2003 FORM 10-K ZIMMER HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) The ineffective portion of a derivative’s change in fair value, if any, is reported in net earnings. Stock Compensation – At December 31, 2003, the Company has three stock-based employee compensation plans, which are described more fully in Note 16. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, ‘‘Accounting for Stock Issued to Employees,’’ and related Interpretations. No stock based employee compensation cost is reflected in net income, as all options granted under those plans had exercise prices equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, ‘‘Accounting for Stock Based Compensation,’’ to the above plans. Comprehensive Income – Other comprehensive income refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but are excluded from net earnings as these amounts are recorded directly as an adjustment to stockholders’ equity. The Company’s other comprehensive income is comprised of unrealized foreign currency hedge gains and losses, net of tax, minimum pension liability adjustments, net of tax, and foreign currency translation adjustments. The components of accumulated other comprehensive income at December 31, 2003, 2002 and 2001, are as follows (in millions): Accounting Pronouncements – Effective January 1, 2003, the Company adopted the provisions of SFAS No. 143, ‘‘Accounting for Asset Retirement Obligations,’’ and SFAS No. 146, ‘‘Accounting for Costs Associated with Exit or Disposal Activities,’’ without any material impact on its financial position, results of operations or cash flows. In 2003, the FASB issued SFAS No. 149, ‘‘Amendment of Statement 133 on Derivative Instruments and Hedging Activities.’’ SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. The Company has adopted the provisions of SFAS No. 149 without any material impact on its financial position, results of operations or cash flows. In 2003, the FASB issued SFAS No. 150, ‘‘Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.’’ SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company has adopted the provisions of SFAS No. 150 without any material impact on its financial position, results of operations or cash flows. In 2003, the FASB revised SFAS No. 132, ‘‘Employers’ Disclosures about Pensions and Other Postretirement Benefits’’. The revised SFAS No. 132 retains the disclosure requirements of the original SFAS No. 132 and adds additional disclosure requirements regarding assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The revised SFAS No. 132 is effective for fiscal years ending after December 15, 2003 for certain disclosures with the remaining disclosures effective for fiscal years ending after June 15, 2004. The Company adopted revised SFAS No. 132 on December 31, 2003. In 2002, the FASB issued FASB Interpretation (‘‘FIN’’) No. 45, ‘‘Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others’’. FIN 45 requires a guarantor to recognize a liability, at the inception of the guarantee, for the fair value of obligations it has undertaken in issuing the guarantee and also requires more detailed disclosures with respect to guarantees. FIN 45 is effective for guarantees issued or modified after December 31, 2002 and requires additional disclosures for existing guarantees. The adoption of FIN 45 did not have a material impact on the Company’s financial position, results of operations or cash flows. In 2003, the FASB issued FIN No. 46, ‘‘Consolidation of Variable Interest Entities’’, and subsequent revision, FIN No. 46R ‘‘Consolidation of Variable Interest Entities’’. FIN 46R defines a variable interest entity (‘‘VIE’’) as a corporation, partnership, trust, or any other legal structure that does not have equity investors with a controlling financial interest or has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46R requires consolidation of a VIE by the primary beneficiary 41 2003 2002 2001 Net unrealized foreign currency hedge gains (losses) $(40.4) $(8.5) $ 7.2 Cumulative translation adjustment 179.7 23.1 9.6 Minimum pension liability (0.6) (0.6) – $138.7 $14.0 $16.8 (in millions, except per share amounts) For the Years Ended December 31, 2003 2002 2001 Net earnings, as reported $346.3 $257.8 $149.8 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax (14.3) (12.7) (13.4) Pro forma net earnings $332.0 $245.1 $136.4 Earnings per share: Basic – as reported $ 1.67 $ 1.33 $ 0.77 Basic – pro forma 1.60 1.26 0.70 Diluted – as reported 1.64 1.31 0.77 Diluted – pro forma 1.57 1.25 0.70 Weighted average shares outstanding: Basic 207.7 194.5 193.7 Diluted 211.2 196.8 194.3