2 0 0 1 A N N U A L R E P O R T
N e w P r o d u c t s
N e w M a r k e t s
N e w G e o g r a p h i e s
Zimmer Holdings, Inc.
345 East Main Street
P.O. Box 708
Warsaw, Indiana 46580
www.zimmer.com
Z i m m e r H o l d i n g s , I n c .
C O M P A N Y P R O F I L E
Founded in 1927 and headquartered in Warsaw, Indiana, Zimmer Holdings, Inc.
is a global leader in the design, development, manufacturing and marketing
of orthopaedic reconstructive implants, fracture management products and
orthopaedic surgical products. Implants restore joint function lost due to disease
or trauma to knees, hips, shoulders and elbows; fracture management products
reattach or stabilize bone and tissue to support the body’s natural healing process.
F I N A N C I A L H I G H L I G H T S (dollars in millions, except per share amounts)
Reported
Proforma
2001
2000
2001
2000
SELECTED FINANCIAL DATA
Sales
Operating Profit
Earnings Per Share — Basic
Earnings Per Share — Diluted
SALES BY GEOGRAPHIC REGION (Reported)
Americas
Asia Pacific
Europe
$
$
$
$
$
$
$ 1,178.6
248.3
.77
.77
$ 1,040.6
$ 268.0
0.91
$
0.91
$
$ 1,178.6
$ 318.3
$
$
.99
.98
$ 1,040.6
$ 268.0
0.81
$
0.81
$
2001
2000
1999
1998
1997
790.7
255.2
132.7
$ 655.4
$ 264.5
$ 120.7
$ 587.9
$ 235.3
$ 115.7
Consolidated
$ 1,178.6
$ 1,040.6
$ 938.9
SALES BY MARKET (Reported)
Reconstructive Implants
Fracture Management
Orthopaedic Surgical Products
$
$
$
886.5
128.3
163.8
$ 764.5
$ 123.4
$ 152.7
$ 679.1
$ 112.8
$ 147.0
$
$
$
$
$
$
$
558.6
189.5
112.7
860.8
609.0
102.8
149.0
$ 543.4
$ 195.2
$ 111.3
$ 849.9
$ 624.4
$
93.2
$ 132.3
$ 849.9
Consolidated
*Proforma earnings exclude costs of separation from the company’s former parent and include interest expense for all periods; proforma results are being
presented as a result of Zimmer’s 2001 spin-off from its former parent company on August 6, 2001.
$ 938.9
$ 1,040.6
$ 1,178.6
860.8
$
5 - Y E A R R E V E N U E G R O W T H
S A L E S B Y M A R K E T
S A L E S B Y G E O G R A P H I C R E G I O N
up
13%
Reconstructive
Implants
Fracture
Management
75%
11%
Americas
67%
97 98 99 00 01
14%
Orthopaedic
Surgical Products
Asia Pacific
22%
11%
Europe
T O O U R S H A R E H O L D E R S
A Y E A R T O R E M E M B E R
On August 7, 2001, Zimmer Holdings, Inc. began trading on
the New York Stock Exchange. Our market value on that day made
the Zimmer spin-off the largest such transaction in the history of
healthcare — a new entity with a market cap of nearly $6 billion
dollars was born. While our spin-off was an incredibly exciting event,
we were even more excited about our opportunities — new products,
new markets and new geographies. You can feel the enthusiasm of our
employees and of our award-winning sales force. We are now able to
chart our own course in orthopaedics, free to make decisions and
investments that we trust and believe will lead to even greater growth.
Z I M M E R P R I D E G O E S P U B L I C !
That was our rallying cry throughout the spin-off process, and
pride is what gives Zimmer people the spirit to succeed. Our people
don’t just want to win, they refuse to lose. We have been guided by
four key strategies: rapid commercialization of great ideas, internal
innovation in our core areas, acquisition of promising products, tech-
nologies or companies, and flawless execution. It is not enough to
just know the business — we “sweat” the details. This simple plan has
served us well as we reinvigorated our company, our product lines and
our people. We expect it to elevate us to new levels of success.
2 0 0 1 A C H I E V E M E N T S
Our spin-off was only part of an exciting 2001. We also
recorded many significant achievements and put in motion impor-
tant initiatives designed to drive future growth.
For the year, consolidated sales of $1.179 billion were 13% over
prior year. Sales in constant currency increased 17%. All comments
relating to operating results herein are based on proforma* results.
While gross profit margins for the year increased from 72.0% to
73.4%, S,G&A expenses increased at a rate well below revenue
growth. G&A expenses were virtually flat for the fourth consecutive
year despite revenue growth, during that time, of more than
$300 million.
Operating profit grew 19% in 2001 over the prior year and
increased as a ratio to sales from 25.8% to 27.0%. Net earnings
increased 22% while diluted EPS increased 21% to $0.98 cents on
average diluted shares outstanding of 194.3 million.
Operating cash flow was $215 million versus $213 million in
2000. In general terms, we reinvested some of our net earnings gains
into new product inventory and instrument pipeline builds essential
to our organic growth and the maintenance of our new product
commitments. Additionally, our net debt has declined by more than
$100 million from $450 million at the time of our spin, to $346 mil-
lion at year end 2001.
A key driver of our 2001 results was the performance of our
Americas business. For the year, our Americas reconstructive business
grew by 25%. Based on those results, we believe we are outpacing the
market growth by a significant margin and are clearly gaining more
market share than any other company. Overall, the performance of
our Americas’ business was outstanding, with a sales increase of 21%
over the prior year. Our European business continues to benefit from
our focused investments, with annual sales growth of 10%, 14% con-
stant currency, led by the UK, Italy and Germany. We finished the
year strong with a 16% increase in the fourth quarter over the prior
year. Asia-Pacific net sales decreased 4% for the year and increased 8%
constant currency to $255.2 million as a result of weakness in the yen
as well as government instituted price reductions in Japan.
Ray Elliott
Chairman, President and
Chief Executive Officer
A F U T U R E O F N E W P R O D U C T S , N E W M A R K E T S
A N D N E W G E O G R A P H I E S
With new products, we will build on our strength in recon-
structive implants and trauma to address changing patient needs.
Today’s orthopaedic patient is younger, more active and better
informed than ever before. As the baby boom generation ages, the
number of candidates for orthopaedic care rises dramatically. Many
of these people fully intend to return to work or to their active
lifestyles. They have high expectations. New products are the life-
blood of any medical device company and our goal is to be a new
products “machine.” In 2001, we increased our R&D spending by
more than 30%. Our investment in research and development in
2001 of nearly 6% of revenues was at the highest level of our indus-
try and we intend to keep it that way.
We currently have more than 40 major new product develop-
ment projects, 20 of which will reach the market in 2002.
During the year, we announced the formation of a new unit
within the company exclusively focused on building on our leadership
in Minimally Invasive Solutions™ (MIS) for orthopaedic surgery. We
also announced plans for our MIS Institute focused on working with
both developing surgeons and clinicians to make advanced techniques
a practical reality for everyone. The potential of less invasive surgery
is clear. Our M/G ™ Unicompartmental Knee now featuring MIS
minimally invasive solution instrumentation, saw increased sales of
178% for the year, against a substantial existing base. Our new
lifestyle designs website for patients, www.pacewithlife.com has
received nearly 200,000 visitors. In the future, our revolutionary MIS
procedures may well change orthopaedic reconstructive surgery, with
Zimmer at the forefront.
We also continue our development of Trabecular Metal (TM),
which, we believe, has the potential to be the next great advance in
orthopaedic materials because of its inherent stiffness, friction, and
porous properties. Made of tantalum, it is capable of withstanding
most physiologic loads and is neither a coating nor a spray but rather
an independent structural material. We released a line of TM porous
patellas for knee replacement and finished development of TM
NexGen® Complete Knee Solution tibial implants late in 2001. We
continue to drive our development processes for the utilization of
TM in hip replacement, trauma, and other new product areas includ-
ing spinal. As our tag line clearly says, we believe TM is the “the best
thing next to bone.™ ”
The potential of a unique patient lifestyle design coupled with
direct-to-consumer education has been dramatically demonstrated in
the success of our NexGen Legacy® LPS-Flex Fixed Knee system.
Originally designed to safely accommodate the need for greater knee
flexion (up to 155 degrees) in Asian and Eastern lifestyles, this prod-
uct has received an enthusiastic reception from patients around the
world who require high flexion to resume their active lifestyles. Sales
of the LPS-Flex Knee rose 278% for the year, backed by a public
c
r
V
F
information campaign that drove more than 70,000 patients to our
www.pacewithlife.com website. More than 10% of these patients, or
7,000 people, chose to utilize our unique physician locator to find a sur-
geon in their area who uses the LPS-Flex Knee. We expect continued
strong growth of this product both in Asia and in North America.
Despite our original focus on the Asian market, more than 50% of our
LPS-Flex Knee sales in 2001 came from our Americas sales team.
Another technology advance that continues to be an exciting rev-
enue growth driver is our Longevity ® Crosslinked Polyethylene for our
articulating surfaces. Longevity Polyethylene was first introduced in the
hip and has seen tremendous success. During 2001, we completed
development and readied for marketing a similar offering for knees —
Prolong™ Highly Crosslinked Polyethylene. In addition to standard
product approval, for the US market, the FDA granted our additional
claim of “resistance to delamination.”
A key to our future will be our ability to leverage our brand
strength, our award-winning sales forces, and our heritage of trust for
success in new markets. We intend to enter rapidly growing, adjacent
markets such as spine, pain management and blood management. We
believe orthobiologics may transform orthopaedic treatments, and we
recently entered into an agreement to develop and commercialize prom-
ising cartilage repair and regeneration technology.
Finally, we are a global company. With approximately one-third of
our revenues from outside the Americas, we have only just begun to
focus on new geographies. We have revitalized our business in Europe
and intend to reach greater critical mass. From the historic strength of
our base in Asia and particularly in Japan, Korea and Taiwan, we believe
we can continue to take advantage of the increasing sophistication of
economies and healthcare systems in this most populous region of
the world.
VA L U E S
Following the spin-off, we devoted both management and
employee time to capturing the Zimmer Vision and Values statements
that you will find elsewhere in this report. These statements reflect our
spirit, our pride and our belief in not only what we are about, but what
we can accomplish in the future.
Our Vision is clear and our Values consistent with leadership in an
industry that gives people back their active lives. Although aspirational,
they are consistent with our trusted tradition and the rebuilding of this
great company. Zimmer people understand that what we do is special
and that our personal efforts are crucial to a patient’s quality of life.
Zimmer is focused on meeting, not inhibiting patient lifestyle expecta-
tions. We understand the commercial and financial trust that you place
in us and that trust can never replace or supersede the commitment we
have to the surgeon and the patient.
We earn our reputation in operating rooms around the world
everyday. We “place confidence in the surgeons’ skilled hands.” Now, as
a new public company we have a similar challenge. Our reputation will
grow and as our fifth value so clearly states, “we expect to win.”
I wish to thank our employees and their families, our distributors,
associates, shareholders and the communities in which we live and work
for helping to add a new chapter to the “circle blue Z.”
Ray Elliott
Chairman, President and Chief Executive Officer
February 6, 2002
*Proforma earnings exclude cost of separation from the company’s former parent and include
interest expense for all periods; proforma reporting is required as result of Zimmer’s 2001
spin-off from its former parent.
O U R V I S I O N
NEW PRODUCTS
We own a rich intellectual
property portfolio with more
than 600 patents worldwide.
Since 1997, we have tripled
new product output. Recent
new technology and products
include:
Highly Crosslinked
Polyethylene
Reducing wear by as much
as 89 percent, we have formu-
lated two new materials,
Longevity and Prolong
polyethylenes for use in hips
and knees, respectively.
Trabecular Metal
Made from tantalum, it’s the
first novel porous structural
material introduced in two
decades.
NEW MARKETS
We believe that our Circle
Blue Z logo is one of the
industry’s most trusted and
respected brands. Our vision
for growth includes expand-
ing into new fast-growing,
adjacent markets such as
spinal and orthobiologicals
through acquisitions or
licensing agreements. We
have made great headway
thus far.
Orthobiologicals
Our exclusive collaboration
with Isto Technologies will
develop and market their
patented allograft tissue.
The product is intended
to repair articular cartilage
damaged from sports injuries,
and possibly regenerate
articular surfaces destroyed
by osteoarthritis.
NEW GEOGRAPHIES
Today we have operations in
20 countries and sell products
in 70 countries. We derive
about one-third of our sales
from these international
markets and believe addi-
tional critical mass should
be achieved in Europe.
To be the global leader in
enhanced quality of life for
orthopaedic patients. To
place confidence in the sur-
geons’ skilled hands. To reaf-
firm our traditions, inspire
our future and ensure our
success through each patient’s
new freedom.
O U R M I S S I O N
To develop, produce and
globally market the highest
quality orthopaedic products
and services that repair, re-
place and regenerate. We will
enhance patient quality of life.
We are committed to part-
nerships that foster mutual
trust, respect and benefit.
By investing in our people
and delivering innovative
solutions, we will increase
shareholder value.
OUR VALUES
Pride in our Company
The Circle Blue Z brand
is our heritage. What we
believe in our heart, we
wear on our sleeve.
Devotion to our People
Our foundation is the
integrity, dedication, creativity
and diversity of our people.
We work as a team. We care
about and need each other.
Spirit of Innovation
Our spirit of innovation
in products, services and
processes changes orthopaedic
care every day. The courage to
pursue new perspectives
needs our constant and
powerful dedication.
Pledge to Quality
Patients trust that our
life’s work will safely and
effectively improve their
lives. We are committed
to defect-free products.
Passion to be the Best
We are a passionate and
aggressive competitor who
expects to win. We believe in
flawless execution. By leading,
we will best serve our industry
and our stakeholders.
econ-
the
y. Many
e-
w
velop-
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y. We
hniques
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ur new
y MIS
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TM),
and
ather
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ation of
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Sales
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
¥ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For year ended December 31, 2001
Commission Ñle number 001-16407
ZIMMER HOLDINGS, INC.
(Exact name of registrant as speciÑed in its charter)
Delaware
(State of Incorporation)
345 East Main Street
Warsaw, Indiana
(Address of principal executive oÇces)
13-4151777
(IRS Employer IdentiÑcation No.)
46580
(Zip Code)
Registrant's telephone number, including area code:
(574) 267-6131
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, $.01 par value
Preferred Stock Purchase Rights
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has Ñled all reports required to be Ñled by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to Ñle such reports), and (2) has been subject to such Ñling
requirements for the past 90 days. Yes ¥ No n
Indicate by check mark if disclosure of delinquent Ñlers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of the registrant's knowledge, in deÑnitive
proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ¥
As of February 13, 2002, 193,966,174 shares of the registrant's $.01 par value common stock were
outstanding. The aggregate market value of shares held by non-aÇliates was $6,654,870,206 (based on
closing price of these shares on the New York Stock Exchange on such date and assuming solely for the
purpose of this calculation that all directors and executive oÇcers of the registrant are ""aÇliates'').
Document
Proxy Statement with respect to the 2002 Annual Meeting of Stockholders
Form 10-K
Part III
Documents Incorporated by Reference
This annual report contains certain statements that are forward-looking statements within the meaning
of federal securities laws. When used in this report, the words ""may,'' ""will,'' ""should,'' ""would,''
""anticipate,'' ""estimate,'' ""expect,'' ""plan,'' ""believe,'' ""predict,'' ""potential,'' ""intend'' and similar
expressions are intended to identify forward-looking statements. Forward-looking statements are subject to
risks and uncertainties that could cause actual results to diÅer materially from those projected. These risks
and uncertainties include, but are not limited to, price and product competition, rapid technological
development, demographic changes, dependence on new product development, the mix of products and
services, customer demand for products and services, the ability to successfully integrate acquired
companies, control of costs and expenses, the ability to form and implement alliances, changes in
reimbursement programs by third-party payors, eÅects of complying with applicable governmental
regulations, product liability and intellectual property litigation losses, general industry and market
conditions and growth rates and general domestic and international economic conditions including interest
rate and currency exchange rate Öuctuations. Readers of this report are cautioned not to place undue
reliance on these forward-looking statements, since, while the Company believes the assumptions on which
the forward-looking statements are based are reasonable, there can be no assurance that these forward-
looking statements will prove to be accurate. This cautionary statement is applicable to all forward-looking
statements contained in this report.
ZIMMER HOLDINGS, INC.
2001 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Part I
Item 1.
Item 2.
Item 3.
Item 4.
Business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Legal Proceedings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Submission of Matters to a Vote of Security HoldersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ÏÏÏÏÏÏÏÏÏ
Item 6.
Selected Financial Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ÏÏÏ
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Financial Statements and Supplementary Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial
Item 9.
Disclosure ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 10. Directors and Executive OÇcers of the Registrant ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 11. Executive CompensationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 12.
Security Ownership of Certain BeneÑcial Owners and Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 13. Certain Relationships and Related Transactions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Part III
Page
3
11
12
12
12
13
14
22
24
46
47
48
49
49
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
49
Part IV
2
Item 1. Business
General
PART I
Zimmer Holdings, Inc., a Delaware corporation, was incorporated on January 12, 2001, as a wholly-
owned subsidiary of Bristol-Myers Squibb Company as part of a previously announced plan by Bristol-
Myers Squibb to create a separate company relating to the design, development, manufacture and
marketing of orthopaedic reconstructive implants, fracture management products and other products used
for orthopaedic and general surgery. Zimmer, Inc., the Company's predecessor founded in 1927, was
acquired by Bristol-Myers Squibb in 1972 and along with its wholly-owned subsidiaries and certain other
Bristol-Myers Squibb operations comprised the orthopaedics business of Bristol-Myers Squibb. Unless the
context requires otherwise, the terms ""Company'' and ""Zimmer'' as used herein refer to Zimmer
Holdings, Inc. and all of its subsidiaries and the predecessor orthopaedics business operated under Bristol-
Myers Squibb.
On July 25, 2001, Bristol-Myers Squibb transferred the assets and liabilities of its orthopaedic
business to the Company. On August 6, 2001, Bristol-Myers Squibb distributed all of the shares of the
Company's common stock to Bristol-Myers Squibb stockholders in the form of a dividend of one share of
Company common stock, and the associated preferred stock purchase right, for every ten shares of Bristol-
Myers Squibb common stock. Bristol-Myers Squibb received a ruling from the Internal Revenue Service
that the transfer of the orthopaedic business to the Company and the subsequent distribution of all
Company common stock to Bristol-Myers Squibb stockholders qualiÑed as a tax free transaction.
The Company has operations in 20 countries and markets products in 70 countries, with headquarters
in Warsaw, Indiana, and manufacturing, distribution and warehousing and/or oÇce facilities in more than
50 locations worldwide.
Products
The Company is a global leader in the design, development, manufacture and marketing of
orthopaedic reconstructive implants and fracture management products. Orthopaedic reconstructive
implants restore joint function lost due to disease or trauma in joints such as knees, hips, shoulders, and
elbows. Fracture management products are devices used primarily to reattach or stabilize damaged bone or
tissue to support the body's natural healing process. The Company also manufactures and markets
orthopaedic surgical products which include surgical supplies and instruments designed to aid in
orthopaedic surgical procedures. The Company manages its operations through three major geographic
areas Ó the Americas, which is comprised principally of the United States and includes other North,
Central and South American markets; Asia PaciÑc, which is comprised primarily of Japan and includes
other Asian and PaciÑc markets; and Europe, which is comprised principally of Europe and includes the
Middle East and Africa. Information about geographic segments can be found in Note 13 to the
Consolidated Financial Statements, which are included herein under Item 8.
Reconstructive Implants
Reconstructive implants restore joint function lost due to disease or trauma in joints such as knees,
hips, shoulders and elbows. The majority of reconstructive implant procedures restore joint function lost
due to degenerative diseases such as arthritis and relieve pain in knees and hips.
Knee Implants
Total knee surgeries typically include a femoral component, a patella (knee cap), a tibial tray and an
articulating surface (placed on the tibial tray).
Knee replacement surgeries include Ñrst-time joint replacement procedures and revision procedures for
the replacement, repair or enhancement of an implant product or component from a previous procedure.
3
Knee implants are designed to accommodate diÅerent levels of ligament stabilization of the joint. While
some knee implant designs, called cruciate retaining designs, require the retention of the posterior cruciate
ligament, other designs, called posterior stabilized designs, provide joint stability without the posterior
cruciate ligament. There are also procedures for partial reconstruction of the knee, which treat limited
knee degeneration and involve the replacement of only one side or compartment of the knee with a
unicompartmental knee prosthesis. The Company oÅers a wide range of products for specialized knee
procedures, including the following brands:
NexGen» Complete Knee Solution. The NexGen knee product line is a comprehensive system
for knee replacement surgery with a leading position in posterior stabilized and revision procedures.
The NexGen knee system oÅers joint stability and sizing that can be tailored to individual patient
needs while providing surgeons with a uniÑed system of interchangeable components. The NexGen
knee system provides surgeons with complete and versatile knee instrument options, including milling
and multiple saw blade cutting instrument systems. The breadth and versatility of the NexGen knee
system allows surgeons to change from one type of implant to another during surgery, according to the
needs of the patient, and to support current surgical philosophies.
The NexGen Legacy» Posterior Stabilized Knee product line utilizes a posterior stabilized
surgical approach. The posterior stabilized capabilities have recently been augmented through the
introduction of the NexGen Legacy Posterior Stabilized Flex Knee, a high-Öexion implant that can
accommodate knee Öexion up to a 155-degree range of motion in some patients when implanted using
a specialized surgical technique.
The NexGen Revision Knee product line is designed with extensive options to accommodate the
variable needs in revision procedures. These products accommodate more diÇcult procedures as
certain products are augmentable for bone loss and provide increased constraint for laxity of the
ligaments.
M/GTM Unicompartmental Knee System. The M/G uni system boasts a 98 percent implant
survival rate post-surgery at 10 years and applies the same Öexibility and quality of our other knee
implant products to the unicompartmental procedure. The M/G uni system's patented minimally
invasive intramedullary instrumentation, as well as its new minimally invasive extramedullary
instrumentation, oÅers accurate alignment, precise cuts and secure Ñxation that provide surgeons with
the ability to accurately and eÇciently repair damage to joint surfaces of one knee compartment with
predictable, reproducible results through a small incision. The new minimally invasive instrumentation
for the M/G uni system positions the Company to continue to lead and to capitalize on growing
trends toward less invasive surgical procedures.
ProlongTM Highly Crosslinked Polyethylene Articular Surfaces. Prolong Polyethylene is a new
bearing surface material for total knee replacement. In certain laboratory tests that simulate joint
function, it demonstrates improved wear performance compared to current normal polyethylene
bearing material. The Food and Drug Administration has approved the additional claim of ""resistance
to delamination'' for Prolong Polyethylene. Most knee articulating surfaces only receive the more
general ""resistance to wear'' claim that clearly does not deÑnitively address the primary mode of
failure in knees, which is sub-surface fatigue.
Hip Implants
Total hip replacement surgeries replace both the head of the femur and the socket portion of the
pelvis (acetabulum) of the natural hip and include Ñrst time joint replacement procedures and revision
procedures for the replacement, repair or enhancement of an implant product or component from a
previous procedure. The femur is the long bone between the pelvis and the knee. The acetabulum is the
cup-shaped portion of the pelvis. Historically, most hip implant procedures have involved the use of bone
cement to attach the prosthetic components to the surrounding bone. Today, many femoral and
acetabulum cup replacement components are porous which means they do not require bone cement
4
because bone can actually grow into, and onto, the implant surface. The Company's hip replacement
products are among the industry's leading brands, which include:
VerSys» Hip System. The VerSys Hip System, a Zimmer Öagship brand, is supported by a
common instrumentation set and is an innovative, integrated family of hip products that oÅers
surgeons design-speciÑc options to meet varying surgical philosophies and patient needs. The VerSys
Hip System includes the following features: a variety of stem designs and Ñxation options for both
primary and revision situations, a modular design that allows for a variety of femoral heads, optimal
sizing selections, and a common instrumentation set for use with virtually all VerSys stems. In
addition, the Öexibility of the VerSys stem platform allows for the incorporation of technological
developments, with the planned introduction of approximately 340 new stems, some of which were
launched in 2001.
ZMRTM Hip System. The ZMR Revision Hip System, introduced in 2000 to address the porous
modular revision market, provides the versatility to accommodate varying Ñxation and sizing needs.
Building on the ZMR Revision Hip System, the recent launch of revision acetabular components will
allow the Company to provide a comprehensive approach to revision hip surgery that matches its
approach to revision knee surgery.
Specialty Hips. To complement the broad capabilities of the above hip brands, the Company
oÅers a number of specialty hip products tailored to the needs of speciÑc patient populations and
geographic regions. The Mayo»1 Conservative Hip Prosthesis, a novel, short-stemmed, porous femoral
implant was developed for minimal bone removal. The CPT» Hip System, the cemented hip brand
designed for both initial and revision procedures, was tailored for countries with a historical preference
towards collarless, polished, tapered products. The Company is currently seeking pre-marketing
regulatory approval (""PMA'') in the United States for the Epoch» Hip Prosthesis product line, which
is comprised, in part, of a unique composite material that allows the normal amount of anatomical
stress to be placed on patients' bones while still potentially providing extensive Ñxation and reduced
thigh pain. The system is currently available in Europe.
Trilogy» Acetabular System. The Trilogy Acetabular System, including titanium alloy shells,
polyethylene liners, screws and instruments, is a leading acetabular cup system. The Trilogy
acetabular family of products oÅers patients and surgeons innovative options and versatile component
designs and instrumentation. One option, the Longevity» Highly Crosslinked Polyethylene Liners, is
designed to reduce polyethylene wear debris associated with reconstructive implants. Polyethylene
debris may cause the degeneration of bone surrounding reconstructive implants, a painful condition
called osteolysis. The Trilogy Acetabular System also features a variety of Ñxation surfaces with
successful long-term history, including a titanium Ñber mesh to provide biological Ñxation. These are
porous implants that do not require bone cement because bone can grow into, and onto, the implant
surface. The Company has and continues to augment its oÅerings of porous reconstructive hip
implants through the introduction of Trabecular Metal, a material that provides a dramatically higher
level of porosity than existing alternatives and is similar in stiÅness to natural bone and is believed to
be a major advancement in orthopaedic materials.
Minimally Invasive SolutionsTM (""MIS'').
In 2001, the Company announced that it had
established a dedicated business team to maximize the potential patient beneÑts of applying minimally
invasive surgical techniques to orthopaedic surgery. The Company also indicated it will create a
medical education process, the MIS Institute, to help facilitate training for surgeons and other medical
professionals on the procedures required for minimally invasive procedures. The Company is currently
working with three major medical centers to evaluate and reÑne an advanced minimally invasive hip
replacement procedure. The goals of this eÅort are to reduce postoperative rehabilitation and to
accelerate a patient's recovery of life style. The Company's MIS business unit will focus both on
further commercializing existing minimally invasive approaches and investigating ways to apply
1 trademark of Mayo Foundation
5
minimally invasive principles to additional procedures. A distinct medical education process, the MIS
Institute will also be created to facilitate the training required for these procedures. One of the
surgical approaches employed for the MIS hip procedure uses two small portals, each less than two
inches in diameter. Standard implants are used in the procedure. The incision for a traditional, open
hip replacement is as much as 12 inches long. Other less invasive approaches such as a ""mini''
incision are also being evaluated.
Other Reconstructive Implants
The Coonrad/Morrey product line is a leading family of elbow replacement implant products and the
Bigliani/Flatow» shoulder product line gives the Company a signiÑcant share of the global shoulder
implant market. These systems are designed to treat arthritic conditions and fractures as well as to
enhance the outcome of primary or revision surgery. Both systems oÅer surgeons a wide variety of
implants and instrumentation to accommodate diÅering surgical philosophies and patient needs.
Fracture Management
Fracture management products include devices used primarily to reattach or stabilize damaged bone
and tissue to support the body's natural healing process. The most common surgical stabilization of bone
fracture involves the internal Ñxation of bone fragments. This stabilization can involve the use of a wide
assortment of plates, screws, rods, wires and pins. In addition, tissue attachment devices are used to treat
soft tissue trauma. The Company oÅers a comprehensive line of products designed for use in the Ñxation
of fractures, including hip Ñxation products, plates, screws, pins, wires and nails. The recently expanded
fracture management product line enables the Company to oÅer surgeons cost-eÅective, quality products,
including:
M/DN» Intramedullary Fixation. The M/DN nail, an intramedullary nailing system for the
internal Ñxation of long bone fractures, incorporates implants and instruments to align and Ñx
fractures of the tibia, femur and humerus. The system has multiple screw options to provide increased
surgical Öexibility. An innovative screw hole conÑguration has expanded applications for the product.
In addition, the introduction of a minimally invasive approach has been developed to further expand
the brand in the marketplace.
Zimmer» Periarticular Plating System. The periarticular plating system, used to stabilize
fractures near joints, permits fracture Ñxation plates to be accurately Ñtted to the anatomy of the
periarticular, or joint, region of the distal femur, proximal tibia and distal tibia in a low-proÑle format.
Zimmer Plates and Screws (""ZPS''). The ZPS internal fracture Ñxation system is a
comprehensive system of certiÑed stainless steel plates, screws and instruments for internal fracture
compression. Because this system is compatible with major competitive systems made by other
market participants, it aÅords surgeons added Öexibility and value.
Cable-Ready» Cable Grip System. The patented Cable-Ready Cable Grip System encircles
bone fragments with wire to hold them together. The system has an innovative mechanism that
minimizes cable tension loss typical of similar cable system devices.
TransFxTM 2 External Fixation System. The TransFx Ñxator product is a comprehensive
external Ñxation system that provides versatility in treating a variety of fractures of the upper and
lower extremity. The system is designed to increase Öexibility of Ñxation options while reducing
system complexity.
2 trademark of Immedica, Inc.
6
Orthopaedic Surgical Products
The Company manufactures and markets other surgical products, which surgeons use for both
orthopaedic and non-orthopaedic procedures, including tourniquets, blood management systems, wound
debridement products, powered instruments for use in surgical procedures, pain management devices and
orthopaedic softgoods, which provide support and/or heat retention and compression for trauma of the
knee, ankle, back and upper extremities, including the shoulder, elbow, neck and wrist. The Company has
developed, and intends to continue developing, technologically advanced surgical products to support its
reconstructive implant and fracture management product systems in the operating room environment with
a focus on blood and pain management systems.
OrthoPAT»3 Autotransfusion System. This innovative autotransfusion system, which includes
patented disposable components, has been speciÑcally designed to collect and prepare a patient's own
blood for re-infusion during and following an open surgical procedure. Depending on the nature of the
surgery performed, multiple OrthoPAT autotransfusion units may be required for a single procedure.
The Company markets OrthoPAT Autotransfusion System through an exclusive distribution
arrangement in the United States and Canada.
Pulsavac» Plus Wound Debridement System. The Company recently introduced the Pulsavac
Plus lavage system, a variable-powered, fully disposable debridement system with the versatility to
meet the needs of today's operating room.
Palm PumpTM 4 Pain Management System. The Palm Pump Pain Management System,
developed and manufactured by Sorenson Medical, Inc., provides a continuous infusion of local
anesthetic directly to a surgical site. The pump, designed for use both during and after surgery, allows
surgeons and patients to adjust anesthesia levels depending on pain levels. Designed to dull sensation
in pre-deÑned surgical locations only, this pump avoids altering sensation in other body parts or
depressing patient consciousness. In addition, used as a post-operating pain management device, the
pump can increase patient mobility, facilitate rehabilitation and increase patient satisfaction. The
pump may have particularly strong application potential in minimally invasive surgical procedures and
would expedite a patient's return to mobility after such procedures. The Company markets this pump
through an exclusive distribution arrangement in the United States.
Product Development
The Company is engaged in ongoing research and development to introduce clinically advanced new
materials, product designs and surgical techniques. The product development function is integrated with
strategic brand marketing and manufacturing eÅorts, which allows the Company to understand its
customers' needs and to respond more quickly with top-quality products. The rapid commercialization of
innovative new materials, product designs and surgical techniques, one of the Company's core strategies,
has been an important driver of sales growth in recent years.
New products, procedures, techniques and instruments introduced since 1997 include the ZMR hip
system, the Legacy Posterior Stabilized Flex Knee, the Longevity Highly Crosslinked Polyethylene Liner
for hip cups, the M/DN intramedullary nail, the Bigliani/Flatow shoulder implant, the Prolong Highly
Crosslinked Polyethylene for total knee replacement, M/G Unicompartmental Knee System with MIS
instrumentation, Zimmer Plates and Screws internal fracture Ñxation system, the TransFx External
Fixation System and the Trabecular Metal Monoblock Cup.
The Company is actively broadening its product oÅerings in each of the product categories and
exploring new technologies that have applications in multiple areas. For the years ended December 31,
2001, 2000 and 1999, the Company spent approximately $71.6 million, $52.0 million and $45.2 million,
3 trademark of Haemonetics Corporation
4 trademark of Sorenson Medical, Inc.
7
respectively, on research and development. The increase in research and development expenditures has
accelerated the output of new reconstructive implant and fracture management products through advanced
new materials, product designs and surgical techniques. The Company's primary research and development
facility is located in Warsaw, Indiana, and employs more than 330 research and development employees.
The Company will continue to identify and capitalize on external sources of innovative technologies
through possible acquisitions of other complementary products, businesses, technology licensing arrange-
ments and strategic alliances. During 2001 the Company announced the creation of a medical education
process, the MIS Institute, to help facilitate training for surgeons and other medical professionals on the
procedures for applying minimally invasive surgical techniques to orthopaedic surgery. In connection with
this, the Company is working with major medical centers to evaluate and reÑne an advanced minimally
invasive hip replacement procedure. In addition, the Company has developed and maintains close
relationships with a number of widely recognized orthopaedic surgeons who assist in product research and
development.
Government Regulations
The Company is subject to some degree of government regulation with regard to its products and
operations in the countries in which it operates. It is the policy of the Company to comply fully with all
regulatory requirements applicable to its products and operations.
In the United States, the Medical Device Amendments of 1976 to the Federal Food, Drug and
Cosmetic Act, the Safe Medical Devices Act of 1990, the FDA Modernization Act, and regulations issued
or proposed thereunder, provide for regulation by the Food and Drug Administration (""FDA'') of the
development, testing, manufacturing and marketing of medical devices. The FDA regulates laboratory and
manufacturing practices, labeling and record keeping for medical devices and review of required
manufacturers' reports of adverse experience to identify potential problems with marketed medical devices.
A few of the devices developed and marketed by the Company are in a category for which the FDA has
implemented stringent clinical investigation and pre-market approval requirements. 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 or refund of the costs of such devices. There are also
certain requirements of state, local and foreign governments that must be complied with in the
manufacture and marketing of the Company's products.
In many of the foreign countries in which the Company markets its products, it is subject to
regulations aÅecting, among other things, product standards, packaging requirements, labeling requirements
and import restrictions. Many of the regulations applicable to the Company's devices and products in these
countries are similar to those of the FDA. The member countries of the European Union have adopted the
European Medical Device Directives, which create a single set of medical device regulations for all
member countries. These regulations require companies that wish to manufacture and distribute medical
devices in European Union member countries to obtain Community European (CE) marks for their
products. The Company has authorization to place the CE mark on products it distributes in European
Union countries.
Regulatory requirements aÅecting the Company and its products have continued to increase. It has
always been the practice of the Company to comply with all regulatory requirements governing its
operations and products; and the Company believes that the manufacturing, quality control and internal
control procedures that it employs meet the requirements of the regulations in all material respects.
Government agencies and legislative bodies in the United States and throughout the world inÖuence
reimbursement rates to varying degrees. The Company believes that its experience in dealing with
governmental regulatory requirements, its eÇcient means of distribution and its emphasis on the ongoing
development of eÇcacious and technologically advanced products should enable it to continue to compete
eÅectively within this regulated environment.
8
The orthopaedic industry is subject to various government regulations pertaining to healthcare fraud
and abuse, including anti-kickback laws and physician self-referral laws. Violations of these laws are
punishable by criminal and/or civil sanctions, including, in some instances, imprisonment and exclusion
from participation in government healthcare programs, including Medicare, Medicaid, VA health programs
and CHAMPUS. The scope and enforcement of these laws and regulations are uncertain and subject to
rapid change, especially in light of the lack of applicable precedent and regulations. The Company believes
that its operations are in material compliance with these laws.
The Company's facilities and operations are subject to various government environmental and
occupational health and safety requirements of the United States and foreign countries, including those
relating to discharges of substances in the air, water and land, the handling, storage and disposal of wastes
and the cleanup of properties by pollutants. The Company believes it is currently in material compliance
with such requirements.
Sales and Marketing
The Company has operations in 20 countries and markets its products in 70 countries. Globally, the
Company manages its business through three major geographic areas Ì the Americas, which is comprised
principally of the United States and includes other North, Central and South American markets; Asia
PaciÑc, which is comprised principally of Japan and includes other Asian and PaciÑc markets; and Europe,
which is comprised principally of Europe and includes the Middle East and Africa. Company products are
distributed in these regions primarily through networks of agents and distributors who market and sell to
orthopaedic surgeons, third party distributors, hospitals and surgery centers, among others.
The Company's primary customers include orthopaedic surgeons, hospitals and healthcare purchasing
organizations or buying groups. These customers range from large multinational enterprises to independent
surgeons. A majority of U.S. hospitals and surgeons belong to at least one group purchasing organization.
No individual end user accounted for over 0.5 percent of net sales.
The Company utilizes more than 1,200 sales associates, sales managers and support personnel, some
of whom are employed by independent distributors. The Company invests a signiÑcant amount of time and
expense in providing training in such areas as product features and beneÑts, how to use speciÑc products
and how to best assist surgeons. The presence of sales representatives is deemed by surgeons and hospitals
to be necessary in a high number of procedures and the extensive sales training provided by the Company
enables representatives, when requested, to make meaningful contributions during surgeries. Salesforce
representatives rely heavily on strong technical selling skills, medical education and in-surgery staÅ
technical support.
In response to the diÅerent healthcare systems throughout the world, the Company's sales and
marketing strategies and organizational structures diÅer by region. The Company has, however, carefully
integrated a global approach to salesforce training, marketing and medical education into each locality to
provide consistent, high quality service. The Company sponsors more than 300 medical education events
each year for and with orthopaedic surgeons around the world.
The Americas is the largest region, accounting for approximately 67 percent of 2001 sales, with the
United States accounting for the vast majority of sales in this region. The U.S. salesforce consists of
26 independent distributors with more than 650 sales associates, sales managers and support personnel, all
of whom sell Company products exclusively. Also, the Company has concentrated on negotiating contracts
with buying groups and managed care accounts and has increased unit growth by linking the level of
discount received to sales growth.
The Asia PaciÑc region accounted for approximately 22 percent of 2001 sales with Japan being the
largest foreign market, constituting the vast majority of sales in this region. In Japan the Company
maintains a hybrid network of approximately 130 dealers and approximately 150 direct sales associates who
have built strong relationships with leading orthopaedic surgeons. The knowledge and skills of sales
associates play a critical role in Japan because many doctors perform orthopaedic surgeries infrequently
9
and must rely on the orthopaedic salesforce for extensive technical support. Also, in many hospitals,
operating room nurses do not specialize and often have relatively minimal knowledge of, and experience
with, orthopaedic instrumentation and procedures. The Company intends to continue to strengthen its
relationships with Japanese surgeons through its medical education conferences.
The European region accounted for approximately 11 percent of 2001 sales, with the principal
countries in which the Company operates being France, Germany, Italy, Spain and the United Kingdom.
The Company's salesforce in this region is also comprised of direct sales associates, independent
distributors and commissioned agents.
Competition
The orthopaedics industry is highly competitive. In the global markets for reconstructive implants,
fracture management and orthopaedic surgical products, major competitors include J&J DePuy
Orthopaedics (a subsidiary of Johnson & Johnson); Biomet, Inc.; Stryker Corp.; Smith & Nephew, Inc.;
Sulzer Medica Ltd. and Synthes-Stratec. Competition within the industry is primarily based on technology,
quality, reputation, customer relationships and service.
In the Americas, J&J DePuy, Biomet, Inc. and Stryker Corp., along with the Company, account for a
large majority of the total reconstructive implant sales.
In the Asia PaciÑc market for reconstructive implant and fracture management products, the
Company competes primarily with J&J DePuy and Stryker Corp. as well as regional companies, including
Kyocera and MDM. Factors, such as the dealer system, complex regulatory environments and the
accompanying inability to compete on price, make it diÇcult for smaller companies, particularly those that
are non-regional, to compete eÅectively with the market leaders in the Asia PaciÑc region.
In Europe the reconstructive implant and fracture management product markets are more fragmented
than the Americas or the Asia PaciÑc regions. The variety of philosophies held by European surgeons
regarding hip reconstruction, for example, has allowed for the survival of many small, niche European
companies. Today most hip implants sold in Europe are products developed speciÑcally for Europe,
although global products are gaining acceptance. Therefore, the Company, in addition to its global
products, will continue to develop and produce specially tailored products to meet speciÑc European needs.
The Company believes it is a leading player in this region in the reconstructive implant market.
The Company believes that patents and other proprietary rights are important to the success of its
business and also relies upon trade secrets, know-how, continuing technological innovation and licensing
opportunities to develop and maintain its competitive position. The Company protects its proprietary rights
through a variety of methods, including conÑdentiality agreements and proprietary information agreements
with vendors, employees, consultants and others who may have access to proprietary information.
The Company owns more than 610 issued patents and over 220 pending patent applications and has
licensed more than 440 issued patents and over 250 pending patent applications that relate to aspects of
the technology incorporated in many of its products. Also, the Company is a party to several license
agreements with unrelated third parties pursuant to which it has obtained, for the life of the licensed
patent, the exclusive or non-exclusive rights to these patents in consideration for royalty payments,
including highly crosslinked polyethylene. In August 2000 the Company entered into an exclusive
distribution and strategic alliance agreement with Implex Corporation, relating to the development and
distribution of reconstructive implant and fracture management products incorporating Trabecular Metal
technology. This agreement provides the Company, with an exclusive right, subject to speciÑed conditions
beginning with the third quarter of 2003, to purchase speciÑed assets and proprietary rights of the Implex
Corporation utilizing a predeÑned process.
Employees
At December 31, 2001, the Company employed more than 3,400 employees worldwide including more
than 330 employees dedicated to research and development. Approximately 2,550 employees are located
10
within the United States and 850 employees are located outside of the United States, primarily in Japan
and throughout Europe. Approximately 200 North American employees are members of a trade union
covered by a collective bargaining agreement. In addition, approximately 10 employees are represented by
a union in the United Kingdom.
In May 2000, the Company renewed a collective bargaining agreement with the United Steelworkers
of America covering employees at the Dover, Ohio, facility. This agreement is eÅective until May 15,
2003, and is automatically renewed on a year-to-year basis until either party gives a written notice of its
intent to terminate the agreement, 60 days prior to a termination date. The Company believes that its
relationship with its employees and the unions that represent them is good.
Item 2. Properties
The Company has the following properties:
Location
Use
Warsaw, Indiana ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Research & Development,
Owned/
Leased
Square
Feet
Owned
803,400
Manufacturing, Warehousing, Marketing,
Administration and Corporate
Headquarters
Leased
Warsaw, Indiana ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Warehousing
Statesville, North Carolina ÏÏÏÏÏÏÏÏÏÏÏ Manufacturing and Warehousing
Owned
Dover, Ohio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Research & Development, Manufacturing Owned
and Warehousing
Sydney, Australia ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ OÇces and Warehousing
Wemmel, Belgium ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ OÇces and Warehousing
Shanghai, China ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ OÇces and Warehousing
Aix en Provence, France ÏÏÏÏÏÏÏÏÏÏÏÏÏ OÇces and Warehousing
Dietzenbach, Germany ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ OÇces and Warehousing
Kiel, Germany ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ OÇces and Warehousing
Milan, Italy ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ OÇces and Warehousing
Fukuoka, Japan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Distribution
Gotemba, Japan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ OÇces, Service Center and Warehousing
Tokyo, Japan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ OÇces and Warehousing
Seoul, Korea ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ OÇces and Warehousing
B.S.Amersfoort, Netherlands ÏÏÏÏÏÏÏÏÏÏ OÇces and Warehousing
Auckland, New Zealand ÏÏÏÏÏÏÏÏÏÏÏÏÏ OÇces and Warehousing
Mississauga, Ontario ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ OÇces and Warehousing
Ponce, Puerto Rico ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Manufacturing and Warehousing
Rio Piedras, Puerto Rico ÏÏÏÏÏÏÏÏÏÏÏÏÏ OÇces and Warehousing
Singapore ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ OÇces and Warehousing
Barcelona, Spain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ OÇces and Warehousing
Taipei, Taiwan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ OÇces and Warehousing
Swindon, United Kingdom ÏÏÏÏÏÏÏÏÏÏÏÏ OÇces and Warehousing
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Owned
Leased
Leased
Leased
Leased
Leased
Owned
Leased
Leased
Leased
Leased
Leased
89,000
156,000
140,000
24,000
27,460
5,136
5,000
14,115
21,000
24,349
19,161
83,000
11,588
20,788
4,560
4,400
52,000
112,800
3,475
10,000
16,211
7,571
65,000
In addition to the above, the Company maintains more than 20 oÇces and warehouse facilities in
various countries, including the United States, Japan, Australia, France and China. The Company believes
that all of the facilities and equipment are in good condition, well maintained and able to operate at
present levels.
11
Item 3. Legal Proceedings
Information pertaining to legal proceedings can be found in Note 16 to the Consolidated Financial
Statements, which are included herein under Item 8.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock, $.01 par value, is traded on the New York Stock Exchange under the
symbol ""ZMH.'' The high and low sales prices for the common stock for the calendar quarters since
August 7, 2001, (the Ñrst day of trading of the common stock), are set forth as follows:
QUARTERLY HIGH-LOW SHARE PRICES
High
Low
Year Ended December 31, 2001:
Third Quarter (August 7, 2001 through September 30, 2001) ÏÏÏÏÏÏÏÏÏÏÏÏ
Fourth Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$30.50
$33.30
$24.70
$27.50
The Company has not declared or paid dividends on the common stock since becoming a public
company on August 6, 2001. Currently, the Company does not anticipate paying any cash dividends on the
common stock in the foreseeable future. The Company's credit facility also restricts the payment of
dividends under certain circumstances.
The number of stockholders of record on February 13, 2002, was 620,581. On February 13, 2002, the
closing price of the common stock, as reported on the New York Stock Exchange, was $34.45 per share.
12
Item 6. Selected Financial Data.
The Ñnancial information for each of the Ñve years ended December 31, 2001, is set forth below (in
millions, except per share amounts):
SUMMARY OF OPERATIONS
$
$
Net salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Pro forma net earnings (unaudited)(1) ÏÏÏÏÏÏÏÏÏÏ
Earnings per common share
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Pro forma earnings per common share
(unaudited)(1)
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Average common shares outstanding(3)
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
BALANCE SHEET DATA
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due to former parent ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other long-term obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2001
2000
1999
1998
$1,178.6
149.8
190.8
$1,040.6
176.0
N/A
$938.9
149.9
N/A
$860.8
144.9
N/A
1997(2)
(unaudited)
$849.9
61.9
N/A
0.77
0.77
$
0.91
0.91
$ 0.77
0.77
$ 0.75
0.75
$ 0.32
0.32
0.99
0.98
193.7
194.3
N/A
N/A
193.6
193.6
$ 745.0
Ó
150.0
213.9
79.3
78.7
$ 597.4
144.0
Ó
Ó
5.5
N/A
N/A
N/A
193.6
193.6
$605.6
41.0
Ó
Ó
4.2
N/A
N/A
N/A
193.6
193.6
$579.2
50.0
Ó
Ó
3.2
N/A
N/A
N/A
193.6
193.6
$611.5
87.0
Ó
Ó
0.9
N/A
(1) Pro forma earnings exclude $70.0 million ($49.9 million net of tax) in costs relating to the separation
of the Company from its former parent and include interest expense related to debt expected to be
assumed or incurred under the Credit Facility (see Separation from Bristol-Myers Squibb in Item 7)
as if outstanding from January 1, 2001. Assumed average outstanding borrowings from January 1 to
July 31, 2001 were $450 million at an average interest rate of 5.4 percent. Interest expense includes
the amortization of fees. Pro forma Ñnancial information is presented herein to provide users of the
Ñnancial statements with information about the impact of the Company's separation from its former
parent.
(2) During 1997, management changed its strategic focus and operating structure by exiting certain
businesses, closing manufacturing facilities, reorganizing its U.S. distributor network, centralizing its
European operations, streamlining product lines and reducing the size of its organization. As a result,
net earnings in 1997 were reduced due to pretax charges of $104 million ($64 million after taxes).
(3) For periods ended prior to August 6, 2001, average common shares reÖect the number of shares of
Company common stock outstanding on August 6, 2001, the date all of the shares of Company
common stock were distributed to the stockholders of the Company's former parent. For periods
subsequent to August 6, 2001, average common shares reÖect any new issuances of common stock
and the dilutive eÅect of outstanding stock options, where appropriate.
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the consolidated Ñnancial statements and
the corresponding notes included elsewhere in this Form 10-K. This Management's Discussion and
Analysis of Financial Condition and Results of Operations contains forward-looking statements.
Overview
The Company is a global leader in the design, development, manufacture and marketing of
orthopaedic reconstructive implants and fracture management products. Orthopaedic reconstructive
implants restore joint function lost due to disease or trauma in joints such as knees, hips, shoulders and
elbows. Fracture management products are devices used primarily to reattach or stabilize damaged bone
and tissue to support the body's natural healing process. The Company also manufactures and markets
surgical products for orthopaedic and general surgery. With operations in 20 countries and products
marketed in 70 countries, operations are managed through three geographic regions Ì the Americas, Asia
PaciÑc and Europe.
Separation from Bristol-Myers Squibb
The Company was incorporated in Delaware as a wholly-owned subsidiary of Bristol-Myers Squibb on
January 12, 2001. On July 25, 2001, Bristol-Myers Squibb transferred the assets and liabilities of its
orthopaedic business to the Company. On August 6, 2001, Bristol-Myers Squibb distributed all of the
shares of Company common stock to Bristol-Myers Squibb stockholders in the form of a dividend of one
share of Company common stock, and the associated preferred stock purchase right, for every ten shares
of Bristol-Myers Squibb common stock. In addition, the Company assumed all obligations under a
$600 million credit facility (""Credit Facility'') established by the Company and its former parent with
then outstanding borrowings of $290 million. With additional borrowings under the Credit Facility, the
Company repaid amounts due to its former parent of approximately $90 million, and Ñnally, the Company
assumed an additional $22 million of borrowings under the Credit Facility for separation costs. In addition,
the Company recognized certain liabilities and obligations for pension, postretirement, long-term disability
and U.S. sales agent beneÑts. Recognition of these liabilities, obligations and other adjustments are
reÖected in the remaining net investment in the Company by its former parent of $14.1 million as of the
distribution date. The distribution qualiÑed as a tax-free transaction under Section 355 and 368(a)(1)(1)
of the Internal Revenue Code of 1986 as more fully described in Note 12 to the Consolidated Financial
Statements, which are included herein under Item 8.
The Company incurred $70.0 million ($49.9 million net of taxes) in costs, fees and expenses relating
to the separation from Bristol-Myers Squibb and the related distribution of Company common stock to
Bristol-Myers Squibb stockholders which was partially funded by additional borrowings under the credit
facility. The costs, fees and expenses are primarily for retention bonuses, legal separation matters,
professional expenses and costs of producing, printing, mailing and distributing the information statement
relating to the distribution.
Except for separation costs and the ongoing interest cost associated with debt assumed or incurred as
of the distribution date, the Company does not currently anticipate that operating costs resulting from the
separation from its former parent will materially impact its cost structure as reÖected in its historical
consolidated results.
Reported and Pro Forma Results of Operations
The following discussion of operations presents both reported and unaudited pro forma results of
operations. Unaudited pro forma Ñnancial information is presented herein to provide users of the Ñnancial
statements with information about the impact of the Company's separation from its former parent. The
separation costs described above are attributable to the distribution, and the Company anticipates no
further separation costs. The unaudited pro forma consolidated statement of earnings for the year ended
December 31, 2001, presented herein, has been prepared giving eÅect to the exclusion of costs incurred by
14
the Company to separate from its former parent and includes a full year of interest expense on debt
expected to be assumed or incurred at the distribution date as if such debt were outstanding from
January 1, 2001. The unaudited pro forma consolidated statement of earnings for the year ended
December 31, 2001 does not purport to represent what results of operations actually would have been or to
project Ñnancial performance for any future period. This information should be read in conjunction with
the consolidated Ñnancial statements and corresponding notes included elsewhere in this Form 10-K.
The following table sets forth the reported and pro forma consolidated results of operations for the
periods indicated (in millions, except per share amounts):
Year Ended December 31,
Reported
2000
1999
2001
Net Sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cost of products sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,178.6
325.9
$1,040.6
290.9
$938.9
269.3
Gross ProÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Research and development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Selling, general and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating ProÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Earnings before income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
852.7
71.6
532.8
604.4
248.3
7.4
240.9
91.1
749.7
52.0
429.7
481.7
268.0
Ó
268.0
92.0
669.6
45.2
393.5
438.7
230.9
Ó
230.9
81.0
Pro Forma
2001
(Unaudited)
$1,178.6
314.0(a)
864.6
68.4(a)
477.9(a)
546.3
318.3
21.4(b)
296.9
106.1(c)
Net Earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 149.8
$ 176.0
$149.9
$ 190.8
Earnings Per Share
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
0.77
0.77
$
$
0.91
0.91
$ 0.77
$ 0.77
$
$
0.99
0.98
Average Shares Outstanding
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
193.7
194.3
193.6
193.6
193.6
193.6
193.7
194.3
The pro forma adjustments to the accompanying reported historical Ñnancial information for the year
ended December 31, 2001 are described below:
(a) ReÖects the add back of costs related to the separation of the Company from its former parent.
The Company incurred $70 million in separation costs ($49.9 million net of tax).
(b) ReÖects interest expense related to debt expected to be assumed or incurred under the Credit
Facility (see Note 7 in Notes to Consolidated Financial Statements). Assumed average
borrowings from January 1 through July 31, 2001 were $450 million at an average interest rate of
5.4 percent and includes the amortization of fees.
(c) ReÖects the tax eÅect of the pro forma adjustments for separation costs and interest expense
using a rate of 26.8 percent, reÖecting the non-deductibility of certain separation costs.
15
The following tables set forth sales by geographic region and product category for the years ended
December 31, 2001, 2000 and 1999 (in millions):
Net Sales by Geographic Region
Year Ended December 31,
2000
2001
1999
Americas ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Asia PaciÑc ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Europe ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 790.7
255.2
132.7
$ 655.4
264.5
120.7
$587.9
235.3
115.7
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,178.6
$1,040.6
$938.9
Net Sales by Product Category
Year Ended December 31,
2000
2001
1999
Reconstructive implants ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fracture managementÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Orthopaedic surgical products ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 886.5
128.3
163.8
$ 764.5
123.4
152.7
$679.1
112.8
147.0
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,178.6
$1,040.6
$938.9
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Net sales for the year ended December 31, 2001 increased 13 percent (increased 17 percent constant
currency). Sales growth reÖected strong demand for reconstructive implants and outstanding results in the
Company's largest operating segment, the Americas. This increase in the Americas was partially oÅset by
weak local currencies in Asia PaciÑc and Europe. This increase was comprised of a 14 percent increase
due to incremental volume and changes in the mix of product sales, a 3 percent increase due to higher
average selling prices and a 4 percent decrease due to foreign exchange rate Öuctuations.
The introduction of new materials, techniques and technologies has contributed to a signiÑcant
increase in demand for the Company's products and has generally had a favorable eÅect on sales as
average selling prices for the new materials and technologies generally exceed those being replaced. For
example, sales have been favorably aÅected by a market shift from cruciate retaining designs to posterior
stabilized designs for total knee procedures. The Company maintains a relatively strong market position in
posterior stabilized knees. Sales have also beneÑted from a market shift from cemented components to
higher priced porous components for total hip replacements. Introduction of the ZMR Revision Hip
System provided the Company with a more comprehensive oÅering in a market subcategory that is
reported to experience a higher growth rate than primary hip replacements.
Introduction of the Prolong Highly Crosslinked Polyethylene Articular Surface for total knee
replacement procedures exempliÑes the Company's continued use of innovative materials and technologies
and follows the successful introduction of the Longevity Highly Crosslinked Polyethylene Liner for total
hip replacement procedures. The market acceptance of the Longevity Polyethylene Liner, which commands
premium prices in most markets over the standard polyethylene liner, has been rapid.
Net sales in the Americas increased 21 percent to $790.7 million compared to 2000. This increase
was comprised of a 16 percent increase due to incremental volume and changes in the mix of product
sales, together with a 5 percent increase due to higher average selling prices. Sales of reconstructive
implants increased 25 percent with strong sales in all categories. Knee sales increased 25 percent led by
growth in sales of NexGen Legacy Posterior Stabilized Knee, the recently introduced NexGen Legacy
posterior stabilized flex knee, as well as the M/G Unicompartmental Knee, now featuring MIS
instrumentation. Hip sales increased 23 percent, driven by continued conversion to porous stems, the ZMR
16
Modular Revision Hip System, Trabecular Metal acetabular cups, and increased sales of Trilogy
Acetabular System cups incorporating Longevity Highly Crosslinked Polyethylene Liners. Fracture
management product sales increased 11 percent, in large part due to the introduction of the new ZPS
internal Ñxation devices during the fourth quarter and increased sales in fracture instruments.
Net sales in Asia PaciÑc decreased 4 percent to $255.2 million compared to 2000. This decrease was
comprised of an 8 percent increase due to incremental volume and changes in the mix of product sales,
which was more than oÅset by a 12 percent decrease due to foreign exchange rate Öuctuations. Knee sales
decreased 6 percent (increased 5 percent constant currency), reÖecting continuing strong sales of NexGen
Legacy Posterior Stabilized Flex Knee. Hip sales decreased 2 percent (increased 9 percent constant
currency) driven primarily by continued conversion to porous stems, introduction of the ZMR Revision
Hip System and sales of Trilogy cups incorporating Longevity Highly Crosslinked Polyethylene Liners.
Fracture management products decreased 8 percent (increased 3 percent constant currency) with higher
sales of M/DN Intramedullary Fixation nails oÅset by weaker sales of compression hip screws.
Net sales in Europe increased 10 percent (increased 14 percent constant currency) to $132.7 million
compared to 2000. This increase was comprised of a 13 percent increase due to incremental volume and
changes in the mix of product sales, a 1 percent increase due to higher average selling prices and a
4 percent decrease due to foreign exchange rate Öuctuations. This increase was driven by double-digit
growth in Germany, Italy, Spain and the United Kingdom. Knee sales increased 13 percent (increased
17 percent constant currency) driven by strong sales of the NexGen Legacy knee prostheses system as well
as M/G Unicompartmental Knee with MIS instrumentation. Hip sales increased 11 percent (increased
15 percent constant currency) supported by the recent introduction of the ZMR Revision Hip System and
increased sales of Trilogy cups incorporating Longevity Highly Crosslinked Polyethylene Liners. Fracture
management sales decreased 8 percent (decreased 4 percent constant currency) in comparison to high-
volume tender sales that occurred in the fourth quarter of 2000.
Overall, worldwide reconstructive implant sales increased 16 percent (increased 19 percent constant
currency) to $886.5 million. Knee sales increased by 16 percent (increased 20 percent constant currency)
to $481.7 million, reÖecting continued strong sales of the NexGen Legacy Posterior Stabilized Knee and
NexGen Legacy Posterior Stabilized Flex Knee, introduced recently in the Americas. Hip sales increased
by 15 percent (increased 19 percent constant currency) to $376.6 million, driven by continued conversion
to porous hip stems, strong sales of Trilogy cups incorporating Longevity Highly Crosslinked Polyethylene
Liners and the continuing introduction of the ZMR Revision Hip System. Fracture management product
sales increased 4 percent (increased 8 percent constant currency) to $128.3 million, driven by the
introduction of the new ZPS internal Ñxation devices and strong sales of M/DN nails in Asia PaciÑc.
Orthopaedic surgical product sales increased 7 percent (increased 10 percent constant currency) to
$163.8 million, led by the introduction of the OrthoPAT Autotransfusion System, that can be used
perioperatively.
Gross proÑt as a percentage of net sales was 72.3 percent in 2001, or 73.4 percent excluding
separation costs of $11.9 million, compared to 72.0 percent in 2000. This increase was due to higher
average selling prices, favorable premium priced product mix, as well as improved manufacturing
eÇciencies associated with increased sales volume and enhanced productivity. This was partially oÅset by
the unfavorable impact of changes in foreign currency exchange rates and inÖationary expense increases,
including wages and fringe beneÑts.
Research and development as a percentage of net sales was 6.1 percent in 2001, or 5.8 percent
excluding separation costs of $3.2 million, compared to 5.0 percent in 2000. This increase was due to
higher spending on research and development activities focused on broadening the Company's product
oÅerings in areas such as less invasive approaches to orthopaedic procedures, incorporation of new
materials such as Trabecular Metal and highly crosslinked polyethylene. Research and development
expenditures, consistent with the Company's strategy to oÅer innovative new products and comprehensive
solutions, increased over 50 percent to $68.4 million, excluding separation costs, for the 2 year period
ended December 31, 2001.
17
Selling, general and administrative expenses as a percentage of net sales were 45.2 percent in 2001, or
40.5 percent excluding separation costs of $54.9 million, compared to 41.3 percent in 2000. In the fourth
quarter 2001, the Company recorded a $3.0 million pretax charge for possible payments of non-reimbursed,
direct medical expenses to certain patients who choose to revise recalled Saint-Gobain manufactured
zirconia femoral heads. Excluding the costs of separation and charges related to Saint-Gobain, selling,
general and administrative expenses increased 11 percent to $474.9 million in 2001 from $429.7 million in
2000. This increase was driven by an increase in selling and marketing expenses where the Company
continued to invest in selling and marketing programs, including sales force expansion, support for the
U.S. distributor network, target direct-to-customer advertising and the establishment of the MIS business
unit. General and administrative expenses, in dollar terms, remained constant in 2001 compared with 2000,
reÖecting strict expense controls across all geographic regions. Over the four year period ended
December 31, 2001, general and administrative expenses excluding the aforementioned $3.0 million have
remained constant while net sales increased by over $300 million. In 2000 the Company recorded pretax
charges of $14 million related to changes made to its operations as discussed in Note 2 to the
Consolidated Financial Statements, which are included herein under Item 8.
Operating proÑt decreased 7 percent in 2001 to $248.3 million from $268.0 million in 2000. Excluding
separation costs of $70.0 million, operating proÑt increased 19 percent to $318.3 million, due primarily to
the increase in gross proÑt margin, together with expense leveraging.
The eÅective tax rate on earnings before taxes increased to 37.8 percent in 2001 compared to
34.3 percent in 2000. Excluding separation costs and including pro forma interest expense for 2001, the
eÅective tax rate increased to 35.7 percent. The tax provision prior to August 6, 2001 was computed by the
Company's former parent. The Company's tax rate after August 6, 2001 was 36.1 percent on a pro forma
separate return basis.
Net earnings decreased 15 percent in 2001 to $149.8 million from $176.0 million in 2000. Basic and
diluted earnings per share decreased 15 percent in 2001 to $0.77 from $0.91 in 2000. Excluding separation
costs of $49.9 million, net of tax, and including incremental pro forma interest expense, net of tax, of
$8.9 million, pro forma net earnings were $190.8 million for 2001. Basic and diluted earnings per share for
2001, on a pro forma basis, were $0.99 and $0.98, respectively.
Adjusting 2000 for a full year of assumed interest of $29.0 million, net of tax of $19.1 million, net
earnings would have been $156.9 million, or $0.81 per share for both basic and diluted. This assumes that
$500.0 million of debt would have been outstanding for the full year 2000 at an interest rate of
5.7 percent.
Pro forma net earnings of $190.8 million for 2001 represent a 22 percent increase from 2000 net
earnings, adjusted for a full year of assumed interest, of $156.9 million. Basic earnings per share on the
same basis reÖect an increase of 22 percent in 2001, to $0.99 from $0.81 in 2000, while diluted earnings
per share increased 21 percent in 2001, to $0.98 from $0.81 in 2000.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Net sales increased 11 percent for the year ended December 31, 2000. Sales growth reÖected strong
demand for reconstructive implants and fracture management products, which was aided in part by the
introduction of new products. This increase was comprised of a 10 percent increase due to incremental
volume and changes in the mix of product sales and a 1 percent increase due to higher average selling
prices.
Net sales in the Americas increased 11 percent in 2000 to $655.4 million, led by growth in the
southeast region of the United States and at targeted teaching hospitals throughout the United States. This
increase was comprised of a 9 percent increase due to incremental volume and changes in the mix of
product sales, together with a 2 percent increase due to higher average selling prices. Sales of
reconstructive implants increased 16 percent supported by new product launches. Knee sales increased
10 percent led by growth in sales of the NexGen Legacy Posterior Stabilized Knee. Hip sales increased
18
19 percent, driven by strong sales of VerSys porous hip stems, the introduction of ZMR hip, the new
modular revision hip product and increased sales of Trilogy acetabular cups incorporating Longevity Highly
Crosslinked Polyethylene Liners. Fracture management product sales increased 9 percent with the ongoing
introduction of periarticular plating system and the M/DN intramedullary nail.
Net sales in Asia PaciÑc increased 13 percent in 2000 (increased 7 percent constant currency) to
$264.5 million, driven by the introduction of new products in the reconstructive implant and fracture
management product lines. This increase was comprised of an 8 percent increase due to incremental
volume and changes in the mix of product sales, a 1 percent decrease due to lower average selling prices
and a 6 percent increase due to foreign exchange rate Öuctuations. The lower average selling prices were
the result of reductions in Japan in government reimbursement prices for reconstructive implants, which
went into eÅect during the fourth quarter of 2000. Knee sales increased 14 percent (increased 10 percent
constant currency), driven by the introduction of the NexGen Legacy Posterior Stabilized Flex Knee, a
product designed to accommodate deep knee Öexion, which is more common in day-to-day activities in
Asia. Hip sales increased 7 percent (increased 2 percent constant currency), driven primarily by strong
sales of VerSys porous hip stems and Trilogy acetabular cups. Fracture management product sales
increased 13 percent (increased 6 percent constant currency), reÖecting a net increase due to strong
M/DN intramedullary nail sales oÅset by lower sales of compression hip screws compared to 1999 in
which there was a new product launch.
Net sales in Europe increased 4 percent in 2000 to $120.7 million, driven by higher sales in the
United Kingdom, Germany, Spain, France and Italy. This increase was comprised of a 17 percent increase
due to incremental volume and changes in the mix of product sales oÅset by a 13 percent decrease due to
foreign exchange rate Öuctuations. Knee sales increased 3 percent (increased 17 percent constant
currency), driven by strong sales of the NexGen Legacy system of knee prostheses. Hip sales increased
5 percent (increased 17 percent constant currency), supported by the introduction of ZMR revision hip
system and the oÅering of specialized hip products that appeal to European surgical philosophies, such as
CPT, SKF/SKT and the Mercure hip. Fracture management product sales increased 2 percent (increased
13 percent constant currency) with the introduction of the M/DN intramedullary nail.
Overall, worldwide reconstructive implant sales increased by 13 percent in 2000 to $764.5 million.
During this period, foreign exchange rate Öuctuations had no material eÅect on overall reconstructive
implant sales. Knee sales increased by 10 percent (increased 11 percent constant currency) to
$413.7 million, driven primarily by strong sales of NexGen Legacy knee prostheses across all regions. Hip
sales increased by 14 percent (increased 13 percent constant currency) to $328.7 million, reÖecting
increased market penetration of porous hip stems and Trilogy acetabular cups in the Americas and Asia
PaciÑc. Fracture management product sales increased worldwide by 10 percent (increased 9 percent
constant currency) in 2000 to $123.4 million. This increase was driven primarily by sales of the recently
launched MD/N intramedullary nail in all regions. Orthopaedic surgical product sales increased by
4 percent overall in 2000 to $152.7 million. This increase was driven primarily by sales of distributed
powered instruments and arthroscopy products in Asia PaciÑc.
Gross proÑt as a percentage of net sales was 72.0 percent in 2000, compared to 71.3 percent in 1999.
This increase was driven by lower product costs due to negotiated decreases in raw material costs, the
rationalization of manufacturing operations and investment in more eÇcient manufacturing equipment.
Research and development as a percentage of net sales in 2000 remained at the 1999 level of
5 percent. Research and development expenditures increased 15 percent to $52.0 million in 2000 from
$45.2 million in 1999. This increase was due, in part, to increased spending on engineering, development
and commercialization activities as the Company broadened its product oÅerings and in part, to design and
development consulting in support for design and concept testing of new products, greater demand for
post-market clinical studies and prospective and retrospective clinical evaluations.
Selling, general and administrative expenses as a percentage of net sales were 41.3 percent in 2000,
compared to 41.9 percent in 1999. This decrease was due to lower distribution expenses in Asia PaciÑc
where selected distribution and customer service functions were consolidated, which was partially oÅset by
19
hiring of new sales associates and support personnel and increased commissions in the Americas due to a
greater number of distributors exceeding sales targets. General and administrative expenses increased
1 percent in 2000 while sales increased 11 percent. In 2000 and 1999 the Company recorded pretax
charges of $14 million and $15 million, respectively, related to changes made to its operations as discussed
in Note 2 to the Consolidated Financial Statements, which are included herein under Item 8.
Operating proÑt increased 16 percent in 2000 to $268.0 from $230.9 million in 1999. This increase
was due to lower product costs, consolidation of distribution and customer service functions in Asia PaciÑc
and strict control on general and administrative expenses.
The eÅective tax rate on earnings before taxes decreased to 34.3 percent compared to 35.1 percent in
1999. This decrease was due to increased earnings in lower tax jurisdictions.
Net earnings increased 17 percent to $176.0 million from $149.9 million in 1999. Basic and diluted
earnings per share increased 18 percent to $0.91 from $0.77 in 1999.
Operating ProÑt by Segment
The following table sets forth the operating proÑt by segment for the years ended December 31, 2001,
2000 and 1999:
Operating ProÑt by Segment
Percent of net sales
Year Ended December 31,
2000
1999
2001
Americas ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Asia PaciÑc ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Europe ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
47%
41
16
48%
38
15
47%
33
20
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Operating proÑt for the Americas as a percentage of net sales decreased to 47 percent in 2001 from
48 percent in 2000. This decrease reÖects higher selling expenses partially oÅset by favorable eÅects of
increased sales of higher margin products and higher average selling prices.
Operating proÑt for Asia PaciÑc as a percentage of net sales increased to 41 percent in 2001 from
38 percent in 2000. While revenues were adversely aÅected by weak local currencies, the negative impact
of foreign currency on sales was largely mitigated in operating proÑt by gains on derivative Ñnancial
instruments (more fully described in Note 8 to the Consolidated Financial Statements, which are included
herein under Item 8), asset management and expense reduction initiatives.
Operating proÑt for Europe as a percentage of net sales increased to 16 percent in 2001 from
15 percent in 2000. The increase in 2001 was due to favorable country and product mix.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Operating proÑt for the Americas as a percentage of sales increased to 48 percent in 2000 from
47 percent in 1999. This increase reÖects the favorable eÅects of increased sales of higher margin products,
higher average selling prices and reduced product cost.
Operating proÑt for Asia PaciÑc as a percentage of net sales increased to 38 percent in 2000 from
33 percent in 1999. This increase reÖects lower operating expenses and favorable foreign exchange rate
Öuctuations.
Operating proÑt for Europe as a percentage of net sales decreased to 15 percent in 2000 from
20 percent in 1999. This decrease was due principally to unfavorable foreign exchange rate Öuctuations.
20
Liquidity and Capital Resources
Cash Öow generated from operations was $171.8 million in 2001, compared with $232.4 million in
2000 and $180.1 million in 1999. The decrease in cash Öow from operations in 2001 was primarily
attributable to the incurrence of separation costs. Excluding separation costs and including incremental pro
forma interest, pro forma cash Öow generated from operations was $214.9 million in 2001. If the Company
had adjusted 2000 for a full year of assumed interest, cash Öow from operations for 2000 would have been
$213.3 million. The increase of $1.6 million from 2000 to 2001 was due to increases in net earnings,
accounts payable due to favorable payment terms, other current liabilities for royalties and commissions as
a result of higher net sales, oÅset by inventory investment necessary for new product introductions.
Working capital management remained strong. Accounts receivable days decreased to 52 days in
2001, 10 days lower than 2000, reÖecting improved collections and credit terms in the Americas and an
improvement in the negotiated payment terms in Asia PaciÑc. Accounts receivable days in the Americas
are consistently below 40. Consistent with the Company's strategy to expand product oÅerings, the
Company expects to maintain inventory at a level that ensures the successful launch of a continuous
stream of new products. Inventory days increased to 221 days in 2001. This increase was due to
investments necessary to support the launch of new products during 2001 and 2002.
Cash Öow used in investing activities, principally capital expenditures, was $54.7 million in 2001,
compared with $29.0 million in 2000 and $33.2 million in 1999. The increase in capital expenditures in
2001 was driven by investments to increase manufacturing and distribution capacity, investments for new
product development and the expansion of the Company's main distribution facility in Warsaw, Indiana to
support sales growth, the purchase of computer hardware and software for a new information technology
system for the Company's North American operations and additional computer system infrastructure
required as a result of the separation.
On July 31, 2001, the Company and certain subsidiaries of the Company entered into a $600 million
three-year, multi-currency, revolving senior unsecured credit agreement (the ""Credit Facility''). The
Credit Facility contains customary aÇrmative and negative covenants, including a maximum leverage ratio
and a minimum interest coverage ratio. The Company is in compliance with all covenants under the
Credit Facility. Available borrowings under the Credit Facility at December 31, 2001 were $241.8 million.
Cash provided by operating and Ñnancing activities was also used in 2001 to fund payments to the
Company's former parent for dividends of $290.0 million, debt due of $144.0 million and other items of
$32.8. The Company had $18.4 million in cash and equivalents and outstanding borrowings of
$363.9 million as of December 31, 2001. The Company maintains a capital structure that is consistent
with an investment grade credit rating.
Management believes that cash Öows from operations, together with available borrowings under the
Credit Facility, will be suÇcient to meet the Company's working capital, capital expenditure and debt
service needs in the near term. Should investment opportunities arise, the Company believes that its
earnings, balance sheet and cash Öows will allow the Company to obtain additional capital, if necessary.
The ability to issue additional equity is subject to limitations in order to preserve the tax-free nature of the
distribution. Under the tax sharing agreement with its former parent, the Company is required to
indemnify the former parent for the amount of any tax imposed under Section 355(e) of the Internal
Revenue Code.
SigniÑcant Accounting Policies
As indicated elsewhere in this Form 10-K, management is responsible for the integrity of the Ñnancial
information presented herein. The consolidated Ñnancial statements have been prepared in accordance with
generally accepted accounting principles. Where necessary, they reÖect estimates based on management's
judgment. When selecting or evaluating accounting alternatives, management focuses on those, subject to
considerations of cost of administration, that produce from among the available alternatives information
most useful for decision-making. SigniÑcant accounting policies that are important to the portrayal of the
21
Company's Ñnancial condition and results, which, in some cases require management's judgment, are
summarized in the Notes to the Consolidated Financial Statements, which are included herein under
Item 8. These include but are not limited to accounting for inventories, prepaid expenses, income taxes,
derivative Ñnancial instruments, product liability and stock compensation. While alternative methods of
accounting for these items could result in diÅerent amounts to be reported under diÅerent conditions or
using alternative assumptions, in the aggregate, such diÅerences are not likely to materially or adversely
aÅect the Company's Ñnancial condition.
Recent Accounting Pronouncements
Information about recent accounting pronouncements can be found in Note 2 to the Consolidated
Financial Statements, which are included herein under Item 8.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
The Company is exposed to certain market risks as part of its ongoing business operations, including
risks from changes in foreign currency exchange rates, interest rates and commodity prices, that could
impact its results of operations, cash Öows and Ñnancial condition. The Company manages its exposure to
these and other market risks through regular operating and Ñnancing activities, and on a limited basis,
through the use of derivative Ñnancial instruments. Derivative Ñnancial instruments are used solely as risk
management tools and not for speculative investment purposes.
Foreign Currency Exchange Risk
The Company operates on a global basis and is exposed to the risk that its operating results, cash
Öows and Ñnancial position could be adversely aÅected by changes in foreign currency exchange rates. The
Company is primarily exposed to foreign currency exchange rate risk with respect to its transactions and
net assets denominated in Japanese Yen and the Euro. The Company manages the foreign currency
exposure centrally, on a combined basis, which allows the Company to net exposures and to take
advantage of any natural oÅsets. In order to reduce the uncertainty of foreign exchange rate movements on
transactions denominated in foreign currencies, the Company enters into derivative Ñnancial instruments in
the form of foreign exchange forward or options contracts with major international Ñnancial institutions.
These forward and option contracts are designed to hedge anticipated foreign currency transactions,
primarily intercompany sale and purchase transactions, for periods consistent with commitments. Realized
and unrealized gains and losses on these contracts that qualify as hedges are temporarily recorded in other
comprehensive income, then recognized in earnings when the hedged item aÅects net earnings. The
notional amounts of outstanding foreign exchange forward and option contracts, principally Japanese Yen
and the Euro, entered into with third parties, at December 31, 2001 and 2000, were $82 million and
$39 million, respectively. For all contracts outstanding at December 31, 2001: the Company has rights to
purchase U.S. Dollars and sell Japanese Yen; contract maturity dates range from January 2002 to
December 2002; and the weighted average contract rate is Yen 117.
The Company maintains written policies and procedures governing its risk management activities. The
Company's policy requires that critical terms of hedging instruments are the same as hedged forecasted
transactions. On this basis, with respect to cash Öow hedges, changes in cash Öows attributable to hedged
transactions are generally expected to be completely oÅset by changes in the fair value of hedge
instruments. As part of its risk management program, the Company furthermore performs sensitivity
analyses to assess potential changes in revenue, operating results, cash Öows and Ñnancial position relating
to hypothetical movements in currency exchange rates. A sensitivity analysis of changes in the fair value of
foreign exchange forward contracts outstanding at December 31, 2001, indicated that, if the U.S. Dollar
uniformly changed in value by 10 percent relative to the Japanese Yen, the fair value of those contracts
would increase or decrease earnings before income taxes, depending on the direction of the change, by
approximately $8.2 million. Any change in the fair value of foreign exchange forward contracts as a result
22
of a Öuctuation in a currency exchange rate is expected to be largely oÅset by a change in the value of the
hedged transaction. Consequently, foreign exchange contracts would not subject us to material risk due to
exchange rate movements because contract gains and losses would oÅset gains and losses on the assets,
liabilities, and transactions being hedged.
The Company had exposures to net foreign currency denominated assets and liabilities of
approximately $87 million and $49 million at December 31, 2001 and 2000, respectively, primarily in the
Japanese Yen and the Euro.
Commodity Price Risk
The Company purchases raw material commodities such as cobalt chrome, titanium, medical grade
polymer and sterile packaging. The Company enters into 12 to 24 month supply contracts on these
commodities to alleviate the impact of market Öuctuation in prices. As part of the Company's risk
management program, sensitivity analyses related to potential commodity price changes are performed. A
10 percent price change across all these commodities would not have a material impact on the Company's
consolidated Ñnancial position, results of operations or cash Öows.
Interest Rate Risk
In the normal course of business, the Company is exposed to market risk from changes in interest
rates that could impact its results of operations and Ñnancial condition. The Company manages its
exposure to interest rate risks through its regular operations and Ñnancing activities.
Presently, the Company invests its cash and cash equivalents in money market and other interest
bearing accounts. The primary investment objective is to ensure capital preservation of its invested
principal funds by limiting default and market risk. Currently, the Company does not use derivative
Ñnancial instruments in its investment portfolio.
The Company is subject to movements in interest rate risk on the committed Credit Facility and its
uncommitted credit facilities. All of its debt outstanding is Öoating. The Company currently does not
hedge its interest rate exposure. If interest rates were to increase 10 percent (or 35 basis points), assuming
the amount outstanding remains constant, the result would be an annual increase of interest expense of
approximately $1.3 million. However, due to the uncertainty of the actions that would be taken and their
possible eÅects, this analysis assumes no such action, nor management actions to mitigate interest rate
changes. Further, this analysis does not consider the eÅect of the change in the level of overall economic
activity that could exist in such an environment. Presently, the Company intends to utilize cash Öow to
reduce outstanding borrowings.
Credit Risk
A substantial portion of the Company's trade receivables is due from hospitals and other healthcare
providers. The Company generally does not receive collateral for these receivables. Although the
concentration of these receivables with customers in a similar industry poses a risk of non-collection, the
Company believes this risk is mitigated somewhat by the large number and geographic dispersion of these
customers and by frequent monitoring of the creditworthiness of the customers to whom credit is granted
in the normal course of business.
Exposure to credit risk is controlled through credit approvals, credit limits and monitoring procedures,
and the Company believes that reserves for losses are adequate. There is no signiÑcant net exposure due to
any individual customer or other major concentration of credit risk.
23
Item 8. Financial Statements and Supplementary Data.
Zimmer Holdings, Inc.
Index to Consolidated Financial Statements
Financial Statements:
Report of ManagementÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Report of Independent Accountants ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statements of Earnings for the Years Ended December 31, 2001, 2000 and 1999 ÏÏ
Consolidated Balance Sheets as of December 31, 2001 and 2000ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2001, 2000
and 1999ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000
and 1999ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Notes to Consolidated Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Page
25
26
27
28
29
30
31
24
REPORT OF MANAGEMENT
To the Stockholders of
Zimmer Holdings, Inc.:
Management is responsible for the integrity of the Ñnancial information presented in this Form 10-K.
The consolidated Ñnancial statements have been prepared in accordance with generally accepted
accounting principles. Where necessary, they reÖect estimates based on management's judgment.
Management relies upon established accounting procedures and related systems of internal control for
meeting its responsibilities to maintain reliable Ñnancial records. These systems are designed to provide
reasonable assurance that assets are safeguarded and that transactions are properly recorded and executed
in accordance with management's intentions. Auditors periodically review the accounting and control
systems, and these systems are revised if and when weaknesses or deÑciencies are found.
The Audit Committee of the Board of Directors, composed solely of directors from outside the
Company, meets regularly with management and its independent accountants to discuss audit scope and
results, internal control evaluations, and other accounting, reporting and Ñnancial matters. The independent
accountants have access to the Audit Committee without management's presence.
J. RAYMOND ELLIOTT
Chairman, President and Chief Executive OÇcer
Zimmer Holdings, Inc.
SAM R. LENO
Senior Vice President and Chief Financial OÇcer
Zimmer Holdings, Inc.
25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
Zimmer Holdings, Inc.:
In our opinion, the consolidated Ñnancial statements listed in the accompanying index present fairly,
in all material respects, the Ñnancial position of Zimmer Holdings, Inc. and its subsidiaries at
December 31, 2001 and 2000, and the results of their operations and their cash Öows for each of the three
years in the period ended December 31, 2001 in conformity with accounting principles generally accepted
in the United States of America. These Ñnancial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these Ñnancial statements based on our audits.
We conducted our audits of these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the Ñnancial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the Ñnancial statements,
assessing the accounting principles used and signiÑcant estimates made by management, and evaluating the
overall Ñnancial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
PRICEWATERHOUSECOOPERS LLP
Indianapolis, Indiana
January 24, 2002
26
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in millions, except per share data)
For the Years Ended December 31,
1999
2000
2001
Net Sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cost of products sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,178.6
325.9
$1,040.6
290.9
$938.9
269.3
Gross ProÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Research and development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Selling, general and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating ProÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Earnings before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
852.7
71.6
532.8
604.4
248.3
7.4
240.9
91.1
749.7
669.6
52.0
429.7
481.7
268.0
Ó
268.0
92.0
45.2
393.5
438.7
230.9
Ó
230.9
81.0
Net Earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 149.8
$ 176.0
$149.9
Earnings Per Common Share
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
0.77
0.77
$
$
0.91
0.91
$ 0.77
$ 0.77
Weighted Average Common Shares Outstanding
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
193.7
194.3
193.6
193.6
193.6
193.6
The accompanying notes are an integral part of these consolidated Ñnancial statements.
27
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
ASSETS
Current Assets:
Cash and equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts receivables, less allowance for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Inventories, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Prepaid expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Current Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Property, Plant and Equipment, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred Income Taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31,
2001
2000
$ 18.4
181.7
200.0
59.3
49.2
508.6
148.2
66.8
21.4
$
Ó
188.7
152.3
41.4
37.0
419.4
118.5
40.0
19.5
Total Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$745.0
$597.4
Current Liabilities:
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Current Liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Due to Former Parent ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other Long-term Liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term Debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 67.4
4.3
151.4
150.0
373.1
Ó
79.3
213.9
Total Liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
666.3
Stockholders' Equity:
Common stock, $.01 par value, one billion shares authorized,
193.9 million issued and outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated other comprehensive incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net investment by former parent ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Stockholders' Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1.9
4.4
55.6
16.8
Ó
78.7
$ 50.1
10.5
126.3
Ó
186.9
144.0
5.5
Ó
336.4
Ó
Ó
Ó
7.0
254.0
261.0
Total Liabilities and Stockholders' Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$745.0
$597.4
The accompanying notes are an integral part of these consolidated Ñnancial statements.
28
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in millions)
Common Shares
Number
Amount
Paid-in
Capital
Retained
Earnings
$ Ó
$ Ó
$
Accumulated
Other
Comprehensive
Income
Net
Investment
by Former
Parent
Total
Stockholders'
Equity
$12.3
$372.0
$ 384.3
Balance January 1, 1999 ÏÏÏÏÏÏÏÏÏÏÏÏ
Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign currency translationÏÏÏÏÏÏÏÏÏÏ
Comprehensive incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash transferred to former parent
Balance December 31, 1999 ÏÏÏÏÏÏÏÏÏ
Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign currency translationÏÏÏÏÏÏÏÏÏÏ
Comprehensive incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash transferred to former parent
Balance December 31, 2000 ÏÏÏÏÏÏÏÏÏ
Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign currency translationÏÏÏÏÏÏÏÏÏÏ
Unrealized foreign currency hedge
gains, net of taxÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Comprehensive incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Net cash transferred to former parent
Dividend to former parent ÏÏÏÏÏÏÏÏÏÏÏ
Issuance of common stock ÏÏÏÏÏÏÏÏÏÏÏ
ReclassiÑcation of remaining net
investment of former parentÏÏÏÏÏÏÏÏ
Ó
Ó
193.6
Ó
Exercise of stock options and issuance
of restricted stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
0.3
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
1.9
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
69.7
Ó
Ó
Ó
Ó
Ó
Ó
(14.1)
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
(5.0)
Ó
Ó
7.3
Ó
(0.3)
Ó
Ó
7.0
Ó
2.6
7.2
Ó
Ó
Ó
Ó
Ó
Ó
149.9
Ó
Ó
149.9
(5.0)
144.9
(137.9)
(137.9)
384.0
176.0
Ó
Ó
391.3
176.0
(0.3)
175.7
(306.0)
(306.0)
254.0
80.1
Ó
Ó
Ó
(56.3)
(290.0)
(1.9)
14.1
Ó
Ó
261.0
149.8
2.6
7.2
159.6
(56.3)
(290.0)
Ó
Ó
4.4
$
78.7
Balance December 31, 2001 ÏÏÏÏÏÏÏÏÏ
193.9
$1.9
$4.4
$ 55.6
$16.8
$
4.4
Ó
The accompanying notes are an integral part of these consolidated Ñnancial statements.
29
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Cash Öows provided by (used in) operating activities:
Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustments to reconcile net earnings to net cash provided by operating
activities:
DepreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts payable and accrued liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets and liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
For the Years Ended
December 31,
2000
1999
2001
$ 149.8
$ 176.0
$ 149.9
23.4
1.1
2.6
(50.2)
41.9
3.2
23.1
7.8
7.8
(2.1)
14.5
5.3
22.0
0.5
(14.1)
1.6
24.5
(4.3)
180.1
Net cash provided by operating activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
171.8
232.4
Cash Öows used in investing activities:
Additions to property, plant and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash used in investing activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(54.7)
(54.7)
(29.0)
(29.0)
(33.2)
(33.2)
Cash Öows provided by (used in) Ñnancing activities:
Proceeds from borrowings, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividend paid to former parent ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net increase (decrease) in due to former parent ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net transactions with former parent ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from exercise of stock options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
366.3
(290.0)
(144.0)
(32.8)
1.4
Ó
Ó
102.6
(306.0)
Ó
Ó
Ó
(9.0)
(137.9)
Ó
Net cash used in Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(99.1)
(203.4)
(146.9)
EÅect of exchange rates on cash and equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Increase in cash and equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and equivalents, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
0.4
18.4
Ó
Cash and equivalents, end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
18.4
$
Ó
Ó
Ó
Ó
$
Ó
Ó
Ó
Ó
The accompanying notes are an integral part of these consolidated Ñnancial statements.
30
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business
Zimmer Holdings, Inc. and its subsidiaries (individually and collectively the ""Company'') design,
develop, manufacture and market orthopaedic reconstructive implants and fracture management products.
Orthopaedic reconstructive implants restore joint function lost due to disease or trauma in joints such as
knees, hips, shoulders and elbows, while fracture management products are devices used primarily to
reattach or stabilize damaged bone and tissue to support the body's natural healing process. The Company
also manufactures and markets other products relating to orthopaedic and general surgery. The Company
has operations in 20 countries and markets its products in 70 countries. The Company operates in a single
industry but has three reportable geographic segments.
2. SigniÑcant Accounting Policies
The following is a summary of the accounting policies adopted by the Company which have a
signiÑcant eÅect on the consolidated Ñnancial statements.
Basis of Presentation Ì The consolidated Ñnancial statements include the accounts of Zimmer
Holdings, Inc. and its wholly-owned subsidiaries after elimination of all signiÑcant intercompany accounts
and transactions. The consolidated Ñnancial statements represent the Company's operations as a public
company commencing on August 6, 2001, combined with the operations of Zimmer as a division of its
former parent prior to becoming a public company. For periods prior to August 6, 2001, intercompany
accounts with its former parent, other than speciÑc outstanding obligations, were combined with invested
capital and reported in the consolidated Ñnancial statements as net investment by former parent. At the
distribution date the Company recognized certain liabilities and obligations for pension, postretirement,
long-term disability and U.S. sales agent beneÑts. Recognition of these liabilities, obligations and other
adjustments are reÖected in the remaining net investment in the Company by its former parent of
$14.1 million as of the distribution date. During 2000 and 1999, the Company consolidated and made
other changes in manufacturing, terminated a license and distribution agreement and reduced the size of
the organization in areas aÅected by these changes. As a result, the Company recorded pretax charges of
$17 million ($3 million in cost of products sold and $14 million in selling, general and administrative
expenses) and $21 million ($6 million in cost of products sold and $15 million in selling, general and
administrative expenses) for the years ended December 31, 2000 and 1999, respectively. These actions
were completed during 2001.
Use of Estimates Ì The consolidated Ñnancial statements are prepared in conformity with generally
accepted accounting principles and, accordingly, include amounts that are based on management's best
estimates and judgments. Actual results could diÅer from those estimates.
Foreign Currency Translation Ì The Ñnancial statements of the Company's foreign subsidiaries are
translated into U.S. dollars using period-end exchange rates for assets and liabilities and average exchange
rates for operating results. Unrealized translation gains and losses are included in accumulated other
comprehensive income (loss) in stockholders' equity. Foreign currency transaction gains and losses
included in net earnings are not material.
Revenue Recognition Ì A signiÑcant portion of the Company's revenue is recognized for Ñeld based
product upon notiÑcation that the product has been implanted or used. For all other transactions, the
Company recognizes revenue when title is passed to customers. Estimated returns and allowances are
recorded as a reduction of sales when the revenue is recognized. Shipping and handling fees billed to
customers are recorded as revenue, while related costs are included in selling, general and administrative
expenses. The reserves for doubtful accounts were $6.5 million and $4.9 million as of December 31, 2001
and 2000, respectively.
31
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Cash and Equivalents Ì The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. The Company currently does not have any investments
which would not be considered cash equivalents. Prior to August 6, 2001, cash and Ñnancing activities of
the Company's operations were managed by the Company's former parent. Interest expense on Ñnancing
from the Company's former parent included in net earnings is not material. Cash and equivalents are
carried at cost, which approximates fair value.
Inventories Ì Inventories, net of allowances for obsolete and slow-moving goods, are stated at the
lower of cost or market, with cost determined on the basis of average costing.
Prepaid Expenses Ì Prepaid expenses include the cost of instruments in stock for surgical procedures
provided to customers by the Company. These costs are recognized in selling, general and administrative
expense in the year in which the instruments are placed into service.
Property, Plant and Equipment Ì Property, plant and equipment is carried at cost less accumulated
depreciation. Depreciation is computed based on the estimated useful lives of 10 to 40 years for buildings
and improvements and 3 to 8 years for machinery and equipment using the straight-line method.
Maintenance and repairs are expensed as incurred. Any impairments would be recognized based on an
assessment of future operations (including cash Öows) to ensure that assets are appropriately valued.
Income Taxes Ì The Company accounts for income taxes using the liability method. Under this
method, deferred tax assets and liabilities are determined based on diÅerences between Ñnancial reporting
and tax bases of assets and liabilities and are measured using the enacted tax rates in eÅect for the years
in which the diÅerences are expected to reverse. Deferred tax expense represents the change in net
deferred tax assets and liabilities during the year. No provision has been made for U.S. and state income
taxes or foreign withholding taxes on the undistributed earnings of foreign subsidiaries because it is
expected that such earnings will be reinvested overseas indeÑnitely.
Derivative Financial Instruments Ì The Company maintains written policies and procedures that
permit, under appropriate circumstances and subject to proper authorization, the use of derivative Ñnancial
instruments solely for hedging purposes. The use of derivative Ñnancial instruments for trading or
speculative purposes is prohibited. The Company utilizes foreign exchange forward and option contracts to
oÅset the eÅect of exchange rate Öuctuations on anticipated foreign currency transactions, primarily
intercompany sales and purchases expected to occur within the next twelve to twenty-four months.
Derivative instruments that qualify as fair value, cash Öow or net investment hedges are designated as such
from inception. Formal documentation is maintained of the Company's objectives, the nature of the risk
being hedged, identiÑcation of the instrument, the hedged transaction, the hedging relationship and how
eÅectiveness of the hedging instrument will be assessed. The Company's policy requires that critical terms
of a hedging instrument are essentially the same as a hedged forecasted transaction. On this basis, with
respect to a cash Öow hedge, changes in cash Öows attributable to the hedged transaction are generally
expected to be completely oÅset by changes in the fair value of hedge instruments. The Company,
therefore, performs quarterly assessments of hedge eÅectiveness by verifying and documenting that critical
terms of the hedge instrument and forecasted transaction have not changed. The Company also assesses on
a quarterly basis whether there have been adverse developments regarding the risk of a counterparty
default. For derivatives which qualify as hedges of future cash Öows, the eÅective portion of changes in fair
value is temporarily recorded in other comprehensive income and then recognized in earnings when the
hedged item aÅects net earnings. The ineÅective portion of a derivative's change in fair value, if any, is
reported in net earnings.
Stock Compensation Ì The Company applies Accounting Principles Board (""APB'') Opinion No. 25,
""Accounting for Stock Issued to Employees,'' and related interpretations in accounting for its employee
stock options. Accordingly, no compensation expense has been recognized for Ñxed stock-based
32
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
compensation plans. The Company has made all of the required pro forma disclosures for each of the
three years ended December 31, 2001, under the measurement requirements of Statement of Financial
Accounting Standards (""SFAS'') No. 123, ""Accounting for Stock-Based Compensation.''
Comprehensive Income Ì Other comprehensive income refers to revenues, expenses, gains and losses
that under generally accepted accounting principles are included in comprehensive income but are
excluded from net earnings as these amounts are recorded directly as an adjustment to stockholders'
equity. The Company's other comprehensive income is comprised of unrealized foreign currency hedge
gains, net of tax, and foreign currency translation adjustments.
The components of accumulated other comprehensive income at December 31, 2001 and 2000, are as
follows (in millions):
Net unrealized foreign currency hedge gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cumulative translation adjustmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2001
$ 7.2
9.6
$16.8
2000
$ Ó
7.0
$7.0
Accounting Pronouncements Ì EÅective January 1, 2001, the Company adopted the provisions of
SFAS No. 133, ""Accounting for Derivative Instruments and Hedging Activities,'' without any material
impact on its Ñnancial position, results of operations or cash Öows.
In July 2001 the Financial Accounting Standards Board (""FASB'') issued SFAS No. 141, ""Business
Combinations,'' and No. 142, ""Goodwill and Other Intangible Assets.'' SFAS No. 141 requires that
companies use the purchase method of accounting for all business combinations initiated after June 30,
2001, and addresses the initial recognition of goodwill and other intangible assets acquired in a business
combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets
acquired outside a business combination, whether acquired individually or with a group of other assets.
SFAS No. 142 also addresses the recognition and measurement of goodwill and other intangible assets
subsequent to their acquisition. The Company has completed no business combinations since the eÅective
date of SFAS No. 141, but will comply with the Standard for future acquisitions. As the Company
currently has no goodwill and only minimal other intangible assets, adoption of SFAS No. 142 is not
expected to have a material eÅect on the Company's consolidated Ñnancial statements.
In August 2001 the FASB issued SFAS No. 143, ""Accounting for Asset Retirement Obligations.''
SFAS No. 143 addresses Ñnancial accounting and reporting for obligations associated with the retirement
of tangible long-lived assets and the associated asset retirement costs and applies to legal obligations
associated with the retirement of long-lived assets that result from the acquisition, construction,
development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees.
SFAS No. 143 is eÅective for Ñnancial statements issued for Ñscal years beginning after June 15, 2002.
This pronouncement is not expected to have a material eÅect on the Company's consolidated Ñnancial
statements.
In October 2001 the FASB issued SFAS No. 144, ""Accounting for the Impairment or Disposal of
Long Lived Assets.'' SFAS No. 144 modiÑes and expands the Ñnancial accounting and reporting for the
impairment or disposal of long-lived assets other than goodwill, which is speciÑcally addressed by SFAS
No. 142. SFAS No. 144 maintains the requirement that an impairment loss be recognized for a long-lived
asset to be held and used if its carrying value is not recoverable from its undiscounted cash Öows, with the
recognized impairment being the diÅerence between the carrying amount and fair value of the asset. With
respect to long-lived assets to be disposed of other than by sale, SFAS No. 144 requires that the asset be
considered held and used until it is actually disposed of. With respect to long-lived assets to be disposed of
33
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
by sale, the statement requires that such assets be carried at the lower of their carrying amount or fair
value less cost to sell. SFAS No. 144 will be eÅective for the Company's Ñrst quarter of 2002 and is not
expected to have a material eÅect on the Company's consolidated Ñnancial statements.
3. Separation from Bristol-Myers Squibb Company
The Company was incorporated in Delaware as a wholly-owned subsidiary of Bristol-Myers Squibb,
its former parent, on January 12, 2001. On July 25, 2001, Bristol-Myers Squibb transferred the assets and
liabilities of its orthopaedic business to the Company. On August 6, 2001, Bristol-Myers Squibb
distributed all of the shares of Company common stock to Bristol-Myers Squibb stockholders in the form
of a dividend of one share of Company common stock and the associated preferred stock purchase right,
for every 10 shares of Bristol-Myers Squibb common stock. The distribution qualiÑed as a tax-free
distribution made under Section 355 and 368(a)(1)(1) of the Internal Revenue Code of 1986 as more
fully described in Note 12. On August 6, 2001, the Company assumed all obligations under a $600 million
credit facility established by the Company and its former parent (the ""Credit Facility'') with then
outstanding borrowings of $290 million. With additional borrowings under the Credit Facility, the
Company repaid amounts due to its former parent of approximately $90 million, and Ñnally, the Company
assumed an additional $22 million of borrowings under the Credit Facility for separation costs.
The Company incurred $70.0 million ($49.9 million net of taxes) in costs, fees and expenses relating
to the separation from its former parent and the related distribution of Company common stock to the
Bristol-Myers Squibb stockholders. These costs, fees and expenses were primarily for retention bonuses;
legal separation matters; professional expenses; and costs of producing, printing, mailing and distributing
the information statement related to the distribution.
4.
Inventories
Inventories at December 31, 2001 and 2000, consist of the following (in millions):
2001
2000
Finished goods ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Raw materials and work in progress ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$158.4
41.6
$116.6
35.7
Inventories, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$200.0
$152.3
Reserves for obsolete and slow-moving inventory at December 31, 2001 and 2000 were $43.3 million
and $41.3 million, respectively. Provisions charged to expense were $11.9 million, $12.1 million and
$5.2 million for the years ended December 31, 2001, 2000 and 1999, respectively. Amounts written oÅ
against the reserve were $8.5 million, $8.5 million and $2.5 million for the years ended December 31,
2001, 2000 and 1999, respectively.
34
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
5. Property, Plant and Equipment
Property, plant and equipment at December 31, 2001 and 2000, was as follows (in millions):
2001
2000
Land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Building and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Construction in progress ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
8.0
320.3
27.8
$
8.3
301.0
6.5
Accumulated depreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
356.1
(207.9)
315.8
(197.3)
Property, plant and equipment, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 148.2
$ 118.5
6. Other Current Liabilities
Other current liabilities at December 31, 2001 and 2000, consist of the following (in millions):
2001
2000
Contractual obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Salaries, wages and beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 49.5
39.2
62.7
$ 44.9
15.6
65.8
Total other current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$151.4
$126.3
7. Debt
Committed Credit Facility
On July 31, 2001, the Company and certain subsidiaries, together with its former parent, entered into
a $600 million three-year, multi-currency, revolving senior unsecured credit agreement (the ""Credit
Facility''). Borrowings under the Credit Facility may bear interest at the appropriate LIBOR rate,
depending upon the currency denomination of the borrowing, or an alternate base rate plus, in each case,
an applicable margin determined by reference to the Company's senior unsecured long-term debt rating
and the amounts drawn under the Credit Facility. On the distribution date, the Company's former parent
was relieved of all obligations under the Credit Facility. The Credit Facility matures on July 31, 2004.
As of December 31, 2001, the Company had $363.9 million in outstanding borrowings, including
$358.2 million under the Credit Facility. The Credit Facility borrowings were comprised of $284 million in
U.S. dollar based borrowings with a weighted average interest rate of 4.35 percent and the equivalent of
$74.2 million in Japanese Yen based borrowings with a weighted average interest rate of 1.17 percent as of
December 31, 2001.
The Credit Facility is to be used for general corporate purposes. The Credit Facility also allows for
the issuance of letters of credit.
The Credit Facility contains customary aÇrmative and negative covenants and events of default for an
unsecured Ñnancing arrangement, none of which are considered restrictive to the operation of the business.
Financial covenants include a maximum leverage ratio and a minimum interest coverage ratio. The
Company was in compliance with all covenants under the Credit Facility as of December 31, 2001. Also,
the Credit Facility would restrict the payment of dividends and the making of investments if the Company
does not have an investment grade rating, as deÑned. Commitments under the Credit Facility are subject
to certain fees, including a facility fee.
35
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Uncommitted Credit Facilities
On July 17, 2001, the Company entered into a $26 million uncommitted unsecured revolving line of
credit. The former parent was a guarantor under this credit line until distribution date, at which time the
Company's former parent was relieved of all obligations under this uncommitted facility. The purpose of
this credit line is to support the working capital needs, letters of credit and overdraft needs for the
Company's subsidiaries. The pricing is similar to the Credit Facility. In the event instruments available
under the Credit Facility are unavailable in the domiciled jurisdiction of the subsidiary, then relevant
alternative local market pricing will be made available. The uncommitted credit agreement contains
customary aÇrmative and negative covenants and events of default for an unsecured uncommitted
Ñnancing arrangement, none of which are considered restrictive to the operation of the business. In
addition, the uncommitted credit agreement provides for unconditional and irrevocable guarantees by the
Company. In the event the Company's long-term debt ratings by both Standard & Poor's Ratings Services
and Moody's Investor's Service, Inc., fall below investment grade, then the Company may be required to
repay all outstanding and contingent obligations. The uncommitted credit line matures on July 31, 2002.
Outstanding borrowings under this uncommitted line of credit as of December 31, 2001 was $5.7 million
with a weighted average interest rate of 4.98%. There was an outstanding letter of credit for $1.9 million.
Total utilization of this uncommitted line of credit as of December 31, 2001 was $7.6 million.
On October 24, 2001, the Company entered into a separate $10 million uncommitted revolving
unsecured line of credit. The purpose of this credit line is to support short term working capital needs of
the Company. The pricing is similar to the Credit Facility. The agreement for this uncommitted line of
credit contains customary covenants, none of which are considered restrictive to the operation of the
business. This uncommitted line of credit matures on July 31, 2002. There were no borrowings under this
uncommitted line of credit as of December 31, 2001.
The Company was in compliance with all covenants under both uncommitted credit facilities as of
December 31, 2001. The Company expects to repay its short-term debt from operating cash Öow.
Outstanding debt as of December 31, 2001 is as follows (in millions):
Credit Facility ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other Bank Borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$358.2
5.7
Total Debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less: Current Portion ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
363.9
150.0
Total Long-Term DebtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$213.9
The Company paid $4.6 million in interest charges during 2001.
Fair Value
The carrying value of the Company's borrowings approximate fair value due to their short-term
maturities and variable interest rates.
8. Derivative Financial Instruments
EÅective January 1, 2001, the Company adopted SFAS No. 133, ""Accounting for Derivative
Instruments and Hedging Activities,'' as amended, which requires that all derivative instruments be
recognized as either assets or liabilities on the balance sheet and measured at fair value. The transition
impact of this accounting requirement did not have a material eÅect on the Company's consolidated
Ñnancial statements.
36
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
The Company is exposed to market risk due to changes in currency exchange rates. As a result, the
Company utilizes foreign exchange forward and option contracts to oÅset the eÅect of exchange rate
Öuctuations on anticipated foreign currency transactions, primarily intercompany sales and purchases
expected to occur within the next twelve to twenty-four months. The Company does not hold Ñnancial
instruments for trading or speculative purposes. For derivatives which qualify as hedges of future cash
Öows, the eÅective portion of changes in fair value is temporarily recorded in other comprehensive income,
then recognized in earnings when the hedged item aÅects earnings. The ineÅective portion of a derivative's
change in fair value, if any, is reported in earnings. The net amount recognized in earnings during the year
ended December 31, 2001, due to ineÅectiveness and amounts excluded from the assessment of hedge
eÅectiveness, was not signiÑcant.
The notional amounts of outstanding foreign exchange forward and option contracts, principally
Japanese Yen and the Euro, entered into with third parties, at December 31, 2001 and 2000, were
$82 million and $39 million, respectively. The fair value of derivative instruments recorded in prepaid
expenses at December 31, 2001, was $8.1 million, or $5.2 million net of taxes, which is deferred in other
comprehensive income and is expected to be reclassiÑed to earnings over the next Ñfteen months. The fair
value of derivative instruments reclassiÑed from other comprehensive income and recognized in earnings in
2001 was $7.9 million, or $5.1 million, net of taxes. The carrying value of all Ñnancial instruments
approximated their fair values at December 31, 2001 and 2000.
9. Capital Stock and Earnings Per Share
As discussed in Note 2, all of the shares of Company common stock were distributed on August 6,
2001 by the former parent to its stockholders in the form of a dividend of one share of Company common
stock, and the associated preferred stock purchase right, for every ten shares of common stock of the
former parent. In July 2001 the board of directors of the Company adopted a rights agreement intended to
have anti-takeover eÅects. Under this agreement one right attaches to each share of Company common
stock. The rights will not become exercisable until the earlier of: a) the Company learns that a person or
group acquired, or obtained the right to acquire, beneÑcial ownership of securities representing more than
15 percent of the shares of Company common stock then outstanding, or b) such date, if any, as may be
designated by the board of directors following the commencement of, or Ñrst public disclosure of an
intention to commence, a tender oÅer or exchange oÅer for shares of Company common stock then
outstanding that could result in a person or group acquiring, or obtaining the right to acquire, beneÑcial
ownership of securities representing more than 15 percent of Company common stock then outstanding.
The board of directors authorized for issuance 2 million shares of a series of preferred stock of the
Company designated as Series A Participating Cumulative Preferred Stock (""Series A Preferred Stock'')
in connection with the adoption of the rights agreement. Shares of the Series A Preferred Stock are only
issuable upon the exercise of the rights. No shares of the Series A Preferred Stock have been issued as of
December 31, 2001.
The board of directors may redeem all of the rights at a redemption price of $0.01 per right. If not
previously exercised or redeemed, the rights will expire 10 years from the date that the rights agreement
commenced.
The numerator for both basic and diluted earnings per share is net earnings available to common
stockholders. The denominator for basic earnings per share is the weighted average number of common
shares outstanding during the period. The denominator for diluted earnings per share is weighted average
37
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
shares outstanding adjusted for the eÅect of dilutive stock options. The following is a reconciliation of
weighted average shares for the basic and diluted share computations (in millions):
2001
2000
1999
Weighted average shares outstanding for basic net earnings per shareÏÏÏ
EÅect of dilutive stock options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
193.7
0.6
193.6
Ì
193.6
Ì
Weighted average shares outstanding for diluted net earnings per share
194.3
193.6
193.6
For periods prior to the distribution on August 6, 2001, basic and diluted shares outstanding are
assumed to be equivalent to the number of shares of Company common stock outstanding immediately
following the distribution.
10. Stock Option and Compensation Plans
As of December 31, 2001, the Company had three stock option plans in eÅect, the 2001 Stock
Incentive Plan, the TeamShare Stock Option Plan and the Stock Plan for Non-Employee Directors. The
Company has reserved 34.3 million shares of common stock for issuance under these plans, 3 million of
which are under the TeamShare Stock Option Plan and the Stock Plan for Non-Employee Directors.
Options may be granted under these plans at a price of not less than the fair market value of a share of
common stock on the date of grant. The 2001 Stock Incentive Plan provides for the grant of nonqualiÑed
stock options and incentive stock options, long-term performance awards, restricted stock awards and
deferred stock units. Options granted under the 2001 Stock Incentive Plan may include stock appreciation
rights. The TeamShare Stock Option Plan provides for the grant of non-qualiÑed stock option and stock
appreciation rights while the Stock Plan for Non-Employee Directors provides for awards of stock options,
restricted stock and restricted stock units to non-employee directors.
Options granted under these plans generally vest over three to Ñve years, although in no event in less
than one year, and expire ten years from the date of grant. Certain options have price thresholds, which
aÅect exercisability.
Under the 2001 Stock Incentive Plan, the total number of awards which may be granted in a given
year pursuant to options and other awards under the Plan may not exceed 1.9 percent of the outstanding
shares of the Company's stock on the eÅective date of the Plan for 2001 or January 1 of each subsequent
year, plus the number of shares from the prior year that were available for grant but not granted, that were
granted but subsequently terminated, expired, cancelled or surrendered without being exercised or tendered
in the prior year to pay for options or satisfy tax withholding requirements. No participant may receive
options or awards which in the aggregate exceed 2,000,000 shares of stock over the life of the Plan.
At the distribution date, certain options to purchase Bristol-Myers Squibb stock that were held by
Company employees were converted to Company stock options under either the 2001 Stock Incentive Plan
or the TeamShare Stock Option Plan. The options were converted at quantities and exercise prices that
maintained the intrinsic value of the option as it existed immediately prior to the distribution. The vesting
dates and exercise periods of the options were not aÅected by the conversion.
38
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
A summary of the status of all options granted to employees and non-employee directors at
December 31, 2001, and changes during the period from the distribution date is presented below:
Conversion of Bristol-Myers Squibb options on distribution date ÏÏÏÏÏÏÏÏÏÏ
Options granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Options exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Options cancelled ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Options
8,699,929
2,238,542
(128,645)
(82,896)
Outstanding at end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
10,726,930
Exercisable, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3,954,347
Weighted Average
Exercise Price
$23.93
28.67
12.80
29.88
25.01
$19.15
The following table summarizes information about stock options outstanding at December 31, 2001:
Range of
Exercise Prices
$6.25 Ó $17.00
$17.01 Ó $27.50
$27.51 Ó $37.50
Outstanding
Weighted
Average
Remaining
Contractual Life
3.88 years
7.51 years
8.54 years
Weighted
Average
Exercise Price
$11.24
24.75
30.99
Exercisable
Weighted
Average
Exercise Price
$11.24
24.30
31.74
Options
1,934,276
1,359,083
660,988
3,954,347
Options
1,937,534
4,148,631
4,640,765
10,726,930
The Company applies the provisions of APB Opinion No. 25, ""Accounting for Stock Issued to
Employees,'' in accounting for stock-based compensation; therefore, no compensation expense has been
recognized for its Ñxed stock option plans as options are granted at fair market value. The Company has
adopted the disclosure requirements for SFAS No. 123, ""Accounting for Stock-Based Compensation.''
Accordingly, if compensation expense for the Company's stock-based compensation plans had been
determined based upon the fair value of awards granted, the Company's net income would have been
reduced by approximately $13 million, $8 million and $7 million, or $0.07, $0.04 and $0.04 per common
share, basic and diluted, resulting in net income of $137 million, $168 million and $143 million for the
years ended December 31, 2001, 2000 and 1999, respectively. The weighted average fair value for options
granted during 2001, 2000 and 1999 was $14.10 per common share, $16.34 per common share and $17.78
per common share. The fair value of each option granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
2001
2000
1999
Dividend Yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Volatility ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Risk-free interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Assumed forfeiture rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected life (years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
0.0% 1.5% 2.4%
41.7% 24.5% 21.8%
4.8% 6.3% 5.5%
3.0% 3.0% 3.0%
7
7
7
The above assumptions for 2001 pertain to the Company while prior period Ñgures are associated with
the Company's former parent.
39
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Restricted Stock
At the distribution, certain members of management had restricted stock grants for Bristol-Myers
Squibb stock which were converted into Company restricted stock grants at quantities and prices that
maintained the intrinsic value that existed immediately prior to the distribution. Total converted grants
represented 106,560 shares at the distribution date. Subsequent to the distribution, restrictions on
20,361 shares were eliminated. In addition, restricted stock grants were made for 33,681 shares. The
awards are being expensed over the vesting period of Ñve years from date of grant and the expense
recorded by the Company for all periods presented was not signiÑcant.
11. Retirement and Postretirement BeneÑt Plans
The Company has deÑned beneÑt pension plans covering substantially all U.S. and Puerto Rico
employees and certain employees outside the U.S. and Puerto Rico. The principal pension plan is the
Zimmer Holdings, Inc. Retirement Plan. Plan beneÑts are primarily based on years of credited service and
the participant's compensation. Foreign pension arrangements, including various retirement and termination
beneÑt plans required by local law or coordinated with government-sponsored plans, are not signiÑcant in
the aggregate.
The Company also provides comprehensive medical and group life insurance beneÑts to substantially
all U.S. and Puerto Rico retirees who elect to participate in the Zimmer Holdings, Inc. comprehensive
medical and group life plans. The medical plan is contributory, and the life insurance plan is non-
contributory. No similar plans exist for employees outside the U.S. and Puerto Rico.
In both the U.S. and jurisdictions outside of the U.S., the Company has adopted employee beneÑt
plans that are comparable to those of its former parent. In general, for purposes of determining eligibility
to participate, eligibility for beneÑts, beneÑt forms and vesting under Company plans, each active employee
is credited with his or her service with the former parent to the extent the corresponding plans of the
former parent gave credit for such service.
In connection with the distribution, the Company and its former parent entered into an Employee
BeneÑts Agreement which allocated responsibilities relating to employee compensation, beneÑt plans and
programs and other related matters. Under the Agreement, as of a speciÑed date, active employees of the
Company ceased to be active participants in beneÑt plans maintained by the former parent and became
eligible to participate in all applicable Company plans.
The Employee BeneÑts Agreement provides that as of the distribution date, the Company assumes,
retains and is liable for all wages, salaries, welfare, incentive compensation and other employee-related
obligations and liabilities for all current and former employees of the Company, except as speciÑcally
provided in the agreement. The former parent retained certain obligations for domestic pension beneÑts for
service rendered through the distribution date. The former parent also retained obligations for medical and
group life insurance beneÑts for all domestic retirees and those employees eligible to retire as of the
distribution date. Substantially all assets funding its domestic pension and postretirement beneÑt plans
were retained by the former parent.
40
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
The components of net pension expense for the Company's U.S. and Puerto Rico deÑned beneÑt
retirement and postretirement beneÑt plans subsequent to the distribution date are as follows (in millions):
Service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net periodic beneÑt cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31, 2001
Pension
Postretirement
$2.3
0.7
$3.0
$0.5
0.5
$1.0
The weighted average actuarial assumptions used in accounting for the Company's U.S. and Puerto
Rico deÑned beneÑt retirement and postretirement beneÑt plans were as follows:
December 31, 2001
Pension
Postretirement
Discount rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Rate of compensation increase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected long-term rate of return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Initial healthcare cost trend rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ N/A
Ultimate healthcare cost trend rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ N/A
First year of ultimate trend rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ N/A
7.25%
3.50%
9.00%
7.25%
N/A
N/A
9.00%
5.00%
2008
Changes in beneÑt obligations and plan assets, from the distribution date to December 31, 2001 for
the Company's U.S. and Puerto Rico pension and postretirement beneÑt plans, were (in millions):
Pension
Postretirement
BeneÑt obligation Ì beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Obligation assumed from former parentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
Ó
22.6
2.3
0.7
(0.1)
$
Ó
17.1
0.5
0.5
Ó
Projected beneÑt obligation Ì end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 25.5
$ 18.1
Plan assets at fair market value Ì beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Assets contributed by former parentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
Ó
2.3
(0.1)
Plan assets at fair market value Ì end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
2.2
$
$
Ó
Ó
Ó
Ó
Funded status ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrecognized prior service costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrecognized actuarial (gain) loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(23.3)
0.2
(2.2)
$(18.1)
(0.1)
2.0
Net amount recognized ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(25.3)
$(16.2)
Accrued beneÑt liability recognized ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(25.3)
$(16.2)
In addition to the U.S. and Puerto Rico plans outlined above, the Company also has pension
arrangements for certain of its foreign operations. The amount recognized relative to such plans was an
asset of $4.5 million at December 31, 2001. Pension expense from such plans was immaterial for all
periods presented.
41
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
The projected beneÑt obligation, accumulated beneÑt obligation and fair value of plan assets for
certain of the Company's pension and postretirement plans with accumulated beneÑt obligations in excess
of plan assets were $43.6 million, $8.8 million and $2.2 million, respectively, as of December 31, 2001.
A one percentage point change in the assumed health care cost trend rates would have no signiÑcant
eÅect on the service and interest cost components of net postretirement beneÑt expense and the
accumulated postretirement beneÑt obligation.
Included in the consolidated statement of earnings are allocations from the Company's former parent
for expenses speciÑcally attributable to the Company's employees' participation in its retirement and
postretirement beneÑt plans for periods prior to the distribution. Amounts included were $6 million,
$10 million and $10 million for the years ended December 31, 2001, 2000 and 1999, respectively.
The Company also sponsors deÑned contribution plans for substantially all of the U.S. and Puerto
Rico employees. The principal deÑned contribution plan is the Zimmer Holdings, Inc. Savings and
Investment Program. The Company's contribution under this plan is based on employee contributions and
the level of company match. The Company recognized $3.0 million of expense for the savings and
investment plan for each of the years ended December 31, 2001, 2000 and 1999.
12.
Income Taxes
The components of earnings before income taxes consist of the following (in millions):
2001
2000
1999
United States operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$200.4
40.5
$211.0
57.0
$207.9
23.0
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$240.9
$268.0
$230.9
The provision for income taxes consists of:
Current:
Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred:
Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 68.8
15.9
28.6
113.3
$ 58.2
10.8
26.0
$ 50.3
9.7
16.0
95.0
76.0
(9.5)
(1.6)
(11.1)
(22.2)
2.7
0.3
(6.0)
(3.0)
11.3
1.7
(8.0)
5.0
$ 91.1
$ 92.0
$ 81.0
For periods prior to the separation, the income tax provision was calculated on a separate return basis
while actual tax payments were made on a combined return basis by the Company's former parent.
Income taxes paid by the Company for the period after the separation were $43.4 million.
42
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
A reconciliation of the U.S. statutory income tax rate to the Company's eÅective tax rate is as
follows:
U.S. statutory income tax rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State taxes, net of federal deductionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign income taxes at rates diÅerent from the U.S. statutory rate,
net of foreign tax credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Tax beneÑt relating to operations in Puerto Rico ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Earnings of Foreign Sales Corporation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-deductible separation costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2001
2000
1999
35.0%
3.9
35.0%
2.7
35.0%
3.2
0.9
(2.6)
(1.4)
1.9
0.1
(1.0)
(1.2)
(1.8)
Ó
0.6
0.1
(1.0)
(2.3)
Ó
0.1
37.8%
34.3%
35.1%
Deferred income taxes reÖect the net tax eÅects of temporary diÅerences between the carrying
amounts of assets and liabilities for Ñnancial reporting purposes and the amounts used for income tax
purposes. The components of deferred income taxes consisted of the following (in millions):
2001
2000
Inventory ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 39.1
30.6
40.1
6.2
$33.0
25.0
8.0
11.0
$116.0
$77.0
Current deferred income taxes at December 31, 2001 and 2000, were $49.2 million and $37.0 million,
respectively. Non-current deferred income taxes at December 31, 2001 and 2000, were $66.8 million and
$40.0 million, respectively.
The Company's former parent received a ruling from the Internal Revenue Service (""IRS''), that the
distribution would qualify as a tax-free transaction. Such a ruling, while generally binding upon the IRS, is
subject to certain factual representations and assumptions. The Company has agreed to certain restrictions
on its future actions to provide further assurances that the distribution will qualify as tax-free. If the
Company fails to abide by such restrictions and, as a result, the distribution fails to qualify as a tax-free
transaction, the Company will be obligated to indemnify its former parent for any resulting tax liability.
Under the Tax Sharing Agreement executed in conjunction with the distribution, the Company's
former parent maintains full control and discretion with regard to any federal, foreign, combined,
consolidated and certain separate state tax Ñlings or tax audit issues for periods through the distribution
date and retains all refunds for such periods. The Company's former parent also agreed to indemnify the
Company against any tax liabilities arising from such Ñlings or audits. The Company retains full control
and discretion with regard to certain state and other tax Ñlings, refunds and liabilities through the
distribution date and for all tax Ñlings and proceedings after the distribution date. The Company and its
former parent anticipate an adjustment of distribution date tax balances based on actual tax Ñlings. If
required, the adjustment will result in an increase or decrease to the remaining net investment by the
Company's former parent as reported in the Consolidated Statement of Stockholders' Equity.
No provision has been made for U.S. federal and state income taxes or foreign taxes that may result
from future remittances of the undistributed earnings of foreign subsidiaries, since it is management's
43
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
practice and intent to reinvest such earnings in the operations of these subsidiaries. If the total
undistributed earnings of foreign subsidiaries were remitted, a signiÑcant amount of the additional tax
would be oÅset by the allowable foreign tax credits.
13. Segment Data
The Company designs, develops, manufactures and markets orthopaedic reconstructive implants,
fracture management products and orthopaedic surgical products which include surgical supplies and
instruments designed to aid in orthopaedic procedures and to accommodate patient rehabilitation needs
post surgery. Operations are managed through three major geographic areas Ì the Americas, which is
comprised principally of the United States and includes other North, Central and South American
markets; Asia PaciÑc, which is comprised primarily of Japan and includes other Asian and PaciÑc markets;
and Europe, which is comprised principally of the major countries of Europe as well as the Middle East
and Africa. This structure is the basis for the Company's reportable segment information discussed below.
Segment performance is evaluated based on sales and segment operating proÑt, exclusive of separation
costs and operating expenses pertaining to global operations and corporate expenses. Included in segment
operating proÑt is a cost of capital charge which is oÅset in global operations. Global operations include
U.S. based research, development engineering, brand management, corporate legal, Ñnance, human
resource functions, and operations and logistics.
Net sales, segment operating proÑt and year-end assets are as follows (in millions):
Net Sales
Operating ProÑt
Year-End Assets
2001
2000
1999
2001
2000
1999
2001
2000
1999
Americas ÏÏÏÏÏÏÏÏÏÏÏ
Asia PaciÑc ÏÏÏÏÏÏÏÏÏ
Europe ÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 790.7
255.2
132.7
$ 655.4
264.5
120.7
$587.9
235.3
115.7
$ 374.3
104.9
20.7
$ 313.4
100.9
18.5
$ 276.0
76.8
23.0
$530.7
141.2
73.1
$346.9
174.5
76.0
$341.3
180.4
83.9
Net sales ÏÏÏÏÏÏÏÏÏÏÏ
$1,178.6
$1,040.6
$938.9
Separation costsÏÏÏÏÏÏ
Global operations and
corporate expensesÏÏ
Operating proÑt ÏÏÏÏÏÏ
Total assets ÏÏÏÏÏÏÏÏÏ
(70.0)
Ì
Ì
(181.6)
(164.8)
(144.9)
$ 248.3
$ 268.0
$ 230.9
$745.0
$597.4
$605.6
Product category (in millions):
2001
2000
1999
Reconstructive
implants ÏÏÏÏÏÏÏÏÏÏ
Fracture managementÏÏ
Orthopaedic surgical
products ÏÏÏÏÏÏÏÏÏÏ
$ 886.5
128.3
$ 764.5
123.4
$679.1
112.8
163.8
152.7
147.0
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,178.6
$1,040.6
$938.9
Depreciation expenses were $23.4 million, $23.1 million and $22.0 million and additions to Ñxed and
other assets were $54.7 million, $29.0 million and $33.2 million for the years ended December 31, 2001,
2000 and 1999, respectively, and related principally to the Company's U.S. and Puerto Rico facilities.
44
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
14. Transactions with Former Parent
Prior to August 6, 2001, the former parent of the Company provided certain services, including
administration of treasury, insurance, payroll, employee compensation and beneÑts, travel and meeting
services, public and investor relations, real estate services, internal audit, corporate aviation and related
services, telecommunications, computing services, corporate income tax and selected legal services.
Management of the Company believes that the methods used to allocate expenses to the Company for
these services were reasonable, although it cannot be assured that all the expenses that would have been
incurred had the Company been a separate, standalone entity have been reÖected in Ñnancial results prior
to separation. These services accounted for a total expense of $17.2 million for the period January 1
through August 6, 2001, and $29.9 million and $28.7 million, respectively, for the years ended
December 31, 2000 and 1999.
The Company and its former parent entered into an Interim Services Agreement pursuant to which
the former parent provided the Company, on an interim, transitional basis, various services, including, but
not limited to, employee beneÑts administration and information technology services. The agreed upon
charges for such services were intended to allow the former parent to recover fully the allocated costs of
providing the services.
The Interim Services Agreement commenced on the distribution date and shall expire no later than
twelve months from the distribution date except for certain information technology services, which expire
December 31, 2002. The agreement may be extended by the parties in writing either in whole or in part.
The Company may terminate the agreement with respect to particular services upon prior written notice.
15. Leases
Future minimum rental commitments under non-cancelable operating leases in eÅect as of
December 31, 2001 were $5.0 million for 2002, $3.9 million for 2003, $2.9 million for 2004, $2.2 million
for 2005, $1.6 million for 2006 and $1.2 million thereafter.
16. Commitments and Contingencies
The Company is subject to product liability and other claims arising in the ordinary course of
business, for which the Company maintains insurance, subject to self-insured retention limits. The
Company establishes accruals for product liability and other claims in conjunction with outside counsel
based on current information and historical settlement information for open claims, related fees and for
claims incurred but not reported. While it is not possible to predict with certainty the outcome of these
cases, it is the opinion of management that these cases will not have a material adverse eÅect on the
consolidated Ñnancial position, results of operations or cash Öows of the Company.
In addition to product liability, the Company is subject to other lawsuits and claims arising in the
ordinary course of business, none of which are expected to have, upon ultimate resolution, a material eÅect
on the Company's consolidated Ñnancial position, results of operations or cash Öows.
The Company markets Saint-Gobain manufactured zirconia femoral heads in certain of its hip
replacement products. During the year Saint-Gobain issued a product recall of several batches of these
zirconia femoral heads. In the fourth quarter 2001, the Company established an accrual of $3.0 million for
possible payments of non-reimbursed, direct medical expenses to certain patients who choose to undergo a
revision procedure related to this product.
Pursuant to the Company's exclusive distribution and strategic alliance with Implex Corporation
relating to Trabecular Metal products and technology and other products, the Company is subject to
45
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
annual minimum purchase commitments. Such commitments are in line with the Company's expectations
and product development plans with regard to the products covered under this agreement.
17. Quarterly Financial Information (Unaudited) (in millions, except per share data)
Net sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net earnings per common share:
2000 Quarter Ended
2001 Quarter Ended
Mar
Jun
Sep
Dec
Mar
Jun
Sep
Dec
$253.5
183.6
38.6
$260.9
192.4
47.3
$251.8
179.5
42.6
$274.4
194.2
47.5
$286.0
203.8
36.0
$294.3
212.0
43.2
$286.7
207.8
27.4
$311.6
229.1
43.2
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
0.20
0.20
Pro forma (1)
Gross proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ N/A
Net earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ N/A
Net earnings per share:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ N/A
DilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ N/A
0.24
0.24
N/A
N/A
N/A
N/A
0.22
0.22
N/A
N/A
N/A
N/A
0.25
0.25
N/A
N/A
N/A
N/A
0.19
0.19
0.22
0.22
0.14
0.14
0.22
0.22
207.3
41.9
215.7
48.9
211.5
47.9
230.1
52.1
0.22
0.22
0.25
0.25
0.25
0.25
0.27
0.27
(1) Pro forma earnings exclude $70.0 million ($49.9 million net of tax) in costs relating to the separation
of the Company from its former parent and include interest expense related to debt expected to be
assumed or incurred under the Credit Facility as if outstanding from January 1, 2001. Assumed
average outstanding borrowings from January 1 to July 31, 2001 were $450 million at an average
interest rate of 5.4 percent. Interest expense includes the amortization of fees. Pro forma Ñnancial
information is presented herein to provide users of the Ñnancial statements with information about the
impact of the Company's separation from its former parent.
18. Subsequent Events
On January 17, 2002, the Company announced that it had entered into an exclusive collaboration
agreement with Isto Technologies, Inc., a privately held biotechnology Ñrm, to develop and commercialize
Isto's patented allograft tissue for the surgical repair of articular cartilage defects and, potentially, for the
regeneration of articular surfaces lost to osteoarthritis.
Under the terms of the agreement, the Company will be the exclusive, worldwide distributor of Isto's
in vitro cultured cartilage grafts, called Neocartilage. In addition, the Company will provide Ñnancial and
technical resources to accelerate the development and commercialization of this new regenerative cartilage
approach. The long-term agreement allows the Company to establish and build an equity position in Isto
as certain development milestones are reached.
In addition, subsequent to December 31, 2001, in connection with its normal risk management
activities, the Company entered into foreign exchange forward contracts to purchase U.S. Dollars and sell
Japanese Yen for an aggregate notional value of $90 million. The contracts, which have been designated as
hedges of anticipated foreign currency transactions, contain maturity dates ranging from January 2003 to
December 2003 with a weighted average contract rate of Yen 129.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None
46
PART III
Item 10. Directors and Executive OÇcers of the Registrant
EXECUTIVE OFFICERS OF THE COMPANY
Name
J. Raymond Elliott ÏÏÏÏÏÏÏÏÏÏÏÏ
James T. Crines ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
David C. Dvorak ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Sam R. Leno ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
John S. Loveman-Krelle ÏÏÏÏÏÏÏ
Bruno A. Melzi ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Bruce E. Peterson ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Age
52
42
38
56
50
54
53
Position
Chairman, President and Chief Executive OÇcer
Vice President, Controller
Senior Vice President, Corporate AÅairs and General Counsel
Senior Vice President and Chief Financial OÇcer
President, Asia PaciÑc
President, Europe/MEA
President, Americas
J. RAYMOND ELLIOTT was appointed Chairman on August 6, 2001 and President and Chief
Executive OÇcer of the Company on March 20, 2001. Mr. Elliott was appointed President of Zimmer,
Inc., the Company's predecessor (""Zimmer, Inc.''), in November 1997. Concurrently, Mr. Elliott served
as a corporate Vice President of the Company's former parent prior to the distribution, from November
1997 until the separation. Mr. Elliott has approximately 30 years of experience in orthopaedics, medical
devices and consumer products. Prior to joining Zimmer, Inc., he served as President and Chief Executive
OÇcer of Cybex, Inc., a publicly traded medical rehabilitation and cardiovascular products company, from
September 1995 to June 1997, and previously as President and Chief Executive OÇcer of J.R. Elliott &
Associates, a privately held M&A Ñrm. During this time, Mr. Elliott successfully completed several M&A
and turnaround projects for the federal government and numerous healthcare Ñrms, including the role of
Chairman and Chief Executive OÇcer for Cablecom Inc. Mr. Elliott has also served as Chairman and
President of various divisions of Southam, Inc., a communications group, and as Group President of Ñve
divisions of food and beverage leader John Labatt, Inc. He began his career in the healthcare industry
with American Hospital Supply Corporation (later Baxter International), where he gained 15 years
experience in sales, marketing, operations, business development and general management, leading to his
appointment as President of the Far East divisions, based in Tokyo, Japan. Mr. Elliott has served as a
director on more than 15 business-related boards in the U.S., Canada, Japan and Europe and has served
on three occasions as Chairman. He is currently a director of the State of Indiana Workplace
Development Board and a trustee of the Orthopaedic Research and Education Foundation (""OREF''). He
holds a bachelor's degree from the University of Western Ontario, Canada.
JAMES T. CRINES joined Zimmer, Inc. in 1997 as Director of Finance. On July 1, 2001, he was
appointed Vice President, Controller after serving as Vice President, Finance and Information Technology
since September 2000. Mr. Crines served Zimmer, Inc. as Director of Finance and Logistics, Japan from
May 1999 until September 2000. Mr. Crines served as Associate Director, Accounting at Bristol-Myers
Squibb from September 1995 until he joined Zimmer, Inc. Mr. Crines has over 18 years of experience in
corporate and operations Ñnance and accounting, including Ñve years as an auditor with Price Waterhouse
from 1981 to 1986. He was employed by American Cyanamid from 1986 to 1995 and served in a variety
of increasingly important Ñnancial roles, culminating in his promotion to Division Controller of its global
animal health and nutrition businesses in 1993. Mr. Crines holds a bachelor's degree in accounting from
the University of Scranton and an M.B.A. from Rutgers University and is a CertiÑed Public Accountant.
DAVID C. DVORAK was appointed Senior Vice President, Corporate AÅairs and General Counsel
of the Company eÅective December 6, 2001. Prior to his appointment, Mr. Dvorak served as Senior Vice
President, General Counsel and Corporate Secretary and was a member of the Executive Committee of
STERIS Corporation, an Ohio-based leader in medical sterilization and infection control products. Prior to
joining STERIS in 1996, Mr. Dvorak practiced corporate law at two large Cleveland, Ohio, law Ñrms,
focusing on mergers and acquisitions and on securities law. Mr. Dvorak holds a B.S. degree in Business
47
Administration from Miami University in Oxford, Ohio, and a J.D. degree, magna cum laude, from Case
Western Reserve University School of Law in Cleveland, Ohio.
SAM R. LENO was appointed Senior Vice President and Chief Financial OÇcer of the Company
eÅective July 16, 2001. Prior to his appointment, Mr. Leno served as Senior Vice President and Chief
Financial OÇcer of Arrow Electronics, Inc., a global distributor of electronic components, a position he
held from March 1999 until he joined the Company. From July 1995 until February 1999, Mr. Leno
served as Executive Vice President and Chief Financial OÇcer of Corporate Express, Inc., a global
supplier of oÇce products and services. He served as Chief Financial OÇcer of Coram Healthcare, which
specializes in home IV infusion, from 1994 until 1995. From 1971 to 1994, Mr. Leno held several Ñnancial
positions of increasing responsibility at Baxter International, Inc., formerly American Hospital Supply
Corporation, including Vice President, Finance and Information Technology, Hospital Business, from 1989-
1994, Vice President, Financial Planning and Analysis, from 1988 to 1989, and Vice President, Corporate
Restructuring, from 1986 until 1988. Prior to joining American Hospital Supply, he served as a U.S. Naval
OÇcer. Mr. Leno holds a B.S. degree in Accounting from Northern Illinois University and a M.B.A. from
Roosevelt University.
JOHN S. LOVEMAN-KRELLE joined Zimmer, Inc. in 1987. He has served as President, Asia
PaciÑc since June 2000. Mr. Loveman-Krelle served as Vice President, Global Marketing-Knees from
January 1996 until June 1997 and as Vice President and General Manager from June 1997 until his
promotion to his current position. Mr. Krelle has over 20 years of experience in the orthopaedics and
medical products industry; and his previous responsibilities with Zimmer, Inc. include Vice President,
Patient Care Global Marketing and Development and Vice President, Global Knee Marketing. Prior to
1987, he held positions in sales, marketing and management with Schering AG. Mr. Krelle holds a
bachelor's degree in mechanical engineering and an M.B.A. from Sussex University, U.K.
BRUNO A. MELZI joined Zimmer, Inc. in 1990 as Managing Director, Italy. In March 2000,
Mr. Melzi was promoted from Vice President and Managing Director of Italy, Germany and Switzerland,
a position he held since October of 1997, to his current position of President, Europe/MEA. Mr. Melzi
has over 27 years of experience in the orthopaedics and medical products industry. He has previously
served as General Manager and member of the Board of Directors of Johnson & Johnson Italy from 1983
to 1990, as Smith & Nephew's Business Director for Italy from 1982 to 1983 and as Executive Marketing
Director for Johnson & Johnson's Ethicon suture division from 1980 to 1982. Mr. Melzi holds a degree in
law from the University of Pavia, Italy.
BRUCE E. PETERSON was appointed President, Americas of Zimmer, Inc. eÅective July 1, 2001.
He joined Zimmer, Inc. in 1995 as Senior Vice President, U.S. Sales and Marketing and was given
additional responsibility for Canada and Latin America in May 2000. Mr. Peterson has over 25 years of
sales, marketing and management experience in the orthopaedics industry, including eight years with
Johnson & Johnson Orthopaedics from 1975 to 1983, three previous years from 1984 to 1986 with
Zimmer, Inc. and nine years as Distributor Principal and President of Great Lakes Orthopaedics from
1986 to 1995. Mr. Peterson holds a bachelor's degree from Youngstown State University.
Information relating to the directors will appear in the section entitled ""Nominees for Director'' in the
deÑnitive Proxy Statement to be dated March 12, 2002, and to be Ñled with the Commission relating to
the Company's 2002 Annual Meeting of Stockholders, which section is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this Item concerning remuneration of the Company's oÇcers and
directors and information concerning material transactions involving such oÇcers and directors is
incorporated herein by reference from the Company's deÑnitive Proxy Statement for its 2002 Annual
Meeting of Stockholders which will be Ñled with the Commission pursuant to Regulation 14A within
120 days after the end of the Company's last Ñscal year.
48
Item 12. Security Ownership of Certain BeneÑcial Owners and Management
The information required by this Item concerning the stock ownership of management and Ñve
percent beneÑcial owners is incorporated herein by reference from the Company's deÑnitive Proxy
Statement for its 2002 Annual Meeting of Stockholders which will be Ñled with the Commission pursuant
to Regulation 14A within 120 days after the end of the Company's last Ñscal year.
Item 13. Certain Relationships and Related Transactions
The information required by this Item concerning certain relationships and related transactions is
incorporated herein by reference from the Company's deÑnitive Proxy Statement for its 2002 Annual
Meeting of Stockholders which will be Ñled with the Commission pursuant to Regulation 14A within
120 days after the end of the Company's last Ñscal year.
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a) 1. Financial Statements
The following consolidated Ñnancial statements of the Company and its subsidiaries are set forth
in Part II, Item 8.
Report of Independent Accountants
Consolidated Statements of Earnings for the Years Ended December 31, 2001, 2000 and 1999
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2001, 2000
and 1999
Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All Ñnancial statement schedules are omitted because they are not applicable or the information
required therein is set forth in the Notes to Consolidated Financial Statements included in Item 8 of
this report.
3. Exhibits
A list of exhibits required to be Ñled as part of this report is set forth in the Index to Exhibits,
which immediately precedes such exhibits, and is incorporated herein by reference.
(b) Reports on Form 8-K
A report on Form 8-K dated November 13, 2001 was Ñled reporting under Item 5 to facilitate
the Ñling of exhibits to the report executed copies of certain incomplete exhibits previously Ñled and
certain other instruments, documents or contracts.
49
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SIGNATURES
ZIMMER HOLDINGS, INC.
By:
/s/
J. RAYMOND ELLIOTT
J. Raymond Elliott
Chairman of the Board,
President and Chief Executive OÇcer
Dated: March 11, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/
J. RAYMOND ELLIOTT
J. Raymond Elliott
Chairman of the Board, President,
Chief Executive OÇcer and Director
(Principal Executive OÇcer)
March 11, 2002
/s/ SAM R. LENO
Sam R. Leno
/s/
JAMES T. CRINES
James T. Crines
/s/ LARRY C. GLASSCOCK
Larry C. Glasscock
/s/ REGINA E. HERZLINGER
Regina E. Herzlinger
/s/
JOHN L. MCGOLDRICK
John L. McGoldrick
/s/ AUGUSTUS A. WHITE III
Augustus A. White III
Senior Vice President and
Chief Financial OÇcer
(Principal Financial OÇcer)
March 11, 2002
Vice President, Controller
(Principal Accounting OÇcer)
March 11, 2002
Director
March 11, 2002
Director
March 11, 2002
Director
March 11, 2002
Director
March 11, 2002
50
Exhibit
No.
2
3.1
3.2
3.3
4.1
4.2
4.3
10.1
10.2
INDEX TO EXHIBITS
Description
Contribution and Distribution Agreement between Bristol-Myers Squibb Company and Zimmer
Holdings, Inc., dated as of August 6, 2001 (incorporated herein by reference to Exhibit 10.1 to
Current Report on Form 8-K/A dated December 7, 2001)
Restated CertiÑcate of Incorporation of Zimmer Holdings, Inc. (incorporated herein by reference
to Exhibit 3.1 to Current Report on Form 8-K dated November 13, 2001)
CertiÑcate of Designations of Series A Participating Cumulative Preferred Stock of Zimmer
Holdings, Inc., dated as of August 6, 2001 (incorporated herein by reference to Exhibit 3.2 to
Current Report on Form 8-K dated November 13, 2001)
Restated Bylaws of Zimmer Holdings, Inc. (incorporated herein by reference to Exhibit 3.3 to
Current Report on Form 8-K dated November 13, 2001)
Specimen Common Stock certiÑcate (incorporated herein by reference to Exhibit 4.1 to
Amendment No. 3 to Registration Statement on Form 10, dated July 6, 2001)
Rights Agreement between Zimmer Holdings, Inc. and Mellon Investor Services LLC, as Rights
Agent, dated as of August 6, 2001 (incorporated herein by reference to Exhibit 4.1 to Current
Report on Form 8-K dated November 13, 2001)
Specimen Right CertiÑcate (incorporated herein by reference to Exhibit B to the Rights
Agreement Ñled as Exhibit 4.2 hereto)
Contribution and Distribution Agreement between Bristol-Myers Squibb Company and Zimmer
Holdings, Inc., dated as of August 6, 2001 (Ñled as Exhibit 2 hereto)
Interim Services Agreement between Bristol-Myers Squibb Company and Zimmer Holdings, Inc.,
dated as of August 6, 2001 (incorporated herein by reference to Exhibit 10.2 to Current Report
on Form 8-K dated November 13, 2001)
10.3* Employee BeneÑts Agreement between Bristol-Myers Squibb Company and Zimmer Holdings,
10.4
Inc., dated as of August 6, 2001 (incorporated herein by reference to Exhibit 10.3 to Current
Report on Form 8-K dated November 13, 2001)
Tax Sharing Agreement between Bristol-Myers Squibb Company and Zimmer Holdings, Inc.,
dated as of August 6, 2001 (incorporated herein by reference to Exhibit 10.4 to Current Report
on Form 8-K dated November 13, 2001)
10.5* Zimmer Holdings, Inc. Savings and Investment Program, eÅective August 6, 2001 (incorporated
herein by reference to Exhibit 10.2 to Current Report on Form 8-K dated August 6, 2001)
10.6* Zimmer Holdings, Inc. 2001 Stock Incentive Plan, eÅective August 6, 2001 (incorporated herein
by reference to Exhibit 10.3 to Current Report on Form 8-K dated August 6, 2001)
10.7* Zimmer Holdings, Inc. TeamShare Stock Option Plan, eÅective August 6, 2001 (incorporated
herein by reference to Exhibit 10.4 to Current Report on Form 8-K dated August 6, 2001)
10.8* Zimmer Holdings, Inc. Executive Performance Incentive Plan, eÅective August 6, 2001
(incorporated herein by reference to Exhibit 10.5 to Current Report on Form 8-K dated
August 6, 2001)
10.9* Zimmer Holdings, Inc. Stock Plan for Non-Employee Directors, eÅective August 6, 2001
(incorporated by reference to Exhibit 10.6 to Current Report on Form 8-K dated August 6, 2001)
10.10* Zimmer Holdings, Inc. Deferred Compensation Plan for Non-Employee Directors, eÅective
August 6, 2001 (incorporated herein by reference to Exhibit 10.7 to Current Report on Form 8-K
dated August 6, 2001)
10.11 Three Year Competitive Advance and Revolving Credit Facility among Zimmer Holdings, Inc.,
Zimmer, Inc., Zimmer K.K., Zimmer LTD. and the lenders named therein, dated as of July 31,
2001 (incorporated herein by reference to Exhibit 10.1 to Current Report on Form 8-K dated
August 6, 2001)
10.12* Zimmer Holdings, Inc. Long-Term Disability Income Plan for Highly Compensated Employees
(incorporated herein by reference to Exhibit 10.15 to Current Report on Form 8-K dated
November 13, 2001)
Exhibit
No.
Description
10.13* Retention Agreement of J. Raymond Elliott (incorporated herein by reference to Exhibit 10.5 to
Current Report on Form 8-K Dated November 13, 2001)
10.14* Retention Agreement of Roy D. Crowninshield (incorporated herein by reference to Exhibit 10.6
to Current Report on Form 8-K Dated November 13, 2001)
10.15* Retention Agreement of Bruce E. Peterson (incorporated herein by reference to Exhibit 10.7 to
Current Report on Form 8-K Dated November 13, 2001)
10.16* Retention Agreement of Bruno A. Melzi
10.17* Retention Agreement of John S. Loveman-Krelle (incorporated herein by reference to
Exhibit 10.9 to Current Report on Form 8-K Dated November 13, 2001)
10.18* Compensation Agreement of J. Raymond Elliott (incorporated herein by reference to
Exhibit 10.10 to Current Report on Form 8-K Dated November 13, 2001)
10.19* Compensation Agreement of Roy D. Crowninshield (incorporated herein by reference to
Exhibit 10.11 to Current Report on Form 8-K Dated November 13, 2001)
10.20* Compensation Agreement of Bruce E. Peterson (incorporated herein by reference to
Exhibit 10.12 to Current Report on Form 8-K Dated November 13, 2001)
10.21* Compensation Agreement of Bruno A. Melzi
10.22* Compensation Agreement of John S. Loveman-Krelle (incorporated herein by reference to
10.23
Exhibit 10.14 to Current Report on Form 8-K Dated November 13, 2001)
$26,000,000 Uncommitted Standard Instrument Line of Credit between Zimmer, Inc. and
subsidiaries and Bank of America, N.A. and its aÇliates and subsidiaries dated July 17, 2001
10.24 Amendment No. 1 to Letter Agreement dated July 17, 2001 between Zimmer, Inc. and Bank of
America, N.A. dated July 26, 2001
10.25 Uncommitted Credit Agreement between Zimmer, Inc. and Sumitomo Mitsui Banking
Corporation dated October 29, 2001
10.26 First Amendment to Three Year Competitive Advance and Revolving Credit Facility among
Zimmer Holdings, Inc., Zimmer, Inc., Zimmer K.K., Zimmer LTD. and the lenders named
therein, dated as of December 10, 2001
List of Subsidiaries of Zimmer Holdings, Inc.
Consent of PricewaterhouseCoopers LLP
21
23
* indicates management contracts or compensatory plans or arrangements
C O R P O R A T E I N F O R M A T I O N
B O A R D O F D I R E C T O R S
O F F I C E R S A N D K E Y M A N A G E M E N T
J. Raymond Elliott
Chairman, President and
Chief Executive Officer
Zimmer Holdings, Inc.
Larry C. Glasscock
President and
Chief Executive Officer
Anthem Insurance Companies
Regina E. Herzlinger
Sheryl L. Conley
Vice President,
Global Brand Management and
Commercialization
Kenneth Coonce
Vice President,
Operations and Logistics
James T. Crines
Vice President and
Professor of Business Administration
Controller
Dennis J. Kline
Vice President,
Human Resources
John S. Krelle
President,
Asia Pacific
Sam R. Leno
Senior Vice President and
Chief Financial Officer
Bruno A. Melzi
Harvard Business School
John L. McGoldrick
Executive Vice President
Bristol-Myers Squibb Company
Augustus A. White III, M.D.
Professor of Orthopaedic Surgery
Harvard Medical School
Roy D. Crowninshield, Ph.D.
President,
Senior Vice President and
Chief Scientific Officer
David C. Dvorak
Senior Vice President,
Corporate Affairs and
General Counsel
J. Raymond Elliott
Chairman, President and
Chief Executive Officer
Europe/Middle East/Africa
Bruce E. Peterson
President,
Americas
Paul D. Schoenle
Vice President,
Senior Counsel and Secretary
James P. Simpson
Vice President,
Regulatory and Government Affairs
S H A R E H O L D E R I N F O R M AT I O N
Zimmer Holdings, Inc.
Common Stock
Contact Information
345 E. Main Street
Warsaw, IN 46580
(574) 267-6131
Transfer Agent
Mellon Investor Services
P.O. Box 3315
South Hackensack, NJ 07606
(888) 552-8493 Domestic
(201) 329-8660 International
Zimmer Holdings, Inc. is listed on the
Sam R. Leno
New York Stock Exchange (NYSE)
Senior Vice President and
under the symbol ZMH.
Independent Auditors
PricewaterhouseCoopers LLP
Indianapolis, IN
Chief Financial Officer
(574) 372-4790
Email: sam.leno@zimmer.com
For investor kits, press releases, stock
quotes and product information, please
visit the company web site at
www.zimmer.com
or call (866) 688-7656.
2 0 0 1 A N N U A L R E P O R T
N e w P r o d u c t s
N e w M a r k e t s
N e w G e o g r a p h i e s
Zimmer Holdings, Inc.
345 East Main Street
P.O. Box 708
Warsaw, Indiana 46580
www.zimmer.com
Z i m m e r H o l d i n g s , I n c .