,
conducted a hearing on the defendant's charges from being wrongfully enjoined.
In May 2000, the court entered a judgment in favor of the defendant awarding the
defendant compensatory damages of $4.8 million and punitive damages of
$4.8 million. Additionally, the court awarded the defendant ongoing compensatory
damages of $408,000 per month for the next twelve months or until final
resolution of this case, whichever comes first, and assessed the Company for
related court costs.
In March 2000, Howmedica Osteonics Corp. served a lawsuit against the Company
alleging patent infringement. The lawsuit seeks an order of infringement,
injunctive relief, compensatory damages and various other costs and relief. The
Company believes it has strong defenses against this claim and intends to
vigorously defend this lawsuit. The Company also believes this claim is, in
part,
F-32
Wright Medical Group, Inc.
Notes to Consolidated Financial Statements (Continued)
15. Commitments and Contingencies: (Continued)
covered pursuant to the Company's patent infringement insurance. Management does
not believe that the outcome of this claim will have a material adverse effect
on the Company's financial position or results of operations.
In 1999, groundwater contamination was detected at our Arlington, Tennessee
facility. The Company is presently negotiating the terms of further
investigation with state environmental officials, however, based on the
Company's current assessment, it does not believe it will have a significant
effect on the Company's financial position and results of operations.
The Company is subject to various legal proceedings, product liability claims
and other matters which arise in the ordinary course of business. In the opinion
of management, the amount of liability, if any, with respect to these matters
will not materially affect the results of operations or financial position of
the Company.
In the Company's normal course of operations, it will enter into various royalty
agreements with third party surgeons and consultants. Minimum guaranteed
payments under royalty or other consultant agreements are as follows at
December 31, 2000 (in thousands):
----------------------------------------------------------------------
YEAR AMOUNT
---- --------
2001........................................................ $2,623
2002........................................................ 1,452
2003........................................................ 938
2004........................................................ 764
2005........................................................ 10
Thereafter.................................................. 38
------
$5,825
======
UNAUDITED UPDATE:
In December, 2001, the Tennessee Court of Appeals reversed, in part, the trial
court's ruling in the Company's case against a former employee of the Company.
The Court of Appeals reversed the punitive damages award and limited the total
damages to the amount of the injunction bond of $500,000. Within sixty
(60) days of the Court of Appeals decision, either our former employee or we may
seek permission to appeal the case to the Tennessee Supreme Court.
Management believes that if an adverse outcome related to this appeal did occur,
a portion of such judgment may be subject to reimbursement from the Company's
applicable insurance carrier. Accordingly, management does not believe that the
resolution of this matter will have a material adverse effect on the Company's
financial position or results of operations.
16. Segment Data:
The Company has one reportable segment, orthopaedic products, which includes the
design, manufacture and marketing of reconstructive joint devices and
bio-orthopaedic products. The Company manages its business primarily on a
geographic basis. These geographic business units consist of operations in the
United States, Europe and Other (which principally represents Canada, South
America, Mexico, Japan and the Pacific Rim). The Company evaluates performance
based on operating income of each geographic business unit. Identifiable assets
are those assets used exclusively in the operations of each business segment.
Revenues attributed to each geographic unit are based on the location in which
the sale originated.
F-33
Wright Medical Group, Inc.
Notes to Consolidated Financial Statements (Continued)
16. Segment Data: (Continued)
Net sales of orthopaedic products by category and information by geographic area
are as follows (in thousands):
----------------------------------------------------------------------------------------------------
PREDECESSOR COMPANY COMPANY
--------------------------- ----------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED JANUARY 1 TO DECEMBER 8 TO YEAR ENDED
DECEMBER 31, DECEMBER 7, DECEMBER 31, DECEMBER 31,
1998 1999 1999 2000
Net Sales by Product Line: ------------ ------------ ------------- ------------
Knees................................... $ 56,116 $ 52,753 $ 3,448 $ 62,889
Hips.................................... 28,330 23,596 1,912 47,690
Extremities............................. 13,675 13,774 836 17,271
Biologics............................... 4,869 7,367 896 20,996
Other................................... 3,982 3,704 884 8,706
-------- -------- -------- --------
Total................................... $106,972 $101,194 $ 7,976 $157,552
======== ======== ======== ========
Net Sales by Geographic Business Unit:
United States........................... $ 94,792 $ 90,589 $ 7,144 $113,323
Europe.................................. 8,837 7,499 714 41,018
Other................................... 3,343 3,106 118 3,211
-------- -------- -------- --------
Total................................... $106,972 $101,194 $ 7,976 $157,552
======== ======== ======== ========
Operating Income (Loss):
United States........................... $ (9,591) $ (7,878) $(16,193) $(19,731)
Europe.................................. 961 1,153 (1,637) (5,149)
Other................................... (111) 271 (118) 244
-------- -------- -------- --------
Total................................... $ (8,741) $ (6,454) $(17,948) $(24,636)
======== ======== ======== ========
-----------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31,
1999 2000
------------ ------------
Long-lived Assets:
United States............................................... $ 67,501 $68,488
Europe...................................................... 32,280 30,414
Other....................................................... 656 862
-------- -------
Total....................................................... $100,437 $99,764
======== =======
Sales to United States-based customers, aggregated $77.6 million,
$73.8 million, $5.7 million, and $95.0 million for the year ended December 31,
1998, for the period from January 1 to December 7, 1999, for the period from
December 8 to December 31, 1999, and for the year ended December 31, 2000,
respectively. These sales along with United States export sales are included in
United States sales in the above table.
17. Proposed Offering:
UNAUDITED UPDATE:
At completion of the Company's initial public offering, all outstanding
redeemable convertible preferred stock and related accrued dividends were
converted into shares of common stock.
F-34
Wright Medical Group, Inc.
Notes to Consolidated Financial Statements (Continued)
17. Proposed Offering: (Continued)
In January 2002, the Company's Board of Directors authorized management to
pursue a registration with the SEC to sell shares of the Company's common stock
to the public at an offering price to be determined.
18. Subsequent Events:
On April 11, 2001, the FDA sent the Company a "warning letter" stating that the
FDA believes ALLOMATRIX-TM- Injectable Putty is a medical device that is subject
to the premarket notification requirement. The Company believes that
ALLOMATRIX-TM- Injectable Putty and some of its other allograft-based products
are human tissue and therefore are not subject to FDA approval as a medical
device. The FDA has orally advised us that after reviewing our designation
request, it has decided to regulate ALLOMATRIX-TM- Injectable Putty as a medical
device. Upon official notification of this decision, we will submit a 510(k)
premarket notification for the product. We have continued to market
ALLOMATRIX-TM- Injectable Putty after receiving the warning letter, and we
intend to continue marketing and selling ALLOMATRIX-TM- Injectable Putty. There
can be no assurance that the 510(k) premarket notification that we intend to
submit will be cleared by the FDA in a timely manner or at all. Also, the FDA
may take enforcement action against us, including requiring us to modify or
cease distribution of ALLOMATRIX-TM- Injectable Putty, which would adversely
affect the Company's profitability. Although the Company is currently unable to
predict the outcome, management does not believe that the ultimate resolution of
this matter will materially adversely affect the Company's financial position or
operating results.
F-35
[LOGO]
PART II
Information Not Required In Prospectus
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than the
underwriting discounts and commissions, payable by WMG in connection with the
sale of common stock being registered. All amounts shown are estimates, except
the SEC registration fee, the NASD filing fees and the Nasdaq listing fee.
-----------------
ITEM AMOUNT TO BE PAID
---- -----------------
SEC registration fee........................................ $ 10,677.34
NASD fee.................................................... 12,105.80
Blue Sky fees and expenses.................................. 5,000.00
Legal fees and expenses..................................... 200,000.00
Accounting fees and expenses................................ 150,000.00
Printing expenses........................................... 225,000.00
Transfer agent fees......................................... 15,000.00
Miscellaneous............................................... 82,216.86
-----------------
Total. $ 700,000.00
=============
Item 14. Indemnification of Directors and Officers
Delaware Law and our amended and restated certificate of incorporation provide
that we will, under certain situations, indemnify any director, officer,
employee or agent of WMG made or threatened to be made a party to a proceeding,
by reason of the former or present official capacity of the person, against
judgments, penalties, fines, settlements and reasonable expenses, including
attorneys' fees, incurred by the person in connection with the proceeding if
certain statutory standards are met. Any person is also entitled, subject to
certain limitations, to payment or reimbursement of reasonable expenses in
advance of the final disposition of the proceeding. A proceeding means a
threatened, pending or completed civil, criminal, administrative, arbitration or
investigative proceeding, including one by or in the right of WMG. Reference is
made to Section 145 of the Delaware General Corporate Law for a full statement
of these indemnification rights.
We also maintain a directors and officers insurance policy pursuant to which our
directors and officers are insured against liability for actions in their
capacity as directors and officers.
Item 15. Recent Sales of Unregistered Securities
Since November 23, 1999, our date of incorporation, we have issued and sold the
following securities without registration under the Securities Act in reliance
on Section 4(2) of the Securities Act. The following information reflects the
two-for-one common stock split that occurred on August 8, 2000, immediately
prior to our initial issuance of series C preferred stock, and the 1 for 2.75
reverse common stock split that occurred on July 12, 2001, in connection with
our initial public offering:
1. In November 1999, we sold all of the then outstanding shares of our common
stock to Warburg Pincus at a cash price of $1.00 per share for a total price
of $10.00.
2. In connection with our acquisition of Wright Medical Technology, Inc. in
December 1999, we made the following issuances of securities:
- Warburg Pincus purchased 572 shares of our common stock at $.01 per share,
8,330,000 shares of our series A preferred stock at $3.17 per share,
4,970,000 shares of series B preferred stock at $3.17 per share,
$24,386,141 aggregate principal amount of 10% subordinated notes and a
warrant to purchase 345,455 shares of our common stock, for a total
purchase price of $66,500,000;
II-1
- Vertical Fund Associates, L.P. purchased 28 shares of our common stock at
$.01 per share, 700,000 shares of our series A preferred stock at $3.17
per share, $1,283,481 aggregate principal amount of 10% subordinated notes
and a warrant to purchase 18,182 shares of our common stock, for a total
purchase price of $3,500,000;
- PGI Investments Limited, was issued 1 share of our common stock, 21,932
shares of our series A preferred stock, a warrant to purchase 3,988 shares
of our common stock and $40,208 aggregate principal amount of 10%
subordinated notes, by operation of law as a result of the acquisition;
- Princes Gate Investors, L.P. was issued 15 shares of our common stock,
230,356 shares of our series A preferred stock, a warrant to purchase
41,883 shares of our common stock and $422,320 aggregate principal amount
of 10% subordinated notes, by operation of law as a result of the
acquisition of WMT;
- PGI Sweden AB was issued 1 share of our common stock, 21,932 shares of our
series A preferred stock, a warrant to purchase 3,988 shares of our common
stock and $40,208 aggregate principal amount of 10% subordinated notes, by
operation of law as a result of the acquisition of WMT;
- Marinbeach United S.A. was issued 1 share of our common stock, 10,980
shares of our series A preferred stock, a warrant to purchase 1,996 shares
of our common stock and $20,131 aggregate principal amount of 10%
subordinated notes, by operation of law as a result of the acquisition of
WMT;
- California Public Employees' Retirement System was issued 103 shares of
our common stock, 1,554,800 shares of our series A preferred stock, a
warrant to purchase 282,691 shares of our common stock and $2,850,467
aggregate principal amount of 10% subordinated notes, by operation of law
as a result of the acquisition of WMT; and
- Certain of our employees were issued options to purchase 160,000 shares of
our series A preferred stock with a per share exercise price of $.63,
warrants to purchase 29,091 shares of our common stock and $293,333
aggregate principal amount of our 10% subordinated notes, in the
aggregate, by operation of law as a result of the acquisition of WMT.
3. In connection with our acquisition of Cremascoli Ortho Holding, S.A. in
December 1999, we made the following issuances of securities:
- Warburg Pincus purchased 3,180,374 shares of our series A preferred stock
at $3.17 per share, 2,919,626 shares of series B preferred stock at $3.17
per share and $11,184,621 aggregate principal amount of 10% subordinated
notes, for a total purchase price of $30,500,000;
- Vertical Fund Associates, L.P. purchased 300,000 shares of our series A
preferred stock at $3.17 per share and $550,063 aggregate principal amount
of 10% subordinated notes, for a total purchase price of $1,500,000; and
- Six former stockholders of Cremascoli were issued 84,027 shares of our
series A preferred stock and $166,042 of our 10% subordinated notes, in
the aggregate, by operation of law as a result of the acquisition of
Cremascoli by WMG.
4. In August 2000, we sold Warburg Pincus 9 shares of our common stock at $.01
per share, 1,200,010 shares of our series C preferred stock at $1.58 per
share and $1,100,111 aggregate principal amount of 10% subordinated notes,
for a total purchase price of $3,000,000 in cash.
5. In August 2000, we sold Vertical Fund Associates, L.P. 4 shares of our
common stock at $.01 per share, 600,005 shares of our series C preferred
stock at $1.58 per share and $550,055 aggregate principal amount of 10%
subordinated notes, for a total purchase price of $1,500,000 in cash.
6. In August 2000, we sold James T. Treace and Angeline G. Treace 6 shares of
our common stock at $.01 per share, 800,007 shares of our series C preferred
stock at $1.58 per share and $733,407 aggregate principal amount of 10%
subordinated notes, for a total purchase price of $2,000,000 in cash.
7. In August 2000, we sold F. Barry Bays 3 shares of our common stock at $.01
per share, 400,003 shares of our series C preferred stock at $1.58 per share
and $366,704 aggregate principal amount of 10% subordinated notes, for a
total purchase price of $1,000,000 in cash.
8. In August 2000, we sold John R. Treace 1 share of our common stock at $.01
per share, 200,002 shares of our series C preferred stock at $1.58 per share
and $183,352 aggregate principal amount of 10% subordinated notes, for a
total purchase price of $500,000 in cash.
II-2
9. In August 2000, we sold Thomas E. Timbie 1 share of our common stock at $.01
per share, 200,002 shares of our series C preferred stock at $1.58 per share
and $183,352 aggregate principal amount of 10% subordinated notes, for a
total purchase price of $500,000 in cash.
10. In August 2000, we sold James E. Thomas 4 shares of our common stock at $.01
per share, 600,005 shares of our series C preferred stock at $1.58 per share
and $550,055 aggregate principal amount of 10% subordinated notes, for a
total purchase price of $1,500,000 in cash.
11. In December 2000, we sold Jeffrey G. Roberts and Rebecca R. Roberts 30,000
shares of our series C preferred stock at $1.58 per share and $27,503
aggregate principal amount of 10% subordinated notes, for a total purchase
price of $75,000 in cash.
12. In December 2000, we sold Joyce B. Jones 4,000 shares of our series C
preferred stock at $1.58 per share and $3,667 aggregate principal amount of
10% subordinated notes, for a total purchase price of $10,000 in cash.
13. In December 2000, we sold John T. Treace 1 share of our common stock at $.01
per share, 200,002 shares of our series C preferred stock at $1.58 per share
and $183,352 aggregate principal amount of 10% subordinated notes, for a
total purchase price of $500,000 in cash.
14. In December 2000, we sold Holly J. Treace 7,900 shares of our series C
preferred stock at $1.58 per share and $7,242 aggregate principal amount of
10% subordinated notes, for a total purchase price of $19,750 in cash.
15. In December 2000, we sold Heather A. Treace 7,900 shares of our series C
preferred stock at $1.58 per share and $7,242 aggregate principal amount of
10% subordinated notes, for a total purchase price of $19,750 in cash.
16. In December 2000, we sold Jennie L. Dapas 7,900 shares of our series C
preferred stock at $1.58 per share and $7,242 aggregate principal amount of
10% subordinated notes, for a total purchase price of $19,750 in cash.
17. In December 2000, we sold Jennifer Walker 1,580 shares of our series C
preferred stock at $1.58 per share and $1,448 aggregate principal amount of
10% subordinated notes, for a total purchase price of $3,950 in cash.
18. In December 2000, we sold Alan Taylor 2,500 shares of our series C preferred
stock at $1.58 per share and $2,292 aggregate principal amount of 10%
subordinated notes, for a total purchase price of $6,250 in cash.
19. In December 2000, we sold Michael E. Kaufman 4,000 shares of our series C
preferred stock at $1.58 per share and $3,667 aggregate principal amount of
10% subordinated notes, for a total purchase price of $10,000 in cash.
20. In December 2000, we sold John T. Treace 7,900 shares of our series C
preferred stock at $1.58 per share and $7,242 aggregate principal amount of
10% subordinated notes, for a total purchase price of $19,750 in cash.
21. In December 2000, we sold John K. Bakewell 1 share of our common stock at
$.01 per share, 120,001 shares of our series C preferred stock at $1.58 per
share and $110,011 aggregate principal amount of 10% subordinated notes, for
a total purchase price of $300,000 in cash.
22. In December 2000, we sold Warren Haggard 6,000 shares of our series C
preferred stock at $1.58 per share and $5,501 aggregate principal amount of
10% subordinated notes, for a total purchase price of $15,000 in cash.
23. In December 2000, we sold Jack Parr, Ph.D. 10,000 shares of our series C
preferred stock at $1.58 per share and $9,168 aggregate principal amount of
10% subordinated notes, for a total purchase price of $25,000 in cash.
24. In December 2000, we sold Jason P. Hood 316 shares of our series C preferred
stock at $1.58 per share and $290 aggregate principal amount of 10%
subordinated notes, for a total purchase price of $790 in cash.
25. In December 2000, we sold Dekany Financial Ltd. 1 share of our common stock
at $.01 per share, 96,001 shares of our series C preferred stock at $1.58
per share and $88,009 aggregate principal amount of 10% subordinated notes,
for a total purchase price of $240,000 in cash.
26. In December 2000, we sold Giovanni Carollo 40,000 shares of our series C
preferred stock at $1.58 per share and $36,670 aggregate principal amount of
10% subordinated notes, for a total purchase price of $100,000 in cash.
27. In December 2000, we sold Kenneth Asset Corporation 1 share of our common
stock at $.01 per share, 64,001 shares of our series C preferred stock at
$1.58 per share and $58,673 aggregate principal amount of 10% subordinated
notes, for a total purchase price of $160,000 in cash.
II-3
28. In February 2001, we issued 5,453 shares of our common stock at $4.35 per
share, and $11,945 aggregate principal amount of 10% subordinated notes as a
result of the release of an environmental escrow.
29. In March 2001, we sold Robert Glen Coleman, our Senior Vice President of
Marketing and Business Development, 100,001 shares of our series C preferred
stock at $1.58 per share, 1 share of our common stock and $91,676 aggregate
principal amount of 10% subordinated notes, for a total purchase price of
$250,000.
30. From December 1999 through July 12, 2001, we granted options to employees
and distributors under our 1999 Equity Incentive Plan to purchase an
aggregate of 2,671,092 shares of common stock at a price of $4.35 per share
and 463,188 at a per share exercise price of $8.25. From July 13, 2001
through December 31, 2001, we granted 61,356 options at fair market value.
During this period, 347,056 shares were canceled upon termination of
employment. As of December 31, 2001, options to purchase 2,848,580 shares of
our common stock remain outstanding.
31. From December 1999 through December 31, 2001, we granted options to purchase
a total of 247,272 shares of our common stock to non-employee directors
under the 1999 Equity Incentive Plan at a per share exercise price of $4.35
and 29,090 at a per share exercise price of $8.25. None of these options had
been exercised as of December 31, 2001, and therefore, all remained
outstanding.
32. From December 1999 through December 31, 2001, we issued 69,688 shares of our
common stock and $227,948 in cash representing the cash equivalent of 52,356
shares of our common stock at $4.35 per share to distributors under the 1999
Equity Incentive Plan.
The above option grants were made in reliance on Rule 701 or Section 4(2) under
the Securities Act. With regard to our reliance upon the exemptions set forth in
the previous sentence, we made inquiries to establish that these sales qualified
for exemptions from the registration requirements. In particular, we confirmed
that:
- all offers of sales and sales were made by personal contact from our
officers or directors or other persons closely associated with us;
- each investor made representations that he or she was sophisticated in
relation to this investment and we have no reason to believe these
representations were incorrect;
- each purchaser gave assurance of investment intent and the certificates
for the shares bear a legend accordingly; and
- offers and sales within any offering were made to a limited number of
persons.
Item 16. Exhibits and Financial Statement Schedules
(A) EXHIBITS
See the Exhibit Index attached to this registration statement which is
incorporated herein by reference.
(B) FINANCIAL STATEMENT SCHEDULES.
See Financial Statement Schedules attached hereto as Schedule II.
Item 17. Undertakings.
(a) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the Delaware General Corporation Law, the
Certificate of Incorporation or Bylaws of the Registrant, the Purchase
Agreement, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission this indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding)
is asserted by a director, officer or controlling person in connection
with the securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether this indemnification by it is against public policy as expressed
in the Securities Act and will be governed by the final adjudication of
this issue.
II-4
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-5
Signatures
Pursuant to the requirements of the Securities Act of 1933, we have duly caused
this Amendment No. 1 to the Registration Statement on Form S-1 to be signed on
our behalf by the undersigned, thereunto duly authorized, in the city of
Arlington, Tennessee on this 13th day of February 2002.
WRIGHT MEDICAL GROUP, INC.
By: /s/ F. BARRY BAYS
---------------------------------------------------------
F. Barry Bays
PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities indicated, on February 13, 2002.
Signature Title Date
--------- ----- ----
/s/ F. BARRY BAYS President, Chief Executive Officer and
------------------------------------------- Director February 13, 2002
F. Barry Bays (Principal Executive Officer)
/s/ JOHN K. BAKEWELL Chief Financial Officer (Principal
------------------------------------------- Financial February 13, 2002
John K. Bakewell Officer and Principal Accounting Officer)
*
------------------------------------------- Chairman of the Board February 13, 2002
James T. Treace
*
------------------------------------------- Director February 13, 2002
Richard B. Emmitt
*
------------------------------------------- Director February 13, 2002
James E. Thomas
*
------------------------------------------- Director February 13, 2002
Thomas E. Timbie
*
------------------------------------------- Director February 13, 2002
Elizabeth H. Weatherman
II-6
John K. Bakewell, by signing his name below, signs this document on behalf of
each of the above-named persons specified by an asterisk (*), pursuant to a
power of attorney duly executed by such persons, filed with the Securities and
Exchange Commission in the Registrant's Registration Statement on Form S-1 on
January 29, 2002.
/s/ JOHN K. BAKEWELL
------------------------------------------- Attorney-in-fact
John K. Bakewell
II-7
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To WRIGHT MEDICAL GROUP, INC.
We have audited in accordance with generally accepting auditing standards, the
consolidated financial statements of Wright Medical Group, Inc. included in this
registration statement for the periods indicated in our report thereon. Our
report on the financial statements includes an explanatory paragraph with
respect to the change in the method of accounting for surgical instruments as
discussed in Note 2 to the financial statements. Our audit was made for the
purpose of forming an opinion on those statements taken as a whole. The
financial statement schedule listed under item 16(b) of this registration
statement is the responsibility of Wright Medical Group's management and is
presented for the purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. The
financial statement schedule has been subjected to the auditing procedures
applied in the audit of the basic financial statements and in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Memphis, Tennessee
July 9, 2001
II-8
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
The audit referred to in our report to Wright Medical Technology, Inc., dated
April 26, 1999, which is contained in the Prospectus constituting part of this
Registration Statement included the audit of the schedule listed under item
16(b) for the year ended December 31, 1998. This financial statement schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based upon our audit.
In our opinion, such schedule presents fairly, in all material respects, the
information set forth therein.
BDO SEIDMAN, LLP
Memphis, Tennessee
April 26, 1999
II-9
Schedule II--Valuation and Qualifying Accounts Allowance for Doubtful Accounts
Wright Medical Group, Inc.
BALANCE AT CHARGED TO FROM
BEGINNING COSTS AND PURCHASE BALANCE AT
OF PERIOD EXPENSES TRANSACTIONS DEDUCTIONS END OF PERIOD
---------- ---------- ------------ ---------- -------------
IN THOUSANDS
Description
Allowance for doubtful accounts deducted from
accounts receivable
For the period ended:
December 31, 2000................................ $ 1,607 $ 1,121 -- $ 432 $ 2,296
-------- -------- ---------- --------- -----------
December 31, 1999................................ $ 527 $ 24 $ 1,070 $ 14 $ 1,607
-------- -------- ---------- --------- -----------
December 7, 1999................................. $ 1,781 $ 145 -- $ 1,399 $ 527
-------- -------- ---------- --------- -----------
December 31, 1998................................ $ 306 $ 1,490 -- $ 15 $ 1,781
-------- -------- ---------- --------- -----------
Sales returns and allowance:
For the period ended:
December 31, 2000................................ $ 681 $ 204 -- -- $ 885
-------- -------- ---------- --------- -----------
December 31, 1999................................ $ 731 $ (50) -- -- $ 681
-------- -------- ---------- --------- -----------
December 7, 1999................................. $ 838 $ (107) -- -- $ 731
-------- -------- ---------- --------- -----------
December 31, 1998................................ $ 744 $ 94 -- -- $ 838
-------- -------- ---------- --------- -----------
II-10
Exhibit Index
EXHIBIT NO. DESCRIPTION
----------- -----------
1.1 Form of Underwriting Agreement.*
2.1 Amended and Restated Agreement and Plan of Merger, dated as
of December 7, 1999, among Wright Medical Technology, Inc.,
Warburg Pincus Equity Partners, LP, Wright Acquisition
Corp., Inc. and Wright Medical Group, Inc.+
3.1 Form of Fourth Amended and Restated Certificate of
Incorporation of Wright Medical Group, Inc.+
3.2 Form of Amended and Restated Bylaws of Wright Medical Group,
Inc.+
4.1 Registration Rights Agreement, dated December 7, 1999, among
the investors listed on Schedule I to the Agreement and
Wright Medical Group, Inc.+
4.2 Investor Rights Agreement, dated December 22, 1999, among
the investors listed on Schedule I to the Agreement,
Warburg, Pincus Equity Partners, L.P., and Wright Medical
Group, Inc.+
4.3 Form of Stock Certificate.+
5.1 Opinion of Willkie Farr & Gallagher.*
10.1 Stockholders Agreement, dated December 7, 1999, among the
stockholders, the investors listed on Schedule I to the
Agreement and Wright Medical Group, Inc.+
10.2 Amendment No. 1 to the Stockholders Agreement, dated
August 7, 2000.+
10.3 Form of Employment Agreement between Wright Medical Group,
Inc. and certain of its Executive Officers.+
10.4 1999 Equity Incentive Plan.+
10.5 Form of Incentive Stock Option Agreement.+
10.6 Form of Non-Qualified Stock Option Agreement.+
10.7 Credit Agreement, dated as of August 1, 2001, among Wright
Medical Group, Inc., Wright Medical Technology, Inc., the
Lenders named therein, The Chase Manhattan Bank, as
Administrative Agent, Collateral Agent and Issuing Bank,
Credit Suisse First Boston, as Co-Syndication Agent and U.S.
Bank National Association, as Co-Syndication Agent. ++
10.8 Form of Indemnification Agreement between the Registrant and
its Directors and Executive Officers.+
10.9 Form of Warrant.+
10.10 Amendment No. 1 to the Incentive Stock Option Agreement.+
10.11 Form of Sales Representative Award Agreement under the 1999
Equity Incentive Plan.+
10.12 Form of Non-Employee Director Stock Option Agreement under
the 1999 Equity Incentive Plan.+
10.13 Form of Amended and Restated 1999 Equity Incentive Plan.+
16.1 Acknowledgment of Ernst & Young LLP.+
16.2 Acknowledgment of BDO Seidman, LLP.+
21.1 List of Subsidiaries.+
23.1 Consent of BDO Seidman, LLP.
23.2 Consent of Arthur Andersen LLP.
23.4 Consent of Willkie Farr & Gallagher (included in Exhibit
5.1).*
24.1 Power of Attorney.**
------------------------
+ Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-59732).
++ Incorporated by reference to the Company's Current Report on Form 8-K,
filed August 3, 2001.
* To be filed by Amendment.
** Previously filed.
II-11