ZIMMER HOLDINGS, INC. AND SUBSIDIARIES 2003 FORM 10-K The Company is committed to providing high quality products to its customers. To meet this commitment, the Company has implemented modern quality systems and concepts throughout the organization. The quality assurance department supervises the Company’s quality systems. Senior management is actively involved in setting quality policies and managing internal and external quality performance. The Company’s regulatory affairs and compliance department is responsible for assuring compliance with all applicable regulations, standards and internal policies. Since 1998, the Company has initiated numerous quality improvement programs and maintains an excellent compliance record. All of the Company’s manufacturing operations are ISO 9000 and/or ISO 13485/13488 series certified. The Company’s facilities and operations are also 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. The orthopaedics industry is highly competitive. In the global markets for reconstructive implants, trauma and orthopaedic surgical products, major competitors include: DePuy Orthopaedics, Inc. (a subsidiary of Johnson & Johnson), Stryker Corp., Biomet, Inc., Synthes-Stratec, Inc. and Smith & Nephew, plc. In the Americas geographic segment, DePuy Orthopaedics, Inc., Stryker Corp. and Biomet, Inc., 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 DePuy Orthopaedics, Inc. 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 segments. The variety of philosophies held by European surgeons regarding hip reconstruction, for example, has fostered the existence 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. Particularly with the acquisition of Centerpulse, the Company believes it is well positioned in this region in the reconstructive implant market. In the spinal implant area, the Company competes globally primarily with Medtronic/Sofamor Danek, Inc. (a subsidiary of Medtronic, Inc.), Synthes-Stratec, Inc., DePuy Spine (a subsidiary of Johnson & Johnson), Stryker Corp., and EBI, L.P. (a subsidiary of Biomet, Inc.). In the dental reconstructive implant area, the Company competes primarily with Nobel Biocare AB, Straumann AG, and Implant Innovations, Inc. (a subsidiary of Biomet, Inc.). Competition within the industry is primarily based on technology, innovation, quality, reputation, customer relationships and service. A key factor in the Company’s continuing success in the future will continue to be its ability to develop new products and improve upon existing products and technologies. Where possible, the Company will continue to seek patent, trademark and other intellectual property protection concerning the surgical techniques, materials, technologies and products it designs and develops. The Company manufactures substantially all of its products at nine facilities located in the United States, Puerto Rico, Switzerland and France. Specifically, the Company presently conducts manufacturing operations for various product areas in Warsaw, Indiana; Winterthur, Switzerland; Ponce, Puerto Rico; Dover, Ohio; Austin, Texas$^{10}$; Statesville, North Carolina; Calabassas, California; Carlsbad, California; and Etupes, France. The Company believes that its manufacturing facilities set industry standards in terms of automation and have the flexibility to accommodate future growth. The manufacturing operations at these facilities are designed to incorporate the cellular concept for production and to implement tenets of a manufacturing philosophy focused on continuous operational improvement. In addition, at certain of the Company’s manufacturing facilities, many of the employees are cross-trained. The Company generally operates its manufacturing facilities at its targeted goal of approximately 90 percent of total capacity. The Company continually evaluates the potential to in-source products currently purchased from outside vendors to on-site production. The Company is currently in the process of expanding certain of its facilities. Improving manufacturing productivity has been a major contributor to the Company’s profitability improvements in recent years. Major areas of improvement have included utilization of computer-assisted robots to precision polish medical devices, automation of certain manufacturing processes, in-sourcing of core products, high-speed machining, and negotiated reductions in raw materials costs. The Company uses a diverse and broad range of raw materials in the design, development and manufacturing of its products. The Company purchases all of its raw materials and select components used in manufacturing its products from external suppliers. In addition, the Company purchases some supplies from single sources for reasons of quality assurance, $^{10}$The Company has announced plans to phase-out this facility by the end of 2005. 13 MANUFACTURING AND RAW MATERIALS COMPETITION