Preliminary proxy statements relating to merger or acquisition


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

SCHEDULE 14A
(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No.          )

Filed by the Registrant ý

Filed by a Party other than the Registrant o

Check the appropriate box:

ý


Preliminary Proxy Statement

o


Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

o


Definitive Proxy Statement

o


Definitive Additional Materials

o


Soliciting Material Pursuant to §240.14a-12


ARTHROCARE CORPORATION

(Name of Registrant as Specified In Its Charter)

Payment of Filing Fee (Check the appropriate box):

o


No fee required.

ý


Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, $.001 par value
(2) Aggregate number of securities to which transaction applies:
As of February 25, 2014, (a) 34,402,320 shares of common stock outstanding and (b) 1,432,688 shares of common stock issuable upon exercise of outstanding options and stock appreciation rights with exercise prices below $48.25;(c) 446,664 shares of common stock underlying restricted stock units; and (d) 449,994 shares of common stock underlying performance shares.
(3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
Solely for the purpose of calculating the filing fee, the underlying value of the transaction was calculated based on the sum of: (a) 34,402,320 shares of common stock multiplied by $48.25 per share; (b) 1,432,688 shares of common stock issuable upon exercise of outstanding options and stock appreciation rights with exercise prices below $48.25 multiplied by $18.45 per share (which is equal to the difference between $48.25 and $29.80, the weighted average exercise price of such options); (c) 446,664 shares of common stock underlying restricted stock units multiplied by $48.25 per share; and (d) 449,994 shares of common stock underlying performance shares multiplied by $48.25 per share. In accordance with Rule 0-11 of the Exchange Act, as amended, the filing fee was calculated by multiplying the aggregate value of the transaction by 0.00012880.
(4) Proposed maximum aggregate value of transaction:
$1,729,608,782.10
(5) Total fee paid:
$222,773.61

o


Fee paid previously with preliminary materials.

o


Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.



(1)


Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:

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ARTHROCARE CORPORATION



NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON                , 2014



TO THE STOCKHOLDERS:

Notice is hereby given that a special meeting of stockholders of ArthroCare Corporation, a Delaware corporation (the "Company" ), is to be held on                              ,                               , 2014 at                              , local time, at                              . At the special meeting, holders of record on                              , 2014 of our common stock will be asked to vote on the following matters:

    1.
    To approve and adopt the Agreement and Plan of Merger, dated as of February 2, 2014, by and among the Company, Smith & Nephew, Inc., a Delaware corporation, Rosebud Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of Smith & Nephew, Inc., and Smith & Nephew plc, an English public limited company, as it may be amended from time to time;

    2.
    To approve an adjournment of the special meeting, if advisable or necessary, including to solicit additional proxies in order to obtain approval of the merger agreement by our stockholders; and

    3.
    To approve, on a non-binding advisory basis, the golden parachute compensation for each of our named executive officers that is based on or otherwise relates to the merger.

After careful consideration, our Board of Directors unanimously determined that the merger agreement and the transactions contemplated thereby are fair to, and in the best interests of, the Company and its stockholders and approved, adopted and declared advisable the merger agreement and the other transactions contemplated thereby, including the merger. Our Board of Directors unanimously recommends approval and adoption of the merger agreement by the stockholders of the Company and our Board of Directors unanimously recommends that you vote "FOR" the proposal to approve and adopt the merger agreement, "FOR" the proposal to adjourn the special meeting, and "FOR" the non-binding advisory proposal to approve the golden parachute compensation for each of our named executive officers that is based on or otherwise relates to the merger .

We cannot complete the merger unless the holders of a majority of the outstanding shares of our common stock vote to approve and adopt the merger agreement. Approval of the proposal to adjourn the special meeting requires the affirmative vote of a majority in voting power of the shares present in person or by proxy at the special meeting if a quorum is present, and requires the affirmative vote of a majority of the shares present in person or by proxy at the special meeting if a quorum is not present. The non-binding advisory proposal to approve the golden parachute compensation for our named executive officers that is based on or otherwise relates to the merger will be approved if a majority in voting power of the shares represented in person or by proxy at the special meeting and entitled to vote on the subject matter vote in favor of this proposal. The obligations of ArthroCare and Smith & Nephew to complete the merger are also subject to the satisfaction or waiver of several other conditions. We encourage you to read the accompanying proxy statement, including the annexes, in its entirety because it explains the proposed merger, the documents related to the merger and other related matters.

Whether or not you plan to attend the special meeting, please submit your proxy by completing and mailing to us the enclosed proxy card or by granting your proxy electronically over the Internet or by telephone, as soon as possible. YOUR VOTE IS IMPORTANT . If your shares are held in an account at a brokerage firm, bank or other nominee, you should instruct your broker, bank or nominee how to vote your shares using the enclosed voting instruction form furnished by your broker, bank or nominee. If you do not vote or do not instruct your broker, bank or nominee how to vote, it will have the same effect as voting against the proposal to adopt the merger agreement.


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All stockholders are cordially invited to attend our special meeting in person. However, to assure your representation at our special meeting, you are urged to sign and return the enclosed proxy as promptly as possible in the postage-prepaid envelope enclosed for that purpose. Alternatively, you are urged to vote by submitting a proxy via the Internet or telephone. Instructions for voting your proxy are contained on your proxy card or voting instruction form. Those instructions are also available on our website at www.arthrocare.com, under the "Investor Relations" tab. Any stockholder attending our special meeting may vote in person even if such stockholder has returned a proxy.

By Order of the Board of Directors






David Fitzgerald
President and Chief Executive Officer

Austin, Texas
, 2014

This proxy statement is dated                              , 2014 and is being mailed on or about                              , 2014.


IMPORTANT NOTICE

TO ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING, PLEASE MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS SOON AS POSSIBLE IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE. ALTERNATIVELY, YOU CAN SUBMIT YOUR PROXY VIA THE INTERNET OR TELEPHONE. INSTRUCTIONS FOR SUBMITTING YOUR PROXY ARE CONTAINED ON YOUR PROXY CARD OR VOTING INSTRUCTION FORM. THOSE INSTRUCTIONS ARE ALSO AVAILABLE ON OUR WEBSITE AT WWW.ARTHROCARE.COM, UNDER THE "INVESTOR RELATIONS" TAB. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON EVEN IF YOU RETURNED A PROXY.

THIS PROXY STATEMENT IS AVAILABLE FOR VIEWING, PRINTING AND DOWNLOADING AT http://www.proxyvote.com


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Page

SUMMARY

1

The Companies

1

The Merger

2

Date, Time and Place of Special Meeting; Purpose of Special Meeting

2

Stockholders Entitled to Vote; Record Date; Vote Required

2

Quorum

3

Shares Owned by Our Directors and Officers

3

Market Price

3

Recommendation of Our Board of Directors; Our Reasons for the Merger

4

Interests of Our Directors and Executive Officers in the Merger

4

Opinion of Piper Jaffray & Co.

4

Delisting and Deregistration of Our Common Stock

5

Conditions to Completion of the Merger

5

Restrictions on Solicitation of Acquisition Proposals

6

Changes in Board Recommendation

7

Required Efforts to Consummate the Merger

8

Termination of the Merger Agreement

8

Termination Fee Payable by ArthroCare

9

Remedies; Maximum Liability

10

Specific Performance

10

Voting Agreements

10

Smith & Nephew's Financing of the Merger

11

Material U.S. Federal Income Tax Consequences

11

Regulatory Matters

12

Appraisal Rights

12

Treatment of Company Stock Options, Stock Appreciation Rights, Restricted Stock Units and Performance Shares

13

Treatment of Employee Stock Purchase Plan

13

Treatment of Shares Held in the Company's Retirement Savings and Investment Plan

14

Legal Proceedings Relating to the Merger

14

QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING

15

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

24

THE COMPANIES

25

ARTHROCARE CORPORATION SPECIAL MEETING

26

General; Date, Time and Place of Special Meeting

26

Purpose of the Special Meeting

26

Recommendation of Our Board of Directors

26

Quorum

26

Vote Required

26

Shares Owned by Our Directors and Executive Officers

27

Voting; Proxies

28

Adjournments

29

Revocation of Proxies

29

Solicitation of Proxies

29

Appraisal Rights

30

Assistance

30

PROPOSAL 1—ADOPTION OF THE MERGER AGREEMENT

31

THE MERGER

31

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Page

Background of the Merger

31

Recommendation of our Board of Directors; Our Reasons for the Merger

42

Opinion of Piper Jaffray

45

Certain Financial Forecasts

59

Interests of Our Directors and Officers in the Merger

62

Delisting and Deregistration of Our Common Stock

76

Material U.S. Federal Income Tax Consequences

77

Regulatory Matters

79

Appraisal Rights

80

Smith & Nephew's Financing of the Merger

84

Legal Proceedings Relating to the Merger

85

Effects on the Company if the Merger is Not Completed

85

THE MERGER AGREEMENT

86

Explanatory Note Regarding the Merger Agreement

86

Structure of the Merger

86

Closing and Effective Time of the Merger

86

Effect of the Merger on ArthroCare's Stock

87

Procedures for Surrendering Shares for Payment

87

Withholding

88

Treatment of ArthroCare Equity-Based Awards

89

Representations and Warranties

89

Definition of "Material Adverse Effect"

91

Conduct of the Business Pending the Merger

92

Board Obligation to Call a Stockholders' Meeting

94

Restrictions on Solicitation of Acquisition Proposals

95

Changes in Board Recommendation

97

Required Efforts to Consummate the Merger

98

Employee Benefits Matters

100

Directors' and Officers' Indemnification and Insurance

100

Takeover Provisions

101

Litigation Related to the Merger

101

ArthroCare Series A Preferred Stock

102

Other Covenants

102

Conditions to Completion of the Merger

102

Termination of the Merger Agreement

104

Termination Fee Payable by ArthroCare

105

Remedies

105

Guarantee

106

Specific Performance

106

Fees and Expenses

106

Amendments, Waivers

106

Governing Law and Venue, Waiver of Jury Trial

106

THE VOTING AGREEMENTS

107

Voting Provisions

107

Restrictions on Transfer; Other Actions

108

Non-Solicitation

108

Termination

108

OEP SPA Waiver

109

PROPOSAL 2—AUTHORITY TO ADJOURN THE SPECIAL MEETING

110

The Adjournment Proposal

110

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Page

Board of Directors Recommendation

110

PROPOSAL 3—ADVISORY VOTE ON NAMED EXECUTIVE OFFICER GOLDEN PARACHUTE COMPENSATION

111

MARKET PRICE

115

SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS AND CERTAIN BENEFICIAL OWNERS

116

DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS

120

HOUSEHOLDING

120

WHERE YOU CAN FIND MORE INFORMATION

120

Annex A: Agreement and Plan of Merger dated as of February 2, 2014 among ArthroCare Corporation, Smith & Nephew, Inc., Rosebud Acquisition Corporation and Smith & Nephew plc

Annex B: Opinion of Piper Jaffray & Co.

Annex C: Section 262 of the General Corporation Law of the State of Delaware

Annex D: Voting Agreement by and among OEP, Christian Ahrens, Gregory Belinfanti and Smith & Nephew

Annex E: Voting Agreement executed by each of the members of the Company's Board of Directors (other than Mr. Ahrens and Mr. Belinfanti) and Smith & Nephew

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SUMMARY

This summary, together with the section of this proxy statement entitled "Questions and Answers About the Merger and the Special Meeting," highlights selected information from this proxy statement and may not contain all of the information that is important to you as a stockholder of ArthroCare or that you should consider before voting on the proposal to adopt the merger agreement. To better understand the merger, you should carefully read this entire proxy statement and all of its annexes, including the merger agreement, which is attached as Annex A , before voting on the proposal to adopt the merger agreement. Each item in this summary includes a page reference directing you to a more complete description of that item. You may obtain without charge copies of documents incorporated by reference into this proxy statement by following the instructions under "Where You Can Find More Information" beginning on page 120.


The Companies (page 25)

    ArthroCare Corporation
    7000 West William Cannon
    Building 1
    Austin, TX 78735
    (512) 391-3900

ArthroCare Corporation (NASDAQ: ARTC), a Delaware corporation, which we refer to in this proxy statement as ArthroCare, the Company, we, us or our, is a leading global provider of minimally invasive surgical products. We are a medical device company that develops, manufactures and markets surgical products, many of which are based on our minimally invasive patented Coblation® technology. The Company seeks to improve existing soft-tissue surgical procedures and enable new minimally invasive procedures. ArthroCare's innovative technologies have improved the lives of many diverse individuals.

For additional information about ArthroCare and our business, see "Where You Can Find More Information" on page 120.

    Smith & Nephew, Inc.
    150 Minuteman Road
    Andover, MA 01810
    (978) 749-1000

Smith & Nephew, Inc., a Delaware corporation, which we refer to in this proxy statement as Smith & Nephew, is a medical technology business that offers equipment for orthopedic reconstruction, advanced wound management, sports medicine and trauma & extremities. Smith & Nephew operates as a subsidiary of Smith & Nephew plc.

    Smith & Nephew plc
    15 Adam Street
    London
    WC2N 6LA
    United Kingdom
    +44 (0)20 7401 7646

Smith & Nephew plc (NYSE: SNN), an English public limited company, which we refer to in this proxy statement as Parent HoldCo, is a global medical technology business that operates in the orthopedic reconstruction, advanced wound management, sports medicine and trauma & extremities markets. Parent HoldCo is the parent holding company of Smith & Nephew.

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    Rosebud Acquisition Corporation
    1450 East Brooks Road
    Memphis, TN 38116
    (901) 396 2121

Rosebud Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of Smith & Nephew, which we refer to in this proxy statement as Merger Sub, was formed on or around February 19, 2010 to facilitate possible unrelated transactions. Merger Sub has not conducted any business operations other than those incident to its formation and the transactions contemplated by the merger agreement. If the merger is completed, Merger Sub will cease to exist following its merger with and into ArthroCare.


The Merger (page 31)

Pursuant to the terms of the Agreement and Plan of Merger, which we refer to as the merger agreement, that is described in this proxy statement and attached as Annex A , ArthroCare will be acquired by Smith & Nephew. We encourage you to carefully read in its entirety the merger agreement, which is the principal document governing the merger.

The merger agreement provides that, subject to the terms and conditions contained therein, Merger Sub will merge with and into ArthroCare, with ArthroCare continuing as the surviving corporation and a wholly-owned subsidiary of Smith & Nephew. Upon the completion of the merger, each share of our common stock outstanding immediately prior to the completion of the merger (other than shares held by the Company as treasury stock, by Smith & Nephew, by subsidiaries of Smith & Nephew or the Company or by holders who have properly demanded appraisal rights under the General Corporation Law of the State of Delaware, which we refer to as the DGCL), will be converted into the right to receive $48.25 in cash per share, without interest and less any applicable withholding taxes. Any amounts withheld and paid to the appropriate governmental authority in accordance with applicable law will be treated for all purposes as having been paid to the holder of our common stock in respect of which such withholding was made.


Date, Time and Place of Special Meeting; Purpose of Special Meeting (page 26)

The special meeting will be held at      , on      ,      , 2014, at      local time. At the special meeting, you will be asked to consider and vote on (i) a proposal to approve and adopt the merger agreement, as it may be amended from time to time, (ii) a proposal to approve the adjournment of the special meeting, if advisable or necessary, including to solicit additional proxies in order to obtain approval and adoption of the merger agreement by our stockholders, and (iii) a non-binding advisory proposal to approve the golden parachute compensation for each of our named executive officers that is based on or otherwise relates to the merger.


Stockholders Entitled to Vote; Record Date; Vote Required (page 26)

Only holders of record of our common stock at the close of business on      , 2014, the record date for the determination of stockholders entitled to notice of and to vote at the special meeting, may vote at the special meeting. For each share of our common stock that you owned on the record date, you are entitled to cast one vote on each matter voted upon at the special meeting.

Approval and adoption of the merger agreement requires the affirmative vote of a majority of the outstanding shares of our common stock (including the shares of our common stock resulting from the recently completed conversion of the Company Series A Preferred Stock). Failures to vote, by proxy or in person, and abstentions will have the same effect as a vote "AGAINST" the proposal to adopt the merger agreement. Approval of the proposal to adjourn the special meeting, if advisable or necessary, including to solicit additional proxies in order to obtain approval and adoption of the merger

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agreement by our stockholders requires the affirmative vote of a majority in voting power of the shares present in person or by proxy at the special meeting if a quorum is present, and requires the affirmative vote of a majority of the shares present in person or by proxy at the special meeting if a quorum is not present. Approval of the non-binding advisory proposal to approve the compensation for our named executive officers that is based on or otherwise relates to the merger requires the affirmative vote of the majority in voting power of the shares represented in person or by proxy at the special meeting (provided a quorum is present). Because the proposal to adjourn the special meeting, if advisable or necessary, including to solicit additional proxies in order to obtain approval of the merger agreement by our stockholders and the non-binding advisory proposal to approve the compensation for our named executive officers that is based on or otherwise relates to the merger require the affirmative vote of the majority of the voting power of the shares represented in person or by proxy and entitled to vote, abstentions will be counted as votes "AGAINST" such proposals; however, a failure to vote, by proxy or in person, will have no effect on the outcome of such proposals.

On the record date, there were            shares of our common stock entitled to vote at the special meeting. Under the terms of the Voting Agreements, OEP AC Holdings, LLC, which we refer to as OEP, and the members of our Board of Directors, who together owned approximately      % of our outstanding common stock as of the record date, have agreed to vote their shares of common stock for the adoption of the merger agreement. See "Summary—Voting Agreements."


Quorum (page 26)

A quorum of stockholders is necessary to hold the special meeting. The required quorum for the transaction of business at the special meeting is the representation, either in person or by proxy, at the special meeting of a majority in voting power of the shares of common stock of the Company issued and outstanding and entitled to vote. Thus,                              shares of our common stock must be represented at the special meeting for there to be a quorum. If a quorum is not present in person or by proxy at the special meeting, we expect that the special meeting will be adjourned or postponed to solicit additional votes at the Company's expense. Abstentions count as present for establishing a quorum.


Shares Owned by Our Directors and Officers (page 27)

As of      , 2014, the record date for the determination of stockholders entitled to notice of and to vote at the special meeting, our directors and executive officers beneficially owned and were entitled to vote an aggregate of            shares of common stock, or approximately      % of our total common stock outstanding on that date. On the record date, there were            shares of our common stock entitled to vote at the special meeting. Under the terms of the Voting Agreements, OEP and the members of our Board of Directors, who together as of the record date owned approximately      % of our outstanding common stock as of the record date, have agreed to vote their shares of common stock for the adoption of the merger agreement. See "Summary—Voting Agreements."


Market Price (page 115)

Our common stock is listed on NASDAQ, under the symbol "ARTC." On January 31, 2014, the last full trading day prior to the public announcement of the proposed merger, our common stock closed at $45.38 per share. On      , 2014, the latest practicable trading day before the printing of this proxy statement, our common stock closed at $            .

We have never paid a dividend on our common stock and do not anticipate paying one for the indefinite future. Until the effective time of the merger, the merger agreement does not permit us to declare, set aside or pay any dividend or other distribution, except for dividends between the Company and its wholly owned subsidiaries, without the prior written consent of Smith & Nephew. Following the merger, there will be no further market for our common stock.

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Recommendation of Our Board of Directors; Our Reasons for the Merger (page 42)

Our Board of Directors has unanimously determined that the merger agreement and the transactions contemplated thereby are fair to, and in the best interests of, ArthroCare and its stockholders and approved and declared advisable the merger agreement, the merger and the other transactions contemplated by the merger agreement.

Our Board of Directors unanimously recommends approval and adoption of this agreement by the stockholders of the Company and our Board of Directors unanimously recommends that you vote "FOR" the proposal to approve and adopt the merger agreement, "FOR" the proposal to adjourn the special meeting, and "FOR" the non-binding advisory proposal to approve the golden parachute compensation for each of our named executive officers that is based on or otherwise relates to the merger.

To review the factors that our Board of Directors considered when deciding whether to approve the merger agreement and the transactions contemplated by the merger agreement, see "The Merger—Recommendation of Our Board of Directors; Our Reasons for the Merger."


Interests of Our Directors and Executive Officers in the Merger (page 62)

When considering the recommendation of our Board of Directors that you vote "FOR" the proposal to approve and adopt the merger agreement, you should be aware that our directors and executive officers have interests in the merger that are different from, or in addition to, those of our stockholders generally. The Board of Directors was aware of and considered these interests, among other matters, in evaluating and negotiating the merger agreement and the merger, and in recommending that the merger agreement be adopted by the stockholders of the Company. In the discussion below, we have quantified certain payments and benefits on a pre-tax basis to our executive officers and to our non-employee directors. For the purposes of the agreements and plans described in this proxy statement that are applicable to our directors and executive officers, the completion of the transactions contemplated by the merger agreement will constitute a change in control and a sale of the Company.


Opinion of Piper Jaffray & Co. (page 45)

On February 2, 2014, Piper Jaffray & Co., which we refer to as Piper Jaffray, rendered its oral opinion to the Board of Directors (which was subsequently confirmed in writing by delivery of Piper Jaffray's written opinion dated the same date) to the effect that, as of February 2, 2014, and based upon and subject to the various assumptions and limitations set forth therein, the merger consideration of $48.25 in cash per share to be received by the holders of common stock in the merger was fair, from a financial point of view, to such stockholders.

Piper Jaffray's opinion was directed to the Board of Directors, and only addressed the fairness, from a financial point of view, to the holders of common stock of the merger consideration to be received by such stockholders in the merger and did not address any other aspect or implication of the merger. The summary of Piper Jaffray's opinion in this proxy statement is qualified in its entirety by reference to the full text of its written opinion, which is included as Annex B to this proxy statement and sets forth the assumptions made, procedures followed, matters considered and limitations on the scope of the review undertaken by Piper Jaffray in preparing its opinion. However, neither Piper Jaffray's written opinion nor the summary of its opinion and the related analyses set forth in this proxy statement is intended to be, and they do not constitute, a recommendation to any holders of common stock as to how such holders should vote or act with respect to the merger or any other matter.

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See Annex B and the section of this proxy statement entitled "The Merger—Opinion of Piper Jaffray" beginning on page 45.


Delisting and Deregistration of Our Common Stock (page 76)

If the merger is completed, our common stock will no longer be listed on NASDAQ and will be deregistered under the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act, and we will no longer file periodic reports with the U.S. Securities and Exchange Commission, which we refer to as the SEC.


Conditions to Completion of the Merger (page 102)

As more fully described in this proxy statement and in the merger agreement, each party's obligation to consummate the merger depends on a number of conditions being satisfied (or, if permitted by applicable law, waived), including:

    •
    approval and adoption of the merger agreement by an affirmative vote of the majority of the outstanding shares of our common stock entitled to vote thereon in accordance with the DGCL;

    •
    all applicable waiting periods (and any extensions thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which we refer to as the HSR Act, relating to the merger will have expired or been terminated, and all consents, approvals, authorizations, clearances, non-actions or investigation closures or conclusions under the antitrust laws of the United Kingdom and Germany will have been made, obtained or taken, and any applicable waiting periods or periods to apply for a review of any decision thereunder will have expired or been terminated (provided that no such waiting period or review period shall have terminated or expired, and no such approval shall have been obtained, subject to or conditioned upon the imposition of a "burdensome condition," other than the "agreed actions," as described in the section entitled "—Required Efforts to Consummate the Merger" below);

    •
    no provision of any applicable law and no order, injunction or ruling will enjoin, prohibit or otherwise make illegal the consummation of the merger;

    •
    there will not have been instituted and remain pending any unresolved action or proceeding by any governmental authority challenging or seeking to make illegal, enjoin or otherwise to restrain or prohibit the consummation of the merger;

    •
    the accuracy of representations and warranties made by the other party in the merger agreement (subject generally to a material adverse effect standard, with different standards applicable to certain representations and warranties);

    •
    the other party will not have failed to perform in all material respects all of its obligations under the merger agreement required to be performed by it at or prior to the effective time of the merger;

    •
    as a condition to the obligation of Smith & Nephew and Merger Sub only, no applicable law will have been enacted, enforced, promulgated or issued that has or would result in a burdensome condition, other than an agreed action;

    •
    as a condition to the obligation of Smith & Nephew and Merger Sub only, no event, occurrence, revelation, development, change or state of circumstances or facts which, individually or in the aggregate, has had or would reasonably be expected to have a "company material adverse effect" will have occurred since the date of the merger agreement and be continuing; and

    •
    as a condition to the obligation of Smith & Nephew and Merger Sub only, there will not have been instituted and remain pending any unresolved action or proceeding by any governmental

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      authority (i) seeking to restrain or prohibit the ownership or operation by Smith & Nephew, ArthroCare or any of their respective affiliates of all or any portion of the businesses or assets of any of Smith & Nephew, ArthroCare or any of their respective affiliates following the closing of the merger, except in any such case in so far as such restraint or prohibition would constitute an agreed action or (ii) seeking to compel Smith & Nephew, ArthroCare or any of their respective affiliates to take or accept any burdensome condition, other than an agreed action.


Restrictions on Solicitation of Acquisition Proposals (page 95)

ArthroCare has agreed that it and its subsidiaries will not, and will not authorize any of their respective directors and officers, employees, investment bankers, attorneys, accountants, consultants and other advisors or representatives to, directly or indirectly:

    •
    solicit, initiate or knowingly take any action to facilitate or encourage the submission of any Acquisition Proposal, as defined and described in the section entitled "The Merger Agreement—Restrictions on Solicitation of Acquisition Proposals," beginning on page 95;

    •
    enter into or participate in any discussions or negotiations with, furnish any nonpublic information relating to ArthroCare or any of its subsidiaries or afford access to the business, properties, assets, books or records of ArthroCare or any of its subsidiaries to, otherwise knowingly cooperate in any way with, or knowingly assist, participate in, facilitate or encourage any effort by any third party that, to the knowledge of ArthroCare, is seeking to make, or has made an Acquisition Proposal;

    •
    make an adverse recommendation change (as defined below), except as described below in the section entitled "The Merger Agreement—Changes in Board Recommendation";

    •
    approve any transaction under, or any person becoming an "interested stockholder" under, Section 203 of the DGCL; or

    •
    enter into any agreement in principle, letter of intent, term sheet, merger agreement, acquisition agreement, option agreement or other similar instrument relating to an Acquisition Proposal.

Notwithstanding the restrictions described above, if before obtaining the approval of ArthroCare stockholders for the merger, ArthroCare receives a bona fide written Acquisition Proposal and the Board of Directors reasonably believes the Acquisition Proposal will or would reasonably be expected to lead to a Superior Proposal as described in the section entitled "The Merger Agreement—Restrictions on Solicitation of Acquisition Proposals," beginning on page 95, ArthroCare, subject to its compliance in all material respects with the non-solicitation provision of the merger agreement, may:

    •
    engage in negotiations or discussions with the third party that has made the Acquisition Proposal and, if applicable, waive the third party's noncompliance with the provisions of any standstill agreement to the extent necessary to permit such negotiations or discussions; and

    •
    furnish to the third party that has made an Acquisition Proposal or its representatives non-public information relating to ArthroCare or any of its subsidiaries pursuant to a confidentiality agreement with the third party on substantially the same terms (other than standstill obligations) or terms more favorable to ArthroCare than those contained in the confidentiality agreement previously entered into between ArthroCare and Smith & Nephew (provided that any non-public information not previously provided to Smith & Nephew must be provided to Smith & Nephew prior to or substantially concurrently with being provided to the third party making the Acquisition Proposal).

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Changes in Board Recommendation (page 97)

Except as summarized below, under the terms of the merger agreement, the Board of Directors has agreed not to recommend an Acquisition Proposal or fail to include in the proxy statement, withdraw or modify in a manner adverse to Smith & Nephew or make any public statement that contradicts, the Board of Directors' recommendation in favor of the merger (any of the foregoing being referred to as an "adverse recommendation change").

Notwithstanding the foregoing, the Board of Directors may effect an adverse recommendation change (i) following the receipt of a bona fide written Acquisition Proposal that the Board of Directors has determined constitutes a Superior Proposal or (ii) in response to material events or changes in circumstances arising after the date of the merger agreement that were neither known to nor reasonably foreseeable by the Board of Directors as of the date of the merger agreement (an "intervening event"), in each case only if the Board of Directors determines in good faith, after consultation with outside legal counsel, that the failure to take such action would be inconsistent with its fiduciary duties under the DGCL. Notwithstanding any adverse recommendation change, until the merger agreement is terminated in accordance with its terms (see "—Termination of the Merger Agreement" below), ArthroCare may not enter into any agreement in principle, letter of intent, term sheet, merger agreement, acquisition agreement, option agreement or other similar instrument relating to an Acquisition Proposal (other than a confidentiality agreement), and ArthroCare will otherwise remain subject to all of its obligations under the merger agreement.

However, the Board of Directors may not make an adverse recommendation change (or terminate the merger agreement in order to enter into a definitive, written agreement concerning a Superior Proposal) unless:

    •
    ArthroCare promptly provides written notice to Smith & Nephew of its intention to take such action at least three business days in advance and attaching (i) in the case of an adverse recommendation change to be made following receipt of an Acquisition Proposal that the Board of Directors has determined constitutes a Superior Proposal, the most current version of the proposed agreement under which such Superior Proposal is proposed to be consummated and the identity of the third party making the Acquisition Proposal; or (ii) in the case of an adverse recommendation change to be made pursuant to an intervening event, a reasonably detailed description of the underlying facts giving rise to, and the reasons for making, such adverse recommendation change; and

    •
    Smith & Nephew does not make, within three business days after its receipt of that written notification, a binding and irrevocable written offer that (i) in the case of any adverse recommendation change to be made following receipt of a Superior Proposal, is at least as favorable to the stockholders of ArthroCare as such Superior Proposal or (ii) in the case of an adverse recommendation change to be made pursuant to an intervening event, obviates the need for such adverse recommendation change.

During any applicable three business day period, ArthroCare has agreed to negotiate in good faith with Smith & Nephew regarding any revisions to the terms of the merger agreement proposed by Smith & Nephew.

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Required Efforts to Consummate the Merger (page 98)

Subject to certain exceptions described below and the terms and conditions of the merger agreement, Parent HoldCo, Smith & Nephew and ArthroCare have agreed to use their respective reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under any applicable laws to consummate the transactions contemplated by the merger agreement as promptly as practicable and no later than the End Date (as defined below), including (i) preparing and filing as promptly as practicable with any governmental authority or other third party all documentation to effect all necessary filings, notices, petitions, statements, registrations, submissions of information, applications and other documents, (ii) obtaining and maintaining all approvals, consents, registrations, permits, authorizations and other confirmations required to be obtained from any governmental entity or other third party that are necessary, proper or advisable to consummate the transactions contemplated by the merger agreement, including by defending, contesting and resisting any actual or threatened claim, suit, action, objection or other proceeding brought by a governmental authority or other third party challenging any transaction contemplated by the merger agreement as violative of any applicable law, including antitrust laws, and seeking to have vacated, lifted, reversed or overturned any decree, judgment, injunction or other order that prohibits, prevents or restricts consummation of the transactions contemplated by the End Date or which would materially impair or materially delay the transactions contemplated by the merger agreement. Notwithstanding the foregoing, no party is required to (A) enter into any settlement, undertaking, consent decree, stipulation or agreement with any governmental authority in connection with the transactions contemplated by the merger agreement or (B) divest or otherwise hold separate (including by establishing a trust or otherwise), or take any other action with respect to any of its or the surviving corporation's subsidiaries or any of their respective affiliates' businesses, assets or properties (any such action in the foregoing clause (A) or (B), a "burdensome condition"), other than with respect to the negotiation of and entry into a non-exclusive license on a worldwide basis with one or two third parties (in no case requiring licenses that would allow more than one third party to manufacture or have manufactured, or sell or have sold, products in overlapping fields of use) for use solely in the field of radiofrequency energy in the sports medicine field of use with respect to certain products and related intellectual property (the "agreed actions").


Termination of the Merger Agreement (page 104)

The merger agreement may be terminated at any time prior to the effective time of the merger, whether before or after the stockholders of ArthroCare have adopted the merger agreement, by:

    •
    mutual written agreement of ArthroCare and Smith & Nephew;

    •
    either ArthroCare or Smith & Nephew if:

    •
    the merger has not been consummated on or before July 2, 2014 (the "End Date"), provided that if, as of the End Date, one or more closing conditions relating to antitrust clearances or approvals or governmental actions challenging the merger has not been satisfied or waived, then, upon notice given by Smith & Nephew or ArthroCare to the other party not later than 6:00 p.m., eastern time, on the End Date may, the End Date will be extended as far as to September 2, 2014; provided, further, that (A) if Smith & Nephew and ArthroCare mutually agree no later than September 2, 2014 to extend the End Date, they may extend the End Date to October 2, 2014 and (B) if Smith & Nephew and ArthroCare mutually agree no later than October 2, 2014 to extend the End Date, they may extend the End Date to November 3, 2014;

    •
    there is any applicable law or order, injunction or ruling that (i) makes consummation of the merger illegal or otherwise prohibited, (ii) restrains or enjoins ArthroCare or Smith & Nephew from consummating the merger and has become final and nonappealable or

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        (iii) conditions the consummation of the merger on the acceptance of, or the taking of any action that constitutes, a burdensome condition (other than an agreed action) and has become final and nonappealable;

      •
      at the ArthroCare stockholder meeting called for the purpose of voting on the approval and adoption of the merger agreement (including any adjournment or postponement thereof), the requisite stockholder approval is not obtained; or

      •
      the other party has breached any representation or warranty or failed to perform any covenant or agreement set forth in the merger agreement that would cause a condition to the terminating party's obligation to consummate the merger not to be satisfied and such breach or failure (i) is incapable of being cured by the End Date or (ii) has not been cured within 30 days following notice of such breach or failure.

    •
    by Smith & Nephew, if:

    •
    an adverse recommendation change has occurred, or at any time after receipt or public announcement of an Acquisition Proposal, the Board of Directors will have failed to reaffirm its recommendation in favor of the merger as promptly as practicable (but in any event within 10 business days) after receipt of any written request to do so from Smith & Nephew; or

    •
    ArthroCare materially breaches its obligations described in the section entitled "—Restrictions on Solicitation of Acquisition Proposals" and "—Changes in Board Recommendation" above.

    •
    by ArthroCare, at any time prior to the meeting to approve and adopt the merger agreement by ArthroCare stockholders, if the Board of Directors makes an adverse recommendation change in compliance in all material respects with the Company's obligations described under "—Restrictions on Solicitation of Acquisition Proposals" and "—Changes in Board Recommendation", in order to enter into a definitive written agreement concerning a Superior Proposal, provided that ArthroCare will have paid to Parent HoldCo the termination fee as described in the section entitled "—Termination Fee Payable by ArthroCare" below.


Termination Fee Payable by ArthroCare (page 105)

ArthroCare has agreed to pay to Parent HoldCo a fee of $54.9 million upon termination of the merger agreement in the following circumstances:

    •
    Smith & Nephew terminates the merger agreement because of an adverse recommendation change, because, after receipt or public announcement of an Acquisition Proposal, the Board of Directors failed to reaffirm its recommendation in favor of the merger agreement within 10 business days of being requested to do so by Smith & Nephew or because of a material breach of ArthroCare's obligations described above under "—Restrictions on Solicitation of Acquisition Proposals" and "—Changes in Board Recommendation"; or

    •
    ArthroCare terminates the merger agreement because, prior to the stockholder meeting to approve the merger agreement, the Board of Directors makes an adverse recommendation change in compliance with ArthroCare's obligations described above under "—Restrictions on Solicitation of Acquisition Proposals" and "—Changes in Board Recommendation" in order to enter into a definitive written agreement concerning a Superior Proposal.

In addition, ArthroCare has agreed to pay to Parent HoldCo a fee of $54.9 million if the merger agreement is terminated by Smith & Nephew or ArthroCare because (i) the merger has not been consummated on or before the End Date or (ii) the stockholder approval of the merger agreement is not obtained at the stockholder meeting to approve the merger agreement (including any adjournment or postponement thereof), but only if:

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    •
    after the date of the merger agreement and prior to such termination, an Acquisition Proposal will have been publicly announced and not publicly and unconditionally withdrawn at least five business days prior to (x) the date of termination, in the case of a termination pursuant to clause (i) above or (y) the stockholder meeting, in the case of a termination pursuant to clause (ii) above;

    •
    in the case of a termination pursuant to clause (i) above, at the time of such termination the condition regarding stockholder approval of the merger agreement has not been satisfied; and

    •
    within nine months following the date of such termination, ArthroCare will have entered into a definitive agreement with respect to or recommended to its stockholders an Acquisition Proposal or an Acquisition Proposal will have been consummated (provided that, for purposes of this bullet, each reference to "15%" in the definition of Acquisition Proposal will be deemed to be a reference to "50%").


Remedies; Maximum Liability (page 105)

The merger agreement provides that, in the event that any termination fee is paid or payable, Smith & Nephew's right to receive payment of the termination fee will be the sole and exclusive remedy of Smith & Nephew and its affiliates and representatives against ArthroCare and its affiliates and representatives under the merger agreement or arising out of or related to the merger agreement or the transactions contemplated thereby, and upon payment of such amount, none of ArthroCare or any of its affiliates or representatives will have any liability or obligation relating to or arising out of the merger agreement or the transactions contemplated thereby. In no event will ArthroCare be required to pay more than one termination fee.


Specific Performance (page 106)

The merger agreement provides that prior to termination of the merger agreement the parties will be entitled to an injunction to prevent breaches of the merger agreement and to specifically enforce the performance of the terms and provisions of the merger agreement.


Voting Agreements (page 107)

Concurrently with the execution of the merger agreement, OEP and all members of our Board of Directors entered into voting agreements with Smith & Nephew, which we refer to as the Voting Agreements. The Voting Agreements require each stockholder who signed a Voting Agreement to vote all of his or her shares (i) in favor of the adoption and approval of the merger agreement and approval of the merger and other transactions contemplated by the merger agreement, (ii) in favor of any proposal to adjourn or postpone any meeting of the stockholders of the Company at which any of the foregoing matters are submitted for consideration to solicit additional votes and (iii) against any Acquisition Proposal (as defined by the merger agreement) and certain other actions that would reasonably be expected to interfere with consummation of the merger. Each stockholder who signed a Voting Agreement has waived appraisal rights and provided an irrevocable proxy. The Voting Agreements do not limit or restrict a stockholder who signs a Voting Agreement in his or her capacity as a director or officer from acting in such capacity or voting in such capacity in such person's sole discretion on any matter.

Each stockholder who entered into a Voting Agreement also agreed to comply with certain restrictions on the transfer of its shares of Company common stock or Company Series A Preferred Stock, as applicable, prior to the earlier of the termination of the Voting Agreement or the date on which the merger agreement is adopted by the stockholders of the Company.

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The Voting Agreements and irrevocable proxies granted under the Voting Agreements terminate upon the earlier to occur of: (i) termination of the merger agreement in accordance with its terms, (ii) the date on which there is any material modification, waiver or amendment to the merger agreement that is adverse to not approved by the stockholder who signed the voting agreement and (iii) the effective time of the merger.

As of January 31, 2014, stockholders who signed the Voting Agreements collectively owned approximately 17.6% of the outstanding shares of common stock of the Company on an as-converted basis.

The foregoing summary of the Voting Agreements is subject to, and qualified in its entirety by reference to, the full text of the Voting Agreement by and among OEP, Christian Ahrens, Gregory Belinfanti and Smith & Nephew, which we refer to as the OEP Voting Agreement, and the form of Voting Agreement executed by each of the members of our Board of Directors (other than Mr. Ahrens and Mr. Belinfanti) and Smith & Nephew, which we refer to as the Form Director Voting Agreement and, together with the OEP Voting Agreement, the Voting Agreements. Copies of the OEP Voting Agreement and the Form Director Voting Agreement are attached as Annex D and Annex E , respectively, to this proxy statement and are incorporated herein by reference.


Smith & Nephew's Financing of the Merger (page 84)

The funds necessary to consummate the merger and related transactions and pay related expenses will be financed from Smith & Nephew's debt facilities and cash balances, including its existing committed loan facilities and any renewals or replacements thereof. This includes a maximum aggregate price of approximately $1.7 billion to pay holders of the Company's common stock and holders of Company Options, Company Stock Appreciation Rights, Company RSUs and Company Performance Shares the amounts due to them under the merger agreement, based upon the number of shares of the Company's common stock, Company Options, Company Stock Appreciation Rights, Company RSUs and Company Performance Shares outstanding as of                                    , 2014. Smith & Nephew has represented that it has, or will have prior to and at closing, sufficient funds to consummate the merger. Under the merger agreement, Parent HoldCo has guaranteed the performance of Smith & Nephew's obligations under the merger agreement, including payment of the merger consideration.


Material U.S. Federal Income Tax Consequences (page 77)

The exchange of shares of our common stock for cash pursuant to the merger will generally be a taxable transaction for U.S. federal income tax purposes. In general, a U.S. holder (as defined in "The Merger—Material U.S. Federal Income Tax Consequences") whose shares of our common stock are converted into cash in the merger will recognize gain or loss for U.S. federal income tax purposes equal to the difference, if any, between the amount of cash received with respect to such shares (determined before the deduction of any applicable withholding taxes) and the holder's adjusted tax basis in such shares. Gain or loss must be calculated separately for each block of our common stock (i.e., shares acquired at the same cost in a single transaction) exchanged for cash in the merger. Any such gain or loss will be capital gain or loss if the holder holds the shares as capital assets, and will be long-term capital gain or loss if the holding period for the shares of our common stock exceeds one year. The merger will generally not be a taxable transaction to non-U.S. holders (as defined in "The Merger—Material U.S. Federal Income Tax Consequences") under U.S. federal income tax laws, subject to the exceptions discussed in "The Merger—Material U.S. Federal Income Tax Consequences." This may also be a taxable transaction under applicable state, local and/or foreign income or other tax laws. In addition, under certain circumstances, a portion of the merger consideration received may be subject to withholding under applicable tax laws. Any amounts withheld and paid to the appropriate governmental authority in accordance with applicable law will be treated for all purposes as having been paid to the holder of our common stock in respect of which such withholding was made.

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You should read "The Merger—Material U.S. Federal Income Tax Consequences" for a more complete discussion of the U.S. federal income tax consequences of the merger. Tax matters can be complicated, and the tax consequences of the merger to you will depend on your particular tax situation. We urge you to consult your tax advisor for a complete analysis of the effect of the merger on your federal, state, local and/or foreign taxes.


Regulatory Matters (page 79)

Under the HSR Act, we cannot complete the merger until we and Smith & Nephew have filed Notification and Report Forms with the Antitrust Division of the U.S. Department of Justice, which we refer to as the Antitrust Division, and the U.S. Federal Trade Commission, which we refer to as the FTC, and the applicable waiting period is terminated by the FTC or expires. The termination or expiration of the waiting period means the parties have satisfied the regulatory requirements under the HSR Act. On February 24, 2014, ArthroCare and Smith & Nephew each filed a Notification and Report Form under the HSR Act with the FTC and the DOJ. The initial waiting period under the HSR Act will expire at 11:59 p.m. (Eastern time in the U.S.) on March 26, 2014. If the FTC or DOJ requests additional information and documentation relevant to the merger prior to the expiration of the 30-day period, the waiting period will be extended until the 30th calendar day following the date of the parties' substantial compliance with the request. Thereafter, the waiting period can be extended only by court order or with the parties' consent.

We and Smith & Nephew are also seeking approvals from the competition authorities in the United Kingdom and Germany. These approvals are conditions to closing.

The parties submitted a draft notification to the United Kingdom Office of Fair Trading ("OFT") on February 28, 2014. The OFT's formal Phase 1 timetable does not commence until such time as the OFT accepts that the notification is complete and a formal notification is submitted. Following this declaration, the standard Phase I procedure lasts 40 working days, but can be extended in some circumstances. The OFT (or the Competition and Markets Authority ("CMA") after April 1, 2014) may refer the transaction to Phase 2 review at the United Kingdom Competition Commission (or to the CMA in its Phase 2 function after April 1, 2014) if it believes that the transaction may be expected to result in a substantial lessening of competition. On reference, the Competition Commission (or the CMA after April 1, 2014) may then prohibit the transaction if the consummation of the transaction absent proposed conditions would lead to a substantial lessening of competition.

The parties filed a notification with the German Federal Cartel Office ("FCO") on February 28, 2014. The statutory Phase I review period ends on March 28, 2014. Where the FCO is able to ascertain during the Phase I review period that the notified transaction does not raise substantive competition concerns in Germany, it issues an informal clearance letter, sometimes before final expiry of the period. The FCO may conduct an in-depth Phase II review that extends the review period to a total of four months. After a Phase II review, the FCO may prohibit the transaction if the consummation of the transaction absent proposed conditions and/or obligations would lead to a significant impediment of effective competition, in particular due to the creation or strengthening of a dominant market position.


Appraisal Rights (page 80)

Pursuant to Section 262 of the DGCL, holders of Company common stock who do not vote in favor of adoption of the merger agreement and who comply fully with the applicable requirements of Section 262 of the DGCL and do not otherwise withdraw or lose the right to appraisal under Delaware law, have the right to seek appraisal of the fair value of their shares of Company common stock, as determined by the Delaware Court of Chancery, if the merger is completed. The "fair value" of your Company common stock as determined by the Delaware Court of Chancery may be more than, less than, or equal to the value of the merger consideration per share that you are otherwise entitled to

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receive under the terms of the merger agreement. Holders of Company common stock who wish to preserve any appraisal rights they may have must so advise ArthroCare by submitting a written demand for appraisal prior to the vote to adopt the merger agreement, and must otherwise follow fully the procedures prescribed by Section 262 of the DGCL. A person having a beneficial interest in shares of Company common stock held of record in the name of another person, such as a broker, bank or other nominee, must act promptly to cause the record holder to follow the steps summarized in this proxy statement and in a timely manner to perfect appraisal rights. In view of the complexity of Section 262 of the DGCL, ArthroCare stockholders who may wish to pursue appraisal rights should consult their legal and financial advisors.


Treatment of Company Stock Options, Stock Appreciation Rights, Restricted Stock Units and Performance Shares (page 64)

At the effective time of the merger, outstanding options to purchase Company common stock, which we refer to as Company Options, stock appreciation rights relating to Company common stock, which we refer to as Company Stock Appreciation Rights, restricted stock units of Company common stock, which we refer to as Company RSUs, and performance shares of Company common stock, which we refer to as Company Performance Shares, will be treated as described below:

    •
    Each Company Option and each Company Stock Appreciation Right will become fully vested and exercisable immediately prior to the effective time of the merger. Each Company Option and Company Stock Appreciation Right that remains outstanding and unexercised as of immediately prior to the completion of the merger will be cancelled and converted into the right to receive an amount in cash equal to the product of (i) the number of shares of our common stock subject to each such Company Option or Company Stock Appreciation Right, as applicable, and (ii) the excess, if any, of $48.25 over the exercise price per share of each such Company Option or Company Stock Appreciation Right, as applicable, less any required withholding taxes. Any Company Option and Company Stock Appreciation Right with an exercise price per share that is equal to or greater than $48.25 will be cancelled as of immediately prior to the completion of the merger for no consideration.

    •
    Each Company RSU award that is outstanding immediately prior to the completion of the merger will be cancelled and converted into the right to receive $48.25 for each share of Company common stock underlying such Company RSU award, less any required withholding taxes.

    •
    The performance achievement for the performance period associated with the Company Performance Share awards will be assessed immediately prior to the effective time of the merger (using the last business day of the last completed fiscal quarter prior to the effective time of the merger for any performance period ongoing at the effective time of the merger), and the vesting of such Company Performance Share awards will be accelerated based upon such performance achievement (but in no event will less than one-third of the target number of shares subject to each award of Company Performance Shares vest). Each Company Performance Share that becomes vested as a result of the merger will be cancelled and converted into the right to receive $48.25, less any required withholding taxes. Each Company Performance Share that does not become vested as a result of the merger will be cancelled in exchange for no consideration.


Treatment of Employee Stock Purchase Plan (page 100)

The Company's Employee Stock Purchase Plan, as amended, which we refer to as the Company ESPP, will not accept any new participants (or allow any existing participants to increase their payroll deductions from those in effect on the date of the merger agreement) and the current offering period will end on the earlier of the scheduled purchase date for such offering period or the seventh business

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day prior to the effective time of the merger (with any participant payroll deductions not applied to the purchase of shares of Company common stock returned to the participant). The Company ESPP will terminate prior to the effective time of the merger. Each right to purchase shares of Company common stock granted under the Company ESPP, each of which we refer to as a Company ESPP Right, that is outstanding on the purchase date of the current offering period will be exercised on the purchase date determined in accordance with the previous sentence for the purchase of shares of Company common stock pursuant to the terms of the Company ESPP, and each share purchased thereunder will be canceled immediately prior to the effective time of the merger and converted into the right to receive the per share merger consideration of $48.25, less any required withholding taxes.


Treatment of Shares Held in the Company's Retirement Savings and Investment Plan (page 67)

The Company's Retirement Savings and Investment Plan, which we refer to as the Company's 401(k) Plan, will be terminated immediately prior to the effective time of the merger. Each of our continuing employees will be permitted to make rollover contributions of eligible rollover distributions (excluding loans) in cash to an eligible defined contribution retirement plan at Smith & Nephew. Each share of common stock of the Company in an account under the Company's 401(k) Plan will be canceled immediately prior to the effective time and converted into the right to receive the per share merger consideration of $48.25.


Legal Proceedings Relating to the Merger (page 85)

Shortly following the announcement of the merger, six putative class action and/or derivative lawsuits were filed in the Court of Chancery of the State of Delaware by alleged stockholders of ArthroCare against various combinations of the Company, the individual directors of the Company, Smith & Nephew, Merger Sub, and Parent HoldCo, and, in one case, One Equity Partners LLC, OEP, (together, with One Equity Partners LLC, the "OEP Entities") and JPMorgan Chase & Co. On February 25, 2014, these cases were consolidated under the caption In re ArthroCare Corporation Stockholder Litigation, Consol. C.A. No. 9313-VCL.

These lawsuits generally allege, among other things, that the directors of the Company breached their fiduciary duties to the Company's stockholders and that the Company, Smith & Nephew, Merger Sub, Parent HoldCo, the OEP Entities and/or JPMorgan Chase & Co. aided and abetted these fiduciary breaches. In support of these claims, the lawsuits generally allege, among other things, that the merger consideration undervalues the Company, that the sales process leading up to the merger was flawed, and that the merger agreement contains deal-protection provisions that unduly favor Smith & Nephew and deter potential superior proposals. One of the complaints further alleges conflicts of interest in the transaction resulting from the OEP Entities' investment in ArthroCare and the purported roles of JPMorgan Chase & Co. (OEP is an indirect subsidiary of JPMorgan Chase & Co.) as financial advisor to Smith & Nephew and a putative participant in the transaction financing, and that the involvement of JPMorgan Chase & Co. and its affiliates as Smith & Nephew's advisor and putative deal financing source allegedly violated the terms of a stock purchase agreement, which was entered into with ArthroCare at the time that OEP Entities invested in the Company, which we refer to in this proxy statement as the OEP SPA. That complaint brings derivative claims, alleging that OEP Entities breached the OEP SPA, and that JPMorgan Chase & Co. and Smith & Nephew, Merger Sub and Parent HoldCo tortiously interfered with the OEP SPA.

The lawsuits seek, among other things, to enjoin the merger, or in the event that an injunction is not entered and the merger closes, rescission of the merger and unspecified money damages, costs and attorneys' and experts' fees. We believe these lawsuits are meritless and intend to defend against them.

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QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING

The following questions and answers briefly address some questions you may have regarding the special meeting and the proposed merger. These questions and answers may not address all questions that may be important to you as a stockholder of ArthroCare. Please refer to the more detailed information contained elsewhere in this proxy statement, the annexes to this proxy statement and the documents referred to in this proxy statement. We encourage you to read this proxy statement, including the annexes, in its entirety because it explains the proposed merger, the documents related to the merger and other related matters. In this proxy statement, the terms "the Company," "we," "our," "ours," "us" and "ArthroCare" refer to ArthroCare Corporation. We refer to Smith & Nephew, Inc. as Smith & Nephew, Rosebud Acquisition Corporation as Merger Sub and Smith & Nephew plc as Parent HoldCo.

Q:
Why am I receiving this proxy statement and proxy card?

A:
You are receiving this proxy statement and proxy card because, as of            , 2014, the record date for the determination of stockholders entitled to notice of and to vote at the special meeting, you owned shares of our common stock, $0.001 par value, which we refer to as our common stock. We have entered into an agreement and plan of merger with Smith & Nephew, Merger Sub and Parent HoldCo, which we refer to in this proxy statement as the merger agreement. Under the merger agreement, subject to the approval and adoption of the merger agreement by our stockholders and the satisfaction of other conditions to the completion of the merger, we will become a wholly-owned subsidiary of Smith & Nephew and our common stock will no longer be listed on NASDAQ. A copy of the merger agreement is attached to this proxy statement as Annex A .

    In order to complete the merger, stockholders representing the majority of our outstanding shares of common stock must vote to approve and adopt the merger agreement. We will hold a special meeting of our stockholders, which we refer to as the special meeting, to obtain this approval. Our Board of Directors is providing this proxy statement to give you information for use in determining how to vote on the proposals submitted to the stockholders at the special meeting. You should read this proxy statement and the annexes carefully and in their entirety. The enclosed proxy card and voting instructions allow you, as our stockholder, to have your shares voted at the special meeting without attending the special meeting. Your proxy is being solicited by the Board of Directors.

Your vote is very important. We encourage you to submit your proxy as soon as possible.

Q:
As a holder of ArthroCare common stock, what will I be entitled to receive in the merger?

A:
Upon the completion of the merger, each share of our common stock outstanding immediately prior to the completion of the merger, other than shares held by the Company as treasury stock, by Smith & Nephew or Merger Sub, by subsidiaries of the Company or Smith & Nephew or by holders who properly demand appraisal rights under the DGCL, will be automatically converted into the right to receive $48.25 in cash, without interest and less any applicable withholding taxes, which we refer to in this proxy statement as the merger consideration. For example, if you own 100 shares of our common stock, you will be entitled to receive $4,825 in cash, without interest, less any applicable withholding taxes, in exchange for your shares. Any amounts withheld and paid to the appropriate governmental authority in accordance with applicable law will be treated for all purposes as having been paid to the holder of our common stock in respect of whose shares the withholding was made.

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Q:
As a holder of Company Options, Company Stock Appreciation Rights, Company RSUs or Company Performance Shares, what will I receive upon the completion of the merger?

A:
As further detailed in the sections entitled "The Merger Agreement—Treatment of ArthroCare Equity-Based Awards" and "Interests of Our Directors and Executive Officers in the Merger—Merger Agreement—Effect of the Merger on Company Options, Company Stock Appreciation Rights, Company RSUs and Company Performance Shares," at the effective time of the merger, each Company Option, Company Stock Appreciation Right, Company RSU and Company Performance Share, that is outstanding immediately prior to the merger will be canceled and, in exchange, each holder of a cancelled Company Option, Company Stock Appreciation Right, Company RSU and Company Performance Share will be entitled to receive a cash amount, if any, equal to the product of (i) $48.25 less any applicable exercise price per share, and (ii) the number of shares of Company common stock covered by such Company Option, Company Stock Appreciation Right, Company RSU and, to the extent vested as a result of attained performance (but in no event will less than one-third of the target number of shares subject to each award of Company Performance Shares vest), Company Performance Share, less any required withholding taxes.

Q:
If I participate in the Company ESPP, how will my stock purchase rights be treated in the merger?

A:
The current offering period will be the final offering period under the Company ESPP. To the extent the current offering period has not expired and would otherwise remain open at the effective time of the merger, the current offering period will be shortened and will terminate on the seventh business day prior to the effective time of the merger and the Company will cause your outstanding Company ESPP Rights under the Company ESPP to be exercised as of such date (with any of your payroll deductions not applied to the purchase of shares of Company common stock returned to you). When the current offering period terminates, no new offering or purchase period will commence, the funds credited to you will be used to purchase shares of Company common stock, and each share will be cancelled and converted into the right to receive the per share merger consideration of $48.25, subject to applicable withholdings. The Company ESPP will terminate prior to the effective time of the merger.

Q:
If I hold shares of the Company's common stock in the Company's 401(k) Plan, how will my shares be treated in the merger?

A:
Pursuant to the terms of the merger agreement, the Company's 401(k) Plan will be terminated immediately prior to the effective time of the merger. If you hold shares of common stock of the Company in your account under the Company's 401(k) Plan, each such share will be canceled immediately prior to the effective time of the merger and converted into the right to receive the per share merger consideration of $48.25.

Q:
How does the merger consideration compare to the market price of ArthroCare's common stock?

A:
The merger consideration of $48.25 per share of our common stock represents a 6.3% premium to the closing price of our common stock on January 31, 2014, the last trading day prior to the announcement of the merger agreement, a 10.3% premium to the average closing price for the thirty trading days ended January 31, 2014, a 20.09% premium to the average closing price for the sixty trading days ended January 31, 2014, a 23.98% premium to the average closing price for the ninety trading days ended January 31, 2014 and a 31.00% premium to the average closing price for the 180 trading days ended January 31, 2014.

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Q:
When and where is the special meeting?

A:
The special meeting of our stockholders will convene on            ,             , 2014, at         local time at        .

Q:
What matters will I be asked to vote on at the special meeting?

A:
You will be asked to vote on (i) a proposal to approve and adopt the merger agreement, as it may be amended from time to time, (ii) a proposal to approve the adjournment of the special meeting, if advisable or necessary, including to solicit additional proxies in order to obtain approval and adoption of the merger agreement by our stockholders, and (iii) a non-binding advisory proposal to approve the golden parachute compensation for each of our named executive officers that is based on or otherwise relates to the merger.

Q:
Who can vote or submit a proxy to vote and attend the special meeting?

A:
All holders of record of our common stock as of the close of business on            , 2014, the record date for the determination of stockholders entitled to notice of and to vote at special meeting, are entitled to receive notice of, and to attend and vote or submit a proxy to vote at the special meeting. If your shares are held of record in an account at a brokerage firm, bank or other nominee, such firm, bank or nominee is considered the holder of record of your shares and will forward the proxy notice and materials to you with a voting instruction form explaining how to vote your shares. If you want to attend the special meeting and your shares are held of record in an account at a brokerage firm, bank or other nominee, then you must bring to the special meeting a legal proxy from the record holder of the shares (your broker, bank or nominee) authorizing you to vote at the special meeting.

Q:
How do I vote my shares of Company common stock held in the Company's 401(k) Plan?

A:
Under the terms of the Company's 401(k) Plan, participants who hold company stock in their accounts have the right to direct the trustee of the Company's 401(k) Plan, Fidelity Management Trust Company, who we refer to in this proxy statement as Fidelity, to vote their shares at the special meeting. Fidelity will vote the shares held in the Company's 401(k) Plan as directed by those participants who hold shares. Any directions you provide to Fidelity concerning the voting of shares should be communicated in writing. Your directions will be held in confidence by Fidelity and will not be divulged to the Company, Smith & Nephew, or any officer or employee thereof, or any other person. Upon its receipt of the directions, Fidelity will vote the shares held in your account under the Company's 401(k) Plan as directed by you. Around the time of mailing of this notice of special meeting, you will receive materials with a voting instruction form. This form will explain how to vote the shares you hold under the Company's 401(k) Plan and must be returned to Fidelity. Generally, Fidelity will not vote shares if it has not received any direction from you, except as required by law. If you do not provide voting directions to Fidelity, the Company has the option to direct Fidelity to vote your shares in the same proportion on each issue for which it received voting instructions from participants.

Q:
How does the Board of Directors recommend that I vote?

A:
Our Board of Directors unanimously recommends approval and adoption of the merger agreement by the stockholders of the Company and our Board of Directors unanimously recommends that you vote "FOR" the proposal to approve and adopt the merger agreement, "FOR" the proposal to approve the adjournment of the special meeting, and "FOR" the non-binding advisory proposal to approve the golden parachute compensation for each of our named executive officers that is based on or otherwise relates to the merger.

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Q:
Why is the Board of Directors recommending that I vote "FOR" the proposal to adopt the merger agreement?

A:
After careful consideration, our Board of Directors unanimously determined that the merger is fair to, and in the best interests of, us and our stockholders, approved, adopted and declared advisable the merger agreement and the merger and the other transactions contemplated thereby and unanimously recommended approval and adoption of the merger agreement by the stockholders of the Company. In reaching its decision to approve and adopt the merger agreement and the merger and to recommend the approval and adoption of the merger agreement by our stockholders and the approval of the other proposals, the Board of Directors consulted with our management, as well as our legal and financial advisors, and considered the terms of the proposed merger agreement and the transactions set forth in the merger agreement. Our Board of Directors also considered each of the items set forth under "The Merger—Recommendation of Our Board of Directors; Our Reasons for the Merger."

Q:
What vote of ArthroCare' stockholders is required to approve the proposal to approve and adopt the merger agreement?

A:
As a condition of the merger, approval of this proposal requires the affirmative vote of the holders of a majority of the outstanding shares of our common stock. On the record date, there were      shares of our common stock entitled to vote at the special meeting. Under the terms of the Voting Agreements, OEP and the members of our Board of Directors, who owned approximately            % of our outstanding common stock as of the record date, have agreed to vote their shares of common stock for the adoption of the merger agreement. See "Summary—Voting Agreements." Our obligations and those of Smith & Nephew to complete the merger are also subject to the satisfaction or waiver of several other conditions.

Q:
What vote of ArthroCare' stockholders is required to approve the proposal to adjourn the special meeting?

A:
Approval of this proposal requires the affirmative vote of a majority in voting power of the shares present in person or by proxy at the special meeting if a quorum is present, and requires the affirmative vote of a majority of the shares present in person or by proxy at the special meeting if a quorum is not present.

Q:
What vote of ArthroCare' stockholders is required to approve, on a non-binding advisory basis, the golden parachute compensation for each of our named executive officers that is based on or otherwise relates to the merger?

A:
Approval of this proposal requires the affirmative vote of a majority of the shares having voting power present in person or represented by proxy at the special meeting (provided that a quorum is present).

Q:
Why am I being asked to cast a vote on a non-binding advisory proposal to approve the golden parachute compensation for each of our named executive officers that is based on or otherwise relates to the merger?

A:
In accordance with the rules promulgated by the SEC, under Section 14A of the Exchange Act, we are providing our stockholders with the opportunity to cast a vote on a non-binding advisory proposal to approve the golden parachute compensation for each of our named executive officers that is based on or otherwise relates to the merger.

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Q:
What is the "golden parachute compensation"?

A:
The "golden parachute compensation" is certain compensation that is based on or otherwise relates to the completion of the merger and that is paid or may become payable to each of our named executive officers. See "Advisory Vote On Named Executive Officer Golden Parachute Compensation" for more information, including estimated amounts that may be paid or become payable to each of our named executive officers.

Q:
What will happen if stockholders do not approve the advisory vote on the golden parachute compensation for each of our named executive officers that is based on or otherwise relates to the merger at the special meeting?

A:
The advisory vote on the proposal for the golden parachute compensation for each of our named executive officers that is based on or otherwise relates to the merger is a vote separate and apart from the vote to approve the merger agreement. You may vote for this proposal and against adoption of the merger agreement, or vice versa. Because the vote on this proposal is advisory only, it will not be binding on us or Smith & Nephew. Accordingly, because we are contractually obligated to pay the golden parachute compensation, if ArthroCare's stockholders approve the merger agreement and the merger is completed, the compensation will be payable, subject only to the conditions under the applicable contractual arrangements and any future amendments thereto, regardless of the outcome of the advisory vote.

Q:
Have any ArthroCare stockholders agreed to support the merger?

A:
Yes. Pursuant to the Voting Agreements (as defined below in the section entitled "Voting Agreements" beginning on page 107), OEP and all members of our Board of Directors have agreed to vote in favor of the adoption and approval of the merger agreement and approval of the merger and other transactions contemplated by the merger agreement, subject to the terms and conditions of the Voting Agreements, as described under "Voting Agreements" beginning on page 107.

    ArthroCare and OEP are parties to that certain Securities Purchase Agreement, dated as of August 14, 2009, which we refer to as the OEP SPA. Under the OEP SPA, OEP is subject to certain standstill provisions with respect to Company common stock. Our Board of Directors waived any restrictions (including standstill restrictions) that may be applicable to OEP and its affiliates under the OEP SPA in connection with the OEP Voting Agreement.

    As of January 31, 2014, stockholders who signed the Voting Agreements collectively owned approximately 17.6% of the outstanding shares of common stock of the Company on an as-converted basis.

Q:
How many votes am I entitled to cast for each share of common stock I own?

A:
For each share of our common stock that you owned on            , 2014, the record date for the special meeting, you are entitled to cast one vote on each matter to be voted upon at the special meeting.

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Q:
How do I cast my vote?

A:
Before you vote, you should read this proxy statement in its entirety, including its annexes, and carefully consider how the proposed merger would affect you.

    If you were a holder of record on            , 2014, you may vote in person at the special meeting, by submitting a proxy for the special meeting by completing, signing, dating and returning the enclosed proxy card in the accompanying pre-addressed, postage paid envelope, or by granting a proxy electronically via the Internet or by telephone by following the instructions on the enclosed proxy card. Internet and telephone proxy submissions are available 24 hours a day, and if you use one of these methods, you do not need to return a proxy card. You must have the enclosed proxy card available, and follow the instructions on such proxy card, in order to grant a proxy over the Internet or telephone.

    If as a stockholder of record you sign, date and mail your proxy and do not indicate how you want to vote, or if you indicate you wish to vote "FOR" the proposal to approve and adopt the merger agreement but do not indicate a choice on the other proposals, your proxy will be voted "FOR" each proposal. However, if you indicate that you wish to vote "AGAINST" the proposal to approve and adopt the merger agreement, your shares will only be voted "FOR" the other proposals if you indicate that you wish to vote "FOR" those proposals.

    If you hold your shares in "street name," which means your shares are held of record by a broker, bank or nominee, you must provide the record holder of your shares with instructions on how to vote your shares in accordance with the voting instructions provided by your broker, bank or nominee. If you do not provide your broker, bank or nominee with instructions on how to vote your shares, it will not be permitted to vote your shares. Also, please note that if your shares are held in "street name" and you wish to vote at the special meeting in person, you must bring to the special meeting a legal proxy from the record holder of the shares (your broker, bank or nominee) authorizing you to vote at the special meeting.

Q:
What will happen if I abstain from voting or fail to vote on the proposals or instruct my broker to vote on the proposals?

A:
If you attend the special meeting or send in your signed proxy card, but abstain from voting on any proposal, your shares will still be counted for purposes of determining whether a quorum exists. If you indicate on your proxy that you abstain from voting on a proposal, it will have the same effect as a vote against the proposal to adopt the merger agreement, the proposal to adjourn the special meeting and the non-binding advisory proposal to approve the golden parachute compensation for each of our named executive officers that is based on or otherwise relates the merger.

    If you fail to cast your vote, in person, by proxy or electronically via the Internet or by telephone, or fail to give voting instructions to your broker, bank or nominee, it will have the same effect as a vote against the proposal to adopt the merger agreement and it will have no effect on the proposal to adjourn the special meeting and the non-binding advisory proposal to approve the golden parachute compensation for each of our named executive officers that is based on or otherwise relates the merger.

Q:
What is a broker non-vote?

A:
Broker non-votes are shares held by brokers and other record holders that are present in person or by proxy at the special meeting, but with respect to which the broker or other record holder is not instructed by the beneficial owner of such shares how to vote on a particular proposal and the broker does not have discretionary voting power on such proposal. Because brokers and other record holders do not have discretionary voting authority with respect to any of the three proposals

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    described in this proxy statement, if a beneficial owner of shares of Company common stock held in "street name" does not give voting instructions to the broker or other holder of record, then those shares will not be present in person or by proxy at the special meeting. As a result, it is expected that there will not be any broker non-votes in connection with any of the three proposals described in this proxy statement.

Q:
When should I submit my proxy?

A:
You should submit your proxy as soon as possible so that your shares will be voted at the special meeting.

Q:
Can I change my vote after I have delivered my proxy?

A:
Yes. If you were a stockholder of record on            , 2014, you may revoke your proxy and change your vote at any time before your proxy is voted at the special meeting. You can do this in one of four ways:

•
delivering to our corporate secretary a signed written notice of revocation, bearing a date later than the date of the proxy, stating that the proxy is revoked (written revocations may be sent to ArthroCare Corporation, Attn: General Counsel, 7000 West William Cannon Drive, Building One, Austin, Texas 78735);

•
signing and delivering a new paper proxy, relating to the same shares and bearing a later date than the original proxy;

•
submitting another proxy by telephone or over the Internet (your latest telephone or Internet proxy will govern); or

•
attending the annual meeting and voting in person, although attendance at the annual meeting will not, by itself, revoke a proxy.

    If you have instructed a broker, bank or other nominee to vote your shares, you must follow the directions received from your broker, bank or other nominee to change those instructions.

Q:
What should I do if I receive more than one set of voting materials?

A:
You may receive more than one set of voting materials, including multiple copies of this proxy statement and multiple proxy cards or voting instruction cards. For example, if you hold your shares in more than one brokerage account, you will receive a separate voting instruction card for each brokerage account in which you hold shares. If you are a holder of record and your shares are registered in more than one name, you will receive more than one proxy card. In order to ensure that all of your shares are voted at the special meeting, please complete, sign, date and return each proxy card and voting instruction card that you receive.

Q:
Am I entitled to appraisal rights?

A:
Yes. As a holder of our common stock, you are entitled to exercise appraisal rights under Section 262 of the DGCL, a copy of which is attached to this proxy statement as Annex C , in connection with the merger, if you do not vote in favor of the proposal to adopt the merger agreement and otherwise meet certain conditions and satisfy fully certain procedures set forth in Section 262 of the DGCL and described in this proxy statement under the caption "The Merger—Appraisal Rights."

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Q:
Is the merger expected to be taxable to me?

A:
Yes. The exchange of shares of our common stock for cash pursuant to the merger will generally be a taxable transaction for U.S. federal income tax purposes.

    You should read "The Merger—Material U.S. Federal Income Tax Consequences" for a more complete discussion of the U.S. federal income tax consequences of the merger.

Q:
I have physical certificates evidencing my shares. Should I send in my share certificates now?

A:
No. After the merger is completed, you will be sent a letter of transmittal with written instructions for exchanging your share certificates for the merger consideration. These instructions will tell you how and where to send in your certificates for your merger consideration. You will receive your cash payment after the paying agent receives your stock certificates and any other documents requested in the instructions.

Q:
What should I do if I have lost my share certificates?

A:
Most of our stockholders hold their shares through book entry positions and have never possessed physical certificates representing their shares. However, if you had a physical certificate or certificates representing your shares and have lost one or more of your share certificates, please contact our transfer agent, American Stock Transfer and Trust at 1-800-937-5449, to obtain replacement certificates. You may be required to provide an undertaking or post a bond to secure against the risk that the share certificates may be subsequently recirculated.

Q:
When do you expect the merger to be completed?

A:
We are working toward completing the merger as quickly as possible and expect to complete the merger in mid-2014. However, because there are certain conditions that must be met before completing the merger, we cannot be certain of the timing of the completion of the merger.

Q:
What happens if the merger is not completed?

A:
If our stockholders do not approve the proposal to adopt the merger agreement or if the merger is not completed for any other reason, our stockholders will not receive any payment for their shares of our common stock in connection with the merger, and the employee equity-based awards will remain outstanding and not be cancelled in exchange for any cash payment. Instead, we would remain an independent public company and shares of our common stock would continue to be listed and traded on NASDAQ. Under specified circumstances, we may be required to pay Smith & Nephew a termination fee of $54.9 million as described in "The Merger Agreement—Termination Fee Payable by ArthroCare."

Q:
What happens if I sell my shares of ArthroCare common stock before the special meeting?

A:
The record date for the special meeting is earlier than the date of the special meeting and the date that the merger is expected to be completed. If you transfer your shares of our common stock after the record date, but before the special meeting, you will retain your right to vote at the special meeting, but will transfer the right to receive the $48.25 per share in cash, without interest, less any applicable withholding taxes, to be received by our stockholders in the merger. The merger consideration is payable only to those stockholders who hold their shares as of immediately prior to the closing of the merger.

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Q:
Who can help answer my questions?

A:
If you have any questions about the merger or how to submit your proxy, please contact our proxy solicitor, Georgeson, using the information below. If you would like additional copies, without charge, of this proxy statement or the enclosed proxy card, you should contact our proxy solicitor at:

Toll Free: (800) 279-6913

Email to: ArthroCare@georgeson.com

Address: Georgeson Inc.
480 Washington Boulevard
Jersey City, NJ 07310

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this filing may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding the merger and the ability to consummate the merger. These forward-looking statements generally include statements that are predictive in nature and depend upon or refer to future events or conditions, and include words such as "believes," "plans," "anticipates," "projects," "estimates," "expects," "intends," "strategy," "future," "opportunity," "may," "will," "should," "could," "potential," or similar expressions. Statements that are not historical facts are forward-looking statements. Forward-looking statements are based on current beliefs and assumptions that are subject to risks and uncertainties. Forward-looking statements speak only as of the date they are made, and ArthroCare undertakes no obligation to update any of them publicly in light of new information or future events. Actual results could differ materially from those contained in any forward-looking statement as a result of various factors, including, without limitation: (1) ArthroCare may be unable to obtain stockholder approval as required for the merger; (2) conditions to the closing of the merger may not be satisfied and required regulatory approvals may not be obtained; (3) the merger may involve unexpected costs, liabilities or delays; (4) the business of ArthroCare may suffer as a result of uncertainty surrounding the merger; (5) the outcome of any legal proceedings related to the merger; (6) ArthroCare may be adversely affected by other economic, business, and/or competitive factors; (7) the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement; (8) the ability to recognize benefits of the merger; (9) risks that the merger disrupts current plans and operations and the potential difficulties in employee retention as a result of the merger; and (10) other risks to consummation of the merger, including the risk that the merger will not be consummated within the expected time period or at all. If the merger is consummated, ArthroCare stockholders will cease to have any equity interest in ArthroCare and will have no right to participate in its earnings and future growth. Additional factors that may affect the future results of ArthroCare are set forth in its filings with the SEC, including its Annual Report on Form 10-K for the year ended December 31, 2013, which is available on the SEC's website at www.sec.gov. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date thereof.

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THE COMPANIES

    ArthroCare Corporation
    7000 West William Cannon
    Building 1
    Austin, TX 78735
    (512) 391-3900

ArthroCare, a Delaware corporation, is a leading global provider of minimally invasive surgical products. We are a medical device company that develops, manufactures and markets surgical products, many of which are based on our minimally invasive patented Coblation® technology. The Company seeks to improve existing soft-tissue surgical procedures and enable new minimally invasive procedures. ArthroCare's innovative technologies have improved the lives of many diverse individuals.

For additional information about ArthroCare and our business, see "Where You Can Find More Information" on page 120.

    Smith & Nephew, Inc.
    150 Minuteman Road
    Andover, MA 01810
    (978) 749-1000

Smith & Nephew, a Delaware corporation, is a medical technology business that offers equipment for orthopedic reconstruction, advanced wound management, sports medicine and trauma & extremities. Smith & Nephew operates as a subsidiary of Smith & Nephew plc.

    Smith & Nephew plc
    15 Adam Street
    London
    WC2N 6LA
    United Kingdom
    +44 (0)20 7401 7646

Smith & Nephew plc, or Parent HoldCo, an English public limited company, is a global medical technology business that operates in the orthopedic reconstruction, advanced wound management, sports medicine and trauma & extremities markets. Parent HoldCo is the parent holding company of Smith & Nephew.

    Rosebud Acquisition Corporation
    1450 East Brooks Road
    Memphis, TN 38116
    (901) 396 2121

Rosebud Acquisition Corporation, or Merger Sub, a Delaware corporation and wholly-owned subsidiary of Smith & Nephew, was formed on or around February 19, 2010 to facilitate possible unrelated transactions. Merger Sub has not conducted any business operations other than those incident to its formation and the transactions contemplated by the merger agreement. If the merger is completed, Merger Sub will cease to exist following its merger with and into ArthroCare.

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ARTHROCARE CORPORATION SPECIAL MEETING

General; Date, Time and Place of Special Meeting

Your proxy is solicited on behalf of the board of directors of ArthroCare Corporation, a Delaware corporation, which we refer to as "ArthroCare," "the Company," "we," "us" or "our," for use at our special meeting of stockholders to be held on                              ,                               , 2014 at                              local time, at                              , or at any postponement or adjournment thereof, for the purposes discussed in this proxy statement and in the accompanying notice of special meeting and any business properly brought before the special meeting. Proxies are solicited to give all stockholders of record an opportunity to vote on matters properly presented at the special meeting.


Purpose of the Special Meeting

The specific proposals to be considered and acted upon at the special meeting are summarized in the accompanying notice of special meeting of stockholders and on page 2 of this Proxy Statement. In addition, each proposal is described in more detail in the sections entitled "Proposal No. 1," "Proposal No. 2" and "Proposal No. 3" to this Proxy Statement.


Recommendation of Our Board of Directors

Our Board of Directors has unanimously determined that the merger agreement and the transactions contemplated thereby are fair to, and in the best interests of, ArthroCare and its stockholders and approved, adopted and declared advisable the merger agreement and the merger and the other transactions contemplated thereby.

Our Board of Directors unanimously recommends approval and adoption of the merger agreement by the stockholders of the Company and our Board of Directors unanimously recommends that our stockholders vote "FOR" the proposal to adjourn the special meeting, and "FOR" the non-binding advisory proposal to approve the golden parachute compensation payable to our named executive officers in connection with the merger.

Stockholders of record at the close of business on                              , 2014, which we refer to as the record date, are entitled to receive notice of and to vote at the special meeting. The Company has one series of common shares outstanding, designated common stock. The common stock has a par value of $0.001 per share. As of the record date, there were                              shares of the Company's common stock issued and                              shares outstanding of the Company's common stock held by                              stockholders of record. As of                              , 2014, no preferred stock was outstanding.


Quorum

The required quorum for the transaction of business at the special meeting is a majority in voting power of the shares of common stock issued and outstanding on the Record Date and entitled to vote at the special meeting, present in person or represented by proxy. All votes, including abstentions, that are present in person at the special meeting or by proxy and that are entitled to vote at the special meeting will be treated as "present" for the purpose of establishing a quorum.


Vote Required

Each stockholder is entitled to one vote for each share of Company common stock held as of the record date.

You may vote "FOR" or "AGAINST," or you may "ABSTAIN" from voting on each proposal.

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Broker non-votes are shares held by brokers and other record holders that are present in person or represented by proxy at the special meeting, but with respect to which the broker or other record holder is not instructed by the beneficial owner of such shares how to vote on a particular proposal and the broker does not have discretionary voting power on such proposal. Because brokers and other record holders do not have discretionary voting authority with respect to any of the three proposals described in this proxy statement, if a beneficial owner of shares of Company common stock held in "street name" does not give voting instructions to the broker or other holder of record, then those shares will not be present in person or represented by proxy at the special meeting. As a result, it is expected that there will not be any broker non-votes in connection with any of the three proposals described in this proxy statement. If you do not instruct your broker, bank or other nominee to vote your shares, your shares will not be voted and the effect will be the same as a vote "AGAINST" the proposal to approve and adopt the merger agreement. However, a failure to instruct your broker, bank or other nominee to vote on the proposal to adjourn the special meeting if advisable or necessary, including to solicit additional proxies in order to obtain approval and adoption of the merger agreement by our stockholders or, assuming a quorum is present, the non-binding advisory proposal to approve the golden parachute compensation for each of our named executive officers will have no effect on the outcome of such proposals.

The proposal to adopt the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of our common stock. Because the vote on the proposal to adopt the merger agreement is based on the total number of shares outstanding, rather than the number of actual votes present or cast, abstentions will have the same effect as a vote "AGAINST" the proposal to adopt the merger agreement (Proposal No. 1). On the record date, there were            shares of our common stock entitled to vote at the special meeting. Under the terms of the Voting Agreements, OEP and the members of our Board of Directors, who together owned approximately                              % of our outstanding common stock as of the record date, have agreed to vote their shares of common stock for the adoption of the merger agreement. See "Summary—Voting Agreements."

Approval of the proposal to adjourn the special meeting, if advisable or necessary, including to solicit additional proxies in order to obtain approval and adoption of the merger agreement by our stockholders (Proposal No. 2) requires the affirmative vote of a majority in voting power of the shares present in person or by proxy at the special meeting if a quorum is present, and requires the affirmative vote of a majority of the shares present in person or by proxy at the special meeting if a quorum is not present. Abstentions will have the same effect as a vote against the proposal.

The non-binding advisory proposal to approve the golden parachute compensation for each of our named executive officers that is based on or otherwise relates the merger (Proposal No. 3) will be approved if a majority in voting power of shares of common stock represented in person or by proxy at the special meeting vote in favor of the proposal, provided a quorum is present. Abstentions will have the same effect as a vote against the proposal.

A list of our stockholders will be available for review for any purpose germane to the special meeting at 7000 West William Cannon Drive, Building One, Austin, Texas 78735 during regular business hours for a period of ten days before the special meeting and will also be available at the special meeting.


Shares Owned by Our Directors and Executive Officers

As of                              , 2014, the record date for the determination of stockholders entitled to notice of and to vote at the special meeting, our directors and executive officers beneficially owned and were entitled to vote an aggregate of                              shares of common stock, or approximately                              % of our total common stock outstanding on that date. On the record date, there were                              shares of our common stock entitled to vote at the special meeting. Under the

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terms of the Voting Agreements, OEP and the members of our Board of Directors, who together owned approximately                              % of our outstanding common stock as of the record date, have agreed to vote their shares of common stock for the adoption of the merger agreement.


Voting; Proxies

To ensure that your shares are represented at the special meeting, the Company recommends that you provide voting instructions promptly by proxy, even if you plan to attend the special meeting in person. If you fail to return your proxy, the effect will be that your shares will not be counted for purposes of determining whether a quorum is present at the special meeting (unless you are a record holder as of the record date and attend the annual meeting in person) and will have the same effect as a vote "AGAINST" Proposal No. 1 and will have no effect on Proposals No. 2 and 3.

If you are a stockholder of record as of the Record Date, you may provide voting instructions by proxy by completing, signing, dating and returning the enclosed proxy card. You may alternatively follow the instructions on the enclosed proxy card for Internet or telephone proxy submissions. Proxy cards submitted by mail must be received before            , 2014 to be voted at the special meeting. If you submit your proxy through the Internet or by telephone, it must be received by 11:59 p.m., Eastern time,            , 2014.

If you sign, date and return your proxy without indicating how you wish to vote, or if you indicate you wish to vote "FOR" the proposal to approve and adopt the merger agreement but do not indicate a choice on the other proposals, your proxy will be voted "FOR" each of the proposals being presented at the special meeting. However, if you indicate that you wish to vote "AGAINST" the proposal to approve and adopt the merger agreement, your shares will only be voted "FOR" the other proposals if you indicate that you wish to vote "FOR" those proposals.

If you fail to return your proxy, the effect will be that your shares will not be counted for purposes of determining whether a quorum is present at the special meeting (unless you are a record holder as of the Record Date and attend the special meeting in person) and will have the same effect as a vote "AGAINST" Proposal No. 1 and will have no effect on Proposals No. 2 and 3.

If your shares are held by a bank, broker or other nominee on your behalf in "street name," your bank, broker or other nominee will send you instructions as to how to provide voting instructions for your shares by proxy. Many banks and brokerage firms have a process for their customers to provide voting instructions by telephone or via the Internet, in addition to providing voting instructions by proxy card. If shares are held through a broker, the broker will not have the authority to exercise discretion to vote shares with respect to any of the proposals, as specified under NASDAQ and SEC rules. If you do not instruct your broker, bank or other nominee to vote your shares, your shares will not be voted and the effect will be the same as a vote "AGAINST" the proposal to approve and adopt the merger agreement. However, a failure to instruct your broker, bank or other nominee to vote on the proposal to adjourn the special meeting if advisable or necessary, including to solicit additional proxies in order to obtain approval and adoption of the merger agreement by our stockholders or, assuming a quorum is present, the non-binding advisory proposal to approve the golden parachute compensation for each of our named executive officers will have no effect on the outcome of such proposals.

Abstentions will be counted as present for purposes of determining the presence of a quorum for the transaction of business. Abstentions will have the effect of a vote "AGAINST" Proposals No. 1, No. 2 and No. 3.

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Adjournments

Although it is not currently expected, the special meeting may be adjourned for the purpose of, among other things, soliciting additional votes.

    •
    Our bylaws expressly provide that if a quorum is not present at the special meeting, then the meeting may be adjourned by stockholders from time to time by the holders of a majority of the shares present in person or by proxy at the special meeting. In addition, if a quorum is present, the special meeting may be adjourned by stockholders by the affirmative vote of the holders of a majority in voting power of the shares present in person or by proxy at the special meeting. Any signed proxies received by us for which no voting instructions are provided on such matter will be voted in favor of an adjournment. However, if you indicate that you wish to vote "AGAINST" the proposal to approve and adopt the merger agreement, your shares will only be voted "FOR" the adjournment proposal if you indicate that you wish to vote "FOR" such proposal.

    •
    Under the merger agreement, we may not, without Smith & Nephew's permission, adjourn or postpone the special meeting, except under certain circumstances. In particular, we may adjourn the special meeting without Smith & Nephew's consent for up to three periods (none of which may exceed 10 business days), if advisable or necessary, including to solicit additional votes in favor of the proposal to adopt the merger agreement if there are insufficient votes to adopt the merger agreement at the time of the special meeting.


Revocation of Proxies

Any proxy given pursuant to this solicitation may be revoked by the stockholder of record on      , 2014 before the proxy is voted at the special meeting in any one of four ways:

    •
    delivering to the Secretary of the Company a written notice of revocation bearing a date later than the date of the proxy, stating that the proxy is revoked;

    •
    signing and delivering a new duly executed paper proxy, relating to the same shares and bearing a later date than the original proxy;

    •
    submitting another proxy by telephone or over the Internet (the person's latest telephone or Internet proxy will govern); or

    •
    attending the special meeting and voting in person. Attendance at the special meeting will not, by itself, revoke a proxy.

If the stockholder of record on                              , 2014 has instructed a broker, bank or other nominee to vote its shares, it must follow the directions received from its broker, bank or other nominee to change those instructions.


Solicitation of Proxies

The cost of soliciting proxies will be borne by the Company. The Company may reimburse brokerage firms and other persons representing beneficial owners of shares for their expenses in forwarding solicitation material to such beneficial owners. We have engaged Georgeson, a proxy solicitation firm, to assist in the solicitation of proxies and provide related advice and informational support for a services fee, and we will pay Georgeson approximately $9,500 plus reimbursement of out-of-pocket expenses. Proxies may also be solicited by Georgeson or, without additional compensation, certain of the Company's directors, officers and regular employees, personally or by telephone, facsimile, email telegram or via the Internet.

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Appraisal Rights

As more fully described below in the section entitled "The Merger—Appraisal Rights," under applicable Delaware law, stockholders who do not wish to accept the consideration payable for their shares of common stock pursuant to the merger may seek judicial appraisal of the "fair value" of their shares by the Delaware Court of Chancery. The "fair value" of your shares of Company common stock as determined by the Delaware Court of Chancery may be more than, less than, or equal to the value of the merger consideration per share that you are otherwise entitled to receive under the terms of the merger agreement.

Generally, in order to properly demand appraisal, a stockholder must:

    •
    deliver to us a written demand for appraisal, in compliance with Section 262 of the DGCL, before the vote on the proposal to adopt the merger agreement at the special meeting;

    •
    not vote in favor of the proposal to adopt the merger agreement;

    •
    hold of record shares of our common stock on the date the written demand for appraisal is made and continue to hold the shares of record through the effective date of the merger; and

    •
    strictly follow the statutory procedures for perfecting appraisal rights under Section 262 of the DGCL, which are described in the section entitled "The Merger—Appraisal Rights," and included as Annex C to this proxy statement.

Merely voting against, or failing to vote in favor of, the proposal to adopt the merger agreement will not preserve your right to appraisal under the DGCL. Also, because a submitted proxy not marked "AGAINST" or "ABSTAIN" will be voted "FOR" the proposal to adopt the merger agreement, the submission of a proxy not marked "AGAINST" or "ABSTAIN" will result in the waiver of appraisal rights. If you hold shares in the name of a broker, bank or other nominee, you must instruct your nominee to take the steps necessary to enable you to demand appraisal for your shares.

Annex C to this proxy statement contains the full text of Section 262 of the DGCL, which relates to your right of appraisal. We encourage you to read these provisions carefully and in their entirety. If you or your nominee fails to follow all of the steps required by Section 262 of the DGCL, you will lose your right of appraisal.


Assistance

If you need assistance in completing your proxy card or have questions regarding the special meeting, please contact our proxy solicitor at:

    Toll Free: (800) 279-6913
    Email to: ArthroCare@Georgeson.com
    Address: Georgeson Inc.
    480 Washington Boulevard
    26th Floor
    Jersey City, NJ 07310

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PROPOSAL 1—ADOPTION OF THE MERGER AGREEMENT

THE MERGER

This discussion of the merger does not purport to be complete and is qualified in its entirety by reference to the merger agreement, which is attached to this proxy statement as Annex A and which is incorporated by reference into this proxy statement. You should read the entire merger agreement carefully as it is the legal document that governs the merger.


Background of the Merger

Our Board of Directors and management, in their ongoing effort to maximize stockholder value, have periodically reviewed and assessed our business strategy, the various trends and conditions affecting our industry and our businesses generally and a variety of strategic alternatives, including a potential sale of the Company.

In early 2013, our management and members of the Transaction Committee of our Board of Directors, a standing committee of the Board of Directors that was formed to review strategic alternatives that might become available to the Company and to meet periodically to consider those matters (which we refer to as our Transaction Committee and whose membership is comprised of Gregory A. Belinfanti, Terrence E. Geremski and Peter L. Wilson, with James G. Foster as an alternate), discussed potential strategic alternatives that might be available to the Company with representatives of Piper Jaffray. While we expected that an exploration of strategic alternatives with third parties might receive a limited response given that the investigation of the Company by the United States Department of Justice regarding allegations of securities and related fraud committed under a previous management team was still pending at that time, at the direction of the Company, Piper Jaffray contacted three medical device manufacturing companies, which did not include Smith & Nephew, to gauge their potential interest in an acquisition of our Company. These three companies were identified based on their business and operations within the medical device manufacturing industry and their prior experience in making large acquisitions.

From early February through April 2013, Piper Jaffray had preliminary discussions with these three companies regarding a potential acquisition of the Company. In March 2013, one of the three medical device manufacturing companies entered into a confidentiality agreement with the Company, which agreement included a standstill provision that terminated upon the announcement of a merger, and that company also met with our senior management to discuss the Company and our business. Two of the three medical device manufacturing companies, including the company that had entered into a confidentiality agreement and met with our senior management, indicated that they were not interested in engaging in discussions regarding a potential acquisition of the Company at that time. The third medical device manufacturing company indicated that it was interested in potentially acquiring only the Company's ENT business, emphasized that it had no interest in the Company's sports medicine business and noted that its position regarding a lack of interest in the sports medicine business was not likely to change. Our Board of Directors determined not to pursue negotiations with the third medical device manufacturing company because we believed, in consultation with Piper Jaffray, that the Company's value as a stand-alone entity exceeded the net value after tax that could be achieved from splitting the Company into two separate businesses and selling the ENT business.

In October 2013, Mike Frazzette, Smith & Nephew's President of Advanced Surgical Devices, requested a meeting with the Company's senior management. On November 5, 2013, Mr. Frazzette and Cyrille Petit, Smith & Nephew's Chief Corporate Development Officer, met with David Fitzgerald, our President and Chief Executive Officer, and Todd Newton, our Executive Vice President, Chief Financial Officer and Chief Operating Officer, in Austin, Texas. During the meeting, Mr. Frazzette and Mr. Petit expressed Smith & Nephew's interest in engaging in discussions concerning a potential acquisition of

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the Company. Smith & Nephew did not make an offer to acquire the Company or indicate a potential purchase price at that time.

Shortly after the meeting, representatives of the Company and Smith & Nephew and their respective advisors began negotiating the terms of a potential confidentiality agreement pursuant to which the Company would provide Smith & Nephew with confidential Company information to facilitate Smith & Nephew's evaluation of the Company.

In addition, on November 5, 2013, our senior management met with representatives of Piper Jaffray to discuss potential responses to Smith & Nephew's inquiry as well as possible timing and process for engaging with additional third parties that might have the financial capability and strategic interest to pursue a potential transaction with the Company.

On November 8, 2013, our Transaction Committee held a special telephonic meeting. Representatives of Latham & Watkins LLP, our legal advisors (which we refer to as Latham & Watkins), attended the meeting. Our Transaction Committee received an update regarding the meeting between Mr. Fitzgerald, Mr. Newton and representatives of Smith & Nephew, including a discussion of the status of a confidentiality agreement being negotiated by the parties and plans for Smith & Nephew to commence due diligence efforts.

On November 12, 2013, Smith & Nephew signed a confidentiality agreement with the Company, which included a standstill provision that terminated upon the announcement of a merger. Following execution of the confidentiality agreement, our management began to participate in preliminary meetings and discussions with Smith & Nephew relating to business and legal due diligence.

Starting on November 18, 2013, at the direction of our Board of Directors, Piper Jaffray began to contact certain medical device manufacturing companies regarding a potential acquisition of the Company, in addition to Smith & Nephew. The parties contacted were selected based on an assessment conducted by Piper Jaffray and reviewed with management, which considered, among other things, the perceived strategic fit of their respective businesses with the Company's businesses, the likelihood that they might be interested in a potential acquisition of the Company based upon their position in the market place, historical contacts with the Company and historical acquisition activity, including their prior experience making large acquisitions, and their perceived ability to complete an acquisition of the Company in a timely manner.

From November 18, 2013 through early-December 2013, at the direction of our Board of Directors, Piper Jaffray contacted a total of five medical device manufacturing companies, in addition to Smith & Nephew, including two of the three potential acquirors contacted by Piper Jaffray at the request of the Company in early 2013. Piper Jaffray did not re-contact the third medical device manufacturing company that had identified potential interest only in the Company's ENT business in early 2013 because our Transaction Committee, based on the input of its advisors, continued to believe that the highest value for the Company would be realized through the sale of the combined businesses and thus it was in the best interest of the Company's stockholders to evaluate the potential sale of the combined business. Our Board of Directors had not reached any decision, however, on whether it was in the best interests of the Company's stockholders to sell the Company. The Company ultimately entered into confidentiality agreements with three medical device manufacturing companies (in addition to the confidentiality agreement with Smith & Nephew) including one of the potential acquirors who had also been contacted in early 2013 and entered into its confidentiality agreement with the Company in March 2013. Each of the confidentiality agreements included a standstill provision that terminated upon the announcement of the merger.

Our senior management, together with representatives of Piper Jaffray, held meetings with each of the four potential acquirors who executed confidentiality agreements regarding a potential acquisition of the Company and the Company's business(including Smith & Nephew) and, at those meetings, the

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Company described the material terms of the pending deferred prosecution agreement that the Company expected to enter into with the U.S. Department of Justice. At various times following these meetings, each of the three potential acquirors who met with management, other than Smith & Nephew, indicated that they were not interested in pursuing an acquisition of the Company at that time, either without giving a reason for their decision, because they were not interested in an acquisition of the entire Company but might be interested in an acquisition of only its ENT business or because they were not prepared to explore a potential acquisition with the Company or make an offer to acquire the Company at that time.

On November 19, 2013, at a meeting held in Austin, Texas with members of Smith & Nephew senior management, members of our senior management provided an overview of the Company and our businesses. Following the meeting, Mr. Fitzgerald and Mr. Newton met with Mr. Petit and Jeff Thomas, Smith & Nephew's Vice President, Corporate Development for Advanced Surgical Devices, and Mr. Petit emphasized that Smith & Nephew would not be interested in a multiple-bidder process to acquire the Company and would like to enter into an exclusivity agreement with the Company with the intent to expeditiously conduct its required due diligence and negotiate satisfactory terms to acquire the Company.

On November 25, 2013, our Transaction Committee held a special telephonic meeting. Representatives of Latham & Watkins and Piper Jaffray also attended. Our Transaction Committee reviewed the Company's discussions with third parties to date with representatives of Piper Jaffray and our management, including Piper Jaffray's ongoing outreach to third parties that might be interested in a potential strategic transaction with the Company. Our Transaction Committee selected Piper Jaffray to act as financial advisor to our Board of Directors and to facilitate continuation of the strategic transaction process based on its knowledge and experience in the medical device industry and familiarity with the Company and our business, and authorized management to finalize an engagement letter with Piper Jaffray.

On November 26, 2013, we entered into an engagement letter with Piper Jaffray to engage them as our financial advisor in connection with a potential sale of the Company. In early 2013, our Board of Directors and management had discussed with representatives of J.P. Morgan Securities LLC strategic alternatives that might be available to the Company and the potential retention of J.P. Morgan Securities LLC to provide financial advisory services (which retention did not occur). J.P. Morgan Securities LLC informed the Company that from time to time, as part of its ordinary course business development activities, it had discussions with two medical device manufacturing companies, including Smith & Nephew, concerning the industry landscape and inquired as to those companies' potential interest in a transaction with various potential acquisition candidates, including the Company, and neither company expressed an interest in a potential transaction with the Company at that time.

On December 10, 2013, Mr. Petit called Mr. Fitzgerald and indicated that Smith & Nephew's board of directors had authorized Mr. Petit to present to the Company a preliminary non-binding acquisition proposal at a price of $43.00 per share of our common stock in cash, contingent on completion of due diligence. Mr. Petit reiterated during the call that Smith & Nephew would be unwilling to participate in any auction process, and stated that Smith & Nephew would require a 60-day exclusivity period as a condition to its continued exploration of a potential transaction with the Company. In addition, Mr. Petit outlined certain other contemplated elements of Smith & Nephew's non-binding proposal, including Smith & Nephew's preliminary views with respect to transaction structure, timing of a transaction, receipt of voting agreements and the parties to those voting agreements, the termination fee to be paid by the Company in certain circumstances (although no specific proposal was discussed), and Smith & Nephew's obligations with respect to obtaining any required regulatory approvals in connection with the transaction. Smith & Nephew's $43.00 per share non-binding proposal reflected an approximately 11.54% premium to the $38.55 per share closing price of our common stock on December 10, 2013.

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On December 13, 2013, our Transaction Committee held a telephonic meeting. Representatives of Latham & Watkins and Piper Jaffray also attended. Our Transaction Committee discussed Smith & Nephew's preliminary non-binding oral proposal to acquire the Company at a price of $43.00 per share of our common stock in cash. In reviewing Smith & Nephew's proposal, our Transaction Committee considered, among other things, a preliminary valuation analysis of the Company discussed with Piper Jaffray, the timing and risks associated with our business plan, the optimal timing for a sale of the Company and Smith & Nephew's statement that it would require a 60-day exclusivity period as a condition to their continued exploration of a potential transaction with the Company. Our Transaction Committee authorized Mr. Fitzgerald to inform Mr. Petit, and representatives of Piper Jaffray to inform J.P. Morgan Limited and Centerview Partners LLC, which we refer to as JP Morgan and Centerview, the financial advisors for Smith & Nephew, that the proposed purchase price of $43.00 per share for our common stock in the initial proposal was financially inadequate, and that our Transaction Committee would seek a price proposal of at least $50.00 per share.

In addition, at the December 13, 2013 meeting, our Transaction Committee determined that it was not in the best interests of the Company's stockholders to enter into exclusive negotiations with Smith & Nephew at the $43.00 per share price proposed by Smith & Nephew. Representatives of Piper Jaffray, the members of our Transaction Committee and the members of management present discussed the potential acquirors that had been contacted to date regarding interest in a potential strategic transaction with the Company, including three medical device manufacturers that entered into confidentiality agreements with the Company other than Smith & Nephew and that had held or agreed to have meetings with the Company prior to December 13, 2013, as well as certain additional potential companies that might be subject to future outreach. Following the discussion, our Transaction Committee instructed Piper Jaffray to contact two additional medical device manufacturers which had prior experience in making large acquisitions and which had not previously been contacted by Piper Jaffray regarding a potential acquisition of the Company. Our Transaction Committee and representatives of Piper Jaffray discussed the possibility of soliciting interest in a potential transaction from private equity firms and other financial investors, but, based in part on an ability-to-pay analysis performed by Piper Jaffray, our Transaction Committee determined that financial buyers would be unlikely to be able to match the price being offered by Smith & Nephew or other potential strategic acquirors due to the synergies that those strategic acquirors would expect to be able to realize through an acquisition. Our Transaction Committee also considered the risks to the Company should information concerning its potential exploration of strategic alternatives leak to the public, which risks included damaging the Company's relationships with its customers, suppliers, and employees.

On December 16 and December 17, 2013, Piper Jaffray spoke with representatives of the two additional medical device manufacturing companies that had not previously been contacted about the Company concerning their interest in a potential acquisition of the Company. On December 19 and December 20, 2013, each of the two potential acquirors indicated that they were not interested in pursuing an acquisition of the Company at that time, and the Company did not enter into a confidentiality agreement or conduct management meetings with either potential acquiror.

Ultimately, on or prior to December 20, 2013, all seven potential acquirors that Piper Jaffray contacted in the fall of 2013 (other than Smith & Nephew) declined to continue with discussions or submit a proposal regarding an acquisition of the entire Company. On December 16, 2013, representatives of Piper Jaffray called representatives of JP Morgan and Centerview to discuss Smith & Nephew's proposal in accordance with the instructions given by our Transaction Committee at its meeting on December 13, 2013. During that call, representatives of Piper Jaffray informed the representatives of JP Morgan and Centerview that our Transaction Committee believed the price proposed in Smith & Nephew's December 10, 2013 proposal was financially inadequate.

On December 18, 2013, we received a written non-binding acquisition proposal from Smith & Nephew, pursuant to which Smith & Nephew proposed to acquire all the outstanding shares of our

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common stock at a price of $45.50 per share in cash. The offer was subject to the satisfactory completion of due diligence, negotiation of a definitive merger agreement, a termination fee equal to 4.5% of the equity value implied by the offer price and other conditions. The letter indicated that Smith & Nephew intended to finance the transaction through third party financing, but that its offer would not be subject to a financing condition. The letter also indicated that Smith & Nephew wished to enter into exclusive negotiations with us for a period of 45 days to work toward the completion of due diligence and execution of a definitive acquisition agreement. Smith & Nephew's offer of $45.50 per share reflected an approximately 14.04% premium over the $39.90 per share closing price of our common stock on December 18, 2013.

On December 18, 2013 and December 19, 2013, our Board of Directors held a regularly scheduled meeting. Representatives of Latham & Watkins and Piper Jaffray also attended the meeting. During that meeting, representatives of Latham & Watkins reviewed the fiduciary duties of our Board of Directors, including in connection with a potential sale of the Company, and a member of our Board of Directors designated by OEP again discussed with our Board of Directors the relationship between OEP and JP Morgan (which relationship had been discussed at prior meetings at which the two members of our Board of Directors designated by OEP also disclosed the existence of informational barriers between OEP and JP Morgan), noting, among other things, that OEP was an indirect subsidiary of JPMorgan Chase & Co., an affiliate of JP Morgan. After discussion, the members of our Board of Directors who were not designated by OEP fully considered the relationship between OEP and JPMorgan Chase & Co., and the status of JP Morgan as an advisor to Smith & Nephew, and unanimously agreed that OEP's relationship with JPMorgan Chase & Co. would not affect the Company's ongoing negotiations with Smith & Nephew. Our Board of Directors then discussed Smith & Nephew's non-binding proposal and reviewed the third parties contacted and the results of Piper Jaffray's outreach to other potential acquirors to date. Our Board of Directors reviewed the Company's strategic plan and its potential future as a stand-alone business, noting the Company's current financial position, the principal products in its development pipeline and preliminary results for the Company's fourth quarter, and discussed the various risks facing the Company, including that achieving significant results from the Company's current strategic plan would take a number of years and the significant risks related to the continued growth of the Company's business and the ultimate success of the Company's research and development initiatives. Our Board of Directors also discussed strategies the Company might pursue as an alternative to pursuing the Company's stand-alone business plan or a sale of the Company, including engaging in a strategic business combination with another company, acquiring another business, a leveraged recap and special dividend, and/or potentially splitting the Company into two separate businesses. Following the discussions and consultation with Piper Jaffray and our management, our Board of Directors determined that there were no other currently viable potential acquirors of the Company, including private equity firms and other financial investors, who were likely to offer to pay a price higher than Smith & Nephew to acquire the Company and be able to complete a transaction in a timely manner. After weighing the information provided by Piper Jaffray and Latham & Watkins, and discussing at length, our Board of Directors authorized our management to negotiate with Smith & Nephew to attempt to obtain a higher price, a reduced termination fee and eliminate or reduce the time of any exclusivity period.

On December 19, 2013, representatives of Piper Jaffray contacted representatives of JP Morgan and Centerview and communicated the Company's intention to make a non-binding counter-offer to Smith & Nephew's proposal, including a proposed purchase price of $47.00 per share and a termination fee equal to 2.5%.

On December 20, 2013, Mr. Fitzgerald spoke with Mr. Petit by telephone and, during their conversation, made a non-binding counter-offer to Smith & Nephew, including a proposed purchase price of $47.00 per share of our common stock in cash and a termination fee equal to 2.5% of the equity value implied by the offer price. The closing price of our common stock on that day was $39.40.

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On December 22, 2013, Mr. Petit called Mr. Fitzgerald to indicate that he was authorized to present to the Company a revised non-binding proposal to acquire the Company at a price of $46.00 per share of our common stock, with a termination fee equal to 3.5% of the equity value implied by the offer price and an exclusive negotiating period ending February 5, 2014. Mr. Petit informed Mr. Fitzgerald that the $46.00 per share price represented Smith & Nephew's best and final offer. The $46.00 per share price reflected an approximately 16.75% premium to the $39.40 per share closing price of our common stock on December 20, 2013.

Later that day, our Board of Directors held a special telephonic meeting. Representatives of Latham & Watkins and Piper Jaffray attended. Our Board of Directors discussed the revised proposal from Smith & Nephew and reviewed a preliminary valuation analysis of the Company prepared by Piper Jaffray. Representatives from Piper Jaffray confirmed that JP Morgan and Centerview had stated during a telephone call between Piper Jaffray, JP Morgan and Centerview that took place following Mr. Petit's call to Mr. Fitzgerald that Smith & Nephew would be unwilling to further increase its offered price. Piper Jaffray also informed our Board of Directors that all of the other potential bidders contacted on behalf of the Company had either declined to proceed with discussions or had indicated that they were only interested in an acquisition of the ENT business. Our Board of Directors also discussed the required regulatory approvals in connection with a transaction with Smith & Nephew, and the impact of those regulatory requirements on certainty and timing of the transaction. After weighing the strength of Smith & Nephew's offer against the likelihood of successfully soliciting other potential bidders, our Board of Directors requested that our management attempt to negotiate a reduced termination fee, an increase in the offer price, a commitment from Smith & Nephew on regulatory approval efforts to ensure certainty in exchange for exclusivity and a shorter exclusivity period. Management was authorized to negotiate and enter into an exclusivity agreement with Smith & Nephew. Our Board of Directors also authorized our Transaction Committee to work with management and the Company's advisors to negotiate and enter into a proposed transaction with Smith & Nephew.

On December 26, 2013, after subsequent negotiations, we entered into a written exclusivity agreement with Smith & Nephew that contemplated a non-binding purchase price of $46.00 per share of our common stock in cash and a termination fee equal to 3.2% of the equity value implied by the offer price (which was below the mean and median termination fee for similarly sized medical device acquisitions) and provided for a binding exclusivity period ending January 21, 2014, with an automatic extension to February 4, 2014, unless the Company gave notice of termination on or before January 15, 2014. We and Smith & Nephew were unable to agree to any terms related to regulatory approval efforts obligations in the exclusivity letter. The $46.00 per share offer price reflected an approximately 14.91% premium to the $40.03 per share closing price of our common stock on December 26, 2013.

On December 30, 2013, we provided Smith & Nephew and its advisors access to our electronic due diligence data site to facilitate the due diligence process.

Between January 3, 2014 and January 28, 2014, members of our management team, together with representatives of Piper Jaffray and Latham & Watkins, participated in due diligence meetings in Austin, Texas and Dallas, Texas and attended due diligence conference calls with representatives of Smith & Nephew and its advisors to review various operational aspects of the Company and to address various business and legal due diligence questions.

On January 7, 2014, following the close of trading on the U.S. public stock markets, we issued a press release announcing that we had entered into a deferred prosecution agreement with the Department of Justice relating to reported allegations of securities and related fraud committed under a previous management team. The terms of the deferred prosecution agreement were materially the same as previously described to the three potential acquirers and Smith & Nephew in the management meetings that took place prior to entering into the exclusivity agreement with Smith & Nephew and the financial terms were consistent with the amounts reserved for the matter as disclosed in the Company's

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public filings. The closing price on the day following the announcement was $46.57, an increase of approximately 14.48% from the $40.68 per share closing price the prior day.

On January 10, 2014, during management due diligence meetings in Dallas, Texas, Mr. Newton and a representative of Piper Jaffray met with members of Smith & Nephew's senior management and discussed Smith & Nephew's non-binding price proposal of $46.00 per share in cash in light of the deferred prosecution agreement and the subsequent increase in the trading price of the Company's common stock. Mr. Petit responded that he would discuss with his Board of Directors whether Smith & Nephew was willing to increase its proposed offer price, and Mr. Newton emphasized to Mr. Petit the need for Smith & Nephew to provide more closing certainty related to regulatory matters to obtain our Board of Directors' approval for the proposed transaction.

On January 12, 2014, Latham & Watkins sent an initial draft of a merger agreement to Davis, Polk & Wardwell, LLP, Smith & Nephew's legal advisors, which we refer to as Davis Polk.

On January 13, 2014, representatives from Piper Jaffray called representatives from JP Morgan and Centerview to discuss the Company's request that Smith & Nephew increase its per share proposal to acquire the Company. The representatives from JP Morgan and Centerview stated that Smith & Nephew hoped to send a revised proposal at a higher price on January 14, 2014, before the next meeting of our Board of Directors.

On January 14, 2014, our Transaction Committee held a telephonic meeting. Representatives of Latham & Watkins and Piper Jaffray also attended. Our management and advisors provided our Transaction Committee with an update on the status of negotiations with Smith & Nephew, including the provisions of the draft merger agreement sent to Davis Polk, the comments from JP Morgan and Centerview that Smith & Nephew hoped to provide a revised price proposal at a higher price, the fact that Smith & Nephew failed to provide a new price proposal that day, an absence of in-bound contacts from other participants in the strategic transaction process since the announcement of the deferred prosecution agreement and the terms of the exclusivity agreement with Smith & Nephew. After discussing these topics, our Transaction Committee directed our management to terminate the current exclusivity period in accordance with its terms, and extend exclusivity until January 24, 2014 in order to provide sufficient time for Smith & Nephew to complete its due diligence efforts and submit a revised acquisition proposal and to allow any continuation of exclusivity thereafter to be at the Company's discretion.

On January 15, 2014, representatives from Piper Jaffray called representatives from JP Morgan and Centerview to emphasize that Smith & Nephew would need to provide a revised price proposal in order to extend exclusivity. On that same day, Mr. Fitzgerald spoke with Mr. Petit by telephone and Mr. Petit indicated that he expected that a revised price proposal with a premium to the then-market price would be forthcoming following further input from Smith & Nephew's board of directors.

Later that day, the Company gave Smith & Nephew notice that it was exercising its right to terminate exclusivity effective at 5:00 p.m. Eastern Standard Time on January 21, 2014 but that it would continue to abide by the terms of the exclusivity agreement until 5:00 p.m. Eastern Standard Time on January 24, 2014 in order to facilitate continued discussions.

On January 16, 2014, members of our senior management and representatives of Piper Jaffray met with members of Smith & Nephew's senior management in Austin, Texas for further management due diligence meetings. That evening, Mr. Fitzgerald and Mr. Newton met with Mr. Petit and Mr. Thomas and discussed the continuation of the exclusivity period, the need for Smith & Nephew to complete its due diligence with respect to the Company and the need for the Company to receive a revised price proposal from Smith & Nephew.

On January 17, 2014, based on Mr. Petit's assurances that a revised price proposal with a premium to the then-market price would be forthcoming, Mr. Fitzgerald confirmed by email that the Company

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would extend exclusivity until January 24, 2014 and that exclusivity would remain in place thereafter so as long as good faith negotiations were continuing, as determined in the Company's discretion, but that in no event would exclusivity extend beyond February 4, 2014, unless communicated in writing.

On January 21, 2014, we publicly announced the dismissal by the Department of Justice of the pending civil investigative demand involving the Company related the False Claims Act. The closing price of our common stock on January 22, 2014, the day following the announcement was $47.72.

On January 23, 2014, Mr. Petit called Mr. Fitzgerald to inform him that he was unable to provide an update on price at that time. Later on January 23, 2014, our Transaction Committee held a telephonic meeting. Representatives of Latham & Watkins and Piper Jaffray also attended. Our management team updated our Transaction Committee on the negotiation process to date and informed our Transaction Committee that Smith & Nephew had not yet provided an updated price proposal. Our Transaction Committee discussed with our management team and representatives of Piper Jaffray the upcoming expiration of the exclusivity period on January 24, 2014, the absence of in-bound contacts following the announcement of the deferred prosecution agreement and resolution of certain civil claims from any of the other potential acquirors previously approached by the Company, the delay in receiving Smith & Nephew's revised proposal, the potential outcomes of negotiations with Smith & Nephew and the terms and timing of a potential strategic transaction.

On January 24, 2014, our Board of Directors held a special telephonic meeting. Representatives of Latham & Watkins and Piper Jaffray also attended. Our Board of Directors discussed the status of the negotiation process, the timing of a potential transaction and whether to continue exclusive negotiations with Smith & Nephew given that Smith & Nephew had yet to provide an updated price proposal.

Later that morning, Mr. Petit called Mr. Fitzgerald to provide an update on timing for delivery of a revised proposal by Smith & Nephew. Mr. Petit told Mr. Fitzgerald that Smith & Nephew's due diligence was substantially complete and that it intended to provide a revised price proposal following Smith & Nephew's board meeting on January 29, 2014, at a premium to the then-current price per share of common stock, which was $47.05 per share. Mr. Petit also notified Mr. Fitzgerald that Smith & Nephew intended to deliver a draft of the merger agreement on January 25, 2014.

That evening, our Transaction Committee held a telephonic meeting. Representatives of Latham & Watkins and Piper Jaffray also attended. Our Transaction Committee discussed the extension of Smith & Nephew's exclusivity period in light of Smith & Nephew's indication that it would not provide a revised proposal until January 29, 2014, the fact that there had been no in-bound contacts from other potential acquirors since the Company's Department of Justice settlement and litigation announcements and the fact that Smith & Nephew had indicated it would submit a proposal at a premium to the current market price for the Company's common stock by January 29, 2014. Following the discussion, our Transaction Committee agreed to continue the exclusivity period through January 29, 2014, subject to its satisfaction that negotiations continued in good faith, in order to incentivize Smith & Nephew to submit a revised offer.

That night, Davis Polk sent Latham & Watkins a draft merger agreement.

On January 26, 2014, our Transaction Committee held a telephonic meeting. Representatives of Latham & Watkins and Piper Jaffray attended. Our Transaction Committee, management and the Company's advisors discussed certain principal issues raised by the draft merger agreement provided by Davis Polk, including Smith & Nephew's obligations related to obtaining regulatory approvals and the potential impact of those terms on the certainty of closing of the transaction. Our Transaction Committee emphasized the Company's interest in getting a revised price proposal before further engaging in detail on the draft merger agreement.

Later that day, representatives of Latham & Watkins called representatives of Davis Polk and representatives from Piper Jaffray called representatives from JP Morgan and Centerview to discuss

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certain principal issues raised by the draft merger agreement provided by Davis Polk. During the call with Piper Jaffray, JP Morgan and Centerview reiterated that we should expect a revised price proposal on January 29, 2014.

On January 27, 2014, Davis Polk sent to Latham & Watkins an initial draft of the form of Voting Agreement, which Smith & Nephew had requested to be signed by OEP and each member of our Board of Directors as a condition to Smith & Nephew's willingness to proceed with a potential transaction. Between January 28, 2014 and February 2, 2014, representatives of OEP's legal counsel, Latham & Watkins and Davis Polk negotiated and finalized the terms of the form of Voting Agreement.

Between January 28, 2014 and February 2, 2014, based on input from their respective clients, representatives of Latham & Watkins and Davis Polk negotiated the principal issues raised by the merger agreement, which included the scope of the Company's representations and warranties, the conditions to the obligations of the parties to complete the transaction, the strength of Smith & Nephew's commitment to obtain regulatory approvals and whether Smith & Nephew would be required to pay a reverse termination fee in the event the transaction was not completed due to a failure to obtain regulatory approval, and exchanged revised drafts of the merger agreement.

On January 28, 2014, Mr. Petit confirmed in a telephone call with Mr. Fitzgerald that Smith & Nephew would be submitting a revised price proposal on January 29, 2014.

On January 28, 2014, our Transaction Committee held a telephonic meeting. Representatives of Latham & Watkins and Piper Jaffray also attended. Our Transaction Committee discussed the open issues under the draft merger agreement as well as the processes for attempting to reach agreement on the principal outstanding issues.

On January 29, 2014, Mr. Petit called Mr. Fitzgerald by telephone to deliver Smith & Nephew's revised non-binding acquisition proposal for an acquisition of all of the outstanding common stock of the Company at a purchase price of $48.00 per share in cash. Mr. Petit reiterated that Smith & Nephew would be unwilling to accept total risk with respect to regulatory approvals. Mr. Petit informed Mr. Fitzgerald that the revised offer represented Smith & Nephew's stretched valuation based on the further due diligence performed since its last proposal and would terminate the following day at 12:00 p.m. Central Standard Time unless agreed to by the Company. Smith & Nephew's offer of $48.00 per share reflected an approximately 4.78% premium to the $45.81 per share closing price of our common stock on January 29, 2014.

Later that afternoon, our Transaction Committee held a telephonic meeting. Representatives of Latham & Watkins and Piper Jaffray also attended. At this meeting, representatives from Piper Jaffray reviewed their preliminary valuation analysis for the Company and discussed with our Transaction Committee the proposed $48.00 per share transaction price, the premium it represented over the Company's current and historical share prices, the Company's significant stockholders and the trading history of the Company's stock. In addition, representatives from Latham & Watkins discussed the status of the merger agreement, including the negotiations of the party's obligations with respect to obtaining regulatory approvals and the regulatory risk analysis. Our management also discussed the Company's financial results from the fourth quarter, which were within but at the high end of analysts' expectations, and our Transaction Committee and our advisors discussed the price proposed by Smith & Nephew as well as potential responses to Smith & Nephew's offer both with respect to price and with respect to open transaction terms.

Following these discussions, our Transaction Committee directed our management and advisors to inform Smith & Nephew that it would need to raise its proposed purchase price to $50.00 per share and provide more closing certainty related to regulatory matters to obtain our Board of Directors' approval for the proposed transaction. Our Transaction Committee concluded that it should take this

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approach not because it believed that $50.00 per share was the fair value of the Company, or the minimum bid that it would accept, but rather as a means to elicit from Smith & Nephew the highest price that it was willing to pay to acquire the Company.

Later that day, Piper Jaffray contacted representatives of JP Morgan and Centerview and said that Smith & Nephew would need to increase its proposed purchase price to $50.00 per share.

The next day, on January 30, 2014, Mr. Fitzgerald called Mr. Petit to discuss increasing Smith & Nephew's proposed price. Mr. Petit suggested Smith & Nephew would wait until after the close of the markets on January 31, 2014 to consider increasing its proposed price and emphasized Smith & Nephew's desire to announce the transaction prior to the opening of the trading markets in London on February 3, 2014.

Later that day, our Board of Directors held a special telephonic meeting. Representatives of Latham & Watkins and Piper Jaffray attended. Our Board of Directors and its advisors discussed the proposed terms of the transaction, including the $48.00 per share price previously proposed by Smith & Nephew, the draft merger agreement and the related risks to consummating a transaction. Representatives from Latham & Watkins provided an update regarding the parties' obligations with respect to obtaining regulatory approvals, the regulatory risk analysis, and the anticipated regulatory approval requirements and process. Our Board of Directors, its advisors and our management also discussed in detail that while much of the uncertainty related to the Department of Justice actions against the Company had been resolved, many public stock analysts believed that the Company's current stock price reflected an acquisition premium. The Board of Directors also discussed the fact that, even assuming that the Company attained results near the high end of management's forecasts for the next five years, the Company was unlikely to achieve a valuation above the price being offered by Smith & Nephew. Our Board of Directors also reviewed with its advisors the history of the price negotiations with Smith & Nephew, including the increase of the proposed acquisition price from $43.00 per share of common stock to $48.00 per share of common stock since the initial non-binding oral proposal made by Smith & Nephew and the lack of alternative buyers likely to match or exceed Smith & Nephew's offer based on the strategic transaction process that had been undertaken by the Company and the fact that no in-bound inquires had been received from any alternative buyers following the announcement of the deferred prosecution agreement with the Department of Justice.

On January 31, 2014, Mr. Petit called Mr. Fitzgerald to indicate that Smith & Nephew would provide a revised price proposal on February 1, 2014, pending continued progress on the merger agreement.

Later that day, our Transaction Committee held a telephonic meeting. Representatives of Latham & Watkins and Piper Jaffray also attended. Our Transaction Committee discussed the progress of negotiations on the merger agreement. Representatives of Latham & Watkins discussed with our Transaction Committee their regulatory risk analysis for the proposed transaction, the ways in which such regulatory risk may be addressed, and the obligations of the parties with respect to obtaining regulatory approvals under the merger agreement.

On February 1, 2014, our Transaction Committee held a telephonic meeting to discuss the status of negotiations and the continued progress on the merger agreement.

That afternoon, Mr. Petit called Mr. Fitzgerald to inform Mr. Fitzgerald that only Olivier Bohuon, Smith & Nephew's Chief Executive Officer, was authorized to provide an increase to Smith & Nephew's prior offer price and that any increase would be very small and subject to satisfactory resolution of the obligations of the parties with respect to obtaining regulatory approvals under the merger agreement.

Later that day, Mr. Petit and Mr. Bohuon called Mr. Fitzgerald to confirm that Smith & Nephew would revise its proposal to offer $48.25 in cash for each outstanding share of common stock of the

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Company. Mr. Bohuon informed Mr. Fitzgerald that Smith & Nephew would not offer any further increases. The $48.25 per share reflected an approximately 6.32% premium to the $45.38 per share closing price of our common stock on January 31, 2014. The 52-week high closing price for our common stock for the period ending January 31, 2014 was $48.00, which occurred on January 21, 2014.

Later that evening, our Board of Directors held a special telephonic meeting. Representatives of Latham & Watkins and Piper Jaffray attended. At this meeting, representatives of Latham & Watkins reviewed with our Board of Directors their fiduciary duties in connection with considering a sale of the Company to Smith & Nephew. Representatives of Latham & Watkins also reviewed with our Board of Directors the terms and conditions of the proposed merger agreement, including the scope of the parties' obligations with respect to obtaining regulatory approvals, and the terms and conditions of the form of Voting Agreement. In addition, representatives of Piper Jaffray reviewed their valuation analysis with respect to the Company and Smith & Nephew's offer, as well as Smith & Nephew's proposed financing for the transaction.

Following these discussions, our Board of Directors authorized its advisors to negotiate the final terms of the definitive merger agreement and related documents with the goal of presenting final agreements to our Board of Directors the following day. Our Board of Directors also discussed the fact that another investment bank had historically provided financial advisory services to the Company, and was party with the Company to an engagement letter that provided that this investment bank would be entitled to a role in future transactions. In light of this existing arrangement, our Board of Directors determined to continue that engagement and authorized the amendment of the previously existing engagement letter to address those matters. Our Board of Directors did not request a fairness opinion from this investment bank in connection with the merger.

That night and the following morning, Latham & Watkins and Davis Polk negotiated and exchanged drafts of the merger agreement and form of Voting Agreement.

On February 2, 2014, our Board of Directors held a special telephonic meeting. Representatives of Latham & Watkins and Piper Jaffray attended. At this meeting, representatives of Latham & Watkins reviewed the fiduciary duties of our Board of Directors, the negotiations that had taken place regarding the terms of the merger agreement since the previous Board meeting in particular concerning improvements still required in the agreed actions being committed to in the agreement by Smith & Nephew to reduce the regulatory risk being borne by the Company, changes to the merger agreement and the remaining open issues. Our Board of Directors then instructed its advisors to finalize the terms of the definitive merger agreement, including improving the terms relating to Smith & Nephew's obligations to obtain regulatory approvals, and stayed the meeting pending further negotiations.

Latham & Watkins and Davis Polk negotiated the remaining terms and finalized the merger agreement, pending board approval.

Later that night, our Board of Directors reconvened its meeting. Latham & Watkins and Piper Jaffray attended. At this meeting,

    •
    representatives of Latham & Watkins reviewed with our Board of Directors the final terms and conditions of the proposed merger agreement and the form of Voting Agreement;

    •
    representatives of Latham & Watkins, Piper Jaffray and management discussed with our Board of Directors the parties' obligations with respect to obtaining regulatory approvals, the regulatory approval process, and potential outcomes in connection with a transaction with Smith & Nephew, and representatives from both Latham & Watkins and Piper Jaffray provided their views with respect to Smith & Nephew's obligations under the merger agreement to obtain required regulatory approvals in connection with the transaction and related risks to the consummation of the transaction; and

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    •
    representatives of Piper Jaffray delivered their oral opinion (subsequently confirmed in writing) that, as of such date, and based upon and subject to the factors and assumptions set forth in Piper Jaffray's written opinion, dated February 2, 2014, the consideration of $48.25 per share of common stock in cash to be paid to the holders of our common stock in the proposed transaction was fair, from a financial point of view, to such holders. See "—Opinion of Piper Jaffray & Co."

After discussions with its financial and legal advisors, our Board of Directors unanimously determined the merger to be advisable and fair to and in the best interests of our stockholders. Our Board of Directors resolved unanimously to approve, adopt and declare advisable the merger agreement and the transactions contemplated thereby, including the merger. Our Board of Directors also waived any restrictions (including standstill restrictions) pursuant to the Stock Purchase Agreement between the Company and OEP dated August 14, 2009 that may have been applicable in connection with OEP and its designees on our Board of Directors entering into the Voting Agreement required by Smith & Nephew. Our Board of Directors also unanimously resolved to recommend approval and adoption of the merger agreement by the stockholders of the Company.

The merger agreement was executed by the Company and Smith & Nephew later that night on February 2, 2014.

On February 3, 2014, before the opening of trading on the London public stock markets, Smith & Nephew issued a press release announcing the execution of the merger agreement.


Recommendation of our Board of Directors; Our Reasons for the Merger

In evaluating the merger, the Board of Directors consulted with the Company's senior management, the Company's outside counsel, Latham & Watkins, and the Company's financial advisor, Piper Jaffray, and, in the course of reaching its determination that the merger agreement and the transactions contemplated thereby are fair to, and in the best interests of, the Company and its stockholders and to approve and adopt the merger agreement and the transactions contemplated thereby and to recommend that the Company's stockholders vote to approve and adopt the merger agreement, our Board of Directors considered a wide and complex range of factors, including the following principal factors supporting our Board of Directors' determination:

Certainty of Value. Based upon its knowledge of, and familiarity with, the Company's historical and current business, operations, prospects, business strategy, competitive position and the medical device industry generally, our Board of Directors determined that the merger consideration, which consists solely of cash, provides immediate liquidity and certainty of value to the Company's stockholders.

Stand-Alone Operational Risks. The advantages of entering into the merger agreement and consummating the merger in comparison to the risks associated with remaining independent as a stand-alone company and pursuing the Company's strategic plan, including (i) potential future competition, including from larger and better funded companies which might have competitive advantages from their broader commercial scope and economies of scale in pricing, (ii) the risks inherent in the medical device industry, (iii) the challenges and risks associated with growing the Company through either organic growth or strategic acquisitions, and (iv) the various additional risk factors pertaining to the Company that are listed in Item 1A of Part I of its Annual Report on Form 10-K for the year ended December 31, 2013 and the "Where You Can Find More Information" section below.

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Compelling Value. The fact that the merger consideration represents a premium over the market prices at which the Company common stock closed prior to the announcement of the execution of the merger agreement, including the fact that the merger consideration of $48.25 represented a premium of approximately:

    •
    6.32% over the $45.38 closing price per share of Company common stock on January 31, 2014, the last trading day before the announcement of the execution of the merger agreement;

    •
    10.30% over the $43.75 average closing price per share of Company common stock for the 30 trading days ended January 31, 2014;

    •
    20.09% over the $40.18 average closing price per share of Company common stock for the 60 trading days ended January 31, 2014;

    •
    23.98% over the $38.92 average closing price per share of Company common stock for the 90 trading days ended January 31, 2014; and

    •
    31.00% over the $36.83 average closing price per share of Company common stock for the 180 trading days ended January 31, 2014.

Strategic Alternatives. Our Board of Directors considered its understanding of, and familiarity with, the other strategic alternatives available to the Company, including the discussions that took place with certain other potential acquirors as described in more detail above in "Background of the Merger," and determined that the merger is superior to the other strategic alternatives reasonably available currently to the Company.

Negotiations with Smith & Nephew. The Company considered the course of negotiations between the Company and Smith & Nephew, which resulted in an increase of $5.25 from the price per share of Company common stock initially offered by Smith & Nephew, and our Board of Director's belief, based on these negotiations, that this was the highest price per share of common stock that Smith & Nephew was willing to pay and that the terms of the merger agreement were the most favorable terms to the Company to which Smith & Nephew was then willing to agree.

Solicitation of Other Potential Acquirors. The Company had solicited eight other potential acquirors to see if they would be interested in acquiring the Company, and no other potential acquiror had submitted a price proposal or proposed a strategic alternative as favorable to the Company stockholders as the merger with Smith & Nephew.

Likelihood of Completion. Our Board of Directors considered the likelihood that the merger will be consummated, based on, among other things, the likelihood of receiving the Company stockholder approval necessary to complete the transaction in a timely manner, the limited number of conditions to the merger, the absence of a financing condition, Smith & Nephew's representation that it will have sufficient financial resources to pay the aggregate merger consideration and consummate the merger, our Board of Director's assessment, after discussion with Piper Jaffray, that Smith & Nephew has the financial capability to complete the merger, the relative likelihood of obtaining required regulatory approvals and the remedies available under the merger agreement to the Company in the event of various breaches of the merger agreement by Smith & Nephew or Merger Sub.

Opinion of Piper Jaffray. The opinion of Piper Jaffray, delivered to our Board of Directors on February 2, 2014, to the effect that, as of such date and based on and subject to the assumptions made, procedures followed, matters considered and limitations on the scope of the review undertaken by Piper Jaffray, as described in its written opinion, the merger consideration of $48.25 in cash per share to be received by the holders of common stock in the merger was fair, from a financial point of view, to such stockholders, as more fully described below under "Opinion of Piper Jaffray."

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Terms of the Merger Agreement. The terms and conditions of the merger agreement, including the Company's ability under certain circumstances to respond to a bona fide written proposal for an acquisition transaction from a third party prior to stockholder approval, and our Board of Directors' right, after complying with the terms of the merger agreement, to terminate the merger agreement in order to enter into an agreement with respect to a superior proposal, upon payment of a termination fee of $54.9 million (approximately 3.2% of the equity value of the transaction), which is within the customary range of termination fees payable in similar transactions and which, in the determination of our Board of Directors, taking into consideration the advice of its advisors, would not deter or preclude a third party with both the financial capability and strategic interest in the Company from submitting a potential superior proposal.

Regulatory Commitments. The level of commitment of Smith & Nephew to obtain applicable regulatory approvals was negotiated vigorously to the satisfaction of our Board of Directors.

Stockholder Vote. The fact that the merger will be subject to approval by the Company's stockholders.

Structure and Availability of Appraisal Rights. Our Board of Directors considered the fact that the merger would be subject to the approval of the Company stockholders and that the Company stockholders would be free to reject the merger and that if the Company's stockholders so desire and if they comply fully with all of the required procedures under the DGCL, they will be able to exercise appraisal rights with respect to the merger, which would allow such stockholders to seek appraisal of the fair value of their shares as determined by the Delaware Court of Chancery.

Our Board of Directors also considered a variety of risks and other potentially negative factors concerning the merger and the merger agreement, including the following:

No Stockholder Participation in Future Growth or Earnings. The fact that the nature of the transaction as an all cash transaction would prevent Company stockholders from participating in any future earnings or growth of the Company, and Company stockholders would not benefit from any potential future appreciation in the value of the Company or the shares, including any value that could be achieved if the Company engaged in future strategic transactions, including a future sale of the Company.

Effect of Failure to Complete Transactions. While the Company expects that the merger will be consummated, there can be no assurance that all of the conditions to the consummation of the merger will be satisfied or that the merger will receive required regulatory approvals, and, as a result, it is possible that the merger may not be completed in a timely matter or at all, even if the merger agreement is adopted by the Company's stockholders. Our Board of Directors also considered potential negative effects if the merger were not consummated, including:

    •
    the trading price of Company common stock could be adversely affected;

    •
    the Company would have incurred significant transaction and opportunity costs attempting to consummate the merger without compensation;

    •
    the Company could lose customers, suppliers, business partners and employees, including key sales and other personnel, after the announcement of the entry into the merger agreement;

    •
    the Company's business may be subject to significant disruption and decline;

    •
    the market's perceptions of the Company's prospects could be adversely affected; and

    •
    the Company's directors, officers, and other employees would have expended considerable time and effort to negotiate, implement and consummate the merger, and their time may have been

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      diverted from other important business opportunities and operational matters while working to implement the merger.

Effect of Public Announcement. Our Board of Directors considered the effect of a public announcement of the merger on the Company's operations, stock price and employees, the Company's ability to retain key management, the Company's ability to effectively recruit replacement personnel if key sales and other personnel were to depart while the merger is pending and the potential adverse effects on the financial results of the Company as a result of any related disruption in the Company's business.

Taxable Transaction. Our Board of Directors considered the fact that the merger will be a taxable transaction to the Company's stockholders that are U.S. holders for U.S. federal income tax purposes.

Interim Restrictions on Business. Our Board of Directors considered restrictions imposed by the merger agreement on the conduct of the Company's business prior to the consummation of the merger, which require the Company to operate its business in the ordinary course of business, and which subject the operations of the Company's business to other restrictions, which could delay or prevent the Company from undertaking timely business enhancement opportunities that may arise prior to the consummation of the merger and that may have an adverse effect on the Company's ability to respond to changing market and business conditions in a timely manner or at all.

Termination Fee. Our Board of Directors considered the fact that, under certain circumstances, the Company may be required to pay to Smith & Nephew a termination fee of $54.9 million, including the potential effect of such termination fee to deter other potential acquirors from publicly making a competing offer for the Company, and the impact of the termination fee on the Company's ability to engage in certain transactions for nine months from the date the merger agreement is terminated in certain circumstances; and

Interests of our Board of Directors and Management. Our Board of Directors considered the possibility that the executive officers and directors of the Company could have interests in the transactions contemplated by the merger agreement that would be different from, or in addition to, those of the Company's stockholders. See "—Interests of Our Directors and Executive Officers in the Merger."

Our Board of Directors concluded that the potential benefits that it expected the Company and the Company's stockholders would achieve as a result of the merger outweighed the risks and potentially negative factors relevant to the merger. The foregoing discussion of our Board of Directors' reasons for its recommendation to the Company's stockholders to vote to adopt the merger agreement is not intended to be exhaustive, but addresses the material information and factors considered by our Board of Directors in its consideration of the merger. In light of the wide variety of factors considered by our Board of Directors in connection with its evaluation of the merger and the complexity of these matters, our Board of Directors did not find it practicable to, and did not, quantify or otherwise assign relative weights to, the specific reasons underlying its determination and recommendation. Rather, our Board of Directors viewed its determinations and recommendations as being based on the totality of the information and factors presented to and considered by the Board of Directors. In considering the factors discussed above, individual directors may have given different weights to different factors.


Opinion of Piper Jaffray

The Company retained Piper Jaffray to act as financial advisor to the Board of Directors, and, if requested, to render to the Board of Directors an opinion as to the fairness, from a financial point of view, of the merger consideration of $48.25 in cash per share to be received by the holders of common stock.

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The full text of the Piper Jaffray written opinion dated February 2, 2014, which sets forth, among other things, the assumptions made, procedures followed, matters considered and limitations on the scope of the review undertaken by Piper Jaffray in rendering its opinion, is attached as Annex B . You are urged to, and should, carefully read the Piper Jaffray opinion in its entirety and this summary is qualified in its entirety by reference to the written opinion. The Piper Jaffray opinion addresses only the fairness, from a financial point of view and as of the date of the opinion, of the merger consideration of $48.25 in cash per share to be received by the holders of common stock in the merger. Piper Jaffray's opinion was directed to the Board of Directors in connection with its consideration of the merger and was not intended to be, and does not constitute, a recommendation to any holders of common stock as to how such holders should vote or act with respect to the merger or any other matter.

In connection with rendering the opinion described above and performing its related financial analyses, Piper Jaffray, among other things:

    •
    reviewed and analyzed the financial terms of a draft of the merger agreement;

    •
    reviewed and analyzed certain financial and other data with respect to the Company that was publicly available;

    •
    reviewed and analyzed certain information, including financial forecasts, relating to the business, earnings, cash flow, assets, liabilities and prospects of the Company that were publicly available, as well as those that were furnished to Piper Jaffray by the Company;

    •
    conducted discussions with members of senior management and representatives of the Company concerning the immediately preceding matters described above, as well as the Company's business and prospects before and after giving effect to the merger;

    •
    reviewed the current and historical reported prices and trading activity of common stock and similar information for certain other companies deemed by Piper Jaffray to be comparable to the Company;

    •
    compared the financial performance of the Company with that of certain other publicly-traded companies that Piper Jaffray deemed relevant; and

    •
    reviewed the financial terms, to the extent publicly available, of certain business combination transactions that Piper Jaffray deemed relevant.

In addition, Piper Jaffray conducted such other analyses, examinations and inquiries and considered such other financial, economic and market criteria as Piper Jaffray deemed necessary in arriving at its opinion.

The following is a summary of the material financial analyses performed by Piper Jaffray in connection with the preparation of its fairness opinion and reviewed with the Board of Directors at a meeting held on February 2, 2014.

This summary includes information presented in tabular format, which tables must be read together with the text of each analysis summary and considered as a whole in order to fully understand the financial analyses presented by Piper Jaffray. The tables alone do not constitute a complete summary of the financial analyses. The order in which these analyses are presented below, and the results of those analyses, should not be taken as any indication of the relative importance or weight given to these analyses by Piper Jaffray or the Board of Directors. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before January 31, 2014, and is not necessarily indicative of current market conditions.

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For purposes of its analyses, and unless the context indicates otherwise, Piper Jaffray calculated (i) the Company's implied per share equity value based on diluted shares of common stock and common stock equivalents outstanding, including options and stock units calculated using the treasury stock method, together with the assumed conversion of the Company's Series A Preferred Stock, and (ii) enterprise value ("EV") to be implied equity value, plus debt and preferred stock (if applicable), less cash, which, in the case of the Company, was $178 million, or $192.5 million of cash (after payment of the Department of Justice, which we refer to as the DOJ, settlement), less $14.5 million estimated as the fair value of contingent consideration related to the ENTrigue Surgical acquisition.

    Historical Trading Analysis

Piper Jaffray reviewed the historical closing prices and trading volumes for the Company's common stock over the one-year period ended January 31, 2014, in order to provide background information on the prices at which the Company's common stock has historically traded. The following table summarizes some of these historical closing prices, and average closing prices, as well as the premium that the merger consideration reflects as compared to the reference closing prices:


Closing Price
per Share
Premium

Price on January 31, 2014

$ 45.38 6.3 %

1 week prior price (January 24, 2014)

$ 47.05 2.6 %

4 weeks prior price (January 3, 2014)

$ 39.73 21.4 %

Average price since announcement of the DOJ settlement (January 8, 2014)

$ 46.69 3.3 %

1 day prior to announcement of the DOJ settlement price (January 7, 2014)

$ 40.58 18.9 %

30 trading day average

$ 43.75 10.3 %

60 trading day average

$ 40.18 20.1 %

90 trading day average

$ 38.92 24.0 %

180 trading day average

$ 36.83 31.0 %

One-year average

$ 36.31 32.9 %

One-year high (January 21, 2014)

$ 48.00 0.5 %

One-year low (August 30, 2013)

$ 31.67 52.4 %

Merger Consideration

$ 48.25 0.0 %

    Selected Public Companies Analysis

    Orthopedics

Piper Jaffray reviewed preliminary historical financial data of the Company for the year ended December 31, 2013 as well as projected financial data prepared by the Company's management for the year ending December 31, 2014, and compared such data to corresponding historical balance sheet data and consensus Wall Street research forecasts for public companies in the orthopedics industry that Piper Jaffray believed were comparable to the Company's business profile. Piper Jaffray selected public companies that it considered to be medical technology orthopedics companies with revenue for the last twelve month period for which financial information was publicly available ("LTM") greater than $50 million.

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Based on these criteria, Piper Jaffray selected the following thirteen companies 1 :

    •
    Alphatec Holdings, Inc. 4

    •
    CONMED Corporation

    •
    Exactech, Inc.

    •
    Globus Medical, Inc.

    •
    Integra LifeSciences Holdings Corporation

    •
    LDR Holding Corporation 2,3,4

    •
    NuVasive, Inc.

    •
    RTI Surgical, Inc. 2,4

    •
    Smith & Nephew plc

    •
    Stryker Corporation

    •
    Tornier N.V. 2,3,4

    •
    Wright Medical Group Inc. 2,3,4,5

    •
    Zimmer Holdings, Inc.

For the selected orthopedic public companies analysis, Piper Jaffray compared calendar year, which we refer to as calendar year or CY, 2013 and projected CY 2014 implied EV/revenue and EV/earnings before interest, taxes, depreciation and amortization ("EBITDA") multiples for the Company based on the merger consideration on the one hand, to the corresponding implied EV multiples for the selected orthopedic public companies derived from their closing prices per share on January 31, 2014, as well as their cash and debt outstanding amounts as indicated in public filings as of such date on the other hand, as well as the Company's implied price-to-earnings, which we refer to as P/E, multiple based on the merger consideration and the Company's projected CY 2014 earnings on the one hand, to implied P/E multiples for the selected companies derived from such closing prices per share and their respective projected CY 2014 earnings. CY 2013 and projected CY 2014 revenue, EBITDA and earnings for the Company were based on the preliminary historical financial data and estimates provided by the Company's management. Projected CY 2013 and projected CY 2014 revenue, EBITDA and earnings for the selected medical technology—orthopedics public companies—were based on Wall Street consensus estimates. Piper Jaffray determined that EV/EBITDA multiples were not meaningful to its valuation analysis, and therefore omitted them, if they were negative or greater than 25.0x. Piper Jaffray determined that P/E multiples were not meaningful to its valuation analysis, and therefore omitted them, if they were negative or greater than 40.0x.


1
OrthoFix International N.V. excluded due to failure to meet NASDAQ listing requirements (untimely quarterly filings).

2
EV/CY 2013 EBITDA multiple for this company was deemed not meaningful, for the reasons set forth below.

3
EV/CY 2014 EBITDA multiple for this company was deemed not meaningful, for the reasons set forth below.

4
CY 2014 P/E multiple for this company was deemed not meaningful, for the reasons set forth below.

5
Pro forma for the sale of Wright Medical Group Inc.'s OrthoRecon business to Microport and Wright Medical Group Inc.'s acquisition of Biotech International.

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The analysis indicated the following multiples:



Selected Orthopedic Public Companies

ArthroCare(1) High 75 th % Mean Median 25 th % Low

EV to projected CY 2013 revenue(2)

4.1x 5.5x 3.6x 3.0x 2.9x 1.8x 1.2x

EV to projected CY 2014 revenue

3.8x 4.8x 3.5x 2.7x 2.9x 1.8x 0.9x

EV to projected CY 2013 EBITDA(2)

16.9x 18.4x 13.2x 12.0x 11.5x 10.7x 8.2x

EV to projected CY 2014 EBITDA

16.0x 16.3x 12.2x 11.0x 10.1x 9.3x 7.5x

CY 2014 P/E

32.4x 29.4x 22.7x 19.8x 17.8x 15.9x 14.8x

(1)
Based on the merger consideration of $48.25 per share.

(2)
CY 2013 financial information for the Company was based on preliminary historical financial information.

Based on this analysis, Piper Jaffray noted that, with respect to the Company, each of the EV multiples based on the merger consideration fell between the "High" and the 75th percentile range of implied EVs for the selected orthopedic public companies and that the P/E multiple exceeded the "High" of the implied P/E multiples for the selected orthopedic public companies. In addition, Piper Jaffray observed that the range of implied per share values for common stock based on the mean and median for each analysis yielded the following, as compared to the merger consideration:


Implied Per Share Value of
Common Stock

CY 2013 Revenue

$36.39-$36.69

CY 2014 Revenue

$36.28-$38.00

CY 2013 Adjusted EBITDA

$34.78-$36.13

CY 2014 Adjusted EBITDA

$32.61-$35.18

CY 2014 Earnings

$26.43-$29.45

Merger Consideration

$48.25

    Medical Technology—Financial Profile

Piper Jaffray also reviewed the preliminary historical financial data of the Company for the year ended December 31, 2013 as well as projected financial data prepared by the Company's management for the year ending December 31, 2014, as more fully described above, and compared such data to corresponding historical balance sheet data and consensus Wall Street research forecasts for public companies in the medical technology industry that Piper Jaffray believed were comparable to the Company's financial profile. Piper Jaffray selected public companies that it considered to be primarily medical technology companies with projected revenue growth between 2% and 15% in CY 2013 and CY 2014, LTM revenue greater than $50 million and less than $3 billion, LTM gross margins greater than 65%, and LTM EBITDA margins greater than 10%. Piper Jaffray excluded those companies of which the primary business is believed to be medical diagnostics.

Based on these criteria, Piper Jaffray selected the following nine companies:

    •
    Cyberonics, Inc.

    •
    Edwards Lifesciences Corp.

    •
    Exactech, Inc.

    •
    Globus Medical, Inc..

    •
    Intuitive Surgical, Inc..

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    •
    Masimo Corporation

    •
    NuVasive, Inc.

    •
    Thoratec Corp.

    •
    Vascular Solutions, Inc.

For the selected financial profile public companies analysis, Piper Jaffray compared CY 2013 and projected CY 2014 implied EV/revenue and EV/EBITDA multiples for the Company based on the merger consideration on the one hand, to the corresponding implied EV multiples for the selected financial profile public companies based on their closing prices per share on January 31, 2014, as well as their cash and debt outstanding amounts as indicated in public filings as of such date on the other hand, as well as the Company's implied P/E multiple based on the merger consideration and the Company's projected CY 2014 earnings on the one hand, to implied P/E multiples for the selected medical technology public companies based on such closing prices per share and their respective projected CY 2014 earnings, on the other hand. CY 2013 and projected CY 2014 revenue, EBITDA and earnings for the Company were based on the estimates of the Company's management. Projected CY 2013 and projected CY 2014 revenue, EBITDA and earnings for the selected financial profile public companies were based on Wall Street consensus estimates.

The analysis indicated the following multiples:



Selected Medical Technology
Public Companies

ArthroCare(1) High 75 th % Mean Median 25 th % Low

EV to projected CY 2013 revenue(2)

4.1x 6.3x 4.7x 3.8x 3.5x 2.9x 1.5x

EV to projected CY 2014 revenue

3.8x 5.8x 4.2x 3.6x 3.3x 2.8x 1.4x

EV to projected CY 2013 EBITDA(2)

16.9x 18.7x 17.7x 14.8x 14.3x 13.5x 8.2x

EV to projected CY 2014 EBITDA

16.0x 17.1x 16.1x 14.1x 15.1x 12.7x 7.5x

Equity Value to projected CY 2014 earnings

32.4x 29.7x 29.0x 24.9x 25.4x 21.2x 18.3x

(1)
Based on the merger consideration of $48.25 per share.

(2)
CY 2013 financial information for the Company was based on preliminary historical financial information.

Based on this analysis, Piper Jaffray noted that, with respect to the Company, each of the EV multiples based on the merger consideration fell between the 75th percentile and the mean range of implied EVs for the selected medical technology public companies and that the P/E multiple exceeded the "High" of the implied P/E multiples for the selected medical technology public companies. In addition, Piper Jaffray observed that the range of implied per share values for common stock based on the mean and median for each analysis, yielded the following, as compared to the merger consideration:


Implied Per Share Value of
Common Stock

CY 2013 Revenue

$42.55-$45.79

CY 2014 Revenue

$42.60-$45.86

CY 2013 Adjusted EBITDA

$41.81-$43.08

CY 2014 Adjusted EBITDA

$43.20-$45.93

CY 2014 Earnings

$37.02-$37.80

Merger Consideration

$48.25

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    Selected M&A Transaction Analysis

    Orthopedics

Piper Jaffray reviewed merger and acquisition, which we refer to as M&A, transactions involving target companies in the medical technology orthopedics industry that Piper Jaffray believed were comparable to the Company's business profile. Piper Jaffray selected transactions that were announced after January 1, 2006 for which it believed the targets to be medical technology orthopedics companies with LTM revenue greater than $50 million.

Based on these criteria, Piper Jaffray selected the following 11 transactions:

Target
Acquiror Date of Transaction Announcement

MAKO Surgical Corp.(1)(2)(3)

Stryker Corp. September 25, 2013

Wright Medical Technology, Inc. (OrthoRecon)(5)

MicroPort Scientific Corporation June 19, 2013

Orthovita, Inc.(2)(3)

Stryker Corp. May 16, 2011

Synthes Holding AG

Johnson & Johnson April 27, 2011

Osteotech, Inc.

Medtronic, Inc. August 17, 2010

Abbott Spine, Inc.(4)(5)

Zimmer Holdings Inc. September 4, 2008

Kyphon, Inc.(2)(3)

Medtronic, Inc. July 27, 2007

DJO Opco Holdings, Inc.

ReAble Therapeutics, Inc. (Blackstone) July 16, 2007

Plus Orthopedics Holding AG(5)

Smith & Nephew plc March 12, 2007

Biomet, Inc.

Investment Consortium December 18, 2006

Encore Medical Corporation

Blackstone Capital Partners June 30, 2006

(1)
EV/LTM revenue multiple for this transaction was deemed not meaningful, for the reasons set forth below.

(2)
EV/LTM EBITDA multiple for this transaction was deemed not meaningful, for the reasons set forth below.

(3)
EV/FTM EBITDA multiple for this transaction was deemed not meaningful, for the reasons set forth below.

(4)
EV/LTM EBITDA multiple for this transaction was not available.

(5)
EV/FTM EBITDA multiple for this transaction was not available.

For the selected orthopedics M&A transactions analysis, Piper Jaffray compared implied EV/LTM revenue and EV/LTM EBITDA multiples for the Company, based on the merger consideration, to the corresponding multiples for each selected transaction, as well as the Company's implied multiples of EV to projected revenue and EV to projected EBITDA for the 12 month period immediately following the LTM period, which we refer to as FTM, based on the merger consideration, to the corresponding multiples for each selected transaction. LTM revenues and LTM EBITDA for the Company were based on preliminary historical financial data for the 12 months ended December 31, 2013. Projected FTM revenues and FTM EBITDA for the Company were for the 12 months beginning December 31, 2013 and were based on estimates of the Company's management. FTM revenues and FTM EBITDA for the selected transactions were based on selected Wall Street research. Piper Jaffray determined that EV/revenue transaction multiples were not meaningful, and therefore omitted them, if they were negative or greater than 12.0x. Piper Jaffray determined that EV/EBITDA transaction multiples were not meaningful, and therefore omitted them, if they were negative or greater than 30.0x.

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The analysis indicated the following multiples:



Selected Orthopedics M&A Transactions

ArthroCare(1) High 75 th % Mean Median 25 th % Low

EV to LTM revenue

4.1x 8.1x 4.8x 3.7x 3.3x 2.7x 1.1x

EV to FTM revenue

3.8x 11.0x 4.8x 3.9x 3.0x 2.6x 1.1x

EV to LTM EBITDA

16.9x 20.2x 15.9x 14.0x 14.2x 13.0x 5.8x

EV to FTM EBITDA

16.0x 14.8x 13.5x 12.7x 12.4x 11.7x 11.0x

(1)
Based on the merger consideration of $48.25 per share.

Based on this analysis, Piper Jaffray noted that, with respect to the Company the EV/LTM revenue multiple fell between the 75th percentile and the mean range of implied EVs for the selected orthopedics M&A transactions, the EV/FTM revenue multiple fell between the mean and the median range of implied EVs for the selected orthopedics M&A transactions, the EV/LTM EBITDA multiple fell between the 75th percentile and the "High" range of implied EVs for the selected orthopedics M&A transactions, and the EV/FTM EBITDA multiple exceeded the "High" of the implied EVs for the selected orthopedics M&A transactions. In addition, Piper Jaffray observed that the range of implied per share values for common stock based on the mean and median for each analysis, yielded the following, as compared to the merger consideration:


Implied Per Share Value of Common Stock

LTM Revenue

$40.23 - $44.16

FTM Revenue

$39.73 - $49.69

LTM Adjusted EBITDA

$41.04 - $41.49

FTM Adjusted EBITDA

$38.82 - $39.48

Merger Consideration

$48.25

    Medical Technology—Financial Profile

Piper Jaffray also reviewed M&A transactions involving target companies in the medical technology industry that Piper Jaffray believed were comparable to the Company's financial profile. Piper Jaffray selected transactions that were announced after January 1, 2006 for which it believed the targets to have been primarily medical technology companies with LTM revenue greater than $50 million and less than $3 billion, projected FTM revenue growth between 2% and 15%, LTM gross margin greater than 65% and LTM EBITDA margin greater than 10%. Piper Jaffray excluded transactions in which the target's primary business was believed to be medical diagnostics.

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Based on these criteria, Piper Jaffray selected the following 13 transactions:

Target
Acquiror Date of Transaction Announcement

Given Imaging LTD

Covidien plc December 8, 2013

Conceptus, Inc. (1)

Bayer HealthCare LLC April 29, 2013

Kensey Nash Corp.

Royal DSM N.V. May 3, 2012

American Medical Systems, Inc.

Endo Pharmaceuticals Holdings, Inc. April 11, 2011

AGA Medical Holdings, Inc.

St. Jude Medical, Inc. October 18, 2010

Micrus Endovascular Corp.

Johnson & Johnson July 11, 2010

Somanetics Corp.

Covidien plc June 16, 2010

Aspect Medical Systems, Inc.

Covidien plc September 28, 2009

Mentor Corporation

Johnson & Johnson December 1, 2008

Datascope Corp.

Getinge AB September 16, 2008

ConvaTec (Bristol-Myers Squibb)

Avista Capital Partners and Nordic Capital May 2, 2008

Biomet, Inc.

Investment Consortium December 18, 2006

Guidant Corp. (certain non-CRM assets)

Abbott Laboratories January 17, 2006

(1)
EV/LTM EBITDA multiple for this transaction was deemed not meaningful.

For the selected financial profile M&A transactions analysis, Piper Jaffray compared the implied EV/LTM revenue and EV/LTM EBITDA multiples for the Company, based on the merger consideration, to the corresponding multiples for each selected transaction, as well as the Company's implied EV/FTM revenue and EV/FTM EBITDA multiples, based on the merger consideration, to the corresponding multiples for each selected transaction. LTM revenues and LTM EBITDA for the Company were based on preliminary historical financial data for the 12 months ended December 31, 2013. Projected FTM revenue and FTM EBITDA for the Company were for the 12 months beginning December 31, 2013 and were based on estimates of the Company's management. FTM revenues and FTM EBITDA for the selected transactions were based on selected Wall Street research. Piper Jaffray determined that EV/EBITDA ratios were not meaningful to its valuation analysis, and therefore omitted them, if they were negative or greater than 30.0x.

The analysis indicated the following multiples:



Selected Medical Technology M&A Transactions

ArthroCare(1) High 75 th % Mean Median 25 th % Low

EV to LTM revenue

4.1x 7.9x 5.2x 4.4x 4.2x 3.4x 2.0x

EV to FTM revenue

3.8x 6.9x 5.0x 4.0x 3.7x 3.2x 1.8x

EV to LTM EBITDA

16.9x 27.3x 17.2x 15.9x 15.2x 11.4x 10.2x

EV to FTM EBITDA

16.0x 28.8x 15.4x 14.6x 13.8x 10.0x 9.5x

(1)
Based on the merger consideration of $48.25 per share.

Based on this analysis, Piper Jaffray noted that, with respect to the Company, the EV/LTM revenue multiple fell between the 25th percentile and the median range of implied EVs for the selected medical technology M&A transactions, the EV/FTM revenue multiple fell between the mean and the median range of implied EVs for the selected medical technology M&A transactions, the EV/LTM EBITDA multiple fell between the 75th percentile and the mean range of implied EVs for the selected medical technology M&A transactions, and the EV/FTM EBITDA multiple fell between the 75th percentile and the "High" range of implied EVs for the selected medical technology M&A

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transactions. In addition, Piper Jaffray observed that the range of implied per share values for common stock based on the mean and median for each analysis, yielded the following, as compared to the merger consideration:


Implied Per Share Value of
Common Stock

LTM Revenue

$49.60 - $51.96

FTM Revenue

$47.17 - $50.21

LTM Adjusted EBITDA

$44.12 - $45.89

FTM Adjusted EBITDA

$42.45 - $44.58

Merger Consideration

$48.25

    Premiums Paid Analysis

Piper Jaffray reviewed publicly available information for selected completed or pending M&A transactions to determine the premiums paid in such transactions over recent trading prices of the target companies prior to announcement of the transaction. Piper Jaffray selected transactions for which Piper Jaffray considered the target to be a public medical technology company, and applied, among others, the following criteria 1,2 :

    •
    M&A transactions between public target and acquirer seeking to purchase more than 85% of shares;

    •
    transactions announced since January 1, 2006;

    •
    enterprise value of target greater than $500 million;

    •
    100% cash consideration;

    •
    target based in North America; and

    •
    excluded transactions in which the target's primary business was medical diagnostics.

Based on these criteria, Piper Jaffray selected 24 transactions, and the table below shows a comparison of premiums paid in the selected transactions over certain time periods to the premium that would be paid to the holders of common stock based on the merger consideration of $48.25 per share.


1
Excludes Abbott acquisition of Advanced Medical Optics, Inc. (2009) due to premiums greater than 200% resulting from certain unfavorable regulatory and operating circumstances at Advanced Medical Optics, Inc.

2
Excludes Warburg Pincus's acquisition of Bausch & Lomb Holdings, Inc. (2007) because Bausch & Lomb Holdings, Inc. was not primarily a medical technology company.

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The analysis indicated the following premiums:



Selected Transactions

ArthroCare(1) High 75 th % Mean Median 25 th % Low

Premium 1 day prior (to announcement of merger)(2)

6.3 % 86 % 30 % 26 % 24 % 19 % 5 %

Premium 1 day prior (to announcement of DOJ settlement)(3)

18.9 % — — — — — —

Premium 1 week prior (to announcement of merger)(4)

2.6 % 78 % 29 % 25 % 26 % 19 % 3 %

Premium 4 weeks prior (to announcement of merger)(5)

21.4 % 107 % 34 % 32 % 30 % 24 % 12 %

Premium to 52 week closing high(6)

0.5 % 68 % 25 % 15 % 14 % 8 % (28 )%

(1)
Based on the merger consideration of $48.25.

(2)
Based on the closing price per share of $45.38 on January 31, 2014.

(3)
Based on the closing price per share of $40.58 on January 7, 2014, which represents the last closing price prior to the announcement of a $30 million settlement with the DOJ.

(4)
Based on the closing price per share of $47.05 on January 24, 2014.

(5)
Based on the closing price per share of $39.73 on January 3, 2014.

(6)
Based on the closing price per share of $48.00 on January 21, 2014.

The premiums paid analysis showed that the premiums over the market prices at the selected dates for common stock implied by the merger consideration fell between the "Low" and the 25th percentile range of premiums paid in the selected transactions, except for the premium 1 week prior, which fell below the "Low" of premiums paid in the selected transactions. In addition, Piper Jaffray observed that the range of implied per share values for common stock, based on the mean and median for each analysis yielded the following, as compared to the merger consideration.


Implied Per Share Value of
Common Stock

Premium 1 day prior (to announcement of merger)

$50.25 - $51.01

Premium 1 day prior (to announcement of DOJ settlement)

$56.20 - $57.04

Premium 1 week prior (to announcement of merger)

$58.93 - $59.30

Premium 4 weeks prior (to announcement of merger)

$51.54 - $52.58

Premium to 52 week closing high

$54.96 - $55.26

Merger consideration

$48.25

    Discounted Cash Flows Analysis

Using a discounted cash flows analysis, Piper Jaffray calculated an estimated range of theoretical enterprise values for the Company based on the net present value of (i) projected unlevered free cash flows from December 31, 2013 to December 31, 2018, discounted back to December 31, 2013 and (ii) a projected terminal value at December 31, 2018 based upon terminal year multiples of projected EBITDA, discounted back to December 31, 2013. The free cash flows for each year and terminal year EBITDA were calculated from the Financial Forecasts, which were provided to Piper Jaffray by the Company and are described under "—Certain Financial Forecasts." Piper Jaffray calculated the range of net present values for unlevered free cash flows for such periods based on a range of discount rates ranging from 9.1% to 11.1%, based on its estimation of the Company's weighted average cost of capital. Piper Jaffray calculated a range of terminal values using terminal EBITDA multiples ranging

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from 10.0x to 12.0x applied to projected 2018 EBITDA, and discounted such resulting values back to December 31, 2013 using a range of discount rates ranging from 9.1% to 11.1%.

This analysis resulted in implied per share values for common stock ranging from $39.98 to $48.43. Piper Jaffray observed that the merger consideration was within the range of implied per share values derived from this analysis.

    Other Information—Company Analyst Price Targets

Piper Jaffray also noted for the Board of Directors the following additional information that was not relied upon in rendering its opinion, but was provided for informational purposes.

Piper Jaffray reviewed selected Wall Street research equity analyst per share target prices for Company common stock as of January 6, 2014 (the day prior to announcement of the DOJ settlement). The range of these target prices was $38.00 to $48.00, with an average target price of $44.17.

Additionally, Piper Jaffray reviewed selected Wall Street research equity analyst per share target prices for Company common stock available as of January 31, 2014 (the last trading day prior to announcement of the merger). The range of these target prices was $43.00 to $60.00, with an average target price of $51.17. No revenue or earnings per share estimates underlying such target prices changed since the target price estimates as of January 6, 2014, with the exception of one analyst who had raised estimated 2013 revenue by $400,000.

    Miscellaneous

The summary set forth above does not contain a complete description of the analyses performed by Piper Jaffray and reviewed with the Board of Directors, but summarizes the material analyses performed by Piper Jaffray in rendering its opinion. The preparation of a fairness opinion is not necessarily susceptible to partial analysis or summary description. Piper Jaffray believes that its analyses and the summary set forth above must be considered as a whole and that selecting portions of its analyses or of the summary, without considering the analyses as a whole or all of the factors included in its analyses, would create an incomplete view of the processes underlying the analyses set forth in the Piper Jaffray opinion. In arriving at its opinion, Piper Jaffray considered the results of all of its analyses and did not attribute any particular weight to any factor or analysis. Instead, Piper Jaffray made its determination as to fairness on the basis of its experience and financial judgment after considering the results of all of its analyses. In addition, the ranges of valuations resulting from any particular analysis described above should not be taken to be Piper Jaffray's view of the actual value of common stock.

None of the selected companies or transactions used in the analyses above is directly comparable to the Company or the merger. Accordingly, an analysis of the results of the comparisons is not purely mathematical; rather, it involves considerations and judgments concerning differences in historical and projected financial and operating characteristics of the selected companies and target companies in the selected transactions and other factors that could affect the public trading value or transaction value of the companies involved.

Piper Jaffray performed its analyses for purposes of providing its opinion to the Board of Directors. In performing its analyses, Piper Jaffray made numerous assumptions with respect to industry performance, general business and economic conditions and other matters. Certain of the analyses performed by Piper Jaffray are based upon financial projections of future results furnished to Piper Jaffray by the Company's management, which are not necessarily indicative of actual future results and may be significantly more or less favorable than actual future results. These financial projections are inherently subject to uncertainty because, among other things, they are based upon numerous factors or events beyond the control of the parties or their respective advisors. Neither Piper Jaffray nor the

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Company assumes responsibility if future results are materially different from projected financial results.

Piper Jaffray's opinion was one of many factors taken into consideration by the Board of Directors in making the determination to approve the merger agreement. While Piper Jaffray provided advice to the Board of Directors during the Company's negotiations with Smith & Nephew, the Company's Board of Directors determined the amount of merger consideration and Piper Jaffray did not recommend any specific amount or type of merger consideration.

Piper Jaffray relied upon and assumed, without assuming liability or responsibility for independent verification, the accuracy and completeness of all information that was publicly available or was furnished, or otherwise made available, to Piper Jaffray or discussed with or reviewed by Piper Jaffray. Piper Jaffray further relied upon the assurances of the management of the Company that the financial information provided to Piper Jaffray by the management of the Company was prepared on a reasonable basis in accordance with industry practice, and that the management of the Company was not aware of any information or facts that would make any information provided to Piper Jaffray incomplete or misleading. Without limiting the generality of the foregoing, for the purpose of its opinion, Piper Jaffray assumed that with respect to financial forecasts, estimates and other forward-looking information reviewed by Piper Jaffray, that such information was reasonably prepared based on assumptions reflecting the best currently available estimates and judgments of the management of the Company as to the expected future results of operations and financial condition of the Company. Piper Jaffray expressed no opinion as to any such financial forecasts, estimates or forward-looking information or the assumptions on which they were based. Piper Jaffray relied, with consent of the Board of Directors, on advice of the outside counsel, and independent accountants to the Company, and on the assumptions of the management of the Company, as to all accounting, legal, tax and financial reporting matters with respect to the Company and the merger agreement.

In arriving at its opinion, Piper Jaffray assumed that the executed merger agreement was in all material respects identical to the last draft reviewed by Piper Jaffray. Piper Jaffray relied upon and assumed, without independent verification, that (i) the representations and warranties of all parties to the merger agreement and all other related documents and instruments that are referred to therein are true and correct, (ii) each party to such agreements will fully and timely perform all of the covenants and agreements required to be performed by such party, including that the Company's Series A Preferred Stock would be converted into common stock prior to consummation of the merger, (iii) the merger will be consummated pursuant to the terms of the merger agreement without amendments thereto and (iv) all conditions to the consummation of the merger will be satisfied without waiver by any party of any conditions or obligations thereunder. Additionally, Piper Jaffray assumed that all the necessary regulatory approvals and consents required for the merger will be obtained in a manner that would not adversely affect the Company or the contemplated benefits of the merger.

In arriving at its opinion, Piper Jaffray did not perform any appraisals or valuations of any specific assets or liabilities (fixed, contingent or other) of the Company, and Piper Jaffray was not furnished or provided with any such appraisals or valuations, nor did Piper Jaffray evaluate the solvency of the Company under any state or federal law relating to bankruptcy, insolvency or similar matters. The analyses performed by Piper Jaffray in connection with its opinion were going concern analyses. Piper Jaffray expressed no opinion regarding the liquidation value of the Company or any other entity. Without limiting the generality of the foregoing, Piper Jaffray undertook no independent analysis of any pending or threatened litigation, regulatory action, possible unasserted claims or other contingent liabilities, to which the Company or any of its affiliates is a party or may be subject, and at the Company's direction and with its consent, Piper Jaffray's opinion made no assumption concerning, and therefore did not consider, the possible assertion of claims, outcomes or damages arising out of any such matters. Piper Jaffray also assumed that neither the Company nor Smith & Nephew is party to

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any material pending transaction, including without limitation, any financing, recapitalization, acquisition or merger, divestiture or spin-off, other than the merger.

Piper Jaffray's opinion was necessarily based upon the information available to it and facts and circumstances as they existed and were subject to evaluation on the date of its opinion. Events occurring after the date of its opinion could materially affect the assumptions used in preparing its opinion. Piper Jaffray did not undertake to reaffirm or revise its opinion or otherwise comment upon any events occurring after the date of its opinion and does not have any obligation to update, revise or reaffirm its opinion.

Piper Jaffray's opinion addressed solely the fairness, from a financial point of view, to holders of common stock of the proposed merger consideration set forth in the merger agreement and did not address any other terms or agreement relating to the merger or any other terms of the merger agreement. Piper Jaffray was not requested to opine as to, and its opinion does not address, the basic business decision to proceed with or effect the merger, the merits of the merger relative to any alternative transaction or business strategy that may be available to the Company, Smith & Nephew's ability to fund the merger consideration, or any other terms contemplated by the merger agreement or the fairness of the merger to any other class of securities, creditor or other constituency of the Company. Furthermore, Piper Jaffray expressed no opinion with respect to the amount or nature of compensation to any officer, director or employee of any party to the merger, or any class of such persons, relative to the merger consideration or with respect to the fairness of any such compensation.

    Information about Piper Jaffray

As a part of its investment banking business, Piper Jaffray is regularly engaged in the valuation of businesses in the medical technology and other industries and their securities in connection with mergers and acquisitions, underwritings, secondary distributions of listed and unlisted securities, private placements, and valuations for corporate and other purposes. The Board of Directors selected Piper Jaffray to be its financial advisor and render its fairness opinion in connection with the merger on the basis of such experience and its familiarity with the Company.

Piper Jaffray acted as a financial advisor to the Company in connection with the merger and will receive a fee, currently estimated to be approximately $14.77 million from the Company, which is contingent upon the consummation of the merger, except for $1 million of such fee which has been earned by Piper Jaffray for rendering its fairness opinion and is creditable against the total fee. The opinion fee was not contingent upon the consummation of the merger or the conclusions reached in Piper Jaffray's opinion. The Company has also agreed to indemnify Piper Jaffray against certain liabilities and reimburse Piper Jaffray for certain expenses in connection with its services. In the ordinary course of its business, Piper Jaffray and its affiliates may actively trade securities of the Company and Parent HoldCo for its own account or the account of its customers and, accordingly, may at any time hold a long or short position in such securities. In the ordinary course of its business, Piper Jaffray also publishes research on the common stock of the Company and the common stock of Parent HoldCo. Piper Jaffray may also, in the future, provide investment banking and financial advisory services to the Company or Parent HoldCo or entities that are affiliated with the Company or Parent HoldCo, for which Piper Jaffray would expect to receive compensation. Piper Jaffray has acted as financial advisor to the Company in the two years prior to the issuance of its fairness opinion, including having rendered a fairness opinion to the Board of Directors in connection with the Company's acquisition of ENTrigue Surgical, Inc. in June 2013, for which Piper Jaffray received compensation. Piper Jaffray has not received fees or other compensation from Parent HoldCo in the two years prior to the issuance of its fairness opinion.

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Consistent with applicable legal and regulatory requirements, Piper Jaffray has adopted policies and procedures to establish and maintain the independence of Piper Jaffray's research department and personnel. As a result, Piper Jaffray's research analysts may hold opinions, make statements or recommendations and/or publish research reports with respect to the Company and the merger and other participants in the merger that differ from the opinions of Piper Jaffray's investment banking personnel.


Certain Financial Forecasts

The Company, as a matter of course, does not make public projections as to future revenues, earnings or other results due to, among other reasons, the uncertainty of the underlying assumptions and estimates. In the normal course of business planning, each year our management prepares, for internal use, certain financial forecasts with respect to the Company's business plans for the immediately succeeding three year period. These financial forecasts are part of an annual strategic plan that is discussed and reviewed with our Board of Directors. In late 2013, our management prepared certain financial forecasts for the Company with respect to fiscal years 2014, 2015 and 2016, which were included in a strategic plan provided to our Board of Directors and which were subsequently updated to reflect the final 2014 budget for the Company approved by our Board of Directors in December 2013. We refer to the strategic plan, as updated for the final 2014 budget approved by our Board of Directors, as the 2013 Strategic Plan.

In addition, in December 2013, and in connection with the Company's evaluation of the potential acquisition by Smith & Nephew of the Company, our management prepared additional financial forecasts for fiscal years 2017 and 2018 (which we refer to, together with the 2013 Strategic Plan, as the Financial Forecasts). The Financial Forecasts were provided to Piper Jaffray for use in connection with the preparation of its valuation analysis with respect to the Company and to our Board of Directors in connection with its consideration of the merger. We provided the three potential acquirers that entered into confidentiality agreements with us in connection with a potential acquisition of the Company, other than Smith & Nephew, with a summary of our revenue projections (based on the 2013 Strategic Plan) and our main business initiatives planned for the 2014 - 2016 period. We provided Smith & Nephew with the Financial Forecasts (other than with respect to fiscal years 2017 and 2018). We did not provide any financial forecasts, including the Financial Forecasts, to any other third parties in connection with a potential acquisition of the Company.

The Financial Forecasts were necessarily based on a variety of assumptions and estimates. The assumptions and estimates underlying the Financial Forecasts may not be realized and are inherently subject to significant business, economic and competitive uncertainties and contingencies, all of which are difficult to predict and many of which are beyond our control. The assumptions and estimates used to create the Financial Forecasts involve judgments made with respect to, among other things, when new planned products would be available in the market, the effects of changes to our distribution organization, the adoption rate for new products during the forecast period, future procedure volumes, the ability of the Company to maintain market share, future product pricing, cost of goods sold, selling and marketing expenses, research and development spending, general and administrative expenses, income tax rates and the factors described under "Risk Factors" in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2013 and the Company's other filings with the SEC, all of which are difficult to predict and some of which are outside of our control. The Financial Forecasts also reflect assumptions as to certain business decisions that do not reflect any of the effects of the merger, or any other changes that may in the future affect us or our assets, business, operations, properties, policies, corporate structure, capitalization and management as a result of the merger or otherwise. Accordingly, there can be no assurance that the assumptions and estimates used to prepare the Financial Forecasts will prove to be accurate, and actual results may materially differ.

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The inclusion of the Financial Forecasts in this proxy statement should not be regarded as an indication that the Company, Smith & Nephew or any of our respective advisors or representatives considered or consider the Financial Forecasts to be an accurate prediction of future events, and the Financial Forecasts should not be relied upon as such. None of the Company, Smith & Nephew or any of our respective advisors or representatives has made or makes any representation regarding the information contained in the Financial Forecasts, and except as may be required by applicable securities laws, none of them intend to update or otherwise revise or reconcile the Financial Forecasts to reflect circumstances existing after the date such Financial Forecasts were generated or to reflect the occurrence of future events even in the event that any or all of the assumptions underlying the Financial Forecasts are shown to be in error. ArthroCare's stockholders are cautioned not to place undue reliance on the Financial Forecasts included in this proxy statement, and such projected financial information should not be regarded as an indication that the Company, our Board of Directors, Piper Jaffray, Smith & Nephew or any other person considered, or now considers, them to be reliable predictions of future results, and they should not be relied upon as such.

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A summary of the Financial Forecasts is set forth below.


2014 2015 2016 2017 2018

Total Revenue

$ 405 $ 441 $ 488 $ 522 $ 559

COGS

129 133 148 161 173

Gross Profit

276 308 340 361 386

Operating Expenses

R&D

35 38 39 41 42

G&A

32 34 34 35 37

S&M

134 140 150 162 173

Amortization of Intangibles

2 2 1 1 1

Operating Income(1)

$ 73 $ 94 $ 115 $ 122 $ 132

Interest and Other Income (Exp.)

0 0 0 0 0

Pre-tax Income

73 94 115 122 132

Tax Provision(2)

21 24 29 31 33

Net Income(1)

$ 53 $ 70 $ 86 $ 91 $ 99

EPS (Adjusted)

$ 1.49 $ 1.97 $ 2.37 $ 2.47 $ 2.66

Shares Outstanding (Includes Preferred)

35.3 35.8 36.3 36.8 37.3

EBITDA






Operating Income

$ 73 $ 94 $ 115 $ 122 $ 132

Depreciation & Amortization

15 15 16 16 17

Stock Based Compensation

8 8 8 8 8

Adjusted EBITDA(1)(3)

$ 96 $ 117 $ 139 $ 146 $ 157

Unlevered Free Cash Flow






Operating Income

$ 73 $ 94 $ 115 $ 122 $ 132

Cash Taxes Paid(4)

(13 ) (22 ) (27 ) (29 ) (32 )

Net Operating Profit After Taxes

60 72 88 93 101

Depreciation & Amortization

15 15 16 16 17

Stock Based Compensation

8 8 8 8 8

Capital Expenditures

(31 ) (28 ) (12 ) (12 ) (12 )

Eleven Blade Earnout

— — (3 ) — —

Change in Working Capital

(2 ) (5 ) (6 ) (6 ) (6 )

Unlevered Free Cash Flow(5)

$ 50 $ 62 $ 91 $ 99 $ 108

Growth and Margins

Revenue Growth

7 % 9 % 11 % 7 % 7 %

Gross Margin

68 % 70 % 70 % 69 % 69 %

Operating Margin

18 % 21 % 24 % 23 % 24 %

Adjusted EBITDA Margin

24 % 27 % 28 % 28 % 28 %

Net Margin

13 % 16 % 18 % 17 % 18 %

(1)
Excludes investigation and restatement related costs as defined in the Company's Annual Report on Form 10-K for the year ending December 31, 2013.

(2)
Net of tax impact of add-back for investigation and restatement costs.

(3)
Non-GAAP measure. For this purpose, Adjusted EBITDA represents net income before stock-based compensation expense, income tax and depreciation and amortization.

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(4)
Assumes net operating loss utilization of $13.2 million in 2014 and $6.3 million for years 2015-2018.

(5)
Non-GAAP measure. For this purpose, Unlevered Free Cash Flow represents operating income before cash taxes paid, depreciation and amortization, stock based compensation, Eleven Blade earnout and change in working capital. Unlevered Free Cash flow forecasts in the 2013 Strategic Plan provided to Smith & Nephew were $69 million and $89 million in 2015 and 2016, respectively. The differences were due to different forecasts for the Company's capital expenditures in 2015 (attributable to finalization in 2014 of capital expenditures relating to the 2013 construction of a manufacturing facility in Costa Rica) and the exclusion of adjustments relating to projected ENTrigue future contingent consideration payments, which the Company's management estimates to have a fair value of $14.5 million, as calculated by applying the income approach using a Monte Carlo simulation method. If management's estimates of ENTrigue future contingent consideration payments were included, Unlevered Free Cash Flows would have been $61 million in 2015, $89 million in 2016, $90 million in 2017 and $94 million in 2018.

Although presented with numerical specificity, the Financial Forecasts are not actual facts and reflect numerous assumptions, estimates and judgments as to future events made by our management, including assumptions, estimates and judgments noted above. Moreover, the Financial Forecasts are based on certain future business decisions that are subject to change. The Financial Forecasts generally take into account estimated future tax rates. There can be no assurance that the assumptions, estimates and judgments used to prepare the Financial Forecasts will prove to be accurate, and actual results may differ materially from those contained in the Financial Forecasts. The inclusion of the Financial Forecasts in this proxy statement should not be regarded as an indication that such Financial Forecasts will be predictive of actual future results, and the Financial Forecasts should not be relied upon as such. The Financial Forecasts are forward-looking statements.

The Financial Forecasts should be read together with the historical financial statements of the Company, which have been filed with the SEC, and the other information regarding the Company contained elsewhere in this proxy statement. None of the Financial Forecasts were prepared with a view toward public disclosure, nor were they prepared with a view toward compliance with the published guidelines of the SEC or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. Neither our independent auditors, nor any other independent accountants (including, without limitation, Smith & Nephew's), have compiled, examined, or performed any procedures with respect to the prospective financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, the prospective financial information or United States generally accepted accounting principles ("GAAP") but, in the view of the Company's management, the Financial Forecasts were prepared on a reasonable basis. The report of the Company's independent registered public accounting firm included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013 relates to the Company's historical financial information. It does not extend to the Financial Forecasts and should not be read to do so.


Interests of Our Directors and Officers in the Merger

The Company's executive officers and the members of our Board of Directors may be deemed to have certain interests in the merger and related transactions that may be different from or in addition to those of the Company's stockholders generally. Those interests may create potential conflicts of interest. Our Board of Directors was aware of those interests and considered them, among other matters, in reaching its decision to approve the merger agreement and related transactions.

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    Merger Consideration for Shares of Common Stock

The directors and executive officers of the Company who own shares of Company common stock will receive the same per share merger consideration ($48.25) on the same terms and conditions as the other stockholders of the Company. As of February 18, 2014, the directors and executive officers of the Company beneficially owned, in the aggregate 11,948,330 shares of Company common stock, which for purposes of this subsection includes any converted preferred shares but excludes any shares of Company common stock held in the Company's 401(k) Plan or issuable upon exercise or settlement, as applicable, of Company Options, Company Stock Appreciation Rights, Company RSUs and Company Performance Shares held by such individuals. The directors and executive officers would receive an aggregate of $576,506,923 in cash, without interest, less any required withholding taxes, in connection with the merger for such shares of Company common stock. For a description of the treatment of Company Options, Company Stock Appreciation Rights, Company RSUs, and Company Performance Shares held by the directors and executive officers of the Company, see below under the heading "Interests of our Directors and Officers in the Merger—Merger Agreement—Effect of the Merger on Company Options, Company Stock Appreciation Rights, Company RSUs and Company Performance Shares." For a description of the treatment of shares of Company common stock held in the Company's 401(k) Plan by the executive officers of the Company, see below under the heading "Interests of our Directors and Officers in the Merger—Merger Agreement—Effect of the Merger on Shares of Company Common Stock Under the Company's 401(k) Plan."

The following table sets forth, as of February 18, 2014, the cash consideration that each executive officer and director would be entitled to receive in respect of outstanding shares of Company common stock beneficially owned by him or her (excluding shares underlying Company Options, Company Stock Appreciation Rights, Company RSUs and Company Performance Shares and shares held in the Company's 401(k) Plan).

Name
Number of
Shares
Consideration
Payable in
Respect of Shares ($)

David Fitzgerald

127,840 6,168,280

Todd Newton

22,543 1,087,670

James L. Pacek

9,072 437,724

Scott Schaffner

8,995 434,009

Jean Woloszko

21,787 1,051,223

Gayle Wiley

0 0

Bruce Prothro

2,307 111,313

Richard Rew

14,735 710,964

Fred Dinger III

0 0

James G. Foster

26,270 1,267,528

Barbara D. Boyan, Ph.D.

6,076 293,167

Peter L. Wilson

30,763 1,484,315

Tord B. Lendau

6,239 301,032

Gregory A. Belinfanti

5,833,155 281,449,729 (1)

Christian P. Ahrens

5,833,155 281,449,729 (1)

Fabiana Lacerca-Allen

0 0

Terrence E. Geremski

5,393 260,212

(1)
This figure includes the converted preferred shares and 13,617 shares released to Gregory A. Belinfanti and 13,617 shares released to Christian P. Ahrens.

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    Merger Agreement

    Effect of the Merger on Company Options, Company Stock Appreciation Rights, Company RSUs and Company Performance Shares

    Company Options.

As of February 18, 2014, Company directors and executive officers held an aggregate of 793,483 Company Options. Pursuant to the terms of the merger agreement, immediately prior to the effective time of the merger, the vesting and exercisability of all Company Options will be accelerated in full.

Immediately prior to the effective time of the merger, each outstanding Company Option will be cancelled. The holders of any such Company Options with an exercise price per share less than $48.25 will, in consideration of the cancellation of each such Company Option, be entitled to receive, as soon as practicable after the effective time of the merger, an amount in cash determined by multiplying (x) the excess of the per share merger consideration of $48.25 over the applicable exercise price of such Company Option by (y) the number of shares of Company common stock subject to such Company Option. The cash payments for Company Options are subject to all relevant withholding and other taxes required by applicable law.

The table below sets forth information regarding the Company Options held by each of the Company's executive officers and directors, as of February 18, 2014, having an exercise price per share of Company common stock less than $48.25 pursuant to the terms of the merger agreement as described above.

Name
Shares
Subject to
Vested
Company
Options
Weighted
Average
Exercise Price
Per Share for
Vested
Company
Options ($)
Consideration
Payable in
Respect of
Vested
Company
Options ($)
Shares
Subject to
Accelerated
Company
Options
Weighted
Average
Exercise Price
Per Share for
Accelerated
Company
Options ($)
Consideration
Payable in
Respect of
Accelerated
Company
Options ($)
Total ($)

David Fitzgerald

190,430 24.25 4,569,557 4,401 26.24 96,866 4,666,423

Todd Newton

124,676 25.48 2,839,145 38,671 32.51 608,862 3,448,007

James L. Pacek

67,467 25.53 1,532,805 16,748 31.77 275,974 1,808,779

Scott Schaffner

72,901 27.71 1,497,519 18,219 32.09 294,368 1,791,888

Jean Woloszko

34,049 28.47 673,534 18,787 31.54 313,865 987,399

Gayle Wiley

0 0 0 15,221 36.90 172,758 172,758

Bruce Prothro

23,368 28.80 454,457 15,080 31.46 253,237 707,694

Richard Rew

68,366 27.34 1,416,126 16,548 31.84 271,572 1,687,698

Fred Dinger III

122 46.48 216 18,429 39.26 165,728 165,944

James G. Foster

10,000 24.61 235,600 0 0 0 235,600

Barbara D. Boyan, Ph.D.

30,000 27.11 634,200 0 0 0 634,200

Peter L. Wilson

10,000 24.69 235,600 0 0 0 235,600

Tord B. Lendau

10,000 24.69 235,600 0 0 0 235,600

Gregory A. Belinfanti

0 0 0 0 0 0 0

Christian P. Ahrens

0 0 0 0 0 0 0

Fabiana Lacerca-Allen

0 0 0 0 0 0 0

Terrence E. Geremski

0 0 0 0 0 0 0

The amounts reported in the table above (i) disregard Company Options that have an exercise price per share equal to or greater than $48.25, and (ii) do not reflect any taxes payable by the option holders.

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    Company Stock Appreciation Rights.

As of February 18, 2014, Company directors and executive officers held an aggregate of 94,812 Company Stock Appreciation Rights. Pursuant to the terms of the merger agreement, immediately prior to the effective time of the merger, the vesting and exercisability of all Company Stock Appreciation Rights will be accelerated in full.

Immediately prior to the effective time of the merger, each outstanding award of Company Stock Appreciation Rights will be cancelled. The holders of such awards of Company Stock Appreciation Rights having an exercise per share of less than $48.25 will, in consideration of the cancellation of each such award of Company Stock Appreciation Rights, be entitled to receive, as soon as practicable after the effective time of the merger, an amount in cash determined by multiplying (x) the excess of the per share merger consideration of $48.25 over the applicable exercise price per share of such award of Company Stock Appreciation Rights by (y) the number of shares of Company common stock underlying such award of Company Stock Appreciation Rights. The cash payments for Company Stock Appreciation Rights are subject to all withholding and other taxes required by applicable law.

The table below sets forth information regarding the Company Stock Appreciation Rights held by each of the Company's executive officers and directors, as of February 18, 2014, having an exercise price per share of Company common stock less than $48.25 pursuant to the terms of the merger agreement as described above. There are no unvested Company Stock Appreciation Rights held by the Company's executive officers or directors as of February 18, 2014.

Name
Shares
Subject to
Vested
Company Stock
Appreciation
Rights
Weighted
Average
Purchase Price
Per Share for
Vested
Company Stock
Appreciation
Rights ($)
Consideration
Payable in
Respect of
Vested
Company Stock
Appreciation
Rights ($)

David Fitzgerald

11,814 41.35 81,503

Todd Newton

0 0 0

James L. Pacek

8,456 43.51 40,081

Scott Schaffner

0 0 0

Jean Woloszko

8,507 43.51 40,323

Gayle Wiley

0 0 0

Bruce Prothro

0 0 0

Richard Rew

7,729 36.08 94,062

Fred Dinger III

0 0 0

James G. Foster

11,623 41.30 80,786

Barbara D. Boyan, Ph.D.

11,432 41.25 80,070

Peter L. Wilson

12,005 41.40 82,219

Tord B. Lendau

11,432 41.25 80,070

Gregory A. Belinfanti

0 0 0

Christian P. Ahrens

0 0 0

Fabiana Lacerca-Allen

0 0 0

Terrence E. Geremski

11,814 41.35 81,503

The amounts reported in the table above (i) disregard Company Stock Appreciation Rights that have an exercise price per share equal to or greater than $48.25, and (ii) do not reflect any taxes payable by the equity award holders.

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    Company RSUs.

As of February 18, 2014, Company directors and executive officers held an aggregate of 294,296 Company RSUs, including, with respect to the Company directors, any Company RSUs the settlement of which will be deferred until retirement, resignation or other departure from membership on the Board by such director.

Immediately prior to the effective time of the merger, each outstanding award of Company RSUs will be cancelled. The holders of such Company RSUs will, in consideration of the cancellation of each award of Company RSUs, be entitled to receive, as soon as practicable after the effective time of the merger, an amount in cash determined by multiplying (x) the per share merger consideration of $48.25 by (y) the number of shares of Company common stock underlying such award of Company RSUs. The cash payments for Company RSUs are subject to all withholding and other taxes required by applicable law.

The table below sets forth information regarding the Company RSUs held by each of the Company's executive officers and directors as of February 18, 2014 pursuant to the terms of the merger agreement as described above.

Name
Shares Subject to
Company RSUs
Consideration Payable in Respect
of Company RSUs(1) ($)

David Fitzgerald

59,621 2,876,713

Todd Newton

22,345 1,078,146

James L. Pacek

10,996 530,557

Scott Schaffner

14,623 705,560

Jean Woloszko

17,493 844,037

Gayle Wiley

4,065 196,136

Bruce Prothro

15,026 725,005

Richard Rew

10,534 508,266

Fred Dinger III

5,089 245,544

James G. Foster

18,999 916,702

Barbara D. Boyan, Ph.D.

18,374 886,546

Peter L. Wilson

19,536 942,612

Tord B. Lendau

18,112 873,904

Gregory A. Belinfanti

17,957 866,425

Christian P. Ahrens

17,957 866,425

Fabiana Lacerca-Allen

4,508 217,511

Terrence E. Geremski

19,061 919,693

(1)
The amounts in this column do not reflect any taxes payable by the equity award holders.

    Company Performance Shares.

As of February 18, 2014, Company directors and executive officers held an aggregate of 399,994 Company Performance Shares (at target), which the Company currently estimates will be deemed to vest immediately prior to the effective time of the merger with respect to an aggregate of 133,329 shares of Company common stock, which constitutes one-third of the target number of shares of Company common stock subject to all awards of Company Performance Shares.

The performance achievement for the performance period associated with awards of Company Performance Shares will be assessed immediately prior to the effective time of the merger (using the last business day of the last completed fiscal quarter prior to the effective time of the merger for any performance period ongoing at the effective time of the merger), and the vesting of such Company Performance Share awards will be accelerated based upon such performance achievement, (but in no

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event will less than one-third of the target number of shares subject to each award of Company Performance Shares vest).

Immediately prior to the effective time of the merger, each outstanding award of Company Performance Shares will be cancelled. The holders of such Company Performance Shares will, in consideration of the cancellation of each award of Company Performance Shares, be entitled to receive, as soon as practicable after the effective time of the merger, an amount in cash determined by multiplying (x) the per share merger consideration of $48.25 by (y) the greater of (A) the number of Company Performance Shares that vest immediately prior to the effective time based upon the Company's assessment of performance, and (B) one-third of the target number of Company Performance Shares underlying such award. The cash payments for Company Performance Shares are subject to all withholding and other taxes required by applicable law.

The table below sets forth information regarding the Company Performance Shares held by each of the Company's executive officers, except for Mr. Dinger and Ms. Wiley who do not hold any Company Performance Shares, as of February 18, 2014. No directors other than Mr. Fitzgerald hold Company Performance Shares.

Name
Company Performance
Shares(1)
Company Performance Shares
Expected to Vest Immediately
Prior to the Effective Time(2)
Consideration Payable in Respect
of Company Performance
Shares(3) ($)

David Fitzgerald

57,142 19,047 919,018

Todd Newton

57,142 19,047 919,018

James L. Pacek

57,142 19,047 919,018

Scott Schaffner

57,142 19,047 919,018

Jean Woloszko

57,142 19,047 919,018

Bruce Prothro

57,142 19,047 919,018

Richard Rew

57,142 19,047 919,018

(1)
The amounts in this column constitute the target number of Company Performance Shares held by the individual irrespective of Company performance.

(2)
The amounts in this column constitute one-third of the target number of shares of Company common stock underlying the awards of Company Performance Shares held by the individual.

(3)
The amounts in this column do not reflect any taxes payable by the equity award holders.

    Effect of the Merger on Shares of Company Common Stock under the Company's 401(k) Plan

Pursuant to the terms of the merger agreement, effective as of immediately prior to the effective time of the merger, unless otherwise directed in writing by Smith & Nephew at least five business days prior to the effective time of the merger, the Company will terminate the Company's 401(k) Plan. Participant accounts in the Company's 401(k) Plan also include holdings of the Company's common stock. As of February 18, 2014, the executive officers of the Company beneficially owned in the aggregate 4,828 shares of Company common stock held in the Company's 401(k) Plan. The executive officers would receive an aggregate of $232,951 in cash, without interest, less any required withholding taxes, in connection with the merger for their shares of Company common stock held in the Company's 401(k) Plan. Each share of Company common stock held in the Company's 401(k) Plan will be canceled immediately prior to the effective time of the merger and converted into the right to receive the per share merger consideration of $48.25.

No directors, other than Mr. Fitzgerald, participate in the Company's 401(k) Plan. The table below sets forth information regarding the amount of cash consideration each of the Company's executive

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officers will receive pursuant to the merger agreement with respect to shares in the Company's 401(k) Plan held by each executive officer as of February 18, 2014.

Name
Shares Held under the
Company's 401(k) Plan
Consideration Payable in Respect
of Shares Held under the
Company's 401(k) Plan ($)

David Fitzgerald

416 20,072

Todd Newton

413 19,928

James L. Pacek

996 48,057

Scott Schaffner

305 14,717

Jean Woloszko

831 40,096

Gayle Wiley

0 0

Bruce Prothro

936 45,162

Richard Rew

931 44,921

Fred Dinger III

0 0

    Continuing Employees

The merger agreement provides that, during the period beginning at the effective time of the merger and ending on the first anniversary thereof, Smith & Nephew will, or will cause its subsidiaries to, provide to each employee who is actively employed by the Company or its subsidiaries at the effective time of the merger, each of whom we refer to as a Covered Employee, which may include each of our executive officers, and who is located primarily (i) in the United States, compensation and benefits that are substantially comparable in the aggregate to the compensation and benefits (other than equity compensation and other long-term incentives, change in control, retention, transition, stay or similar arrangements) that were provided to each such Covered Employee under the Company's plans immediately prior to the effective time of the merger and (ii) outside the United States, compensation and benefits that, as determined by Smith & Nephew in its sole discretion, either (x) were provided to each such Covered Employee under the Company's plans immediately prior to the effective time of the merger or (y) are provided to similarly situated employees of Smith & Nephew and its subsidiaries (other than the Company and its subsidiaries).

In addition, the merger agreement provides that in the event any Covered Employee, including each of our executive officers, first becomes eligible to participate under any employee benefit plan, program, policy or arrangement of Smith & Nephew or any of its subsidiaries, each of which we refer to as a Parent Plan, following the effective time of the merger, Smith & Nephew will, or will cause its subsidiaries to, use reasonable best efforts to waive any preexisting condition exclusions and waiting periods with respect to participation and coverage requirements applicable to each such Covered Employee under any Parent Plan providing medical, dental or vision benefits to the same extent each such limitation would have been waived or satisfied under the Company's plan such Covered Employee participated in immediately prior to coverage under such Parent Plan and provide each such Covered Employee with credit for any copayments and deductibles paid under the Company's plan prior to each such Covered Employee's coverage under any Parent Plan during the calendar year in which such amount was paid, to the same extent such credit was given under the Company's plan each such Covered Employee participated in immediately prior to coverage under such Parent Plan in satisfying any applicable deductible or out-of-pocket requirements under such Parent Plan. Finally, as of the immediately prior to effective time of the merger, Smith & Nephew will, or will cause its subsidiaries to, recognize all service of each Covered Employee immediately prior to the effective time of the merger, with the Company and its subsidiaries for vesting and eligibility purposes (but not for benefit accrual purposes, except for vacation and severance, as applicable).

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    Annual Bonus Programs

For each of our executive officers, the Company will determine the amount of the 2013 fiscal year annual cash bonuses for eligible employees who participate in the Company's 2013 Annual Bonus Program for all executive officers and the President/Chief Executive Officer, in the ordinary course of business, based on actual performance and level of achievement of the applicable performance targets in accordance with the terms of the Company's 2013 Annual Bonus Program for all executive officers and the President/Chief Executive Officer as approved by the Compensation Committee of our Board. The Company intends to establish an annual bonus program for the fiscal year ending December 31, 2014 that will cover each of our executive officers.

    Employment and Continuity Agreements

The Company has entered into an employment agreement with its chief executive officer, David Fitzgerald, and its chief financial officer, Todd Newton, and continuity agreements with each of James L. Pacek, Scott Schaffner, Jean Woloszko, Bruce Prothro, Richard Rew, Fred Dinger III and Gayle Wiley,the terms of which are summarized below.

    Continuity Agreements with James L. Pacek, Scott Schaffner, Jean Woloszko, Bruce Prothro, Richard Rew, Fred Dinger III and Gayle Wiley

Pursuant to the continuity agreements with each of Messrs. Pacek, Schaffner, Prothro, Rew, Woloszko and Dinger and Ms. Wiley, in the event of termination without "cause" at any time prior to the occurrence of a "change in control" or after the 24-month period following a "change in control" (each, as defined in the applicable continuity agreement) of the Company, subject to the executive (except for Mr. Woloszko) executing and not revoking a release against the Company, the executive will be entitled to receive (i) severance pay for a term of six months immediately commencing with the termination of the executive's employment with the Company, at a rate equal to the executive's base salary, not including bonus, in effect immediately prior to the executive's termination, and (ii) reimbursements, not to exceed $650 per month (Messrs. Pacek, Rew and Dinger and Ms. Wiley) or $1,500 per month (Mr. Schaffner), for the amount of his or her premium payment for group health coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, which we refer to as COBRA, until the earlier of (A) the time that the executive no longer constitutes a qualified beneficiary (as such term is defined in Section 4980B(g)(1) of the Code) and (B) the date six months following the executive's termination. If the executive's employment is terminated as a result of the executive's disability or death, then the executive will not be entitled to receive severance or other benefits under the continuity agreement, but will be eligible for those benefits as may be established under our existing severance and benefits plans and policies at the time of the disability or death.

In addition, pursuant to the continuity agreements for Messrs. Pacek, Schaffner, Prothro, Rew and Dinger, Woloszko and Ms. Wiley, if the executive's employment with the Company terminates in an "involuntary termination" (as defined in the continuity agreements) at any time within 24 months after a change in control, then, subject to the executive (except for Mr. Woloszko) executing and not revoking a release against the Company, the executive will be entitled to receive (i) severance pay payable in installments during the 24-month period following the executive's termination of employment at a rate equal to the executive's "current compensation" (as defined below), (ii) reimbursements, not to exceed $650 per month (Messrs. Pacek, Rew and Dinger and Ms. Wiley) or $1,500 per month (Mr. Schaffner), for the amount of his or her premium payment for group health coverage pursuant to COBRA until the earlier of (A) the time that the executive no longer constitutes a qualified beneficiary and (B) the date 24 months following the executive's termination (provided that if our obligations cease due to the executive no longer constituting a qualified beneficiary, we will make a lump sum payment to the executive, on the 18 months following the date of the executive's termination, equal to the product of the last monthly reimbursement paid to the executive multiplied by

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six), (iii) executive-level outplacement services for 24 months at our expense, not to exceed $15,000, and (iv) accelerated vesting with respect to 100% of the shares underlying any outstanding Company Options, Company Stock Appreciation Rights or Company RSUs. "Current compensation" means an amount equal to the greater of (i) the executive's base compensation earned in the fiscal year preceding the fiscal year of the executive's termination; or (ii) the executive's base compensation for the fiscal year of the executive's termination, including 100% of any bonus which the executive could have earned during such fiscal year, assuming the achievement of all relevant executive and Company goals, milestones and performance criteria.

Upon a change in control, the vesting of 50% of any outstanding unvested Company Options, Company Stock Appreciation Rights and Company RSUs that the executives then hold will be accelerated as of such change in control. Upon a change in control that constitutes a "hostile takeover" (as defined in the applicable continuity agreement), the vesting of 100% of any outstanding unvested Company Options, Company Stock Appreciation Rights and Company RSUs that the executives then hold will be accelerated as of such change in control.

Under their continuity agreements, Messrs. Pacek, Prothro and Rew and Woloszko are eligible for Company reimbursement of any golden parachute excise tax paid or payable by them in connection with the merger. See "Proposal 3—Advisory Vote on Named Executive Officer Golden Parachute Compensation—Specified Compensation that may Become Payable to our Named Executive Officers in Connection with the Merger" on page 111 of this proxy statement for additional information on this excise tax. In the event that any payment or other benefit under the continuity agreement would be subject to the excise tax imposed by Section 4999 of the Code, then the executive will be entitled to receive an additional payment from us, equal to 100% of any excise tax actually paid or payable by the executive in connection with the benefits under the continuity agreement, plus an additional payment from us in such amount that, after payment of all taxes (including, without limitation, any interest and penalties on such taxes and the excise tax), the executive retains an amount equal to the reimbursement payment. As described below, we did not include this excise tax reimbursement provision in the new employment agreements for Messrs. Fitzgerald and Newton, and Messrs. Schaffner and Dinger and Ms. Wiley are not eligible for this excise tax reimbursement under their continuity agreements.

    Employment Agreement with David Fitzgerald

We have entered into an amended and restated employment agreement with Mr. Fitzgerald in connection with his employment with the Company. Under this agreement, if Mr. Fitzgerald's employment is involuntarily terminated without cause or he resigns due to a constructive termination of his employment (an "involuntary termination," as defined in Mr. Fitzgerald's employment agreement) within 24 months following a "change in control" (as defined in Mr. Fitzgerald's employment agreement), subject to Mr. Fitzgerald executing and not revoking a release against the Company, Mr. Fitzgerald would be entitled to receive (i) severance payable in installments equal to the sum of (A) his base salary (on a monthly basis) multiplied by 24 months, plus (B) an amount equal to the cash portion of his target annual bonus for the fiscal year in which the termination occurs (with it deemed that all performance goals have been met at 100% of budget or plan) multiplied by two, (ii) reimbursement equal to $1,500 per month for 24 months which is intended to reimburse his premium payments, if any, for group health coverage elected by him pursuant to COBRA, and (iii) the accelerated vesting of all of Mr. Fitzgerald's outstanding equity awards as to 100% of the unvested shares at the time of the involuntary termination.

In the event Mr. Fitzgerald's employment is terminated as a result of an involuntary termination at any time prior to the occurrence of a change in control or after the 24-month period following a change in control, subject to Mr. Fitzgerald executing and not revoking a release against the Company, Mr. Fitzgerald would be entitled to receive (i) severance in a lump-sum payment in an amount equal to (A) his base salary (on a monthly basis) multiplied by 18 months, plus (B) an amount equal to the cash

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portion of his target annual bonus for the fiscal year in which the termination occurs (with it deemed that all performance goals have been met at 100% of budget or plan) multiplied by 1.5, and (ii) reimbursement equal to $1,500 per month for 18 months which is intended to reimburse his premium payments, if any, for group health coverage elected by him pursuant to COBRA. If Mr. Fitzgerald's employment is terminated as a result of his death or disability, he will not be entitled to any other severance or other benefits, except that the vesting of all of Mr. Fitzgerald's outstanding equity awards will be automatically accelerated.

Upon a change in control, the vesting of all of Mr. Fitzgerald's outstanding equity awards will be accelerated as to 100% of the then-unvested shares. The amended and restated employment agreement also provides for automatic acceleration of vesting of Mr. Fitzgerald's equity awards in the event of the formal acceptance by our Board of Directors of Mr. Fitzgerald's resignation under circumstances acceptable to our Board of Directors. In addition, in the event of Mr. Fitzgerald's resignation as described in the previous sentence, each Company Option held by Mr. Fitzgerald which was granted to him while he was serving as our President and Chief Executive Officer will remain exercisable until the first anniversary of his resignation or, if earlier, the date on which the Company Option would have expired without regard to his resignation or service with the Company.

    Employment Agreement with Todd Newton

We have entered into an employment agreement with Mr. Newton in connection with his employment with the Company, which was amended in January 2012. Under Mr. Newton's amended employment agreement, if Mr. Newton's employment is involuntarily terminated without cause or he resigns due to a constructive termination of his employment (an "involuntary termination," as defined in Mr. Newton's employment agreement) within 24 months following a "change in control" (as defined in Mr. Newton's employment agreement), subject to Mr. Newton executing and not revoking a release against the Company, Mr. Newton would be entitled to receive (i) severance equal to the sum of (A) his base salary (on a monthly basis) multiplied by 24 months, plus (B) an amount equal to the cash portion of his target annual bonus for the fiscal year in which the termination occurs (with it deemed that all performance goals have been met at 100% of budget or plan) multiplied by two, (ii) reimbursement equal to $1,500 per month for 24 months which is intended to reimburse his premium payments, if any, for group health coverage elected by him pursuant to COBRA, and (iii) the accelerated vesting of all of Mr. Newton's outstanding equity awards as to 100% of the unvested shares at the time of the involuntary termination.

In the event Mr. Newton's employment is terminated as a result of an involuntary termination at any time prior to the occurrence of a change in control or after the 24-month period following a change in control, subject to Mr. Newton executing and not revoking a release against the Company, Mr. Newton would be entitled to receive (i) severance in a lump-sum payment in an amount equal to (A) his base salary (on a monthly basis) multiplied by 12 months, plus (B) an amount equal to the cash portion of his target annual bonus for the fiscal year in which the termination occurs (with it deemed that all performance goals have been met at 100% of budget or plan), and (ii) reimbursement equal to $1,500 per month for 12 months which is intended to reimburse his premium payments, if any, for group health coverage elected by him pursuant to COBRA. If Mr. Newton's employment is terminated as a result of his death or disability, he will not be entitled to any other severance or other benefits.

Upon a change in control, the vesting of all of Mr. Newton's outstanding equity awards will be accelerated as to 50% of the then-unvested Company Options and Company Stock Appreciation Rights and 100% of the then-unvested Company RSUs. Upon a change in control that constitutes a "hostile takeover" (as defined in Mr. Newton's employment agreement), the vesting of 100% of any outstanding unvested equity awards that Mr. Newton then holds will be accelerated as of such change in control.

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See "Advisory Vote On Named Executive Officer Golden Parachute Compensation" for additional information, including the values of the potential change-in-control and severance benefits payable to each named executive officer in connection with the merger. The foregoing descriptions of the employment agreements with Messrs. Fitzgerald and Newton and the continuity agreements with Messrs. Pacek, Schaffner, Prothro, Rew, Dinger, Woloszko and Ms. Wiley do not purport to be complete and are qualified in their entirety by reference to the agreements.

    Potential Payments Upon a Termination in Connection with a Change in Control

If the merger is completed in accordance with the terms of the merger agreement, the consummation of the merger will constitute a "change in control" under the terms of the employment agreements and continuity agreements with the Company's executive officers. The table below describes the estimated potential payments to each of the Company's executive officers under the terms of the executive's employment agreement or continuity agreement. The amounts shown reflect only the additional payments or benefits that the executive would receive if he or she experiences a qualifying termination immediately after the merger; the amounts reported below do not include the value of payments or benefits that have been earned, or any amounts associated with equity awards that vest pursuant to their terms prior to the merger. For purposes of calculating the potential payments set forth in the table below, we have assumed that (i) the effective time of the merger and the date of termination were February 18, 2014 and (ii) the stock price was $48.25 per share, which is the per share merger consideration. The amounts shown in the table are estimates only, as the actual amounts that may be paid upon an individual's termination of employment (if applicable) can only be determined at the actual time of such termination.

Name
Benefit Termination of Employment
within 24 Months
after the Merger ($)

David Fitzgerald

Salary, Severance Payments(1)

2,088,000

Health Insurance Benefits(2)

36,000

Company Options—Unvested and Accelerated(3)

96,866

Company Stock Appreciation Rights—Unvested and Accelerated(3)

0

Company RSUs—Unvested and Accelerated(4)

2,876,713

Company Performance Shares—Unvested and Accelerated(4)

919,018

Total Payments Upon Termination

6,016,597

Todd Newton

Salary, Severance Payments(1)


1,361,892

Health Insurance Benefits(2)

36,000

Company Options—Unvested and Accelerated(3)

608,862

Company Stock Appreciation Rights—Unvested and Accelerated(3)

0

Company RSUs—Unvested and Accelerated(4)

1,078,146

Company Performance Shares—Unvested and Accelerated(4)

919,018

Total Payments Upon Termination

4,003,918

James L. Pacek

Salary, Severance Payments(1)


981,348

Health Insurance Benefits(5)

15,600

Outplacement Services(6)

15,000

Tax Reimbursement(7)

820,549

Company Options—Unvested and Accelerated(3)

275,974

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Name
Benefit Termination of Employment
within 24 Months
after the Merger ($)

Company Stock Appreciation Rights—Unvested and Accelerated(3)

0

Company RSUs—Unvested and Accelerated(4)

530,557

Company Performance Shares—Unvested and Accelerated(4)

919,018

Total Payments Upon Termination

3,558,046

Scott Schaffner

Salary, Severance Payments(1)


957,181

Health Insurance Benefits(2)

36,000

Outplacement Services(6)

15,000

Company Options—Unvested and Accelerated(3)

294,368

Company Stock Appreciation Rights—Unvested and Accelerated(3)

0

Company RSUs—Unvested and Accelerated(4)

705,560

Company Performance Shares—Unvested and Accelerated(4)

919,018

Total Payments Upon Termination

2,927,127

Jean Woloszko

Salary, Severance Payments(1)


849,940

Health Insurance Benefits(5)

15,600

Outplacement Services(6)

15,000

Tax Reimbursement(7)

775,163

Company Options—Unvested and Accelerated(3)

313,865

Company Stock Appreciation Rights—Unvested and Accelerated(3)

0

Company RSUs—Unvested and Accelerated(4)

844,037

Company Performance Shares—Unvested and Accelerated(4)

919,018

Total Payments Upon Termination

3,732,623

Gayle Wiley

Salary, Severance Payments(1)


739,501

Health Insurance Benefits(5)

15,600

Outplacement Services(6)

15,000

Company Options—Unvested and Accelerated(3)

172,758

Company Stock Appreciation Rights—Unvested and Accelerated(3)

0

Company RSUs—Unvested and Accelerated(4)

196,136

Company Performance Shares—Unvested and Accelerated(4)

0

Total Payments Upon Termination

1,138,995

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Name
Benefit Termination of Employment
within 24 Months
after the Merger ($)

Bruce Prothro

Salary, Severance Payments(1)

845,677

Health Insurance Benefits(5)

15,600

Outplacement Services(6)

15,000

Tax Reimbursement(7)

741,795

Company Options—Unvested and Accelerated(3)

253,237

Company Stock Appreciation Rights—Unvested and Accelerated(3)

0

Company RSUs—Unvested and Accelerated(4)

725,005

Company Performance Shares—Unvested and Accelerated(4)

919,018

Total Payments Upon Termination

3,515,332

Richard Rew

Salary, Severance Payments(1)


889,888

Health Insurance Benefits(5)

15,600

Outplacement Services(5)

15,000

Tax Reimbursement(7)

795,468

Company Options—Unvested and Accelerated(3)

271,572

Company Stock Appreciation Rights—Unvested and Accelerated(3)

0

Company RSUs—Unvested and Accelerated(4)

508,266

Company Performance Shares—Unvested and Accelerated(4)

919,018

Total Payments Upon Termination

3,414,812

Fred Dinger III

Salary, Severance Payments(1)


789,000

Health Insurance Benefits(5)

15,600

Outplacement Services(6)

15,000

Company Options—Unvested and Accelerated(3)

165,728

Company Stock Appreciation Rights—Unvested and Accelerated(3)

0

Company RSUs—Unvested and Accelerated(4)

245,544

Company Performance Shares—Unvested and Accelerated(4)

0

Total Payments Upon Termination

1,230,872

(1)
Amount reported represents cash severance payment equal to (i) the executive's monthly base salary multiplied by 24, plus (ii) an amount equal to the cash portion of the executive's target annual bonus for the fiscal year in which the termination occurs multiplied by two.

(2)
Amount reported represents $1,500 per month for 24 months which is the maximum amount payable by the Company to reimburse his premium payments for group health coverage elected by the executive pursuant to COBRA.

(3)
The value of the unvested and accelerated Company Options and Company Stock Appreciation Rights is the difference between per share merger consideration of $48.25 and the exercise price of the equity award, multiplied by the number of unvested shares as of February 18, 2014 consistent with the methodology applied under SEC Regulation M-A Item 1011(b) and Regulation S-K Item 402(t)(2). The amounts in this column (i) disregard Company Options and Company Stock Appreciation Rights with an exercise price per share equal to or greater than $48.25 and (ii) do not reflect any taxes payable by the equity award holders.

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(4)
The value of the accelerated vesting of Company RSUs and Company Performance Shares is based on the merger consideration of $48.25 per share and does not reflect any taxes payable by the holders. The performance achievement for the performance period associated with awards of Company Performance Shares will be assessed immediately prior to the effective time of the merger (using the last business day of the last completed fiscal quarter prior to the effective time of the merger for any performance period ongoing at the effective time of the merger), and the vesting of such Company Performance Share awards will be accelerated based upon such performance achievement, subject to a minimum achievement equal to one-third of the target number of shares subject to each award of Company Performance Shares.

(5)
Amount reported represents $650 per month for 24 months which is the maximum amount payable by the Company to reimburse his premium payments for group health coverage elected by the executive pursuant to COBRA.

(6)
Amount represents the maximum value of outplacement services to be provided for up to 24 months.

(7)
Amount represents Company reimbursement of golden parachute excise tax paid or payable by the executive. In the event that any payment or other benefit under the continuity agreement would be subject to the excise tax imposed by Section 4999 of the Code, the executive officer will be entitled to receive an additional payment from us, equal to 100% of any excise tax actually paid or payable by the executive in connection with the benefits under the continuity agreement, plus an additional payment from us in such amount that after payment of all taxes (including, without limitation, any interest and penalties on such taxes and the excise tax), the executive officer retains an amount equal to the reimbursement payment. The excise tax amount and payment determinations are based on our best estimate of each executive's liabilities under Section 4999 of the Code, assuming the change in control and qualifying termination occurred on February 18, 2014 and that the applicable tax rates for 2014 are not changed by legislation after February 18, 2014, and based on each executive officer's unvested equity awards as of February 18, 2014.

    New Management Arrangements

After the announcement of the merger, Smith & Nephew has had preliminary discussions with certain executive officers of the Company, including certain of the Company's "named executive officers," regarding potential retention agreements or arrangements, and may enter into definitive agreements or arrangements with them regarding their employment and related compensation and benefits, in each case, on a going-forward basis following the consummation of the merger. No such agreements or arrangements have been reached as of the date of this proxy statement, and there can be no assurances that agreement on the terms of any such agreements or arrangements will be reached with any of these executives in the future.

    Director Compensation

Our Non-employee Director Compensation Plan provides a compensation mix of cash and Company RSUs , the settlement of which will be deferred until retirement, resignation or other departure from membership on the Board by such director, the value of which is made up 40% in cash and 60% in Company RSUs.

Upon election to the Board, a new non-employee director will receive an initial equity grant valued at $175,000 in Company RSUs, with the exact number of Company RSUs granted determined based on the closing price of our common stock on the date of grant. The initial Company RSUs will vest over five years, with 20 percent vesting on each of the first five anniversaries of the grant date, subject to continued service. Upon annual re-election to the Board, each non-employee director will receive a grant of Company RSUs with a value of $110,000, with the exact number of Company RSUs

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granted determined based on the closing price of our common stock on the date of grant The annual Company RSUs will vest over 3 years, with one-third vesting on each anniversary of the grant date, subject to continued service. Vesting of all Company RSUs will be fully accelerated for any director (i) upon the death or disability of such director if the disability reasonably prevents continued service as a director or (ii) upon a change in control (which will include the merger). Actual delivery to each director of vested shares under all such Company RSUs will be deferred until retirement, resignation or other departure from membership on the Board by such director. Cash compensation is paid quarterly. If a director holds two chairmanships or is the Lead Director and chairman of a committee, that director will receive the higher amount of compensation associated with the two positions. Our 2013 director compensation is outlined below. A similar program is in place for 2014 director compensation:

Position
Target Annual
Retainer(1) ($)
Target Annual Equity
Grant DSUs(2) ($)
Total Target Value
Cash and Equity ($)

Director

63,038 110,000 173,038

Lead Independent Director

94,556 110,000 204,556

Audit Chair

84,050 110,000 194,050

Compensation Chair

78,797 110,000 188,797

Nominating and Corporate Governance Committee Chair

73,544 110,000 183,544

(1)
The annual retainer is effective January 1, 2013.

(2)
The amount reflects the target 2013 grant date value of DSUs. The DSUs are scheduled to vest over three years, with one-third vesting to occur on each of the first three anniversaries of the grant date.

    Indemnification of Directors and Officers

Subject to certain limitations, our bylaws provide that our directors and officers will be indemnified and further provide for the advancement to them of expenses incurred in connection with actual or threatened proceedings and claims arising out of their status as such to the fullest extent permitted by Delaware law. We are also expressly authorized to purchase and maintain directors' and officers' insurance providing further protection for our directors and officers. We believe that these indemnification provisions and insurance are useful to attract and retain qualified directors and officers.

The limitation of liability and indemnification provisions in our certificate of incorporation and bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duty. These provisions may also have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. In addition, your investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable.


Delisting and Deregistration of Our Common Stock

If the merger is completed, our common stock will no longer be listed on NASDAQ and will be deregistered under the Exchange Act and we will no longer file periodic reports with the SEC.

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Material U.S. Federal Income Tax Consequences

The following discussion summarizes the material U.S. federal income tax consequences of the merger to holders of Company common stock. This discussion is based upon the provisions of the Internal Revenue Code of 1986, as amended, which we refer to as the Code, the U.S. Treasury Regulations promulgated thereunder and judicial and administrative rulings, all as in effect as of the date of this proxy statement and all of which are subject to change or varying interpretation, possibly with retroactive effect. Any such changes could affect the accuracy of the statements and conclusions set forth herein.

This discussion assumes that holders of our common stock hold their shares as capital assets within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all aspects of U.S. federal income taxation that may be relevant to a holder of our common stock in light of such holder's particular circumstances, nor does it discuss the special considerations applicable to holders of our common stock subject to special treatment under the U.S. federal income tax laws, such as, for example, financial institutions or broker-dealers, mutual funds, partnerships or other pass-through entities and their partners or members, tax-exempt organizations, insurance companies, dealers in securities or foreign currencies, traders in securities who elect mark-to-market method of accounting, controlled foreign corporations, passive foreign investment companies, U.S. expatriates, holders who acquired their common stock through the exercise of options or otherwise as compensation, holders who hold their common stock as part of a hedge, straddle, constructive sale or conversion transaction, and holders whose functional currency is not the U.S. dollar. This discussion does not address the impact of the Medicare contribution tax, any aspect of foreign, state, local, alternative minimum, estate, gift or other tax law that may be applicable to a holder. In addition, this discussion does not address the U.S. federal income tax consequences to dissenting stockholders or holders of our common stock who acquired their shares through stock option or stock purchase plan programs or in other compensatory arrangements.

We intend this discussion to provide only a general summary of the material U.S. federal income tax consequences of the merger to holders of our common stock. We do not intend it to be a complete analysis or description of all potential U.S. federal income tax consequences of the merger. The U.S. federal income tax laws are complex and subject to varying interpretation. Accordingly, the Internal Revenue Service may not agree with the tax consequences described in this proxy statement.

If an entity or arrangement treated as a partnership for U.S. federal income tax purposes holds our common stock, the tax treatment of a partner in such partnership generally will depend on the status of the partner and activities of the partnership. If you are a partner of a partnership holding common stock, you should consult your own tax advisor regarding the U.S. federal income tax consequences of the merger to you.

All holders should consult their own tax advisors to determine the particular tax consequences to them (including the application and effect of any state, local or foreign income and other tax laws) of the receipt of cash in exchange for shares of our common stock pursuant to the merger.

For purposes of this discussion, the term "U.S. holder" means a beneficial owner of our common stock that is, for U.S. federal income tax purposes:

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