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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES	2002 FORM 10-K

United States Securities and Exchange Commission

FORM 10-K

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

For year ended December 31, 2002

Commission file number 001-16407

ZIMMER HOLDINGS, INC.

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

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

Indicate by check mark if disclosure of delinquent filers 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 definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ    No o

The aggregate market value of shares held by non-affiliates was $6,930,127,064 (based on closing price of these shares on the New York Stock Exchange on June 28, 2002, and assuming solely for the purpose of this calculation that all directors and executive officers of the registrant are “affiliates”). As of February 19, 2003, 195,763,336 shares of the registrant’s $.01 par value common stock were outstanding.

Documents Incorporated by Reference

ZIMMER HOLDINGS, INC. AND SUBSIDIARIES	2002 FORM 10-K

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     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,” “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 differ 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, effects 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 fluctuations. 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 and the material accompanying this report which comprise the Company’s annual report to stockholders.

Zimmer Holdings, Inc.

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES	2002 FORM 10-K

GENERAL

     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, trauma 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 (“Distribution” or “Separation”). 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 qualified as a tax free transaction.

     The Company’s Internet website is www.zimmer.com. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available or may be accessed free of charge through the Investor Relations section of the Company’s internet website as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. The Company’s internet website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.

GEOGRAPHIC SEGMENTS

     The Company has operations in 20 countries and markets products in more than 70 countries, with headquarters in Warsaw, Indiana, and manufacturing, distribution and warehousing and/or office facilities in more than 50 locations worldwide. The Company manages its operations through three major geographic areas – the Americas, which is comprised principally of the United States and includes other North, Central and South American markets; Asia Pacific, which is comprised primarily of Japan and includes other Asian and Pacific 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.

     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 1.0 percent of net sales.

     The Company utilizes more than 1,300 sales associates, sales managers and support personnel, some of whom are employed by independent distributors. The Company invests a significant amount of time and expense in providing training in such areas as product features and benefits, how to use specific 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. Sales force representatives rely heavily on strong technical selling skills, medical education and in-surgery staff technical support.

     In response to the different healthcare systems throughout the world, the Company’s sales and marketing strategies and organizational structures differ 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 68 percent of 2002 sales, with the United States accounting for the vast majority of sales in this region.

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES	2002 FORM 10-K

The U.S. salesforce consists of 26 independent distributors with more than 650 sales associates, sales managers and sales 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 Pacific region accounted for approximately 20 percent of 2002 sales with Japan being the largest foreign market, accounting for the majority of sales in this region. In Japan and most countries in the Asia Pacific region, the Company maintains a network of dealers and approximately 400 sales associates and sales support personnel who build and maintain strong relationships with leading orthopaedic surgeons in their markets.

     The European region accounted for approximately 12 percent of 2002 sales, with France, Germany, Italy, Spain and the United Kingdom accounting for approximately 75 percent of sales in the region. In addition, the Company also operates in other key markets such as the Benelux, Nordic, Switzerland and emerging regions such as Russia, Central Europe, and Mediterranean markets. The Company’s salesforce in this region is also comprised of independent distributors, commissioned agents, and approximately 200 direct sales associates and sales support personnel.

PRODUCTS

     The Company is a global leader in the design, development, manufacture and marketing of orthopaedic reconstructive implants and trauma products. Orthopaedic reconstructive implants restore joint function lost due to disease or trauma in joints such as knees, hips, shoulders, and elbows. Trauma 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.

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 restores joint function lost due to degenerative diseases such as arthritis and relieve pain in knees and hips.

     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 first-time joint replacement procedures and revision procedures for the replacement, repair or enhancement of an implant product or component from a previous procedure. Knee implants are designed to accommodate different 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 offers 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 offers joint stability and sizing that can be tailored to individual patient needs while providing surgeons with a unified 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 recent addition of Trabecular MetalTM tibial implants in both cruciate retaining and posterior stabilizing philosophies continues the Company’s strategy to add new innovative technologies to this leading brand. Trabecular Metal is a material that provides a dramatically higher level of porosity than existing alternatives, is similar in stiffness and friction to natural bone and is believed to be a major advancement in orthopaedic materials. The Trabecular Metal technology is distributed by the Company under an exclusive distribution and strategic alliance with Implex Corporation, as further described herein under Intellectual Property.
	The NexGen Complete Knee Solution Legacy® Knee-Posterior Stabilized product line provides stability in the absence of the posterior cruciate ligament. The posterior stabilized capabilities have recently been augmented through the introduction of the NexGen Legacy Posterior Stabilized Flex Knee, a high-flexion implant that can potentially safely accommodate knee flexion up to a 155-degree range of motion in some patients when implanted using a specialized surgical technique.
	The NexGen Revision knee product line, consisting of LCCK, RHK and CRA revision knee products, is designed with extensive options to accommodate the variable needs in revision procedures. These products accommodate more difficult procedures and are augmentable for bone loss and provide increased constraint for patients with ligamentous instability. During 2002, the Rotating Hinge Knee was added to the line for optimal constraint in more severe cases.

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES	2002 FORM 10-K

	M/G™ Unicompartmental Knee System. The M/G uni system boasts a 98 percent implant survival rate post-surgery at 10 years and applies the same flexibility and quality of our other knee implant products to unicompartmental, or single compartment disease. The M/G uni system’s patented minimally invasive intramedullary instrumentation, as well as its new minimally invasive extramedullary instrumentation, offers accurate alignment, precise cuts and secure fixation that provide surgeons with the ability to accurately and efficiently 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.
	Prolong™ Highly Crosslinked Polyethylene Articular Surfaces. The Prolong polyethylene is a new bearing surface material for total knee replacement. In certain laboratory tests that simulate joint function, it demonstrates reduced resistance to delamination compared to current standard polyethylene bearing material. The Food and Drug Administration has approved the additional claim of “resistance to delamination” for the Prolong polyethylene product. Most knee articulating surfaces only receive the more general “resistance to wear” claim that clearly does not definitively address the primary mode of failure in knees, which is sub-surface fatigue.

     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 first 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 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 flagship brand, is supported by a common instrumentation set and is an innovative, integrated family of hip products that offers surgeons design-specific options to meet varying surgical philosophies and patient needs. The VerSys Hip System includes the following features: a variety of stem designs and fixation 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 flexibility 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 and 2002.
	ZMR™ Hip System. The ZMR Revision Hip System, introduced in 2000 to address the porous modular revision market, provides the versatility to accommodate varying fixation and sizing needs. The recent line extension to the ZMR brand of over ninety additional implant options creating over 10,800 possible combinations will enable surgeons to further address the difficult and varying needs of their revision patients. 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 offers a number of specialty hip products tailored to the needs of specific 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 primary and revision procedures, was tailored for countries with a historical preference towards collarless, polished, tapered products and a subsidence surgical philosophy. A key line extension to the CPT brand was launched late 2002 and will be instrumental to the growth of this cemented stem line that has a long and successful clinical record and is important to growth in key markets such as Europe. In addition to CE Mark approval in Europe in 2000, the Company has recently received regulatory approval in the United States for the Epoch® Hip Prosthesis product line, which is comprised, in part, of a unique composite design that allows the normal amount of anatomical stress to be placed on patients’ bones while still potentially providing extensive fixation and reduced thigh pain.
	Trilogy® Acetabular System. The Trilogy Acetabular System, including titanium alloy shells, polyethylene liners, screws and instruments, is a leading acetabular cup system. The Trilogy family of products offers patients and surgeons innovative options and versatile component designs and instrumentation. One option, the Longevity® Highly Crosslinked Polyethylene Liner, is designed to reduce polyethylene 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 top-quality fixation surfaces with a successful long-term

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES	2002 FORM 10-K

     The Coonrad/ Morrey product line is a leading family of elbow replacement implant products and the Bigliani/ Flatow® The Complete Shoulder Solution product line gives the Company a significant 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 offer surgeons a wide variety of implants and instrumentation to accommodate differing surgical philosophies and patient needs with continued innovative line extensions being introduced to the market for continued growth of these leading brands.

Trauma

     Trauma 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 fixation 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 offers a comprehensive line of products designed for use in the fixation of fractures, including hip fixation products, plates, screws, pins, wires and nails. The recently expanded trauma product line enables the Company to offer surgeons cost-effective quality products, including:

	M/DN® Intramedullary Fixation. The M/DN intramedullary nailing system for the internal fixation of long bone fractures incorporates implants and instruments to align and fix fractures of the tibia, femur and humerus. The system has multiple screw options to provide increased surgical flexibility. An innovative screw hole configuration 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 fixation plates to be accurately fitted to the anatomy of the periarticular, or joint, region of the bone. The system has expanded to include virtually all regions of the anatomy including femur, tibia, humerus, radius, ulna and fibula.
	Zimmer Plates and Screws (“ZPS”). The ZPS internal fracture fixation system is a comprehensive system of 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 affords surgeons added flexibility 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.
	ITST™ Intertrochanteric/ Subtrochanteric Fixation. The ITST line of nails and screws is part of the M/DN family of intramedullary solutions for proximal femoral fractures. The implants expand the indications for use of an intramedullary device for fixing these types of fractures. The system also allows a more lateral surgical approach which is easier to use and is gaining popularity.

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES	2002 FORM 10-K

	Zimmer Cannulated Screws. A full range of cannulated screws utilizing Biodur®2 108 stainless steel is the first product line on the market utilizing the new high strength stainless steel. The strength allows larger cannulation which permits larger guide wires making surgery easier to perform.

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, traction devices and orthopaedic softgoods, which provide support and/or 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 trauma 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 specifically 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 Systems through an exclusive distribution arrangement in the United States and Canada.
	Pulsavac® Plus Wound Debridement System. The Company 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. The newly introduced Pulsavac LP is a low pressure, disposable debridement system. Based on the successful design of the Pulsavac Plus, it is intended for applications requiring low-pressure lavage to help remove necrotic tissue and facilitate healing.
	ATS® Tourniquet Systems. The ATS range represents the most complete family of tourniquet machines and cuffs available. The family of three machines is designed to meet the specific demands of a wide variety of health care facilities and clinical applications. The range of cuffs which complement the machines provides the flexibility to occlude blood flow safely with convenience and accuracy for adult limbs of every size and shape.

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 efforts, 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 2000 include:

	•	MIS instrumentation for knee and hip procedures including the M/G Unicompartmental Knee System and the “mini” incision hip procedure;
	•	expansion of the NexGen line including tibial and femoral augments and stem extension for revisions; and articular surfaces for the Legacy Posterior Stabilized Knee (LPS);
	•	Legacy Posterior Stabilized Flex Knee (LPS – Flex);
	•	Prolong Highly Crosslinked Polyethylene for total knee replacement;
	•	Rotating Hinge Knee for complex knee revision procedures (RHK);
	•	Trabecular Metal products for knee components, including tibial components, primary patella and augmentation patella;
	•	expanded launch of the Epoch composite hip stem;
	•	expansion of the VerSys porous stem line;
	•	Longevity Highly Crosslinked Polyethylene Liner for hip cups;
	•	revision acetabulum products for hip revision procedures;
	•	the ZMR Hip System;
	•	Trabecular Metal Monoblock Cup;
	•	VerSys Advocate™ cemented stem;
	•	expansion of the CPT line of cemented hip system;
	•	ITST intramedullary nail for proximal femur fracture;
	•	Zimmer Plates and Screws internal fracture fixation system (ZPS);
	•	expansion of the Bigliani/ Flatow shoulder system; and
	•	expansion of the Coonrad/ Morrey elbow system.

     These and other new products introduced in the past 36 months accounted for 18 percent of 2002 total sales, consistent with the Company’s goal of 15% to 20% on annual basis.

     The Company is actively broadening its product offerings in each of the product categories and exploring new technologies that have applications in multiple areas. For the years

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES	2002 FORM 10-K

ended December 31, 2002, 2001 and 2000, the Company spent $80.7 million, $71.6 million and $52.0 million, respectively, on research and development. The increase in research and development expenditures has accelerated the output of new reconstructive implant and trauma products including 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 340 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 arrangements and strategic alliances. During 2001 the Company announced the creation of a medical education process, The Zimmer Institute, to help facilitate training for surgeons, sales associates 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 refine advanced minimally invasive hip and knee replacement and procedures. 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 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, multiple regulations govern the development, testing, manufacturing and marketing of medical devices, including among others, the Federal Food, Drug and Cosmetic Act and regulations issued or proposed there under. The Food and Drug Administration (“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 local regulations affecting, 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 affecting the Company and its products have continued to increase. It is the policy 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 influence reimbursement rates to varying degrees. The Company believes that its experience in dealing with governmental regulatory requirements, its efficient means of distribution and its emphasis on the ongoing development of efficacious and technologically advanced products should enable it to continue to compete effectively within this regulated environment.

     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, Veterans Administration (VA) health programs and Civilian Health and Medical Program Uniformed Service (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.

COMPETITION

     The orthopaedics industry is highly competitive. In the global markets for reconstructive implants, trauma and orthopaedic surgical products, major competitors include: J&J DePuy Orthopaedics (a subsidiary of Johnson & Johnson); Biomet, Inc.; Stryker Corp.; Smith & Nephew, Inc.; Centerpulse Ltd. and Synthes-Stratec. Competition within the industry is primarily based on technology, quality, reputation, customer relationships and service.

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES	2002 FORM 10-K

     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 Pacific market for reconstructive implant and trauma 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 difficult for smaller companies, particularly those that are non-regional, to compete effectively with the market leaders in the Asia Pacific region.

     In Europe the reconstructive implant and trauma product markets are more fragmented than the Americas or the Asia Pacific 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 specifically 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 specific European needs. The Company believes it is a leading player in this region in the reconstructive implant market.

INTELLECTUAL PROPERTY

     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 confidentiality agreements and proprietary information agreements with vendors, employees, consultants and others who may have access to proprietary information.

     The Company owns more than 690 issued patents and over 400 pending patent applications and has licensed more than 450 issued patents and over 300 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 trauma products incorporating Trabecular Metal technology. This agreement provides the Company with an exclusive right, subject to specified conditions beginning with the third quarter of 2003, to purchase specified assets and proprietary rights of the Implex Corporation utilizing a predefined process.

EMPLOYEES

     At December 31, 2002, the Company employed more than 3,600 employees worldwide including more than 340 employees dedicated to research and development. Approximately 2,700 employees are located within the United States and 900 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 effective 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.

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES	2002 FORM 10-K

      The Company has the following properties:

     In addition to the above, the Company maintains more than 20 offices and warehouse facilities in various countries, including the United States, Japan, Australia, France, Russia 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.

      Information pertaining to legal proceedings can be found in Note 17 to the Consolidated Financial Statements, which are included herein under Item 8.

      Not Applicable.

EXECUTIVE OFFICERS OF THE COMPANY

     Certain information with respect to the executive officers of the Company is set forth in Item 10 of this report.

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES	2002 FORM 10-K

      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, are set forth as follows:

Quarterly High-Low Share Prices

     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 beneficial owners of common stock on February 19, 2003, was approximately 532,000. On February 19, 2003, the closing price of the common stock, as reported on the New York Stock Exchange, was $41.99 per share.

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES	2002 FORM 10-K

      The financial information for each of the five years ended December 31, 2002, is set forth below (in millions, except per share amounts):

(1)	Net earnings include $70.0 million ($49.9 million net of tax) in costs relating to the separation of the Company from its former parent, which reduce basic and diluted earnings per share by $0.26 for both. Net earnings also includes $7.4 million ($4.7 million net of tax) of interest expense for the period from the Distribution to December 31, 2001.
(2)	For periods ended prior to August 6, 2001, average common shares reflect 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 reflect any new issuances of common stock and the dilutive effect of outstanding stock options, where appropriate.

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES	2002 FORM 10-K

      The following discussion should be read in conjunction with the consolidated financial 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 trauma products. Orthopaedic reconstructive implants restore joint function lost due to disease or trauma in joints such as knees, hips, shoulders and elbows. Trauma 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 – the Americas, Asia Pacific and Europe.

RESULTS OF OPERATIONS

Year Ended December 31, 2002
Compared to Year Ended December 31, 2001

     Net sales for the year ended December 31, 2002, increased 16 percent. Sales growth reflected strong demand for the Company’s reconstructive implants, including the NexGen line of knee products and the VerSys Hip System. New products launched within the last 36 months represented 18 percent of total sales, including the successful recent launches of key products including the Prolong Highly Crosslinked Polyethylene for NexGen Cruciate Retaining Knee, the Trabecular Metal Monoblock tibials, the Rotating Hinge Knee and the Trabecular Metal acetabular cups. Favorable demographics helped drive increased surgical procedures in all regions, with the Company’s largest operating segment, the Americas, as well as Europe, leading the overall outstanding results. The increase was comprised of a 12 percent increase due to incremental volume and changes in the mix of product sales and a 4 percent increase due to higher average selling prices.

     Net sales in the Americas increased 18 percent for the year to $932.9 million compared to 2001. This increase was comprised of a 13 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 by 21 percent with strong sales in all categories. Knee sales increased 24 percent led by growth in sales of NexGen Legacy Posterior Stabilized Knee, NexGen Legacy Posterior Stabilized Flex Knee, NexGen Cruciate Retaining Knee components incorporating Prolong Highly Crosslinked Polyethylene, the M/G Unicompartmental Knee, which features Minimally Invasive Solutions (“MIS”) Instrumentation and the recently launched NexGen Trabecular Metal tibial component. Hip sales increased 17 percent driven by continued conversion to porous stems, Trabecular Metal acetabular cups, and increased sales of Trilogy Acetabular System cups incorporating Longevity Highly Crosslinked Polyethylene Liners. Trauma product sales increased 10 percent for the year in large part due to increased sales of the Zimmer Periarticular Plating System and the Zimmer Plates and Screws.

     Net sales in Asia Pacific increased 6 percent (increased 8 percent constant currency) for the year to $269.6 million. This increase was comprised of a 7 percent increase due to incremental volume and changes in the mix of product sales and 1 percent increase due to higher average selling prices, offset by a 2 percent decrease due to foreign exchange rate fluctuations. Knee sales increased 9 percent (increased 11 percent constant currency) reflecting continued strong growth in the NexGen Legacy Posterior Stabilized Flex Knee. Hip sales increased 11 percent (increased 14 percent constant currency) driven primarily by the continued conversion to porous stems and sales of Trilogy Acetabular System cups

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incorporating Longevity Highly Crosslinked Polyethylene Liners. Trauma product sales decreased 13 percent (decreased 10 percent constant currency) reflecting a decline in M/DN® Intramedullary Fixation nails and compression hip screw sales, primarily in Japan.

     Net sales in Europe increased 28 percent (increased 23 percent constant currency) to $169.9 million. The strong sales reflected high demand on reconstructive implants. Eastern Europe, Finland, France, Scandinavia, Switzerland and the United Kingdom all achieved higher than 30 percent growth in reconstructive implant sales. This increase was comprised of 20 percent due to incremental volume and changes in the mix of product sales, a 3 percent increase due to higher average selling prices and a 5 percent increase due to foreign exchange rate fluctuations. Knee sales increased 27 percent (increased 22 percent constant currency) driven by strong sales of the NexGen Legacy system of knee prostheses, including the Flex Knee, the M/G Unicompartmental Knee with MIS Instrumentation, and the recently launched Rotating Hinge Knee. Hip sales increased 33 percent (increased 28 percent constant currency) driven by strong sales of Trilogy Acetabular System cups incorporating Longevity Highly Crosslinked Polyethylene Liners, VerSys porous stems, supported by the ZMR Modular Revision Hip System and Trabecular Metal acetabular cups.

     Overall, worldwide reconstructive implant sales increased 20 percent (increased 20 percent constant currency) to $1,061.7 million. Knee sales increased by 22 percent (increased 21 percent constant currency) to $586.1 million, led by NexGen Legacy Posterior Stabilized Knee including the Flex Knee, NexGen Trabecular Metal tibial components, the NexGen Cruciate Retaining Knee with Prolong Highly Crosslinked Polyethylene, and the M/G Unicompartmental Knee with MIS Instrumentation. Hip sales increased 17 percent (increased 17 percent constant currency) to $441.1 million driven by continued conversion to porous stems, Trabecular Metal acetabular cups, and increased sales of Trilogy Acetabular System cups incorporating Longevity Highly Crosslinked Polyethylene Liners. Longevity Liner sales comprised 85 percent of primary hip liner sales in 2002. Trauma product sales increased 4 percent (increased 5 percent constant currency) to $133.8 million, led by sales of the Zimmer Periarticular Plating System. Orthopaedic surgical product sales increased by 8 percent (increased 9 percent constant currency) to $176.9 million, led by the continued growth of the OrthoPAT Autotransfusion System.

     Gross profit as a percentage of net sales was 74.9 percent in 2002 compared to 72.7 percent in 2001, or 73.7 percent excluding separation costs of $11.9 million. The increase was attributable to increased average selling prices realized in all segments, the continued conversion from cemented hip implants to higher margin porous products, increased penetration of Longevity Highly Crosslinked Polyethylene Liners, higher sales of revision implants and various manufacturing improvements. The Company upgraded its automated foundry process for casting knee femorals, hip stems and cups. An increased number of products were moved to robotic polishing, as well as, additional porous knee femorals converted to the fiber metal laser welding process. Several products previously purchased from outside suppliers were moved in house for production. Investments in high speed machining and new tooling technologies made improvements in reducing both product cycle times and scrap. Lastly, standardization of the Company’s manufacturing processes resulted in improvement in efficiency.

     Research and development as a percentage of net sales was 5.9 percent in 2002 compared to 6.1 percent in 2001 or 5.8 percent excluding separation costs of $3.2 million. Increases in research and development costs outpaced sales growth, reflecting investments in active and new projects, and is consistent with the Company’s stated target to be at the higher end of the industry average, or approximately 6 percent of sales. The Company has many active projects underway focused on areas of strategic significance, including MIS and the establishment of The Zimmer Institute, innovative materials such as Trabecular Metal and Highly Crosslinked Polyethylene, lifestyle designs, revision implants and biotechnology.

     Selling, general and administrative expenses as a percentage of net sales were 39.8 percent in 2002 compared to 45.6 percent in 2001, or 40.9 percent excluding separation costs of $54.9 million. Selling, general and administrative expenses increased 13 percent to $546.0 million in 2002 from $482.2 million, excluding separation costs of $54.9 million, in 2001. Excluding separation costs, the improvement in the expense ratio reflects lower selling expenses as a result of lower costs associated with the Company’s U.S. distributor network, sales force and distributor reorganization in Japan, and improved efficiency in the utilization of instruments. This was partially offset by approximately $2 million of consulting costs associated with tax services and analysis of various external development opportunities, continued investments in various strategic initiatives including MIS, direct-to-consumer advertising, training and medical education, and higher insurance premiums.

     Operating profit increased 62 percent in 2002 to $400.9 million from $248.3 million in 2001, or increased 26 percent from $318.3 million excluding separation costs of $70.0 million, due to controlled increases in operating expenses at rates below sales growth.

     The effective tax rate on earnings before taxes decreased to 33.7 percent in 2002 compared to 37.8 percent in 2001, or 35.8 percent excluding separation costs. The decrease from 35.8 percent to 33.7 percent was due to expanded operations in Puerto Rico, increased R&D credits, higher foreign tax credits and the implementation of certain business strategies in 2002 which resulted in reducing taxes in certain jurisdictions and increased credits.

     Net earnings increased 72 percent to $257.8 million from $149.8 million in 2001, due to improved gross profit, lower rate of increase in selling, general and administrative expenses than sales and the incurrence of $70.0 million

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES	2002 FORM 10-K

($49.9 million, net of tax) of separation costs in 2001. Basic and diluted earnings per share increased 73 percent and 70 percent to $1.33 and $1.31, respectively, from $0.77 in 2001.

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 reflected strong demand for reconstructive implants and outstanding results in the Company’s largest operating segment, the Americas. This increase in the Americas was partially offset by weak local currencies in Asia Pacific 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 fluctuations.

     The introduction of new materials, techniques and technologies has contributed to a significant increase in demand for the Company’s products and has generally had a favorable effect on sales as average selling prices for the new materials and technologies generally exceed those being replaced. For example, sales have been favorably affected 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 benefited 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 offering 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 exemplifies 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 Modular Revision Hip System, Trabecular Metal acetabular cups, and increased sales of Trilogy Acetabular System cups incorporating Longevity Highly Crosslinked Polyethylene Liners. Trauma product sales increased 11 percent, in large part due to the introduction of the new ZPS internal fixation devices during the fourth quarter and increased sales in fracture instruments.

     Net sales in Asia Pacific 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 offset by a 12 percent decrease due to foreign exchange rate fluctuations. Knee sales decreased 6 percent (increased 5 percent constant currency), reflecting 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. Trauma products decreased 8 percent (increased 3 percent constant currency) with higher sales of M/DN Intramedullary Fixation nails offset 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 fluctuations. 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 system of knee prostheses 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. Trauma 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, reflecting 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. Trauma product sales increased 4 percent (increased 8 percent constant currency) to $128.3 million, driven by the introduction of the new ZPS internal fixation devices and strong sales of M/DN nails in Asia Pacific. Orthopaedic

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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 profit as a percentage of net sales was 72.7 percent in 2001, or 73.7 percent excluding separation costs of $11.9 million, compared to 72.1 percent in 2000. This increase was due to higher average selling prices, favorable premium priced product mix, as well as improved manufacturing efficiencies associated with increased sales volume and enhanced productivity. This was partially offset by the unfavorable impact of changes in foreign currency exchange rates and inflationary expense increases, including wages and fringe benefits.

     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 offerings 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 offer 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.

     Selling, general and administrative expenses as a percentage of net sales were 45.6 percent in 2001, or 40.9 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 patients who chose to revise certain 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 $429.8 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, reflecting 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.

     Operating profit decreased 7 percent in 2001 to $248.3 million from $268.0 million in 2000. Excluding separation costs of $70.0 million, operating profit increased 19 percent to $318.3 million, due primarily to the increase in gross profit margin, together with expense leveraging.

     The effective tax rate on earnings before taxes increased to 37.8 percent in 2001 compared to 34.3 percent in 2000. Excluding separation costs, the effective tax rate increased to 35.8 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, principally due to the incurrence of $70.0 million ($49.9 million net of tax) of separation costs related to the Distribution. The net earnings decrease was partially offset by improvements in gross profit and lower selling, general and administrative expenses excluding separation costs. Basic and diluted earnings per share decreased 15 percent in 2001 to $0.77 from $0.91 in 2000.

OPERATING PROFIT BY SEGMENT

     The following table sets forth the operating profit by segment for the years ended December 31, 2002, 2001 and 2000:

Operating Profit by Segment

     Percent of net sales

Year Ended December 31, 2002
Compared to Year Ended December 31, 2001

     Operating profit for the Americas as a percentage of net sales increased to 46.5 percent in 2002 from 45.1 percent in 2001, reflecting improved gross profit margins due to higher average selling prices and increased sales of higher margin products, and lower selling expenses as a percent of sales due to lower costs associated with the U.S. distributor network. The Americas continued to invest in strategic initiatives such as MIS, field sales personnel, medical education programs and new product launches.

     Operating profit for Asia Pacific as a percentage of net sales increased to 43.7 percent in 2002 from 41.1 percent in 2001. This increase reflects lower selling, general and administrative expenses as a percent of sales in Japan as a result of a sales force and distributor reorganization, partially offset by lower gross profit margins as a result of lower yen hedge gains compared to 2001.

     Operating profit for Europe as a percentage of net sales increased to 21.0 percent in 2002 from 15.6 percent in 2001, due to improved gross profit margins as a result of higher average selling prices and favorable product and country mix, the leveraging of sales growth in Europe on controlled increases in operating expenses and improved efficiency in the utilization of instruments.

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES	2002 FORM 10-K

Year Ended December 31, 2001
Compared to Year Ended December 31, 2000

     Operating profit for the Americas as a percentage of net sales decreased to 45.1 percent in 2001 from 47.8 percent in 2000. This decrease reflects higher selling expenses partially offset by favorable effects of increased sales of higher margin products and higher average selling prices.

     Operating profit for Asia Pacific as a percentage of net sales increased to 41.1 percent in 2001 from 38.1 percent in 2000. While revenues were adversely affected by weak local currencies, the negative impact of foreign currency on sales was largely mitigated in operating profit by gains on derivative financial 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 profit for Europe as a percentage of net sales increased to 15.6 percent in 2001 from 15.3 percent in 2000. The increase in 2001 was due to favorable country and product mix.

LIQUIDITY AND CAPITAL RESOURCES

     Cash flow generated from operations was $220.2 million in 2002, compared with $171.8 million in 2001. The principal source of cash was net earnings of $257.8 million, non-cash charges for depreciation of $25.3 million, partially offset by working capital investments of $62.9 million. In 2001, the Company incurred $70.0 million ($49.9 million net of tax) for the separation from its former parent.

     Working capital continues to be a key management focus. The Company strategically invested in inventory and instruments to support strong sales growth in the Americas and Europe, and to support new products launched during the year as well as expected to be launched in 2003. The Company intends to operate at approximately 250 to 260 days of inventory and ended 2002 at 247 days. Accounts receivable collection remained strong, with the Americas at a record 33 days, 4 days favorable to prior year. During the year, the Company contributed $20.7 million to the U.S. and Puerto Rico pension plans, representing maximum allowable funding, for liabilities assumed from its former parent on Distribution, in addition to liabilities accrued since Distribution. The Company expects 2003 pension contributions to be lower than the 2002 level.

     Cash flow used in investing activities was $35.7 million in 2002 compared with $54.7 million in 2001. In 2001, the Company invested in the expansion of its manufacturing and distribution capacity with an addition to the Company’s main distribution center in Warsaw, Indiana, to support sales growth. In 2002, the Company continued to invest in computer hardware and software for the new information technology system for the Company’s North American operations and additional computer system infrastructure required as a result of the separation.

     The Company has a $600 million, committed, multi-currency, revolving senior unsecured syndicated credit agreement (the “Credit Facility”) that matures July 31, 2004. The Credit Facility contains customary affirmative 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 as of December 31, 2002. Also, the Credit Facility restricts the payment of dividends and the making of investments if the Company does not have an investment grade rating, as defined. The Company’s credit rating as of December 31, 2002 met such requirement. Available borrowings under the Credit Facility at December 31, 2002, were $443.8 million. Borrowings under the Credit Facility may bear interest at higher or lower margins above LIBOR, based on the Company’s senior unsecured long-term debt rating and the amounts drawn under the Credit Facility.

     Cash provided by operating activities, together with proceeds from issuance of common stock, were used in 2002 to fund payments of debt of $212.8 million. The Company had $15.7 million in cash and cash equivalents and outstanding borrowings of $156.7 million as of December 31, 2002. The Company expects to pay off the remaining debt balance by the end of 2003 with cash provided from operations absent any cash requirements for acquisitions during the period. The Company intends to maintain a capital structure that is consistent with an investment grade credit rating.

     Management believes that cash flows from operations, together with available borrowings under the Credit Facility, will be sufficient to meet the Company’s working capital, capital expenditure and debt service needs. Should investment opportunities arise, the Company believes that its earnings, balance sheet and cash flows 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.

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CONTRACTUAL OBLIGATIONS

     The Company has entered into contracts with various third parties in the normal course of business which will require future payments. The following table illustrates the Company’s contractual obligations:

CRITICAL ACCOUNTING POLICIES

     The financial results of the Company are affected by the selection and application of accounting policies and methods. Significant accounting policies which, in some cases, require management’s judgment are discussed below.

	Revenue Recognition – A significant portion of the Company’s revenue is recognized for field based product upon notification that the product has been implanted or used. For all other transactions, the Company recognizes revenue when title is passed to customers, generally upon shipment. Estimated returns and allowances are recorded as a reduction of sales when the revenue is recognized.
	Inventories – The Company must determine as of each balance sheet date how much, if any, of its inventory may ultimately prove to be unsaleable or unsaleable at its carrying cost. Reserves are established to effectively adjust any such inventory to net realizable value. To determine the appropriate level of reserves, the Company evaluates current stock levels in relation to historical and expected patterns of demand for all of its products. A series of algorithms is applied to the data to assist management in its evaluation. Management evaluates the need for changes to valuation reserves based on market conditions, competitive offerings and other factors on a regular basis. Further information about inventory reserves is provided in notes to the consolidated financial statements.
	Instruments – The Company, as is customary in the industry, consigns surgical instruments for use in orthopaedic procedures with the Company’s products. The Company’s accounting policy requires that the full cost of instruments be recognized as an expense in the year in which the instruments are placed in service. An alternative to this method is to depreciate the cost of instruments over their useful lives. The Company may from time to time consider a change in accounting for instruments to better align its accounting policy with certain Company competitors.
	Property, Plant and Equipment – The Company determines estimated useful lives of property, plant and equipment based on historical patterns of use and physical and technological characteristics of assets, as appropriate. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company reviews property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows relating to the asset are less than its carrying amount.
	Derivative Financial Instruments – Critical aspects of the Company’s accounting policy for derivative financial instruments include conditions which require that critical terms of a hedging instrument are essentially the same as a hedged forecasted transaction. Another important element of the policy requires that formal documentation be maintained as required by the SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Failure to comply with these conditions would result in a requirement to recognize changes in market value of hedge instruments in earnings as they occur. Management routinely monitors significant estimates, assumptions and judgments associated with derivative instruments, and compliance with formal documentation requirements.
	Stock Compensation – 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 fixed stock option plans as options are granted at fair market value. SFAS No. 123, “Accounting for Stock-Based Compensation” provides an alternative method of accounting for stock options based on an option pricing model, such as Black-Scholes. The Company has adopted the disclosure requirements of SFAS No. 123 and SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” Information regarding compensation expense under the alternative method is provided in notes to the consolidated financial statements.

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	Pensions and Other Postretirement Benefits – The Company’s pension and postretirement benefit costs and liabilities are calculated utilizing various actuarial assumptions and methodologies prescribed under SFAS No. 87, “Employers’ Accounting for Pensions” and No. 106, “Employers Accounting for Postretirement Benefits Other Than Pensions.” The most significant actuarial assumptions include the discount rate, expected rate of return on plan assets and the expected healthcare cost trend rate. Other actuarial assumptions utilized in determining pension and postretirement benefit costs include, among others, mortality rates and employee turnover rates. The discount rate assumption is based upon the review of high quality corporate bond rates and the change in those rates during the year. The expected rate of return on plan assets and healthcare cost trend rate are based upon an evaluation of trends and experiences taking into account current and expected market conditions.
	A twenty-five basis point change in the discount rate or the expected rate of return on plan assets would not have a material impact on the Company’s financial position, results of operations or cash flows. A reasonable change in the other actuarial assumptions would not have a material impact on the Company’s financial position, results of operations or cash flows.
	Income Taxes – The Company estimates income tax expense and income tax liabilities and assets by taxable jurisdiction. Realization of deferred tax assets in each taxable jurisdiction is dependent on the Company’s ability to generate future taxable income sufficient to realize the benefits. The Company evaluates deferred tax assets on an ongoing basis and provides valuation allowances if it is determined to be “more likely than not” that the deferred tax benefit will not be realized. Federal income taxes are provided on the portion of the income of foreign subsidiaries that is expected to be remitted to the U.S.
	Commitments and Contingencies – Accruals for product liability and other claims are established with internal and external counsel based on current information and historical settlement information for claims, related fees and for claims incurred but not reported. An actuarial model is used by the Company to assist management in determining an appropriate level of accruals for product liability claims. Historical patterns of claim loss development over time are statistically analyzed to arrive at factors which are then applied to loss estimates in the actuarial model. The amounts established represent management’s best estimate of the ultimate costs that it will incur under the various contingencies.

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 10 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 finally, 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, post-retirement, long-term disability and U.S. sales agent benefits. Recognition of these liabilities and obligations and other adjustments were reflected in the remaining net investment in the Company by its former parent of $14.1 million as of the Distribution and subsequently reclassified to opening retained earnings. The Distribution qualified 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 were 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, the Company does not currently anticipate that operating costs resulting from the separation from its former parent will materially impact its cost structure as reflected in its historical consolidated results.

RECENT ACCOUNTING PRONOUNCEMENTS

     Information about recent accounting pronouncements is included in Note 2 to the Consolidated Financial Statements, which are included herein under Item 8.

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES	2002 FORM 10-K

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 financial condition, results of operations and cash flows. The Company manages its exposure to these and other market risks through regular operating and financing activities, and on a limited basis, through the use of derivative financial instruments. Derivative financial 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 financial condition, results of operations and cash flows could be adversely affected 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 offsets. In order to reduce the uncertainty of foreign exchange rate movements on transactions denominated in foreign currencies, the Company enters into derivative financial instruments in the form of foreign exchange forward contracts with major international financial institutions. These forward 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 cash flow hedges are temporarily recorded in other comprehensive income, then recognized in earnings when the hedged item affects 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, 2002 and 2001, were $252 million and $82 million, respectively. For all contracts outstanding at December 31, 2002: the Company has obligation to purchase U.S. Dollars and sell Japanese Yen and the Euro at set maturity dates ranging from January 2003 through September 2004. The weighted average contract rates for 2003 and 2004 are 129 and 117 Yen and $0.97 and $1.03 Euro, respectively.

     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 flow hedges, changes in cash flows attributable to hedged transactions are generally expected to be completely offset 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 flows and financial 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, 2002, indicated that, if the U.S. Dollar uniformly changed in value by 10 percent relative to the Japanese Yen and the Euro, with no change in the interest differentials, the fair value of those contracts would increase or decrease earnings before income taxes, depending on the direction of the change, by an average approximate amount of $17.1 million and $9.9 million for the Yen and Euro contracts, respectively. Any change in the fair value of foreign exchange forward contracts as a result of a fluctuation in a currency exchange rate is expected to be largely offset by a change in the value of the hedged transaction. Consequently, foreign exchange contracts would not subject the Company to material risk due to exchange rate movements because gains and losses on these contracts offset gains and losses on the assets, liabilities, and transactions being hedged.

     The Company had net investment exposures to net foreign currency denominated assets and liabilities of approximately $135 million and $87 million at December 31, 2002 and 2001, respectively, primarily in the Japanese Yen and the Euro.

COMMODITY PRICE RISK

     The Company purchases raw material commodities such as cobalt chrome, titanium, tantalum, 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 fluctuation 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 financial position, results of operations or cash flows.

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 financial condition. The Company manages its exposure to interest rate risks through its regular operations and financing activities.

     Presently, the Company invests its cash and cash equivalents in money market and investment-grade short-term debt instruments. 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 financial instruments in its investment portfolio.

     The Company’s exposure to interest rate risk arises principally from the variable rates associated with its credit

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES	2002 FORM 10-K

facilities. The Company is subject to movements in interest rate risk on the committed Credit Facility and its uncommitted credit facilities. Presently, all of its debt outstanding is floating. The Company currently does not hedge its interest rate exposure, but may do so in the future. Based upon the Company’s overall interest rate exposure as of December 31, 2002, a change of 10% in interest rates would not have a material effect on the Company’s earnings or cash flows over a one-year period. However, due to the uncertainty of the actions that would be taken and their possible effects, this analysis assumes no such action, nor management actions to mitigate interest rate changes. Further, this analysis does not consider the effect of the change in the level of overall economic activity that could exist in such an environment. Presently, the Company intends to utilize cash flow to reduce outstanding borrowings.

CREDIT RISK

     Financial instruments, which potentially subject the Company to concentrations of credit risk, are primarily cash, cash equivalents, counterparty transactions, and accounts receivable.

     The Company places its investments in highly rated financial institutions and money market instruments, and limits the amount of credit exposure to any one entity. The Company does not believe it is exposed to any significant credit risk on its cash and cash equivalents and investments.

     The Company is exposed to credit loss in the event of nonperformance by the financial institutions with which it conducts business. However, this loss is limited to the amounts, if any, by which the obligations of the counterparty to the financial instrument contract exceed the obligation of the Company. The Company also minimizes exposure to credit risk by dealing with a diversified group of major financial institutions. Credit risk is managed through the monitoring of counterparty financial condition and by the use of standard credit guidelines. The Company does not anticipate any nonperformance by any of the counterparties.

     Concentration of credit risk with respect to trade accounts receivable is limited due to the large number of customers and their dispersion across a number of geographic areas and by frequent monitoring of the creditworthiness of the customers to whom credit is granted in the normal course of business. However, essentially all of the Company’s trade receivables are concentrated in the public and private hospital and healthcare industry in the U.S. and internationally or with distributors who operate in international markets and, accordingly, are exposed to their respective business, economic and country specific variables. Repayment is dependent upon the financial stability of these industry sectors and the respective countries’ national economic and health care systems. 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 significant net exposure due to any individual customer or other major concentration of credit risk.

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES	2002 FORM 10-K

Zimmer Holdings, Inc.

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES	2002 FORM 10-K

Report Of Management

      Management is responsible for the integrity of the financial information presented in this Form 10-K. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles. Where necessary, they reflect 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 financial 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. The Company, independent accountants and internal auditors periodically review the accounting and control systems, and these systems are revised if and when weaknesses or deficiencies 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 financial matters. The independent accountants have access to the Audit Committee without management’s presence.

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES	2002 FORM 10-K

Report of Independent Accountants

      In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Zimmer Holdings, Inc. and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES	2002 FORM 10-K

Consolidated Statements of Earnings

The accompanying notes are an integral part of these consolidated financial statements.

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES	2002 FORM 10-K

Consolidated Balance Sheets

The accompanying notes are an integral part of these consolidated financial statements.

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ZIMMER HOLDINGS, INC. AND SUBSIDIARIES	2002 FORM 10-K

Consolidated Statements of Stockholders’ Equity