2003 FORM 10-K ZIMMER HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 16. STOCK OPTION AND COMPENSATION PLANS  b) such date, if any, as may be designated by the board of directors following the commencement of, or first public disclosure of an intention to commence, a tender offer or exchange offer for shares of Company common stock then outstanding that could result in a person or group acquiring, or obtaining the right to acquire, beneficial ownership of securities representing more than 20 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, 2003. 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 shares outstanding adjusted for the effect of dilutive stock options. The following is a reconciliation of weighted average shares for the basic and diluted share computations (in millions): As of December 31, 2003, the Company had three stock option plans in effect, the 2001 Stock Incentive Plan, the TeamShare Stock Option Plan and the Stock Plan for Non- Employee Directors. The Company has reserved the maximum number of shares of common stock available for award under the terms of each of these plans and has registered 34.3 million shares of common stock. 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 nonqualified 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- qualified stock options and, in certain jurisdictions, 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 five years, although in no event in less than one year, and expire ten years from the date of grant. In the past, certain options have had price thresholds, which affect exercisability. All such price thresholds have been satisfied. 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 effective 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 million shares of stock over the life of the Plan. At the Distribution, 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 affected by the conversion. A summary of the status of all options granted to employees and non-employee directors at December 31 and changes during the period from the distribution date is presented below: Weighted Options Average (in thousands) Exercise Price Conversion of Bristol-Myers Squibb options on Distribution 8,700 $23.93 Options granted 2,239 28.67 Options exercised (129) 12.80 Options cancelled (83) 29.88 Outstanding at December 31, 2001 10,727 25.01 Options granted 1,833 30.34 Options exercised (1,262) 18.94 Options cancelled (263) 28.73 Outstanding at December 31, 2002 11,035 26.51 Options granted 2,395 43.06 Options exercised (2,688) 23.80 Options cancelled (272) 34.76 Outstanding at December 31, 2003 10,470 $30.77 2003 2002 2001 Weighted average shares outstanding for basic net earnings per share 207.7 194.5 193.7 Effect of dilutive stock options 3.5 2.3 0.6 Weighted average shares outstanding for diluted net earnings per share 211.2 196.8 194.3 52