Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. WRIGHT MEDICAL GROUP INC (1137861) 10-Q published on Jul 29, 2015 at 7:18 pm
Reporting Period: Jun 29, 2015
We entered into 2020 Notes Hedges in connection with the issuance of the 2020 Notes with three counterparties (the Option Counterparties). The 2020 Notes Hedges, which are cash-settled, are intended to reduce our exposure to potential cash payments that we would be required to make if holders elect to convert the 2020 Notes at a time when our stock price exceeds the conversion price. However, in connection with certain events, including, among others, (i) a merger other than our proposed merger with Tornier, or other make-whole fundamental change (as defined in the 2020 Notes indenture), (ii) certain hedging disruption events, which may include changes in tax laws, an increase in the cost of borrowing our common stock in the market or other material increases in the cost to the Option Counterparties of hedging the 2020 Note Hedges and warrants, (iii) our failure to perform certain obligations under our 2020 Notes indenture or under the 2020 Notes Hedges and warrant transactions, (iv) certain payment defaults on our existing indebtedness in excess of $25 million or (v) if we or any of our significant subsidiaries become insolvent or otherwise becomes subject to bankruptcy proceedings, the Option Counterparties have the discretion to terminate the 2020 Note Hedges and warrant transactions at a value determined by them in a commercially reasonable manner, which may reduce the effectiveness of the 2020 Note Hedges or increase our obligations under the warrant transactions. In addition, the Option Counterparties have broad discretion to make certain adjustments to the 2020 Notes Hedges and warrant transactions upon the occurrence of certain other events, including, among others, (i) any adjustment to the conversion rate of our 2020 Notes, (ii) a change in law that adversely impacts the Option Counterparties’ ability to hedge their positions in our 2020 Note Hedges and warrants or (iii) upon the announcement of certain significant corporate events, including events that may give rise to a termination event as described above, such as the announcement of a third-party tender offer for more than 10% of our shares of common stock or that may have a material economic effect on the warrant transactions. Any such adjustment may also reduce the effectiveness of the 2020 Note Hedges or increase our obligations under the warrant transactions. The aggregate cost of the 2020 Notes Hedges was $144.8 million and is accounted for as a derivative asset in accordance with ASC Topic 815. See Note 7 of the condensed consolidated financial statements for additional information regarding the 2020 Notes Hedges and the 2020 Notes Conversion Derivative.
FASB ASC Topic 260, Earnings Per Share, requires the presentation of basic and diluted earnings per share. Basic earnings per share is calculated based on the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is calculated to include any dilutive effect of our common stock equivalents. Our common stock equivalents consist of stock options, non-vested shares of common stock, stock-settled phantom stock units, restricted stock units, 2.625% Convertible Senior Notes maturing on December 1, 2014 (2014 Notes), and warrants. The dilutive effect of the stock options, non-vested shares of common stock, stock-settled phantom stock units, restricted stock units and warrants is calculated using the treasury-stock method. The dilutive effect of the 2014 Notes is calculated by applying the “if-converted” method. This assumes an add-back of interest, net of income taxes, to net income as if the securities were converted at the beginning of the period. During the three- and six- month periods ended June 30, 2014, the 2014 Notes had an anti-dilutive effect on earnings per share and we therefore excluded them from the dilutive shares calculation. In addition, approximately 0.9 million and 0.9 million common stock equivalents have been excluded from the computation of diluted net loss from continuing operations per share for the three- and six- month periods ended June 30, 2015, respectively, because their effect is anti-dilutive as a result of our net loss in that period. In addition, approximately 1.3 million and 1.6 million common stock equivalents have been excluded from the computation of diluted net loss from continuing operations per share for the three- and six- month periods ended June 30, 2014, because their effect is anti-dilutive as a result of our net loss in that period.
In June 2015, a jury returned a $4.4 million verdict against us in a case involving a fractured hip implant stem sold prior to the MicroPort closing. This was a one-of-a-kind case unrelated to the modular neck fracture cases we have been reporting. There are no other cases pending related to this component, nor are we aware of other instances where this component has fractured. We are presently evaluating our post-trial options. The $4.4 million probable liability associated with this matter is reflected within “Accrued expenses and other current liabilities,” and a $4.1 million receivable associated with the probable recovery from product liability insurance is reflected within “Other current assets.”
In July 2015, we received a written demand from MicroPort seeking indemnification, under the terms of the asset purchase agreement for the sale of our OrthoRecon business, for losses or potential losses it has incurred or may incur as a result of either alleged breaches of representations in the asset purchase agreement or alleged unassumed liabilities. MicroPort asserts the range of potential losses for which it seeks indemnity is between $18.5 million and $30 million. We expect to vigorously contest the validity of these claims. Due to the recent receipt of this demand, we are currently evaluating this matter and have not determined the likelihood of an unfavorable outcome.
In June 2015, a jury returned a $4.4 million verdict against us in a case involving a fractured hip implant stem. This was a one-of-a-kind case unrelated to the modular neck fracture cases we have been reporting. There are no other cases pending related to this component, nor are we aware of other instances where this component has fractured. The case, Alan Warner et al. vs. Wright Medical Technology, Inc. et al., case no. BC 475958, was tried in the Superior Court of the State of California for the County of Los Angeles, Central District. We are presently evaluating our post-trial options.