FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
-------------
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number 0-32883
-------
WRIGHT MEDICAL GROUP, INC.
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-4088127
-------- ----------
(State or other jurisdiction (IRS employer
of incorporation) Identification number)
5677 Airline Road
Arlington, Tennessee 38002
-------------------- -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number (901) 867-9971
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
|X| Yes |_| No
As of August 6, 2001 a total of 22,823,509 shares of voting common stock,
par value $.01 per share, of the registrant were outstanding.
<Page>
WRIGHT MEDICAL GROUP, INC.
INDEX
PAGE
NUMBER
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets as of December 31, 2000 and
June 30, 2001, and Pro Forma
Consolidated Balance Sheet as of June 30, 2001 1
Consolidated Statements of Operations for the three and
six months ended June 30, 2001 and 2000 2
Consolidated Statements of Cash Flows for the six months
ended June 30, 2001 and 2000 3
Notes to Consolidated Financial Statements 4-7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-21
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 22
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 23
Item 2 - Change in Securities and Use of Proceeds 23
Item 3 - Defaults Upon Senior Securities 23
Item 4 - Submission of Matters to a Vote of Security Holders 23
Item 5 - Other Information 23
Item 6 - Exhibits and Reports on Form 8-K 24
SIGNATURES 25
<Page>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WRIGHT MEDICAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
PRO FORMA (1)
DEC. 31, 2000 JUNE 30, 2001 JUNE 30, 2001
------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
----------- -----------
ASSETS:
Current Assets:
Cash and cash equivalents $ 16,300 $ 6,864 $ 6,864
Restricted cash 15,483 10,668 10,668
Accounts receivable, net 27,381 30,117 30,117
Inventories 37,894 36,505 36,505
Prepaid expenses 2,052 2,300 2,300
Deferred income taxes 13,259 12,625 12,625
Other current assets 2,823 3,155 3,155
--------- --------- ---------
Total current assets 115,192 102,234 102,234
--------- --------- ---------
Property, plant and equipment, net 45,083 46,844 46,844
Intangible assets, net 54,681 51,119 51,119
Other assets 2,008 1,378 1,378
--------- --------- ---------
$ 216,964 $ 201,575 $ 201,575
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 7,936 $ 8,954 $ 8,954
Accrued expenses and other current liabilities 44,840 36,071 36,071
Current portion of long-term obligations 8,396 9,658 9,658
--------- --------- ---------
Total current liabilities 61,172 54,683 54,683
--------- --------- ---------
Long-term obligations 112,283 106,745 106,745
Preferred stock dividends 4,631 6,963 --
Deferred income taxes 12,939 12,366 12,366
Other liabilities 11,661 10,241 10,241
--------- --------- ---------
Total liabilities 202,686 190,998 184,035
--------- --------- ---------
Mandatorily redeemable convertible preferred stock,
$.01 par value, shares authorized - 100,000,
shares issued and outstanding - 27,311 and 27,426
in 2000 and 2001; aggregate preferential distribution
of $85,312 at June 30, 2001 91,254 91,435 --
Stockholders' equity (deficit):
Common stock, voting, $.01 par value, shares
Authorized - 100,000, shares issued and
outstanding - 47 in 2000, 70 in 2001 and 13,641 in
pro forma 2001 1 2 138
Common stock, non-voting, $.01 par value,
shares authorized - 100,000; shares issued
and outstanding - 5,983 in pro forma 2001 -- -- 60
Additional paid-in capital 4,769 8,563 106,765
Deferred compensation (2,834) (5,232) (5,232)
Accumulated other comprehensive income (loss) (1,802) (3,721) (3,721)
Accumulated deficit (77,110) (80,470) (80,470)
--------- --------- ---------
Total stockholders' equity (deficit) (76,976) (80,858) 17,540
--------- --------- ---------
$ 216,964 $ 201,575 $ 201,575
========= ========= =========
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
(1) PRO FORMA PRESENTATION GIVES EFFECT TO THE CONVERSION OF PREFERRED STOCK AND
PREFERRED STOCK DIVIDENDS INTO COMMON STOCK. (SEE NOTE 4).
1
<Page>
WRIGHT MEDICAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2001 2000 2001 2000
---------- ----------- ---------- -----------
Net sales $ 42,369 $ 39,260 $ 87,702 $ 81,159
Cost of sales 12,981 21,064 26,653 43,295
---------- ----------- ---------- -----------
Gross profit 29,388 18,196 61,049 37,864
Operating expenses:
Selling, general and administrative 23,246 20,469 46,551 41,619
Research and development 2,486 2,258 4,600 4,047
Amortization of intangible assets 1,355 1,397 2,652 2,794
Stock-based expense (1) 443 19 1,101 21
---------- ----------- ---------- -----------
Total operating expenses 27,530 24,143 54,904 48,481
---------- ----------- ---------- -----------
Income/(loss) from operations 1,858 (5,947) 6,145 (10,617)
Interest expense, net 2,903 2,960 6,023 6,070
Other expense, net 62 283 489 645
---------- ----------- ---------- -----------
Loss before income taxes (1,107) (9,190) (367) (17,332)
Provision for income taxes 106 550 661 1,215
---------- ----------- ---------- -----------
Net loss $ (1,213) $ (9,740) $ (1,028) $ (18,547)
========== =========== ========== ===========
Net loss per share (Note 5):
Net loss applicable to common stockholders $ (2,386) $ (10,800) $ (3,360) $ (20,668)
========== =========== ========== ===========
Net loss per common share--basic and
diluted $ (33.87) $(14,979.20) $ (48.93) $(28,665.74)
========== =========== ========== ===========
Weighted-average number of common
shares outstanding 70 1 69 1
========== =========== ========== ===========
Pro forma net loss per share (Note 5):
Net loss applicable to common
stockholders $ (1,213) $ (1,028)
========== ==========
Net loss per common share--basic and
diluted $ (0.06) $ (0.05)
========== ==========
Weighted-average number of common
shares outstanding 19,358 19,208
========== ==========
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
- ----------
(1) Amounts presented include selling, general and administrative expenses of
$415 and $19 for the three months ended June 30, 2001 and 2000, respectively,
and $1,067 and $21 for the six months ended June 30, 2001 and 2000,
respectively. Amounts presented also include research and development expenses
of $28 and $34 for the three and six months ended June 30, 2001, respectively.
2
<Page>
WRIGHT MEDICAL GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
2001 2000
----------- ----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (1,028) $ (18,547)
Noncash items included in net loss:
Depreciation 4,480 5,423
Amortization of deferred financing costs 311 234
Amortization of intangible assets 2,652 2,794
Provision for inventory reserves 2,565 3,242
Inventory step-ups expensed in cost of sales -- 16,811
Deferred income taxes 484 374
Stock-based expenses 1,101 21
Other 616 (582)
Changes in operating assets and liabilities:
Accounts Receivable (3,605) (4,025)
Inventories (2,013) (3,002)
Other Current Assets 3,416 2,190
Accounts Payable 1,549 1,524
Accrued Expenses and Other Liabilities (8,390) 904
----------- ----------
Net cash provided by operating activities 2,138 7,361
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (8,127) (8,016)
Other 268 --
----------- ----------
Net cash used in investing activities: (7,859) (8,016)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds (payments) of bank and other borrowings (2,369) (3,214)
Issuance of senior subordinated notes 92 --
Issuance of preferred shares 158 --
Payment of initial offering costs (1,453) --
----------- ----------
Net cash used in financing activities (3,572) (3,214)
Effect of exchange rates on cash and cash equivalents (143) (280)
----------- ----------
Net decrease in cash & cash equivalents $ (9,436) $ (4,149)
Cash & cash equivalents - beginning of period $ 16,300 $ 6,733
----------- ----------
Cash & cash equivalents - end of period $ 6,864 $ 2,584
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 3,460 $ 4,043
=========== ==========
Cash paid for income taxes $ 208 $ 36
=========== ==========
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
3
<Page>
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
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 sales representatives in the United
States and through a combination of employee sales representatives, independent
sales 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") on December 7, 1999. This transaction, which
represented a recapitalization of Wright and the inception of the Company in its
present form, was accounted for using the purchase method of accounting. On
December 22, 1999, the Company acquired all of the outstanding common stock of
Cremascoli Ortho Holding S.A. ("Cremascoli"), an orthopaedic medical device
company headquartered in Toulon, France. This acquisition was also 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.
As further discussed in Note 4, on July 18, 2001, the Company completed its
initial public offering for 7.5 million shares of voting common stock at $12.50
per share.
2. BASIS OF PRESENTATION
The unaudited consolidated interim financial statements included in this Form
10-Q have been prepared by the Company, pursuant to the rules and regulations of
the Securities and Exchange Commission (the "SEC"). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed, or
omitted, pursuant to these rules and regulations. These unaudited consolidated
interim financial statements should be read in conjunction with the Company's
consolidated financial statements and related notes included in the Company's
final prospectus dated July 13, 2001 as filed with the SEC.
The accompanying unaudited consolidated interim 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. In the opinion of management, these statements
reflect all adjustments necessary for a fair presentation of the interim
financial statements. All such adjustments are of a normal and recurring nature.
The results of operations for any interim period are not necessarily indicative
of results for the full year.
3. INVENTORIES
Inventories, net of reserves, consist of the following (in thousands):
<Table>
<Caption>
Dec. 31, 2000 June 30, 2001
------------- -------------
Raw materials $ 1,486 $ 1,402
Work-in-process 6,384 7,670
Finished goods 30,024 27,433
---------- ----------
$ 37,894 $ 36,505
========== ==========
</Table>
4
<Page>
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At the dates the Company acquired Wright and Cremascoli (see Note 1),
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 operations over
a one-year period, representing an estimate of the period over which such
inventories were sold. Accordingly, cost of sales was charged $8.3 million and
$16.8 million for the three and six months ended June 30, 2000, respectively.
4. LONG-TERM OBLIGATIONS
<Table>
<Caption>
DEC. 31, 2000 JUNE 30, 2001
------------- -------------
(IN 000's) (IN 000's)
Notes payable $ 72,876 $ 67,500
Senior subordinated notes 45,451 45,555
Capitalized lease obligations 2,352 3,348
--------- ---------
120,679 116,403
Less: current portion (8,396) (9,658)
--------- ---------
$ 112,283 $ 106,745
========= =========
</Table>
As of June 30, 2001, the Company's bank financing consists of two senior credit
facilities. The first senior credit facility consists of a $60.0 million term
loan arrangement and permits borrowings up to $5.0 million under a revolving
line of credit. The term loan bears interest at the Eurodollar rate plus 3.25%.
The second senior credit facility consists of a 17.5 million Euro term loan
($14.8 million at June 30, 2001) that bears interest at the EURIBO rate plus
.25%. The second facility also permits borrowings up to 5.0 million Euro ($4.2
million at June 30, 2001) under a revolving line of credit. At June 30, 2001,
there was $54.0 million outstanding under the first senior credit facility and
$13.5 million outstanding under the second senior credit facility.
On July 18, 2001, the Company completed its initial public offering for 7.5
million shares of voting common stock at $12.50 per share, the net proceeds of
which were approximately $85.2 million after deducting the underwriting discount
of approximately $6.6 million and estimated offering expenses of approximately
$2.0 million. The Company used the net proceeds of this offering to repay $39.4
million of its senior subordinated notes including accrued interest, all of the
Euro-denominated senior credit facility plus interest, totaling approximately
$14.0 million, and approximately $31.8 million of the dollar-denominated senior
credit facility. Simultaneous with the closing of the offering, the Company
converted all of its outstanding mandatorily redeemable, convertible preferred
stock, plus accrued dividends, into common stock. Also in connection with the
offering, the remaining senior subordinated notes totaling approximately $13.1
million, which were all held by Warburg, 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 over-allotment option.
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 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 $22.5 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 approximately $20
million of debt outstanding, excluding capitalized lease obligations.
5
<Page>
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
5. EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
requires the presentation of basic and diluted earnings per share. Basic
earnings per share is calculated based on the weighted-average shares of common
stock outstanding during the period. Diluted earnings per share is calculated to
include any dilutive effect of the Company's common stock equivalents, which
consists of stock options, warrants, and convertible preferred stock. The
dilutive effect of such instruments is calculated using the treasury-stock
method.
For the three and six month periods ended June 30, 2001 and 2000, the Company's
computation of diluted earnings per share does not differ from basic earnings
per share, as the effect of the Company's common stock equivalents is
anti-dilutive. For the same reason, the Company's pro forma computation of
diluted earnings per share for the three and six month period ended June 30,
2001 does not differ from pro forma basic earnings per share. Common stock
equivalents excluded from the calculation of diluted earnings per share totaled
1,987 and 1,994 for the three month periods ended June 30, 2001 and 2000,
respectively, and 2,079 and 1,482 for the six month periods ended June 30, 2001
and 2000, respectively.
Net loss applicable to common stockholders for basic and diluted earnings per
share purposes is as follows (in thousands):
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2001 2000 2001 2000
---- ---- ---- ----
Net loss $(1,213) $ (9,740) $(1,028) $(18,547)
Accrued preferred stock dividends (1,173) (1,060) (2,332) (2,121)
------- -------- ------- --------
Net loss applicable to common stockholders $(2,386) $(10,800) $(3,360) $(20,668)
======= ======== ======= ========
</Table>
6
<Page>
WRIGHT MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of shares and net income (loss) applicable to common
stockholders for pro forma basic and diluted earnings per share is as follows
(in thousands):
<Table>
<Caption>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2001 JUNE 30, 2001
------------- -------------
Weighted-average number of common shares outstanding 70 69
Weighted-average effect of conversion of redeemable convertible preferred
stock and related dividends (Note 4) 19,288 19,139
------------- -------------
Pro forma weighted-average number of common shares outstanding 19,358 19,208
============= =============
Net loss applicable to common stockholders shown above $ (2,386) $ (3,360)
Reversal of accrued preferred stock dividends 1,173 2,332
------------- -------------
Pro forma net loss applicable to common stockholders $ (1,213) $ (1,028)
============= =============
</Table>
The weighted-average effect of the conversion of redeemable convertible
preferred stock and related dividends into common shares was computed as if such
stock was converted at the beginning of the respective period or the date of
original issuance, if later.
6. SUBSEQUENT EVENTS
As further discussed in Note 4, on July 18, 2001 the Company completed its
initial public offering of 7.5 million shares of voting common stock at $12.50
per share. Simultaneous with the closing of the offering, the Company converted
all of its outstanding mandatorily redeemable, convertible preferred stock, plus
accrued dividends, into common stock. Also in connection with the offering, the
remaining senior subordinated notes totaling approximately $13.1 million, which
were all held by Warburg, 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 over-allotment option.
As further discussed in Note 4, on August 1, 2001, the Company entered into a
new senior credit facility with a syndicate of commercial banks for $20 million
in term loans and an unused revolving loan facility of up to $60 million.
In August 2001, the Company began selling its products in Japan through the
Company's wholly-owned Japanese subsidiary, which was legally incorporated in
June 2001. The Company previously marketed its products in Japan through
independent sales distributors.
7
<Page>
ITEM 2.
WRIGHT MEDICAL GROUP, INC.
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 OUR CONSOLIDATED FINANCIAL
STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS FILING. THIS DISCUSSION
AND ANALYSIS CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS. THESE STATEMENTS MAY
INCLUDE, WITHOUT LIMITATION, THE WORDS "BELIEVES", "ESTIMATES", "PROJECTS",
"ANTICIPATES", "EXPECTS" AND WORDS OF SIMILAR IMPORT. THESE FORWARD-LOOKING
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE INDICATED IN THESE STATEMENTS AS A RESULT OF CERTAIN
FACTORS, AS MORE FULLY DISCUSSED BELOW AND UNDER THE HEADING "RISK FACTORS"
CONTAINED IN OUR FINAL PROSPECTUS DATED JULY 13, 2001. THE COMPANY WISHES TO
CAUTION READERS NOT TO PLACE UNDUE RELIANCE ON ANY SUCH FORWARD-LOOKING
STATEMENTS, WHICH STATEMENTS ARE MADE PURSUANT TO THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 AND, AS SUCH, SPEAK ONLY AS OF THE DATE MADE.
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 several sales and distribution
offices across Europe and Canada. Our global distribution system consists of a
sales force of approximately 270 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 70 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, Equity Partners,
L.P. ("Warburg") 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 IPRD costs
totaling $11.7 million.
In December 1999, immediately following our recapitalization, we acquired
Cremascoli Ortho Holding, S.A. ("Cremascoli"), 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 write-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 IPRD charges were
identified related to this acquisition.
8
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net sales in our international markets totaled $29.6 million, or approximately
27% of our total net sales in 1999, $62.5 million, or approximately 40% of our
total net sales in 2000 ($33.8 million or approximately 42% of our total net
sales in the first six months of 2000) and $32.9 million, or approximately 37%
of our total net sales in the first six 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 in the first six months of 2001.
In August 2001, we began selling our products in Japan through our wholly-owned
Japanese subsidiary, which was legally incorporated in June 2001. We are
transitioning from a distributor-based sales network to a direct initiative and
previously marketed our products in Japan through independent sales
distributors. We view this direct sales initiative as a very positive event in
the long-term growth of our international business.
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 new
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 the first six months of 2001, our knee product lines
represented approximately 39%, our hip product lines represented approximately
29% and our extremity product lines represented approximately 12%. Sales of our
bio-orthopaedic materials represented approximately 15% of our total net sales
in the first six months of 2001. In the first six months of 2000, our knee, hip,
extremity, and bio-orthopaedic product lines represented approximately 40%, 32%,
11%, and 12%, respectively, of our total net sales. Other product sales totaled
approximately 5% and 6% of our total net sales in the first six months of 2001
and 2000, respectively, consisting of various orthopaedic products not
considered to be part of our knee, hip, extremity or bio-orthopaedic product
lines.
9
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table sets forth our net sales by product line for the three and
six months ended June 30, 2001 and 2000, respectively, expressed as a dollar
amount and as a percentage of total net sales:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
(UNAUDITED) (UNAUDITED)
--------------------------------- ---------------------------------
IN THOUSANDS: JUNE 30, 2001 JUNE 30, 2000 JUNE 30, 2001 JUNE 30, 2000
------------- ------------- ------------- -------------
Knee products $ 15,986 $ 15,073 $ 34,543 $ 32,686
Hip products 12,274 12,380 25,298 25,580
Extremity products 5,116 4,277 10,360 8,578
Bio-orthopaedic materials 6,694 5,181 13,145 9,607
Other 2,299 2,349 4,356 4,708
------------- ------------- ------------- -------------
Total net sales $ 42,369 $ 39,260 $ 87,702 $ 81,159
============= ============= ============= =============
AS A PERCENTAGE OF TOTAL NET SALES:
Knee products 37.7% 38.4% 39.4% 40.3%
Hip products 29.0 31.5 28.8 31.5
Extremity products 12.1 10.9 11.8 10.6
Bio-orthopaedic materials 15.8 13.2 15.0 11.8
Other 5.4 6.0 5.0 5.8
------------- ------------- ------------- -------------
Total net sales 100.0% 100.0% 100.0% 100.0%
============= ============= ============= =============
</Table>
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 cost of sales during the three and six month periods ended June 30, 2000 are
not comparable to cost of sales in corresponding periods of 2001 because 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 (both occurring in December 1999) in the amount of $31.1 million.
The following table sets forth our cost of sales expressed as a percentage of
sales for the three and six month periods ended June 30, 2001 and 2000,
respectively, adjusted to exclude the cost of sales associated with our
inventory step-ups.
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(UNAUDITED) (UNAUDITED)
--------------------------- -------------------------
2001 2000 2001 2000
---- ---- ---- ----
Cost of sales 30.6% 53.7% 30.4% 53.3%
Effect of acquisition costs
assigned to inventory -- (21.2)% -- (20.7)%
------ ------ ------ ------
Adjusted cost of sales 30.6% 32.5% 30.4% 32.6%
====== ====== ====== ======
</Table>
10
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense
consists primarily of salaries, sales commissions, royalty expenses associated
with our key surgeon consulting agreements, marketing costs, facility costs,
other general business and administrative expenses and 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 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 June 30, 2001, we had net intangible assets totaling
$54.7 million and $51.1 million, respectively. We expect to amortize
approximately $5.1 million in 2001. This amortization does not give effect to
$3.1 million of Cremascoli acquisition consideration remaining in escrow as of
June 30, 2001. These escrowed amounts will be distributed upon the resolution of
the final net asset valuation of Cremascoli. Currently, this matter is in
arbitration. If the seller were to prevail, we would disburse the escrowed
amounts to the seller. If we were to prevail, we would retain the escrowed
amounts. Accordingly, our goodwill balance and the related future amortization,
is subject to prospective adjustment.
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 ($21,000 in the first six months of 2000). To date
in 2001, we have incurred approximately $3.1 million of additional deferred
compensation related to option grants, and in the first six months of 2001 we
recognized stock-based compensation expense totaling $1.1 million. Based on the
stock-based compensation we have incurred to date, we expect that $1.9 million
in 2001, $1.6 million in 2002, $1.5 million in 2003, $1.2 million in 2004 and
$148,000 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 $311,000 and $234,000 for the first six
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. Subsequent to June 30, 2001, we repaid amounts
outstanding under our Euro-denominated senior credit facility, and renegotiated
the terms of our dollar-denominated senior credit facility. Accordingly, we
expect the amortization of deferred financing costs to approximate $255,000
annually over the remaining term of our new senior credit facility.
11
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
We used the net proceeds from the Company's initial public offering (the "IPO")
completed on July 17, 2001, to repay our senior subordinated notes, reduce our
outstanding bank borrowings and increase our invested cash balances. As a
result, we expect that net interest expense will decrease in periods following
the IPO as compared to prior periods. Based on rates in effect at June 30, 2001,
we expect that repayment of debt in connection with the IPO will reduce our net
interest expense by approximately $7.9 million annually.
OTHER EXPENSE, NET. Other expense (income) 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.
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 have net operating loss carryforwards of
approximately $57.7 million domestically, which expire in 2010 through 2018, and
$19.5 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 2010.
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.
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. The value was determined by estimating the costs to develop the
purchased IPRD 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 IPRD.
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:
<Table>
<Caption>
YEAR WHEN
MATERIAL NET CASH ESTIMATED
IN-FLOWS EXPECTED LIKELIHOOD OF DISCOUNT ACQUIRED
PROJECT TO BEGIN SUCCESS RATE IPRD
- ------- -------- ------- ---- ----
(IN '000s)
S.O.S.(R) Project (GUARDIAN(TM)) ................. 2000 85% 22% $ 954
OSTEOSET(R) 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
=======
</Table>
12
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NEW SHOULDER (OLYMPIA(TM))
The objective of this product 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.
Commercialization of this product is being delayed to allow for completion of
the instrumentation's clinical evaluations. We now anticipate completion of this
product development 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 the responses received from our customers'
evaluations of and commitments to this product.
S.O.S.(R) PROJECT (GUARDIAN(TM))
The objective of the Segmented Orthopaedic System, or S.O.S.(R), 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.(R) Adjustable
product line. The delay in completion of this portion of the S.O.S.(R)
development project is due to ongoing negotiation efforts with a third-party
developer. Commercialization of this product is expected in December 2001 with
first year revenues expected to be $930,000 with no additional costs expected to
be incurred.
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.
OSTEOSET(R) 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.
13
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
We are currently pursuing an evaluation and a pre-clinical study. We expect
development efforts to be completed by February 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.
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 2003 with first year revenues of $274,000 expected in
2004.
There were eleven additional projects included in the valuation of purchased
IPRD. 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 IPRD 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 IPRD 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.
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
IPRD represent a reasonably reliable estimate of the future benefits
attributable to the purchased IPRD. We cannot be certain that actual results
will not deviate from our assumptions in future periods.
14
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain financial
data expressed as a percentage of net sales (in thousands):
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
(UNAUDITED) (UNAUDITED)
--------------------------------------------- --------------------------------------------
$ $ $ $
JUNE 30, % OF JUNE 30, % OF JUNE 30, % OF JUNE 30, % OF
2001 SALES 2000 SALES 2001 SALES 2000 SALES
-------- ----- -------- ----- -------- ----- -------- -----
Net sales $ 42,369 100.0% $ 39,260 100.0% $ 87,702 100.0% $ 81,159 100.0%
Cost of sales 12,981 30.6% 21,064 53.7% 26,653 30.4% 43,295 53.3%
-------- ----- -------- ----- -------- ----- -------- -----
Gross profit 29,388 69.4% 18,196 46.3% 61,049 69.6% 37,864 46.7%
Operating expenses:
Selling, general and
administrative 23,246 54.9% 20,469 52.1% 46,551 53.1% 41,619 51.3%
Research and development 2,486 5.9% 2,258 5.8% 4,600 5.2% 4,047 5.0%
Amortization of
intangible assets 1,355 3.2% 1,397 3.6% 2,652 3.0% 2,794 3.4%
Stock-based expense 443 1.0% 19 -- 1,101 1.3% 21 --
-------- ----- -------- ----- -------- ----- -------- -----
Total operating
expenses 27,530 65.0% 24,143 61.5% 54,904 62.6% 48,481 59.7%
-------- ----- -------- ----- -------- ----- -------- -----
Income (loss) from
operations 1,858 4.4% (5,947) (15.2)% 6,145 7.0% (10,617) (13.0)%
Interest expense, net 2,903 6.9% 2,960 7.5% 6,023 6.9% 6,070 7.5%
Other expense, net 62 .1% 283 .7% 489 .5% 645 .8%
-------- ----- -------- ----- -------- ----- -------- -----
Income (loss) before
income taxes (1,107) (2.6)% (9,190) (23.4)% (367) (.4)% (17,332) (21.3)%
Provision for income taxes 106 .3% 550 1.4% 661 .8% 1,215 1.5%
-------- ----- -------- ----- -------- ----- -------- -----
Net income (loss) $ (1,213) (2.9)% $ (9,740) (24.8)% $ (1,028) (1.2)% $(18,547) (22.8)%
======== ===== ======== ===== ======== ===== ======== =====
EBITDA $ 5,836 13.8% $ 6,347 16.2% $ 13,889 15.8% $ 13,787 17.0%
======== ===== ======== ===== ======== ===== ======== =====
</Table>
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2001 TO THREE MONTHS ENDED JUNE 30,
2000
NET SALES. Net sales totaled $42.4 million in the three months ended June 30,
2001, compared to $39.3 million in the three months ended June 30, 2000,
representing an increase of $3.1 million, or 8%. Excluding the negative impact
of foreign exchange rate fluctuations, net sales would have increased 10% when
compared with the prior year comparable quarter. The increase resulted primarily
from unit sales growth in our knee, extremity and bio-orthopaedic product lines.
Knee sales increased $912,000, or 6%, in the three months ended June 30, 2001
compared to the corresponding period in 2000 due to the continued growth of our
ADVANCE(R) knee system which was partially offset by decreased sales of certain
of our more mature knee products. Extremity sales increased $839,000, or 20%, in
the three months ended June 30, 2001 compared to the corresponding period in
2000 due to the introduction of our new LOCON T(TM), EVOLVE(TM) and NEW DEAL(TM)
products and continued sales growth of our core extremity products.
Bio-orthopaedic product sales increased $1.5 million, or 29%, and hip sales
remained relatively constant for the second quarter of 2001 compared to 2000.
The increase in bio-orthopaedic product sales was primarily due to
ALLOMATRIX(TM) injectable putty and the first quarter 2001 introduction of
ALLOMATRIX(TM) C. Continued growth of our CONSERVE(R) and PROFEMUR(R) hip
systems was offset by reduced levels of block-purchase sales, or large volume
contractual agreements, for other hip products in certain international markets
during the second quarter of 2001 compared to the 2000 period.
15
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Domestic net sales totaled $27.2 million in the second quarter of 2001,
representing 64% of our total net sales compared to $23.3 million in the second
quarter of 2000, representing 59% of total net sales. International sales
totaled $15.2 million in the second quarter of 2001, net of a negative currency
impact of approximately $800,000, and $16.0 million in the second quarter of
2000.
COST OF SALES. Cost of sales as a percentage of net sales decreased from 54% in
the second quarter of 2000 to 31% in the second quarter of 2001. Cost of sales
was negatively impacted during the 2000 period by $8.3 million of expense
associated with the 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 second quarter of 2000 to 31%
in the second quarter of 2001. This decrease was due to improved margins
resulting 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 $2.8 million, or 14%, from
$20.5 million in the second quarter of 2000, to $23.3 million in the second
quarter of 2001. The increase was primarily attributable to increased
commissions and royalties resulting from domestic sales growth, costs associated
with senior management additions and expenses related to enhancing our
information systems and administrative capabilities. Including stock-based
expense, selling, general and administrative expense increased $3.2 million, or
16%, from $20.5 million in the second quarter of 2000 to $23.7 million in the
second quarter of 2001.
RESEARCH AND DEVELOPMENT. Research and development expenses, including
stock-based expense, increased $256,000, or 11%, from $2.3 million in the second
quarter of 2000 to $2.5 million in the second quarter 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. Of
this increase, $28,000 was due to stock-based expense.
AMORTIZATION OF INTANGIBLE ASSETS. Non-cash charges associated with the
amortization of intangible assets decreased approximately $42,000, or 3%, from
the second quarter of 2000 to the second quarter of 2001. Amortization for both
the 2000 and 2001 periods were primarily attributable to intangible assets
resulting from our recapitalization and subsequent acquisition of Cremascoli in
December 1999. The slight decrease is primarily the result of foreign currency
fluctuation.
STOCK-BASED EXPENSE. Stock-based expense totaled $443,000 in the second quarter
of 2001, consisting of non-cash charges of $438,000 in connection with the
amortization of deferred compensation associated with employee stock option
grants deemed to be issued below fair market value, and $5,000 of other
stock-based expenses. Stock-based expense was not significant in the second
quarter of 2000.
INTEREST EXPENSE, NET. Interest expense, net, totaled $2.9 and $3.0 million in
the second quarter of 2001 and 2000, respectively. Interest expense, net, in
both periods consisted entirely of interest associated with borrowings
outstanding under our senior credit facilities, our senior subordinated notes
and a non-cash expense for the amortization of deferred financing costs
resulting from the origination of our credit facilities, offset partially by
interest income on invested cash balances.
OTHER EXPENSE, NET. Other expense, net, totaled $62,000 and $283,000 in the
second quarter of 2001 and 2000, respectively, and consisted primarily of net
losses resulting from foreign currency fluctuations.
PROVISION FOR INCOME TAXES. We recorded a tax provision of $106,000 and $550,000
in the second quarter of 2001 and 2000, respectively. The tax provision in both
periods primarily resulted from taxes incurred related to earnings generated by
some of our international operations, principally in Europe. 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.
16
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
EBITDA. The Company defines EBITDA as earnings before net interest expense,
taxes, depreciation, amortization of intangible assets, stock-based expense, and
other non-cash expenses. For 2000, other non-cash expenses include the inventory
step-ups related to our recapitalization and the Cremascoli acquisition. For
2001, there are no other non-cash expenses. Other companies within our industry
may not compute EBITDA in the same manner as we do.
EBITDA totaled $5.8 million in the second quarter of 2001, or 14% of net sales,
compared to $6.3 million in the second quarter of 2000, or 16% of net sales. The
decrease of approximately $500,000 is primarily the result of a 19% increase in
selling, general and administrative expenses (net of depreciation charges),
which more than offset the 11% increase in gross profit realized by the Company
(after removing $8.3 million of inventory step-ups from cost of sales in the
2000 period), when compared to the second quarter of 2000. The increase in
selling, general and administrative expenses was primarily attributable to
increased commissions and royalties resulting from domestic sales growth, costs
associated with senior management additions, and expenses related to enhancing
our information systems and administrative capabilities.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2001 TO SIX MONTHS ENDED JUNE 30, 2000
NET SALES. Net sales totaled $87.7 million in the six months ended June 30,
2001, compared to $81.2 million in the six months ended June 30, 2000,
representing an increase of $6.5 million, or 8%. Excluding the negative impact
of foreign exchange rate fluctuations, net sales would have increased 10% 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 $1.9 million, or 6%, in the six months ended June 30, 2001
compared to the corresponding period in 2000 due to the continued growth of our
ADVANCE(R) knee system, which was partially offset by decreased sales of certain
of our more mature knee products. Extremity sales increased $1.8 million, or
21%, in the six months ended June 30, 2001 compared to the corresponding period
in 2000 due to the introduction of our new LOCON T(TM), EVOLVE(TM) and NEW
DEAL(TM) products and continued sales growth for our core extremity products.
Bio-orthopaedic product sales increased $3.5 million, or 37%, and hip sales
remained relatively constant for the six months ended June 30, 2001 when
compared to the corresponding 2000 period. The increase in bio-orthopaedic
product sales was primarily due to ALLOMATRIX(TM) injectable putty and the first
quarter 2001 introduction of ALLOMATRIX(TM) C. Continued growth of our
CONSERVE(R) and PROFEMUR(R) hip systems was offset by reduced levels of
block-purchase sales, or large volume contractual agreements, for other hip
products in certain international markets during the six months ended June 30,
2001 compared to the corresponding 2000 period.
Domestic net sales totaled $54.8 million in the six months ended June 30, 2001,
representing 63% of our total net sales compared to $47.4 million in the
corresponding period of 2000, representing 58% of total net sales. International
sales totaled $32.9 million in the six months ended June 30, 2001, net of a
negative currency impact of approximately $1.6 million, and $33.8 million in the
six months ended June 30, 2000.
COST OF SALES. Cost of sales as a percentage of net sales decreased from 53% for
the six months ended June 30, 2000 to 30% in the corresponding period of 2001.
Cost of sales was negatively impacted during the 2000 period by $16.8 million of
expense associated with the 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 six months of 2000
to 30% in the first six months of 2001. This decrease was due to improved
margins resulting 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 $4.9 million, or 12%, from
$41.6 million in the six months ended June 30, 2000, to $46.5 million in the six
months ended June 30, 2001. The increase was primarily attributable to increased
commissions and royalties resulting from domestic sales growth, costs associated
with senior management additions and expenses related to enhancing our
information systems and administrative capabilities. Including stock-based
expense, selling, general and administrative expense increased $6.0 million, or
14%, from $41.6 million in the first six months of 2000 to $47.6 million in the
first six months of 2001.
17
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESEARCH AND DEVELOPMENT. Research and development expenses, including
stock-based expense, increased $587,000, or 14.5%, from $4.0 million in the six
months ended June 30, 2000 to $4.6 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. Of this increase, $34,000 was due to stock-based expense.
AMORTIZATION OF INTANGIBLE ASSETS. Non-cash charges associated with the
amortization of intangible assets decreased approximately $142,000, or 5%, from
the six months ended June 30, 2000 to the six months ended June 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. The slight decrease is primarily the result of
foreign currency fluctuation.
STOCK-BASED EXPENSE. Stock-based expense totaled approximately $1.1 million in
the first six months of 2001, consisting of non-cash charges of $731,000 in
connection with the amortization of deferred compensation associated with
employee stock option grants deemed to be issued below fair market value,
$315,000 resulting from the sale of equity securities below fair market value
and $55,000 of other stock-based expenses. Stock-based expense was not
significant in the second quarter of 2000.
INTEREST EXPENSE, NET. Interest expense, net totaled $6.0 and $6.1 million in
the first six months of 2001 and 2000, respectively. Interest expense, net, in
both periods 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 credit facilities, offset partially by interest income on
invested cash balances.
OTHER EXPENSE, NET. Other expense, net totaled $489,000 and $645,000 in the
first six months of 2001 and 2000, respectively, and consisted primarily of net
losses resulting from foreign currency fluctuations.
PROVISION FOR INCOME TAXES. We recorded a tax provision of $661,000 and
$1,215,000 in the first six months of 2001 and 2000, respectively. The tax
provision in both periods primarily resulted from taxes incurred related to
earnings generated by some of our international operations, principally in
Europe. 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.
EBITDA. The Company defines EBITDA as earnings before net interest expense,
taxes, depreciation, amortization of intangible assets, stock-based expense, and
other non-cash expenses. For 2000, other non-cash expenses include the inventory
step-ups related to our recapitalization and the Cremascoli acquisition. For
2001, there are no other non-cash expenses. Other companies within our industry
may not compute EBITDA in the same manner as we do.
EBITDA totaled $13.9 million in the six months ended June 30, 2001, or 16% of
net sales, compared to $13.8 million in the six months ended June 30, 2000, or
17% of net sales. The increase of approximately $100,000 is primarily the result
of a 12% increase in gross profit realized by the Company (after removing $16.8
million of inventory step-ups from cost of sales in the 2000 period) coupled
with a 24% decrease in other expenses, net (primarily foreign currency
fluctuation), offset by a 16% increase in selling, general and administrative
expenses (net of depreciation charges) and a 14% increase in research and
development expenses, when compared to the six month period ended June 30, 2000.
The increase in selling, general and administrative expenses was primarily
attributable to increased commissions and royalties resulting from domestic
sales growth, costs associated with senior management additions, and expenses
related to enhancing our information systems and administrative capabilities.
18
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 for the quarters ended March
31, 2001 and June 30, 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 in the Company's final
prospectus as filed with the SEC on July 13, 2001, and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of such information when read in conjunction with our audited financial
statements and related notes. The operating results for any quarter are not
necessarily indicative of results for any future period.
<Table>
<Caption>
2000 (UNAUDITED) 2001 (UNAUDITED)
----------------------------------------------------- --------------------
FIRST SECOND THIRD FOURTH FIRST SECOND
IN THOUSANDS QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- ------- -------
Net sales $ 41,899 $ 39,260 $ 36,555 $ 39,838 $45,333 $42,369
Cost of sales 22,231 21,064 20,267 16,808 13,672 12,981
-------- -------- -------- -------- ------- -------
Gross profit 19,668 18,196 16,288 23,030 31,661 29,388
Operating expenses:
Selling, general and administrative 21,150 20,469 19,444 21,750 23,305 23,246
Research and development 1,789 2,258 2,027 2,316 2,114 2,486
Amortization of intangible assets 1,397 1,397 1,396 1,396 1,297 1,355
Stock-based expense 2 19 2,893 2,115 658 443
-------- -------- -------- -------- ------- -------
Total operating expenses 24,338 24,143 25,760 27,577 27,374 27,530
-------- -------- -------- -------- ------- -------
Income (loss) from operations $ (4,670) $ (5,947) $ (9,472) $ (4,547) $ 4,287 $ 1,858
======== ======== ======== ======== ======= =======
</Table>
SEASONALITY
Our net sales are subject to seasonality. Because of the European holiday
schedule during the summer months, the Company traditionally experiences lower
sales volumes in these months than throughout the rest of the year.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our cash needs since 1999 through various equity and debt
issuances and through cash flow from operations.
In December 1999, an investment group led by Warburg 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 $17.5 million
Euro. 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 six months of 2001.
19
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
On July 18, 2001, we completed our initial public offering of 7.5 million shares
of voting common stock at $12.50 per share, the net proceeds of which were
approximately $85.2 million after deducting the underwriting discount of
approximately $6.6 million and estimated offering expenses of approximately $2.0
million. We have used the net proceeds of this offering to repay $39.4 million
of our subordinated notes and accrued interest, all of our Euro-denominated
senior credit facility plus interest, totaling approximately $14.0 million, and
approximately $31.8 million of our dollar-denominated senior credit facility.
Simultaneous with the closing of the offering, we converted all of our
outstanding mandatorily redeemable, convertible preferred stock, plus accrued
dividends, into common stock. Also in connection with the offering, the
remaining senior subordinated notes totaling approximately $13.1 million, which
were all held by Warburg, 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 over-allotment option.
On August 1, 2001, a syndicate of commercial banks entered into a new senior
credit facility with us on more favorable terms. 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 the initial public offering, the use of
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. 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.
At June 30, 2001 we had cash and equivalents totaling $6.9 million, working
capital totaling $47.6 million and unused availability under committed credit
facilities, after considering outstanding letters of credit, totaling $6.2
million. We generated $2.1 million of cash in operating activities during the
first six months of 2001 compared to $7.4 million of cash generated by operating
activities during the same period in 2000. Operating cash flows for the first
six months of 2001 were affected by $4.0 million of unrestricted cash used in an
intellectual property license settlement.
Capital expenditures totaled approximately $8.1 million for the six months ended
June 30, 2001, $14.1 million in 2000, and $2.2 million in 1999. Historically,
our capital expenditures have consisted primarily of purchased manufacturing
equipment, research and testing equipment, computer systems and office furniture
and equipment and, in 2000 and 2001, surgical instruments. We expect to incur
capital expenditures of approximately $19.0 million in total for 2001,
approximately $5.0 million of which we anticipate will be used for the
implementation of a new enterprise computer system and $14.0 million of which we
anticipate will be used for routine recurring capital expenditures, including
instruments.
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, the net proceeds of our initial public offering
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.
20
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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". SFAS 141 replaces Accounting Principles Board Opinion ("APB") 16,
"Business Combinations" and SFAS 142 replaces APB 17, "Intangible Assets". The
two statements modify the method of accounting for business combinations entered
into after June 30, 2001 and address the accounting for intangible assets. SFAS
141 is effective immediately and SFAS 142 will be effective for the Company on
January 2002. Upon adoption of SFAS 142, we will no longer amortize goodwill,
but will evaluate it for impairment at least annually. We are currently
evaluating the provisions of these statements to determine their impact.
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.
21
<Page>
ITEM 3.
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 June 30, 2001, we had borrowings of
$67.5 million under our credit facilities that were subject to variable rates,
with a blended rate of 6.56%. Based on this, an adverse change of 1.0% in the
interest rate of all such borrowings outstanding would have caused us to incur
an increase in interest expense of approximately $675,000 on an annual basis.
Beginning August 1, 2001, we had total borrowings of approximately $20.0 million
under our new senior credit facility, 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
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 and do not anticipate doing 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 six months ended June 30, 2001, respectively, and we expect that foreign
currencies will continue to represent a similarly significant percentage of our
net sales in the future. Costs related to these sales are largely denominated in
the same respective currencies, thereby limiting our transaction risk exposures.
However, for sales not denominated in U.S. dollars, if there is an increase in
the rate at which a foreign currency is exchanged for U.S. dollars, it will
require more of the foreign currency to equal a specified amount of U.S. dollars
than before the rate increase. In such cases, 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.
22
<Page>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) Not applicable.
(b) Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
Not applicable.
23
<Page>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as a part of this Quarterly Report
on Form 10-Q:
EXHIBIT
NUMBER DESCRIPTION
-------- ------------------------------------------------------------------
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, L.P., Wright Acquisition Corp., Inc. and
Wright Medical Group, Inc.*
3.1 Form of Fourth Amended and Restated Certification of
Incorporation.*
3.2 Form of Amended and Restated Bylaws.*
4.1 Registration Rights Agreement, dated as of December 7, 1999, by
and among Wright Medical Group, Inc. and the investors named
therein.*
4.2 Investors Rights Agreement, dated as of December 22, 1999, by and
among Warburg, Pincus Equity Partners, L.P., Wright Acquisition
Holdings, Inc. and the investors named therein.*
10.1 Stockholders Agreement, dated as of December 7, 1999, by and among
Wright Medical Group, Inc. and the investors named therein.*
10.2 Amendment No. 1 to the Stockholders Agreement, dated August 7,
2000, by and among Wright Medical Group, Inc. and the investors
named therein.*
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 Form of Indemnification Agreement between Wright Medical Group,
Inc. and its Directors and Executive Officers.*
10.8 Form of Warrant.*
10.9 Amendment No. 1 to the Incentive Stock Option Agreement.*
10.10 Form of Sales Representative Award Agreement under the 1999 Equity
Incentive Plan.*
10.11 Form of Non-Employee Director Stock Option Agreement under the
1999 Equity Incentive Plan.*
10.12 Form of Amended and Restated 1999 Equity Incentive Plan.*
10.13 Credit Agreement, dated as of August 1, 2001, among Wright Medical
Group, Inc., 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.+
21.1 List of Subsidiaries.*
- ----------
* Incorporated by reference to Wright Medical Group, Inc.'s Registration
Statement on Form S-1, filed April 27, 2001, as amended (Registration
Number 333-59732).
+ Incorporated by reference to Wright Medical Group, Inc.'s Current Report
on Form 8-K, filed August 3, 2001.
(b) Reports on Form 8-K
The following current reports on Form 8-K were filed during the
quarter ended June 30, 2001:
<Table>
<Caption>
---------------------------------------------------------------------
Date of Report Items Reported
---------------------------------------------------------------------
August 3, 2001 Announcing the terms of the Amended and
Restated Credit Agreement, dated as of
August 1, 2001
---------------------------------------------------------------------
</Table>
24
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Arlington, State of
Tennessee, on August 13, 2001.
WRIGHT MEDICAL GROUP, INC.
By: /s/ F. Barry Bays
--------------------------------------------
F. Barry Bays
PRESIDENT AND CHIEF EXECUTIVE OFFICER
By: /s/ John K. Bakewell
--------------------------------------------
John K. Bakewell
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER (PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL
ACCOUNTING OFFICER)
25