WRIGHT MEDICAL GROUP INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NUMBER 000-32883

WRIGHT MEDICAL GROUP, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 13-4088127
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)

5677 AIRLINE ROAD, ARLINGTON, TENNESSEE 38002
(Address of principal executive offices) (zip code)

Registrant's telephone number, including area code:
(901) 867-9971

Securities registered pursuant to Section 12(b) of the Act:
NONE

Securities registered pursuant to section 12(g) of the Act:

VOTING COMMON STOCK, PAR VALUE $.01 PER SHARE NASDAQ NATIONAL MARKET
(Title of class) (Name of exchange on which registered)

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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. / /

The aggregate market value of the voting common stock held by non-affiliates
of the registrant as of February 22, 2002, based upon the last sale price of
such voting common stock on that date as reported by the Nasdaq National Market
was $144,316,337.

As of February 22, 2002, there were 23,332,854 shares of voting common stock
outstanding.

Information required by Part III of this Form 10-K, to the extent not set
forth herein, is incorporated by reference from the registrant's definitive
proxy statement for its 2002 annual meeting of stockholders, which will be filed
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended, within 120 days after the end of the fiscal year to which this
Form 10-K relates.

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WRIGHT MEDICAL GROUP, INC.
ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995: Statements in this Form 10-K regarding Wright Medical Group, Inc.'s
business, which are not historical facts, are forward-looking statements that
involve risks and uncertainties and our actual results of operations may differ
materially from those indicated in these forward-looking statements. These
statements may include, without limitation, the words, "believes", "estimates",
"projects", "anticipates", "expects", "future", "intends", "plans" and words of
similar import. For a discussion of such risks and uncertainties, which could
cause actual results to differ from those contained in the forward-looking
statements, see Wright Medical Group, Inc.'s reports filed with the Securities
and Exchange Commission pursuant to the Securities Act of 1933 and the
Securities Exchange Act of 1934. The forward-looking statements included herein
are made as of the date of this Form 10-K, and Wright Medical Group, Inc.
assumes no obligation to update the forward-looking statements after the date
hereof.

1

PART I

ITEM 1. BUSINESS.

OVERVIEW

Wright Medical Group, Inc. (the "Company") is 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, the
Company focuses 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 2001, the
Company had net sales of $172.9 million and a net loss of $1.5 million.

HISTORY

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 Company's predecessor, Wright Medical
Technology, Inc. ("Wright" or the "Predecessor Company") in December 1999. This
transaction, which represented a recapitalization of Wright and the inception of
the Company in its present form, reduced the Company's debt and provided
investment capital, thus allowing the Company to build on the Predecessor
Company's respected brand name and strong relationships with orthopaedic
surgeons developed during their fifty year history.

Shortly thereafter, a new management team was put in place and on
December 22, 1999, the Company acquired Cremascoli Ortho Group ("Cremascoli"),
based in Toulon, France. This acquisition extended the Company's product
offerings, enhanced the Company's product development capabilities, and expanded
the Company's European presence. As a result of combining Cremascoli's strength
in hip reconstruction with Wright's historical expertise in knee reconstruction
and bio-orthopaedic materials, the Company now offers orthopaedic surgeons a
broad range of reconstructive joint devices and bio-orthopaedic materials in
over 40 countries.

Since January 2000, the Company's new management team has implemented
several initiatives, which have increased the Company's focus and spending on
research and development, significantly raised the efficiency of its
manufacturing process, and improved sales force productivity, leading to an
increase in average sales revenue per sales representative in the U.S. of over
33%.

In July 2001, the Company completed its initial public offering ("IPO") of
7,500,000 shares of common stock at a public offering price of $12.50 per share.
The net proceeds generated of $84.8 million, after deducting underwriting
discounts and offering expenses, were used to repay debt.

ORTHOPAEDIC INDUSTRY

The worldwide orthopaedic industry was estimated to be approximately
$11.0 billion in 2000, and the Company believes it will grow at 6-8% annually
over the next three to four years. Six multinational companies currently
dominate the orthopaedic industry, 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 the Company, 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.

2

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
Company specializes in reconstructive joint devices and bio-orthopaedic
materials.

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 use of bone
cement.

The reconstructive joint market is generally divided into the areas of
knees, hips and extremities. The reconstructive joint market is estimated at
$4.8 billion worldwide, with hip reconstruction and knee reconstruction
representing two of the largest sectors.

KNEE RECONSTRUCTION. The knee joint involves the surfaces of three distinct
bones: the lower end of the femur, the upper end of the tibia or shin bone, and
the patella or kneecap. Cartilage on any of these surfaces can be damaged due to
disease or injury, leading to pain and inflammation requiring knee
reconstruction. Knee reconstruction was the largest sector of the reconstructive
joint market in 2000, accounting for sales of approximately $2.2 billion
worldwide.

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.

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.

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.

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.

3

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 substitute materials. 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 does not trigger new bone growth,
whereas osteoinductive materials induce bone growth.

The Company believes 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.

GOVERNMENT REGULATION

UNITED STATES

Numerous governmental authorities, principally the Federal Food and Drug
Administration, or FDA, and corresponding state and foreign regulatory agencies,
strictly regulate the Company's 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, recordkeeping,
advertising and promotion of medical devices.

Generally, before the Company can market a new medical device, marketing
clearance must be obtained 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 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, require detailed and
comprehensive data and generally take 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.

4

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 the Company is not in compliance with the law, it can institute
proceedings to detain or seize products, issue a recall, enjoin future
violations and seek civil and criminal penalties against the Company and its
officers and employees. If the Company fails to comply with these regulatory
requirements, the Company's business, financial condition and results of
operations could be harmed.

Most of the Company's products are approved through the 510(k) premarket
notification process. The Company has conducted clinical trials to support many
of its regulatory approvals. Regulations regarding the manufacture and sale of
the Company's products are subject to change. The Company cannot predict the
effect, if any, that these changes might have on its 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 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 certain of its other allograft-based
products are human tissue and therefore are not subject to FDA clearance or
approval as a medical device. The Company asked the FDA to designate
ALLOMATRIX-TM- Injectable Putty as a product regulated solely as a tissue. The
FDA has orally advised the Company that after reviewing the Company's
designation request it has decided to regulate ALLOMATRIX-TM- Injectable Putty
as a medical device. Upon official notification of this decision, the Company
will submit a 510(k) premarket notification for the product. The Company has
continued to market ALLOMATRIX-TM- Injectable Putty after receiving the warning
letter, and intends to continue to market and sell ALLOMATRIX-TM- Injectable
Putty. The FDA has not raised any objection to the Company's 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 the Company intends to submit will be cleared by the FDA in a timely manner
or at all. Also, the FDA may take enforcement action against the Company,
including requiring the Company to modify or cease distributing ALLOMATRIX-TM-

5

Injectable Putty, detaining or seizing the Company's inventory of ALLOMATRIX-TM-
Injectable Putty, requiring the recall of ALLOMATRIX-TM- Injectable Putty,
enjoining future violations, and seeking criminal and civil penalties against
the Company and its officers and employees, any of which could adversely affect
the Company's financial condition and results of operations.

In addition to granting approvals for the Company's products, the FDA and
international regulatory authorities periodically inspect the Company for
compliance 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 the Company's Arlington, Tennessee
manufacturing facility in January 2002. The Company was 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.

The Company believes its U.S. manufacturing facility complies in all
material respects with FDA requirements. The Company has also implemented
comprehensive procedures to ensure compliance with the FDA quality system
regulations with a focus on comprehensive product design controls.

INTERNATIONAL

The Company must obtain required regulatory approvals and comply with
extensive regulations governing product safety, quality and manufacturing
processes in order to market its 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 its 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 its products in the member countries of the European
Union, the Company is 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 of the Company's products sold internationally are subject to
appropriate foreign regulatory approvals, such as CE marking for the European
Union. The Company's products are manufactured in ISO 9001 compliant facilities.
The Company's 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 the Company's facility at any time.

PRODUCTS

The Company operates as one reportable segment, offering products in four
primary market sectors: knee reconstruction, hip reconstruction, extremity
reconstruction, and bio-orthopaedic

6

materials. The following table shows the net sales and percentages of net sales
contributed by each of the Company's product groups for each of the three most
recent fiscal years ended December 31, 2001.

KNEE RECONSTRUCTION

The Company's knee reconstruction product portfolio strategically positions
the Company 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. The Company
differentiates its products through 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.

The ADVANCE-Registered Trademark- Knee System is the Company's 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 the Company believes 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, the Company believes the
ADVANCE-Registered Trademark- Medial Pivot Knee more closely approximates
natural knee motion, improves clinical wear and provides a better range of
motion. The ADVANCE-Registered Trademark- Knee System is CE marked for sale in
Europe. The Company recently introduced the ADVANCE-Registered Trademark-
product line into some of its international markets and it has received some
initial success. The Company believes that international markets present a
significant opportunity for sales of the ADVANCE-Registered Trademark- Knee
System.

The ADVANTIM-Registered Trademark- Knee System, one of the Company's 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.

7

HIP RECONSTRUCTION

The Company offers a comprehensive line of products for hip joint
reconstruction. This 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, the Company's 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. The Company is therefore able to offer surgeons
and their patients a continuum of treatment options.

The CONSERVE-Registered Trademark- Hip System provides a conservative
restoration, or bone conserving, alternative to conventional total hip
reconstruction, and the Company believes 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, the Company's 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. The Company anticipates offering the ceramic option in the United
States in the near future.

The PERFECTA-Registered Trademark- Hip System is the basic platform for the
Company's 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 the Company continues 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 a greater range of motion after
being implanted.

Through the Company's acquisition of Cremascoli, several hip implant
products designed for the European market, including the ANCA
FIT-Registered Trademark- Hip System and PROFEMUR-TM- R Hip System, were
acquired. The ANCA FIT-Registered Trademark- 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

The Company offers extremity products for the hand, wrist, elbow, shoulder,
foot and ankle in a number of markets worldwide. The Company's small joint
orthopaedic implants have many years of successful clinical history. The Swanson
Hinge Finger has been used by surgeons for over 30 years.

8

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. By providing an
alternative to the harvesting of the patient's own soft tissues as a spacer for
the repaired joint, the ORTHOSPHERE-Registered Trademark- implant thereby
reduces morbidity and operating time. The Company believes this product
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, the Company 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. Thus, the Company believes this product offers
distinct advantages over other currently marketed systems.

In May 2000, the Company introduced the EVOLVE-Registered Trademark- Modular
Radial Head elbow device. The EVOLVE-Registered Trademark- Modular Radial Head
elbow device 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.

The Company's NEWDEAL-Registered Trademark- 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 the
Company's 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 the Company to continue expanding its dominant position in
the extremity market.

BIO-ORTHOPAEDIC MATERIALS

The Company offers 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. The Company was among 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.

In 1996, the Company 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. The Company also offers surgeons the option of
custom-molding their own beads in the operating room using the
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, the Company introduced ALLOMATRIX-TM- Injectable Putty. This
product combines a high content of demineralized bone matrix, or DBM, with the
Company's proprietary surgical grade calcium sulfate carrier. The combination
provides an injectable putty with the osteoinductive properties of DBM and
exceptional handling qualities. This product has been well received by surgeons.
Another combination the Company offers 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, the Company
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.

9

The Company's bio-orthopaedic offerings in international markets include
OSTEOSET-TM- T medicated pellets and OSTEOSET-TM- pellets containing DBM.
OSTEOSET-TM- 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 the bone.

PRODUCT DEVELOPMENT

The Company's research and development staff focuses on developing new
products in the knee, hip, extremity reconstruction and bio-orthopaedic material
markets, and expanding the current product offerings and the markets in which
they are offered. Realizing that new product offerings are a key to future
success, the Company is committed to a strong research and development program.
Research and development expenses totaled $10.1 million in 2001. The Company
believes this level of spending will produce a steady stream of innovative, new
product introductions in coming years.

The Company has established several surgeon advisory panels that provide
advice on market trends and assist with the development and clinical testing of
the Company's products. The Company believes these surgeon advisors are
prominent in the field of orthopaedics. The Company also partners periodically
with other industry participants, particularly in the bio-orthopaedic materials
area, to develop new products.

In the knee, hip and extremity reconstruction areas, the Company's research
and development focus is on expanding the 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 implants. In the bio-orthopaedic materials area, the Company has a
variety of research and development projects that are designed to further expand
the Company's entry into this rapidly growing market. Such 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.

The Company continues to explore and develop alternative bearing surfaces
that improve the clinical performance of its 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 the Company's product designs during 2002.

Following is a brief description of products under development in each of
the Company's principal market sectors:

KNEES

The ADVANCE-Registered Trademark- Stemmed Medial Pivot Knee is a new
extension of the Company's 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

10

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, the Company has 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. The Company believes 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.

HIPS

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 the Company is currently selling
this product in the U.S., the Company is 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 the Company licenses 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.

11

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 tibia 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. The 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

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
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, the Company is developing a modular replacement system for the distal
ulna, a small forearm bone. This new system will continue the Company's
expansion into new markets in the extremity area.

12

BIO-ORTHOPAEDIC MATERIALS

The latest offering in the Company's ALLOMATRIX-TM- family of products is
ALLOMATRIX-TM- C Putty. The Company recently launched ALLOMATRIX-TM- C Putty in
the U.S. and hopes to soon offer the product internationally, pending receipt of
necessary regulatory clearance.

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
the Company's 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

The Company's sales and marketing staff targets orthopaedic surgeons, who
typically are the decision-makers in orthopaedic device purchases. The Company
has established several surgeon advisory panels comprised of surgeons who the
Company believes are leaders in their chosen orthopaedic specialties and involve
both these surgeons and the Company's marketing personnel in all stages of
bringing a product to market--from initial product development to product
launch. As a result, the Company has a well-educated, highly involved marketing
staff and an installed base of well-respected surgeons who serve as advocates to
promote the Company's products in the orthopaedic community.

The Company offers clinical symposia and seminars, publishes advertisements
and the results of clinical studies in industry publications, and offers
surgeon-to-surgeon education on the Company's new products using the surgeon
advisors in an instructional capacity. Additionally, approximately 16,000
practicing orthopaedic surgeons in the U.S. receive information on the Company's
latest products through frequent catalogue and brochure mailings.

The Company's acquisition of Cremascoli provided 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, the Company believes that by
utilizing its European and North American sales and marketing teams'
understanding of surgeon preferences in their local markets, the Company can
effectively modify and cross-sell existing products throughout the worldwide
markets in which the Company competes.

13

The Company's sales are subject to seasonality. Primarily 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.

The Company sells its products in the United States through a sales force of
over 200 people, consisting of 44 independent commission-based sales
representatives or distributors, and approximately 161 independent 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 the Company, which allows the Company to
manage the distributor based on performance criteria. The U.S. field sales
organization is supported by the Company's Tennessee-based sales and marketing
organization. A Vice President of U.S. Sales, a national sales manager, and four
regional directors manage the Company's domestic sales organization.

The Company's products are marketed internationally through a combination of
direct sales offices in certain key international markets and exclusive
distributors in other markets. The Company has 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 the Company's
products into their respective markets. The Company's products are sold into
other countries in Europe, Asia, Africa, South America and Australia using
stocking distribution partners. Stocking distributors purchase products directly
from the Company for resale directly to their local customers, with product
ownership generally passing to the distributor upon shipment. In total, the
Company's international distribution system consists of approximately 250
distributors and sales associates who sell in over 40 countries. The Company's
President of International and the Vice-President of International Sales and
Distribution manage the Company's international sales organization.

The Company's new sales representatives receive formal product training and
are then typically given one product to sell for a period of time, thus allowing
the representatives time to establish relationships within the orthopaedic
community. The sales representatives gradually add additional products until
they carry all of the Company's product lines. This process typically takes
three years. In addition, the Company requires each sales representative to
attend periodic sales and product training.

MANUFACTURING AND SUPPLY

The Company operates manufacturing facilities in both Arlington, Tennessee
and Toulon, France. These facilities primarily produce orthopaedic implants and
some of the related surgical instrumentation used to prepare the bone surfaces
and cavities during the surgical procedure. The majority of the Company's
surgical instrumentation is produced to the Company's specifications and designs
by qualified subcontractors who serve medical device companies.

During the past year, the Company has continued to modernize both 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 the
Company's product specifications and designs. In seeking to optimize the
Company's manufacturing operations, the Company has adopted many sophisticated
manufacturing practices, such as lean manufacturing, which are designed to lower
lead times, minimize waste and reduce inventory. The Company has a wide breadth
of manufacturing capabilities at both facilities, including skilled and
semi-skilled manufacturing personnel.

The Company's 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. The
Company is aware of only two suppliers of medical grade silicone elastomer, only
one of which is used by the Company. Currently, the Company relies on two
suppliers of DBM for use in the Company's bio-orthopaedic products. Other raw
material supplies come from multiple suppliers that supply products to the
Company's specifications and purchase order requirements.

14

The Company maintains a comprehensive quality assurance and quality control
program, which includes documentation of all material specifications, operating
procedures, equipment maintenance and quality control methods. The Company's
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.

The Company believes that its two production facilities can continue to meet
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. 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 the Company's products.

The primary competitive factors facing the Company include: price, quality,
technical capability, breadth of product line and distribution capabilities.
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 the Company does. The Company's
ability to compete is affected by its ability to:

- develop new products and innovative technologies;

- obtain regulatory clearance and compliance for its products;

- protect the proprietary technology of its products and manufacturing
process;

- market its products;

- attract and retain skilled employees and sales representatives; and

- maintain and establish distribution relationships.

INTELLECTUAL PROPERTY

The Company currently owns or has exclusive licenses to more than 108
patents and pending patent applications throughout the world. The Company seeks
to aggressively protect technology, inventions and improvements that are
considered important through the use of patents and trade secrets in the United
States and significant foreign markets. The Company manufactures and markets the
products both under patents and license agreements with other parties.

The Company's knowledge and experience, creative product development,
marketing staff, and trade secret information with respect to manufacturing
processes, materials and product design, are as equally important as the
Company's patents in maintaining the Company's proprietary product lines. As a
condition of employment, the Company requires all employees to execute a
confidentiality agreement relating to proprietary information and assigning
patent rights to the Company.

15

There can be no assurances that the Company's patents will provide
competitive advantages for the Company's products, or that competitors will not
challenge or circumvent these rights. In addition, there can be no assurances
that the United States Patent and Trademark Office, or PTO, will issue any of
the Company's pending patent applications. The PTO may also deny or require
significant narrowing of claims in the Company's pending patent applications,
and patents issuing from the pending patent applications. Any patents issuing
from the pending patent applications may not provide the Company with
significant commercial protection. The Company could incur substantial costs in
proceedings before the PTO, including interference proceedings. These
proceedings could result in adverse decisions as to the priority of the
Company's inventions. Additionally, the laws of some of the countries in which
the Company's products are or may be sold may not protect the Company's products
and intellectual property to the same extent as the laws in the United States,
or at all.

While the Company does not believe that any of its products infringe any
valid claims of patents or other proprietary rights held by third parties, there
can be no assurances that the Company does not infringe any patents or other
proprietary rights held by third parties. If the Company's products were found
to infringe any proprietary right of a third party, the Company 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 the Company holds or to protect trade secrets
or techniques the Company owns. The Company is currently involved in an
intellectual property lawsuit with Howmedica Osteonics Corp., a subsidiary of
Stryker Corporation. See Item 3 of this Form 10-K for further details. Also, the
Company was contacted in August 1996 by Tranquil Prospects, Ltd. claiming that
the Company's EVOLUTION-Registered Trademark- Hip infringed its patents. The
Company has had occasional contact with Tranquil since that time. The Company
believes that neither this former product nor any of its existing products
infringes Tranquil's patents.

The Company also relies on trade secrets and other unpatented proprietary
technology. There can be no assurances that the Company can meaningfully protect
its rights in its unpatented proprietary technology or that others will not
independently develop substantially equivalent proprietary products or processes
or otherwise gain access to the Company's proprietary technology. The Company
seeks to protect its trade secrets and proprietary know-how, in part, with
confidentiality agreements with employees and consultants. There can be no
assurances, however, that the agreements will not be breached, that adequate
remedies for any breach would be available, or that competitors will not
discover or independently develop the Company's trade secrets.

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. The Company believes
that reimbursement is an important factor in the success of any medical device.
Consequently, the Company seeks to obtain reimbursement for all of its products.

Reimbursement in the United States depends on the Company's ability to
obtain FDA clearances and approvals to market these products. Reimbursement also
depends on the Company's ability to demonstrate the short-term and long-term
clinical and cost-effectiveness of its products from the results obtained from
its clinical experience and formal clinical trials. The Company presents these
results at major scientific and medical meetings and publishes 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

16

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. The Company estimates that 25% of the procedures
using its 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 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 December 31, 2001, the Company employed directly and through our
subsidiaries 751 people in the following areas: 347 in manufacturing, 217 in
sales and marketing, 121 in administration and 66 in research and development.
The Company does not have any active organized labor unions. The Company
believes it has an excellent relationship with its employees.

ENVIRONMENTAL

The Company's 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 the Company's
facilities. Under such laws and regulations, the Company is required to obtain
permits from governmental authorities for some of its operations. If the Company
violates or fails to comply with these laws, regulations or permits, it could be
fined or otherwise sanctioned by regulators. Under some environmental laws and
regulations, the Company could also be held responsible for all of the costs
relating to any contamination at its past or present facilities and at third
party waste disposal sites.

The Company believes its costs of complying with current and future
environmental laws, and its liabilities arising from past or future releases of,
or exposure to, hazardous substances will not materially adversely affect its
business, results of operations or financial condition, although there can be no
assurances that they will not do so.

In 1999, groundwater contamination was detected at the Company's Arlington,
Tennessee facility. The Company has taken steps to investigate the nature and
extent of the contamination and, in connection with a state administrative
proceeding, the Company is presently negotiating a Remediation Order with state
environmental officials that will specify the terms of further investigation
and, if necessary, remediation. The Company believes the contamination was
caused by the former owner of the business and has requested indemnification in
accordance with the 1993 purchase agreement by which the Company acquired the
business. The former owner may have factual and legal defenses to the claim and
there can be no assurances that the former owner will not prevail. Additionally,
the former owner is currently involved in bankruptcy proceedings. The Company
believes the bankruptcy will not affect the Company's ability to pursue the
claim under the indemnification, although there can be no assurances that it
will not. Further, there can be no assurance that, even if the Company should
prevail on the claim, the former owner will have the capacity to pay the claim.

17

The Company does not believe that the cost of addressing the contamination,
without regard to indemnification from the former owner of the business, will
materially adversely affect its business, results of operations or financial
condition although there can be no assurances that it will not.

ITEM 2. PROPERTIES.

The Company's U.S. corporate headquarters includes warehouse,
administrative, and manufacturing facilities located in three buildings on 31
acres in Arlington, Tennessee with an aggregate of 168,000 square feet. The
manufacturing facilities have additional capacity, which will allow the Company
to expand production of its current product lines.

The majority of the Company's products are manufactured in the Company's
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. The Company may
exercise a nominal purchase option at any time. The Company's 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,
the Company may exercise a $101,000 purchase option at any time. The Company 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.

The Company's international operations include warehouse, research,
administrative and manufacturing facilities located in several countries. The
Company's primary international manufacturing facility and warehouse are located
in leased facilities in Toulon, France. The Company's primary international
research and development facility is located in leased facilities in Milan,
Italy. In addition, the Company leases office space in France, Belgium and Italy
and warehouse space in Belgium and Italy.

ITEM 3. LEGAL PROCEEDINGS.

From time to time, the Company is subject to lawsuits and claims which arise
out of its operations in the normal course of business. The Company is the
plaintiff or defendant in various litigation matters in the ordinary course of
business, some of which involve claims for damages that are substantial in
amount. The Company believes that the disposition of claims currently pending,
including the matters discussed below, will not have a material adverse effect
on its 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 the Company infringed Howmedica's U.S. Patent No. 5,824,100
related to the Company's 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
the Company's products and could rule that the Company's patents are invalid or
unenforceable. The Company is 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 the Company, the Company may be forced to raise
or borrow funds, as a supplement to any available insurance claim proceeds, to
pay the damages award. The Company believes that it has good defenses to this
lawsuit and intends to defend it vigorously.

18

WRIGHT MEDICAL TECHNOLOGY, INC. V. GRISONI

The Company filed an action against a former employee on March 31, 1998,
regarding the use of intellectual property and trade secrets. The Company
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 the Company's similar product. Initially, the trial court
granted the Company a temporary restraining order and later granted a temporary
injunction. Seven months later, the former employee filed a motion to dissolve
the injunction. The 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 the Company "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. The Company appealed the judgment
and agreed to suspend the injunction pending the outcome of the appeal. In
connection with the appeal the Company was required to post a $5.0 million bond.

The Tennessee Court of Appeals issued its decision on the Company's 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 the Company was 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 the
Company's 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 the Company did not use
Grisoni's information.

In February 2002, Grisoni sought permission to appeal the Court of Appeals'
findings. If this case is accepted by the Tennessee Supreme Court and the
damages reversed by the Court of Appeals are reinstated, the Company may be
required to raise or borrow the money to pay all or a portion of the damages
award.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

19

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

On July 18, 2001, the Company completed its initial public offering, and
issued 7,500,000 shares of voting common stock at $12.50 per share, which
produced net proceeds of $84.8 million after deducting underwriting discounts
and offering expenses. The Company used the net proceeds of its initial public
offering to repay debt. Simultaneous with the closing of the offering, all of
its 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, Warburg, Pincus Equity Partners, L.P. converted
approximately $13.1 million of the Company's senior subordinated notes into
1,125,000 shares of non-voting common stock.

The Company's 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 the Company's common stock existed. The following table sets forth,
for the periods indicated, the high and low closing sales prices per share of
the Company's common stock as reported on the Nasdaq National Market.

On February 27, 2002, the last reported sales price of the Company's common
stock on the Nasdaq National Market was $15.89 per share. As of February 27,
2002, there were 61 stockholders of record and an estimated 3,400 beneficial
stockholders.

DIVIDEND POLICY

The Company has never declared or paid cash dividends on its common stock.
The Company currently intends to retain all future earnings for the operation
and expansion of its business. The Company does not anticipate declaring or
paying cash dividends on its common stock in the foreseeable future. Any payment
of cash dividends on the Company's common stock will be at the discretion of the
Company's board of directors and will depend upon the Company's results of
operations, earnings, capital requirements, contractual restrictions and other
factors deemed relevant by our board. In addition, the Company's current credit
facility prohibits the Company from paying any cash dividends without the
lenders' consent.

RECENT SALES OF UNREGISTERED SECURITIES

In reliance on Section 4(2) under the Securities Act of 1933, the Company
issued the following securities without registration under the Securities Act of
1933:

In February 2001, the Company issued 5,453 shares of voting 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 established in
connection with the Company's acquisition of Cremascoli.

In March 2001, the Company sold Robert Glen Coleman, 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 voting common stock and $91,676
aggregate principal amount of 10% subordinated notes, for a total purchase price
of $250,000.

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At the closing of the Company's initial public offering in July 2001, all of
the Company's subordinated notes were repaid in full and all of the Company's
series of preferred stock were converted into common stock of the Company.

ITEM 6. SELECTED FINANCIAL DATA.

The following table sets forth certain selected consolidated financial data
of Wright Medical Group, Inc. (the Company) and Wright Medical
Technology, Inc., (the Predecessor Company), for the periods indicated. The
selected consolidated financial data as of December 31, 2001, 2000, 1999, and
1997 and for the years ended December 31, 2001, 2000 and 1997, the period from
January 1, 1999 to December 7, 1999, and the period from December 8, 1999 to
December 31, 1999 was derived from the Company's consolidated financial
statements audited by Arthur Andersen LLP. The selected consolidated financial
data as of December 31, 1998 and for the year then ended was derived from the
consolidated financial statements audited by a different firm. The audited
consolidated financial statements as of December 31, 2001 and 2000 and for the
years ended December 31, 2001 and 2000, for the period January 1, 1999 to
December 7, 1999 and for the period December 8, 1999 through December 31, 1999
are included elsewhere in this filing. The audited consolidated financial
statements as of December 31, 1999, 1998 and 1997 and for the years ended
December 31, 1998 and 1997 are not

21

included in this filing. Historical and pro forma results are not necessarily
indicative of the results to be expected for any future period.

- ------------------------------

(1) In connection with the Company's recapitalization and acquisition of
Cremascoli, the Company recorded inventory step-ups pursuant to Accounting
Principles Board (APB) Opinion 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, and
$29.1 million in the year ended December 31, 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 the beneficial conversion
feature of the series C preferred stock of $13.1 million for the year ended
December 31, 2000, and preferred stock dividends of $2.5 million for the
year ended December 31, 2001.

(3) In calculating the pro forma net loss per share, the Company has given
effect to the conversion of all of its outstanding mandatorily redeemable,
convertible preferred stock, plus accrued dividends, into common stock as if
the conversion occurred at the beginning of the respective period.
Therefore, pro forma net loss applicable to common stockholders excludes
preferred stock dividends of $4.4 million and the beneficial conversion
feature of the series C preferred stock of $13.1 million for the year ended
December 31, 2000, and preferred stock dividends of $2.5 million for the
year ended December 31, 2001.

(4) Adjusted EBITDA consists of net loss excluding net interest, taxes,
depreciation, amortization, stock based expenses, and 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. The
Company has presented Adjusted EBITDA to enhance your understanding of its
operating results. It should not be construed 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. The Company may
calculate Adjusted EBITDA differently from other companies. For further
information, see the Company's consolidated financial statements and related
notes.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

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, 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 16, "BUSINESS
COMBINATIONS". 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 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 $26.0 million, of which
$9.3 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.

Net sales in our international markets totaled $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 $64.9 million, or
approximately 38% of our total net sales in 2001. No single foreign country
accounted for more than 10% of our total net sales during 1999, 2000 or 2001;
however, Italy and France together represented approximately 17% of our total
net sales in 2000 and 16% in 2001.

On July 18, 2001, we completed our initial public offering (the "IPO"),
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 debt. 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

24

of common stock. Also in connection with the offering, Warburg converted
approximately $13.1 million of our senior subordinated notes into 1,125,000
shares of non-voting common stock.

In August 2001, we began selling our products in Japan through our newly
formed wholly-owned Japanese subsidiary. We previously marketed our products in
Japan through an independent sales distributor, and have since transitioned to a
direct sales initiative. We view this direct sales initiative as a 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. Other
product sales consists 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 consists 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.

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Our total net sales were $109.2 million in 1999, $157.6 million in 2000, and
$172.9 million in 2001. The following table sets forth our net sales by product
line for 1999, 2000, and 2001 expressed as a dollar amount and as a percentage
of total net sales:

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 for the period from December 8 to December 31, 1999 and
the year ended December 31, 2000 are not comparable to those of other 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 1999, 2000, and 2001, adjusted to exclude the cost of sales

26

associated with our inventory step-ups and the costs associated with surgical
instruments historically carried in inventories:

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. Purchased
intangibles are amortized over periods ranging from three months to 15 years.
Until January 1, 2002, goodwill was amortized on a straight-line basis over
20 years. In accordance with Statement of Financial Accounting Standards (SFAS)
142, "GOODWILL AND OTHER INTANGIBLE ASSETS," after January 1, 2002 we will no
longer amortize goodwill but will evaluate it for impairment upon adoption and
at least annually thereafter.

At December 31, 2000 and 2001, we had net intangible assets totaling
$54.7 million and $48.8 million, respectively. We expect to amortize
approximately $3.2 million in 2002, $3.1 million in 2003, and $3.1 million in
2004. This amortization gives effect to the aforementioned cessation of goodwill
amortization.

STOCK-BASED EXPENSE. Our stock-based expense includes the non-cash
compensation recorded in connection with the issuance of stock options to
employees when the exercise price of the option is less than the deemed fair
value of the stock at the date of grant, the sale of preferred stock to
employees at less than the deemed fair value, and the issuance of stock and
stock options to distributors. Compensation expense related to stock options is
deferred and amortized straight-line over the vesting period of the option,
which is generally four years.

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We incurred approximately $7.9 million and $4.0 million of stock-based
compensation for the years ended December 31, 2000 and 2001, respectively
related to stock grants, stock option grants and the sale of preferred stock to
employees. We recognized $5.0 million and $2.0 million of this compensation
during 2000 and 2001, respectively. The remainder of the compensation was
deferred, and we expect to recognize $1.7 million in 2002, $1.7 million in 2003,
$1.5 million in 2004 and $230,000 in 2005 as non-cash stock-based expense.

TRANSACTION AND REORGANIZATION. Transaction and reorganization expense
includes one-time costs incurred by our predecessor company in connection with
our recapitalization, and costs incurred by us following our recapitalization
and acquisition of Cremascoli related primarily to employee recruitment and
termination expenses, and subsequent terminations or realignments of
arrangements with various international distributors. During the fourth quarter
of 1999 we incurred expenses totaling $9.9 million related to these events.

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:

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.

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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.

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.

Fol