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EX-10.40 - EXHIBIT 10.40 - Tornier N.V.a2200036zex-10_40.htm
EX-10.32 - EXHIBIT 10.32 - Tornier N.V.a2200036zex-10_32.htm
EX-10.37 - EXHIBIT 10.37 - Tornier N.V.a2200036zex-10_37.htm
EX-10.34 - EXHIBIT 10.34 - Tornier N.V.a2200036zex-10_34.htm
EX-10.31 - EXHIBIT 10.31 - Tornier N.V.a2200036zex-10_31.htm
EX-10.30 - EXHIBIT 10.30 - Tornier N.V.a2200036zex-10_30.htm
EX-10.33 - EXHIBIT 10.33 - Tornier N.V.a2200036zex-10_33.htm

Table of Contents

As filed with the Securities and Exchange Commission on September 13, 2010

Registration No. 333-167370

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



AMENDMENT NO. 3
TO
FORM S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933



TORNIER B.V.*
(Exact name of Registrant as specified in its charter)

The Netherlands
(State or other jurisdiction of
incorporation or organization)
  3842
(Primary Standard Industrial
Classification Code Number)
  98-0509600
(I.R.S. Employer
Identification Number)

Fred Roeskestraat 123
1076 EE Amsterdam
The Netherlands
(+ 31) 20 675 4002
(Address, including zip code and telephone number, including area code, of Registrant's principal executive offices)

Fred. Roeskestraat 123
1076 EE Amsterdam
The Netherlands
(+ 31) 20 675 4002
(Name, address, including zip code and telephone number, including area code, of agent for service)



Copies to:
Cristopher Greer, Esq.
Willkie Farr & Gallagher LLP
787 Seventh Avenue
New York, New York 10019
(212) 728-8000
  Charles Ruck, Esq.
Shayne Kennedy, Esq.
Latham & Watkins LLP
650 Town Center Drive, 20th Floor
Costa Mesa, CA 92626
(714) 540-1235



Approximate date of commencement of proposed sale to the public:
as soon as practicable after the effective date of this registration statement.

                  If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box.    o

                  If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

                  If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

                  If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

                  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b2 of the Exchange Act.

Large accelerated filer o   Accelerated filer o   Non-accelerated filer ý
(Do not check if a
smaller reporting company)
  Smaller reporting company o



CALCULATION OF REGISTRATION FEE

       
 
Title of securities to be registered
  Proposed maximum
aggregate offering price(1)(2)

  Amount of
registration fee(3)

 

Ordinary shares, par value €0.01 per share

  $205,000,000   $14,617

 

(1)
Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(o) under the Securities Act of 1933.

(2)
Includes ordinary shares that may be purchased by the underwriters pursuant to an overallotment option.

(3)
Previously paid.

                  The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.

*  The registrant will convert from a private company with limited liability (besloten vennootschap met beperkte aansprakelijkheid) to a public company with limited liability (naamloze vennootschap) prior to the effective date of this registration statement. Upon such conversion, the registrant will be known as Tornier N.V.


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED            , 2010

Preliminary Prospectus

                        Shares

GRAPHIC

Tornier N.V.

Ordinary Shares



              Tornier N.V., a public limited liability company incorporated under the laws of The Netherlands, is selling                        ordinary shares. This is an initial public offering of our ordinary shares. The estimated initial public offering price is between $            and $            per ordinary share.

              Prior to this offering, there has been no public market for our ordinary shares. We have applied to have our ordinary shares listed on the NASDAQ Global Market under the symbol "TRNX."

              Investing in our ordinary shares involves a high degree of risk. See "Risk Factors" beginning on page 8.



 
 
Per
Ordinary Share
 
Total
 
Initial public offering price              
Underwriting discount              
Proceeds to Tornier N.V., before expenses              

              We have granted the underwriters an option for a period of 30 days to purchase up to                        additional ordinary shares on the same terms and conditions set forth above to cover overallotments, if any.

              Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

              The underwriters expect to deliver the ordinary shares to investors on                                    , 2010.



BofA Merrill Lynch       J.P.Morgan



Piper Jaffray



Credit Suisse   Wells Fargo Securities   William Blair & Company

                    , 2010


TABLE OF CONTENTS



              You should rely only on the information contained in this prospectus and any free writing prospectus we may specifically authorize to be delivered or made available to you. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, ordinary shares only in jurisdictions where offers and sales are permitted.

              We have not taken any action to permit a public offering of the ordinary shares outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of the ordinary shares and the distribution of the prospectus outside the United States.

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GRAPHIC

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PROSPECTUS SUMMARY

              This summary highlights information contained elsewhere in this prospectus. Because this section is only a summary, it does not contain all of the information that may be important to you or that you should consider before making an investment decision. For a more complete understanding of this offering, we encourage you to read this entire prospectus, including the information contained in the section entitled "Risk Factors." You should read the following summary together with the more detailed information and consolidated financial information and the notes thereto included in this prospectus.

              Unless the context specifically indicates otherwise, references in this prospectus to "we," "us," "our," the "Company" and "Tornier" refer collectively to Tornier N.V., after giving effect to its conversion to a public limited liability company, and its consolidated subsidiaries.

Our Business

              We are a global medical device company focused on surgeons that treat musculoskeletal injuries and disorders of the shoulder, elbow, wrist, hand, ankle and foot. We refer to these surgeons as extremity specialists. We sell to this extremity specialist customer base a broad line of joint replacement, trauma, sports medicine and orthobiologic products to treat extremity joints. Our motto of "specialists serving specialists" encompasses this focus. In certain international markets, we also offer joint replacement products for the hip and knee. We currently sell over 70 product lines in approximately 35 countries.

              We have had a tradition of innovation, intense focus on surgeon education and commitment to advancement of orthopaedic technology since our founding approximately 70 years ago in France by René Tornier. Our history includes the introduction of the porous orthopaedic hip implant, the application of the Morse taper, which is a reliable means of joining modular orthopaedic implants, and, more recently, the introduction of the reversed shoulder implant in the United States. This track record of innovation over the decades stems from our close collaboration with leading orthopaedic surgeons and thought leaders throughout the world.

              We were acquired in 2006 by an investor group led by Warburg Pincus (Bermuda) Private Equity IX, L.P., or WP Bermuda, and medical device investors, including The Vertical Group, L.P., or The Vertical Group, Split Rock Partners, L.P., or Split Rock, and Douglas W. Kohrs, our Chief Executive Officer. We refer to this group of investors as the Investor Group. They recognized the potential to leverage our reputation for innovation and our strong extremity joint portfolio as a platform upon which they could build a global company focused on the rapidly evolving upper and lower extremity specialties. The Investor Group has contributed capital resources and a management team with a track record of success in the orthopaedic industry in an effort to expand our offering in extremities and accelerate our growth. Since the acquisition in 2006, we have:

    created a single, extremity specialist sales channel in the United States primarily focused on our products;

    enhanced and broadened our portfolio of shoulder joint implants and foot and ankle products;

    entered the sports medicine and orthobiologics markets through acquisitions and licensing agreements;

    improved our hip and knee product offerings, helping us gain market share internationally; and

    significantly increased investment in research and development and expanded business development activities to build a pipeline of innovative new technologies.

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              As a result of the foregoing actions, we believe our addressable worldwide market opportunity has increased from approximately $2 billion in 2006 to approximately $7 billion in 2009.

              We believe we are differentiated by our full portfolio of upper and lower extremity products, our dedicated extremity-focused sales organization and our strategic focus on extremities. We further believe that we are well-positioned to benefit from the opportunities in the extremity products marketplace as we are already among the global leaders in the shoulder and ankle joint replacement markets with the #2 market position worldwide for sales of shoulder joint replacement products and the #1 market position in the United States in foot and ankle joint replacement systems in 2009 as measured by revenue. We more recently have expanded our technology base and product offering to include: new joint replacement products based on new materials; improved trauma products based on innovative designs; and proprietary orthobiologic materials for soft tissue repair. In the United States, which is the largest orthopaedic market, we believe that our single, "specialists serving specialists" distribution channel is strategically aligned with what we believe is an ongoing trend in orthopaedics for surgeons to specialize in certain parts of the anatomy or certain types of procedures.

              Our principal products are organized in four major categories: upper extremity joints and trauma, lower extremity joints and trauma, sports medicine and orthobiologics, and large joints and other. Our upper extremity products include joint replacement and bone fixation devices for the shoulder, hand, wrist and elbow. Our lower extremity products include joint replacement and bone fixation devices for the foot and ankle. Our sports medicine and orthobiologics product category includes products used across several anatomic sites to mechanically repair tissue-to-tissue or tissue-to-bone injuries, in the case of sports medicine, or to support or induce remodeling and regeneration of tendons, ligaments, bone and cartilage, in the case of orthobiologics. Our large joints and other products include hip and knee joint replacement implants and ancillary products.

              Innovations in the orthopaedic industry have typically consisted of evolutions of product design in implant fixation, joint mechanics, and instruments and modifications of existing metal or plastic-based device designs rather than new products based on combinations of new designs and new materials. In contrast, the growth of our target markets has been driven by the development of products that respond to the particular mechanics of small joints and the importance of soft tissue to small joint stability and function. We are committed to the development of new designs utilizing both conventional materials and new tissue-friendly biomaterials that we expect will create new markets. We believe that we are a leader in researching and incorporating some of these new technologies across multiple product platforms.

              In the United States, we sell products from our upper extremity joints and trauma, lower extremity joints and trauma, and sports medicine and orthobiologics product categories; we do not actively market large joints in the United States nor do we currently have plans to do so. While we market our products to extremity specialists, our revenue is generated from sales to healthcare institutions and distributors. We sell through a single sales channel consisting of a network of independent commission-based sales agencies. Internationally, where the trend among surgeons toward specialization is not as advanced as in the United States, we sell our full product portfolio, including upper extremity joints and trauma, lower extremity joints and trauma, sports medicine and orthobiologics and large joints. We utilize several distribution approaches depending on the individual market requirements, including direct sales organizations in the largest European markets and independent distributors for most other international markets. In 2009, we generated revenue of $201.5 million, 57% of which was in North America and 43% of which was international.

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Our Business Strategies

              Our goal is to strengthen our leadership position serving extremity specialists. The key elements of our strategy include:

              Leveraging our "specialists serving specialists" strategy:    We believe our focus on and dedication to extremity specialists enables us to better understand and address the clinical needs of these surgeons. We believe that extremity specialists, who have emerged as a significant constituency in orthopaedics only in the last 10 to 15 years, have been underserved in terms of new technology and also inefficiently served by the current marketplace. We offer a comprehensive portfolio of extremity products, and also serve our customers through a sales channel that is dedicated to extremities, which we believe provides us with a significant competitive advantage because our sales agencies and their representatives have both the knowledge and desire to comprehensively meet the needs of extremity specialists and their patients, without competing priorities.

              Advancing scientific and clinical education:    We believe our specialty focus, commitment to product innovation and culture of scientific advancement attract both thought leaders and up-and-coming surgeon specialists who share these values. We actively involve these specialists in the development of world-class training and education programs and encourage ongoing scientific study of our products. Specific initiatives include the Tornier Master's Courses in shoulder and ankle joint replacement, The Fellows and Chief Residents Courses and a number of clinical concepts courses. We also maintain a registry that many of our customers utilize to study and report on the outcomes of procedures in which our extremity products have been used. We believe our commitment to science and education also enables us to reach surgeons early in their careers and provide them access to a level of training in extremities that we believe is not easily accessible through traditional orthopaedic training.

              Introducing new products and technologies to address more of our extremity specialists' clinical needs:    Our goal is to continue to introduce new technologies for extremity joints that improve patient outcomes and thereby continue to expand our market opportunity and share. Our efforts have been focused on joint replacement, as well as sports medicine and orthobiologics, given the importance of these product categories to extremity surgeons. Since our acquisition by the Investor Group, we have significantly increased our investment in research and development to accelerate the pace of new product introduction. During 2009, we invested $18.1 million in research and development and introduced 18 new products, and in 2008, we invested $20.6 million and introduced nine new products, up from only $13.3 million and four new products in 2007. We have also been active in gaining access to new technologies through external partnerships, licensing agreements and acquisitions. We believe that our reputation for effective collaboration with industry thought leaders as well as our track record of effective new product development and introductions will allow us to continue to gain access to new ideas and technologies early in their development.

              Expanding our international business:    We face a wide range of market dynamics that require our distribution channels to address both our local market positions and local market requirements. One is focused on products for upper extremities and the other on hip and knee replacements and products for lower extremities. In other European markets, we utilize a combination of direct and distributor strategies that have evolved to support our expanding extremity business and also to support our knee and hip market positions. In large international markets where the extremity market segment is relatively underdeveloped, such as Japan and China, the same sales channel sells our hip and knee product portfolios and extremity joint products, which provides these sales channels sufficient product breadth and economic scale. We plan on expanding our international business by continuing to adapt our distribution channels to the unique characteristics of individual markets.

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              Achieving and improving our profitability through operating leverage:    With the additional capital resources brought by the Investor Group, we have made significant investments over the last several years in our research and development, sales and marketing, and manufacturing operations to build what we believe is a world-class organization capable of driving sustainable global growth. For example, we grew our research and development organization from approximately 20 employees as of December 31, 2006, to 79 employees as of December 27, 2009. We created a new global sales and marketing leadership team by integrating key personnel from acquired organizations and recruiting additional experienced medical device sales and marketing professionals. We also expanded our manufacturing capacity with two new plants in Ireland and France. With these organizational and infrastructure investments in place, we believe we have the infrastructure to support our growth for the foreseeable future. As a result, we believe we can increase revenue and ultimately achieve and improve profitability.

Risk Factors

              Investing in our company entails a high degree of risk, as more fully described in the "Risk Factors" section of this prospectus. You should carefully consider such risks before deciding to invest in our ordinary shares. Our principal risks include:

    we have a history of operating losses and negative cash flow;

    if we do not successfully develop and market new products and technologies and implement our business strategy, our business and results of operations will be adversely affected;

    we rely on our independent sales agencies and their representatives to market and sell our products;

    we may be unable to compete successfully against our existing or future competitors;

    we derive a significant portion of our sales from operations in international markets that are subject to political, economic and social instability;

    if we fail to maintain regulatory approvals and clearances, or are unable to obtain, or experience significant delays in obtaining, FDA clearances or approvals for our future products or product enhancements, our ability to commercially distribute and market these products could suffer; and

    your rights as a holder of ordinary shares will be governed by Dutch law and will differ from the rights of shareholders under U.S. law.

Corporate Information

              Our principal executive offices are located at Fred Roeskestraat 123, 1076 EE Amsterdam, The Netherlands. Our telephone number at this address is (+ 31) 20 577 1177. Our agent for service of process in the United States is CT Corporation, 1209 Orange St., Wilmington, DE 19801. Our website is located at www.tornier.com. The information contained on our website is not a part of this prospectus.

              This prospectus contains references to our trademarks Aequalis®, AffinitiTM, AscendTM, Biofiber®, CoverLocTM, FuturaTM, Insite®, IntrafocalTM, HLS Kneetec®, Latitude®, LineaTM, Meije Duo®, NexFixTM, Noetos®, OceaneTM, Osteocure®, Piton®, Pleos®, RFSTM, Salto®, Salto Talaris®, StayfuseTM and TornierTM among others. All other trademarks or trade names referred to in this prospectus are the property of their respective owners.

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THE OFFERING

Ordinary shares offered               ordinary shares
Ordinary shares outstanding immediately after this offering               ordinary shares (or            ordinary shares if the underwriters exercise their overallotment option in full)
Use of proceeds   We estimate that our net proceeds from this offering will be approximately $            million. We plan to use the net proceeds we receive from this offering to repay all of the existing indebtedness under our notes payable of approximately €82.3 million, or $103.3 million at the exchange rate as of July 4, 2010, and for general corporate purposes. See "Use of Proceeds" for additional information.
Overallotment option   We have granted the underwriters a 30-day option to purchase up to                    additional ordinary shares.
Proposed NASDAQ Symbol   TRNX
Directed share program   At our request, the underwriters have reserved for sale, at the initial public offering price, up to            ordinary shares offered by this prospectus to our directors, officers, employees, business associates and related persons.
Risk factors   Investing in our ordinary shares involves a high degree of risk. See "Risk Factors" for a discussion of factors you should carefully consider before investing in our ordinary shares.

              The number of ordinary shares to be outstanding after this offering is based on 88,703,258 ordinary shares outstanding as of July 4, 2010, and excludes:

    10,551,479 ordinary shares issuable upon exercise of outstanding options to purchase ordinary shares as of July 4, 2010, at a weighted average exercise price of $5.53 per ordinary share; and

    4,291,592 ordinary shares reserved for future issuance under our stock option plan as of July 4, 2010.

              Unless we specifically state otherwise, the information in this prospectus assumes:

    an initial public offering price of $            per ordinary share, the mid-point of the range set forth on the cover page of this prospectus;

    a            to            reverse stock split of our ordinary shares, which we intend to effect prior to the closing of this offering;

    our conversion from a private company with limited liability to a public company with limited liability, and the filing of the accompanying amended articles of association to reflect such conversion, prior to the closing of this offering; and

    the underwriters do not exercise their overallotment option.

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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

              The following table presents our summary historical consolidated financial data, as of the dates and for the periods indicated. The summary historical consolidated statement of operations data and other financial data for the years ended December 31, 2007, December 28, 2008 and December 27, 2009, and the summary historical consolidated balance sheet data as of December 28, 2008 and December 27, 2009, have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary historical consolidated balance sheet data as of December 31, 2007 has been derived from our audited consolidated financial statements not included in this prospectus. The consolidated financial statements referred to in the previous two sentences were audited by Ernst & Young LLP, an independent registered public accounting firm, and were prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP.

              The summary historical consolidated statement of operations data and other financial data for the twenty-six weeks ended June 28, 2009, and the twenty-seven weeks ended July 4, 2010, and the summary historical consolidated balance sheet data as of July 4, 2010, have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The June 28, 2009 and July 4, 2010 unaudited consolidated financial statements have been prepared on a basis consistent with our audited consolidated financial statements and reflect all adjustments, consisting of normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of any interim period are not necessarily indicative of the results that may be expected for any other interim period or for the full fiscal year, and the historical results set forth below do not necessarily indicate results expected for any future period.

              Our fiscal quarters are generally determined on a 13-week basis and always end on a Sunday. As a result, our fiscal year is generally 364 days. Our year-end periods end on the Sunday nearest to December 31. Every few years, it is necessary to add an extra week to a quarter to make it a 14-week period in order to have our year end fall on the Sunday nearest to December 31. The first two quarters ended July 4, 2010 include an extra week of operations compared to the first two quarters ended June 28, 2009.

              You should read the summary financial and other data set forth below along with the sections in this prospectus entitled "Use of Proceeds," "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes included elsewhere in this prospectus.

 
  Year ended   Two quarters ended  
 
  December 31,
2007
  December 28,
2008
  December 27,
2009
  June 28,
2009
  July 4,
2010
 
 
  ($ in thousands)
  ($ in thousands)
 
 
   
   
   
  (unaudited)
  (unaudited)
 

Statement of Operations Data:

                               

Revenue

  $ 145,369   $ 177,370   $ 201,462   $ 100,059   $ 116,406  
 

Cost of goods sold

    46,573     45,500     54,859     27,577     32,001  
                       

Gross profit

    98,796     131,870     146,603     72,482     84,405  
 

Sales and marketing

    82,014     106,870     115,630     54,297     64,191  
 

General and administrative

    17,976     21,742     20,790     10,523     11,194  
 

Research and development

    13,305     20,635     18,120     9,937     8,816  
 

Amortization of intangible assets

    7,946     11,186     15,173     5,387     5,878  
 

Special charges

            1,864     610     252  
 

In-process research and development

    15,107                  
                       

Operating loss

    (37,552 )   (28,563 )   (24,974 )   (8,272 )   (5,926 )
 

Interest expense

    (2,394 )   (11,171 )   (19,667 )   (8,511 )   (10,765 )
 

Foreign currency transaction gain (loss)

    (5,859 )   1,701     3,003     2,249     (5,739 )
 

Other non-operating (expense) income

    (1,966 )   (1,371 )   (28,461 )   (919 )   61  
                       

Loss before income taxes

    (47,771 )   (39,404 )   (70,099 )   (15,453 )   (22,369 )
 

Income tax benefit

    6,580     5,227     14,413     1,712     3,715  
                       

Consolidated net loss

    (41,191 )   (34,177 )   (55,686 )   (13,741 )   (18,654 )
                       

Net loss attributable to noncontrolling interest

        (1,173 )   (1,067 )   (785 )   (696 )
                       

Net loss attributable to Tornier

    (41,191 )   (33,004 )   (54,619 )   (12,956 )   (17,958 )

Accretion of noncontrolling interest

        (3,761 )   (1,127 )   (785 )   (679 )
                       

Net loss attributable to ordinary shareholders

  $ (41,191 ) $ (36,765 ) $ (55,746 ) $ (13,741 ) $ (18,637 )
                       

                               

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  Year ended   Two quarters ended  
 
  December 31,
2007
  December 28,
2008
  December 27,
2009
  June 28,
2009
  July 4,
2010
 
 
  ($ in thousands)
  ($ in thousands)
 
 
   
   
   
  (unaudited)
  (unaudited)
 
Balance Sheet Data:                                

Cash and cash equivalents

  $ 17,347   $ 21,348   $ 37,969   $ 54,827   $ 33,209  

Other current assets

    107,968     122,167     133,179     126,115     134,268  

Total assets

    431,614     475,967     520,187     520,906     478,137  

Total liabilities

    181,738     212,442     277,140     293,221     199,905  

Noncontrolling interest

        23,200     23,259     23,200      

Total shareholders' equity

    249,876     240,325     219,788     204,484     278,232  

Other Financial Data:

                               

Net cash provided by (used in) operating activities

  $ (8,165 ) $ (19,482 ) $ 2,291   $ 2,221   $ 1,984  

Net cash provided by (used in) investing activities

    (106,188 )   (43,314 )   (31,104 )   (14,227 )   (15,157 )

Net cash provided by (used in) financing activities

    121,886     66,487     44,857     45,904     9,607  

EBITDA(1)

    (29,795 )   (5,902 )   (20,700 )   4,555     1,407  

Adjusted EBITDA(1)

    12,667     (2,277 )   10,608     5,717     10,766  

(1)
EBITDA, for the periods presented, represents net loss before interest expense, income tax benefit, depreciation and amortization. Adjusted EBITDA gives further effect to, among other things, non-operating (expense) income related to the mark to market of the warrant liability, foreign currency gains and losses, special charges, share-based compensation, operating expenses from a consolidated variable interest entity in-process research and development charges, and the impact of selling acquired inventory. We believe that EBITDA and Adjusted EBITDA provide additional information for measuring our performance and are measures frequently used by securities analysts and investors and therefore management uses these metrics to evaluate our business. EBITDA and Adjusted EBITDA do not represent, and should not be used as a substitute for, net income or cash flows from operations as determined in accordance with generally accepted accounting principles, and neither EBITDA nor Adjusted EBITDA is necessarily an indication of whether cash flow will be sufficient to fund our cash requirements. Our definitions of EBITDA and Adjusted EBITDA may differ from that of other companies.

              The following table reconciles net loss to EBITDA and Adjusted EBITDA on a historical basis:

 
  Year ended   Two quarters ended  
 
  December 31,
2007
  December 28,
2008
  December 27,
2009
  June 28,
2009
  July 4,
2010
 
 
  ($ in thousands)
  ($ in thousands)
 
 
   
   
   
  (unaudited)
  (unaudited)
 

Net loss

  $ (41,191 ) $ (34,177 ) $ (55,686 ) $ (13,741 ) $ (18,654 )

Interest expense

    2,394     11,171     19,667     8,511     10,765  

Income tax benefit

    (6,580 )   (5,227 )   (14,413 )   (1,712 )   (3,715 )

Depreciation and amortization

    15,582     22,331     29,732     11,497     13,011  
                       

EBITDA

  $ (29,795 ) $ (5,902 ) $ (20,700 ) $ 4,555   $ 1,407  

Non-operating (expense) income (mark to market of warrant liability)

    1,966     1,371     28,461     919     (61 )

Foreign currency transaction (gain)/loss

    5,859     (1,701 )   (3,003 )   (2,249 )   5,739  

Share-based compensation

    2,836     3,672     3,913     1,846     2,835  

Special charges

            1,864     610     252  

Operating expenses from consolidated VIE

        283     73     36     594  

In-process research and development

    15,107                  

Sale of acquired inventory

    16,694                  
                       

Adjusted EBITDA

  $ 12,667   $ (2,277 ) $ 10,608   $ 5,717   $ 10,766  
                       

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RISK FACTORS

              An investment in our ordinary shares involves significant risks. You should carefully consider all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in our ordinary shares. Any of the following risks could have a material adverse effect on our business, financial condition and results of operations. In any such case, the market price of our ordinary shares could decline, and you may lose all or part of your investment.

Risks Related to Our Business and Our Industry

We have a history of operating losses and negative cash flow.

              We have experienced operating losses since our acquisition by the Investor Group in July 2006 and at July 4, 2010, we had an accumulated deficit of $162.7 million. Our ability to achieve cash flow positive operations will be influenced by many factors, including the extent and duration of our future operating losses, the level and timing of future sales and expenditures, market acceptance of new products, the results and scope of ongoing research and development projects, competing technologies and market and regulatory developments. Additionally, following this offering, we expect general and administrative expenses to increase due to the additional operational and reporting costs associated with being a public company. As a result, we may continue to incur operating losses for the foreseeable future. These losses will continue to have an adverse impact on shareholders' equity and we may never achieve or sustain profitability.

If we do not successfully develop and market new products and technologies and implement our business strategy, our business and results of operations will be adversely affected.

              We may not be able to successfully implement our business strategy. To implement our business strategy we need to, among other things, develop and introduce new extremity joint products, find new applications for and improve our existing products, properly identify and anticipate our surgeons' and their patients' needs, obtain regulatory clearance or approval for new products and applications and educate surgeons about the clinical and cost benefits of our products.

              We are continually engaged in product development and improvement programs, and we expect new products to account for a significant portion of our future growth. If we do not continue to introduce new products and technologies, or if those products and technologies are not accepted, we may not be successful. Moreover, research and development efforts may require a substantial investment of time and resources before we are adequately able to determine the commercial viability of a new product, technology, material or innovation. Demand for our products could also change in ways we may not anticipate due to evolving customer needs, changing demographics, slow industry growth rates, evolving surgical philosophies and evolving industry standards, among others. Additionally, our competitors' new products and technologies may precede our products to market, may be more effective or less expensive than our products or may render our products obsolete.

              Our targeted surgeons are in areas such as shoulder, upper extremities, lower extremities, sports medicine and reconstructive and general orthopaedics, and our strategy of focusing exclusively on these surgeons may not be successful. In addition, we are seeking to increase our international sales and will need to increase our worldwide direct sales force and enter into distribution agreements with third parties in order to do so. All of this may result in additional or different foreign regulatory requirements, with which we may not be able to comply. Moreover, even if we successfully implement our business strategy, our operating results may not improve. We may decide to alter or discontinue aspects of our business strategy and may adopt different strategies due to business or competitive factors.

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We rely on our independent sales agencies and their representatives to market and sell our products.

              In the United States, we sell our products through a single sales channel primarily focused on our products and consisting of approximately 23 independent commission-based sales agencies, which in the aggregate utilized over 300 sales representatives as of July 4, 2010. Our sales agencies do not sell our products exclusively and may offer similar products from other orthopaedic companies. In fiscal 2009, no individual sales agency accounted for more than 3% of our global revenue. Our success depends largely upon our ability to motivate these sales agencies to sell our products. Additionally, we depend on their sales and service expertise and relationships with the surgeons in the marketplace. Our independent sales agencies may terminate their contracts with us at the end of each yearly term, may devote insufficient sales efforts to our products or may focus their sales efforts on other products that produce greater commissions for them. If our relationship with any of our sales agencies terminated, we could enter into agreements with existing sales agencies to take on the related sales, contract with new sales agencies or a combination of these options. A failure to maintain our existing relationships with our independent sales agencies and their representatives could have an adverse effect on our operations. We do not control our independent sales agencies and they may not be successful in implementing our marketing plans.

We may be unable to compete successfully against our existing or potential competitors, in which case our sales and operating results may be negatively affected and we may not grow.

              The market for orthopaedic devices is highly competitive and subject to rapid and profound technological change. Our success depends, in part, on our ability to maintain a competitive position in the development of technologies and products for use by our customers. We face competition from large diversified orthopaedic manufacturers, such as DePuy Orthopaedics, Inc., or DePuy, a Johnson & Johnson subsidiary, Zimmer Corporation, or Zimmer, and Stryker Corporation, or Stryker, and established mid-sized orthopaedic manufacturers, such as Arthrex, Inc., or Arthrex, Wright Medical Group, Inc., or Wright Medical, and ArthroCare Corporation, or ArthroCare. Many of the companies developing or marketing competitive orthopaedic products are publicly traded or are divisions of publicly traded companies and may enjoy several competitive advantages, including:

    greater financial and human resources for product development and sales and marketing;

    greater name recognition;

    established relationships with surgeons, hospitals and third-party payors;

    broader product lines and the ability to offer rebates or bundle products to offer greater discounts or incentives to gain a competitive advantage;

    established sales and marketing and distribution networks; and

    more experience in conducting research and development, manufacturing, preparing regulatory submissions and obtaining regulatory clearance or approval for products.

              We also compete against smaller, entrepreneurial companies with niche product lines. Our competitors may develop and patent processes or products earlier than we can, obtain regulatory clearance or approvals for competing products more rapidly than we can and develop more effective or less expensive products or technologies that render our technology or products obsolete or non-competitive. We also compete with other organizations in recruiting and retaining qualified scientific and management personnel, as well as in acquiring technologies and technology licenses complementary to our products or advantageous to our business. If our competitors are more successful than us in these matters, we may be unable to compete successfully against our existing or future competitors.

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We derive a significant portion of our sales from operations in international markets that are subject to political, economic and social instability.

              We derive a significant portion of our sales from operations in international markets. Our international distribution system consists of nine direct sales offices and approximately 32 distribution partners, who sell in approximately 35 countries. Most of these countries are, to some degree, subject to political, economic and social instability. For the years ended December 27, 2009, and December 28, 2008, 43% and 48% of our revenue, respectively, was derived from our international operations. Our international sales operations expose us and our representatives, agents and distributors to risks inherent in operating in foreign jurisdictions. These risks include:

    the imposition of additional U.S. and foreign governmental controls or regulations on orthopaedic implants and orthobiologics products;

    the imposition of costly and lengthy new export license requirements;

    the imposition of U.S. or international sanctions against a country, company, person or entity with whom we do business that would restrict or prohibit continued business with that country, company, person or entity;

    economic instability, including currency risk between the U.S. dollar and foreign currencies, in our target markets;

    the imposition of restrictions on the activities of foreign agents, representatives and distributors;

    scrutiny of foreign tax authorities, which could result in significant fines, penalties and additional taxes being imposed upon us;

    a shortage of high-quality international salespeople and distributors;

    loss of any key personnel who possess proprietary knowledge or are otherwise important to our success in international markets;

    changes in third-party reimbursement policies that may require some of the patients who receive our products to directly absorb medical costs or that may require us to sell our products at lower prices;

    changes in tariffs and other trade restrictions;

    work stoppages or strikes in the healthcare industry;

    difficulties in enforcing and defending intellectual property rights; and

    exposure to different legal and political standards.

              Not only are we subject to the laws of other jurisdictions, we are also subject to U.S. laws governing our activities in foreign countries, including various import-export laws, customs and import laws, anti-boycott laws and embargoes. For example, the FDA Export Reform and Enhancement Act of 1996 requires that, when exporting medical devices from the United States for sale in a foreign country, depending on the type of product being exported, the regulatory status of the product and the country to which the device is exported, we must ensure, among other things, that the device is produced in accordance with the specifications of the foreign purchaser; not in conflict with the laws of the country to which it is intended for export; labeled for export; and not offered for sale domestically. In addition, we must maintain records relevant to product export and, if requested by the foreign government, obtain a certificate of exportability. In some instances, prior notification to or approval from the FDA is required prior to export. The FDA can delay or deny export authorization if all applicable requirements are not satisfied. Imports of approved medical devices into the United States are also subject to requirements including registration of establishment, listing of devices, manufacturing in accordance with the quality system regulation, medical device reporting of adverse events, and

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Premarket Notification 510(k) clearance or premarket approval, or PMA, among others and if applicable. If our business activities were determined to violate these laws, regulations or rules, we could suffer serious consequences.

              In addition, a portion of our international sales is made through distributors. As a result, we are dependent upon the financial health of our distributors. If a distributor were to go out of business it would take substantial time, cost and resources to find a suitable replacement and the products held by such distributor may not be returned to us or to a subsequent distributor in a timely manner or at all.

              Any material decrease in our foreign sales may negatively affect our profitability. We generate our international sales primarily in Europe, where healthcare regulation and reimbursement for orthopaedic medical devices vary significantly from country to country. This changing environment could adversely affect our ability to sell our products in some European countries.

Our business plan relies on assumptions about the market for our products, which, if incorrect, may adversely affect our sales.

              We believe that the aging of the general population and increasingly active lifestyles will continue and that these trends will increase the need for our products. The projected demand for our products could materially differ from actual demand if our assumptions regarding these trends and acceptance of our products by the medical community prove to be incorrect or do not materialize, or if non-surgical treatments gain more widespread acceptance as a viable alternative to our orthopaedic implants.

We obtain some of our products through private-label distribution agreements that subject us to minimum performance and other criteria. Our failure to satisfy those criteria could cause us to lose those rights of distribution.

              We have entered into private-label distribution agreements with manufacturers of some of our products. These manufacturers brand their products according to our specifications, and we may have exclusive rights in certain fields of use and territories to sell these products subject to minimum purchase, sales or other performance criteria. Though these agreements do not individually or in the aggregate represent a material portion of our business, if we do not meet these performance criteria, or fail to renew these agreements, we may lose exclusivity in a field of use or territory or cease to have any rights to these products, which could have an adverse effect on our sales. Furthermore, some of these manufacturers may be smaller, undercapitalized companies that may not have sufficient resources to continue operations or to continue to supply us sufficient product without additional access to capital.

If our private label manufacturers fail to provide us with sufficient supply of their products, or if their supply fails to meet appropriate quality requirements, our business could suffer.

              Our private-label manufacturers are sole source suppliers of the products we purchase from them. Given the specialized nature of the products they provide, we may not be able to locate or establish additional or replacement manufacturers of these products. Moreover, these private-label manufacturers typically own the intellectual property associated with their products, and even if we could find a replacement manufacturer for the product, we may not have sufficient rights to enable the replacement party to manufacture the product. While we have entered into agreements with our private-label manufacturers to provide us sufficient quantities of products, we cannot assure you that they will do so, or that any products they do provide us will not contain defects in quality. Our private-label manufacturing agreements have terms expiring between 2011 and 2015 and are renewable under certain conditions or by mutual agreement. The agreements also include some or all of the following provisions allowing for termination under certain circumstances: (i) either party's uncured material

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breach of the terms and conditions of the agreement, (ii) either party filing for bankruptcy, being bankrupt or becoming insolvent, suspending payments, dissolving or ceasing commercial activity, (iii) our inability to meet market development milestones and ongoing sales targets, (iv) termination without cause, provided that payments are made to the distributor, (v) a merger or acquisition of one of the parties by a third party, (vi) the enactment of a government law or regulation that restricts either party's right to terminate or renew the contract or invalidates any provision of the agreement or (vii) the occurrence of a "force majeure," including natural disaster, explosion or war.

              We also rely on these private-label manufacturers to comply with the regulations of the U.S. Food and Drug Administration, or FDA, the competent authorities of the Member States of the European Economic Area, or EEA, or foreign regulatory authorities and their failure to comply with strictly enforced regulatory requirements could expose us to regulatory action including warning letters, product recalls, termination of distribution, product seizures or civil penalties. Any quality control problems that we experience with respect to products manufactured by our private-label manufacturers, any inability by us to provide our customers with sufficient supply of products or any investigations or enforcement actions by the FDA, the competent authorities of the Member States of the EEA or other foreign regulatory authorities could adversely affect our reputation or commercialization of our products and adversely and materially affect our business and operating results.

Failure to comply with the U.S. Foreign Corrupt Practices Act could subject us to, among other things, penalties and legal expenses that could harm our reputation and have a material adverse effect on our business, financial condition and results of operations.

              Our U.S. operations, including those of our subsidiary, Tornier, Inc., are currently subject to the U.S. Foreign Corrupt Practices Act, or the FCPA. Upon the closing of this offering, we will be required to comply with the FCPA, which generally prohibits covered entities and their intermediaries from engaging in bribery or making other prohibited payments to foreign officials for the purpose of obtaining or retaining business or other benefits. In addition, the FCPA imposes accounting standards and requirements on publicly traded U.S. corporations and their foreign affiliates, which are intended to prevent the diversion of corporate funds to the payment of bribes and other improper payments, and to prevent the establishment of "off books" slush funds from which such improper payments can be made. We are also currently subject to similar anticorruption legislation implemented in Europe under the Organization for Economic Co-operation and Development's Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. We operate in a number of jurisdictions that pose a high risk of potential violations of the FCPA and other anticorruption laws, such as Algeria, China and Oman, based on measurements such as Transparency International's Corruption Perception Index and we utilize a number of third-party sales representatives for whose actions we could be held liable under the FCPA. We inform our personnel and third-party sales representatives of the requirements of the FCPA and other anticorruption laws, including, but not limited to their reporting requirements. We have also developed and will continue to develop and implement systems for formalizing contracting processes, performing due diligence on agents and improving our recordkeeping and auditing practices regarding these regulations. However, there is no guarantee that our employees, third-party sales representatives or other agents have not or will not engage in conduct undetected by our processes and for which we might be held responsible under the FCPA or other anticorruption laws.

              If our employees, third-party sales representatives or other agents are found to have engaged in such practices, we could suffer severe penalties, including criminal and civil penalties, disgorgement and other remedial measures, including further changes or enhancements to our procedures, policies and controls, as well as potential personnel changes and disciplinary actions. The Securities and Exchange Commission, or SEC, is currently in the midst of conducting an informal investigation of numerous medical device companies over potential violations of the FCPA. Although we do not believe we are currently a target, any investigation of any potential violations of the FCPA or other

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anticorruption laws by U.S. or foreign authorities also could have an adverse impact on our business, financial condition and results of operations.

              Certain foreign companies, including some of our competitors, are not subject to prohibitions as strict as those under the FCPA or, even if subjected to strict prohibitions, such prohibitions may be laxly enforced in practice. If our competitors engage in corruption, extortion, bribery, pay-offs, theft or other fraudulent practices, they may receive preferential treatment from personnel of some companies, giving our competitors an advantage in securing business, or from government officials, who might give them priority in obtaining new licenses, which would put us at a disadvantage.

Fluctuations in foreign currency rates could result in declines in our reported sales and earnings.

              A substantial portion of our foreign revenue is generated in Europe and other foreign countries in Latin America and Asia where the amounts are denominated in currencies other than the U.S. dollar. For purposes of preparing our financial statements, these amounts are converted into U.S. dollars, the value of which varies with currency exchange rate fluctuations. For sales not denominated in U.S. dollars, if there is an increase in the value of the U.S. dollar relative to the specified foreign currency, we will receive less in U.S. dollars than before the increase in the exchange rate, which could negatively impact our results of operations. Although we address currency risk management through regular operating and financing activities, those actions may not prove to be fully effective.

If we lose one of our key suppliers, we may be unable to meet customer orders for our products in a timely manner or within our budget.

              We use a number of suppliers for raw materials and select components that we need to manufacture our products. These suppliers must provide the materials and components to our standards for us to meet our quality and regulatory requirements. We obtain some key raw materials and select components from a single source or a limited number of sources. For example, we rely on one supplier for raw materials and select components in several of our products, including Poco Graphite, Inc., which supplies graphite for our pyrocarbon products, CeramTec AG, or CeramTec, which supplies ceramic for ceramic heads for hips, and Heymark Metals Ltd., which supplies CoCr used in certain of our hip, shoulder and elbow products. Establishing additional or replacement suppliers for these components, and obtaining regulatory clearance or approvals that may result from adding or replacing suppliers, could take a substantial amount of time, result in increased costs and impair our ability to produce our products, which would adversely impact our business and operating results. We do not have contracts with our sole source suppliers (other than a Quality Assurance Agreement and Secrecy Agreement with CeramTec, which only relate to quality and confidentiality obligations of the parties and do not govern the purchase and receipt of CeramTec products) and instead rely on purchase orders. As a result, those suppliers may elect not to supply us with product or to supply us with less product than we need and we will have limited rights to cause them to do otherwise. In addition, some of our products, which we acquire from third parties, are highly technical and are required to meet exacting specifications, and any quality control problems that we experience with respect to the products supplied by third parties could adversely and materially affect our reputation or commercialization of our products and adversely and materially affect our business, operating results and prospects. Furthermore, some of these suppliers may be smaller, undercapitalized companies that may not have sufficient resources to continue operations or to continue to supply us sufficient product without additional access to capital. We may also have difficulty obtaining similar components from other suppliers that are acceptable to the FDA, the competent authorities or notified bodies of the Member States of the EEA, or foreign regulatory authorities and the failure of our suppliers to comply with strictly enforced regulatory requirements could expose us to regulatory action including warning letters, product recalls, termination of distribution, product seizures or civil penalties. Furthermore, since many of these suppliers are located outside of the United States, we are subject to foreign export laws and U.S. import and customs regulations, which complicate and could delay shipments of

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components to us. For example, all foreign importers of medical devices are required to meet applicable FDA requirements, including registration of establishment, listing of devices, manufacturing in accordance with the quality system regulation, medical device reporting of adverse events, and Premarket Notification 510(k) clearance or PMA, if applicable. In addition, all imported medical devices must also meet Bureau of Customs and Border Protection requirements. While it is our policy to maintain sufficient inventory of materials and components so that our production will not be significantly disrupted even if a particular component or material is not available for a period of time, we remain at risk that we will not be able to qualify new components or materials quickly enough to prevent a disruption if one or more of our suppliers ceases production of important components or materials.

Sales volumes may fluctuate depending on the season and our operating results may fluctuate over the course of the year.

              Our business is seasonal in nature. Historically, demand for our products has been the lowest in our third quarter as a result of the European holiday schedule during the summer months. We have experienced and expect to continue to experience meaningful variability in our revenue and gross profit among quarters, as well as within each quarter, as a result of a number of factors, including, among other things:

    the number and mix of products sold in the quarter;

    the demand for, and pricing of, our products and the products of our competitors;

    the timing of or failure to obtain regulatory clearances or approvals for products;

    costs, benefits and timing of new product introductions;

    increased competition;

    the timing and extent of promotional pricing or volume discounts;

    the availability and cost of components and materials;

    the number of selling days;

    fluctuations in foreign currency exchange rates; and

    impairment and other special charges.

If product liability lawsuits are brought against us, our business may be harmed.

              The manufacture and sale of orthopaedic medical devices exposes us to significant risk of product liability claims. In the past, we have had a small number of product liability claims relating to our products, none of which either individually, or in the aggregate, have resulted in a material negative impact on our business. In the future, we may be subject to additional product liability claims, some of which may have a negative impact on our business. Such claims could divert our management from pursuing our business strategy and may be costly to defend. Regardless of the merit or eventual outcome, product liability claims may result in:

    decreased demand for our products;

    injury to our reputation;

    significant litigation costs;

    substantial monetary awards to or costly settlements with patients;

    product recalls;

    loss of revenue; and

    the inability to commercialize new products or product candidates.

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              Our existing product liability insurance coverage may be inadequate to protect us from any liabilities we might incur. If a product liability claim or series of claims is brought against us for uninsured liabilities or in excess of our insurance coverage, our business could suffer. In addition, a recall of some of our products, whether or not the result of a product liability claim, could result in significant costs and loss of customers.

              In addition, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts or scope to protect us against losses. Any claims against us, regardless of their merit, could severely harm our financial condition, strain our management and other resources and adversely affect or eliminate the prospects for commercialization or sales of a product or product candidate which is the subject of any such claim.

If our patents and other intellectual property rights do not adequately protect our products, we may lose market share to our competitors.

              We rely on patents, trade secrets, copyrights, know-how, trademarks, license agreements and contractual provisions to establish our intellectual property rights and protect our products. These legal means, however, afford only limited protection and may not adequately protect our rights. The patents we own may not be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage, and competitors may be able to design around our patents or develop products that provide outcomes that are similar to ours. In addition, we cannot be certain that any of our pending patent applications will be issued. The United States Patent and Trademark Office, or USPTO, may deny or require a significant narrowing of the claims in our pending patent applications and the patents issuing from such applications. Any patents issuing from the pending patent applications may not provide us with significant commercial protection. We could incur substantial costs in proceedings before the USPTO and the proceedings can be time-consuming, which may cause significant diversion of effort by our technical and management personnel. These proceedings could result in adverse decisions as to the priority of our inventions and the narrowing or invalidation of claims in issued patents. In addition, the laws of some of the countries in which our products are or may be sold may not protect our intellectual property to the same extent as U.S. laws or at all. We also may be unable to protect our rights in trade secrets and unpatented proprietary technology in these countries.

              In the event a competitor infringes upon our patent or other intellectual property rights, enforcing those rights may be costly, difficult and time-consuming. Even if successful, litigation to enforce our intellectual property rights or to defend our patents against challenge could be expensive and time-consuming and could divert our management's attention. We may not have sufficient resources to enforce our intellectual property rights or to defend our patents or other intellectual property rights against a challenge. If we are unsuccessful in enforcing and protecting our intellectual property rights and protecting our products, it could harm our business and results of operations.

              We rely on our trademarks, trade names and brand names to distinguish our products from the products of our competitors, and have registered or applied to register many of these trademarks. However, our trademark applications may not be approved. Third parties may also oppose our trademark applications or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition and could require us to devote resources to advertising and marketing these new brands. Further, our competitors may infringe our trademarks, or we may not have adequate resources to enforce our trademarks.

              In addition, we hold licenses from third parties that are necessary to the design and manufacturing of some of our products. The loss of such licenses would prevent us from manufacturing, marketing and selling these products, which could harm our business.

              In addition to patents, we seek to protect our trade secrets, know-how and other unpatented technology, in part, with confidentiality agreements with our vendors, employees, consultants and others

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who may have access to proprietary information. We cannot be certain, however, that these agreements will not be breached, adequate remedies for any breach would be available or our trade secrets, know-how and other unpatented proprietary technology will not otherwise become known to or be independently developed by our competitors.

If we are subject to any future intellectual property lawsuits, a court could require us to pay significant damages or prevent us from selling our products.

              The orthopaedic medical device industry is litigious with respect to patents and other intellectual property rights. Companies in the orthopaedic medical device industry have used intellectual property litigation to gain a competitive advantage. In the future, we may become a party to lawsuits involving patents or other intellectual property. A legal proceeding, regardless of outcome, could drain our financial resources and divert the time and effort of our management. A patent infringement suit or other infringement or misappropriation claim brought against us or any of our licensees may force us or any of our licensees to stop or delay developing, manufacturing or selling potential products that are claimed to infringe a third party's intellectual property, unless that party grants us or any licensees rights to use its intellectual property. In such cases, we may be required to obtain licenses to patents or proprietary rights of others in order to continue to commercialize our products. However, we may not be able to obtain any licenses required under any patents or proprietary rights of third parties on acceptable terms, or at all. Even if we or our licensees were able to obtain rights to the third party's intellectual property, these rights may be nonexclusive, thereby giving our competitors access to the same intellectual property. Ultimately, we may be unable to commercialize some of our potential products or may have to cease some of our business operations as a result of patent infringement claims, which could severely harm our business.

              In any infringement lawsuit, a third party could seek to enjoin, or prevent, us from commercializing our existing or future products, or may seek damages from us, and any such lawsuit would likely be expensive for us to defend against. If we lose one of these proceedings, a court or a similar foreign governing body could require us to pay significant damages to third parties, seek licenses from third parties, pay ongoing royalties, redesign our products so that they do not infringe or prevent us from manufacturing, using or selling our products. In addition to being costly, protracted litigation to defend or prosecute our intellectual property rights could result in our customers or potential customers deferring or limiting their purchase or use of the affected products until resolution of the litigation.

              We have received, and we may receive in the future, notifications of potential conflicts of existing patents, pending patent applications and challenges to the validity of existing patents. For example, we corresponded with DePuy in 2006 regarding a possible license granted by DePuy to us under a French patent in connection with one of our shoulder products. We did not come to any agreement with DePuy and last corresponded on this matter in early 2007. We were contacted by an individual in June 2010 regarding his French patent and his request that we explain our position regarding this patent with respect to our hip product Meije Duo. We analyzed the patent and our product and responded to the individual stating our belief the product falls outside the scope of his patent. The individual has not responded. We have searched and found that the individual has no corresponding patent outside of France. We do not believe that either notification will have a material adverse effect on our future business. In addition, we may, in the future, become aware of patent applications and issued patents that relate to our products or the surgical applications using our products and, in some cases, we may discuss with outside counsel the relevance of such issued patents to our products.

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Our inability to maintain adequate working relationships with external research and development consultants and surgeons could have a negative impact on our ability to market and sell new products.

              We maintain professional working relationships with external research and development consultants and leading surgeons and medical personnel in hospitals and universities who assist in product research and development. We continue to emphasize the development of proprietary products and product improvements to complement and expand our existing product lines. If we are unable to maintain these relationships, our ability to market and sell new and improved products could decrease, and future operating results could be unfavorably affected.

We incur significant expenditures of resources to maintain relatively high levels of inventory, which can reduce our cash flows.

              As a result of the need to maintain substantial levels of inventory, we are subject to the risk of inventory obsolescence. The nature of our business requires us to maintain a substantial level of inventory. For example, our total consolidated inventory balances were $60.0 million, $68.6 million and $70.7 million at December 28, 2008, December 27, 2009, and July 4, 2010, respectively. In order to market effectively we often must maintain and bring our customers instrument kits, back-up products and products of different sizes. In the event that a substantial portion of our inventory becomes obsolete, it could have a material adverse effect on our earnings and cash flows due to the resulting costs associated with the inventory impairment charges and costs required to replace such inventory.

Recent acquisitions and efforts to acquire and integrate other companies or product lines could adversely affect our operations and financial results.

              We may pursue acquisitions of other companies or product lines. A successful acquisition depends on our ability to identify, negotiate, complete and integrate such acquisition and to obtain any necessary financing. With respect to future acquisitions, we may experience:

    difficulties in integrating any acquired companies, personnel and products into our existing business;

    delays in realizing the benefits of the acquired company or products;

    diversion of our management's time and attention from other business concerns;

    challenges due to limited or no direct prior experience in new markets or countries we may enter;

    higher costs of integration than we anticipated; or

    difficulties in retaining key employees of the acquired business who are necessary to manage these acquisitions.

              In addition, any future acquisitions could materially impair our operating results by causing us to incur debt or requiring us to amortize acquired assets.

If we cannot retain our key personnel, we will not be able to manage and operate successfully, and we may not be able to meet our strategic objectives.

              Our success depends, in part, upon key managerial, scientific, sales and technical personnel, as well as our ability to continue to attract and retain additional highly qualified personnel. We compete for such personnel with other companies, academic institutions, governmental entities and other organizations. There is no guarantee that we will be successful in retaining our current personnel or in hiring or retaining qualified personnel in the future. Loss of key personnel or the inability to hire or retain qualified personnel in the future could have a material adverse effect on our ability to operate successfully. Further, any inability on our part to enforce non-compete arrangements related to key personnel who have left the business could have a material adverse effect on our business.

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Fluctuations in insurance cost and availability could adversely affect our profitability or our risk management profile.

              We hold a number of insurance policies, including product liability insurance, directors' and officers' liability insurance, property insurance and workers' compensation insurance. If the costs of maintaining adequate insurance coverage should increase significantly in the future, our operating results could be materially adversely affected. Likewise, if any of our current insurance coverage should become unavailable to us or become economically impractical, we would be required to operate our business without indemnity from commercial insurance providers.

If a natural or man-made disaster, including as a result of climate change or weather, strikes our manufacturing facilities or distribution channels, we could be unable to manufacture or distribute our products for a substantial amount of time and our sales could decline.

              We principally rely on five manufacturing facilities, three of which are in France and two of which are in Ireland. The facilities and the manufacturing equipment we use to produce our products would be difficult to replace and could require substantial lead-time to repair or replace. For example, the machinery associated with our manufacturing of pyrocarbon in one of our French facilities is highly specialized and would take substantial lead-time and resources to replace. We also maintain warehouses in Stafford, Texas and Montbonnot, France, containing large amounts of our inventory. Our facilities, warehouses or distribution channels may be affected by natural or man-made disasters. Further, such may be exacerbated by climate change, as some scientists have concluded that climate change could result in the increased severity of and perhaps more frequent occurrence of extreme weather patterns. For example, in the event of a hurricane in Stafford, Texas, we may lose substantial amounts of inventory that would be difficult to replace. In the event our facilities, warehouses or distribution channels are affected by a disaster, we would be forced to rely on, among others, third-party manufacturers and alternative warehouse space and distribution channels, which may or may not be available, and our sales could decline. Although we believe we possess adequate insurance for damage to our property and the disruption of our business from casualties, such insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms or at all.

Recent turmoil in the credit markets and the financial services industry may negatively affect our business.

              Recently, the credit markets and the financial services industry have been experiencing a period of unprecedented turmoil and upheaval characterized by the bankruptcy, failure, collapse or sale of various financial institutions and an unprecedented level of intervention from U.S. and foreign governments. While the ultimate outcome of these events cannot be predicted, they may have an adverse effect on our customers' ability to borrow money from their existing lenders or to obtain credit from other sources to purchase our products. In addition, the recent economic crises could also adversely affect our suppliers' ability to provide us with materials and components, either of which may negatively impact our business.

We may need substantial additional funding beyond the proceeds of this offering and may be unable to raise capital when needed, which would force us to delay, reduce, eliminate or abandon our commercialization efforts or product development programs.

              There is no guarantee that our anticipated cash flow from operations will be sufficient to meet all of our cash requirements. We intend to continue to make investments to support our business growth and may require additional funds to:

    expand the commercialization of our products;

    fund our operations and clinical trials;

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    continue our research and development;

    defend, in litigation or otherwise, any claims that we infringe third-party patents or other intellectual property rights;

    commercialize our new products, if any such products receive regulatory clearance or approval for commercial sale; and

    acquire companies and in-license products or intellectual property.

              We believe that the net proceeds from this offering, together with our existing cash and cash equivalent balances and cash receipts generated from sales of our products, will be sufficient to meet our anticipated cash requirements for the foreseeable future. However, our future funding requirements will depend on many factors, including:

    market acceptance of our products;

    the scope, rate of progress and cost of our clinical trials;

    the cost of our research and development activities;

    the cost of filing and prosecuting patent applications and defending and enforcing our patent and other intellectual property rights;

    the cost of defending, in litigation or otherwise, any claims that we infringe third-party patent or other intellectual property rights;

    the cost and timing of additional regulatory clearances or approvals;

    the cost and timing of expanding our sales, marketing and distribution capabilities;

    the effect of competing technological and market developments; and

    the extent to which we acquire or invest in businesses, products and technologies, although we currently have no commitments or agreements relating to any of these types of transactions.

              If we raise additional funds by issuing equity securities, our shareholders may experience dilution. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our shareholders. If we do not have, or are not able to obtain, sufficient funds, we may have to delay development or commercialization of our products or license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize. We also may have to reduce marketing, customer support or other resources devoted to our products or cease operations.

Our operating results could be negatively impacted by future changes in the allocation of income to each of the entities through which we operate and to each of the income tax jurisdictions in which we operate.

              We operate through multiple entities and in multiple income tax jurisdictions with different income tax rates both inside and outside the United States. Accordingly, our management must determine the appropriate allocation of income to each such entity and each of these jurisdictions. Income tax audits associated with the allocation of this income and other complex issues, including inventory transfer pricing and cost sharing and product royalty arrangements, may require an extended period of time to resolve and may result in income tax adjustments if changes to the income allocation are required. Since income tax adjustments in certain jurisdictions can be significant, our future operating results could be negatively impacted by settlement of these matters.

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Future changes in technology or market conditions could result in adjustments to our recorded asset balance for intangible assets, including goodwill, resulting in additional charges that could significantly impact our operating results.

              Our balance sheet includes significant intangible assets, including goodwill and other acquired intangible assets. The determination of related estimated useful lives and whether these assets are impaired involves significant judgments. Our ability to accurately predict future cash flows related to these intangible assets may be adversely affected by unforeseen and uncontrollable events. In the highly competitive medical device industry, new technologies could impair the value of our intangible assets if they create market conditions that adversely affect the competitiveness of our products. We test our goodwill for impairment in the fourth quarter of each year, but we also test goodwill and other intangible assets for impairment at any time when there is a change in circumstances that indicates that the carrying value of these assets may be impaired. Any future determination that these assets are carried at greater than their fair value could result in substantial non-cash impairment charges, which could significantly impact our reported operating results.

Our outstanding debt agreements contain restrictive covenants that may limit our operating flexibility.

              The agreements relating to our outstanding debt contain some financial covenants limiting our ability to transfer or dispose of assets, merge with or acquire other companies, make investments, pay dividends, incur additional indebtedness and liens and conduct transactions with affiliates. We therefore may not be able to engage in any of the foregoing transactions until our current debt obligations are paid in full or we obtain the consent of the lenders. There is no guarantee that we will be able to generate sufficient cash flow or revenue to meet the financial covenants or pay the principal and interest on our debt. Furthermore, there is no guarantee that future working capital, borrowings or equity financing will be available to repay or refinance any such debt.

If reimbursement from third-party payors for our products becomes inadequate, surgeons and patients may be reluctant to use our products and our sales may decline.

              In the United States, healthcare providers who purchase our products generally rely on third-party payors, principally federal Medicare, state Medicaid and private health insurance plans, to pay for all or a portion of the cost of joint reconstructive procedures and products utilized in those procedures. We may be unable to sell our products on a profitable basis if third-party payors deny coverage or reduce their current levels of reimbursement. Our sales depend largely on governmental healthcare programs and private health insurers reimbursing patients' medical expenses. To contain costs of new technologies, third-party payors are increasingly scrutinizing new treatment modalities by requiring extensive evidence of clinical outcomes and cost effectiveness. Currently, we are aware of several private insurers who have issued policies that classify procedures using our Salto Talaris Prosthesis and Conical Subtalar Implants implants as experimental or investigational and denied coverage and reimbursement for such procedures. Surgeons, hospitals and other healthcare providers may not purchase our products if they do not receive satisfactory reimbursement from these third-party payors for the cost of the procedures using our products. Payors continue to review their coverage policies carefully for existing and new therapies and can, without notice, deny coverage for treatments that include the use of our products. If we are not successful in reversing existing non-coverage policies or other private insurers issue similar policies, this could have a material adverse effect on our business and operations.

              In addition, some healthcare providers in the United States have adopted or are considering a managed care system in which the providers contract to provide comprehensive healthcare for a fixed cost per person. Healthcare providers may attempt to control costs by authorizing fewer elective surgical procedures, including joint reconstructive surgeries, or by requiring the use of the least expensive implant available. Additionally, there is a significant likelihood of reform of the U.S.

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healthcare system, and changes in reimbursement policies or healthcare cost containment initiatives that limit or restrict reimbursement for our products may cause our revenue to decline.

              If adequate levels of reimbursement from third-party payors outside of the United States are not obtained, international sales of our products may decline. Outside of the United States, reimbursement systems vary significantly by country. Many foreign markets have government-managed healthcare systems that govern reimbursement for orthopaedic medical devices and procedures. Additionally, some foreign reimbursement systems provide for limited payments in a given period and therefore result in extended payment periods.

Continuing weakness in the global economy is likely to adversely affect our business until an economic recovery is underway.

              Many of our products are used in procedures covered by private insurance, and some of these procedures may be considered elective. We believe the current global economic crisis is likely to reduce the availability or affordability of private insurance or may affect patient decisions to undergo elective procedures. If current economic conditions continue or worsen, we expect that increasing levels of unemployment and pressures to contain healthcare costs could adversely affect the global growth rate of procedure volume, which could have a material adverse effect on our sales and results of operations.

Consolidation in the healthcare industry could lead to demands for price concessions or to the exclusion of some medical device companies from certain of our markets, which could have an adverse effect on our business, financial condition or results of operations.

              Because healthcare costs have risen significantly over the past decade, numerous initiatives and reforms initiated by legislators, regulators and third-party payors to curb these costs have resulted in a consolidation trend in the healthcare industry to create new companies with greater market power, including hospitals. As the healthcare industry consolidates, competition to provide products and services to industry participants has become and will continue to become more intense. This in turn has resulted and will likely continue to result in greater pricing pressures and the exclusion of certain medical device companies from important market segments as group purchasing organizations, independent delivery networks and large single accounts continue to use their market power to consolidate purchasing decisions for some of our customers. We expect that market demand, government regulation, third-party reimbursement policies and societal pressures will continue to change the worldwide healthcare industry, resulting in further business consolidations and alliances among our customers, which may reduce competition, exert further downward pressure on the prices of our products and may adversely impact our business, financial condition or results of operations.

If we experience significant disruptions in our information technology systems, our business may be adversely affected.

              We depend on our information technology systems for the efficient functioning of our business, including accounting, data storage, purchasing and inventory management. Currently, we have a non-interconnected information technology system; however, we have undertaken the implementation of an upgrade of our systems. We expect that this upgrade will take two to three years to implement; however, when complete it should enable management to better and more efficiently conduct our operations and gather, analyze, and assess information across all of our business and geographic locations. We may experience difficulties in implementing this upgrade in our business operations, or difficulties in operating our business under this upgrade, either of which could disrupt our operations, including our ability to timely ship and track product orders, project inventory requirements, manage our supply chain, and otherwise adequately service our customers. In the event we experience significant disruptions as a result of the current implementation in our information technology system, we may not be able to fix our systems in an efficient and timely manner. Accordingly, such events may

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disrupt or reduce the efficiency of our entire operation and have a material adverse effect on our results of operations and cash flows.

Risks Related to Regulatory Environment

The sale of our products is subject to regulatory clearances or approvals and our business is subject to extensive regulatory requirements. If we fail to maintain regulatory approvals and clearances, or are unable to obtain, or experience significant delays in obtaining, FDA clearances or approvals for our future products or product enhancements, our ability to commercially distribute and market these products could suffer.

              Our medical device products and operations are subject to extensive regulation by the FDA and various other federal, state and foreign governmental authorities, such as those of the European Union and the competent authorities of the Member States of the EEA. Government regulation of medical devices is meant to assure their safety and effectiveness, and includes regulation of, among other things:

    design, development and manufacturing;

    testing, labeling, packaging, content and language of instructions for use, and storage;

    clinical trials;

    product safety;

    marketing, sales and distribution;

    premarket clearance and approval;

    recordkeeping procedures;

    advertising and promotion;

    recalls and field corrective actions;

    post-market surveillance, including reporting of deaths or serious injuries and malfunctions that, if they were to recur, could lead to death or serious injury; and

    product import and export.

              Before a new medical device, or a new use of, or claim for, an existing product can be marketed in the United States, it must first receive either premarket clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act, or FDCA, or PMA, from the FDA, unless an exemption applies. In the 510(k) clearance process, the FDA must determine that the proposed device is "substantially equivalent" to a device legally on the market, known as a "predicate" device, with respect to intended use, technology and safety and effectiveness to clear the proposed device for marketing. Clinical data is sometimes required to support substantial equivalence. The PMA pathway requires an applicant to demonstrate the safety and effectiveness of the device for its intended use based, in part, on extensive data including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling data. The PMA process is typically required for devices that are deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices. Products that are approved through a PMA application generally need FDA approval before they can be modified. Similarly, some modifications made to products cleared through a 510(k) may require a new 510(k). Both the 510(k) and PMA processes can be expensive and lengthy and entail significant user fees, unless exempt. The FDA's 510(k) clearance process usually takes from three to 12 months, but may take longer. The PMA pathway is much more costly and uncertain than the 510(k) clearance process and it generally takes from one to five years, or even longer, from the time the application is filed with the FDA until an approval is obtained. The process of obtaining regulatory clearances or approvals to market a medical

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device can be costly and time-consuming, and we may not be able to obtain these clearances or approvals on a timely basis, if at all.

              Most of our currently commercialized products have received premarket clearance under Section 510(k) of the FDCA. If the FDA requires us to go through a lengthier, more rigorous examination for future products or modifications to existing products than we had expected, our product introductions or modifications could be delayed or canceled, which could cause our sales to decline. In addition, the FDA may determine that future products will require the more costly, lengthy and uncertain PMA process. Although we do not currently market any devices under PMA, we cannot assure you that the FDA will not demand that we obtain a PMA prior to marketing or that we will be able to obtain the 510(k) clearances with respect to future products.

              The FDA can delay, limit or deny clearance or approval of a device for many reasons, including:

    we may not be able to demonstrate to the FDA's satisfaction that our products are safe and effective for their intended users;

    the data from our pre-clinical studies and clinical trials may be insufficient to support clearance or approval, where required;

    the manufacturing process or facilities we use may not meet applicable requirements; and

    changes in FDA clearance or approval policies or the adoption of new regulations may require additional data.

              Any delay in, or failure to receive or maintain, clearance or approval for our products under development could prevent us from generating revenue from these products or achieving profitability. Additionally, the FDA and other governmental authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could lead governmental authorities or a court to take action against us, including:

    issuing untitled letters or public warning letters to us;

    imposing fines and penalties on us;

    obtaining an injunction preventing us from manufacturing or selling our products;

    bringing civil or criminal charges against us;

    delaying the introduction of our products into the market;

    delaying pending requests for clearance or approval of new uses or modifications to our existing products;

    recalling, detaining or seizing our products; or

    withdrawing or denying approvals or clearances for our products.

              If we fail to obtain and maintain regulatory approvals or clearances, our ability to sell our products and generate revenues will be materially harmed.

Outside of the United States, our medical devices must comply with the laws and regulations of the foreign countries in which they are marketed, and compliance may be costly and time-consuming.

              To market and sell our products in other countries, we must seek and obtain regulatory approvals, certifications or registrations and comply with the laws and regulations of those countries. These laws and regulations, including the requirements for approvals, certifications or registrations and the time required for regulatory review, vary from country to country. Obtaining and maintaining

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foreign regulatory approvals, certifications or registrations are expensive, and we cannot be certain that we will receive regulatory approvals, certifications or registrations in any foreign country in which we plan to market our products. If we fail to obtain or maintain regulatory approvals, certifications or registrations in any foreign country in which we plan to market our products, our ability to generate revenue will be harmed.

              In particular, in the EEA, which is composed of the 27 Member States of the EU plus Liechtenstein, Norway and Iceland, our medical devices must comply with the essential requirements of the EU Medical Devices Directives (Council Directive 93/42/EEC of 14 June 1993 concerning medical devices, as amended, and Council Directive 90/385/EEC of 20 June 2009 relating to active implantable medical devices, as amended). Compliance with these requirements entitles us to affix the CE conformity mark to our medical devices, without which they cannot be marketed in the EEA.

              Further, the advertising and promotion of our products is subject to EEA Member States laws implementing Directive 93/42/EEC concerning Medical Devices, or the EU Medical Devices Directive, Directive 2006/114/EC concerning misleading and comparative advertising, and Directive 2005/29/EC on unfair commercial practices, as well as other EEA Member State legislation governing the advertising and promotion of medical devices. These laws may limit or restrict the advertising and promotion of our products to the general public and may impose limitations on our promotional activities with healthcare professionals.

Modifications to our marketed products may require new 510(k) clearances or PMAs, or may require us to cease marketing or recall the modified products until clearances are obtained.

              Any modification to a 510(k)-cleared device that could significantly affect its safety or efficacy, or that would constitute a major change in its intended use, technology, materials, packaging and certain manufacturing processes, may require a new 510(k) clearance or, possibly, a PMA. The FDA requires every manufacturer to make the determination regarding the need for a new 510(k) clearance or PMA in the first instance, but the FDA may review the manufacturer's decision. The FDA may not agree with a manufacturer's decision regarding whether a new clearance or approval is necessary for a modification, and may retroactively require the manufacturer to submit a premarket notification requesting 510(k) clearance or an application for PMA. We have made modifications to our products in the past and may make additional modifications in the future that we believe do not or will not require additional clearances or approvals. No assurance can be given that the FDA would agree with any of our decisions not to seek 510(k) clearance or PMA. If the FDA requires us to cease marketing and recall the modified device until we obtain a new 510(k) clearance or PMA, our business, financial condition, results of operations and future growth prospects could be materially adversely affected. Further, our products could be subject to recall if the FDA determines, for any reason, that our products are not safe or effective. Any recall or FDA requirement that we seek additional approvals or clearances could result in significant delays, fines, increased costs associated with modification of a product, loss of revenue and potential operating restrictions imposed by the FDA.

Healthcare policy changes, including the recently enacted legislation to reform the U.S. healthcare system, may have a material adverse effect on us.

              In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, collectively, the PPACA, which substantially changes the way health care is financed by both governmental and private insurers, encourages improvements in the quality of healthcare items and services, and significantly impacts the medical device industry. The PPACA includes, among other things, the following measures:

      an excise tax on any entity that manufactures or imports medical devices offered for sale in the United States;

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      a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical effectiveness research;

      new reporting and disclosure requirements on device manufacturers for any "transfer of value" made or distributed to prescribers and other healthcare providers, effective March 30, 2013;

      payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models, beginning on or before January 1, 2013;

      an independent payment advisory board that will submit recommendations to reduce Medicare spending if projected Medicare spending exceeds a specified growth rate; and

      a new licensure framework for follow-on biologic products.

These provisions could meaningfully change the way healthcare is delivered and financed, and may materially impact numerous aspects of our business.

              In the future there may continue to be additional proposals relating to the reform of the U.S. healthcare system. Certain of these proposals could limit the prices we are able to charge for our products, or the amounts of reimbursement available for our products, and could limit the acceptance and availability of our products. The adoption of some or all of these proposals could have a material adverse effect on our financial position and results of operations.

              Additionally, initiatives sponsored by government agencies, legislative bodies and the private sector to limit the growth of healthcare costs, including price regulation and competitive pricing, are ongoing in markets where we do business. We could experience a negative impact on our operating results due to increased pricing pressure in the United States and certain other markets. Governments, hospitals and other third-party payors could reduce the amount of approved reimbursements for our products. Reductions in reimbursement levels or coverage or other cost-containment measures could unfavorably affect our future operating results.

Our financial performance may be adversely affected by medical device tax provisions in the health care reform laws.

              The PPACA imposes a deductible excise tax equal to 2.3% of the price of a medical device on any entity that manufactures or imports medical devices offered for sale in the United States, with limited exceptions, beginning in 2013. Under these provisions, the total cost to the medical device industry is estimated to be approximately $20 billion over 10 years. These taxes would result in a significant increase in the tax burden on our industry, which could have a material, negative impact on our results of operations and our cash flows.

The use, misuse or off-label use of our products may harm our image in the marketplace or result in injuries that lead to product liability suits, which could be costly to our business or result in FDA sanctions if we are deemed to have engaged in such promotion.

              Our currently marketed products have been cleared by the FDA's 510(k) clearance process for use under specific circumstances. Our promotional materials and training methods must comply with FDA and other applicable laws and regulations, including the prohibition on the promotion of a medical device for a use that has not been cleared or approved by the FDA. Use of a device outside of its cleared or approved indication is known as "off-label" use. We cannot, however, prevent a surgeon from using our products or procedure for off-label use, as the FDA does not restrict or regulate a physician's choice of treatment within the practice of medicine. However, if the FDA determines that

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our promotional materials or training constitute promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine and criminal penalties. Other federal, state or foreign governmental authorities might also take action if they consider our promotion or training materials to constitute promotion of an uncleared or unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement. In that event, our reputation could be damaged and adoption of the products would be impaired. Although we train our sales force not to promote our products for off-label uses, and our instructions for use in all markets specify that our products are not intended for use outside of those indications cleared for use, the FDA or another regulatory agency could conclude that we have engaged in off-label promotion.

              In addition, there may be increased risk of injury if surgeons attempt to use our products off-label. Furthermore, the use of our products for indications other than those indications for which our products have been cleared by the FDA may not effectively treat such conditions, which could harm our reputation in the marketplace among surgeons and patients. Surgeons may also misuse our products or use improper techniques if they are not adequately trained, potentially leading to injury and an increased risk of product liability. Product liability claims are expensive to defend and could divert our management's attention and result in substantial damage awards against us. Any of these events could harm our business and results of operations.

If our marketed medical devices are defective or otherwise pose safety risks, the FDA and similar foreign governmental authorities could require their recall, or we may initiate a recall of our products voluntarily.

              The FDA and similar foreign governmental authorities may require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture or in the event that a product poses an unacceptable risk to health. Manufacturers may, on their own initiative, recall a product if any material deficiency in a device is found. In the past we have initiated voluntary product recalls. For example, in 2008, we recalled a small number of medical devices due to a mislabeled product. We requested FDA closure of the recall in January 2010. A government-mandated or voluntary recall by us or one of our sales agencies could occur as a result of an unacceptable risk to health, component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our products would divert managerial and financial resources and have an adverse effect on our financial condition and results of operations. Any recall could impair our ability to produce our products in a cost-effective and timely manner in order to meet our customers' demands. We may also be required to bear other costs or take other actions that may have a negative impact on our future sales and our ability to generate profits. We may initiate voluntary recalls involving our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted.

              In the EEA we must comply with the EU Medical Device Vigilance System, the purpose of which is to improve the protection of health and safety of patients, users and others by reducing the likelihood of reoccurrence of incidents related to the use of a medical device. Under this system, incidents must be reported to the competent authorities of the Member States of the EEA. An incident is defined as any malfunction or deterioration in the characteristics and/or performance of a device, as well as any inadequacy in the labeling or the instructions for use which, directly or indirectly, might lead to or might have led to the death of a patient or user or of other persons or to a serious deterioration in their state of health. Incidents are evaluated by the EEA competent authorities to whom they have been reported, and where appropriate, information is disseminated between them in

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the form of National Competent Authority Reports, or NCARs. The Medical Device Vigilance System is further intended to facilitate a direct, early and harmonized implementation of Field Safety Corrective Actions, or FSCAs across the Member States of the EEA where the device is in use. An FSCA is an action taken by a manufacturer to reduce a risk of death or serious deterioration in the state of health associated with the use of a medical device that is already placed on the market. An FSCA may include the recall, modification, exchange, destruction or retrofitting of the device. FSCAs must be communicated by the manufacturer or its legal representative to its customers and/or to the end users of the device through Field Safety Notices.

If our products cause or contribute to a death or a serious injury, or malfunction in certain ways, we will be subject to medical device reporting regulations, which can result in voluntary corrective actions or agency enforcement actions.

              Under the FDA medical device reporting regulations, or MDR, we are required to report to the FDA any incident in which our product has or may have caused or contributed to a death or serious injury or in which our product malfunctioned and, if the malfunction were to recur, would likely cause or contribute to death or serious injury. If we fail to report these events to the FDA within the required timeframes, or at all, the FDA could take enforcement action against us. Any adverse event involving our products could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection, mandatory recall or other enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business, and may harm our reputation and financial results.

Our manufacturing operations require us to comply with the FDA's and other governmental authorities' laws and regulations regarding the manufacture and production of medical devices, which is costly and could subject us to enforcement action.

              We and certain of our third-party manufacturers are required to comply with the FDA's Quality System Regulation, or QSR, which covers the methods of documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our products. We and certain of our suppliers are also subject to the regulations of foreign jurisdictions regarding the manufacturing process for our products marketed outside of the United States. The FDA enforces the QSR through periodic announced and unannounced inspections of manufacturing facilities. The failure by us or one of our suppliers to comply with applicable statutes and regulations administered by the FDA and other regulatory bodies, or the failure to timely and adequately respond to any adverse inspectional observations or product safety issues, could result in, among other things, any of the following enforcement actions:

      untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;

      customer notifications or repair, replacement, refunds, recall, detention or seizure of our products;

      operating restrictions or partial suspension or total shutdown of production;

      refusing or delaying our requests for 510(k) clearance or PMA of new products or modified products;

      withdrawing 510(k) clearances or PMAs that have already been granted;

      refusal to grant export approval for our products; or

      criminal prosecution.

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              Any of these actions could impair our ability to produce our products in a cost-effective and timely manner in order to meet our customers' demands. We may also be required to bear other costs or take other actions that may have a negative impact on our future sales and our ability to generate profits. Furthermore, our key component suppliers may not currently be or may not continue to be in compliance with all applicable regulatory requirements, which could result in our failure to produce our products on a timely basis and in the required quantities, if at all.

We are subject to substantial post-market government regulation that could have a material adverse effect on our business.

              The production and marketing of our products are subject to extensive regulation and review by the FDA and numerous other governmental authorities both in the United States and abroad. For example, in addition to other state regulatory requirements, Massachusetts, California and Arizona require compliance with the standards in industry codes such as the Code of Ethics on Interactions with Health Care Professionals issued by the Advanced Medical Technology Association (commonly known as AdvaMed), the Code on Interactions with Healthcare Professionals issued by MEDEC, the national association of Canada's medical technology companies, and international equivalents. The failure by us or one of our suppliers to comply with applicable regulatory requirements could result in, among other things, the FDA or other governmental authorities:

      imposing fines and penalties on us;

      preventing us from manufacturing or selling our products;

      delaying the introduction of our new products into the market;

      recalling or seizing our products;

      withdrawing, delaying or denying approvals or clearances for our products;

      issuing warning letters or untitled letters;

      imposing operating restrictions;

      imposing injunctions; and

      commencing criminal prosecutions.

              Failure to comply with applicable regulatory requirements could also result in civil actions against us and other unanticipated expenditures. If any of these actions were to occur it would harm our reputation and cause our product sales to suffer and may prevent us from generating revenue.

The results of our clinical trials may not support our product candidate claims or may result in the discovery of adverse side effects.

              Our ongoing research and development, pre-clinical testing and clinical trial activities are subject to extensive regulation and review by numerous governmental authorities both in the United States and abroad. We are currently conducting post-market clinical studies of some or our products to gather additional information about these products' safety, efficacy or optimal use. In the future we may conduct clinical trials to support approval of new products. Clinical trials must be conducted in compliance with FDA regulations or the FDA may take enforcement action. The data collected from these clinical trials may ultimately be used to support market clearance for these products. Even if our clinical trials are completed as planned, we cannot be certain that their results will support our product candidate claims or that the FDA or foreign authorities will agree with our conclusions regarding them. Success in pre-clinical testing and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the later trials will replicate the results of prior trials and studies. The clinical trial process may fail to demonstrate that our product candidates are safe and

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effective for the proposed indicated uses, which could cause us to abandon a product candidate and may delay development of others. Any delay or termination of our clinical trials will delay the filing of our product submissions and, ultimately, our ability to commercialize our product candidates and generate revenues. It is also possible that patients enrolled in clinical trials will experience adverse side effects that are not currently part of the product candidate's profile.

If the third parties on which we rely to conduct our clinical trials and to assist us with pre-clinical development do not perform as contractually required or expected, we may not be able to obtain regulatory clearance or approval for or commercialize our products.

              We often must rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if these third parties need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our pre-clinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for, or successfully commercialize, our products on a timely basis, if at all, and our business, operating results and prospects may be adversely affected. Furthermore, our third-party clinical trial investigators may be delayed in conducting our clinical trials for reasons outside of their control.

Federal regulatory reforms may adversely affect our ability to sell our products profitably.

              From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the clearance or approval, manufacture and marketing of a medical device. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be.

We may be subject to or otherwise affected by federal and state healthcare laws, including fraud and abuse and health information privacy and security laws, and could face substantial penalties if we are unable to fully comply with such laws.

              Although we do not provide healthcare services, submit claims for third-party reimbursement, or receive payments directly from Medicare, Medicaid or other third-party payors for our products or the procedures in which our products are used, healthcare regulation by federal and state governments could significantly impact our business. Healthcare fraud and abuse and health information privacy and security laws potentially applicable to our operations include:

    the federal Anti-Kickback Law, which constrains our marketing practices and those of our independent sales agencies, educational programs, pricing policies and relationships with healthcare providers, by prohibiting, among other things, soliciting, receiving, offering or providing remuneration, intended to induce the purchase or recommendation of an item or service reimbursable under a federal healthcare program, such as the Medicare or Medicaid programs;

    the federal False Claims Act, the federal Civil Monetary Penalties Law, the Physician Self-Referral Law and other laws which prohibit, among other things, knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent or relate to a prohibited referral;

    the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, and its implementing regulations, which created federal criminal laws that prohibit executing a

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      scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters and which also imposes certain regulatory and contractual requirements regarding the privacy, security and transmission of individually identifiable health information;

    state laws analogous to each of the above federal laws, such as anti-kickback and false claims laws that may apply to items or services reimbursed by any third-party payor, including commercial insurers, and state laws governing the privacy and security of certain health information, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts; and

    state laws that require medical device manufacturers to adopt marketing codes of conduct and constrain their relationships with physicians and other referral sources, and federal and state laws that mandate reporting of financial relationships between manufacturers and referral sources.

              If our past or present operations, or those of our independent sales agencies, are found to be in violation of any of such laws or any other governmental regulations that may apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from federal healthcare programs and the curtailment or restructuring of our operations. Similarly, if the healthcare providers or entities with whom we do business are found to be non-compliant with applicable laws, they may be subject to sanctions, which could also have a negative impact on us. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Further, the recently enacted Patient Protection and Affordable Care Act, or PPACA, among other things, amends the intent requirement of the federal anti-kickback and criminal health care fraud statutes. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the PPACA provides that the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the false claims statutes. Any action against us for violation of these laws, even if we successfully defend against them, could cause us to incur significant legal expenses and divert our management's attention from the operation of our business.

              The PPACA also includes a number of provisions that impact medical device manufacturers, including new reporting and disclosure requirements on device and drug manufacturers for any "transfer of value" made or distributed to prescribers and other healthcare providers, effective March 30, 2013. Such information will be made publicly available in a searchable format beginning September 30, 2013. In addition, device and drug manufacturers will also be required to report and disclose any investment interests held by physicians and their immediate family members during the preceding calendar year. Failure to submit required information may result in civil monetary penalties of up to an aggregate of $150,000 per year (and up to an aggregate of $1 million per year for "knowing failures"), for all payments, transfers of value or ownership or investment interests not reported in an annual submission. The PPACA also imposes excise taxes on medical device manufacturers, permits the use of comparative effectiveness research to make Medicare coverage determinations in certain circumstances, creates an Independent Medicare Advisory Board charged with recommending ways to reduce the rate of Medicare spending and changes payment methodologies under the Medicare and Medicaid programs. All of these changes could adversely affect our business and financial results.

              Governments and regulatory authorities have increased their enforcement of health care fraud and abuse laws in recent years. For example, in 2007 five competitors in the orthopaedics industry settled a Department of Justice investigation into the financial relationships and consulting agreements

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between the companies and surgeons. The companies agreed to new corporate compliance procedures and federal monitoring. At issue were financial inducements designed to encourage physicians to use the payor company's products exclusively and the failure of physicians to disclose these relationships to hospitals and patients. Individual states may also be investigating the relationship between healthcare providers and companies in the orthopaedics industry. Many states have their own regulations governing the relationship between companies and health care providers. While we have not been the target of any investigations, we cannot guarantee that we will not be investigated in the future. If investigated we cannot assure that the costs of defending or resolving those investigations or proceedings would not have a material adverse effect on our financial condition, results of operations and cash flows.

Failure to obtain and maintain regulatory approval in foreign jurisdictions will prevent us from marketing our products abroad.

              We currently market, and intend to continue to market, our products internationally. Outside the United States, we can market a product only if we receive a marketing authorization and, in some cases, pricing approval, from the appropriate regulatory authorities. The approval procedure varies among countries and can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA clearance or approval. The foreign regulatory approval process may include all of the risks associated with obtaining FDA clearance or approval in addition to other risks. For example, in order to market our products in the Member States of the EEA, our devices are required to comply with the essential requirements of the EU Medical Devices Directives (Council Directive 93/42/EEC of 14 June 1993 concerning medical devices, as amended, and Council Directive 90/385/EEC of 20 June 2009 relating to active implantable medical devices, as amended). Compliance with these requirements entitles us to affix the CE conformity mark to our medical devices, without which they cannot be commercialized in the EEA. In order to demonstrate compliance with the essential requirements and obtain the right to affix the CE conformity mark we must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification. Except for low risk medical devices (Class I), where the manufacturer can issue an EC Declaration of Conformity based on a self-assessment of the conformity of its products with the essential requirements of the Medical Devices Directives, a conformity assessment procedure requires the intervention of a Notified Body, which is an organization accredited by a Member State of the EEA to conduct conformity assessments. The Notified Body would typically audit and examine the quality system for the manufacture, design and final inspection of our devices before issuing a certification demonstrating compliance with the essential requirements. Based on this certification we can draw up an EC Declaration of Conformity, which allows us to affix the CE mark to our products.

              We may not obtain foreign regulatory approvals or certifications on a timely basis, if at all. Clearance or approval by the FDA does not ensure approval or certification by regulatory authorities or Notified Bodies in other countries, and approval or certification by one foreign regulatory authority or Notified Body does not ensure approval by regulatory authorities in other foreign countries or by the FDA. We may be required to perform additional pre-clinical or clinical studies even if FDA clearance or approval, or the right to bear the CE mark, has been obtained. If we fail to receive necessary approvals to commercialize our products in foreign jurisdictions on a timely basis, or at all, our business, financial condition and results of operations could be adversely affected.

Our existing xenograft-based orthobiologics business is and any future orthobiologics products we pursue would be subject to emerging governmental regulations that could materially affect our business.

              Some of our products are xenograft, or animal-based, tissue products. Our principal xenograft-based orthobiologics offering is Conexa reconstructive tissue matrix. All of our current xenograft tissue-

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based products are regulated as medical devices and are subject to the FDA's medical device regulations.

              While we do not currently offer any products based on human tissue, in the future we may offer orthobiologics products based on human tissue. The FDA has statutory authority to regulate human cells, tissues and cellular and tissue-based products, or HCT/Ps. An HCT/P is a product containing or consisting of human cells or tissue intended for transplantation into a human patient, including allograft-based products. The FDA, EU and Health Canada have been working to establish more comprehensive regulatory frameworks for allograft-based, tissue-containing products, which are principally derived from cadaveric tissue.

              Section 361 of the Public Health Service Act, or PHSA, authorizes the FDA to issue regulations to prevent the introduction, transmission or spread of communicable disease. HCT/Ps regulated as 361 HCT/Ps are subject to requirements relating to: registering facilities and listing products with the FDA; screening and testing for tissue donor eligibility; Good Tissue Practice, or GTP, when processing, storing, labeling and distributing HCT/Ps, including required labeling information; stringent recordkeeping; and adverse event reporting. The FDA has also proposed extensive additional requirements that address sub-contracted tissue services, tracking to the recipient/patient, and donor records review. If a tissue-based product is considered human tissue, the FDA requirements focus on preventing the introduction, transmission and spread of communicable diseases to recipients. A product regulated solely as a 361 HCT/P is not required to undergo premarket clearance or approval.

              The FDA may inspect facilities engaged in manufacturing 361 HCT/Ps and may issue untitled letters, warning letters, or otherwise authorize orders of retention, recall, destruction and cessation of manufacturing if the FDA has reasonable grounds to believe that an HCT/P or the facilities where it is manufactured are in violation of applicable regulations. There are also requirements relating to the import of HCT/Ps that allow the FDA to make a decision as to the HCT/Ps' admissibility into the United States.

              An HCT/P is eligible for regulation solely as a 361 HCT/P if it is: minimally manipulated; intended for homologous use as determined by labeling, advertising or other indications of the manufacturer's objective intent for a homologous use; the manufacture does not involve combination with another article, except for water, crystalloids or a sterilizing, preserving, or storage agent (not raising new clinical safety concerns for the HCT/P); and it does not have a systemic effect and is not dependent upon the metabolic activity of living cells for its primary function or, if it has such an effect, it is intended for autologous use or allogeneic use in close relatives or for reproductive use. If any of these requirements are not met, then the HCT/P is also subject to applicable biologic, device, or drug regulation under the FDCA or the PHSA. These biologic, device or drug HCT/Ps must comply both with the requirements exclusively applicable to 361 HCT/Ps and, in addition, with requirements applicable to biologics under the PHS Act, or devices or drugs under the FDCA, including premarket licensure, clearance or approval.

              Title VII of the PPACA, the Biologics Price Competition and Innovation Act of 2009, or BPCIA, creates a new licensure framework for follow-on biologic products, which could ultimately subject our orthobiologics business to competition to so-called "biosimilars." Under the BPCIA, a manufacturer may submit an application for licensure of a biologic product that is "biosimilar to" or "interchangeable with" a referenced, branded biologic product. Previously, there had been no licensure pathway for such a follow-on product. While we do not anticipate that the FDA will license a follow-on biologic for several years, given the need to generate data sufficient to demonstrate "biosimilarity" to or "interchangeability" with the branded biologic according to criteria set forth in the BPCIA, as well as the need for the FDA to implement the BPCIA's provisions with respect to particular classes of biologic products, we cannot guarantee that our orthobiologics will not eventually become subject to direct competition by a licensed "biosimilar."

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              Procurement of certain human organs and tissue for transplantation, including allograft tissue we may use in future products, is subject to federal regulation under the National Organ Transplant Act, or NOTA. NOTA prohibits the acquisition, receipt, or other transfer of certain human organs, including bone and other human tissue, for valuable consideration within the meaning of NOTA. NOTA permits the payment of reasonable expenses associated with the removal, transportation, implantation, processing, preservation, quality control and storage of human organs. For any future products implicating NOTA's requirements, we would reimburse tissue banks for their expenses associated with the recovery, storage and transportation of donated human tissue that they would provide to us for processing. NOTA payment allowances may be interpreted to limit the amount of costs and expenses that we may recover in our pricing for our products, thereby negatively impacting our future revenue and profitability. If we were to be found to have violated NOTA's prohibition on the sale or transfer of human tissue for valuable consideration, we would potentially be subject to criminal enforcement sanctions, which could materially and adversely affect our results of operations. Further, in the future, if NOTA is amended or reinterpreted, we may not be able to pass these expenses on to our customers and, as a result, our business could be adversely affected.

Our operations involve the use of hazardous materials, and we must comply with environmental health and safety laws and regulations, which can be expensive and may affect our business and operating results.

              We are subject to a variety of laws and regulations of the countries in which we operate and distribute products, such as the European Union, or EU, France, Ireland, other European nations and the United States, relating to the use, registration, handling, storage, disposal, recycling and human exposure to hazardous materials. Liability under environmental laws can be joint and several and without regard to comparative fault, and environmental, health and safety laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations, which could harm our business. In the EU, where our manufacturing facilities are located, we and our suppliers are subject to EU environmental requirements such as the Registration, Evaluation, Authorisation and Restriction of Chemicals, or REACH, regulation. In addition, we are subject to the environmental, health and safety requirements of individual European countries in which we operate such as France and Ireland. For example, in France, requirements known as the Installations Classées pour la Protection de l'Environnement regime provide for specific environmental standards related to industrial operations such as noise, water treatment, air quality and energy consumption. In Ireland, our manufacturing facilities are likewise subject to local environmental regulations, such as related to water pollution and water quality, that are administered by the Environmental Protection Agency. We believe that we are in material compliance with all applicable environmental, health and safety requirements in the countries in which we operate and do not have reason to believe that we are responsible for any cleanup liabilities. In addition, certain hazardous materials are present at some of our facilities, such as asbestos, that we believe are managed in compliance with all applicable laws. We are also subject to greenhouse gas regulations in the EU and elsewhere and we believe that we are in compliance based on present emissions levels at our facilities. Although we believe that our activities conform in all material respects with applicable environmental, health and safety laws, we cannot assure you that violations of such laws will not arise as a result of human error, accident, equipment failure, presently unknown conditions or other causes. The failure to comply with past, present or future laws, including potential laws relating to climate control initiatives, could result in the imposition of fines, third-party property damage and personal injury claims, investigation and remediation costs, the suspension of production or a cessation of operations. In particular, in relation to our manufacturing facility located in Saint-Ismier, France, we do not have a formal agreement and/or authorization to discharge wastewater to the local community wastewater treatment system, which could notably lead to fines, civil liability, and/or reduced throughput. As has been standard practice for business operations in the area, we believe that we obtained authorization from local authorities to connect to the wastewater discharge network at the time we first made our

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connection in 2003. Since 2006, when authority over such matters was assumed by an inter-community agency, the Syndicat Intercommunal de la Zone Verte (SIZOV), we have been seeking formal documentation of agreement and/or authorization from SIZOV. As with the other business operations in the area, we have not yet been able to obtain such formal agreement and/or authorization documentation because SIZOV was in the process of developing its wastewater discharge standards. These standards have now been completed and recent testing of our discharge wastewater indicates that we meet all applicable standards. We anticipate receiving formal authorization before the end of 2010. We also expect that our operations will be affected by other new environmental and health and safety laws, including laws relating to climate control initiatives, on an ongoing basis. Although we cannot predict the ultimate impact of any such new laws, they could result in additional costs and may require us to change how we design, manufacture or distribute our products, which could have a material adverse effect on our business.

Risks Relating to Our Ordinary Shares and this Offering

An active trading market for our ordinary shares may not develop and the trading price for our ordinary shares may fluctuate significantly.

              We applied to list our ordinary shares on the NASDAQ Global Market. Prior to the completion of this offering, there has been no public market for our ordinary shares, and there is no guarantee that a liquid public market for our ordinary shares will develop. If an active public market for our ordinary shares does not develop following the completion of this offering, the market price and liquidity of our ordinary shares may be materially and adversely affected. The initial public offering price for our ordinary shares will be determined by negotiation between us and the underwriters based upon several factors, and we can provide no assurance that the trading price of our ordinary shares after this offering will not decline below the initial public offering price. As a result, investors in our ordinary shares may experience a significant decrease in the value of their investment.

The trading prices of our ordinary shares are likely to be volatile, which could result in substantial losses to investors.

              The trading prices of our ordinary shares are likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, like the performance and fluctuation of the market prices of other companies with business operations located mainly in Europe that have listed their securities in the United States. A number of European companies have listed or are in the process of listing their securities on U.S. stock markets. The securities of some of these companies have experienced significant volatility, including price declines in connection with their initial public offerings. The trading performances of these European companies' securities after their offerings may affect the attitudes of investors toward European companies listed in the United States in general and consequently may impact the trading performance of our ordinary shares, regardless of our actual operating performance.

              In addition to market and industry factors, the price and trading volume for our ordinary shares may be highly volatile for factors specific to our own operations, including the following:

      variations in our revenue, earnings and cash flow;

      announcements of new investments, acquisitions, strategic partnerships or joint ventures;

      announcements of new services and expansions by us or our competitors;

      changes in financial estimates by securities analysts;

      additions or departures of key personnel;

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      release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities;

      potential litigation or regulatory investigations; and

      fluctuations in market prices for our products.

              Any of these factors may result in large and sudden changes in the volume and price at which our ordinary shares will trade. In the past, shareholders of a public company often brought securities class action suits against the company following periods of instability in the market price of that company's securities. If we were involved in a class action suit, it could divert a significant amount of our management's attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

We have in the past and may in the future experience deficiencies, including material weaknesses, in our internal control over financial reporting. Our business and our share price may be adversely affected if we do not remediate these material weaknesses or if we have other weaknesses in our internal controls.

              Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP. A material weakness, as defined in the standards established by the Public Company Accounting Oversight Board, is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In connection with the audit of our financial statements for 2009, we identified a material weakness in our internal control over financial reporting relating to our audited financial statements for fiscal years 2007 and 2008. Specifically, in our case, management and our independent registered accounting firm have determined that internal controls over identifying, evaluating and documenting accounting analysis and conclusions over complex non-routine transactions, including related-party transactions, require strengthening. Although we implemented initiatives aimed at addressing this material weakness, these initiatives may not remediate the identified material weakness. Our management and independent registered public accounting firm did not perform an evaluation of our internal control over financial reporting during any period in accordance with the provisions of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act. Going forward, as a public company, absent an available exemption, we will be required to comply with Section 404 of the Sarbanes-Oxley Act by no later than December 31, 2011. Had we and our independent registered public accounting firm performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act, additional control deficiencies may have been identified by management or our independent registered public accounting firm, and those control deficiencies could have also represented one or more material weaknesses. We cannot be certain as to when we will be able to implement the requirements of Section 404 of the Sarbanes-Oxley Act. If we fail to implement the requirements of Section 404 in a timely manner, we might be subject to sanctions or investigation by regulatory agencies such as the SEC. In addition, failure to comply with Section 404 or the report by us of a material weakness may cause investors to lose confidence in our financial statements, and the trading price of our ordinary shares may decline. If we fail to remedy any material weakness, our financial statements may be inaccurate, our access to the capital markets may be restricted and the trading price of our ordinary shares may decline.

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If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding our ordinary shares, the market price for our ordinary shares and trading volume could decline.

              The trading market for our ordinary shares will be influenced by research or reports that industry or securities analysts publish about us or our business. If one or more analysts who cover us downgrade our ordinary shares, the market price for our ordinary shares would likely decline. If one or more of these analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for our ordinary shares to decline.

The sale or availability for sale of substantial amounts of our ordinary shares could adversely affect their market price.

              Sales of substantial amounts of our ordinary shares in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of our ordinary shares and could materially impair our ability to raise capital through equity offerings in the future. The ordinary shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended, or the Securities Act, and shares held by our existing shareholders may also be sold in the public market in the future subject to the restrictions in Rule 144 and Rule 701 under the Securities Act and the applicable lock-up agreements. There will be                        ordinary shares outstanding immediately after this offering, or                        ordinary shares if the underwriters exercise their option to purchase additional ordinary shares in full. In connection with this offering, we and our officers, directors and certain of our shareholders have agreed not to sell any ordinary shares for 180 days after the date of this prospectus without the prior written consent of the underwriters. Upon expiration of these agreements with our officers, directors and certain of our shareholders, there will be an additional                        ordinary shares that may be sold on the public market without restriction. However, the underwriters may release these securities from these restrictions at any time, subject to applicable regulations of the Financial Industry Regulatory Authority, Inc., or FINRA. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of our ordinary shares.

              We are party to a registration rights agreement with certain of our shareholders and officers, including TMG Holdings Coöperatief U.A., or TMG, Vertical Fund I, L.P., or VFI, Vertical Fund II, L.P., or VFII, KCH Stockholm AB, or KCH, Phil Invest ApS and Douglas W. Kohrs, which requires us to register up to                        of our ordinary shares held by these persons under the Securities Act, subject to certain restrictions and conditions described in "Description of Ordinary Shares—Registration Rights". The market price of our ordinary shares could decline as a result of the registration of or the perception that registration may occur of a large number of our ordinary shares.

You will experience immediate and substantial dilution.

              The initial public offering price is substantially higher than the as adjusted net tangible book value of each outstanding ordinary share immediately after this offering. As a result, purchasers of our ordinary shares in this offering will suffer immediate and substantial dilution. Based on an assumed initial public offering price of $            per ordinary share, the midpoint of the range set forth on the cover page of this prospectus, and our as adjusted net tangible book value as of July 4, 2010, the dilution will be $            per share to new investors in this offering. If the underwriters sell additional shares following the exercise of their option to purchase additional shares or if option holders exercise outstanding options to purchase ordinary shares, further dilution could occur.

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We are a Netherlands company, and it may be difficult for you to obtain or enforce judgments against us or our executive officers, some of our directors and some of our named experts in the United States.

              We were formed under the laws of The Netherlands and, as such, the rights of holders of our ordinary shares and the civil liability of our directors will be governed by Dutch laws and our amended articles of association. The rights of shareholders under the laws of The Netherlands may differ from the rights of shareholders of companies incorporated in other jurisdictions. Some of the named experts referred to in this prospectus are not residents of the United States, and certain of our directors and our executive officers and most of our assets and some of the assets of our directors are located outside the United States. As a result, you may not be able to serve process on us or on such persons in the United States or obtain or enforce judgments from U.S. courts against them or us based on the civil liability provisions of the securities laws of the United States. There is doubt as to whether Dutch courts would enforce certain civil liabilities under U.S. securities laws in original actions or enforce claims for punitive damages.

              Under our amended articles of association, we indemnify and hold our directors harmless against all claims and suits brought against them, subject to limited exceptions. Although there is doubt as to whether U.S. courts would enforce such provision in an action brought in the United States under U.S. securities laws, such provision could make enforcing judgments obtained outside of The Netherlands more difficult to enforce against our assets in The Netherlands or jurisdictions that would apply Dutch law.

Your rights as a holder of ordinary shares will be governed by Dutch law and will differ from the rights of shareholders under U.S. law.

              We are a public limited liability company incorporated under Dutch law. The rights of holders of ordinary shares are governed by Dutch law and our amended articles of association. These rights differ from the typical rights of shareholders in U.S. corporations. For example, Dutch law significantly limits the circumstances under which shareholders of Dutch companies may bring an action on behalf of a company.

We have not determined a specific use for a portion of the net proceeds from this offering, and we may use these proceeds in ways with which you may not agree.

              We have not determined a specific use for a portion of the net proceeds of this offering, and our management will have considerable discretion in deciding how to apply these proceeds. You will not have the opportunity to assess whether the proceeds are being used appropriately before you make your investment decision. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. There is no guarantee that the net proceeds will be used in a manner that would improve our results of operations or increase the price of our ordinary shares, nor that these net proceeds will be placed only in investments that generate income or appreciate in value.

We do not anticipate paying dividends on our ordinary shares.

              We have not previously declared or paid cash dividends and we have no plan to declare or pay any dividends in the near future on our ordinary shares. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business. Our board of directors has complete discretion as to whether to distribute dividends. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

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We will incur increased costs as a result of being a public company.

              Upon completion of this offering, we will become a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the NASDAQ Global Market, imposes various requirements on the corporate governance practices of public companies. We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. For example, as a result of becoming a public company, we will need to adopt policies regarding internal controls and disclosure controls and procedures. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

WP Bermuda and its affiliates, our major shareholder, will control approximately        % of our ordinary shares after this offering, and this concentration of ownership may deter a change in control or other transaction that is favorable to our shareholders.

              Upon completion of this offering, WP Bermuda and its affiliates, or Warburg Pincus, will, in the aggregate, beneficially own approximately        % of our outstanding ordinary shares, or approximately        % if the underwriters exercise their overallotment option in full. These shareholders could effectively control all matters requiring our shareholders' approval, including the election of directors. This concentration of ownership may also cause, delay, deter or prevent a change in control, and may make some transactions more difficult or impossible to complete without the support of these shareholders, regardless of the impact of this transaction on our other shareholders. In addition, our Securityholders' Agreement, as amended on August 27, 2010, gives TMG, an affiliate of Warburg Pincus, effective from and after the closing of this offering, the right to designate three of the eight directors to be nominated to our board of directors for so long as TMG beneficially owns at least 25% of the outstanding shares, two of the eight directors for so long as TMG beneficially owns at least 10% but less than 25% of the outstanding shares and one of the eight directors for so long as TMG beneficially owns at least 5% but less than 10% of the outstanding shares, and the Company has agreed to use its reasonable best efforts to cause the TMG designees to be elected. For more information regarding the Securityholders' Agreement please refer to the discussion under "Related Party Transactions."

After this offering, we may be considered a "controlled company" within the meaning of the NASDAQ listing requirements and, as a result, would qualify for exemptions from certain corporate governance requirements.

              Warburg Pincus may own more than 50% of the voting power of our ordinary shares after this offering, and if so, we would be considered to be a "controlled company" for the purposes of the NASDAQ listing requirements. Under the NASDAQ listing requirements, a "controlled company" is permitted to opt out of the provisions that would otherwise require (i) our board of directors to be comprised of a majority of independent directors, (ii) compensation of our officers to be determined or recommended to the board of directors by a majority of its independent directors or by a compensation committee that is composed entirely of independent directors and (iii) director nominees to be selected or recommended for selection by a majority of the independent directors or by a nominating committee composed solely of independent directors. Although we intend to comply with these listing requirements whether or not we are a controlled company, there is no guarantee that we will not take advantage of these exemptions in the future. Accordingly, you may not have the same protections afforded to shareholders of companies that are subject to all of the NASDAQ corporate governance requirements.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

              This prospectus contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

              You can identify these forward-looking statements by words or phrases such as "may," "will," "expect," "anticipate," "aim," "estimate," "intend," "plan," "believe," "likely to" or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, but are not limited to, statements about:

    our growth strategies;

    our future business development, results of operations and financial condition;

    expected changes in our revenue and certain cost or expense items;

    our ability to develop new products and attract customers;

    our ability to protect our intellectual property rights;

    our expectation regarding the use of proceeds from this offering; and

    assumptions underlying or related to any of the foregoing.

              You should read thoroughly this prospectus and the documents that we refer to in this prospectus with the understanding that our actual future results may be materially different from and worse than what we expect. Other sections of this prospectus include additional factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.

              You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

              Unless otherwise indicated, information contained in this prospectus concerning the global orthopaedic medical device industry, the extremities sub-markets and geographic breakdown, and our and our competitors' market shares, is based on information from independent industry analysts and third-party sources and management estimates. Management estimates are derived from publicly available information released by independent industry analysts and third-party sources, as well as data from our internal research, and are based on assumptions made by us based on such data and our knowledge of such industry and markets, which we believe to be reasonable. Other than Millennium Research Group, none of the sources cited in this prospectus have consented to the inclusion of any data from their reports, nor have we sought their consent. Such data involves risks and uncertainties and are subject to change based on various factors, including those discussed under the heading "Risk Factors."

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USE OF PROCEEDS

              We estimate that we will receive net proceeds from this offering of approximately $       million after deducting underwriting discounts and the estimated offering expenses payable by us. If the underwriters exercise their overallotment option in full, we estimate that we will receive net proceeds of approximately $       million. These estimates are based upon an assumed initial public offering price of $        per share, the mid-point of the range shown on the front cover page of this prospectus. A $1.00 increase or decrease in the assumed initial public offering price of $            per ordinary share would increase or decrease, as applicable, the net proceeds of this offering by $       million, assuming the sale of            ordinary shares at $            per share, the mid-point of the range shown on the front cover page of this prospectus and after deducting underwriting discounts and the estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase or decrease of 1.0 million ordinary shares in the number of ordinary shares offered by us would increase or decrease the net proceeds to us from this offering by approximately $       million, assuming that the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and estimated offering expenses payable by us.

              We intend to use the net proceeds received by us from this offering:

    to repay all of the existing indebtedness under our notes payable, including accrued interest thereon, payable of approximately €82.3 million, or $103.3 million at the exchange rate as of July 4, 2010; and

    for general corporate purposes.

              The notes payable we intend to repay are (i) the €37,000,000 promissory note due March 31, 2014, issued pursuant to a loan note instrument, dated April 3, 2009, between us and certain shareholders named therein; and (ii) the €34,500,000 promissory note due February 28, 2013, issued pursuant to a loan note instrument, dated February 29, 2008, between us and certain shareholders named therein. The notes carry a fixed interest rate of 8.0% per annum with interest payments accrued in kind semi-annually. The following table identifies our affiliates that hold notes and the amounts they own. We intend to repay these note amounts, plus any accrued interest thereon, with a portion of the proceeds from this offering:

Amounts held by our affiliates under the €37,000,000 promissory note due March 31, 2014:   Amounts held by our affiliates under the €34,500,000 promissory note due February 28, 2013:

Affiliate
  Note amount  
Affiliate
  Note amount  

Warburg Pincus (Bermuda)
    Private Equity IX, L.P. 

  11,204,000  

Warburg Pincus (Bermuda)
    Private Equity IX, L.P

  24,700,000  

KCH Stockholm AB

  2,400,000  

KCH Stockholm AB

  3,500,000  

Amy and Richard F. Wallman

  260,000  

Vertical Fund I, L.P. 

  3,153,000  

Douglas W. Kohrs

  258,000  

Vertical Fund II, L.P. 

  929,000  

Ralph E. Barisano, Jr. 

  45,000  

Douglas W. Kohrs

  562,000  

Stephan Epinette

  30,000  

Diane Doty

  166,000  

Diane Doty

  18,000  

Ralph E. Barisano

  26,000  

       

Jamal D. Rushdy

  26,000  

       

James C. Harber

  19,000  

       

James E. Kwan

  7,000  

              We may also use a portion of the net proceeds to acquire other businesses, products or technologies. Our management will have significant flexibility in applying the net proceeds of the offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus.

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DIVIDEND POLICY

              We have not previously declared or paid cash dividends and we have no plan to declare or pay any dividends in the near future on our ordinary shares. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

              Our board of directors has complete discretion as to whether to distribute dividends. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

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CAPITALIZATION

              The following table sets forth our total capitalization as of July 4, 2010:

    on an actual basis; and

    on an as adjusted basis to reflect the sale of            ordinary shares by us in this offering at an assumed initial public offering price of $            per ordinary share, the mid-point of the range set forth on the front cover of this prospectus, after deducting the underwriting discounts and estimated offering expenses payable by us.

              You should read this table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information under "Management's Discussion and Analysis of Financial Condition and Results of Operations."

 
  As of July 4, 2010  
 
  Actual   As adjusted  
 
  (in thousands, except share data)
(unaudited)

 

Long-term debt, including current maturities:

             
 

Notes payable

    69,887        
 

Other long-term debt

    49,039        
           

Total debt

  $ 118,926        
           

Shareholders' equity:

             

Ordinary shares, €0.01 par value, 300,000,000 shares authorized; 88,703,258 shares issued and outstanding, actual;        shares issued and outstanding, as adjusted

    1,156        

Additional paid-in capital

    434,362        

Accumulated deficit

    (162,676 )      

Accumulated other comprehensive income

    5,390        
           

Total shareholders' equity

    278,232        
           

Total capitalization

  $ 397,158        
           

              Each $1.00 increase or decrease in the assumed initial public offering price of $            per ordinary share, the mid-point of the price range set forth on the cover page of this prospectus, would increase or decrease each of the as adjusted additional paid-in-capital, total shareholders' equity and total capitalization by $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of shares we are offering. Each increase or decrease of 1.0 million ordinary shares in the number of ordinary shares offered by us would increase or decrease each of the as adjusted additional paid-in-capital, total shareholders' equity and total capitalization by $             million, assuming that the assumed public offering price remains the same, and after deducting the estimated underwriting discounts and estimated offering expenses payable by us.

              The number of ordinary shares to be outstanding after this offering is based on 88,703,258 ordinary shares outstanding as of July 4, 2010, and excludes:

    10,551,479 ordinary shares issuable upon exercise of outstanding options to purchase ordinary shares as of July 4, 2010, at a weighted average exercise price of $5.53 per ordinary share; and

    4,291,592 ordinary shares reserved for future issuance under our stock option plan as of July 4, 2010.

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DILUTION

              If you invest in our ordinary shares, your interest will be diluted immediately to the extent of the difference between the public offering price per ordinary share you will pay in this offering and the as adjusted net tangible book value per ordinary share immediately after this offering.

              Our net tangible book value as of July 4, 2010, was approximately            per ordinary share. Net tangible book value per ordinary share represents the amount of total tangible assets, minus the amount of total liabilities, divided by the total number of ordinary shares outstanding. Dilution is determined by subtracting net tangible book value per ordinary share from the assumed public offering price per ordinary share.

              Without taking into account any other changes in such net tangible book value after July 4, 2010, our as adjusted net tangible book value at July 4, 2010, would have been $        per ordinary share, after giving effect to the sale of        ordinary shares in this offering at an assumed initial public offering price of $        per share, the mid-point of range set forth on the cover page of this prospectus, and after deducting underwriting discounts and estimated offering expenses payable by us. This represents an immediate increase in as adjusted net tangible book value of $        per ordinary share to existing shareholders and immediate dilution of $        per ordinary share to new investors in this offering.

              The following table illustrates the dilution on a per ordinary share basis:

Assumed initial public offering price per ordinary share

  $    
       
 

Net tangible book value per ordinary share

  $    
       
 

Increase per ordinary share attributable to this offering

       
       

As adjusted net tangible book value per ordinary share after this offering

       
       

Dilution per ordinary share to new investors in the offering

  $    
       

              A $1.00 increase or decrease in the assumed public offering price of $        per ordinary share would increase or decrease our as adjusted net tangible book value by approximately $         million, or $        per ordinary share, and the as adjusted dilution per share to investors in this offering by approximately $        per ordinary share, assuming no change to the number of ordinary shares offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and the estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase or decrease of 1.0 million ordinary shares in the number of ordinary shares offered by us would increase or decrease our as adjusted net tangible book value by approximately $         million, or $        per ordinary share, and the as adjusted dilution per share to investors in this offering by approximately $        per ordinary share assuming no change to the number of ordinary shares offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and the estimated offering expenses payable by us. The as adjusted information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our ordinary shares and other terms of this offering determined at pricing.

              If the underwriters exercise their overallotment option in full, our as adjusted net tangible book value at July 4, 2010 would be $        million, or $        per ordinary share, representing an immediate increase to existing shareholders of $        per ordinary share and immediate dilution of $        per share to new investors in this offering.

              The following table summarizes, on an as adjusted basis as of July 4, 2010, the differences between our existing shareholders as of July 4, 2010 and the new investors in this offering with respect to the number of ordinary shares purchased from us, the total consideration paid and the average price

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per ordinary share paid at an assumed initial public offering price of $        per share, the mid-point of the range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and estimated offering expenses payable by us.

 
  Ordinary shares
purchased
   
   
   
 
 
  Total consideration    
 
 
  Average price
per ordinary
share
 
 
  Number   Percent   Amount   Percent  

Existing shareholders

                               

New investors

                               
 

Total

                               

              A $1.00 increase or decrease in the assumed public offering price of $        per ordinary share would increase or decrease total consideration paid by new investors, total consideration paid by all shareholders and average price per ordinary share paid by all shareholders $        , $        and $        , respectively, assuming the sale of         ordinary shares at $        per share, the mid-point of the range set forth on the cover page of this prospectus, and after deducting underwriting discounts and estimated offering expenses payable by us.

              If the underwriters exercise their option to purchase additional shares in full, the number of ordinary shares beneficially owned by existing shareholders would decrease to approximately        , or approximately        % of the total number of ordinary shares outstanding after this offering, and the number of shares held by new investors will be increased to        shares, or approximately        % of the total number of ordinary shares outstanding after this offering.

              The tables and calculations above are based on 88,703,258 ordinary shares outstanding as of July 4, 2010, and excludes:

    10,551,479 ordinary shares issuable upon exercise of outstanding options to purchase ordinary shares as of July 4, 2010, at a weighted average exercise price of $5.53 per ordinary share; and

    4,291,592 ordinary shares reserved for future issuance under our stock option plan as of July 4, 2010.

              The table and calculations above excludes ordinary shares reserved for future issuance. To the extent the options are exercised and awards are granted under these plans, there may be dilution to our shareholders. We may also choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our shareholders.

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SELECTED CONSOLIDATED FINANCIAL DATA

              The following table sets forth our selected historical consolidated financial information. The selected historical consolidated statements of operations data and other financial data for the years ended December 31, 2007, December 28, 2008, and December 27, 2009, and the selected historical balance sheet data as of December 28, 2008 and December 27, 2009, have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary historical consolidated balance sheet data as of December 31, 2007 has been derived from our audited consolidated financial statements not included in this prospectus. The selected historical consolidated statements of operations data and other financial data for the period from July 18, 2006 to December 31, 2006, and the selected historical balance sheet data as of December 31, 2006, were derived from the audited consolidated financial statements not included in this prospectus. The consolidated financial statements referred to in the previous three sentences have been audited by Ernst & Young LLP, an independent registered public accounting firm, and were prepared in accordance with U.S. GAAP. On July 18, 2006, we were acquired by the Investor Group. Selected financial data as of December 31, 2005 and for the periods from January 1, 2005 to December 31, 2005 and January 1, 2006 to July 18, 2006 have not been presented because it is not available and cannot be created without unreasonable effort and expense. Furthermore, we believe that financial data for the periods from January 1, 2005 to December 31, 2005 and January 1, 2006 to July 18, 2006 do not significantly contribute to an investor's understanding of our historical financial performance and financial condition because of our acquisition and adoption of uniform accounting standards on July 18, 2006.

              Our selected historical consolidated statement of operations data and other financial data for the 26 weeks ended June 28, 2009, and 27 weeks ended July 4, 2010, and the selected historical balance sheet data as of July 4, 2010, have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The June 28, 2009 and July 4, 2010 unaudited financial statements have been prepared on a basis consistent with our audited consolidated financial statements and reflect all adjustments, consisting of normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of any interim period are not necessarily indicative of the results that may be expected for any other interim period or for the full fiscal year, and the historical results set forth below do not necessarily indicate results expected for any future period.

              Our fiscal quarters are generally determined on a 13-week basis and always end on a Sunday. As a result, our fiscal year is generally 364 days. Our year-end periods end on the Sunday nearest to December 31. Every few years, it is necessary to add an extra week to a quarter to make it a 14-week period in order to have our year end fall on the Sunday nearest to December 31. For example, the first two quarters of 2010 include an extra week of operations compared to the first two quarters of 2009. For the purposes of this prospectus, references to:

    2007 and our 2007 fiscal year refer to the fiscal year ended December 31, 2007;

    2008 and our 2008 fiscal year refer to the fiscal year ended December 28, 2008;

    2009 and our 2009 fiscal year refer to the fiscal year ended December 27, 2009;

    the first two quarters of 2009 refers to the 26-week period ended June 28, 2009; and

    the first two quarters of 2010 refers to the 27-week period ended July 4, 2010.

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              The information presented below should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the notes thereto included elsewhere in this prospectus.

 
   
  Year ended   Two quarters ended  
 
  Period from
July 18, 2006
to December 31,
2006
 
 
  December 31,
2007
  December 28,
2008
  December 27,
2009
  June 28,
2009
  July 4,
2010
 
 
   
   
   
   
  (unaudited)
  (unaudited)
 
 
  (in thousands, except per share data)
  (in thousands, except
per share data)

 

Statement of Operations Data:

                                     

Revenue

  $ 46,158   $ 145,369   $ 177,370   $ 201,462   $ 100,059   $ 116,406  
 

Cost of goods sold

    19,912     46,573     45,500     54,859     27,577     32,001  
                           

Gross profit

    26,246     98,796     131,870     146,603     72,482     84,405  
 

Sales and marketing

    21,544     82,014     106,870     115,630     54,297     64,191  
 

General and administrative

    9,118     17,976     21,742     20,790     10,523     11,194  
 

Research and development

    1,730     13,305     20,635     18,120     9,937     8,816  
 

Amortization of intangible assets

    2,272     7,946     11,186     15,173     5,387     5,878  
 

Special charges

                1,864     610     252  
 

In-process research and development

    9,649     15,107                  
                           

Operating loss

    (18,067 )   (37,552 )   (28,563 )   (24,974 )   (8,272 )   (5,926 )
 

Interest expense

    (828 )   (2,394 )   (11,171 )   (19,667 )   (8,511 )   (10,765 )
 

Foreign currency transaction gain (loss)

    115     (5,859 )   1,701     3,003     2,249     (5,739 )
 

Other non-operating (expense) income

        (1,966 )   (1,371 )   (28,461 )   (919 )   61  
                           

Loss before income taxes

    (18,780 )   (47,771 )   (39,404 )   (70,099 )   (15,453 )   (22,369 )
 

Income tax benefit

    2,279     6,580     5,227     14,413     1,712     3,715  
                           

Consolidated net loss

    (16,501 )   (41,191 )   (34,177 )   (55,686 )   (13,741 )   (18,654 )

Net loss attributable to noncontrolling interest

            (1,173 )   (1,067 )   (785 )   (696 )
                           

Net loss attributable to Tornier

    (16,501 )   (41,191 )   (33,004 )   (54,619 )   (12,956 )   (17,958 )

Accretion of noncontrolling interest

            (3,761 )   (1,127 )   (785 )   (679 )
                           

Net loss attributable to ordinary shareholders

  $ (16,501 ) $ (41,191 ) $ (36,765 ) $ (55,746 ) $ (13,741 ) $ (18,637 )
                           

Weighted-average ordinary shares outstanding: basic and diluted

    44,000     66,666     71,791     73,224     72,935     78,117  

Net loss per share: basic and diluted

  $ (0.38 ) $ (0.62 ) $ (0.51 ) $ (0.76 ) $ (0.19 ) $ (0.24 )
                           

Balance Sheet Data:

                                     

Cash and cash equivalents

  $ 8,734   $ 17,347   $ 21,348   $ 37,969   $ 54,827   $ 33,209  

Other current assets

    88,911     107,968     122,167     133,179     126,115     134,268  

Total assets

    291,124     431,614     475,967     520,187     520,906     478,137  

Total liabilities

    141,426     181,738     212,442     277,140     293,221     199,905  

Noncontrolling interest

            23,200     23,259     23,200      

Total shareholders' equity

    149,698     249,876     240,325     219,788     204,484     278,232  

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  Year ended   Two quarters ended  
 
  Period from
July 18, 2006
to December 31,
2006
 
 
  December 31,
2007
  December 28,
2008
  December 27,
2009
  June 28,
2009
  July 4,
2010
 
 
   
   
   
   
  (unaudited)
  (unaudited)
 
 
  (in thousands)
  (in thousands)
 

Other Financial Data:

                                     

Net cash provided by (used in) operating activities

  $ 6,116   $ (8,165 ) $ (19,482 ) $ 2,291   $ 2,221   $ 1,984  

Net cash provided by (used in) investing activities

    (14,508 )   (106,188 )   (43,314 )   (31,104 )   (14,227 )   (15,157 )

Net cash provided by (used in) financing activities

    (1,829 )   121,886     66,487     44,857     45,904     9,607  

Depreciation and amortization

    4,919     15,582     22,331     29,732     11,497     13,011  

Capital expenditures

    (4,671 )   (17,729 )   (31,622 )   (23,448 )   (11,197 )   (13,505 )

Effect of exchange rate changes on cash and cash equivalents

    699     1,080     310     577     (419 )   (1,194 )

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

              You should read the following discussion of our financial condition and results of operations together with the selected consolidated financial data, consolidated financial statements and the notes thereto included elsewhere in this prospectus, and other financial information included in this prospectus. The following discussion may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under "Risk Factors" and elsewhere in this prospectus. These risks could cause our actual results to differ materially from any future performance suggested below.

Overview

              We are a global medical device company focused on surgeons that treat musculoskeletal injuries and disorders of the shoulder, elbow, wrist, hand, ankle and foot. We refer to these surgeons as extremity specialists. We sell to this extremity specialist customer base a broad line of joint replacement, trauma, sports medicine and orthobiologic products to treat extremity joints. Our motto of "specialists serving specialists" encompasses this focus. In certain international markets, we also offer joint replacement products for the hip and knee. We currently sell over 70 product lines in approximately 35 countries.

              We have had a tradition of innovation, intense focus on surgeon education and commitment to advancement of orthopaedic technology since our founding approximately 70 years ago in France by René Tornier. Our history includes the introduction of the porous orthopaedic hip implant, the application of the Morse taper, which is a reliable means of joining modular orthopaedic implants, and, more recently, the introduction of the reversed shoulder implant in the United States. This track record of innovation over the decades stems from our close collaboration with leading orthopaedic surgeons and thought leaders throughout the world.

              We were acquired in 2006 by the Investor Group. They recognized the potential to leverage our reputation for innovation and our strong extremity joint portfolio as a platform upon which they could build a global company focused on the rapidly evolving upper and lower extremity specialties. The Investor Group has contributed capital resources and a management team with a track record of success in the orthopaedic industry in an effort to expand our offering in extremities and accelerate our growth. Since the acquisition in 2006, we have:

      created a single, extremity specialist sales channel in the United States primarily focused on our products;

      enhanced and broadened our portfolio of shoulder joint implants and foot and ankle products;

      entered the sports medicine and orthobiologics markets through acquisitions and licensing agreements;

      improved our hip and knee product offerings, helping us gain market share internationally; and

      significantly increased investment in research and development and expanded business development activities to build a pipeline of innovative new technologies.

              As a result of the foregoing actions, we believe our addressable worldwide market opportunity has increased from approximately $2 billion in 2006 to approximately $7 billion in 2009.

              We believe we are differentiated by our full portfolio of upper and lower extremity products, our dedicated extremity-focused sales organization and our strategic focus on extremities. We further believe that we are well-positioned to benefit from the opportunities in the extremity products marketplace as we are already among the global leaders in the shoulder and ankle joint replacement

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markets with the #2 market position worldwide for sales of shoulder joint replacement products and the #1 market position in the United States in foot and ankle joint replacement systems in 2009 as measured by revenue. We more recently have expanded our technology base and product offering to include: new joint replacement products based on new materials; improved trauma products based on innovative designs; and proprietary orthobiologic materials for soft tissue repair. In the United States, which is the largest orthopaedic market, we believe that our single, "specialists serving specialists" distribution channel is strategically aligned with what we believe is an ongoing trend in orthopaedics for surgeons to specialize in certain parts of the anatomy or certain types of procedures.

              Our principal products are organized in four major categories: upper extremity joints and trauma, lower extremity joints and trauma, sports medicine and orthobiologics, and large joints and other. Our upper extremity products include joint replacement and bone fixation devices for the shoulder, hand, wrist and elbow. Our lower extremity products include joint replacement and bone fixation devices for the foot and ankle. Our sports medicine and orthobiologics product category includes products used across several anatomic sites to mechanically repair tissue-to-tissue or tissue-to-bone injuries, in the case of sports medicine, or to support or induce remodeling and regeneration of tendons, ligaments, bone and cartilage, in the case of orthobiologics. Our large joints and other products include hip and knee joint replacement implants and ancillary products.

              Innovations in the orthopaedic industry have typically consisted of evolutions of product design in implant fixation, joint mechanics, and instruments and modifications of existing metal or plastic-based device designs rather than new products based on combinations of new designs and new materials. In contrast, the growth of our target markets has been driven by the development of products that respond to the particular mechanics of small joints and the importance of soft tissue to small joint stability and function. We are committed to the development of new designs utilizing both conventional materials and new tissue-friendly biomaterials that we expect will create new markets. We believe that we are a leader in researching and incorporating some of these new technologies across multiple product platforms.

              In the United States, we sell products from our upper extremity joints and trauma, lower extremity joints and trauma, and sports medicine and orthobiologics product categories; we do not actively market large joints in the United States nor do we currently have plans to do so. While we market our products to extremity specialists, our revenue is generated from sales to healthcare institutions and distributors. We sell through a single sales channel consisting of a network of independent commission-based sales agencies. Internationally, where the trend among surgeons toward specialization is not as advanced as in the United States, we sell our full product portfolio, including upper extremity joints and trauma, lower extremity joints and trauma, sports medicine and orthobiologics and large joints. We utilize several distribution approaches depending on the individual market requirements, including direct sales organizations in the largest European markets and independent distributors for most other international markets. In 2009, we generated revenue of $201.5 million, 57% of which was in North America and 43% of which was international.

              We have significantly grown our business since our acquisition by the Investor Group in July 2006. Since then we have built an extremities focused business that offers a broad range of products to a focused group of specialty surgeons. We believe this strategy has been the primary factor in enabling our revenue growth from 2006 to 2009. During that time we also increased our operating expenses significantly. We have strategically invested with particular emphasis on product development, acquisition of strategic products and technologies and sales commissions to support both current and future growth. While we believe we will continue to experience operating losses during 2010, we also believe the investments made will allow us to grow our revenue at rates exceeding our expected growth in operating expenses in the future.

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Foreign Currency Exchange Rates

              A substantial portion of our business is located outside the United States and as a result we generate revenue and incur expenses denominated in currencies other than the U.S. dollar. The majority of our operations denominated in currencies other than the U.S. dollar are denominated in Euros. In 2009 and 2008, approximately 43% and 48%, respectively, of our sales were denominated in foreign currencies. As a result, our revenue can be significantly impacted by fluctuations in foreign currency exchange rates. We expect that foreign currencies will continue to represent a similarly significant percentage of our sales in the future. Selling, marketing and administrative costs related to these sales are largely denominated in the same foreign currencies, thereby limiting our transaction risk exposure. We therefore believe that the risk of a significant impact on our revenue from foreign currency fluctuations is minimal. However, a substantial portion of the products we sell in the United States are manufactured in countries where costs are incurred in Euros. Fluctuations in the Euro to U.S. dollar exchange rate will have an impact on the cost of the products we manufacture in those countries, but we would not likely be able to change our U.S. dollar selling prices of those same products in the United States in response to those cost fluctuations. As a result, fluctuations in the Euro to U.S. dollar exchange rates could have a significant impact on our gross profit in the future.

Basis of Presentation

              Our fiscal quarters are generally determined on a 13-week basis and always end on a Sunday. As a result, our fiscal year is generally 364 days. Our year-end periods end on the Sunday nearest to December 31. Every few years, it is necessary to add an extra week to a quarter to make it a 14-week period in order to have our year end fall on the Sunday nearest to December 31. For example, the first two quarters ended July 4, 2010 include an extra week of operations compared to the first two quarters ended June 28, 2009. For purposes of this management's discussion and analysis of financial condition and results of operations, references to:

      2007 and our 2007 fiscal year refer to the fiscal year ended December 31, 2007;

      2008 and our 2008 fiscal year refer to the fiscal year ended December 28, 2008;

      2009 and our 2009 fiscal year refer to the fiscal year ended December 27, 2009;

      The first two quarters of 2009 refers to the 26-week period ended June 28, 2009; and

      The first two quarters of 2010 refers to the 27-week period ended July 4, 2010.

Corporate Transactions

              Since our acquisition by the Investor Group in 2006, we have engaged in a series of acquisitions as we have sought to grow the business and broaden our product portfolio. Below is a summary of our recent acquisitions:

Relevant Acquisitions

              Axya Holdings, Inc., or Axya.    On February 27, 2007, we acquired 100% of the stock of Axya. With the addition of Axya's sports medicine domain expertise and products, which included traditional and advanced suture anchors and arthroscopic instruments for soft tissue repair in the shoulder, we were positioned to enter the shoulder sports medicine market. Many surgeons who perform rotator cuff repair surgery also perform shoulder joint replacement surgery, and the Axya product portfolio provided us the ability to sell additional products to our existing customer base.

              Nexa Orthopedics, Inc., or Nexa.    On February 27, 2007, we acquired 100% of the stock of Nexa. Nexa, a private company based in San Diego, California, was an extremity-focused orthopaedic company with a strong portfolio of implants for the foot and ankle. Nexa's products complemented our Salto and Salto Talaris ankle implants and significantly broadened our lower extremity product portfolio. In addition, Nexa had proprietary capabilities to manufacture orthopaedic implants with

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pyrocarbon, a highly wear-resistant, biocompatible material with wide potential applicability to our entire existing product portfolio. Nexa also had a next-generation shoulder joint replacement implant in its development pipeline, which we currently market as our Ascend shoulder implant. We believe Nexa was the only orthopaedic company in the world with vertically integrated pyrocarbon design and manufacturing capabilities.

              DVO Extremity Solutions, LLC, or DVO.    On March 5, 2007, we acquired the assets of DVO. DVO was an orthopaedic company primarily focused on trauma products, including implants for the hand and wrist. In addition, DVO was developing a shoulder joint replacement that would complement our existing product offering. We commercially launched the shoulder joint replacement product in 2008 as the Affiniti.

              C2M Medical, Inc., or C2M Medical.    On March 26, 2010, we exercised our option to acquire 100% of the stock of C2M Medical, a medical device development company based in San Antonio, Texas, focused on the sports medicine market. C2M Medical developed the Piton Knotless Anchor, an advanced arthroscopic technology for rotator cuff repair. In 2008, we signed a license agreement with C2M Medical for exclusive worldwide rights to the Piton, along with an option to acquire the company. C2M Medical was determined to be a variable interest entity and was consolidated by us beginning in 2008 upon signing the initial license agreement. Refer to Note 16 of our consolidated financial statements for further information regarding the accounting for C2M Medical.

Components of Results of Operations

Revenue

              We derive our revenue from the sale of medical devices that are used by surgeons who treat diseases and disorders of extremity joints including the shoulder, elbow, wrist, hand, ankle and foot. We report our sales in four primary product categories: upper extremity joints and trauma, lower extremity joints and trauma, sports medicine and orthobiologics, and larger joints and other. Our revenue is generated from sales to two types of customers: healthcare institutions and distributors, with healthcare institutions representing a majority of our revenue. We utilize a network of independent sales agencies for sales in the United States and a combination of employee sales representatives, independent sales agencies and distributors for sales outside the United States. Revenue from sales to healthcare institutions is recognized at the time of surgical implantation. We generally record revenue from sales to our distributors at the time the product is shipped to the distributor. Distributors, who sell the products to their customers, take title to the products and assume all risks of ownership at the time of shipment. Our distributors are obligated to pay within specified terms regardless of when, if ever, they sell the products. We charge our customers for shipping and record shipping revenue as part of revenue.

Cost of Goods Sold

              We manufacture a majority of the products that we sell. Our cost of goods sold consists primarily of direct labor, allocated manufacturing overhead, raw materials and components, and excludes amortization of intangible assets, which is presented as a separate component of operating expenses. A portion of the products we sell are manufactured by third parties, and our cost of goods sold for those products consists primarily of the price invoiced by our third-party vendors. Cost of goods sold also includes share-based compensation expenses related to individuals whose salaries are also included within this category. A majority of our current manufacturing facilities are located in Europe and the related manufacturing costs are incurred in Euro. As a result, the cost of goods sold for our products sold in the United States that were manufactured in Europe is subject to foreign currency exchange rate fluctuations.

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Sales and Marketing

              Our variable selling costs consist primarily of commissions paid to our independent sales agencies used in the United States and some other countries to generate sales, royalties based on certain product sales and freight expense we pay to ship our products to customers. Our non-variable sales and marketing costs consist primarily of salaries, personnel costs, including share-based compensation and other support costs related to the selling, marketing and support of our products as well as trade shows, promotions and physician training. Sales and marketing expenses also include the cost of distributing our products, which includes the operating costs and certain administrative costs related to our various worldwide sales and distribution operations. We provide surgical instrumentation to our customers for use during procedures involving our products. There are no contractual arrangements related to our customers' use of our surgical instrumentation and we do not charge a fee for providing access to the related instrumentation. We record surgical instrumentation on our balance sheet as a long-lived asset. The depreciation expense related to our surgical instrumentation is included in sales and marketing expenses.

General and Administrative

              General and administrative expenses consist of expenses for our executive, finance, legal, compliance, administrative, information technology and human resource departments. General and administrative expenses also include share-based compensation expense related to individuals within these departments.

Research and Development

              Research and development expenses include costs associated with the design, development, testing, deployment, enhancement and regulatory clearance or approval of our products. This category also includes costs associated with the design and execution of our clinical trials and regulatory submissions. Research and development expenses also include share-based compensation related to individuals within our research and development groups.

Amortization of Intangible Assets

              Amortization expense for intangible assets includes purchased developed technology, customer relationships and intellectual property, including patents and license rights.

In-Process Research and Development

              Acquired in-process research and development, or IPR&D, reflects amounts assigned to those projects acquired in business combinations prior to December 28, 2008, or the acquisition of assets for which the related products have not received regulatory clearance or approval and have no alternative future use. IPR&D acquired in business combinations subsequent to December 28, 2008, would be recorded as indefinite-lived intangible assets on consolidated balance sheets.

Special Charges

              Special charges consist of certain severance, lease termination and moving costs related to the consolidation of our U.S. facilities during 2009. Special charges also include legal and consulting costs related to establishing new sales and distribution subsidiaries in the United Kingdom and Denmark.

Interest Expense

              Interest expense reflects interest associated with both our notes payable and other long-term and short-term debt. Our notes payable accrue paid-in-kind interest at a rate of 8% annually. Our notes payable were also issued together with warrants to purchase our ordinary shares. The estimated fair value of the warrants at the date of issuance was recorded as a discount to the related notes payable. The debt discount is accreted as additional interest expense to the par value of the notes

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payable over the related term. We also incur interest expense at varying rates of interest on various revolving lines of credit, secured and unsecured term loans and other mortgage-related debt.

Foreign Currency Transaction Gain (Loss)

              Foreign currency transaction gain (loss) consists primarily of foreign currency gains and losses on transactions denominated in a currency other than the functional currency of the related entity. Our foreign currency transactions primarily consist of foreign currency denominated cash, liabilities and intercompany receivables and payables.

Other Non-operating (Expense) Income

              Other non-operating (expense) income primarily relates to losses incurred in the revaluation of our warrant liabilities to fair value as well as other expenses not related to the operations of the business.

Income Tax Benefit

              Income tax benefit includes federal income taxes, income taxes in foreign jurisdictions, state income taxes and changes to our deferred taxes and deferred tax valuation allowance.

Results of Operations

First Two Quarters of 2010 Compared to First Two Quarters of 2009

              Our year-end periods end on the Sunday nearest to December 31. Every few years, it is necessary to add an extra week to a quarter to make it a 14-week period in order to have our year end fall on the Sunday nearest to December 31. For example, the first quarter of the two quarters ended July 4, 2010, includes an extra week of operations compared to the first quarter of the two quarters ended June 28, 2009. The following table sets forth, for the periods indicated, our results of operations expressed as a percentage of revenue:

 
  Two quarters ended  
 
  June 28,
2009
  July 4,
2010
 

Revenue

    100 %   100 %

Cost of goods sold

    28     27  
           

Gross profit

    72     73  

Operating expenses:

             
 

Selling and marketing

    54     55  
 

General and administrative

    11     10  
 

Research and development

    10     8  
 

Amortization of intangible assets

    5     5  
 

Special charges

    1     *  
           

Operating loss

    (8 )%   (5 )%

*
Not meaningful

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              The following tables set forth, for the periods indicated, our revenue by product category and geography expressed as dollar amounts and the changes in revenue between the specified periods expressed as percentages:

 
  Two quarters ended    
 
Revenue by Product Category
  June 28,
2009
  July 4,
2010
  Percent
change
 
 
  ($ in thousands)
   
 

Upper extremity joints and trauma

  $ 62,615   $ 70,587     13 %

Lower extremity joints and trauma

    9,868     11,848     20  

Sports medicine and orthobiologics

    2,544     6,517     156  

Large joints and other

    25,032     27,454     10  
                 
 

Total

  $ 100,059   $ 116,406     16 %
                 

 

 
  Two quarters ended    
 
Revenue by Geography
  June 28,
2009
  July 4,
2010
  Percent
change
 
 
  ($ in thousands)
   
 

North America

  $ 56,130   $ 65,238     16 %

International

    43,929     51,168     16  
                 
 

Total

  $ 100,059   $ 116,406     16 %
                 

              Revenue.    Revenue increased by 16% to $116.4 million for the first two quarters of 2010 from $100.1 million for the first two quarters of 2009, as a result of increased sales in each of our product categories, with the most significant dollar increase occurring in our upper extremity joints and trauma category. We have also experienced an increase in sales in our sports medicine and orthobiologics categories as we continue to broaden our portfolio of offerings in this market. Our overall revenue growth of 16% was consistent across both our North American and international geographies. Our revenue was positively impacted by approximately $0.6 million during the first two quarters of 2010 as a result of foreign currency fluctuations. Revenue also increased over the first two quarters of 2009 due to the extra week of operations included in our 2010 first quarter.

              Revenue by product category.    Revenue in upper extremity joints and trauma increased by 13% to $70.6 million for the first two quarters of 2010 from $62.6 million for the first two quarters of 2009, primarily as a result of the continued increase in sales of our Aequalis shoulder and Affiniti products. We believe that increased sales of our Aequalis shoulder resulted from continued market growth in shoulder replacement procedures and further market acceptance of our reversed and standard Aequalis shoulder joint replacement products. We have seen an increase in sales in our Affiniti shoulder products, which were launched at the end of 2008. Revenue in our lower extremity joints and trauma increased by 20% to $11.8 million for the first two quarters of 2010 from $9.9 million for the first two quarters of 2009, primarily due to increased sales in our foot and ankle fixation products in both North America and internationally. We continue to focus our U.S. distribution network on selling our full range of products and have increased the number of products available internationally. Revenue in sports medicine and orthobiologics increased by 156% to $6.5 million for the first two quarters of 2010 from $2.5 million for the first two quarters of 2009. This increase was attributable to an increase in sales of our Piton products, as well as an increase in sales of our Conexa product, which was in the beginning stages of initial launch during the first quarter of 2009. The first two quarters of 2010 also included initial revenue from our ArthroTunneler, which was launched during the second half of 2009. Revenue from large joints and other increased by 10% to $27.5 million for the first two quarters of 2010 from $25.0 million for the first two quarters of 2009. Our large joint and other revenue increase was primarily due to the existence of an extra week in our first quarter of 2010, combined with approximately $0.1 million of favorable impacts from changes in foreign currency exchange rates.

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              Revenue by geography.    Revenue in North America increased by 16% to $65.2 million for the first two quarters of 2010 from $56.1 million for the first two quarters of 2009, primarily driven by continued increase in sales in upper extremities joints and trauma products, together with a significant increase in sales in sports medicine and orthobiologics products with the launch of Conexa and as our focus on this category increased during 2009. Revenue from the first two quarters of 2010 was also favorably impacted by the extra week compared to the first two quarters of 2009. International revenue increased by 16% to $51.2 million for the first two quarters of 2010 from $43.9 million for the first two quarters of 2009. Our international revenue was positively impacted by approximately $0.6 million during the first two quarters of 2010 as a result of foreign currency fluctuations, principally due to the performance of the Australian Dollar against the U.S. dollar. Excluding the impact of the change in currency exchange rates, our international revenue increased by 15%, primarily due to the launch of our United Kingdom sales office in the first quarter of 2010, increased revenue in France, Spain, and Australia, and the existence of an extra week in the first quarter of 2010.

              Cost of goods sold.    Our cost of goods sold increased by 16% to $32.0 million for the first two quarters of 2010 from $27.6 million for the first two quarters of 2009. As a percentage of revenue, cost of goods sold decreased from 28% for the first two quarters of 2009 to 27% for the first two quarters of 2010, primarily due to a lower level of charges for excess and obsolete inventory during the first two quarters of 2010 offset by the fact that our products currently being sold include a higher level of overhead costs than those sold in the first two quarters of 2009. We have intentionally increased our manufacturing overhead costs in an effort to establish a sufficient level of capacity and manufacturing infrastructure to support our current and future growth plans. Our manufacturing overhead costs have grown at a rate faster than our factory output in recent years, causing an increase in the fully absorbed cost of our products. However, we believe this has allowed us to establish an infrastructure that will be able to sustain our sales growth plans and has increased our ability to obtain leverage on our costs in the future. Our cost of goods sold and corresponding gross profit as a percentage of revenue can be expected to fluctuate in future periods depending upon changes in our product sales mix and prices, distribution channels and geographies, manufacturing yields, period expenses, levels of production volume and currency exchange rates.

              Selling and marketing.    Our selling and marketing expenses increased by 18% to $64.2 million for the first two quarters of 2010 from $54.3 million for the first two quarters of 2009, primarily as a result of $2.9 million of additional variable commissions and royalty expenses on higher revenue, $0.9 million of increased instrument depreciation and maintenance expense from a larger volume of instruments in the field, approximately $0.2 million of increased expense due to changes in foreign currency exchange rates and approximately $1.4 million of increased non-variable selling and marketing expenses related to the additional week of operations included in the first quarter of 2010. The remaining increase in selling and marketing expenses relates to general increases in our selling, marketing, training and distribution costs to support continued growth and product expansion, including our expansion into the United Kingdom and Scandinavia. Selling and marketing expense as a percentage of revenue increased from 54% for the first two quarters of 2009 to 55% for the first two quarters of 2010. The increase in our selling and marketing expenses as a percentage of revenue is due primarily to the increased operating expenses of our new sales office in the United Kingdom, which began operations in the first quarter of 2010.

              General and administrative.    Our general and administrative expenses increased by 6% to $11.2 million for the first two quarters of 2010 from $10.5 million for the first two quarters of 2009. As a percentage of revenue, general and administrative expenses decreased to 10% for the first two quarters of 2010 compared to 11% for the first two quarters of 2009. The increase in expenses in the first two quarters of 2010 is primarily due to severance-related expenses of approximately $0.4 million accrued in the first quarter of 2010 from the departure of our former CFO, as well as increased stock option expense of approximately $0.3 million. While general and administrative expenses as a

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percentage of revenue decreased by 100 basis points, given our preparation for an initial public offering of our ordinary shares, we may not be able to continue to maintain our general and administrative costs as a percentage of revenue in 2010.

              Research and development.    Research and development expenses decreased by 11% to $8.8 million for the first two quarters of 2010 from $9.9 million for the first two quarters of 2009, primarily due to a reduction in the required outside spending for the particular product development projects underway during the first two quarters of 2010 as compared to 2009 as well as a $0.3 million research grant given to the Orthopedic Research and Education Foundation during 2009 that did not recur in the first two quarters of 2010. The decrease in product development expenses was partially offset by consolidated operating expenses from C2M Medical, including certain operating expenses related to the launch of our Piton product. C2M Medical was a variable interest entity which we consolidated in 2008 and holds the intellectual property related to our Piton products. The first two quarters of 2010 included $0.6 million of operating expenses related to C2M Medical compared to an immaterial amount for the first two quarters of 2009. During the first quarter of 2010, we acquired C2M Medical and merged the entity into our existing U.S. operations. The acquisition of C2M was completed in order to purchase the intellectual property related to our Piton products, which we had previously been licensing from C2M, and therefore the C2M entity was no longer needed. As a percentage of revenue, research and development decreased from 10% for the first two quarters of 2009 to 8% for the first two quarters of 2010 due to a higher level of new product development spending occurring during the first two quarters of 2009 compared to the first two quarters of 2010. We expect our level of research and development to fluctuate depending on the timing of new product development projects.

              Amortization of intangible assets.    Amortization of intangible assets increased by 9% to $5.9 million for the first two quarters of 2010 from $5.4 million for the first two quarters of 2009, primarily as a result of additional amortization related to certain license intangibles acquired during 2009.

              Special charges.    Special charges decreased by 59% to $0.3 million for the first two quarters of 2010 compared to $0.6 million for the first two quarters of 2009. These special charges were primarily related to the relocation of our U.S. headquarters and the establishment of our sales office in the United Kingdom. Both of these activities began in the second quarter of 2009. The majority of the expenses related to these activities were completed in the first quarter of 2010. These consolidation and restructuring activities were intended to result in a more efficient use of space and resources within our U.S. operations. The net impact on future periods is expected to be immaterial because the reduction in lease expense and headcount will be offset by additional lease costs in our remaining U.S. facilities to accommodate relocated employees as well as by increased headcount to perform activities within the remaining U.S. locations, including certain activities previously performed by terminated individuals.

              Interest expense.    Our interest expense increased by 26% to $10.8 million for the first two quarters of 2010 from $8.5 million for the first two quarters of 2009 due to the issuance of €37 million of 8% notes payable together with warrants to purchase 8.8 million ordinary shares in April of 2009. 2010 interest expense includes two full quarters of interest expense related to the 8% stated interest on the notes, together with additional interest expense related to the notes being issued at a discount because they were issued in conjunction with warrants. Refer to Note 8 of our consolidated financial statements for further discussion of the accounting treatment of our notes and warrants.

              Foreign currency transaction gain (loss).    Our foreign currency transaction loss was $5.7 million for the first two quarters of 2010 compared to a $2.2 million foreign currency transaction gain for the first two quarters of 2009. The primary driver of our foreign currency transaction loss in the first two quarters of 2010 and gain in the first two quarters of 2009 is related to the revaluation of our warrant liability, which is denominated in a currency other than our functional currency. We recorded a foreign currency loss of $11.8 million and gain of $1.8 million in the first two quarters of 2010 and 2009, respectively, to revalue the warrant liability. The offsetting foreign currency gains and losses in each period relate to the impact of revaluing certain of our intercompany debt and payables between our U.S. and European subsidiaries as a result of changes in the Euro to U.S. dollar exchange rate.

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              Other non-operating (expense) income.    Other non-operating income was $0.1 million for the first two quarters of 2010 compared to expense of $1.0 million for the first two quarters of 2009. Our non-operating income and expense primarily relates to the adjustment of our warrant liability to fair value at the end of each reporting period. We have subsequently settled our warrant liability in May of 2010 by exchanging all the outstanding warrants for our ordinary shares.

              Income tax benefit.    Our income tax benefit increased $2.0 million to $3.7 million for the first two quarters of 2010 from $1.7 million for the first two quarters of 2009. Our effective tax rate for the first two quarters of 2010 and 2009 was 17% and 11%, respectively. Given our history of operating losses, we do not generally record a provision for income taxes in the United States and certain of our European sales offices. Our income tax benefit in the first two quarters of both 2010 and 2009 primarily relate to tax benefit recorded related to our French subsidiaries and the reversal of deferred tax liabilities recognized in the Netherlands related to the debt discount on the notes payable issued in 2008 and 2009. The change in our effective tax rate from the first two quarters of 2009 to the first two quarters of 2010 primarily relates to the relative percentage of our pre-tax loss made up by our French and Netherlands operations.

Fiscal Year Comparisons

              The following table sets forth, for the periods indicated, our results of operations expressed as a percentage of revenue.

 
  Year ended  
 
  December 31,
2007
  December 28,
2008
  December 27,
2009
 

Revenue

    100 %   100 %   100 %

Cost of goods sold

    32     26     27  
               

Gross profit

    68     74     73  

Operating expenses:

                   
 

Selling and marketing

    56     60     57  
 

General and administrative

    12     12     10  
 

Research and development

    9     12     9  
 

Amortization of intangible assets

    5     6     8  
 

In-process research and development

    10          
 

Special charges

            1  
               

Operating loss

    (26 )%   (16 )%   (12 )%

              The following tables set forth, for the periods indicated, our revenue by product category and geography expressed as dollar amounts and the changes in revenue between the specified periods expressed as percentages:

Revenue by Product Category

 
  Year ended    
   
 
 
  Percent change  
 
  December 31,
2007
  December 28,
2008
  December 27,
2009
 
 
  2008/2007   2009/2008  
 
  ($ in thousands)
   
   
 

Upper extremity joints and trauma

  $ 87,724   $ 108,829   $ 125,454     24 %   15 %

Lower extremity joints and trauma

    13,729     18,167     20,417     32 %   12 %

Sports medicine and orthobiologics

    2,082     2,513     6,593     21 %   162 %

Large joints and other

    41,834     47,861     48,998     14 %   2 %
                           
 

Total

  $ 145,369   $ 177,370   $ 201,462     22 %   14 %
                           

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Revenue by Geography


 
  Fiscal year ended    
   
 
 
  Percent change  
 
  December 31,
2007
  December 28,
2008
  December 27,
2009
 
 
  2008/2007   2009/2008  
 
  ($ in thousands)
   
   
 

North America

  $ 73,701   $ 92,730   $ 114,206     26 %   23 %

International

    71,668     84,640     87,256     18 %   3 %
                           
 

Total

  $ 145,369   $ 177,370   $ 201,462     22 %   14 %
                           

Fiscal Year Ended December 27, 2009, Compared to Fiscal Year Ended December 28, 2008

              Revenue.    Revenue increased by 14% to $201.5 million in 2009 from $177.4 million in 2008, primarily as a result of growth in our target markets, new product launches and market share gains by our shoulder and ankle joint replacement products. During 2009, we launched 18 new products; six of these new products were introduced primarily in North America. Our revenue was negatively impacted by approximately $4.5 million during 2009 as a result of foreign currency fluctuations, principally due to the performance of the Euro against the U.S. dollar. Excluding the impact of the change in foreign currency exchange rates, our revenue increased by 16%.

              Revenue by product category.    Revenue in upper extremity joints and trauma product category increased by 15% to $125.5 million in 2009 from $108.8 million in 2008, primarily as a result of the continued increase in sales of our shoulder products, including our reversed shoulder and our Affiniti shoulder products, which launched at the end of 2008. We believe that increased sales of our reversed shoulder products resulted from continued market growth in shoulder replacement procedures and further market acceptance of our reversed and standard Aequalis shoulder joint replacement products. Our Affiniti shoulder products continued to grow in sales volume since their 2008 launch. Our upper extremity joints and trauma product category continues to represent the most significant group of products in our revenue, representing approximately 61% and 62% of revenue in 2008 and 2009, respectively. We expect our upper extremity joints and trauma product category will remain a significant portion of revenue in the immediate future and will be a primary driver of our anticipated 2010 revenue growth. Revenue in our lower extremity joints and trauma product category increased by 12% to $20.4 million in 2009 from $18.2 million in 2008, primarily due to high volume growth in our U.S. ankle products, which we believe was driven by our surgeon training and education efforts. Revenue in our sports medicine and orthobiologics product category increased by 162% to $6.6 million in 2009 from $2.5 million in 2008. This increase was attributable to the launch of our orthobiologics product, Conexa, as well as increasing market acceptance of our Piton anchors. We expect revenue in this product category to increase as we focus on further developing and broadening these products. Revenue in the large joint and other product category increased by 2% to $49.0 million in 2009 from $47.9 million in 2008. Our large joint products are primarily sold internationally and were negatively impacted by the strengthening of the U.S. dollar. Excluding the impact of currency fluctuations, our large joint sales increased by 9%, driven primarily by an increase in sales volumes of certain of our hip products during 2009. We also launched the HLS Kneetec, a new knee joint implant, during 2009 to continue to strengthen our knee product revenue. We have made the strategic decision to focus the sale of our large joint products only in select international markets.

              Revenue by geography.    Revenue in North America increased by 23% to $114.2 million in 2009 from $92.7 million in 2008. Revenue internationally increased by 3% to $87.3 million in 2009 from $84.6 million in 2008. Our international revenue was negatively impacted by approximately $4.5 million during 2009 as a result of foreign currency fluctuations, principally due to the performance of the Euro against the U.S. dollar. Excluding the impact of the change in currency exchange rates, our

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international revenues increased by 8%, driven primarily by increased sales in our French market as well as in Germany and Australia.

              Cost of goods sold.    Our cost of goods sold increased by 21% to $54.9 million in 2009 from $45.5 million in 2008, primarily attributable to increased manufacturing overhead costs to support increased production capacity, which grew at a rate higher than production during 2008, the period in which the majority of our 2009 product sales were manufactured. As a percentage of revenue, cost of goods sold increased to 27% in 2009 from 26% in 2008, as we increased our manufacturing overhead costs in an effort to establish a sufficient level of capacity and manufacturing infrastructure to support our current and future growth plans. During 2009, we leased and moved into a new manufacturing facility in Macroom, Ireland, which should enable us to expand our Irish manufacturing capacity. We also purchased a new facility in Grenoble, France in 2009, which expanded our manufacturing facilities in France. Our increases in manufacturing overhead costs have grown at a rate faster than our factory output in recent years, causing an increase in the fully absorbed cost of our products. However, this has allowed us to establish an infrastructure that we believe will be able to sustain our sales growth plans and has increased our ability to leverage our costs in the future. In addition, we experienced charges for excess and obsolete inventory of $6.8 million during 2009 compared to $3.6 million during 2008 as a result of higher levels of obsolete inventory from a higher level of new product launches during 2009 and an increase in estimated shrinkage of U.S. consigned inventory. We also incurred certain one-time charges for relocating our Ireland manufacturing facility during 2009. Our cost of goods sold and corresponding gross profit as a percentage of revenue can be expected to fluctuate in future periods depending on changes in our product sales mix and prices, distribution channels and geographies, manufacturing yields, period expenses, levels of production volume and foreign currency exchange rates.

              Selling and marketing.    Our selling and marketing expenses increased by 8% to $115.6 million in 2009 from $106.9 million in 2008, primarily as a result of $5.2 million of higher variable commissions and royalty expenses related to higher revenue, $3.0 million of increased instrumentation depreciation and $3.1 million of increased selling expenses related to new product promotions and training offset by a positive impact of $2.6 million due to changes in foreign currency exchange rates. Selling and marketing expense as a percentage of revenue decreased from 60% in 2008 to 57% in 2009, primarily as a result of our ability to increase revenue at a higher rate than the increases in our existing sales and distribution expenses. We believe this reflects the results of our having increased sales and marketing expenses in prior years to build a sales and distribution infrastructure capable of supporting the revenue growth we experienced in 2009. While we believe our existing infrastructure is sufficient to support our 2010 growth plans, we do not anticipate that our selling and marketing expenses will decrease as a percentage of revenue during 2010.

              General and administrative.    Our general and administrative expenses decreased by 4% to $20.8 million in 2009 from $21.7 million in 2008, primarily as a result of the consolidation of certain administrative functions in France related to a subsidiary acquired in the Nexa acquisition, combined with a reduction of certain French property taxes. As a percentage of revenue, general and administrative expenses decreased two percentage points from 12% in 2008 to 10% in 2009. We were able to decrease our general and administrative expenses as a percentage of revenue during 2009 through controlled expenditures on certain legal and administrative costs; however, given our preparation for an initial public offering of our ordinary shares, we expect that general and administrative expense could increase and we may not be able to continue to decrease our general and administrative costs as a percentage of revenue in 2010.

              Research and development.    Research and development expenses decreased by 12% to $18.1 million in 2009 from $20.6 million in 2008, primarily due to favorable foreign currency exchange rates and consolidation of certain research and development activities into our Warsaw, Indiana facility. Research and development expenses represented 9% and 12% of revenue in 2009 and 2008,

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respectively. We believe that continued investment in research and development is an important part of sustaining our growth strategy through new product development and anticipate that research and development expenses as a percentage of revenue in 2010 will remain at a level similar to 2009.

              Amortization of intangible assets.    Amortization of intangible assets increased by 36% to $15.2 million in 2009 from $11.2 million in 2008 primarily as a result of $3.4 million of impairment charges recorded in 2009 from the abandonment of certain previously acquired developed technology and a full year of amortization related to the intangible asset recorded upon the consolidation of C2M Medical in 2008.

              Special charges.    In 2009, we recorded special charges totaling $1.9 million related to the consolidation and restructuring of certain activities in our Boston, New Jersey and San Diego facilities, as well as the relocation of our U.S. headquarters. These consolidation and restructuring activities were intended to result in a more efficient use of space and resources within our U.S. operations. The net impact on future periods is expected to be immaterial because the reduction in lease expense and headcount will be offset by additional lease costs in our remaining U.S. facilities to accommodate relocated employees as well as by increased headcount to perform activities within the remaining U.S. locations, including certain activities previously performed by terminated individuals.

              Interest expense.    Our interest expense increased by 76% to $19.7 million in 2009 from $11.2 million in 2008 due to the full year impact of interest related to €34.5 million of notes payable issued in February 2008 and €37.0 million of notes payable issued in April 2009. Of the $19.7 million of interest expense in 2009, $10.0 million relates to non-cash amortization of debt discount recorded on the notes payable issued in both 2008 and 2009 and $7.3 million relates to paid-in-kind interest accrued as additional principal value of the notes payable issued in 2008 and 2009.

              Foreign currency transaction gain (loss).    Our foreign currency transaction gain increased by 77% to $3.0 million in 2009 from $1.7 million in 2008. During 2009, we recorded a $3.9 million foreign currency gain related to the revaluation of our warrant liability, which is denominated in a currency other than our functional currency. The remaining foreign currency gains in 2009 and 2008 relate primarily to the impact of revaluing certain of our intercompany debt and payables between our U.S. and European subsidiaries as a result of changes in the Euro to U.S. dollar exchange rate.

              Other non-operating (expense) income.    Other non-operating expenses increased to $28.5 million in 2009 from $1.4 million in 2008 due to the charge recorded as a result of the change in the fair value of the warrant liability issued with the 2008 and 2009 notes payable. This increase in fair value primarily relates to our change in the estimated fair value of our ordinary shares from $5.66 per share at the end of 2008 to $7.50 per share at the end of 2009.

              Income tax benefit.    Our income tax benefit increased $9.2 million to $14.4 million in 2009 compared to $5.2 million in 2008. Our effective tax rate for 2009 and 2008 was 21% and 13%, respectively. Given our history of operating losses, we do not generally record a provision for income taxes in the United States and certain of our European sales offices. During 2009, we recorded a $3.2 million tax benefit related to losses incurred in France that we believe will be realizable in the future because of the existence of sufficient deferred tax liabilities that will reverse over time, creating future taxable income. We also recorded a $2.8 million income tax benefit in the United States as a result of a law change allowing for a one-time ability to carry back our current year losses for five years. Finally, we recorded a $9.2 million income tax benefit related to the reversal of deferred tax liabilities on the debt discount recorded on the notes payable issued in 2008 and 2009.

Fiscal Year Ended December 28, 2008, Compared to Fiscal Year Ended December 31, 2007

              Revenue.    Revenue increased by 22% to $177.4 million in 2008 from $145.4 million in 2007, primarily as a result of continued market penetration of our various shoulder joint replacement

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products together with strong international sales growth in our hip products due to several newly launched product offerings. Our revenue was positively impacted in 2008 by approximately $5.6 million as a result of fluctuations in foreign currency exchange rates. Excluding the impact of foreign currency exchange rate changes, our revenue grew by approximately 18% during 2008.

              Revenue by product category.    Revenue in our upper extremity joints and trauma product category increased by 24% to $108.8 million in 2008 from $87.7 million in 2007 as a result of continued market penetration and increased sales of our standard and reversed shoulder products, as well as a 29% increase in sales of our hand, wrist and elbow products, which included the first full year of revenue from our CoverLoc Wrist Plate that was acquired through the DVO acquisition. Revenue in our lower extremity joints and trauma product category increased by 32% to $18.2 million in 2008 from $13.7 million in 2007, driven primarily from a 56% increase in our ankle joint replacement product sales. Our revenue in the sports medicine and orthobiologics product category increased by 21% to $2.5 million in 2008 from $2.1 million in 2007. This increase was primarily due to the inclusion of sales of products acquired in the Axya acquisition for the full year in 2008 compared to only ten months in 2007. In both 2007 and 2008, our primary sports medicine product sales consisted of bone anchors and related products that we manufactured on an original equipment manufacturer basis for a third-party orthopaedic company in 2007. Revenue of the large joint and other product category increased by 14% to $47.9 million in 2008 from $41.8 million in 2007. Sales in our large joint and other product category are primarily denominated in foreign currencies and were favorably impacted by the fluctuations of foreign currency exchange rates during 2008. Excluding the impact of foreign currency exchange rate changes, revenue in our large joint and other product category grew approximately 7%, primarily driven by increased sales of our hip products due to the launch of several new products.

              Revenue by geography.    Revenue in North America increased by 26% to $92.7 million in 2008 from $73.7 million in 2007, primarily driven by sales of our standard and reversed shoulder products. Our international revenue was positively impacted in 2008 by approximately $5.6 million as a result of fluctuations in foreign currency exchange rates. Excluding the impact of foreign currency exchange rate changes, our international revenue increased by approximately 10% which was a result of increased revenue in our French, German and Australian sales offices, as well as in our export division, which sells products to distributors in markets in which we have no direct distribution.

              Cost of goods sold.    Our cost of goods sold decreased by 2% to $45.5 million in 2008 from $46.6 million in 2007, which was primarily attributable to the recognition in cost of goods sold in 2007 of inventory acquired in business combinations that had been stepped up to fair value, resulting in lower realized margin upon sale, all of which was recognized in cost of goods sold in 2007. As a percentage of revenue, cost of goods sold decreased to 26% in 2008 from 32% in 2007. This decrease in our cost of goods sold as a percentage of revenue in 2007 included the reversal of $16.7 million of this inventory step-up.

              Selling and marketing.    Our selling and marketing expenses increased by 30% to $106.9 million in 2008 from $82.0 million in 2007, primarily as a result of increased variable commissions, royalties and freight related to higher revenue, higher surgical instrument depreciation and increased selling and marketing expenses to support our expanding product categories and new product launches. Our selling and marketing expenses increased in 2008 as a result of the fluctuations in foreign currency exchange rates, as a significant portion of our selling and marketing expenses are incurred in currencies other than the U.S. dollar. Selling and marketing expense as a percentage of revenue increased from 56% in 2007 to 60% in 2008, primarily as a result of increased selling and marketing expenses to support the launch and marketing of new and acquired products.

              General and administrative.    Our general and administrative expenses increased by 21% to $21.7 million in 2008 from $18.0 million in 2007 due to increased legal, tax, accounting and other professional and administrative fees incurred as we began preparing ourselves to be a publicly traded

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company. Our general and administrative expenses also increased during 2008 as a result of fluctuations in foreign currency exchange rates. As a percentage of revenue, general and administrative expenses remained constant at 12% in both 2007 and 2008.

              Research and development.    Research and development expenses increased by 55% to $20.6 million in 2008 from $13.3 million in 2007 to support new product development. Research and development expenses as a percentage of revenue were 12% and 9% in 2008 and 2007, respectively. We increased research and development in 2008 in an effort to support our strategy of broadening our product portfolio as well as to complete development of certain new product launches.

              Amortization of intangible assets.    Amortization of intangible assets increased by 41% to $11.2 million in 2008 from $7.9 million in 2007, primarily as a result of a full year of amortization of intangible assets acquired in the DVO, Nexa and Axya acquisitions. Amortization of intangible assets also increased in 2008 as a result of the consolidation of C2M Medical, which was the holding company that purchased the intangible asset that became the basis of our Piton knotless fixation device. Please see Note 16 of the consolidated financial statements for further discussion of the accounting for C2M Medical.

              In-process research and development.    In 2007, upon our acquisition of DVO, Nexa and Axya we recognized an expense of $15.1 million representing the estimated fair value of acquired IPR&D that had not yet reached technological feasibility and had no alternative future use. The fair value was determined by estimating the costs to develop the acquired IPR&D into commercially viable products, estimating the resulting net cash flows from this project and discounting the cash flows back to their present values. The resulting cash flows from the projects were based on our management's best estimates of revenue, cost of goods sold, research and development costs, selling and marketing costs, general and administrative costs and income taxes from the project.

              Interest expense.    Our interest expense increased to $11.2 million in 2008 from $2.4 million in 2007 due to the full-year impact of interest related to €34.5 million of notes payable issued in February of 2008. Of the $11.2 million of interest expense, net recorded in 2008, $4.7 million relates to non-cash amortization of debt discount recorded on the notes payable issued in 2008 and $3.4 million relates to paid-in-kind interest accrued as additional principal value of the notes payable issued in 2008.

              Foreign currency transaction gain (loss).    Our foreign currency transaction gain increased to a gain of $1.7 million in 2008 from a loss of $5.9 million in 2007. The majority of our foreign currency gains and losses in 2008 and 2007 relates to the impact of revaluing certain of our intercompany debt and payables between our U.S. and European subsidiaries as a result of changes in the Euro to U.S. dollar exchange rate.

              Other non-operating (expense) income.    Other non-operating expenses decreased by 30% to $1.4 million in 2008 from $2.0 million in 2007. Our non-operating expenses in 2008 consisted primarily of charges related to the disposal of non-operating assets that were previously acquired in 2007. The $2.0 million of non-operating expense in 2007 relates to certain value-added taxes incurred upon the transfer of acquisition-related expenses between legal entities to obtain future income tax deductibility.

              Income tax benefit.    Our income tax benefit decreased by 21% to $5.2 million in 2008 from $6.6 million in 2007, based on lower pre-tax loss. Our effective tax rate in 2008 and 2007 was 13% and 14%, respectively.

Seasonality and Quarterly Fluctuations

              Our business is seasonal in nature. Historically, demand for our products has been the lowest in our third quarter as a result of the European holiday schedule during the summer months.

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              We have experienced and expect to continue to experience meaningful variability in our revenue and gross profit among quarters, as well as within each quarter, as a result of a number of factors, including, among other things, the number and mix of products sold in the quarter; the demand for, and pricing of, our products and the products of our competitors; the timing of or failure to obtain regulatory clearances or approvals for products; costs, benefits and timing of new product introductions; increased competition; the timing and extent of promotional pricing or volume discounts; changes in average selling prices; the availability and cost of components and materials; number of selling days; fluctuations in foreign currency exchange rates; and impairment and other special charges. In addition, we issued notes payable and warrants in both 2008 and 2009 in order to raise working capital. During 2009, we adopted new accounting guidance that requires we record the fair value of the warrants as a liability on our balance sheet and adjust that liability to fair value at each reporting period, which changes are recognized as either an expense or revenue in our statement of operations.

Liquidity and Capital Resources

              Since inception, we have generated significant operating losses. These, combined with significant charges not related to cash from operations, such as IPR&D, amortization of acquired intangible assets, fair value adjustments to our warrant liability and accretion of noncontrolling interests, have resulted in an accumulated deficit of $162.7 million as of July 4, 2010. Historically, our liquidity needs have been met through a combination of sales of our equity securities together with issuances of notes payable and warrants to both current shareholders and new investors and other bank related debt. Our notes payable have financial and operational covenants that could limit our ability to transfer or dispose of assets, merge with or acquire other companies, make investments, pay dividends, incur additional indebtedness and liens and conduct transactions with affiliates. As of July 4, 2010, we have $49.0 million in debt excluding our notes payable. Certain of these other debt agreements also include financial covenants that (i) require us to have a minimum level of tangible net worth in our U.S. operating subsidiary, (ii) have various levels of performance tests of debt to equity and debt to modified income specifically related to our French operating subsidiary and (iii) restrict our ability to borrow in our U.S. operating subsidiary if there is a default under the agreement, all of which may have an impact on our liquidity.

              The following table sets forth, for the periods indicated, certain liquidity measures:

 
  As of    
 
 
  December 31,
2007
  December 28,
2008
  December 27,
2009
  As of July 4,
2010
 
 
  ($ in thousands)
 

Cash and cash equivalents

  $ 17,347   $ 21,348   $ 37,969   $ 33,209  

Working capital

    48,507     66,779     98,993     91,155  

Line of credit availability

    1,821     7,927     13,530     3,813  

              Operating activities.    Net cash provided by operating activities was $2.0 million for the first two quarters of 2010 compared to $2.2 million for the first two quarters of 2009, primarily driven by higher levels of accounts payable and accruals due to timing and an improvement in our consolidated net loss adjusted for non-cash items offset by increases in inventory, receivables and other current assets.

              Net cash provided by operating activities was $2.3 million in 2009 compared to net cash used in operating activities of $19.5 million in 2008. This improvement in our cash flows from operations was primarily driven by an improvement in our consolidated net loss adjusted for non-cash items by approximately $17.1 million, due to our increased leverage on operating expenses versus our increase in revenue. In addition, we decreased inventory by $4.3 million due to improved inventory management and lower levels of inventory to support product launches. We also experienced $5.4 million in favorable cash flows from lower receivable balances as a result of improved collection efforts in 2009. These cash flow improvements were partially offset by other changes in current assets and liabilities.

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              Net cash used in operating activities was $19.5 million in 2008 compared to net cash used in operating activities of $8.2 million for 2007. The increase in net cash used in operating activities in 2008 was primarily driven by increased inventory of $21.3 million compared to 2007. The majority of this change in inventory was the result of inventory levels decreasing by $16.7 million in 2007 as a result of the fair value step-up on the sale of inventory that was acquired through business acquisitions. The remaining growth in inventory in 2008 was related to the additional inventory necessary to support a larger number of new product launches. This increase in inventory was offset by improvements in our consolidated net loss adjusted for non-cash items, better collections of receivables and increased cash from changes in other current assets and liabilities.

              Investing activities.    Net cash used in investing activities, including our acquisition- and licensing-related payments, totaled $15.2 million during the first two quarters of 2010, compared to $14.2 million during the first two quarters of 2009. The first two quarters of 2010 included $7.9 million of instrument additions and $5.7 million of property, plant and equipment additions primarily related to preparing our new French manufacturing facility to begin production and $1.7 million of acquisition and licensing related payments related to contingent purchase price from a previous acquisition, as certain milestones were achieved in the first two quarters of 2010 and continued payments of contingent purchase price related to our consolidated subsidiary's acquisition of our Piton technology. The purchase agreement related to our acquisition of our Piton technology requires that we make payments equal to 25% of the sales of Piton for a three-year period ending in the fourth quarter of 2011. The first two quarters of 2009 included $7.1 million of instrument additions and $4.1 million of property, plant and equipment additions and $3.0 million of acquisition and licensing related payments primarily from the execution of our license agreement with TAG for the ArthroTunneler products.

              Net cash used in investing activities, including our acquisition and licensing related payments, totaled $31.1 million, $43.3 million and $106.2 million in 2009, 2008 and 2007, respectively. Acquisition- and licensing-related payments of $7.7 million and $12.7 million in 2009 and 2008, respectively, were primarily related to earn-out payments made to the shareholders of DVO as a part of the asset purchase agreement we entered into in 2007. The payments made in 2009 were the final earn-out payments to be made under this agreement. Acquisition-related payments of $88.5 million in 2007 pertain to the purchase price paid for the acquisitions of Nexa and DVO. The amounts related to the addition of surgical instrumentation equipment was $13.5 million, $12.4 million and $8.6 million in 2009, 2008 and 2007, respectively. The increase in surgical instrumentation in 2009 relates primarily to supporting continued revenue growth as well as certain new product launches. The increase in surgical instrumentation in 2008 as compared to 2007 relates primarily to the building of instrument sets to support a much larger group of new product launches. The amounts related to property, plant and equipment was $11.1 million, $13.5 million and $8.3 million in 2009, 2008 and 2007 respectively. In 2009, we had approximately $2.4 million on leasehold improvements in conjunction with moving our Irish manufacturing operations into a newly leased facility. In 2008, we had approximately $6.1 million to purchase a new manufacturing facility in Grenoble, France.

              Our industry is capital intensive, particularly as it relates to surgical instrumentation. Historically, our capital expenditures have consisted principally of purchased manufacturing equipment, research and testing equipment, computer systems, office furniture and equipment and surgical instruments.

              Financing activities.    Net cash provided by financing activities decreased to $9.6 million during the first two quarters of 2010, from $45.9 million during the first two quarters of 2009. The decrease in net cash provided by financing activities was due to $49.3 million of proceeds in 2009 from the issuance of notes payable and warrants that did not reoccur in 2010 offset by an increase in borrowings under our revolving credit facilities during the first two quarters of 2010. We also generated $0.9 million in cash in the first two quarters of 2010 through the sale of ordinary shares and exercise of stock options.

              Net cash provided by financing activities totaled $44.9 million, $66.5 million and $121.9 million in 2009, 2008 and 2007. During 2009 and 2008, proceeds of $49.3 million and $52.4 million,

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respectively, were generated from the issuance of notes payable and warrants to be used as working capital. Proceeds of $2.9 million and $8.9 million were generated in 2009 and 2008, respectively, through the sale of our ordinary shares to various investors. In 2007, we also sold our ordinary shares and issued mandatorily convertible bonds for total proceeds of $100.9 million used primarily to fund our acquisitions of Nexa and DVO. During 2009, we made payments of $3.5 million on short-term debt and made payments of $3.9 million on long-term borrowing arrangements, net of cash generated from new long-term borrowing arrangements. This compares to payments on short-term debt of $2.1 million and cash generated of $7.3 million on long-term borrowing arrangements, net of payments on long-term debt, in 2008.

              The decrease in proceeds generated by the issuance of long-term debt was due to our ability to raise a higher level of term loans in France secured by certain working capital balances during 2008. During 2007, we generated proceeds of $11.1 million from additional borrowings under our short-term debt facilities and generated $9.9 million in proceeds from the issuance of new long-term debt, net of payments on existing long-term borrowings. The additional proceeds generated on short-term borrowings during 2007 relate to a higher level of usage of our revolving credit facilities at the end of 2007 compared to 2008 to support near term cash needs. We were also able to generate a slightly higher level of proceeds from the issuance of new long-term debt agreements during 2007 compared to 2008 to support our working capital needs.

              Other liquidity information.    We have funded our cash needs since our acquisition in 2006 through the issuance of equity, notes payable and warrants to a group of investors. Although it is difficult for us to predict our future liquidity requirements, we believe that our current cash balance of approximately $33.2 million and our existing available credit lines of $3.8 million will be sufficient to fund our working capital requirements and operations and permit anticipated capital expenditures in 2010. Our European subsidiaries have established a combination of secured and unsecured available lines of credit totaling in excess of $20.0 million as of July 4, 2010. The secured lines of credit generally have between one and two year terms and are renewed at the end of the related term. The unsecured lines of credit do not include specific terms and can be terminated by the banks upon 60 days notice. These lines of credit have variable interest rates based on the Euro Overnight Index Average plus 0.3% to 1.3% or a three-month Euro rate plus 1% to 3%. At July 4, 2010, we also had a $6 million credit line secured by our U.S. operating subsidiary, which was renewed in August of 2010. As a part of the renewal of this credit line, the total available credit was increased to $10 million and now has a two-year renewal term. This line is secured by working capital and equipment and bears interest at a 30-day LIBOR plus 2.25% interest rate. In the event that we would require additional working capital to fund future operations, we could seek to acquire that through additional equity or debt financing arrangements. If we raise additional funds by issuing equity securities, our shareholders may experience dilution. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. There is no assurance that any financing transaction will be available on terms acceptable to us, or at all. If we do not have, or are not able to obtain, sufficient funds, we may have to delay development or commercialization of our products or license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize.

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Contractual Obligations and Commitments

              The following table summarizes our outstanding contractual obligations as of December 27, 2009, for the categories set forth below, assuming only scheduled amortizations and repayment at maturity:

 
  Total   Less than
1 Year
  1-3 Years   3-5 Years   More than
5 Years
 
 
  ($ in thousands)
 

Amounts reflected in consolidated balance sheet:

                               

Bank debt

  $ 43,713   $ 22,779   $ 11,353   $ 5,600   $ 3,981  

Notes payable

    102,946             102,946      

Shareholder loan

    1,015                 1,015  

Capital leases

    1,460     520     709     231      

Amounts not reflected in consolidated balance sheet:

                               

Interest on bank debt

    3,507     1,359     1,073     491     584  

Accrued paid-in-kind interest on notes payable

    49,431             49,431      

Interest on capital leases

    109     60     47     2      

Operating leases

    18,158     3,954     6,621     3,099     4,484  
                       
 

Total

  $ 220,339   $ 28,672   $ 19,803   $ 161,800   $ 10,064  
                       

The following table summarizes our outstanding contractual obligations as of July 4, 2010, for the categories set forth below, assuming only scheduled amortizations and repayment at maturity:

 
  Total   Less than
1 Year
  1-3 Years   3-5 Years   More than
5 Years
 
 
  ($ in thousands)
 

Amounts reflected in consolidated balance sheet:

                               

Bank debt

  $ 45,161   $ 28,109   $ 9,267   $ 4,297   $ 3,488  

Notes payable

    89,719         43,291     46,428      

Shareholder loan

    2,212                 2,212  

Capital leases

    1,666     561     818     287      

Amounts not reflected in consolidated balance sheet:

                               

Interest on bank debt

    3,059     1,180     1,042     529     308  

Accrued paid-in-kind interest on notes payable

    43,074         20,728     22,346      

Interest on capital leases

    173     79     83     11      

Operating leases

    15,781     4,080     5,171     2,927     3,603  
                       
 

Total

  $ 200,845   $ 34,009   $ 80,400   $ 76,825   $ 9,611  
                       

Off-Balance Sheet Arrangements

              We do not have any off-balance sheet arrangements, as defined by the rules and regulations of the SEC, that have or are reasonably likely to have a material effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. As a result, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these arrangements.

Critical Accounting Policies

              Our consolidated financial statements and related financial information are based on the application of U.S. GAAP. Our most significant accounting policies are described in Note 2 to our consolidated financial statements included elsewhere in this prospectus. The preparation of our

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consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes.

              Certain of our more critical accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, our observance of trends in the industry, information provided by our physician customers and information available from other outside sources, as appropriate. Changes in accounting estimates are reasonably likely to occur from period to period. Changes in these estimates and changes in our business could have a material impact on consolidated financial statements.

              We believe that the following accounting policies are both important to the portrayal of our financial condition and results of operations and require subjective or complex judgments. Further, we believe that the items discussed below are properly recognized in our consolidated financial statements for all periods presented. Management has discussed the development, selection and disclosure of our critical financial estimates with the audit committee and our board of directors. The judgments about those financial estimates are based on information available as of the date of our consolidated financial statements. Our critical financial policies and estimates are described below:

Revenue Recognition

              Our revenue is generated from sales to two types of customers: healthcare institutions and distributors. Sales to healthcare institutions represent the majority of our revenue. We utilize a network of independent sales agencies for sales in the United States and a combination of direct sales organizations, independent sales agencies and distributors for sales outside the United States. Revenue from sales to healthcare institutions is recognized at the time the device is implanted. We receive a notification of implant from the healthcare institution when the surgery occurs. Title to inventory generally does not transfer until the product is surgically implanted. We generally recognize revenue from sales to distributors at the time the product is shipped to the distributor. Distributors, who sell the products to their customers, take title to the products and assume all risks of ownership at time of shipment. Our distributors are obligated to pay within specified terms regardless of when, if ever, they sell the products. In general, healthcare institutions and distributors do not have any rights of return or exchange.

Allowance for Doubtful Accounts

              We maintain an allowance for doubtful accounts for estimated losses in the collection of accounts receivable. We make estimates regarding the future ability of our customers to make required payments based on historical credit experience, delinquency and expected future trends. The majority of our receivables are due from healthcare institutions, many of which are government funded. Accordingly, our collection history with this class of customer has been favorable and has resulted in a low level of historical write-offs. We write off accounts receivable when we determine that the accounts receivable are uncollectible, typically upon customer bankruptcy or the customer's non-response to continued collection efforts.

              We believe that the amount included in our allowance for doubtful accounts has been a historically appropriate estimate of the amount of accounts receivable that is ultimately not collected. While we believe that our allowance for doubtful accounts is adequate, the financial condition of our customers and the geopolitical factors that impact reimbursement under individual countries' healthcare systems can change rapidly, which may necessitate additional allowances in future periods. Our

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allowance for doubtful accounts was $2.7 million and $2.2 million at December 27, 2009, and December 28, 2008, respectively.

Excess and Obsolete Inventory

              We value our inventory at the lower of the actual cost to purchase or manufacture the inventory on a first-in, first-out, or FIFO, basis or its net realizable value. We regularly review inventory quantities on hand for excess and obsolete inventory and, when circumstances indicate, we incur charges to write down inventories to their net realizable value. Our review of inventory for excess and obsolete quantities is based on an analysis of historical product sales together with our forecast of product demand and production requirements. A significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. Additionally, our industry is characterized by regular new product development that could result in an increase in the amount of obsolete inventory quantities on hand due to cannibalization of existing products. Also, our estimates of future product demand may prove to be inaccurate, in which case we may be required to incur charges for excess and obsolete inventory. In the future, if additional inventory write-downs are required, we would recognize additional cost of goods sold at the time of such determination. Regardless of changes in our estimates of future product demand, we do not increase the value of our inventory above its adjusted cost basis. Therefore, although we make every effort to ensure the accuracy of our forecasts of future product demand, significant unanticipated decreases in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results. Charges incurred for excess and obsolete inventory were $6.8 million, $3.6 million and $3.8 million for the fiscal years ended 2009, 2008 and 2007, respectively.

Instruments

              Instruments are handheld devices used by orthopaedic surgeons during joint replacement and other surgical procedures to facilitate the implantation of our products. There are no contractual terms with respect to the usage of our instruments by our customers. Surgeons are under no contractual commitment to use our instruments. We maintain ownership of these instruments and, when requested, we allow the surgeons to use the instruments to facilitate implantation of our related products. We do not currently charge for the use of our instruments and there are no minimum purchase commitments of our products. As our surgical instrumentation is used numerous times over several years, often by many different customers, instruments are recognized as long-lived assets once they have been placed in service. Instruments, and instrument parts, that have not been placed in service are carried at cost, net of allowances for excess and obsolete instruments, and are included as instruments in progress within instruments, net on the consolidated balance sheets. Once placed in service, instruments are carried at cost, less accumulated depreciation. Depreciation is computed using the straight-line method based on average estimated useful lives. Estimated useful lives are determined principally in reference to associated product life cycles, and average five years. As instruments are used as tools to assist surgeons, depreciation of instruments is recognized as a sales and marketing expense. Instrument depreciation expense was $4.0 million, $6.3 million and $9.4 million during the fiscal years ended December 31, 2007, December 28, 2008 and December 27, 2009, respectively.

              We review instruments for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. An impairment loss would be recognized when estimated future undiscounted cash flows relating to the assets are less than the asset's carrying amount. An impairment loss is measured as the amount by which the carrying amount of an asset exceeds its fair value.

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Goodwill and Long-Lived Assets

              We have approximately $136.9 million of goodwill recorded as a result of the acquisition of businesses. Goodwill is tested for impairment annually or more frequently if changes in circumstances or the occurrence of events suggest that impairment exists. Based on our single business approach to decision-making, planning and resource allocation, we have determined that we have one reporting unit for purposes of evaluating goodwill for impairment. We use widely accepted valuation techniques to determine the fair value of our reporting unit used in our annual goodwill impairment analysis. Our valuation is primarily based on the income approach that is supported by a discounted cash flow analysis. The market approach used consists of comparisons to the valuations of a group of guideline public companies. We do not currently generate earnings from operations and therefore do not use the results of the market approach in our valuation. Rather, the results of our market approach are used to evaluate the reasonableness of the income approach. We performed our annual impairment test on the first day of the fourth quarter of 2009 and determined that the fair value of our reporting unit exceeded its carrying value and, therefore, no impairment charge was necessary.

              The impairment evaluation related to goodwill requires the use of considerable management judgment to determine discounted future cash flows, including estimates and assumptions regarding the amount and timing of cash flows, cost of capital and growth rates. Cash flow assumptions used in the assessment are estimated using assumptions in our annual operating plan as well as our five-year strategic plan. Our annual operating plan and strategic plan contain revenue assumptions that are derived from existing technology as well as future revenues attributed to in-process technologies and the associated launch, growth and decline assumptions normal for the life cycle of those technologies. In addition, management considers relevant market information, peer company data and historical financial information. We also considered our historical operating losses in assessing the risk related to our future cash flow estimates and attempted to reflect that risk in the development of our weighted average cost of capital.

              Our business is capital intensive, particularly as it relates to surgical instrumentation. We depreciate our property, plant and equipment and amortize our intangible assets based upon our estimate of the respective asset's useful life. Our estimate of the useful life of an asset requires us to make judgments about future events, such as product life cycles, new product development, product cannibalization and technological obsolescence, as well as other competitive factors beyond our control. We account for the impairment of long-lived assets in accordance with FASB ASC Section 360, Property, Plant and Equipment (FASB ASC 360). Accordingly, when indicators of impairment exist, we evaluate impairments of our property, plant and equipment based upon an analysis of estimated undiscounted future cash flows. If we determine that a change is required in the useful life of an asset, future depreciation and amortization is adjusted accordingly. Alternatively, if we determine that an asset has been impaired, an adjustment would be charged to earnings based on the asset's fair market value, or discounted cash flows if the fair market value is not readily determinable, reducing revenue in that period.

Warrant Liability

              During 2008 and 2009 we raised additional working capital funds through the sale of notes payable and warrants to purchase our ordinary shares. In accordance with U.S. GAAP, these warrants were classified as a liability and carried at fair value because the warrants were denominated in a currency other than the functional currency of the issuing entity. We estimated the fair value of the warrant liability using a Black-Scholes option pricing model. The determination of the fair value of our warrant liability utilizing the Black-Scholes model is affected by our share price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. The expected life of our warrants was determined to be equal to the remaining contractual term as the warrants were fully detachable from the notes payable with which they were issued. As a non-public

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entity, historic volatility is not available for our ordinary shares. As a result, we estimated volatility based on a peer group of companies, which collectively provides a reasonable basis for estimating volatility. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with a remaining term approximately equal to the remaining term of the warrants. The final input, which has a significant impact on the estimated fair value of our warrant liability, is our estimated fair value of our underlying ordinary shares. Refer to "—Significant Factors Used in Determining Fair Value of Our Ordinary Shares" below for a detailed discussion of how we estimate the fair value of our underlying shares. In May 2010, we executed agreements with 100% of the warrant holders to exchange their warrants for ordinary shares of Tornier B.V. This transaction settled the warrant liability. Refer to Note 8 of the consolidated financial statements for further discussion of this transaction.

Accounting for Income Taxes

              Our effective tax rate is based on income by tax jurisdiction, statutory rates and tax-saving initiatives available to us in the various jurisdictions in which we operate. Significant judgment is required in determining our effective tax rate and evaluating our tax positions. This process includes assessing temporary differences resulting from differing recognition of items for income tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. Realization of deferred tax assets in each taxable jurisdiction is dependent on our ability to generate future taxable income sufficient to realize the benefits. Management evaluates deferred tax assets on an ongoing basis and provides valuation allowances to reduce net deferred tax assets to the amount that is more likely than not to be realized.

              Our valuation allowance balances totaled $22.8 million and $17.4 million as of December 27, 2009, and December 28, 2008, respectively, due to uncertainties related to our ability to realize, before expiration, some of our deferred tax assets for both U.S. and foreign income tax purposes. These deferred tax assets primarily consist of the carryforward of certain tax basis net operating losses and general business tax credits.

              In July 2006, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), effective January 1, 2007, which requires the tax effects of an income tax position to be recognized only if they are more-likely-than-not to be sustained based solely on the technical merits as of the reporting date. On December 30, 2008, the FASB further delayed the effective date of this guidance for certain non-public enterprises until annual financial statements for fiscal years beginning after December 15, 2008. Effective July 1, 2009, this standard was incorporated into FASB ASC Section 740, Income Taxes. We adopted these provisions of ASC Section 740 in 2009. As a multinational corporation, we are subject to taxation in many jurisdictions and the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions. If we ultimately determine that the payment of these liabilities will be unnecessary, we will reverse the liability and recognize a tax benefit in the period in which we determine the liability no longer applies. Conversely, we record additional tax charges in a period in which we determine that a recorded tax liability is less than we expect the ultimate assessment to be. Our liability for unrecognized tax benefits totaled $3.0 million as of December 27, 2009. See Note 11 to our consolidated financial statements for the fiscal year ended December 27, 2009, for further discussion of our unrecognized tax benefits.

Share-Based Compensation

              The estimated fair value of share-based awards exchanged for employee and non-employee director services are expensed over the requisite service period. Option awards issued to non-employees (excluding non-employee directors) are recorded at their fair value as determined in accordance with

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authoritative guidance, are periodically revalued as the options vest and are recognized as expense over the related service period.

              For purposes of calculating share-based compensation, we estimate the fair value of stock options using a Black-Scholes option pricing model. The determination of the fair value of share-based payment awards utilizing this Black-Scholes model is affected by our share price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends.

              We do not have information available which is indicative of future exercise and post-vesting behavior to estimate the expected term. As a result, we adopted the simplified method of estimating the expected term of a stock option, as permitted by the Staff Accounting Bulletin No. 107. Under this method, the expected term is presumed to be the mid-point between the vesting date and the contractual end of the term. As a non-public entity, historic volatility is not available for our ordinary shares. As a result, we estimated volatility based on a peer group of companies, that we believe collectively provides a reasonable basis for estimating volatility. We intend to continue to consistently use the same group of publicly traded peer companies to determine volatility in the future until sufficient information regarding volatility of our ordinary share price becomes available or the selected companies are no longer suitable for this purpose. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with a remaining term approximately equal to the expected life of our stock options. The estimated pre-vesting forfeiture rate is based on our historical experience together with estimates of future employee turnover. We do not expect to declare dividends in the foreseeable future.

              The following table summarizes the amount of share-based compensation expense recognized in our statements of operations by expense category:

 
  Year ended  
 
  December 31,
2007
  December 28,
2008
  December 27,
2009
 
 
  ($ in thousands)
 

Cost of goods sold

  $ 221   $ 341   $ 77  

Selling and marketing

    794     1,034     1,306  

General and administrative

    1,608     2,051     2,250  

Research and development

    213     246     280  
               

Total share-based compensation

  $ 2,836   $ 3,672   $ 3,913  
               

              If factors change and we employ different assumptions, share-based compensation expense may differ significantly from what we have recorded in the past. If there is a difference between the assumptions used in determining share-based compensation expense and the actual factors which become known over time, specifically with respect to anticipated forfeitures, we may change the input factors used in determining share-based compensation costs for future grants. These changes, if any, may materially impact our results of operations in the period such changes are made. We expect to continue to grant stock options in the future, and to the extent that we do, our actual share-based compensation expense recognized in future periods will likely increase.

Significant Factors Used in Determining Fair Value of Our Ordinary Shares

              The fair value of our ordinary shares that underlie the stock options we have granted has historically been determined by our board of directors based upon information available to it at the time of grant. Because, prior to this offering, there has been no public market for our ordinary shares, our board of directors has determined the fair value of our ordinary shares by utilizing, among other things, transactions involving sales of our ordinary shares, other financing events involving our ordinary shares and contemporaneous valuation studies conducted as of January 31, 2008, and December 27,

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2009. The findings of these valuation studies were based on our business and general economic, market and other conditions that could be reasonably evaluated at that time. The analyses of the valuation studies incorporated extensive due diligence that included a review of our company, including its financial results, business agreements, intellectual property and capital structure. The valuation studies also included a thorough review of the conditions of the industry in which we operate and the markets that we serve. The methodologies of the valuation studies included an analysis of the fair market value of our company using three widely accepted valuation methodologies: (1) market multiple, (2) comparable transactions and (3) discounted cash flow. These valuation methodologies were based on a number of assumptions, including our forecasted future revenue and industry, general economic, market and other conditions that could reasonably be evaluated at the time of the valuation.

              The market multiple methodology involved the multiplication of revenue by risk-adjusted multiples. Multiples were determined through an analysis of certain publicly traded companies, which were selected on the basis of operational and economic similarity with our principal business operations. Revenue multiples, when applicable, were calculated for the comparable companies based upon daily trading prices. A comparative risk analysis between us and the public companies formed the basis for the selection of appropriate risk-adjusted multiples for our company. The risk analysis incorporated factors that relate to, among other things, the nature of the industry in which we and other comparable companies are engaged. The comparable transaction methodology also involved multiples of earnings and cash flow. Multiples used in this approach were determined through an analysis of transactions involving controlling interests in companies with operations similar to our principal business operations. The discounted cash flow methodology involved estimating the present value of the projected cash flows to be generated from the business and theoretically available to the capital providers of our company. A discount rate was applied to the projected future cash flows to reflect all risks of ownership and the associated risks of realizing the stream of projected cash flows. Since the cash flows were projected over a limited number of years, a terminal value was computed as of the end of the last period of projected cash flows. The terminal value was an estimate of the value of the enterprise on a going concern basis as of that future point in time. Discounting each of the projected future cash flows and the terminal value back to the present and summing the results yielded an indication of value for the enterprise. Our board of directors took these three approaches into consideration when establishing the fair value of our ordinary shares.

              The fair value of our ordinary shares was initially established on July 18, 2006, based on the price per share paid in the Investor Group's initial acquisition. During the first quarter of 2007, we sold approximately $92.6 million of additional ordinary shares to our existing shareholders at a price of $4.63 per share to fund certain acquisitions. This price was then used as the fair value of our ordinary shares until December 31, 2007. During 2007, we began to integrate three acquired companies, all of which expanded our product portfolio and helped to increase our sales by 22%. On January 1, 2008, we increased the value of our ordinary shares to $5.66 per share based on the conclusions of our board of directors in analyzing several factors including an independent valuation. We believe this increase in fair value was warranted based on several factors including our continued revenue growth and broadening product portfolio, offset by our increased operating expenses from the acquired business. From January 1, 2008 to December 27, 2009, we granted 3,316,250 stock options at an exercise price of $5.66 per share. During this period, we continued to experience revenue growth through continued product launches, new product licensing transactions and increased volumes and market share. However, during the same period we increased manufacturing costs and operating expenses to build an operational foundation on which we could sustain continued double digit revenue growth. As a result, we experienced a decrease in our operating profitability and higher levels of cash used to sustain our operations compared to 2007. As a result of our continued high growth offset by increased spending levels, we determined that a change in the fair value of our ordinary shares was not necessary. This determination was supported by the fact that, during this time, we sold additional shares of our ordinary shares to various investors, including former shareholders of one of our 2007 acquisitions and

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certain other business partners, all at a price of $5.66 per share. During this time, we also raised additional working capital through the sale of $52.4 million of notes payable and warrants in February 2008 and $49.3 million of notes payable and warrants in April 2009. These sales of notes payable and warrants were to a combination of then current investors, certain new investors and members of management. In both instances, the exercise price of the warrants sold was set at $5.66 per share as we continued to estimate the value of our ordinary shares to be $5.66 per share. On December 27, 2009, we decided to increase our estimate of the fair value of our ordinary shares to $7.50 per share. Our estimated fair value of $7.50 per share was determined by our board of directors based on several factors including an independent valuation discussed previously. We believed the increase in the estimated fair value of our ordinary shares was appropriate during 2009 as our sales continued to grow at a high rate while our operating profit, excluding depreciation, amortization and share-based compensation, began to increase and our cash flow from operations also improved substantially. Stock options granted during these periods had exercise prices equal to the then estimated fair value of our ordinary shares.

              We also granted 2,296,392 options in June of 2010 as part of our annual option grants as well as for certain new employees and a new director. These options were granted within an exercise price of $7.50 per share which we estimated to be the fair value of our underlying shares at the dates of grant. Our board of directors estimated the fair value of our underlying ordinary shares during 2010 by reviewing various factors including our first quarter results, current market conditions, the impact of various 2010 corporate transactions and by reviewing an updated independent valuation report. We believed that certain factors were increasing the fair value of our ordinary shares such as a shortened time period between the estimated valuation date and the estimated date of our pending initial public offering which would reduce the discount to our ordinary shares for the current lack of liquidity and marketability. However, this increase in fair value was offset by two dilutive transactions occurring in 2010 in which we issued additional ordinary shares in our acquisition of C2M (refer to Note 16 of the consolidated financial statements) and in the exchange of all previously outstanding warrants (refer to Note 21 of the consolidated financial statements). Both of these transactions included the issuance of additional ordinary shares without corresponding increases in our overall estimated enterprise value. As a result, these transactions reduced the fair value of our ordinary shares on a per share basis. As a result of our analyses, we determined that the fair value of our ordinary shares was $7.50 per ordinary share. The weighted average fair value of the option grants was $3.69 per share aggregating total future compensation of $8.5 million, reduced by our ongoing estimates of expected forfeitures, to be recognized over the four year period subsequent to the respective dates of grant.

              Although it is reasonable to expect that the completion of our initial public offering will increase the value of our ordinary shares as a result of increased liquidity and marketability, at this stage the amount of additional value cannot be measured with precision or certainty.

Recent Accounting Pronouncements

              We adopted the FASB Accounting Standards Codification, or ASC, Topic 105 as the single official source of authoritative, nongovernmental generally accepted accounting principles in the United States. On the effective date, all then-existing non-SEC accounting literature and reporting standards were superseded and deemed non-authoritative. The adoption of this pronouncement did not have a material impact on our consolidated financial statements; however, the ASC affected the way we reference authoritative guidance in our consolidated financial statements.

              In December 2007, the FASB issued ASC Topic 805, formerly SFAS No. 141(R), Business Combinations. ASC Topic 805 establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any controlling interest; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose

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to enable users of the financial statements to evaluate the nature and financial effects of the business combination. ASC Topic 805 is to be applied prospectively to business combinations for which the acquisition date is during or after 2009. As the guidance is applied prospectively, the adoption did not have a material impact on our current consolidated financial statements or results of operations.

              In December 2007, the FASB also issued ASC Topic 810, formerly SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51. ASC Topic 810 changes the accounting and reporting for minority interests, which are recharacterized as noncontrolling interests and classified as a component of equity. ASC Topic 810 required retroactive adoption of the presentation and disclosure requirements for existing minority interests. The guidance became effective for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years. The impact of adoption on the consolidated financial statements was immaterial.

              In March 2008, the FASB issued ASC Topic 815, formerly SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment to SFAS No. 133. ASC Topic 815 requires increased disclosure of our derivative instruments and hedging activities, including how derivative instruments and hedging activities affect consolidated statement of earnings, balance sheets and cash flows. The guidance was effective for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years. The adoption of this guidance did not have a material impact on our financial position or results of operations.

              In July 2006, the FASB issued ASC Topic 740, formerly FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109. ASC Topic 740 clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements by defining the criterion that an individual tax position must meet in order to be recognized in the financial statements. ASC Topic 740 requires that the tax effects of a position be recognized only if it is more likely than not to be sustained based solely on the technical merits as of the reporting date. ASC Topic 740 further requires that interest that the tax law requires to be paid on the underpayment of taxes should be accrued on the difference between the amount claimed or expected to be claimed on the return and the tax benefit recognized in the financial statements. ASC Topic 740 also requires additional disclosures of unrecognized tax benefits, including a reconciliation of the beginning and ending balance. On December 30, 2008, the FASB further delayed the effective date of this guidance for certain non-public enterprises until annual financial statements for fiscal years beginning after December 15, 2008. We adopted these provisions of ASC Topic 740 in 2009. We recognized $0.3 million in retained earnings as the impact of adoption. Refer to Note 11 to our consolidated financial statements and related notes thereto for details regarding the impact of adoption.

              In June of 2008, the Emerging Issues Task Force, or EITF, issued ASC Topic 815, formerly EITF Issue 07-5, Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity's Own Stock. ASC Topic 815 addresses how an entity should determine if an instrument (or an embedded feature), such as the warrants issued by us in 2008 and 2009, is indexed to its own stock. The EITF reached a consensus that establishes a two-step approach to making this assessment. In the first step, an entity evaluates any contingent exercise provisions. In the second step, an entity will evaluate the instruments' settlement provisions. This guidance became effective for fiscal year 2009 for us, and is accounted for as a change in accounting principle through prospective application, with the cumulative effect of adoption of $0.9 million recognized in accumulated deficit. In addition, adoption of this guidance required that warrants issued by us in 2008 be reclassified from equity to a liability. These warrants, as well as warrants issued in 2009, are now carried at fair value on the consolidated balance sheet as warrant liabilities. These liabilities were adjusted to fair value through current period earnings. We have subsequently settled our warrant liability in May of 2010 by exchanging all the outstanding warrants for our ordinary shares. See Note 8 to our consolidated financial statements and related notes thereto for further discussion.

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Quantitative and Qualitative Disclosures About Market Risk

              We are exposed to various market risks, which may result in potential losses arising from adverse changes in market rates and prices, such as interest rates and foreign currency exchange rate fluctuations. We do not enter into derivatives or other financial instruments for trading or speculative purposes. We believe we are not exposed to a material market risk with respect to our invested cash and cash equivalents.

Interest Rate Risk

              Borrowings under our various revolving lines of credit in the United States and in Europe generally bear interest at variable annual rates. Borrowings under our various term loans in the United States and Europe are mixed between variable and fixed interest rates. As of July 4, 2010, we had $22.4 million in borrowings under our revolving lines of credit and $26.6 million in borrowings under various term loans. Based upon this debt level, a 10% increase in the interest rate on such borrowings would not have a material impact on interest expense.

              At July 4, 2010, our cash and cash equivalents were $33.2 million. Based on our annualized average interest rate, a 10% decrease in the interest rate on such balances would result in an immaterial impact on an annual basis.

Foreign Currency Exchange Rate Risk

              Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies could adversely affect our financial results. In the first two quarters of 2010 and fiscal years 2009 and 2008, approximately 44%, 43% and 48%, respectively, of our sales were denominated in foreign currencies. We expect that foreign currencies will continue to represent a similarly significant percentage of our sales in the future. Operating expenses related to these sales are largely denominated in the same respective currency, thereby limiting our transaction risk exposure. We therefore believe that the risk of a significant impact on our operating income from foreign currency fluctuations is not significant. However, for sales not denominated in U.S. dollars, if there is an increase in the rate at which a foreign currency is exchanged for U.S. dollars, it will require more of the foreign currency to equal a specified amount of U.S. dollars than before the rate increase. In such cases and if we price our products in the foreign currency, we will receive less in U.S. dollars than we did before the rate increase went into effect. If we price our products in U.S. dollars and competitors price their products in local currency, an increase in the relative strength of the U.S. dollar could result in our prices not being competitive in a market where business is transacted in the local currency.

              In 2009, approximately 91% of our sales denominated in foreign currencies were derived from EU countries and were denominated in Euros. Additionally, we have significant intercompany payables and debt with certain European subsidiaries, which are denominated in foreign currencies, principally the Euro. Our principal exchange rate risk therefore exists between the U.S. dollar and the Euro. Fluctuations from the beginning to the end of any given reporting period result in the remeasurement of our foreign currency-denominated cash, receivables, payables and debt-generating currency transaction gains or losses that impact our non-operating revenue/expense levels in the respective period and are reported in foreign currency transaction gain (loss) in our consolidated financial statements. We recorded a foreign currency transaction loss of approximately $0.9 million in 2009 related to the translation of our foreign-denominated receivables, payables and debt into U.S. dollars. We do not currently hedge our exposure to foreign currency exchange rate fluctuations. We may, however, hedge such exposure to foreign currency exchange rates in the future.

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Controls and Procedures

              We have not performed an evaluation of our internal control over financial reporting, such as required by Section 404 of the Sarbanes-Oxley Act, nor have we engaged our independent registered public accounting firm to perform an audit of our internal control over financial reporting as of any balance sheet date or for any period reported in our financial statements. Had we performed such an evaluation or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, control deficiencies, including material weaknesses and significant deficiencies, in addition to those discussed below, may have been identified.

              Solely in connection with the audit of our consolidated financial statements for 2007, 2008 and 2009, we and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company's annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness consisted of our lack of policies and procedures, with the associated internal controls, to appropriately identify, evaluate and document accounting analysis and conclusions for complex, non-routine transactions including related party transactions.

              Certain related party transactions that occurred in 2006, 2007 and 2008 were either not identified by us on a timely basis, or inappropriate accounting conclusions were reached at the time of the transactions. These transactions were identified and appropriate accounting conclusions were reached during 2009 in conjunction with our financial statement close process and the audit of our 2009 financial statements by our independent registered public accounting firm. We have taken numerous steps and plan to take additional steps intended to address the underlying causes of the material weakness, primarily through the development and implementation of formal policies, improved processes and documented procedures, and the hiring of additional accounting and finance personnel as necessary. The actions that we have taken are subject to ongoing senior management review, as well as audit committee oversight.

              Presently, we are not an accelerated filer, as such term is defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and therefore our management team is not currently required to perform an annual assessment of the effectiveness of our internal control over financial reporting and our independent registered public accounting firm is not required to express an opinion on management's assessment and on the effectiveness of our internal control over financial reporting. These requirements will first apply to our annual report on Form 10-K for our fiscal year ending January 1, 2011.

              Notwithstanding the material weaknesses described above, we have performed additional analyses and other procedures to enable management to conclude that our consolidated financial statements included in this filing were prepared in accordance with U.S. generally accepted accounting principles.

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BUSINESS

Overview

              We are a global medical device company focused on surgeons that treat musculoskeletal injuries and disorders of the shoulder, elbow, wrist, hand, ankle and foot. We refer to these surgeons as extremity specialists. We sell to this extremity specialist customer base a broad line of joint replacement, trauma, sports medicine and orthobiologic products to treat extremity joints. Our motto of "specialists serving specialists" encompasses this focus. In certain international markets, we also offer joint replacement products for the hip and knee. We currently sell over 70 product lines in approximately 35 countries.

              We have had a tradition of innovation, intense focus on surgeon education and commitment to advancement of orthopaedic technology since our founding approximately 70 years ago in France by René Tornier. Our history includes the introduction of the porous orthopaedic hip implant, the application of the Morse taper, which is a reliable means of joining modular orthopaedic implants, and, more recently, the introduction of the reversed shoulder implant in the United States. This track record of innovation over the decades stems from our close collaboration with leading orthopaedic surgeons and thought leaders throughout the world.

              We were acquired in 2006 by the Investor Group. They recognized the potential to leverage our reputation for innovation and our strong extremity joint portfolio as a platform upon which they could build a global company focused on the rapidly evolving upper and lower extremity specialties. The Investor Group has contributed capital resources and a management team with a track record of success in the orthopaedic industry in an effort to expand our offering in extremities and accelerate our growth. Since the acquisition in 2006, we have:

      created a single, extremity specialist sales channel in the United States primarily focused on our products;

      enhanced and broadened our portfolio of shoulder joint implants and foot and ankle products;

      entered the sports medicine and orthobiologics markets through acquisitions and licensing agreements;

      improved our hip and knee product offerings, helping us gain market share internationally; and

      significantly increased investment in research and development and expanded business development activities to build a pipeline of innovative new technologies.

              As a result of the foregoing actions, we believe our addressable worldwide market opportunity has increased from approximately $2 billion in 2006 to approximately $7 billion in 2009.

              We believe we are differentiated by our full portfolio of upper and lower extremity products, our dedicated extremity-focused sales organization and our strategic focus on extremities. We further believe that we are well-positioned to benefit from the opportunities in the extremity products marketplace as we are already among the global leaders in the shoulder and ankle joint replacement markets with the #2 market position worldwide for sales of shoulder joint replacement products and the #1 market position in the United States in foot and ankle joint replacement systems in 2009 as measured by revenue. We more recently have expanded our technology base and product offering to include: new joint replacement products based on new materials; improved trauma products based on innovative designs; and proprietary orthobiologic materials for soft tissue repair. In the United States, which is the largest orthopaedic market, we believe that our single, "specialists serving specialists" distribution channel is strategically aligned with what we believe is an ongoing trend in orthopaedics for surgeons to specialize in certain parts of the anatomy or certain types of procedures.

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              Our principal products are organized in four major categories: upper extremity joints and trauma, lower extremity joints and trauma, sports medicine and orthobiologics, and large joints and other. Our upper extremity products include joint replacement and bone fixation devices for the shoulder, hand, wrist and elbow. Our lower extremity products include joint replacement and bone fixation devices for the foot and ankle. Our sports medicine and orthobiologics product category includes products used across several anatomic sites to mechanically repair tissue-to-tissue or tissue-to-bone injuries, in the case of sports medicine, or to support or induce remodeling and regeneration of tendons, ligaments, bone and cartilage, in the case of orthobiologics. Our large joints and other products include hip and knee joint replacement implants and ancillary products.

              Innovations in the orthopaedic industry have typically consisted of evolutions of product design in implant fixation, joint mechanics, and instruments and modifications of existing metal or plastic-based device designs rather than new products based on combinations of new designs and new materials. In contrast, the growth of our target markets has been driven by the development of products that respond to the particular mechanics of small joints and the importance of soft tissue to small joint stability and function. We are committed to the development of new designs utilizing both conventional materials and new tissue-friendly biomaterials that we expect will create new markets. We believe that we are a leader in researching and incorporating some of these new technologies across multiple product platforms.

              In the United States, we sell products from our upper extremity joints and trauma, lower extremity joints and trauma, and sports medicine and orthobiologics product categories; we do not actively market large joints in the United States nor do we currently have plans to do so. While we market our products to extremity specialists, our revenue is generated from sales to healthcare institutions and distributors. We sell through a single sales channel consisting of a network of independent commission-based sales agencies. Internationally, where the trend among surgeons toward specialization is not as advanced as in the United States, we sell our full product portfolio, including upper extremity joints and trauma, lower extremity joints and trauma, sports medicine and orthobiologics and large joints. We utilize several distribution approaches depending on the individual market requirements, including direct sales organizations in the largest European markets and independent distributors for most other international markets. In 2009, we generated revenue of $201.5 million, 57% of which was in North America and 43% of which was international.

Our Business Strategies

              Our goal is to strengthen our leadership position serving extremity specialists. The key elements of our strategy include:

              Leveraging our "specialists serving specialists" strategy:    We believe our focus on and dedication to extremity specialists enables us to better understand and address the clinical needs of these surgeons. We believe that extremity specialists, who have emerged as a significant constituency in orthopaedics only in the last ten to 15 years, have been underserved in terms of new technology and also inefficiently served by the current marketplace. We offer a comprehensive portfolio of extremity products, and also serve our customers through a sales channel that is dedicated to extremities, which we believe provides us with a significant competitive advantage, because our sales agencies and their representatives have both the knowledge and desire to comprehensively meet the needs of extremity specialists and their patients, without competing priorities.

              Advancing scientific and clinical education:    We believe our specialty focus, commitment to product innovation and culture of scientific advancement attract both thought leaders and up-and-coming surgeon specialists who share these values. We actively involve these specialists in the development of world-class training and education programs and encourage ongoing scientific study of our products. Specific initiatives include the Tornier Master's Courses in shoulder and ankle joint replacement, The Fellows and Chief Residents Courses, and a number of clinical concepts courses. We

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also maintain a registry that many of our customers utilize to study and report on the outcomes of procedures in which our extremity products have been used. We believe our commitment to science and education also enables us to reach surgeons early in their careers and provide them access to a level of training in extremities that we believe is not easily accessible through traditional orthopaedic training.

              Introducing new products and technologies to address more of our extremity specialists' clinical needs:    Our goal is to continue to introduce new technologies for extremity joints that improve patient outcomes and thereby continue to expand our market opportunity and share. Our efforts have been focused on joint replacement, as well as sports medicine and orthobiologics, given the importance of these product categories to extremity surgeons. Since our acquisition by the Investor Group, we have significantly increased our investment in research and development to accelerate the pace of new product introduction. During 2009, we invested $18.1 million in research and development and introduced 18 new products, and in 2008, we invested $20.6 million and introduced nine new products, up from only $13.3 million and four new products in 2007. We have also been active in gaining access to new technologies through external partnerships, licensing agreements and acquisitions. We believe that our reputation for effective collaboration with industry thought leaders as well as our track record of effective new product development and introductions will allow us to continue to gain access to new ideas and technologies early in their development.

              Expanding our international business:    We face a wide range of market dynamics that require our distribution channels to address both our local market positions and local market requirements. For example, in France, which is a more developed extremities market and where we have a diversified extremities, hip and knee business, we have two direct sales organizations. One is focused on products for upper extremities, and the other focused on hip and knee replacements and products for lower extremities. In other European markets, we utilize a combination of direct and distributor strategies that have evolved to support our expanding extremity business and also to support our knee and hip market positions. In large international markets where the extremity market segment is relatively underdeveloped, such as Japan and China, the same sales channel sells our hip and knee product portfolios and extremity joint products, which provides these sales channels sufficient product breadth and economic scale. We plan on expanding our international business by continuing to adapt our distribution channels to the unique characteristics of individual markets.

              Achieving and improving our profitability through operating leverage:    With the additional capital resources brought by the Investor Group, we have made significant investments over the last several years in our research and development, sales and marketing, and manufacturing operations to build what we believe is a world-class organization capable of driving sustainable global growth. For example, we grew our research and development organization from approximately 20 employees as of December 31, 2006 to 79 employees as of December 27, 2009. We created a new global sales and marketing leadership team by integrating key personnel from acquired organizations and recruiting additional experienced medical device sales and marketing professionals. We also expanded our manufacturing capacity with two new plants in Ireland and France. With these organizational and infrastructure investments in place, we believe we have the infrastructure to support our growth for the foreseeable future. As a result, we believe we can increase revenue and ultimately achieve and improve profitability.

Our Surgeon Customers

              We estimate that there are over 80,000 orthopaedic and over 9,000 podiatric surgeons worldwide who specialize in surgical treatment of the musculoskeletal system, including bones, joints and soft tissues such as tendons and ligaments. In the United States and certain other developed markets, there has been a trend over the past two decades for these surgeons to specialize in certain parts of the anatomy or certain types of procedures. We believe that the trend toward specialization has

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been supported by the expansion of specialist professional societies and an increase in the number of fellowship programs. We focus on the following orthopaedic specialist groups:

              Upper Extremity Specialists:    Upper extremity specialists perform joint replacement and trauma and soft tissue repair procedures for the shoulder, elbow, wrist and hand. We believe the evolution of this specialty has been driven by the unique requirements of these joints due to the relative importance of soft tissue to joint function and the increased complexity and breadth of technology available for use in these procedures. For this reason, in addition to joint replacement and trauma products, upper extremity specialists utilize a broad range of sports and orthobiologic products. We believe upper extremity specialists now perform the majority of shoulder joint replacements that were previously performed by reconstructive and general orthopaedic surgeons.

              Lower Extremity Specialists:    Lower extremity specialists perform a wide range of joint replacement, trauma, reconstruction and soft tissue repair procedures for the foot and ankle. This specialist group principally consists of orthopaedic surgeons who have received fellowship or other specialized training. Additionally, Doctors of Podiatric Medicine with special surgical training may perform certain foot and ankle surgical procedures in the United States, Canada and United Kingdom.

              Sports Medicine Specialists:    Sports medicine specialists are surgeons who use minimally invasive surgical techniques, including arthroscopy, for the repair of soft tissues. Arthroscopy is a minimally invasive surgical technique in which a surgeon creates several small incisions at the surgery site; inserts a fiber optic scope with a miniature video camera as well as surgical instruments through the incisions to visualize, access and conduct the procedure; and uses a video monitor to view the surgery itself. The sports medicine specialty is not just limited to treatment of athletes, but rather all patients with orthopaedic soft tissue injuries or disease. The most common sports medicine procedures are ligament repairs in the knee and rotator cuff tendon repair in the shoulder.

              Reconstructive and General Orthopaedic Surgeons:    Reconstructive and general orthopaedic surgeons are important customers for us in selected European countries and other international markets. In these markets orthopaedic surgeons may treat multiple areas of bone and joint disease and trauma, and commonly perform procedures involving extremity joints as well as hip and knee joint replacement. For these target customers, we are able to provide not only our broad product category for extremity joint procedures, but also our hip and knee joint replacement products.

Our Target Markets

              We compete on a worldwide basis providing upper and lower extremity specialist surgeons a wide range of products from several major segments of the orthopaedic market, including extremity joints, sports medicine, orthobiologics and trauma. In addition, we compete in the hip and knee segments of certain international markets where we have a strong legacy presence such as in France, where participation in the local hip and knee market is important to our distributor partners, and in China, where the market for our extremity focused products is still small. The table below provides the estimated portion of the various market segments that are addressed by our currently marketed products as well as the estimated compound annual growth rate, or CAGR, for each market segment.

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The table also provides an estimate of the total market size, which includes the portion addressable by our products, for each of the market segments.

 
  Estimated addressable market   Estimated total global orthopaedic market(2)  
 
  2009
market size
($ in billions)
  2009-2013
estimated
CAGR
  2009
market size
($ in billions)
 

Extremity Joints

  $ 0.9 (1)   11 %(1) $ 0.9  

Sports Medicine

  $ 1.1 (1)   10 %(1) $ 3.3  

Orthobiologics

  $ 0.7 (1)   11 %(1) $ 3.9  

Trauma

  $ 2.3 (1)   12 %(1) $ 5.2  

Knee Joints

  $ 1.0 (2)   5 %(2) $ 6.8  

Hip Joints

  $ 0.9 (2)   5 %(2) $ 5.7  

Spine

    NA     NA   $ 7.2  
               
 

Total

  $ 7.0     10 % $ 33.0  

(Sum
of numbers may not match total due to rounding) 
(1)
Based on data provided by Millennium Research Group.
(2)
Based on management's experience and industry data. Our hip and knee addressable market is limited to selected international geographies.

              We believe our addressable portion of the market will grow at a faster rate than the overall orthopaedic market due to the introduction of new technologies with improved clinical outcomes, a growing number of extremity specialists, the aging of the general population and the desire for people to remain physically active as they grow older. Overviews of the major orthopaedic markets in which we compete, as well as our targeted participation in those markets, are as follows:

              Extremity Joints:    The extremity joint market includes implantable devices used for the replacement of shoulder, elbow, hand, and foot and ankle joints. We believe this market has been under-served and underdeveloped by major orthopaedic companies, which have generally focused on the much larger hip, knee and spine markets. As a result, the growth of the extremity joint market is still benefiting from market-expanding design and materials technologies and from growth in the number of upper and lower extremity specialists. We believe that we are a leader in both the shoulder and ankle joint replacement portions of this market based upon revenue.

              Sports Medicine:    Sports medicine refers to the repair of soft tissue injuries that often occur when people are engaged in physical activity, but that also result from age-related wear and tear. We believe market growth has been driven by both new technology and the continued acceptance of minimally invasive surgical techniques. The most common sports medicine procedures are anterior cruciate ligament repairs in the knee and rotator cuff repairs in the shoulder. The primary sports medicine products include capital equipment and related disposables as well as bone anchors, which are implantable devices used to attach soft tissue to bone, sutures, or thread for soft tissue, and handheld instruments. We estimate that our products currently address only a portion of the sports medicine market, primarily bone anchors and other products utilized for rotator cuff repairs. The total sports medicine market also includes capital or powered equipment and related disposables, but we do not have any product offerings in these areas.

              Orthobiologics:    Orthobiologics refer to products, both biologic and synthetic, that are utilized to stimulate hard and soft tissue healing following surgery for a wide range of orthopaedic injuries or disorders. We believe market growth is being driven by the application of an expanding biotechnology knowledge base to the development of products that can improve clinical outcomes by inducing tissue healing and regeneration. The primary product categories in the total orthobiologics market are bone

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grafting materials, cell therapy systems, including growth factors, and tendon and ligament grafts. We currently only offer tendon and ligament graft products for extremities.

              Trauma:    The trauma market includes devices that are used to treat fractures, joint dislocations, severe arthritis and deformities that result from either acute injuries or chronic wear and tear. The major products in the trauma market include metal plates, screws, pins, wires and external fixation devices used to hold fractured bone fragments together until they heal properly. These devices are also utilized in the treatment of a wide range of non-traumatic surgical procedures, especially in the foot and ankle. As the market has transitioned from external casting performed in the emergency room, to internal fixation performed on a scheduled basis in the operating room, our extremity specialist customers have expanded their role in treating trauma injuries. Our products currently address only a portion of the trauma market, consisting primarily of plating systems, screws and pins for the repair of extremity joint injuries and disorders.

              Knee Joints:    Knee joint replacements are performed for patients who have developed an arthritic condition that compromises the joints' articulating surfaces (articulating surfaces are bone segments connected by a joint). The knee joint replacement system has multiple components including a femoral component, a tibial component and a patella component (knee cap). We currently provide a broad line of knee joint replacement products in selected international geographies. We do not currently address the knee joint market in the United States.

              Hip Joints:    Hip joint replacements are performed for patients who have suffered a femoral fracture or suffer from severe arthritis or other conditions that have led to the degradation of the articular cartilage or bone structure residing between the femoral head and the acetabulum (hip socket). The hip joint replacement system generally includes both femoral and acetabular components. We currently provide a broad line of hip joint replacement products in selected international geographies. We do not currently address the hip joint market in the United States.

Our Product Portfolio

              We offer a broad product line designed to meet the needs of our extremity specialists and their patients. Although the industry traditionally organizes the orthopaedic market based on the mechanical features of the products, we organize our product categories in a way that aligns with the types of surgeons who use them. Therefore, we distinguish upper extremity joints and trauma from lower extremity joints and trauma, as opposed to viewing joint implants and trauma products as distinct product categories. Along these lines, our product offering is as follows:

Product category
  Target addressable geography   Estimated addressable market
size 2009 ($ in billions)(1)
 

Upper extremity joints and trauma

  United States and International   $ 2.0  

Lower extremity joints and trauma

  United States and International   $ 1.2  

Sports medicine and orthobiologics

  United States and International   $ 1.8  

Large joints and other

  Selected International Markets   $ 1.9  
           

Total

      $ 7.0  

(Sum
of numbers may not match total due to rounding) 
(1)
Based on data provided by Millennium Research Group, except for "Large joints and other." Large joints and other estimated addressable market data is based on management's experience and industry data.

              See Fiscal Year Comparisons contained in the Management's Discussion and Analysis of Financial Condition and Results of Operation section of this prospectus for our three-year revenue history by product category.

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Upper Extremity Joints and Trauma

              The upper extremity joints and trauma product category includes joint implants and bone fixation devices for the shoulder, hand, wrist and elbow. Our global revenue from this category for the year ended December 27, 2009, was $125.5 million, or 62% of revenue, which represents growth of 15% over the prior fiscal year.

              Shoulder Joint Replacement and Trauma Implants—We believe we had the #2 market position worldwide for sales of shoulder joint replacement products in 2009 as measured by revenue. We expect the shoulder to continue to be the largest and most important product category for us for the foreseeable future. Our shoulder joint implants are used to treat painful shoulder conditions due to arthritis, irreparable rotator cuff tendon tears, bone disease, fractured humeral heads or failed previous shoulder replacement surgery. Our products are designed for the following:

      Our total joint replacement products have two components—a humeral implant consisting of a metal stem attached to a metal ball, and a plastic implant for the glenoid (shoulder socket). Together, these two components mimic the function of a natural shoulder joint.

      Our hemi joint replacement products replace only the humeral head and allow it to articulate against the native glenoid.

      Our reversed implants are used in arthritic patients lacking rotator cuff function. The components are different from a traditional "total" shoulder in that the humeral implant has the plastic socket and the glenoid has the metal ball. This design has the biomechanical impact of shifting the pivot point of the joint away from the body centerline and giving the deltoid muscles a mechanical advantage to enable the patient to elevate the arm.

      Our resurfacing implants are designed to minimize bone resection to preserve bone, which may benefit more active or younger patients with shoulder arthritis.

      Trauma devices, such as plates, screws and nails, are non-articulating implants used to help stabilize fractures of the humerus.

              We offer a complete range of these shoulder implants as described in the table below:

Shoulder Joint Replacement and Trauma Implants

Product
  Description   Year(s) of
introduction
  Region
currently
marketed

Aequalis Shoulder Joint

  Shoulder joint replacement implant to treat pain or disability due to arthritis, severe trauma and other conditions. The Aequalis system includes versions for traditional resurfacing, reverse, fracture and reverse fracture joint replacement.   1991-2009   United States
and
International

Affiniti Shoulder Joint

 

Shoulder joint replacement implant to treat pain or disability due to arthritis, severe trauma and other conditions. The Affiniti system is designed to facilitate a simple, reproducible surgical technique.

 

2007

 

United States
and
International

Ascend Shoulder Joint

 

Shoulder joint replacement implant to treat pain or disability due to arthritis, severe trauma and other conditions. The Ascend system is a bone-sparing design.

 

2009

 

United States

Aequalis Trauma Systems

 

Specialty shoulder plates and nails for reconstruction of humeral fractures.

 

2007-2009

 

United States
and
International

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              Hand, Wrist and Elbow Joint Replacement and Trauma Implants—We offer joint replacement products that are used to treat arthritis in the hand, wrist and elbow. In addition, we offer trauma products including plates, screws and pins, to treat fractures of the hand, wrist and elbow. One of our distinctive product offerings for these smaller, non-load bearing joints are implants made from a biocompatible material called pyrocarbon, which has low joint surface friction and a high resistance to wear. We offer a wide range of pyrocarbon implants internationally and have begun to introduce some of these products into the United States. Our hand, wrist and elbow products are described in the table below:

Hand, Wrist and Elbow Joint Replacement and Trauma Implants

Product
  Description   Year(s) of
introduction
  Region
currently
marketed

CoverLoc Wrist Plate

  Metallic trauma plate used to stabilize wrist fractures as they heal. The CoverLoc technology allows the screws to pull bone fragments to the plate and lock them for stability, while also covering the screw heads to minimize soft tissue irritation.   2006   United States
and
International

Latitude Elbow

 

Elbow joint replacement implant to treat pain or disability due to arthritis, severe trauma and other conditions. The Latitude system provides for anatomic reconstruction of the elbow joint.

 

2000

 

United States
and
International

Pyrocarbon Radial Head

 

Radial head (of the elbow joint) replacement implant made of pyrocarbon and titanium to treat pain or disability due to arthritis, severe trauma, and other conditions.

 

2002

 

International

RHS Radial Head System

 

Radial head (of the elbow joint) replacement implant to treat pain or disability due to arthritis, severe trauma and other conditions. The anatomic bipolar system consists of multiple stem diameters and head sizes to match a wide range of patients.

 

2006

 

United States
and
International

Pyrocarbon Hand and Wrist

 

A range of spacers and joint replacements manufactured from pyrocarbon for arthritic bones to relieve pain and restore function of the hand and wrist joints.

 

1994-2009

 

International
(some thumb implants in the United States)

Intrafocal Pin Plate

 

Internal pin-and-plate fixation system for minimally invasive stabilization of wrist fractures.

 

2005

 

United States
and
International

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Lower Extremity Joints and Trauma

              Our global revenue from lower extremity joints and trauma for the year ended December 27, 2009, was $20.4 million, 10% of revenue, which represents growth of 12% over the prior fiscal year.

              Ankle Joint Implants—We believe we held the #1 market position by revenue in the United States in foot and ankle joint replacement systems in 2009. Ankle arthritis is a painful condition that can be treated by fusing the ankle joint with plates or screws or by replacing the joint with an articulating multi-component implant. These joint implants may be mobile bearing, in which the plastic component is free to slide relative to the metal bearing surfaces, or fixed bearing, in which this component is constrained. Precision bearing implants are highly anatomic fixed bearing implants. These products include:

Ankle Joints Implants

Product
  Description   Year(s) of
introduction
  Region
currently
marketed

Salto Talaris Ankle Joint

  Total ankle joint replacement implant to treat pain or disability from severe arthritis. The Salto Talaris is a precision bearing (2-part) implant.   2007   United States

Salto Ankle Joint

 

Total ankle joint replacement implant to treat pain or disability from severe arthritis. The Salto is a mobile bearing (3-part) implant.

 

1997

 

International

              Other Foot and Ankle Joint and Trauma Implants—Our products include joint replacement implants to treat arthritis of the toes and other small bone joints, trauma and bone fusion implants for

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the foot and ankle, and other implants to address certain other deformities of the foot. These products include:

Other Foot and Ankle

Product
  Description   Year(s) of
introduction
  Region
currently
marketed

Nexfix Fixation System

  Specialty plates, compression screws and pins with instrumentation designed to facilitate bone and joint fusion procedures of the foot.   2007   United States
and
International

Futura Foot Implants

 

The Futura product line includes forefoot joint replacement implants to treat pain or disability from severe arthritis or other conditions, and flatfoot correction implants.

 

1996-2004

 

United States
and
International

Stayfuse Fusion System

 

A two-part locking implant to fuse joints of the toes.

 

2001

 

United States
and
International

Wave Calcaneal Plate

 

Metallic trauma plate used in calcaneal fractures (heel bone) with a small incision.

 

2009

 

United States

Ankle Fusion Plate

 

Specialty CoverLoc plates to stabilize the ankle joint for fusion procedures.

 

2010

 

United States

Resorbable Fixation System

 

Bioresorbable pins and screws used in trauma and bone fusion to stabilize bone fragments.

 

2007

 

United States
and
Selected
International
Countries

Osteocure

 

Cylindrical and wedge shaped implants with a bioresorbable, porous scaffold to support bony in-growth and to fill defects left by surgery, trauma or disease in the foot.

 

2005

 

United States

Sports Medicine and Orthobiologics

              Our revenue from sports medicine and orthobiologics for the year ended December 27, 2009, was $6.6 million, or 3.3% of overall revenue, which represents growth of 162% over the prior fiscal year. Nearly all of our products in this product category were launched during the first half of 2009 and only in the United States. We have introduced many of these products internationally in 2010.

              Sports Medicine—The sports medicine product category includes products used across several anatomic sites to mechanically repair tissue-to-tissue or tissue-to-bone injuries. Because of its close relationship to shoulder joint replacement, the sports medicine market is of critical strategic importance to us. Rotator cuff repair is the largest sub-segment in the sports medicine market. Other procedures

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include shoulder instability treatment, Achilles tendon repair and soft tissue reconstruction of the foot and ankle and several other soft tissue repair procedures. Our current product offering includes:

Sports Medicine

Product
  Description   Year(s) of
introduction
  Region
currently
marketed

Piton Knotless Suture Anchor

  Knotless suture anchor fixation system for securing soft tissue to bone. Used for soft tissue procedures in the upper and lower extremities including rotator cuff and Achilles tendon repair.   2008   United States
and
Selected
International
Countries

ArthroTunneler

 

Single-use device for creating intersecting bone tunnels, which enable anchor-less fixation of tendon to bone in rotator cuff repair.

 

2009

 

United States
and
Selected
International
Countries

Insite Suture Anchors

 

Screw-in suture anchor fixation system for securing soft tissue to bone. Used for soft tissue procedures in the upper and lower extremities including rotator cuff and Achilles tendon repair. Insite implants are available in titanium, high strength polymer and resorbable polymer versions.

 

2008

 

United States
and
Selected
International
Countries

              Orthobiologics—The field of orthobiologics employs tissue engineering and regenerative medicine technologies focused on remodeling and regeneration of tendons, ligaments, bone and cartilage. Biologically or synthetically derived soft tissue grafts and scaffolds are used to treat soft tissue injures and are complementary to many sports medicine applications, including rotator cuff tendon repair and Achilles tendon repair. Hard tissue orthobiologics products are used in many bone fusion or trauma cases where healing potential may be compromised and additional biologic factors are desired to enhance healing, where the surgeon needs additional bone stock and does not want to harvest a bone graft from another surgical site or in cases where the surgeon wishes to use materials that are naturally incorporated by the body over time in contrast to traditional metallic-based products that may require later removal. We recently commercialized our first orthobiologics product through an exclusive collaboration with LifeCell:

Orthobiologics

Product
  Description   Year of
introduction
  Region
currently
marketed

Conexa

  Orthobiologic reconstructive tissue matrix used in the repair of injured or surgically reconstructed soft tissue such as rotator cuff or Achilles tendons. The graft supports regeneration of soft tissue.   2008   United States
and
Selected
International
Countries

              We have a robust pipeline of orthobiologics products under development and are actively pursuing new product additions. We have in-licensed biologic materials such as Biofiber, an advanced high-strength resorbable polymer fiber produced using recombinant DNA technology as well as our F2A peptide, a synthetic version of the natural human FGF-2 growth factor.

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Large Joints and Other

              The large joints and other product category includes hip and knee joint replacement implants and ancillary products. Hip and knee joint replacements are used to treat patients with painful arthritis in these larger joints. Our global revenue from large joints and other products for the year ended December 27, 2009, was $49.0 million, or 24% of overall revenue, which represents growth of 2% over the prior fiscal year.

              We generated nearly all of our revenue from this category outside of the United States. We have continued to innovate in this area so that we can maintain or grow market share in several international markets where the extremity markets have not yet reached a size to permit the type of channel focus that we have in the United States or where extremities specialization is not as prevalent as in the United States. We currently have no plans to actively market our large joint implants in the United States.

Hip Joints

Product
  Description   Year(s) of
introduction
  Region
currently
marketed

Hip stems

  Linea: The Linea anatomic stem is used for total hip replacement procedures. The implant is available in both cemented and cementless versions.   1992   International

 

Oceane: The Oceane stem is used for total hip replacement for cemented applications.

 

1997-2009

 

International

 

Meije Duo: The Meije Duo stem is used for total hip replacement procedures. The stem's taper is engineered to associate with ceramic femoral heads.

 

2005

 

International

Hip heads

 

Femoral heads are matched with hip stems and cups depending on the surgeon preference. Hip head materials include cobalt chrome, ceramic and high carbon content forged metal-on metal bearings.

 

1992-2002

 

International

Hip cups

 

Hip cups replace the damaged hip socket and articulate with the hip head implants. The hip cups include polyethylene, ceramic and metal materials in multiple configurations.

 

2003-2009

 

International

Pleos Hip Navigation System

 

The Pleos Computer-Assisted Surgery hip navigation system allows the surgeon to obtain optimum positioning of the implants.

 

2004

 

International

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Knee Joints

Product
  Description   Year(s) of
introduction
  Region
currently
marketed

HLS Knee Implants

  Noetos: Knee joint replacement implant used to relieve pain caused by severe arthritis. It is available in cemented or cementless versions, and with fixed or mobile tibial bearings.   2001   International

 

Kneetec: Knee joint replacement implant used to relieve pain caused by severe arthritis with an improved anatomic shape.

 

2010

 

International

 

Uni Evolution Knee: Bone-sparing resurfacing implant that replaces only one side of the knee to relieve pain due to arthritis localized to only one side of the knee

 

1996

 

International

Pleos Knee Navigation System

 

The Pleos Computer-Assisted Surgery knee navigation system allows the surgeon to simulate surgical approaches before actually cutting the femoral bone.

 

2007

 

International

Instruments and Other

Product
  Description   Year(s) of
introduction
  Region
currently
marketed

TBCem Bone Cement

  Bone cement is used to secure implant stems to bone. Four cements are available: standard or low viscosity, either with or without antibiotics.   2009   International

Instruments

 

Custom surgical instruments used to prepare the joint for the implant.

 

Various

 

United States
and
International

Our Technologies

              The orthopaedic industry has produced many innovations in product design over the years. These innovations have typically consisted of evolutions of product design in implant fixation, joint mechanics, and instruments and modifications of existing metal or plastic-based device designs rather than new products based on combinations of new designs and new materials. In contrast, the growth of our target markets has been driven by the development of products that respond to the particular mechanics of small joints and the importance of soft tissue to small joint stability and function. We are committed to the development of new designs utilizing both conventional materials and new tissue-friendly biomaterials that we expect will create new product categories. We believe that we are a leader

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in researching and incorporating some of these new technologies across multiple product platforms. A few selected examples are listed below:

      Advanced Design Technologies

      Bone sparing implants: Several of our newer implants, such as our Ascend Shoulder, as well as our current implants, such as our Salto Talaris ankle implant, follow a philosophy of bone sparing site preparation to minimize the amount of native tissue that must be removed for the implant. We believe this philosophy results in a more anatomic implant that is less traumatic to the patient. By preserving native tissue, we believe surgeons retain more options compared to traditional implants should a revision procedure be required in the future.

      Adjustable locking plates: We have incorporated CoverLoc technology into some of our plating systems, including wrist and ankle plates. CoverLoc technology is based upon high precision machining that places screw holes through metal plates at anatomic angles. Each hole is angled to achieve optimal screw or peg placement aimed at reducing the risk of screw loosening. Furthermore, the technology provides the surgeon the ability to pull bone fragments to the plate and then lock the screws in the desired angle with the cover plate, while providing protection for the surrounding soft tissues from the screw heads.

      Knotless suture locking: Cinch technology is a patented mechanism that is the basis for our knotless suture anchor platform. The Piton suture anchor is the first product to incorporate Cinch technology. Cinch technology eliminates the need for knots while allowing surgeons to independently and sequentially tension each suture, even after inserters are removed. We believe this innovative design makes it easier for surgeons to perform arthroscopic surgery, eliminates knot slippage, and enables a uniform soft tissue repair across the repaired surface.

      Advanced Materials

      Pyrocarbon: This material is gaining acceptance for use in orthopaedics due to its biocompatibility, low joint surface friction and high resistance to wear. Pyrocarbon also has a stiffness similar to bone, making it an ideal material for orthopaedic implants. We offer several joint replacement or joint spacer devices made from pyrocarbon in the hand, wrist and elbow, and have recently announced what we believe to be the first human implant of a pyrocarbon shoulder implant.

      Resorbable polymers: Some of our products utilize resorbable polymers, the benefit of which is that once a soft tissue injury has healed and the implant is no longer necessary, there is no longer a foreign substance residing in the body. Our Biofiber material is a high-strength resorbable polymer that can be processed in many physical configurations including fiber, mesh and film. These materials are biocompatible and non-inflammatory. They degrade by cell-friendly processes into metabolites that already exist in humans, unlike other acidic bioresorbable materials. We also offer high strength next-generation resorbable materials in our Resorbable Fixation System product line of trauma pins and screws. These products benefit from a combination of materials having a long history of surgical use and our supplier's ability to produce a high-strength, reliable, biodegradable implant.

      Orthobiologic Technologies

      Orthobiologic tissue grafts: Our Conexa reconstructive tissue matrix product line was introduced through a partnership with LifeCell. The Conexa material provides a complex three-dimensional biologic architecture to support cellular repopulation and vascular

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        channels that allow for rapid capillary in-growth. Surgeons use this product in procedures to support regeneration of soft tissue, such as rotator cuff and Achilles tendons repairs.

      Synthetic Growth Factors: F2A is an engineered peptide that is a synthetic version of the natural human FGF-2 growth factor. FGF-2 and other naturally occurring growth factors may play key roles in the body's healing and repair processes. Synthetic growth factors may address many of the manufacturing, handling and shelf life challenges that have limited the clinical role of natural growth factors. We have recently conducted pre-clinical testing of a scaffold incorporating F2A that demonstrates tissue regeneration in both small and large animal models. F2A has not yet been approved by the FDA.

Distribution

              We have developed our distribution channels to serve the needs of our customers, primarily extremity specialist surgeons in the United States and a mix of extremity specialist and general orthopaedic surgeons in international markets. In the United States, we have a broad offering of joint replacement and repair, sports and biologic products targeting extremity specialists through a single distribution channel. Internationally, we utilize several distribution approaches depending on individual market requirements. We utilize direct sales organizations in several mature European markets and independent sales agencies for most other international markets. In France, we have two direct sales forces, one handling our upper extremity focused products and one handling our lower extremity portfolio. In emerging international markets such as China and Japan, where extremity markets are still undeveloped, we utilize independent sales agencies that carry both our extremity-focused and our hip and knee portfolios.

      United States

              In the United States, we sell upper extremity joints and trauma, lower extremity joints and trauma, sports medicine and orthobiologics products. We do not actively market hip or knee replacement joints in the United States, although we have FDA clearance for selected large joint products. We sell our products through a single sales channel. Our U.S. sales force consists of a network of approximately 23 independent commission-based sales agencies, which in aggregate utilized over 300 sales representatives as of April 4, 2010. We believe a significant portion of these sales agencies' commission revenue is generated by sales of our products. Our success depends largely upon our ability to motivate these sales agencies and their representatives to sell our products. Additionally, we depend on their sales and service expertise and relationships with the surgeons in the marketplace. Our independent sales agencies are not obligated to renew their contracts with us, may devote insufficient sales efforts to our products or may focus their sales efforts on other products that produce greater commissions for them. A failure to maintain our existing relationships with our independent sales agencies and their representatives could have an adverse effect on our operations. We do not control our independent sales agencies and they may not be successful in implementing our marketing plans. We employ four area business directors to support these independent sales agencies and have also recently started a Field Marketing Manager program, to help drive adoption of our newly introduced extremities, sports and orthobiologics products. During the course of the year, we host numerous opportunities for product training throughout the United States.

      International

              We sell our full product portfolio, including upper and lower extremities, sports medicine and orthobiologics and large joints, in most international markets. We believe our full range of hip and knee products enable us to more effectively and efficiently service these markets where procedure or anatomic specialization is not as prevalent as in the United States and where extremities, sports medicine and orthobiologics markets have not yet reached a size to permit the degree of channel focus

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we have in the United States. Our international distribution system consists of nine direct sales offices and approximately 32 distributors that sell our products in approximately 35 countries. Our largest international market is France, where we have a direct sales force of 26 direct sales representatives. We also have direct sales offices and corporate subsidiaries in Germany, Italy, Spain, Switzerland, The Netherlands, the United Kingdom, Denmark and Australia that employ direct sales employees. Additional European countries, as well as countries in Latin America and Asia, are served by distributors who purchase products directly from us for resale to their local customers, with product ownership generally passing to the distributor upon shipment. As part of our strategy to grow internationally, we have selectively converted from distributors to direct sales representation in certain countries, as we did in the United Kingdom and Denmark in 2009. We intend to focus on expanding our presence in underserved countries, such as China, where we signed an agreement in 2009 with Weigao for the exclusive distribution of our shoulder, hip and knee products for a four-year term. Under this agreement, Weigao committed to a minimum purchase amount of €418,000 for 2010. Purchase quotas and prices for the following years will be set at the end of each year. The agreement may be terminated prior to its expiration in 2014 upon breach by either party, including Weigao's failure to meet the purchase quota.

              Our total revenue in France was $46.3 million in 2009, $43.2 million in 2008 and $37.3 million in 2007. Our total revenue in The Netherlands was $3.6 million in 2009, $3.4 million in 2008 and $2.9 million in 2007.

Research and Development

              We are committed to a strong research and development program and have significantly increased our investment in this area since the acquisition by the Investor Group in 2006. Our research and development expenses were $18.1 million, $20.6 million and $13.3 million in 2009, 2008 and 2007, respectively. As of April 4, 2010, we had a research and development staff of 79 people, or 10% of total employees, principally located in Warsaw, Indiana and Montbonnot, France, with additional staff in Grenoble, France, San Diego, California and Boston, Massachusetts.

              We have dedicated internal product development teams focused on continuous innovation and introduction of new products for extremity joint replacements, extremity joint trauma, soft tissue repair and large joint replacement. We also have an active business development team that seeks to in-license development-stage products, which our internal team assists in bringing to market. In collaboration with our internal teams, we work closely with external research and development consultants and a global network of leading surgeon inventors to ensure we have broad access to best-in-class ideas and technology to drive our product development pipeline.

              Our investment in internal and external development programs has driven consistent new product introductions. For example, we introduced 18 new products in 2009 and nine new products in 2008, up from four new products in 2007.

Manufacturing and Supply

              We manufacture substantially all of our products at five sites including Montbonnot, Saint-Ismier and Grenoble, France, and Dunmanway and Macroom, Ireland. Our operations in France have a long history and deep experience with orthopaedic manufacturing and innovation and we have invested in facilities upgrades to both expand capabilities and establish incremental lean cellular manufacturing practices there as well. Our Ireland location has been practicing lean cellular manufacturing concepts for many years with a philosophy focused on continuous operational improvement and optimization. We continually evaluate the potential to in-source products currently purchased from outside vendors to on-site production. We are continuously working on product and process improvement projects to optimize our manufacturing processes and product costs to improve

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our profitability and cash flow. We believe that our manufacturing facilities and relationships will support our potential capacity needs for the foreseeable future.

              We use a diverse and broad range of raw materials in the manufacturing of our products. We purchase all of our raw materials and select components used in manufacturing our products from external suppliers. In addition, we purchase some supplies from single sources for reasons of proprietary know-how, quality assurance, sole source availability, cost-effectiveness or constraints resulting from regulatory requirements. For example, we rely on one supplier for raw materials and select components in several of our products, including Poco Graphite, Inc., which supplies graphite for pyrocarbon on a purchase order basis, Heymark Metals Ltd., which supplies CoCr used in certain of our hip, shoulder and elbow products on a purchase order basis, and CeramTec, which supplies ceramic for ceramic heads for hips on a purchase order basis.

              We believe we are the only vertically integrated manufacturer of pyrocarbon orthopaedic products with production equipment to enable production of larger-sized implants. While we rely on an external supplier to supply us with surgical grade substrate material, we control the remaining pyrocarbon manufacturing process, which we believe gives us a competitive advantage in design for manufacturing and prototyping of this innovative material.

              We work closely with our suppliers to ensure continuity of supply while maintaining high quality and reliability. To date, we have not experienced any significant difficulty in locating and obtaining the materials necessary to fulfill our production requirements.

              Some of our products are provided by suppliers under a private label distribution agreement. Under these agreements, the supplier generally retains the intellectual property and exclusive manufacturing rights. The supplier private labels the products under the Tornier brand for sale in certain fields of use and geographic territories. These agreements may be subject to minimum purchase or sales obligations.

              Our private-label distribution agreements expire between 2011 and 2015 and are renewable under certain conditions or by mutual agreement. These agreements are terminable by either party upon notice and such agreements include some or all of the following provisions allowing for termination under certain circumstances: (i) either party's uncured material breach of the terms and conditions of the agreement, (ii) either party filing for bankruptcy, being bankrupt or becoming insolvent, suspending payments, dissolving or ceasing commercial activity, (iii) our inability to meet market development milestones and ongoing sales targets, (iv) termination without cause, provided that payments are made to the distributor, (v) a merger or acquisition of one of the parties by a third party, (vi) the enactment of a government law or regulation that restricts either party's right to terminate or renew the contract or invalidates any provision of the agreement or (vii) the occurrence of a "force majeure," including natural disaster, explosion or war.

Competition

              The market for orthopaedic devices is highly competitive and subject to rapid and profound technological change. Our currently marketed products are, and any future products we commercialize will be, subject to intense competition. We believe that the principal competitive factors in our markets include product features and design, reputation and service. One of the key factors to our future success will be our ability to continue to introduce new products and improve existing products and technologies.

              We face competition from large diversified orthopaedic manufacturers, such as DePuy, Zimmer and Stryker, and established mid-sized orthopaedic manufacturers, such as Arthrex, Wright Medical and ArthroCare. Many of the companies developing or marketing competitive orthopaedic products are

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publicly traded or are divisions of publicly traded companies and may enjoy several competitive advantages, including:

      greater financial and human resources for product development and sales and marketing;

      significantly greater name recognition;

      established relationships with surgeons, hospitals and third-party payors;

      broader product lines and the ability to offer rebates or bundle products to offer greater discounts or incentives to gain a competitive advantage;

      established sales and marketing and distribution networks; and

      more experience in conducting research and development, manufacturing, preparing regulatory submissions and obtaining regulatory approval for products.

              We also compete against smaller, entrepreneurial companies with niche product lines. Our competitors may develop and patent processes or products earlier than us, obtain regulatory clearance or approvals for competing products more rapidly than us and develop more effective or less expensive products or technologies that render our technology or products obsolete or non-competitive. We also compete with our competitors in recruiting and retaining qualified scientific and management personnel, as well as in acquiring technologies and technology licenses complementary to our products or advantageous to our business. If our competitors are more successful than us in these matters, our business may be harmed.

Intellectual property

              Patents and other proprietary rights are important to the continued success of our business and as of December 27, 2009, we have filed more than 117 patent applications, with over 305 applications claiming priority to such applications throughout the world and 126 patents issued throughout the world, approximately 85 of which are U.S. patents. Of our issued patents, 60% will expire within the next 10 years and the remaining 40% will expire within the next 20 years. Within the next three years, the following number of U.S. patents held by us are set to expire: one patent in 2011, four patents in 2012 and two patents in 2013. The expiration of these patents is not expected to have a material adverse effect on our business. We currently have 89 pending U.S. patent applications.

              We also rely upon trade secrets, know-how, continuing technological innovation and licensing opportunities to develop and maintain our competitive position. We protect our proprietary rights through a variety of methods, including confidentiality agreements and proprietary information agreements with vendors, employees, consultants and others who may have access to proprietary information.

              Although we believe our patents are valuable, our knowledge and experience, our creative product development and marketing staff, and our trade secret information with respect to manufacturing processes, materials and product design, have been equally important in maintaining our proprietary product lines. As a condition of employment, we generally require employees to execute a confidentiality agreement relating to proprietary information and assigning patent rights to us. We cannot be assured that our patents will provide competitive advantages for our products, or that our competitors will not challenge or circumvent these rights. In addition, we cannot be assured that the United States Patent and Trademark Office, or USPTO, or foreign patent offices will issue any of our pending patent applications. The USPTO and foreign patent offices may also deny or require significant narrowing of claims in our pending patent applications and patents issuing from the pending patent applications. Any patents issuing from our pending patent applications may not provide us with significant commercial protection. We could incur substantial costs in proceedings before the USPTO or foreign patent offices, including interference or opposition proceedings. These proceedings could

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result in adverse decisions as to the priority of our inventions. Additionally, the laws of some of the countries in which our products are or may be sold may not protect our products and intellectual property to the same extent as the laws in the United States, or at all.

              While we do not believe that any of our products infringe any valid claims of patents or other proprietary rights held by third parties, we cannot be assured that we do not infringe any patents or other proprietary rights held by third parties. If our products were found to infringe any proprietary right of a third party, we could be required to pay significant damages or license fees to the third party or cease production, marketing and distribution of those products. Litigation may also be necessary to enforce patent rights we hold or to protect trade secrets or techniques we own.

              We also rely on trade secrets and other unpatented proprietary technology. We cannot be assured that we can meaningfully protect our rights in our unpatented proprietary technology or that others will not independently develop substantially equivalent proprietary products or processes or otherwise gain access to our proprietary technology. We seek to protect our trade secrets and proprietary know-how, in part, with confidentiality agreements with employees and consultants. We cannot be assured, however, that the agreements will not be breached, that we will have adequate remedies for any breach or that our competitors will not discover or independently develop our trade secrets.

Corporate History

              We were founded in the 1940s by René Tornier in Saint-Ismier, France and are one of the early pioneers of the orthopaedic implant market. We originally manufactured dental surgical products, and diversified into screws and plates for orthopaedic surgery in the 1950s, and entered the joint replacement market with a hip implant in the 1960s. Alain Tornier, René Tornier's son, began to work for us in 1970 and assumed a leadership role in 1976 when René Tornier died. Alain Tornier modernized our manufacturing; organized and expanded commercial operations with a direct sales force in France; introduced a knee implant product line; and established our first international subsidiary in Spain. During the 1990s and early 2000s, Alain Tornier continued to improve upon our growth by introducing new products and expanding into new international markets. In 2006, Alain Tornier sold a majority stake in us to the Investor Group, but retained a minority equity position and became a non-executive director and consultant.

              Since the acquisition by the Investor Group, we have significantly increased our investment in research and development, from $3.0 million in 2006 to $18.1 million in 2009. In addition, we have expanded our product portfolio and ability to serve our target customers through a series of strategic acquisitions, licensing and distribution agreements. Each of these transactions was specifically targeted for its potential to either improve our ability to compete in an existing market or expand our addressable market by broadening our product portfolio into a related area. The entry into the sports medicine market in particular expanded our addressable market to include the core products used by our shoulder surgeon customers, who typically perform both shoulder joint replacement and shoulder sports medicine procedures. In addition, we have been active in licensing new material technologies with longer-term potential to differentiate our product offering. Finally, we expanded geographically in selected international markets.

              See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Material Corporate Transactions" for a discussion of our material corporate transactions.

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Government regulation

Regulatory Matters

      FDA Regulation

              Both before and after approval or clearance our products and product candidates are subject to extensive regulation. In the United States, we are regulated by the FDA under the Federal Food, Drug, and Cosmetic Act, as well as other regulatory bodies. These regulations govern, among other things, the following activities in which we and our contract manufacturers, contract testing laboratories and suppliers are involved:

      product development;

      product testing;

      product manufacturing;

      product labeling;

      product safety;

      product storage;

      product market clearance or approval;

      product advertising and promotion;

      product import and export; and

      product sales and distribution.

              Failure to comply with the Federal Food, Drug, and Cosmetic Act could result in, among other things, warning letters, civil penalties, delays in approving or refusal to approve a product candidate, product recall, product seizure, interruption of production, operating restrictions, suspension on withdrawal of product approval, injunctions or criminal prosecution.

      FDA Approval or Clearance of Medical Devices

              In the United States, medical devices are subject to varying degrees of regulatory control and are classified in one of three classes depending on risk and the extent of controls the FDA determines are necessary to reasonably ensure their safety and efficacy. These classifications generally require the following:

      Class I:       general controls, such as labeling and adherence to quality system regulations;

      Class II:      general controls, premarket notification (510(k)) and special controls such as performance standards, patient registries and postmarket surveillance; and

      Class III:    general controls and approval of a PMA.

              Most of our new products fall into FDA classifications that require the submission of a Premarket Notification (510(k)) to the FDA. In the 510(k) process, the FDA reviews a premarket notification and determines whether a proposed device is "substantially equivalent" to a previously cleared 510(k) device or a device that was in commercial distribution before May 28, 1976, for which the FDA has not yet called for the submission of PMA applications, referred to as a predicate device. In making this determination, the FDA compares the proposed device to the predicate device. If the two devices are comparable in intended use and safety and effectiveness, the device may be cleared for

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marketing. 510(k) submissions generally include, among other things, a description of the device and its manufacturing, device labeling, medical devices to which the device is substantially equivalent, safety and biocompatibility information and the results of performance testing. In some cases, a 510(k) submission must include data from human clinical studies. Marketing may commence only when the FDA issues a clearance letter finding the proposed device to be substantially equivalent to the predicate. After a device receives 510(k) clearance, any product modification that could significantly affect the safety or effectiveness of the product, or that would constitute a significant change in intended use, requires a new 510(k) clearance or, if the device would no longer be substantially equivalent, would require a PMA. If the FDA determines that the product does not qualify for 510(k) clearance, then the company must submit and the FDA must approve a PMA before marketing can begin.

              Other devices we may develop and market may be classified as Class III for which the FDA has implemented stringent clinical investigation and PMA requirements. The PMA process would require us to provide clinical and laboratory data that establishes that the new medical device is safe and effective. Information about the device and its components, device design, manufacturing and labeling, among other information, must also be included in the PMA. As part of the PMA review, the FDA will typically inspect the manufacturer's facilities for compliance with QSR requirements, which govern testing, control, documentation and other aspects of quality assurance with respect to manufacturing. The FDA will approve the new device for commercial distribution if it determines that the data and information in the PMA constitute valid scientific evidence and that there is reasonable assurance that the device is safe and effective for its intended use(s). The PMA can include post-approval conditions including, among other things, restrictions on labeling, promotion, sale and distribution, or requirements to do additional clinical studies post-approval. Even after approval of a PMA, a new PMA or PMA supplement is required to authorize certain modifications to the device, its labeling or its manufacturing process.

              All of our devices marketed in the United States have been listed, cleared or approved by the FDA. Some low-risk medical devices (including most instruments) do not require FDA review and approval or clearance prior to commercial distribution, but are subject to FDA regulations and must be listed with the FDA. The FDA has the authority to: halt the distribution of certain medical devices; detain or seize adulterated or misbranded medical devices; or order the repair, replacement of or refund the costs of such devices. There are also requirements of state, local and foreign governments that we must comply with in the manufacture and marketing of our products. For example, some jurisdictions require compliance with the Pharmaceutical Research and Manufacturers of America's Code on Interactions with Healthcare Professionals or its equivalent. Laws and regulations and the interpretation of those laws and regulations may change in the future. We cannot foresee what effect, if any, such changes may have on us.

      Clinical Trials

              One or more clinical trials are almost always required to support a PMA application and are sometimes required to support a 510(k) submission. Clinical trials of unapproved or uncleared medical devices or devices being studied for uses for which they are not approved or cleared (investigational devices) must be conducted in compliance with FDA requirements. If an investigational device could pose a significant risk to patients, the sponsor company must submit an application for an investigational device exemption, or IDE, to the FDA prior to initiation of the clinical study. An IDE application must be supported by appropriate data, such as animal and laboratory test results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The IDE will automatically become effective 30 days after receipt by the FDA unless the FDA notifies the company that the investigation may not begin. Clinical trials of investigational devices may not begin until an institutional review board, or IRB, has approved the study.

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              During the trial, the sponsor must comply with the FDA's IDE requirements including, for example, for investigator selection, trial monitoring, adverse event reporting and recordkeeping. The investigators must obtain patient informed consent, rigorously follow the investigational plan and trial protocol, control the disposition of investigational devices and comply with reporting and recordkeeping requirements. We, the FDA and the IRB at each institution at which a clinical trial is being conducted may suspend a clinical trial at any time for various reasons, including a belief that the subjects are being exposed to an unacceptable risk. During the approval or clearance process, the FDA typically inspects the records relating to the conduct of one or more trials supporting the application.

      Post-market Regulation

              After a device is cleared or approved for marketing, numerous and pervasive regulatory requirements continue to apply. These include:

      the QSR regulation, which governs, among other things, how manufacturers design, test, manufacture, exercise quality control over and document manufacturing of their products;

      labeling and claims regulations, which prohibit the promotion of products for unapproved or "off-label" uses and impose other restrictions on labeling; and

      the Medical Device Reporting regulation, which requires reporting to the FDA certain adverse experiences associated with use of the product.

              We continue to be subject to inspection by the FDA to determine our compliance with regulatory requirements, as do our suppliers, contract manufacturers and contract testing laboratories.

      International Regulation

              We are subject to regulations and product registration requirements in many foreign countries in which we may sell our products, including in the areas of:

      design, development, manufacturing and testing;

      product standards;

      product safety;

      marketing, sales and distribution;

      packaging and storage requirements;

      labeling requirements;

      content and language of instructions for use;

      clinical trials;

      record keeping procedures;

      advertising and promotion;

      recalls and field corrective actions;

      post-market surveillance, including reporting of deaths or serious injuries and malfunctions that, if they were to recur, could lead to death or serious injury;

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      import and export restrictions; and

      tariff regulations, duties and tax requirements.

              The time required to obtain clearance required by foreign countries may be longer or shorter than that required for FDA clearance, and requirements for licensing a product in a foreign country may differ significantly from FDA requirements.

              In many of the foreign countries in which we market our products, we are subject to local regulations affecting, among other things, design and product standards, packaging requirements and labeling requirements. Many of the regulations applicable to our devices and products in these countries are similar to those of the FDA.

              In the EEA, our devices are required to comply with the essential requirements of the EU Medical Devices Directives (Council Directive 93/42/EEC of 14 June 1993 concerning medical devices, as amended, and Council Directive 90/385/EEC of 20 June 2009 relating to active implantable medical devices, as amended). Compliance with these requirements entitles us to affix the CE conformity mark to our medical devices, without which they cannot be commercialized in the EEA. In order to demonstrate compliance with the essential requirements and obtain the right to affix the CE conformity mark we must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification. Except for low-risk medical devices (Class I), where the manufacturer can issue an EC Declaration of Conformity based on a self-assessment of the conformity of its products with the essential requirements of the Medical Devices Directives, a conformity assessment procedure requires the intervention of a Notified Body, which is an organization accredited by a Member State of the EEA to conduct conformity assessments. The Notified Body would typically audit and examine the quality system for the manufacture, design and final inspection of our devices before issuing a certification demonstrating compliance with the essential requirements. Based on this certification we can draw up an EC Declaration of Conformity, which allows us to affix the CE mark to our products.

      U.S. Anti-kickback and False Claims Laws

              In the United States, there are federal and state anti-kickback laws that prohibit the payment or receipt of kickbacks, bribes or other remuneration intended to induce the purchase or recommendation of healthcare products and services. Violations of these laws can lead to civil and criminal penalties, including exclusion from participation in federal healthcare programs. These laws are potentially applicable to manufacturers of products regulated by the FDA, such as us, and hospitals, physicians and other potential purchasers of such products.

              In particular, the federal Anti-Kickback Law prohibits persons from knowingly and willfully soliciting, receiving, offering or providing remuneration, directly or indirectly, to induce either the referral of an individual, or the furnishing, recommending, or arranging for a good or service, for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs. The definition of "remuneration" has been broadly interpreted to include anything of value, including for example, gifts, discounts, the furnishing of supplies or equipment, credit arrangements, payments of cash, waivers of payments, ownership interests and providing anything at less than its fair market value. In addition, the recently enacted Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, collectively, the PPACA, among other things, amends the intent requirement of the federal anti-kickback and criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the PPACA provides that the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the false claim statutes. The lack of uniform interpretation of

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the Anti-Kickback Law makes compliance with the law difficult. The penalties for violating the Anti-Kickback Law can be severe. These sanctions include criminal penalties and civil sanctions, including fines, imprisonment and possible exclusion from participation in federal healthcare programs.

              Recognizing that the Anti-Kickback Law is broad and may technically prohibit many innocuous or beneficial arrangements within the healthcare industry, the U.S. Department of Health and Human Services issued regulations in July of 1991, which the Department has referred to as "safe harbors." These safe harbor regulations set forth certain provisions which, if met in form and substance, will assure medical device manufacturers, healthcare providers and other parties that they will not be prosecuted under the federal Anti-Kickback law. Additional safe harbor provisions providing similar protections have been published intermittently since 1991. Our arrangements with physicians, hospitals and other persons or entities who are in a position to refer may not fully meet the stringent criteria specified in the various safe harbors. Although full compliance with these provisions ensures against prosecution under the federal Anti-Kickback Law, the failure of a transaction or arrangement to fit within a specific safe harbor does not necessarily mean that the transaction or arrangement is illegal or that prosecution under the federal Anti-Kickback law will be pursued. Even though we continuously strive to comply with the requirements of the Anti-Kickback Law, liability under the Anti-Kickback Law may still arise because of the intentions or actions of the parties with whom we do business, including our independent distributors. While we are not aware of any such intentions or actions, we have only limited knowledge regarding the intentions or actions underlying those arrangements. Conduct and business arrangements that do not fully satisfy one of these safe harbor provisions may result in increased scrutiny by government enforcement authorities.

              Other provisions of state and federal law provide civil and criminal penalties for presenting, or causing to be presented, to third-party payors for reimbursement, claims that are false or fraudulent, or that are for items or services that were not provided as claimed. Although our business is structured to comply with these and other applicable laws, it is possible that some of our business practices in the future could be subject to scrutiny and challenge by federal or state enforcement officials under these laws. This type of challenge could have a material adverse effect on our business, financial condition and results of operations.

      Third-Party Coverage and Reimbursement

              We anticipate that sales volumes and prices of our products will depend in large part on the availability of coverage and reimbursement from third-party payors. Third-party payors include governmental programs such as Medicare and Medicaid, private insurance plans and workers' compensation plans. These third-party payors may deny coverage or reimbursement for a product or therapy if they determine that the product or therapy was not medically appropriate or necessary. The third-party payors also may place limitations on the types of physicians that can perform specific types of procedures. Also, third-party payors are increasingly challenging the prices charged for medical products and services. Some third-party payors must also approve coverage for new or innovative devices or therapies before they will reimburse healthcare providers who use the products or therapies. Even though a new product may have been cleared for commercial distribution, we may find limited demand for the device until reimbursement approval has been obtained from governmental and private third-party payors.

              The Centers for Medicare & Medicaid Services, or CMS, the agency responsible for administering the Medicare program, sets coverage and reimbursement policies for the Medicare program in the United States. CMS policies may alter coverage and payment related to our product portfolio in the future. These changes may occur as the result of national coverage determinations issued by CMS or as the result of local coverage determinations by contractors under contract with CMS to review and make coverage and payment decisions. Medicaid programs are funded by both

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federal and state governments, may vary from state to state and from year to year and will likely play an even larger role in healthcare funding pursuant to the PPACA.

              A key component in ensuring whether the appropriate payment amount is received for physician and other services, including those procedures using our products, is the existence of a Current Procedural Terminology, or CPT, code. To receive payment, health care practitioners must submit claims to insurers using these codes for payment for medical services. CPT codes are assigned, maintained and annually updated by the American Medical Association and its CPT Editorial Board. If the CPT codes that apply to the procedures performed using our products are changed, reimbursement for performances of these procedures may be adversely affected.

              In the United States, some insured individuals enroll in managed care programs, which monitor and often require pre-approval of the services that a member will receive. Some managed care programs pay their providers on a per capita basis, which puts the providers at financial risk for the services provided to their patients by paying these providers a predetermined payment per member per month and, consequently, may limit the willingness of these providers to use our products.

              We believe that the overall escalating cost of medical products and services has led to, and will continue to lead to, increased pressures on the healthcare industry to reduce the costs of products and services. All third-party reimbursement programs are developing increasingly sophisticated methods of controlling healthcare costs through prospective reimbursement and capitation programs, group purchasing, redesign of benefits, requiring second opinions prior to major surgery, careful review of bills, encouragement of healthier lifestyles and other preventative services and exploration of more cost- effective methods of delivering healthcare. There can be no assurance that third-party reimbursement and coverage will be available or adequate, or that future legislation, regulation or reimbursement policies of third-party payors will not adversely affect the demand for our products or our ability to sell these products on a profitable basis. The unavailability or inadequacy of third-party payor coverage or reimbursement could have a material adverse effect on our business, operating results and financial condition.

              In international markets, reimbursement and healthcare payment systems vary significantly by country, and many countries have instituted price ceilings on specific product lines and procedures. There can be no assurance that procedures using our products will be considered medically reasonable and necessary for a specific indication, that our products will be considered cost-effective by third-party payors, that an adequate level of reimbursement will be available or that the third-party payors' reimbursement policies will not adversely affect our ability to sell our products profitably.

Litigation

              On October 25, 2007, two of our former sales agents filed a complaint in the U.S. District Court for the Southern District of Illinois, alleging that we had breached their agency agreements and committed fraudulent and negligent misrepresentations. The plaintiffs, Garry Boyd of Boyd Medical, Inc. and Charles Wetherill of Addison Medical, Inc., claimed that we had intentionally set their 2007 quotas too high, in hopes that Messrs. Boyd and Wetherill would not meet the quotas so that we could terminate them for cause and install another distributor in their territories. The complaint also included allegations that we had falsely suggested to the plaintiffs that if they dropped all other product lines, we would fill the void with new product lines. The jury rendered a verdict on July 31, 2009, awarding the plaintiffs a total of $2.6 million in actual damages and $4 million in punitive damages. While the court struck the award of punitive damages on March 31, 2010, it denied our motion to set aside the verdict or order a new trial. We have filed a notice of appeal with the U.S. Court of Appeals for the Seventh Circuit in respect of the actual damages claims. Plaintiffs have also appealed the court's striking of the punitive damages award, and the appeal has been consolidated with

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our appeal. Opening briefs were submitted to the U.S. Court of Appeals for the Seventh Circuit on July 7, 2010.

              We are also involved in litigation and proceedings in the ordinary course of business. We do not believe that such litigation or proceedings, individually or in the aggregate, are likely to have a material adverse effect on our business, financial position or results of operations.

Facilities

              Our U.S. headquarters are located in a 19,100 square foot facility in Edina, Minnesota, where we conduct our principal executive, sales and marketing and administrative activities. This facility is leased through 2015. Our U.S. distribution and customer service operations are based in an owned 20,000 square foot facility in Stafford, Texas and our research and development operations are based in a 12,200 square foot leased facility in Warsaw, Indiana, with small satellite quality, marketing and research and development offices in Beverly, Massachusetts and San Diego, California.

              Our global corporate headquarters are located in Amsterdam, The Netherlands. Outside the United States, our primary manufacturing facilities are in Montbonnot, Saint-Ismier and Grenoble, France; and Dunmanway and Macroom, Ireland. In the 111,800 square foot Montbonnot campus, we conduct manufacturing, sales and marketing, research and development, quality and regulatory assurance, distribution and administrative functions. In our 54,900 square foot Saint-Ismier facility and 15,200 square foot Dunmanway and 84,700 square foot Macroom facilities, we solely conduct manufacturing operations and manufacturing support such as purchasing, engineering and quality assurance functions. Our pyrocarbon manufacturing is performed at our 10,000 square foot facility in Grenoble, France. In addition, we maintain subsidiary sales offices and distribution warehouses in various countries, including France, Germany, Italy, Netherlands, Denmark, Spain, Switzerland, United Kingdom and Australia. We believe that our facilities are adequate and suitable for their use.

              The value of our long-lived assets in the United States was $16.0 million in 2009, $15.1 million in 2008 and $11.1 million in 2007. The value of our long-lived assets in France was $32.5 million in 2009, $27.2 million in 2008 and $20.3 million in 2007. The value of our long-lived assets in The Netherlands was $0.5 million in 2009, $0.5 million in 2008 and $0.5 million in 2007.

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              Below is a summary of our material facilities:

Entity
  City   State/Country   Owned or
Leased
  Occupancy   Square
Footage
  Lease
Expiration
Date
 

Tornier, Inc.

  Stafford   Texas,
United States
  Owned   Offices/Warehouse/Distribution     20,000     N/A  

Tornier, Inc.

 

Warsaw

 

Indiana,
United States

 

Leased

 

Offices/R&D

   
12,200
   
2/28/2015
 

Tornier, Inc.

 

Edina

 

Minnesota,
United States

 

Leased

 

Offices

   
19,100
   
12/31/2015
 

Tornier SAS

 

St Ismier

 

France

 

Leased

 

Offices/Manufacturing/R&D

   
54,900
   
5/29/2012
 

Tornier SAS

 

Montbonnot

 

France

 

Leased

 

Offices

   
15,100
   
5/29/2012
 

Tornier SAS

 

Montbonnot

 

France

 

Leased

 

Warehouse/Distribution/Offices

   
19,500
   
5/29/2012
 

Tornier SAS

 

Montbonnot

 

France

 

Leased

 

Offices/R&D

   
25,500
   
5/29/2012
 

Tornier SAS

 

Montbonnot

 

France

 

Owned 51%

 

Manufacturing/Offices

   
51,700
   
9/3/2018
 

BioProfile

 

Grenoble

 

France

 

Leased

 

Manufacturing/Offices/R&D

   
9,900
   
7/22/2012
 

Tornier Deutschland GmbH

 

Burscheid

 

Germany

 

Owned

 

Sales Office

   
1,900
   
N/A
 

Tornier Orthopedics Ireland Limited

 

Dunmanway

 

Ireland

 

Owned

 

Manufacturing/Offices

   
15,200
   
N/A
 

Tornier Orthopedics Ireland Limited

 

Macroom

 

Ireland

 

Leased

 

Manufacturing/Offices

   
84,700
   
12/1/2028
 

Tornier B.V.

 

Schiedam

 

The Netherlands

 

Leased

 

Offices

   
720
   
10/31/2010
 

Employees

              As of December 27, 2009, we had approximately 769 employees, including 331 in manufacturing and operations, 79 in research and development and the remaining in sales, marketing and related administrative support. Of our 769 worldwide employees, 157 employees were located in the United States and 612 employees were located outside of the United States, primarily throughout Europe.

Insurance

              We maintain property insurance and general, commercial and product liability policies in amounts we consider adequate and customary for a business of our kind. However, because of the nature of our business, we cannot ensure that we will be able to maintain insurance on a commercially reasonably basis or at all, or that any future claims will not exceed our insurance coverage.

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MANAGEMENT

Directors and Executive Officers

              We have a one-tier board structure. Our board of directors consists of eight members. The following table sets forth, as of September 1, 2010, certain information concerning our directors and executive officers.

Name
  Age  
Position
Douglas W. Kohrs     52   President, Chief Executive Officer and Executive Director

Carmen L. Diersen

 

 

49

 

Global Chief Financial Officer

Robert J. Ball

 

 

38

 

Vice President, Global Research and Development

Ralph E. Barisano, Jr. 

 

 

50

 

Vice President, Global Quality Assurance and Regulatory Affairs

Stéphan Epinette

 

 

39

 

Vice President, International Commercial Operations

Andrew E. Joiner

 

 

49

 

Vice President and General Manager, U.S. Commercial Operations

Jamal D. Rushdy

 

 

39

 

Vice President, Global Business and Corporate Development

James C. Harber

 

 

40

 

Vice President, Distal Extremities Global Business Strategy

James E. Kwan

 

 

51

 

Vice President, Global Supply Chain

Sean D. Carney(2), (3)

 

 

41

 

Chairman, Non-executive Director

Richard B. Emmitt(1)

 

 

65

 

Non-executive Director

Kevin C. O'Boyle(1)

 

 

54

 

Non-executive Director

Alain Tornier(3)

 

 

64

 

Non-executive Director

Simon Turton, Ph.D. 

 

 

43

 

Non-executive Director

Richard F. Wallman(1), (3)

 

 

59

 

Non-executive Director

Elizabeth H. Weatherman(2)

 

 

50

 

Non-executive Director

(1)
Member of the audit committee. The audit committee will be established upon the effectiveness of this registration statement.

(2)
Member of the compensation committee. The compensation committee will be established upon the effectiveness of this registration statement.

(3)
Member of the nominating and corporate governance committee. The nominating and corporate governance committee will be established upon the effectiveness of this registration statement.

              The following is a biographical summary of the experience of our directors and executive officers:

              Douglas W. Kohrs was appointed as our President, Chief Executive Officer and a director in July 2006. Mr. Kohrs was appointed as a director in connection with the Securityholders' Agreement

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that we entered into with certain holders of our securities. For more information regarding the Securityholders' Agreement, please refer to the discussion below under "Related Party Transactions." Mr. Kohrs has 29 years of experience in the medical device industry. Prior to joining us he served as President and Chief Executive Officer of American Medical Systems Holdings, Inc., a publicly held medical device company, from April 1999 until January 2005 and served as Chairman of the American Medical Systems Holdings, Inc. board of directors until May 2006. During the past ten years, Mr. Kohrs has also served on the board of directors of nine different medical device companies. Mr. Kohrs currently serves on the board of ev3, Inc., a publicly held medical device company, and previously served on the board of Kyphon, Inc., also a publicly held medical device company. Prior to joining American Medical Systems Holdings, Inc., Mr. Kohrs was General Manager of Sulzer Spine-Tech Inc., an orthopaedic implant manufacturer of which he was a founding member beginning in August 1991. Mr. Kohrs holds a Master of Business Administration from Northeastern University, a Bachelor of Science in Bioengineering from Texas A&M University and a Bachelor of Arts in Engineering Sciences from Austin College. Mr. Kohrs' prior experience, including as Chief Executive Officer of American Medical Systems Holdings, Inc. at the time of its initial public offering, and his understanding of our business and industry have led our board of directors to the conclusion that he should serve as a director at this time in light of our business and structure.

              Carmen L. Diersen joined us in June 2010 as Global Chief Financial Officer. She has 18 years of experience in the medical device industry, including nine years in spinal orthopaedics. Prior to joining us, she served from September 2006 to June 2010 as the Chief Operating and Financial Officer of Spine Wave, Inc., a privately held developer of advanced materials, techniques, and implant systems for spinal surgery. From March 2004 to September 2006, Ms. Diersen served as Executive Vice President and Chief Financial Officer of American Medical Systems Holdings, Inc., a publicly held medical device company. Prior to American Medical Systems Holdings, Inc., Ms. Diersen spent 12 years in financial leadership positions at Medtronic, Inc., in the cardiac surgery, cardiac rhythm management and spinal surgery businesses, concluding her career there as the Vice President and General Manager of Musculoskeletal Tissue Services for Medtronic Sofamor Danek. Prior to Medtronic, Inc., she spent 10 years at Honeywell, Inc. Ms. Diersen earned a Master of Business Administration from the Carlson School of Management at the University of Minnesota and a Bachelor of Science in Accounting from the University of North Dakota. She became a Certified Public Accountant in 1983. Ms. Diersen has served on the board of directors of SonoSite, Inc., a publicly held leader in point of care ultrasound systems, since October 2005 and previously served on the board of directors of Memry Corporation, a publicly held medical specialty materials company, from December 2004 through September 2008 when the company was sold and Wright Medical Group, Inc., a publicly held medical device company from December 2009 until June 2010 when she joined us.

              Robert J. Ball joined us in September 2006 as Vice President, Global Research and Development. He has over 11 years of experience in the orthopaedic medical device industry. Prior to joining us he served as Vice President of Research Development of Kinetikos Medical Incorporated, or KMI, a medical device company, beginning in December 2002, and also assumed responsibility for Marketing and Product Development in May 2005, continuing in each capacity until August 2006, when KMI was acquired by Integra LifeSciences Holdings Corporation. Prior to joining KMI, Mr. Ball held positions at DePuy, where he oversaw the development and launch of orthopaedic products in the upper extremity. Prior to joining DePuy, he