AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 19, 2003
REGISTRATION NO. 333-105562
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ZIMMER HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
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<Table>
DELAWARE 3842 13-4151777
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
</Table>
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345 EAST MAIN STREET
WARSAW, INDIANA 46580
(574) 267-6131
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
DAVID C. DVORAK, ESQ.
ZIMMER HOLDINGS, INC.
345 EAST MAIN STREET
WARSAW, INDIANA 46580
(574) 267-6131
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
MORTON A. PIERCE, ESQ.
M. ADEL ASLANI-FAR, ESQ.
JACK S. BODNER, ESQ.
DEWEY BALLANTINE LLP
1301 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
(212) 259-8000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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THE INFORMATION CONTAINED IN THIS PROSPECTUS MAY BE CHANGED. WE MAY NOT SELL
THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE
WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JUNE 19, 2003
Offer to Exchange
Each Outstanding Bearer Share
of
INCENTIVE CAPITAL AG
for
Shares of Common Stock of Zimmer Holdings, Inc. and Cash
(in each case subject to the procedures and adjustments described in this offer)
by
ZIMMER HOLDINGS, INC.
OUR OFFER AND THE WITHDRAWAL RIGHTS WILL EXPIRE AT 4:00 P.M., CENTRAL EUROPEAN
TIME, 10:00 A.M., NEW YORK CITY TIME, ON MONDAY, AUGUST 25, 2003, UNLESS
EXTENDED. INCENTIVE CAPITAL AG BEARER SHARES TENDERED PURSUANT TO OUR OFFER MAY
BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION OF OUR OFFER.
We are offering to exchange for each outstanding bearer share of InCentive
Capital AG, nominal value CHF 20 per share, that is validly tendered and not
properly withdrawn prior to the expiration of our offer, shares of Zimmer
Holdings, Inc. common stock, par value $0.01 per share, and cash, in Swiss
francs, without interest. The amount of shares of Zimmer common stock and cash
that we are offering for each InCentive bearer share will be calculated based on
a formula and will depend on, among other things, the number of Centerpulse AG
registered shares held by InCentive and the net value of other assets remaining
in InCentive on the last day of our offer, as more fully described in the
section captioned "OUR OFFER -- Terms of Our Offer; Expiration Date." Under
Swiss law, our offer is subject to a "cooling-off" period of 10 Swiss trading
days at the beginning of our offer during which tenders of InCentive bearer
shares will not be recognized as valid tenders under our offer. Therefore, July
3, 2003 is the first date upon which tenders of InCentive bearer shares will be
recognized as valid tenders under our offer.
You may elect to vary the proportion of shares of our common stock and cash
that you receive in our offer. Any election you make in our offer will be taken
together with elections made under a similar mix and match election feature
included in our offer for all the outstanding registered shares, nominal value
CHF 30 per share, and American depositary shares of Centerpulse, which we refer
to as our Centerpulse offer. The mix and match election you make will be limited
to the extent other InCentive shareholders or holders of Centerpulse registered
shares, including registered shares represented by Centerpulse American
depositary shares, or ADSs, make off-setting elections. Credit Suisse First
Boston, whom we have appointed to act as the Swiss offer manager for our offer,
will allocate the offer consideration among InCentive shareholders based on the
off-setting elections made by other tendering securityholders in our offer and
our Centerpulse offer. To the extent that elections cannot be satisfied as a
result of the lack of such off-setting elections, entitlements to shares of
Zimmer common stock and cash in excess of the standard entitlement will be
reduced on a pro rata basis. Once the share allocations have been determined,
the cash element of the consideration will be reduced or increased, as the case
may be, for each InCentive shareholder who has been allocated an increased or
reduced number of shares of Zimmer common stock. We describe our procedures for
election and proration in the section captioned "OUR OFFER -- Mix and Match
Election."
The purpose of this offer is for Zimmer to acquire control of, and
ultimately the entire interest in, Centerpulse. Promptly following this offer,
if Zimmer acquires that number of InCentive bearer shares and Centerpulse
registered shares, including registered shares represented by Centerpulse ADSs,
representing more than 98% of the voting power of InCentive and/or Centerpulse,
Zimmer intends to request the cancellation of the remaining InCentive and/or
Centerpulse registered share certificates in accordance with the compulsory
process available under applicable Swiss law.
We believe that our offer is more favorable to you than the exchange offer
commenced by Smith & Nephew Group plc for InCentive bearer shares on April 25,
2003. As is the case in Smith & Nephew Group's offer, the number of shares of
our common stock and cash that you will receive in our offer will be based on
the consideration being offered for Centerpulse registered shares in our
Centerpulse offer, subject to adjustments based on the net value of all other
assets held by InCentive on the last day of our offer. Based on the closing
price of our common stock on the New York Stock Exchange on June 16, 2003 of
US$47.19 and the noon buying rate for Swiss francs on such date of CHF 1.3009 =
US$1.00, our Centerpulse offer has an implied value of CHF 346 per Centerpulse
registered share. Based on the closing price of Smith & Nephew ordinary shares
on June 16, 2003 of L3.7525 and the exchange rate for English pounds on such
date of L1.00 = CHF 2.1875, Smith & Nephew Group's offer for Centerpulse
registered shares has an implied value of CHF 280 per Centerpulse registered
share. Based on these closing prices and exchange rates, the implied value of
our Centerpulse offer represents a premium of approximately CHF 66 per
Centerpulse registered share, or approximately 23.6% over the implied value of
Smith & Nephew Group's offer for Centerpulse registered shares. You should be
aware that the value of our offer and Smith & Nephew Group's offer will
fluctuate as the market prices of our common stock and Smith & Nephew ordinary
shares change.
Our obligation to exchange shares of Zimmer common stock and cash for
InCentive bearer shares is subject to a number of conditions which are more
fully described in the section captioned "OUR OFFER -- Conditions of Our Offer,"
including among others, that at least 80% of the total number of the InCentive
bearer shares outstanding on a fully diluted basis have been validly tendered
and not withdrawn.
Our common stock trades on the New York Stock Exchange under the symbol
"ZMH" and InCentive bearer shares trade on the SWX Swiss Exchange under the
symbol "INC."
FOR A DISCUSSION OF CERTAIN FACTORS THAT YOU SHOULD CONSIDER IN CONNECTION
WITH OUR OFFER, PLEASE CAREFULLY READ THE SECTION CAPTIONED "RISK FACTORS"
BEGINNING ON PAGE 17.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
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The Swiss Offer Manager for our offer is:
[CREDIT SUISSE LOGO]
The date of this prospectus is June [--], 2003
We have not authorized any person to provide any information or to make any
representation in connection with our offer other than the information contained
or incorporated by reference in this prospectus, and if any person provides any
of this information or makes any representation of this kind, that information
or representation must not be relied upon as having been authorized by us.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
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REGULATORY STATEMENT
Our offer is subject to the applicable laws of Switzerland, including the
Federal Act on Stock Exchanges and Securities Trading of Switzerland, and the
United States, including the applicable tender offer rules promulgated under the
Securities Exchange Act of 1934, as amended, or the Exchange Act. This offer
document constitutes a prospectus under Section 5 of the Securities Act of 1933,
as amended, with respect to shares of common stock to be issued under our offer.
We have filed with the SEC a registration statement on Form S-4, of which
this prospectus is a part. The registration statement on Form S-4 and any
amendments thereto, including exhibits, may be examined and copies may be
obtained from the offices of the SEC in the manner set forth in the section
captioned "WHERE YOU CAN FIND MORE INFORMATION."
Sales Restrictions in Certain Countries and Jurisdictions
The shares of Zimmer common stock described herein may not be offered or
sold in the United Kingdom, by means of this prospectus or any other document,
other than to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which will not result
in an offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995. THIS DOCUMENT IS IMPORTANT AND REQUIRES
YOUR IMMEDIATE ATTENTION. If you are in any doubt about the action you should
take, you are recommended immediately to seek your own personal financial advice
from your stockbroker, bank manager, solicitor, accountant or other independent
financial adviser duly authorized under the Financial Services & Markets Act
2000 if you are resident in the United Kingdom or, if not, another appropriately
authorized independent financial adviser.
The distribution of this prospectus and the making of our offer may, in
certain jurisdictions, be restricted by law. Our offer is not being made,
directly or indirectly, in or into, and will not be capable of acceptance from
within, any jurisdiction in which the making of our offer or the acceptance
thereof would not be in compliance with the laws of that jurisdiction. Persons
who come into possession of this prospectus should inform themselves of and
observe any of these restrictions. Any failure to comply with these restrictions
may constitute a violation of the securities laws of any of these jurisdictions.
We do not assume any responsibility for any violation by any person of any of
these restrictions. WE ARE NOT MAKING OUR OFFER IN OR INTO -- AND YOU MAY NOT
ACCEPT OUR OFFER IN OR FROM -- AUSTRALIA, CANADA OR JAPAN.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION ON BEHALF OF US NOT CONTAINED IN THIS PROSPECTUS OR IN THE FORM
OF DECLARATION OF ACCEPTANCE AND ASSIGNMENT AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
QUESTIONS AND ANSWERS ABOUT THE
TRANSACTION......................... iii
WHERE YOU CAN FIND MORE INFORMATION... ix
NOTE ON INCENTIVE AND CENTERPULSE
INFORMATION......................... xi
SUMMARY............................... 1
Reasons for Our Offer............... 1
Our Offer........................... 1
Risk Factors........................ 5
Indebtedness and the Financing of
Our Offer........................ 5
Comparison of Shareholder Rights.... 5
Ownership of Zimmer After Our Offer
and Our Centerpulse Offer........ 5
The Companies....................... 6
COMPARATIVE MARKET PRICE DATA......... 7
COMPARATIVE HISTORICAL AND PRO FORMA
PER SHARE DATA...................... 8
SELECTED HISTORICAL CONSOLIDATED
FINANCIAL DATA OF ZIMMER............ 11
SELECTED HISTORICAL CONSOLIDATED
FINANCIAL DATA OF INCENTIVE......... 12
SELECTED HISTORICAL CONSOLIDATED
FINANCIAL DATA OF CENTERPULSE....... 13
SELECTED PRO FORMA CONDENSED COMBINED
FINANCIAL DATA...................... 15
RISK FACTORS.......................... 17
Risks Relating to Our Proposed Offer
and Centerpulse Offer............ 17
Risks Relating to Our Industry...... 23
Risks Relating to Our Business...... 27
THE COMPANIES......................... 33
Zimmer Holdings, Inc................ 33
InCentive Capital AG................ 34
Centerpulse AG...................... 35
BACKGROUND AND REASONS FOR OUR
OFFER............................... 39
Background of Our Offer............. 39
Reasons for Our Offer............... 45
OUR OFFER............................. 49
Offer Documentation................. 49
Terms of Our Offer; Expiration
Date............................. 49
Mix and Match Election.............. 51
Extension, Termination and
Amendment........................ 52
Subsequent Offering Period.......... 52
Exchange of InCentive Bearer Shares;
Delivery of Zimmer Common Stock
and Cash Consideration........... 53
Cash Instead of Fractional Shares of
Zimmer Common Stock.............. 54
</Table>
<Table>
<Caption>
PAGE
----
Withdrawal Rights................... 54
Procedures for Tendering InCentive
Bearer Shares.................... 55
Transfer and Withholding Taxes...... 56
Matters Concerning Validity and
Eligibility...................... 57
Announcement of Results of Our
Offer............................ 57
Ownership of Zimmer After Our Offer
and Our Centerpulse Offer........ 57
Currency Exchange Rates............. 58
Taxation............................ 58
Purpose of Our Offer; Plans For
InCentive........................ 67
Effect of Our Offer on the Market
For InCentive Bearer Shares;
Registration Under the Exchange
Act.............................. 67
Conditions of Our Offer............. 68
Certain Legal Matters; Regulatory
Approvals........................ 69
Actions of Zimmer Stockholders...... 73
Relationships with InCentive........ 73
Source and Amount of Funds.......... 74
Fees and Expenses................... 74
Accounting Treatment................ 75
Stock Exchange Listing.............. 75
THE CENTERPULSE OFFER................. 76
Terms of Our Centerpulse Offer...... 76
Conditions of Our Centerpulse
Offer............................ 76
SMITH & NEPHEW GROUP OFFERS FOR
INCENTIVE AND CENTERPULSE........... 79
Combination Agreement............... 79
Transaction Agreement............... 79
Tender Agreement.................... 79
Commencement of Smith & Nephew Group
Offers........................... 80
MARKET PRICE AND DIVIDEND MATTERS..... 81
Market Price History................ 81
Dividend Information................ 82
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS................ 83
DESCRIPTION OF ZIMMER CAPITAL STOCK... 104
Authorized Capital Stock............ 104
Common Stock........................ 104
Preferred Stock..................... 104
Certain Anti-Takeover Provisions of
Our Restated Certificate of
Incorporation and Restated
By-laws.......................... 105
Rights Agreement.................... 108
</Table>
i
<Table>
<Caption>
PAGE
----
Delaware Business Combination
Statute.......................... 111
Transfer Agent and Registrar........ 112
COMPARATIVE RIGHTS OF INCENTIVE
SHAREHOLDERS AND ZIMMER STOCKHOLDERS
IN GENERAL.......................... 113
Authorized Capital Stock............ 113
Preferred Stock..................... 113
Voting Rights; Cumulative Voting.... 114
Stock Class Rights.................. 114
Supermajority Voting................ 115
Shares with Privileged Voting
Rights........................... 116
Action Without a Meeting............ 116
Meetings............................ 117
Director Nominations/Shareholder
Proposals........................ 117
Directors........................... 117
Standard of Conduct for Directors... 118
Limitation of Director Liability.... 119
Directors' Conflicts of Interest.... 119
Indemnification and Insurance....... 120
Shareholder Derivative Suits........ 121
Dividends........................... 121
Appraisal Rights.................... 122
Preemptive Rights................... 122
Amendments to Charter Documents..... 123
</Table>
<Table>
<Caption>
PAGE
----
By-laws............................. 123
Share Acquisition Provisions........ 123
Anti-Takeover Measures.............. 124
Stockholder Rights Plan............. 124
Disclosure of Interests Under Swiss
Law.............................. 125
Mandatory Bid Rules Under Swiss
Law.............................. 125
Rights of Purchase and Redemption... 125
Rights of Inspection................ 126
Limitations on Enforceability of
Civil Liabilities Under U.S.
Federal Securities Laws.......... 127
"Short Swing" Profits............... 128
Proxy Statements and Reports........ 128
Reporting Requirements.............. 128
SECURITY OWNERSHIP OF DIRECTORS,
EXECUTIVE OFFICERS AND CERTAIN
BENEFICIAL OWNERS OF INCENTIVE...... 130
Beneficial Owners................... 130
Shareholdings of Directors and
Executive Officers............... 130
FORWARD-LOOKING STATEMENTS............ 131
LEGAL MATTERS......................... 131
EXPERTS............................... 131
INDEX TO FINANCIAL STATEMENTS......... F-1
</Table>
Annex A -- Excerpts from InCentive Capital AG Annual Report 2002
Annex B -- Excerpts from InCentive Capital AG Annual Report 2001
Schedule I -- Information Concerning the Directors and Executive Officers of
Zimmer Holdings, Inc.
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All references to "dollars," "US$" or "$" in this prospectus are to United
States dollars, and all references to "CHF" are to Swiss francs. The noon buying
rate in New York City for cable transfers in foreign currencies, as certified
for customs purposes by the Federal Reserve Bank of New York on June 16, 2003
was CHF 1.3009 = US$1.00. All references to "U.S." in this prospectus are to the
United States of America.
Where a time is stated in this prospectus, it is generally given in Central
European time and the local time in New York City. At the date of this
prospectus, New York City time is 6 hours behind Central European time.
All references to "Swiss trading day" mean a day on which the SWX Swiss
Exchange is open for trading. For purposes of our offer, a "business day" means
any day other than a Saturday, Sunday or federal holiday and consists of the
time period from 12:01 a.m. through 12:00 midnight, New York City time.
THIS PROSPECTUS INCORPORATES IMPORTANT BUSINESS AND FINANCIAL INFORMATION
ABOUT ZIMMER HOLDINGS, INC. AND CENTERPULSE AG FROM DOCUMENTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION, OR SEC, THAT HAVE NOT BEEN INCLUDED IN OR
DELIVERED WITH THIS PROSPECTUS. THIS INFORMATION IS AVAILABLE AT THE INTERNET
WEBSITE THE SEC MAINTAINS AT HTTP://WWW.SEC.GOV, AS WELL AS FROM OTHER SOURCES.
SEE THE SECTION CAPTIONED "WHERE YOU CAN FIND MORE INFORMATION."
YOU ALSO MAY REQUEST COPIES OF THESE DOCUMENTS FROM US, WITHOUT CHARGE,
UPON WRITTEN OR FACSIMILE REQUEST TO OUR SWISS OFFER MANAGER AT ITS ADDRESS AND
FAX NUMBER SET FORTH ON THE BACK COVER OF THIS PROSPECTUS OR VIA E-MAIL AT
EQUITY.PROSPECTUS@CSFB.COM. IN ORDER TO RECEIVE TIMELY DELIVERY OF THE
DOCUMENTS, YOU MUST MAKE YOUR REQUEST NO LATER THAN AUGUST 15, 2003.
ii
QUESTIONS AND ANSWERS ABOUT THE TRANSACTION
The following are some of the questions that you as an InCentive
shareholder may have regarding our offer and answers to those questions. The
information in this summary is not complete and we urge you to read carefully
the remainder of this prospectus and the accompanying Form of Declaration of
Acceptance and Assignment, which we are sending to InCentive shareholders.
WHAT IS ZIMMER'S PROPOSED TRANSACTION?
Pursuant to the filing of the registration statement on Form S-4, of which
this prospectus is a part, with the SEC, we are offering to acquire all of the
outstanding InCentive bearer shares, in exchange for shares of Zimmer common
stock and cash. As of April 30, 2003, there were 2,147,202 InCentive bearer
shares outstanding.
IS THIS OFFER RELATED TO ZIMMER'S OFFER FOR ALL OF THE ISSUED AND OUTSTANDING
SHARE CAPITAL OF CENTERPULSE?
Yes. This offer is intended to facilitate our acquisition of Centerpulse
AG, which we plan to effect through a parallel exchange offer for all of the
outstanding Centerpulse registered shares, including registered shares
represented by Centerpulse ADSs, pursuant to a separate registration statement
on Form S-4. As of April 22, 2003, InCentive beneficially owned approximately
18.9% of the outstanding Centerpulse registered shares, including registered
shares represented by Centerpulse ADSs. One of the conditions to our offer is
that InCentive must divest itself of all of its assets other than Centerpulse
registered shares and cash. The amount of cash remaining in InCentive after its
divestiture will not be known until the expiration of our offer.
In our Centerpulse offer, (i) each Centerpulse registered share validly
tendered and not withdrawn before the expiration of our Centerpulse offer will
be exchanged for 3.68 shares of Zimmer common stock and CHF 120 in cash, without
interest, and (ii) each Centerpulse ADS will be exchanged for 0.368 of a share
of Zimmer common stock and the U.S. dollar equivalent of CHF 12, without
interest. Ten Centerpulse ADSs are equivalent to one Centerpulse registered
share. In addition, holders of Centerpulse registered shares and Centerpulse
ADSs will receive cash instead of any fractional shares of Zimmer common stock
to which they are entitled. Our Centerpulse offer is described more fully in
this prospectus in the section captioned "THE CENTERPULSE OFFER."
WHAT WILL I RECEIVE IN EXCHANGE FOR MY INCENTIVE BEARER SHARES?
Upon the completion of InCentive's divestitures, InCentive's assets are
expected to be comprised of only Centerpulse registered shares and cash. As a
result, the precise value of the consideration we are offering in our offer,
which is affected by the adjusted net asset value of InCentive on the last day
of our offer, cannot be known prior to the expiration of our offer. In exchange
for each InCentive bearer share you validly tender and do not withdraw before
the expiration of our offer, and in the absence of a mix and match election as
described in this prospectus, you will receive (i) that portion of the cash and
shares of our common stock being offered in our Centerpulse offer for each
Centerpulse registered share held by InCentive equal to the proportionate
interest represented by each InCentive bearer share in the Centerpulse
registered shares held by InCentive, plus (or minus) (ii) an amount in cash
equal to the net asset value of InCentive, not including the value of the
Centerpulse registered shares held by InCentive, which net asset value is
referred to as the adjusted net asset value. In addition, you will receive cash
instead of any fractional shares of Zimmer common stock to which you may be
entitled.
WHY IS ZIMMER'S OFFER SUPERIOR TO THE OFFER MADE BY SMITH & NEPHEW GROUP?
We believe that our offer is superior to Smith & Nephew Group's offer for
the following reasons:
Premium Over the Smith & Nephew Group Offer. As noted above, the value of
InCentive cannot be determined prior to the expiration of our Centerpulse offer.
However, the consideration we are offering for each InCentive bearer share will
be calculated based on the consideration we are offering in our Centerpulse
offer and the number of Centerpulse registered shares held by InCentive, subject
to
iii
adjustments based on the adjusted net asset value of InCentive. Therefore, the
premium of our Centerpulse offer over that of Smith & Nephew should serve as a
useful reference for comparing our offer with Smith & Nephew Group's exchange
offer for InCentive bearer shares. As of June 16, 2003, our Centerpulse offer
implies a per share value for Centerpulse registered shares of CHF 346, which
value represents a 23.6% premium over the per share value for Centerpulse
registered shares implied by Smith & Nephew Group's offer on such date of CHF
280. The value implied by Smith & Nephew Group's offer was calculated based on
the offer price of 25.15 Smith & Nephew Group ordinary shares and CHF 73.42 for
each Centerpulse registered share, the closing price of Smith & Nephew Group
ordinary shares on June 16, 2003 of L3.7525 per share, as reported on the London
Stock Exchange and the exchange rate for English pounds on such date L1.00 = CHF
2.1875.
Complementary Businesses and Assets. Consolidation of efforts in the
spinal segment and Europe should allow us to capitalize on high growth
opportunities. We believe that the combination of the diverse technological
resources of Zimmer and Centerpulse will advance Zimmer's development of new
materials, products and procedures through scale with increased functionality.
The combination of Zimmer's and Centerpulse's research and development,
sales/distribution, marketing and financial resources and compatible cultures is
expected to create a business platform upon which new orthopaedic devices can be
brought to the market on a more expedited basis and at lower cost. In addition,
we believe that the business combination provides Zimmer with a unique
opportunity to leverage Centerpulse's product lines and diversify into dental
products.
Financial Performance. We believe that the combination of Zimmer and
Centerpulse will (i) generate approximately US$70 to US$90 million in annual
operational efficiencies and cost savings by 2006 and (ii) be accretive in 2004
to the consensus earnings per share estimate of US$1.91 as of June 16, 2003,
excluding one-time transaction and integration costs. We believe that the
strategic compatibility of the products and technologies of Zimmer and
Centerpulse will provide the combined company with significant earnings power
and a strong platform from which it can actively pursue future growth
opportunities in future technologies such as minimally invasive computer
assisted surgery and alternate materials, as well as biologics.
Global Scale and Increased Geographic Market of Our Products. The
combination of Zimmer and Centerpulse is expected to significantly expand
Zimmer's global reach and enhance its market-leading position in reconstructive
implants, spine, trauma and dental products. We believe that, to the extent the
existing customer relationships of the two companies can be leveraged for the
benefit of the combined company, the combination will create the opportunity for
deeper market and customer penetration in Europe where Zimmer had less than 15%
of 2002 sales. The companies have insignificant overlap in virtually all key
geographic segments on a by-country basis and have corresponding strengths in
each geographic segment.
Stock Performance. We believe that a combination of Zimmer and Centerpulse
has significant beneficial long-term growth prospects, which will maximize
shareholder value. For the past 20 months, our common stock has consistently
outperformed the FTSE 100, S&P 500 and an orthopaedics index comprised of
Synthes-Stratec, Inc., Biomet, Inc., Johnson & Johnson, Medtronic, Inc. and
Stryker Corp. Between January 1, 2002 and June 16, 2003, the per share price of
our common stock has increased approximately 55% and outperformed Smith & Nephew
and the orthopaedics index by approximately 64% and 81%, respectively.
CAN YOU INCREASE THE CONSIDERATION BEING OFFERED IN YOUR OFFER FOR OUR BEARER
SHARES?
There is a possibility that other bidders will choose to commence offers
for InCentive bearer shares or that Smith & Nephew will choose to increase the
consideration offered for InCentive bearer shares. If this occurs, we, in our
sole discretion, may choose to increase the amount of shares of Zimmer common
stock and/or cash to be exchanged for each InCentive bearer share in our offer
so that its value is equal to or greater than the highest price per share then
being offered by other bidders, and, in that case, and subject to the Swiss
Takeover Board's approval, we will extend our offer in compliance with
applicable U.S. and
iv
Swiss securities laws so that you will receive the increased amount of shares of
Zimmer common stock and/or cash in exchange for your InCentive bearer shares.
WHAT IF I WANT TO RECEIVE MORE SHARES OF ZIMMER COMMON STOCK AND LESS CASH, OR
MORE CASH AND FEWER SHARES OF ZIMMER COMMON STOCK FOR MY INCENTIVE BEARER
SHARES?
Our offer will contain a mix and match election feature whereby tendering
InCentive shareholders may elect to receive either more shares of Zimmer common
stock or more cash than the standard entitlement. However, this election will be
available to InCentive shareholders only to the extent that off-setting
elections have been made by other tendering securityholders in our offer and our
Centerpulse offer.
This election is described more fully in the section captioned "OUR
OFFER -- Mix and Match Election." Any InCentive shareholder who wishes to elect
to receive a higher proportion of cash or shares of Zimmer common stock should
carefully read and comply with the instructions in the accompanying Form of
Declaration of Acceptance and Assignment.
WILL I BE TAXED ON THE ZIMMER COMMON STOCK AND CASH I RECEIVE?
U.S. Federal Income Tax. The receipt of Zimmer common stock and/or cash by
a U.S. holder in exchange for its InCentive bearer shares pursuant to our offer
will be a taxable transaction for U.S. federal income tax purposes. The receipt
of Zimmer common stock and/or cash by a non-U.S. holder in exchange for its
InCentive bearer shares pursuant to our offer generally will not be subject to
U.S. federal income tax.
Swiss Income Tax. The receipt of Zimmer common stock and/or cash by a
Swiss holder in exchange for its InCentive bearer shares pursuant to our offer
will be a taxable transaction for Swiss income tax purposes. However, if a Swiss
holder is an individual who holds InCentive bearer shares as a private asset,
the receipt of Zimmer common stock and/or cash for InCentive bearer shares
pursuant to our offer will not be subject to Swiss income tax. The receipt of
Zimmer common stock and/or cash by a non-Swiss holder in exchange for its
InCentive bearer shares pursuant to our offer generally will not be subject to
Swiss income tax.
U.K. Tax on Capital Gains. In general, a U.K. holder that receives Zimmer
common stock and/or cash from Zimmer pursuant to our offer will not recognize a
chargeable gain or allowable loss for U.K. tax purposes, except to the extent of
the cash. With respect to any U.K. holder that owns (either alone or together
with parties connected with such holder) more than 5% of InCentive's bearer
shares, application for clearance from the U.K. Inland Revenue under Section 138
of the Taxation of Chargeable Gains Act of 1992 has been made to secure this
treatment for such U.K. holder. The receipt of Zimmer common stock and/or cash
by a non-U.K. holder in exchange for its InCentive bearer shares pursuant to our
offer generally will not be subject to U.K. tax on capital gains.
For a more detailed discussion of material U.S. federal, Swiss and U.K. tax
consequences or our offer, see the section captioned "OUR OFFER -- Taxation."
BECAUSE TAX MATTERS ARE COMPLICATED, WE URGE YOU TO CONTACT YOUR OWN TAX
ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO YOU OF OUR OFFER.
WHAT IS THE MINIMUM CONDITION TO YOUR OFFER?
Our offer is subject to a number of conditions, including, among others, a
minimum condition that at least 80% of the total number of the InCentive bearer
shares outstanding on a fully diluted basis have been validly tendered and not
withdrawn. Based on 2,147,202 InCentive bearer shares outstanding as of April
30, 2003 and no options to purchase InCentive bearer shares, our acquisition of
1,717,762 InCentive bearer shares would satisfy the minimum condition. For a
complete discussion of the conditions of our offer, see the section captioned
"OUR OFFER -- Conditions of Our Offer."
v
IS ZIMMER'S FINANCIAL CONDITION RELEVANT TO MY DECISION TO TENDER IN YOUR OFFER?
Yes. InCentive bearer shares accepted in our offer will be exchanged for
shares of Zimmer common stock and cash. You should consider Zimmer's financial
condition before you decide to become one of Zimmer's stockholders through our
offer. You also should consider the likely result Zimmer's acquisition of
Centerpulse will have on Zimmer's financial condition.
WHAT PERCENTAGE OF YOUR SHARES WILL INCENTIVE SHAREHOLDERS OWN AFTER YOUR OFFER?
If we exchange all of the InCentive bearer shares reported to be
outstanding on April 30, 2003, former InCentive shareholders would own in the
aggregate approximately 3.4% of the outstanding shares of Zimmer common stock.
HAS YOUR OFFER BEEN APPROVED BY INCENTIVE'S BOARD OF DIRECTORS?
Our offer is being made without the prior approval of InCentive's board of
directors. However, our offer is conditioned upon, among other things, our
entering into an agreement with the four principal shareholders of InCentive
containing terms and conditions that are substantially similar to their
agreement with Smith & Nephew Group and Smith & Nephew relating to Smith &
Nephew Group's offer, and an agreement with InCentive containing terms and
conditions that are substantially similar to InCentive's transaction agreement
with Smith & Nephew Group and Smith & Nephew, as described in the sections
captioned "OUR OFFER -- Conditions of Our Offer" and "SMITH & NEPHEW OFFERS FOR
INCENTIVE AND CENTERPULSE." Nevertheless, under the terms of Smith & Nephew
Group's offer, InCentive shareholders are permitted to withdraw their InCentive
bearer shares tendered into Smith & Nephew Group's offer and tender their
InCentive bearer shares into our offer.
HAS YOUR CENTERPULSE OFFER BEEN APPROVED BY CENTERPULSE'S BOARD OF DIRECTORS?
Our Centerpulse offer is being made without the prior approval of
Centerpulse's board of directors and is not conditioned upon the receipt of the
approval of Centerpulse's board of directors. However, it is our objective to
complete a friendly transaction that has the support of Centerpulse's board of
directors. Nevertheless, under the terms of Smith & Nephew Group's offer for
Centerpulse, holders of Centerpulse registered shares and Centerpulse ADSs are
permitted to withdraw their Centerpulse registered shares and Centerpulse ADSs
tendered into Smith & Nephew Group's offer and tender their Centerpulse
registered shares and Centerpulse ADSs into our Centerpulse offer.
WHEN CAN I TENDER MY INCENTIVE BEARER SHARES?
Under Swiss law, our offer is subject to a "cooling-off" period of 10 Swiss
trading days at the beginning of our offer during which tenders of Incentive
bearer shares will not be recognized as valid tenders under our offer.
Therefore, July 3, 2003 is the first date upon which tenders of InCentive bearer
shares will be recognized as valid tenders under our offer.
HOW LONG DO I HAVE TO DECIDE WHETHER TO TENDER IN YOUR OFFER?
You will have at least until 4:00 p.m., Central European time, 10:00 a.m.,
New York City time, on Monday, August 25, 2003, to decide whether to tender your
InCentive bearer shares pursuant to our offer unless we shall have extended the
period of time during which our offer is open. When we make reference to the
"expiration of our offer" anywhere in this prospectus, this is the time we are
referring to, including, when applicable, any extension period that may apply.
UNDER WHAT CIRCUMSTANCES CAN YOUR OFFER BE EXTENDED?
We reserve the right, subject to applicable law, to extend the period of
time during which our offer remains open if the conditions to our offer have not
been satisfied.
vi
HOW WILL I BE NOTIFIED IF YOUR OFFER IS EXTENDED?
If we extend our offer, we will inform Credit Suisse First Boston, the
Swiss offer manager, of that fact and will make a public announcement of the
extension no later than the fourth Swiss trading day following the day on which
our offer was previously scheduled to expire.
HOW DO I PARTICIPATE IN YOUR OFFER?
You have to instruct the bank, broker or custodian through which you hold
your InCentive bearer shares to arrange, before the expiration of our offer, for
the book-entry transfer of your InCentive bearer shares into the Swiss offer
manager's account at SIS SegaInterSettle AG, or SIS, and deliver a message to
the Swiss offer manager via SIS's book-entry confirmation system confirming that
you have received and agree to be bound by the terms of our offer. The bank,
broker or custodian through which you hold your InCentive bearer shares will
provide you with a form which can be used to instruct them to tender your
InCentive bearer shares.
UNTIL WHAT TIME CAN I WITHDRAW PREVIOUSLY TENDERED INCENTIVE BEARER SHARES?
You can withdraw previously tendered InCentive bearer shares at any time
during our initial offer period and the period during which our offer is
extended.
HOW DO I WITHDRAW INCENTIVE BEARER SHARES PREVIOUSLY TENDERED TO ZIMMER?
To withdraw InCentive bearer shares, you must deliver a written or
facsimile notice of withdrawal with the required information to your bank,
broker or custodian while you still have the right to withdraw your InCentive
bearer shares.
CAN I TENDER MY INCENTIVE BEARER SHARES AFTER YOUR OFFER EXPIRES?
If all of the conditions to our offer are satisfied or waived, and we
accept for exchange InCentive bearer shares tendered pursuant to our offer,
holders of InCentive bearer shares who do not accept our offer prior to its
expiration will have an opportunity to accept our offer on the same terms during
a 10 Swiss trading day period beginning after the announcement that our offer
will be consummated. There will be no withdrawal rights during this subsequent
offering period.
WILL INCENTIVE CONTINUE AS A PUBLIC COMPANY?
Following the exchange of InCentive bearer shares pursuant to our offer, to
the extent permitted by applicable laws and rules of the SWX Swiss Exchange, we
intend to seek to delist InCentive bearer shares from the SWX Swiss Exchange.
IF I DECIDE NOT TO TENDER, HOW WILL YOUR OFFER AFFECT MY INCENTIVE BEARER
SHARES?
The exchange of InCentive bearer shares pursuant to our offer will
substantially reduce the number of InCentive bearer shares that might otherwise
trade and will reduce the number of InCentive shareholders. The reduction in
publicly traded InCentive bearer shares will adversely affect liquidity and may
adversely affect market values of InCentive bearer shares. InCentive
shareholders do not have appraisal rights in connection with our offer.
WILL I HAVE TO PAY ANY FEES OR COMMISSIONS?
Zimmer will pay or reimburse any applicable Swiss federal securities
transfer tax payable with respect to the exchange of InCentive bearer shares
pursuant to our offer. However, you should consult with your bank, broker or
custodian as to whether or not they charge any transaction fee or service
charge.
vii
WHOM CAN I TALK TO IF I HAVE QUESTIONS ABOUT YOUR OFFER?
You can submit your questions to Credit Suisse First Boston, the Swiss
offer manager, either in writing at its address set forth on the back cover of
this prospectus or via e-mail at equity.prospectus@csfb.com. In the alternative,
you can call your bank, broker or custodian.
WHERE CAN I FIND MORE INFORMATION ON YOU?
You can find more information about us from various sources described in
the section captioned "WHERE YOU CAN FIND MORE INFORMATION."
viii
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. InCentive is not required to file reports with the
SEC, but has furnished its InCentive Capital AG Annual Report 2001 to
shareholders to the SEC. Centerpulse files annual and current with the SEC. You
may read and copy any reports, statements or other information that we and
Centerpulse file, and the InCentive Capital AG Annual Report 2001 that InCentive
submitted, at the SEC's public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information regarding the public reference room. Zimmer's and Centerpulse's
public filings also are available to the public from commercial document
retrieval services and at the Internet website maintained by the SEC at
http://www.sec.gov.
We have filed a registration statement on Form S-4 to register with the SEC
the offering and sale of our shares of common stock to be issued to InCentive
shareholders pursuant to our offer. This prospectus is a part of that
registration statement. As allowed by SEC rules, this prospectus does not
contain all of the information that you can find in the registration statement
or the exhibits to the registration statement.
Because InCentive does not file, but furnishes, information to the SEC, no
information regarding InCentive is permitted to be incorporated by reference
herein. You may read and copy any such information on InCentive by visiting the
SEC's public reference room indicated above. InCentive's submissions are also
available at the Internet website maintained by the SEC indicated above. You may
also read excerpts from the InCentive Capital AG Annual Report 2002 and the
InCentive Capital AG Annual Report 2001 attached to this prospectus as Annex A
and Annex B, respectively.
The SEC allows us to incorporate information into this prospectus "by
reference," which means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is deemed to be part of this prospectus, except for
any information superseded by information contained directly in this prospectus.
This prospectus incorporates by reference the documents set forth below that
Zimmer and Centerpulse have previously filed with the SEC. These documents
contain important information about Zimmer and Centerpulse and their financial
condition.
ZIMMER FILINGS (FILE NO. 001-16407):
- Annual Report on Form 10-K for the fiscal year ended December 31, 2002,
filed on March 12, 2003;
- Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
2003, filed on May 13, 2003;
- Current Report on Form 8-K, filed on April 23, 2003;
- The description of our common stock set forth in our Registration
Statement on Form 10 filed on March 26, 2001, including all amendments
and reports filed for the purpose of updating such description; and
- The description of our preferred stock purchase rights set forth in our
Registration Statement on Form 10 filed on March 26, 2001, including all
amendments and reports filed for the purpose of updating such
description.
CENTERPULSE FILINGS (FILE NO. 001-14654):
- Annual Report on Form 20-F for the fiscal year ended December 31, 2002,
filed on April 25, 2003 (except for the report of Centerpulse's
independent public accountants contained therein which is not
incorporated herein by reference because the consent of Centerpulse's
independent public accountants has not yet been obtained nor has
exemptive relief under Rule 437, promulgated under the Securities Act of
1933, as amended, been granted to us by the SEC);
ix
- Report by Foreign Issuer on Form 6-K, filed on May 30, 2003;
- Amendment to Report by Foreign Issuer on Form 6-K, filed on May 22, 2003;
- Report by Foreign Issuer on Form 6-K, filed on May 14, 2003;
- Report by Foreign Issuer on Form 6-K, filed on March 31, 2003;
- Report by Foreign Issuer on Form 6-K, filed on March 28, 2003;
- Report by Foreign Issuer on Form 6-K, filed on March 25, 2003;
- Report by Foreign Issuer on Form 6-K, filed on February 12, 2003;
- Report by Foreign Issuer on Form 6-K, for fiscal quarter ended December
31, 2002, filed on February 7, 2003; and
- Report by Foreign Issuer on Form 6-K, filed on January 23, 2003.
We hereby incorporate by reference additional documents that either we or
Centerpulse may file with the SEC between the date of this prospectus and the
expiration date of our offer (or the date that our offer is terminated). These
include, but are not limited to, periodic reports, such as annual reports on
Form 10-K or 20-F, quarterly reports on Form 10-Q, current reports on Form 8-K
and Reports by Foreign Issuer on Form 6-K, as well as proxy statements.
You may obtain any of these documents upon request to the Swiss offer
manager at its address set forth on the back cover of this prospectus or from
the SEC at the SEC's Internet website described above.
IF YOU WOULD LIKE TO REQUEST DOCUMENTS FROM US, PLEASE CONTACT THE SWISS
OFFER MANAGER NO LATER THAN AUGUST 15, 2003 TO RECEIVE THEM BEFORE THE
EXPIRATION DATE OF OUR OFFER. If you request any incorporated documents, the
Swiss offer manager will mail them to you by first-class mail, or other equally
prompt means, within one U.S. business day of receipt of your request.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS IN MAKING YOUR DECISION WHETHER TO TENDER YOUR
INCENTIVE BEARER SHARES INTO OUR OFFER. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE
YOU WITH INFORMATION THAT DIFFERS FROM THAT CONTAINED IN THIS PROSPECTUS. THIS
PROSPECTUS IS DATED JUNE [--], 2003. YOU SHOULD NOT ASSUME THAT THE INFORMATION
CONTAINED IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THAT DATE,
AND NEITHER THE MAILING OF THIS PROSPECTUS TO SHAREHOLDERS NOR THE ISSUANCE OF
SHARES OF ZIMMER COMMON STOCK IN OUR OFFER SHALL CREATE ANY IMPLICATION TO THE
CONTRARY.
x
NOTE ON INCENTIVE AND CENTERPULSE INFORMATION
INCENTIVE CAPITAL AG
In respect of information relating to InCentive presented in, or omitted
from, this prospectus, including all InCentive financial information, we have
relied exclusively upon publicly available information, including annual and
semi-annual reports provided by InCentive to its shareholders. Excerpts from the
InCentive Capital AG Annual Report 2002 and the InCentive Capital AG Annual
Report 2001 have been attached to this prospectus as Annex A and Annex B,
respectively. Although we have no knowledge that would indicate that any
statements contained herein based upon such reports and documents are
inaccurate, incomplete or untrue, we were not involved in the preparation of
such information and statements. In addition, to date, InCentive has not
cooperated with us in, and has not been involved in, the preparation of this
prospectus, has not verified the information contained in this prospectus
relating to InCentive, has provided our representatives only limited access to
InCentive's accounting records and has not permitted its independent public
accountants to provide us with all of the information we require, including an
independent public accountants' consent. As InCentive does not reconcile its
financial information prepared in accordance with International Accounting
Standards, or IAS, to United States generally accepted accounting principles, or
U.S. GAAP, we have not been able to present U.S. GAAP reconciled financial
information for InCentive. Any financial information regarding InCentive that
may be detrimental to us following our acquisitions of Centerpulse and InCentive
that has not been publicly disclosed by InCentive, or errors in our estimates
due to the lack of cooperation from InCentive, may have an adverse effect on the
benefits we expect to achieve through the consummation of our Centerpulse offer.
Pursuant to Rule 409 promulgated under the Securities Act of 1933, as
amended, we are omitting certain information regarding InCentive within the
control of persons unaffiliated with the registrant from this prospectus, which
is intended to be filed by amendment to the registration statement on Form S-4,
if and when such information is available. The annual and semi-annual reports
provided by InCentive to its shareholders have not proved sufficient to allow us
to present, or describe fully and accurately, certain information regarding
InCentive's business, operations and management without unreasonable effort or
expense, including, among other things, the following line items:
- an explanation of the material differences between the rights of
InCentive shareholders and the rights of holders of Zimmer common stock,
as required by Item 4(a)(4), which included information with respect to
InCentive only to the extent that such information was publicly
available;
- the information relating to InCentive's business, as required by Item
17(b)(1), is necessarily incomplete and represents the extent to which
information regarding InCentive is publicly available;
- due to the lack of publicly available information regarding InCentive's
financial information for the quarters ended March 31, 2003 and 2002,
such information has not been included;
- the disclosure required by Item 17(b)(5) (management's discussion and
analysis of financial condition and results of operations), which has not
been included;
- the disclosure required by Item 17(b)(6) (changes in and disagreements
with accountants on accounting and financial disclosure), which has not
been included; and
- the disclosure required by Item 17(b)(10) (quantitative and qualitative
disclosures about market risk), which has not been included.
Pursuant to Rule 409, we have requested that InCentive and its independent
public accountants provide us with the information that we require to furnish
complete disclosure regarding the business, operations, financial condition and
management of InCentive. In addition, pursuant to Rule 437 promulgated under the
Securities Act, we have requested that InCentive provide us with the consent of
its independent public accountants required for us to include in this prospectus
its audit reports with respect to InCentive's financial statements. Upon our
obtaining from InCentive or its independent public
xi
accountants the information necessary to enable us to more fully comply with the
disclosure requirements of Form S-4, we will file an amendment to the
registration statement, of which this prospectus forms a part, to include such
additional information regarding InCentive that we deem material, reliable and
appropriate.
CENTERPULSE AG
In respect of information relating to Centerpulse's business, operations
and management presented in, or omitted from, this prospectus, we have relied
upon publicly available information, including information publicly filed by
Centerpulse with the SEC, and documentation provided to us by Centerpulse over
the course of our due diligence review of Centerpulse. Information publicly
filed by Centerpulse may be examined and copies may be obtained at the places
and in the manner set forth in the section captioned "WHERE YOU CAN FIND MORE
INFORMATION." However, Centerpulse has omitted from the due diligence materials
provided to us all of the financial information necessary for us to fully assess
the financial condition of Centerpulse. To date, Centerpulse has not cooperated
with us in, and has not been involved in, the preparation of this prospectus,
has not verified the information contained in this prospectus relating to
Centerpulse, has provided our representatives only limited access to
Centerpulse's accounting records and has not permitted its independent public
accountants to provide us with all of the information we require, including an
independent public accountants' consent. Although we have no knowledge that
would indicate that any statements contained herein regarding Centerpulse's
financial condition based upon such publicly filed reports and documents are
inaccurate, incomplete or untrue, we were not involved in the preparation of
such information and statements. As a result, we have made adjustments and
assumptions in preparing the pro forma financial information presented in this
prospectus which have necessarily involved our estimates with respect to
Centerpulse's financial information. Any financial information regarding
Centerpulse that may be detrimental to us following our acquisitions of
Centerpulse and InCentive that has not been publicly disclosed by Centerpulse,
or errors in our estimates due to the lack of cooperation from Centerpulse, may
have an adverse effect on the benefits we expect to achieve through the
consummation of our Centerpulse offer.
Centerpulse's historical consolidated financial statements are prepared in
accordance with International Financial Reporting Standards, or IFRS, which
differ in certain material respects from U.S. GAAP. Assuming a minimum of 66.7%
of the outstanding registered shares of Centerpulse are tendered for Zimmer
common shares, on a going forward basis, all former Centerpulse shareholders
will receive financial information of the combined group stated in accordance
with U.S. GAAP. Significant differences between IFRS and U.S. GAAP include, as
they currently relate to Centerpulse, among others:
- IFRS requires goodwill and intangible assets to be amortized over their
estimated useful lives while U.S. GAAP only requires the amortization of
finite lived intangible assets. U.S. GAAP requires goodwill and other
indefinite lived intangible assets to be carried at cost without being
amortized and requires an impairment test to be performed on an annual
basis, with any impairment being immediately recognized as an expense.
- Under U.S. GAAP, long-lived assets, including intangible assets, are
considered impaired if the sum of undiscounted cash flows expected to
result from use and eventual disposition are less than the carrying
amount. If the asset is determined to be impaired, a loss is recognized
upon a comparison of carrying amount to either market value or discounted
cash flows. Under IFRS, an impairment loss is recognized based upon a
comparison of the carrying value to the higher of the net selling price
or discount cash flows expected to result from use.
- IFRS requires the amount of "in-process research and development"
included in the purchase price of acquisitions to be considered a form of
goodwill which is amortized over its estimated useful life. U.S. GAAP
requires the entire amount of "in-process research and development" to be
expensed at the acquisition date.
- IFRS allows temporary declines in market value of available for sale
securities to be recognized in shareholders' equity or earnings, based
upon company policy, while U.S. GAAP requires temporary
xii
declines in market value of available for sale securities to be recorded
in shareholders' equity. IFRS requires other than temporary declines in
market value of available for sale securities previously recognized in
earnings to be reversed through earnings upon recovery while U.S. GAAP
only allows such reversals of previously recorded losses upon ultimate
sale.
- IFRS requires an impairment test to be performed for the asset recorded
as a result of over-funded pension plans. U.S. GAAP does not permit an
impairment to be recorded for over-funded pension plans.
- IFRS does not require expense recognition for repricing of fixed stock
option awards while U.S. GAAP requires that certain modifications to
fixed stock option awards result in variable accounting, resulting in
compensation expense, from the date of the modification to the exercise
date.
Pursuant to Rule 409, we requested that Centerpulse and its independent
public accountants provide us with the information we require to furnish
complete disclosure regarding the business, operations, financial condition and
management of Centerpulse. Centerpulse responded by providing us with documents
for our due diligence review which ommitted the accounting records necessary for
us to fully assess the financial condition of Centerpulse. In addition, pursuant
to Rule 437, we have requested that (i) Centerpulse cooperate in obtaining the
consent of its independent public accountants, and (ii) Centerpulse's
independent public accountants provide us with their consent required for us to
incorporate by reference into this prospectus their audit report included in
Centerpulse's Annual Report on Form 20-F for the fiscal year ended December 31,
2002. Upon our obtaining from Centerpulse or its independent public accountants
the information necessary to enable us to more fully comply with the disclosure
requirements of Form S-4, we will file an amendment to the registration
statement, of which this prospectus is a part, to include such additional
information regarding Centerpulse that we deem material, reliable and
appropriate.
xiii
SUMMARY
This summary highlights selected information from this prospectus, and may
not contain all of the information that is important to you. To better
understand our offer to InCentive shareholders, you should read this entire
prospectus carefully, as well as those additional documents to which we refer
you. You may obtain the information incorporated by reference into this
prospectus by following the instructions in the section captioned "WHERE YOU CAN
FIND MORE INFORMATION."
REASONS FOR OUR OFFER
Our offer for all of the outstanding bearer shares of InCentive is being
made to facilitate our acquisition of Centerpulse, which we plan to effect
through a parallel exchange offer for all of the outstanding share capital of
Centerpulse. We believe that a combination of Zimmer and Centerpulse represents
a compelling opportunity to maximize value for stockholders of both companies by
combining Zimmer with a long-term strategic partner that will allow us to
realize myriad strategic advantages resulting in growth opportunities within the
medical devices industry. We believe that the combination will create a global
leader in the design, development, manufacture and marketing of orthopaedic
reconstructive implants, spine, trauma and dental products. For the fiscal year
ended December 31, 2002, the pro forma net earnings of the combined company was
estimated at US$287 million. We believe that the combination of Zimmer and
Centerpulse will (i) generate approximately US$70 to US$90 million in annual
operational efficiencies and cost savings by 2006 and (ii) be accretive in 2004
to the consensus earnings per share estimate of US$1.91 as of June 16, 2003,
excluding one-time transaction and integration costs. The strategic
compatibility of the products and technologies of Zimmer and Centerpulse is
expected to provide the combined company with significant earnings power and a
strong platform from which it can actively pursue growth opportunities in the
industry. For Zimmer, Centerpulse provides a unique platform for growth and
diversification in Europe as well as in the spine and dental segments of the
medical device industry.
OUR OFFER
We are offering to exchange for each outstanding bearer share of InCentive
that is validly tendered and not properly withdrawn prior to the expiration of
our offer, shares of Zimmer common stock and cash, without interest. InCentive,
an investment company listed on the SWX Swiss Exchange, beneficially owns
approximately 18.9% of the outstanding registered shares of Centerpulse.
Contemporaneously with our offer for InCentive bearer shares, we are also making
an offer to exchange 3.68 shares of Zimmer common stock and CHF 120 in cash,
without interest, for each Centerpulse registered share, and 0.368 of a share of
Zimmer common stock and the U.S. dollar equivalent of CHF 12 in cash, without
interest, for each Centerpulse ADS. As discussed below, our offer also includes
a mix and match election feature that will entitle you to elect to vary the
proportions of the shares of Zimmer common stock and cash that you will receive
in our offer, subject to the offsetting elections of other InCentive
shareholders in our offer and Centerpulse securityholders in our Centerpulse
offer.
In connection with a competing offer by Smith & Nephew for InCentive bearer
shares, InCentive has agreed to divest all of its assets, other than Centerpulse
registered shares, so that InCentive's assets will only consist of Centerpulse
registered shares and cash prior to the scheduled expiration date of Smith &
Nephew's offer. As a condition of our offer, InCentive and the major
shareholders of InCentive must enter into agreements with us which are
substantially similar to the agreements entered into with Smith & Nephew,
including an agreement requiring InCentive to divest all of its assets, other
than its Centerpulse registered shares. Assuming InCentive has taken these
actions, our offer price for each InCentive bearer share in our offer will be
calculated by reference to the formula (A+B)/C where:
A = the total number of shares of Zimmer common stock and the amount of
cash that would be payable under our Centerpulse offer for the
Centerpulse registered shares held by InCentive;
B = the adjusted net asset value (positive or negative) of InCentive
calculated as at the last day of our offer period but excluding the
calculation in "A" above and attributing no value to any
1
InCentive bearer shares held by InCentive or its subsidiaries, as
confirmed by an accounting firm of international repute to be appointed
by Zimmer; and
C = the total number of InCentive bearer shares outstanding on the last day
of our offer period less the number of InCentive bearer shares held by
InCentive or its subsidiaries on that date.
As a result, the consideration you receive for each InCentive bearer share
will consist of an amount of Zimmer common stock and a portion of cash payable
in Swiss francs which will mirror what InCentive would have received if it had
tendered its Centerpulse registered shares in our Centerpulse offer, plus or
minus the cash attributable to the adjusted net asset value of InCentive
excluding its Centerpulse holdings. If the adjusted net asset value is negative,
then the cash portion attributable to the consideration received by InCentive in
relation to its Centerpulse holdings shall be reduced, by a proportionate
degree, and if after such reduction there is still a negative balance, the
number of shares of Zimmer common stock to be issued shall be reduced by a
corresponding amount calculated by reference to the average closing price of
Zimmer common stock from the fifth to the third Swiss trading day prior to the
settlement date of our offer.
The number of shares of Zimmer common stock to be issued in exchange for
each InCentive bearer share, known as the "exchange ratio", is fixed and,
subject to the mix and match election feature described below, will not change
between now and the time our offer is consummated. The exchange ratio is based
on US$48.28, which is the closing price of a share of Zimmer common stock on May
19, 2003, the day immediately prior to the announcement of our offer. The value
of the shares of Zimmer common stock you will receive will fluctuate based on
changes in the market price of Zimmer common stock. Fluctuations in the market
price of Zimmer common stock between now and the consummation of our offer will
change the value of the shares of Zimmer common stock that you will receive.
Therefore, the value of the shares of Zimmer common stock that you will receive
could be higher or lower than the price on which the exchange ratio was based.
For information on the range of trading prices of Zimmer common stock on the New
York Stock Exchange, please refer to the section captioned "MARKET PRICE AND
DIVIDEND MATTERS."
MIX AND MATCH ELECTION
Our offer will contain a mix and match election feature, whereby tendering
holders of InCentive bearer shares may elect to receive either more shares of
Zimmer common stock or more cash than the standard entitlement. However, this
election will be available to holders of InCentive bearer shares only to the
extent that off-setting elections have been made by other tendering
securityholders in our offer and our InCentive offer. Elections made in our
offer will be taken together with elections made under a similar mix and match
election feature included in our Centerpulse offer (described in the section
captioned "THE CENTERPULSE OFFER") in determining whether mix and match
elections under our offer will be fulfilled. All calculations will be made by
reference to the number of acceptances and elections as of the last day of the
subsequent offering period and, for the purposes of these calculations, the
assumed value per share of Zimmer common stock shall be US$48.28, the same as
the closing price of a share of Zimmer common stock on May 19, 2003, the day
immediately prior to the announcement of our offer and InCentive offer.
This election is described more fully in the section captioned "OUR
OFFER -- Mix and Match Election" below. Any InCentive shareholder who wishes to
make a mix and match election should carefully read that section of this
prospectus and comply with the instructions in the accompanying Form of
Declaration of Acceptance and Assignment.
2
CONDITIONS OF OUR OFFER
The following is a brief summary of the conditions to our offer, all of
which may be waived, if permitted by applicable law:
- all conditions of our Centerpulse offer having been satisfied or waived
by us;
- each person who is a member of the board of directors of InCentive having
delivered at or prior to the expiration of the offer period a validly
executed undertaking to Zimmer (A) agreeing, contingent upon Zimmer
having received valid acceptances for at least 80% of the total number of
InCentive bearer shares outstanding on a fully diluted basis at the
expiration of the offer period, to take, or cause to be taken, as soon as
possible after our offer has been declared unconditional, all actions
necessary to convene a shareholders meeting of InCentive to be held as
soon as possible following the consummation of our offer with the sole
agenda item being "removal of existing board members and election of new
board members" and to propose that all of the persons who are members of
the board of directors of InCentive on the date of the InCentive
shareholders meeting be removed and immediately replaced by the
individuals designated by Zimmer, and (B) agreeing, contingent upon
Zimmer having received valid acceptances for at least 80% of the total
number of InCentive bearer shares outstanding on a fully diluted basis at
the expiration of the offer period, to take, or cause to be taken, all
actions necessary to ensure, for the period from the time our offer has
been declared unconditional until such time as all of the Zimmer
designees to the board of directors of InCentive take office, that
neither InCentive nor any of its directors, officers or employees take
any action (except with the prior written consent of Zimmer, which
consent shall not be unreasonably withheld, or if required by applicable
law) that would result in any variance in the assets or liabilities of
InCentive from those in existence on the date of our offer is declared
unconditional, other than nominal and reasonable cash payments and the
incurrence of nominal and reasonable liabilities required to maintain the
corporate and administrative functioning of InCentive in the normal
course, taking into account the reduced business activities of InCentive,
but not to exceed CHF 50,000 in the aggregate (this condition will be
deemed to have been satisfied, if all members of the board of directors
of InCentive have delivered the undertakings described above other than
those directors who have not received a confirmation of Zimmer that it
will hold harmless such directors in respect of any liability incurred as
a consequence of complying with the above described undertaking);
- at the expiration of the offer period, InCentive (i) shall only have
assets consisting solely of 2,237,577 Centerpulse registered shares and
cash and (ii) shall have no material liabilities, contingent or
otherwise, as determined in the opinion of PricewaterhouseCoopers Ltd.,
referred to as the review body, other than liabilities the amount of
which, as determined in the opinion of the review body, are taken into
account in the calculation of adjusted net asset value;
- the registration statement on Form S-4 filed by Zimmer with the SEC in
connection with our offer having become effective in accordance with the
provisions of the Securities Act; no stop order suspending the
effectiveness of the registration statement having been issued by the SEC
and no proceedings for that purpose having been initiated by the SEC and
not concluded or withdrawn;
- Zimmer having received valid acceptances for at least 80% of the total
number of InCentive bearer shares outstanding on a fully diluted basis at
the expiration of the offer period;
- no court or regulatory authority having issued a decision or an order
which prohibits our offer or its consummation or renders our offer or its
consummation unlawful;
- InCentive or any of its subsidiaries not having disposed, or agreed to
dispose (including acceptance of any offer), of any Centerpulse
registered shares held by it or its subsidiaries and not having become
obliged to do so, except for any such transfer within the InCentive
group; and
- until the end of the offer period, no litigation proceedings having been
initiated against InCentive and its subsidiaries which are neither
insured nor provisioned for in the consolidated balance sheet
3
of InCentive for the fiscal year ended December 31, 2002 and whose amount
in dispute is in excess of CHF 35 million in the aggregate.
For a more detailed description of the conditions to our offer, please read
the section captioned "OUR OFFER -- Conditions of Our Offer."
EXTENSION, TERMINATION AND AMENDMENT
Subject to applicable Swiss law, the SEC's rules and regulations and the
conditions of our offer, which, among other things, limit our ability to amend
or terminate our offer, we also reserve the right, at any time or from time to
time:
- to extend, for any reason, the period of time during which our offer is
open;
- to delay acceptance for exchange of or, regardless of whether we
previously accepted InCentive bearer shares for exchange, exchange of any
InCentive bearer shares pursuant to our offer or to terminate our offer
and not accept or exchange any InCentive bearer shares not previously
accepted or exchanged, upon the failure of any of the conditions of our
offer to be satisfied; and
- to waive any condition or otherwise amend our offer in any respect.
EXCHANGE OF INCENTIVE BEARER SHARES; DELIVERY OF SHARES OF ZIMMER COMMON STOCK
AND CASH
Subject to the conditions of our offer, we will accept for exchange all
InCentive bearer shares validly tendered and not properly withdrawn pursuant to
our offer. We shall be deemed to have accepted for exchange tendered InCentive
bearer shares when, as and if we shall give oral or written notice to the Swiss
offer manager of our acceptance of the tender of such InCentive bearer shares.
We expect to exchange Zimmer common stock and pay the applicable cash proceeds
and cash instead of fractional shares for the InCentive bearer shares tendered
in our offer to the Swiss offer manager no later than 10 Swiss trading days
after the expiration of the subsequent offering period. The Swiss offer manager
will act as an agent for the tendering holders for the purpose of receiving
shares of Zimmer common stock and cash and cash to be paid instead of fractional
shares of Zimmer common stock from us and transmitting those shares and cash to
tendering InCentive shareholders.
CASH INSTEAD OF FRACTIONAL SHARES OF ZIMMER COMMON STOCK
Fractional entitlements to shares of Zimmer common stock will not be
delivered to InCentive shareholders with respect to the InCentive bearer shares
validly tendered in our offer. To the extent that InCentive shareholders are
entitled to receive fractions of shares of Zimmer common stock in exchange for
their InCentive bearer shares, those fractional entitlements will be combined
with the other InCentive shareholders' fractional entitlements and subsequently
sold on behalf of such shareholders on the New York Stock Exchange. Each such
InCentive shareholder who would not receive full consideration as shares of
Zimmer common stock will receive cash consideration corresponding to the
fraction of the price of the share of Zimmer common stock, which price shall be
based on the net per share sale price, after deduction of related fees and
expenses, of all of the shares of Zimmer common stock combined from the
fractional entitlements and sold on behalf of those tendering InCentive
shareholders. For a more detailed description regarding the payment of cash
instead of fractional shares of Zimmer common stock, please read the section
captioned "OUR OFFER -- Cash Instead of Fractional Shares of Zimmer Common
Stock."
WITHDRAWAL RIGHTS
Your tender of InCentive bearer shares pursuant to our offer is
irrevocable, except that InCentive bearer shares tendered pursuant to our offer
may be withdrawn at any time prior to the expiration of our offer.
4
PROCEDURES FOR TENDERING SHARES
You must comply with the instructions for acceptance of our offer and
delivery of your tendered InCentive bearer shares that you will receive from
your bank, broker or custodian or directly from the financial institution or
intermediary with which your securities are deposited. We urge you to read the
section captioned "OUR OFFER -- Procedures for Tendering InCentive Bearer
Shares" as well as the transmittal materials.
CURRENCY TRANSLATION
References in this prospectus to "dollars," "$" or "US$" are to the
currency of the United States and references to Swiss francs or "CHF" are to the
currency of Switzerland. Solely for your convenience, this prospectus contains
translations of Swiss franc amounts into U.S. dollars at specified rates. These
translations should not be taken as assurances that the Swiss franc amounts
currently represent these U.S. dollar amounts or could be converted into U.S.
dollars at the rate indicated or at any other rate at any time.
In this prospectus, unless otherwise stated, Swiss francs have been
translated into U.S. dollars at a rate of CHF 1.3009 = US$1.00, which was based
on the noon buying rate in New York City for cable transfers in Swiss francs as
certified for customs purposes by the Federal Reserve Bank of New York on June
16, 2003, which we refer to in this prospectus as the "noon buying rate." For
historical information regarding rates of exchange between Swiss francs and U.S.
dollars, see the section captioned "OUR OFFER -- Currency Exchange Rates."
RISK FACTORS
Our offer is, and upon the consummation of our offer and our Centerpulse
offer, the combined company will be, subject to several risks. In deciding
whether to tender your InCentive bearer shares pursuant to our offer, you should
carefully read and consider the risk factors contained in the section captioned
"RISK FACTORS."
INDEBTEDNESS AND THE FINANCING OF OUR OFFER
In connection with the cash portion of the consideration payable pursuant
to our offer, Zimmer has entered into credit agreements providing for the
availability of senior unsecured credit facilities in an aggregate principal
amount of up to US$1,750 million. For further information relating to the terms
of such credit agreements, see the section captioned "OUR OFFER -- Source and
Amount of Funds."
COMPARISON OF SHAREHOLDER RIGHTS
You will receive Zimmer common stock if you tender your InCentive bearer
shares in our offer. There are numerous differences between the rights of a
shareholder of InCentive, a Swiss company, and the rights of a stockholder of
Zimmer, a Delaware corporation. We urge you to review the discussion in the
section captioned "COMPARATIVE RIGHTS OF INCENTIVE SHAREHOLDERS AND ZIMMER
STOCKHOLDERS IN GENERAL."
OWNERSHIP OF ZIMMER AFTER OUR OFFER AND OUR CENTERPULSE OFFER
Based on the estimated per share consideration payable in connection with
our offer and our Centerpulse offer, we estimate that we will issue
approximately 43.8 million shares of Zimmer common stock and that, upon the
consummation of our offer and our Centerpulse offer, current holders of Zimmer
common stock will own approximately 82%, former holders of Centerpulse
registered shares, including holders of Centerpulse ADSs, but excluding
InCentive, will own approximately 14.6%, and former InCentive shareholders will
own approximately 3.4%, of the then outstanding shares of Zimmer common stock.
5
THE COMPANIES
Zimmer Holdings, Inc.
345 East Main Street
Warsaw, Indiana 46580
Telephone: (574) 267-6131
Zimmer, based in Warsaw, Indiana, is a global leader in the design,
development, manufacture and marketing of reconstructive orthopaedic implants
and trauma products. Orthopaedic reconstruction 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. Zimmer
also manufactures and markets other products related to orthopaedic surgery. For
the year 2002, Zimmer recorded worldwide revenues of approximately US$1.4
billion. Zimmer was founded in 1927 and has more than 3,600 employees worldwide.
InCentive Capital AG
Baarerstrasse 8
CH-6301 Zug
Telephone: +41 41 712 29 45
InCentive Capital AG is an investment company domiciled in Zug,
Switzerland. Its corporate history began as InCentive Investment AG, which was
incorporated in 1985. InCentive Investment AG was merged into India Investment
AG at the end of October 2000, and was renamed InCentive Capital AG. InCentive
is listed on the investment companies segment of the SWX Swiss Exchange.
InCentive beneficially owns approximately 18.9% of the outstanding Centerpulse
registered shares. Under the terms of our offer for InCentive bearer shares, by
the time our offer is consummated, InCentive will have divested itself of all
its assets except for its equity interest in Centerpulse and cash. Incentive has
three legal names, each of which identifies the same legal entity: InCentive
Capital AG, Incentive Capital Ltd. and InCentive Capital SA.
Centerpulse AG
Andreasstrasse 15
CH-8050 Zurich
Telephone: +41 1 306 96 96
Centerpulse AG, formerly Sulzer Medica AG, is a leading medical technology
group employing over 2,800 employees globally, which serves the reconstructive
joint, spinal and dental implant markets. Following divestiture of its
Cardiovascular Division, which was concluded in January 2003, Centerpulse is
organized into three divisions: orthopaedics, spine-tech and dental.
Centerpulse, which is organized and headquartered in Switzerland, has five
production facilities in Switzerland, the United States and France. For the year
2002, Centerpulse recorded worldwide revenues from continuing operations of
approximately CHF 1.2 billion. Centerpulse has three legal names, each of which
identifies the same legal entity: Centerpulse AG, Centerpulse Ltd. and
Centerpulse SA.
6
COMPARATIVE MARKET PRICE DATA
Shares of Zimmer common stock are listed on the New York Stock Exchange
under the symbol "ZMH" and InCentive bearer shares are listed on the SWX Swiss
Exchange under the symbol "INC."
As reported on their respective exchanges, the following table sets out
historical closing prices per share for shares of Zimmer common stock and
InCentive bearer shares and the equivalent basis market value per share of
InCentive bearer shares on:
- May 19, 2003, the last trading day before we announced our intention to
commence our offer for all of the outstanding InCentive bearer shares,
and
- June 16, 2003, the most recent practicable trading date before the
mailing of this prospectus.
The equivalent basis market value per InCentive bearer share is determined
by multiplying the price per share of Zimmer common stock by the exchange ratio
and then adding to that amount the per share cash purchase price pursuant to the
terms of our offer. For purposes of calculating the per share cash purchase
price, the net asset value of InCentive, other than Centerpulse registered
shares it holds, is assumed to be CHF 108 million, consisting of cash and cash
equivalents.
<Table>
<Caption>
INCENTIVE
BEARER SHARES
INCENTIVE EQUIVALENT
ZIMMER BEARER BASIS
COMMON STOCK SHARES MARKET
(NYSE) (SWX) VALUE
------------ ------------- -------------
May 19, 2003.................................. US$48.28 CHF 330 CHF 414
June 16, 2003................................. US$47.19 CHF385 CHF411
</Table>
In determining the equivalent basis market value per InCentive bearer
share, amounts in Swiss francs have been translated into U.S. dollars or Swiss
francs, as required, at the noon buying rate in New York City of CHF 1.2945 =
US$1.00, and CHF 1.3009 = US$1.00 for cable transfers in Swiss francs as
certified for customs purposes by the Federal Reserve Bank of New York on May
19, 2003 and June 16, 2003, respectively. For more information about U.S. dollar
and Swiss franc exchange rates, see the section captioned "OUR OFFER -- Currency
Exchange Rates."
The market prices of Zimmer common stock and InCentive bearer shares may
fluctuate during the offer period and thereafter, and may be different from the
prices set forth above at the expiration of the offer period and at the time you
receive your shares of Zimmer common stock. YOU ARE ENCOURAGED TO OBTAIN CURRENT
MARKET QUOTATIONS PRIOR TO MAKING ANY DECISION WITH RESPECT TO OUR OFFER.
7
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA
The table set forth below depicts the earnings per common share, pro forma
earnings per common share before cumulative effect of change in accounting
principle, book value per common share and cash dividends declared per common
share for (i) Zimmer, Centerpulse and InCentive on a historical basis, (ii) the
combination of Zimmer, Centerpulse and InCentive on a pro forma combined basis
and (iii) the combination of Zimmer, Centerpulse and InCentive on a per share
equivalent pro forma basis for Centerpulse and InCentive. The pro forma data of
the combined company assumes a 100% acquisition of Centerpulse registered
shares, including registered shares represented by Centerpulse ADSs and the
Centerpulse registered shares held by InCentive, and was derived by combining
the historical consolidated financial information of Zimmer and Centerpulse
using the purchase method of accounting for business combinations as described
elsewhere in this prospectus. For a discussion of the assumptions and
adjustments made in the preparation of the pro forma financial information
presented in this prospectus, see the section captioned "UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS." The Centerpulse per share equivalent
pro forma data shows the effect of the combination of Zimmer, Centerpulse and
InCentive from the perspective of an owner of Centerpulse registered shares and
InCentive bearer shares.
Operating results for InCentive for the year ended December 31, 2002 and
for the three months ended March 31, 2003 and its net assets at that date have
been excluded from the pro forma financial information. The purchase price for
InCentive is inclusive of an offer for Centerpulse registered shares held by
InCentive equivalent in all respects to our offer for Centerpulse registered
shares plus cash for the value of InCentive's other holdings, which are expected
to be monetized prior to completion of our offer for InCentive. Accordingly, at
the time of the acquisition, it is expected that the InCentive balance sheet
will consist of Centerpulse registered shares already contemplated by our
Centerpulse offer and cash and the incremental purchase price to be paid for
InCentive should be equal to the net cash acquired with InCentive and there
should be no net effect on the net assets of the combined company.
InCentive's consolidated financial statements are prepared in accordance
with IAS, which differ in certain material respects from U.S. GAAP.
Centerpulse's consolidated financial statements are prepared in accordance
with IFRS, which differ in certain material respects from U.S. GAAP. For a
discussion of the significant differences between IFRS and U.S. GAAP, see the
section captioned "NOTE ON INCENTIVE AND CENTERPULSE INFORMATION" and note 31 to
the 2002 audited consolidated financial statements of Centerpulse included
elsewhere in this prospectus.
You should read the information presented in this table below together with
the historical financial statements of Zimmer, Centerpulse and InCentive and the
related notes and the Unaudited Pro Forma Condensed Combined Financial
Statements appearing elsewhere in this prospectus or incorporated herein by
reference. The pro forma data is unaudited and for illustrative purposes only.
The companies may have performed differently had they always been combined. You
should not rely on this information as being indicative of the historical
results that would have been achieved had the companies always been combined or
the future results that the combined company will achieve after the consummation
of our offer and our Centerpulse offer.
8
<Table>
<Caption>
THREE MONTHS YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
2003 2002
--------------- ------------
ZIMMER
Per Share Data:
Earnings per common share
Basic............................................. $ 0.69 $ 1.33
Diluted........................................... 0.68 1.31
Pro forma earnings per common share before cumulative
effect of change in accounting principle(1)
Basic............................................. 0.41 1.34
Diluted........................................... 0.41 1.33
Book value of equity per common share.................. 2.76 1.88
Dividends declared per common share.................... -- --
Pro Forma Combined:
Earnings per common share before cumulative effect of
change in accounting principle(1)
Basic............................................. $ 0.41 $ 1.20
Diluted........................................... 0.40 1.19
Book value of equity per common share.................. 10.32 N/A
Dividends declared per common share.................... -- --
INCENTIVE
Per Share Data:
Earnings per common share.............................. N/A(2) CHF 85.00
Book value of equity per common share.................. N/A(2) 238.94
Dividends declared per common share.................... N/A(2) --
Pro Forma Combined:
Earnings per equivalent share using a fixed exchange
ratio of 3.83(3) Zimmer common shares for one
InCentive bearer share and an exchange rate of CHF
1.37 = US$1.00....................................... CHF 2.10 CHF 7.11
Book value of equity per common share..................... 55.14 N/A
Dividends declared per common share....................... -- --
CENTERPULSE
Per Share Data:
Earnings per common share
Basic............................................. CHF 3.72 CHF 33.10
Diluted........................................... 3.71 32.82
Book value of equity per common share.................. 111.43 107.70
Dividends declared per common share.................... -- --
Pro Forma Combined:
Earnings per equivalent share using a fixed exchange
ratio of 3.68 shares of Zimmer for one Centerpulse
share
Basic............................................. CHF 2.07 CHF 6.89
Diluted........................................... 2.02 6.83
Book value of equity per common share.................. 53.27 N/A
Dividends declared per common share.................... -- --
</Table>
9
- ---------------
(1) Pro forma net earnings for the three months ended March 31, 2003 are before
the cumulative effect of an accounting change of $55 million and for the
year ended December 31, 2002 reflect the retroactive application of a new
accounting method for instruments. Effective January 1, 2003, Zimmer changed
its method of accounting for instruments which are owned by Zimmer and used
by orthopaedic surgeons during total joint replacement and other surgical
procedures. Instruments are recognized as long-lived assets and are included
in property, plant and equipment and are depreciated using the straight-line
method based on estimated useful lives, determined principally in reference
to associated product life cycles, with the majority over five years. In
prior periods, undeployed instruments were carried as a prepaid expense at
cost and recognized in selling, general and administrative expense in the
year in which the instruments were placed into service.
(2) There is no public interim financial information available for InCentive.
(3) See "OUR OFFER -- Terms of Offer; Expiration Date" for a further discussion
of the number of shares of Zimmer common stock that will be exchanged for
InCentive bearer shares.
References to "N/A" mean not applicable.
10
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF ZIMMER
The following table sets forth a summary of selected historical
consolidated financial data of Zimmer for each of the years in the five year
period ended December 31, 2002 and for each of the quarters ended March 31, 2003
and March 31, 2002. This information is derived from, and should be read in
conjunction with, the audited consolidated financial statements of Zimmer and
the unaudited interim consolidated financial statements of Zimmer. Certain of
these financial statements also are included elsewhere in this prospectus. The
operating results for the quarter ended March 31, 2003 are not necessarily
indicative of the results for the remainder of the fiscal year or any future
period. Our management believes that its respective unaudited consolidated
interim financial statements reflect all adjustments, which are of a normal
recurring nature, necessary for a fair statement of the results for the interim
periods presented. See the section "WHERE YOU CAN FIND MORE INFORMATION."
<Table>
<Caption>
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
--------------- ------------------------------------------
2003 2002 2002 2001 2000 1999 1998
------ ------ ------ ------ ------ ------ ------
STATEMENT OF EARNINGS DATA (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Net sales.................................. $ 390 $ 319 $1,372 $1,179 $1,041 $ 939 $ 861
Net earnings............................... 135 55 258 150 176 150 145
Pro forma net earnings before cumulative
effect of change in accounting
principle(1)............................. 80 56 261 156 177 155 147
Earnings per common share
Basic.................................... $ 0.69 $ 0.28 $ 1.33 $ 0.77 $ 0.91 $ 0.77 $ 0.75
Diluted.................................. 0.68 0.28 1.31 0.77 0.91 0.77 0.75
Pro forma earnings per common share before
cumulative effect of change in accounting
principle(1)
Basic.................................... $ 0.41 $ 0.29 $ 1.34 $ 0.81 $ 0.91 $ 0.80 $ 0.76
Diluted.................................. 0.41 0.29 1.33 0.80 0.91 0.80 0.76
Average common shares outstanding(2)
Basic.................................... 195.7 194.0 194.5 193.7 193.6 193.6 193.6
Diluted.................................. 198.0 195.7 196.8 194.3 193.6 193.6 193.6
BALANCE SHEET DATA
Total assets............................... $ 979 $ 859 $ 745 $ 597 $ 606 $ 579
Due to former parent....................... -- -- -- 144 41 50
Short-term debt............................ 77 157 150 -- -- --
Long-term debt............................. -- -- 214 -- -- --
Other long-term obligations................ 93 92 79 5 4 3
Stockholders' equity....................... 543 366 79 N/A N/A N/A
</Table>
- ---------------
(1) Pro forma net earnings for the three months ended March 31, 2003 are before
the cumulative effect of an accounting change of $55 million and for the
three months ended March 31, 2002 and for each of the years in the five year
period ended December 31, 2002 reflect the retroactive application of a new
accounting method for instruments. Effective January 1, 2003, Zimmer changed
its method of accounting for instruments which are owned by Zimmer and used
by orthopaedic surgeons during total joint replacement and other surgical
procedures. Instruments are recognized as long-lived assets and are included
in property, plant and equipment and are depreciated using the straight-line
method based on estimated useful lives, determined principally in reference
to associated product life cycles, with the majority over five years. In
prior periods, undeployed instruments were carried as a prepaid expense at
cost and recognized in selling, general and administrative expense in the
year in which the instruments were placed into service. Net earnings for
2001 include $70 million ($50 million net of tax) in costs relating to the
separation of Zimmer from its former parent, which reduce basic and diluted
earnings per share by $0.26. Net earnings for 2001 also include $7 million
($5 million net of tax) of interest expense for the period from the
effective date of the separation of Zimmer from its former parent to
December 31, 2001.
(2) For periods ended prior to August 6, 2001, average common shares reflect the
number of shares of Zimmer common stock outstanding on August 6, 2001, the
date all of the shares of Zimmer common stock were distributed to the
stockholders of Zimmer'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 common stock equivalents, where
appropriate.
References to "N/A" mean not applicable.
11
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF INCENTIVE
The following table sets forth selected historical consolidated financial
data of InCentive for each of the years in the five year period ended December
31, 2002. This information is derived from, and should be read in conjunction
with, the audited consolidated financial statements of InCentive. Certain of
these financial statements also are included elsewhere in this proxy statement.
Interim financial information for each of the quarters ended March 31, 2003 and
2002 is not included because InCentive does not prepare quarterly financial
statements.
The selected historical consolidated financial data for each of the years
in the five year period ended December 31, 2002 were prepared in Swiss francs.
InCentive's consolidated financial statements are prepared in accordance with
IAS, which differ in certain material respects from U.S. GAAP.
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------------------------
2002 2001 2000 1999 1998(1)
------- -------- ------- ------- -------
(IN THOUSANDS CHF, EXCEPT PER SHARE AMOUNTS)
SUMMARIZED INCOME STATEMENT DATA:
Total income/(loss)....................... 191,816 (412,257) (56,234) 166,422 384
Total expense............................. 13,385 29,079 8,032 3,171 4,737
Gain/(loss) for the year.................. 178,431 (441,336) (64,266) 163,251 (4,353)
Per Share Data
Gain/(loss) per share..................... 85 (206) (101) 490 (15)
Weighted Average Number of Shares: (in
thousands).............................. 2,107 2,142 636 333 303
BALANCE SHEET DATA:
Cash and due from banks................... 181,717 255,236 425,815 3,900 1,286
Investments long
Marketable securities................... 488,230 317,076 474,457 264,343 101,760
Replacement values of derivatives....... 33,201 1,973 25,886 0 0
Private equity.......................... 11,547 37,416 33,949 0 0
Replacement values of forward forex
contracts............................. 420 3,775 2,097 0 0
Other................................... 0 0 0 0 0
Total assets.............................. 719,519 630,730 987,803 268,292 104,824
Total current liabilities................. 22,588 118,911 18,700 1,188 970
Total shareholder's equity................ 696,931 511,819 962,550 267,105 108,375
</Table>
- ---------------
(1) Financial results as per India Investment AG report 1999. InCentive Capital
AG is an investment company, domiciled in Zug Switzerland, which was created
in 2000 as a result of the merger between InCentive Investment AG, Zurich
and India Investment AG, Zug.
12
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF CENTERPULSE
The following table sets forth selected historical consolidated financial
data of Centerpulse for each of the years in the five year period ended December
31, 2002 and for each of the quarters ended March 31, 2003 and March 31, 2002.
This information is derived from, and should be read in conjunction with, the
audited consolidated financial statements of Centerpulse and the unaudited
consolidated interim financial statements of Centerpulse. Certain of these
financial statements also are included elsewhere in this prospectus. The
operating results for the quarter ended March 31, 2003 are not necessarily
indicative of the results for the remainder of the fiscal year or any future
period. See the section captioned "WHERE YOU CAN FIND MORE INFORMATION."
The selected historical consolidated financial data for each of the years
in the five year period ended December 31, 2002 and each of the quarters ended
March 31, 2003 and 2002 were prepared in Swiss francs. Centerpulse's
consolidated financial statements are prepared in accordance with IFRS, which
differ in certain material respects from U.S. GAAP. See the section captioned
"NOTE ON INCENTIVE AND CENTERPULSE INFORMATION" and note 31 to the 2002 audited
consolidated financial statements of Centerpulse for a discussion of the
significant differences between IFRS and U.S. GAAP.
<Table>
<Caption>
THREE MONTHS
ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------- -----------------------------------------
2003 2002 2002 2001 2000 1999 1998
------ ----- ------ ------- ------ ----- -----
(IN MILLIONS CHF, EXCEPT PER SHARE AND PER ADS AMOUNTS)
INCOME STATEMENT DATA
Net sales........................ 318 321 1,470 1,418 1,347 1,182 1,541
Net income/Net loss.............. 44 44 337 (1,193) 190 483 143
Income/loss per share............ 3.72 4.42 33.10 (119.62) 19.01 48.37 14.32
Diluted income/loss per share.... 3.71 4.41 32.82 (119.62) 18.98 48.37 14.20
Weighted average number of shares
adjusted for dilutive share
options (in thousands)........ 11,825 9,945 10,268 9,973 10,012 9,986 9,988
Income/loss per ADS.............. 0.37 0.44 3.31 (11.96) 1.90 4.84 1.43
Diluted income/loss per ADS...... 0.37 0.44 3.28 (11.96) 1.90 4.84 1.42
BALANCE SHEET DATA
Total assets..................... 2,220 2,338 2,871 2,525 2,396 2,299
Current provisions............... 82 92 223 54 52 29
Short-term debt.................. 72 70 75 86 105 480
Other non-current provisions..... 159 159 1,468 144 151 49
Long-term debt................... 353 487 20 19 31 288
Stockholders' equity............. 1,314 1,270 784 1,993 1,844 1,227
</Table>
13
Exceptional operating items reflected in Net income/Net loss above for the
periods presented included:
<Table>
<Caption>
THREE MONTHS
ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------- ----------------------------------
2003 2002 2002 2001 2000 1999 1998
----- ----- ---- ------ ---- ---- ----
(IN MILLIONS CHF)
Hip and knee settlement....................... -- -- -- (1,476) -- -- --
Impairment of intangible assets............... -- -- 28 (91) -- (240) --
Other exceptional expenses.................... -- -- (40) (107) (1) (14) --
Operating income from discontinued
operations(1)............................... -- 4 -- -- -- -- --
Gain on sale of discontinued operations(2).... 18 -- 200 -- -- 579 --
Total exceptional operating items............. -- -- 188 (1,674) (1) 325 --
</Table>
- ---------------
(1) Discontinued operations:
On June 3, 1998 Centerpulse announced its intention to exit the
electrophysiology business. This business was sold on February 1, 1999 for
US$802 million (including cash on hand of CHF 19 million).
On June 12, 2002, Centerpulse announced its plans to divest of the
cardiovascular division and to focus on its core businesses orthopedics, spine
and dental. On November 7, 2002, Centerpulse announced the closing of the sale
of IntraTherapeutics, Inc. to ev3 Inc., a portfolio company of private equity
firms Warburg Pincus LLC and The Vertical Group. On November 18, 2002,
Centerpulse announced the closing of the sale of Vascutek Ltd. to Terumo
Corporation of Japan. On January 21, 2003, Centerpulse announced the closing of
the sale of Carbomedics, Inc. and Mitroflow Corp. to Italian medical device
company Snia S.p.A. With the sale of Carbomedics and Mitroflow the divestiture
of the cardiovascular division was completed.
The impact of the business divested in January 2003 on the consolidated
financial statements for the three month period ended March 31, 2003 was as
follows: Sales CHF 7 million, Operating income CHF 0 million, Taxes CHF 1
million, Assets CHF 92 million, thereof Cash 1 million, Liabilities CHF 26
million.
(2) Gain on sale of discontinued operations:
The pre-tax gain on the sale of the Cardiac Care business in January 2003
amounts to CHF 18 million. The US$36 million subordinated loan which was part of
the purchase price remains in the balance sheet in other accounts receivable and
prepaid expenses.
The pre-tax gain on the sale of the business unit Vascular Care, consisting
of Centerpulse's grafts and stents business amounted to CHF 200 million. This
division represented 19% of Centerpulse's consolidated revenues in 2001 with
operations primarily in the European Union and North America.
The pre-tax gain on the sale of the Electrophysiology business amounted to
CHF 579 million. The transactions of the discontinuing operations from January
1, 1999, to the date of sale are not considered significant and are included in
the gain on sale of discontinued operations.
14
SELECTED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following table sets forth selected pro forma condensed combined
financial data (i) derived from the audited consolidated financial statements of
Zimmer for the fiscal year ended December 31, 2002 and the unaudited
consolidated interim financial statements of Zimmer for the period ended March
31, 2003 and (ii) derived from the audited consolidated financial statements of
Centerpulse for the fiscal year ended December 31, 2002 and the unaudited
consolidated interim financial statements of Centerpulse for the period ended
March 31, 2003, in each case, included elsewhere in this prospectus, and is
qualified in its entirety by such statements.
Centerpulse's consolidated financial statements are prepared in accordance
with IFRS, which differ in certain material respects from U.S. GAAP. For a
discussion of the significant differences between IFRS and U.S. GAAP, see the
section captioned "NOTE ON INCENTIVE AND CENTERPULSE INFORMATION" and note 31 to
the 2002 audited consolidated financial statements of Centerpulse included
elsewhere in this prospectus.
The following pro forma financial information is presented for illustrative
purposes only and is not necessarily indicative of (i) results of operations and
financial position that would have been achieved had the consummation of our
offer and our Centerpulse offer taken place on the dates indicated or (ii) the
future operations of the combined company. The following table should be relied
on only for the limited purpose of presenting what the results of operations and
financial position of the combined businesses of Zimmer and Centerpulse might
have looked like had our offer and our Centerpulse offer taken place at an
earlier date. For a discussion of the assumptions and adjustments made in the
preparation of the pro forma financial information presented in this prospectus,
see the section captioned "UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS." You can find more information about our offer in the section
captioned "OUR OFFER" and our Centerpulse offer in the section captioned "THE
CENTERPULSE OFFER."
Operating results for InCentive for the year ended December 31, 2002 and
for the three months ended March 31, 2003 and its net assets at that date have
been excluded from the pro forma financial information. The purchase price for
InCentive is inclusive of an offer for Centerpulse registered shares held by
InCentive equivalent in all respects to our offer for Centerpulse registered
shares plus cash for the value of InCentive's other holdings, which are expected
to be monetized prior to completion of our offer for InCentive. Accordingly, at
the time of the acquisition, it is expected that the InCentive balance sheet
will consist of Centerpulse registered shares already contemplated by our
Centerpulse offer and cash and the incremental purchase price to be paid for
InCentive should be equal to the net cash acquired with InCentive and there
should be no net effect on the net assets of the combined company.
The following pro forma financial information should be read in conjunction
with:
- the Unaudited Pro Forma Condensed Combined Financial Statements and the
accompanying notes in the section captioned "UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS;"
- financial statements of Zimmer for the year ended December 31, 2002 and
for the three-month period ended March 31, 2003 and the notes relating
thereto, included elsewhere in this prospectus; and
- financial statements of Centerpulse for the fiscal year ended December
31, 2002 and for the three-month period ended March 31, 2003 and the
notes relating thereto, included elsewhere in this prospectus.
15
<Table>
<Caption>
THREE MONTHS YEAR
ENDED ENDED
MARCH 31, DECEMBER 31,
2003 2002
-------------- --------------
(IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
STATEMENTS OF EARNINGS DATA
Net sales................................................... $ 622 $2,168
Net earnings before cumulative effect of change in
accounting principle...................................... 98 287
Earnings per common share
Basic................................................... $ 0.41 $ 1.20
Diluted................................................. 0.40 1.19
Average common shares outstanding
Basic................................................... 239.5 238.3
Diluted................................................. 242.7 241.5
</Table>
<Table>
<Caption>
MARCH 31,
2003
-------------
(IN MILLIONS)
BALANCE SHEET DATA
Total assets................................................ $ 5,065
Short-term debt............................................. 212
Long-term debt.............................................. 1,350
Other long-term obligations................................. 209
Stockholders' equity........................................ 2,487
</Table>
16
RISK FACTORS
In deciding whether to tender your InCentive bearer shares pursuant to our
offer, you should carefully consider the risks set forth below in addition to
the other information contained in this prospectus. Please also refer to the
additional risk factors identified in the periodic reports and other documents
of Zimmer and Centerpulse incorporated by reference into this prospectus and
listed in the section captioned "WHERE YOU CAN FIND MORE INFORMATION."
As used below, "we" or "us" refers to Zimmer or, after the consummation of
our offer and our Centerpulse offer as described in this prospectus, Zimmer,
InCentive and Centerpulse, as the context requires.
RISKS RELATING TO OUR PROPOSED OFFER AND CENTERPULSE OFFER
MARKET FLUCTUATIONS MAY REDUCE THE MARKET VALUE OF THE CONSIDERATION WE ARE
OFFERING TO YOU BECAUSE THE EXCHANGE RATIO CONTEMPLATED BY OUR OFFER IS FIXED.
The consideration in our offer consists in part of a specified number of
shares, or a fraction of a share, of Zimmer common stock, subject to election
procedures, rather than a number of shares, or a fraction of a share, of Zimmer
common stock with a specified value. The exchange ratio is based on US$48.28,
which is the closing price of a share of Zimmer common stock on May 19, 2003,
the day immediately prior to the announcement of our offer. The value of the
shares of Zimmer common stock you receive will fluctuate, based on changes in
the market price for Zimmer common stock. Any fluctuation in the market price of
Zimmer common stock between now and the closing of our offer will change the
value of the shares of Zimmer common stock that you will receive. Therefore, the
value of the shares of Zimmer common stock that you will receive could be higher
or lower than the price on which the exchange ratio was based. In addition,
although Zimmer believes that after the acquisitions of InCentive and
Centerpulse are consummated Zimmer's common stock will trade on a comparable
basis to its trading performance prior the consummation of our offer, this may
not be the case. For information regarding the range of trading prices of Zimmer
common stock on the New York Stock Exchange, please refer to the section
captioned "MARKET PRICE AND DIVIDEND MATTERS."
IF YOU ELECT THE MIX AND MATCH FEATURE, YOU MAY NOT RECEIVE ALL CONSIDERATION
IN THE FORM YOU HAVE ELECTED.
Our offer will contain a mix and match election feature, whereby tendering
InCentive shareholders may elect to receive either more shares of Zimmer common
stock or more cash than the standard entitlement. However, this election will be
available to InCentive shareholders only to the extent that off-setting
elections have been made by other tendering securityholders in our offer and the
Centerpulse offer. Elections made in our offer will be taken together with
elections made under a similar mix and match election feature included in our
Centerpulse offer (described in the section captioned "THE CENTERPULSE OFFER")
in determining whether mix and match elections under our offer will be
fulfilled. In other words, in order for a InCentive shareholder to receive a
higher proportion of cash, other securityholders will have to elect to receive a
higher proportion of shares of Zimmer common stock, and vice versa. To the
extent that elections cannot be satisfied as a result of a lack of such
off-setting elections, entitlements to shares of Zimmer common stock and cash in
excess of the standard entitlement will be reduced on a pro rata basis. Once the
share allocations have been determined, the cash element of the consideration
will be reduced or increased (as the case may be) for each InCentive shareholder
who has been allocated an increased or reduced number of shares of Zimmer common
stock. All calculations will be made by reference to the number of acceptances
and elections as of the last day of the subsequent offering period and, for the
purposes of these calculations, the assumed value per share of Zimmer common
stock shall be US$48.28, the same as the closing price of a share of Zimmer
common stock on May 19, 2003, the day immediately prior to the announcement of
our offer and our Centerpulse offer. We describe our procedures for election and
proration in the section captioned "OUR OFFER -- Mix and Match Election."
17
THIS TRANSACTION MAY ADVERSELY AFFECT THE LIQUIDITY AND VALUE OF NON-TENDERED
INCENTIVE BEARER SHARES.
In the event that not all of the InCentive bearer shares are tendered, the
number of securityholders and the number of InCentive bearer shares held by
individual holders will be greatly reduced. As a result, the closing of our
offer would adversely affect the liquidity and may adversely affect the market
value of the remaining InCentive bearer shares held by the public. Subject to
SWX Swiss Exchange rules, we may delist the InCentive bearer shares on the SWX
Swiss Exchange. As a result of the delisting, InCentive bearer shares not
tendered pursuant to our offer may become illiquid and may be of reduced value.
See the section captioned "OUR OFFER -- Purpose of Our Offer; Plans for
InCentive" and "-- Effect of Our Offer on the Market For InCentive Bearer
Shares; Registration Under the Exchange Act."
UPON YOUR RECEIPT OF SHARES OF ZIMMER COMMON STOCK IN OUR OFFER, YOU WILL
BECOME A STOCKHOLDER IN A DELAWARE CORPORATION, WHICH MAY CHANGE CERTAIN
SHAREHOLDER RIGHTS AND PRIVILEGES YOU HOLD AS A SHAREHOLDER OF A SWISS
CORPORATION.
Zimmer is governed by the laws of the United States, the State of Delaware
and by its certificate of incorporation and restated by-laws. The Delaware
General Corporation Law, referred to in this prospectus as the DGCL, extends to
stockholders certain rights and privileges that may not exist under Swiss law
and, conversely, does not extend certain rights and privileges that you may have
as a shareholder of a company governed by Swiss law. In addition to our existing
rights agreement, or poison pill, the directors of a Delaware corporation may
elect to adopt certain provisions that have the effect of discouraging a third
party from acquiring control of the corporation. Such provisions could limit the
price that some investors might be willing to pay in the future for shares of
Zimmer common stock. These Delaware provisions may also have the effect of
discouraging or preventing certain types of transactions involving an actual or
a threatened change in control of Zimmer, including unsolicited takeover
attempts, even though such a transaction may offer Zimmer stockholders the
opportunity to sell their shares of Zimmer common stock at a price above the
prevailing market price. For a detailed discussion of the rights of Zimmer
stockholders versus the rights of InCentive shareholders, see the section
captioned "COMPARATIVE RIGHTS OF INCENTIVE SHAREHOLDERS AND ZIMMER STOCKHOLDERS
IN GENERAL."
OUR INDEBTEDNESS FOLLOWING OUR OFFER AND OUR CENTERPULSE OFFER WILL BE HIGHER
THAN OUR EXISTING INDEBTEDNESS.
Our indebtedness as of March 31, 2003 was approximately US$77 million. Our
pro forma total and net indebtedness as of March 31, 2003, after giving effect
to the acquisition of 100% of the outstanding shares of InCentive and
Centerpulse, as described in the section captioned "UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS," are approximately US$1,562 million and
US$1,418 million, respectively. As a result of the increase in debt, demands on
our cash resources will increase after the consummation of our offer and our
Centerpulse offer, which could have important effects on an investment in our
common stock. For example, the increased levels of indebtedness could:
- reduce funds available for investment in research and development and
capital expenditures; or
- create competitive disadvantages compared to other companies with lower
debt levels.
Moreover, if one or more rating agencies downgrades our credit rating to
below investment grade as a result of the debt incurred to finance our offer and
our Centerpulse offer, we may have difficulty obtaining additional financing and
our cost of obtaining additional financing or refinancing existing debt may be
increased significantly.
WE HAVE ONLY CONDUCTED A LIMITED DUE DILIGENCE REVIEW OF THE NON-PUBLIC RECORDS
OF INCENTIVE AND CENTERPULSE. THEREFORE, WE MAY BE SUBJECT TO UNKNOWN
LIABILITIES OF INCENTIVE OR CENTERPULSE WHICH MAY HAVE A MATERIAL ADVERSE
EFFECT ON OUR PROFITABILITY AND RESULTS OF OPERATIONS.
To date, we have only conducted a limited due diligence review of InCentive
and Centerpulse. As a result, after the consummation of our offer and our
Centerpulse offer, we may be subject to unknown liabilities of InCentive or
Centerpulse, which may have a material adverse effect on our profitability and
18
results of operations, which we might have otherwise discovered if we had been
permitted by InCentive and Centerpulse to conduct a complete due diligence
review.
THE MARKET PRICE OF ZIMMER COMMON STOCK MAY DECLINE AS A RESULT OF OUR OFFER
AND OUR CENTERPULSE OFFER.
The market price of our common stock may decline as a result of our offer
and our Centerpulse offer if:
- the integration of Centerpulse's business is unsuccessful;
- we do not achieve the expected benefits of our acquisitions of
Centerpulse and InCentive as rapidly or to the extent anticipated by
financial analysts or investors; or
- the effect of our acquisitions of Centerpulse and InCentive on our
financial results is not consistent with the expectations of financial
analysts or investors.
In connection with our offer and our Centerpulse offer, we estimate that we
will issue approximately 43.8 million shares of Zimmer common stock. The
increase in the number of shares of our common stock issued may lead to sales of
such shares or the perception that such sales may occur, either of which may
adversely affect the market for, and the market price of, our common stock.
Upon consummation of our offer, InCentive shareholders will become holders
of shares of our common stock. Our results of operations, as well as the trading
price of our common stock, may be affected by factors different from those
affecting InCentive's results of operations and the price of InCentive bearer
shares. See the section captioned "COMPARATIVE RIGHTS OF INCENTIVE SHAREHOLDERS
AND ZIMMER STOCKHOLDERS IN GENERAL."
UNCERTAINTIES EXIST IN INTEGRATING THE BUSINESS OPERATIONS OF ZIMMER AND
CENTERPULSE.
We intend, to the extent possible, to integrate our operations with those
of Centerpulse. Our goal in integrating these operations is to increase earnings
and achieve cost savings by taking advantage of the anticipated synergies of
consolidation and enhanced growth opportunities. We believe the combination of
Zimmer and Centerpulse will generate approximately US$70 to US$90 million in
annual operational efficiencies and cost savings by 2006. Retention payments and
other employee related costs, costs for lease terminations, meetings, trainings,
rebranding, integration of information technology systems, and other cash costs
are anticipated in connection with the integration of Zimmer and Centerpulse.
Such costs are preliminarily estimated to amount to $160 million within the
twelve months succeeding the transaction. Actual costs may vary from the
preliminary estimates. Although we believe that the integration of Centerpulse's
operations into ours will not present any significant difficulties, there can be
no assurance that we will not encounter substantial difficulties integrating our
operations with Centerpulse's operations, resulting in a delay or the failure to
achieve the anticipated synergies and, therefore, the expected increases in
earnings and cost savings. The difficulties of combining the operations of the
companies include, among other things:
- possible inconsistencies in standards, controls, procedures and policies,
business cultures and compensation structures between Zimmer and
Centerpulse;
- coordinating and consolidating ongoing and future research and
development efforts;
- consolidating sales and marketing operations;
- retaining existing customers and attracting new customers;
- retaining strategic partners and attracting new strategic partners;
- retaining key employees;
- retaining and integrating distributors and key sales representatives;
19
- consolidating corporate and administrative infrastructures;
- integrating and managing the technologies and products of the two
companies, including consolidating and integrating computer information
systems;
- identifying and eliminating redundant and underperforming operations and
assets;
- using capital assets efficiently to develop the business of the combined
company;
- minimizing the diversion of management's attention from ongoing business
concerns;
- coordinating geographically separate organizations;
- possible tax costs or inefficiencies associated with integrating the
operations of the combined company;
- possible modification of operating control standards in order to comply
with the Sarbanes-Oxley Act and the rules and regulations promulgated
thereunder;
- retaining and attracting new designers and surgeons to support new
products and new technology development; and
- limitations on existing plant capacity.
For these reasons, we may fail to complete successfully the necessary
integration of Zimmer and Centerpulse, or to realize any of the anticipated
benefits of the integration of the two companies. Actual cost savings and
synergies may be lower than we currently expect and may take a longer time to
achieve than we currently anticipate.
FULL INTEGRATION OF OUR OPERATIONS WITH CENTERPULSE'S OPERATIONS MAY NOT BE
ACHIEVED IF WE CANNOT COMPULSORILY ACQUIRE ALL OF THE ISSUED AND OUTSTANDING
INCENTIVE BEARER SHARES AND CENTERPULSE REGISTERED SHARES, INCLUDING
REGISTERED SHARES REPRESENTED BY CENTERPULSE ADSS.
Our offer is subject to a condition that, before the end of our offer
period, there having been validly tendered and not properly withdrawn at least
80% of the InCentive bearer shares on a fully diluted basis. Our Centerpulse
offer is subject to a condition that, before the expiration of the Centerpulse
offer period, there having been validly tendered and not properly withdrawn at
least 66 2/3% of the Centerpulse registered shares, including registered shares
represented by Centerpulse ADSs, on a fully diluted basis. To effect the
compulsory acquisition of all of the InCentive bearer shares and Centerpulse
registered shares, including registered shares represented by Centerpulse ADSs,
under Swiss law, we are required to have a beneficial interest in at least 98%
of all of the InCentive bearer shares and 98% of all of the Centerpulse
registered shares, including registered shares represented by Centerpulse ADSs.
It is possible that, at the end of our offer period and the Centerpulse offer
period, we will not hold a sufficient number of InCentive bearer shares or
Centerpulse registered shares, including registered shares represented by
Centerpulse ADSs, as the case may be, to effect a compulsory acquisition of the
remaining outstanding InCentive bearer shares or Centerpulse registered shares,
including registered shares represented by Centerpulse ADSs. This could prevent
or delay us from realizing some or all of the anticipated benefits from the
integration of our operations with Centerpulse's operations.
WE WILL BE SUBJECT TO THE LIABILITIES RESULTING FROM CENTERPULSE'S IMPLANT
LITIGATION AFTER THE CONSUMMATION OF OUR OFFER.
According to publicly available information concerning Centerpulse,
Centerpulse is currently party to various litigation related to alleged defects
in certain of its hip and knee implant devices. Following Centerpulse's December
5, 2000 recall of various Inter-Op(TM) shells and May 17, 2001 notification
regarding various tibial base plates, lawsuits were filed in numerous courts
throughout the United States and elsewhere in the world against Centerpulse,
alleging defective design, marketing and manufacture of these products.
Plaintiffs also alleged breach of express and implied warranties associated with
these devices.
20
On May 8, 2002, the U.S. District Court for the Northern District of Ohio
granted final approval of a class action settlement agreement that resolved all
claims related to the affected products subject to the above-mentioned recall
and notification in the United States. The final settlement agreement
established a settlement trust to pay claims in accordance with the terms of the
settlement agreement. Similar litigation was commenced in Canada. On May 7,
2002, Centerpulse agreed to a class action settlement in a lawsuit pending in
Quebec Superior Court. Final approval of the settlement was issued on March 28,
2003. Prior thereto, Centerpulse concluded individual settlements with a number
of other patients in Canada. Outside the United States and Canada, approximately
140 persons received affected hip or knee implants, not all of these individuals
have brought claims, but those that have, have been settled. Notwithstanding the
settlement of the matters covered by the settlement agreements in the United
States and Canada, Centerpulse may still have certain further liability to
plaintiffs who opted out of those settlements or who may otherwise assert claims
against Centerpulse arising out of alleged defective hip and knee devices.
After consummation of our offer, Centerpulse will be a subsidiary of Zimmer
and, therefore, the financial position, results of operations and cash flows of
Zimmer may be affected by any liabilities of Centerpulse relating to the
Inter-Op(TM) shells or tibial base plates. For a more complete discussion of
this matter, please refer to the discussion in the section captioned "THE
COMPANIES -- Centerpulse AG -- Litigation Matters."
OUR CENTERPULSE OFFER COULD TRIGGER CERTAIN CHANGE OF CONTROL PAYMENTS IN THE
EMPLOYMENT AGREEMENTS OF CERTAIN MEMBERS OF CENTERPULSE'S SENIOR MANAGEMENT.
The employment agreements of certain members of the Centerpulse senior
management may contain change of control clauses providing for compensation,
plus, in each case, applicable social security system payments on behalf of such
individuals, to be granted in the event the employment agreements of these
employees are terminated following the consummation of our offer, either by
Centerpulse or by those employees, should their respective positions with
Centerpulse be materially changed. If successful, our Centerpulse offer would
effect such a change of control, thereby giving rise to potential change of
control payments.
CENTERPULSE RECENTLY DIVESTED SEVERAL BUSINESSES AND OPERATIONS. ZIMMER WILL
BE SUBJECT TO CENTERPULSE'S VARIOUS ONGOING OBLIGATIONS RELATING TO THESE
RECENT DIVESTITURES.
As part of its strategy to focus on core businesses, Centerpulse recently
divested several businesses and operations, including its cardiovascular
division. In connection with these transactions, Centerpulse gave
representations, warranties and indemnities relating to the divested businesses
to the purchasers, some of which remain in force. Centerpulse has also assumed
or retained ongoing potential liabilities with respect to many of these divested
businesses. After the consummation of our offer, Centerpulse will be a
subsidiary of Zimmer and, therefore, our financial position, results of
operations and cash flows may be affected by these ongoing potential
liabilities.
ANTITRUST AND COMPETITION AUTHORITIES IN VARIOUS JURISDICTIONS MAY ATTEMPT TO
DELAY OR PREVENT OUR ACQUISITION OF CENTERPULSE VOTING AND CONTROL RIGHTS OR
MAY REQUIRE DIVESTITURES.
We are unaware of any antitrust filings or approvals that are required with
respect to our offer. However, we and Centerpulse conduct operations in a number
of jurisdictions where antitrust filings or approvals may be required in
connection with our Centerpulse offer. We have made or will make antitrust
filings with the relevant authorities in the United States, the Czech Republic,
Austria, France, Germany, Italy and Spain. Until the applicable waiting period
in the United States under the HSR Act expires or is terminated and we receive
the required clearances from other governmental authorities with respect to our
Centerpulse offer, either we may not purchase Centerpulse securities under our
Centerpulse offer or we may be entitled to acquire the Centerpulse securities
but not to exercise the voting or other rights attaching to those securities. We
are currently in the process of reviewing whether any other filings will be
required or advisable in other jurisdictions, and we intend to make the
appropriate regulatory filings and applications if we decide that such filings
are necessary or advisable. We cannot provide any assurance that
21
the necessary approvals will be obtained or that there will not be any adverse
consequences to our or Centerpulse's business resulting from the failure to
obtain these regulatory approvals or from conditions that could be imposed in
connection with obtaining these approvals, including divestitures or other
operating restrictions upon Centerpulse or the combined company. Our Centerpulse
offer is conditioned upon the receipt from all European, U.S. and other foreign
authorities of approval and/or clearance of our acquisition of Centerpulse
without Zimmer, Centerpulse or any of our subsidiaries being required to meet
any condition or requirement giving rise to specified adverse financial effects
and no court or other authority prohibiting the consummation of our offer and
our Centerpulse offer. You should be aware that all required regulatory
approvals may not be obtained in time and could result in a significant delay in
the consummation of our offer and our Centerpulse offer.
OUR VERIFICATION OF THE RELIABILITY OF THE CENTERPULSE INFORMATION INCLUDED
IN, OR OMITTED FROM, THIS PROSPECTUS, PURSUANT TO OUR DUE DILIGENCE REVIEW OF
CENTERPULSE, HAS BEEN LIMITED BY CENTERPULSE'S FAILURE TO PROVIDE US WITH THE
ACCOUNTING RECORDS NECESSARY FOR US TO FULLY ASSESS THE FINANCIAL CONDITION OF
CENTERPULSE.
In respect of information relating to Centerpulse's business, operations
and management presented in, or omitted from, this prospectus, we have relied
upon publicly available information, including information publicly filed by
Centerpulse with the SEC, and documentation provided to us by Centerpulse over
the course of our due diligence review of Centerpulse. However, Centerpulse has
omitted from the due diligence materials provided to us all the financial
information necessary for us to fully assess the financial condition of
Centerpulse. To date, Centerpulse has provided our representatives with only
limited access to Centerpulse's accounting records and has not permitted its
independent public accountants to provide us with all of the information we
require, including an independent public accountants' consent. Although we have
no knowledge that would indicate that any statements contained herein regarding
Centerpulse's financial condition based upon such publicly filed reports and
documents are inaccurate, incomplete or untrue, we were not involved in the
preparation of such information and statements. As a result, we have made
adjustments and assumptions in preparing the pro forma financial information
presented in this prospectus which have necessarily involved our estimates with
respect to Centerpulse's financial information. Any financial information
regarding Centerpulse that may be detrimental to us following our acquisitions
of Centerpulse and InCentive that has not been publicly disclosed by
Centerpulse, or errors in our estimates due to the lack of cooperation from
Centerpulse, may have an adverse effect on the benefits we expect to achieve
through the consummation of our Centerpulse offer.
THE CASH PORTION OF THE CONSIDERATION TO BE PAID IN OUR OFFER AND OUR
CENTERPULSE OFFER TO TENDERING SECURITYHOLDERS IS BASED ON A FIXED AMOUNT OF
SWISS FRANCS AND, THEREFORE, ZIMMER IS SUBJECT TO CURRENCY FLUCTUATIONS
THROUGH THE PAYMENT DATE.
Because Zimmer will pay all holders of InCentive bearer shares and
Centerpulse registered shares in Swiss francs, Zimmer must buy Swiss francs with
U.S. dollars at the prevailing exchange rate on the payment date. As a result,
the actual amount of U.S. dollars required to buy a sufficient amount of Swiss
francs to pay the cash portion of the consideration to such holders will depend
upon the exchange rate prevailing on the business day on which the funds are
made available by Zimmer to the Swiss offer manager. Additionally, the actual
amount of U.S. dollars into which the cash portion of the consideration payable
into our Centerpulse offer for the Centerpulse ADSs, which is a fixed amount of
Swiss francs, is convertible will depend upon the exchange rate prevailing on
the business day on which the funds are made available by Zimmer to the U.S.
exchange agent. Therefore, Zimmer is subject to the risk of fluctuations in the
U.S. dollar/Swiss franc exchange rate.
22
WE COULD INCUR SUBSTANTIAL LIABILITY IF THE ISSUANCE OF ZIMMER COMMON STOCK
PURSUANT TO OUR OFFER, OR ANY OTHER FACTOR, CAUSES THE SPIN-OFF OF ZIMMER BY
ZIMMER'S FORMER PARENT TO BE TAXABLE FOR U.S. FEDERAL INCOME TAX PURPOSES.
In connection with the spin-off of Zimmer from Zimmer's former parent on
August 6, 2001, Zimmer's former parent received a private letter ruling from the
Internal Revenue Service, or IRS, to the effect that the transfer of the
orthopaedic business to Zimmer and the subsequent spin-off of Zimmer common
stock to Zimmer's former parent stockholders qualified as a tax-free transaction
under sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as
amended. The private letter ruling is based on the accuracy of representations
as to numerous factual matters, the inaccuracy of which could cause the IRS to
revoke all or any part of the private letter ruling retroactively. If the
spin-off were to fail to qualify for tax-free treatment, then, in general,
additional tax would be payable by the consolidated group of which Zimmer's
former parent is the common parent. Each member of Zimmer's former parent's
consolidated group at the time of the spin-off, including Zimmer, would be
jointly and severally liable for this tax. In addition, we entered into a tax
sharing agreement with Zimmer's former parent that prohibits us from taking
certain actions that might jeopardize the tax treatment of the spin-off and
related transactions, and requires us to indemnify Zimmer's former parent for
any taxes that result from such actions. If we are required to make any
indemnity payments, or are otherwise liable for additional taxes relating to the
spin-off, the amount of such payments or liability could be substantial and our
results of operations could be materially adversely affected. In accordance with
the tax sharing agreement, we have obtained an opinion of counsel to the effect
that the consummation of our offers for Centerpulse and InCentive will not cause
the spin-off or related transactions to be taxable to Zimmer's former parent or
its stockholders.
CENTERPULSE COULD INCUR SUBSTANTIAL LIABILITY IF THE ACQUISITION OF
CENTERPULSE CAUSES THE SEPARATION OF CENTERPULSE FROM SULZER AG TO BE TAXABLE
FOR SWISS TAX PURPOSES.
In connection with the separation of Centerpulse from Sulzer AG on July 10,
2001, Sulzer AG received private rulings from the applicable Swiss tax
authorities regarding the tax-free nature of the separation, including rulings
dated February 28, 2001 (Federal Tax Administration/Division Federal District
Tax, Withholding Tax and Stamp Duty) and March 2, 2001 (Tax Administration of
the Canton of Zurich). Centerpulse entered into a Separation Agreement with
Sulzer AG that requires Centerpulse to indemnify Sulzer AG for tax liabilities
that result from Centerpulse's noncompliance with the covenants and conditions
contained in the tax rulings or deviation from the factual descriptions on which
the tax rulings were based. If Centerpulse is required to make any indemnity
payments, or is otherwise liable for additional taxes relating to the
separation, the amount of such payments or liability could be substantial and
Centerpulse's results of operations could be materially adversely affected. We
have obtained a ruling by the competent tax authorities to the effect that, on
the basis of certain factual representations by us, the spin-off of Centerpulse
from Sulzer AG on July 10, 2001 will not be subject to Swiss corporate income
tax as a result of the consummation of our offers for Centerpulse and InCentive.
RISKS RELATING TO OUR INDUSTRY
WE FACE INTENSE COMPETITION AND OUR FAILURE TO COMPETE EFFECTIVELY COULD HAVE
A MATERIAL ADVERSE EFFECT ON OUR PROFITABILITY AND RESULTS OF OPERATIONS.
The orthopaedics industry is highly competitive. We compete with many
companies ranging from small start-up enterprises to multinational companies
that are larger and have access to greater financial, marketing, technical and
other resources. Our present or future products could be rendered obsolete or
uneconomical by technological advances by one or more of our present or future
competitors or by other therapies, including biological therapies. To remain
competitive, therefore, we must continue to develop and acquire new products and
technologies.
The orthopaedics industry has undergone significant consolidation over the
past few years, as the leading players have sought to build complete product
lines and gain economies of scale. Because we only
23
produce and market products in selected product categories of the orthopaedics
industry, we may not be able to compete successfully with our competitors in the
future, especially those that offer customers a broader range of orthopaedic, as
well as other medical equipment and supplies.
In the global markets for reconstructive implants, trauma products and
orthopaedic products, a handful of competitors, including Smith & Nephew plc,
Biomet, Inc., J&J DePuy Orthopaedics (a subsidiary of Johnson & Johnson),
Stryker Corp. and Synthes-Stratec compete with us for the majority of product
sales, particularly in the Americas and the Asia-Pacific region, primarily on
the basis of technology, quality, reputation, customer relationships and
service. In local markets outside of the United States, other factors, including
local distribution systems, complex regulatory environments and differing
medical philosophies and product preferences, influence competition as well.
Some of our competitors have, and in the future these and other competitors may
have, significantly greater financial, marketing and other resources than us.
Our competitors may be in a stronger position to respond quickly to new or
emerging technologies, may be able to undertake more extensive marketing
campaigns, may adopt more aggressive pricing policies and may be more successful
in attracting potential customers, employees and strategic partners.
WE ARE SUBJECT TO COST-CONTAINMENT EFFORTS OF MANAGED CARE AND HOSPITAL BUYING
GROUPS IN THE UNITED STATES AND GOVERNMENT ORGANIZATIONS IN EUROPE AND THE
ASIA PACIFIC REGION, WHICH MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR
PROFITABILITY AND RESULTS OF OPERATIONS.
The development of managed care programs in which health care providers
contract to provide comprehensive health care to a patient population at a fixed
cost per person has caused, and we expect will continue to cause, pressures on
health care providers to lower costs. For example, managed care programs often
prescribe only those orthopaedic recovery products that match a patient as to
age, need for mobility and other parameters in an effort to provide more
cost-effective care. We cannot assure you that such policies will not have a
material adverse effect on our operating results.
Many existing and potential customers for our products have combined to
form group purchasing organizations in an effort to lower costs as well. Group
purchasing organizations negotiate pricing arrangements with medical supply
manufacturers and distributors, and these negotiated prices are made available
to a group purchasing organization's affiliated hospitals and other members.
Strict compliance arrangements require the affiliated hospitals and other
members of the group purchasing organization to purchase specified products from
a given manufacturer or distributor. In contrast, voluntary compliance
arrangements allow members to choose between the products covered by the
arrangement and another manufacturer's products, whether or not purchased under
a negotiated arrangement. If we are not one of the providers selected by a group
purchasing organization, affiliated hospitals and other members may be less
likely to purchase our products, and if the group purchasing organization has
negotiated a strict compliance contract for another manufacturer's products, we
may be precluded from making sales to members of the group purchasing
organization for the duration of the contractual arrangement. Even if we are one
of the selected providers, because we only compete in selected product
categories of the orthopaedics industry, we may be at a disadvantage relative to
other providers that are able to offer volume discounts based on purchases of a
broader range of medical equipment and supplies, including from more
orthopaedics industry product categories. Further, our failure to offer reduced
prices to group purchasing organizations may cause us to lose market share to
our competitors and could have a material adverse effect on our sales, business,
financial condition and results of operations.
In international markets, where the movement toward health care reform and
the development of managed care is generally not as advanced as in the United
States, we have experienced downward pressure on product pricing and other
effects of health care reform similar to what we have experienced in the United
States. In Japan, for example, in both 1998 and 2000, the Japanese Ministry of
Health, Labor and Welfare implemented plans to reduce reconstructive implant and
fracture management product prices. We expect health care reform and managed
care to continue to develop in our primary international markets, including the
Asia Pacific region and Europe, which may result in further downward pressure in
24
product pricing. The timing and the effects on us of health care reform and the
development of managed care in international markets cannot currently be
predicted.
IF THIRD-PARTY PAYORS DECLINE TO REIMBURSE OUR CUSTOMERS FOR OUR PRODUCTS OR
REDUCE REIMBURSEMENT LEVELS, OUR ABILITY TO SELL OUR PRODUCTS PROFITABLY WILL
BE HARMED.
We sell our products and services to hospitals, doctors and other health
care providers, all of which receive reimbursement for the health care services
provided to their patients from third-party payors, such as domestic and
international government programs, private insurance plans and managed care
programs. These third-party payors may deny reimbursement if they determine that
a device used in a procedure was not in accordance with cost-effective treatment
methods, as determined by the third-party payor, or was used for an unapproved
indication. Third-party payors may also decline to reimburse for experimental
procedures and devices. If our products are not considered cost-effective by
third-party payors, our customers may not be reimbursed for our products.
In addition, third-party payors are increasingly attempting to contain
health care costs by limiting both coverage and the level of reimbursement for
medical products and services. We cannot assure you that levels of
reimbursement, if any, will not be decreased in the future, or that future
legislation, regulation or reimbursement policies of third-party payors will not
otherwise adversely affect the demand for and price levels of our products.
WE AND OUR CUSTOMERS ARE SUBJECT TO VARIOUS GOVERNMENTAL REGULATIONS AND WE
MAY INCUR SIGNIFICANT EXPENSES TO COMPLY WITH THESE REGULATIONS AND DEVELOP
PRODUCTS COMPATIBLE WITH THESE REGULATIONS.
The medical devices we design, develop, manufacture and market are subject
to rigorous regulation by the U.S. Food and Drug Administration and numerous
other U.S. federal and state and foreign governmental authorities. 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 thereunder. The process of
obtaining regulatory approvals to market a medical device, particularly from the
U.S. Food and Drug Administration and certain foreign governmental authorities,
can be costly and time consuming and approvals might not be granted for future
products on a timely basis, if at all. A few of the devices developed and
marketed by us are in a category for which the U.S. Food and Drug Administration
has implemented stringent clinical investigation and pre-market approval
requirements. The U.S. Food and Drug Administration 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. Delays in receipt of, or failure to obtain, approvals for
future products could result in delayed realization of product revenues or in
substantial additional costs which could have a material adverse effect on our
business or results of operations.
In addition, we cannot assure you that we will be or will continue to be in
compliance with applicable U.S. Food and Drug Administration and other material
regulatory requirements once we have obtained clearance or approval for a
product. These requirements include, among other things, the Quality System
Regulation, recordkeeping regulations, labeling requirements and adverse event
reporting regulations. Failure to comply with applicable U.S. Food and Drug
Administration medical device regulatory requirements could result in, among
other things, warning letters, fines, injunctions, civil penalties, repairs,
replacements, refunds, recalls or seizures of products, total or partial
suspension of production, the U.S. Food and Drug Administration's refusal to
grant future premarket clearances or approvals, withdrawals or suspensions of
current product applications and criminal prosecution. Any of these actions, in
combination or alone, could have a material adverse effect on our business,
financial condition and results of operations.
In many of the foreign countries in which we market our products, we are
subject to regulations affecting, among other things, product standards,
packaging requirements, labeling requirements, import/export restrictions,
tariff regulations, duties and tax requirements. Many of the regulations
applicable to our devices and products in such countries, such as the European
Medical Device Directives
25
(which create a single set of medical device regulations for all European Union
member states), are similar to those of the U.S. Food and Drug Administration.
In addition, in many countries the national health or social security
organizations require our products to be qualified before they can be marketed
with the benefit of reimbursement eligibility. Failure to receive, or delays in
the receipt of, relevant foreign qualifications also could have a material
adverse effect on our business, financial condition and results of operations.
Due to the movement towards harmonization of standards in the European Union, we
expect a changing regulatory environment in Europe characterized by a continuing
shift from a country-by-country regulatory system to a single European Union
regulatory system. Under the European Medical Device Directives, companies that
wish to manufacture and distribute medical devices in European Union member
states must obtain European Community marks for their products. The marks
indicate compliance with European Standards for safety, allowing such products
to be marked in Europe. The timing of this harmonization and its effect on us
cannot currently be predicted. However, any such developments could have a
material adverse effect on our business, financial condition and results of
operations.
As both the U.S. Food and Drug Administration and foreign government
regulators have become increasingly stringent, we may be subject to more
rigorous regulation by governmental authorities in the future. Our products and
operations are also often subject to the rules of industrial standards bodies,
such as the International Standards Organization. If we fail to adequately
address any of these regulations, our business will be harmed.
WE ARE SUBJECT TO HEALTH CARE FRAUD AND ABUSE REGULATIONS THAT COULD REQUIRE
US TO CHANGE OUR BUSINESS PRACTICES AND RESTRICT OUR OPERATIONS IN THE FUTURE.
Our industry is subject to various U.S. federal and state laws pertaining
to health care 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 U.S. federal and state health care programs, including
Medicare, Medicaid, Veterans Administration health programs and Civilian Health
and Medical Program Uniformed Service (TRICARE/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.
We believe that our operations are in material compliance with these laws.
However, because of the far-reaching and uncertain nature of these laws, we may
be required to alter one or more of our practices to be in compliance with these
laws. In addition, we cannot assure you that the occurrence of one or more
violations of these laws would not result in a material adverse effect on our
business, financial condition and results of operations. If there is a change in
law, regulation or administrative or judicial interpretations, some of our
existing business practices could be challenged as unlawful and, as a result, we
may have to change those practices, which could have a material adverse effect
on our business, financial condition and results of operations.
WE MAY INCUR PRODUCT LIABILITY LOSSES, AND INSURANCE COVERAGE MAY BE
INADEQUATE OR UNAVAILABLE TO COVER THESE LOSSES.
Our business is subject to potential product liability risks that are
inherent in the design, development, manufacture and marketing of medical
devices. Our products are often used in surgical and intensive care settings. In
addition, some of the medical devices we manufacture and sell are designed to be
implanted in the human body for long periods of time. In the ordinary course of
business, we are the subject of product liability suits alleging that component
failures, manufacturing flaws, design defects or inadequate disclosure of
product-related risks or product-related information could result in an unsafe
condition or injury to patients. Product liability lawsuits and claims, safety
alerts or product recalls, regardless of their ultimate outcome, could have a
material adverse effect on our business, financial condition and results of
operations.
As part of our risk management policy, we maintain insurance, subject to
self-insured retention limits. We establish accruals for product liability and
other claims in conjunction with outside counsel based on current and historical
settlement information for open claims, related fees and for claims incurred but
not reported. However, product liability claims against us may exceed the
coverage limits of any insurance
26
policies or cause us to record a self-insured loss. Even if any product
liability loss is covered by an insurance policy, these policies may have
substantial retentions or deductibles that provide that we will not receive
insurance proceeds until the losses incurred exceed the amount of those
retentions or deductibles. To the extent that any losses are below these
retentions or deductibles, we will be responsible for paying these losses. A
product liability claim in excess of applicable insurance could have a material
adverse effect on our business, financial position and results of operations.
RISKS RELATING TO OUR BUSINESS
AS A RESULT OF THE CONSUMMATION OF OUR OFFER AND OUR CENTERPULSE OFFER, WE
WILL BE A LARGER AND BROADER ORGANIZATION, AND IF OUR MANAGEMENT IS UNABLE TO
MANAGE THE COMBINED BUSINESSES OF ZIMMER AND CENTERPULSE, OUR OPERATING
RESULTS WILL SUFFER.
As a result of the consummation of our offer and our Centerpulse offer,
Zimmer will acquire approximately 2,800 employees of Centerpulse worldwide.
Consequently, we will face challenges inherent in efficiently managing an
increased number of employees over large geographic distances, including the
need to implement appropriate systems, policies, benefits and compliance
programs. The inability to manage successfully the geographically more diverse
and substantially larger combined organization, or any significant delay in
achieving successful management, could have a material adverse effect on us
after our offer and our Centerpulse offer are consummated and, as a result, on
the market price of our common stock.
OUR EXPOSURE TO THE EUROPEAN REGULATORY REGIME WILL INCREASE FOLLOWING THE
CONSUMMATION OF OUR OFFER AND OUR CENTERPULSE OFFER.
In 2002, we derived approximately US$480 million, or 35%, of our total
revenue from sales of our products outside of the United States. The European
region accounted for approximately 12% of our 2002 sales. After consummation of
our offer and our Centerpulse offer, approximately 41% of our total revenue will
be derived from sales outside the United States. Approximately 25% of such total
revenue will be derived from sales in the European region. Our international
operations are, and will continue to be, subject to a number of risks and
potential costs. We are required to obtain various licenses and permits from
foreign governments and to comply with significant regulations that vary by
country in order to market our products in such jurisdictions. There can be no
assurance that we will be able to obtain and maintain any necessary licenses,
permits and certifications or comply with applicable regulations of foreign
governments. The failure by us to obtain or maintain the required licenses,
permits or certifications, or comply with those regulations, could have a
material adverse effect on our business and financial results.
EXPOSURE TO FOREIGN MARKET RISK WILL BE INCREASED FOLLOWING THE CONSUMMATION
OF OUR OFFER AND OUR CENTERPULSE OFFER.
Centerpulse's largest division is orthopaedics, which focuses on joint care
and includes a traditionally strong hip and knee implant business. Centerpulse
estimates that it has a leading share of the European implant market, with an
approximate 25% market share. Centerpulse's spine-tech division offers a full
range of spinal implant systems primarily in the United States. Centerpulse
estimates that it has a global market share of 5%. Centerpulse's dental
division, producing mainly dental implants, serves primarily the United States
and European markets. The Americas are Zimmer's largest marketing region,
accounting for approximately 68% of 2002 sales, with the United States
accounting for the vast majority of sales in the region. The European region
accounted for approximately 12% of Zimmer's 2002 sales. The Asia-Pacific region
accounted for approximately 20% of Zimmer's 2002 sales. Certain risks are
inherent in international operations, including exposure to currency
fluctuations, political and economic conditions and unexpected changes in
regulatory requirements. For example, in Japan, in both 1998 and 2000, the
Japanese Ministry of Health, Labor and Welfare implemented plans to reduce
reconstructive implant and fracture management product prices. We expect health
care reform and managed care to continue to develop in our primary international
markets including the Asia-Pacific region, which may result in further downward
27
pressure in product pricing. There can be no assurance that such factors will
not have a greater adverse effect on Zimmer than on Centerpulse.
IF WE FAIL TO ATTRACT, HIRE AND RETAIN QUALIFIED PERSONNEL, WE MAY NOT BE ABLE
TO DESIGN, DEVELOP, MARKET OR SELL OUR PRODUCTS OR SUCCESSFULLY MANAGE OUR
BUSINESS.
Our ability to attract new customers, retain existing customers and pursue
our strategic objectives depends on the continued services of our current
management, sales, product development and technical personnel and our ability
to identify, attract, train and retain similar personnel. Competition for top
management personnel is intense and we may not be able to recruit and retain the
personnel we need if we are unable to offer competitive salaries and benefits,
or if our stock does not perform well. The loss of any one of our management
personnel, or our inability to identify, attract, train, retain and integrate
additional qualified management personnel, could make it difficult for us to
manage our business successfully and pursue our strategic objectives. We do not
carry key person life insurance on any of our employees. Similarly, competition
for skilled sales, product development and technical personnel is intense and we
may not be able to recruit and retain the personnel we need. The loss of the
services of any key sales, product development and technical personnel, or our
inability to hire new personnel with the requisite skills, could restrict our
ability to develop new products or enhance existing products in a timely manner,
sell products to our customers or manage our business effectively.
IF WE FAIL TO MAINTAIN OUR RELATIONSHIPS WITH, AND THE SUPPORT OF, ORTHOPAEDIC
SURGEONS, CUSTOMERS MAY NOT BUY OUR PRODUCTS AND OUR REVENUE AND PROFITABILITY
MAY DECLINE.
We have developed and maintain close relationships with a number of widely
recognized orthopaedic surgeons who assist in product research and development
and advise us on how to satisfy the full range of surgeon and patient needs.
These professionals often become product "champions," speaking about our
products at medical seminars, assisting in the training of other professionals
in the use of our products and providing us with feedback on the industry's
acceptance of our new products. The failure of our products to retain the
support of orthopaedic surgeons, who frequently recommend products or influence
product selection decisions, or the failure of our new products to secure and
retain similar support from leading surgeons, could have a material adverse
effect on our business, financial condition and results of operations.
IF WE FAIL TO RETAIN THE INDEPENDENT AGENTS AND DISTRIBUTORS UPON WHOM WE RELY
HEAVILY TO MARKET OUR PRODUCTS, CUSTOMERS MAY NOT BUY OUR PRODUCTS AND OUR
REVENUE AND PROFITABILITY MAY DECLINE.
Our marketing success in the United States and abroad depends largely upon
our agents' and distributors' sales and service expertise and relationships with
the customers in the marketplace. Many of these agents have developed strong
ties to existing and potential customers because of their detailed knowledge of
products and instruments and commonly provide operating room personnel with
implant and instrument product training as well as product support in the
operating room. A significant loss of these agents could have a material adverse
effect on our business, financial condition and results of operations.
IF WE DO NOT INTRODUCE NEW PRODUCTS IN A TIMELY MANNER, OUR PRODUCTS MAY
BECOME OBSOLETE OVER TIME, CUSTOMERS MAY NOT BUY OUR PRODUCTS AND OUR REVENUE
AND PROFITABILITY MAY DECLINE.
Demand for our products may change, in certain cases, in ways we may not
anticipate because of:
- evolving customer needs;
- the introduction of new products and technologies;
- evolving surgical philosophies; and
- evolving industry standards.
28
Without the timely introduction of new products and enhancements, our
products may become obsolete over time, in which case our revenue and operating
results would suffer. The success of our new product offerings will depend on
several factors, including our ability to:
- properly identify and anticipate customer needs;
- commercialize new products in a timely manner;
- manufacture and deliver instrumentation and products in sufficient
volumes on time;
- differentiate our offerings from competitors' offerings;
- achieve positive clinical outcomes for new products;
- satisfy the increased demands by healthcare payors, providers and
patients for shorter hospital stays, faster post-operative recovery and
lower-cost procedures;
- innovate and develop new materials, product designs and surgical
techniques; and
- provide adequate medical education relating to new products and attract
key surgeons to advocate these new products.
In addition, new materials, product designs and surgical techniques that we
develop may not be accepted quickly, in some or all markets, because of, among
other factors:
- entrenched patterns of clinical practice;
- the need for regulatory clearance; and
- uncertainty with respect to third-party reimbursement.
Moreover, innovations generally will require a substantial investment in
research and development before we can determine the commercial viability of
these innovations and we may not have the financial resources necessary to fund
these innovations. In addition, even if we are able to successfully develop
enhancements or new generations of our products, these enhancements or new
generations of products may not produce revenue in excess of the costs of
development and they may be quickly rendered obsolete by changing customer
preferences or the introduction by our competitors of products embodying new
technologies or features.
WE CONDUCT A SIGNIFICANT AMOUNT OF OUR SALES ACTIVITY OUTSIDE OF THE UNITED
STATES, WHICH SUBJECTS US TO ADDITIONAL BUSINESS RISKS AND MAY CAUSE OUR
PROFITABILITY TO DECLINE DUE TO INCREASED COSTS.
Because we sell our products in a number of foreign countries, our business
is subject to risks associated with doing business internationally. In 2002, we
derived approximately US$480 million, or 35% of our total revenue, from sales of
our products outside of the United States. We intend to continue to pursue
growth opportunities in sales internationally, which could expose us to greater
risks associated with international sales and operations. In addition, after
consummation of our offer and our Centerpulse offer, approximately 41% of our
total revenue will be derived from sales outside the United States. Our
international operations are, and will continue to be, subject to a number of
risks and potential costs, including:
- changes in foreign medical reimbursement policies and programs;
- unexpected changes in foreign regulatory requirements;
- differing local product preferences and product requirements;
- fluctuations in foreign currency exchange rates;
- diminished protection of intellectual property in some countries outside
of the United States;
- trade protection measures and import or export licensing requirements;
- difficulty in staffing and managing foreign operations;
- labor force instability;
- differing labor regulations;
29
- potentially negative consequences from changes in tax laws; and
- political and economic instability.
As we expand our international operations, including through the
acquisitions of InCentive and Centerpulse, we may encounter new risks. For
example, as we focus on building our international sales and distribution
networks in new geographic regions, we must continue to develop relationships
with qualified local distributors and trading companies. If we are not
successful in developing these relationships, we may not be able to grow sales
in these geographic regions.
Any of these factors may, individually or as a group, have a material
adverse effect on our business, financial condition and results of operations.
WE ARE SUBJECT TO RISKS ARISING FROM CURRENCY EXCHANGE RATE FLUCTUATIONS,
WHICH COULD INCREASE OUR COSTS AND MAY CAUSE OUR PROFITABILITY TO DECLINE.
In 2002, we derived approximately US$480 million, or 35% of our total
revenues, from sales of our products outside of the United States. In addition,
after consummation of our offer and our Centerpulse offer, approximately 41% of
our total revenue will be derived from sales outside the United States. Measured
in local currency, a substantial portion of our business' foreign generated
revenues were generated in Japan and in Europe. The United States dollar value
of our foreign-generated revenues varies with currency exchange rate
fluctuations. Significant increases in the value of the United States dollar
relative to the Japanese yen or the euro, as well as other currencies, could
have a material adverse effect on our results of operations. We address currency
risk management through regular operating and financing activities, and on a
limited basis, through the use of derivative financial instruments. The
derivative financial instruments we enter into are in the form of foreign
exchange forward contracts with major financial institutions. The 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.
WE MAY ACQUIRE OTHER BUSINESSES OR FORM JOINT VENTURES THAT COULD NEGATIVELY
AFFECT OUR PROFITABILITY, DILUTE YOUR OWNERSHIP OF OUR COMPANY, INCREASE OUR
DEBT OR CAUSE US TO INCUR SIGNIFICANT EXPENSE.
As part of our business strategy, we occasionally pursue acquisitions of
other complementary businesses and technology licensing arrangements. We also
occasionally intend to pursue strategic alliances that leverage our brand name
and salesforce to expand our product offerings and geographic presence. As a
result, we may enter markets in which we have no or limited prior experience. If
we were to make any acquisitions, we may not be able to integrate these
acquisitions successfully into our existing business and we could assume unknown
or contingent liabilities or experience negative effects on our reported results
of operations from acquisition-related charges and the amortization of acquired
technology, goodwill and other intangibles. Integration of an acquired company
also may require management resources that otherwise would be available for
ongoing development of our existing business. We may not identify or complete
these transactions in a timely manner, on a cost-effective basis or at all, and
we may not realize the benefits of any acquisition, technology license or
strategic alliance. In addition, to finance any acquisitions, it may be
necessary for us to raise additional funds through public or private financings.
Additional funds may not be available on terms that are favorable to us and, in
the case of equity financings, may result in dilution to our stockholders.
Furthermore, we may be limited in our ability to issue stock as consideration
for future acquisitions in order to ensure the tax-free treatment of the
distribution of our stock from our former parent. Any future acquisitions by us
could also result in large and immediate write-offs, the incurrence of debt and
contingent liabilities or amortization of expenses related to goodwill and other
intangibles, any of which could harm our operating results.
30
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR BUSINESS AND
PROSPECTS MAY BE HARMED.
Our failure to protect our intellectual property could seriously harm our
business and prospects because we believe that developing new products and
technologies that are unique is critical to our success. We will incur
substantial costs in obtaining patents and, if necessary, defending our
intellectual propriety rights. The patent positions of orthopaedic
reconstructive implant and fracture management product companies, including
ours, can be highly uncertain and involve complex and evolving legal and factual
questions. We do not know whether we will obtain the patent protection we seek,
or that the protection we do obtain will be found valid and enforceable if
challenged. Our efforts to protect our intellectual property through patents,
trademarks, service marks, domain names, trade secrets, copyrights,
confidentiality and nondisclosure agreements and other measures may not be
adequate to protect our proprietary rights. Patent filings by third parties,
whether made before or after the date of our filings, could render our
intellectual property less valuable. Disputes may arise as to ownership of our
intellectual property or as to whether products designed by our competitors
infringe our intellectual property rights. Employees, consultants and others who
participate in developing our products may breach their agreements with us
regarding our intellectual property, and we may not have adequate remedies for
the breach. In addition, intellectual property rights may be unavailable or
limited in some foreign countries, which could make it easier for competitors to
capture market position. Competitors may also capture market share from us by
designing products that mirror the capabilities of our products or technology
without infringing our intellectual property rights. If we do not obtain
sufficient international protection for our intellectual property, our
competitiveness in international markets could be impaired, which would limit
our growth and future revenue.
PUBLIC ANNOUNCEMENTS OF LITIGATION EVENTS MAY CAUSE OUR STOCK PRICE TO
DECLINE.
During the course of our administrative proceedings and/or lawsuits, there
may be public announcements of the results of hearings, motions, and other
interim proceedings or developments in the litigation. If securities analysts or
investors perceive these results to be negative, it could have a substantial
negative effect on the trading price of our common stock.
WE MAY BE SUBJECT TO INTELLECTUAL PROPERTY LITIGATION AND INFRINGEMENT CLAIMS,
WHICH COULD CAUSE US TO INCUR SIGNIFICANT EXPENSES OR PREVENT US FROM SELLING
OUR PRODUCTS.
A successful claim of patent or other intellectual property infringement
against us could adversely affect our growth and profitability, in some cases
materially. We cannot assure you that others will not claim that our proprietary
or licensed products are infringing their intellectual property rights or that
we do not in fact infringe those intellectual property rights. From time to
time, we receive notices from third parties of potential infringement and
receive claims of potential infringement. We may be unaware of intellectual
property rights of others that may cover some of our technology. If someone
claims that our products infringed their intellectual property rights, any
resulting litigation could be costly and time consuming and would divert the
attention of management and key personnel from other business issues. The
complexity of the technology involved and the uncertainty of intellectual
property litigation increase these risks. Claims of intellectual property
infringement also might require us to enter into costly royalty or license
agreements. However, we may be unable to obtain royalty or license agreements on
terms acceptable to us or at all. We also may be subject to significant damages
or an injunction preventing us from manufacturing, selling or using some of our
products in the event of a successful claim of patent or other intellectual
property infringement. Any of these adverse consequences could have a material
adverse effect on our business, financial condition and results of operations.
WE MAY NOT HAVE FINANCING FOR FUTURE CAPITAL REQUIREMENTS, WHICH MAY PREVENT
US FROM ADDRESSING GAPS IN OUR PRODUCT OFFERINGS, IMPROVING OUR TECHNOLOGY OR
INCREASING OUR MANUFACTURING CAPACITY.
If we cannot incur additional debt or issue equity or are limited with
respect to incurring additional debt or issuing equity, we may be unable to
address gaps in our product offerings, improve our technology or increase our
manufacturing capacity, particularly through strategic acquisitions or
investments. Although
31
historically our cash flow from operations has been sufficient to satisfy
working capital, capital expenditure and research and development requirements,
in the future we may need to incur additional debt or issue equity in order to
fund these requirements as well as to make acquisitions and other investments.
We cannot assure you that debt or equity financing will be available to us on
acceptable terms or at all. If we raise funds through the issuance of debt or
equity, any debt securities or preferred stock issued will have rights and
preferences and privileges senior to those of holders of our common stock in the
event of a liquidation. The terms of the debt securities may impose restrictions
on our operations. If we raised funds through the issuance of equity, this
issuance would dilute your ownership of us.
If the price of our equity is low or volatile, we may not be able to issue
additional equity to fund future acquisitions. Also, regardless of the
volatility of the price of our equity, we may be limited in our ability to issue
stock as consideration for future acquisitions in order to ensure the tax-free
treatment of the distribution of our stock from our former parent.
Our ability to make payments on and to refinance our indebtedness,
including the debt to be incurred under the credit agreements dated June 12,
2003 among Zimmer, the lenders and the other parties thereto, and future
indebtedness, and to fund working capital, capital expenditures and strategic
acquisitions and investments, will depend on our ability to generate cash in the
future. Our ability to generate cash is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control.
WE MAY BE AFFECTED BY ENVIRONMENTAL LAWS AND REGULATIONS.
We are subject to a variety of laws, rules and regulations in the United
States relating to discharges of substances in the air, water and land, the
handling, storage and disposal of wastes and the cleanup of properties
necessitated by pollutants. Any of those regulations could require us to acquire
expensive equipment or to incur substantial other expenses to comply with them.
If we incur substantial additional expenses, product costs could significantly
increase. Also, if we fail to comply with present or future environmental laws,
rules and regulations, such failure could result in fines, suspension of
production or cessation of operations.
32
THE COMPANIES
ZIMMER HOLDINGS, INC.
GENERAL
Zimmer Holdings, Inc. is a company incorporated in Delaware with its shares
listed on the New York Stock Exchange under the symbol "ZMH." An additional
listing application will be submitted to the New York Stock Exchange and a
supplemental listing application will be submitted to the SWX Swiss Exchange in
order to list the shares issued in connection with our offer and our Centerpulse
offer.
Zimmer was incorporated on January 12, 2001 as a wholly owned subsidiary of
our former parent as part of a previously announced plan by our former parent 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 surgery. Zimmer, Inc., our predecessor founded in
1927, was acquired by our former parent in 1972 and along with its wholly owned
subsidiaries and certain other of our former parent's operations comprised the
orthopaedics business of Zimmer's former parent until our incorporation. Unless
the context requires otherwise, the term "Zimmer" as used herein refers to
Zimmer and all of its subsidiaries and the predecessor orthopaedics business
operated thereunder.
On July 25, 2001, Zimmer's former parent transferred the assets and
liabilities of its orthopaedics business to us. On August 6, 2001, our former
parent distributed all of the shares of our common stock to our former parent's
stockholders in the form of a dividend of one share of Zimmer common stock, and
the associated preferred stock purchase right, for every ten shares of Zimmer's
former parent's common stock, referred to as the distribution or separation. Our
former parent received a ruling from the IRS that the transfer of the
orthopaedics business to us and the subsequent distribution of all our common
stock to our former parent's stockholders qualified as a tax free transaction.
GEOGRAPHIC SEGMENTS
We have operations in 20 countries and market our 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.
Our operations are divided into three major geographic areas -- the Americas,
which is comprised principally of the United States (accounting for
approximately 96% of 2002 Americas net sales) and includes other North, Central
and South American markets; Asia-Pacific, which is comprised primarily of Japan
(accounting for approximately 71% of 2002 Asia-Pacific net sales) and includes
other Asian and Pacific markets; and Europe, which is comprised principally of
Europe and includes the Middle East and Africa.
Our 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.
Our 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 more than 1.0% of net sales.
We utilize more than 1,300 sales associates, sales managers and support
personnel, some of whom are employed by independent distributors. We invest 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 us 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.
33
In response to the different healthcare systems throughout the world, our
sales and marketing strategies and organizational structures differ by region.
We have, however, carefully integrated a global approach to salesforce training,
marketing and medical education into each locality to provide consistent, high
quality service. We sponsor 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% of
2002 sales, with the United States accounting for the vast majority of sales in
this region. The U.S. salesforce consists of 26 independent distributors with
more than 700 sales associates, sales managers and sales support personnel, all
of whom sell our products exclusively. Also, we have concentrated on negotiating
contracts with buying groups and managed care accounts and have increased unit
growth by linking the level of discount received to sales growth.
The Asia-Pacific region accounted for approximately 20% of 2002 sales, with
Japan being the largest foreign market and accounting for the majority of sales
in that region. In Japan and most countries in the Asia-Pacific region, we
maintain 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% of 2002 sales, with
France, Germany, Italy, Spain and the United Kingdom accounting for
approximately 75% of sales in that region. In addition, we also operate in other
key markets such as the Benelux, Nordic, Switzerland and emerging regions such
as Russia, Central Europe, and the Mediterranean. Our salesforce in this region
is also comprised of independent distributors, commissioned agents, and
approximately 200 direct sales associates and sales support personnel.
PRODUCTS
We are a global leader in the design, development, manufacture and
marketing of reconstructive orthopaedic implants and trauma products.
Orthopaedic reconstruction 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. Zimmer also manufactures and markets
other products related to orthopaedic surgery. For the year 2002, Zimmer
recorded worldwide revenues of approximately US$1.4 billion.
Our principal executive offices are located at 345 East Main Street,
Warsaw, Indiana 46580 and our telephone number is (574) 267-6131.
INCENTIVE CAPITAL AG
InCentive Capital AG is an investment company domiciled in Zug,
Switzerland. Its predecessor corporation was InCentive Investment AG, which was
incorporated in 1985. InCentive Investment AG was merged into India Investment
AG at the end of October 2000, and was renamed InCentive Capital AG. InCentive
is listed on the investment companies segment of the SWX Swiss Exchange. Under
its articles of association, InCentive has three legal names, each of which
identifies the same legal entity: InCentive Capital AG, InCentive Capital Ltd.
and InCentive Capital SA.
InCentive's principal activities consist in the direct or indirect
acquisition, management and disposal of all forms of participations in quoted
and unquoted domestic and foreign companies, with no regard to risk
diversification. InCentive may actively influence the management of companies in
which it is invested. InCentive may enter into all forms of financial
transactions, including, but not limited to, the use of derivative instruments,
the borrowing of external capital and the extension of financing to other
companies.
InCentive's objective is to provide a vehicle for investors to achieve
long-term capital appreciation, primarily through investments in undervalued
companies or companies with strategic potential. InCentive aims to catalyze
corporate change through such investments. In addition, InCentive invests
selectively in
34
high growth industries, such as, but not limited to, quoted and unquoted
companies in the global healthcare and technology sectors.
As of its 2002 Annual Report, InCentive acquired stakes in Swiss or foreign
public or private companies. Its primary purpose was to catalyze change in
companies which in InCentive's opinion were undervalued or which had strategic
potential, primarily through merger and acquisition transactions, restructurings
and participation in industry consolidations. InCentive also invested
selectively in areas such as healthcare and technology, including its beneficial
ownership of approximately 18.9% of the registered shares of Centerpulse.
The address of InCentive's principal place of business is Baarerstrasse 8,
CH-6301 Zug, Switzerland, and InCentive's telephone number is +41 41 712 29 45.
CENTERPULSE AG
Centerpulse AG, formerly Sulzer Medica AG, is a leading medical technology
group employing over 2,800 employees globally, which serves the reconstructive
joint, spinal and dental implant markets. Following the divestiture of its
cardiovascular division, which was concluded in January 2003, Centerpulse is
organized into three divisions: orthopaedics, spine-tech and dental.
Centerpulse, which is organized and headquartered in Switzerland, has five
production facilities in Switzerland, the United States and France. For the year
2002, Centerpulse recorded worldwide revenues from continuing operations of
approximately CHF 1.2 billion. Under its articles of association, Centerpulse
has three legal names, each of which identifies the same legal entity:
Centerpulse AG, Centerpulse Ltd. and Centerpulse SA.
Centerpulse's largest division is orthopaedics, which focuses on joint care
and includes the traditionally strong hip and knee implant businesses.
Centerpulse estimates that it has a leading share of the European implant
market, with an approximate 25% market share. In 2002, the orthopaedics division
reported total sales of CHF 923 million, of which CHF 542 million was in Europe.
The currency adjusted underlying sales growth for 2002 was 14%.
Centerpulse's spine-tech division offers a full range of spinal implant
systems primarily in the United States. Centerpulse estimates that it has a
global market share of approximately 5%. In 2002, the spine-tech division had
sales of CHF 179 million, a currency adjusted growth of approximately 12% for
2002.
Centerpulse's dental division, producing mainly dental implants, serves
primarily the United States and European markets. Centerpulse estimates that it
occupies the No. 4 position globally, with a market share of approximately 13%.
In 2002, the dental division had sales of CHF 131 million, a currency adjusted
increase of approximately 18% for 2002.
The address of Centerpulse's principal place of business is Andreasstrasse
15, CH-8050 Zurich, Switzerland, and Centerpulse's telephone number is +41 1 306
96 96.
FINANCIAL FORECASTS
During the course of our due diligence review of documentation provided to
us by Centerpulse, conducted during May and June 2003, Centerpulse provided us
with information regarding its anticipated future results for the years ending
December 31, 2003, 2004, 2005, 2006 and 2007. However, we were provided these
forecasts following the pre-announcement of our offer and we were not provided
detailed supporting materials necessary to validate the underlying assumptions
of such forecasts.
35
The projected total sales and the projected net income, calculated in
accordance with IFRS, included in such information for each of those years was
as follows:
<Table>
<Caption>
PROJECTED TOTAL SALES PROJECTED NET INCOME
YEAR ENDING DECEMBER 31, (IN MILLIONS CHF) (IN MILLIONS CHF)
- ------------------------ --------------------- --------------------
2003.............................................. 1,348 130
2004.............................................. 1,502 169
2005.............................................. 1,681 213
2006.............................................. 1,888 259
2007.............................................. 2,110 306
</Table>
The information in the preceding paragraph was prepared by Centerpulse
solely for internal use and not for publication or public disclosure. Zimmer is
not including this information in this prospectus to influence your decision
whether to tender your Centerpulse registered shares or Centerpulse ADSs in our
offer, but because this information was made available by Centerpulse to Zimmer,
and you should not rely on this information in making your decision whether to
tender your Centerpulse registered shares or Centerpulse ADSs in our offer. This
information was based on numerous variables and assumptions that are inherently
uncertain and may be beyond the control of Centerpulse's management. In
particular, this information may be affected by Centerpulse's ability to achieve
strategic goals, objectives and targets over the applicable period. These
assumptions necessarily involve judgments with respect to, among other things,
future economic, competitive and regulatory conditions and financial market
conditions, all of which are difficult or impossible to predict accurately and
many of which are beyond Centerpulse's control. Accordingly, actual results may
vary significantly from those set forth in this information. In addition, this
information was not prepared with a view toward compliance with published
guidelines of the SEC, the guidelines established by the American Institute of
Certified Public Accountants for preparation and presentation of financial
forecasts or U.S. GAAP. Moreover, this information was not reconciled to U.S.
GAAP. None of Centerpulse, the Centerpulse board of directors, Centerpulse's
advisors, agents, representatives or independent consultants and accountants and
none of Zimmer, its board of directors, advisors, agents, representatives or
independent consultants and accountants assume any responsibility for the
accuracy of this information, nor do they assume any obligation to update or
revise this information. Neither Centerpulse nor Zimmer intends to make publicly
available any update or other revisions to any of the information to reflect
circumstances existing after the date of preparation of this information or the
occurrence of unanticipated events, even if experience or future changes in
assumed conditions make it clear that this information is inaccurate. The
inclusion of this information in this prospectus should not be regarded as a
representation by Centerpulse, Zimmer or any other person that the forecasted
results will be achieved.
LITIGATION MATTERS
According to publicly available information concerning Centerpulse,
Centerpulse is currently party to various litigation related to alleged defects
in certain of its products, specifically, Inter-Op(TM) shell and tibial base
plates. Following Centerpulse's December 5, 2000 recall of various Inter-Op(TM)
shells and May 17, 2001 notification regarding the tibial base plates, lawsuits
were filed in both state and federal courts throughout the United States against
Centerpulse, alleging defective design, marketing and manufacture of these
products. Plaintiffs also alleged claims against Centerpulse for breach of
express and implied warranties associated with these devises.
Between June and September 2001, the Judicial Panel on Multi-District
Litigation consolidated and transferred all pending federal litigation relating
to the Inter-Op(TM) shell and the tibial base plate to the U.S. District Court
for the Northern District of Ohio. In addition to the multi-district litigation
proceeding in the federal court, a substantial number of lawsuits were filed in
state courts around the country. In August 2001, in Nueces County, Texas,
Centerpulse defended the only recall-related lawsuit ever to go to trial. The
jury in that lawsuit awarded the three patients and their spouses a total of
approximately US$15 million. Centerpulse subsequently appealed the judgment and
later settled the lawsuit for a substantially reduced amount.
36
Also in August 2001, the district court conditionally certified a class of
affected product recipients and preliminarily approved a class action settlement
agreement that resolved all claims related to the affected products. This
initial settlement agreement was modified in extensive negotiations over the
succeeding seven months culminating in a final agreement reached through the
combined efforts of attorneys for Centerpulse and attorneys representing
patients in both federal and state courts. The district court granted
preliminary approval of the modified settlement agreement on March 13, 2002 and
final approval on May 8, 2002. Following the end of the appeal period on July 5,
2002 (by which time no appeals were filed), there should be no further
challenges to the settlement agreement.
The final settlement agreement established a settlement trust in order to
pay claims in accordance with the terms of the settlement agreement. The
settlement trust was funded with approximately US$1.1 billion, of which
Centerpulse contributed US$725 million in cash on November 4, 2002.
Centerpulse's insurers and Sulzer AG, Centerpulse's former parent company,
funded the balance. The settlement trust is divided into five separate funds:
the Medical Research and Monitoring Fund (US$1.0 million); the Unrevised
Affected Product Recipient Fund (US$28 million), from which class members who
have not undergone a revision surgery are entitled to receive US$1,000; the
Affected Product Revision Surgery Fund (US$622.5 million), from which class
members who have undergone a revision surgery are entitled to receive US$160,000
for each affected product that has been revised; the Extraordinary Injury Fund
(US$100 million), from which a class member who has experienced any of several
specified complications related to an affected product may apply for benefits;
and the Professional Services Fund (US$244 million), which includes two
sub-funds: the Subrogation and Uninsured Expenses Sub-Fund (US$60 million), from
which third-party payors and uninsured patients may be reimbursed their expenses
up to US$15,000 per affected product revision surgery; and the Plaintiffs'
Counsel Sub-Fund (US$184 million), from which contingent-fee attorneys
representing class members are entitled to receive up to US$46,000 per revision
and from which participating attorneys are eligible to be compensated.
Centerpulse has entered into separate agreements with the Centers for
Medicare and Medicaid Services, or Medicare, and approximately 200 private
insurers implementing a process for validating and paying claims for
reimbursement of expenses from the Subrogation and Uninsured Expenses Sub-Fund.
Pursuant to these agreements, Medicare and the private insurers receive a lump
sum of no more than US$15,000 for each patient for whom they are the primary
payor.
The settlement agreement specifies certain cut-off dates after which class
members who undergo a revision surgery for an affected product are no longer
eligible to receive benefits as a consequence of that revision surgery. These
dates are June 5, 2003 for class members implanted with an affected Inter-Op(TM)
shell; November 17, 2003 for class members implanted with an affected tibial
base plate; and September 8, 2004 for class members implanted with a reprocessed
Inter-Op(TM) shell. Patients whose reprocessed Inter-Op(TM) shell, a shell
recovered in the voluntary recall and subjected to a newly validated cleaning
and Inter-Op(TM) process prior to implantation, is revised prior to the cut-off
date are entitled to class revision surgery benefits.
Notwithstanding the settlement of the matters covered by the settlement
agreement, Centerpulse may still have certain further liability in respect
thereof because those class plaintiffs who opted out of the settlement agreement
class action are entitled to assert, and may continue to assert, their
individual claims against Centerpulse. As of April 11, 2003, 36 opt outs had not
resolved their individual claims against Centerpulse. One of these is known to
have undergone revision surgery, 31 do not appear to have undergone revision
surgery and the status of four is unknown.
In addition, pursuant to the settlement agreement, Centerpulse agreed to
fund 50% of the cost of providing benefits for each validated claim for revision
surgery benefits in excess of 4,000 and 100% of the cost of providing benefits
for each validated claim for reprocessed Inter-Op(TM) shell revision surgery
benefits in excess of 64. As of April 11, 2003, the claims administrator for the
settlement trust had received 4,362 claim forms in relation to hip implant and
tibial base plate revision surgery and 150 claim forms for reprocessed hip
implant revision surgery. The claims administrator has determined that for these
classes of
37
claims, 3,795 and 119 respectively are likely to be valid. It is not known at
present how many more claims will be made or whether the remaining and future
claims are valid and hence how many will qualify for settlement. Claims
processing will continue throughout 2003, 2004 and 2005. In addition, in the
event that the US$60 million Subrogation and Uninsured Expense Sub-Fund is
depleted, the settlement agreement provides that the settlement trust can apply
to Centerpulse for additional funding.
Outside of the United States, the other main litigation associated with the
recalls has taken place in Canada. Approximately 780 Inter-Op(TM) shells and 453
reprocessed shells were sold in Canada, all of which were sold in Quebec and all
plaintiffs are believed to be residents of Quebec. The total number of cases of
revision surgery is approximately 110. On May 7, 2002, Centerpulse agreed to a
class action settlement in a lawsuit pending in Quebec Superior Court. The
Quebec court granted preliminary approval of the class action settlement on
December 20, 2002 and final approval on March 28, 2003, subject to the entry of
a written order. The settlement calls for Centerpulse to pay US$1,000 to each
class member who has not undergone a revision surgery, US$75,000 to each class
member who has undergone a single revision of an affected product, US$100,000 to
each class member who has undergone two revisions of an affected product and
US$150,000 to each class member who has undergone three or more revisions of an
affected product or who experienced any of several specified complications.
Following final approval of the settlement, class members have 30 days during
which to opt out of the class if they so choose. Prior to preliminary approval
of the class settlement, Centerpulse concluded individual settlements with 70
patients, representing what Centerpulse believes is the majority of Canadian
patients whose recalled Inter-Op(TM) shell required a revision surgery.
Outside of the United States and Canada, approximately 140 affected
recipients in Australia, Austria, Belgium, France, Germany, Italy, Japan, Korea,
Sweden and Switzerland had to undergo revision surgery. In some instances, the
patients who received affected hip or knee implants have brought claims against
Centerpulse. Several of these claims have already been settled.
After consummation of our offer and our Centerpulse offer, Centerpulse will
be a subsidiary of Zimmer and, therefore, the financial position, results of
operations and cash flows of Zimmer may be affected by any liabilities of
Centerpulse relating to the Inter-Op(TM) shells or tibial base plates.
38
BACKGROUND AND REASONS FOR OUR OFFER
BACKGROUND OF OUR OFFER
Our strategic objective has been to become the leader in the design,
development, manufacturing and marketing of orthopaedic reconstructive implants
and fracture management products with future growth emphasis on spine,
orthobiologics and minimally invasive surgeries. In this regard, we have
attempted to increase our market share and presence worldwide in the
geographical areas in which we principally compete, namely the Americas,
Asia-Pacific and with a special emphasis on European strategic growth. As a key
element of our execution of this strategy, we have from time to time explored
possible acquisitions of complementary businesses and technologies to expand our
product and service offerings and leverage our brand name and salesforce,
including the acquisition of Centerpulse.
On March 10, 2002, Mr. J. Raymond Elliott, Zimmer's Chairman, President and
Chief Executive Officer, and Dr. Max Link, the Chairman of Centerpulse, met in
New York to discuss a potential business combination between Zimmer and
Centerpulse.
On March 12, 2002, Zimmer formally engaged Credit Suisse First Boston to
act as its exclusive financial advisor in connection with its potential interest
in the acquisition of Centerpulse.
Between March 12, 2002 and June 26, 2002, representatives of Credit Suisse
First Boston met several times with representatives of Zimmer to discuss the
financial and strategic merits of a potential combination of Zimmer and
Centerpulse.
At a June 26, 2002 meeting of our board of directors, representatives of
Credit Suisse First Boston reviewed with the board of directors the relative
merits of a business combination with Centerpulse as compared to other available
acquisition alternatives in the global orthopaedic sector, and the unique
strategic fit of a potential business combination with Centerpulse, including
complementary geographic markets and product lines. At the conclusion of this
meeting, the board of directors determined to further consider a possible
business combination between Zimmer and Centerpulse and authorized the
management of Zimmer and its financial advisor to contact the management of
Centerpulse regarding a possible transaction.
On June 30, 2002, Mr. Elliott and Mr. Sam R. Leno, the Senior Vice
President and Chief Financial Officer of Zimmer, met in Madrid, Spain with Dr.
Link to discuss the potential of a business combination between Zimmer and
Centerpulse, including the merits of such a combination, potential structure and
timing and general views as to valuation.
In early July 2002, Mr. Elliott and Dr. Link, at the conclusion of a
telephone conversation regarding a potential business combination of Zimmer and
Centerpulse, determined to discontinue talks regarding combining the two
companies because of significant differences between the parties regarding the
relative valuations of Zimmer and Centerpulse. On July 15, 2002, Dr. Link
assumed the added responsibility of Chief Executive Officer of Centerpulse.
On August 20, 2002, Mr. Rene Braginsky, Chief Executive Officer of
InCentive, a significant shareholder of Centerpulse, and a representative of
Credit Suisse First Boston met in Zurich for purposes of a general business
discussion. Among other matters, the subject of a potential business combination
between Zimmer and Centerpulse was discussed, and Mr. Braginsky suggested the
reopening of discussions between Zimmer and Centerpulse.
Subsequent to the August 20 meeting, the parties agreed to schedule another
meeting between representatives of Zimmer and Centerpulse.
On September 5, 2002, a representative of Credit Suisse First Boston
contacted Prof. Dr. Rolf Watter, a member of Centerpulse's board of directors,
to discuss a potential re-initiation of discussions between Zimmer and
Centerpulse.
39
On September 7, 2002, Dr. Watter communicated to the Credit Suisse First
Boston representative that certain members of Centerpulse's board, including Dr.
Link, Dr. Watter and Dr. Johannes Randegger, would be willing to meet Mr.
Elliott and Mr. Leno in Zurich on September 22, 2002.
On September 22, 2002, Mr. Elliott and Mr. Leno met in Zurich, Switzerland
with Dr. Link, Mr. Urs Kamber, the Chief Financial Officer of Centerpulse, Dr.
Randegger and Dr. Watter, to discuss the strategic compatibility of Zimmer and
Centerpulse. At the conclusion of the meeting, the parties agreed to re-initiate
discussions regarding a potential business combination of Zimmer and Centerpulse
after Centerpulse had completed a rights offering to its existing shareholders,
which offering funded the settlement trust with respect to U.S. litigation
related to Inter-Op(TM) shell and tibial base plates.
On October 9, 2002, after Centerpulse had completed its rights offering,
representatives of Zimmer and Centerpulse met in New York City to discuss the
terms of a potential transaction between Zimmer and Centerpulse. At this
meeting, Dr. Link requested that Zimmer submit a written offer to Centerpulse
regarding its interest in a business combination with Centerpulse.
On October 17, 2002, Zimmer sent the following letter to the Centerpulse
board:
[LETTERHEAD OF ZIMMER HOLDINGS, INC.]
October 17, 2002
Centerpulse AG
Board of Directors
Andreasstrasse 15
CH-8050 Zurich, Switzerland
Attn: Dr. Max Link
Chairman of the Board and Chief Executive Officer
Gentlemen:
On behalf of Zimmer Holdings, Inc. ("Zimmer"), I am pleased to submit this
preliminary proposal with respect to a strategic transaction between Zimmer and
Centerpulse AG ("Centerpulse").
As we have discussed, the combination of our companies would create a leading
global reconstructive company with over $2 billion in revenues. Zimmer and
Centerpulse have complementary strengths and market positions across the global
orthopaedic industry, and our respective strategies are consistent with the
objective of becoming the leader in terms of innovation, growth and value. As a
result, we believe that our companies are a compelling fit and such a
combination would be favorably received by investors and in the best interest of
the shareholders of both companies.
Proposed Transaction Structure -- Based on our analysis of the information
available to us to date, we would be willing to pursue a transaction whereby
Centerpulse shareholders would receive, for each outstanding Centerpulse share,
a combination of 3.77 shares of Zimmer common stock and CHF 25 in cash. Based on
Zimmer's closing stock price of $40.00 as of October 16th, 2002, and based on
the CHF/US$ exchange rate as of the same date, this represents consideration per
Centerpulse share of approximately 250 CHF. This consideration represents a
meaningful premium to Centerpulse's recent trading levels, and is in line with
premiums received in historical comparable transactions. The transaction would
result in Centerpulse shareholders owning nearly 20% of the combined company's
share capital. Our intention would be to structure a transaction in the form of
a public exchange offer. We have noted the recent volatility in Centerpulse's
stock price since the announcement of the rights offering, and have developed
our proposal based on average trading values over the past several weeks and
months.
Our proposal is necessarily based on our current understanding of Centerpulse,
without the benefit of due diligence. In determining the terms of this proposal,
we have taken into account Centerpulse's financial
40
results published through the second quarter of 2002, Centerpulse's recent
rights offering and capital increase completed October 8, 2002 and the resulting
financial impact on Centerpulse's per share value, and our understanding of the
status of Centerpulse's ongoing litigation, asset sales and overall strategic
objectives. Our proposal could have additional limited upside if we are provided
with new, positive information.
Conditions -- This preliminary proposal is subject to: (i) satisfactory
completion of comprehensive due diligence, (ii) Zimmer and Centerpulse Board
approvals, (iii) receipt of all necessary regulatory and other approvals, (iv)
the negotiation of mutually acceptable definitive documentation, which we expect
would include customary representations, covenants and conditions, (v) an
undertaking from InCentive Capital in support of the transaction and agreed upon
price prior to the initiation of due diligence, and (vii) confirmation of our
assumption that there would be no material adverse tax consequences in a
transaction. Any final transaction will be subject to any applicable shareholder
approval.
Proposed Process -- We are prepared to pursue an expeditious process in order
to, among other things, minimize the disruption to our respective businesses.
Our plan would be to engage in mutual due diligence, while simultaneously
negotiating the definitive documentation.
We would initially expect to hold meetings with our respective management teams
(Chairman/CEO, CFO, and other senior level executives) to discuss Centerpulse's
and Zimmer's businesses, prospects, financial information including projections,
and areas for potential synergies. Concurrent with these meetings, we would
envision a period for in-depth, confirmatory due diligence. We would expect to
work with you, your legal and financial advisors to negotiate definitive
documentation, prepare regulatory filings, draft joint press releases, etc. with
the goal of announcing a transaction by mid-December 2002. We would anticipate
launching a formal public offer as soon as practicable after the announcement of
a transaction.
Exclusivity -- Because of the substantial management time and expense required
in order to fully evaluate a potential transaction and formulate definitive
terms, our willingness to proceed with the proposed transaction is based on
Centerpulse's commitment to pursue a transaction exclusively with Zimmer. We
intend to commence our due diligence after the execution of a mutually
satisfactory exclusivity agreement, which we believe can and will be achieved
rapidly.
Confidentiality -- This letter is being delivered based on our understanding
that, unless otherwise mutually agreed by us in writing, its submission and its
contents will not be disclosed to any other person other than mutually agreed
upon advisors and will otherwise be treated as strictly confidential.
This letter is not intended to be, and is not, a binding contract between us and
nothing in this letter should be considered to constitute a binding obligation
of Zimmer or Centerpulse with respect to the subject matter of this letter,
other than the obligations specified in the paragraph entitled
"Confidentiality", but is intended merely as an indication of our continued
interest to proceed with the transaction on the terms outlined in this letter.
The proposal provided herein will terminate on the earlier of the close of
business on Wednesday, November 6, 2002, or such time that any of the contents
of this letter (or its existence) are disclosed to a third party by Centerpulse
or its representatives.
Should you wish to discuss this letter or our indication of interest, please do
not hesitate to contact me at (574) 372-4313, or, in my absence, Sam Leno at
(574) 372-4790.
We are excited about this opportunity and are prepared to pursue it
enthusiastically. We have sent the sole copy of this expression of interest to
you and assume you will be responsible for distributing it to your Board. We
look forward to working with you toward the completion of a successful
transaction.
Sincerely,
/s/ RAY ELLIOTT
Chairman, President and Chief Executive Officer
Zimmer Holdings, Inc.
* * * *
41
In late October 2002, Dr. Link informed Mr. Elliott that the Centerpulse
board of directors had reviewed Zimmer's indication of interest, deemed Zimmer's
proposal inadequate and was not prepared at that time to pursue further
discussions with Zimmer regarding a potential business combination between
Zimmer and Centerpulse. In addition, Dr. Link informed Mr. Elliott that the
Centerpulse board of directors had decided to operate their business
independently.
Subsequent to that date, several investment bankers contacted Zimmer's
senior executives inquiring about Zimmer's interest in making a proposal to
acquire Centerpulse. None of these investment bankers indicated to the senior
executives of Zimmer that a confidential memorandum relating to Centerpulse
would be made available to parties who executed confidentiality agreements.
Thereafter, Zimmer senior executives had no other contact from Centerpulse or
its representatives.
On March 20, 2003, Centerpulse and Smith & Nephew announced they had
entered into a transaction agreement pursuant to which the two companies would
combine their businesses through two simultaneous exchange offers, one with
respect to Centerpulse and one with respect to InCentive, to be commenced by
Smith & Nephew Group. The Smith & Nephew Group offers are more fully described
in the section captioned "SMITH & NEPHEW GROUP OFFERS FOR CENTERPULSE AND
INCENTIVE."
Between March 20, 2003 and mid-April 2003, our board of directors met
several times, joined by members of management, to consider making an
unsolicited competing offer to acquire all issued and outstanding share capital
of Centerpulse. During this time, the management of Zimmer held discussions with
its financial and legal advisors regarding a possible acquisition of
Centerpulse.
At a board of directors meeting held on April 22, 2003 to discuss a
potential acquisition of Centerpulse, Credit Suisse First Boston reviewed with
the board of directors the financial aspects of such a business combination. At
the conclusion of this meeting, the board of directors approved continuing to
proceed with the consideration of an offer for all of the issued and outstanding
Centerpulse registered shares, including registered shares represented by
Centerpulse ADSs, and InCentive bearer shares.
On April 25, 2003, Smith & Nephew Group commenced its exchange offers for
Centerpulse and InCentive.
On May 13, 2003, Zimmer management provided an update to Zimmer's board of
directors regarding the strategic implications of a combination with
Centerpulse, including the potential for global expansion in the reconstructive
implant, spine, trauma and dental markets, operational efficiencies, and
technological advances through research and development.
On May 19, 2003, our board of directors met to discuss the potential
acquisition of Centerpulse, the amount and type of consideration to be offered
and other matters related to the transaction. Also at this meeting,
representatives of Credit Suisse First Boston reviewed financial aspects of our
proposed exchange offers with the board of directors, and representatives of
Dewey Ballantine LLP reviewed legal aspects of the proposed offer. At the
conclusion of this meeting, our board of directors approved our offer and our
Centerpulse offer and the delivery of a proposal to Dr. Link and the boards of
directors of Centerpulse and InCentive to acquire Centerpulse and InCentive.
42
On May 20, 2003, we delivered the following letter, which was publicly
released, to Dr. Link, Centerpulse's board of directors and InCentive's board of
directors, setting forth the material terms of our exchange offers for all of
the issued and outstanding Centerpulse registered shares and Centerpulse ADSs,
pursuant to which we offered 3.68 shares of Zimmer common stock and CHF 120 per
Centerpulse registered share and 0.368 of a share of Zimmer common stock and CHF
12 per Centerpulse ADS:
[LETTERHEAD OF ZIMMER HOLDINGS, INC.]
May 20, 2003
Dr. Max Link
Chairman of the Board
and Chief Executive Officer
Centerpulse AG
Andreasstrasse 15
CH-8050 Zurich, Switzerland
Dear Max:
Over the past few weeks, I have been thinking carefully about the future of
our two companies. My colleagues and I are impressed with the business that you,
your management team, and the Centerpulse workforce have developed. You will
remember that we discussed a potential business combination between Centerpulse
and Zimmer several times last year, as recently as October. We discussed the
unique, complementary nature of our geographic strengths and product lines. We
discussed the compelling strategic benefits of being the #1 global orthopaedics
company with our shared vision for the future. We confirmed the geographic fit
of our businesses by continent, country, and state, and our long-term commitment
to Winterthur. We mutually agreed Centerpulse is the ideal partner for Zimmer
and, just as important, that Zimmer is the ideal partner for Centerpulse. We
provided you with a preliminary written offer in October that indicated we were
prepared to increase our offer based upon new information. We are increasing our
offer now.
I realize that you have already started down the road toward a combination
with Smith & Nephew plc. As I am sure you can understand, we were disappointed
by that announcement in light of our friendly discussions. We were surprised
that your advisors did not give Zimmer the opportunity to receive the
confidential memorandum, which would have enabled us to make a superior offer,
before proceeding with an agreement with Smith & Nephew. Since October, you have
clarified and financed your product liability issues, you successfully divested
your cardiovascular businesses, and you have improved your continuing
operations. Therefore, we are pleased to make the following offer, which
Zimmer's Board of Directors has authorized, regarding a combination between our
two companies. One of our goals is to meet with you as soon as possible so that
we can discuss the superior merits of our offer.
We are offering to acquire all of Centerpulse's outstanding registered
shares and ADSs in an exchange offer pursuant to which holders of Centerpulse
registered shares will receive CHF 120 in cash and 3.68 shares of Zimmer common
stock per Centerpulse share. Based on the closing price of Zimmer common stock
and the USD/CHF exchange rate as of May 19, 2003, this offer represents
approximately CHF 350 per Centerpulse share. Our price is based upon our review
of publicly available information regarding Centerpulse, including recent
filings by Smith & Nephew.
We also intend to commence a separate offer to acquire all of the
outstanding bearer shares of InCentive Capital AG, which currently has a
beneficial interest in approximately 18.9% of the outstanding Centerpulse
registered shares. The terms of the InCentive offer will be substantially the
same as the offer for Centerpulse registered shares.
43
The Centerpulse and InCentive offers will allow shareholders to elect to
vary the proportions of the shares of Zimmer common stock and cash received in
the offer, subject to offsetting elections of other tendering shareholders.
We believe our offer is both financially and strategically superior to
Smith & Nephew's offer, both immediately and over the long term. It will combine
Centerpulse's leadership position in European orthopaedics and platforms in
spine and dental with Zimmer's leading positions in the U.S. and Japan in
reconstructive products and Minimally Invasive Solutions. Together, Centerpulse
and Zimmer will operate as the world's largest and most profitable
reconstructive company, providing products to address the complete
osteoarthritis "continuum of care" required by an aging but increasingly active
population. Moreover, this transaction is clearly in the best interests of your
shareholders, employees and surgeons.
- It will provide the opportunity for your shareholders to realize
significantly greater value for their shares than that presented by the
current, competing offer. Zimmer's offer represents a 26% premium over
the closing price per Centerpulse share on March 19, 2003, the trading
day immediately prior to announcement of the Centerpulse-Smith & Nephew
transaction, and a 19% premium over the proposed Smith & Nephew
transaction, based on the closing share price for Smith & Nephew ordinary
shares on May 19, 2003. Our October preliminary offer represented a 26%
premium over the one month average share price immediately prior to
October 17, 2002. The offer contained in this letter represents a 33%
premium over the one month average share price immediately prior to the
Smith & Nephew offer of March 20, 2003. These premia are consistent with
transactions completed on the SWX Swiss Exchange over the past five
years. The current Zimmer offer has a 63% greater cash component than
Smith & Nephew's offer. Centerpulse shareholders will receive both
greater immediate and long-term value through continuing investment in
the best performing company in our industry.
- It will allow Centerpulse's employees to become part of a fast-growing
industry leader with a strong commitment to R&D and significant financial
and operational strength. Zimmer has consistently reported superior
operating results compared to Smith & Nephew as measured by sales growth,
EBITDA growth, and EBITDA margins. In addition, your employees will find
that Zimmer's corporate culture is supportive of their individual and
collective goals. We encourage a performance-based culture and management
by local nationals. Upon our spin-off from our former parent in 2001, we
became a focused, independent company with a highly entrepreneurial
culture in which all employees can excel.
- It will allow the surgeons with whom you have established loyal
relationships to work with a company dedicated solely to orthopaedics,
with the best R&D pipeline in the industry. We are both equally proud of
our award-winning sales forces. Partnering with key academic centers
around the world, surgeons can take advantage of both of our new,
state-of-the-art medical education initiatives. They will benefit from
the research of a combined company focused on developing advanced
surgical techniques that put confidence in the surgeon's hands. We both
invest at the top of our class in R&D as a percentage of sales. Zimmer
has been in business for more than 75 years and has a history of
innovation -- as does Centerpulse.
In conclusion, the strategic merit of a Centerpulse/Zimmer combination is
compelling. As the #1 pure-play orthopaedics company, we will have leading
market positions in every critical product and geographic
market -- reconstructive, including hips and knees, as well as Europe, the U.S.,
and Japan. We will possess leading technologies, including minimally invasive
surgery, alternate materials, and biologics. We will have leading global scale,
with more than $2 billion in sales, 2,000 sales people, and 1,000 issued
patents. Finally, we expect to drive superior sales growth and EBITDA margins in
excess of 30%. We will create dual listings on both the New York Stock Exchange
and the SWX Swiss Exchange. This is a vision worth realizing!
Since another offer was commenced for Centerpulse and InCentive Capital, we
are advised that, in order to preserve our rights as a competing bidder under
Swiss law, we must make our proposal by pre-announcement filings with the Swiss
Takeover Board. However, we strongly prefer to work together with
44
you and your Board of Directors to complete this transaction and we are prepared
to commit all the necessary resources to do so. We are prepared to begin due
diligence immediately as provided by Swiss law.
I look forward to contacting you in the next few days to discuss our offer.
With personal regards,
/s/ RAY ELLIOTT
Chairman of the Board, President
and Chief Executive Officer
cc: The Board of Directors of Centerpulse
The Board of Directors of InCentive Capital
The Swiss Takeover Board
* * * *
In addition, as indicated in Mr. Elliott's letter, on May 20, 2003, Zimmer
made a pre-announcement of its offers for Centerpulse and InCentive shares in
accordance with Swiss law.
On May 21, 2003, Mr. Elliott and other Zimmer representatives met with Dr.
Randegger and Dr. Watter to discuss, among other things, the pre-announcement of
Zimmer's planned exchange offer for Centerpulse registered shares and the
process for the due diligence to be conducted by Zimmer.
In connection with each party's proposed due diligence review of the other
party, on May 26, 2003, Zimmer and Centerpulse executed a confidentiality
agreement relating to information to be provided to Zimmer and its
representatives, and on June 9, 2003, Zimmer and Centerpulse executed a
confidentiality agreement relating to information to be provided to Centerpulse
and its representatives. Following these dates, the parties provided each other
with access to information and personnel for due diligence purposes. On June 11,
2003, Zimmer and InCentive executed confidentiality agreements relating to due
diligence information to be provided to each party. Thereafter, Zimmer and
InCentive conducted due diligence reviews of one another.
On June 19, 2003, Zimmer commenced parallel exchange offers for all the
issued and outstanding registered shares and ADSs of Centerpulse and all the
bearer shares of InCentive.
REASONS FOR OUR OFFER
In reaching its decision to pursue a combination of Zimmer and Centerpulse,
our board of directors consulted with senior management and our financial and
legal advisors and considered a number of factors, including those set forth
below. We believe that a combination of Zimmer and Centerpulse represents a
compelling opportunity to increase value for stockholders of Zimmer, Centerpulse
and InCentive by combining Zimmer with a long-term strategic partner that will
allow us to realize myriad strategic advantages resulting in growth
opportunities within the medical devices industry.
We believe that the combination will create a global leader in the design,
development, manufacture and marketing of orthopaedic reconstructive implants,
spine, trauma and dental products. For the fiscal year ended December 31, 2002,
the pro forma net earnings of the combined company were estimated at US$287
million. We believe that the combination of Zimmer and Centerpulse will (i)
generate approximately US$70 to US$90 million in annual operational efficiencies
and cost savings by 2006 and (ii) be accretive in 2004 to the consensus earnings
per share estimate of US$1.91 as of June 16, 2003, excluding one-time
transaction and integration costs. The strategic compatibility of the products
and technologies of Zimmer and Centerpulse is expected to provide the combined
company with significant earnings power and a strong platform from which it can
actively pursue growth opportunities in the industry. For Zimmer, Centerpulse
provides a unique platform for growth and diversification in Europe as well as
in the spine and dental segments of the medical devices industry.
45
MARKET DYNAMICS
The market for orthopaedic reconstructive implants, trauma products and
general orthopaedic surgical products continues to enjoy growth on a global
scale. According to publicly available research analyst reports, from 1998 to
2002, the industry grew at annual rates from approximately 6% to 17%, and is
forecasted to continue to grow at approximately 12% over the next several years
through sales to orthopaedic surgeons, hospitals and healthcare purchasing
organizations. Market growth for reconstructive implants, representing
approximately 40% of worldwide orthopaedic sales, has been attributed to several
factors:
- An aging population in the United States and around the world: the U.S.
Census Bureau estimates that the total number of people age 65 and over
in the United States will increase by 4.9 million to 39.7 million between
2000 and 2010, and further estimates that the percentage of the world's
population age 65 and over will grow from approximately 6.9% of the total
population to approximately 9.5% during the period from 2000 to 2020;
- Continued technological advances (i) in biological applications, such as
bone graft substitutes and bone replacements, and (ii) that make joint
replacement a more attractive option for patients and physicians;
- The use of new implant materials;
- Reduction in hospitalization, decreased procedural costs and shorter
rehabilitation processes resulting from improvements in implant fixation,
surgical technique and pre- and post-surgical pathways and care;
- Increasing incidence of the replacement, repair or enhancement of an
existing implant product or component (revision);
- The general increase in active lifestyles and high-impact recreational
activities and sports by the young and old alike;
- Increases in selling and strategic brand marketing programs, target
direct-to-consumer advertising and an overall advancement in patient
education and knowledge due to innovations in global dissemination of
information via the Internet; and
- Improved average implant pricing.
GLOBAL SCALE AND INCREASED GEOGRAPHIC MARKET OF OUR PRODUCTS
The combination of Zimmer and Centerpulse is expected to significantly
expand Zimmer's global reach and enhance its market-leading position in
reconstructive implants and trauma products. We believe that the combination
will create the opportunity for deeper market and customer penetration in the
geographic segments in which Zimmer already operates and expansion into
geographic segments in which Zimmer does not possess significant operations, in
either case, to the extent the existing customer relationships of the two
companies can be leveraged for the benefit of the combined company. The
companies have insignificant overlap in virtually all key geographic segments on
a by-country basis and have corresponding strengths in each geographic segment.
For example, we believe Zimmer's sales and marketing efforts in the
Americas, Asia-Pacific and Europe will benefit from the addition of
Centerpulse's distribution pipeline and customer base in Europe. While the
greatest percentage of Zimmer's global sales is in the Americas, principally the
United States, accounting for approximately 68% of its 2002 sales and 74% of
segment operating profit before global operations and corporate expenses,
Centerpulse's particular geographic strength and market position in Europe,
based on its reputation and long-term customer relationships developed over many
years with surgeons, hospitals and healthcare organizations, will give the
combined company an important expanded outlet. Specifically, in Europe, a region
that accounted for 12% of our 2002 sales and 6% of Zimmer's segment operating
profit before global operations and corporate expenses, the reconstructive
implant and trauma products markets are highly fragmented. For example, surgeons
hold differing philosophies
46
regarding hip reconstruction and product type. We believe that the combination
of Zimmer and Centerpulse will have positive results for sales of products such
as the knee prosthesis NexGen Legacy(TM), due to Centerpulse's market position
and product mix.
The combination will further advance Zimmer's presence in the lucrative
Japanese market. In 2002, the Asia-Pacific region accounted for approximately
20% of our sales and 20% of our segment operating profit before global
operations and corporate expenses. Japan is the largest market for us in
Asia-Pacific, accounting for the majority of sales in the region. We have more
than 25 years of experience in the Japanese market and have long been a market
leader in hips, knees and trauma devices. We believe that Centerpulse's
distribution pipeline for its reconstructive implants, together with an expanded
product range sold through a larger sales force, will increase the customer base
in the region.
COMPLEMENTARY PRODUCT LINES
We believe the acquisition of Centerpulse and its extensive product line
will complement our current orthopaedic and reconstructive product offerings.
For example, Zimmer's leading market position with respect to knee implant
devices and Centerpulse's leading market position in hip implant devices
complement the overall product line and offer significant customer synergies. We
also believe that the combination will allow us to more easily pursue such
technologies as highly cross-linked polyethylene, minimally invasive solutions,
high flexion knees, alternate bearing materials, computer assisted surgeries,
biologics and open cell metal technologies. We believe that a combination of the
technological resources of both companies will allow us to develop more quickly
new materials, products and procedures through economies of scale with increased
functionality. Consolidation of efforts in the spinal segment and Europe is
expected to allow us to capitalize on high growth opportunities. In addition,
the combination also provides a unique diversification into dental products. The
combination of Zimmer's and Centerpulse's research and development,
"sales/distribution" staff, marketing, financial resources and compatible
cultures will, we believe, create a business platform upon which new orthopaedic
devices can be brought to the market on a more expedited basis and at lower
cost.
FINANCIAL BENEFITS
We believe that a combination of Zimmer and Centerpulse will enhance our
long-term growth prospects and maximize stockholder value. For the past 20
months, our common stock has consistently outperformed the FTSE 100, S&P 500 and
an orthopaedics index comprised of Synthes-Stratec, Biomet, Johnson & Johnson,
Medtronic and Stryker. Between January 1, 2002 and June 16, 2003, the per share
price of our common stock has increased approximately 55% and outperformed Smith
& Nephew and the orthopaedics index by approximately 64% and 81%, respectively.
We believe that our stock price performance is due primarily to Zimmer's focus
of strategically investing in inventory and instruments to support strong sales
growth in the Americas and Europe, and to support new products launched in 2002
and expected to be launched in 2003. We believe that the combined company's
earnings will enable it to more readily invest in and develop new products.
Zimmer's product sales grew worldwide by approximately 13% and 16% in 2001
and 2002, respectively, with an operating profit margin of approximately 29% for
the fiscal year ended December 31, 2002. Specifically, Zimmer's sales in Europe
grew by 28% in 2002. The price of Zimmer's common stock increased 36% in 2002
and 13.7% in 2003, through June 16 2003. Growth in earnings per share was 70% in
2002. Although past performance is not a guarantee of future results, we have
consistently achieved superior profitability, market growth, operating results
and stockholder returns.
We believe that the combination of production abilities of Centerpulse with
Zimmer's developmental capabilities will result in a combined company with
greater profitability and a better position in the medical devices industry. For
the fiscal year ended December 31, 2002, the pro forma net revenue of the
47
combined company was approximately US$2.2 billion. The estimated market share
and 2002 pro forma sales of the combined company are:
- #1 pure play orthopaedic company, with pro forma sales of US$2.2 billion;
- #1 in served global orthopaedic market, with pro forma sales of US$2.0
billion*;
- #1 in the reconstructive implants market, with pro forma sales of US$1.73
billion:
-- #1 in hip implants, with pro forma sales of US$753 million,
-- #1 in knee implants, with pro forma sales of US$811 million, and
-- #1 in extremities implants, with pro forma sales of US$84 million;
- #5 in the trauma products market, with pro forma sales of US$140 million;
and
- #6 in the spinal implants market, with pro forma sales of US$115 million.
- ---------------
* Served orthopaedic market is comprised of hips, knees, shoulders, elbows,
spine, trauma and dental markets.
OTHER CONSIDERATIONS
Our board of directors also considered potential adverse consequences and
negative factors, primarily consisting of the following:
- A significant portion of our debt has been allocated to funding the
consideration for Zimmer's proposed acquisitions of Centerpulse and
InCentive. As a result of this allocation, Zimmer will be more leveraged
than it has historically been.
- The significant degree of difficulty and management distraction that is
inherent in the process of integrating Centerpulse and Zimmer and the
risk that operational efficiencies and cost savings sought in the
proposed acquisitions of Centerpulse and InCentive might not be fully
achieved or that achieving these benefits may take longer than expected.
- The dependence of the value of shares of Zimmer common stock on the
successful integration of the businesses of Centerpulse and InCentive if
our offer and our Centerpulse offer are successful.
- The risk that our offer and our Centerpulse offer might not be
consummated despite Zimmer's efforts, even if the issuance of shares of
Zimmer common stock relating to such offers is approved by Zimmer
stockholders.
- Other risks described under the section captioned "RISK FACTORS."
Our board of directors believes that these risks are outweighed by the
potential benefits of the acquisitions of Centerpulse and InCentive.
48
OUR OFFER
OFFER DOCUMENTATION
This prospectus and the related documents are being used to make our offer
to all holders of InCentive bearer shares. A separate Swiss exchange offer
prospectus, to which this prospectus is being attached as Exhibit I, also is
being delivered to InCentive shareholders located anywhere outside the U.S. in
accordance with applicable Swiss law.
THE DISTRIBUTION OF THIS PROSPECTUS AND THE MAKING OF OUR OFFER MAY, IN
SOME JURISDICTIONS, BE RESTRICTED BY LAW. OUR OFFER IS NOT BEING MADE, DIRECTLY
OR INDIRECTLY, IN OR INTO, AND MAY NOT BE ACCEPTED FROM WITHIN, ANY JURISDICTION
WHERE THE MAKING OF OUR OFFER OR THE ACCEPTANCE THEREOF WOULD BE CONSIDERED
ILLEGAL OR OTHERWISE VIOLATE ANY APPLICABLE LAW OR REGULATION OR WHERE WE WOULD
BE OBLIGATED TO CHANGE THE TERMS OF OUR OFFER, TO FILE AN ADDITIONAL APPLICATION
WITH ANY AUTHORITIES OR OTHER INSTITUTIONS OR TO UNDERTAKE ADDITIONAL MEASURES
IN RELATION TO OUR OFFER. THIS PROSPECTUS AND THE RELATED DOCUMENTS MUST NOT BE
DISTRIBUTED IN SUCH JURISDICTIONS OR SENT TO SUCH JURISDICTIONS. PERSONS IN SUCH
JURISDICTIONS MUST NOT USE THESE DOCUMENTS FOR MARKETING PURPOSES FOR SALE OF
SHARES OF OUR COMMON STOCK. WE DO NOT ASSUME ANY RESPONSIBILITY FOR ANY
VIOLATION BY ANY PERSON OF ANY OF THESE RESTRICTIONS.
TERMS OF OUR OFFER; EXPIRATION DATE
We are offering to exchange for each outstanding bearer share of InCentive
that is validly tendered and not properly withdrawn prior to the expiration of
our offer, shares of Zimmer common stock and cash, without interest. InCentive,
an investment company listed on the SWX Swiss Exchange, beneficially owns
approximately 18.9% of the outstanding registered shares of Centerpulse.
Contemporaneously with our offer for InCentive bearer shares, we are also making
an offer to exchange 3.68 shares of Zimmer common stock and CHF 120 in cash,
without interest, for each Centerpulse registered share, and 0.368 of a share of
Zimmer common stock and the U.S. dollar equivalent of CHF 12 in cash, without
interest, for each Centerpulse ADS. As discussed below, our offer also includes
a mix and match election feature that will entitle you to elect to vary the
proportions of the shares of Zimmer common stock and cash that you will receive
in our offer, subject to the offsetting elections of other InCentive
shareholders in our offer and Centerpulse securityholders in our Centerpulse
offer.
In connection with a competing offer by Smith & Nephew for InCentive bearer
shares, InCentive has agreed to divest all of its assets, other than Centerpulse
registered shares, so that InCentive's assets will only consist of Centerpulse
registered shares and cash prior to the scheduled expiration date of Smith &
Nephew's offer. As a condition of our offer, InCentive and the major
shareholders of InCentive must enter into agreements with us which are
substantially similar to the agreements entered into with Smith & Nephew,
including an agreement requiring InCentive to divest all of its assets, other
than its Centerpulse registered shares. Assuming InCentive has taken these
actions, our offer price for each InCentive bearer share in our offer will be
calculated by reference to the formula (A+B)/C where:
A = the total number of shares of Zimmer common stock and the amount of
cash that would be payable under the terms of our Centerpulse offer for
the Centerpulse registered shares held by InCentive;
B = the adjusted net asset value (positive or negative) of InCentive
calculated as at the last day of our offer period but excluding the
calculation in "A" above and attributing no value to any InCentive
bearer shares held by InCentive or its subsidiaries, as confirmed by an
accounting firm of international repute to be appointed by Zimmer; and
C = the total number of InCentive bearer shares outstanding on the last day
of our offer period less the number of InCentive bearer shares held by
InCentive or its subsidiaries on that date.
For a discussion of the consideration payable under the terms of the
Centerpulse offer, which consideration factors into the calculation above as
variable "A," see the section captioned "THE CENTERPULSE OFFER -- Terms of Our
Centerpulse Offer."
49
As a result, the consideration for each InCentive bearer share will consist
of an amount of Zimmer common stock and a portion of cash payable in Swiss
francs, which will mirror what InCentive would have received if it had tendered
its Centerpulse registered shares in our Centerpulse offer, plus or minus an
amount of cash equal to the adjusted net asset value of InCentive excluding its
Centerpulse holdings. If the adjusted net asset value is negative, then the cash
portion attributable to the consideration received by InCentive in relation to
its Centerpulse holdings shall be reduced, by a proportionate degree, and if
after such reduction there is still a negative balance, the number of shares of
Zimmer common stock to be issued shall be reduced by a corresponding amount
calculated by reference to the average closing price of Zimmer common stock from
the fifth to third trading day prior to the settlement date of our offer.
The offer price paid in our offer will be adjusted for any dilutive effects
in respect of the InCentive bearer shares or Zimmer common stock (except for
shares issued for management options under InCentive or Zimmer benefit plans and
disclosed in InCentive's or Zimmer's financial statements for the fiscal year
ended December 31, 2002), including dividend payments, capital increases below
market value, or the issuance of options (except for management options issued
under InCentive or Zimmer benefit plans in the normal course consistent with
past practice), warrants, convertible securities and other rights of any kind to
acquire InCentive bearer shares or shares of Zimmer common stock, as the case
may be, or any other transaction having a dilutive effect on the value of our
offer.
The number of shares of Zimmer common stock to be issued in exchange for
each InCentive bearer share, known as the "exchange ratio," is fixed and,
subject to the mix and match election feature described below in the section
captioned "-- Mix and Match Election," will not change between now and the time
our offer is consummated. The exchange ratio is based on US$48.28, which is the
closing price of a share of Zimmer common stock on May 19, 2003, the day
immediately prior to the announcement of our offer. The value of the shares of
Zimmer common stock you will receive will fluctuate, based on changes in the
market price for Zimmer common stock. Fluctuations in the market price of Zimmer
common stock between now and the consummation of our offer will change the value
of the shares of Zimmer common stock that you will receive and will depend upon
any number of reasons, including those specific to Zimmer as well as those that
influence the trading prices of equity securities generally. Therefore, the
value of the shares of Zimmer common stock that you will receive could be higher
or lower than the price on which the exchange ratio was based. For information
on the range of trading prices of Zimmer common stock on the New York Stock
Exchange, please refer to the section captioned "MARKET PRICE AND DIVIDEND
MATTERS."
Fractional entitlements to shares of Zimmer common stock will not be
delivered to holders of InCentive bearer shares validly tendered in our offer.
Instead, fractional entitlements to shares of Zimmer common stock will
subsequently be combined and sold on the New York Stock Exchange and the net
proceeds of the sales will be distributed pro rata to the InCentive shareholders
entitled to fractional entitlements. See the section captioned "-- Cash Instead
of Fractional Shares of Zimmer Common Stock."
Under Swiss law, our offer is subject to a "cooling-off" period of 10 Swiss
trading days at the beginning of our offer during which tenders of InCentive
bearer shares will not be recognized as valid tenders under our offer.
Therefore, July 3, 2003 is the first date upon which tenders of InCentive bearer
shares will be recognized as valid tenders under our offer. Our offer will
expire at 4:00 p.m., Central European time, 10:00 a.m. New York City time, on
Monday, August 25, 2003, unless we shall have extended the period of time for
which our offer is open. When we make reference to the "expiration of our offer"
anywhere in this prospectus, this is the time we are referring to, including,
when applicable, any extension period that may apply. When we make reference to
the "expiration date" anywhere in this prospectus, we are referring to the
latest time and date on which our offer, as may be so extended, expires.
Our offer is also subject to the conditions set forth in the section
captioned "-- Conditions of Our Offer." If any of these conditions is not
satisfied, we may terminate our offer and return all tendered InCentive bearer
shares to tendering holders, extend our offer and, subject to withdrawal rights
as set forth in the section captioned "-- Withdrawal Rights," retain all such
InCentive bearer shares until the
50
expiration of our offer as so extended, waive such conditions and, subject to
any requirement to extend the period of time during which our offer is open,
accept all InCentive bearer shares validly tendered by the expiration date and
not withdrawn, or delay acceptance of InCentive bearer shares, subject to
applicable law, until the satisfaction or waiver of the conditions of our offer.
For a description of our right to extend the period of time during which our
offer is open and to amend, delay or terminate our offer, see the description in
the sections captioned "-- Extension, Termination and Amendment" and "-- Certain
Legal Matters; Regulatory Approvals."
MIX AND MATCH ELECTION
Our offer will contain a mix and match election, whereby tendering
InCentive shareholders may elect to receive either more shares of Zimmer common
stock or more cash than the standard entitlement. However, this election will be
available to InCentive shareholders only to the extent that off-setting
elections have been made by other tendering securityholders in our offer and the
Centerpulse offer. Elections made in our offer will be taken together with
elections made under a similar mix and match election included in our
Centerpulse offer (described in the section captioned "THE CENTERPULSE OFFER")
in determining whether mix and match elections under our offer will be
fulfilled. In other words, in order for an InCentive shareholder to receive a
higher proportion of cash, other securityholders will have to elect to receive a
higher proportion of shares of Zimmer common stock, and vice versa. To the
extent that elections cannot be satisfied as a result of the lack of such
off-setting elections, entitlements to shares of Zimmer common stock and cash in
excess of the standard entitlement will be reduced on a pro rata basis. Once the
share allocations have been determined, the cash element of the consideration
will be reduced or increased (as the case may be) for each InCentive shareholder
who has been allocated an increased or reduced number of shares of Zimmer common
stock. All calculations will be made by reference to the number of acceptances
and elections as of the last day of the subsequent offering period and, for the
purposes of these calculations, the assumed value per share of Zimmer common
stock shall be US$48.28, the same as the closing price of a share of Zimmer
common stock on May 19, 2003, the day immediately prior to the announcement of
our offer and our Centerpulse offer.
If you validly tender your InCentive bearer shares in our offer, you may
elect to receive for each InCentive bearer share:
- the standard entitlement, describe above, in "-- Terms of Our Offer;
Expiration Date;"
- as many shares of Zimmer common stock as possible; or
- as much cash as possible.
Tendering InCentive shareholders may submit their mix and match election to
their bank, broker or custodian until the end of the subsequent offering period
applicable to our offer. Tendering InCentive shareholders who have not submitted
a mix and match election prior to that time will be deemed to have elected the
standard entitlement. InCentive shareholders who make mix and match elections
will not know the exact number of shares of Zimmer common stock or the amount of
cash they will receive until settlement of the consideration under our offer.
We will determine all questions as to the validity of any mix and match
election, in our sole discretion, which determination will be final and binding
on all parties. We also reserve the absolute right to waive any defect or
irregularity in any election, whether or not similar defects or irregularities
are waived in the case of other InCentive shareholders. No election will be
validly made until all defects or irregularities have been cured or waived.
Neither we, the Swiss offer manager nor any other person will have any
obligation to notify you of any defects or irregularities in elections or incur
any liability for failure to notify you.
YOUR MIX AND MATCH ELECTION WILL NOT BE VALID UNLESS YOU VALIDLY TENDER
YOUR INCENTIVE BEARER SHARES PURSUANT TO THE TERMS OF OUR OFFER AND MAKE A VALID
ELECTION AS DESCRIBED IN THE INSTRUCTIONS TO THE FORM OF DECLARATION OF
ACCEPTANCE AND ASSIGNMENT YOU RECEIVED WITH THIS PROSPECTUS. Please read the
discussion in the section captioned "-- Procedures for Tendering InCentive
Bearer Shares."
51
EXTENSION, TERMINATION AND AMENDMENT
We reserve the right, at any time prior to the expiration of our offer,
until all of the conditions specified in the section captioned "-- Conditions of
Our Offer" shall have been satisfied, to extend the period of time during which
our offer is open and to amend our offer by giving oral or written notice of
such extension or amendment to the Swiss offer manager followed by public
announcement thereof, subject, in all cases, to applicable Swiss law and the
Exchange Act. All conditions to our offer must be satisfied or waived before the
expiration of our offer. In the case of an extension, any such announcement will
be issued no later than the fourth Swiss trading day following the previously
scheduled expiration date. During any such extension, all InCentive bearer
shares previously validly tendered and not withdrawn will remain subject to our
offer, including the rights of a tendering InCentive shareholder to withdraw its
tendered bearer shares in accordance with the procedures set forth in the
section captioned "-- Withdrawal Rights."
Subject to Swiss tender offer regulations and the rules and regulations of
the SEC, we also reserve the right, at any time or from time to time,
- if any of the conditions of our offer are not satisfied, (i) to delay
acceptance for exchange or exchange of any InCentive bearer shares
tendered pursuant to our offer or (ii) to terminate our offer and not
accept for exchange or exchange any InCentive bearer shares not
previously accepted for exchange or exchanged, and
- to waive any condition or otherwise amend our offer in any respect, by
giving oral or written notice of such delay, termination or amendment to
the Swiss offer manager and followed as promptly as practicable by public
announcement thereof.
In accordance with Swiss tender offer regulations, Zimmer will not be
permitted to extend our offer beyond the date that is 40 Swiss trading days
after the commencement of our offer unless Zimmer receives the approval of the
Swiss Takeover Board. If Zimmer is required by the rules and regulations of the
SEC to extend the expiration date of our offer beyond the date that the
expiration date of our offer is permitted to be extended without Swiss Takeover
Board approval, including as a result of the waiver of a condition to our offer,
Zimmer will seek the approval of the Swiss Takeover Board to allow an extension
of our offer in order to comply with the rules and regulations of the SEC.
Subject to applicable law, and without limiting the manner in which we may
choose to make any public announcement, we assume no obligation to publish,
advertise or otherwise communicate any such public announcement other than by
making a release to the Dow Jones News Service, Bloomberg, Reuters Economic
Services and Telekurs/AWP News. Zimmer expects to announce by release to the Dow
Jones News Service, Bloomberg, Reuters Economic Services and Telekurs/AWP News
within four Swiss trading days following the expiration date of our offer the
percentage of outstanding InCentive bearer shares that have been validly
tendered pursuant to our offer and whether our offer will be completed, extended
or abandoned.
If we make a material change in the terms of our offer or the information
concerning our offer, or if we waive a condition of our offer, we will extend
our offer to the extent required under applicable Swiss law or the Exchange Act.
If, prior to the expiration date, we change the type or amount of consideration
offered to you, that change will apply to all holders whose InCentive bearer
shares are validly tendered and accepted for exchange pursuant to our offer. If,
at the time notice of that change is first published, sent or given to you, our
offer is scheduled to expire at any time earlier than the tenth business day
from and including the date that such notice is first so published, sent or
given, we will extend our offer until the expiration of that ten business-day
period.
SUBSEQUENT OFFERING PERIOD
If all of the conditions to our offer are satisfied or waived, and Zimmer
accepts for exchange InCentive bearer shares tendered pursuant to our offer,
InCentive shareholders who do not accept our offer prior to its expiration will
have an opportunity to accept our offer on the same terms during a ten Swiss
52
trading day period after the announcement by Zimmer that our offer will be
consummated. There will be no withdrawal rights during the subsequent offer
period.
EXCHANGE OF INCENTIVE BEARER SHARES; DELIVERY OF ZIMMER COMMON STOCK AND CASH
CONSIDERATION
Upon the terms and subject to the conditions of our offer, including, if
our offer is extended or amended, and the terms and conditions of any such
extension or amendment, no later than four Swiss trading days after the
expiration of our offer, we will accept for exchange all InCentive bearer shares
validly tendered and not withdrawn pursuant to the terms of our offer, with
respect to InCentive bearer shares tendered prior to the expiration of our
offer, and upon the expiration of the subsequent offering period, with respect
to InCentive bearer shares tendered during the subsequent offering period. In
addition, we reserve the right, subject to applicable law, to delay the
acceptance for exchange or the exchange of InCentive bearer shares in order to
comply in whole or in part with any applicable law. For a description of our
right to terminate our offer and not accept the InCentive bearer shares for
exchange or to delay acceptance of InCentive bearer shares for exchange, see the
section captioned "-- Extension, Termination and Amendment."
For purposes of our offer, we shall be deemed to have accepted for exchange
tendered InCentive bearer shares, as and if we shall give oral or written notice
to the Swiss offer manager of our acceptance of the tender of such InCentive
bearer shares. We expect to exchange Zimmer common stock and pay the applicable
cash proceeds and cash instead of fractional shares for the InCentive bearer
shares tendered in our offer to the Swiss offer manager no later than 10 Swiss
trading days after the expiration of the subsequent offering period. The Swiss
offer manager will act as agent for the tendering holders for the purpose of
receiving shares of Zimmer common stock and cash and cash to be paid instead of
fractional shares of Zimmer common stock from us and transmitting such shares
and cash to tendering InCentive shareholders. Subject to the timely receipt by
the Swiss offer manager of a confirmation of the book-entry transfer of such
InCentive bearer shares into the Swiss offer manager's account at SIS, as
described in the section captioned "-- Procedures for Tendering InCentive Bearer
Shares," and a properly completed and duly executed Form of Declaration of
Acceptance and Assignment or a facsimile thereof, and all other required
documents, within 10 Swiss trading days after the expiration of the subsequent
offering period applicable to our offer, the Swiss offer manager will deliver
the applicable number of shares of Zimmer common stock, together with the
applicable cash consideration (including cash payments to be made instead of
issuing fractional shares of Zimmer common stock) to shareholders who validly
tendered their InCentive bearer shares pursuant to our offer.
UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID BY US ON THE CASH PAID FOR
YOUR INCENTIVE BEARER SHARES (INCLUDING CASH PAYMENTS WE MAKE INSTEAD OF ISSUING
FRACTIONAL SHARES OF ZIMMER COMMON STOCK) EVEN IF THERE IS A DELAY IN MAKING THE
EXCHANGE AND PAYMENTS.
Holders who tender their InCentive bearer shares in our offer may elect in
the Form of Declaration of Acceptance and Assignment to have their shares of
Zimmer common stock registered in the name of a nominee or registered in their
own name in the share register of Zimmer.
If we increase the value of the consideration to be paid for InCentive
bearer shares pursuant to our offer, we will pay such increased consideration
for all InCentive bearer shares exchanged pursuant to our offer.
If any tendered InCentive bearer shares are not accepted for exchange
pursuant to our offer for any reason, or if certificates are submitted for more
InCentive bearer shares than are tendered, such InCentive bearer shares will be
credited to an account such InCentive bearer shares will be credited to an
account maintained at the book-entry transfer facility, without expense to the
tendering shareholder, as promptly as practicable following the expiration or
termination of our offer.
53
CASH INSTEAD OF FRACTIONAL SHARES OF ZIMMER COMMON STOCK
Fractional entitlements to shares of Zimmer common stock will not be
delivered to InCentive shareholders with respect to the InCentive bearer shares
validly tendered in our offer. To the extent that InCentive shareholders are
entitled to receive fractions of shares of Zimmer common stock in exchange for
their InCentive bearer shares, those fractional entitlements will be combined
with the other InCentive shareholders fractional entitlements and subsequently
sold on behalf of such shareholders on the New York Stock Exchange. Each such
InCentive shareholder who would not receive full consideration as shares of
Zimmer common stock will receive cash consideration corresponding to the
fraction of the price of the share of Zimmer common stock, which price shall be
based on the net per share sale price (after deduction of related fees and
expenses) of all of the shares of Zimmer common stock combined from the
fractional entitlements and sold on behalf of those tendering InCentive
shareholders.
By the acceptance of our offer, a tendering InCentive shareholder
authorizes the Swiss offer manager to combine such holder's fractional
entitlement to a share of Zimmer common stock with other entitlements and sell
them on the New York Stock Exchange. The payment of the consideration in cash
instead of fractional shares of Zimmer common stock will be made to such holder
within 10 Swiss trading days after the expiration of the subsequent offering
period applicable to our offer.
YOU WILL NOT RECEIVE ANY INTEREST ON THE CASH TO BE GIVEN FOR FRACTIONAL
SHARES OF ZIMMER COMMON STOCK, EVEN IF THERE IS A DELAY IN MAKING THE EXCHANGE
AND PAYMENT.
WITHDRAWAL RIGHTS
Your tender of InCentive bearer shares pursuant to our offer is
irrevocable, except that InCentive bearer shares tendered pursuant to our offer
may be withdrawn at any time prior to the expiration of our offer. If we (i)
extend the period of time during which our offer is open, (ii) are delayed in
accepting for exchange the InCentive bearer shares, or (iii) are unable to
exchange the InCentive bearer shares pursuant to our offer for any reason, then,
without prejudice to our rights under our offer, the Swiss offer manager may, on
our behalf, retain all InCentive bearer shares tendered and such InCentive
bearer shares may not be withdrawn except as otherwise provided in this section.
Any such delay will be considered an extension of our offer to the extent
required by law.
The Swiss offer manager will make arrangements on the SWX Swiss Exchange to
allow InCentive shareholders who have tendered such shares pursuant to our
offer, to withdraw such InCentive bearer shares from our offer and sell those
shares pursuant to a separate trading line on the SWX Swiss Exchange only to
purchasers who wish to, and simultaneously with such purchase will, tender such
shares in our offer. InCentive shareholders who are interested in selling their
InCentive bearer shares in this manner should contact their bank, broker or
other custodial institution or the Swiss offer manager. In the alternative,
InCentive shareholders may withdraw such shares as set forth below and hold such
shares or sell such shares without restriction.
For a withdrawal to be effective, a written, telegraphic, telex or
facsimile transmission notice of withdrawal must be timely received by your
bank, broker or custodian and must specify the name of the person who tendered
the InCentive bearer shares to be withdrawn and the number of InCentive bearer
shares to be withdrawn and the name of the holder of the InCentive bearer
shares, if different from that of the person who tendered such InCentive bearer
shares. Withdrawals may not be rescinded, and InCentive bearer shares withdrawn
will thereafter be deemed not validly tendered for purposes of our offer.
However, withdrawn InCentive bearer shares may be tendered again by following
one of the procedures described in the section captioned "-- Procedures for
Tendering InCentive Bearer Shares" at any time prior to the expiration of our
offer.
All questions as to the form and validity (including time of receipt) of
any notice of withdrawal will be determined by us, in our sole discretion, which
determination shall be final and binding. Neither we, the Swiss offer manager
nor any other person will be under any duty to give notification of any defect
or irregularity in any notice of withdrawal or incur any liability for failure
to give any such notification.
54
PROCEDURES FOR TENDERING INCENTIVE BEARER SHARES
Zimmer has retained Credit Suisse First Boston to act as Swiss offer
manager in connection with our offer made to holders of InCentive bearer shares.
VALID TENDER OF INCENTIVE BEARER SHARES
To validly tender InCentive bearer shares pursuant to our offer, you must
complete the following procedures:
- If you personally hold InCentive bearer shares, you must comply with the
instructions to transfer and deliver your shares as described in the Form
of Declaration of Acceptance and Assignment and return the form to your
bank, broker or custodian before the expiration of our offer.
- If your InCentive bearer shares are held through a financial institution,
you must comply with the instructions for acceptance of our offer and
delivery of your tendered InCentive bearer shares that you will receive
directly from the financial institution or intermediary with which your
securities are deposited. If you have not received any instructions from
your financial institution or intermediary, you should contact your
financial institution or intermediary. Your acceptance of our offer
should be received by your financial institution or intermediary, in
accordance with its instructions, before the date indicated in its
instructions.
BOOK-ENTRY TRANSFER
The Swiss offer manager will establish an account through SIS to hold the
InCentive bearer shares to be tendered into our offer. Any financial
intermediary or institution that is a participant in SIS's systems may make a
book-entry transfer of bearer shares by causing SIS to transfer such bearer
shares into the SIS account in favor of the Swiss offer manager in accordance
with their procedures for transfer. You should, thus, instruct your financial
institution or intermediary to tender the number of bearer shares you wish to
tender by book-entry transfer to the Swiss offer manager's account.
If you validly tender your InCentive bearer shares and they are accepted by
Zimmer, there will be a binding agreement between you and Zimmer on the terms
and subject to the conditions set forth in this prospectus and in the Form of
Declaration of Acceptance and Assignment and the instructions to such form.
Do not send Forms of Declaration of Acceptance and Assignment or other
offer documents to Zimmer or InCentive. These materials must be submitted to
your bank, broker or custodian following the procedures described above and in
the instructions to the Form of Declaration of Acceptance and Assignment in
order for you to participate in our offer.
IT IS UP TO YOU TO DECIDE HOW TO DELIVER YOUR INCENTIVE BEARER SHARES AND
ALL OTHER REQUIRED DOCUMENTS TO YOUR BANK, BROKER OR CUSTODIAN. IT IS YOUR
RESPONSIBILITY TO ENSURE THAT ALL NECESSARY MATERIALS IN THE PROPER FORM ARE
RECEIVED BY YOUR BANK, BROKER OR CUSTODIAN BEFORE THE EXPIRATION DATE. WE
RECOMMEND THAT YOU USE AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED,
INSTEAD OF MAIL. IF DELIVERY IS BY MAIL, WE RECOMMEND THAT YOU USE REGISTERED
MAIL, WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO YOUR BANK, BROKER OR CUSTODIAN
BEFORE THE EXPIRATION OF OUR OFFER. IF YOUR BANK, BROKER OR CUSTODIAN DOES NOT
RECEIVE ALL OF THE MATERIALS IN THE PROPER FORM REQUIRED BY THIS SECTION BEFORE
THE EXPIRATION DATE, YOUR INCENTIVE BEARER SHARES WILL NOT BE VALIDLY TENDERED
IN OUR OFFER.
OTHER REQUIREMENTS
Notwithstanding any other provision, the exchange of InCentive bearer
shares accepted pursuant to our offer will in all cases be made only after
proper and timely delivery to, and receipt by your bank, broker or custodian of
the tendered InCentive bearer shares, in accordance with the instructions in the
Form of Declaration of Acceptance and Assignment or that you receive from your
financial intermediary
55
or institution, as the case may be. If you wish to accept our offer, you have to
complete, sign and return the Form of Declaration of Acceptance and Assignment
on or before 4:00 p.m., Central European time, 10:00 a.m., New York City time,
Monday, August 25, 2003 or, if our offer has been extended, before the
expiration of our offer, as extended.
EFFECT OF TENDER
If you tender your InCentive bearer shares in our offer, you agree to sell,
assign and transfer to Zimmer all right, title and interest in and to all of the
InCentive bearer shares tendered and any and all cash dividends, distributions,
rights, other shares or other securities issued or issuable in respect of such
bearer shares on or after the date of this prospectus.
By tendering your InCentive bearer shares, you represent and warrant that
you have the full power and authority to validly tender, exchange, assign and
transfer the InCentive bearer shares tendered and to acquire shares of Zimmer
common stock and receive payment of cash issuable or payable upon the exchange
of such tendered InCentive bearer shares, and that, when and if the tendered
InCentive bearer shares are accepted for exchange, Zimmer will acquire good,
marketable and unencumbered title to the tendered InCentive bearer shares, free
and clear of all liens, restrictions, charges and encumbrances, and not subject
to any adverse claim or right. You also warrant that you will, upon request,
execute and deliver any additional documents deemed by Zimmer or the Swiss offer
manager to be necessary or desirable to complete the exchange, sale, assignment
and transfer of the tendered InCentive bearer shares.
The tendering holder irrevocably appoints designees of Zimmer as the
holder's proxies, each with full power of substitution, to the full extent of
the holder's rights with respect to the InCentive bearer shares tendered by the
holder and accepted for exchange by Zimmer and with respect to any and all
distributions in respect of the tendered InCentive bearer shares on or after the
date of this prospectus. All such proxies will be considered coupled with an
interest in the tendered InCentive bearer shares. This appointment is effective
when, and only to the extent that, Zimmer accepts for exchange InCentive bearer
shares tendered by the holder as provided in this prospectus. Upon the
effectiveness of the appointment, all prior powers of attorney, proxies and
consents given by the holder with respect to the tendered InCentive bearer
shares (and with respect to any and all distributions) will be revoked, and no
subsequent powers of attorney, proxies or consents may be given (and, if given,
will not be deemed effective). Zimmer's designees will, with respect to the
InCentive bearer shares and related distributions for which the appointment is
effective, be empowered to exercise all voting and other rights of the holder as
they, in their sole discretion, may deem proper. Zimmer reserves the right to
require that, in order for the InCentive bearer shares to be deemed validly
tendered, immediately upon Zimmer's exchange of Zimmer common stock and payment
of cash for the tendered InCentive bearer shares, Zimmer must be able to
exercise full voting, consent and other rights to the extent permitted under
applicable law with respect to the tendered InCentive bearer shares and
distributions, including voting at any meeting of InCentive shareholders.
TRANSFER AND WITHHOLDING TAXES
SWISS TRANSFER AND WITHHOLDING TAXES
In the case of a tendering holder that is a Swiss holder, Swiss federal
securities transfer tax is payable with respect to the exchange of InCentive
bearer shares pursuant to our offer if such holder is a securities dealer as
defined under the Swiss stamp tax act, referred to as a Swiss securities dealer,
or if a Swiss securities dealer acts as an intermediary to the transaction. In
the case of a tendering holder that is not a Swiss holder, there is no Swiss
securities transfer tax consequence of our offer unless a Swiss securities
dealer acts as an intermediary to the transaction. Zimmer will pay or reimburse
any applicable Swiss federal securities transfer tax with respect to the
exchange of InCentive bearer shares pursuant to our offer. Neither the exchange
of InCentive bearer shares for Zimmer common stock nor the entitlement for cash
pursuant to our offer is subject to Swiss withholding tax or Swiss value added
tax ("VAT") with respect to any tendering holder. For a more complete discussion
of Swiss transfer and withholding taxes,
56
see the discussion in the section captioned "-- OUR
OFFER -- Taxation -- Material Swiss Tax Consequences" below.
U.K. TRANSFER AND WITHHOLDING TAXES
There should be no U.K. stamp duty or stamp duty reserve tax implications
arising with respect to the exchange of InCentive bearer shares pursuant to our
offer. The exchange of InCentive bearer shares for Zimmer common stock and/or
cash pursuant to our offer is not subject to U.K. withholding tax or U.K. VAT.
For a more complete discussion of U.K. transfer and withholding taxes, see the
discussion in the section captioned "-- OUR OFFER -- Taxation -- Material U.K.
Tax Consequences" below.
U.S. FEDERAL TRANSFER AND WITHHOLDING TAXES
There is no U.S. federal transfer tax or VAT. Tendering U.S. holders, and
in some cases tendering non-U.S. holders, may be subject to U.S. federal backup
withholding tax with respect to proceeds from the exchange of InCentive bearer
shares pursuant to our offer unless such holders comply with certain
certification procedures or otherwise establish an exemption from backup
withholding. For a more complete discussion of U.S. federal withholding taxes,
see the discussion in the section captioned "-- OUR OFFER -- Taxation --
Material U.S. Federal Tax Consequences" below.
MATTERS CONCERNING VALIDITY AND ELIGIBILITY
We will determine all questions as to the form of documents and the
validity, eligibility (including time of receipt) and acceptance for exchange of
any tender of InCentive bearer shares in our sole discretion. All our
determinations in these matters will be final and binding. We reserve the
absolute right to reject any or all tenders of InCentive bearer shares
determined by us not to be in proper form or the acceptance for exchange of or
exchange for which may, in the opinion of our counsel, be unlawful. We also
reserve the absolute right to waive any defect or irregularity in any tender of
InCentive bearer shares. Neither we, the Swiss offer manager nor any other
person will be under any duty to give notification of any defect or irregularity
in tenders or incur any liability for failure to give any such notification. Any
InCentive bearer shares withdrawn will be deemed not to have been validly
tendered for purposes of our offer. However, at any time prior to expiration of
our offer, you may re-tender withdrawn InCentive bearer shares by following the
procedures discussed above in the section captioned "-- Procedures for Tendering
InCentive Bearer Shares."
IF YOU HAVE ANY QUESTIONS ABOUT THE PROCEDURE FOR TENDERING INCENTIVE
BEARER SHARES, PLEASE CONTACT THE SWISS OFFER MANAGER AT ITS ADDRESS SET FORTH
ON THE BACK COVER OF THIS PROSPECTUS OR VIA E-MAIL AT
EQUITY.PROSPECTUS@CSFB.COM, OR YOUR BANK, BROKER OR CUSTODIAN.
ANNOUNCEMENT OF RESULTS OF OUR OFFER
We will announce the final results of our offer and whether all of the
conditions to our offer have been fulfilled or waived and whether Zimmer will
accept the tendered InCentive bearer shares for exchange no later than four
Swiss trading days after expiration of our offer. The announcement will be made
by a release to the Dow Jones News Service, Bloomberg, Reuters Economic Services
and Telekurs/ AWP News.
OWNERSHIP OF ZIMMER AFTER OUR OFFER AND OUR CENTERPULSE OFFER
Based on the estimated per share consideration payable in the connection
with our offer and our Centerpulse offer, we estimate that we will issue
approximately 43.8 million shares of Zimmer common stock and that, upon the
consummation of our offer and our Centerpulse offer, current holders of Zimmer
common stock will own approximately 82%, former holders of Centerpulse
registered shares, including holders of Centerpulse ADSs, will own approximately
14.6%, and former InCentive shareholders will own approximately 3.4%, of the
then outstanding shares of Zimmer common stock.
57
CURRENCY EXCHANGE RATES
The following table sets forth, for the periods indicated, certain
historical exchange rates between U.S. dollars and Swiss francs based on the
Federal Reserve Bank of New York noon buying rate:
<Table>
<Caption>
THREE MONTHS
ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------- --------------------------------
2003 2002 2002 2001 2000 1999 1998
----- ----- ---- ---- ---- ---- ----
(CHF = US$1.00)
High........................................... 1.40 1.72 1.72 1.82 1.83 1.60 1.54
Low............................................ 1.33 1.64 1.38 1.59 1.55 1.36 1.29
Average(1)..................................... 1.36 1.70 1.55 1.69 1.69 1.51 1.45
Period Ended................................... 1.35 1.68 1.38 1.66 1.62 1.59 1.37
</Table>
- ---------------
(1) The average of the noon buying rates on the last day of each month during
the period.
No representation is made that the Swiss franc or U.S. dollar amounts could have
been or could in the future be so converted at any particular rate.
TAXATION
The following is a general summary of material U.S. federal, Swiss, and
U.K. tax consequences of our offer and the ownership of Zimmer common stock
received pursuant to our offer. The discussion under the heading "Material U.S.
Federal Tax Consequences" was prepared by and represents the opinion of Dewey
Ballantine LLP, as special U.S. tax counsel, to Zimmer. The discussion under the
heading "Material Swiss Tax Consequences" was prepared by and represents the
opinion of Pestalozzi Lachenal Patry, as special Swiss tax counsel, to Zimmer.
The discussion under the heading "Material U.K. Tax Consequences" was prepared
by and represents the opinion of Bird & Bird, as special U.K. tax counsel, to
Zimmer. Beneficial owners of InCentive bearer shares that are subject to tax in
jurisdictions other than the United States, Switzerland and the United Kingdom
should consult their own tax advisors regarding the tax consequences to them of
our offer and the ownership of Zimmer common stock received pursuant to our
offer.
THIS SUMMARY IS NOT INTENDED TO BE, AND SHOULD NOT BE CONSTRUED TO BE,
LEGAL OR TAX ADVICE TO ANY PARTICULAR BENEFICIAL OWNER OF INCENTIVE BEARER
SHARES. ALL BENEFICIAL OWNERS OF INCENTIVE BEARER SHARES ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS REGARDING THE SPECIFIC U.S. FEDERAL, STATE, LOCAL AND
NON-U.S. TAX CONSEQUENCES TO THEM OF OUR OFFER AND THE OWNERSHIP OF ZIMMER
COMMON STOCK RECEIVED PURSUANT TO OUR OFFER.
MATERIAL U.S. FEDERAL TAX CONSEQUENCES
The following is a summary of material U.S. federal income tax consequences
to "U.S. holders," as defined below, and the material U.S. federal income and
estate tax consequences to "non-U.S. holders," as defined below, of our offer
and the ownership of Zimmer common stock received pursuant to our offer. This
summary is based on currently existing provisions of the Internal Revenue Code
of 1986, as amended, referred to as the Code, treasury regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all as in
effect on the date of this prospectus and all of which are subject to change,
possibly with retroactive effect. This discussion does not address any aspect of
state or local tax law.
This summary is limited to beneficial owners that hold InCentive bearer
shares, and that will hold Zimmer common stock received pursuant to our offer,
as "capital assets" (generally, property held for investment). Moreover, this
summary does not discuss all aspects of U.S. federal taxation that may be
important to beneficial owners in light of their particular circumstances or the
U.S. federal tax consequences to beneficial owners subject to special treatment
under U.S. federal tax law, such as banks and other financial institutions,
insurance companies, dealers in securities, traders who have elected mark-
to-market accounting, tax-exempt organizations, certain former citizens or
former long-term residents of
58
the United States, partnerships or other pass-through entities, persons that
hold or will hold InCentive bearer shares or Zimmer common stock as part of a
"straddle," "hedging," "conversion," or other risk reduction transaction for
U.S. federal income tax purposes, persons who acquired their shares upon the
exercise of employee stock options or otherwise as compensation, persons that
actually or constructively own 10% or more of the voting shares of InCentive, or
U.S. holders that have a functional currency other than the U.S. dollar, all of
whom may be subject to tax rules that differ significantly from those summarized
below.
As used herein, the term "U.S. holder" means a person that beneficially
owns InCentive bearer shares, or that will beneficially own Zimmer common stock
received pursuant to our offer, and that is, for U.S. federal income tax
purposes:
- an individual who is a citizen or resident of the United States;
- a corporation (or other entity taxable as a corporation for U.S. federal
income tax purposes) created or organized in or under the laws of the
United States, any state thereof, or the District of Columbia;
- an estate the income of which is subject to U.S. federal income taxation
regardless of its source; or
- a trust (a) if a court within the United States is able to exercise
primary jurisdiction over its administration and one or more U.S. persons
have authority to control all of its substantial decisions, or (b) if, in
general, it was in existence on August 20, 1996, was treated as a U.S.
person under the Code on the previous day, and elected under applicable
treasury regulations to continue to so be treated.
As used herein, the term "non-U.S. holder" means a beneficial owner that is
not a partnership for U.S. federal income tax purposes and is not a U.S. holder.
If a partnership is a beneficial owner of InCentive bearer shares or of
Zimmer common stock received pursuant to our offer, the U.S. federal tax
treatment of a partner in the partnership generally will depend upon the status
of the partner and the activities of the partnership. A partnership that is a
beneficial owner of InCentive bearer shares or of Zimmer common stock received
pursuant to our offer, and partners in such a partnership, are urged to consult
their own tax advisors regarding the U.S. federal, state, local and non-U.S. tax
consequences to them of our offer and the ownership of Zimmer common stock
received pursuant to our offer.
U.S. HOLDERS
Exchange of InCentive Bearer Shares for Zimmer Common Stock and/or Cash
Pursuant to Our Offer
A U.S. holder that exchanges InCentive bearer shares for Zimmer common
stock and/or cash pursuant to our offer generally will recognize taxable gain or
loss equal to the difference between (1) the amount of cash plus the fair market
value of Zimmer common stock received (including fractional shares to which a
holder is entitled) pursuant to our offer, (referred to as a holder's amount
realized) and (2) such U.S. holder's adjusted tax basis in the InCentive bearer
shares exchanged therefor. For purposes of determining a U.S. holder's amount
realized, it appears that the fair market value of the Zimmer common stock
should be determined as of the date we accept such U.S. holder's tender of
InCentive bearer shares, (referred to as the acceptance date), and that the
amount of cash should be determined, depending on the U.S. holder's method of
accounting and foreign currency elections in effect, by reference to the U.S.
dollar value of the Swiss francs received pursuant to our offer on either the
acceptance date or the date the Swiss francs are received by or on behalf of the
U.S. holder. Each U.S. holder is urged to consult its own tax advisor as to the
determination of its amount realized in its particular circumstances. Gain or
loss recognized generally will be U.S. source capital gain or loss, and will be
long-term capital gain or loss if the U.S. holder held its InCentive bearer
shares for more than one year. Long-term capital gains of a non-corporate U.S.
holder generally are subject to a reduced rate of U.S. federal income tax. The
deduction of capital loss is subject to limitations.
59
A U.S. holder's tax basis in Zimmer common stock received pursuant to our
offer should be equal to the fair market value of such stock, as taken into
account in determining the U.S. holder's amount realized, and the U.S. holder's
holding period for such Zimmer common stock should begin on the day following
the day the Zimmer common stock is so taken into account.
Special U.S. federal income tax rules would apply to U.S. holders if
InCentive were a passive foreign investment company, or PFIC. InCentive will be
a PFIC if 75% or more of its gross income in a taxable year, including the pro
rata share of the gross income of any company (U.S. or non-U.S.) in which
InCentive is considered to own 25% or more of the shares by value, is passive
income. Alternatively, InCentive will be a PFIC if 50% or more of its assets in
a taxable year, averaged over the year (determined by averaging the percentages
at the end of each quarter of the taxable year) and ordinarily determined based
on fair market value and including the pro rata share of the assets of any
company (U.S. or non-U.S.) in which InCentive is considered to own 25% or more
of the shares by value, are held for the production of, or produce, passive
income. Based on publicly available information with respect to the composition
of InCentive's assets, it appears that InCentive may in fact be a PFIC. If
InCentive were a PFIC in prior years or were to become a PFIC prior to the
consummation of our offer, U.S. holders could become subject to adverse U.S.
federal income tax consequences, including, depending on the situation, being
subject to a special tax plus an interest charge on any gain recognized upon
exchange of InCentive bearer shares for Zimmer common stock and/or cash. Each
U.S. holder is urged to consult its own tax advisor regarding the potential
application of the PFIC rules in its particular circumstances.
Currency Exchange Gain or Loss
If the U.S. dollar value of Swiss francs taken into account by a U.S.
holder in determining its amount realized as a result of our offer differs from
the U.S. dollar value of the Swiss francs received by or on behalf of the U.S.
holder, such U.S. holder will recognize U.S. source ordinary income or loss, as
the case may be, measured by the difference between the amount so taken into
account and the U.S. dollar value of the Swiss francs received. The U.S. holder
may recognize additional U.S. source ordinary income or loss, as the case may
be, when its Swiss francs are converted into U.S. dollars or otherwise disposed
of, to the extent there has been a change in the exchange rate between the Swiss
franc and the U.S. dollar during the period the U.S. holder holds the Swiss
francs. Each U.S. holder is urged to consult its own tax advisor regarding the
application of the currency exchange gain and loss rules in its particular
circumstances.
Distributions on Zimmer Common Stock
We do not currently anticipate making distributions on our common stock.
If, however, after consummation of our offer, we do make distributions on our
common stock, such distributions will constitute dividends for U.S. federal
income tax purposes to the extent paid from our current or accumulated earnings
and profits, as determined under U.S. federal income tax principles.
Distributions in excess of earnings and profits will constitute a return of
capital that is applied against and reduces the U.S. holder's adjusted tax basis
in our common stock. Any remaining excess will be treated as gain realized on
the sale or other disposition of the common stock and will be treated as
described in the section captioned "-- OUR OFFER -- Taxation -- U.S.
Holders -- Disposition of Zimmer Common Stock" below.
Disposition of Zimmer Common Stock
A U.S. holder that sells or otherwise disposes of Zimmer common stock
received pursuant to our offer (including any fractional share that is sold on
its behalf) generally will recognize taxable gain or loss equal to the
difference between (i) the holder's amount realized (generally, the sum of the
cash plus the fair market value of any property received) and (ii) the holder's
adjusted tax basis in such Zimmer common stock. Gain or loss recognized
generally will be capital gain or loss, and will be long-term capital gain or
loss if the U.S. holder held the Zimmer common stock for more than one year on
the date of
60
disposition. Long-term capital gains of a non-corporate U.S. holder generally
are subject to a reduced rate of U.S. federal tax. The deduction of capital loss
is subject to limitations.
Jobs and Growth Tax Relief Reconciliation Act of 2003
Under the recently enacted Jobs and Growth Tax Relief Reconciliation Act of
2003, dividends and long-term capital gains earned by individual U.S. holders
before January 1, 2009 generally are subject to U.S. federal income tax at a
reduced maximum tax rate of 15%. This rate reduction does not apply to dividends
received in respect of certain short-term or hedged positions, or to dividends
or capital gains received in certain other situations. Holders are urged to
consult their own tax advisors regarding the implications of the new tax
legislation in their particular circumstances.
Information Reporting and Backup Withholding
Proceeds from the exchange of InCentive bearer shares pursuant to our
offer, the sale or other disposition of Zimmer common stock, and distributions
on Zimmer common stock that are paid to a U.S. holder (other than certain exempt
recipients, such as corporations) generally are subject to information reporting
and to backup withholding at the applicable rate (currently 28%) if the U.S.
holder fails to provide a valid taxpayer identification number to the paying
agent and comply with certain certification procedures or otherwise establish an
exemption from backup withholding. Backup withholding is not an additional tax.
The amount of any backup withholding from a payment to a U.S. holder will be
allowed as a credit against such holder's U.S. federal income tax liability and
may entitle such holder to a refund, provided the holder furnishes certain
required information to the IRS in a timely manner.
NON-U.S. HOLDERS
Exchange of InCentive Bearer Shares for Zimmer Common Stock and/or Cash
Pursuant to Our Offer
A non-U.S. holder generally will not be subject to U.S. federal income tax
on any gain recognized upon the exchange of InCentive bearer shares for Zimmer
common stock and/or cash pursuant to our offer, unless (i) such gain is
effectively connected with a trade or business of the non-U.S. holder in the
United States and, if a tax treaty applies, is attributable to a permanent
establishment maintained by the non-U.S. holder in the United States, or (ii)
the non-U.S. holder is an individual who is present in the United States for a
period or periods aggregating 183 or more days in the taxable year of the
exchange and certain other conditions are met.
The potential application of information reporting and backup withholding
with respect to the consideration payable to a non-U.S. holder pursuant to our
offer is described in the section captioned "-- OUR OFFER --
Taxation -- Material U.S. Federal Tax Consequences -- Non-U.S. Holders --
Information Reporting and Backup Withholding," below.
Distributions on Zimmer Common Stock
We do not currently anticipate making distributions on our common stock.
If, however, after consummation of our offer we do make distributions on our
common stock, such distributions will constitute dividends for U.S. federal
income tax purposes to the extent paid from our current or accumulated earnings
and profits, as determined under U.S. federal income tax principles.
Distributions in excess of earnings and profits will constitute a return of
capital that is applied against and reduces the non-U.S. holder's adjusted tax
basis in our common stock. Any remaining excess will be treated as gain realized
on the sale or other disposition of the common stock and will be treated as
described in the section captioned "-- OUR OFFER -- Taxation -- Material U.S.
Federal Tax Consequences -- Non-U.S. Holders -- Disposition of Zimmer Common
Stock" below.
Dividends that are not effectively connected with a non-U.S. holder's
conduct of a trade or business in the United States generally will be subject to
withholding of U.S. federal income tax at the rate of 30%, or
61
if a tax treaty applies, a lower rate specified by the treaty. non-U.S. holders
are urged to consult their own tax advisors regarding their entitlement to
benefits under a relevant income tax treaty.
Dividends that are effectively connected with a non-U.S. holder's conduct
of a trade or business in the United States and, if a tax treaty applies,
attributable to a permanent establishment maintained by the non-U.S. holder in
the United States, generally will not be subject to withholding (provided
certain certification requirements are met) but will be subject to U.S. federal
income tax imposed on net income at the regular graduated U.S. federal income
tax rates and in the manner generally applicable to U.S. persons, and, for
corporate holders, under certain circumstances, will be subject to the U.S.
"branch profits tax" at the rate of 30%, or if a tax treaty applies, a lower
rate specified by the treaty.
Disposition of Zimmer Common Stock
A non-U.S. holder generally will not be subject to U.S. federal income tax
on gain recognized on a sale or other disposition of Zimmer common stock
received pursuant to our offer unless any one of the following is true:
- such gain is effectively connected with the non-U.S. holder's conduct of
a trade or business in the United States and, if a tax treaty applies,
attributable to a permanent establishment maintained by such non-U.S.
holder in the United States;
- the non-U.S. holder is a nonresident alien individual present in the
United States for 183 or more days in the taxable year of the disposition
and certain other requirements are met; or
- the Zimmer common stock constitutes a "U.S. real property interest" by
reason of our status as a "U.S. real property holding corporation," or a
USRPHC, for U.S. federal income tax purposes at any time during the
shorter of (i) the period during which the non-U.S. holder holds its
Zimmer common stock or (ii) the 5-year period ending on the date the
non-U.S. holder disposes of its Zimmer common stock. In general, we would
be a USRPHC if interests in U.S. real estate comprised the majority of
our assets. We believe that we are not currently and will not become a
USRPHC. However, because the determination of whether we are a USRPHC
depends on the fair market value of our U.S. real property interests
relative to the fair market value of our other business assets, there can
be no assurance that we will not become a USRPHC in the future. Even if
we are or were to become a USRPHC, so long as the Zimmer common stock is
"regularly traded on an established securities market" within the meaning
of Section 897(c)(3) of the Code, such common stock will be treated as
U.S. real property interests only in the hands of a non-U.S. holder that
owns, or has owned, directly or indirectly, within the five years
preceding the sale or disposition of such common stock, more than 5% of
the Zimmer common stock outstanding. If we are or were to become a USRPHC
and a non-U.S. holder owned directly or indirectly more than 5% of the
Zimmer common stock outstanding during the period described above or the
Zimmer common stock were not "regularly traded on an established
securities market," the non-U.S. holder generally would be subject to
U.S. federal income tax on its net gain derived from the disposition of
its Zimmer common stock as though the non-U.S. holder was engaged in a
business in the United States and the gain or loss was effectively
connected with such business.
U.S. Federal Estate Tax
Zimmer common stock that is owned or treated as owned by an individual who
at the time of death is a non-U.S. person (as specifically defined for U.S.
federal estate tax purposes) will be included in his or her gross estate for
U.S. federal estate tax purposes unless an applicable estate tax treaty provides
otherwise and, therefore, may be subject to U.S. federal estate tax.
Information Reporting and Backup Withholding
A non-U.S. holder may be subject to and information reporting and backup
withholding at the applicable rate (currently 28%) with respect to proceeds from
the exchange of InCentive bearer shares
62
pursuant to our offer or with respect to proceeds from the sale or other
disposition of Zimmer common stock received pursuant to our offer. If a non-U.S.
holder exchanges its InCentive bearer shares or disposes of its Zimmer common
stock outside the United States through a non-U.S. office of a broker, then the
backup withholding and information reporting requirements generally will not
apply to the proceeds. However, information reporting, but not backup
withholding, will apply to the payment of proceeds, if a non-U.S. holder
exchanges its InCentive bearer shares or sells its Zimmer common stock through a
non-U.S. office of a broker that is, for U.S. federal income tax purposes, a
U.S. person or has certain other enumerated connections with the United States
unless the broker has documentary evidence in its files that such holder is a
non-U.S. person and certain other conditions are met or the non-U.S. holder
otherwise establishes an exemption.
If a non-U.S. holder receives proceeds from the exchange of InCentive
bearer shares pursuant to our offer or receives proceeds from the sale or other
disposition of Zimmer common stock through a U.S. office of a broker, such
payment is subject to both backup withholding and information reporting unless
such holder properly provides an IRS Form W-8BEN certifying that it is a
non-U.S. person or otherwise establishes an exemption.
If we make distributions on our common stock, we and other payors will be
required to report such distributions to the IRS on IRS Form 1042-S even if the
payments are not otherwise subject to information reporting. The portion of a
distribution that constitutes a dividend may be subject to backup withholding
and additional information reporting unless the non-U.S. holder provides an IRS
Form W-8BEN certifying that it is a non-U.S. holder (or otherwise meets the
documentary evidence requirements for establishing that it is a non-U.S. holder)
or otherwise establishes an exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the non-U.S.
holder's U.S. federal income tax liability if certain required information is
furnished to the IRS in a timely manner. Non-U.S. holders are urged to consult
their own tax advisors regarding the application of backup withholding in their
particular circumstances and the availability of and procedure for obtaining an
exemption from backup withholding under current treasury regulations.
MATERIAL SWISS TAX CONSEQUENCES
This discussion summarizes the material Swiss tax consequences of our offer
and the ownership of Zimmer common stock received pursuant to our offer. This
discussion is not exhaustive and is intended only as a general guide for
beneficial owners that hold their InCentive bearer shares (and that will hold
Zimmer common stock received pursuant to our offer) as investments and that are
not subject to special rules under Swiss tax law. Beneficial owners are urged to
consult their own tax advisors regarding the Swiss tax consequences of our offer
and the ownership of Zimmer common stock received pursuant to our offer in light
of their particular circumstances.
As used herein, the term "Swiss holder" means a person that beneficially
owns InCentive bearer shares, or that will beneficially own Zimmer common stock
received pursuant to our offer, and that is, for Swiss tax purposes, (a) a
resident or domiciliary of Switzerland, or (b) a non-resident and
non-domiciliary of Switzerland that holds InCentive bearer shares or Zimmer
common stock in connection with the conduct of a trade or business in
Switzerland through a permanent establishment or a fixed place of business
maintained by such person within Switzerland. A "non-Swiss holder" is a person
(including an offshore vehicle) that beneficially owns InCentive bearer shares,
or that will beneficially own Zimmer common stock received pursuant to our
offer, and that is not a Swiss holder.
This summary is based on current law and practice, which is subject to
change possibly with retroactive effect.
63
SWISS HOLDERS
Exchange of InCentive Bearer Shares for Zimmer Common Stock and/or Cash
Pursuant to Our Offer
A Swiss resident individual who holds InCentive bearer shares as part of
such holder's private assets generally will not be subject to any Swiss income
taxation on gains realized upon the exchange of InCentive bearer shares for
Zimmer common stock and/or cash pursuant to our offer.
For Swiss holders other than Swiss resident individuals who hold their
InCentive bearer shares as part of their private assets, the practice adopted by
the Swiss Federal Tax Administration provides that the exchange of InCentive
bearer shares for Zimmer common stock and/or cash pursuant to our cross-border
offer generally will give rise to a taxable gain or allocable loss for purposes
of the Swiss taxation on capital gains. Such gain or loss will be equal to the
difference between (a) the fair market value of Zimmer common stock plus the
amount of cash received by a holder pursuant to our offer and (b) the book value
of the InCentive bearer shares exchanged therefor. However, it is possible that
the Swiss Federal Tax Administration, in anticipation of the new Swiss merger
law, might accept a deferral of the Swiss federal income tax. A Swiss holder
that is a corporation may, under certain circumstances, be eligible for relief
from taxation with respect to capital gains.
Swiss federal securities transfer tax is payable if a Swiss securities
dealer exchanges InCentive bearer shares for Zimmer common stock or if a Swiss
securities dealer acts as an intermediary to the transaction. Zimmer will pay or
reimburse any applicable Swiss federal securities transfer tax with respect to
the exchange of InCentive bearer shares pursuant to our offer.
Neither the exchange of InCentive bearer shares for Zimmer common stock nor
the entitlement for cash pursuant to our offer is subject to Swiss withholding
tax or VAT.
Distributions on Zimmer Common Stock
We do not currently anticipate making distributions on our common stock.
If, however, after consummation of our offer, we do make distributions on our
common stock, such distributions will be treated as dividends and subject to
Swiss income tax on the gross amount of such distributions, to the extent paid
out of our current or accumulated earnings and profits. Dividends paid on Zimmer
common stock will be subject to U.S. withholding taxes, at a reduced rate under
the U.S. - Switzerland income tax treaty, if applicable. Part of such U.S.
withholding tax may be refunded to a Swiss holder if the dividend income is duly
declared in such holder's income tax return and in its books, respectively, and
part may, to a certain extent, be credited against the holder's Swiss income tax
liability.
Disposition of Zimmer Common Stock
A Swiss resident individual who holds Zimmer common stock as a private
asset generally will not be subject to Swiss income taxation on gains realized
upon a disposition of Zimmer common stock. A disposition of Zimmer common stock
by a Swiss holder other than a Swiss resident individual holding Zimmer common
stock as a private asset may give rise to a taxable gain or allowable loss for
purposes of Swiss taxation on capital gains, subject to any available exemption
or relief.
A disposition of Zimmer common stock will be subject to Swiss federal
securities transfer tax if either of the parties to the transaction qualifies as
a Swiss securities dealer or if a Swiss securities dealer acts as an
intermediary to the transaction.
NON-SWISS HOLDERS
In general, there will be no Swiss tax consequences of our offer to
non-Swiss holders of InCentive bearer shares unless a Swiss securities dealer
acts as an intermediary to the transaction, in which case Swiss federal
securities transfer tax will be payable by the Swiss securities dealer and may
be charged to the holder. Zimmer will pay or reimburse any applicable Swiss
federal securities transfer tax with respect to the exchange of InCentive bearer
shares pursuant to our offer. There generally will be no Swiss tax
64
consequences to non-Swiss holders of owning Zimmer common stock received
pursuant to our offer. However, if a holder of Zimmer common stock disposes of
such stock to a Swiss securities dealer, or if a Swiss securities dealer acts as
an intermediary to the transaction, Swiss federal securities transfer tax will
be payable by the Swiss securities dealer and may be charged to the holder.
MATERIAL U.K. TAX CONSEQUENCES
This discussion summarizes the material U.K. tax consequences of our offer
and the ownership of Zimmer common stock received pursuant to our offer. This
discussion is not exhaustive and is intended only as a general guide for
beneficial owners that hold their InCentive bearer shares (and that will hold
Zimmer common stock received pursuant to our offer) as investments and that are
not subject to special rules under U.K. tax law. For example, this prospectus
does not summarize the U.K. tax consequences for U.K. Pension Funds, U.K.
Authorized Units Trusts (Mutual Funds) or certain non-domiciled individuals.
Beneficial owners are urged to consult their own tax advisors regarding the U.K.
tax consequences of our offer and the ownership of Zimmer common stock received
pursuant to our offer in light of their particular circumstances.
As used herein, the term "U.K. holder" means a person that beneficially
owns InCentive bearer shares, or that will beneficially own Zimmer common stock
received pursuant to our offer, and that is, for U.K. tax purposes, (a) a
resident of the United Kingdom, or (b) a non-resident that holds InCentive
bearer shares or Zimmer common stock in connection with the conduct of a trade
in the United Kingdom through a branch, agency or permanent establishment
maintained by such person within the United Kingdom.
This summary is based on current law, which is subject to change possibly
with retroactive effect.
U.K. HOLDERS
Exchange of InCentive Bearer Shares for Zimmer Common Stock and/or Cash
Pursuant to Our Offer
In general, a U.K. holder that does not hold more than 5% of the InCentive
bearer shares or any other class of shares in InCentive will not recognize a
chargeable gain or allowable loss for U.K. tax purposes upon the exchange of
InCentive bearer shares pursuant to our offer, except to the extent of cash
received in exchange therefor. Any chargeable gain or allowable loss that
otherwise would have arisen on a disposal by the U.K. holder of InCentive bearer
shares will be "rolled-over" into the Zimmer common stock received pursuant to
our offer. The U.K. holder will take the same base cost in the Zimmer common
stock received pursuant to our offer as such holder had in the InCentive bearer
shares exchanged therefor. For these purposes, the base cost of a holder's
InCentive bearer shares will be allocated between the Zimmer common stock and
cash received pursuant to our offer by reference to the market value of the
Zimmer common stock and the sterling equivalent of the cash received on the date
of the disposal. The U.K. holder's holding period (where relevant) for Zimmer
common stock received pursuant to our offer will include the period such holder
held the InCentive bearer shares exchanged therefor.
A U.K. holder that holds (either alone or together with persons connected
with such holder) more than 5% of the InCentive bearer shares or any other class
of shares in InCentive is advised that an application for clearance (that the
transaction is for a bona fide commercial purpose) has been made to the Inland
Revenue under Section 138 of the Taxation of Chargeable Gains Act 1992 in
respect of the exchange, although receipt of such clearance is not a condition
of our offer. Provided such clearance is given, any such U.K. holder will be
treated in the manner described above with respect to U.K. holders who do not
hold more than 5% of the InCentive bearer shares.
A U.K. holder that receives cash in the exchange (including cash in respect
of fractional entitlements to Zimmer common stock) pursuant to our offer
generally will be treated as effecting a disposal or part disposal of InCentive
bearer shares to the extent of the cash received and may, depending on the U.K.
holder's particular circumstances, incur a liability to U.K. tax on capital
gains. For these purposes, the base cost of a U.K. holder's InCentive bearer
shares will be allocated between the Zimmer common
65
stock and cash received pursuant to our offer by reference to the market value
of the Zimmer common stock and the sterling equivalent of the cash received on
the date of the disposal. Any cash received in Swiss francs or US dollars will
be converted into sterling by reference to the exchange rate prevailing at the
date of disposal, from which the relevant proportion of a U.K. holder's base
cost will be deducted to determine the amount of any chargeable gain or
allowable loss. No charge to U.K. tax will arise in relation to any exchange
movements arising after this date in respect of the cash received and its
subsequent conversion into sterling except where the shareholder is within the
charge to U.K. corporation tax.
To the extent that a U.K. holder who is an individual higher rate taxpayer
receives cash, such holder will be chargeable to U.K. tax on capital gains at
40%, subject to U.K. taper relief. The latter can reduce the tax rate on
chargeable gains, depending on the period of ownership of the shares, to 24%
after 10 years of qualifying ownership.
Special rules apply for the purposes of U.K. tax on capital gains where a
U.K. holder that receives cash (including cash in respect of fractional
entitlements to Zimmer common stock) pursuant to our offer also receives Zimmer
common stock and the amount of cash received is "small" compared with the value
of the InCentive bearer shares exchanged therefor. For these purposes, the
receipt of an amount of cash equal to 5% or less of the market value of the U.K.
holder's InCentive bearer shares will be treated as "small." The Inland Revenue
will also accept that an amount in cash is "small" if its equivalent is equal to
or less than 3,000 British pounds even if the amount of such cash exceeds 5% of
the market value of the U.K. holder's InCentive bearer shares in respect of
which it is received. In such cases, there generally will be no disposal or part
disposal of the U.K. holder's InCentive bearer shares in respect of the receipt
of cash. The amount of the cash received will instead be deducted from the U.K.
holder's allowable expenditure in computing the U.K. tax on capital gains or any
allowable loss on a subsequent disposal of the Zimmer common stock received in
the exchange.
Distributions on Zimmer Common Stock
We do not currently anticipate making distributions on our common stock.
If, however, after consummation of our offer, we do make distributions on our
common stock, U.K. holders will, in general, be subject to U.K. income tax or
corporation tax on the gross amount of the dividends paid on the Zimmer common
stock. A U.K. holder who is an individual generally will be chargeable to income
tax in the U.K. on such dividends at the Schedule F ordinary rate (currently
10%) or, to the extent that his or her income exceeds the threshold for higher
rate tax, at the Schedule F upper rate (currently 32.5%). Dividends paid on
Zimmer common stock will be subject to U.S. withholding taxes, at a reduced rate
under the U.S.-U.K. income tax treaty, if applicable. Credit should be available
against U.K. income tax or corporation tax for any U.S. withholding tax,
provided that such credit will not exceed the credit which would have been
allowed had all reasonable steps been taken (including any claims which could be
made by the holder under the U.S.-U.K. income tax treaty) to minimize such U.S.
tax.
A U.K. holder that is a corporation generally will be charged corporation
tax on dividends received from Zimmer under Schedule D Case V at the U.K.
corporation tax rate of 30% (subject to credit for any U.S. withholding tax). In
addition, it should be possible for U.K. corporate holders that own more than
10% of the voting rights in Zimmer to claim tax credits for underlying tax
(deemed paid credits) on the relevant profits out of which the dividends were
paid.
Disposition of Zimmer Common Stock
A U.K. holder generally will recognize a chargeable gain or allowable loss
upon the disposition of Zimmer common stock received pursuant to our offer. The
gain or loss, as the case may be, will be for an amount equal to the difference
between (a) the sum of the fair market value of any cash and property received
upon disposition of the Zimmer common stock and (b) the U.K. holder's base cost
in the Zimmer common stock.
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Stamp Duty
The sale of shares in a non-U.K. company, including the exchange of
InCentive bearer shares pursuant to our offer or the disposition of Zimmer
common stock received pursuant to our offer, will not be subject to U.K. stamp
duty reserve tax, and generally will not be subject to stamp duty provided the
transfer is not executed in the United Kingdom. Accordingly, there will, in
general, be no U.K. stamp duty or stamp duty reserve tax implications arising
from our offer. Stamp duty may apply to a disposition of Zimmer common stock
received pursuant to our offer if the transfer is executed in the United
Kingdom.
VAT
The sale of shares is an exempt supply for U.K. VAT purposes. Accordingly,
there will be no material U.K. VAT implications to holders as a result of our
offer or a holder's subsequent disposition of Zimmer common stock received
pursuant to our offer.
NON-U.K. HOLDERS
In general, there will be no U.K. tax consequences of our offer or the
ownership of Zimmer common stock to non-U.K. holders of InCentive bearer shares
or Zimmer common stock. However, stamp duty may apply to a disposition of Zimmer
common stock received pursuant to our offer if the transfer is executed in the
United Kingdom.
PURPOSE OF OUR OFFER; PLANS FOR INCENTIVE
We are making our offer in order to acquire control of, and ultimately the
entire common equity interest in, InCentive, which currently beneficially owns
approximately 18.9% of the outstanding Centerpulse registered shares. Our offer
is intended to facilitate our acquisition of Centerpulse, which we plan to
effect through our Centerpulse offer. Promptly following our offer, if Zimmer
acquires that number of bearer shares representing more than 98% of the voting
power of InCentive, Zimmer intends to request the cancellation of the remaining
share certificates of InCentive in accordance with the compulsory process under
Swiss law. You will not have appraisal rights as a result of the consummation of
our offer.
If we gain control of InCentive but are not entitled to acquire
compulsorily all of the outstanding InCentive bearer shares, then we currently
intend to, subject to applicable Swiss law and constitution documents of
InCentive, reconstitute the board of directors of InCentive to reflect our
majority ownership interest in InCentive. Replacement board members have not yet
been identified and their number and identity will depend on the circumstances
at the relevant time. We also currently intend to, subject to the SWX Swiss
Exchange listing rules, request that the board of directors of InCentive review
whether the InCentive bearer shares should continue to be listed on the SWX
Swiss Exchange and, to the extent possible, implement the intentions outlined
above, which are consistent with gaining control of InCentive.
We would only make decisions on these courses of action following receipt
of legal, taxation and financial advice, and our intentions must be read as
subject to the legal obligation of the InCentive board of directors to comply
with all legal and regulatory requirements and their fiduciary and statutory
duties.
EFFECT OF OUR OFFER ON THE MARKET FOR INCENTIVE BEARER SHARES; REGISTRATION
UNDER THE EXCHANGE ACT
REDUCED LIQUIDITY; POSSIBLE DELISTING
The tender of InCentive bearer shares pursuant to our offer will reduce the
number of InCentive bearer shares that might otherwise trade publicly and may
adversely affect the liquidity and market value of the remaining InCentive
bearer shares held by the public. InCentive bearer shares are listed and
principally traded on the SWX Swiss Exchange. Depending on the number of
InCentive bearer shares acquired pursuant to our offer, following consummation
of our offer, InCentive bearer shares may no longer meet the requirements of the
SWX Swiss Exchange for continued listing.
67
If the SWX Swiss Exchange were to delist InCentive bearer shares following
the exchange of those securities in our offer, the market for them may be
adversely affected. It is possible that InCentive bearer shares would be traded
on other securities exchanges and that price quotations would be reported by
such exchanges or by other sources. The extent of the public market for the
InCentive bearer shares and the availability of such quotations would, however,
depend upon the number of holders and/or the aggregate market value of the
InCentive bearer shares remaining at such time, the interest in maintaining a
market in the InCentive bearer shares on the part of securities firms and other
factors.
If, after the consummation of our offer, Zimmer holds more than 98% of the
InCentive bearer shares, then Zimmer intends to seek cancellation of the
remaining InCentive share certificates in accordance with the compulsory process
under Swiss law. InCentive shareholders whose InCentive bearer shares are
cancelled in such a proceeding will receive the offer consideration for their
shares.
STATUS AS "MARGIN SECURITIES"
The InCentive bearer shares are presently "margin securities" under the
regulations of the Federal Reserve Board, which has the effect, among other
things, of allowing brokers to extend credit on the collateral of InCentive
bearer shares. Depending on the factors similar to those described above with
respect to listing and market quotations, following consummation of our offer,
the InCentive bearer shares may no longer constitute "margin securities" for the
purposes of the Federal Reserve Board's margin regulations, in which event the
InCentive bearer shares would be ineligible as collateral for margin loans made
by brokers.
CONDITIONS OF OUR OFFER
Notwithstanding any other provisions of our offer, we will not be required
to accept for exchange and, subject to any applicable Swiss law and rules and
regulations of the SEC, we may postpone the acceptance for exchange of, or
exchange for, tendered InCentive bearer shares, and may, in our reasonable
judgment, extend, terminate or amend our offer as to any InCentive bearer shares
not then accepted for exchange if in our reasonable judgment the following
conditions have not been satisfied on or before the date of expiration of our
offer.
CENTERPULSE OFFER CONDITIONS SATISFIED CONDITION
All conditions of our Centerpulse offer having been satisfied or waived by
Zimmer.
REMOVAL OF INCENTIVE BOARD CONDITION
Each person who is a member of the board of directors of InCentive having
delivered at or prior to the expiration of the offer period a validly executed
undertaking to Zimmer (A) agreeing, contingent upon Zimmer having received valid
acceptances for at least 80% of the total number of InCentive bearer shares
outstanding on a fully diluted basis at the expiration of the offer period, to
take, or cause to be taken, as soon as possible after our offer has been
declared unconditional, all actions necessary to convene a shareholders meeting
of InCentive to be held as soon as possible following the consummation of our
offer with the sole agenda item being "removal of existing board members and
election of new board members" and to propose that all of the persons who are
members of the board of directors of InCentive on the date of the InCentive
shareholders meeting be removed and immediately replaced by the individuals
designated by Zimmer, and (B) agreeing, contingent upon Zimmer having received
valid acceptances for at least 80% of the total number of InCentive bearer
shares outstanding on a fully diluted basis at the expiration of the offer
period, to take, or cause to be taken, all actions necessary to ensure, for the
period from the time our offer has been declared unconditional until such time
as all of the Zimmer designees to the board of directors of InCentive take
office, that neither InCentive nor any of its directors, officers or employees
take any action (except (x) with the prior written consent of Zimmer, which
consent shall not be unreasonably withheld, or (y) if required by applicable
law) that would result in any variance in the assets or liabilities of InCentive
from those in existence on the date our offer is declared unconditional, other
than nominal
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and reasonable cash payments and the incurrence of nominal and reasonable
liabilities required to maintain the corporate and administrative functioning of
InCentive in the normal course, taking into account the reduced business
activities of InCentive, but not to exceed CHF 50,000 in the aggregate.
This condition will be deemed to have been satisfied, if all members of the
board of directors of InCentive have delivered the undertakings described above
other than those directors who have not received a confirmation of Zimmer that
it will hold harmless such directors in respect of any liability incurred as a
consequence of complying with the above described undertaking.
ASSETS AND LIABILITIES CONDITION
At the expiration of the offer period, InCentive (i) shall only have assets
consisting solely of 2,237,577 Centerpulse registered shares and cash and (ii)
shall have no material liabilities, contingent or otherwise, as determined in
the opinion of PricewaterhouseCoopers Ltd., referred to as the review body,
other than liabilities the amount of which, as determined in the opinion of the
review body, are taken into account in the calculation of adjusted net asset
value.
REGISTRATION EFFECTIVENESS CONDITION
The registration statement on Form S-4 filed by Zimmer with the SEC in
connection with our offer having become effective in accordance with the
provisions of the Securities Act; no stop order suspending the effectiveness of
the registration statement having been issued by the SEC and no proceedings for
that purpose having been initiated by the SEC and not concluded or withdrawn.
MINIMUM TENDER CONDITION
Zimmer having received valid acceptances for at least 80% of the total
number of InCentive bearer shares outstanding on a fully diluted basis at the
expiration of the offer period. If, at or prior to the expiration of the offer
period, Zimmer shall have waived this condition, Zimmer shall also waive the
condition entitled "Removal of InCentive Board Condition."
NO REGULATORY AUTHORITY PROHIBITION CONDITION
No court or regulatory authority having issued a decision or an order which
prohibits our offer or its consummation or renders our offer or its consummation
unlawful.
NON-DISPOSAL OF CENTERPULSE REGISTERED SHARES CONDITION
InCentive or any of its subsidiaries not having disposed, or agreed to
dispose (including acceptance of any offer), of any Centerpulse registered
shares held by it or its subsidiaries and not having become obliged to do so,
except for any such transfer within the InCentive group.
LITIGATION CONDITION
Until the end of the offer period, no litigation proceedings having been
initiated against InCentive and its subsidiaries which have not been made public
prior to May 20, 2003 and which are neither insured nor provisioned for in the
consolidated balance sheet of InCentive for the fiscal year ended December 31,
2002 and whose amount in dispute is in excess of CHF 35 million in the
aggregate.
We reserve the right to waive one or more of the conditions set forth
above, either in whole or in part, and to withdraw our offer if one or more of
the above conditions is not met.
CERTAIN LEGAL MATTERS; REGULATORY APPROVALS
While we expect that there will be no requirement to file any antitrust
notification or report with respect to our offer, we expect that we will be
required to make such filings in connection with our Centerpulse offer in
certain jurisdictions. Based on an examination of publicly available information
69
relating to the businesses in which Zimmer and Centerpulse and our respective
subsidiaries are engaged, we believe that the consummation of our offer and our
Centerpulse offer should not violate the applicable antitrust and competition
laws. Nevertheless, we cannot be certain that a challenge to our offer and our
Centerpulse offer on antitrust or competition grounds will not be made, or, if
such a challenge is made, what the result will be.
In addition, antitrust enforcement and other regulatory agencies frequently
scrutinize transactions such as our Centerpulse offer. At any time before or
after we acquire Centerpulse registered shares and Centerpulse ADSs, any
antitrust or other regulatory enforcement agency in a jurisdiction where we have
not filed documentation could take whatever action under the applicable law of
the jurisdiction as it deems necessary or desirable in the public interest,
including seeking to enjoin our acquisition of Centerpulse registered shares and
Centerpulse ADSs pursuant to our Centerpulse offer or our ability to vote or
otherwise exercise rights of ownership over the Centerpulse registered shares
and Centerpulse ADSs that we acquire under our Centerpulse offer, seeking
divestiture of Centerpulse registered shares and Centerpulse ADSs acquired by us
or divestiture of assets of us or Centerpulse, or seeking to impose conditions
on the operation of our or Centerpulse's businesses. Private parties, and in the
United States, state attorneys general, may also bring legal action under the
antitrust laws under some circumstances.
HART-SCOTT-RODINO
Under the HSR Act and the rules promulgated thereunder by the Federal Trade
Commission, or the FTC, a share exchange offer may not be completed until
notification has been filed with the FTC and the Antitrust Division of the
Department of Justice and a thirty (30) day waiting period has been observed.
This waiting period may be terminated by the FTC and the Antitrust Division
before its expiration. Zimmer intends to file a notification and report form
under the HSR Act with the FTC and the Antitrust Division on or about June 23,
2003. Accordingly, the waiting period under the HSR Act applicable to our
Centerpulse offer will expire at 11:59 p.m., New York City time on or about July
23, 2003, unless such waiting period is earlier terminated by the FTC and the
Antitrust Division or extended by a request from the FTC or the Antitrust
Division for additional information and documentary material prior to the
expiration of the waiting period. Pursuant to the HSR Act, we have requested
early termination of the waiting period applicable to our Centerpulse offer.
There can be no assurance, however, that the 30-day HSR Act waiting period will
be terminated early.
ANTITRUST LAWS IN SWITZERLAND
Under Swiss antitrust laws, mergers or acquisitions involving parties with
certain aggregate sales and with individual sales within Switzerland exceeding
certain thresholds require notification to, and approval by, the Swiss
authorities before such mergers or acquisitions are implemented. In this case,
no notification to, or approval by, the Swiss antitrust authorities is required.
ANTITRUST LAWS IN EUROPEAN UNION COUNTRIES
Zimmer and Centerpulse each conduct business in member states of the
European Union, or EU. Council Regulation 4064/89, as amended, requires that the
European Commission be notified and approve certain mergers or acquisitions
involving parties with aggregate worldwide sales and individual EU sales
exceeding certain thresholds before such mergers or acquisitions are
implemented. No notification to, or approval by, the European Commission is
required in connection with our Centerpulse offer as the parties' aggregate
worldwide sales do not exceed the thresholds specified in EU Council Regulation
4064/89, as amended.
Accordingly, the antitrust authorities of certain EU member states may have
jurisdiction to review our proposed acquisition of Centerpulse. Based upon our
examination of publicly available information concerning Centerpulse, we believe
that, within the EU, the antitrust authorities in Austria, France, Germany,
Italy and Spain have jurisdiction to examine our proposed acquisition of
Centerpulse. In Austria, France and Germany, notice of mergers or acquisitions
must be given to the relevant national
70
authorities when the parties have worldwide and national sales exceeding
specified thresholds. In Spain, notice of mergers or acquisitions must be given
to the relevant national authorities when the parties have national sales or
market shares exceeding specified thresholds. In Italy, notice of mergers or
acquisitions must be given to the competent national authority when the parties,
alone and together, have sales in Italy exceeding specified thresholds. In these
five countries, the relevant thresholds for our proposed acquisition of
Centerpulse have been met and the appropriate notifications have been or will be
filed.
Austria
Transactions subject to antitrust notification in Austria must obtain
approval from the Cartel Court before the merger can be implemented. There is no
deadline for filing a merger, but parties generally file as soon as they have a
clear intention to proceed with the transaction. In general merger review in
Phase I takes between five and seven weeks. It takes the Cartel Court
approximately one week to forward the filed documents to the statutory
interveners, namely the Federal Competition Authority and the Federal Cartel
Attorney, by mail. Only the statutory interveners can request an in-depth
investigation by the Cartel Court. They must do so within four weeks after the
receipt of the notification. If they do not request further investigation, the
Cartel Court must clear the transaction without delay after the four-week period
has elapsed. It will take the Cartel Court approximately a further week to issue
the clearance decision and to send it to the notifying party. If the statutory
interveners request a Phase II review, the Cartel Court has five months from the
date of the original filing to issue a decision. If it fails to do so within
that period, the merger is deemed to be cleared. The Cartel Court may prohibit
mergers and acquisitions that create or strengthen a dominant position on the
relevant market. However, expected improvements in competitive conditions that
outweigh the disadvantages of the merger, an enhancement of the international
competitiveness of the undertakings concerned, and general national economic
considerations may weigh in the balance in favour of an otherwise problematic
merger. The Cartel Court may also attach conditions or restrictions to its
clearance decision. The transaction was notified to the Cartel Court on June 2,
2003.
France
As a general rule, transactions subject to antitrust notification in France
are suspended automatically and may not be put into effect until they have been
approved by the national antitrust authorities. The national antitrust
authorities of France have five weeks from the date they receive a complete
notification to approve the proposed transaction or to refer the case for
further review. The five week deadline may be extended by up to three weeks in
cases where the parties offer commitments to address competition concerns
identified by the French authorities, with a view to securing the antitrust
authorities' approval of the proposed transaction. In the event that the case is
referred for further review, a final decision on the proposed transaction must
be made within 19 to 20 weeks following referral of the case for further review.
The national antitrust authorities in France examine notified transactions and
may prohibit mergers and acquisitions that create or strengthen a dominant
position and therefore impede effective competition in the relevant market in
France. As part of this examination, the national antitrust authorities consider
whether any contribution to economic progress outweighs the negative effects of
the merger or acquisition on competition. The French antitrust authorities were
notified of our proposed acquisition of Centerpulse on June 11, 2003.
Germany
Transactions subject to antitrust notification in Germany are suspended
automatically and may not be put into effect until they have been approved by
the national antitrust authority. The national antitrust authority has one month
from the receipt of notification to approve the proposed transaction or to
indicate to the parties that the proposed transaction requires further review.
In cases requiring further review, the national antitrust authority has three
additional months to make a final decision. At the request of the national
antitrust authority and with the parties' consent, the one month and four month
deadlines provided by German antitrust law may be extended by short periods of
time. The national antitrust authority in Germany examines notified transactions
and has the power to prohibit mergers or acquisitions
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that create or strengthen a dominant position, unless the parties can
demonstrate that the merger or acquisition also will result in an improvement in
market conditions that outweighs the disadvantages of market dominance. The
German antitrust authorities were notified of our proposed acquisition of
Centerpulse on May 30, 2003 and the acquisition was cleared on June 11, 2003.
Italy
There is no obligation to suspend a transaction subject to notification in
Italy, provided that notice of the proposed transaction has first been given to
the national antitrust authority. If a transaction that is subject to
notification in Italy is implemented and the transaction is later prohibited,
the national antitrust authorities may require that measures be taken in order
to restore conditions of effective competition (including, for example, the sale
of shares in the target and the sale of businesses owned and operated by the
target). In Italy, the national antitrust authority has 30 days from the date of
its receipt of a complete notification to approve the proposed transaction or to
initiate a second-phase review. In the case of a second-phase review, the
national antitrust authority has 45 days to make a final decision. This 45 day
period may be extended by up to 30 days if the parties fail to supply data and
information in their possession upon the national antitrust authority's request.
In the event that the national antitrust authority decides to initiate a
second-phase review, it also has power to order the parties not to proceed with
the merger or acquisition until such time as the second-phase review is
completed.
The national antitrust authority in Italy examines notified transactions
and has power to prohibit mergers or acquisitions that create or strengthen a
dominant position on the Italian market with the effect of eliminating or
restricting competition appreciably and on a lasting basis.
Spain
Transactions meeting the Spanish thresholds must obtain approval from the
Service for the Defence of Competition, or SDC, prior to implementation. The
Minister of Economy acting through the SDC has one month from notification to
decide whether to refer the transaction to the Court for the Defence of
Competition, or CDC, for a second-stage in-depth investigation. If it does not
do so, the transaction is deemed to be approved, unless the transaction has not
been notified by the parties but is the subject of proceedings initiated by the
SDC on its own initiative. If the CDC conducts a second-stage in-depth
investigation, it has two months from the referral from the Minister to issue a
non-binding report for the Council of Ministers which is the final decision
making body. Once the report is sent to the Council of Ministers, it has one
additional month to take a final decision. If the Council of Ministers does not
issue a decision within the one month period, the transaction is deemed to be
approved. If the Council of Ministers issues a decision, it can be an
unconditional clearance, an approval subject to conditions which contribute to
economic and social progress in a manner which outweighs the restrictive effects
on competition or a prohibition decision where the Council of Ministers rules
that the transaction prevents the maintenance of effective competition in the
market. The Spanish antitrust authorities were notified of our proposed
acquisition of Centerpulse on June 16, 2003.
OTHER JURISDICTIONS
Based upon our examination of publicly available information concerning
Centerpulse, it appears that Zimmer and Centerpulse and their subsidiaries own
property and/or conduct business in a number of foreign countries (including
other countries in the EU) in addition to those described above. In connection
with the acquisition of Centerpulse securities pursuant to our Centerpulse
offer, the laws of certain of these foreign countries require or advise the
filing of information with, or the obtaining of approval of, their respective
governmental authorities. In this regard, Zimmer intends to make filings with
the national competition authorities in the Czech Republic.
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Czech Republic
Under Czech antitrust laws, in the case of a public bid, it is lawful to
acquire shares in the target before a final decision approving the transaction
is made. It is unlawful, however, for the purchaser to determine or influence
the competitive behavior of the target, in particular by exercising voting
rights attaching to any shares acquired before the transaction has been approved
by the national antitrust authority. In the Czech Republic, in the case of a
public bid, the notification must be filed before the offer is published. The
national antitrust authority has 30 days from its receipt of the notification to
approve the proposed transaction or to initiate a second-phase inquiry. In the
event that a second-phase inquiry is initiated, and in the case of a public bid,
a final decision must be made within two months of receipt of the original
notification. The national antitrust authority in the Czech Republic examines
notified transactions and may prohibit mergers or acquisitions that
significantly impede competition in the relevant market. As required by Czech
law, the notification of our proposed acquisition of Centerpulse was filed on
June 16, 2003.
GENERAL
Based on our examination of publicly available information concerning
InCentive, we are not aware of:
- any governmental license or regulatory permit that appears to be material
to InCentive's business that might be adversely affected by our
acquisition of InCentive bearer shares contemplated in our offer;
- any approval or other action by any government or governmental
administrative or regulatory authority or agency, domestic or foreign,
that would be required for the acquisition or ownership of InCentive
bearer shares by us as contemplated in our offer; or
- any approval or other action by any government or governmental
administrative regulatory authority or agency, domestic or foreign, or
any consent, waiver or other approval that would be required as a result
of or in connection with our offer.
Should any such approval or other action be required, we currently intend
to seek such approval or take such other action. However, any such required
approval or other action could impose conditions on the consummation of our
offer or otherwise require changes to the terms of our offer, which could result
in conditions to our offer not being satisfied. For more information about the
conditions to our offer, see the section captioned "-- Conditions of Our Offer."
We cannot predict whether we would be required to delay the acceptance for
payment of, or payment for, InCentive bearer shares tendered pursuant to our
offer pending the outcome of any such matter. We can give no assurance that we
would be able to obtain any such approval or take other action, if needed.
ACTIONS OF ZIMMER STOCKHOLDERS
The issuance of shares of our common stock in connection with our offer and
our Centerpulse offer is subject to the approval of our stockholders. A special
meeting of our stockholders is scheduled to be held on or about July 22, 2003 to
vote on this matter. Our stockholder approval on this matter is a condition to
our obligation to consummate our Centerpulse offer. In turn, our offer is
conditioned upon the satisfaction, or our waiver, of the conditions of our
Centerpulse offer. See the section captioned "-- Conditions of Our
Offer -- Centerpulse Offer Conditions Satisfied Condition." There can be no
assurance that this approval will be obtained. If our stockholders approve the
issuance of our common stock, no further stockholder approval will be required
in relation to our offer or our Centerpulse offer.
RELATIONSHIPS WITH INCENTIVE
Except as set forth in this prospectus, neither we nor, to the best of our
knowledge, any of our directors, executive officers or other affiliates has any
contract, arrangement, understanding or relationship with any other person with
respect to any securities of InCentive, including, but not limited to, any
73
contract, arrangement, understanding or relationship concerning the transfer or
the voting of any securities, joint ventures, loan or option arrangements, puts
or calls, guaranties of loans, guaranties against loss or the giving or
withholding of proxies. Except as described in this prospectus, there have been
no contacts, negotiations or transactions since June 16, 2001 between us or, to
the best of our knowledge, any of our directors, executive officers or other
affiliates on the one hand, and InCentive or its affiliates, on the other hand,
concerning a merger, consolidation or acquisition, a tender offer or other
acquisition of securities, an election of directors, or a sale or other transfer
of a material amount of assets. Neither we, nor, to the best of our knowledge,
any of our directors, executive officers or other affiliates has since June 16,
2001, had any transaction with InCentive or any of its executive officers,
directors or affiliates that would require disclosure under the rules and
regulations of the SEC applicable to our offer.
As of the date of this prospectus, we do not beneficially own any InCentive
bearer shares and, to the best of our knowledge, no director or executive
officer of Zimmer owns any InCentive bearer shares.
SOURCE AND AMOUNT OF FUNDS
In connection with the cash portion of the consideration payable pursuant
to our offer and our Centerpulse offer, Zimmer has entered into the following
credit agreements: (i) a 364-day revolving credit agreement dated June 12, 2003
by and among Zimmer, JPMorgan Chase Bank, as administrative agent, the lenders
and certain other parties thereto, collectively referred to as the credit
facility parties, and (ii) a revolving credit and term loan agreement dated June
12, 2003 by and among the credit facility parties. Pursuant to the credit
agreements, the lenders are providing Zimmer with senior unsecured credit
facilities, or the facilities, in an aggregate principal amount of up to
US$1,750 million. It is currently anticipated that the facilities will be
comprised of (i) a 364-day revolving credit and competitive advance facility in
an aggregate principal amount of US$400 million, (ii) a three-year revolving
credit and competitive advance facility in an aggregate principal amount of
US$800 million and (iii) a five-year term loan facility in an aggregate
principal amount of US$550 million.
The lenders' commitments under the 364-day facility will expire and the
borrowings thereunder will mature 364 days after the date of the signing of such
facility. Zimmer may elect to convert revolving credit loans outstanding under
the 364-day facility on the termination thereof to a term loan which will be
repayable in a single payment one year after the termination of the 364-day
facility. The lenders' commitments under the three-year facility expire and the
borrowings thereunder will mature on the third anniversary of the signing
thereof. The full amount of the five-year term facility must be drawn in a
single drawing on the date of the initial borrowing thereunder. The five-year
term facility matures on the fifth anniversary of the signing of such facility
and amortizes in equal quarterly installments in aggregate annual amounts equal
to US$50 million, US$150 million and US$350 million, payable in the third,
fourth and fifth years of the term, respectively.
The proceeds of loans under the facilities will be used by Zimmer, on the
date of the initial borrowing thereunder, to pay the cash consideration payable
in our offer and our Centerpulse offer, to refinance the existing debt of
Centerpulse, to repay in full all amounts under the existing Zimmer credit
agreement and to pay transaction costs. Thereafter, the proceeds of loans under
the revolving credit facilities may be used for working capital and other
general corporate purposes.
FEES AND EXPENSES
Except as set forth in this section, we will not pay any fees or
commissions to any broker, dealer or other person for soliciting tenders of
InCentive bearer shares pursuant to our offer.
Credit Suisse First Boston, a Swiss bank, is acting as Swiss offer manager
in connection with our offer and our Centerpulse offer. Credit Suisse First
Boston LLC, an affiliate of Credit Suisse First Boston, is acting as dealer
manager in connection with our Centerpulse offer and as financial advisor to us
in connection with our proposed acquisitions of Centerpulse and InCentive.
Credit Suisse First Boston, acting through its Cayman Islands branch, also is
acting as a lender to Zimmer in connection with the financing of the cash
portion of the consideration to be paid in our offer and our Centerpulse offer.
Credit Suisse
74
First Boston and Credit Suisse First Boston LLC will receive customary
compensation for acting in the foregoing capacities. We also have agreed to
reimburse Credit Suisse First Boston Credit Suisse First Boston LLC for their
out-of-pocket expenses, including the fees and expenses of legal counsel and
other advisors, incurred in connection with their respective engagements, and to
indemnify Credit Suisse First Boston, Credit Suisse First Boston LLC and certain
related persons against certain liabilities and expenses in connection with
their respective engagements, including certain liabilities under U.S. federal
securities laws. In the ordinary course of business, Credit Suisse First Boston
and its affiliates may actively trade the securities of InCentive for their own
account and for the accounts of customers, and accordingly, may at any time hold
a long or short position in such securities.
ACCOUNTING TREATMENT
The acquisition of InCentive bearer shares acquired in our offer will be
accounted for under the purchase method of accounting under U.S. GAAP, which
means that InCentive's results of operations will effectively be included with
ours from the closing date and its consolidated assets and liabilities will be
recorded at their fair values at the same time (except for the minority
interest, if any, in the assets and liabilities which will remain at historical
cost) with the excess, if any, allocated to goodwill.
Operating results for InCentive for the year ended December 31, 2002 and
for the three months ended March 31, 2003 and its net assets at that date have
been excluded from the pro forma financial information. The purchase price for
InCentive is inclusive of an offer for Centerpulse registered shares held by
InCentive equivalent in all respects to our offer for Centerpulse registered
shares plus cash for the value of InCentive's other holdings, which are expected
to be monetized prior to completion of our offer for InCentive. Accordingly, at
the time of the acquisition it is expected that the InCentive balance sheet will
consist of Centerpulse shares already contemplated by the Centerpulse offer and
the incremental purchase price to be paid for InCentive should be equal to the
net cash acquired with InCentive and there should be no net effect on the net
assets of the combined company.
STOCK EXCHANGE LISTING
Shares of Zimmer common stock are listed on the New York Stock Exchange. We
intend to make applications to list the shares of Zimmer common stock we will
issue in our offer and our Centerpulse offer on the SWX Swiss Exchange and on
the New York Stock Exchange.
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THE CENTERPULSE OFFER
TERMS OF OUR CENTERPULSE OFFER
In our Centerpulse offer, we will offer to exchange:
- In respect of each Centerpulse registered share that is validly tendered
and not properly withdrawn:
-- 3.68 shares of Zimmer common stock; and
-- CHF 120 in cash, without interest; and
- In respect of each Centerpulse ADS that is validly tendered and not
properly withdrawn:
-- 0.368 of a share of Zimmer common stock; and
-- the U.S. dollar equivalent of CHF 12 in cash, without interest.
The number of shares of Zimmer common stock issued in exchange for each
Centerpulse registered share and Centerpulse ADS is fixed and will not change
between now and the time our Centerpulse offer is consummated, subject to a mix
and match feature in our Centerpulse offer that is identical to that offered in
our offer, whereby holders of Centerpulse registered shares and Centerpulse ADSs
may elect to receive more or fewer shares of Zimmer common stock to the extent
that other holders of Centerpulse registered shares and Centerpulse ADSs or
Incentive shareholders make off-setting elections.
CONDITIONS OF OUR CENTERPULSE OFFER
Notwithstanding any other provisions of our Centerpulse offer, we will not
be required to accept for exchange and, subject to any applicable Swiss law and
rules and regulations of the SEC, we may postpone the acceptance for exchange
of, or exchange for, tendered Centerpulse registered shares and Centerpulse
ADSs, and may, in our reasonable judgment, extend, terminate or amend our
Centerpulse offer as to any Centerpulse registered shares or Centerpulse ADSs
not then accepted for exchange if in our reasonable judgment the following
conditions have not been satisfied on or before the date of expiration of our
Centerpulse offer.
STOCKHOLDER APPROVAL CONDITION
Zimmer must have received the requisite vote of its stockholders to approve
the issuance of the shares of Zimmer common stock pursuant to our Centerpulse
offer and our offer.
STOCK EXCHANGE LISTING CONDITION
The shares of Zimmer common stock issuable upon consummation of our
Centerpulse offer and our offer must have been approved for listing on the New
York Stock Exchange.
ANTITRUST CONDITION
All competent European Union, U.S. and other foreign authorities having
approved and/or granted clearance of the acquisition of Centerpulse without a
party being required to meet any condition or requirement giving rise to: (i)
costs and/or loss of earnings before interest, tax and amortization, or EBITA,
in excess of CHF 23 million in the aggregate; or (ii) a decrease in consolidated
turnover of CHF 75 million in the aggregate of Zimmer, after giving effect to
our Centerpulse offer and our offer. In addition, no other orders or directions
by any court or other authority prohibiting the consummation of our Centerpulse
offer and our offer will have been issued.
REGISTRATION EFFECTIVENESS CONDITION
The registration statement on Form S-4 filed by Zimmer with the SEC in
connection with our Centerpulse offer having become effective in accordance with
the provisions of the Securities Act; no stop
76
order suspending the effectiveness of the registration statement having been
issued by the SEC and no proceedings for that purpose having been initiated by
the SEC and not concluded or withdrawn.
MINIMUM TENDER CONDITION
Zimmer having received valid acceptances for at least 66 2/3% of the total
number of the Centerpulse registered shares outstanding (including Centerpulse
registered shares represented by Centerpulse ADSs and, provided our offer for
all the issued and outstanding InCentive bearer has become unconditional,
Centerpulse registered shares held by InCentive) on a fully diluted basis at the
expiration of the offer period for our Centerpulse offer. If, at or prior to the
expiration of the offer period for our Centerpulse offer, Zimmer shall have
waived this condition, Zimmer shall also waive the condition entitled "Removal
of Centerpulse Board Condition."
REMOVAL OF CENTERPULSE BOARD CONDITION
Each person who is a member of the board of directors of Centerpulse having
delivered, at or prior to the expiration of the offer period for our Centerpulse
offer, a validly executed undertaking to Zimmer (i) agreeing, contingent upon
Zimmer having received valid acceptances for at least 66 2/3% of the total
number of Centerpulse registered shares outstanding (including registered shares
represented by Centerpulse ADSs and, provided our offer has become
unconditional, registered shares held by InCentive) on a fully-diluted basis at
the expiration of the offer period for our Centerpulse offer, to take, or cause
to be taken, as soon as possible after our Centerpulse offer has been declared
unconditional, all actions necessary to convene a shareholders meeting of
Centerpulse to be held as soon as possible following the consummation of our
Centerpulse offer with the sole agenda item being "removal of existing board
members and election of new board members" and to propose that all of the
persons who are members of the board of directors of Centerpulse on the date of
the Centerpulse shareholders meeting be removed and immediately replaced by the
individuals designated by Zimmer, and (ii) agreeing, contingent upon Zimmer
having received valid acceptances for at least 66 2/3% of the total number of
Centerpulse registered shares outstanding (including registered shares
represented by Centerpulse ADSs and, provided our offer has become
unconditional, registered shares held by InCentive) on a fully-diluted basis at
the expiration of the offer period for our Centerpulse offer, to take, or cause
to be taken, all actions necessary to ensure, for the period from the time our
Centerpulse offer has been declared unconditional until such time as all of the
Zimmer designees to the board of directors of Centerpulse take office, that
neither Centerpulse nor any of its directors, officers or employees take any of
the following actions (except (x) with the prior written consent of Zimmer,
which consent shall not be unreasonably withheld, or (y) if required by
applicable law):
(A) sell, lease, transfer, encumber or pledge any of the assets of
Centerpulse or its affiliates with a value of CHF 100,000 or greater;
(B) enter into, materially amend or terminate any agreement with respect to
Centerpulse or its affiliates involving a commitment of CHF 100,000 or
greater or having a term that extends beyond December 31, 2003;
(C) amend or propose to amend, or otherwise change the articles of
association of Centerpulse or equivalent organizational documents of
affiliates of Centerpulse, or take any action with respect to such
amendment or any recapitalization, reorganization, liquidation or
dissolution of any such entity;
(D) authorize, issue, sell, pledge, dispose of, grant or encumber capital
stock or other ownership interest in Centerpulse or any of its
affiliates, or any options, warrants, convertible or exchangeable
securities or other rights of any kind to acquire capital stock or
other ownership interests in Centerpulse or any of its affiliates;
(E) acquire, sell or make any capital contribution to or investment in any
other corporation, partnership or other business organization or any
division thereof or enter into any agreement
77
with any affiliate or third party involving a merger, purchase, sale,
recapitalization or other business combination with an aggregate value
of CHF 100,000 or greater;
(F) enter into any employment, consulting, charge in control or severance
agreement with any director, officer, employee or consultant of
Centerpulse or its affiliates, or otherwise bind Centerpulse or any of
its affiliates to establish, adopt or enter into any collective
bargaining, compensation, bonus, stock option, pension, termination,
severance or other employee or fringe benefit plan or agreement or any
other arrangement for the benefit of any director, officer, employee or
consultant of Centerpulse or any of its affiliates;
(G) declare, or propose to declare or pay any dividends on, or make any
other distributions (whether in cash, securities or other property) in
respect of, any of the outstanding capital securities of Centerpulse or
any of its affiliates;
(H) waive any claims or rights of Centerpulse or any of its affiliates or
otherwise relating to the properties, assets, liabilities or businesses
with a value of CHF 100,000 or greater;
(I) amend, renew, fail to maintain or cancel any liability or insurance
policies related to Centerpulse or any of its affiliates or any of
their respective properties or assets;
(J) effectuate a facility closing or layoff of 10 or more employees of
Centerpulse or its affiliates; or
(K) settle or compromise any pending or threatened suit, action or claim
for CHF 100,000 or greater in any way involving or otherwise relating,
directly or indirectly, to Centerpulse or its affiliates or their
respective assets, liabilities, business or employees.
This condition will be deemed to have been satisfied, if all members of the
board of directors of Centerpulse have delivered the undertaking described above
other than those directors who have not received a confirmation of Zimmer that
it will hold harmless such directors in respect of any liability incurred as a
consequence of complying with the above described undertaking.
NO MATERIAL ADVERSE CHANGE CONDITION
Centerpulse, until the end of the offer period for our Centerpulse offer,
not having:
- become subject to a mandated recall for a product, the consolidated
turnover of which product family exceeded CHF 75 million in Centerpulse's
consolidated prior year results and such recall having resulted, or,
according to the opinion of an investment bank or accounting firm of
international repute to be appointed by Zimmer, referred to as the
expert, likely to result, in costs and/or loss of EBITA (after insurance
payable to Centerpulse) in excess of CHF 23 million; or
- suffered a disablement of its manufacturing facilities in Winterthur,
Switzerland or Austin, Texas, having resulted, or, according to the
opinion of the expert, likely to result, in costs and/or loss of EBITA
(after insurance payable to Centerpulse) in excess of CHF 23 million.
We reserve the right to waive one or more of the conditions set forth above
(except for the conditions relating to Zimmer stockholder approval and stock
exchange listing), either in whole or in part, and to withdraw our Centerpulse
offer if one or more of the above conditions is not met.
78
SMITH & NEPHEW GROUP OFFERS FOR INCENTIVE AND CENTERPULSE
On April 25, 2003, Smith & Nephew Group plc, parent of Smith & Nephew plc,
a company incorporated under the laws of England and Wales, commenced exchange
offers to acquire all of the outstanding share capital of InCentive and
Centerpulse, referred to as the Smith & Nephew Group offers. Our offer and our
Centerpulse offer constitute competing offers. The terms of the Smith & Nephew
Group offers permit holders of InCentive bearer shares, Centerpulse registered
shares and Centerpulse ADSs to withdraw their shares or ADSs from the Smith &
Nephew Group offers, if already tendered, and tender into our offer and our
Centerpulse offer, as the case may be. Pursuant to agreements relating to the
Smith & Nephew Group offers, under certain circumstances, including if our offer
and our Centerpulse offer are successful, Centerpulse and InCentive could be
obligated to pay Smith & Nephew Group CHF 20.0 million and CHF 4.0 million,
respectively. In connection with its parallel offers, Smith & Nephew entered
into the following agreements:
COMBINATION AGREEMENT
On March 20, 2003, Smith & Nephew Group and Smith & Nephew entered into a
combination agreement with Centerpulse whereby the parties made certain
arrangements in connection with the Smith & Nephew Group offer for all
outstanding registered shares of Centerpulse. Pursuant to the terms of the
combination agreement, Centerpulse agreed to, among other things, immediately
cease, and not to solicit or initiate, any discussions or negotiations with any
entity (other than Smith & Nephew or its affiliates) concerning any merger,
consolidation, business combination, liquidation, reorganization or sale of
assets or shares or similar transaction involving Centerpulse or any subsidiary
of Centerpulse, other than the taking of a position by Centerpulse's board of
directors and disclosing such position to its shareholders, third parties or
governmental or regulatory bodies in respect of transactions initiated by third
parties or such disclosure to Centerpulse's shareholders or any third party or
governmental or regulatory bodies which, as advised by outside counsel, is
advisable under applicable law.
TRANSACTION AGREEMENT
On March 20, 2003, InCentive entered into a transaction agreement with
Smith & Nephew Group and Smith & Nephew. Under the terms of that transaction
agreement, InCentive is obligated to dispose of its investments other than
Centerpulse registered shares, so that, were Smith & Nephew Group's offer for
InCentive bearer shares to reach completion, InCentive's assets at that time
would consist only of Centerpulse registered shares and cash. Pursuant to the
terms of the transaction agreement, InCentive agreed to, among other things,
immediately cease, and not to solicit or initiate, any discussions or
negotiations with any entity (other than Smith & Nephew or its affiliates)
concerning any merger, consolidation, business combination, liquidation,
reorganization or sale of assets or shares or similar transaction involving
InCentive or any subsidiary of InCentive, other than the taking of a position by
InCentive's board of directors and disclosing such position to its shareholders,
third parties or governmental or regulatory bodies in respect of transactions
initiated by third parties or such disclosures to InCentive's shareholders or
any third party or governmental or regulatory bodies which, as advised by
outside counsel, is advisable under applicable law.
TENDER AGREEMENT
On March 20, 2003, Smith & Nephew Group and Smith & Nephew also entered
into a tender agreement with Rene Braginsky, Hans Kaiser, "Zurich"
Versicherungs-Gesellschaft and III Institutional Investors International Corp.,
who collectively hold approximately 77% of InCentive's issued share capital.
Pursuant to that tender agreement, InCentive shareholders party to the tender
agreement agreed, among other things:
- not to acquire any Smith & Nephew Group shares or Smith & Nephew shares
or rights to acquire Smith & Nephew Group shares or Smith & Nephew shares
until six months after the end of the subsequent offering period without
Smith & Nephew Group or Smith & Nephew's consent, unless
79
Smith & Nephew Group's offer for InCentive bearer shares has previously
failed, except that acquisitions or sales on account of third parties in
respect of asset management agreements shall be permitted;
- to cease, and not to solicit or initiate, any discussions or negotiations
with any entity (other than Smith & Nephew or its affiliates) concerning
any merger, consolidation, business combination, liquidation,
reorganization or sale of assets or shares or similar transaction
involving InCentive or any subsidiary of InCentive other than the taking
of a position by InCentive's board of directors and disclosing such
position to its shareholders, third parties or governmental or regulatory
bodies in respect of transactions initiated by third parties or such
disclosures to InCentive's shareholders or any third party or
governmental or regulatory bodies which, as advised by outside counsel,
is advisable under applicable law;
- to indemnify Smith & Nephew Group or Smith & Nephew for any loss
resulting from an acquisition by InCentive shareholders party to the
tender agreement of InCentive bearer shares or Centerpulse registered
shares which would cause Smith & Nephew Group or Smith & Nephew to be
obligated under Swiss law to increase the offer price under Smith &
Nephew Group's offer for InCentive bearer shares or its offer for
Centerpulse registered shares and Centerpulse ADSs; and
- to not be entitled to withdraw any InCentive bearer shares tendered by
them in Smith & Nephew Group's offer for InCentive bearer shares, unless
Smith & Nephew Group announces its offer for InCentive bearer shares or
Centerpulse registered shares and Centerpulse ADSs has failed for reasons
other than a competing offer for InCentive bearer shares or Centerpulse
registered shares and Centerpulse ADSs.
The tender agreement further provides in the event that a competing offer
for InCentive bearer shares and/or Centerpulse registered shares and Centerpulse
ADSs is made which has a higher economic value than the consideration offered by
Smith & Nephew, and the competing offer has become or been declared
unconditional, the tender agreement provides that Smith & Nephew may (i) declare
its exchange offer for InCentive unconditional (in which case InCentive's net
asset value shall be calculated on the basis of the consideration offered by the
competing offer) or (ii) permit InCentive to tender its Centerpulse registered
shares into the competing offer for Centerpulse registered shares and
Centerpulse ADSs during the statutory extension period. On June 11, 2003, the
Swiss Takeover Board issued recommendations in connection with our offer and our
Centerpulse offer which, among other things, held that the limitations on
withdrawal rights of the InCentive shareholders party to the tender agreement
were invalid.
COMMENCEMENT OF SMITH & NEPHEW GROUP OFFERS
On April 25, 2003, Smith & Nephew Group commenced a public tender offer for
all of the outstanding Centerpulse registered shares and Centerpulse ADSs
pursuant to which Smith & Nephew Group has offered 25.15 new Smith & Nephew
Group shares and CHF 73.42 in cash in respect of each Centerpulse registered
share, or 0.2515 new Smith & Nephew Group ADSs and the U.S. dollar equivalent of
CHF 7.34 in cash for each Centerpulse ADS. Based on the closing price of Smith &
Nephew ordinary shares on the London Stock Exchange on June 16, 2003 of L3.7525
and the exchange rate for English pounds on such date of CHF 2.1875 = L1.00, the
Smith & Nephew Group exchange offer values each Centerpulse registered share at
CHF 280. In parallel, Smith & Nephew Group commenced a public tender offer for
all outstanding bearer shares of InCentive whereby Smith & Nephew Group offered
that fraction of consideration equal to the corresponding economic value that
one InCentive bearer share represents relative to one Centerpulse registered
share, plus or minus the per share value of net cash left in InCentive.
80
MARKET PRICE AND DIVIDEND MATTERS
MARKET PRICE HISTORY
Zimmer common stock is listed and traded on the New York Stock Exchange and
is quoted under the symbol "ZMH," InCentive bearer shares are listed and traded
on the SWX Swiss Exchange and are quoted under the symbol "INC." The following
table sets forth, for the periods indicated, as reported by the New York Stock
Exchange and SWX Swiss Exchange, the high and low last reported closing prices
per share of each company's security as reported and the per share cash
dividends declared for such securities.
<Table>
<Caption>
ZIMMER COMMON STOCK INCENTIVE BEARER SHARES
SALES PRICE SALES PRICE
--------------------------- ---------------------------
HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
------ ------ --------- ------ ------ ---------
US$ US$ US$ CHF CHF CHF
2001
First Quarter.......................... N/A N/A -- 489 455 --
Second Quarter......................... N/A N/A -- 465 340 --
Third Quarter.......................... 30.50 24.70 -- 351 240 --
Fourth Quarter......................... 33.30 27.50 -- 266 232 --
2002
First Quarter.......................... 36.36 29.55 -- 300 260 --
Second Quarter......................... 36.34 30.90 -- 330 285 --
Third Quarter.......................... 39.46 29.37 -- 310 250 --
Fourth Quarter......................... 42.60 37.46 -- 340 280 --
2003
First Quarter.......................... 49.90 38.02 -- 340 300 --
Second Quarter (through June 16,
2003)................................ 49.58 41.20 -- 400 319 --
</Table>
On May 19, 2003, which was the last trading day in the United States prior
to our announcement of our intention to commence with our offer, the per share
closing price of our common stock was US$48.28 per share and the per share
closing price of InCentive bearer shares was CHF 292 per share. On June 16,
2003, the most recent practicable date prior to the mailing of this prospectus
to you, the per share closing price of our common stock was US$47.19 per share
and the per share closing price of InCentive bearer shares was CHF 385 per
share.
We encourage you to obtain current market quotations for Zimmer common
stock and InCentive bearer shares. For information about U.S. dollar / Swiss
franc exchange rates, see the section captioned "OUR OFFER -- Currency Exchange
Rates."
81
AVERAGE TRADING VOLUME
(IN THOUSANDS)
<Table>
<Caption>
ZIMMER INCENTIVE
COMMON STOCK BEARER SHARES
------------ -------------
2001
First Quarter............................................... NA 0.3
Second Quarter.............................................. NA 0.2
Third Quarter............................................... 2,150 0.2
Fourth Quarter.............................................. 901 3.7
2002
First Quarter............................................... 765 0.2
Second Quarter.............................................. 650 0.3
Third Quarter............................................... 1,164 0.2
Fourth Quarter.............................................. 1,273 0.9
2003
First Quarter............................................... 1,211 0.3
Second Quarter (through June 16, 2003)...................... 2,048 0.1
</Table>
We intend to make applications as necessary to list on the SWX Swiss
Exchange and New York Stock Exchange the shares that we will issue and exchange
pursuant to our offer and our Centerpulse offer.
DIVIDEND INFORMATION
ZIMMER
Zimmer has not declared or paid dividends on its common stock since
becoming a public company on August 6, 2001. Currently, Zimmer does not
anticipate paying any cash dividends on its common stock in the foreseeable
future. The credit facilities Zimmer entered into on June 12, 2003 described in
this prospectus contain restrictions on Zimmer's ability to make dividend
payments under certain circumstances. On June 16, 2003, there were approximately
54,213 holders of record of Zimmer common stock, including brokerage firms
holding Zimmer common stock in "street name" and other nominees.
INCENTIVE
InCentive bearer shares began trading on the SWX Swiss Exchange in November
2000. Because InCentive has not provided Zimmer or its representatives access to
any of its business or financial information and InCentive's publicly available
information contains no data regarding InCentive's dividend policy, no InCentive
dividend information is provided herein.
82
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following sets forth pro forma condensed combined financial information
(i) derived from the audited consolidated financial statements of Zimmer for the
fiscal year ended December 31, 2002 and the unaudited consolidated interim
financial statements of Zimmer for the period ended March 31, 2003 and (ii)
derived from the audited consolidated financial statements of Centerpulse for
the fiscal year ended December 31, 2002 and the unaudited interim consolidated
financial statements of Centerpulse for the period ended March 31, 2003, in each
case included elsewhere in this prospectus, and is qualified in its entirety by
such statements. Certain amounts in Centerpulse's financial statements have been
reclassified to conform to the presentation in Zimmer's financial statements.
Centerpulse's consolidated financial statements from which these pro forma
financial statements are derived are prepared in accordance with IFRS, which
differ in certain material respects from U.S. GAAP. In preparing the pro forma
information for the year ended December 31, 2002, Zimmer relied upon the
reconciliation from IFRS to U.S. GAAP that was included in note 31 of
Centerpulse's 2002 audited consolidated financial statements. Centerpulse issued
financial information for the period ended March 31, 2003 under IFRS, which was
included on Form 6-K. However, this quarterly information did not include
information relating to U.S. GAAP. To present pro forma information as of and
for the period ended March 31, 2003, Zimmer obtained the necessary adjustments
to convert the financial information of Centerpulse from IFRS to U.S. GAAP based
upon information obtained from Centerpulse as part of our due diligence review.
The following pro forma financial information is presented for illustrative
purposes only and is not necessarily indicative of (i) results of operations and
financial position that would have been achieved had the consummation of our
offer and our Centerpulse offer taken place on the dates indicated or (ii) the
future operations of the combined company. The following table should be relied
on only for the limited purpose of presenting what the results of operations and
financial position of the combined businesses of Zimmer and Centerpulse might
have looked like had our offer and our Centerpulse offer taken place at an
earlier date. You can find more information about our offer and our Centerpulse
offer under the sections captioned "OUR OFFER" and "THE CENTERPULSE OFFER."
The acquisition of Centerpulse will be accounted for as a purchase under
U.S. GAAP. Cost will be determined on the basis of cash paid plus the fair value
of Zimmer shares exchanged and stock options assumed. With respect to the
latter, this will be determined on the acquisition date. For the purpose of
determining cost for the pro forma information below, we have used the closing
price of Zimmer common stock on the NYSE on June 16, 2003 of US$47.19 and the
noon buying rate for Swiss francs on such date of CHF 1.3009 = US$1.00.
The cost of an acquired entity in a purchase business combination is
allocated to the assets acquired and liabilities assumed based on their
estimated fair values at the date of acquisition under U.S. GAAP. The following
pro forma financial information includes a preliminary allocation of the
estimated purchase price to the net assets of Centerpulse based on publicly
available information and management's general knowledge of Centerpulse's
business and the orthopaedic market. Actual amounts, determined on the basis of
more detailed information, will differ from the amounts reflected below.
The costs and related synergistic effect of integrating Zimmer and
Centerpulse's businesses are not reflected in the pro forma financial
information below. The timing and effect of actions associated with integration
are as yet uncertain. However, costs as further described in the Notes to the
Unaudited Pro Forma Condensed Combined Statement of Earnings and related savings
are expected to be significant.
Operating results for InCentive for the year ended December 31, 2002 and
for the three months ended March 31, 2003 and its net assets at that date have
been excluded from the pro forma financial information. The purchase price for
InCentive is inclusive of an offer for Centerpulse registered shares held by
InCentive equivalent in all respects to our offer for Centerpulse shares plus
cash for the value of InCentive's other holdings, which are expected to be
monetized prior to completion of our tender for InCentive. Accordingly, at the
time of the acquisition, it is expected that the InCentive balance sheet will
83
consist of Centerpulse registered shares already contemplated by our Centerpulse
offer and cash and the incremental purchase price to be paid for InCentive will
be equal to the cash acquired with InCentive and there will be no net effect on
the net assets of the combined company.
The following pro forma financial information should be read in conjunction
with:
- the accompanying notes to the Unaudited Pro Forma Condensed Combined
Financial Statements;
- financial statements of Zimmer for the year ended December 31, 2002 and
for the three-month period ended March 31, 2003 and the notes relating
thereto, included elsewhere in this prospectus; and
- financial statements of Centerpulse for the fiscal year ended December
31, 2002 and for the three-month period ended March 31, 2003, and the
notes relating thereto, included elsewhere in this prospectus.
84
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 2002
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
ZIMMER AND CENTERPULSE
-------------------------
PRO FORMA
ZIMMER CENTERPULSE(A) ADJUSTMENTS COMBINED(G)
------ -------------- ----------- -----------
NET SALES...................................... $1,372 $796 $ -- $2,168
Cost of products sold.......................... 344 236 32(b) 612
------ ---- ----- ------
GROSS PROFIT................................... 1,028 560 (32) 1,556
Research and development....................... 81 47 -- 128
Selling, general and administrative............ 546 402 (5)(c) 943
------ ---- ----- ------
Operating expenses............................. 627 449 (5) 1,071
OPERATING PROFIT............................... 401 111 (27) 485
Interest expense, net.......................... 12 16 44(d) 72
------ ---- ----- ------
Earnings before income taxes and minority
interests.................................... 389 95 (71) 413
Provision for income taxes..................... 131 17 (23)(e) 125
------ ---- ----- ------
Net earnings before minority interests......... 258 78 (48) 288
Minority interests............................. -- 1 -- 1
------ ---- ----- ------
NET EARNINGS................................... $ 258 $ 77 $ (48) $ 287
====== ==== ===== ======
EARNINGS PER COMMON SHARE
Basic........................................ $ 1.33 $ 1.20
Diluted...................................... $ 1.31 $ 1.19
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic........................................ 194.5 43.8(f) 238.3
Diluted...................................... 196.8 44.7(f) 241.5
</Table>
See notes to unaudited pro forma condensed combined financial statements.
85
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 2002
Centerpulse amounts have been translated into U.S. dollars at a rate of CHF 1.56
= US$1.00, the average exchange rate for the year ended December 31, 2002, as
disclosed in the explanatory notes to Centerpulse's Annual Report on Form 20-F
for the fiscal year ended December 31, 2002.
U.S. GAAP AND CONFORMING ACCOUNTING POLICY ADJUSTMENTS
(a) Centerpulse's consolidated financial statements are prepared in
accordance with IFRS, which differ, in certain material respects from U.S. GAAP.
In addition, Centerpulse has adopted certain accounting policies that differ
from Zimmer. The following schedule summarizes the necessary adjustments which
were estimated based upon information obtained from the audited consolidated
financial statements of Centerpulse contained in the Annual Report on Form 20-F
for the fiscal year ended December 31, 2002, publicly available information and
information obtained from Centerpulse as part of our due diligence review. See
the section captioned "NOTE ON INCENTIVE AND CENTERPULSE INFORMATION" and note
31 to the audited consolidated 2002 financial statements of Centerpulse for a
discussion of the significant differences between IFRS and U.S. GAAP. Certain of
the conforming reclassification adjustments were derived from Centerpulse's
disclosure of significant accounting policies, related notes, transcripts of
quarterly conference calls and information obtained during due diligence. Other
conforming adjustments may be necessary after Zimmer is able to gain additional
access to the detailed accounting records of Centerpulse.
<Table>
<Caption>
CENTERPULSE
CONFORMING
CENTERPULSE ACCOUNTING
CONTINUING AND U.S. GAAP CENTERPULSE CENTERPULSE
OPERATIONS(I) ADJUSTMENTS ADJUSTED ADJUSTED
------------------------------------------- ------------------
(IN MILLIONS CHF) (IN MILLIONS US$)
Net sales.............................. 1,241 -- 1,241 $796
Cost of product sold................... 402 (34)(ii) 368 236
----- --- ----- ----
Gross profit........................... 839 34 873 560
Research and development............... 73 -- 73 47
Selling, general and administrative.... 539 88 (iii 627 402
Other operating income................. 1 (1)(iii) -- --
Goodwill amortization.................. 43 (43)(iii) -- --
Exceptional operating items............ 9 (9)(iii) -- --
----- --- ----- ----
Operating income....................... 176 (3) 173 111
Interest expense, net.................. 24 1(iv) 25 16
Other non-operating expense............ 1 (1)(iv) -- --
----- --- ----- ----
Income before taxes.................... 151 (3) 148 95
Income taxes........................... 27 --(v) 27 17
----- --- ----- ----
Net income before minority interests... 124 (3) 121 78
Minority interests..................... 2 -- 2 1
----- --- ----- ----
Net income............................. 122 (3) 119 $ 77
===== === ===== ====
</Table>
- ---------------
Unless otherwise indicated, the following adjustments were extracted from note
31 of Centerpulse's 2002 audited consolidated financial statements.
86
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF EARNINGS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 2002
<Table>
<Caption>
(i) Centerpulse consolidated net income from continuing operations obtained from
note 11 of Centerpulse's 2002 audited consolidated financial statements.
<Caption>
(IN MILLIONS CHF)
-----------------
(ii) Approximately one-half employee benefit expense U.S. GAAP
adjustment (allocation based on estimated headcount
split)...................................................... 12
Approximately one-half option re-pricing expense U.S. GAAP
adjustment (allocation based on estimated headcount
split)...................................................... 8
Re-classification of insurance expense to SG&A to conform
with Zimmer statement of earnings classification (estimated
based upon review of Centerpulse's MD&A, quarterly
transcript disclosures and information obtained during due
diligence).................................................. (20)
Re-classification of instrument expense to SG&A to conform
with Zimmer statement of earnings classification (estimated
based upon review of Centerpulse's accounting policies,
related note disclosures and information obtained during due
diligence).................................................. (34)
---
(34)
===
(iii) Reduce goodwill amortization to reflect U.S. GAAP write-off
of in-process research and development...................... (11)
Eliminate remaining non-U.S. GAAP goodwill amortization..... (43)
Approximately one-half employee benefit expense U.S. GAAP
adjustment (allocation based on estimated headcount
split)...................................................... 12
Approximately one-half option re-pricing expense U.S. GAAP
adjustment (allocation based on estimated headcount
split)...................................................... 9
Re-classification of insurance expense to SG&A to conform
with Zimmer statement of earnings classification (estimated
based upon review of Centerpulse's MD&A, quarterly
transcript disclosures and information obtained during due
diligence).................................................. 20
Re-classification of instrument expense to SG&A to conform
with Zimmer statement of earnings classification (estimated
based upon review of Centerpulse's accounting policies,
related note disclosures and information obtained during due
diligence).................................................. 34
U.S. GAAP adjustment for impairment charge on intangible
assets...................................................... 3
Reversal of non-U.S. GAAP impairment recovery on
investments................................................. 13
Goodwill amortization reclassified to SG&A to conform to
Zimmer statement of earnings presentation................... 43
Exceptional operating items reclassified to SG&A to conform
to Zimmer statement of earnings presentation................ 9
Other operating income reclassified to SG&A to conform to
Zimmer statement of earnings presentation................... (1)
---
88
===
(iv) Other non-operating expense reclassified to interest
expense, net................................................ 1
(v) Income tax effect on U.S. GAAP adjustments (less than $1
million).................................................... --
</Table>
OTHER ADJUSTMENTS
(b) Reflects an increase of $3 million in depreciation expense resulting
from the step-up of property, plant and equipment to their respective fair
values, as required by Statement of Financial Accounting
87
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF EARNINGS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 2002
Standards No. 141, assuming estimated remaining useful lives of ten years. Also
reflects an estimated $29 million of amortization expense related to
technology-based intangible assets over periods ranging from seven to twenty
years. Valuation of specific identifiable intangible assets requires knowledge
of certain product revenue and cash flow projections and other information to
which Zimmer has not had access. In the absence of specific knowledge, the
amount of purchase price allocated to technology-based intangibles represents
Zimmer's estimates based on standard valuation methodologies and management's
general knowledge of Centerpulse's business and the orthopaedic market. Actual
amounts, determined on the basis of more detailed information, will differ from
the preliminary amounts.
(c) Effective January 1, 2003 Zimmer changed its accounting policy for
loaner instruments from an expense based method to an asset based method. See
note 2 to Zimmer's March 31, 2003 Quarterly Report on Form 10-Q for a detailed
discussion of the accounting change. The adjustment reflects Zimmer's instrument
expense assuming the new asset-based accounting policy had been applied from the
beginning of the period.
(d) Reflects the elimination of interest expense on existing borrowings
replaced by estimated interest expense on approximately $1,562 million in total
debt we expect to incur under the facilities described in the section captioned
"OUR OFFER -- Source and Amount of Funds." Based on our current investment grade
rating from Standard and Poor's and from Moody's, the applicable interest rate
under the revolving facilities is expected to be the applicable LIBOR rate plus
125 basis points, and under the term loan, is expected to be the applicable
LIBOR rate plus 150 basis points. Interest expense was calculated using an
estimated weighted average annual interest rate of 4.0%, calculated on constant
debt levels throughout the year and also includes estimated amortization of debt
issuance cost. Our annual interest expense may be lower or higher if LIBOR rates
or our credit rating changes. A 1/8% change in the annual interest rate would
increase or decrease interest expense by approximately $2 million. A summary of
the various elements comprising the interest adjustment follows:
<Table>
<Caption>
(IN MILLIONS US$)
-----------------
Elimination of net interest expense on existing Centerpulse
borrowings to be replaced by Zimmer borrowings under the
facilities................................................ $(16)
Elimination of net interest expense on existing Zimmer
borrowings to be replaced by Zimmer borrowings under the
facilities................................................ (12)
Interest expense under the facilities on the basis described
above..................................................... 63
Amortization of debt issuance costs over the life of the
facilities (calculated on a straight-line basis in
proportion to the value of the respective one, three and
five year facilities)..................................... 9
----
$ 44
====
</Table>
(e) Reflects the income tax effects of adjustments based upon the average
of the respective company's effective tax rates for the year ended December 31,
2002.
(f) The increase in weighted average common shares outstanding for the
basic earnings per share calculation reflects the issuance of 3.68 shares of
Zimmer common stock for each of the 11,892,518 outstanding registered shares of
Centerpulse, as of March 26, 2003 as disclosed in Centerpulse's 2002 Form 20-F,
while the increase for the diluted earnings per share calculation also includes
an additional 0.9 million shares to account for the dilutive effect of
outstanding Centerpulse stock options expected to be converted into Zimmer stock
options. The increase in dilutive shares was calculated on the basis of an
estimated 347,000 outstanding Centerpulse stock options, as disclosed in note 2
to the Smith & Nephew pro forma financial statements included in Smith &
Nephew's registration statement on Form F-4 filed on
88
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF EARNINGS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 2002
April 25, 2003, converted based on the ratio of the Centerpulse offer price
(translated into U.S. dollars at the June 16, 2003 noon buying rate for Swiss
francs of CHF 1.3009 = US$1.00) to Zimmer's closing stock price of US$47.19 as
quoted on the NYSE on such date.
(g) The pro forma statement of net earnings assumes a 100% tender of
Centerpulse registered shares, the maximum amount of shares subject to tender.
However, the transaction could be consummated with less than a 100% tender of
Centerpulse registered shares. Assuming a 66.7% tender of Centerpulse registered
shares, the minimum amount that must be tendered for Zimmer to obtain control
pursuant to Swiss law, pro forma net earnings would differ from the reported pro
forma net earnings as follows:
<Table>
<Caption>
(IN MILLIONS US$)
-----------------
Net earnings assuming a 100% tender of Centerpulse shares... $ 287
Adjustments:
Record 33.3% minority interest in earnings of
Centerpulse............................................ (26)
Record lower depreciation and amortization expense to
account for differences in basis of PP&E and intangible
assets................................................. 11
Record lower interest expense to account for reduced
debt................................................... 15
Tax effect of adjustments................................. (9)
-----
Net earnings assuming a 66.7% tender of Centerpulse
shares.................................................... $ 278
=====
Earnings per common share assuming a 66.7% tender of
Centerpulse shares:
Basic..................................................... $1.24
Diluted................................................... $1.23
Weighted Average Common Shares Outstanding
</Table>
<Table>
<Caption>
HISTORICAL ADJUSTED PRO FORMA
---------- -------- ---------
Basic.......................................... 194.5 29.2 223.7
Diluted........................................ 196.8 30.1 226.9
</Table>
The increase in weighted average common shares outstanding for the basic
earnings per share calculation reflects the issuance of 3.68 shares of Zimmer
common stock for each of the 7,932,309 tendered registered shares of Centerpulse
(representing 66.7% of the outstanding Centerpulse registered shares as of March
26, 2003) while the increase for the diluted earnings per share calculation also
includes an additional 0.9 million shares to account for the dilutive effect of
outstanding Centerpulse stock options expected to be converted into Zimmer stock
options. The increase in dilutive shares was calculated on the basis of an
estimated 347,000 outstanding Centerpulse stock options, as disclosed in note 2
to the Smith & Nephew pro forma financial statements, converted based on the
ratio of the Centerpulse offer price (translated into U.S. dollars at the June
16, 2003 noon buying rate for Swiss francs of CHF 1.3009 = US$1.00) to Zimmer's
closing stock price of US$47.19 as quoted on the NYSE on such date.
NONRECURRING
The objective of the pro forma information provided herein is to provide
information about the continuing impact of the proposed transaction by showing
how it might have affected historical operating results if the transaction had
been consummated at the beginning of the most recent full fiscal year. As such,
nonrecurring charges are necessarily excluded from the unaudited pro forma
condensed combined
89
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF EARNINGS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 2002
statement of earnings. Zimmer expects to incur nonrecurring charges as of and
within the twelve month period succeeding the transaction, estimated as follows:
<Table>
<Caption>
(IN MILLIONS US$)
-----------------
In-process research and development......................... $166
Inventory step-up........................................... 80
----
Total non-cash charges.................................... $246
====
</Table>
Refer to note(k) under Notes to Unaudited Pro Forma Condensed Combined
Balance Sheet for further description of in-process research and development.
The step-up of inventories to their respective fair values, as required by
Statement of Financial Accounting Standards No. 141, results in an increase in
cost of products sold as the inventory is sold to third party customers, which
is expected to occur within the twelve month period succeeding the transaction.
Retention payments and other employee related costs, costs for lease
terminations, meetings, training, re-branding, integration of information
technology systems, and other cash costs are anticipated in connection with the
integration of Zimmer and Centerpulse. Such costs are preliminarily estimated to
amount to US$160 million within the twelve months succeeding the transaction.
Actual costs may vary from the preliminary estimates.
90
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
MARCH 31, 2003
(DOLLARS IN MILLIONS)
<Table>
<Caption>
ZIMMER AND CENTERPULSE
---------------------------
PRO FORMA
ZIMMER CENTERPULSE(A) ADJUSTMENTS COMBINED(L)
------ -------------- ----------- -----------
ASSETS
CURRENT ASSETS:
Cash and equivalents........................... $ 33 $ 111 $ -- $ 144
Accounts receivable, less allowance for
doubtful accounts............................ 237 222 -- 459
Inventories, net............................... 266 222 80(b) 568
Prepaid expenses............................... 18 82 1(c) 101
Deferred income taxes.......................... 21 3 -- 24
---- ------ ------ ------
Total Current Assets......................... 575 640 81 1,296
Property, Plant and Equipment, net............. 311 133 30(d) 474
Intangible Assets.............................. -- -- 960(e) 960
Goodwill....................................... -- 481 1,457(f) 1,938
Investments.................................... -- 35 -- 35
Deferred Income Taxes.......................... 75 389 (132)(g) 332
Other Assets................................... 18 -- 12(c) 30
---- ------ ------ ------
TOTAL ASSETS................................. $979 $1,678 $2,408 $5,065
==== ====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................... $ 65 $ 38 $ -- $ 103
Income taxes payable........................... 42 22 -- 64
Other current liabilities...................... 159 153 -- 312
Short term debt................................ 77 52 83(h) 212
---- ------ ------ ------
Total Current Liabilities.................... 343 265 83 691
Other Long-term Liabilities.................... 93 116 -- 209
Deferred Income Taxes.......................... -- 13 309(g) 322
Long-Term Debt................................. -- 256 1,094(h) 1,350
---- ------ ------ ------
TOTAL LIABILITIES............................ 436 650 1,486 2,572
---- ------ ------ ------
Commitments and Contingencies (m)..............
Minority Interest.............................. -- 6 -- 6
STOCKHOLDERS' EQUITY
Common stock................................... 2 259 (259)(i) 2
Paid in capital................................ 76 694 1,416(j) 2,186
Retained earnings (deficit).................... 449 36 (202)(k) 283
Accumulated other comprehensive income......... 16 45 (45)(i) 16
Treasury stock................................. -- (12) 12(i) --
---- ------ ------ ------
TOTAL STOCKHOLDERS' EQUITY..................... 543 1,022 922 2,487
---- ------ ------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..... $979 $1,678 $2,408 $5,065
==== ====== ====== ======
</Table>
See notes to unaudited pro forma condensed combined financial statements.
91
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET
MARCH 31, 2003
Centerpulse amounts have been translated into U.S. dollars at a rate of CHF 1.38
= US$1.00, the exchange rate disclosed in the overview to Centerpulse's First
Quarter 2003 Interim Report filed on Form 6-K.
U.S. GAAP AND CONFORMING ACCOUNTING POLICY ADJUSTMENTS
(a) Centerpulse's consolidated financial statements from which these pro
forma financial statements are derived are prepared in accordance with IFRS,
which differ in certain material respects from U.S. GAAP. Centerpulse issued
financial information for the period ended March 31, 2003 under IFRS, which was
included on Form 6-K. However, this quarterly information did not include
information relating to U.S. GAAP. To present pro forma information as of and
for the period ended March 31, 2003, Zimmer obtained the necessary adjustments
to convert the financial information of Centerpulse from IFRS to U.S. GAAP based
upon information obtained from Centerpulse as part of our due diligence review.
With respect to the reclassification adjustments to conform the Centerpulse
accounts to the Zimmer basis of presentation, certain of these adjustments were
derived from the disclosure of significant accounting policies and related
notes, plus information obtained during due diligence. Other conforming
adjustments may be necessary after Zimmer is able to gain additional access to
the detailed accounting records of Centerpulse.
92
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET -- (CONTINUED)
MARCH 31, 2003
<Table>
<Caption>
CENTERPULSE
CONFORMING
ACCOUNTING AND
U.S. GAAP CENTERPULSE CENTERPULSE
CENTERPULSE(I) ADJUSTMENTS ADJUSTED ADJUSTED
------------------------------------------------ -----------------
(IN MILLIONS CHF) (IN MILLIONS US$)
ASSETS
CURRENT ASSETS:
Cash and equivalents...................... 153 -- 153 $ 111
Accounts receivable, less allowance for
doubtful accounts....................... 306 -- 306 222
Inventories, net.......................... 306 -- 306 222
Prepaid expenses.......................... 113 -- 113 82
Deferred income taxes..................... -- 5(ii) 5 3
----- --------- ----- ------
Total Current Assets.................... 878 5 883 640
Property, Plant and Equipment, net........ 184 -- 184 133
Intangible Assets......................... 562 (562)(iii) -- --
Goodwill.................................. -- 664(iii) 664 481
Investments............................... 59 (11)(iv) 48 35
Deferred Income Taxes..................... 537 -- 537 389
----- --------- ----- ------
TOTAL ASSETS.............................. 2,220 96 2316 $1,678
===== ========= ===== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................... 52 -- 52 $ 38
Income taxes payable...................... -- 31(v) 31 22
Current provisions........................ 82 (82)(v) -- --
Other current liabilities................. 160 51(v) 211 153
Short term debt........................... 72 -- 72 52
----- --------- ----- ------
Total Current Liabilities............... 366 -- 366 265
Other Long-term Liabilities............... 1 159(v) 160 116
Other Non-current Provisions.............. 159 (159)(v) -- --
Deferred Income Taxes..................... 18 -- 18 13
Long-term Debt............................ 353 -- 353 256
----- --------- ----- ------
TOTAL LIABILITIES....................... 897 -- 897 650
Commitments and Contingencies(m)..........
Minority Interest......................... 9 -- 9 6
STOCKHOLDERS' EQUITY
Common stock.............................. 357 -- 357 259
Paid-in capital........................... 957 -- 957 694
Retained earnings (deficit)............... (46) 96(vi) 50 36
Currency translation adjustments.......... 62 (62)(v) -- --
Accumulated other comprehensive income.... -- 62(v) 62 45
Treasury stock............................ (16) -- (16) (12)
----- --------- ----- ------
TOTAL STOCKHOLDERS' EQUITY................ 1,314 96 1,410 1,022
----- --------- ----- ------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.................................. 2,220 96 2,316 $1,678
===== ========= ===== ======
</Table>
93
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET -- (CONTINUED)
MARCH 31, 2003
- ---------------
Unless otherwise indicated, the following adjustments were based upon
information obtained during due diligence.
<Table>
<Caption>
(IN MILLIONS CHF)
-----------------
(i) Amounts obtained from Centerpulse's First Quarter 2003
Interim Report filed on Form 6-K
(ii) Income tax effects on U.S. GAAP adjustments................. 5
(iii) Reduce goodwill to reflect the U.S. GAAP write-off of
in-process research and development (IPR&D)............... (134)
Reverse non-U.S. GAAP intangible impairment charge.......... 182
Eliminate non-U.S. GAAP goodwill amortization............... 54
Goodwill reclassified from intangibles to a separate balance
sheet line item to conform to Zimmer balance sheet
presentation.............................................. 562
----
664
====
(iv) Reversal of non-U.S.-GAAP impairment recovery on
investments............................................... (11)
(v) Reclassify various line items to conform to Zimmer balance
sheet presentation
(vi) Effect of above adjustments on stockholders' equity......... 96
</Table>
OTHER ADJUSTMENTS
(b) Inventory is adjusted to record its estimated fair market value as of
the acquisition date based on Centerpulse's margins less estimated selling and
distribution cost and an allowance for a distributor profit, assumed as one-half
of the remaining profit.
(c) Reflects the capitalization of an estimated $20 million of financing
costs ($8 million current and $12 million non-current) that will be amortized
over the life of the new credit facilities with the current portion partially
offset by the write-off of $(7) million of unamortized debt issuance costs for
Centerpulse's credit facilities, which are expected to be refinanced as part of
the transaction.
(d) Property, plant and equipment is adjusted to record its estimated fair
market value as of the acquisition date based on replacement cost, which is
assumed to equate to "Fire insurance value" disclosed in note 16 to
Centerpulse's 2002 audited consolidated financial statements less estimated
accumulated depreciation.
(e) Intangible assets are adjusted to reflect the allocation of: (i) $690
million to brand assets encompassing the trade names, long standing reputation,
know-how and base technology of Centerpulse which are considered to have an
indefinite useful life and, (ii) $270 million to technology assets comprised of
current product technology with an expected useful life of seven years and other
technology-based assets that are expected to have useful lives of twenty years.
Valuation of specific identifiable intangible assets requires knowledge of
certain product revenue and cash flow projections and other information to which
Zimmer has not had access. In the absence of specific knowledge, the amount of
purchase price allocated to brand and technology-based intangibles represents
Zimmer estimates based on standard valuation methodologies and management's
general knowledge of Centerpulse's business and the orthopaedic market. Actual
amounts, determined on the basis of more detailed information, will differ from
the preliminary amounts.
(f) These amounts reflect the preliminary estimates of the adjustments
necessary to record the Centerpulse assets acquired and liabilities assumed at
their respective fair values. The allocation is based
94
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET -- (CONTINUED)
MARCH 31, 2003
on publicly available information and limited information obtained during due
diligence, and necessarily involved our reasonable estimates. Actual amounts,
determined on the basis of more detailed information, will differ from the
preliminary amounts. The total purchase price was determined and allocated as
follows:
<Table>
<Caption>
(IN MILLIONS US$)
-----------------
Cash to be paid in exchange for 11,892,518 Centerpulse
shares at CHF 120 per Centerpulse share translated at CHF
1.3009 = US$1.00, the noon buying rate for Swiss francs on
June 16, 2003............................................. $1,097
Zimmer shares to be exchanged for 11,892,518 Centerpulse
shares at an exchange ratio of 3.68 shares of Zimmer
common stock at a market price of US$47.19 per share, the
NYSE closing price on June 16, 2003....................... 2,065
Fair value of an estimated 347,000 outstanding Centerpulse
stock options, as disclosed in note 2 to the Smith &
Nephew's pro forma financial statements with an average
intrinsic value of CHF 169 per share, based on a weighted
average exercise price of CHF 181 per share as reported by
Centerpulse in note 30 to its consolidated 2002 financial
statements, which are assumed to have no service
requirement beyond the transaction date, translated at CHF
1.3009 = US$1.00, the noon buying rate for Swiss francs on
June 16, 2003............................................. 45
Plus direct acquisition costs ($20 million Smith & Nephew
break up fee and $40 million transaction fees)............ 60
------
Total purchase price........................................ $3,267
======
Purchase price allocated to:
Net assets of Centerpulse adjusted to U.S. GAAP at March
31, 2003............................................... $1,022
Less elimination of historical goodwill................... (481)
Less elimination of unamortized debt issuance costs....... (7)
Less elimination of certain NOL deferred tax assets....... (107)
Add (subtract) fair value adjustments:
Inventory step-up......................................... 80
Property, plant and equipment step-up..................... 30
Brand -- indefinite life intangible asset................. 690
Technology -- intangible asset............................ 270
In-process research and development....................... 166
Deferred taxes............................................ (334)
Goodwill.................................................. 1,938
------
$3,267
======
</Table>
95
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET -- (CONTINUED)
MARCH 31, 2003
(g) Reflects the income tax effects of the purchase price allocation to
certain tangible and intangible assets, as follows:
<Table>
<Caption>
(IN MILLIONS US$)
-----------------
Deferred tax liability related to PP&E step-up.............. $ 9
Deferred tax liability related to inventory step-up......... 25
Write off certain NOL deferred tax assets................... 107
Deferred tax liability related to brand and technology
intangible assets......................................... 300
----
Total....................................................... $441
====
</Table>
The Centerpulse deferred tax asset relating to net operating losses in the
U.S. has been reduced to reflect Zimmer estimates of its use taking into account
the statutory limitation that will apply to the acquisition of Centerpulse
stock. Deferred tax liabilities have been estimated related to the difference in
book and tax basis in assets created or re-valued in relation to the acquisition
of Centerpulse. A blended statutory tax rate was used based on a historic split
of sales and assets among specific geographic markets, as reported by
Centerpulse. Actual amounts, determined on the basis of more detailed
information, will differ from the preliminary amounts.
(h) Reflects the following sources and uses of funds:
<Table>
<Caption>
(IN MILLIONS US$)
-----------------
Sources:
Borrowings under term loan.................................. $ 550
Borrowings under three-year revolving facility.............. 800
Borrowings under 364-day revolving facility................. 212
------
Total borrowings............................................ $1,562
======
Uses:
Cash to be paid in exchange for 11,892,518 Centerpulse
shares at CHF 120 per Centerpulse share translated at CHF
1.3009 = US$1.00, the noon buying rate for Swiss francs on
June 16, 2003............................................. $1,097
Acquisition costs ($20 million Smith & Nephew break up fee
and $40 million transaction fees)......................... 60
Financing fees.............................................. 20
Repayment of existing Centerpulse borrowings................ 308
Repayment of existing Zimmer borrowings..................... 77
------
$1,562
======
</Table>
(i) Reflects the elimination of shareholders' equity in Centerpulse.
(j) Reflects an increase in equity of $2,110 million for Zimmer shares
issued in exchange for Centerpulse shares, offset by the elimination of $(694)
of Centerpulse paid in capital.
(k) Reflects the elimination of Centerpulse's retained earnings of $(36)
million and the allocation of $(166) million to in-process research and
development, defined as the value assigned to projects for which the related
products have not received regulatory approval and have no alternative future
use. The amount was determined assuming a certain percentage of estimated future
cash flows would pertain to projects in development. Estimated cash flows are
discounted back to their present value using a discount rate that takes into
account an assumed level of risk of projects not being developed to a stage of
commercial feasibility.
96
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET -- (CONTINUED)
MARCH 31, 2003
(l) The unaudited pro forma condensed combined balance sheet assumes a 100%
tender of Centerpulse shares, the maximum amount of shares subject to tender.
However, the transaction could be consummated with less than a 100% tender of
Centerpulse shares. Assuming a 66.7% tender of Centerpulse shares, the minimum
amount that must be tendered for Zimmer to obtain control pursuant to Swiss law,
pro forma net assets would differ from reported pro forma net assets as follows:
<Table>
<Caption>
(IN MILLIONS US$)
-----------------
Net assets assuming a 100% tender of Centerpulse shares..... $2,487
Adjustments to reduce fair value attributed to net assets of
Centerpulse on a pro rata basis (33.3%):
Inventory step-up........................................... (27)
PP&E step-up................................................ (10)
Intangible assets including brand and technology assets..... (320)
Goodwill.................................................... (411)
Less debt required to finance acquisition................... 365
Record minority interest in book value of Centerpulse net
assets.................................................... (340)
Tax effect of adjustments................................... 111
------
Net assets assuming a 66.7% tender of Centerpulse shares.... $1,855
======
</Table>
In the event of a 66.7% tender of Centerpulse shares, the purchase price
and estimated purchase price allocation would be as follows:
<Table>
Cash to be paid in exchange for 7,932,309 Centerpulse shares
at CHF 120 per Centerpulse share translated at CHF 1.3009
= US$1.00, the noon buying rate for Swiss francs on June
16, 2003.................................................. $ 732
Zimmer shares to be exchanged for 7,932,309 Centerpulse
shares at an exchange ratio of 3.68 shares of Zimmer
common stock at a market price of US$47.19 per share, the
NYSE closing price on June 16, 2003....................... 1,377
Fair value of an estimated 347,000 outstanding Centerpulse
stock options, based upon note 2 to the Smith & Nephew pro
forma financial statements, with an average intrinsic
value of CHF 169 per share, based on a weighted average
exercise price of CHF 181 per share as reported by
Centerpulse in note 30 to its consolidated 2002 financial
statements, which are assumed to have no service
requirement beyond the transaction date, translated at CHF
1.3009 = US$1.00, the noon buying rate for Swiss francs on
June 16, 2003............................................. 45
Plus direct acquisition costs ($20 million Smith & Nephew
break up fee and $40 million transaction fees)............ 60
------
Total purchase price........................................ $2,214
======
Purchase price allocated to:
Net assets of Centerpulse adjusted to U.S. GAAP at March
31, 2003............................................... $ 682
Less elimination of historical goodwill................... (481)
Less elimination of unamortized debt issuance costs....... (7)
Less elimination of certain NOL deferred tax assets....... (107)
</Table>
97
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET -- (CONTINUED)
MARCH 31, 2003
<Table>
Add (subtract) fair value adjustments:
Inventory step up......................................... 53
Property, plant and equipment step-up..................... 20
Brand -- indefinite life intangible asset................. 460
Technology -- intangible asset............................ 180
In-process research and development....................... 110
Deferred taxes............................................ (223)
Goodwill.................................................. 1,527
------
$2,214
======
</Table>
The following reflects sources and uses of funds assuming a 66.7% tender of
Centerpulse shares:
<Table>
Sources:
Borrowings under term loan................................ $ 550
Borrowings under three-year revolving facility............ 647
------
Total Borrowings............................................ $1,197
======
Uses:
Cash to be paid in exchange for 7,932,309 Centerpulse shares
at CHF 120 per Centerpulse share translated at CHF 1.3009
= US$1.00, the noon buying rate for Swiss francs on June
16, 2003.................................................. $ 732
Acquisition costs ($20 million Smith & Nephew break up fee
and $40 million transaction fees)......................... 60
Financing fees.............................................. 20
Repayment of existing Centerpulse borrowings................ 308
Repayment of existing Zimmer borrowings..................... 77
------
$1,197
======
</Table>
(m) Centerpulse and InCentive are subject to a variety of claims, including
product liability, intellectual property, tax and contract related claims
arising in the ordinary course of business. On the basis of limited due
diligence performed by Zimmer, Zimmer has identified certain matters,
including those described in Note 9 to the audited consolidated 2002
financial statements of Centerpulse, which may be significant. While it is
not possible to predict with certainty the outcome of these matters, with
the passage of time and additional development of these matters, they could
result in liabilities that are both probable and estimable and as such,
would require recognition in the Centerpulse and InCentive balance sheets.
98
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
ZIMMER AND CENTERPULSE
-------------------------
PRO FORMA
ZIMMER CENTERPULSE(A) ADJUSTMENTS COMBINED(F)
------ -------------- ----------- -----------
NET SALES...................................... $ 390 $232 $ -- $ 622
Cost of products sold.......................... 97 60 8(b) 165
------ ---- ----- -----
GROSS PROFIT................................... 293 172 (8) 457
Research and development....................... 21 14 -- 35
Selling, general and administrative............ 150 113 -- 263
------ ---- ----- -----
Operating expenses............................. 171 127 -- 298
OPERATING PROFIT............................... 122 45 (8) 159
Interest expense, net.......................... 1 6 10(c) 17
------ ---- ----- -----
Earnings before income taxes, minority
interests and cumulative effect of a change
in accounting principle...................... 121 39 (18) 142
Provision for income taxes..................... 40 8 (5)(d) 43
------ ---- ----- -----
Net earnings before minority interests and
cumulative effect of a change in accounting
principle.................................... 81 31 (13) 99
Minority interests............................. -- 1 -- 1
------ ---- ----- -----
NET EARNINGS BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE............... $ 81 $ 30 $ (13) $ 98
====== ==== ===== =====
EARNINGS PER COMMON SHARE BEFORE CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
Basic........................................ $ 0.41 $0.41
Diluted...................................... $ 0.41 $0.40
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic........................................ 195.7 43.8(e) 239.5
Diluted...................................... 198.0 44.7(e) 242.7
</Table>
See notes to unaudited pro forma condensed combined financial statements.
99
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
Centerpulse amounts have been translated into U.S. dollars at a rate of CHF 1.37
= US$1.00, the average exchange rate for the quarter ended March 31, 2003 as
disclosed in the overview to Centerpulse's First Quarter 2003 Interim Report
filed on Form 6-K.
U.S. GAAP AND CONFORMING ACCOUNTING POLICY ADJUSTMENTS
(a) Centerpulse's consolidated financial statements from which these pro forma
financial statements are derived are prepared in accordance with IFRS, which
differ in certain material respects from U.S. GAAP. Centerpulse issued financial
information for the period ended March 31, 2003 under IFRS, which was included
on Form 6-K. However, this quarterly information did not include information
relating to U.S. GAAP. To present pro forma information as of and for the period
ended March 31, 2003, Zimmer obtained the necessary adjustments to convert the
financial information of Centerpulse from IFRS to U.S. GAAP based upon
information obtained from Centerpulse as part of our due diligence review. With
respect to the reclassification adjustments to conform the Centerpulse accounts
to Zimmer basis of presentation, certain of these adjustments were derived from
the disclosure of significant accounting policies, related notes, transcripts of
quarterly conference calls and information obtained during due diligence. Other
conforming adjustments may be necessary after the Zimmer is able to gain
additional access to the detailed accounting records of Centerpulse.
<Table>
<Caption>
CENTERPULSE
CENTERPULSE CONFORMING AND
CONTINUING U.S. GAAP CENTERPULSE CENTERPULSE
OPERATIONS(I) ADJUSTMENTS ADJUSTED ADJUSTED
--------------------------------------------- -----------------
(IN MILLIONS CHF) (IN MILLIONS US$)
Net sales.................................. 318 -- 318 $232
Cost of product sold....................... 104 (22)(ii) 82 60
--- ---- --- ----
Gross profit............................... 214 22 236 172
Research and development................... 19 -- 19 14
Selling, general and administrative........ 131 25 (iii) 156 113
Other operating income..................... 1 (1)(iii) -- --
Goodwill amortization...................... 10 (10)(iii) -- --
--- ---- --- ----
Operating income........................... 55 6 61 45
Interest expense........................... 9 -- 9 6
Other non-operating expense................ 5 (5)(iii) -- --
--- ---- --- ----
Income before taxes........................ 41 11 52 39
Income taxes............................... 10 -- 10 8
--- ---- --- ----
Net income before minority interests....... 31 11 42 31
Minority interests......................... 1 -- 1 1
--- ---- --- ----
Net income................................. 30 11 41 $ 30
=== ==== === ====
</Table>
- ---------------
100
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF EARNINGS -- (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2003
Unless otherwise indicated, the following adjustments were based upon
information obtained during due diligence.
<Table>
(i) Centerpulse statement of earnings obtained from
Centerpulse's interim quarterly report on Form 6-K for the
period ended March 31, 2003 (excludes CHF 18 million gain on
sale of discontinued operations less estimated tax effect of
CHF 4 million).
</Table>
<Table>
<Caption>
(IN MILLIONS CHF)
-----------------
(ii) Re-classification of insurance expense to SG&A to conform
with Zimmer statement of earnings classification
(estimated based upon review of Centerpulse's MD&A,
quarterly transcript disclosures and information obtained
during due diligence)..................................... (13)
Re-classification of instrument expense to SG&A to conform
with Zimmer statement of earnings classification
(estimated based upon review of Centerpulse's accounting
policies, related note disclosures and information
obtained during due diligence)............................ (9)
---
(22)
===
(iii) Reduce goodwill amortization to reflect U.S. GAAP write-off
of in-process research and development.................... (2)
Eliminate remaining non-U.S. GAAP goodwill amortization..... (10)
Re-classification of insurance expense to SG&A to conform
with Zimmer statement of earnings classification
(estimated based upon review of Centerpulse's MD&A,
quarterly transcript disclosures and information obtained
during due diligence)..................................... 13
Re-classification of instrument expense to SG&A to conform
with Zimmer statement of earnings classification
(estimated based upon review of Centerpulse's accounting
policies, related note disclosures and information
obtained during due diligence)............................ 9
Goodwill amortization, other operating income and other
non-operating expense reclassified to SG&A to conform to
Zimmer statement of earnings presentation................. 14
U.S. GAAP adjustment for impairment charge on intangible
assets.................................................... 1
---
25
===
</Table>
OTHER ADJUSTMENTS
(b) Reflects an increase of $1 million in depreciation expense resulting
from the step-up of property, plant and equipment to their respective fair
values, as required by Statement of Financial Accounting Standards No. 141,
assuming estimated remaining useful lives of ten years. Also reflects an
estimated $7 million of amortization expense related to technology-based
intangible assets over periods ranging from seven to twenty years.
(c) Reflects the elimination of interest expense on existing borrowings
replaced by estimated interest expense on approximately $1,562 million in debt
under the facilities described in the section captioned "OUR OFFER -- Source and
Amount of Funds." Based on our current investment grade rating from Standard and
Poor's and from Moody's, the applicable interest rate under the revolving
facilities is expected to be the applicable LIBOR rate plus 125 basis points,
and under the term loan, is expected to be the applicable LIBOR rate plus 150
basis points. Interest expense was calculated using an estimated weighted
average annual interest rate of 4.0%, calculated on constant debt levels
throughout the year and also includes amortization of debt issuance cost. Our
annual interest expense may be lower or higher if
101
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF EARNINGS -- (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2003
LIBOR rates or our credit rating changes. A 1/8% change in the annual interest
rate would increase or decrease interest expense by approximately $2 million. A
summary of the various elements comprising the interest adjustment follows:
<Table>
<Caption>
(IN MILLIONS US$)
-----------------
Elimination of interest expense on Centerpulse borrowings to
be replaced by Zimmer borrowings.......................... $(6)
Elimination of interest expense on existing Zimmer
borrowings to be replaced by Zimmer borrowings under the
facilities................................................ (1)
Interest expense under the facilities on the basis described
above..................................................... 15
Amortization of debt issuance costs over the life of the
facilities (calculated on a straight-line basis in
proportion to the value of the respective one, three and
five year facilities)..................................... 2
---
$10
---
</Table>
(d) Reflects the income tax effects of adjustments based upon the average
of the respective company's effective tax rates for the quarter ended March 31,
2003.
(e) The increase in weighted average common shares outstanding for the
basic earnings per share calculation reflects the issuance of 3.68 shares of
Zimmer common stock for each of the 11,892,518 outstanding registered shares of
Centerpulse while the increase for the diluted earnings per share calculation
also includes an additional 0.9 million shares to account for the dilutive
effect of outstanding Centerpulse stock options expected to be converted into
Zimmer stock options. The increase in dilutive shares equivalents was calculated
on the basis of an estimated 347,000 outstanding Centerpulse stock options as
disclosed in note 2 to the Smith & Nephew pro forma financial statements,
converted based on the ratio of the Centerpulse offer price (translated into
U.S. dollars at the June 16, 2003 noon buying rate for Swiss francs of CHF
1.3009 = US$1.00) to Zimmer's closing stock price of US$47.19 as quoted on the
NYSE on such date.
(f) The pro forma statement of net earnings assumes a 100% tender of
Centerpulse shares, the maximum amount of shares subject to tender. However, the
transaction could be consummated with less than a 100% tender of Centerpulse
shares. Assuming a 66.7% tender of Centerpulse shares, the minimum amount that
must be tendered for Zimmer to obtain control pursuant to Swiss law, pro forma
net earnings would differ from the reported pro forma net earnings as follows:
<Table>
<Caption>
(IN MILLIONS US$)
-----------------
Net earnings assuming a 100% tender of Centerpulse shares... $ 98
Adjustments:
Record 33.3% minority interest in earnings of
Centerpulse............................................ (10)
Record lower depreciation and amortization expense to
account for difference in basis of PP&E and intangible
assets................................................. 2
Record lower interest expense to account for reduced
debt................................................... 3
Tax effect of adjustments................................... (1)
-----
Net earnings assuming a 66.7% tender of Centerpulse
shares.................................................... $ 92
=====
Earnings per common share assuming a 66.7% tender of
Centerpulse shares:
Basic.................................................. $0.41
Diluted................................................ $0.40
</Table>
102
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF EARNINGS -- (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2003
<Table>
<Caption>
HISTORICAL ADJUSTED PRO FORMA
---------- -------- ---------
Weighted Average Common Shares Outstanding
Basic............................................. 195.7 29.2 224.9
Diluted........................................... 198.0 30.1 228.1
</Table>
The increase in weighted average common shares outstanding for the basic
earnings per share calculation reflects the issuance of 3.68 shares of Zimmer
common stock for each of the 7,932,309 tendered Centerpulse registered shares
(66.7% of total Centerpulse registered shares) while the increase for the
diluted earnings per share calculation also includes an additional 0.9 million
shares to account for the dilutive effect of outstanding Centerpulse stock
options expected to be converted into Zimmer stock options. The increase in
dilutive share equivalents was calculated on the basis of an estimated 347,000
outstanding Centerpulse stock options, as disclosed in note 2 to the Smith &
Nephew pro forma financial statements, converted based on the ratio of the
Centerpulse offer price (translated into U.S. dollars at the June 16, 2003 noon
buying rate for Swiss francs of CHF 1.3009 = US$1.00) to Zimmer's closing stock
price of US$47.19 as quoted on the NYSE on such date.
NONRECURRING
The objective of the pro forma information provided herein is to provide
information about the continuing impact of the proposed transaction by showing
how it might have affected operating results if the transaction had been
consummated at the beginning of the most recent full fiscal year. As such,
nonrecurring charges are necessarily excluded from the unaudited pro forma
condensed combined statement of earnings. Zimmer expects to incur nonrecurring
charges as of and within the twelve month period succeeding the transaction,
estimated as follows:
<Table>
<Caption>
(IN MILLIONS US$)
In-process research and development......................... $166
Inventory step-up........................................... 80
----
Total non-cash charges.................................... $246
====
</Table>
Refer to note (k) under Notes to Unaudited Pro Forma Condensed Combined
Balance Sheet for further description of in-process research and development.
The step-up of inventories to their respective fair values, as required by
Statement of Financial Accounting Standards No. 141, results in an increase in
cost of products sold as the inventory is sold to third party customers, which
is expected to occur within the twelve month period succeeding the transaction.
Retention payments and other employee related costs, costs for lease
terminations, meetings, training, re-branding, integration of information
technology systems, and other cash costs are anticipated in connection with the
integration of Zimmer and Centerpulse. Such costs are preliminarily estimated to
amount to $160 million within the twelve months succeeding the transaction.
Actual costs may vary from the preliminary estimates.
103
DESCRIPTION OF ZIMMER CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Under our restated certificate of incorporation and restated by-laws, each,
as amended, we are authorized to issue 1,250,000,000 shares of capital stock, of
which 1,000,000,000 shares are common stock, US$0.01 par value per share, and
250,000,000 shares are preferred stock, US$0.01 par value per share.
COMMON STOCK
As of June 16, 2003, there were 196,716,694 shares of common stock
outstanding. The holders of our common stock are entitled to one vote per share
on all matters presented to the stockholders, including elections of directors,
and, except as otherwise required by law or provided in any resolution adopted
by our board with respect to any series of preferred stock, the holders of such
shares will possess all voting power afforded to holders of common stock. Our
restated certificate of incorporation does not provide for cumulative voting in
the election of directors. Subject to any preferential rights of any outstanding
series of our preferred stock created by our board from time to time, the
holders of common stock will be entitled to receive ratably dividends as may be
declared from time to time by our board from funds legally available therefor.
If the corporation liquidates its business, the holders of common stock are
entitled to share ratably in all assets available for distribution to such
holders after the corporation pays its liabilities and the liquidation
preference of any outstanding preferred stock. The common stock has no
preemptive or conversion rights or other subscription rights. The rights,
preferences and privileges of holders of common stock are subject to, and may be
adversely affected by, the rights of the holders of shares of any series of
preferred stock which we may designate and issue in the future. All outstanding
shares of common stock are fully paid and non-assessable.
PREFERRED STOCK
Our restated certificate of incorporation authorizes our board of directors
to establish one or more series of our preferred stock and to determine, with
respect to any series of our preferred stock, the terms and rights of such
series, including:
- the designation of the series;
- the number of shares of the series, which number our board may
thereafter, except where otherwise provided in the applicable certificate
of designation, increase or decrease, but not below the number of shares
thereof then outstanding;
- whether dividends, if any, will be cumulative or noncumulative, and, in
the case of shares of any series having cumulative dividend rights, the
date or dates or method of determining the date or dates from which
dividends on the shares of such series shall be cumulative;
- the rate of any dividends, or method of determining such dividends,
payable to the holders of the shares of such series, any conditions upon
which such dividends will be paid and the date or dates or the method for
determining the date or dates upon which such dividends will be payable;
- the redemption rights and price or prices, if any, for shares of the
series;
- the terms and amounts of any sinking fund provided for the purchase or
redemption of shares of the series;
- the amounts payable on and the preferences, if any, of shares of the
series in the event of any voluntary or involuntary liquidation,
dissolution or winding up of corporate affairs;
- the provisions, if any, for the conversion or exchange of the shares, at
any time at the option of the holder or the corporation or upon the
happening of a specified event, into shares of any other class or series,
or any other security, of the corporation or any other corporation, and
the specification of such other class or the conversion or exchange price
or prices or rate or rates, any adjustments
104
thereof, the date or dates as of which such shares will be convertible or
exchangeable and all other terms and conditions upon which such
conversion or exchange may be made;
- restrictions on the issuance of shares of the same series or of any other
class or series, if any; and
- the voting rights, if any, of the holders of the shares of the series.
We believe that the ability of our board of directors to issue one or more
series of our preferred stock will provide us with flexibility in structuring
possible future financings and acquisitions and in meeting other corporate needs
which might arise. The authorized shares of our common stock, as well as shares
of our preferred stock, will be available for issuance without further action by
our stockholders, unless such action is required by applicable law or the rules
of any stock exchange or automated quotation system on which our securities may
be listed or traded. The New York Stock Exchange currently requires stockholder
approval as a prerequisite to listing shares in several instances, including the
issuance of common stock or securities convertible into or exercisable for
common stock if the common stock has or will have voting power equal to, or the
number of shares to be issued is or will be, at least 20% of the voting power or
number of shares of common stock outstanding prior to issuance. If the approval
of our stockholders is not required for the issuance of shares of our preferred
stock or our common stock, our board may determine not to seek stockholder
approval.
SERIES A PARTICIPATING CUMULATIVE PREFERRED STOCK
As of June 16, 2003, 2,000,000 shares of our Series A Participating
Cumulative Preferred Stock have been reserved for issuance upon exercise of
rights under our rights agreement. For a more detailed discussion of our rights
agreement and our Series A Participating Cumulative Preferred Stock, see the
section captioned "-- Rights Agreement."
CERTAIN ANTI-TAKEOVER PROVISIONS OF OUR RESTATED CERTIFICATE OF INCORPORATION
AND RESTATED BY-LAWS
BOARD OF DIRECTORS
Our restated certificate of incorporation provides that, except as
otherwise fixed by or pursuant to the provisions of a certificate of
designations setting forth the rights of the holders of any class or series of
our preferred stock, the number of our directors will be fixed from time to time
exclusively pursuant to a resolution adopted by a majority of the total number
of directors which we would have if there were no vacancies or unfilled
newly-created directorships, but shall not be less than three. Our board of
directors is divided into three classes. Our directors, other than those who may
be elected by the holders of our preferred stock, are elected by classes to
three year terms, with each class being as nearly equal in number as possible,
so that approximately one-third of the directors are elected at each annual
meeting of stockholders.
Our restated certificate of incorporation provides that, except as
otherwise provided for, fixed by or pursuant to a certificate of designations
setting forth the rights of the holders of any class or series of our preferred
stock, newly created directorships resulting from any increase in the number of
directors and any vacancies on our board resulting from death, resignation,
disqualification, removal or other cause will be filled by the affirmative vote
of a majority of the remaining directors then in office, even though less than a
quorum of our board, and not by the stockholders. Any director elected in
accordance with the preceding sentence will hold office for the remainder of the
term and until such director's successor shall have been duly elected and
qualified. No decrease in the number of directors constituting our board will
shorten the term of any incumbent director. Subject to the rights of holders of
our preferred stock, any director may be removed from office only for cause and
only by the affirmative vote of the holders of at least 80% of the voting power
of all our voting stock then outstanding, voting together as a single class.
These provisions would preclude a third party from removing incumbent
directors and simultaneously gaining control of our board by filling the
vacancies created by removal with its own nominees. Under the classified board
provisions described above, it would take at least two elections of directors
for any
105
individual or group to gain control of our board. Accordingly, these provisions
could discourage a third party from initiating a proxy contest, making a tender
offer or otherwise attempting to gain control of us.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
Our restated certificate of incorporation provides that any action required
or permitted to be taken by our stockholders must be effected at a duly called
annual or special meeting of such stockholders and may not be effected by any
consent in writing by such stockholders. Except as otherwise required by law and
subject to the rights of the holders of any of our preferred stock, special
meetings of our stockholders for any purpose or purposes may be called only by
our board pursuant to a resolution stating the purpose or purposes thereof
approved by a majority of the total number of directors which we would have if
there were no vacancies or unfilled newly-created directorships or by our
chairman of the board. Any power of stockholders to call a special meeting is
specifically denied. No business other than that stated in the notice shall be
transacted at any special meeting. These provisions may have the effect of
delaying consideration of a stockholder proposal until the next annual meeting
unless a special meeting is called by our board or the chairman of the board.
ADVANCE NOTICE PROCEDURES
Our restated by-laws establish an advance notice procedure which requires
us to provide notice to each stockholder of record entitled to vote at such
meeting stating the place, day and hour of an annual or special meeting of our
stockholders and the purpose or purposes for which the meeting is called. We
must deliver notice not less than 10 calendar days nor more than 60 calendar
days before the date of such meeting, either personally, by mail or by other
lawful means, except where further notice may be required by law. If mailed,
such notice will be deemed delivered when deposited in the United States mail
with postage paid and addressed to the stockholder at such person's address as
appears on our stock transfer books. Meetings may be held without notice if all
of the stockholders entitled to vote are present, except in certain
circumstances, or if notice has been effectively waived by those stockholders
not present in accordance with our restated by-laws. Any scheduled meeting may
be postponed and any special meeting cancelled by resolution of our board of
directors, upon public notice given prior to the date of the scheduled meeting.
Only such business shall be conducted at a special meeting of the stockholders
as shall have been brought before the meeting pursuant to our notice
requirement.
Our advance notice procedure further provides for stockholders to make
nominations of candidates for election as directors or to bring other business
before an annual meeting. Our stockholder notice procedure provides that only
persons who are nominated by, or at the direction of, our chairman of the board,
or by a stockholder who has given timely written notice to our secretary prior
to the meeting at which directors are to be elected, will be eligible for
election as our directors. Our stockholder notice procedure also provides that
at an annual meeting only such business may be conducted as has been brought
before the meeting by, or at the direction of, our chairman of the board, or by
a stockholder who has given timely written notice to our secretary of such
stockholder's intention to bring such business before such meeting. Under our
stockholder notice procedure, for notice of stockholder nominations to be timely
made at an annual meeting, such written notice must be received by our secretary
at our principal executive offices not later than the close of business on the
90th calendar day nor earlier than the close of business on the 120th calendar
day prior to the first anniversary of the preceding year's annual meeting,
provided, that in the event that the date of the annual meeting is more than 30
calendar days before or more than 60 calendar days after such anniversary date,
notice by the stockholder to be timely must be so delivered not earlier than the
close of business on the 120th calendar day prior to such annual meeting and not
later than the close of business on the later of the 90th calendar day prior to
such annual meeting or the 10th calendar day following the day on which public
announcement of a meeting date is first made by us. In no event will the public
announcement of an adjournment or postponement of an annual meeting commence a
new time period or extend any time period for the giving of notice as described
above.
Notwithstanding the foregoing, in the event that the number of directors to
be elected to our board is increased and there is no public announcement by us
naming all of the nominees for director or specifying
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the size of our increased board at least 100 calendar days prior to the first
anniversary of the preceding year's annual meeting, a stockholder's notice also
will be considered timely, but only with respect to nominees for any new
positions created by such increase, if it shall be delivered to our secretary at
our principal executive offices not later than the close of business on the 10th
calendar day following the day on which such public announcement is first made
by us. Under our stockholder notice procedure, for notice of a stockholder
nomination to be timely made at a special meeting which may be called, except as
otherwise required by law or the holders of preferred stock, by our board of
directors or chairman of the board, at which directors are to be elected, such
notice must be received by our secretary at our principal executive offices not
earlier than the close of business on the 120th calendar day prior to such
special meeting and not later than the close of business on the later of the
90th calendar day prior to such special meeting or the 10th calendar day
following the day on which public announcement is first made of the date of the
special meeting and of the nominees proposed by our board to be elected at such
meeting. In no event will the public announcement of an adjournment or
postponement of a special meeting commence a new time period or extend any time
period for the giving of notice as described above.
In addition, under our stockholder notice procedure, a stockholder's notice
to us proposing to nominate a person for election as a director or relating to
the conduct of business other than the nomination of directors must contain the
information required by our restated certificate of incorporation and restated
by-laws. Except as provided by law, our restated certificate of incorporation or
restated by-laws, if the chairman of a meeting determines that an individual was
not nominated, or other business was not brought before the meeting, in
accordance with our stockholder notice procedure, such individual will not be
eligible for election as a director, or such business will not be conducted at
such meeting, as the case may be. Notwithstanding the foregoing, if the
stockholder or qualified representative does not appear at the meeting to
present a nomination or business, such nomination will be disregarded and such
business will not be transacted.
AMENDMENT OF ZIMMER RESTATED CERTIFICATE OF INCORPORATION AND RESTATED BY-LAWS
Our restated certificate of incorporation provides that the certificate
generally may be amended by a majority of the outstanding shares of Zimmer
common stock; provided, however, that the affirmative vote of the holders of at
least 80% of our voting stock then outstanding, voting together as a single
class, is required to remove directors (which can only be done for cause) and to
amend provisions of the restated certificate of incorporation relating to the
inability of stockholders to act by written consent or call a special meeting,
the number, election, removal and term of our directors and the filling of
vacancies. Our restated certificate of incorporation further provides that the
restated by-laws may be altered, repealed and adopted by (i) an affirmative vote
of the majority of stockholders entitled to vote, voting as a single case;
provided, however, that the amendment of provisions of the restated by-laws
relating to the ability to call a special meeting and notice of stockholder
business and nominations shall require the affirmative vote of the holders of at
least 80% of the voting power of the outstanding shares of voting stock, voting
together as a single class, or (ii) an affirmative vote of the majority of the
whole board of directors.
INDEMNIFICATION
Our restated certificate of incorporation requires indemnification of our
past and present directors, officers, employees and agents to the fullest extent
permitted under Delaware law. Under Delaware law, a corporation may indemnify
any director, officer, employee or agent involved in a third party action by
reason of his agreeing to serve, serving or formerly serving as an officer,
director, employee or agent of the corporation, against all expenses, judgments,
fines and settlement amounts paid in the third party action, if the director,
officer, employee or agent acted in good faith and reasonably believed that his
actions were in, or not opposed to, the best interests of the corporation and,
with respect to any criminal proceeding, had no reasonable cause to believe that
his conduct was unlawful. In addition, a corporation may indemnify any director,
officer, employee or agent involved in a derivative action brought by or on
behalf of the corporation against expenses incurred in the derivative action, if
the director, officer, employee or agent acted in good faith and reasonably
believed that his actions were in, or not opposed to, the best interests of
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the corporation. If a person has been successful in defending a third party or
derivative action, indemnification for expenses incurred is mandatory under
Delaware law.
The statutory provisions for indemnification are nonexclusive with respect
to any other rights, such as contractual rights, to which a person seeking
indemnification may be entitled. Furthermore, under Delaware law a corporation
may advance expenses incurred by officers, directors, employees and agents in
defending any action upon receipt of an undertaking by the person to repay the
amount advanced if it is ultimately determined that such person is not entitled
to indemnification.
In addition, under our restated certificate of incorporation, we may
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee, or agent of our corporation or of another
corporation against any liability arising out of the person's status as a
director, officer, employee or agent of our corporation whether or not we would
have the power to indemnify such person against such expense, liability or loss
under the Delaware law.
RIGHTS AGREEMENT
On July 30, 2001, we entered into a Rights Agreement with Mellon Investor
Services LLC, referred to throughout this prospectus as the rights agreement,
which was amended on June 15, 2002. For information regarding how to receive the
rights agreement and amendment, see the section captioned "WHERE YOU CAN FIND
MORE INFORMATION."
ANTI-TAKEOVER EFFECTS
The rights are intended to have anti-takeover effects. If the rights become
exercisable, the rights will cause substantial dilution to a person or group
that attempts to acquire or merge with us in most cases. Accordingly, the
existence of the rights may deter a potential acquiror from making a takeover
proposal or tender offer. The rights should not interfere with any merger or
other business combination approved by our board of directors because we may
redeem the rights as described below and because our board of directors can
amend the rights agreement to exempt a transaction approved by our board of
directors so as to cause the rights to not become exercisable.
EXERCISABILITY OF RIGHTS
Under the rights agreement, one right attaches to each share of our common
stock outstanding and, when exercisable, entitles the registered holder to
purchase from us one one-thousandth of a share of Series A Participating
Cumulative Preferred Stock, par value US$0.01 per share, issuable in fractions,
at an initial purchase price of US$140.
The rights will not become exercisable until the earlier of:
- such time as we learn that a person or group acquired, or obtained the
right to acquire, beneficial ownership of securities representing more
than 20% of the shares of our common stock then outstanding; and
- such date, if any, as may be designated by our 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 our 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% of the shares of our common stock then
outstanding.
Additionally, at any time a person or a group acquires, or obtains the
right to acquire, beneficial ownership of securities representing more than 20%
of the shares of our common stock then outstanding, the flip-in or flip-over
features of the rights or, at the discretion of our board of directors, the
exchange features of the rights, may be exercised by any holder, except for such
person or group. Until a right is exercised, the holder thereof will have no
rights as a stockholder of our company, including, but not limited to, the right
to vote or receive dividends.
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"FLIP IN" FEATURE
In the event a person or group acquires, or obtains the right to acquire,
beneficial ownership of securities representing more than 20% of the shares of
our common stock then outstanding, the holder of each right, except for such
person or group, will have the right to receive, upon exercise of the right,
that number of one one-thousandths of a share of our Series A Participating
Cumulative Preferred Stock equal to the number of our shares of common stock
which at the time of such transaction would have a market value of twice the
exercise price of the right. For example, if we assume that the initial purchase
price of US$140 is still in effect on the date that the flip-in feature of the
right is exercised, any holder of a right, except for the person or group that
acquired, or obtained the right to acquire, beneficial ownership of securities
representing more than 20% of the shares of our common stock then outstanding,
can exercise his or her right by paying us US$140 in order to receive from us
shares of Series A Participating Cumulative Preferred Stock having a value equal
to US$280.
"EXCHANGE" FEATURE
At any time after a person or group acquires, or obtains the right to
acquire, beneficial ownership of securities representing more than 20%, but less
than 50%, of the shares of our common stock then outstanding, our board of
directors may, at its option, exchange all or some of the rights, except for
those held by such person or group, for:
- shares of our Series A Participating Cumulative Preferred Stock, shares
of our common stock or a combination of cash, stock and debt securities
having an aggregate value equal to one half the value of the Series A
Participating Cumulative Preferred Stock issuable upon exercise of a
right, or
- cash equal to the exercise price of a right.
Use of this exchange feature means that eligible rights holders would not have
to pay a purchase price to receive the cash, stock or debt securities we
distribute to them.
"FLIP OVER" FEATURE
In the event we are acquired in a merger or other business combination
transaction by a publicly traded company or 50% or more of our assets or our
earning power and our subsidiaries, taken as a whole, are sold or otherwise
transferred to a publicly traded company, each holder of a right, except for a
person or group that acquires, or obtains the right to acquire, beneficial
ownership of securities representing more than 20% of the shares of our common
stock then outstanding, will have the right to receive, upon exercise of the
right, that number of shares of common stock of such acquiring company which at
the time of such transaction would have a market value of twice the exercise
price of the right. In the event we are acquired in a merger or other business
combination transaction by a company that is not publicly traded or 50% or more
of our assets or our earning power and our subsidiaries, taken as a whole, are
sold or otherwise transferred to a company that is not publicly traded, each
holder of a right, except for a person or group that acquires, or obtains the
right to acquire, beneficial ownership of securities representing more than 20%
of the shares of our common stock then outstanding will have the right to
receive, upon exercise of the right, at the holders option, that number of
shares of the acquiring company or common stock of the surviving company which
at the time of such transaction would have a book value of twice the exercise
price of the right, or if the acquiring company has an affiliate which has
publicly traded common shares, that number of common shares of such affiliate
which at the time of the transaction would have a market value equal to twice
the exercise price of the right.
REDEMPTION OF RIGHTS
At any time before the earlier to occur of:
- the time that a person or group acquires, or obtains the right to
acquire, beneficial ownership of securities representing more than 20% of
the shares of our common stock then outstanding, or
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- August 5, 2011,
our board of directors may redeem all of the rights at a redemption price of
US$0.01 per right, subject to certain adjustments. The right to exercise the
rights, as described above under "Exercisability of Rights," will terminate upon
the action of our board of directors electing to redeem the rights, and at such
time, the holders of the rights will have the right to receive only the
redemption price for each right held.
ADJUSTMENT AND AMENDMENT OF RIGHTS
The number of preferred shares or other securities issuable upon exercise
of the rights is subject to adjustment by our board of directors in the event of
any change in our capital stock, whether by reason of changes in capitalization,
any distribution, evidences of indebtedness, options or warrants to holders of
capital stock or otherwise. The purchase price and the number of preferred
shares or other securities issuable upon exercise of the rights are subject to
adjustment in the event of a declaration of a stock dividend on the common
shares or a subdivision or combination of the common shares prior to an exchange
of the rights. At any time before a person or group acquires, or obtains the
right to acquire, beneficial ownership of securities representing more than 20%
of the shares of our common stock then outstanding, our board of directors may,
without the approval of any holders of the rights, amend or supplement the terms
of the existing rights agreement, except that no amendment or supplement may be
made that reduces the redemption price of the rights. However, if at any time
after a person or group acquires, or obtains the right to acquire, beneficial
ownership of securities representing more than 20%, or such lower percentage as
may be amended in the existing rights agreement, of the shares of our common
stock then outstanding, our board of directors may not adopt amendments to the
existing rights agreement that adversely affect the interests of holders of the
rights.
TERMINATION OF RIGHTS
If not previously exercised, the rights will expire at August 5, 2011,
unless we earlier redeem or exchange the rights or extend the final expiration
date.
SERIES A PARTICIPATING CUMULATIVE PREFERRED STOCK
In connection with the creation of the rights, as described above, our
board of directors has authorized the issuance of shares of Series A
Participating Cumulative Preferred Stock.
We have designed the dividend, liquidation, voting and redemption features
of our Series A Participating Cumulative Preferred Stock so that the value of
one one-thousandth of a share of our Series A Participating Cumulative Preferred
Stock approximates the value of one share of our common stock. Shares of our
Series A Participating Cumulative Preferred Stock may only be purchased after
the rights have become exercisable, and each share of the Series A Participating
Cumulative Preferred Stock:
- will be neither redeemable nor entitled to the operation of a retirement
or sinking fund and will rank junior to all other series of preferred
stock, unless otherwise provided in the terms of those series of
preferred stock;
- will have a preferential quarterly dividend in an amount equal to the
greater of:
-- 1,000 times any dividend declared on each share of common stock, such
number to adjusted pursuant to the certificate of designations if our
company makes certain stock distributions, or
-- US$0.05 per share less any amounts paid as a result of dividends on
our common stock since the end of the last fiscal quarter;
- in the event of liquidation, will entitle its holder to receive a
preferred liquidation payment equal to the greater of US$1,000 per share
and 1,000 times, as adjustable pursuant to the certificate of
designations, the payment made per share of common stock, in addition to
any accrued and unpaid dividends or distributions on the preferred stock;
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- will have 1,000 votes, as adjustable pursuant to the certificate of
designations, for each share of Series A Participating Cumulative
Preferred Stock held of record, voting together as one class with the
common stock and any other capital stock with general voting rights, and
if at the time of an annual meeting for the election of directors, six
quarterly dividends payable on the Series A Participating Cumulative
Preferred Stock are in default, the number of directors constituting the
board will be increased by two which seats will be voted on by the
holders of Series A Participating Cumulative Preferred Stock voting as a
separate class; and
- in the event of any merger, consolidation or other transaction in which
shares of common stock are converted or exchanged, will be entitled to
receive 1,000 times, as adjustable pursuant to the certificate of
designations, the amount and type of consideration received per share of
common stock.
The rights of our Series A Participating Cumulative Preferred Stock as to
dividends, liquidation and voting, and in the event of mergers and
consolidations, are protected by certain antidilution provisions. Whenever
dividends payable on the Series A Participating Cumulative Preferred Stock are
in default, until all accrued and unpaid dividends and distributions have been
paid in full, we will not, and will not permit any subsidiary to:
- declare or pay any dividend, make any distribution on, or redeem or
purchase any common stock;
- declare or pay any dividend or make any distribution on any stock ranking
equal to the Series A Participating Cumulative Preferred Stock except
dividends paid ratably on such stock;
- redeem or purchase or otherwise acquire for consideration any stock
ranking equal to the Series A Participating Cumulative Preferred Stock
except for a redemption or acquisition by us of such stock in exchange
for capital stock ranking junior to the Series A Participating Cumulative
Preferred Stock; and
- purchase or otherwise acquire for consideration any shares of Series A
Participating Cumulative Preferred Stock or any stock ranking equal to it
except in accordance with a purchase offer made in writing or made public
to all holders of such shares upon such terms as our board of directors
determines are fair and equitable to the stockholders.
Any amendment adversely affecting the rights of the Series A Participating
Cumulative Preferred Stock is subject to the approval of at least 66 2/3% of
such outstanding stock, voting as a separate class.
DELAWARE BUSINESS COMBINATION STATUTE
Section 203(a) of the DGCL provides that, subject to exceptions set forth
therein, an interested stockholder of a Delaware corporation shall not engage in
any business combination, including mergers, consolidations or acquisitions of
additional shares of the corporation, with the corporation for a three-year
period following the date that such stockholder becomes an interested
stockholder unless:
- prior to such date, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, other than statutorily excluded shares; or
- on or subsequent to such date, the business combination is approved by
the board of directors of the corporation and authorized at an annual or
special meeting of stockholders by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.
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Except as otherwise set forth in Section 203(c)(5) of the DGCL, an
interested stockholder is defined to include:
- any person that is the owner of 15% or more of the outstanding voting
stock of the corporation, or is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within three years immediately prior
to the date of determining whether the person is interested or not; and
- the affiliates and associates of any such person.
Section 203 may make it more difficult for a person who would be an
interested stockholder to effect various business combinations with a
corporation for a three-year period. We have not elected to be exempt from the
restrictions imposed under Section 203. The provisions of Section 203 may
encourage persons interested in acquiring us to negotiate in advance with our
board, since the stockholder approval requirement would be avoided if a majority
of the directors then in office approves either the business combination or the
transaction which results in any such person becoming an interested stockholder.
Such provisions also may have the effect of preventing changes in our
management. It is possible that such provisions could make it more difficult to
accomplish transactions which our stockholders may otherwise deem to be in their
best interests.
TRANSFER AGENT AND REGISTRAR
We have appointed Mellon Investor Services LLC as our transfer agent and
registrar for our common stock. The transfer agent's telephone number in the
United States is (800) 522-6645.
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COMPARATIVE RIGHTS OF INCENTIVE SHAREHOLDERS
AND ZIMMER STOCKHOLDERS IN GENERAL
Holders of InCentive bearer shares will receive shares of Zimmer common
stock as part of the consideration in our offer. InCentive is organized under
the laws of Switzerland and Zimmer is organized under the laws of Delaware.
InCentive does not file its articles of association with the SEC and has not
provided Zimmer with a copy of such document. Information with respect to
InCentive shareholders' rights has been included to the extent it is publicly
known or was reasonably available to Zimmer. The following is a summary of the
material differences among (i) the current rights of Zimmer stockholders under
U.S. securities law, Delaware law, the restated certificate of incorporation of
Zimmer, the restated by-laws of Zimmer and the Zimmer rights agreement prior to
the consummation of the proposed transaction, and (ii) the rights of InCentive
shareholders under Swiss law and, to the extent that such information is
publicly known or was reasonably available to Zimmer, InCentive's articles of
association.
The following summary, however, is not complete and does not identify all
differences that may, under given situations, be material to InCentive
shareholders and is subject in all respects, and is qualified by reference, to
U.S. state and federal securities law, Swiss law, Delaware law, the restated
certificate of Zimmer, the restated by-laws of Zimmer, the Zimmer rights
agreement and InCentive's articles of association. For more information
regarding how to obtain any of these documents, see the section captioned "WHERE
YOU CAN FIND MORE INFORMATION."
AUTHORIZED CAPITAL STOCK
ZIMMER
The authorized capital stock of Zimmer is set forth in the section
captioned "DESCRIPTION OF ZIMMER CAPITAL STOCK."
INCENTIVE
Based on publicly available information, as of April 30, 2003, the nominal
share capital of InCentive was CHF 42,944,040, consisting of 2,147,202 fully
paid-in bearer shares, nominal value CHF 20 per share. InCentive's articles of
association authorize the board of directors to increase the nominal share
capital without shareholders' approval up to an amount of CHF 21,472,020 by
issuing up to 1,073,601 bearer shares, nominal value CHF 20 per share. This
authorization expires on May 16, 2004. InCentive's articles of association also
provide that the nominal share capital may be increased if conversion or option
rights to new shares are exercised. Such conversion or option rights may be
issued by the board of directors without shareholders' approval on a stand-alone
basis or in connection with bonds or similar financing instruments. The issuance
of such conversion or option rights may lead to a nominal share capital increase
by an amount of up to CHF 21,472,020 by issuing up to 1,073,601 bearer shares,
nominal value CHF 20 per share.
PREFERRED STOCK
ZIMMER
Zimmer's restated certificate authorizes the board of directors to provide
for the issuance from time to time of one or more series of preferred stock with
certain rights above those of common stock. The Zimmer board of directors has
authorized the issuance of 2,000,000 shares of Series A Participating Cumulative
Preferred Stock in connection with the rights agreement. The Series A
Participating Cumulative Preferred Stock is only issuable upon the exercise of
the rights as set forth in the rights agreement. For a further description, see
the section captioned "DESCRIPTION OF ZIMMER CAPITAL STOCK -- Preferred
Stock -- Series A Participating Cumulative Preferred Stock" and "-- Rights
Agreement."
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INCENTIVE
InCentive may issue preferred stock by amendment of its articles of
association as approved by resolution of its shareholders. Preferential rights
of preferred stock may extend to, in particular, cumulative or non-cumulative
dividends, liquidation proceeds and preemptive rights in the case of the
issuance of new shares.
If preemptive rights of existing shareholders with respect to the issuance
of such new classes of shares are to be waived or restricted, the respective
resolutions are subject to a qualified majority vote of two thirds of the shares
represented at the meeting. For further discussion, see the sections captioned
"-- Voting Rights; Cumulative Voting" and "-- Preemptive Rights."
VOTING RIGHTS; CUMULATIVE VOTING
ZIMMER
Each share of Zimmer common stock is entitled to one vote per share on all
matters to be voted upon by such shares. Section 214 of the DGCL, provides that
no cumulative voting rights exist in respect of elections of directors unless
otherwise stated in the certificate of incorporation. Because Zimmer's restated
certificate does not specifically provide for cumulative voting in elections of
directors, shares of Zimmer common stock cannot be cumulatively voted.
The presence, in person or by proxy, of shares representing a majority of
the votes entitled to be cast at any Zimmer stockholders' meeting constitutes a
quorum, except that when specified business is to be voted on by a class or
series of stock voting as a class, the holders of a majority of the voting power
of the outstanding shares of such class or series shall constitute a quorum of
such class or series for the transaction of such business. Pursuant to Zimmer's
restated by-laws, elections of directors at all meetings of stockholders called
for such purpose will be by ballot. Except as otherwise provided in any
resolution adopted by our board with respect to any series of preferred stock,
proposals are passed upon a vote of the majority of the shares of Zimmer common
stock represented at a meeting at which a quorum is present. Pursuant to
Zimmer's restated certificate, certain corporate actions and director elections
require the affirmative vote of at least 80% of the voting power of all shares
of Zimmer entitled to vote.
INCENTIVE
Under Swiss law, shareholders pass resolutions and elect directors upon the
vote of an absolute majority of the votes represented, unless provided otherwise
by law or the articles of association. Each bearer share of InCentive entitles
its holder to one vote.
According to InCentive's articles of association, shareholders have the
right to vote at the general meeting only if they provide a confirmation by the
custodian bank pursuant to which the respective shares may only be resold after
the respective general meeting has been hold.
Under Swiss law, proxies of shareholders are entitled to attend
shareholders' meetings and exercise all rights of the represented shareholders
at such meeting.
According to InCentive's articles of association the chairman of the
shareholders meeting decides on the voting procedure. Secret voting has to be
executed if one shareholders applies for it.
Swiss law does not provide for the right of cumulative voting. Further,
InCentive's articles of association do not provide for any specific rights for
minority shareholders or specific groups of shareholders.
STOCK CLASS RIGHTS
ZIMMER
Under the DGCL, any change to the rights of holders of Zimmer common stock
or any series of preferred stock would require an amendment to the certificate
of incorporation. The DGCL provides that
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the holders of shares of a class or series shall be entitled to vote as a class
upon a proposed amendment if the amendment will:
- increase or decrease the authorized shares of the class or series;
- increase or decrease the par value of the shares of the class or series;
or
- alter or change the powers, preferences or special rights of the shares
of the class or series so as to affect them adversely.
Zimmer's restated certificate grants the board of directors the right to
issue shares of common stock as well as shares of preferred stock. Each share of
authorized common stock shall be identical in all respects to every other share
of common stock and shall have equal rights and privileges. Holders of common
stock do not have preemptive or conversion rights or other subscription rights.
The rights, preferences and privileges of holders of common stock are subject
to, and may be adversely affected by, the rights of holders of any series of
preferred stock which may be designated by the board of directors and issued in
the future. For further discussion on the rights of Zimmer common stock, see the
section captioned "DESCRIPTION OF ZIMMER CAPITAL STOCK -- Common Stock."
Zimmer's board of directors has the authority to issue from time to time in
one or more series preferred stock, to establish the number of shares of each
series and to fix the designation, powers, privileges, preferences and rights of
the shares of each such series and the qualifications, limitations and
restrictions thereof. The number of authorized shares of preferred stock may be
increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the
outstanding common stock, without a vote of the holders of the preferred stock,
or of any series thereof, unless a vote of any such holders is required pursuant
to any certificate of designation. Any amendment that adversely affects the
rights of the holders of Zimmer's Series A Participating Cumulative Preferred
Stock must be approved by at least 66 2/3% of such outstanding stock, voting as
a separate class. For further discussion on the rights of Zimmer's Series A
Participating Cumulative Preferred Stock, see the section captioned "DESCRIPTION
OF ZIMMER CAPITAL STOCK -- Preferred Stock -- Series A Participating Cumulative
Preferred Stock."
INCENTIVE
Under Swiss law, the general meeting of shareholders may, by virtue of an
amendment to the articles of association, decide on the issue of preferred
shares or to convert existing shares into preferred shares. Unless otherwise
provided for in the articles of association, a company, having issued preferred
shares, may only issue new preferred shares with preferential rights to the
disadvantage of existing shareholders with the consent of a special meeting of
the impaired preferred shareholders as well as that of a general meeting of all
shareholders. The articles of association of the company must ensure that each
voting stock class may elect at least one representative to the board of
directors.
SUPERMAJORITY VOTING
ZIMMER
Unless otherwise specified in a corporation's certificate of incorporation,
the DGCL requires a majority vote of stockholders to approve a merger, sale of
assets or similar reorganization transaction. Zimmer's restated certificate does
not specifically provide for such a supermajority vote. However, the affirmative
vote of at least 80% of the outstanding shares is necessary to alter, amend or
adopt any provision inconsistent with the certain provisions of the restated
certificate. For a further discussion, see the section captioned "DESCRIPTION OF
ZIMMER CAPITAL STOCK."
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INCENTIVE
Resolutions regarding extraordinary matters listed in the Swiss Code of
Obligations (Art. 704) require the affirmative vote of at least two-thirds of
the votes represented and the absolute majority of the par value of the shares
represented. Such extraordinary matters include:
- an alteration of the purpose of the company;
- the creation of shares with increased voting powers;
- the implementation of restrictions on the transfer of registered shares
and the removal of such restrictions;
- the authorized or conditional increase of the share capital;
- the increase of the share capital out of equity, against contribution in
kind, or for the purpose of an acquisition of assets and the granting of
special benefits;
- the restriction or suspension of preemptive rights;
- the change of the registered office of the company; and
- the dissolution of the company without liquidation.
SHARES WITH PRIVILEGED VOTING RIGHTS
ZIMMER
Under the DGCL, each stockholder of a Delaware corporation is entitled to
one vote for each share of capital stock held by such stockholder unless the
certificate of incorporation provides otherwise. Zimmer's restated certificate
does not alter the voting rights of Zimmer stockholders, and allows for a
certificate of designations to provide certain rights to any class of preferred
stock. Pursuant to Zimmer's certificate of designations, each share of our
Series A Participating Cumulative Preferred Stock will have 1,000 votes, as
adjustable, with all shares of the class voting together as one class with the
common stock and any other capital stock with general voting rights. If at the
time of an annual meeting for the election of directors six quarterly dividend
payment are in default, the board of directors will be increased by two seats
which seats will be voted on by the holders of Series A Participating Cumulative
Preferred Stock voting as a single class.
INCENTIVE
As InCentive's articles of association provide that each share carries one
vote, InCentive may, by amendment of its articles of association, issue stock
with a lesser par value, thereby creating shares with privileged voting rights.
The par value of such shares may not be less than 10% of the par value of the
common shares. If shares with privileged voting rights are to be issued and/or
preemptive rights of existing shareholders with respect to the issuance of such
shares are to be waived or restricted, the respective resolutions are subject to
a qualified majority vote of two thirds of the shares represented at the
meeting. For further discussion, see the sections captioned "-- Voting Rights;
Cumulative Voting" and "-- Preemptive Rights."
ACTION WITHOUT A MEETING
ZIMMER
Under the DGCL, unless otherwise provided in a corporation's certificate of
incorporation, any action required or permitted to be taken at a stockholders'
meeting may be taken by written consent signed by the holders of the number of
shares that would have been required to effect the action at an actual meeting
of the stockholders. Zimmer's restated certificate prohibits stockholders from
taking action by written consent.
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INCENTIVE
Under Swiss law, resolutions by written consent are not permitted.
MEETINGS
ZIMMER
Under the restated by-laws, Zimmer will hold an annual meeting on such date
and at such place as may be fixed by our board of directors. Under Section
211(d) of the DGCL, the board of directors or those persons authorized by the
corporation's certificate of incorporation or by-laws may call a special meeting
of the corporation's stockholders. Pursuant to Zimmer's restated certificate and
restated by-laws, a special meeting of the Zimmer stockholders may be called
only by a majority of the entire board of directors or by the chairman of the
board.
INCENTIVE
"General Meeting" means any shareholders' meeting. An annual (ordinary)
general meeting must be held within six months following the end of a financial
year for the purpose of approval of annual financial statements and the annual
report. Any general meeting which is called in addition to the annual (ordinary)
general meeting is called an "extraordinary" general meeting. The invitation to
the general meeting, together with the date and the agenda and the proposals,
must be published in the Swiss Official Gazette of Commerce twenty days prior to
such general meeting.
Under Swiss law, extraordinary general meetings may be called by the board,
or, if necessary, by the statutory auditors. The board may be requested to call
an extraordinary general meeting by one or more shareholders representing
together at least 10% of the share capital or if resolved by an ordinary
shareholders' meeting. General meetings may be called upon shorter notice only
if all shareholders are represented at the relevant meeting. However, such
option has no practical relevance for listed companies such as InCentive.
DIRECTOR NOMINATIONS/SHAREHOLDER PROPOSALS
ZIMMER
The restated by-laws provide for the nomination of persons to the board of
directors and for stockholder proposals of business to be considered by
stockholders. Please see the section captioned "DESCRIPTION OF ZIMMER CAPITAL
STOCK."
INCENTIVE
Under Swiss law, one or more shareholders representing together at least
10% of share capital may request the calling of a general meeting and items to
be included in the agenda. Shareholders representing shares with an aggregate
nominal value of at least one million Swiss francs may request that a specific
item be put on the agenda of the general shareholders' meeting. Additionally, a
resolution of the general meeting may demand that another general meeting be
held.
DIRECTORS
ZIMMER
Zimmer's restated certificate provides that the number of directors of
Zimmer shall be determined by a resolution of the whole board of directors, but
shall not be less than three. The board currently has five directors. The
directors are divided into three classes, as nearly as equal in number as
possible, with each class serving a three year term to expire at the third
succeeding annual meeting of stockholders after their election, staggered such
that one class will expire each year. Each director holds office until his or
her successor is duly elected and qualified.
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Section 141 of the DGCL provides that the stockholders of a Delaware
corporation who comply with certain procedural requirements and who have a
proper purpose have the right to: inspect the corporation's stock ledger, a list
of its stockholders and its other books and records; and make copies or extracts
of those materials during normal business hours, provided that (i) a stockholder
makes a written request under oath stating the purpose of his inspection and
(ii) the inspection is for a purpose reasonably related to a person's interest
as a stockholder.
Zimmer's restated certificate provides that directors may be removed from
office only for cause by a the affirmative vote of the holders of 80% of the
voting stock then outstanding, voting together as a single class. Zimmer's
restated certificate also provides that newly created directorships resulting
from any increase in the number of directors and any vacancy in the board of
directors resulting from death, resignation, or removal from office shall only
be filled by a majority vote of the remaining directors. A director elected in
this manner will serve for the remainder of the full term of the class of
directors in which the new directorship was created, or the vacancy occurred,
and until such director's successor shall have been duly elected and qualified.
INCENTIVE
Neither the Swiss Code of Obligations nor InCentive's articles of
association provide for a maximum number of members of the board of directors.
As of April 30, 2003, InCentive's board of directors consisted of five
directors. Under Swiss law, the shareholders of a Swiss company may, at a
general meeting, (i) appoint the members of the board of directors and (ii)
grant discharge to members of the board of directors.
Under Swiss law, the board may not be classified with respect to the term
of office any director may hold. However, a staggered board may be created by
electing directors for the same term of office at different points of time.
InCentive's articles of association stipulate that the board members are
elected for a period of three office periods. One office period is the period
from one ordinary shareholders' meeting until the next ordinary shareholders'
meeting.
Under Swiss law, board members may be removed at any time without cause and
with immediate effect by resolution of the shareholders at an ordinary or
extraordinary general meeting of the shareholders, irrespective of any
provisions of InCentive's articles of association or any service contract the
director might have with InCentive. Compensation may be payable by InCentive
pursuant to any service contract.
In the event of a vacancy, the remaining directors chair InCentive until
the next election of board members at a general meeting. Newly elected board
members do not, according to InCentive's articles of association, enter in the
period of office of their predecessors. If the vacancies endanger the ability of
the board of directors to make decisions, the remaining board members must call
an extraordinary general meeting for elections.
STANDARD OF CONDUCT FOR DIRECTORS
ZIMMER
None of the DGCL, Zimmer's restated certificate or restated by-laws contain
specific provisions setting forth the standard of conduct of a director. The
scope of the fiduciary duties of directors is generally determined by the courts
of the State of Delaware. In general, directors have a duty to act in good faith
without self-interest, on a well-informed basis and in a manner they reasonably
believe to be in the best interest of the shareholders.
Zimmer's restated by-laws provide that the business and affairs of the
corporation shall be managed by or under the direction of the board of
directors. Additionally, the restated by-laws authorize the board of directors
or any committee of the board of directors to delegate officers of the
corporation to the extent permitted by law.
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INCENTIVE
Under Swiss law, a company's directors and senior officers are bound to
performance standards as specified in the Swiss Code of Obligations.
Specifically, members of the board must act in accordance with the duties
imposed by statutory law, in accordance with the articles of association and in
the best interest of the company. Directors and members of senior management are
generally disqualified from participating in decisions that directly affect
them. In addition, directors and senior officers must carry out their duties
with due care, safeguard the interest of the company in good faith and extend
equal treatment to all shareholders in like circumstances. The test for the duty
of care is primarily an objective one: the director or senior officer is
required to apply the care a reasonable and conscious person would apply under
the same circumstances. To some extent, particular skills and functions of the
board member or officer concerned may be taken into consideration.
To the extent that Swiss law allows the delegation of executive management,
and such delegation is actually made by virtue of written organizational
regulations, the responsibility of the board is limited to due election,
instruction and supervision of the executive management. InCentive has delegated
executive management to InCentive Asset Management, an investment manager
unaffiliated with InCentive or any of its subsidiaries, to the extent permitted
by law.
LIMITATION OF DIRECTOR LIABILITY
ZIMMER
As permitted by the DGCL, Zimmer's restated certificate provides that
directors of Zimmer shall not be personally liable to Zimmer or its stockholders
for monetary damages resulting from a breach of fiduciary duty as a director
except, as required by the DGCL, for liability arising from (i) any breach of
the director's duty of loyalty to Zimmer or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) payment of a dividend or approval of a stock repurchase
in violation of Section 174 of the DGCL or (iv) any transaction from which the
director derived an improper personal benefit.
INCENTIVE
Swiss law does not permit a company to exempt any member of its board of
directors, any person engaged in the management or liquidation of the company or
its auditors from any liability for damages suffered by the company, the
shareholders or the company's obligees which were caused by intentional or
negligent violation of that person's duties. However, the general meeting of
shareholders may pass a resolution discharging the members of the board of
directors from liability for certain actions. Such release is effective only for
facts that have been disclosed and only vis-a-vis the company and those
shareholders who have consented to the resolution or who acquired shares
subsequently with knowledge of the resolution.
DIRECTORS' CONFLICTS OF INTEREST
ZIMMER
The DGCL provides that contracts or transactions between a corporation and
one or more of its directors, or between a corporation and any other entity in
which one or more of its directors are directors or have a financial interest,
are not void or voidable solely because of such interest or because such
interested director is present at or participates in the meeting of the board
that authorizes the transaction or because his or her vote is counted, as long
as one of the following three conditions is satisfied: (i) the interest is
disclosed and a majority of the disinterested directors approve the transaction
(this constituting not only approval, but also a quorum); (ii) the interest is
disclosed and the transaction is approved "in good faith" by vote of the
stockholders; or (iii) the transaction is fair to the corporation as of the time
it is authorized, approved or ratified by the board of directors, a committee
thereof or the stockholders.
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INCENTIVE
Swiss law does not have a general provision on conflicts of interest.
However, the Swiss Code of Obligations contains a provision which requires
directors to safeguard the interests of the company, and to adhere to a duty of
loyalty and a duty of care. Breach of this provision entails personal liability
of the directors vis-a-vis the company. In addition, Swiss law contains a
provision under which payments made to a shareholder not at arm's length must be
repaid to the company. Publicly listed companies domiciled in Switzerland have
to render a corporate governance report, in which the business activities of the
members of the board of directors have to be disclosed.
INDEMNIFICATION AND INSURANCE
ZIMMER
Zimmer's restated certificate requires indemnification of its past and
present directors, officers, employees and agents to the fullest extent
permitted under the DGCL. Under the DGCL, a corporation may indemnify any
director, officer, employee or agent involved in a third party action by reason
of his agreeing to serve, serving or formerly serving as an officer, director,
employee or agent of the corporation, against all expenses, judgments, fines and
settlement amounts paid in the third party action, if the director, officer,
employee or agent acted in good faith and reasonably believed that his actions
were in, or not opposed to, the best interests of the corporation and, with
respect to any criminal proceeding, had no reasonable cause to believe that his
conduct was unlawful. In addition, a corporation may indemnify any director,
officer, employee or agent involved in a derivative action brought by or on
behalf of the corporation against expenses incurred in the derivative action, if
the director, officer, employee or agent acted in good faith and reasonably
believed that his actions were in, or not opposed to, the best interests of the
corporation. If a person has been successful in defending a third party or
derivative action, indemnification for expenses incurred is mandatory under the
DGCL.
The statutory provisions for indemnification are nonexclusive with respect
to any other rights, such as contractual rights, to which a person seeking
indemnification may be entitled. Furthermore, under the DGCL a corporation may
advance expenses incurred by officers, directors, employees and agents in
defending any action upon receipt of an undertaking by the person to repay the
amount advanced if it is ultimately determined that such person is not entitled
to indemnification.
In addition, under Zimmer's restated certificate, Zimmer may purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of Zimmer or of another corporation against any liability
arising out of the person's status as a director, officer, employee or agent of
Zimmer whether or not Zimmer would have the power to indemnify such person
against such expense, liability or loss under the DGCL.
INCENTIVE
It is admissible under Swiss law to agree in a fiduciary agreement to hold
a board member harmless for any liabilities that he is confronted with during
his term of office, save for tort, gross negligence, willful intent or
contradictory action with regard to legitimate instructions. Swiss law permits
the company or each board member or officer individually to purchase and
maintain insurance for directors, officers and auditors. The coverage of such
insurances depends on the individual insurance policy.
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SHAREHOLDER DERIVATIVE SUITS
ZIMMER
Under the DGCL, a stockholder of a Delaware corporation may initiate a
derivative action to enforce a right of the corporation if the corporation fails
to enforce that right itself. The complaint pursuant to such an action must
state that:
- the plaintiff was a stockholder in the corporation at the time of the
transaction of which the plaintiff complains; or
- the plaintiff's shares thereafter devolved on the plaintiff by operation
of law;
and either:
- allege with particularity the efforts made by the plaintiff to first
obtain the relief sought by the plaintiff from the corporations
directors; or
- state the reasons for the plaintiff's failure to obtain such relief or
make such effort.
INCENTIVE
Under Swiss law, each shareholder is entitled to file an action for damage
caused to the company. The claim of the shareholder is for performance to the
company. If the shareholder, based upon the factual and legal situation, had
sufficient cause to file an action, the judge shall discretionally divide the
costs incurred between the plaintiff and the company to the extent the costs
should not be imposed on the defendant.
DIVIDENDS
ZIMMER
Under the DGCL, a Delaware corporation's board of directors, subject to
restrictions set forth in the corporation's certificate of incorporation, may
declare and pay dividends out of (i) the surplus of the corporation, which is
defined as net assets less statutory capital, or (ii) out of the net profits of
the current or the preceding fiscal year. If, however, the capital of the
corporation has been diminished to an amount less than the aggregate amount of
capital represented by the issued and outstanding stock of all classes having
preference upon the distribution of assets, the board may not declare and pay
dividends out of the corporation's net profits until the deficiency in the
capital has been repaired. The restated certificate does not contain any
provision restricting dividends on common stock beyond the statutory provisions.
INCENTIVE
Under Swiss law, only the ordinary general meeting of shareholders resolves
on the distribution of dividends. Consequently, Swiss law does not provide for
the distribution of interim dividends. Dividends may only be paid out of the
audited balance sheet profit or out of reserves created for this purpose.
Payments out of the share capital are not allowed, and interest shall not be
paid on the share capital. In this respect, the share capital includes share
premiums, (i.e., the excess of the consideration for the issue of shares over
the aggregate nominal share capital, if any).
Prior to the distribution of dividends, 5% of the annual profits must be
allocated to the general reserve until the amount of general reserves has
reached 20% of the paid-in nominal share capital. The articles of association
can provide for a higher general reserve or for the creation of further reserves
setting forth their purpose and use.
The board of directors may propose that a dividend be paid out, but can not
resolve the dividend itself. Dividends require approval by the shareholders.
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APPRAISAL RIGHTS
ZIMMER
The DGCL generally provides that the stockholders of a Delaware corporation
involved in a merger or consolidation have the right to demand and receive
payment of the fair value of their stock. Appraisal rights are not available,
however, to holders of shares which are:
- listed on a national securities exchange,
- designated on a national market system security on an interdealer
quotation system operated by the National Association of Securities
Dealers, Inc., or
- held of record by more than 2,000 stockholders;
Appraisal rights are available under the DGCL if stockholders are required
to accept in the merger or consolidation anything other than a combination of:
- shares of stock or depository receipts of the surviving corporation in
the merger or consolidation, or
- shares of stock or depositary receipts of another corporation that, at
the effective date of the merger or consolidation will be:
-- listed on a national securities exchange;
-- designated on a national market system security on an interdealer
quotation system operated by the National Association of Securities
Dealers, Inc.; or
-- held of record by more than 2,000 stockholders.
INCENTIVE
There are no appraisal rights under Swiss law. However, the Swiss Stock
Exchange Act provides that upon a public takeover offer for the shares of a
listed Swiss company, and the offeror having acquired or contracted to acquire
more than 98% of the voting rights in the company, the offeror may, within three
months of the expiration of the offer, bring a court action against the company
with a motion to cancel the outstanding shares (and other equity securities, if
any (a squeeze-out)). The remaining shareholders may participate in these
proceedings. After such cancellation has been awarded, the target company
reissues the securities to the offeror against payment of the offer price or
exchange of the offered shares and passes on the price paid by the offeror or
the shares received from the offeror, as the case may be, to the holders of the
cancelled securities.
PREEMPTIVE RIGHTS
ZIMMER
Under the DGCL, a stockholder of a Delaware corporation is not entitled to
preemptive rights to subscribe for additional issuances of stock or any security
convertible into stock unless preemptive rights are specifically granted in the
certificate of incorporation or otherwise contractually granted. Zimmer's
restated certificate does not provide for any preemptive rights.
INCENTIVE
Under Swiss law, the issuance of (i) voting or non-voting shares, or (ii)
rights to subscribe for, or convert into, equity securities (which may be
connected to debt instruments), against consideration, is subject to prior
approval of the shareholders' meeting. In addition, such rights must at first be
offered to the existing equity shareholders in proportion to the respective
nominal values of their holdings. The shareholders' meeting may, but only for
valid reasons and subject to a qualified majority, withdraw or restrict such
preemptive rights. Valid reasons for the withdrawal of preemptive rights are, in
particular, the takeover of an enterprise, or parts thereof, and the acquisition
of participations, including the participations
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of employees in the company. No shareholder shall be advantaged or disadvantaged
by such withdrawal without valid reason.
AMENDMENTS TO CHARTER DOCUMENTS
ZIMMER
Under the DGCL, unless the corporation's certificate of incorporation
requires a greater vote, any amendment to the certificate of incorporation
requires:
- the approval of the board of directors;
- the affirmative vote of a majority of the outstanding stock entitled to
vote on the amendment; and
- the affirmative vote of a majority of the outstanding stock of each class
entitled to vote on the amendment of a class.
Zimmer's restated certificate generally may be amended by a majority of the
outstanding shares of Zimmer common stock; provided, however, that the
affirmative vote of at least 80% of the outstanding shares is necessary to
alter, amend or adopt any provision inconsistent with certain articles. For a
further discussion, see the section captioned "DESCRIPTION OF ZIMMER CAPITAL
STOCK."
INCENTIVE
Under Swiss law, shareholders may by majority resolution and qualified
majority resolution, as the case may be, amend any provisions of the company's
articles of association, subject to mandatory statutory provisions. Under Swiss
law, the board of directors is not authorized to amend the articles of
association. Some exceptions to this principle apply in connection with the
implementation of capital increases. Amendments affecting the rights of the
holders of any class of shares may, depending on the rights attached to the
class and the nature of the amendments, also require approval by resolution of
the classes affected in a separate class meeting. For a further discussion, see
the section captioned "-- Stock Class Rights."
BY-LAWS
ZIMMER
Section 109 of the DGCL provides that a corporation's by-laws may be
amended or repealed by the stockholders and, to the extent provided for in the
certificate of incorporation, the board of directors. Zimmer's restated
certificate provides that the by-laws may be altered, repealed and adopted by
(i) an affirmative vote of the majority of the stockholders entitled to vote,
voting as a single class, provided, however, that the affirmative vote of at
least 80% of the outstanding shares is necessary to alter, amend or adopt any
provision inconsistent with certain articles (see the section captioned
"DESCRIPTION OF ZIMMER CAPITAL STOCK") or (ii) an affirmative vote of the
majority of the whole board of directors.
INCENTIVE
According to InCentive's articles of association, the board of directors
may pass organizational regulations.
SHARE ACQUISITION PROVISIONS
ZIMMER
Section 203 of the DGCL prohibits a Delaware corporation from engaging in
mergers, dispositions of 10% or more of its assets, issuances of stock and
business combinations with a person or group that owns 15% or more of the voting
stock of the corporation, referred to as an interested stockholder, for a period
of three years of such person becoming an interested stockholder unless (i) the
board of directors approved
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the business combination or the transaction that resulted in the person or group
becoming an interested stockholder, (ii) after the completion of the transaction
that resulted in the person or group becoming an interested stockholder, the
person or group acquired at least 85% of the voting stock other than stock owned
by inside directors and certain employee stock plans, or (iii) after the person
or group became an interested stockholder, the board of directors and at least
two-thirds of the voting stock (other than stock owned by the interested
stockholder) approved the business combination. Zimmer, in its restated
certificate, did not expressly elect to "opt out" of Section 203 of the DGCL
and, therefore, Zimmer is governed by the limitations set forth in Section 203
of the DGCL.
INCENTIVE
Under Swiss law, there is no similar prohibition of business combinations
with interested shareholders. However, in certain circumstances, shareholders
and members of the board of Swiss companies, as well as persons close to them,
must refund the company for any payments not made on an arm's length basis.
ANTI-TAKEOVER MEASURES
ZIMMER
Delaware courts will generally apply a policy of judicial deference to the
decisions of a Delaware corporation's board of directors to adopt anti-takeover
measures in the face of a potential acquisition or takeover if the directors are
able to show that (i) they had reasonable grounds for believing that the
acquisition or takeover proposal presented a threat to the corporation's policy
and effectiveness, and (ii) the board action taken was reasonable in relation to
the threat posed. For a description of Zimmer's anti- takeover provisions, see
the sections captioned "DESCRIPTION OF ZIMMER CAPITAL STOCK -- Certain
Anti-Takeover Provisions of Our Restated Certificate of Incorporation and
Restated By-laws" and "-- Rights Agreement."
INCENTIVE
Under Swiss law, directors of a company have a duty to take only those
actions which are in the interests of the company. Generally, anti-takeover
measures are not actions which fall within this category. Anti-takeover measures
of public companies are partly regulated by the Swiss Stock Exchange Act. From
the time a takeover offer is published until the result is announced, the board
of the target company may not enter into legal transactions which would have the
effect of significantly altering the assets or liabilities of the target
company. Decisions taken at a general meeting of shareholders are not subject to
this restriction and may be implemented irrespective of whether they were
adopted before or after publication of an offer. Although this means that in
general the board of the target company may not take steps designed to make the
company less attractive to the offeror or harder for it to acquire the target,
there are certain permissible maneuvers to defeat a hostile bidder, especially
if they are put into place before an actual bid has surfaced. As opposed to
certain pre-offer techniques, which usually require a resolution of the general
meeting, most post-offer maneuvers are proscribed by the Swiss takeover rules
(Swiss Stock Exchange Act and related Ordinances).
STOCKHOLDER RIGHTS PLAN
ZIMMER
For a summary of Zimmer's stockholder rights plan, see the section
captioned "DESCRIPTION OF ZIMMER CAPITAL STOCK -- Rights Agreement."
INCENTIVE
Swiss law does not allow companies to adopt shareholder rights plans.
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DISCLOSURE OF INTERESTS UNDER SWISS LAW
Under the Directive on Information Relating to Corporate Governance
(Corporate Governance Directive) of the SWX Swiss Exchange, the listed companies
must disclose, inter alia, the shares held by members of the board or the
executive management and parties related to such persons, in toto. Such
disclosure must be made in an annex to the annual report.
The Swiss Stock Exchange Act and the related Ordinances require a person
who has a certain interest in equity securities of a Swiss company listed in
whole or in part on a Swiss stock exchange to notify the company and the Swiss
stock exchange where the equity securities in question are listed. The
obligation to disclose is triggered by a change from below a notifiable
percentage to, or above, such percentage, and vice versa. The notifiable
percentages are 5, 10, 20, 33 1/3, 50 or 66 2/3% of the voting rights,
irrespective of whether or not such voting rights may be exercised. Persons
acting in concert, due to shareholders' agreements or as members of a group or a
family, for example, are also subject to the disclosure obligation. Securities
dealers are obliged to disclose their holdings if they are trading shares in
their own name and for their own account. A shareholder may also passively
reach, exceed or fall below one of the above thresholds due to an increase or a
reduction of the share capital. The notification to the company and the stock
exchange must be made no later than four trading days following the day upon
which the obligation to notify arises. The company must then publish the
notified share interests within two trading days in the Swiss Commercial Gazette
and in an electronic medium publishing stock market information. There are no
provisions under Swiss law entitling the company to investigate the beneficial
ownership of its shares by serving notice on shareholders who in response to
such notice must reveal their shareholdings.
Additionally, a disclosure requirement exists under Swiss company law
according to which a listed company must disclose in its annual report the
identity of all of its shareholders who hold more than 5% of its voting rights.
MANDATORY BID RULES UNDER SWISS LAW
Takeovers of public companies are regulated by the Swiss Stock Exchange
Act. The Swiss Stock Exchange Act provides that when any person acquires, even
by a series of transactions over a period of time, shares which, together with
shares held or acquired by persons acting in concert with it, exceed the
threshold of 33 1/3% or more of the voting rights of a public company, the
acquirer must make an offer for all of the equity shares of the company, whether
voting or non-voting. The offer price may not be lower than the current stock
market price and must not be below 25% of the highest price paid by the offeror
in the preceding 12 months for equity securities of the target company. The
offer price may be settled by cash payment or in exchange for equity securities.
The Swiss Stock Exchange Act allows a Swiss target company to opt out of the
mandatory offer rules by adopting an article to this effect in its articles of
association. Furthermore, target companies may raise the threshold triggering a
mandatory offer requirement in their articles of incorporation from 33 1/3% to
no more than 49% of the voting rights. InCentive's articles of association
contain an opting-out clause. As a consequence, shareholders or groups of
shareholders have no obligation to make a mandatory public offer to all other
shareholders if their shareholdings reach the thresholds set forth above.
RIGHTS OF PURCHASE AND REDEMPTION
ZIMMER
Under the DGCL, a corporation may purchase or redeem its own shares out of
surplus, provided, generally that no repurchase or redemption shall occur:
- when the capital is or would become impaired;
- at a price higher than the redemption price in the case of common stock
redeemable at the option of the corporation; or
125
- where, in the case of redemption, the redemption is not authorized by
other provisions of the DGCL or the certificate of incorporation.
However, at any time, a corporation may purchase or redeem any of its
shares which are entitled upon any distribution of assets to a preference over
another class of its stock if these shares will be retired upon acquisition or
redemption, thereby reducing the capital of the corporation.
The New York Stock Exchange requires that prompt publicity be given and
prompt notice be sent to the New York Stock Exchange of action which will result
in, or which looks toward, either the partial or full call for redemption of a
listed security. New York Stock Exchange rules provide that when a listed
security is fully redeemed, trading is suspended as soon as the redemption funds
become available to the holders of the security. When only a part of the listed
securities are redeemed, the amount authorized to be listed is reduced by the
amount redeemed as soon as the redemption funds become available to holders of
the redeemed securities.
Zimmer's restated certificate does not restrict the corporation's rights to
repurchase or redeem its shares.
INCENTIVE
Under Swiss law, a stock company may not issue redeemable shares. A stock
company may purchase its own shares, provided that:
- freely disposable equity in the amount necessary for this purpose is
available; and
- the total par value of such shares held by the company does not exceed
10% of the total share capital.
Such repurchased shares do not carry any right to vote at shareholders'
meetings. Furthermore, the stock company must create a blocked reserve on its
balance sheet in the amount of the purchase price of the shares held as treasury
shares. The conditions mentioned above do not apply if a company's shareholders
resolve that such company shall buy back shares in order to cancel them so as to
reduce the share capital.
Listed companies intending to implement a share buyback program must comply
with additional requirements of the Swiss Stock Exchanges and Securities Trading
Statute and the Swiss Takeover Board. All public offers by a listed company for
its own shares are deemed to be tender offers. Selective share purchases are
only permitted under certain circumstances.
RIGHTS OF INSPECTION
ZIMMER
Under the DGCL, stockholders who comply with certain procedural
requirements and who have a proper purpose have the right to:
- inspect the corporation's stock ledger, a list of its stockholders and
its other books and records; and
- make copies or extracts of those materials during normal business hours,
provided that (i) the stockholder makes a written request under oath
stating the purpose of his inspection and (ii) the inspection is for a
purpose reasonably related to the person's interest as a stockholder.
INCENTIVE
Under Swiss law, shareholders have a right to inspect the share register
only with regard to their own shareholdings and otherwise only to the extent
necessary for exercising their shareholder rights. No other person has a right
to inspect the share register. The company books and correspondence of a Swiss
company may only be inspected with the express authorization of the shareholders
meeting or by resolution of the board of directors and subject to the
safeguarding of business secrets. At the general
126
meeting of shareholders, any shareholder is entitled to request information from
the board of directors concerning the affairs of the company. Shareholders may
also ask the auditors on issues regarding audit examination. The board of
directors and the auditors, respectively, have to answer shareholders' questions
to the extent necessary for the exercise of shareholders' rights and subject to
prevailing business secrets or other material interests of the company.
In addition, if the shareholders' inspection and information rights prove
to be insufficient, each shareholder may propose to the shareholders' meeting
that specific facts be examined by a special commissioner in a special
inspection. If the shareholders' meeting approves the proposal, the company or
any shareholder may, within thirty days from the shareholders' meeting, ask the
courts at the company's domicile to appoint a special commissioner. If the
shareholders' meeting rejects the request, one or more shareholders representing
at least 10% of the share capital or shares in an aggregate nominal value of at
least CHF 2 million may request the judge to appoint a special commissioner. The
judge will issue such order if the petitioners can prima facie show that the
board of directors, any member thereof or an officer of the company infringed
the law or the articles of association and damaged the company or the
shareholders. The costs of the investigation are generally allocated to the
company and only in exceptional cases to the petitioner(s). For information
regarding inspection of the annual business report and the auditor's report, see
the section captioned "-- Proxy Statement and Reports" below.
LIMITATIONS ON ENFORCEABILITY OF CIVIL LIABILITIES UNDER U.S. FEDERAL SECURITIES
LAWS
InCentive is incorporated in Switzerland. According to the Excerpt of the
Commercial Register of April 20, 2003, one member of InCentive's board of
directors is a U.S. citizen and resident, one director is a German citizen and
resident and three directors are Swiss citizens and residents. As a result, in a
lawsuit based on the civil liability provisions of the U.S. federal securities
laws, U.S. investors may find it difficult to:
- effect service within the U.S. upon InCentive and the directors and
officers of InCentive located outside the U.S.;
- enforce, in U.S. courts or outside the U.S., judgments obtained against
those persons in U.S. courts;
- enforce, in U.S. courts or outside the U.S., judgments obtained against
those persons in courts in jurisdictions outside the U.S.; and
- enforce against those persons in Switzerland, whether in original actions
or in actions for the enforcement of judgments of U.S. courts, civil
liabilities based solely upon the U.S. federal securities laws.
Switzerland and the United States do not have a treaty providing for
reciprocal recognition of and enforcement of judgments in civil and commercial
matters. The recognition and enforcement of a judgment of the courts of the
United States in Switzerland is governed by the principles set forth in the
Swiss Federal Act on Private International Law. This statute provides in
principle that a judgment rendered by a non-Swiss court may be enforced in
Switzerland only if:
- the foreign court had jurisdiction pursuant to the Swiss Federal Act on
Private International Law;
- the judgment of such foreign court has become final and non-appealable;
- the judgment does not contravene Swiss public policy; and
- the court procedures and the service of documents leading to the judgment
were in accordance with the due process of law.
127
"SHORT SWING" PROFITS
ZIMMER
Directors and officers of Zimmer are governed by rules under the Exchange
Act that may require directors and officers to forfeit to Zimmer any "short
swing" profits realized from purchases and sales, as determined under the
Exchange Act and the rules thereunder, of Zimmer equity securities over short
periods.
INCENTIVE
Swiss law does not explicitly address "short swing" profits. However,
pursuant to the Swiss Penal Code a person who has information as an insider with
respect to a listed company is subject to a fine and/or imprisonment if such
person (i) abuses a confidential fact (usually by dealing in securities) or
makes such confidential fact known to a third party, (ii) foresees that the
dissemination of such confidential fact will have a significant effect on the
price of a listed security, or (iii) makes a profit or avoids a loss.
Furthermore, a "tippee" who learns a confidential fact from an insider commits
an offense if he as tippee abuses the information as set forth above, provided
the insider is guilty of insider dealing. Insiders can be directors, managers,
auditors, agents or any of their auxiliaries.
PROXY STATEMENTS AND REPORTS
ZIMMER
Under the Exchange Act proxy rules, Zimmer must comply with notice and
disclosure requirements relating to the solicitation of proxies for
stockholders' meetings.
INCENTIVE
As a foreign private issuer, InCentive is not subject to U.S. proxy
solicitation rules. However, under Swiss law, notice of a shareholder meeting
must be accompanied by: (i) the items on the agenda; and (ii) the proposals of
the board of directors or the proposals of the shareholders who have requested
the holding of a general meeting or the inclusion of an item in the agenda. If
the company proposes to the shareholders a member of its corporate body or some
other dependent person as a proxy for a general meeting of shareholders, it
shall also designate an independent person who might be mandated as a proxy by
the shareholders. No later than 20 days prior to the ordinary general meeting of
shareholders, the annual business report and the auditor's report must be made
available for inspection at the company's domicile. Any shareholder may request
that a copy of these documents be immediately sent to it.
REPORTING REQUIREMENTS
ZIMMER
As a U.S. public company, Zimmer must file with the SEC, among other
reports and notices:
- an annual report on Form 10-K within 90 days (scheduled to be reduced to
60 days by December 15, 2004 under recently adopted SEC rules) after the
end of each fiscal year;
- quarterly reports on Form 10-Q within 45 days (scheduled to be reduced to
35 days by December 15, 2005 under recently adopted SEC rules) after the
end of each fiscal quarter; and
- reports on Form 8-K upon the occurrence of certain corporate events.
INCENTIVE
Under the listing rules of the SWX Swiss Exchange, InCentive is required to
inform the market of any price-sensitive facts that have arisen in its sphere of
activity and are not public knowledge. Facts are deemed to be price sensitive if
they are likely to result in substantial price movements in the shares of the
company. Ad hoc publicity announcements must be made to the market participants
so as to ensure their
128
equal treatment. Furthermore, the admission board of the SWX Swiss Exchange must
be notified prior to trading. Events which typically trigger a publication duty
are corporate restructurings, changes in capital, including share repurchase
offers and material changes in relation to the earnings situation, material
changes in the course of business and, if unforeseen, changes in the board of
directors, management and auditors of the company.
The listing rules of the SWX Swiss Exchange allow postponement of the
disclosure of a price sensitive fact without the need for a specific
dispensation by the SWX Swiss Exchange on condition that (i) such facts arise in
relation to a plan or decision of the company, (ii) the dissemination of such
facts would prejudice the interests of the company and (iii) the company ensures
that such facts will continue to be treated confidentially. Furthermore, the
listing rules of the SWX Swiss Exchange require InCentive to publish and file
annual audited business reports and interim financial reports (audited and
non-audited). Interim reports must cover a time frame of six months or less.
This summary illustrates the material differences between the corporation
laws of Delaware and Switzerland, InCentive's articles of association and
Zimmer's restated certificate, restated by-laws and rights agreement. InCentive
does not file organizational information with the SEC and has not provided
Zimmer with such information. Zimmer has included herein organizational
information concerning InCentive insofar as it is publicly known or reasonably
available to Zimmer. The differences can be determined in full by reference to
the Swiss Code of Obligations, the related regulations, the DGCL, InCentive's
articles of association and Zimmer's restated certificate, restated by-laws and
rights agreement. The DGCL and the Swiss Code of Obligations, respectively,
provide that some of the statutory provisions as they affect various rights of
holders of shares may be modified by provisions in the certificate of
incorporation and by-laws, for Delaware corporations, or the articles of
association, for Swiss corporations.
129
SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN
BENEFICIAL OWNERS OF INCENTIVE
According to InCentive's annual report to its shareholders for the year
ended December 31, 2002, InCentive has 2,147,202 bearer shares on issue as of
December 31, 2002. As of that date, InCentive has not issued any participation
certificates, non-voting equity securities, convertible bonds or options and has
no executive stock option plan. Each bearer share entitles its holder to one
vote.
The following tables set forth certain information regarding beneficial
ownership of InCentive bearer shares as of December 31, 2002, as disclosed in
InCentive's annual report to its shareholders for the year ended December 31,
2002, by:
- each person then known by InCentive to own beneficially 5% or more of
InCentive bearer shares;
- each of InCentive's directors;
- each of InCentive's executive officers; and
- all of InCentive's directors and named executive officers as a group.
BENEFICIAL OWNERS
Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to securities.
According to InCentive's annual report to its shareholders for the year ended
December 31, 2002, InCentive only has bearer shares outstanding. As a
consequence, InCentive's knowledge as to beneficial ownership of its bearer
shares is limited to notifications made by its shareholders pursuant to
disclosure rules of the SWX Swiss Exchange. The only disclosure provided by
InCentive in its annual report to its shareholders for the year ended December
31, 2002 regarding the domicile of its shareholders concerns the domicile of
beneficial owners of 5% or more of InCentive bearer shares, as indicated
directly below.
<Table>
<Caption>
BENEFICIAL OWNER DOMICILE %
- ---------------- ------------------- -----
"Zurich" Versicherungs-Gesellschaft...................... Zurich, Switzerland 24.96
III Institutional Investors International Corp. ......... Grand Cayman, 20.87
Cayman Islands
Rene Braginsky(1)........................................ Zurich, Switzerland 20.00
Hans Kaiser Family....................................... Switzerland 11.01
</Table>
- ---------------
(1) Mr. Braginsky is a director, the CEO and the delegate of InCentive's board
of directors. Information regarding his holdings in InCentive is the only
information provided regarding the shareholdings of InCentive's board of
directors. Mr. Braginsky is the only executive officer of InCentive. The
management of InCentive's operation is carried out by InCentive Asset
Management, an investment manager unaffiliated with InCentive or any of its
subsidiaries.
SHAREHOLDINGS OF DIRECTORS AND EXECUTIVE OFFICERS
Other than the information relating to the holdings of Mr. Braginsky,
InCentive does not provide in its annual report to its shareholders for the year
ended December 31, 2002 information as to the shareholdings of its directors.
However, InCentive does disclose that its directors and "those close to them"
hold 668,445 InCentive bearer shares.
130
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements based on current
expectations, estimates, forecasts and projections about the orthopaedics
industry, management's beliefs and assumptions made by management.
Forward-looking statements may be identified by the use of forward-looking terms
such as "may," "will," "expects," "believes," "anticipates," "plans,"
"estimates," "projects," "targets," "forecasts," and "seeks" or the negative of
such terms or other variations on such terms or comparable terminology. These
statements are not guarantees of future performance and involve risks,
uncertainties and assumptions that could cause actual outcomes and results to
differ materially. 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 our products and
services, supply and prices of raw materials and products, customer demand for
our products and services, our ability to successfully integrate acquired
companies, control of costs and expenses, our ability to form and implement
alliances, international growth, U.S. and foreign government regulation, product
liability and intellectual property litigation losses, reimbursement levels from
third-party payors, general industry and market conditions and growth rates and
general domestic and international economic conditions including interest rate
and currency exchange rate fluctuations. In particular, forward looking
statements as to our financial and business performance following the proposed
acquisitions should be qualified by the absence of any opportunity for us to
perform comprehensive due diligence on InCentive, a significant shareholder of
Centerpulse, or Centerpulse. These forward looking statements must have been
significantly different had such due diligence review been undertaken. Readers
of this prospectus are cautioned not to place undue reliance on these
forward-looking statements, since, while we believe 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
prospectus and the material accompanying this prospectus.
LEGAL MATTERS
The validity of the shares of Zimmer common stock offered hereby will be
passed upon for Zimmer Holdings, Inc. by Dewey Ballantine LLP.
EXPERTS
The financial statements of Zimmer Holdings, Inc. included in and
incorporated in this prospectus by reference to Zimmer Holdings, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 2002 have been so included
and incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent public accountants, given on the authority of said firm as experts
in auditing and accounting.
131
INDEX TO FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
Report of Independent Accountants........................... F-2
Consolidated Financial Statements
Consolidated Statements of Earnings for the years ended
December 31, 2002, 2001 and 2000....................... F-3
Consolidated Balance Sheets at December 31, 2002 and
2001................................................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2002, 2001 and 2000........... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000....................... F-6
Notes to the Consolidated Financial Statements............ F-7
First Quarter Consolidated Financial Statements
Consolidated Statements of Earnings for the three months
ended March 31, 2003 and 2002.......................... F-24
Consolidated Balance Sheets at March 31, 2003 (Unaudited)
and December 31, 2002.................................. F-25
Consolidated Statements of Cash Flows for the three months
ended March 31, 2003 and 2002.......................... F-26
Notes to Interim Consolidated Financial Statements........ F-27
CENTERPULSE AG AND SUBSIDIARIES
Consolidated Financial Statements*
Consolidated Income Statements for the years ended
December 31, 2002, 2001 and 2000....................... F-31
Consolidated Balance Sheets at December 31, 2001 and
2000................................................... F-32
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2002, 2001 and 2000........... F-33
Consolidated Cash Flow Statements for the years ended
December 31, 2002, 2001 and 2000....................... F-34
Notes to the Consolidated Financial Statements............ F-35
Unaudited Interim Consolidated Financial Statements**
Unaudited Interim Consolidated Income Statement for the
three months ended January-March, 2003 and 2002
(Restated)............................................. F-77
Unaudited Interim Consolidated Balance Sheet at March 31,
2003 and December 31, 2002 (Restated).................. F-78
Unaudited Interim Condensed Consolidated Statements of
Shareholders' Equity for the three months ended March
31, 2003 and 2002 and the years ended December 31, 2002
and 2001............................................... F-79
Unaudited Interim Consolidated Cash Flow Statements for
the three months ended January-March 2003 and 2002
(Restated)............................................. F-80
Notes to the Unaudited Interim Consolidated Financial
Statements............................................. F-81
</Table>
- ---------------
* The report of Centerpulse's independent accountants has not been included
herein because the consent of such independent accountants cannot be
obtained. The consolidated financial statements of Centerpulse included
herein have been extracted from Centerpulse's Annual Report on Form 20-F for
the fiscal year ended December 31, 2002 filed with the SEC.
** The unaudited interim consolidated financial statements of Centerpulse
included herein have been extracted from Centerpulse's Report by Foreign
Issuer on Form 6-K, filed on May 14, 2003.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Zimmer Holdings, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of earnings, stockholders' equity and cash flows
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.
PRICEWATERHOUSECOOPERS LLP
Indianapolis, Indiana
January 23, 2003
F-2
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Net Sales................................................... $1,372.4 $1,178.6 $1,040.6
Cost of products sold....................................... 344.8 321.6 290.9
-------- -------- --------
Gross Profit................................................ 1,027.6 857.0 749.7
-------- -------- --------
Research and development.................................... 80.7 71.6 52.0
Selling, general and administrative......................... 546.0 537.1 429.7
-------- -------- --------
Operating expenses.......................................... 626.7 608.7 481.7
-------- -------- --------
Operating Profit............................................ 400.9 248.3 268.0
Interest expense............................................ 12.0 7.4 --
-------- -------- --------
Earnings before income taxes................................ 388.9 240.9 268.0
Provision for income taxes.................................. 131.1 91.1 92.0
-------- -------- --------
Net Earnings................................................ $ 257.8 $ 149.8 $ 176.0
======== ======== ========
Earnings Per Common Share
Basic....................................................... $ 1.33 $ 0.77 $ 0.91
Diluted..................................................... $ 1.31 $ 0.77 $ 0.91
Weighted Average Common Shares Outstanding
Basic....................................................... 194.5 193.7 193.6
Diluted..................................................... 196.8 194.3 193.6
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
--------------------
2002 2001
-------- --------
(IN MILLIONS, EXCEPT
SHARE AMOUNTS)
ASSETS
Current Assets:
Cash and equivalents...................................... $ 15.7 $ 18.4
Accounts receivable, less allowance for doubtful
accounts............................................... 214.8 181.7
Inventories, net.......................................... 257.6 200.0
Prepaid expenses.......................................... 71.7 59.3
Deferred income taxes..................................... 52.6 49.2
------ ------
Total Current Assets........................................ 612.4 508.6
Property, Plant and Equipment, net.......................... 157.8 148.2
Deferred Income Taxes....................................... 70.1 66.8
Other Assets................................................ 18.6 21.4
------ ------
Total Assets................................................ $858.9 $745.0
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 59.8 $ 67.4
Income taxes payable...................................... 19.5 4.3
Other current liabilities................................. 164.8 151.4
Short-term debt........................................... 156.7 150.0
------ ------
Total Current Liabilities................................... 400.8 373.1
Other Long-term Liabilities................................. 91.8 79.3
Long-term Debt.............................................. -- 213.9
------ ------
Total Liabilities........................................... 492.6 666.3
------ ------
Commitments and Contingencies (Note 17)
Stockholders' Equity:
Common stock, $0.01 par value, one billion shares
authorized, 195.2 million (193.9 million in 2001)
issued and outstanding................................. 2.0 1.9
Paid-in capital........................................... 36.9 4.4
Retained earnings......................................... 313.4 55.6
Accumulated other comprehensive income.................... 14.0 16.8
------ ------
Total Stockholders' Equity.................................. 366.3 78.7
------ ------
Total Liabilities and Stockholders' Equity.................. $858.9 $745.0
====== ======
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<Table>
<Caption>
ACCUMULATED NET
COMMON SHARES OTHER INVESTMENT TOTAL
--------------- PAID-IN RETAINED COMPREHENSIVE BY FORMER STOCKHOLDERS'
NUMBER AMOUNT CAPITAL EARNINGS INCOME PARENT EQUITY
------ ------ ------- -------- ------------- ---------- -------------
(IN MILLIONS)
Balance January 1, 2000..... -- $ -- $ -- $ -- $ 7.3 $ 384.0 $ 391.3
-------
Net earnings................ -- -- -- -- -- 176.0 176.0
Foreign currency
translation............... -- -- -- -- (0.3) -- (0.3)
-------
Comprehensive income........ -- -- -- -- -- -- 175.7
-------
Net cash transferred to
former parent............. -- -- -- -- -- (306.0) (306.0)
----- ---- ----- ------ ------ ------- -------
Balance December 31, 2000... -- -- -- -- 7.0 254.0 261.0
Net earnings................ -- -- -- 69.7 -- 80.1 149.8
Foreign currency
translation............... -- -- -- -- 2.6 -- 2.6
Unrealized foreign currency
hedge gains, net of tax... -- -- -- -- 12.1 -- 12.1
Reclassification
adjustment................ -- -- -- -- (4.9) -- (4.9)
-------
Comprehensive income........ -- -- -- -- -- -- 159.6
-------
Net cash transferred to
former parent............. -- -- -- -- -- (56.3) (56.3)
Dividend to former parent... -- -- -- -- -- (290.0) (290.0)
Issuance of common stock.... 193.6 1.9 -- -- -- (1.9)
Reclassification of
remaining net investment
of former parent.......... -- -- -- (14.1) -- 14.1 --
Exercise of stock options
and issuance of restricted
stock..................... 0.3 -- 4.4 -- -- -- 4.4
----- ---- ----- ------ ------ ------- -------
Balance December 31, 2001... 193.9 1.9 4.4 55.6 16.8 -- 78.7
Net earnings................ -- -- -- 257.8 -- -- 257.8
Foreign currency
translation............... -- -- -- -- 13.5 -- 13.5
Unrealized foreign currency
hedge losses, net of
tax....................... -- -- -- -- (12.2) -- (12.2)
Reclassification
adjustment................ -- -- -- -- (3.5) -- (3.5)
Minimum pension liability,
net of tax................ -- -- -- -- (0.6) -- (0.6)
-------
Comprehensive income........ -- -- -- -- -- -- 255.0
-------
Exercise of stock options
and issuance of restricted
stock..................... 1.3 0.1 32.5 -- -- -- 32.6
----- ---- ----- ------ ------ ------- -------
Balance December 31, 2002... 195.2 $2.0 $36.9 $313.4 $ 14.0 $ -- $ 366.3
===== ==== ===== ====== ====== ======= =======
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
ZIMMER HOLDINGS, INC. AND CONTROLLED ENTITIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
2002 2001 2000
------- ------- -------
(IN MILLIONS)
Cash flows provided by (used in) operating activities:
Net earnings.............................................. $ 257.8 $ 149.8 $ 176.0
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation........................................... 25.3 23.4 23.1
Income taxes........................................... 29.9 1.1 7.8
Receivables............................................ (25.0) 2.6 7.8
Inventories............................................ (59.7) (50.2) (2.1)
Accounts payable and accrued liabilities............... (12.2) 41.9 14.5
Other assets and liabilities........................... 4.1 3.2 5.3
------- ------- -------
Net cash provided by operating activities......... 220.2 171.8 232.4
------- ------- -------
Cash flows used in investing activities:
Additions to property, plant and equipment................ (33.7) (54.7) (29.0)
Investments in other assets............................... (2.0)
------- ------- -------
Net cash used in investing activities....................... (35.7) (54.7) (29.0)
------- ------- -------
Cash flows provided by (used in) financing activities:
Proceeds from (payments of) borrowings, net............... (212.8) 366.3 --
Dividend paid to former parent............................ -- (290.0) --
Net increase (decrease) in due to former parent........... -- (144.0) 102.6
Net transactions with former parent....................... -- (32.8) (306.0)
Proceeds from exercise of stock options................... 23.9 1.4 --
------- ------- -------
Net cash used in financing activities............. (188.9) (99.1) (203.4)
------- ------- -------
Effect of exchange rates on cash and equivalents............ 1.7 0.4 --
------- ------- -------
Increase (decrease) in cash and equivalents....... (2.7) 18.4 --
Cash and equivalents, beginning of year..................... 18.4 -- --
------- ------- -------
Cash and equivalents, end of year........................... $ 15.7 $ 18.4 $ --
======= ======= =======
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Zimmer Holdings, Inc. and its subsidiaries (individually and collectively
the "Company") design, develop, manufacture and market orthopaedic
reconstructive implants and trauma products. Orthopedic reconstructive implants
restore joint function lost due to disease or trauma in joints such as knees,
hips, shoulders and elbows, while 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 other products
relating to orthopaedic and general surgery. The Company has operations in 20
countries and markets its products in 70 countries. The Company operates in a
single industry but has three reportable geographic segments.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- The consolidated financial statements include the
accounts of the Company after elimination of all significant intercompany
accounts and transactions. The consolidated financial statements represent the
Company's operations as a public company commencing on August 6, 2001, combined
with the operations of Zimmer as a division of its former parent prior to
becoming a public company. For periods prior to August 6, 2001, intercompany
accounts with its former parent, other than specific outstanding obligations,
were combined with invested capital and reported in the consolidated financial
statements as net investment by former parent. Certain amounts in the 2001 and
2000 consolidated financial statements have been reclassified to conform to the
2002 presentation.
Use of Estimates -- The consolidated financial statements are prepared in
conformity with accounting principles generally accepted in the United States
and, accordingly, include amounts that are based on management's best estimates
and judgments. Actual results could differ from those estimates.
Foreign Currency Translation -- The financial statements of the Company's
foreign subsidiaries are translated into U.S. dollars using period-end exchange
rates for assets and liabilities and average exchange rates for operating
results. Unrealized translation gains and losses are included in accumulated
other comprehensive income in stockholders' equity. Foreign currency transaction
gains and losses included in net earnings are not material.
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. The reserves for doubtful accounts were $7.2 million and $6.5
million as of December 31, 2002 and 2001, respectively.
Cash and Equivalents -- The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents. The
Company currently does not have any investments which would not be considered
cash equivalents. The carrying amounts reported in the balance sheet for cash
and cash equivalents are valued at cost, which approximates their fair value.
Inventories -- Inventories, net of allowances for obsolete and slow-moving
goods, are stated at the lower of cost or market, with cost determined on the
basis of average costing.
Prepaid Expenses -- Prepaid expenses include the cost of instruments in
stock for surgical procedures consigned for use in connection with implantation
of the Company's products. These costs are recognized in selling, general and
administrative expense in the year in which the instruments are placed into
service.
Property, Plant and Equipment -- Property, plant and equipment is carried
at cost less accumulated depreciation. Depreciation is computed based on the
estimated useful lives of ten to forty years for buildings and improvements and
3 to 8 years for machinery and equipment using the straight-line method.
Maintenance
F-7
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and repairs are expensed as incurred. 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.
Research and Development -- The Company expenses all research and
development costs as incurred. Research and development costs include salaries,
prototypes, depreciation of equipment used in research and development,
consultant fees and amounts paid to collaborative partners.
Income Taxes -- The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes." Under this method, deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates in effect for the years in which the differences are expected
to reverse. Federal income taxes are provided on the portion of the income of
foreign subsidiaries that is expected to be remitted to the U.S.
Derivative Financial Instruments -- The Company accounts for all derivative
financial instruments in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which requires that all
derivative instruments be required as assets or liabilities on the balance sheet
and measured at fair value. The Company maintains written policies and
procedures that permit, under appropriate circumstances and subject to proper
authorization, the use of derivative financial instruments solely for hedging
purposes. The use of derivative financial instruments for trading or speculative
purposes is prohibited. The Company utilizes foreign exchange forward contracts
to offset the effect of exchange rate fluctuations on anticipated foreign
currency transactions, primarily intercompany sales and purchases expected to
occur within the next twelve to twenty-four months. Derivative instruments that
qualify as cash flow hedges are designated as such from inception. Formal
documentation is maintained of the Company's objectives, the nature of the risk
being hedged, identification of the instrument, the hedged transaction, the
hedging relationship and how effectiveness of the hedging instrument will be
assessed. The Company's policy requires that critical terms of a hedging
instrument are essentially the same as a hedged forecasted transaction. On this
basis, with respect to a cash flow hedge, changes in cash flows attributable to
the hedged transaction are generally expected to be completely offset by the
cash flows attributable to hedge instruments. The Company, therefore, performs
quarterly assessments of hedge effectiveness by verifying and documenting that
critical terms of the hedge instrument and forecasted transactions have not
changed. The Company also assesses on a quarterly basis whether there have been
adverse developments regarding the risk of a counterparty default. For
derivatives which qualify as hedges of future cash flows, the effective portion
of changes in fair value is temporarily recorded in other comprehensive income
and then recognized in earnings when the hedged item affects net earnings. The
ineffective portion of a derivative's change in fair value, if any, is reported
in net earnings.
Stock Compensation -- At December 31, 2002, the Company has three
stock-based employee compensation plans, which are described more fully in Note
10. 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 income and
F-8
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
<Table>
<Caption>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
2002 2001 2000
------ ------ ------
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
Net income, as reported.................................... $257.8 $149.8 $176.0
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of tax............................................... (12.7) (13.4) (7.8)
------ ------ ------
Pro forma net income....................................... $245.1 $136.4 $168.2
====== ====== ======
Earnings per share:
Basic -- as reported..................................... $ 1.33 $ 0.77 $ 0.91
Basic -- pro forma....................................... 1.26 0.70 0.87
Diluted -- as reported................................... 1.31 0.77 0.91
Diluted -- pro forma..................................... 1.25 0.70 0.87
</Table>
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,
2002 and 2001, are as follows (in millions):
<Table>
<Caption>
2002 2001
----- -----
Net unrealized foreign currency hedge gains (losses)........ $(8.5) $ 7.2
Cumulative translation adjustment........................... 23.1 9.6
Minimum pension liability................................... (0.6) --
----- -----
$14.0 $16.8
===== =====
</Table>
Accounting Pronouncements -- Effective January 1, 2002, the Company adopted
the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," and SFAS
No. 144 without any material impact on its financial position, results of
operations or cash flows.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. SFAS No. 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002. This pronouncement is not expected to have a material effect on the
Company's financial position, results of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses the
financial accounting and reporting for exit and disposal activities and certain
costs associated with those activities. SFAS No. 146 requires that a liability
for a cost associated with an exit or disposal activity, other than certain
one-time termination benefits, be measured initially at its fair value and
recognized in the period in which the liability is incurred. SFAS No. 146 is
effective for exit or
F-9
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
disposal activities that are initiated after December 31, 2002. This
pronouncement is not expected to have a material effect on the Company's
financial position, results of operations or cash flows.
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition to the fair value method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure provisions of
SFAS No. 123 and APB Opinion No. 28, "Interim Financial Reporting," to require
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock-based employee compensation
on reported net earnings and earnings per share in annual and interim financial
statements. While SFAS No. 148 does not amend SFAS No. 123 to require companies
to account for employee stock options using the fair value method, the
disclosure provisions of SFAS No. 148 are applicable to all companies with
stock-based employee compensation, regardless of whether they account for that
compensation using the fair value method of SFAS No. 123 or the intrinsic value
method of APB Opinion No. 25. The Company adopted SFAS No. 148 on December 31,
2002.
3. INVENTORIES
Inventories at December 31, 2002 and 2001, consist of the following (in
millions):
<Table>
<Caption>
2002 2001
------ ------
Finished goods.............................................. $206.7 $158.4
Raw materials and work in progress.......................... 50.9 41.6
------ ------
Inventories, net............................................ $257.6 $200.0
====== ======
</Table>
Reserves for obsolete and slow-moving inventory at December 31, 2002 and
2001 were $45.5 million and $43.3 million, respectively. Provisions charged to
expense were $6.0 million, $11.9 million and $12.1 million for the years ended
December 31, 2002, 2001 and 2000, respectively. Amounts written off against the
reserve were $7.1 million, $8.5 million and $8.5 million for the years ended
December 31, 2002, 2001 and 2000, respectively.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2002 and 2001, was as follows
(in millions):
<Table>
<Caption>
2002 2001
------- -------
Land........................................................ $ 8.2 $ 8.0
Building and equipment...................................... 354.4 320.3
Construction in progress.................................... 13.3 27.8
------- -------
375.9 356.1
Accumulated depreciation.................................... (218.1) (207.9)
------- -------
Property, plant and equipment, net.......................... $ 157.8 $ 148.2
======= =======
</Table>
F-10
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. OTHER CURRENT LIABILITIES
Other current liabilities at December 31, 2002 and 2001, consist of the
following (in millions):
<Table>
<Caption>
2002 2001
------ ------
Service arrangements........................................ $ 59.6 $ 49.5
Salaries, wages and benefits................................ 29.0 39.2
Accrued liabilities......................................... 76.2 62.7
------ ------
Total other current liabilities............................. $164.8 $151.4
====== ======
</Table>
6. OTHER LONG-TERM LIABILITIES
Included in Other Long-term Liabilities at December 31, 2002 and 2001 were
$43.5 million and $30.7 million, respectively, of accrued distributor benefits.
The Company's independent distributors accrue benefits based upon Company
financial performance.
7. DEBT
CREDIT FACILITY
The Company has a $600 million multi-currency, revolving senior unsecured
syndicated Credit Facility that matures on July 31, 2004. Borrowings under the
Credit Facility may bear interest at the appropriate LIBOR rate, depending upon
the currency denomination of the borrowing, or an alternative base rate, in each
case, an applicable margin determined by reference to the Company's senior
unsecured long-term debt rating and the amounts drawn under the Credit Facility.
As of December 31, 2002, the Company had $156.7 million in outstanding
borrowings, including $156.2 million under the Credit Facility. As of December
31, 2002, the Credit Facility borrowings were comprised of $82 million in U.S.
dollar based borrowings with a weighted average interest rate of 3.42 percent
(4.35 percent as of December 31, 2001) and the equivalent of $74.2 million in
Japanese Yen based borrowings with a weighted average interest rate of 0.93
percent (1.17 percent as of December 31, 2001). The borrowings under the Credit
Facility have been classified as short term based on the Company's expectation
it will be repaid by the end of 2003.
The Credit Facility is to be used for general corporate purposes. The
Credit Facility also allows for the issuance of letters of credit.
The Credit Facility contains customary affirmative and negative covenants
and events of default for an unsecured financing arrangement, none of which are
considered restrictive to the operation of the business. Financial covenants
include a maximum leverage ratio and a minimum interest coverage ratio. The
Company was in compliance with all covenants under the Credit Facility as of
December 31, 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. Commitments under the Credit Facility are subject to certain fees,
including a facility and a utilization fee.
UNCOMMITTED CREDIT FACILITIES
The Company has a $26 million uncommitted unsecured revolving line of
credit. The purpose of this credit line is to support the working capital needs,
letters of credit and overdraft needs for the Company. The uncommitted credit
agreement contains customary affirmative and negative covenants and events of
default, none of which are considered restrictive to the operation of the
business. In addition, this uncommitted credit
F-11
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
agreement provides for unconditional and irrevocable guarantees by the Company.
In the event the Company's long-term debt ratings by both Standard and Poor's
Ratings Services and Moody's Investor's Service, Inc., fall below BB- and Ba3,
then the Company may be required to repay all outstanding and contingent
obligations. The Company's credit rating as of December 31, 2002 met such
requirement. This uncommitted credit line matures on July 31, 2003. Outstanding
borrowings under this uncommitted line of credit as of December 31, 2002 were
$0.5 million with a weighted average interest rate of 6.35%.
The Company also has a $15 million uncommitted revolving unsecured line of
credit. The purpose of this line of credit is to support short-term working
capital needs of the Company. The agreement for this uncommitted unsecured line
of credit contains customary covenants, none of which are considered restrictive
to the operation of the business. This uncommitted line matures on July 31,
2003. There were no borrowings under this uncommitted line of credit as of
December 31, 2002.
The Company has a $20 million uncommitted revolving unsecured line of
credit. The purpose of this line of credit is to support short-term working
capital needs of the Company. The pricing is based upon money market rates. The
agreement for this uncommitted unsecured line of credit contains customary
covenants, none of which are considered restrictive to the operation of the
business. This uncommitted line matures on July 31, 2003. There were no
borrowings under this uncommitted line of credit as of December 31, 2002.
The Company was in compliance with all covenants under all three of the
uncommitted credit facilities as of December 31, 2002. The Company had no
long-term debt as of December 31, 2002.
Outstanding debt as of December 31, 2002 and 2001, consist of the following
(in millions):
<Table>
<Caption>
2002 2001
------ ------
Credit Facility............................................. $156.2 $358.2
Uncommitted credit facilities............................... 0.5 5.7
------ ------
Total debt.................................................. $156.7 $363.9
====== ======
</Table>
The Company paid $13.0 million and $4.6 million in interest charges during
2002 and 2001, respectively.
FAIR VALUE
The carrying value of the Company's borrowings approximates fair value due
to their short term maturities and variable interest rates.
8. DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to market risk due to changes in currency exchange
rates. As a result, the Company utilizes foreign exchange forward contracts to
offset the effect of exchange rate fluctuations on anticipated foreign currency
transactions, primarily intercompany sales and purchases expected to occur
within the next twelve to twenty-four months. The Company does not hold
financial instruments for trading or speculative purposes. For derivatives which
qualify as hedges of future cash flows, the effective portion of changes in fair
value is temporarily recorded in other comprehensive income, then recognized in
earnings when the hedged item affects earnings. The ineffective portion of a
derivative's change in fair value, if any, is reported in earnings. The net
amount recognized in earnings during the years ended December 31, 2002 and 2001,
due to ineffectiveness and amounts excluded from the assessment of hedge
effectiveness, was not significant.
F-12
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The notional amounts of outstanding foreign exchange forward contracts,
principally Japanese Yen and the Euro, entered into with third parties, at
December 31, 2002, was $252 million. The fair value of derivative instruments
recorded in accrued liabilities at December 31, 2002, was $13.8 million, or $8.5
million net of taxes, which is deferred in other comprehensive income and is
expected to be reclassified to earnings over the next two years, of which, $7.7
million, or $4.8 million, net of taxes, is expected to be reclassified to
earnings over the next twelve months.
9. CAPITAL STOCK AND EARNINGS PER SHARE
As discussed in Note 14, all of the shares of Company common stock were
distributed at the Distribution by the former parent to its stockholders in the
form of a dividend of one share of Company common stock, and the associated
preferred stock purchase right, for every ten shares of common stock of the
former parent. In July 2001 the board of directors of the Company adopted a
rights agreement intended to have anti-takeover effects. Under this agreement
one right attaches to each share of Company common stock. The rights will not
become exercisable until the earlier of: a) the Company learns that a person or
group acquired, or obtained the right to acquire, beneficial ownership of
securities representing more than 20 percent of the shares of Company common
stock then outstanding, or b) such date, if any, as may be designated by the
board of directors following the commencement of, or 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, 2002.
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):
<Table>
<Caption>
2002 2001 2000
----- ----- -----
Weighted average shares outstanding for basic net earnings
per share................................................. 194.5 193.7 193.6
Effect of dilutive stock options............................ 2.3 0.6 --
----- ----- -----
Weighted average shares outstanding for diluted net earnings
per share................................................. 196.8 194.3 193.6
===== ===== =====
</Table>
For periods prior to the Distribution, basic and diluted shares outstanding
are assumed to be equivalent to the number of shares of Company common stock
outstanding immediately following the Distribution.
10. STOCK OPTION AND COMPENSATION PLANS
As of December 31, 2002, 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
F-13
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 option and stock appreciation rights while the
Stock Plan for Non-Employee Directors provides for awards of stock options,
restricted stock and restricted stock units to non-employee directors.
Options granted under these plans generally vest over three to five years,
although in no event in less than one year, and expire ten years from the date
of grant. Certain options have price thresholds, which affect exercisability.
Under the 2001 Stock Incentive Plan, the total number of awards which may
be granted in a given year pursuant to options and other awards under the plan
may not exceed 1.9 percent of the outstanding shares of the Company's stock on
the 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:
<Table>
<Caption>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
-------------- ----------------
(IN THOUSANDS)
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
====== ======
</Table>
F-14
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 2002:
<Table>
<Caption>
OUTSTANDING EXERCISABLE
---------------------------- ------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES OPTIONS LIFE PRICE OPTIONS PRICE
- ------------------------ -------------- ----------- -------- -------------- --------
(IN THOUSANDS) (IN THOUSANDS)
$ 6.25-$17.00 1,275 2.93 $10.92 1,275 $10.92
$17.01-$27.50 3,675 6.61 24.83 2,021 24.59
$27.51-$37.50 6,085 8.02 30.78 1,367 31.28
------ -----
11,035 4,663
====== =====
</Table>
Options exercisable at December 31, 2002 and 2001, were 4.7 million and 4.0
million, respectively, with average exercise prices of $22.81 and $19.15,
respectively.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
<Table>
<Caption>
2002 2001 2000
---- ---- ----
Dividend Yield.............................................. --% --% 1.5%
Volatility.................................................. 30.3% 41.7% 24.5%
Risk-free interest rate..................................... 4.6% 4.8% 6.3%
Assumed forfeiture rate..................................... 3.0% 3.0% 3.0%
Expected life (years)....................................... 5 7 7
</Table>
The above assumptions for 2002 and 2001 pertain to the Company, while 2000
assumptions are associated with the Company's former parent.
The weighted average fair value for options granted during 2002, 2001 and
2000 was $10.63, $14.10 and $16.34, respectively.
See Note 2 for the effect on net earnings and earnings per share if the
Company had applied the fair value recognition provisions of SFAS No. 123 to
stock based employee compensation.
RESTRICTED STOCK
At the Distribution, certain members of management had restricted stock
grants for Bristol-Myers Squibb stock which were converted into Company
restricted stock grants at quantities and prices that maintained the intrinsic
value that existed immediately prior to the Distribution. Total converted grants
represented 106,560 shares at the Distribution. Subsequent to the Distribution,
restrictions on 32,578 and 20,361 shares were eliminated in 2002 and 2001,
respectively. In addition, restricted stock grants were made for 50,200 and
33,681 shares in 2002 and 2001, respectively. The awards are being expensed over
the vesting period of five years from date of grant and the expense recorded by
the Company for all periods presented was not significant.
11. RETIREMENT AND POSTRETIREMENT BENEFIT PLANS
The Company has defined benefit pension plans covering substantially all
U.S. and Puerto Rico employees. Plan benefits are primarily based on years of
credited service and the participant's compensation. In addition to the U.S. and
Puerto Rico defined benefit pension plans, the Company sponsors various
F-15
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
non-U.S. pension arrangements, including retirement and termination benefit
plans required by local law or coordinated with government sponsored plans.
The Company also provides comprehensive medical and group life insurance
benefits to substantially all U.S. and Puerto Rico retirees who elect to
participate in the Company's comprehensive medical and group life plans. The
medical plan is contributory, and the life insurance plan is non-contributory.
No similar plans exist for employees outside the U.S. and Puerto Rico.
In both the U.S. and jurisdictions outside of the U.S., the Company has
adopted employee benefit plans that are comparable to those of its former
parent. In general, for purposes of determining eligibility to participate,
eligibility for benefits, benefit forms and vesting under Company plans, each
active employee is credited with his or her service with the former parent to
the extent the corresponding plans of the former parent gave credit for such
service.
In connection with the Distribution, the Company and its former parent
entered into an Employee Benefits Agreement which allocated responsibilities
relating to employee compensation, benefit plans and programs and other related
matters. Under the agreement, as of a specified date, active employees of the
Company ceased to be active participants in benefit plans maintained by the
former parent and became eligible to participate in all applicable Company
plans.
The agreement provides that, as of the Distribution, the Company assumed,
retained and is liable for all wages, salaries, welfare, incentive compensation
and other employee-related obligations and liabilities for all current and
former employees of the Company, except as specifically provided otherwise. The
former parent retained certain obligations for domestic pension benefits for
services rendered through the Distribution. The former parent also retained
obligations for medical and group life insurance benefits for all domestic
retirees and those employees eligible to retire as of the Distribution.
Substantially all assets funding its pension and postretirement benefit plans
were retained by the former parent.
The components of net pension expense as of December 31 for the Company's
defined benefit retirement plans subsequent to the Distribution are as follows
(in millions):
<Table>
<Caption>
U.S. AND
PUERTO RICO NON-U.S.
------------ -------------
2002 2001 2002 2001
----- ---- ----- -----
Service cost............................................. $ 7.2 $2.3 $ 2.0 $ 1.4
Interest cost............................................ 2.0 0.7 0.7 0.5
Expected return on plan assets........................... (1.2) -- (1.0) (0.5)
Amortization of prior service cost....................... 0.1 -- -- --
Amortization of unrecognized actuarial (gain) loss....... 0.1 -- 0.2 (0.1)
----- ---- ----- -----
Net periodic benefit cost................................ $ 8.2 $3.0 $ 1.9 $ 1.3
===== ==== ===== =====
</Table>
The weighted average actuarial assumptions used in accounting for the
Company's defined benefit retirement plans were as follows:
<Table>
<Caption>
U.S. AND
PUERTO RICO NON-U.S.
----------- -----------
2002 2001 2002 2001
---- ---- ---- ----
Discount rate.............................................. 7.00% 7.25% 4.17% 3.64%
Rate of compensation increase.............................. 3.60% 3.50% 3.17% 2.92%
Expected long-term rate of return on plan assets........... 9.00% 9.00% 5.95% 5.68%
</Table>
F-16
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in benefit obligations and plan assets, for December 31, 2002 and
2001 for the Company's pension plans, were (in millions):
<Table>
<Caption>
U.S. AND
PUERTO RICO NON-U.S.
--------------- -------------
2002 2001 2002 2001
------ ------ ----- -----
Benefit obligation -- beginning of year.............. $ 25.5 $ -- $13.3 $12.6
Obligation assumed from former parent................ -- 22.6 3.9 3.3
Plan amendments...................................... (1.6) -- -- --
Service cost......................................... 7.2 2.3 2.0 1.3
Interest cost........................................ 2.0 0.7 0.7 0.5
Benefits paid........................................ (0.1) (0.1) (0.6) (2.6)
Actuarial (gain) loss................................ 9.5 -- 0.6 (0.1)
Exchange rate gain (loss)............................ -- -- 1.7 (1.7)
------ ------ ----- -----
Benefit obligation -- end of year.................... $ 42.5 $ 25.5 $21.6 $13.3
====== ====== ===== =====
Plan assets at fair market value -- beginning of
year............................................... $ 2.2 $ -- $12.5 $12.6
Assets contributed by former parent.................. -- 2.3 3.6 3.1
Actual return on plan assets......................... (1.0) -- (2.0) (0.5)
Company contributions................................ 20.7 -- 2.7 1.6
Benefits paid........................................ (0.2) (0.1) (0.6) (2.6)
Expenses............................................. (0.3) -- -- --
Exchange rate gain (loss)............................ -- -- 1.1 (1.7)
------ ------ ----- -----
Plan assets at fair market value -- end of year...... $ 21.4 $ 2.2 $17.3 $12.5
====== ====== ===== =====
Funded status........................................ $(21.1) $(23.3) $(4.3) $(0.8)
Unrecognized prior service cost...................... (1.5) 0.2 -- 0.1
Unrecognized actuarial (gain) loss................... 9.8 (2.2) 8.4 4.4
------ ------ ----- -----
Net amount recognized................................ $(12.8) $(25.3) $ 4.1 $ 3.7
====== ====== ===== =====
Amounts recognized in consolidated balance sheet:
Prepaid pension.................................... $ -- $ -- $ 5.0 $ 4.4
Accrued benefit liability.......................... (13.9) (25.3) (0.9) (0.7)
Accumulated other comprehensive income............. 1.1 -- -- --
------ ------ ----- -----
Net amount recognized.............................. $(12.8) $(25.3) $ 4.1 $ 3.7
====== ====== ===== =====
</Table>
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the Company's U.S. and Puerto Rico pension plans with
accumulated benefit obligations in excess of plan assets were $38.9 million,
$21.5 million and $20.5 million, respectively, as of December 31, 2002 and $25.5
million, $8.8 million and $2.2 million, respectively, as of December 31, 2001.
F-17
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of net periodic expense as of December 31 for the Company's
postretirement benefit plans subsequent to the Distribution are as follows (in
millions):
<Table>
<Caption>
DECEMBER 31, 2002 2001
- ------------ ---- ----
Service cost................................................ $1.1 $0.5
Interest cost............................................... 1.2 0.5
---- ----
Net periodic benefit cost................................... $2.3 $1.0
==== ====
</Table>
The weighted average actuarial assumptions used in accounting for the
Company's postretirement benefit plans were as follows:
<Table>
<Caption>
DECEMBER 31, 2002 2001
- ------------ ----- ----
Discount rate............................................... 7.00% 7.25%
Initial health care cost trend rate......................... 10.00% 9.00%
Ultimate health care cost trend rate........................ 5.00% 5.00%
First year of ultimate trend rate........................... 2012 2008
</Table>
Changes in benefit obligations and plan assets, from the Distribution to
December 31, 2002 for the Company's postretirement benefit plans, were (in
millions):
<Table>
<Caption>
DECEMBER 31, 2002 2001
- ------------ ------ ------
Benefit obligation -- beginning of year..................... $ 18.1 $ --
Obligation assumed from former parent....................... -- 17.1
Service cost................................................ 1.1 0.5
Interest cost............................................... 1.2 0.5
Actuarial loss.............................................. 0.1 --
------ ------
Benefit obligation -- end of year........................... $ 20.5 $ 18.1
------ ------
Funded status............................................... $(20.5) $(18.1)
Unrecognized prior service cost............................. (0.1) (0.1)
Unrecognized actuarial loss................................. 2.1 2.0
------ ------
Net amount recognized....................................... $(18.5) $(16.2)
====== ======
Accrued benefit liability recognized........................ $(18.5) $(16.2)
====== ======
</Table>
As of December 31, 2002 and 2001, the Company has no assets in its
postretirement benefit plans.
A one percentage point change in the assumed health care cost trend rates
would have no significant effect on the service and interest cost components of
net postretirement benefit expense and the accumulated postretirement benefit
obligation. The effect of a change in the healthcare cost trend rate is tempered
by a cap that limits medical costs to be paid by the Company.
Included in the consolidated statement of earnings are allocations from the
Company's former parent for expenses specifically attributable to the Company's
employees' participation in its retirement and postretirement benefit plans for
periods prior to the Distribution. Amounts included were $6.0 million and $10.0
million for the years ended December 31, 2001 and 2000, respectively.
The Company also sponsors defined contribution plans for substantially all
of the U.S. and Puerto Rico employees. The principal defined contribution plan
is the Zimmer Holdings, Inc. Savings and Investment Program. The Company's
contribution under this plan is based on employee contributions and the level of
F-18
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
company match. The Company recognized $3.5 million, $3.0 million and $3.0
million of expense for the savings and investment program for the years ended
December 31, 2002, 2001 and 2000, respectively.
12. INCOME TAXES
The components of earnings before taxes consist of the following (in
millions):
<Table>
<Caption>
2002 2001 2000
------ ------ ------
United States operations................................... $292.0 $200.4 $211.0
Foreign operations......................................... 96.9 40.5 57.0
------ ------ ------
Total...................................................... $388.9 $240.9 $268.0
====== ====== ======
</Table>
The provision for income taxes consists of (in millions):
<Table>
Current:
Federal................................................... $ 79.9 $68.8 $58.2
State..................................................... 12.9 15.9 10.8
Foreign................................................... 34.4 28.6 26.0
------ ----- -----
127.2 113.3 95.0
------ ----- -----
Deferred:
Federal................................................... 3.3 (9.5) 2.7
State..................................................... (1.3) (1.6) 0.3
Foreign................................................... 1.9 (11.1) (6.0)
------ ----- -----
3.9 (22.2) (3.0)
------ ----- -----
$131.1 $91.1 $92.0
====== ===== =====
</Table>
For periods prior to the Distribution, the income tax provision was
calculated on a separate return basis while actual tax payments were made on a
combined return basis by the Company's former parent. Income taxes paid by the
Company during 2002 and 2001 (for the period after the Distribution) were $114.2
million and $43.4 million, respectively.
A reconciliation of the U.S. statutory income tax rate to the Company's
effective tax rate is as follows:
<Table>
<Caption>
2002 2001 2000
---- ---- ----
U.S. statutory income tax rate.............................. 35.0% 35.0% 35.0%
State taxes, net of federal deduction....................... 3.0 3.9 2.7
Foreign income taxes at rates different from
the U.S. statutory rate, net of foreign tax credits....... -- 0.9 (1.0)
Tax benefit relating to operations in Puerto Rico........... (2.6) (2.6) (1.2)
Earnings of Foreign Sales Corporation....................... (1.1) (1.4) (1.8)
R&D Credit.................................................. (0.6) (0.1) --
Non-deductible separation costs............................. -- 1.9 --
Other....................................................... -- 0.2 0.6
---- ---- ----
Effective income tax rate................................... 33.7% 37.8% 34.3%
==== ==== ====
</Table>
F-19
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of
deferred income taxes consisted of the following (in millions):
<Table>
<Caption>
2002 2001
------ ------
Inventory................................................... $ 40.1 $ 39.1
Depreciation................................................ 36.3 30.6
Accrued liabilities......................................... 37.4 40.1
Other....................................................... 8.9 6.2
------ ------
$122.7 $116.0
====== ======
</Table>
The Company's former parent received a ruling from the Internal Revenue
Service ("IRS"), that the Distribution would qualify as a tax-free transaction.
Such a ruling, while generally binding upon the IRS, is subject to certain
factual representations and assumptions. The Company has agreed to certain
restrictions on its future actions to provide further assurances that the
Distribution will qualify as tax-free. If the Company fails to abide by such
restrictions and, as a result, the Distribution fails to qualify as a tax-free
transaction, the Company will be obligated to indemnify its former parent for
any resulting tax liability.
Under the Tax Sharing Agreement (the "Agreement") executed in conjunction
with the Distribution, the Company's former parent retains control and
discretion with regard to any federal, foreign, combined, consolidated and
certain separate state tax filings or tax audits for periods through the
Distribution and retains all refunds for such periods. The Agreement was amended
to clarify the Company is responsible for 25 percent of tax audit assessments in
foreign jurisdictions for periods prior to the Distribution up to a cumulative
maximum of $5 million.
At December 31, 2002, the Company had an aggregate of $53.7 million of
unremitted earnings of foreign subsidiaries that have been, or are intended to
be, permanently reinvested for continued use in foreign operations. If the total
undistributed earnings of foreign subsidiaries were remitted, a significant
amount of the additional tax would be offset by the allowable foreign tax
credits.
13. SEGMENT DATA
The Company designs, develops, manufactures and markets orthopaedic
reconstructive implants, trauma products and orthopaedic surgical products which
include surgical supplies and equipment designed to aid in orthopaedic
procedures and to accommodate patient rehabilitation needs post surgery.
Operations are managed 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 the major countries of Europe as well as the Middle
East and Africa. This structure is the basis for the Company's reportable
segment information discussed below. Segment performance is evaluated based on
sales and segment operating profit, exclusive of separation costs and operating
expenses pertaining to global operations and corporate expenses. Included in
segment operating profit is a cost of capital charge which is offset in global
operations. Global operations include U.S. based research, development
engineering, brand management, corporate legal, finance, human resource
functions, and operations and logistics.
F-20
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net sales, segment operating profit and year-end assets are as follows (in
millions):
<Table>
<Caption>
NET SALES OPERATING PROFIT YEAR-END ASSETS
------------------------------ --------------------------- ---------------
2002 2001 2000 2002 2001 2000 2002 2001
-------- -------- -------- ------- ------- ------- ------ ------
Americas............. $ 932.9 $ 790.7 $ 655.4 $ 434.1 $ 356.3 $ 313.4 $597.2 $530.7
Asia Pacific......... 269.6 255.2 264.5 117.8 104.9 100.9 158.9 141.2
Europe............... 169.9 132.7 120.7 35.7 20.7 18.5 102.8 73.1
-------- -------- -------- ------ ------
Net sales............ $1,372.4 $1,178.6 $1,040.6
======== ======== ========
Separation costs..... -- (70.0) --
Global operations and
corporate
expenses........... (186.7) (163.6) (164.8)
------- ------- -------
Operating profit..... $ 400.9 $ 248.3 $ 268.0
======= ======= =======
Total assets......... $858.9 $745.0
====== ======
</Table>
Product category:
<Table>
<Caption>
2002 2001 2000
-------- -------- --------
Reconstructive implants................................ $1,061.7 $ 886.5 $ 764.5
Trauma................................................. 133.8 128.3 123.4
Orthopaedic surgical products.......................... 176.9 163.8 152.7
-------- -------- --------
Total.................................................. $1,372.4 $1,178.6 $1,040.6
======== ======== ========
</Table>
Depreciation expenses were $25.3 million, $23.4 million and $23.1 million
and additions to fixed and other assets were $33.7 million, $54.7 million and
$29.0 million for the years ended December 31, 2002, 2001 and 2000,
respectively, and related principally to the Company's U.S. and Puerto Rico
facilities.
14. SEPARATION FROM BRISTOL-MYERS SQUIBB COMPANY
The Company was incorporated in Delaware as a wholly-owned subsidiary of
Bristol-Myers Squibb, its former parent, on January 12, 2001. On July 25, 2001,
Bristol-Myers Squibb transferred the assets and liabilities of its orthopaedic
business to the Company. On August 6, 2001, Bristol-Myers Squibb distributed all
of the shares of Company common stock to Bristol- Myers Squibb stockholders in
the form of a dividend of one share of Company common stock and the associated
preferred stock purchase right, for every 10 shares of Bristol-Myers Squibb
common stock. The Distribution qualified as a tax-free distribution made under
Section 355 and 368(a)(1)(1) of the Internal Revenue Code of 1986 as more
fully-described in Note 12. On August 6, 2001, the Company assumed all
obligations under the 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. The Company also recognized certain liabilities and obligations for
pension, post-retirement, long-term disability and U.S. sales agent benefits.
Recognition of these liabilities and obligations reduced the net investment in
Zimmer by its former parent.
The Company incurred $70.0 million ($49.9 million net of taxes) in costs,
fees and expenses relating to the separation from its former parent and
distribution of Company common stock to the Bristol-Myers Squibb stockholders.
These costs, fees and expenses were primarily for retention bonuses; legal
separation matters; professional expenses; and costs of producing, printing,
mailing and distributing the information statement related to the Distribution.
F-21
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. TRANSACTIONS WITH FORMER PARENT
Prior to the Distribution, the former parent of the Company provided
certain services, including administration of treasury, insurance, payroll,
employee compensation and benefits, travel and meeting services, public and
investor relations, real estate services, internal audit, corporate aviation and
related services, telecommunications, computing services, corporate income tax
and selected legal services. Management of the Company believes that the methods
used to allocate expenses to the Company for these services were reasonable,
although it cannot be assured that all the expenses that would have been
incurred had the Company been a separate, standalone entity have been reflected
in financial results prior to the Distribution. These services accounted for a
total expense of $17.2 million for the period January 1, 2001 through the
Distribution, and $29.9 million for the year ended December 31, 2000.
The Company and its former parent entered into an Interim Services
Agreement pursuant to which the former parent provided the Company, on an
interim, transitional basis, various services, including, but not limited to,
employee benefits administration and information technology services. The agreed
upon charges for such services were intended to allow the former parent to
recover fully the allocated costs of providing the services. The Interim
Services Agreement expired on December 31, 2002, except with respect to
information technology services, which will remain in effect until the Company
completes the transition to an alternative service provider, expected by mid
year 2003.
16. LEASES
Future minimum rental commitments under non-cancelable operating leases in
effect as of December 31, 2002 were $8.3 million for 2003, $7.0 million for
2004, $5.7 million for 2005, $4.4 million for 2006, $2.9 million for 2007 and
$8.6 million thereafter. Total rent expense for the years ended December 31,
2002, 2001 and 2000 aggregated $9.1 million, $5.7 million and $6.0 million,
respectively.
17. COMMITMENTS AND CONTINGENCIES
The Company is subject to product liability and other claims arising in the
ordinary course of business, for which the Company maintains insurance, subject
to self-insured retention limits. The Company establishes accruals for product
liability and other claims in conjunction with outside counsel based on current
information and historical settlement information for open claims, related fees
and for claims incurred but not reported. While it is not possible to predict
with certainty the outcome of these cases, it is the opinion of management that
these cases will not have a material adverse effect on the consolidated
financial position, results of operations or cash flows of the Company.
In addition to product liability, the Company is subject to other lawsuits
and claims arising in the ordinary course of business, none of which are
expected to have, upon ultimate resolution, a material effect on the Company's
consolidated financial position, results of operations or cash flows.
Pursuant to the Company's exclusive distribution and strategic alliance
with Implex Corporation relating to Trabecular Metal products and technology and
other products, the Company is subject to annual minimum purchase commitments.
Such commitments are in line with the Company's expectation and product
development plans with regard to the products covered under this agreement.
F-22
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<Table>
<Caption>
2001 QUARTER ENDED 2002 QUARTER ENDED
--------------------------------- ---------------------------------
MAR JUN SEP DEC MAR JUN SEP DEC
------ ------ ------ ------ ------ ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Net sales................................. $286.0 $294.3 $286.7 $311.6 $319.1 $345.6 $337.5 $370.2
Gross profit.............................. 204.9 212.8 211.7 227.6 238.3 260.4 252.4 276.5
Net earnings(1)........................... 36.0 43.2 27.4 43.2 54.6 65.9 65.1 72.2
Net earnings per common share:
Basic................................... 0.19 0.22 0.14 0.22 0.28 0.34 0.33 0.37
Diluted................................. 0.19 0.22 0.14 0.22 0.28 0.34 0.33 0.37
</Table>
- ---------------
(1) 2001 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. Net
earnings also include $7.4 million ($4.7 million net of tax) of interest
expense for the period from the Distribution to December 31, 2001.
F-23
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<Table>
<Caption>
THREE MONTHS
ENDED MARCH 31,
---------------------
2003 2002
--------- ---------
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS,
UNAUDITED)
NET SALES................................................... $390.1 $319.1
Cost of products sold....................................... 96.9 80.8
------ ------
GROSS PROFIT................................................ 293.2 238.3
------ ------
Research and development.................................... 21.4 19.1
Selling, general and administrative......................... 149.8 130.9
------ ------
Operating expenses........................................ 171.2 150.0
------ ------
OPERATING PROFIT............................................ 122.0 88.3
Interest expense............................................ 1.4 3.6
------ ------
Earnings before income taxes and cumulative effect of change
in accounting principle................................... 120.6 84.7
Provisions for income taxes................................. 40.4 30.1
------ ------
Earnings before cumulative effect of change in accounting
principle................................................. 80.2 54.6
Cumulative effect of change in accounting principle, net of
tax....................................................... 55.1 --
------ ------
NET EARNINGS................................................ $135.3 $ 54.6
====== ======
EARNINGS PER COMMON SHARE -- BASIC
Earnings before cumulative effect of change in accounting
principle.............................................. $ 0.41 $ 0.28
Cumulative effect of change in accounting principle, net
of tax................................................. 0.28 --
------ ------
Earnings Per Common Share -- Basic........................ $ 0.69 $ 0.28
====== ======
EARNINGS PER COMMON SHARE -- DILUTED
Earnings before cumulative effect of change in account
principle.............................................. $ 0.41 $ 0.28
Cumulative effect of change in accounting principle, net
of tax................................................. 0.27 --
------ ------
Earnings Per Common Share -- Diluted...................... $ 0.68 $ 0.28
====== ======
PRO FORMA AMOUNTS ASSUMING THE NEW ACCOUNTING PRINCIPLE IS
APPLIED RETROACTIVELY
Net Earnings.............................................. $ 80.2 $ 56.2
Earnings Per Common Share -- Basic........................ $ 0.41 $ 0.29
Earnings Per Common Share -- Diluted...................... $ 0.41 $ 0.29
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic..................................................... 195.7 194.0
Diluted................................................... 198.0 195.7
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2003 2002
----------- ------------
(UNAUDITED)
(IN MILLIONS, EXCEPT SHARE
AMOUNTS)
ASSETS
CURRENT ASSETS:
Cash and equivalents...................................... $ 33.4 $ 15.7
Accounts receivable, less allowance for doubtful
accounts............................................... 237.4 214.8
Inventories, net.......................................... 265.9 257.6
Prepaid expenses.......................................... 17.5 71.7
Deferred income taxes..................................... 20.5 52.6
------ ------
Total Current Assets................................... 574.7 612.4
Property, Plant and Equipment, net.......................... 311.0 157.8
Deferred Income Taxes....................................... 74.6 70.1
Other Assets................................................ 18.5 18.6
------ ------
TOTAL ASSETS................................................ $978.8 $858.9
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Account payable........................................... $ 64.8 $ 59.8
Income taxes payable...................................... 42.0 19.5
Other current liabilities................................. 159.0 164.8
Short term debt........................................... 76.9 156.7
------ ------
Total Current Liabilities.............................. 342.7 400.8
Other Long-term Liabilities................................. 93.4 91.8
------ ------
TOTAL LIABILITIES........................................... 436.1 492.6
------ ------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, one billion shares
authorized, 196.4 in 2003 and 195.2 in 2002 issued and
outstanding............................................ 2.0 2.0
Paid-in capital........................................... 75.8 36.9
Retained earnings......................................... 448.7 313.4
Accumulated other comprehensive income.................... 16.2 14.0
------ ------
TOTAL STOCKHOLDERS' EQUITY.................................. 542.7 366.3
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $978.8 $858.9
====== ======
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
FOR THE THREE
MONTHS ENDED
MARCH 31,
---------------
2003 2002
------ ------
(IN MILLIONS,
UNAUDITED)
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net earnings.............................................. $135.3 $ 54.6
Depreciation.............................................. 19.6 5.5
Income taxes.............................................. 59.1 20.3
Cumulative effect of change in accounting principle....... (89.1) --
Receivables............................................... (22.2) (16.6)
Inventories............................................... (7.4) (21.9)
Accounts payable and accrued expenses..................... 2.2 (11.3)
Other assets and liabilities.............................. 7.3 1.9
------ ------
Net cash provided by operating activities.............. 104.8 32.5
------ ------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property, plant and equipment................ (33.0) (6.5)
Investments in other assets............................... -- (2.0)
------ ------
Net cash used in investing activities.................. (33.0) (8.5)
------ ------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Repayments of borrowings, net............................. (79.6) (19.3)
Proceeds from exercise of stock options................... 25.3 4.8
Net decrease in due to/from former parent................. -- (6.9)
------ ------
Net cash used in financing activities.................. (54.3) (21.4)
------ ------
Effect of exchange rates on cash and equivalents............ 0.2 (0.2)
------ ------
Increase in cash and equivalents.......................... 17.7 2.4
Cash and equivalents, beginning of year..................... 15.7 18.4
------ ------
Cash and equivalents, end of period......................... $ 33.4 $ 20.8
====== ======
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-26
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial data presented herein is unaudited and should be read in
conjunction with the consolidated financial statements and accompanying notes
included in the 2002 annual report on Form 10-K filed by Zimmer Holdings, Inc.
(together with all its subsidiaries, the "Company"). In the opinion of
management, the accompanying unaudited consolidated financial statements include
all adjustments necessary for a fair presentation of the financial position,
results of operations and cash flows for the interim periods presented. Results
for interim periods should not be considered indicative of results for the full
year. Certain amounts in the three months ended March 31, 2002 have been
reclassified to conform to the current presentation.
2. CHANGE IN ACCOUNTING PRINCIPLE
Instruments are hand held devices used by orthopaedic surgeons during total
joint replacement and other surgical procedures. Effective January 1, 2003,
instruments are recognized as long-lived assets and are included in property,
plant and equipment. Undeployed instruments are carried at cost, net of
allowances for obsolescence. Instruments in the field are carried at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method based on average estimated useful lives of approximately five years
determined principally in reference to associated product life cycles. In
accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," the Company
reviews instruments 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. Depreciation of instruments is
recognized as a selling, general and administrative expense, consistent with
classification of instrument cost in prior periods.
In prior periods, undeployed instruments were carried as a prepaid expense
at cost and recognized in selling, general and administrative expense in the
year in which the instruments were placed into service. The new method of
accounting for instruments was adopted to recognize the cost of an important
asset of the Company's business within the consolidated balance sheet and
meaningfully allocate the cost of that asset over the periods benefited, which
the Company has determined extend through a product's life cycle.
The effect of the change during the quarter ended March 31, 2003 was to
increase earnings before cumulative effect of change in accounting principle by
$2.8 million, or $0.014 per share. The cumulative effect adjustment of $55.1
million (net of income taxes of $34.0 million) to retroactively apply the new
capitalization method as if applied in years prior to 2003 is included in
earnings during the quarter ended March 31, 2003. The pro forma amounts shown on
the consolidated statement of earnings have been adjusted for the effect of the
retroactive application on depreciation and related income taxes.
3. STOCK COMPENSATION
At March 31, 2003, the Company had three stock-based compensation plans for
employees and non-employee directors, which are described more fully in the
notes to the consolidated financial statements included in the Company's 2002
annual report on Form 10-K. 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
compensation cost is reflected in net earnings related to those plans, as all
stock options granted 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
F-27
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
share if the Company had applied the fair value recognition provisions of SFAS
No. 123, "Accounting for Stock Based Compensation," to the above plans.
<Table>
<Caption>
FOR THE THREE
MONTHS ENDED
MARCH 31,
----------------
2003 2002
------- ------
(IN MILLIONS,
EXCEPT PER SHARE
AMOUNTS)
Net earnings, as reported................................... $135.3 $54.6
Deduct: Total stock-based compensation expense determined
under fair value based method for all awards, net of
tax....................................................... (3.5) (3.2)
------ -----
Pro forma net earnings...................................... $131.8 $51.4
====== =====
Earnings per share:
Basic -- as reported...................................... $ 0.69 $0.28
Basic -- pro forma........................................ 0.67 0.26
Diluted -- as reported.................................... 0.68 0.28
Diluted -- pro forma...................................... 0.67 0.26
</Table>
4. COMPREHENSIVE INCOME
The reconciliation of net earnings to comprehensive income is as follows:
<Table>
<Caption>
FOR THE THREE
MONTHS ENDED
MARCH 31,
--------------
2003 2002
------ -----
(IN MILLIONS)
Net Earnings................................................ $135.3 $54.6
Other Comprehensive Income (Loss):
Foreign currency translation.............................. 1.0 (2.2)
Unrealized foreign currency hedge gains (losses), net of
tax.................................................... 3.8 (0.1)
Reclassifications......................................... (2.6) (2.1)
------ -----
Total Other Comprehensive Income (Loss)..................... 2.2 (4.4)
------ -----
Comprehensive Income........................................ $137.5 $50.2
====== =====
</Table>
5. EARNINGS PER SHARE
The following table reconciles the diluted shares used in computing diluted
earnings per share:
<Table>
<Caption>
FOR THE THREE
MONTHS ENDED
MARCH 31,
-------------
2003 2002
----- -----
(IN MILLIONS)
Basic average common shares outstanding..................... 195.7 194.0
Effect of dilutive securities............................... 2.3 1.7
----- -----
Diluted average common shares outstanding................... 198.0 195.7
===== =====
</Table>
There were no anti-dilutive securities outstanding at March 31, 2003 or
2002.
F-28
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVENTORIES
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
(IN MILLIONS)
Finished goods........................................ $212.9 $206.7
Raw materials and work in progress.................... 53.0 50.9
------ ------
Inventories, net.................................... $265.9 $257.6
====== ======
</Table>
7. PROPERTY, PLANT AND EQUIPMENT
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
(IN MILLIONS)
Land.................................................. $ 8.2 $ 8.2
Buildings and equipment............................... 359.6 354.4
Instruments........................................... 275.6 --
Construction in progress.............................. 13.3 13.3
------- -------
656.7 375.9
Accumulated depreciation.............................. (345.7) (218.1)
------- -------
Property, plant and equipment, net.................. $ 311.0 $ 157.8
======= =======
</Table>
8. FINANCIAL INSTRUMENTS
The Company is exposed to market risk due to changes in currency exchange
rates. As a result, the Company utilizes foreign exchange forward contracts to
offset the effect of exchange rate fluctuations on certain anticipated foreign
currency transactions, primarily intercompany sales and purchases expected to
occur within the next twelve to twenty-four months. The Company does not hold
financial instruments for trading or speculative purposes. For derivatives which
qualify as hedges of future cash flows, the effective portion of changes in fair
value is temporarily recorded in other comprehensive income, then recognized in
earnings when the hedged item affects earnings. The ineffective portion of a
derivative's change in fair value, if any, is reported in earnings. The net
amount recognized in earnings during the quarters ended March 31, 2003 and 2002,
due to ineffectiveness and amounts excluded from the assessment of hedge
effectiveness, was not significant. The fair value of outstanding derivative
instruments recorded on the balance sheet at March 31, 2003, together with
settled derivative instruments where the hedged item has not yet affected
earnings, was a net unrealized loss of $11.8 million, or $7.3 million net of
taxes, and is deferred in other comprehensive income and is expected to be
reclassified to earnings over the next two years; $8.8 million, or $5.4 million
net of taxes, is expected to be reclassified to earnings over the next twelve
months.
9. SEGMENT INFORMATION
The Company designs, develops, manufactures and markets orthopaedic
reconstructive implants, trauma products, and orthopaedic surgical products
which include surgical supplies and equipment designed to aid in orthopaedic
procedures and to accommodate patient rehabilitation needs post surgery.
Operations are managed 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 as well as the Middle East and Africa. This
structure is the basis for the Company's reportable segment information
discussed below. Segment performance is evaluated based on sales and segment
operating profit,
F-29
ZIMMER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exclusive of operating expenses pertaining to global operations and corporate
expenses. Global operations include U.S. based research, development
engineering, brand management, corporate legal, finance, human resource
functions and operations and logistics.
Net sales and segment operating profit are as follows (in millions):
<Table>
<Caption>
NET SALES OPERATING PROFIT
--------------- -----------------
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
--------------- -----------------
2003 2002 2003 2002
------ ------ ------- -------
Americas........................................... $266.1 $224.3 $135.0 $107.2
Asia Pacific....................................... 70.0 57.8 32.8 25.8
Europe............................................. 54.0 37.0 14.2 8.7
------ ------
Total............................................ $390.1 $319.1
====== ======
Global Operations and corporate expenses........... (60.0) (53.4)
------ ------
Operating profit................................... $122.0 $ 88.3
====== ======
</Table>
Product category net sales are as follows (in millions):
<Table>
<Caption>
NET SALES
---------------
THREE MONTHS
ENDED MARCH 31
---------------
2003 2002
------ ------
Reconstructive implants..................................... $309.9 $245.1
Trauma...................................................... 35.8 32.6
Orthopaedic surgical products............................... 44.4 41.4
------ ------
Total..................................................... $390.1 $319.1
====== ======
</Table>
10. COMMITMENTS AND CONTINGENCIES
The Company is subject to product liability and other claims arising in the
ordinary course of business, for which the Company maintains insurance, subject
to self-insured retention limits. The Company establishes accruals for product
liability and other claims in conjunction with outside counsel based on current
information and historical settlement information for open claims, related fees
and for claims incurred but not reported. While it is not possible to predict
with certainty the outcome of these cases, it is the opinion of management that
these cases will not have a material adverse effect on the consolidated
financial position, results of operations or cash flows of the Company.
In addition to product liability, the Company is subject to other lawsuits
and claims arising in the ordinary course of business, none of which are
expected to have, upon ultimate resolution, a material effect on the Company's
consolidated financial position, results of operations or cash flows.
F-30
CENTERPULSE AG AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
<Table>
<Caption>
NOTES 2002 2001 2000
----- ----- ------- -----
(IN MILLIONS CHF)
NET SALES................................................... 1,470 1,418 1,347
Cost of sales............................................... (480) (540) (420)
GROSS PROFIT................................................ 990 878 927
Selling, general and administrative expense................. (631) (648) (555)
Research and development expense............................ (94) (130) (108)
Other operating income...................................... 8 2 -- 6
Goodwill amortization....................................... (50) (57) (39)
Hip and knee implant litigation............................. 9 -- (1,476) --
Exceptional operating items................................. 10 (12) (198) (1)
Gain on sale of discontinued operations..................... 11 200 -- --
OPERATING INCOME/(LOSS)..................................... 405 (1,631) 230
Financial (expense)/income.................................. 12 (28) 7 29
Other non-operating (expense)/income........................ 12 (1) (21) --
INCOME/LOSS BEFORE TAXES.................................... 376 (1,645) 259
Taxes....................................................... 13 (37) 454 (67)
NET INCOME/(NET LOSS) BEFORE MINORITY INTERESTS............. 339 (1,191) 192
Minority interests.......................................... (2) (2) (2)
NET INCOME/(LOSS)........................................... 337 (1,193) 190
PER REGISTERED SHARE/PER AMERICAN DEPOSITARY SHARE (ADS)
Basic earnings/(loss) per share............................. 14 33.10 (119.62) 19.01
Basic earnings/(loss) per ADS............................... 3.31 (11.96) 1.90
Diluted earnings/(loss) per share........................... 14 32.82 (119.62) 18.98
Diluted earnings/(loss) per ADS............................. 3.28 (11.96) 1.90
</Table>
The accompanying notes are an integral part of these financial statements.
F-31
CENTERPULSE AG AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
NOTES 2002 2001
----- ----- -----
(IN MILLIONS CHF)
ASSETS
NON-CURRENT ASSETS
Intangible assets........................................... 15 604 930
Property, plant and equipment............................... 16 200 236
Investments and other financial assets...................... 17 70 65
Deferred income taxes....................................... 13 541 643
TOTAL NON-CURRENT ASSETS.................................... 1,415 1,874
CURRENT ASSETS
Inventories................................................. 18 352 411
Trade accounts receivable................................... 19 290 308
Other accounts receivable and prepaid expenses.............. 82 122
Cash and cash equivalents................................... 199 156
TOTAL CURRENT ASSETS........................................ 923 997
TOTAL ASSETS................................................ 2,338 2,871
EQUITY AND LIABILITIES
SHAREHOLDERS' EQUITY........................................ 21 1,270 784
Minority interests.......................................... 8 7
NON-CURRENT LIABILITIES
Non-current borrowings...................................... 22 487 20
Deferred income taxes....................................... 19 19
Non-current provisions...................................... 23 159 1,468
Other non-current liabilities............................... 4 11
Total non-current liabilities............................... 669 1,518
CURRENT LIABILITIES
Current borrowings.......................................... 24 70 75
Current provisions.......................................... 23 92 223
Trade accounts payable...................................... 64 70
Other current and accrued liabilities....................... 25 165 194
TOTAL CURRENT LIABILITIES................................... 391 562
TOTAL LIABILITIES........................................... 1,060 2,080
TOTAL EQUITY AND LIABILITIES................................ 2,338 2,871
</Table>
The accompanying notes are an integral part of these financial statements.
F-32
CENTERPULSE AG AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<Table>
<Caption>
CUMULATIVE
SHARE ADDITIONAL RETAINED TRANSACTION TREASURY
CAPITAL PAID-IN CAPITAL EARNINGS ADJUSTMENT STOCK TOTAL
------- --------------- -------- ----------- -------- ------
(IN MILLIONS CHF, EXCEPT SHARE DATA)
JANUARY 1, 2000.................... 300 766 683 95 (5) 1,839
Dividends (CHF 5 per share)........ -- -- (50) -- -- (50)
Options exercised (note 30)........ -- 3 -- -- -- 3
Increase in treasury stock......... -- -- -- -- (2) (2)
Net income......................... -- -- 190 -- -- 190
Currency translation adjustments... -- -- -- 13 -- 13
Comprehensive income(1)............ -- -- 190 13 -- 203
DECEMBER 31, 2000.................. 300 769 823 108 (7) 1,993
Adjustments for adopting IAS 39.... -- -- 12 -- -- 12
Dividends (CHF 6 per share)........ -- -- (60) -- -- (60)
Options exercised (note 30)........ -- -- -- -- -- --
Increase in treasury stock......... -- -- -- -- (9) (9)
Fair value reserve................. -- -- (9) -- -- (9)
Net income......................... -- -- (1,193) -- -- (1,193)
Currency translation adjustments... -- -- -- 50 -- 50
Comprehensive income(1)............ -- -- (1,193) 50 -- (1,143)
DECEMBER 31, 2001.................. 300 769 (427) 158 (16) 784
Capital increase(2)................ 55 201 -- -- -- 256
Cost of capital increase(2)........ -- (18) -- -- -- (18)
Options exercised (note 30)........ 1 2 -- -- -- 3
Increase in treasury stock......... -- -- -- -- (1) (1)
Fair value reserve................. -- -- -- -- -- --
Net income......................... -- -- 337 -- -- 337
Currency translation adjustments... -- -- -- (91) -- (91)
Comprehensive income(1)............ -- -- 337 (91) -- 246
DECEMBER 31, 2002.................. 356 954 (90) 67 (17) 1,270
</Table>
- ---------------
(1) Comprehensive income includes changes in equity, other than those arising
from investment by owners and distributions to owners. The comprehensive
income was CHF 246, CHF (1,143) and CHF 203 million in 2002, 2001 and 2000,
respectively.
(2) As part of the financing of the obligations under the Settlement Agreement,
the Company increased its capital by means of a tradeable preemptive rights
offering, which was completed with the delivery of new shares on October 15,
2002.
The accompanying notes are an integral part of these financial statements.
F-33
CENTERPULSE AG AND SUBSIDIARIES
CONSOLIDATED CASH FLOW STATEMENTS
<Table>
<Caption>
2002 2001 2000
------ ------ ----
(IN MILLIONS CHF)
CASH FLOW FROM OPERATING ACTIVITIES
Net income/(net loss)..................................... 337 (1,193) 190
Minority interests........................................ 2 2 2
Gain on sale of discontinued operations................... (200) -- --
Depreciation and amortization............................. 124 195 117
Change in provisions(1)................................... (1,282) 1,492 (7)
Change in net current assets & long-term receivables...... (75) (40) (10)
Exceptional write-down of goodwill........................ -- 53 --
Other non-cash items, net................................. (15) (416) 5
TOTAL CASH FLOW FROM OPERATING ACTIVITIES................... (1,109) 93 297
CASH FLOW FROM INVESTING ACTIVITIES
(Purchase)/sale of intangible assets...................... (2) (8) (6)
(Purchase)/sale of tangible assets........................ (60) (71) (49)
Acquisitions including minority investments............... (14) (413) (80)
Proceeds from divestitures................................ 400 27 4
(Purchase)/sale of long-term financial assets............. (11) (38) (22)
TOTAL CASH FLOW FROM INVESTING ACTIVITIES................... 313 (503) (153)
NET CASH FLOW BEFORE FINANCING ACTIVITIES................... (796) (410) 144
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of share capital................... 241 -- 3
Change in treasury stock.................................. (1) (9) (2)
Increase in borrowings.................................... 1,010 7 --
Repayment of borrowings................................... (484) (26) (4)
Dividends................................................. -- (60) (50)
TOTAL CASH FLOW (-USED IN) FROM FINANCING ACTIVITIES........ 766 (88) (53)
Net effect of currency translation on cash and cash
equivalents............................................... 73 21 (4)
CHANGE IN CASH AND CASH EQUIVALENTS......................... 43 (477) 87
Cash and cash equivalents at beginning of period............ 156 633 546
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. 199 156 633
Supplemental cash flow information:
Interest receipts........................................... 4 14 39
Interest payments........................................... (12) (8) (8)
Income tax payments......................................... (44) (24) (55)
</Table>
- ---------------
(1) Included in change in provisions in 2002 is the cash outflow related to the
hip and knee implant litigation of CHF 1,242 million.
The accompanying notes are an integral part of these financial statements.
F-34
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: GENERAL INFORMATION
On January 9, 1997, the Board of Directors of Sulzer Ltd, Winterthur,
Switzerland ("Sulzer") approved a plan to offer a minority shareholding in its
SulzerMedica Group ("Group") to the public. In order to prepare for this
offering, Sulzer transferred its ownership interest in its orthopedic,
electrophysiology and cardiovascular prostheses subsidiaries to SulzerMedica Ltd
("SulzerMedica" or the "Company"), a company previously named Sulzer Orthopedics
Ltd, incorporated in Switzerland. On July 14, 1997, SulzerMedica Ltd increased
its share capital by 2,600,000 registered shares, each with a nominal value of
CHF 30. These shares were sold to the public through an Initial Public Offering
(IPO) in July 1997, for CHF 350 per share. Upon completion of the IPO via
capital increase, Sulzer's beneficial ownership of the Company's common stock
was reduced to 74%. On February 1, 1999, Sulzer-Medica completed its sale of the
electrophysiology business.
At the Sulzer Annual General Meeting on April 19, 2001 the shareholders
approved the separation of Sulzer and SulzerMedica. The separation was completed
on July 10, 2001. At the extraordinary shareholders' meeting of SulzerMedica on
July 9, 2001 the Company took the final step to complete its independence from
parent company Sulzer. At the Annual General Meeting of SulzerMedica on May 17,
2002 the shareholders approved the change of the Group's name from SulzerMedica
to Centerpulse.
On June 12, 2002 the Group announced its plans to divest its Cardiovascular
Division, comprising the Group's entire Cardiac and Vascular Care product lines
that produce and distribute mechanical and tissue heart valves and products for
the treatment of vascular obstructions and diseases. On November 7, 2002, the
Group concluded the sale of IntraTherapeutics, Inc. to ev3 Inc., a portfolio
company run by equity firms Warburg Pincus LLC and The Vertical Group, for USD
95 million. On November 18, 2002, the Group concluded the sale of Vascutek Ltd.
to Terumo Corporation of Japan for USD 170 million. On November 27, 2002, the
Group announced that it had entered into a definitive agreement to sell its
Carbomedics Inc. and Mitroflow Corp. mechanical and tissue valve business to the
Italian medical device company Snia S.p.A. for a total consideration of USD 116
million. On January 21, 2003, the Group announced that this sale had been
concluded.
NOTE 2: BASIS OF PREPARATION
The consolidated financial statements have been prepared in accordance with
International Financial Reporting Standards (IFRS). The consolidated financial
statements have been prepared under the historical cost convention as modified
by the revaluation of available-for-sale investment securities.
In 2002 no new International Accounting Standards or International
Financial Reporting Standards have been introduced.
The term "in millions CHF" in these Consolidated Financial Statements
refers to millions of Swiss francs.
NOTE 3: ACCOUNTING AND CONSOLIDATION PRINCIPLES
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. The most significant estimates relate to
valuation of the depreciable lives of fixed assets and intangible assets,
allowances for doubtful accounts, inventory obsolescence, provisions, impairment
charges and deferred taxes. Actual results could differ from estimates.
F-35
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Consolidation principles. The consolidated financial statements include
all of the assets, liabilities, income and expense of companies in which
Centerpulse, directly or indirectly, holds more than 50% of the voting rights or
otherwise has the power to control the company.
Acquisitions have been accounted for using the purchase method. All
material intercompany balances and transactions are eliminated.
Investments in associated companies. Companies in which the Group holds
between 20% and 50% of the voting rights and exercises significant influence are
accounted for by using the equity method. Due to the insignificance of this
position the Group's share in the equity is presented under "Investments and
other financial assets" and not in a separate line. The Group's share of net
income is presented under "Other operating income".
Available-for-sale investments. As of January 1, 2001 minority investments
and other financial assets are initially recorded at cost and subsequently
carried at fair value. The Group has classified all these equity investments as
available-for-sale. Changes in fair value are deferred as a fair value
adjustment in equity and recycled to the income statement when the asset is
sold. Unrealized losses considered to be other than temporary are included in
the income statement. Depending on the classification of the investment as
operating or not, the impairment is recorded as other operating expenses or as
financial expense, or as exceptional operating item, respectively.
Foreign currency conversion. Items included in the financial statements of
each entity in the Group are measured using the currency that best reflects the
economic substance of the underlying events and circumstances relevant to that
entity ("the measurement currency"). The consolidated financial statements are
presented in Swiss Francs, which is the measurement currency of the parent.
Transactions in foreign currencies are translated into the measurement currency
using exchange rates prevailing at the dates of transaction. Assets and
liabilities in foreign currencies are stated at the year-end rate. The resulting
exchange differences are included in the net income.
The assets and liabilities of foreign affiliates, including acquired
goodwill, are translated using the year-end rates of exchange. Income statements
and cashflow statements are translated at average exchange rates for the year if
the effective rate does not deviate significantly from the average exchange
rate. Currency conversion differences resulting from consolidation are included
in shareholders' equity. In the event of sale or liquidation of foreign
affiliated companies, the cumulative currency conversion differences relating to
the Company that has been disposed of form part of the gain or loss on the sale
or liquidation proceeds.
Goodwill and other intangible assets. Goodwill arising from acquisitions
is capitalized in the currency of the acquired company and amortized on a
straight-line basis over its useful life, not exceeding 20 years.
Other intangible assets include licenses, patents, trademarks and similar
rights as well as existing technology acquired from third parties. These assets
are amortized over their estimated useful lives, not exceeding 10 years.
Property, plant and equipment. Property, plant and equipment are stated at
cost less accumulated depreciation. Depreciation is provided on a straight-line
basis over the estimated useful life, land is not depreciated.
F-36
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The estimated useful lives of property, plant and equipment are as follows:
<Table>
Buildings................................................... 25-40 years
Machinery................................................... 5-15 years
Equipment................................................... 5-10 years
Tools, EDP equipment and patterns........................... max. 5 years
Motor vehicles.............................................. 4 years
</Table>
Interest costs on borrowings to finance the construction of property, plant
and equipment are capitalized during the period of time that is required to
complete and prepare the property for its intended use, as part of the cost of
the asset.
Investment property. Investment property is held for long-term rental
yields and is not occupied by the Group. Such properties are carried at cost
less accumulated depreciation. The disclosed fair value is based on market
evidence and on discounted cash flow projections based on existing and potential
rent contracts.
Impairment. If circumstances affecting the recoverability of tangible and
intangible assets change, and impairment has occurred, the Company compares the
estimated discounted cash flows expected to be generated by the asset with its
carrying value. It then records and recognizes an impairment charge by means of
a special depreciation of the excess carrying value and adjusts the useful lives
of intangible assets as appropriate.
Inventories. Raw materials, supplies and consumables are stated at the
lower of cost or net realisable value. Finished products and work in progress
are stated at the lower of production cost or net realizable value. Production
costs include the cost of materials and direct and indirect manufacturing cost.
Depending on the nature and the use, inventories are valued on the basis of
weighted average prices or the FIFO method. Allowances are made for obsolete,
slow-moving and excess inventories.
Accounts receivable. Trade receivables are carried at original invoice
amount less provision made for impairment of these receivables. Such provision
for impairment of trade receivables is established if there is objective
evidence that the Group will not be able to collect all amounts due according to
the original terms of receivables. The amount of the provision is the difference
between the carrying amount and the recoverable amount, being the present value
of expected cash flows.
Cash and cash equivalents. Cash and cash equivalents comprise bills,
postal and bank accounts, together with current account and deposit balances
with maturities of under three months at acquisition.
Provisions. Provisions are recognized when the Group has a present legal
or constructive obligation as a result of past events, it is probable that an
outflow of resources will be required to settle the obligation, and a reliable
estimate of the amount can be made.
Derivative financial instruments. The Company uses derivative financial
instruments to manage the economic impact of fluctuations in foreign currency
exchange rates. Derivative financial instruments are initially recognized in the
balance sheet at cost and subsequently are remeasured at their fair value. The
method of recognizing the resulting gain or loss is dependent on the nature of
the item being hedged. The Group designates certain derivatives as either (1) a
hedge of the fair value of a recognized asset or liability (fair value hedge),
or (2) a hedge of a forecasted transaction or of a firm commitment (cash flow
hedge), or (3) a hedge of a net investment in a foreign entity on the date a
derivative contract is entered into.
Changes in the fair value of derivatives that are designated and qualify as
fair value hedges and that are highly effective, are recorded in the income
statement, along with any changes in the fair value of the hedged asset or
liability that is attributable to the hedged risk.
F-37
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in the fair value of derivatives that are designated and qualify as
cash flow hedges and that are highly effective, are recognized in equity. The
Group has classified all hedging activities as fair value hedges.
Employee benefits. The liability of defined benefit plans for retirement
benefits corresponds to the present value of benefits payable. The discount rate
used for determining the present value is based on the prevailing interest rates
applicable to long-term corporate or government bond issues with maturities
extending over the average duration of the retirement benefit entitlements. All
actuarially computed gains and losses which exceed 10% of the present value of
future benefits payable or the underlying assets of the benefit plan
("corridor"), are amortized over the average remaining active period of
employment.
Defined contribution plans are pure saving plans without any added
benefits. The contributions made are charged directly to personnel costs.
Revenue recognition. Revenue comprises the invoiced value for the sale of
goods and services net of value-added tax, rebates and discounts, and after
eliminating sales within the Group. Revenue from the sale of goods is recognized
when significant risks and rewards of ownership of the goods are transferred to
the buyer. Accruals for estimated future returns and credits are made when the
related revenue is recognized. Such amounts are estimated on the basis of
historical rates of return, customer inventory levels and other factors.
Income per share. Basic income per share is calculated by dividing net
income by the weighted average number of shares issued minus treasury stock
during the year.
Diluted net income per share is computed by dividing net income by the
weighted average number of registered shares issued, minus treasury stock,
during the year plus the incremental shares that would have been outstanding
under the management stock option plan (see "Stock-based compensation") upon the
assumed exercise of dilutive stock options.
Research and development costs. Research expenditure is recognized as an
expense as incurred. Costs incurred on development projects (relating to the
design and testing of new or improved products) are recognized as intangible
assets when it is probable that the project will be a success considering its
commercial and technological feasibility, and only if the cost can be measured
reliably.
Stock-based compensation. Under the terms of the management stock option
plans, the option exercise price is equal to the fair market value of the share
at the date of grant and, accordingly, no costs other than social security costs
are recorded in connection with the plans.
Taxes. Provision is made for all income taxes assessed on profits earned
up to the balance sheet date in the year to which they relate. Deferred taxes
are included on differences between the amounts carried for tax purposes and
those carried for corporate purposes, applying the liability method. For this
purpose, all the valuation differences recorded by affiliated companies and tax
losses they are carrying forward are taken into consideration. Deferred taxes
are calculated at the locally applicable tax rates. These tax rates are
immediately adjusted to reflect the effects of changes in the law. A potential
offset against future tax costs through losses they are carrying forward and
valuation differences is included in the balance sheet if this is expected to be
realized in the form of anticipated profits. Deferred taxes on proposed profit
distributions by subsidiaries are accrued. Where profits of subsidiaries are
retained in the business and used for local investment, they are not included in
the deferred tax calculation. Where the disposal of an investment is foreseen,
the applicable deferred taxes are included. Deferred tax assets and liabilities
are only offset by the entities subject to these taxes, to the extent that such
income taxes are payable to the same authority and such offset is permitted by
law. The movements in the deferred tax position are accounted for as a direct
charge or credit to tax expense.
F-38
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EXPLANATORY NOTES
NOTE 4: CURRENCY EXCHANGE RATES
<Table>
<Caption>
AVERAGE RATES
---------------------
CONSOLIDATED
YEAR-END RATES STATEMENTS OF INCOME
CONSOLIDATED AND CASH FLOW
BALANCE SHEETS STATEMENTS
------------------ ---------------------
CHF 2002 2001 2000 2002 2001 2000
- --- ---- ---- ---- ----- ----- -----
1 US Dollar.................................... USD 1.39 1.68 1.62 1.56 1.69 1.69
1 Pound Sterling............................... GBP 2.23 2.44 2.43 2.34 2.43 2.56
1 Euro......................................... EUR 1.45 1.48 1.52 1.47 1.51 1.56
100 Japanese Yen............................... JPY 1.17 1.28 1.42 1.24 1.39 1.57
</Table>
NOTE 5: COMPOSITION OF THE GROUP
A list of investments held directly or indirectly by Centerpulse Ltd is
provided below:
<Table>
<Caption>
COMPANY/ MANAGEMENT SHARE REGISTERED CAPITAL
- ------------------- ----- ------------------
SWITZERLAND
(4) Centerpulse Management Ltd, Zurich...................... 100 % CHF 100,000.--
Max Link
(4) Centerpulse Services Ltd, Zurich........................ 100 % CHF 100,000.--
Claudio Aquilina
(1) Centerpulse Orthopedics Ltd, Baar....................... 100 % CHF 12,000,000.--
(3) Richard Fritschi
(1) Centerpulse Orthopedics (Switzerland) Ltd, Munsingen.... 100 % CHF 100,000.--
(3) Peter Liniger
(2) Sulzer Cardiovascular Ltd, Baar......................... 100 % CHF 500,000.--
Mike Barrett
BELGIUM
(1) Centerpulse BeLux SA/NV, Brussels....................... 100 % EUR 300,000.--
(3) Jean-Pierre Willems
GERMANY
(4) Centerpulse Germany Holding GmbH, Freiburg.............. 100 % EUR 35,000,000.--
Urs Kamber
(1) Centerpulse Germany GmbH, Freiburg...................... 100 % EUR 4,500,000.--
(3) Klaus Hug/Georg Stadler
(5) Centerpulse Dental GmbH, Freiburg....................... 100 % EUR 511,292.--
Werner Grotz/Steven E. Hanson
(2) Sulzer Cardiovascular GmbH, Hamburg..................... 100 % EUR 512,000.--
Mike Barrett
FRANCE
(1) Centerpulse France SA, Etupes........................... 100 % EUR 130,000.--
(3) Maurice Meytre
(1) Centerpulse Sud-Ouest Sarl, Toulouse-Blagnac............ 100 % EUR 54,000.--
(3) Francoise Loesch
(1) Centerpulse Ouest Sarl, La Meziere...................... 100 % EUR 2,256,000.--
(3) Philippe Jaffres
(1) Centerpulse Centre Sarl, Ebreuil (Vichy)................ 100 % EUR 8,000.--
(3) Benoit Combe
</Table>
F-39
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
COMPANY/ MANAGEMENT SHARE REGISTERED CAPITAL
- ------------------- ----- ------------------
(1) Centerpulse Nord Sarl, Lille............................ 100 % EUR 8,000.--
(3) Eric Bauduin
(1) Centerpulse Industrie Sarl, Etupes...................... 100 % EUR 1,600,000.--
Maurice Meytre
(2) Sulzer Cardiovascular SA, Meudon (Paris)................ 100 % EUR 2,515,409.--
James F. A. Deegan
(5) Centerpulse Dental Sarl, Rungis (Paris)................. 100 % EUR 76,225.--
Alexander Ochsner
UNITED KINGDOM
(4) Centerpulse (UK) Holdings Ltd, Inchinnan................ 100 % GBP 16,160,000.--
Marcel Bauckhage
(4) SM RE Ltd, St. Peter Port (Guernsey).................... 100 % CHF 5,000,000.--
Guy Hendry
(1) Centerpulse (UK) Ltd, Alton............................. 100 % GBP 1,050,000.--
(3) Guido Bassing
(2) Sulzer Carbomedics UK Ltd, Crawley...................... 100 % GBP 1,000.--
James F. A. Deegan
NETHERLANDS
(1) Centerpulse Netherlands BV, Utrecht..................... 100 % EUR 25,000.--
(3) Rob Ringelberg
(2) Sulzer Cardiovascular BV, Utrecht....................... 100 % EUR 150,500.--
John Lawrence Groover
ITALY
(1) Centerpulse Italia S.p.A., Opera (Milan)................ 100 % EUR 14,025,000.--
(3) Marco Grubenmann
(1) Allo System Srl, Villorba (Treviso)..................... 51 % EUR 40,000.--
(3) Antonio De Cristofaro
(1) Migliori Srl, Viagrande (Catania)....................... 51 % EUR 434,000.--
(3) Fernando Migliori
AUSTRIA
(1) Centerpulse Austria GmbH, Modling....................... 100 % EUR 60,000.--
(3) Manfred Koppl
SPAIN
(1) Centerpulse Iberica SA, Madrid.......................... 100 % EUR 62,226.10--
(3) Marcel Kyburz
SWEDEN
(1) Centerpulse Orthopedics Sweden AB, Stockholm............ 100 % SEK 200,000.--
(3) Bengt Sedell
CZECH REPUBLIC
(1) Centerpulse CZ sro, Prague.............................. 100 % CZK 24,700,000.--
Oldrich Cech
CANADA
(2) Sulzer Medica Canada Inc., Toronto...................... 100 % CAD 3,200,000.--
Paul E. Parsons
(1) Centerpulse Orthopedics Canada Inc., Toronto............ 100 % CAD 4,000,001.--
Daniel Berdat
(2) Sulzer Carbomedics Canada Ltd, Calgary.................. 100 % CAD 100.--
Charles D. Griffin
</Table>
F-40
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
COMPANY/ MANAGEMENT SHARE REGISTERED CAPITAL
- ------------------- ----- ------------------
(2) Sulzer Mitroflow Corp., Richmond........................ 100 % CAD 12,000,000.--
Mark Seboldt
(5) Centerpulse Dental Corp., Etobicoke (Ontario)........... 100 % CAD 100.--
Steven E. Hanson
USA
(4) Centerpulse USA Holding Co., Houston, Texas............. 100 % USD 185,000,000.--
Gabor-Paul Ondo
(4) Centerpulse USA Inc., Houston, Texas.................... 100 % USD 1,000.--
Gabor-Paul Ondo
(2) Sulzer Carbomedics Inc., Austin, Texas.................. 100 % USD 117,490,215.--
Dennis C. Wallach
(1) Centerpulse Orthopedics Inc., Austin, Texas............. 100 % USD 209,349,052.--
David Floyd
(3) Centerpulse Spine-Tech Inc, Minneapolis/Minnesota....... 100 % USD 615,290,443.--
Mike McCormick
(3) Centerpulse Spine Tech Surgical Inc,
Minneapolis/Minnesota..................................... 100 % USD 13,702,429.--
Mike McCormick
(5) Centerpulse Dental Inc., Carlsbad/California............ 100 % USD 52,378,029.--
Steven E. Hanson
(6) Centerpulse Biologics Inc., Austin, Texas............... 100 % USD 1,280,394.--
Thomas Zehnder
AUSTRALIA
(1) Centerpulse Australia Pty Ltd, Chatswood................ 100 % AUD 14,450,000.--
Paul Aragones
(5) Centerpulse Dental Australia Pty Ltd, Kensington........ 100 % AUD 1.--
David Colquhoun
ISRAEL
(5) Centerpulse Dental Ltd, Ramat Gan....................... 100 % ILS 100.--
Steven E. Hanson
SOUTH AFRICA
(1) Centerpulse RSA (Proprietary) Ltd, Greenside............ 100 % ZAR 100.--
(3) Michael Nesbitt
INDIA
(1) Centerpulse India Ltd, Chennai.......................... 100 % INR 3,000,000.--
(3) K. Senthilnathan
JAPAN
(1) Centerpulse Japan KK, Tokyo............................. 100 % JPY 350,000,000.--
(3) Hans Rudolf Schuerch
KOREA
(1) Centerpulse Korea Ltd, Seoul............................ 100 % KRW 319,220,000.--
(3) Dae Sik Pyon
</Table>
- ---------------
(1) Orthopedics
(2) Cardiovascular (divested as of January 21, 2003)
(3) Spine-Tech
(4) Management
F-41
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) Dental
(6) Research & Development Biologics
Acquisitions of subsidiaries in the year 2001 are set out in the following
list which indicates the companies acquired, the country, the division and the
date of integration into the consolidation. In each case, all voting rights were
acquired. No significant acquisitions took place in 2002 and 2000.
On June 12, 2002 the Group announced its plans to divest its Cardiovascular
Division. For further information see note 11.
2001
- Paragon Implant Company Encino (USA); Dental Division; Jan. 1, 2001
- IntraTherapeutics Inc. St. Paul (USA); Cardiovascular Division; Feb. 1,
2001
- Sulzer Australia Pty Ltd Chatswood (Australia); Orthopedics and
Cardiovascular Division; July 1, 2001
The purchase price considerations of these acquisitions amount to CHF 432
million in 2001. No agreements to make contingent payments have been entered
into in connection with these acquisitions.
The 1999 agreement to purchase Mitroflow Inc. foresees a potential
adjustment of the purchase price of a maximum of USD 17 million including
interest, depending upon when Centerpulse receives approval from the US Federal
Drug Administration, FDA, for the main product, a biological valve. If FDA
approval is not obtained within a specified time frame no payment beyond the
recorded liability is required.
NOTE 6: EFFECTS OF ACQUISITIONS
The impact of significant subsidiaries acquired was as follows:
<Table>
<Caption>
2002 2001 2000
---- ---- ----
(IN MILLIONS CHF)
Net sales................................................... -- 91 --
Operating income............................................ -- (33) --
Non-current assets acquired................................. -- 89 --
Current assets acquired..................................... -- 53 --
thereof cash acquired..................................... -- 6 --
Liabilities acquired........................................ -- (47) --
</Table>
NOTE 7: SEGMENT INFORMATION
In 2002 the Group changed its reporting structure from two segments to four
segments. The information presented below has been changed from prior years to
reflect this adjustment to the primary reporting format. Since the change the
Group's business has been managed on a worldwide basis and structured into four
operating segments. The Orthopedics division develops, manufactures and
distributes hip, knee and other orthopedic implants. Spine-Tech develops and
distributes spinal implants. The Dental division develops, manufactures and
distributes dental implants. The Cardiovascular Division develops, manufactures
and distributes heart valves including repair products, vascular grafts and
stents.
As discussed in greater detail in note 11, the Group has decided to divest
its Cardiovascular Division, including the Company's entire Cardiac Care and
Vascular Care product lines. Subsequent to this divestment the Company will
comprise of the three remaining global businesses (Orthopedics, Spine-Tech and
Dental).
F-42
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Group's further operating activities consist of biologic activities and
Group management, including the costs of holding, financing and managing
Centerpulse.
The geographic segmentation reflects the main operating areas of the Group.
The Group's policy specifies that the transfer of goods and services between the
various segments be carried out at arm's length.
Between the Divisions, no material inter-segment sales have occurred.
PRIMARY REPORTING FORMAT -- SEGMENT INFORMATION BY DIVISION
PART 1
<Table>
<Caption>
2002 2001 2000
----- ------ -----
(IN MILLIONS CHF)
NET SALES
Orthopedics Division........................................ 923 855 861
Spine-Tech Division......................................... 179 175 179
Dental Division............................................. 131 120 57
Cardiovascular Division(1).................................. 237 268 250
TOTAL....................................................... 1,470 1,418 1,347
OPERATING INCOME
Orthopedics Division........................................ 168 (1,370) 187
Spine-Tech Division......................................... 7 (35) (4)
Dental Division............................................. 15 2 2
Cardiovascular Division(1).................................. 37 (88) 61
Biologics and Group Management.............................. 178 (140) (16)
TOTAL....................................................... 405 (1,631) 230
</Table>
- ---------------
(1) Incl. in 2002 and 2001 are CHF 7.8 million sales to ATS Medical, Inc.
PRIMARY REPORTING FORMAT -- SEGMENT INFORMATION BY DIVISION
PART 2
<Table>
<Caption>
2002 2001 2000
----- ----- -----
(IN MILLIONS CHF)
CAPITAL EXPENDITURE
Orthopedics Division...................................... 40 55 42
Spine-Tech Division....................................... 11 19 11
Dental Division........................................... 3 5 2
Cardiovascular Division................................... 8 9 6
Biologics and Group Management............................ 9 4 2
TOTAL....................................................... 71 92 63
</Table>
F-43
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
2002 2001 2000
----- ----- -----
(IN MILLIONS CHF)
DEPRECIATION AND AMORTIZATION
Orthopedics Division...................................... 51 57 51
Spine-Tech Division....................................... 45 48 50
Dental Division........................................... 11 12 1
Cardiovascular Division................................... 16 104 12
Biologics and Group Management............................ 1 3 2
TOTAL....................................................... 124 224 116
ASSETS
Orthopedics Division...................................... 413 488 423
Spine-Tech Division....................................... 1,014 1,185 1,098
Dental Division........................................... 75 86 31
Cardiovascular Division(2)................................ 129 342 198
Biologics and Group Management(2)......................... 707 770 775
TOTAL....................................................... 2,338 2,871 2,525
LIABILITIES
Orthopedics Division...................................... 652 1,526 131
Spine-Tech Division....................................... 149 165 150
Dental Division........................................... 13 15 6
Cardiovascular Division................................... 29 70 51
Biologics and Group Management............................ 217 304 189
TOTAL....................................................... 1,060 2,080 527
</Table>
- ---------------
(2) In 2001 CHF 42 million related to tax assets from loss carry forward of the
Cardiovascular Division are shown under Biologics and Group Management.
SECONDARY REPORTING FORMAT -- GEOGRAPHICAL SEGMENTS
PART 1
<Table>
<Caption>
2002 2001 2000
----- ----- -----
(IN MILLIONS CHF)
NET SALES BY LOCATION OF CUSTOMERS
Switzerland............................................... 69 61 59
European Union............................................ 582 560 530
Other Europe.............................................. 18 19 17
North America............................................. 639 629 602
All Other countries....................................... 162 149 139
TOTAL....................................................... 1,470 1,418 1,347
</Table>
F-44
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
2002 2001 2000
----- ----- -----
(IN MILLIONS CHF)
NET SALES BY LOCATION OF SUBSIDIARIES
Switzerland............................................... 470 472 431
European Union............................................ 586 563 537
Other Europe.............................................. 5 4 4
North America............................................. 834 849 806
All Other countries....................................... 89 70 52
TOTAL....................................................... 1,984 1,958 1,829
TRANSFERS TO OTHER GEOGRAPHIC AREAS FROM
Switzerland............................................... (378) (364) (338)
European Union............................................ (20) (17) (20)
Other Europe.............................................. -- -- --
North America............................................. (116) (159) (124)
All Other countries....................................... -- -- --
TOTAL....................................................... (514) (540) (482)
NET SALES TO THIRD PARTIES BY LOCATION OF SUBSIDIARIES
Switzerland............................................... 92 108 93
European Union............................................ 566 546 517
Other Europe.............................................. 5 4 4
North America............................................. 718 690 681
All Other countries....................................... 89 70 52
TOTAL....................................................... 1,470 1,418 1,347
</Table>
SECONDARY REPORTING FORMAT -- GEOGRAPHICAL SEGMENTS
PART 2
<Table>
<Caption>
2002 2001 2000
----- ------ -----
(IN MILLIONS CHF)
OPERATING INCOME BY LOCATION OF SUBSIDIARIES
Switzerland................................................. 87 (22) 49
European Union.............................................. 256 46 58
Other Europe................................................ -- -- --
North America............................................... 51 (1,662) 118
All Other countries......................................... 11 7 5
TOTAL....................................................... 405 (1,631) 230
ASSETS BY LOCATION OF SUBSIDIARIES
Switzerland................................................. 229 210 223
European Union.............................................. 444 452 454
Other Europe................................................ 5 4 4
North America............................................... 1,590 2,138 1,796
All Other countries......................................... 70 67 48
TOTAL....................................................... 2,338 2,871 2,525
</Table>
F-45
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
2002 2001 2000
----- ------ -----
(IN MILLIONS CHF)
CAPITAL EXPENDITURE BY LOCATION OF SUBSIDIARIES
Switzerland................................................. 6 1 3
European Union.............................................. 22 25 27
Other Europe................................................ -- -- --
North America............................................... 39 63 30
All Other countries......................................... 4 3 3
TOTAL....................................................... 71 92 63
</Table>
NOTE 8: OTHER OPERATING INCOME/EXPENSE
<Table>
<Caption>
2002 2001 2000
---- ----- -----
(IN MILLIONS CHF)
Currency exchange differences............................... 1 (3) (2)
Sundry operating income/expense............................. -- 4 8
Share of gain/loss of associate earnings.................... 1 (1) --
TOTAL OTHER OPERATING INCOME/EXPENSE........................ 2 -- 6
</Table>
Sundry operating income in 2001 and 2000 relates mainly to revenue from an
OEM-agreement entered into at the end of 1999.
NOTE 9: HIP AND KNEE IMPLANT LITIGATION AND OTHER MATERIAL LITIGATION
BACKGROUND
On December 5, 2000, Centerpulse Orthopedics Inc. ("COUS", formerly Sulzer
Orthopedics Inc.), a subsidiary of the Company located in Austin, Texas, issued
a voluntary recall of certain lots of Inter-Op(TM) acetabular shells, a
component of a hip implant manufactured and sold by COUS. The recall stemmed
from an investigation of reports of early loosening of the shell from patients'
hipbones, followed by revision surgery. The investigation identified as
potentially problematic approximately 39,000 shells manufactured between July
1997 and December 2000. On May 17, 2001, COUS sent a special alert to surgeons
who had implanted a porous-coated tibial base plate in patients, advising them
of adverse clinical outcomes reported by some surgeons.
Approximately 25,800 affected Inter-Op(TM) acetabular shells, 8,800
reprocessed Inter-Op(TM) shells and 1,600 affected tibial base plates were
implanted in patients worldwide, with approximately 32,100 devices implanted in
the United States, 1,200 in Canada and 2,900 in other countries. Accordingly,
COUS and the Company faced legal challenges worldwide to resolve cases and
claims in connection with the recall, and the special alert with the main
litigation procedures taking place in the United States and Canada.
LITIGATION IN THE UNITED STATES
Following the December 5, 2000 recall of Inter-Op(TM) shells and the May
17, 2001 special alert regarding tibial base plates, lawsuits were filed in both
state and federal courts throughout the U.S. against COUS, alleging defective
design, marketing and manufacture of its Inter-Op(TM) shell and tibial base
plate. Plaintiffs also alleged claims against COUS for breach of express and
implied warranties associated with these devices.
Between June and September 2001, the Judicial Panel on Multi-District
Litigation consolidated and transferred all pending federal litigation relating
to the Inter-Op(TM) shell and the tibial base plate to the U.S. District Court
for the Northern District of Ohio (the "Court"). In addition to the
multi-district litigation proceeding in the federal court, a substantial number
of lawsuits were filed in state courts around the country.
F-46
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In August 2001, in Nueces County, Texas COUS defended the only recall-related
lawsuit ever to go to trial in Nueces County, Texas. The jury in that lawsuit
awarded three patients and their spouses a total of approximately USD 15
million. COUS subsequently appealed the judgment and later settled the lawsuit
for a substantially reduced amount.
Also in August 2001, the Court conditionally certified a class of affected
product recipients and preliminarily approved a Class Action Settlement
Agreement (the "Settlement Agreement"), that resolved all claims related to the
affected products. This initial Settlement Agreement was modified in extensive
negotiations over the succeeding seven months culminating in a final agreement
reached through the combined efforts of attorneys for COUS and attorneys
representing patients in both federal and state courts. The Court granted
preliminary approval of the modified Settlement Agreement on March 13, 2002 and
final approval on May 8, 2002.
The Settlement Agreement established a Settlement Trust (the "Settlement
Trust") in order to pay claims in accordance with the terms of the Settlement
Agreement. The Settlement Trust was funded with approximately USD 1.1 billion,
of which Centerpulse contributed USD 725 million in cash on November 4, 2002.
Centerpulse's insurers and Sulzer AG, the Company's former parent company,
funded the balance. The Settlement Trust is divided into five separate funds:
the Medical Research and Monitoring Fund (USD 1.0 million); the Unrevised
Affected Product Recipient Fund (USD 28 million), from which class members who
have not undergone a revision surgery are entitled to receive USD 1,000; the
Affected Product Revision Surgery Fund (USD 622.5 million), from which class
members who have undergone revision surgery are entitled to receive USD 160,000
for each affected product that has been revised; the Extraordinary Injury Fund
(USD 100 million), from which a class member who has experienced any of several
specified complications related to an affected product may apply for benefits;
and the Professional Services Fund (USD 244 million), which includes two
sub-funds: the Subrogation and Uninsured Expenses Sub-Fund (USD 60 million),
from which third-party payors and uninsured patients may be reimbursed their
expenses up to USD 15,000 per affected product revision surgery; and the
Plaintiffs' Counsel Sub-Fund (USD 184 million), from which contingent-fee
attorneys representing class members are entitled to receive up to USD 46,000
per revision and from which members of the Plaintiffs' Liaison Counsel are
eligible to be compensated.
COUS has entered into separate agreements with the Centers for Medicare and
Medicaid Services (together, "Medicare") and approximately 200 private insurers
implementing a process for validating and paying claims for reimbursement of
expenses from the Subrogation and Uninsured Expenses Sub-Fund. Pursuant to these
agreements, Medicare and the private insurers receive a lump sum of no more than
USD 15,000 for each patient for whom they are the primary payor.
The Settlement Agreement specifies certain cut-off dates after which class
members who undergo a revision surgery for an affected product are no longer
eligible to receive benefits as a consequence of that revision surgery. These
dates are June 5, 2003 for class members implanted with an affected
Inter-Op(TM)shell; November 17, 2003 for class members implanted with an
affected tibial baseplate; and September 8, 2004 for class members implanted
with a reprocessed Inter-Op(TM) shell. Patients whose reprocessed Inter-Op(TM)
shell, a shell recovered in the voluntary recall and subjected to a newly
validated cleaning and sterilization process prior to implantation, is revised
prior to the cut-off date are entitled to class revision surgery benefits even
though COUS believes that the reprocessed Inter-Op(TM) shells are entirely safe
and effective.
The class plaintiffs who opted out of the Settlement Agreement may still
bring claims against the Company. In addition, pursuant to the Settlement
Agreement, the Company agreed to fund 50% of the cost of providing benefits for
each validated claim for revision surgery benefits in excess of 4,000 and 100%
of the cost of providing benefits for each validated claim for reprocessed
Inter-Op(TM) shell revision surgery benefits in excess of 64.
F-47
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, in the event that the USD 60 million Subrogation and Uninsured
Expenses Sub-Fund is depleted, the Settlement Agreement provides that the
Settlement Trust can apply to the Company for additional funding.
LITIGATION IN CANADA
In Canada, approximately 780 patients were implanted with a recalled
Inter-Op(TM) shell. On May 7, 2002, COUS agreed to a class action settlement in
a lawsuit pending in Quebec Superior Court. The Quebec court granted final
approval of the class settlement on March 28, 2003. The settlement calls for the
Company to pay USD 1,000 to each class member who has not undergone a revision
surgery, USD 75,000 to each class member who has undergone a single revision of
an affected product, USD 100,000 to each class member who has undergone two
revisions of an affected product, and USD 150,000 to each class member who has
undergone three or more revisions of an affected product or who experienced any
of several specified complications. Following final approval of the settlement,
class members will have thirty days during which to opt out of the class if they
so choose. Prior to preliminary approval of the class settlement, COUS concluded
individual settlements with 70 patients, representing what the company believes
is the majority of Canadian patients whose recalled Inter-Op(TM) shell required
revision surgery.
STATUS OUTSIDE THE U.S. AND CANADA
Outside the United States and Canada, approximately 140 affected product
recipients in Australia, Austria, Belgium, France, Germany, Italy, Japan, Korea,
Sweden and Switzerland had to undergo revision surgery. In some instances the
patients who received affected hip or knee implants have brought claims against
Centerpulse. Several of these claims have already been settled.
RELATED MATTERS
COUS, Centerpulse and various other Centerpulse companies are defendants in
a number of lawsuits in U.S. state and federal courts brought by patients
implanted with Inter-Op(TM) hip implants and tibial base plate knee implants
that were not affected products and therefore are not covered by the Settlement
Agreement. Many of the lawsuits were filed prior to the finalization of the
Settlement Agreement, apparently under the mistaken belief that the patient was
implanted with an affected product. Following the announcement of the Settlement
Agreement, some patients discovered that their implant is not an affected
product. The Company is aware of approximately 75 such lawsuits as of the
current date, involving both patients who did and who did not undergo revision
surgery. There may be additional such lawsuits that have not as yet come to the
attention of the Company, and additional such lawsuits may be filed in the
future. The Company believes that the products at issue in these lawsuits are
not defective and intends to defend vigorously against any attempt to pursue
these claims.
OTHER LITIGATION
JOINT MEDICAL PRODUCTS CORPORATION
Joint Medical Products Corporation, a division of Johnson & Johnson, filed
a complaint on January 28, 1997, in the U.S. District Court for the District of
Connecticut against Centerpulse USA Inc. and COUS. The suit alleged infringement
of a patent owned by Joint Medical relating to an acetabular cup and polymeric
insert used in hip prostheses and sought treble damages, attorneys' fees and
injunctive relief. In December 1997 (and as later amended in December 1999), the
parties stipulated and the court ordered that the case be dismissed without
prejudice and that the parties' April 1995 agreement tolling the statute of
limitations remain in effect pending the conclusion of a reissue proceeding in
the US Patent and Trademark Office, the USPTO, involving the Joint Medical
patent. A "reissue" proceeding is an administrative proceeding in which a patent
owner surrenders his patent to the USPTO, alleging that a mistake was made
during the original
F-48
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
examination of the underlying patent application in the USPTO, and requests that
the USPTO reissue a corrected patent. The USPTO then initiates a new examination
proceeding in light of the information received from the patent owner and
others. At this time, the Company does not know whether or when the USPTO will
reissue the Joint Medical patent or, since the patent claims may change during
the reissue proceeding, what defenses may be available to the Company if the
USPTO does reissue the Joint Medical patent. In the event that the USPTO
reissues the Joint Medical Products patent, the Company intends to defend itself
vigorously against any allegations of infringement.
GARY MICHELSON
Dr. Gary Michelson initiated an arbitration proceeding against Spine-Tech
in 2001 alleging breaches of a 1999 settlement agreement between the parties
(the "1999 Agreement"), including Spine-Tech's alleged failure to pay royalties
due on sales of fusion cages to Smith & Nephew prior to the Company's
acquisition of Spine-Tech in 1998 and Spine-Tech's alleged omission of an
attribution notice from certain publications as required by the terms of the
1999 Agreement. The 1999 Agreement provides for a USD 50,000 penalty payable by
Spine-Tech for each incident of omission, and Dr. Michelson has alleged
approximately 2,000 such incidents. The arbitration hearing is currently set for
April 2003, and Spine-Tech intends to defend itself vigorously against Dr.
Michelson's allegations.
GUIDANT CORPORATION
By letter dated March 21, 2001, Guidant Corporation ("Guidant") made a
demand for indemnification against Centerpulse USA Holding Co. ("Holding Co.")
under the terms of the 1998 Stock and Asset Purchase Agreement (the "Guidant
Agreement") by which Holding Co. sold its electrophysiology business to Guidant.
In the demand, Guidant asserted that it issued a physician advisory with respect
to three models of Micron defibrillators (approximately 2,000 devices)
manufactured by Sulzer Intermedics Inc. ("Intermedics") and that, as a result
thereof, the defibrillators are being replaced sooner than otherwise
anticipated. Guidant made a demand against Holding Co. for the damages or losses
allegedly suffered by Guidant or Intermedics. By letter dated March 13, 2002,
Guidant asserted that the projected amount of its claim would be approximately
USD $3.7 million, and made demand for payment of USD $2.1 million allegedly
incurred as of that date. Holding Co. has responded by denying Guidant's request
for indemnification and by requesting additional information from Guidant with
respect thereto. The Company is aware of one lawsuit brought by a Micron
recipient, Gerald Lavey, alleging that he suffered and continues to suffer
damages and harm for which he seeks USD $1.5 million from Guidant and
Intermedics. Guidant and Intermedics, in turn, have made demand against Holding
Co. for indemnification under the Guidant Agreement for Lavey's claim, and
Holding Co. has denied that it is liable to indemnify Guidant and Intermedics.
The Company intends to defend itself vigorously in these matters.
IMPLANT INNOVATIONS, INC.
In March 2003, Implant Innovations, Inc. (3i), a subsidiary of Biomet,
Inc., served a complaint filed in the U.S. District Court for the Southern
District of Florida against Centerpulse Dental Inc., a subsidiary of the
Company. The suit alleges that various products of Centerpulse Dental, including
its Integral(TM), Omniloc(R), Spline(R), Taper-Lock(TM), SpectraCone(TM),
AdVent(TM), Screw-Vent(R), and SwissPlus(TM) impression copings, healing
abutments having matching emergence profiles, bone profiling tools, and abutment
installation tools, infringe six of 3i's patents and seeks treble damages,
attorney fees, and injunctive relief. The Company intends to defend itself
vigorously against 3i's allegations of infringement.
F-49
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10: EXCEPTIONAL OPERATING ITEMS
<Table>
<Caption>
2002 2001 2000
---- ----- ----
(IN MILLIONS CHF)
Litigation settlement income................................ -- 48 --
Impairment of intangibles................................... -- (91) --
Equity Investments (reversal/impairment).................... 28 (50) --
Restructuring and other exceptional legal expenses.......... (40) (105) (1)
TOTAL EXCEPTIONAL OPERATING ITEMS........................... (12) (198) (1)
</Table>
Exceptional operating items in 2002 included restructuring costs in
connection with the move of the Baar operation to Winterthur, production
capacity adjustments in Carbomedics and the formation of the shared service
center in North America, costs for the name change, as well as exceptional legal
expenses of CHF 39 million.
A CHF 16 million charge booked in 2001 in connection with a Canadian Court
ruling to purchase the remaining stake in Orthosoft Inc. was reversed after a
final ruling on December 4, 2002 in favor of Centerpulse. CHF 12 million of an
impairment charge booked in 2001 in relation to the investment in Orquest was
reversed. The forthcoming take over of Orquest by DePuy AcroMed resulted in the
estimate that a substantial part of the impairment is no longer justified.
In 2001, the Company received approximately USD 28 million in connection
with the settlement of a pending litigation by Centerpulse Spine-Tech Inc. Soon
after the integration but especially towards year-end 2001, the stent market did
not develop in line with high sales expectations. Despite restructuring measures
initiated in the fourth quarter at Sulzer IntraTherapeutics Inc., the impairment
test performed as of year-end showed an impairment on goodwill of USD 31 million
and on existing technology of USD 11 million. The value in use (based on the
income approach utilizing the discounted cash flow method) was determined using
a weighted discount rate of 10.3%.
As a result of the deterioration of the cage sales and also in connection
with the introduction of a competitor's product in December 2001, the impairment
test at Centerpulse Spine-Tech's Inc. existing technology disclosed a loss of
USD 8 million. The value in use was determined using a discount rate of 15%. In
relation to the Orthosoft Inc. engagement, a minority holding, total charges of
CHF 5 million were recorded. The high expectations regarding the product
development were not realistic and a Canadian court order to purchase the
remaining stake resulted in an additional charge of CHF 16 million. For an
additional payment commitment of CHF 8 million in 2002 a provision was booked.
The investment in Orquest Inc. and license, cross-license, research and
distribution agreement was determined to be impaired as of year end 2001 as a
result of further delays in the common research and development programs. In
addition, since further benefits are unlikely to be realized, the write down
related to this exposure resulted in an exceptional operating item of USD 20
million.
Centerpulse Orthopedics Inc. cooperated in 1999 with @Outcome in order to
offer orthopedic clinics and surgical group practices a secure internet access
for the communication with patients, thus simplifying patient management. The
market acceptance of the product but also the financial outlook resulted in a
complete write down of the exposure totaling USD 8 million in 2001.
In addition, as a result of the change in management during 2001, various
restructuring measures were initiated in order to improve operational
efficiency. This resulted in exceptional operating items of CHF 33 million in
various other US businesses and the Group office in the US. Restructuring costs
of CHF 20 million for Centerpulse Biologics Inc are included in this position.
F-50
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11: DISCONTINUING OPERATIONS
On June 12, 2002 the Group announced its plans to divest of the
Cardiovascular Division, comprising the Group's entire cardiac care and vascular
care product lines which produce and distribute mechanical and tissue heart
valves and products for the treatment of vascular obstructions and diseases. The
company will focus on its core businesses: hip and knee implants (Orthopedics
Division), spine implants and instrumentation (Spine-Tech Division), dental
implants (Dental Division) and research and development, to capitalize on the
Group's redefined core markets.
On November 7, 2002, the Group announced the closing of the sale of
IntraTherapeutics, Inc. to ev3 Inc., a portfolio company of private equity firms
Warburg Pincus LLC and The Vertical Group for USD 95 million. On November 18,
2002, the Group announced the closing of the sale of Vascutek Ltd. to Terumo
Corporation of Japan for USD 170 million. On November 27, 2002, the Group
announced that it had entered into a definitive agreement to sell its
Carbomedics Inc. and Mitroflow Corp. mechanical and tissue valve business to
Italian medical device company Snia S.p.A. for total consideration of USD 116
million. On January 21, 2003, the group announced the closing of the sale.
The gain on the sale of the business unit Vascular Care, consisting of
Centerpulse's grafts and stents business amounted to CHF 200 million.
In accordance with IAS 35 the Cardiovascular Division divestment qualifies
as a discontinued operation. This division represented 19% of Centerpulse's
consolidated revenues in 2001 with operations primarily in the European Union
and North America.
The impact of the divested business on the consolidated financial
statements was as follows:
<Table>
<Caption>
2002 2001
----- -----
(IN MILLIONS
CHF)
Net sales................................................... 72 --
Operating income............................................ 15 --
Taxes....................................................... (8) --
Total assets................................................ 155 --
thereof cash.............................................. - --
TOTAL LIABILITIES........................................... 47 --
</Table>
The following shows the impact of the discontinuing operations as of and
for each of the years ended December 31, 2002, 2001 and 2000.
CONSOLIDATED INCOME STATEMENTS
<Table>
<Caption>
2002 2002 2002
----------- ------------- -----------
CENTERPULSE DISCONTINUING CENTERPULSE
HISTORICAL OPERATIONS ADJUSTED
----------- ------------- -----------
(IN MILLIONS CHF)
NET SALES......................................... 1,470 229 1,241
Cost of sales..................................... (480) (78) (402)
GROSS PROFIT...................................... 990 151 839
Selling, general and administrative expense....... (631) (92) (539)
Research & development expense.................... (94) (21) (73)
Other operating income............................ 2 1 1
Goodwill amortization............................. (50) (7) (43)
</Table>
F-51
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
2002 2002 2002
----------- ------------- -----------
CENTERPULSE DISCONTINUING CENTERPULSE
HISTORICAL OPERATIONS ADJUSTED
----------- ------------- -----------
(IN MILLIONS CHF)
Exceptional operating items....................... (12) (3) (9)
Gain on sale of discontinued operations........... 200 200 --
OPERATING INCOME.................................. 405 229 176
Financial (expense)/income........................ (28) (4) (24)
Other non-operating (expense)/income.............. (1) -- (1)
INCOME BEFORE TAXES............................... 376 225 151
Taxes............................................. (37) (10) (27)
NET INCOME BEFORE MINORITY INTERESTS.............. 339 215 124
Minority interests................................ (2) -- (2)
NET INCOME........................................ 337 215 122
Cash flow from operating activities............... (1,109) 35 (1,144)
Cash flow from investing activities............... 313 (6) 319
Cash flow from ( -- used in) financing
activities...................................... 766 (23) 789
Adjustment to investing activities(1)............. -- -- (23)
Adjustment to financing activities(1)............. -- 23 --
Consolidated cash flow from operating
activities...................................... (1,109) 35 (1,144)
Consolidated net cash flow from investing
activities...................................... 313 (6) 319
Consolidated net cash flow from financing
activities...................................... 766 -- 766
EARNINGS PER REGISTERED SHARE/PER AMERICAN
DEPOSITORY SHARE(ADS)
Basic earnings/(loss) per share................... 33.10 21.12 11.98
Basic earnings/(loss) per ADS..................... 3.31 2.11 1.20
Diluted earnings/(loss) per share................. 32.82 20.85 11.84
Diluted earnings/(loss) per ADS................... 3.28 2.09 1.18
</Table>
- ---------------
(1) The adjustments represent the net investing activities from intercompany
activities. Consolidated cash flows and consolidated net cash flows present
Centerpulse and the Cardiovascular Division as if the intercompany
transactions had not occurred.
F-52
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
2002 2002 2002
----------- ------------- -----------
CENTERPULSE DISCONTINUING CENTERPULSE
HISTORICAL OPERATIONS ADJUSTED
----------- ------------- -----------
(IN MILLIONS CHF)
ASSETS
NON-CURRENT ASSETS
Intangible assets....................................... 604 27 577
Property, plant and equipment........................... 200 17 183
Investments and other financial assets.................. 70 -- 70
Deferred tax assets..................................... 541 12 529
TOTAL NON-CURRENT ASSETS............................. 1,415 56 1,359
CURRENT ASSETS
Inventories............................................. 352 35 317
Trade accounts receivables.............................. 290 24 266
Other accounts receivables and prepaid expenses......... 82 9 73
Cash and cash equivalents............................... 199 5 194
TOTAL CURRENT ASSETS................................. 923 73 850
TOTAL ASSETS.................................... 2,338 129 2,209
EQUITY AND LIABILITIES
SHAREHOLDERS' EQUITY...................................... 1,270 100 1,170
Minority interests...................................... 8 -- 8
NON-CURRENT LIABILITIES
Non-current borrowings.................................. 487 10 477
Deferred income taxes................................... 19 -- 19
Non-current provisions.................................. 159 -- 159
Other non-current liabilities........................... 4 2 2
TOTAL NON-CURRENT LIABILITIES........................ 669 12 657
CURRENT LIABILITIES
Current borrowings...................................... 70 -- 70
Current provisions...................................... 92 3 89
Trade accounts payable.................................. 64 5 59
Other current and accrued liabilities................... 165 9 156
TOTAL CURRENT LIABILITIES............................ 391 17 374
TOTAL LIABILITIES.................................... 1,060 29 1,031
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY........ 2,338 129 2,209
</Table>
F-53
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATED INCOME STATEMENTS
<Table>
<Caption>
2001 2001 2001
----------- ------------- -----------
CENTERPULSE DISCONTINUING CENTERPULSE
HISTORICAL OPERATIONS ADJUSTED
----------- ------------- -----------
(IN MILLIONS CHF)
NET SALES................................................. 1,418 260 1,158
Cost of sales............................................. (540) (109) (431)
GROSS PROFIT.............................................. 878 151 727
Selling, general and administrative expense............... (648) (120) (528)
Research & development expense............................ (130) (40) (90)
Other operating income/(expense).......................... -- 2 (2)
Goodwill amortization..................................... (57) (11) (46)
Exceptional operating items............................... (198) (78) (120)
Hip and knee implant litigation........................... (1,476) -- (1,476)
OPERATING INCOME.......................................... (1,631) (96) (1,535)
Financial income/(expense)................................ 7 (4) 11
Other non-operating expense............................... (21) -- (21)
INCOME BEFORE TAXES....................................... (1,645) (100) (1,545)
Taxes..................................................... 454 17 437
NET INCOME BEFORE MINORITY INTERESTS...................... (1,191) (83) (1,108)
Minority interests........................................ (2) -- (2)
NET INCOME................................................ (1,193) (83) (1,110)
Cash flow from operating activities....................... 93 13 80
Cash flow from investing activities....................... (503) (10) (493)
Cash flow from (-- used in) financing activities.......... (88) (10) (78)
Adjustment to investing activities(1)..................... -- -- --
Adjustment to financing activities(1)..................... -- -- --
Consolidated cash flow from operating activities.......... 93 13 80
Consolidated net cash flow from investing activities...... (503) (10) (493)
Consolidated net cash flow from financing activities...... (88) (10) (78)
EARNINGS PER REGISTERED SHARE/PER AMERICAN
DEPOSITORY SHARE (ADS)
Basic earnings/(loss) per share........................... (119.62) (8.32) (111.30)
Basic earnings/(loss) per ADS............................. (11.96) (0.83) (11.13)
Diluted earnings/(loss) per share......................... (119.62) (8.32) (111.30)
Diluted earnings/(loss) per ADS........................... (11.96) (0.83) (11.13)
</Table>
- ---------------
(1) The adjustments represent the net investing activities from intercompany
activities. Consolidated cash flows and consolidated net cash flows present
Centerpulse and the Cardiovascular Division as if the intercompany
transactions had not occurred.
F-54
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
2001 2001 2001
----------- ------------- -----------
CENTERPULSE DISCONTINUING CENTERPULSE
HISTORICAL OPERATIONS ADJUSTED
----------- ------------- -----------
(IN MILLIONS CHF)
ASSETS
NON-CURRENT ASSETS
Intangible assets......................................... 930 186 744
Property, plant and equipment............................. 236 34 202
Investments and other financial assets.................... 65 -- 65
Deferred income taxes..................................... 643 49 594
TOTAL NON-CURRENT ASSETS.................................. 1,874 269 1,605
CURRENT ASSETS
Inventories............................................... 411 51 360
Trade accounts receivables................................ 308 40 268
Other accounts receivables and prepaid expenses........... 122 3 119
Cash and cash equivalents................................. 156 21 135
TOTAL CURRENT ASSETS...................................... 997 115 882
TOTAL ASSETS.............................................. 2,871 384 2,487
EQUITY AND LIABILITIES
SHAREHOLDERS' EQUITY...................................... 784 314 470
Minority interests........................................ 7 -- 7
NON-CURRENT LIABILITIES
Non-current borrowings.................................... 20 10 10
Deferred income taxes..................................... 19 -- 19
Non-current provisions.................................... 1,468 6 1,462
Other non-current liabilities............................. 11 5 6
TOTAL NON-CURRENT LIABILITIES............................. 1,518 21 1,497
CURRENT LIABILITIES
Current borrowings........................................ 75 -- 75
Current provisions........................................ 223 6 217
Trade accounts payable.................................... 70 7 63
Other current and accrued liabilities..................... 194 36 158
TOTAL CURRENT LIABILITIES................................. 562 49 513
TOTAL LIABILITIES......................................... 2,080 70 2,010
TOTAL EQUITY AND LIABILITIES.............................. 2,871 384 2,487
</Table>
F-55
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATED INCOME STATEMENTS
<Table>
<Caption>
2000 2000 2000
----------- ------------- -----------
CENTERPULSE DISCONTINUING CENTERPULSE
HISTORICAL OPERATIONS ADJUSTED
----------- ------------- -----------
(IN MILLIONS CHF)
NET SALES................................................. 1,347 250 1,097
Cost of sales............................................. (420) (74) (346)
GROSS PROFIT.............................................. 927 176 751
Selling, general and administrative expense............... (555) (80) (475)
Research & development expense............................ (108) (27) (81)
Other operating income.................................... 6 -- 6
Goodwill amortization..................................... (39) (2) (37)
Exceptional operating items............................... (1) -- (1)
OPERATING INCOME.......................................... 230 67 163
Financial income/(expense)................................ 29 (3) 32
Other non-operating income/(expense)...................... -- -- --
INCOME BEFORE TAXES....................................... 259 64 195
Taxes..................................................... (67) (21) (46)
NET INCOME BEFORE MINORITY INTERESTS...................... 192 43 149
Minority interests........................................ (2) -- (2)
NET INCOME................................................ 190 43 147
Cash flow from operating activities....................... 297 72 222
Cash flow from investing activities....................... (153) 266 (462)
Cash flow from (-used in) financing activities............ (53) (335) 325
Adjustment to investing activities (1).................... -- -- 43
Adjustment to financing activities (1).................... -- (43) --
Consolidated cash flow from operating activities.......... 297 72 225
Consolidated net cash flow from investing activities...... (153) 266 (419)
Consolidated net cash flow from financing activities...... (53) (378) 325
EARNINGS PER REGISTERED SHARE/PER AMERICAN DEPOSITORY
SHARE (ADS)
Basic earnings/(loss) per share........................... 19.01 4.30 14.71
Basic earnings/(loss) per ADS............................. 1.90 0.43 1.47
Diluted earnings/(loss) per share......................... 18.98 4.30 14.68
Diluted earnings/(loss) per ADS........................... 1.90 0.43 1.47
</Table>
- ---------------
(1) The adjustments represent the net investing activities from intercompany
activities. Consolidated cash flows and consolidated net cash flows present
Centerpulse and the Cardiovascular Division as if the intercompany
transactions had not occurred.
On June 3, 1998, the Group announced its intention to exit the
electrophysiology business. The subsidiaries comprising this segment were sold
on February 1, 1999, for USD 802 million (including cash on hand of CHF 19
million). The book profit of CHF 579 million realized from this transaction is
provisional since negotiations with the buyer about the final sales price are
not yet complete.
F-56
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
This transaction resulted in a tax credit of CHF 6 million. No adjustments
were necessary in 2002, 2001 and 2000.
NOTE 12: FINANCIAL INCOME/EXPENSE -- OTHER NON-OPERATING INCOME/EXPENSE
<Table>
<Caption>
2002 2001 2000
---- ---- ----
(IN MILLIONS CHF)
Gain on sale of investments................................. 1 26 4
Interest income............................................. 5 11 38
Interest expense............................................ (13) (8) (8)
Other financial expense..................................... (21) (22) (5)
TOTAL FINANCIAL (EXPENSE)/INCOME............................ (28) 7 29
</Table>
Other financial expenses in 2002 include CHF 14 million expenses for the
arrangement of the USD 635 million debt facility in the context of the hip and
knee implant litigation.
In 2001 and 2000 the gain on sale of investments is a result of a partial
sale of the Company's investment in Thoratec Laboratories Corp. In 2001 the
market value of the stake in Japan Lifeline Co. Ltd, declined significantly and
the related charge of USD 5 million is included in other financial expense. In
connection with the impairment test on ReGen Biologics Inc, an additional loan
allowance of USD 7 million was recorded as other financial expense.
In 2001 the other non-operating expenses of CHF 21 million resulted from
the spin-off of Sulzer and from the defense cost for the unsuccessful hostile
take over attempt.
NOTE 13: TAXES
<Table>
<Caption>
2002 2001 2000
---- ---- ----
(IN MILLIONS CHF)
Current income taxes
Switzerland................................................. 16 12 18
European Union.............................................. 16 10 14
Other Europe................................................ -- -- --
North America............................................... 12 (4) 11
All Other Countries......................................... 5 7 11
TOTAL CURRENT INCOME TAXES.................................. 49 25 54
Deferred income taxes
Switzerland................................................. 2 (7) (2)
European Union.............................................. 5 5 (1)
Other Europe................................................ 1 -- --
North America............................................... (23) (481) 13
All Other Countries......................................... (1) 2 (2)
TOTAL DEFERRED INCOME TAXES................................. (16) (481) 8
TOTAL INCOME TAXES.......................................... 33 (456) 62
Other taxes................................................. 4 2 5
TOTAL TAXES................................................. 37 (454) 67
</Table>
F-57
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Current income taxes, comprising taxes paid or due on the underlying income
of individual subsidiaries, are calculated according to the law applicable in
the individual countries. Other taxes include taxes not directly related to
income.
INCOME BEFORE TAXES
<Table>
<Caption>
2002 2001 2000
---- ------ ----
(IN MILLIONS CHF)
Switzerland................................................. 468 (84) 105
European Union.............................................. 281 34 40
Other Europe................................................ 1 1 1
North America............................................... (213) (1,652) 48
All Other Countries......................................... (161) 56 65
TOTAL INCOME BEFORE TAXES................................... 376 (1,645) 259
</Table>
Using the maximum tax rate for Zurich, Switzerland, of 24.4% the tax charge
on 2002 consolidated income before taxes of CHF 376 million amounts to CHF 92
million. The following table serves to indicate the reasons why in 2002, 2001
and 2000 the charge was below the reference amount.
<Table>
<Caption>
2002 2001 2000
----- -------- -----
(IN MILLIONS CHF)
Income/(loss) before taxes.................................. 375.5 (1,644.8) 258.5
Maximum tax rate (Zurich, Switzerland) (1).................. 24.4% 25.1% 25.2%
Income tax expense at maximum tax rate...................... 91.6 (412.8) 65.1
Taxes at other rates........................................ (35.7) (31.4) (10.6)
Effect of (losses)/credits and loss carry-forwards.......... (0.8) (84.8) (1.9)
Non-temporary differences................................... 16.0 19.2 13.4
Impact of the exceptional write-down of goodwill............ -- 13.3 --
Impact of divestiture....................................... (48.8) -- --
Impact of hip and knee implant litigation................... (4.1) (35.4) --
Changes in tax rate and tax laws............................ (4.1) (3.5) (1.5)
Change in valuation allowance............................... 18.0 84.2 0.1
Other....................................................... 0.7 (4.6) (3.1)
TAX EXPENSE (CURRENT AND DEFERRED).......................... 32.8 (455.8) 61.5
</Table>
- ---------------
(1) The maximum tax rate for 2002 is based on the new domicile of the Company.
In prior years the domicile was Winterthur, Switzerland.
The tax effect on non-temporary differences is mainly due to the annual
amortization of goodwill that is not deductible for tax purposes.
F-58
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, deferred taxes consisted of the following:
<Table>
<Caption>
2002 2001 2000
-------------------- -------------------- --------------------
ASSETS LIABILITIES ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ ----------- ------ -----------
(IN MILLIONS CHF)
Intangible and financial
assets......................... 23 (12) 10 (14) 14 (28)
Tangible fixed assets............ 2 (5) 3 (5) 1 (9)
Loss carry-forwards.............. 550 -- 245 -- 154 --
Inventories...................... 23 (8) 33 (9) 16 (8)
Other assets..................... 13 (3) 26 (5) 19 (3)
Eliminations of unrealized
gains.......................... 40 -- 46 -- 40 --
Non-current provisions........... 11 -- 411 -- 27 (2)
Current provisions............... 123 (2) 113 (2) 48 (2)
Other current liabilities........ 23 (1) 35 -- 9 --
TOTAL POTENTIAL TAX EFFECT....... 808 (31) 922 (35) 328 (52)
Valuation allowance.............. (255) -- (263) -- (154) --
DEFERRED TAXES................... 553 (31) 659 (35) 174 (52)
Set off of assets and
liabilities.................... (12) 12 (16) 16 (32) 32
DEFERRED TAXES, NET.............. 541 (19) 643 (19) 142 (20)
</Table>
The net of tax assets and liabilities amounts to CHF 522 million in 2002
and CHF 624 million in 2001. The change of CHF 102 million resulted from a
deferred tax income of CHF 16 million and a foreign currency translation effect
of CHF 118 million.
The deferred taxes on eliminations of unrealized gains above primarily
relate to unrealized gains from a Swiss company belonging to the Orthopedics
Division.
There was no unrecognized deferred tax liability relating to undistributed
earnings of subsidiaries at December 31, 2002, 2001 and 2000.
The Company has loss carry-forwards available of CHF 3,948 million as of
December 31, 2002. Of this amount, CHF 1,582 million will expire between 2003
and 2009 with the remaining amount of CHF 2,366 million still available for use
post-2009. The tax effect of these loss carry-forwards, at their respective
jurisdictional statutory rate, is CHF 550 million, which when netted with the
associated valuation allowance of CHF 237 million, results in an anticipated tax
benefit of CHF 313 million.
<Table>
<Caption>
TAX EFFECTS OF
LOSS CARRY- LOSS CARRY- VALUATION ANTICIPATED
AT DECEMBER 31, 2002 FORWARDS FORWARDS ALLOWANCE TAX BENEFIT EXPIRES
- -------------------- -------------- -------------- --------- ----------- -------------
(IN MILLIONS CHF)
Switzerland............ 1,217 73 73 -- 2006-09
United
States -- Federal.... 1,122 306 -- 306 2022
United
States -- Capital
loss................. 350 123 118 5 2004-22
United
States -- State...... 1,139 22 22 -- 2003-22
Germany................ 119 26 24 2 After 2009
Other countries........ 1 -- -- 2003-after 09
TOTAL.................. 3,948 550 237 313
</Table>
F-59
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14: EARNINGS PER SHARE
<Table>
<Caption>
2002 2001 2000
------ ------- ------
NET INCOME/(LOSS) IN MILL. CHF............................. 337 (1,193) 190
Weighted average number of shares outstanding (in
thousands)............................................... 10,180 9,973 9,996
BASIC INCOME/(LOSS) PER SHARE IN CHF....................... 33.10 (119.62) 19.01
NET INCOME/(LOSS) IN MILL. CHF............................. 337 (1,193) 190
Weighted average number of shares adjusted for dilutive
share options (in thousands)............................. 10,268 9,973 10,012
DILUTED INCOME/(LOSS) PER SHARE IN CHF..................... 32.82 (119.62) 18.98
</Table>
The share options outstanding are in connection with the Management Stock
Option Plan. Diluted income per share is affected by share options outstanding
when the average share price of the year is above the strike prices of the
outstanding options.
NOTE 15: INTANGIBLE ASSETS
<Table>
<Caption>
2002 2001
------------------------- -------------------------
GOODWILL OTHER TOTAL GOODWILL OTHER TOTAL
-------- ----- ------ --------- ----- -----
(IN MILLIONS CHF)
COST
Balance at January 1....................... 2,162 212 2,374 1,795 148 1,943
Changes in composition of Group............ -- (38) (38) -- 53 53
Additions.................................. 1 3 4 339 8 347
Disposals.................................. (241) (2) (243) -- -- --
Currency conversion adjustment............. (193) (30) (223) 28 3 31
Balance at December 31....................... 1,729 145 1,874 2,162 212 2,374
ACCUMULATED AMORTIZATION
Balance at January 1....................... 1,326 118 1,444 1,204 50 1,254
Changes in composition of Group............ -- (34) (34) -- -- --
Amortization............................... 50 13 63 111 68 179
Disposals.................................. (111) (1) (112) -- -- --
Currency conversion adjustment............. (75) (16) (91) 11 -- 11
Balance at December 31....................... 1,190 80 1,270 1,326 118 1,444
Net book value at January 1.................. 836 94 930 591 98 689
NET BOOK VALUE AT DECEMBER 31................ 539 65 604 836 94 930
</Table>
The 2002 figure includes the regular amortization of goodwill. No
exceptional impairment charges were recognized. Disposals relate to the
divestiture of the vascular care business as described in note 11.
The annual amortization of goodwill in 2001 includes the exceptional
write-down of CHF 52 million on Sulzer IntraTherapeutics Inc. goodwill, as
described in note 10. The total amount of impairment of goodwill in 2002, 2001
and 2000 is CHF 52 million. In the amortization of other intangible assets, the
existing technology impairment charges are included.
As of December 31, 2002 no development costs were capitalized as the
expenses did not fulfill the capitalization criteria.
F-60
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16: TANGIBLE ASSETS
<Table>
<Caption>
LAND AND MACHINERY OTHER 2002 2001
BUILDINGS AND EQUIPMENT FIXED ASSETS TOTAL TOTAL
--------- ------------- ------------ ----- -----
(IN MILLIONS CHF)
COST
Balance at January 1................ 114 164 348 626 562
Changes in composition of Group..... (8) (13) (3) (24) 27
Additions........................... 13 11 44 68 81
Disposals........................... (1) (10) (30) (41) (48)
Currency conversion adjustment...... (11) (15) (32) (58) 4
Balance at December 31................ 107 137 327 571 626
ACCUMULATED AMORTIZATION
Balance at January 1................ 38 120 232 390 339
Changes in composition of Group..... (2) (7) (2) (11) 15
Depreciation........................ 5 12 44 61 69
Disposals........................... -- (11) (22) (33) (36)
Currency conversion adjustment...... (3) (12) (21) (36) 3
Balance at December 31................ 38 102 231 371 390
Net book value at January 1........... 76 44 116 236 223
NET BOOK VALUE AT DECEMBER 31......... 69 35 96 200 236
Fire insurance value at December 31... 107 128 357 592 771
</Table>
Other fixed assets mainly consist of surgical instruments.
No property within Centerpulse is stated as an investment property, as
defined in IAS 40.
In 2002, 2001 and 2000 all interest costs were expensed as occurred, since
they did not fulfill the criteria for capitalization.
Details of leased assets included in tangible fixed assets are as follows:
<Table>
<Caption>
2002 2001
----- -----
(IN MILLIONS CHF)
Cost capitalized............................................ 1 1
Net book value.............................................. -- --
Related lease liability..................................... 3 3
</Table>
F-61
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17: INVESTMENTS AND OTHER FINANCIAL ASSETS
<Table>
<Caption>
INVESTMENTS AVAILABLE-FOR OTHER
IN SALE FINANCIAL 2002 2001
ASSOCIATES INVESTMENTS ASSETS TOTAL TOTAL
----------- ------------- --------- ----- -----
(IN MILLIONS CHF)
Balance at January 1................... 7 11 47 65 104
Adoption of IAS 39..................... -- -- -- -- 15
Additions.............................. -- -- 15 15 43
Disposals.............................. -- (7) (5) (12) (35)
Fair value adjustments................. 1 13 -- 14 (66)
Currency conversion adjustment......... (2) (2) (8) (12) 4
Balance at December 31................. 6 15 49 70 65
NET BOOK VALUE
Balance at January 1................... 7 11 47 65 104
BALANCE AT DECEMBER 31................. 6 15 49 70 65
</Table>
Investments in non-consolidated companies as of December 31, 2002 include
ReGen Biologics Inc, Redwood City (USA), Tutogen Medical Inc, Clifton (USA),
@Outcome Inc, Austin (USA), Orquest Inc, Mountain View (USA), Orthosoft Inc,
Outremont (Canada), Leading KK, Tokyo (Japan), and publicly traded securities of
Thoratec Inc, Berkley (USA) and Japan Lifeline Co. Ltd, Tokyo (Japan), held as
non-current assets.
The estimate of fair value as of December 31, 2002 resulted in a partial
reversal of the impairment charge in the investment of Orquest Inc., amounting
to CHF 13 million.
Revaluation of fair value in 2001 consists of write-offs for the
investments in Orquest Inc, ReGen, @Outcome, Japan Lifeline and Orthosoft Inc.
NOTE 18: INVENTORIES
<Table>
<Caption>
2002 2001
-------------------------- --------------------------
GROSS NET GROSS NET
VALUE ALLOWANCES TOTAL VALUE ALLOWANCES TOTAL
----- ---------- ----- ----- ---------- -----
(IN MILLIONS CHF)
Raw materials, supplies and
consumables........................ 45 -- 45 63 (7) 56
Work in progress..................... 29 (2) 27 44 (2) 42
Finished products and trade
merchandise........................ 371 (91) 280 447 (134) 313
TOTAL INVENTORIES.................... 445 (93) 352 554 (143) 411
</Table>
Obsolescence reserve decreased by CHF 10 million in 2002, and increased in
2001 and 2000 by CHF 75 and 35 million respectively. Write-offs of scrapped
inventory against the allowance for obsolescence were CHF 18, 3 and 4 million in
2002, 2001, and 2000 respectively. The changes in inventory allowance due to
acquisitions and disposals amount to CHF -10, 1 and 0 million in 2002, 2001 and
2000 respectively. The currency conversion adjustment effect on the inventory
allowance was CHF -12, 0 and -2 million in 2002, 2001 and 2000 respectively.
Costs of materials included in cost of sales were CHF 246, 254 and 243 million
in 2002, 2001 and 2000 respectively.
F-62
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 19: TRADE ACCOUNTS RECEIVABLES
<Table>
<Caption>
2002 2001
----- -----
(IN MILLIONS
CHF)
Gross trade accounts receivable............................. 312 332
Allowance for doubtful accounts............................. (22) (24)
TRADE ACCOUNTS RECEIVABLE................................... 290 308
</Table>
Bad debt expenses were CHF 1, 7 and 2 million at December 31, 2002, 2001
and 2000 respectively. Bad debt write-offs against the allowance were CHF 0, 1
and 1 million in 2002, 2001 and 2000 respectively.
NOTE 20: PLEDGED ASSETS
In 2002 in connection with the Senior Credit Facility Agreement described
in note 28, to finance the hip and knee implant litigation as described in note
9, assets of the Company and its material subsidiaries have been pledged to the
Security Agent. The total amount of pledged assets of Centerpulse Group is CHF
2.2 billion.
NOTE 21: SHAREHOLDERS' EQUITY
Outstanding shares with a nominal amount of CHF 30 each as of December 31,
2002 and 2001, amount to 11,791,790 and 9,933,556, respectively. The number of
registered shares was increased by 1,822,408 shares in October 2002 through a
capital increase via a tradable pre-emptive rights offering.
The conditional share capital with a value of CHF 5,752,890 as of December
31, 2001 (original nominal value was CHF 6 million) was increased in 2002 by CHF
4.5 million to CHF 10,252,890. The conditional share capital was reduced due to
shares and ADS options exercised between 1998 and 2002 to CHF 9,188,040. See
also note 30.
Amounts planned for dividend distribution by the Company's subsidiaries at
December 31, 2002, 2001 and 2000 were approximately CHF 241 million, CHF 53
million and CHF 86 million, respectively.
As discussed in note 9 and 28 the Company has made a number of customary
representations and warranties under the senior credit facility agreement.
Hereunder, the Company is not allowed to make any dividend payments as long
as any amount is outstanding under the senior credit facility. Therefore, the
Board of Directors proposes no dividend distribution.
NOTE 22: NON-CURRENT BORROWINGS
<Table>
<Caption>
2002 2001
----- -----
(IN MILLIONS
CHF)
Loans from third parties.................................... 486 13
Mortgage loans.............................................. 6 6
Leasing commitments......................................... 1 2
TOTAL BORROWINGS............................................ 493 21
Current portion............................................. (6) (1)
TOTAL NON-CURRENT BORROWINGS................................ 487 20
</Table>
The increase in loans from third parties relates to the Senior Credit
Facility Agreement as described in note 28.
F-63
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Non-current borrowings will mature as follows:
<Table>
<Caption>
THIRD-PARTY
LOANS MORTGAGE OTHER TOTAL
----------- --------- ------ -----
(IN MILLIONS CHF)
2004 -- 2007...................................... 472 -- -- 472
2008 and thereafter............................... 9 6 -- 15
TOTAL NON-CURRENT BORROWINGS...................... 481 6 -- 487
</Table>
NOTE 23: PROVISIONS
<Table>
<Caption>
PERSONNEL WARRANTIES,
RELATED LITIGATION PROVISION OTHER 2002 2001
PROVISIONS RISKS FOR TAXES PROVISIONS TOTAL TOTAL
---------- ----------- --------- ---------- ------ -----
(IN MILLIONS CHF)
Balance at January 1................ 4 1,474 109 104 1,691 198
Changes in composition of Group..... -- -- -- (5) (5) 3
Increase............................ 5 42 -- 17 64 1,637
Unused amounts reversed............. -- (1) -- (6) (7) --
Utilization......................... (1) (1,333) (11) (22) (1,367) (141)
Currency conversion adjustment...... -- (110) -- (15) (125) (6)
BALANCE AT DECEMBER 31.............. 8 72 98 73 251 1,691
Current portion..................... 2 46 31 13 92 223
Non-current portion................. 6 26 67 60 159 1,468
BALANCE AT DECEMBER 31.............. 8 72 98 73 251 1,691
</Table>
Personnel provisions are accrued to cover expenses arising primarily from
grants, rewards for years of service, termination and pension benefits.
The decrease in provisions for litigation risks in 2002 is related to the
hip and knee implant litigation. The CHF 1,391 million (USD 828 million)
provision recognized in 2001 related to the hip and knee implant litigation was
reduced to CHF 43 million (USD 31 million) at December 31, 2002. USD 725 million
were utilized with the payment of the obligation to the settlement trust. USD 72
million were utilized for other expenses in the context of the hip and knee
implant litigation.
"Other provisions" mainly relate to accrued deductible arising from
insurance policies, and are also a result of the divestiture of various
businesses in 1999 and 2002, in situations where the Company is involved in the
procedure, as provided for in the contract, to determine the final selling
price. Management believes that the recorded provisions are adequate.
NOTE 24: CURRENT BORROWINGS
<Table>
<Caption>
2002 2001
----- -----
(IN MILLIONS
CHF)
Borrowings from third parties............................... 64 75
Reclassification of non-current borrowings.................. 6 --
TOTAL CURRENT BORROWINGS.................................... 70 75
</Table>
F-64
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 25: OTHER CURRENT AND ACCRUED LIABILITIES
<Table>
<Caption>
2002 2001
----- -----
(IN MILLIONS
CHF)
Notes payable............................................... 1 1
Social security contributions............................... 4 3
Assessed taxes payable...................................... 14 5
Commissions payable......................................... 13 14
Other liabilities........................................... 50 53
Vacation and overtime claims................................ 13 15
Salaries, wages and bonuses................................. 30 34
Corporate identity.......................................... 3 15
Fair Value of derivative financial instruments.............. 1 2
Other accruals.............................................. 36 52
Total other current liabilities and accruals................ 165 194
</Table>
NOTE 26: COMMITMENTS AND CONTINGENCIES
The contractual commitments for future investments in property, plant, and
equipment at December 31, 2002, 2001, and 2000 (for which funding will be needed
in future years), were CHF 0, CHF 6 and CHF 3 million respectively.
The future minimum rental commitments for operating leases at December 31
are:
<Table>
<Caption>
2002 2001
------------------------- -------------------------
BUILDINGS OTHER TOTAL BUILDINGS OTHER TOTAL
--------- ----- ----- --------- ----- -----
(IN MILLIONS CHF)
Maturity: < 1 year..................... 4 3 7 5 2 7
Maturity: 1-5 years.................... 5 4 9 11 5 16
Maturity: > 5 years.................... -- 2 2 -- 2 2
Total rental commitments............... 9 9 18 16 9 25
</Table>
Employees of the Company are required to respect local laws and regulatory
guidelines in the course of their business activities. In the normal course of
business, certain subsidiaries are involved in administrative and civil
proceedings that could give rise to claims not covered, or only partly covered,
by insurance. The effects of such proceedings on future earnings cannot be
foreseen.
The Company, Centerpulse USA Holding Co., and certain other material
subsidiaries of the Company have guaranteed the full payment of amounts owing
under the Senior Credit Facility, and have also guaranteed the performance of
all other obligations thereunder, subject in all cases to certain limitations
(including legal limitations under applicable law). Security has been given by
the Borrower, the Company, Centerpulse USA Holding Co. and certain subsidiaries
over certain of each company's tangible and intangible assets on a consolidated
basis in the amount of CHF 2.2 billion.
The Company is party to certain other legal actions arising in the ordinary
course of its business. Provisions have been recorded for such litigation risks
based on a best estimate. Because the judicial process for such cases is
complex, management cannot estimate the amount of any additional losses which
might be incurred in excess of the amounts provided, especially the legal cases
related to the recalled Inter-Op hip shells and withdrawn tibial base plates.
F-65
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the opinion of management, the ultimate outcome of these situations will
not have a material impact on the consolidated financial position and results of
operations.
NOTE 27: RETIREMENT BENEFIT PLANS AND EMPLOYEE COSTS
DEFINED CONTRIBUTION PLAN
The Company has defined contribution plans which cover substantially all of
its US employees and employees in other countries. The benefits of these plans
relate to local customs and practices in the countries concerned. Company
contributions to such plans for the years ended December 31, 2002, 2001 and 2000
were CHF 9 million, CHF 10 million, CHF 8 million respectively.
DEFINED BENEFIT PLANS
Defined benefit plans covering employees of Centerpulse are in place in
Switzerland, France and the United Kingdom up to the time of the disposal of
Vascutek on November 14. Those in Switzerland and the United Kingdom cover
employees of the Company in addition to employees of Sulzer. The assets and
liabilities of these plans that relate to Company personnel have been determined
based on actuarial valuations. The most recent actuarial valuations were
performed on December 31, 2002.
PERSONNEL COSTS FOR DEFINED BENEFIT PLANS
<Table>
<Caption>
2002 2001
----- -----
(IN MILLIONS
CHF)
Current service costs of retirement benefit plans........... (13) (10)
Interest costs.............................................. (6) (5)
Expected return on plan assets.............................. 7 7
Employees contributions..................................... 5 4
Change in portion of over funding not capitalized........... -- (2)
Personnel costs for defined benefit plans................... (7) (6)
</Table>
The actual return on assets was a loss of CHF 9 million in 2002 and a loss
of CHF 7 million in 2001.
FUNDED STATUS
<Table>
<Caption>
2002 2001
----- -----
(IN MILLIONS
CHF)
Present value of funded obligations......................... (132) (134)
Fair value of plan assets(1)................................ 122 148
Over/(under)funding......................................... (10) 14
Actuarial gains (-) and losses.............................. 10 10
Portion of overfunding not capitalized(2)................... -- (24)
Overfunding reflected in the balance sheet.................. -- --
Long-term provision portion................................. -- --
Asset portion............................................... -- --
</Table>
- ---------------
(1) The joint plan assets as of December 31, 2002, and 2001, include the amount
of CHF 0 million and 17 million shares of Centerpulse Ltd which is about 0%
and 0.4% of the total plan assets.
F-66
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) Legal requirements, particularly those of Switzerland, restrict the
utilization of over funded contributions in legally separated benefit plans.
Only amounts that will potentially reduce future pension costs are
capitalized in the consolidated balance sheets.
The actuarial weighted average assumptions used were as follows:
<Table>
<Caption>
2002 2001
---- ----
Discount rate............................................... 4.3% 4.5%
Long-term return on assets.................................. 4.6% 5.1%
Salary increases............................................ 2.3% 2.8%
Pension benefit increases................................... 1.3% 1.3%
Employee turnover........................................... 5.6% 5.3%
NUMBER OF EMPLOYEES COVERED BY DEFINED BENEFIT PLANS AS OF
DECEMBER 31............................................... 770 769
</Table>
<Table>
<Caption>
2002 2001
----- -----
(IN MILLIONS
CHF)
Employee costs
Salaries and wages.......................................... 360 346
Fringe benefits............................................. 69 72
TOTAL PERSONNEL EXPENSES.................................... 429 418
</Table>
NOTE 28: FINANCIAL INSTRUMENTS
The balance sheet values of cash, cash equivalents and current accounts
receivable and payable approximate their market values. In the case of the items
below, the carrying value in the balance sheet and their market values at the
closing date were as follows:
<Table>
<Caption>
2002 2001
----------------- -----------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ------ --------- -----
(IN MILLIONS CHF)
Available-for-sale investments and other financial
assets............................................. 64 64 58 58
Non-current borrowings............................... (493) (493) (21) (21)
</Table>
With the adoption of IAS 39 as per January 1, 2001, the carrying value
corresponds to the fair value excluding borrowings which continue to be at
amortized costs.
The fair value of investments in non-consolidated companies and other
financial assets is based on quoted market prices for those of similar
investments. For investments and other financial assets, which have no quoted
market prices, a reasonable estimate of fair value was made using available
market information and appropriate valuation techniques. The fair value of
non-current borrowings is based on the current rates offered to the Company for
debt of similar maturities. The estimates presented above on long-term financial
instruments are not necessarily indicative of the amounts that would be realized
in a current market exchange.
<Table>
<Caption>
2002 2001
--------------------------- ---------------------------
NOTIONAL CARRYING FAIR NOTIONAL CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
-------- -------- ----- -------- -------- -----
(IN MILLIONS CHF)
Foreign currency instruments
Forward exchange contracts (profit)........ 86 2 2 39 1 1
Forward exchange contracts (-loss)......... 68 (1) (1) 209 (2) (2)
</Table>
F-67
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
All hedges are classified as fair value hedges.
The Group's sales are denominated in a variety of different currencies. The
currency structure of costs deviates to some extent from the currency structure
of sales. In order to manage the exposure to the risk of foreign exchange
movements, the Group makes use of financial instruments such as forward
contracts and options. These instruments are entered into with major financial
institutions and typically expire within one year.
The notional value indicates the volume of the open derivative positions at
the balance sheet date. The determination of the fair value of open transactions
is based, where possible, on quoted prices, or alternatively on other recognized
valuation methods.
Changes in fair values resulting from currency hedging of existing assets
and liabilities are recognized in financial income. These gains and losses
generally correspond to changes in the hedged balance sheet items.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to significant
concentrations of credit risk, consist principally of cash investments, foreign
currency exchange contracts, and trade accounts receivable. The Company
maintains cash and cash equivalents, investments and certain other financial
instruments with various major financial institutions. The Company performs
periodic evaluations of the relative credit standing of these financial
institutions and limits the amount of credit exposure with any institution.
Financial transactions are spread over a number of financial institutions each
of which has a high credit rating.
The overall credit risk relating to derivatives at December 31, 2002 and
2001, amounted to CHF 2.1 and CHF 0.6 million, respectively. The credit risk
measures the maximum exposure which would arise if the counter parties failed to
meet their obligations. The outstanding financial market transactions have all
been arranged with top-rated financial institutions, and there is no
unreasonable concentration of risks.
Concentration of credit risks with respect to trade accounts receivable is
limited due to the large number of customers and their dispersion across many
geographic areas. However, a significant proportion of trade accounts receivable
is with national health care systems in several countries. Although the Company
does not currently foresee a credit risk associated with these receivables,
repayment is dependent upon the financial stability of those countries' national
economies.
SUMMARY OF SENIOR CREDIT FACILITY AGREEMENT
Centerpulse Ltd and Centerpulse Orthopedics Inc. have secured loans under a
senior credit facility from a syndicate of lenders arranged by UBS Warburg Ltd,
in an amount, initially, of USD 635 million, which has since been paid down to
USD 331 million as per December 31, 2002. The senior credit facility agreement
was executed on October 29, 2002. The entire drawings under the senior credit
facility (less transaction costs) were applied in payment of the cash portion
and cash in lieu of the convertible callable component of the Settlement
Agreement on November 4, 2002.
The senior credit facility consisted of two debt tranches: Tranche A of USD
250 million (thereof 63.5% repayable in Euros) and tranche B of USD 385 million
(thereof 28.3% repayable in Euros). Tranche A has already been fully repaid. The
tranche B loan is repayable on November 4, 2007, with nominal interim
amortization payments equal to 0.25% of the initial tranche B loan due every
3-months.
The applicable interest rate for the remaining loan is Libor plus 3.50% per
annum.
A commitment fee of 0.75% per annum was paid on the funding date in respect
of the period from the commitment letter to the funding date.
F-68
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
This fee and all other loan related costs are recognized as financial
expense over the period of repayment and at the equal ratio of repayments,
respectively.
The Group has guaranteed the full payment of amounts owing under the senior
credit facility, and has also guaranteed the performance of all other
obligations thereunder, subject in all cases to certain limitations (including
legal limitations under applicable law). Security has been given over certain
tangible and intangible assets of the Group.
The security interests granted by the Group to the United States Department
of Justice under the Medicare Settlement against the Group are subordinated to
the security interests of the senior banks under the senior credit facility,
under an intercreditor agreement with the senior banks.
All loans under the senior credit facility require prepayments under
certain conditions (with certain exceptions), including (i) in full upon demand
following a change of control (defined as a person or group acquiring more than
35% of the voting share capital), (ii) upon the receipt of proceeds of asset
disposals (subject to certain reinvestment rights), (iii) from 50% of excess
cash flow (payable at delivery of audited accounts for each financial year),
(iv) from the net proceeds of insurance claims (subject to the ability to repair
or replace the damaged assets) and (v) from 50% of the proceeds of any equity or
equity-linked issuances after the funding date.
Centerpulse may voluntarily prepay all or a portion of the senior credit
facility at anytime subject to notice and minimum amounts.
The Group has made a number of customary representations and warranties for
a credit arrangement of that type. The senior credit facility is also subject to
customary affirmative and negative covenants and restrictions. The financial
covenants include ratios involving EBITDA, net cash flow, financial
indebtedness, interest expense and mandatory repayments, all as defined by the
Senior Credit Facility Agreement. Further, the documentation contains the usual
events of default.
NOTE 29: TRANSACTIONS WITH RELATED PARTIES
At the Annual General Meeting of Sulzer on April 19, 2001 the Shareholders
approved the proposed separation of Sulzer and SulzerMedica into two fully
independent quoted companies. The separation was effected on July 10, 2001.
Transactions after the spin-off between the Company and Sulzer and its
subsidiaries are summarized below.
On October 30, 2002 the Company and Sulzer entered into an Amendment to the
Umbrella Agreement dated July 4, 1997, under which it was decided that the
Company pays an account settlement to Sulzer for the usage right for the
trademark, corporate name and/or trade name of Sulzer in the amount of CHF
1,772,000. No additional royalties will have to be paid by Centerpulse and its
affiliates after October 30, 2002.
Certain research and development activities were performed centrally by
Sulzer Markets and Technology Ltd., a subsidiary of Sulzer. Under various cost
sharing agreements the cost of such activities was charged to the companies,
which benefit directly therefrom. Direct research and development services
charged to the Company are separately disclosed in the table at the end of note
29. Exploratory research and development charges allocated to the Company are
disclosed under selling, general and administrative expense in the table at the
end of note 29.
The Company has agreed to indemnify certain suppliers for liability claims,
which may be made against them in connection with the incorporation of their
products into Centerpulse products.
The Company has insurance coverage for product liability under an umbrella
insurance policy for all its subsidiaries.
F-69
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
All transactions have been consistent with arm's length principles
according to the Umbrella Agreement entered into by the Company with Sulzer
during 1997.
Based on the Separation Agreement of July 6, 2001 the Shareholders approved
the proposed new name "Centerpulse" at the Annual Shareholder' Meeting on May
17, 2002. The renaming process is already finalized for the Holding Centerpulse
AG and most of its subsidiaries.
In 2002, the total remuneration for the Board of Directors approximated CHF
1.7 million (in 2001: CHF 1.3 million). Board members receive a substantial
portion of their fees in the form of shares or stock options.
Transactions between the Company and Sulzer and its subsidiaries amounted
to:
<Table>
<Caption>
2002 2001(1) 2000
---- ------- ----
(IN MILLIONS CHF)
TOTAL SALES OF CENTERPULSE PRODUCTS......................... -- 9 19
Rent and maintenance of buildings........................... -- (2) (5)
Selling, general and administrative expense................. -- (2) (4)
Research and development expense............................ -- (2) (3)
TOTAL COSTS................................................. -- (6) (12)
TOTAL INTEREST INCOME....................................... -- 2 3
</Table>
- ---------------
(1) Until July 10, 2001, Centerpulse was part of the Sulzer Group
Balances with Sulzer and its subsidiaries amounted to:
<Table>
<Caption>
2002 2001(1) 2000
---- ------- ----
(IN MILLIONS CHF)
Assets
Current accounts receivable................................. -- -- 5
Cash and cash equivalents................................... -- -- 98
TOTAL ASSETS................................................ -- -- 103
Liabilities
Current borrowings.......................................... -- -- 3
Current accounts payable.................................... -- -- 4
TOTAL LIABILITIES........................................... -- -- 7
</Table>
- ---------------
(1) Until July 10, 2001, Centerpulse was part of the Sulzer Group
NOTE 30: MANAGEMENT STOCK OPTION PLAN
Movements in the number of shares and ADS options outstanding are as
follows:
<Table>
<Caption>
2002 2001 2000
OPTIONS OPTIONS OPTIONS
------- ------- -------
At the beginning of the year............................ 344,463 177,472 126,458
Granted................................................. 215,900 233,943 74,048
Exercised............................................... (35,495) (199) (7,674)
Cancelled or expired.................................... (102,443) (66,753) (15,360)
AT THE END OF THE YEAR.................................. 422,425 344,463 177,472
</Table>
F-70
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Share options outstanding at the end of the year have the following terms:
<Table>
<Caption>
WEIGHTED AVERAGE REMAINING WEIGHTED AVERAGE EXERCISE 2002 2001 2000
GRANT YEAR CONTRACTUAL LIFE IN YEARS PRICE PER SHARE/ADS OPTIONS OPTIONS OPTIONS
- ---------- -------------------------- ------------------------- ------- ------- -------
1997(1).............. -- -- -- 17,440 22,958
1998................. 0.3 CHF 365/USD 24.28 16,640 24,293 31,819
1999................. 1.3 CHF 286/USD 19.36 30,419 43,710 54,703
2000................. 2.3 CHF 358/USD 21.99 38,783 54,119 67,992
2001................. 8.5 CHF 180/USD 12.00 139,045 204,901 --
2002................. 9.3 CHF 145/USD 8.38 197,538 -- --
TOTAL................ CHF 181/USD 13.19 422,425 344,463 177,472
</Table>
- ---------------
(1) expired in July 2002
INCENTIVE PLANS AND STOCK OWNER PLANS
Since the initial public offering of its Shares in 1997, the Company has
had stock option plans in place for the members of its Board of Directors, the
Executive Committee and certain key employees of Centerpulse, including its
senior management.
The 1997 SulzerMedica Management Stock Option Plan (the "1997 Stock Option
Plan") provided for the grant of options for Shares or ADSs (one option covering
one Share or 10 ADSs) with an exercise price set at the time of the grant and
equivalent to the average trading price of the Shares or ADSs during the ten
trading days prior to the date of grant. The last options under the 1997 Stock
Option Plan were granted in April 2000. The options expire five years after the
date of grant. No option may be exercised during the first year after it was
granted. Thereafter, options may be exercised each year in respect of a maximum
of 25% of the Shares or ADSs.
In November 2000, the Company approved the SulzerMedica 2001 Stock Option
Plan (the "2001 Stock Option Plan"), which became effective January 1, 2001. A
maximum of 125,000 Shares (or 1,250,000 ADSs) are available under the 2001 Stock
Option Plan. The Management Development & Compensation Committee of the Board of
Directors determines the exercise price and the vesting conditions at the time
of grant. The options expire ten years after the date of grant.
In July 2001, the Company approved the Sulzer Medica 2001 Long-Term Stock
Option Plan (the "Long-Term Plan"), which became effective August 1, 2001. A
maximum of 250,000 shares (or 2,500,000 ADSs) are available under the Long-Term
Plan. As with the 2001 Stock Option Plan, the exercise price and the vesting
conditions are determined by the Management Development & Compensation Committee
of the Board of Directors at the time of grant. The options expire 10.5 years
after the date of grant.
Under the stock option plans, options were and generally are granted once
annually, in April, but may also be granted to new employees during the year.
Options under the plans are sourced from conditional share capital pursuant to
Article 3a of the Company's Articles of Incorporation or from secondary Shares.
Options under these plans are sourced from up to 350,000 shares (or
3,500,000 ADSs) of authorized, but un-issued registered shares of Centerpulse
AG.
Based on the capital increase of Centerpulse Ltd in October 2002 a proposal
to adjust the price of the stock contained in the Management Stock Option Plan
(MSOP) has been approved by the Management Development & Compensation Committee
of the Board of Directors in December 2002. The strike price reduction was in
the range of 3% to 10%. The different percentage adjustment of the strike prices
was linked to the different parameters of the individual plans.
F-71
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 31: DIFFERENCES BETWEEN IFRS AND US GAAP
The Group's consolidated financial statements are prepared in accordance
with International Financial Reporting Standards (IFRS), which differ, in
certain material respects from accounting principles generally accepted in the
United States of America (U.S. GAAP).
Reconciliation of IFRS and U.S. GAAP net income:
<Table>
<Caption>
2002 2001 2000
---- ------ ----
(IN MILLIONS CHF)
NET INCOME/(NET LOSS) UNDER IFRS............................ 337 (1,193) 190
Impact of in-process research and development cost on
goodwill(1)............................................... 10 11 11
Impact of impairment charge on intangibles(2)............... (3) 17 (13)
Impact of goodwill amortization(3).......................... 50 -- --
Impairment reversal(4)...................................... (13) -- --
Recognized loss on sale of discontinued operations(5)....... (42) -- --
Employee benefits(6)........................................ (24) 3 1
Option re-pricing(7)........................................ (17) -- --
Deferred tax effect on U.S. GAAP adjustments................ 5 -- --
NET INCOME/(NET LOSS) UNDER U.S. GAAP....................... 303 (1,162) 189
thereof net income/(net loss) from continuing operations.... 124 (1,104) 146
thereof net income/(net loss) from discontinuing
operations................................................ 179 (58) 43
</Table>
- ---------------
(1) IMPACT OF IN-PROCESS RESEARCH AND DEVELOPMENT COST ON GOODWILL
In accordance with IAS 22, the amount of "in-process research and
development" included in the purchase price of acquisitions is considered a
form of goodwill which the Company amortizes over a twenty-year period. U.S.
GAAP requires the entire "in-process research and development" amount to be
expensed in the year of acquisition. This difference reverses over the
twenty-year period in which goodwill is amortized under IFRS. In 2002, CHF
10 million of this difference was reversed (2001: CHF 11 million).
(2) IMPACT OF IMPAIRMENT CHARGE ON INTANGIBLES
U.S. Statement of Financial Accounting Standards No. 121 (FAS 121)
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be disposed of" provides that an impairment is evaluated based on
expectations of undiscounted cash flows. This test according to U.S. GAAP
determined that in 2001 and 1999 no impairment had occurred and no
impairment charges were recognized. This difference reverses over the
remaining period in which these definite-lived intangible assets are
amortized under IFRS.
(3) IMPACT OF GOODWILL AMORTIZATION
As of January 1, 2002, the Group adopted Statement of Financial Accounting
Standards No. 142 (SFAS 142), "Goodwill and other Intangible Assets". SFAS
142 requires that all goodwill and other intangible assets existing on
implementation on January 1, 2002 be tested for impairment on an annual
basis. From January 1, 2002 goodwill and intangible assets deemed to have an
indefinite useful life are no longer amortized on a regular basis. For the
purpose of the reconciliation to U.S. GAAP, goodwill was generally amortized
through the income statement over an estimated useful life of 20 years up to
December 31, 2001. Therefore, there was no amortization charge in 2002 under
U.S. GAAP. The corresponding reversal of the regular goodwill amortization
under IFRS resulted in an additional income in the U.S. GAAP reconciliation
of CHF 50 million for 2002.
F-72
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) IMPAIRMENT REVERSAL
Statement of Financial Accounting Standards No. 115 (FAS 115) "Accounting
for Certain Investments in Debt and Equity Securities", does not allow the
reversal of an impairment loss for subsequent increases in the fair value of
a financial asset.
Under IAS 39 the impairment on a previously impaired financial asset is
reversed in the net profit or loss of the period upon subsequent recovery in
fair value of the asset.
(5) RECOGNIZED LOSS ON SALE OF DISCONTINUED OPERATIONS
Due to difference between IFRS and U.S. GAAP in the treatment of impairment
charges and goodwill amortization described under (b) and (c) of the
reconciliation of shareholders' equity the gain on sale of disposals, as
disclosed in note 11, is reduced by CHF 42 million.
(6) EMPLOYEE BENEFITS
U.S. Statement of Financial Accounting Standards No. 87 (FAS 87) "Employer's
Accounting for pensions" does not provide for an impairment test for the
overfunding of pension plans. The change of the amount of the overfunding is
shown in the income statement.
(7) OPTION RE-PRICING
If the exercise price of a fixed stock option award is subsequently reduced,
Financial Accounting Standards Board Interpretation No. 44 "Accounting for
Certain Transactions involving Stock Compensation and interpretation of APB
Opinion No. 25", requires that the option award be accounted for as variable
from the date of the modification to the date the award is exercised, is
forfeited or expires unexercised. As discussed in the reconciliation of net
income, the company records compensation expense or recovery for modified
options calculated as (the amount of) the change in the intrinsic value of
the options from the time of the modification to the date the modified
option is exercised, forfeited or expires.
The principal differences between IFRS and U.S. GAAP are presented on pages
F-115 -- F-117 with explanations of certain adjustments that affect consolidated
shareholders' equity as of December 31, 2002 and 2001.
RECONCILIATION OF SHAREHOLDERS' EQUITY
<Table>
<Caption>
2002 2001
----- ----
(IN MILLIONS
CHF)
SHAREHOLDERS' EQUITY UNDER IFRS............................. 1,270 784
Impact of in-process research and development cost on
goodwill(a)............................................... (138) (177)
Exceptional write-down on intangibles(b).................... 175 241
Impact of goodwill amortization(c).......................... 50 --
Impairment reversal(d)...................................... (13) --
Employee benefits(e)........................................ -- 24
Option re-pricing(f)........................................ (17) --
Deferred taxes(g)........................................... 5 --
SHAREHOLDERS' EQUITY UNDER U.S. GAAP........................ 1,332 872
</Table>
- ---------------
(a) IN-PROCESS RESEARCH & DEVELOPMENT
As discussed in the reconciliation of net income, the amount: "in-process
research and development" is expensed in the year of acquisition. This
difference reverses over the period in which goodwill is amortized under
IFRS.
(b) INTANGIBLES
As discussed in the reconciliation of net income, the impairment charge to
goodwill and existing technology was not recognized under FAS 121.
F-73
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
ORTHOPEDICS SPINE-TECH DENTAL CARDIOVASCULAR
DIVISION DIVISION DIVISION DIVISION TOTAL
----------- ---------- -------- -------------- -----
(IN MILLIONS CHF)
JANUARY 1, 2002.................. 44 714 120 188 1,066
Additions........................ -- -- -- -- --
Impairment losses................ -- -- -- -- --
Goodwill written off related to
disposals...................... -- -- -- (165) (165)
Translation effects.............. -- (120) (20) (3) (143)
DECEMBER 31, 2002................ 44 594 100 20 758
</Table>
- ---------------
(c) GOODWILL
U.S. Statement of Financial Accounting Standards No. 142 (FAS 142)
"Goodwill and other Intangible Assets" does not require goodwill to be
amortized after January 1, 2002. Under IFRS the Group continues to amortize
goodwill.
The changes in the carrying amount of goodwill for the year ended December
31, 2002 are as follows:
Reported net income was CHF 303; (1,162) and 189 million in 2002, 2001 and
2000 respectively. Adding back the goodwill amortization of CHF 0, 59 and
41 million in 2002, 2001 and 2000 respectively, results in Pro forma net
income of CHF 303, (1,103) and 230 million, respectively.
The Group estimates that the aggregate amortization expense for intangibles
subject to amortization for each of the five succeeding financial years
will not materially differ from the current aggregate amortization expense.
(d) IMPAIRMENT REVERSAL
At the end of 2001 the investment in Orquest was impaired and USD 11
million written off.
Evidence of a take-over of Orquest by DePuy AcroMed resulted in the
estimate that a substantial part of the impairment is no longer justified.
CHF 13 million was reversed in line with IAS 39. U.S. GAAP does not allow
the reversal of an impairment of a financial asset.
(e) EMPLOYEE BENEFITS
IAS 19 (revised 1998) "Employee benefits", effective as of January 1, 1999,
limits the benefit amount of plan assets to be recognized to the realizable
economic future benefit.
U.S. GAAP Financial Accounting Standard No. 87 (FAS 87), "Employers'
Accounting for pensions," does not provide for an impairment test for the
over funding of pension plans, as such the amount of the over-funding is
recognized as an asset.
(f) OPTION RE-PRICING
As discussed in the reconciliation of net income, the company records
compensation expense or recovery for modified options calculated as (the
amount of) the change in the intrinsic value of the options from the time
of the modification to the date the modified option is exercised, forfeited
or expires.
(g) DEFERRED TAXES
In the consolidated financial statements, deferred tax assets and
liabilities are classified as long-term and have been presented as such in
the assets and liabilities sections of the balance sheet. This presentation
is in accordance with IAS 12, "Income taxes." U.S. GAAP Statement of
Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income
Taxes," provides that deferred taxes must be separated into a current and a
non-current amount based on the classification of the related asset or
liability.
F-74
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The presentation of deferred tax assets and liabilities in accordance with
FAS 109 at December 31 would be as follows:
<Table>
<Caption>
2002 2001
--------------------------------------------- ---------------------------------------------
NON- NON- NON- NON-
CURRENT CURRENT CURRENT CURRENT CURRENT CURRENT CURRENT CURRENT
ASSETS ASSETS LIABILITIES LIABILITIES ASSETS ASSETS LIABILITIES LIABILITIES
------- ------- ----------- ----------- ------- ------- ----------- -----------
(IN MILLIONS CHF)
Deferred taxes....... 216 592 14 17 243 679 15 20
Valuation allowance.. (68) (187) -- -- (69) (194) -- --
TOTAL DEFERRED
TAXES.............. 148 405 14 17 174 485 15 20
</Table>
This difference relating to deferred taxes does not result in a reconciling
adjustment to shareholders' equity as of December 31, 2002 and 2001 between
IAS and U.S. GAAP.
(h) OPERATING INCOME BEFORE GOODWILL AMORTIZATION AND EXCEPTIONAL ITEMS
Disclosure of operating income before exceptional items and goodwill
amortization is not permitted under U.S. GAAP. The exceptional items,
goodwill amortization and non-operating expenses would be included in the
determination of operating income under U.S. GAAP.
(i) OPERATING INCOME
Operating income under IFRS also consists of the income from discontinuing
operations. Under U.S. GAAP, this income from the grafts and stents
businesses in 2002 would not be included in the operating income. It would
be shown below the operating income as income from discontinuing
operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued several new
accounting standards, including SFAS No. 145 "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections",
SFAS 146 "Accounting for Costs Associated with Exit or Disposal Activities",
which will be effective for periods beginning on or after January 1, 2003. The
Group is currently determining the effect, if any, these new standards cause
divergences from its Consolidated Financial Statements.
FASB interpretation No. 45 "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others", was issued in November 2002. This Interpretation provides further
guidance for the disclosure and accounting for guarantees. The disclosure
provisions have been adopted for the year ended December 31, 2002. In accordance
with the Interpretation, all guarantees entered into after December 31, 2002 are
required to be recognized as a liability at fair value. This new Interpretation
is not expected to have a material impact on the Group's consolidated financial
statements.
FASB interpretation No. 46 "Consolidation of Variable Interest Entities".
This new Interpretation is not expected to have a material impact on the Group's
consolidated financial statements.
The Group adopted SFAS No. 141 for all business combinations after June 30,
2001. This standard requires that all business combinations be accounted for
using the purchase method, and it further clarifies the criteria for recognition
of intangible assets separately from goodwill. Since June 30, 2001, there have
been no material business combinations.
Effective January 1, 2002 the Group adopted SFAS No. 144 "Accounting for
the Impairment or Disposal of Long Lived Assets". This standard supersedes and
amends existing accounting literature related to the impairment and disposal of
long-lived assets.
F-75
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 32: SUBSEQUENT EVENTS
On January 21, 2003 the Group announced the closing of the sale of its
Corbomedics Inc. and Mitroflow Inc. mechanical and tissue heart valve business
to Italian device company Snia s.p.A for total consideration of USD 116 million.
The purchase price consists of cash consideration of USD 80 million, and a
subordinated note with a principal amount of USD 36 million. The sale of
Carbomedics and Mitroflow is the third and final step in Centerpulse's plan to
divest its cardiovascular interests.
In January 2003 the group announced that Mr. G.-P. Ondo, Head of Group Risk
Management and Member of the Executive Board, has left the company to pursue
other interests.
NOTE 33: SUBSEQUENT EVENTS (UNAUDITED)
As noted and further discussed in Note 9, the Company stated that, as of
April 11, 2003, the Claims Administrator for the Trust had received 4,362 claim
forms in relation to hip implants and tibial base plates and 150 claim forms for
reprocessed hip implants. The Claims Administrator has determined that for these
classes of claims, 3,795 and 119 respectively are likely to be valid. It is not
known at present how many more claims will be made or whether the remaining and
future claims are valid and hence how many will qualify for settlement. Claims
processing will continue throughout 2003, 2004 and 2005.
Those class plaintiffs who opted out of the Settlement Agreement may still
bring claims against the Company. As of April 11, 2003, of the original 136
persons opted out of the Settlement Agreement, at present 36 patients implanted
with an affected product remain unresolved, of which one is known to have
undergone revision surgery, and thus represent the highest claimant compensation
category under the Settlement Agreement, 37 have not undergone revision surgery;
and the status of four is unknown.
On March 20, 2003, the Boards of Directors of Smith & Nephew plc ("Smith &
Nephew") and Centerpulse announced that they have agreed to a business
combination transaction between the two companies (the "Transaction").
The Transaction is proposed to be effected by Smith & Nephew Group plc (a
new holding company of Smith & Nephew to be formed for the purposes of the
Transaction) ("Smith & Nephew Group Holding") making tender offers for each of
Centerpulse and InCentive Capital AG, a shareholder of the Company that holds,
or has the right to hold, approximately 19% of the issued shares of Centerpulse.
Pursuant to the Transaction, it is contemplated that Smith & Nephew
shareholders will exchange their Smith & Nephew shares for shares in Smith &
Nephew Group Holding, on a one-for-one basis, by means of a court-approved
reorganization.
It is further contemplated in the Transaction that Smith & Nephew Group
Holding will offer 25.15 new Smith & Nephew Group Holding shares and CHF 73.42
in respect of each Centerpulse share so that Centerpulse and InCentive
shareholders will collectively own 24% of the combined group. Centerpulse and
InCentive shareholders (the latter in respect of InCentive's holding in
Centerpulse) would also be offered a Collective Mix and Match Facility whereby
they may elect to receive more or less cash to the extent that other Centerpulse
or InCentive shareholders have elected to receive more or fewer new Smith &
Nephew Group Holding shares.
The Centerpulse tender offer has been unanimously recommended by the
Centerpulse Board of Directors.
The Centerpulse tender offer is conditional on, among other things,
approval of Smith & Nephew's shareholders, regulatory clearances, court approval
of the Smith & Nephew holding company reorganization and the effectiveness of
the reorganization.
The Transaction is expected to be completed at the end of July 2003.
F-76
CENTERPULSE AG AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED INCOME STATEMENT
<Table>
<Caption>
THREE MONTHS
JANUARY -- MARCH
-------------------
2002
NOTES 2003 RESTATED(1)
----- ----- -----------
(IN MILLIONS CHF,
EXCEPT SHARE/ ADS
DATA)
NET SALES................................................... 2 318 321
Cost of Sales............................................... (104) (103)
GROSS PROFIT................................................ 214 218
Selling, general and administrative expense................. (131) (133)
Research and development expense............................ (19) (19)
Other operating income/expense.............................. 1 0
Goodwill amortization....................................... (10) (11)
Exceptional operating items................................. 0 0
Operating income from discontinued operations............... 3 0 4
Gain on sale of discontinued operations..................... 5 18 0
OPERATING INCOME............................................ 2 73 59
Financial income/expense.................................... (9) (1)
Other non-operating income/expense.......................... (5) 0
INCOME BEFORE TAXES......................................... 59 58
Taxes....................................................... (14) (14)
INCOME BEFORE MINORITY INTERESTS............................ 45 44
Minority interests.......................................... (1) 0
NET INCOME.................................................. 44 44
Basic earnings per share.................................... 3.72 4.42
Basic earnings per ADS...................................... 0.37 0.44
Diluted earnings per share.................................. 3.71 4.41
Diluted earnings per ADS.................................... 0.37 0.44
Number of shares outstanding ('000s)........................ 11825 9945
</Table>
- ---------------
(1) Restated to segregate operating income and expenses of the discontinued
operations from continuing operations.
The accompanying notes are an integral part of these financial statements.
F-77
CENTERPULSE AG AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED BALANCE SHEET
<Table>
<Caption>
DECEMBER 31
MARCH 31 2002
NOTES 2003 RESTATED(1)
----- -------- -----------
(IN MILLIONS CHF)
ASSETS
Intangible assets........................................... 562 577
Property, plant and equipment............................... 184 183
Investments and other financial assets...................... 59 70
Deferred income taxes....................................... 537 529
Non-current assets of discontinued operations............... 3 0 56
TOTAL NON-CURRENT ASSETS.................................... 1342 1415
Inventories................................................. 306 317
Trade accounts receivables.................................. 306 266
Other accounts receivable and prepaid expenses.............. 113 73
Cash and cash equivalents................................... 153 194
Current assets of discontinued operations................... 3 0 73
TOTAL CURRENT ASSETS........................................ 878 923
TOTAL ASSETS................................................ 2220 2338
Equity and liabilities
SHAREHOLDERS' EQUITY........................................ 1314 1270
MINORITY INTERESTS.......................................... 9 8
LIABILITIES
Non-current borrowings...................................... 7 353 477
Deferred income taxes....................................... 18 19
Non-current provisions...................................... 159 159
Other non-current liabilities............................... 1 2
Non-current liabilities of discontinued operations.......... 3 0 12
TOTAL NON-CURRENT LIABILITIES............................... 531 669
Current borrowings.......................................... 72 70
Current provisions.......................................... 6 82 89
Trade accounts payable...................................... 52 59
Other current and accrued liabilities....................... 160 156
Current liabilities of discontinued operations.............. 3 0 17
TOTAL CURRENT LIABILITIES................................... 366 391
TOTAL LIABILITIES........................................... 897 1060
TOTAL EQUITY AND LIABILITIES................................ 2220 2338
</Table>
- ---------------
(1) Restated to segregate assets and liabilities of the discontinued operations
from continuing operations.
The accompanying notes are an integral part of these financial statements.
F-78
CENTERPULSE AG AND SUBSIDIARIES
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
<Table>
<Caption>
ADDITIONAL CUMULATIVE
SHARE PAID-IN RETAINED TRANSLATION TREASURY
CAPITAL CAPITAL EARNINGS ADJUSTMENT STOCK TOTAL
------- ---------- -------- ----------- -------- -----
(IN MILLIONS CHF)
DECEMBER 31, 2001...................... 300 769 (427) 158 (16) 784
Increase in treasury stock............. 0 0 0 0 0 0
Options exercised...................... 0 0 0 0 0 0
Net income............................. 0 0 44 0 0 44
Currency translation adjustments....... 0 0 0 (1) 0 (1)
Comprehensive income(1)................ 0 0 44 (1) 0 43
MARCH 31, 2002......................... 300 769 (383) 157 (16) 827
DECEMBER 31, 2002...................... 356 954 (90) 67 (17) 1270
Increase in treasury stock............. 0 0 0 0 1 1
Options exercised...................... 1 3 0 0 0 4
Net income............................. 0 0 44 0 0 44
Currency translation adjustments....... 0 0 0 (5) 0 (5)
Comprehensive income(1)................ 0 0 44 (5) 0 39
MARCH 31, 2003......................... 357 957 (46) 62 (16) 1314
</Table>
- ---------------
(1) Comprehensive income includes changes in equity, other than those arising
from investment by owners, distributions to owners.
The accompanying notes are an integral part of these financial statements.
F-79
CENTERPULSE AG AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED CASH FLOW STATEMENTS
<Table>
<Caption>
THREE MONTHS
JANUARY-MARCH
------------------
2002
2003 RESTATED(1)
---- -----------
(IN MILLIONS CHF)
Net income.................................................. 45 43
Minority interests.......................................... 1 0
Gain on sale of discontinued operations..................... (18) 0
Depreciation and amortization............................... 24 28
Change in provisions........................................ (5) (38)
Change in net current assets and long-term receivables...... (52) (31)
Other non-cash items, net................................... (2) (2)
Operating cash flow from discontinued operations............ 5 (2)
CASH FLOW FROM OPERATING ACTIVITIES......................... (2) (2)
Purchase/sale of intangible assets.......................... 0 (2)
Purchase/sale of tangible assets............................ (12) (20)
Acquisitions including minority investments................. (1) (16)
Proceeds from divestitures.................................. 93 0
Purchase/sale of long-term financial assets................. 1 3
Cash flow from investing activities from discontinued
operations................................................ (1) 1
CASH FLOW FROM INVESTING ACTIVITIES......................... 80 (34)
Proceeds from issuance of share capital..................... 4 0
Change in treasury stock.................................... 1 0
Change in borrowings........................................ (120) 4
Dividends................................................... 0 0
Cash flow from financing activities from discontinued
operations................................................ 0 0
CASH FLOW FROM FINANCING ACTIVITIES......................... (115) 4
Net effect of currency translation on cash and cash
equivalents............................................... (9) 0
CHANGE IN CASH AND CASH EQUIVALENTS......................... (46) (32)
Cash and cash equivalents at end of prior period............ 199 156
Cash and cash equivalents at end of period.................. 153 124
</Table>
- ---------------
The discontinued operations paid out CHF 85 million dividends to the group in
2003 and CHF 7 million in 2002.
(1) Restated to segregate cash flow from operations, investing and financing
activities of the discontinued operations from continuing operations.
The accompanying notes are an integral part of these financial statements.
F-80
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
These consolidated financial statements are prepared in accordance with IAS
34 "Interim Financial Reporting." The accounting policies used in the
preparation of the consolidated financial statements are consistent with those
used in the annual financial statements for the year ended December 31, 2002.
The business of Centerpulse faces a moderate level of seasonality. Due to
the holiday season in Europe during the third quarter, the period July to
September is typically the weakest within the year.
Income tax expense is recognized based on the best estimate of the weighted
average annual income tax rate expected for the full financial year.
The consolidated financial statements should be read in conjunction with
Centerpulse's 2002 annual consolidated financial statements.
2. SEGMENT INFORMATION
In 2002 the Group changed its reporting structure from two segments to four
segments. Since the change the Group's business has been managed on a worldwide
basis and structured into four operating segments. The Orthopedics Division
develops, manufactures and distributes hip, knee and other orthopedic implants.
The Spine-Tech Division develops and distributes spinal implants. The Dental
Division develops, manufactures and distributes dental implants.
Discontinued operations consist of the Cardiovascular Division, which
develops, manufactures and distributes heart valves including repair products,
vascular grafts and stents. The sale of the Cardiovascular Division has been
completed on January 21, 2003.
Subsequent to this divestment the company comprises of the three remaining
global businesses (Orthopedics, Spine-Tech and Dental).
The Group's further operating activities consist of biologic activities and
Group management, including the costs of holding, financing and managing
Centerpulse.
SEGMENT INFORMATION
<Table>
<Caption>
BIOLOGICS
ORTHOPEDICS SPINE-TECH DENTAL AND GROUP DISCONTINUED
DIVISION DIVISION DIVISION MGT. OPERATIONS TOTAL
----------- ---------- -------- --------- ------------ -----
(UNAUDITED; IN MILLIONS CHF)
THREE MONTHS ENDED MARCH 31, 2002
Sales............................ 242 48 31 0 -- 321
Operating income/loss............ 61 1 2 (9) 4 59
Depreciation and amortization.... 13 12 3 0 5 33
THREE MONTHS ENDED MARCH 31, 2003
Sales............................ 247 41 30 0 -- 318
Operating income/loss............ 65 (3) 2 (8) 17 73
Depreciation and amortization.... 11 10 3 0 1 25
</Table>
- ---------------
Sales of discontinued operations was CHF 7 million in 2003 and CHF 65 million in
2002.
3. DISCONTINUED OPERATIONS
On June 12, 2002 the Group announced its plans to divest of the
Cardiovascular Division and to focus on its core businesses orthopedics, spine
and dental. On November 7, 2002, the Group announced the closing
F-81
CENTERPULSE AG AND SUBSIDIARIES
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
of the sale of IntraTherapeutics, Inc. to ev3 Inc., a portfolio company of
private equity firms Warburg Pincus LLC and The Vertical Group. On November 18,
2002, the Group announced the closing of the sale of Vascutek Ltd. to Terumo
Corporation of Japan. On January 21, 2003, the Group announced the closing of
the sale of Carbomedics, Inc. and Mitroflow Corp. to Italian medical device
company Snia S.p.A. With the sale of Carbomedics and Mitroflow the divestiture
of the Cardiovascular Division was completed.
The impact of the business divested in January 2003 on the consolidated
financial statements was as follows: Sales CHF 7 million, Operating income CHF 0
million, Taxes CHF 1 million, Assets CHF 92 million, thereof Cash 1 million,
Liabilities CHF 26 million.
4. ACQUISITIONS
In January 2003 the Dental Division has set up a new direct sales operation
in Spain. The two former distributors for Dental in Spain, Guidance Dental S.L.
and Miladental S.A., have been merged into the new company Center-pulse Dental
Iberica S.L. For this purpose the Group acquired Guidance Dental for a purchase
price consideration of EUR 1.4 million and integrated Miladental into the new
company.
Total assets acquired amounted to EUR 0.8 million, thereof cash EUR 0.04
million, and total liabilities amounted to EUR 0.7 million.
The effect on sales from the acquisition is not material.
No acquisitions took place in the 1st quarter 2002.
5. GAIN ON SALE OF DISCONTINUED OPERATIONS
The pre-tax gain on the sale of the Cardiac Care business in January 2003
amounts to CHF 18 million. The USD 36 million subordinated loan which was part
of the purchase price remains in the balance sheet in "Other accounts receivable
and prepaid expenses."
6. PROVISIONS
No major change in provisions were booked in the 1st quarter 2003 with the
exception of CHF 18 million provisions used in the context of the US implant
litigation as well as CHF 5 million additional provisions for cost to come for
legal and financial consulting services related to the planned merger of Smith &
Nephew and Centerpulse.
7. SENIOR CREDIT FACILITY/NON-CURRENT BORROWINGS
The Senior Credit Facility of USD 331 million as per December 31, 2002 has
since been paid down to USD 250 million as per March 31, 2003. The installments
were primarily funded by the cash proceeds from the disposal of Carbomedics and
Mitroflow in January 2003. Non-current borrowings have been reduced accordingly
in the 1st quarter of 2003 to CHF 353 million from 477 million at the end of
2002.
8. SUBSEQUENT EVENTS
On March 20, 2003 the Boards of Smith & Nephew and Centerpulse announced
their intention to combine both organizations to a leading global orthopedics
company. The public tender offer for all outstanding shares of Centerpulse was
published on April 25, 2003. The offer period lasts until June 24, 2003. The
settlement of the transaction is expected for July 25.
F-82
ANNEX A
[EXCERPTS]
ANNUAL REPORT 2002 INCENTIVE CAPITAL
A- 1
INCENTIVE CAPITAL AT A GLANCE
InCentive Capital AG is an investment company
domiciled in Zug, Switzerland. Its corporate
history started as Incentive Investment AG, which
was incorporated in 1985. Incentive Investment
was merged into India Investment AG at the end of
October 2000, and was renamed InCentive Capital.
It is listed on the investment companies segment
of the SWX Swiss Exchange.
InCentive Capital acquires stakes in Swiss or
foreign public or private companies. Its primary
purpose is to catalyze change in companies which
in the opinion of InCentive Capital are
undervalued or which have strategic potential,
primarily through M&A transactions, restructuring
and participation in industry consolidation.
InCentive Capital also invests selectively in
areas such as healthcare and technology.
From its foundation in 1985 to 2002, the
InCentive Group has achieved compound annual
investment returns of approximately 23%.
KEY FIGURES
As of 31 December 2002
<Table>
Total shareholders' equity CHF million 696.9
Percentage cash of total assets Percent 25
Net asset value CHF million 700.7
Change NAV YTD Percent 34
NAV per share CHF 326
Share price CHF 335
</Table>
IN A NUTSHELL
- - Catalyst for change
- - Proven investment track record
- - Entrepreneurial investment strategy
A- 2
CATALYST FOR CHANGE
- --------------------------------------------------------------------------------
A- 3
ANNUAL DEVELOPMENT 2002
- --------------------------------------------------------------------------------
A- 4
<Table>
NET ASSET VALUE AS OF 31 DECEMBER 2002
Net asset value in CHF million 700.7
Per share in CHF 326
% change YTD 34
SHARE PRICE AS OF 31 DECEMBER 2002
Per share in CHF 335
% change YTD 27
PREMIUM SHARE PRICE VS. NAV
As of 31 December 2002 3%
</Table>
SHARE PRICE DEVELOPMENT 2002
[SHARE PRICE GRAPH]
A- 5
INVESTMENT PORTFOLIO
As of 31 December 2002, the consolidated net asset value of InCentive Capital
amounted to CHF 700.7 million. The net investment portfolio amounted to CHF
518.0 million or 74% of the net asset value and consisted of 61 positions. CHF
181.7 million or 26% of net asset value was held in cash. This provides
InCentive with the necessary flexibility to act quickly on opportunities in the
financial markets, and gives the company a significant comfort level in the
course of its investment in strategic situations. The breakdown of the net asset
value as of 31 December 2002 by industry and the total investments by asset
class and by currency can be seen in the charts below.
[BAR CHART]
A- 6
TOTAL INVESTMENTS NET AS OF 31 DECEMBER 2002
100% = CHF 518.0 million
BY ASSET CLASS IN PERCENT
[PIE CHARTS]
BY CURRENCY IN PERCENT
Including currency hedges
[PIE CHARTS]
A- 7
CORPORATE GOVERNANCE
- --------------------------------------------------------------------------------
A- 8
INTRODUCTORY REMARK
This report conforms with the new Directive of the SWX Swiss Exchange on
Information relating to Corporate Governance, which entered into force on 1 July
2002.
GROUP STRUCTURE
InCentive Capital AG is a holding company organized under Swiss law. The group
structure of InCentive Capital is as follows:
[CHART]
1) Rene Braginsky, who acts as CEO and delegate of the board of directors of
InCentive Capital AG, holds 100% of the shares of InCentive Asset
Management AG. He also acts as CEO and delegate of the board of directors
of the investment manager.
2) The investment manager has a separate investment management contract with
InCentive Capital AG, and its respective subsidiaries, InCentive Investment
(Jersey) Ltd and BioCentive Ltd, Bermuda.
3) Morgan Stanley Dean Witter Investment Management Inc. manages the
investments of Taj Investments Ltd, Mauritius.
For further details regarding the structure of InCentive Capital Group, please
refer to note 1 of the statutory financial statements of InCentive Capital in
the financial section on page 56.
A- 9
SIGNIFICANT SHAREHOLDERS
InCentive Capital only has bearer shares outstanding. As a consequence,
InCentive Capital does not have a share ledger in which shareholders are
registered. Based on notifications made by shareholders pursuant to the
disclosure rules laid down in the Swiss Stock Exchange Act, InCentive Capital is
only aware of significant shareholders listed in section "Significant
shareholders" on page 50 of this annual report. InCentive Capital has no
knowledge of any agreements among shareholders of InCentive Capital.
CROSS PARTICIPATIONS
InCentive Capital has no cross-shareholdings that exceed 5% of the capital
shareholdings or voting rights.
ORDINARY SHARE CAPITAL
The nominal share capital of InCentive Capital is CHF 42 944 040, consisting of
2 147 202 fully paid-in bearer shares. Each bearer share has a par value of CHF
20. Each share entitles its holder to one vote.
AUTHORIZED AND CONDITIONAL SHARE CAPITAL
The articles of association of InCentive Capital authorize the board of
directors to increase the nominal share capital without shareholders' approval
up to an amount of CHF 21 472 020 by issuing up to 1 073 601 bearer shares with
a nominal value of CHF 20 each (authorized share capital). This authorization
expires on 16 May 2004.
The articles of association of InCentive Capital furthermore provide that the
nominal share capital may be increased if conversion or option rights to new
shares are exercised (conditional share capital). Such conversion or option
rights may be issued by the board of directors without shareholders' approval on
a stand-alone basis or in connection with bonds or similar financing
A- 10
instruments. The issuance of such conversion or option rights may lead to a
nominal share capital increase by an amount of up to CHF 21 472 020 by issuing
up to 1 073 601 bearer shares with a nominal value of CHF 20 each. The board of
directors may exclude the preemptive rights of shareholders in case the options
or exchange rights are used in connection with a takeover or the financing of a
takeover. Presently, there are no conversion or option rights outstanding that
could lead to a share capital increase of InCentive Capital.
CHANGES OF CAPITAL
The nominal share capital of InCentive Capital has not changed since the share
capital increase in the year 2000, when Incentive Investment was merged into
India Investment and the latter was renamed InCentive Capital. A detailed
description of this merger and the subsequent share capital increase can be
found in the offering circular and listing memorandum of InCentive Capital,
dated 2 November 2000.
PARTICIPATION CERTIFICATES AND NON-VOTING EQUITY SECURITIES
InCentive Capital has neither participation certificates nor non-voting equity
securities issued or outstanding.
RESTRICTION ON TRANSFERABILITY OF SHARES
The shares of InCentive Capital are freely transferable. There are no nominee
registration arrangements for shareholders of InCentive Capital.
CONVERTIBLE BONDS AND OPTIONS
InCentive Capital has not issued any convertible bonds or options. Presently,
InCentive Capital has no executive stock option plan in place.
A- 11
BOARD OF DIRECTORS
(Karl Otto Pohl)
KARL OTTO POHL (born 1929, German)
Chairman of the board of directors
Karl Otto Pohl served as President of the German Bundesbank from 1980 to 1991.
From 1992-1998 he was Senior Partner of Bank Sal. Oppenheim jr. & Cie, Cologne.
He has held various board positions including Bertelsmann Ltd., the Robeco
Group, Royal Dutch/Shell International, Unilever N.V. plc, Zurich Allied Ltd.
and Zurich Insurance Company. Mr. Pohl currently serves as a director of Bank
Sal. Oppenheim jr. & Cie (Schweiz) AG, Gabelli Funds Inc., and as an advisory
board member of The Carlyle Group, Barrick Gold, Rolls Royce and KPMG as well as
chairman of the board of directors of InCentive Asset Management, the investment
advisor of InCentive Capital. Mr. Pohl has received seven honorary doctorates
since 1984.
(Ren Braginsky)
RENE BRAGINSKY (born 1949, Swiss)
CEO and delegate of the board of directors
Rene Braginsky is CEO and delegate of the board of directors. His professional
career started in the brokerage department of Union Bank of Switzerland in 1969,
where he spent seven years. This was followed by three years at Bank Vontobel,
before he joined Bank Sal. Oppenheim jr. & Cie (Schweiz) AG as director of the
institutional investors division, a position held between 1980 and 1999. He
co-founded Incentive Investment in 1985. Mr. Braginsky holds 20% of the shares
in InCentive Capital. He is the sole shareholder, CEO and delegate of the board
of directors of InCentive Asset Management AG, the investment manager of
InCentive Capital and its subsidiaries. Following the proposal of the board of
directors of Centerpulse, the General Shareholders' Assembly of Centerpulse
elected Rene Braginsky to its board in May 2002.
A- 12
(Hans Kaiser)
HANS KAISER (born 1943, Swiss)
Board member
Hans Kaiser co-founded Incentive Investment in 1985. Prior to this, between 1978
and 1993 he served as a director of Maag Finanz AG, which he developed into an
investment company. The Hans Kaiser Family holds 11% of InCentive Capital
shares. He has held various financial positions since 1967, with a focus on
credit management, international finance and investment consulting, at, inter
alia, UBS, Hoechst (US), Guyerzeller Zurmont Bank AG and Bank fur Kredit- und
Aussenhandel AG. He studied economics in St. Gallen, Switzerland, obtaining a
lic. oec.
[Joel Mesznik]
JOEL MESZNIK (born 1945, American)
Board member
Joel Mesznik has served as president of Mesco Ltd, an international financial
advisory company, since 1990. Mesco Ltd renders advisory services to InCentive
Capital and its subsidiaries. Other Swiss-related advisory assignments have
included Swisscom AG, Ascom Holding, Oerlikon-Buhrle Holding AG (now Unaxis
Holding AG) and Centerpulse. He started his career at Citibank in 1970 and also
served as Managing Director of Drexel Burnham Lambert. Joel Mesznik is currently
a director of RAIT (NYSE) and Pharma/Wealth, traded on Luxembourg Stock
Exchange, and several privately owned companies. His public duties have included
service on President Ford's Federal Energy Administration Advisory Board and the
United States Congress - Anthony Commission on Public Finance. He holds a B.Sc.
(Civil Engineering) from the City University of New York and an MBA from
Columbia University Graduate School of Business.
A- 13
(Eric Stupp)
ERIC STUPP (born 1965, Swiss)
Board member
Eric Stupp is a partner in the law firm of Bar & Karrer, Zurich,where he
specializes in mergers and acquisitions, banking and capital market
transactions. He joined Bar & Karrer in 1994. He studied law in St. Gallen,
Switzerland, and holds an LL.M. (Master of Laws) degree from the University of
Chicago, USA. Currently, he is also director of Spuhl AG and L&P Swiss Holding
Company. Bar & Karrer provides legal services to InCentive Capital.
A- 14
ELECTION AND TERM OF OFFICE
Members of the board of directors of InCentive Capital are elected individually
for a term of office of three years.
<Table>
<Caption>
Director since Current term expires
- -----------------------------------------------------
Karl Otto Pohl 2000 2004
- -----------------------------------------------------
Rene Braginsky 1994 2004
- -----------------------------------------------------
Hans Kaiser 2000 2004
- -----------------------------------------------------
Joel Mesznik 2000 2004
- -----------------------------------------------------
Eric Stupp 2000 2004
- -----------------------------------------------------
</Table>
All the members of the board of directors will presumably resign im summer 2003
if the tender offer of Smith & Nephew for the shares of InCentive Capital will
become effective.
ROLE AND FUNCTIONING OF THE BOARD
The board of directors holds the ultimate decision-making authority of InCentive
Capital AG for all matters except those reserved by law to the shareholders. The
board of directors has delegated the entire day-to-day management to the CEO and
delegate of the board of directors, who can rely on the support of the
investment manager. The board of directors has the task of directing the
company, defining the strategy, determining the organization and ultimately
supervising the CEO and delegate of the board of directors.
Decisions are taken by the board of directors as a whole. Chairman of the board
is Karl Otto Pohl. Rene Braginsky acts as CEO and delegate of the board of
directors. Presently, there exist no sub-committees within the board. The board
of directors meets at least four times a year. Each board member receives, on a
quarterly basis, a report regarding financial performance, the current status of
the investments made and significant events. Before each of the board meet-
A- 15
ings, each board member receives written information regarding the items on the
agenda. The internal regulations determine in more detail the tasks and duties
of the board of directors, of the chairman and of the delegate. The tasks and
the duties of the investment manager are defined in the asset management
agreement which InCentive Capital and its affiliates concluded with InCentive
Asset Management (see section "Management Agreements").
In addition, Hans Kaiser receives a detailed weekly report from an external
accounting firm regarding the current investments of InCentive Group. The asset
manager liaises regulary with Eric Stupp in order to discuss legal and
compliance matters.
RESPONSIBILITIES OF THE CHAIRMAN OF THE BOARD OF DIRECTORS
The chairman of the board of directors is in close contact with the CEO and
delegate of the board of directors who informs him about all relevant strategic
investments, and management decisions outside formal board meetings. The
chairman supervises the operational management of the CEO and the delegate of
the board. The present chairman is also chairman of the board of directors of
InCentive Asset Management.
RESPONSIBILITIES OF THE DELEGATE OF THE BOARD OF DIRECTORS
The delegate of the board of directors acts as CEO and is responsible for the
day to day management of the company, the execution of decisions taken by the
board and to supervise all service providers mandated by the company. Except for
the delegate of the board InCentive Capital has no executive management board.
The delegate reports on a regular basis to the chairman and informs the board of
directors during board meetings about relevant developments. Due to his double
functions as delegate of the boards of directors of both InCentive Capital and
InCentive Asset Management, he is ultimately responsible for the active
leadership and operational supervision of the investments made or to be made by
InCentive Capital.
A- 16
MANAGEMENT AGREEMENTS
InCentive Capital has mandated InCentive Asset Management AG, an investment
advisory company domiciled in Zurich, that does not belong to InCentive Capital
group of companies, to manage its funds. InCentive Asset Management pursues its
mandate in accordance with InCentive Capital's business policy and asset
allocation guidelines. In particular, InCentive Asset Management identifies and
evaluates investment opportunities, executes and monitors investment and
disinvestment decisions, invests InCentive Capital's liquid assets, and ensures
that payment obligations are fulfilled. Furthermore, the investment manager
takes care of all administrative tasks on behalf of InCentive Capital and is
responsible for informing2 the board of InCentive Capital regularly and in a
timely manner about any relevant events in connection with the investments and
the administration of InCentive Capital. Regular reports to the shareholders,
the Swiss Stock Exchange and the public, as well as business reports and the
periodic determination of the net asset value, are also tasks of the investment
manager.
InCentive Asset Management provides performance reports to the board of
directors of InCentive Capital on the investments made. For its services
InCentive Asset Management receives from InCentive Capital a yearly compensation
of 1.2% of the net asset value of InCentive Capital. The compensation is
computed for each quarter based on the net asset value at the end of each
three-month period. For 2002 InCentive Capital paid a total fee of CHF 8.7
million to InCentive Asset Management.
InCentive Capital, together with its subsidiary Taj Investments Ltd., has
mandated Morgan Stanley Dean Witter Investment Manager Inc. (MSDW) to manage its
India-related investments. MSDW receives from InCentive Capital a yearly
compensation of 1% of the net asset value of Taj Investments Ltd. for its
services. The compensation is computed for each quarter based on the average net
asset value at the end of each week. The total fee paid in 2002 to MSDW by Taj
Investments Ltd. was CHF 0.4 million.
A- 17
TOTAL COMPENSATION FOR THE BUSINESS YEAR 2002
In the year 2002 the total directors' remuneration of InCentive Capital was CHF
823 153. From this remuneration the highest amount paid to any one single board
member was CHF 366 827. In addition during the year 2002 InCentive Capital paid
consultancy honorariums of CHF 671 204 (including VAT) for legal and advisory
services provided by the law firm Bar & Karrer and by Mesco Ltd. Both companies
are related parties of InCentive Capital. In 2002 InCentive Capital paid its
mandated investment advisor - InCentive Asset Management - a compensation of CHF
8.7 million for its services. The company is 100% owned by the CEO and delegate
of the board of directors of InCentive Capital.
SHARES ASSIGNED TO DIRECTORS IN THE BUSINESS YEAR 2002
There are no shares of InCentive Capital assigned to any director or the CEO of
InCentive Capital or as to persons close to them in 2002.
SHARES HELD BY DIRECTORS (AS OF 31 DECEMBER 2002)
As of 31 December 2002, 668 445 InCentive Capital shares were held by the
directors and the CEO, as well as by persons close to them.
OPTION RIGHTS HELD BY DIRECTORS (AS OF 31 DECEMBER 2002)
InCentive Capital has not issued any convertible bonds or options. Presently,
InCentive Capital has no executive stock option plan in place.
ADDITIONAL FEES AND REMUNERATIONS
Except as disclosed under the heading "Total compensation" above, there are no
additional fees and remunerations paid out to the directors or any other related
person.
A- 18
LOANS AND GUARANTEES
There are no loans and guarantees granted by InCentive Capital to directors or
to persons close to them.
SHAREHOLDERS' PARTICIPATION RIGHTS
Each share of InCentive Capital entitles its holder to one vote per share and to
shareholders' rights to the extent provided by law. Shareholders do not have to
register their shares with InCentive Capital in order to exercise their voting
rights. A shareholder may participate and vote at the general meeting of
InCentive Capital if he or she presents a depositary confirmation of his or her
bank confirming that the shares may not be disposed of until the general meeting
has taken place.
Based on a written proxy, shareholders may be represented by a third party. The
articles of incorporation contain no voting rights or representation
restrictions.
The articles of association contain an opting-out clause. As a consequence,
shareholders or groups of shareholders have no obligation to make a mandatory
public takeover offer to all other shareholders if their shareholdings reach the
thresholds set out in the Federal Act on Stock Exchanges and Securities Trading.
A- 19
SUPERVISORY AND CONTROL INSTRUMENTS VIS-A-VIS THE AUDITORS
The board of directors of InCentive Capital does not have any reason to question
the quality or the independence of the external auditors. As a consequence, no
formal supervisory or control instruments vis-a-vis the external auditors have
been implemented.
PUBLIC INFORMATION
InCentive Capital is committed to an open, timely and transparent information
policy towards its shareholders. In addition to the publication of the half-year
and the annual reports, InCentive Capital publishes its net asset value on a
weekly basis in the Saturday issue of the Swiss newspaper "Finanz & Wirtschaft",
in the Financial Times, and electronically on Bloomberg. In addition, the
homepage of InCentive Capital is updated on a regular basis
(www.incentivecapital.ch).
Information requests can be addressed to InCentive Asset Management (please
refer to p. 62, section "Shareholder information", of this annual report).
A- 20
FINANCIAL REPORT
- --------------------------------------------------------------------------------
A- 21
Consolidated Financial Information of InCentive Capital AG
CONSOLIDATED BALANCE SHEET
31 December 2002/2001
<Table>
<Caption>
31 DECEMBER 2002 31 DECEMBER 2001
NOTE CHF CHF
ASSETS
Cash and due from banks 1 181 716 696 255 235 976
Investments long 2
Marketable securities 488 230 018 317 076 458
Replacement values of derivatives 33 200 792 1 972 695
Private equity 11 547 128 37 415 552
Replacement values of forward forex contracts 419 510 3 774 924
Receivables for investments sold 0 3 203 698
Accrued income and prepaid expenses 23 382 251 967
Other receivables 3 4 381 620 11 798 524
TOTAL ASSETS 719 519 146 630 729 794
LIABILITIES AND SHAREHOLDERS' EQUITY
Payables for securities purchased 148 596 3 284 824
Borrowings from prime broker 0 8 490 512
Accounts payable 4 3 132 258 2 971 810
Investments short 2
Marketable securities 5 320 405 14 129 733
Replacement values of derivatives 10 112 574 82 007 932
Replacement values of forward forex contracts 0 918 537
Accrued expenses 5 3 660 603 6 841 729
Other current liabilities 6 56 000 40 360
Income tax accrual 7 157 235 225 481
TOTAL CURRENT LIABILITIES 22 587 671 118 910 918
Share capital 8, 9 42 944 040 42 944 040
Treasury shares -3 720 088 -9 147 627
Paid-in surplus 249 723 240 249 723 240
Retained earnings 407 984 283 228 299 223
TOTAL SHAREHOLDERS' EQUITY 696 931 475 511 818 876
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 719 519 146 630 729 794
</Table>
A- 22
Consolidated Financial Information of InCentive Capital AG
CONSOLIDATED INCOME STATEMENT
1 January to 31 December 2002/2001
<Table>
<Caption>
1 JANUARY 2002 - 1 JANUARY 2001 -
31 DECEMBER 2002 31 DECEMBER 2001
NOTE CHF CHF
Interest income 1 553 267 9 466 549
Dividend income 1 105 463 6 222 123
Realized gain/loss (-) on investments, net 69 540 160 -352 298 170
Unrealized gain/loss (-) on investments, net 123 260 043 -68 632 776
Unrealized loss (-)/gain on investments due to foreign
exchange, net -3 445 892 2 621 342
Realized and unrealized loss on exchange, net -4 663 045 -9 873 411
Other income 10 4 465 859 237 276
TOTAL INCOME/LOSS (-) 191 815 855 -412 257 067
Interest expense 105 417 421 043
Investment advisory fees 9 563 800 10 283 056
Custodian and administration fees 756 527 1 078 204
Other administrative expenses 11 2 959 019 17 296 547
TOTAL EXPENSE 13 384 763 29 078 850
GAIN/LOSS (-) FOR THE YEAR BEFORE TAX 178 431 092 -441 335 917
TAXATION 0 0
GAIN/LOSS (-) FOR THE YEAR 178 431 092 -441 335 917
EARNINGS PER SHARE
Gain/loss (-) per share 9 85 -206
Weighted average of total number of shares 2 107 232 2 142 420
</Table>
A- 23
Consolidated Financial Information of InCentive Capital AG
CONSOLIDATED STATEMENT OF CASH FLOWS
1 January to 31 December 2002/2001
<Table>
<Caption>
1 JANUARY 2002 - 1 JANUARY 2001 -
31 DECEMBER 2002 31 DECEMBER 2001
CHF CHF
OPERATING ACTIVITIES
GAIN/LOSS (-) FOR THE YEAR 178 431 092 -441 335 917
ADJUSTED FOR FINANCING, INVESTMENT AND NON-CASH
ACTIVITIES
Interest income -1 553 267 -9 466 549
Interest expense 105 417 421 043
Dividend income -1 105 463 -6 222 123
Realized gain (-)/loss on investment -69 540 160 352 298 170
Unrealized gain (-)/loss on investment -119 814 151 66 011 434
Realized and unrealized loss on exchange 4 663 045 9 873 411
Other income -4 465 859 -237 276
-191 710 438 412 678 110
CASH FLOW BEFORE WORKING CAPITAL CHANGES -13 279 346 -28 657 807
Net changes of receivables and payables -4 042 637 6 686 865
Interest received 1 781 135 10 305 713
Interest paid -105 417 -397 120
Other income 4 465 859 0
Taxes paid 0 -423 080
NET CASH GENERATED FROM OPERATING ACTIVITIES -11 180 406 -12 485 429
INVESTING ACTIVITIES
Sale of investments 886 680 269 735 664 612
Purchase of investments -954 543 877 -880 009 295
Dividends received 1 069 395 6 283 388
CASH FLOW FROM INVESTING ACTIVITIES -66 794 213 -138 061 295
FINANCING ACTIVITIES
Purchase of treasury shares -9 644 864 -33 995 893
Sale of treasury shares 16 326 371 24 600 895
TOTAL CASH FLOW FROM FINANCING ACTIVITIES 6 681 507 -9 394 998
EFFECTS OF EXCHANGE RATE DIFFERENCES -2 226 168 -10 637 059
DECREASE (-) IN CASH AND CASH EQUIVALENTS -73 519 280 -170 578 781
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 255 235 976 425 814 757
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD 181 716 696 255 235 976
</Table>
A- 24
Consolidated Financial Information of InCentive Capital AG
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
1 January 2001 to 31 December 2002
<Table>
<Caption>
PAID-IN TREASURY PAID-IN RETAINED
CAPITAL SHARES SURPLUS EARNINGS NET EQUITY
CHF CHF CHF CHF CHF
AT 1 JANUARY 2001 42 944 040 0 249 723 240 669 882 511 962 549 791
128 427 bearer shares at CHF 20 par value
each, repurchased at average CHF 264.7098
from 3 July 2001 to 31 December 2001 -33 995 893 -33 995 893
93 959 bearer shares at CHF 20 par value
each, sold at average CHF 261.8258 from 2
August 2001 to 31 December 2001 24 600 895 24 600 895
Realized loss on treasury shares 247 371 -247 371 0
Net loss for the period -441 335 -441 335
917 917
AT 31 DECEMBER 2001 42 944 040 -9 147 627 249 723 240 228 299 223 511 818 876
32 994 bearer shares at CHF 20 par value
each, repurchased at average CHF 292.3217
from 1 January 2002 to 31 December 2002 -9 644 864 -9 644 864
54 829 bearer shares at CHF 20 par value
each, sold at average CHF 297.7689 from 1
January 2002 to 31 December 2002 16 326 371 16 326 371
Realized gain on treasury shares -1 253 968 1 253 968 0
Net gain for the period 178 431 092 178 431 092
AT 31 DECEMBER 2002 42 944 040 -3 720 088 249 723 240 407 984 283 696 931 475
</Table>
A- 25
Consolidated Financial Information of InCentive Capital AG
CONSOLIDATED SCHEDULE OF INVESTMENTS
<Table>
<Caption>
CHANGE DESCRIPTION FAIR VALUE FAIR VALUE
HOLDING HOLDING 31 DEC. 2002 31 DEC. 2001 CHANGE
31 DEC. 2002 31 DEC. 2001 CHF CHF CHF
1. MARKETABLE SECURITIES
A) INDIA INVESTMENTS
AUTOMOBILES & ANCILLARIES
0 1 239 802 -1 239 802 Hero Honda Group 0 10 701 704 -10 701 704
435 3 911 -3 476 Hero Honda Motors Ltd 0 33 759 -33 759
0 212 616 -212 616 Punjab Tractors Ltd 0 1 271 209 -1 271 209
0 996 077 -996 077 Tata Engineering & Locomotive Co 0 3 422 707 -3 422 707
0 15 429 379 -15 429 379
CHEMICALS
0 321 500 -321 500 Reliance Industries Ltd 0 3 377 852 -3 377 852
0 3 377 852 -3 377 852
CONSTRUCTION & HOUSING
0 538 175 -538 175 Gujarat Ambuja Cements Ltd 0 3 519 728 -3 519 728
0 53 000 -53 000 Gujarat Ambuja Cements GDR USD 0 354 173 -354 173
0 3 873 901 -3 873 901
CONSUMER & HOUSEHOLD GOODS
0 96 602 -96 602 Britannia Industries Ltd 0 2 049 197 -2 049 197
0 750 382 -750 382 Dabur India Ltd 0 1 754 278 -1 754 278
0 168 329 -168 329 Nestle India Ltd 0 2 990 577 -2 990 577
0 150 777 -150 777 SmithKline Beecham Consumer Health 0 2 050 588 -2 050 588
0 8 844 640 -8 844 640
ELECTRICAL & ELECTRONICS
0 59 772 -59 772 Infosys Technologies Ltd 0 8 383 444 -8 383 444
0 150 -150 NIIT Ltd 0 1 158 -1 158
0 97 000 -97 000 Wipro Ltd 0 5 351 999 -5 351 999
0 49 770 -49 770 Wipro ADR USD 0 3 024 282 -3 024 282
0 16 760 883 -16 760 883
ENGINEERING & INDUSTRIAL PRODUCTS
0 667 100 -667 100 Bharat Heavy Electricals Ltd 0 3 229 405 -3 229 405
0 66 600 -66 600 Georg Fischer Disa Ltd 0 137 585 -137 585
0 800 076 -800 076 Tata Power Company Ltd 0 3 293 268 -3 293 268
0 6 660 258 -6 660 258
FINANCIAL SERVICES
10 000 10 000 0 Federal Bank Ltd 0 14 874 -14 874
0 531 033 -531 033 HDFC Bank Ltd INR 0 4 108 382 -4 108 382
0 82 400 -82 400 HDFC Bank Ltd USD 0 1 990 507 -1 990 507
0 307 367 -307 367 Housing Development Finance Corp Ltd 0 7 016 973 -7 016 973
0 1 038 400 -1 038 400 State Bank of India 0 6 526 687 -6 526 687
0 35 000 -35 000 State Bank of India GDR USD 0 476 492 -476 492
0 20 133 915 -20 133 915
HEALTH & PERSONAL CARE
0 102 118 -102 118 Cipla Ltd 0 4 002 260 -4 002 260
0 659 502 -659 502 Colgate-Palmolive (India) Ltd 0 3 787 551 -3 787 551
0 80 800 -80 800 Dr. Reddys Laboratories Ltd INR 0 2 569 041 -2 569 041
0 15 700 -15 700 Dr. Reddys Laboratories Ltd USD 0 493 949 -493 949
0 123 811 -123 811 E. Merck (India) Ltd 0 1 176 775 -1 176 775
0 50 000 -50 000 Ranbaxy Laboratories Ltd 0 1 188 463 -1 188 463
0 134 400 -134 400 Strides Arcolab Ltd 0 296 159 -296 159
0 13 514 198 -13 514 198
</Table>
A- 26
Consolidated Financial Information of InCentive Capital AG
<Table>
<Caption>
CHANGE DESCRIPTION FAIR VALUE FAIR VALUE
HOLDING HOLDING 31 DEC. 2002 31 DEC. 2001 CHANGE
31 DEC. 2002 31 DEC. 2001 CHF CHF CHF
MEDIA
0 361 100 -361 100 Zee Telefilms Ltd 0 1 388 138 -1 388 138
0 1 388 138 -1 388 138
METALS & MISCELLANEOUS MATERIALS
0 94 625 -94 625 Hindalco Industries Ltd 0 2 084 474 -2 084 474
0 585 000 -585 000 Tata Iron and Steel Co Ltd 0 1 756 381 -1 756 381
0 3 840 855 -3 840 855
MISCELLANEOUS
100 000 100 000 0 Federal Tech 0 48 237 -48 237
0 535 000 -535 000 Hindustan Lever Ltd 0 4 119 732 -4 119 732
0 187 100 -187 100 ITC Ltd 0 4 359 939 -4 359 939
0 8 527 908 -8 527 908
PETROL REFINING & GAS
0 216 414 -216 414 Bharat Petroleum Corp Ltd 0 1 408 295 -1 408 295
0 415 584 -415 584 Hindustan Petroleum Corp Ltd 0 1 997 517 -1 997 517
0 3 405 812 -3 405 812
TELECOMMUNICATIONS
389 600 389 600 0 Gslot Entertainment Ltd 0 714 307 -714 307
(ex-Adelphia Vision India Ltd)
0 994 000 -994 000 Mahanagar Telephone Nigam Ltd INR 0 4 334 489 -4 334 489
0 73 000 -73 000 Mahanagar Telephone Nigam Ltd USD 0 728 401 -728 401
0 5 777 197 -5 777 197
TRANSPORT
0 192 056 -192 056 Container Corporation of India Ltd 0 972 056 -972 056
0 972 056 -972 056
SECURITIES DEALT IN ANOTHER REGULATED MARKET
HEALTH & PERSONAL CARE
100 000 100 000 0 Shantha Biotechnics 82 600 516 461 -433 861
82 600 516 461 -433 861
MISCELLANEOUS
103 125 103 125 0 Kumaran Systems Inc 356 849 798 901 -442 052
164 866 164 866 0 Modi Xerox Ltd 123 707 283 823 -160 116
480 556 1 082 724 -602 168
TELECOMMUNICATIONS
128 234 128 234 0 Indiainfo.com Ltd 0 49 671 -49 671
0 49 671 -49 671
A) TOTAL INDIA INVESTMENTS 563 156 114 155 848 -113 592 692
</Table>
A- 27
Consolidated Financial Information of InCentive Capital AG
<Table>
<Caption>
CHANGE DESCRIPTION FAIR VALUE FAIR VALUE
HOLDING HOLDING 31 DEC. 2002 31 DEC. 2001 CHANGE
31 DEC. 2002 31 DEC. 2001 CHF CHF CHF
B) NON-INDIA INVESTMENTS
BA) PUBLIC MARKETABLE SECURITIES LONG
HEALTHCARE
0 14 300 -14 300 Abbott Labs 0 1 338 062 -1 338 062
50 000 20 400 29 600 Abgenix Inc 511 331 1 151 812 -640 481
0 40 000 -40 000 Acambis Plc ORD 10P 0 340 798 -340 798
0 5 500 -5 500 Adolor Corp 0 165 700 -165 700
0 18 200 -18 200 Affymetrix Inc 0 1 153 145 -1 153 145
0 18 300 -18 300 Alkermes 0 809 640 -809 640
0 9 600 -9 600 Allergan Inc 0 1 209 254 -1 209 254
0 30 000 -30 000 Altana AG 0 2 484 308 -2 484 308
0 4 800 -4 800 Alteon Inc 0 36 656 -36 656
0 3 200 -3 200 Ameri Source Bergen Corp 0 341 319 -341 319
0 46 200 -46 200 American Home Products Corp 0 4 757 982 -4 757 982
35 000 8 200 26 800 Amgen Inc 2 347 680 776 777 1 570 903
24 300 200 000 -175 700 Amylin Pharmaceuticals Inc 544 220 3 068 115 -2 523 895
0 10 000 -10 000 Andrx Group 0 1 181 761 -1 181 761
0 8 500 -8 500 Anthem Inc 0 706 187 -706 187
0 27 000 -27 000 Applera Corp / Celera Genomics Group 0 1 209 505 -1 209 505
0 13 300 -13 300 Aventis (Ex RP) EUR 3.819 ORDS 0 1 556 507 -1 556 507
0 15 000 -15 000 Aviron 0 1 252 002 -1 252 002
0 19 800 -19 800 Barr Labs Inc 0 2 637 317 -2 637 317
0 5 900 -5 900 Bausch & Lomb Inc 0 372 930 -372 930
20 000 0 20 000 Baxter International Inc 777 056 0 777 056
0 6 500 -6 500 Bayer AG Npv Ords 0 344 722 -344 722
0 4 700 -4 700 Beckman Coulter Inc Com 0 349 460 -349 460
0 6 100 -6 100 Biogen Inc 0 587 163 -587 163
0 6 100 -6 100 Biovail Corp 0 575 901 -575 901
0 21 600 -21 600 Cambridge Antibody Tech Group 10P Ords 0 1 012 302 -1 012 302
25 000 25 000 0 Cardinal Health Inc Com 2 053 301 2 713 134 -659 833
0 28 100 -28 100 Caremark Rx 0 769 229 -769 229
0 11 000 -11 000 Celgene Corp 0 589 320 -589 320
0 8 400 -8 400 Celltech Group Plc 50P ORDS 0 178 460 -178 460
0 11 100 -11 100 Cepheid Inc 0 78 247 -78 247
0 5 100 -5 100 Cima Labs Inc 0 309 438 -309 438
0 26 500 -26 500 Corixa Corp 0 670 277 -670 277
0 2 900 -2 900 Corvas Int'l Inc 0 31 881 -31 881
0 2 600 -2 600 Cryolife Inc 0 130 915 -130 915
0 40 300 -40 300 Cubist 0 2 432 317 -2 432 317
0 16 300 -16 300 Curagen Corp 0 611 997 -611 997
0 38 300 -38 300 CV Therapeutics Inc 0 3 343 987 -3 343 987
0 15 000 -15 000 CVS Corp 0 745 210 -745 210
60 000 60 000 0 Deltagen Inc 39 963 926 477 -886 514
0 6 600 -6 600 Edward Life Sciences Corp 0 306 070 -306 070
0 15 000 -15 000 Enzon Inc 0 1 416 905 -1 416 905
5 000 0 5 000 First Biomed Limited Fund 6 397 953 0 6 397 953
0 6 900 -6 900 First Health Group Corp 0 286 513 -286 513
0 2 800 -2 800 Fisher Imaging Corp 0 56 582 -56 582
0 78 500 -78 500 Genaera Corp 0 513 842 -513 842
0 10 200 -10 200 Genentech Inc 0 928 743 -928 743
0 22 100 -22 100 Genset SA 0 99 037 -99 037
0 10 300 -10 300 Genta Inc Com 0 246 001 -246 001
</Table>
A- 28
Consolidated Financial Information of InCentive Capital AG
<Table>
<Caption>
HOLDING HOLDING CHANGE DESCRIPTION FAIR VALUE FAIR VALUE
31 DEC. 2002 31 DEC. 2001 31 DEC. 2002 31 DEC. 2001 CHANGE
CHF CHF CHF
0 13 800 -13 800 Genzyme Corp 0 1 386 473 -1 386 473
200 000 132 400 67 600 Guilford Pharmaceuticals Inc 1 104 530 2 666 642 -1 562 112
0 14 100 -14 100 Healthcare Company Com STK 0 912 066 -912 066
55 000 30 000 25 000 Human Genome Sciences Inc 672 362 1 697 869 -1 025 507
0 11 400 -11 400 Humana Inc 0 225 587 -225 587
50 000 66 700 -16 700 ICN Pharmaceuticals Inc 756 936 3 750 301 -2 993 365
0 11 100 -11 100 Icos Corp 0 1 070 121 -1 070 121
0 23 500 -23 500 IDEC Pharmaceuticals Corp 0 2 718 765 -2 718 765
230 000 100 000 130 000 Igen International Inc 13 675 492 6 730 384 6 945 108
0 11 200 -11 200 ILEX Oncology 0 508 300 -508 300
0 1 800 -1 800 ImClone Systems Inc 0 140 361 -140 361
0 33 100 -33 100 Incyte Genomics Inc Com 0 1 079 990 -1 079 990
0 5 400 -5 400 Inhale Therapeutic Systems Inc 0 168 125 -168 125
0 6 400 -6 400 Interneuron Pharmaceuticals Inc 0 119 126 -119 126
20 000 10 000 10 000 Intuitive Surgical Inc 170 952 168 344 2 608
0 11 200 -11 200 Invitrogen Corp 0 1 164 165 -1 164 165
0 6 500 -6 500 Kosan Bioscience 0 87 168 -87 168
35 000 35 000 0 La Jolla Pharmaceutical Co 315 679 525 171 -209 492
0 51 200 -51 200 Ligand Pharmaceuticals Inc 0 1 538 220 -1 538 220
50 000 30 000 20 000 Medarex Inc 274 051 904 322 -630 271
0 9 700 -9 700 MedImmune Inc 0 754 600 -754 600
0 7 600 -7 600 Medtronic Inc 0 653 227 -653 227
0 6 400 -6 400 MGI Pharmaceuticals Inc 0 164 134 -164 134
0 15 100 -15 100 Millennium Pharmaceuticals Inc 0 621 178 -621 178
0 3 300 -3 300 Millipore Corp Com 0 336 200 -336 200
50 000 13 000 37 000 MIM Corp 402 404 388 382 14 022
0 1 600 -1 600 Myriad Genetics 0 141 362 -141 362
0 3 300 -3 300 Neorx Corp Com Par $0.02 0 31 958 -31 958
225 000 225 000 0 Neuromedical Systems Inc 0 0 0
0 38 000 -38 000 NPS Pharmaceuticals Inc 0 2 442 743 -2 442 743
215 000 230 000 -15 000 Orchid BioSciences Inc 152 150 2 123 176 -1 971 026
140 000 140 000 0 Oridion Systems Ltd 280 000 1 435 000 -1 155 000
25 000 31 800 -6 800 OSI Pharmaceuticals INC 568 916 2 441 287 -1 872 371
0 8 000 -8 000 Owens & Minor Inc 0 248 403 -248 403
0 8 000 -8 000 Oxford Health Plans 0 404 696 -404 696
0 600 -600 Perbio Science Ords 0 16 241 -16 241
0 3 500 -3 500 Pfizer Inc 0 234 095 -234 095
100 000 6 500 93 500 Pharmaceutical Resources Inc 4 135 048 368 744 3 766 304
0 89 420 -89 420 Phonak Holding AG 0 3 397 960 -3 397 960
0 17 800 -17 800 Protein Design Labs Inc 0 979 917 -979 917
0 16 400 -16 400 Province Healthcare Co STK 0 849 445 -849 445
0 1 600 -1 600 Quest DiagnosticsInc 0 192 573 -192 573
0 8 200 -8 200 Quintiles Transnational Corp 0 220 894 -220 894
0 9 500 -9 500 Rehabcare Corp Com 0 471 966 -471 966
0 17 200 -17 200 Rite Aid Corp 0 146 075 -146 075
50 000 0 50 000 Roche Holding AG 4 817 500 0 4 817 500
0 2 800 -2 800 Sanofi Synthelabo EU R2SHS 0 347 596 -347 596
0 20 000 -20 000 Schering-Plough Corp 0 1 202 070 -1 202 070
0 6 500 -6 500 Seattle Genetics Inc 0 62 185 -62 185
0 3 400 -3 400 Sepracor Inc 0 325 616 -325 616
0 20 000 -20 000 Sequenom Inc 0 358 171 -358 171
0 13 100 -13 100 Serono SA ADR 0 487 892 -487 892
0 200 -200 SERONO SA CHF25 ORDS 0 289 800 -289 800
90 000 90 000 0 Shire Pharmaceuticals Group plc -ADR 2 359 059 5 528 650 -3 169 591
</Table>
A- 29
Consolidated Financial Information of InCentive Capital AG
<Table>
<Caption>
CHANGE DESCRIPTION FAIR VALUE FAIR VALUE
HOLDING HOLDING 31 DEC. 2002 31 DEC. 2001 CHANGE
31 DEC. 2002 31 DEC. 2001 CHF CHF CHF
73 000 28 500 44 500 SHL Telemedicine Ltd 525 600 651 225 -125 625
0 700 -700 Sigma Aldrich Corp Com 0 46 302 -46 302
0 44 231 -44 231 Smith & Nephew ORD 0 446 194 -446 194
0 6 200 -6 200 Supergen Unc 0 149 015 -149 015
0 3 200 -3 200 Tenet Healthcare Corp Com 0 315 378 -315 378
0 5 500 -5 500 Teva Pharmaceutical Industries Ltd ADR 0 568 919 -568 919
0 7 400 -7 400 Thoratec Corp 0 211 143 -211 143
0 6 800 -6 800 Transkaryotic Therapies Inc 0 488 482 -488 482
0 15 000 -15 000 Trimeris Inc Com 0 1 132 165 -1 132 165
0 160 000 -160 000 Tularik Inc 0 6 450 427 -6 450 427
10 000 0 10 000 UCB SA 436 140 0 436 140
1 335 000 1 335 000 0 Vernalis Group plc 3 046 960 6 490 236 -3 443 276
0 700 -700 Versicor Inc 0 23 909 -23 909
0 3 200 -3 200 Vertex Pharmaceuticals Inc 0 132 070 -132 070
0 20 000 -20 000 ViroPharma Inc 0 770 386 -770 386
0 25 100 -25 100 Watson Pharmaceuticals Inc 0 1 322 393 -1 322 393
0 8 900 -8 900 Women First Healthcare Restricted 0 149 228 -149 228
46 365 283 121 379 115 -75 013 832
TECHNOLOGY
0 50 480 -50 480 3COM Corp 0 540 550 -540 550
160 000 160 000 0 Advanced Lighting Technologies Inc 73 265 402 816 -329 551
0 107 200 -107 200 Answerthink Inc 0 1 174 907 -1 174 907
30 000 55 000 -25 000 Arbitron Inc 1 394 538 3 152 455 -1 757 917
0 100 000 -100 000 Computer Horizons Corp NV 0 538 766 -538 766
252 096 252 096 0 eGain Communications Corp 73 460 592 365 -518 905
0 200 000 -200 000 Lucent Technologies Inc 0 2 111 427 -2 111 427
0 40 000 -40 000 Motorola Inc 0 1 008 383 -1 008 383
0 45 000 -45 000 SanDisk Corp 0 1 087 603 -1 087 603
0 60 000 -60 000 Silicon Storage Technology Inc 0 970 787 -970 787
0 65 000 -65 000 SourcingLink.net Inc 0 46 911 -46 911
290 000 290 000 0 Telecomputing Norway 636 884 2 079 999 -1 443 115
2 178 147 13 706 969 -11 528 822
STRATEGIC INVESTMENTS
1 561 077 578 876 982 201 Centerpulse AG 376 219 557 40 521 320 335 698 237
376 219 557 40 521 320 335 698 237
OTHER INVESTMENTS
600 000 250 000 350 000 Allegiance Telecom Inc 557 815 3 478 484 -2 920 669
0 20 000 -20 000 Bankgesellschaft Berlin AG 0 76 144 -76 144
0 75 000 -75 000 Converium Holding AG 0 6 052 500 -6 052 500
8 000 8 000 0 Gutta 0 638 -638
100 000 0 100 000 Placer Dome 1 573 465 0 1 573 465
150 000 0 150 000 Rowan Companies Inc 4 724 778 0 4 724 778
60 000 6 500 53 500 SIG Holding AG 8 940 000 1 033 500 7 906 500
10 000 7 601 2 399 Sulzer AG 1 880 000 1 938 255 -58 255
11 600 0 11 600 Unigestion Holding AG 1 136 800 0 1 136 800
80 000 0 80 000 Tyco Int. Ltd 1 896 017 0 1 896 017
0 10 000 -10 000 Valdera Resources Ltd 0 0 0
57 000 23 220 33 780 Valora Holding AG 15 105 000 5 607 630 9 497 370
210 000 23 000 187 000 Zurich Financial Services 27 090 000 8 958 500 18 131 500
62 903 875 27 145 651 35 758 224
</Table>
A- 30
Consolidated Financial Information of InCentive Capital AG
<Table>
<Caption>
CHANGE DESCRIPTION FAIR VALUE FAIR VALUE
HOLDING HOLDING 31 DEC. 2002 31 DEC. 2001 CHANGE
31 DEC. 2002 31 DEC. 2001 CHF CHF CHF
CONVERTIBLE BONDS
HEALTHCARE
0 149 000 -149 000 Vertex Pharmaceuticals Inc 19.9.07 5% 0 167 555 -167 555
0 167 555 -167 555
BA) TOTAL PUBLIC MARKETABLE SECURITIES LONG NON-INDIA INVESTMENTS 487 666 862 202 920 610 284 746 252
TOTAL PUBLIC MARKETABLE SECURITIES LONG 488 230 018 317 076 458 171 153 560
BB) PUBLIC MARKETABLE SECURITIES SHORT NON - INDIA INVESTMENTS
HEALTHCARE
0 -1 600 1 600 Accredo Health Inc 0 -106 612 106 612
0 -16 100 16 100 Aetna US Healthcare 0 -891 464 891 464
0 -3 200 3 200 Affymetrix Inc 0 -202 751 202 751
0 -2 400 2 400 Applera Corp 0 -107 512 107 512
- -25 000 0 -25 000 Arthrocare Corp -341 697 0 -341 697
0 -11 900 11 900 Bristol Myers Squibb Co USD.10 0 -1 018 621 1 018 621
0 -18 000 18 000 Bruker Daltonics Inc 0 -493 953 493 953
0 -20 700 20 700 Cell Genesys Inc 0 -807 424 807 424
- -40 000 -22 700 -17 300 Chiron Corp -2 086 950 -1 670 290 -416 660
0 -25 000 25 000 Cytyc Corp 0 -1 095 156 1 095 156
0 -17 600 17 600 Emisphere Technologies Inc 0 -942 616 942 616
0 -28 000 28 000 Genencor International Inc 0 -750 043 750 043
0 -25 000 25 000 Genta Inc Com 0 -597 091 597 091
0 -10 000 10 000 Intermune Inc 0 -826 780 826 780
0 -13 700 13 700 Johnson and Johnson 0 -1 358 950 1 358 950
0 -8 200 8 200 Lilly ELI & Co 0 -1 080 937 1 080 937
- -20 000 0 -20 000 Martek Biosciences Corp -698 240 0 -698 240
0 -4 800 4 800 Neurocrine Biosciences Inc 0 -413 370 413 370
- -20 000 -10 000 -10 000 Regeneron PharmaceuticaIs Inc -513 690 -472 637 -41 053
- -30 000 0 -30 000 Scios Inc -1 356 240 0 -1 356 240
- -20 000 0 -20 000 Telik Inc -323 588 0 -323 588
0 -28 000 28 000 Thoratec Corp 0 -798 918 798 918
0 -3 300 3 300 Tularik Inc 0 -133 040 133 040
0 -6 400 6 400 Walgreen Co 0 -361 568 361 568
-5 320 405 -14 129 733 8 809 328
BB) TOTAL PUBLIC MARKETABLE SECURITIES SHORT NON-INDIA INVESTMENTS -5 320 405 -14 129 733 8 809 328
TOTAL PUBLIC MARKETABLE SECURITIES NET NON-INDIA INVESTMENTS 482 346 457 188 790 877 293 555 580
</Table>
A- 31
Consolidated Financial Information of InCentive Capital AG
<Table>
<Caption>
HOLDING HOLDING CHANGE DESCRIPTION FAIR VALUE FAIR VALUE
31 DEC. 2002 31 DEC. 2001 31 DEC. 2002 31 DEC. 2001 CHANGE
CHF CHF CHF
BC) DERIVATIVES LONG
HEALTHCARE
0 69 -69 Abbott Laboratories 18.01.03 C40 USD 0 195 718 -195 718
0 13 -13 Abbott Laboratories 19.01.03 P60 USD 0 9 819 -9 819
0 136 -136 Abgenix Inc 19.01.02 P40 USD 0 154 077 -154 077
0 27 -27 Aetna Inc-new 16.02.02 P35 USD 0 13 821 -13 821
0 54 -54 Amgen Inc 19.01.02 C55 USD 0 25 831 -25 831
0 65 000 -65 000 Antigenics contingent value rights 0 11 -11
0 79 -79 AstraZeneca PLC-Spons ADR 0 6 298 -6 298
19.01.02 P45 USD
0 31 -31 Biomet Inc 20.04.02 C25 USD 0 35 121 -35 121
0 28 -28 Imclone Systems 19.01.02 P75 USD 0 133 936 -133 936
0 54 -54 Medtronic Inc 19.01.02 C40 USD 0 101 056 -101 056
0 34 -34 OSI Pharmaceuticals Inc 19.01.02 C40 0 35 666 -35 666
USD
0 292 -292 Pfizer Inc 18.01.03 C30 USD 0 563 607 -563 607
0 285 -285 Schering-Plough Corp 18.01.03 C30 USD 0 399 417 -399 417
0 230 -230 Schering-Plough Corp 19.01.02 C30 USD 0 225 829 -225 829
0 27 -27 Walgreen Co 19.01.02 P35 USD 0 8 157 -8 157
0 14 -14 Zimmer Holdings Inc 19.01.02 USD 0 13 041 -13 041
0 1 921 405 -1 921 405
STRATEGIC INVESTMENTS
146 000 0 146 000 Centerpulse AG 10.01.03 C200 8 146 800 0 8 146 800
80 000 0 80 000 Centerpulse AG 14.02.03 C195 4 188 000 0 4 188 000
105 000 0 105 000 Centerpulse AG 21.05.03 C230 4 238 850 0 4 238 850
200 000 0 200 000 Centerpulse AG 12.02.03 C200 8 936 000 0 8 936 000
38 000 0 38 000 Centerpulse AG 15.05.03 C240 670 480 0 670 480
100 000 0 100 000 Centerpulse AG 19.03.03 C220 2 978 930 0 2 978 930
0 50 000 -50 000 Sulzer Basket 07.02.02 C750 0 5 000 -5 000
0 23 000 -23 000 Sulzer Basket 07.02.02 C900 0 230 -230
0 98 000 -98 000 Sulzer Medica AG 22.03.02 C150 0 41 160 -41 160
29 159 060 46 390 29 112 670
OTHER INVESTMENTS
1 220 0 1 220 Comex Gold Future Febr. 31.01.03 100:1 3 507 159 0 3 507 159
200 0 200 Comex Silber Future March 28.02.03 407 954 0 407 954
50:1
100 0 100 CME CHF/USD Future 17.03.03 125000:1 126 619 0 126 619
0 49 000 -49 000 Sulzer AG 22.03.02 C450 0 4 900 -4 900
4 041 732 4 900 4 036 832
BC) TOTAL DERIVATIVES LONG 33 200 792 1 972 695 31 228 097
</Table>
A- 32
Consolidated Financial Information of InCentive Capital AG
<Table>
<Caption>
CHANGE DESCRIPTION FAIR VALUE FAIR VALUE
HOLDING HOLDING 31 DEC. 2002 31 DEC. 2001 CHANGE
31 DEC. 2002 31 DEC. 2001 CHF CHF CHF
BD) DERIVATIVES SHORT
HEALTHCARE
0 -17 17 Amgen Inc 19.01.02 C65 USD 0 -571 571
0 -27 27 Barr Laboratories Inc 19.01.02 C75 USD 0 -26 510 26 510
0 -15 15 Cephalon Inc 19.01.02 P75 USD 0 -8 812 8 812
0 -63 63 Cor Therapeutics 19.01.02 P30 USD 0 -65 558 65 558
0 -67 67 Icos Corporation 19.01.02 C65 USD 0 -5 622 5 622
0 -127 127 Immunex Corp 19.01.02 P25 USD 0 -10 658 10 658
0 -117 731 117 731
STRATEGIC INVESTMENTS
- -50 000 0 -50 000 Centerpulse AG 24.01.03 P200 -85 500 0 -85 500
- -30 000 0 -30 000 Centerpulse AG 19.03.03 P210 -328 200 0 -328 200
- -100 000 0 -100 000 Centerpulse AG 19.03.03 P220 -848 753 0 -848 753
- -146 000 0 -146 000 Centerpulse AG 10.01.03 P200 -810 300 0 -810 300
- -80 000 0 -80 000 Centerpulse AG 14.02.03 P195 -511 200 0 -511 200
- -105 000 0 -105 000 Centerpulse AG 21.05.03 P230 -3 041 850 0 -3 041 850
- -38 000 0 -38 000 Centerpulse AG 15.05.03 P240 -613 371 0 -613 371
- -200 000 0 -200 000 Centerpulse AG 12.02.03 P200 -704 000 0 -704 000
0 -16 000 16 000 Sulzer Basket 26.07.02 P775 0 -6 116 750 6 116 750
0 -50 000 50 000 Sulzer Basket 07.02.02 P750 0 -17 700 000 17 700 000
0 -23 000 23 000 Sulzer Basket 07.02.02 P900 0 -11 615 000 11 615 000
0 -60 000 60 000 Sulzer Basket 07.03.02 P800 0 -24 557 226 24 557 226
0 -98 000 98 000 Sulzer Medica AG 22.03.02 P150 0 -7 938 000 7 938 000
-6 943 174 -67 926 976 60 983 802
OTHER INVESTMENTS
0 -49 000 49 000 Sulzer AG 22.03.02 P450 0 -9 481 500 9 481 500
0 -27 500 27 500 Sulzer AG 31.01.02 C250 0 -430 925 430 925
0 -20 000 20 000 Unaxis Holding AG 19.06.02 P345.3 0 -3 390 800 3 390 800
- -20 000 0 -20 000 Unaxis Holding AG 20.05.03 P251.5 -3 169 400 0 -3 169 400
0 -10 000 10 000 Zurich Financial Serv. 15.02.02 P450 0 -660 000 660 000
-3 169 400 -13 963 225 10 793 825
BD) TOTAL DERIVATIVES SHORT -10 112 574 -82 007 932 71 895 358
TOTAL DERIVATIVES NET 23 088 218 -80 035 237 103 123 455
B) TOTAL NON-INDIA INVESTMENTS 505 434 675 108 755 640 396 679 035
TOTAL MARKETABLE SECURITIES 505 997 831 222 911 488 283 086 343
</Table>
A- 33
Consolidated Financial Information of InCentive Capital AG
<Table>
2. PRIVATE EQUITY
HEALTHCARE
209 723 209 723 0 MSC Regenos AG (from merger with Osiris 436 518 2 148 177 -1 711 659
Therapeutics Inc)
1 1 0 Pamot Asset Limited Partnership 138 760 594 655 -455 895
208 768 208 768 0 Physiome Sciences Inc 475 086 1 465 398 -990 312
236 686 236 686 0 Structural Genomix Inc 660 135 3 020 895 -2 360 760
1 710 499 7 229 125 -5 518 626
TECHNOLOGY
0 16 127 -16 127 AIC Advanced Integration Company AG 0 3 870 480 -3 870 480
50 000 50 000 0 BCAB AG 2 750 000 4 228 000 -1 478 000
273 273 0 Catalyst World Wide Ventures N.V 483 926 1 152 421 -668 495
0 20 000 -20 000 Digital-Logic AG 0 2 080 000 -2 080 000
1 261 682 1 261 682 0 Inceptor 0 2 071 689 -2 071 689
1 1 0 MI Capital LLC 0 805 550 -805 550
3 024 683 3 024 683 0 NetByTel 155 411 2 807 712 -2 652 301
746 534 746 534 0 Warrants NetByTel 15.05.03 0 0 0
1 428 571 1 428 571 0 Pixel Devices 182 123 3 984 021 -3 801 898
667 0 667 Restek Ltd 155 0 155
929 368 929 368 0 USA DATA 2 098 051 3 984 021 -1 885 970
5 669 666 24 983 894 -19 314 228
OTHER INVESTMENTS
275 000 275 000 0 Allied World Assurance Holdings Ltd 4 166 963 5 202 533 -1 035 570
4 166 963 5 202 533 -1 035 570
TOTAL PRIVATE EQUITY 11 547 128 37 415 552 -25 868 424
3. FORWARD FOREX CONTRACTS
Forward Forex Contracts Long 419 510 3 774 924 -3 355 414
Forward Forex Contracts Short 0 -918 537 918 537
TOTAL FORWARD FOREX CONTRACTS NET 419 510 2 856 387 -2 436 877
TOTAL INVESTMENTS 517 964 469 263 183 427 254 781 042
</Table>
A- 34
Consolidated Financial Information of InCentive Capital AG
CONSOLIDATED SCHEDULE OF MOVEMENTS IN INVESTMENTS
1 January to 31 December 2002
<Table>
<Caption>
COST OF REALIZED UNREALIZED MARKET
INVESTMENTS GAINS/LOSSES GAINS/LOSSES VALUE
A) MARKETABLE SECURITIES CHF CHF CHF CHF
1 JANUARY 2002 254 434 202 -31 522 714 222 911 488
Cost of purchases 942 730 722 942 730 722
Cost of sales -791 541 -791 541
514 514
Realized gains 204 899 400
Realized losses -115 950 144
Change in unrealized market gains 304 994 066 304 994 066
Change in unrealized market losses -173 111 720 -173 111
720
Change in unrealized exchange gains/losses 14 789 14 789
151 189 208 88 949 256 131 897 135 283 086 343
31 DECEMBER 2002 405 623 410 100 374 421 505 997 831
B) PRIVATE EQUITY
1 JANUARY 2002 47 736 060 -10 320 508 37 415 552
Cost of purchases 11 813 155 11 813 155
Cost of sales -25 598 595 -25 598 595
Realized gains 0
Realized losses -19 409 096
Change in unrealized market gains 7 827 723 7 827 723
Change in unrealized market losses -16 450 026 -16 450 026
Change in unrealized exchange gains/losses -3 460 681 -3 460 681
-13 785 440 -19 409 096 -12 082 984 -25 868 424
31 DECEMBER 2002 33 950 620 -22 403 492 11 547 128
C) TOTAL INVESTMENTS (EXCLUDING FORWARD FOREX
CONTRACTS)
1 JANUARY 2002 302 170 262 -41 843 222 260 327 040
Cost of purchases 954 543 877 954 543 877
Cost of sales -817 140 -817 140
109 109
Realized gains 204 899 400
Realized losses -135 359 240
Change in unrealized market gains 312 821 789 312 821 789
Change in unrealized market losses -189 561 746 -189 561
746
Change in unrealized exchange gains/losses -3 445 892 -3 445 892
137 403 768 69 540 160 119 814 151 257 217 919
31 DECEMBER 2002 439 574 030 77 970 929 517 544 959
</Table>
A- 35
Consolidated Financial Information of InCentive Capital AG
A. ACCOUNTING POLICIES
The consolidated financial statements of InCentive Capital AG ("the Company")
have been prepared in accordance with International Financial Reporting
Standards (IFRS) as issued by the International Accounting Standards Committee
(IASC) including IAS 39 "Financial Instruments: Recognition and Measurement".
Note 1 PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company comprise the annual
financial statements of the Company itself as well as those of all subsidiaries
in which they, directly or indirectly, have an interest of more than one half of
the voting rights, or have the power to exercise control over operations.
Subsidiary companies are consolidated from the date of acquisition or
incorporation using the purchase method. The consolidated financial statements
of the Company include the accounts of the following wholly owned subsidiaries:
InCentive Capital AG, Zug
- - Taj Investments Limited, Port Louis, Mauritius
- - InCentive Investment (Jersey) Limited, St Helier, Jersey
- - BioCentive Limited, Hamilton, Bermuda
- - InCentive Investment Services AG, Zurich, Switzerland
- - BioCentive AG, Zug, Switzerland
- - Centive AG, Zug, Switzerland
- - ImmoCentive AG, Zug, Switzerland
The consolidated financial statements are denominated in Swiss Francs (CHF). The
Companies' and their subsidiaries' books and records are also maintained in
Swiss Francs, this being the functional currency of all the companies. Thus, no
translation differences result on consolidation.
INVESTMENT IN ASSOCIATES
Investments in associates are accounted for by the equity method of accounting.
Associated companies are those companies in which InCentive Capital AG has an
interest of between 20% and 50% of the voting rights and over which it exercises
significant influence but which it does not control.
An investment which is held exclusively with a view to its subsequent disposal
in the near future is not accounted for by the equity method of accounting. This
is in line with the strategic investment policy of InCentive Capital AG as
described in the offering circular and listing memorandum of November 2000.
Note 2 SIGNIFICANT ACCOUNTING POLICIES
FOREIGN CURRENCY TRANSLATION
Foreign currency transactions are accounted for at exchange rates prevailing at
the date of the transaction. At year-end, assets and liabilities denominated in
foreign currencies are translated into Swiss francs at the exchange rate in
force at balance sheet date. Gains and losses resulting from the settlement of
such transactions and from translation at year-end are recognized in the income
statement.
The following exchange rates were used:
<Table>
<Caption>
31 DECEMBER 2002 31 DECEMBER 2001
US Dollar 1.3876 1.6784
Norwegian Krone 19.9650 18.3908
Indian Rupee 0.0289 0.0345
Euro 1.4538 1.4814
Great Britain Pound 2.2267 2.4308
Swedish Krone 15.8800 n/a
Canadian Dollar 0.8810 n/a
</Table>
FINANCIAL INSTRUMENTS
The majority of the InCentive Capital AG Group's balance sheet positions qualify
as financial instruments as defined by IAS 39. Their particular recognition
methods adopted are disclosed in the specific comments related to each item.
A- 36
Consolidated Financial Information of InCentive Capital AG
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash in hand plus current accounts with banks
and time deposits due within three months.
ACCOUNTING FOR INVESTMENT TRANSACTIONS
Investment securities transactions are accounted for on a trade date basis. The
Company uses the "first in first out" cost method for determining the realized
gain or loss on disposal of investments, which is booked through the profit and
loss account. Upon realization the corresponding unrealized gains and losses
from previous periods are reversed. Dividend income and other distributions are
recorded net of non-refundable withholding taxes on the ex-dividend date.
Interest income is recorded on an accrual basis.
INVESTMENTS IN MARKETABLE SECURITIES
Investments in marketable securities are recorded at fair market value.
Securities that are traded on a stock exchange or any other regulated market are
valued on the basis of their last available prices. Securities that are listed
on more than one stock exchange are valued at prices as available on what
constitute their main markets.
Securities that are not listed on any stock exchange but are regularly traded
over the counter are valued at their last available market price.
In accordance with IAS 39 "Financial Instruments: Recognition and Measurement"
investments are classified as available for sale. Gains and losses arising from
a change in the fair value of the securities are included in net profit or loss.
DERIVATIVES
Derivative financial instruments including foreign exchange contracts, precious
metals, futures and equity-linked options (both written and purchased) are
initially recognized in the balance sheet at cost (including transaction costs)
and are subsequently remeasured at their fair value. Fair values are obtained
from quoted market prices.
PRIVATE EQUITY
The Company holds unquoted investments that are classified as "private equity"
in the balance sheet. These investments are valued at their fair value, as
determined in good faith by the board of directors and taking into consideration
prices recently paid by independent third parties. Gains and losses arising from
a change in the fair value of the securities are included in net profit or loss.
As soon as an IPO has taken place, an investment is reallocated to marketable
securities and is valued as such.
CAPITAL INCREASE COSTS
For capital increase at nominal value, the related issuance costs are recorded
as an expense in the income statement. To the extent that a capital increase
occurs at a premium, the related issuance costs are charged directly against
additional paid-in capital in shareholders' equity.
TAXES
InCentive Capital AG was granted holding Company status by the local tax
authorities of Zug. The holding Company status results in complete income tax
exemption and a reduced capital taxation for cantonal and communal tax purposes.
For Swiss federal tax purposes, InCentive Capital AG will benefit from a
participation relief with respect to dividend income and capital gains from
qualifying participations. Other income and the portion of dividends and capital
gains to which the participation relief does not apply are subject to a
deductible corporate income tax of 8.5%. No capital tax is levied at the federal
level.
InCentive Capital AG invests in India through its Mauritius subsidiary, Taj
Investments Ltd, and expects to obtain treaty benefits under the double taxation
treaty between Mauritius and India based on the tax residence certification from
the Mauritius authorities. In Mauritius, Taj Investments Ltd is liable to income
tax under the current Mauritius legislation at the rate of 0%. As from tax year
of assessment 2003/04, the Company is liable to tax in Mauritius at 15% on its
taxable income. It is however entitled to a tax credit equivalent to the higher
of the actual foreign tax suffered and 80% of the Mauritian tax on its foreign
source income. Capital gains of the Company are exempt from tax in Mauritius.
For the years ended 31 December 2002 and 2001, no provision for Mauritius taxes
are considered necessary as a result of accumulated tax losses recorded by Taj
Investments Ltd. The foregoing is based on current interpretation and practice
and is subject to any future changes in Indian or Mauritian tax laws and in the
treaty between India and Mauritius.
The subsidiaries InCentive Investment (Jersey) Ltd and BioCentive Limited,
Hamilton, Bermuda, are not subject to income taxes.
As a consequence of the tax status of InCentive Capital AG, no deferred tax
assets are recognized on timing differences and on tax loss carry-forwards.
Taxes payable as a result of consolidation are dealt with in accordance with IAS
12.
A- 37
Consolidated Financial Information of InCentive Capital AG
TREASURY SHARES
Treasury shares are own shares owned by the Company. They are valued at purchase
cost and are presented as a deduction from equity. Gains or losses on sales of
own shares are charged or credited to the retained earnings account in equity.
B. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
31 DECEMBER 2002 31 DECEMBER 2001
NOTE 1 CASH AND CASH EQUIVALENTS CHF CHF
Cash in hand and at banks 24 043 056 37 538 438
Time deposits 157 673 640 217 697 538
TOTAL 181 716 696 255 235 976
</Table>
Note 2 INVESTMENTS
Details of the investments held at 31 December 2002 and 2001 are shown in the
Consolidated schedule of investments. Details of the realized and unrealized
gains and losses for the year of 2002 are presented in the Consolidated schedule
of movements in investments.
<Table>
<Caption>
DATE POSITIONS MARKET VALUE LATEST EXPIRING DATE COVERING SHARES CONTRACT VOLUME
31.12.2002 6 purchased call 29 159 060 21.05.2003 669 000 140 070 000
options
31.12.2002 9 sold put options 10 112 574 21.05.2003 769 000 161 400 000
31.12.2001 13 purchased call 1 646 576 20.04.2002 326 300 100 754 746
options
31.12.2001 6 purchased put 326 108 16.02.2002 31 000 2 310 318
options
31.12.2001 11 sold put 81 544 304 26.07.2002 346 500 167 794 930
options
31.12.2001 4 sold call 463 628 31.01.2002 38 600 8 131 282
options
</Table>
The "private equity" investment in MI Capital LLC is a pure investment without
further obligations to the Company.
<Table>
<Caption>
31 DECEMBER 2002 31 DECEMBER 2001
NOTE 3 OTHER RECEIVABLES CHF CHF
Loan due from Digital-Logic AG 0 10 313 000
Withholding taxes receivable 340 552 1 481 534
Other accounts receivable 39 068 3 990
Loan due from Restek Ltd 4 002 000 0
TOTAL 4 381 620 11 798 524
</Table>
<Table>
<Caption>
31 DECEMBER 2002 31 DECEMBER 2001
NOTE 4 ACCOUNTS PAYABLE CHF CHF
Directors' fee 701 662 451 748
Social security 33 308 50 636
Accounting and administration fees 93 087 187 511
Asset management fees 2 304 201 2 281 915
TOTAL 3 132 258 2 971 810
</Table>
A- 38
Consolidated Financial Information of InCentive Capital AG
<Table>
<Caption>
31 DECEMBER 2002 31 DECEMBER 2001
NOTE 5 ACCRUED EXPENSES CHF CHF
Investment advisory fees 93 883 482 287
Professional fees 165 983 0
Custodian fees 1 434 634 118
Audit and administration fees 163 009 471 627
Management fees 2 081 400 4 833 300
Guarantee 750 000 0
Capital tax 404 894 420 397
TOTAL 3 660 603 6 841 729
</Table>
<Table>
<Caption>
NOTE 6 OTHER CURRENT LIABILITIES 31 DECEMBER 2002 31 DECEMBER 2001
CHF CHF
Tax at source 56 000 40 360
TOTAL 56 000 40 360
</Table>
Note 7 INCOME TAX ACCRUAL
The income tax accrual can be split into current and deferred tax accruals as
follows:
CURRENT TAX ACCRUAL
Balance at 1 January 2002 157 235
Taxes paid 0
Subtotal at 31 December 2002 157 235
DEFERRED TAX ACCRUAL
Provision at 1 January 2002 68 246
Release of deferred tax accrual -68 246
Subtotal at 31 December 2002 0
TOTAL INCOME TAX ACCRUAL 157 235
Tax expense is calculated using the liability method, in which deferred taxes
are determined by applying a future expected tax rate on temporary differences
arising between the tax basis of assets and liabilities and their carrying
values for financial reporting purposes.
Of the net consolidated income before tax of InCentive Capital AG of CHF 178 431
092 (gain) in 2002 (2001: CHF - 441 335 917 (loss)), CHF 977 416 (gain) (2001:
CHF - 25 564 530 (loss)) came from Taj Investments Ltd, Mauritius, where the
applicable tax rate is nil.
The current tax accrual resulted from dividends not qualifying for participation
relief, realized capital gains and interest in Incentive Investment AG prior to
the merger on 31 October 2000 that are subject to the federal income tax. The
deferred tax accrual results from unrealized capital gains not qualifying for
participation relief of CHF 0 (2001: CHF 870 480) that are subject to the
federal income tax at the effective rate of 7.84%.
At 31 December 2002 InCentive Capital AG had Swiss tax loss carry-forwards of
CHF 41 878 941 (2001: CHF 78 036 573). As the utilization of these loss
carry-forwards by set-off against future taxable profits is very uncertain due
to the participation relief for federal income tax, and the effective income tax
rate may be nil, no deferred tax asset is recognized in the financial statement.
Note 8 SHARE CAPITAL
The Company's share capital as per 31 December 2002 comprised 2 147 202 (31
December 2001: 2 147 202) bearer shares with a nominal value of CHF 20 each.
A- 39
Consolidated Financial Information of InCentive Capital AG
At the ordinary general meeting of 15 May 2002, the Board of Directors of
InCentive Capital was authorized as per Article 651 of the Swiss Code of
Obligations to increase the share capital by maximum CHF 21 472 020 divided into
1 073 601 bearer shares with a nominal value of CHF 20 ("Genehmigte
Kapitalerhohung") which had not been issued by 31 December 2002.
In addition, at the ordinary general meeting of 15 May 2002, the Board of
Directors of InCentive Capital was authorized as per Article 653 of the Swiss
Code of Obligations to increase the share capital by maximum CHF 21 472 020
divided into 1 073 601 bearer shares with a nominal value of CHF 20 ("Bedingte
Kapitalerhohung") which had not been issued by 31 December 2002.
Note 9 SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE
<Table>
<Caption>
THE SHARE CAPITAL COMPRISES AS FOLLOWS: 31 DECEMBER 2002 31 DECEMBER 2001
Number of authorized, issued and paid shares 2 147 202 2 147 202
Nominal value per share (in CHF) 20 20
Gain/Loss ( - ) per year (in CHF) 178 431 092 -441 335 917
Weighted average number of shares 2 107 232 2 142 420
Net gain/loss ( - ) per share (in CHF) 85 -206
Net asset value (excluding treasury shares) per share as per
31 December (in CHF) 326 243
</Table>
<Table>
<Caption>
31 DECEMBER 2002 31 DECEMBER 2001
NOTE 10 OTHER INCOME CHF CHF
Released accruals 2 081 400 0
Other 2 384 459 237 276
TOTAL 4 465 859 237 276
</Table>
Note 11 OTHER ADMINISTRATIVE EXPENSES
Prior-year figure considers the costs of the public tender offer for all the
publicly held registered shares of Sulzer AG, Winterthur.
Note 12 RESTRICTIONS ON ASSETS
There are no restrictions on the Companies' assets.
Note 13 FINANCIAL INSTRUMENTS
The various risks associated with the financial instruments can be summarized as
follows:
Concentration risk
At 31 December 2002, significant portions of the Company's net assets are
concentrated in:
- - Current assets and short-term time deposits with various first-class
counterparties.
- - Indian securities, which involve certain consideration and risks not typically
associated with investments in other more developed markets. In addition to
its smaller size, lower liquidity and greater volatility, the Indian
securities market is less developed and there is often substantially less
publicly available information about Indian issuers than there is in developed
markets.
- - Future economic and political developments in India could adversely affect the
liquidity or value, or both, of the securities in which the Companies are
invested. Furthermore, the Companies' ability to hedge their currency risk is
limited and, accordingly, the Companies may be exposed to currency
devaluations and other exchange rate fluctuations.
- - Financial instruments (shares,options etc.) of/on a single company as the
purpose of InCentive Capital AG is the direct or indirect acquisition,
management and disposal of all forms of participations in quoted and unquoted
domestic and foreign companies with no regard to risk diversification.
A- 40
Consolidated Financial Information of InCentive Capital AG
CREDIT RISK
The Company has no significant concentrations of credit risk. Cash and cash
equivalents and investments are held with first-rate financial institutions.
MARKET RISK
In keeping with its objectives a major part of the Company's assets are invested
in marketable securities. The Company is thus subject to price fluctuations in
currency and stock markets.
INTEREST RISK
The Company is in principal equity-financed and has no long-term interest rate
risk exposures.
Note 14 MANAGEMENT FEES
MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT INC.
Morgan Stanley Dean Witter Investment Management Inc., New York, has been
Investment Advisor of Taj Investments Ltd. For its services under the Investment
Advisory Agreement, the Investment Advisor receives a fee from Taj Investments
Ltd, Mauritius, payable in US Dollars at an annual rate of 1% of Taj Investments
Ltd average net assets (the "Fixed Fee"). The Fixed Fee is calculated on the
Friday of each week ("Valuation Date"), and is paid quarterly in arrears.
INCENTIVE ASSET MANAGEMENT AG
InCentive Asset Management AG, Zurich, (100% owned by Rene Braginsky), has been
Investment Advisor of InCentive Capital AG. For its services under the
Investment Advisory Agreement, the Investment Advisor receives a fee from
InCentive Capital AG, Zug, payable in Swiss Francs and based on a quarterly rate
of 0.3% of InCentive Capital AG's net assets at the end of each quarter.
MERLIN BIOMED NORTH, INC.
Merlin Biomed North, Inc., New York, has been an Investment Advisor for
BioCentive Ltd. For services under the Investment Advisory Agreement, the
Investment Advisor receives a management fee from BioCentive Ltd, payable in US
Dollars and based on a quarterly rate of 0.2% of the net asset value of the
managed assets at the beginning of each quarter. The Investment Advisor is
entitled to a performance fee of up to 16% of the appreciation in excess of a
hurdle of 8% of the net asset value of the managed assets, payable at year-end.
The agreement has been cancelled in August 2002.
Note 15 RELATED PARTY TRANSACTIONS
Parties are considered to be related if one party has the ability to control the
other party or to exercise significant influence over the other party in making
financial or operational decisions.
The following related parties are considered relevant to the Company as of 31
December 2002 as well as 31 December 2001:
Members of the board of directors and the CEO of the Company
InCentive Asset Management AG, Zurich, Switzerland
Mesco Ltd, Ridgefield, USA
Bar & Karrer, Zurich, Switzerland
<Table>
<Caption>
THE RELATED PARTY TRANSACTIONS COMPRISE THE FOLLOWING: 31 DECEMBER 2002 31 DECEMBER 2001
Asset management fees 8 688 451 8 185 607
Legal and advisory fees 671 204 590 234
Directors' remuneration 823 153 497 568
</Table>
The related party transactions are based on customary business contracts (see
Note 14) and are effected at normal market conditions.
Note 16 CONTINGENT LIABILITIES AND OFF-BALANCE SHEET TRANSACTIONS
According to a shareholders agreement concerning Restek Ltd, dated 19/24/25 July
2002 InCentive Investment (Jersey) Ltd has agreed to subscribe - upon first
request from the directors of Restek Ltd - another 500 registered shares at GBP
0.10 par value each under exchange of the subscription rights and at the same
time to grant a further interest-free loan of CHF 3 000 000 to Restek Ltd.
A- 41
Consolidated Financial Information of InCentive Capital AG
On behalf of InCentive Investment (Jersey) Ltd, letters of indemnity regarding
unlimited amounts and maturities were issued in favour of five international
banks. In these letters, InCentive Capital AG guarantees the full and punctual
payment of all amounts owed by the subsidiary in connection with transactions
entered into with the five banks.
The Company shows no borrowings of securities as at 31 December 2002 (31
December 2001: 174 299 registered shares of Sulzer AG, fair value per share CHF
255, fair value in total CHF 44 446 245).
There were no other contingencies and off-balance sheet transactions as at the
balance sheet dates, with the exception of the option contracts mentioned in
Note 2 above.
Note 17 CUSTODIANS
As at 31 December 2002 shares are deposited at:
- - Swiss American Securities Inc, New York
- - UBS, Zurich
- - SIS SegaInterSettle, Zurich
- - Bank Sal. Oppenheim jr. & Cie (Schweiz) AG, Zurich
- - Sal. Oppenheim jr. & Cie KgaA, Cologne
- - BNP Paribas, New York
- - JP Morgan Chase, Luxembourg
- - ABN AMRO Bank N.V., Amsterdam Zurich Branch
- - Lehman Brothers Finance S.A., Zurich
- - Morgan Stanley Dean Witter, New York
- - Prudential Securities Inc, New York
Note 18 SIGNIFICANT SHAREHOLDERS
The Company has issued exclusively bearer shares. The Company is aware of the
following shareholders with interests exceeding 5%:
<Table>
<Caption>
31 DECEMBER 2002
Zurich Financial Services, Zurich, Switzerland 24.96%
III Institutional Investors International Corp., Grand
Cayman, Cayman Islands 20.87%
Rene Braginsky, Zurich, Switzerland 20.00%
Family Hans Kaiser, Switzerland 11.01%
</Table>
Note 19 SEGMENT REPORTING
InCentive Capital AG's sole business segment is the direct or indirect
acquisition, management and disposal of all forms of participation in quoted and
unquoted domestic and foreign companies, resulting in no segment disclosure
reporting as per IAS 14.
Note 20 SUBSEQUENT EVENTS
On 20 March 2003, Smith & Nephew Group Plc, London, UK, pre-announced two
parallel public tender offers for all publicly held shares of Centerpulse Ltd
and InCentive Capital Ltd.
This was the consequence of a transaction agreement of the same date in which
Smith & Nephew and Centerpulse agreed to combine their businesses to create a
leading global orthopedics company. Under said transaction agreement, Smith &
Nephew undertook to achieve this combination by way of a share and cash offer
for all publicly held registered shares in Centerpulse.
A- 42
With some 19% of the share capital and voting rights of Centerpulse, InCentive
Capital is the largest shareholder of the company. Therefore, Smith & Nephew
also entered into a transaction agreement with InCentive Capital under which it
undertook to acquire, inter alia, InCentive Capital's interest in Centerpulse by
way of a share and cash offer for all publicly held shares of InCentive Capital.
The transaction agreement was complemented by a tender agreement, in which
InCentive's main shareholders, namely Zurich Versicherungs-Gesellschaft, III
Institutional Investors International Corp., Mr. Rene Braginsky and the Hans
Kaiser family, who together hold approximately 77% of InCentive Capital's
outstanding shares, undertook, inter alia, to tender their InCentive Capital
shares under the tender offer submitted by Smith & Nephew Group Plc. The Board
of Directors of InCentive Capital has recommended its shareholders to accept the
offer. For details of the proposed transactions we refer to the offer documents.
On behalf of InCentive Investment (Jersey) Ltd, InCentive Asset Management AG
signed a subscription form, dated 30 December 2002 re Bogar AG, Zurich, for 15
100 registered shares with a par value of CHF 10 each at a price of CHF 360,
moreover a told maximum of 19% of Bogar AG.
There have been no other material post-balance sheet events that would require
disclosure or adjustment to the financial statements.
On 19 March 2003, the board of directors reviewed the financial statements and
authorized them for issue. These financial statements will be submitted to the
annual general meeting of shareholders to be held on 5 June 2003 for approval.
A- 43
Statutory Financial Information of InCentive Capital AG
BALANCE SHEET
31 December 2002/2001
<Table>
<Caption>
31 DECEMBER 2002 31 DECEMBER 2001
CHF CHF
ASSETS
Cash and due from banks 111 232 527 113 498 798
Investments
Marketable securities 2 580 000 7 790 000
Replacement values of forward forex contracts 0 1 674 802
Due from group companies 0 108 837 655
Other receivables 341 859 1 484 302
Accrued income and prepaid expenses 14 847 62 604
TOTAL CURRENT ASSETS 114 169 233 233 348 161
Non-current financial investments 483 926 4 152 421
Own shares 3 720 088 9 147 627
Participations 434 084 303 312 052 508
TOTAL NON-CURRENT ASSETS 438 288 317 325 352 556
TOTAL ASSETS 552 457 550 558 700 717
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable 3 068 755 2 176 768
Due to group companies 1 404 391 25 364 491
Accrued expenses 1 746 230 713 937
Provision for participations 0 10 241 000
Other current liabilities 56 000 40 360
TOTAL CURRENT LIABILITIES 6 275 376 38 536 556
Share capital 42 944 040 42 944 040
General legal reserve 461 536 688 506 109 149
Reserve for own shares 3 720 088 9 147 627
Other reserve 50 000 000 0
Accumulated loss -12 018 642 -38 036 655
TOTAL SHAREHOLDERS' EQUITY 546 182 174 520 164 161
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 552 457 550 558 700 717
</Table>
A- 44
Statutory Financial Information of InCentive Capital AG
INCOME STATEMENT
1 January to 31 December 2002/2001
<Table>
<Caption>
1 JANUARY 2002 - 1 JANUARY 2001 -
31 DECEMBER 2002 31 DECEMBER 2001
CHF CHF
Interest income 7 094 528 7 419 304
Dividend income 206 163 303 343 000
Gain/loss (-) on investments 2 783 281 -16 808 978
Gain/loss (-) on own shares 1 253 968 -183 691
Other income 21 732 5 612
TOTAL INCOME/LOSS (-) 217 316 812 -9 224 753
Interest expense 1 002 219 821 731
Administration fees 3 355 906 15 646 746
Asset management fees 8 908 138 8 470 276
Depreciation of participations 177 968 205 0
TOTAL EXPENSE 191 234 468 24 938 753
GAIN/LOSS (-) FOR THE YEAR BEFORE TAX 26 082 344 -34 163 506
Taxation 64 331 61 645
GAIN/LOSS (-) FOR THE YEAR 26 018 013 -34 225 151
</Table>
A- 45
Consolidated Financial Information of InCentive Capital AG
NOTES TO THE STATUTORY FINANCIAL STATEMENTS
as of 31 December 2002
<Table>
<Caption>
CAPITAL INTEREST SHARE CAPITAL
NOTE 1 SIGNIFICANT PARTICIPATIONS BUSINESS ACTIVITY IN % CHF
BioCentive AG, Zug, Switzerland Investments 100 100 000
BioCentive Limited, Hamilton, Bermuda Investments 100 1 500 000
Centive AG, Zug, Switzerland Investments 100 100 000
ImmoCentive AG, Zug, Switzerland Investments 100 100 000
InCentive Investment (Jersey) Limited, St Investments 100 7 300 000
Helier, Jersey
InCentive Investment Services AG, Zurich, Investments 100 500 000
Switzerland
Taj Investments Limited, Port Louis, Investments 100 284 303
Mauritius
TOTAL SIGNIFICANT PARTICIPATIONS 9 884 303
</Table>
<Table>
<Caption>
31 DECEMBER 2002 31 DECEMBER 2001
NOTE 2 SHAREHOLDERS' EQUITY CHF CHF
SHARE CAPITAL 42 944 040 42 944 040
GENERAL LEGAL RESERVE
BEGINNING OF PERIOD 506 109 149 515 256 776
Allocation to other reserve -50 000 000 0
Allocation (-)/reallocation to/from the reserve for own 5 427 539 -9 147 627
shares
ENDING OF PERIOD 461 536 688 506 109 149
</Table>
A- 46
Statutory Financial Information of InCentive Capital AG
<Table>
<Caption>
31 DECEMBER 2002 31 DECEMBER 2001
RESERVE FOR OWN SHARES CHF CHF
BEGINNING OF PERIOD 9 147 627 0
38 427 bearer shares at CHF 20 par value each, repurchased 10 575 504
at average CHF 275.2102 from 3 July 2001 to 31 December
2001
32 994 bearer shares at CHF 20 par value each, repurchased 9 644 864
at average CHF 292.3217 from 1 January 2002 to 31 December
2002
3 959 bearer shares at CHF 20 par value each, sold at -1 244 186
average CHF 314.2677 from 2 August 2001 to 31 December 2001
54 829 bearer shares at CHF 20 par value each, sold at -16 326 371
average CHF 297.76888 from 1 January 2002 to 31 December
002
Realized gain/loss (-) on own shares 1 253 968 -183 691
ENDING OF PERIOD 3 720 088 9 147 627
OTHER RESERVE
BEGINNING OF PERIOD 0 0
Allocation from general legal reserve 50 000 000 0
ENDING OF PERIOD 50 000 000 0
</Table>
<Table>
<Caption>
31 DECEMBER 2002 31 DECEMBER 2001
NOTE 3 AUTHORIZED AND CONDITIONAL CAPITAL INCREASE CHF CHF
Authorized share capital increase 21 472 020 21 472 020
Conditional share capital increase 21 472 020 0
</Table>
<Table>
<Caption>
31 DECEMBER 2002
NOTE 4 SIGNIFICANT SHAREHOLDERS ----------------
The Company has issued exclusively bearer shares and is
aware of the following shareholders with interests exceeding
5%:
Zurich Financial Services, Zurich 24,96%
III Institutional Investors International Corp., Grand 20,87%
Cayman, Cayman Islands
Rene Braginsky, Zurich 20,00%
Family Hans Kaiser 11,01%
</Table>
Note 5 GUARANTEES
On behalf of InCentive Investment (Jersey) Ltd, letters of indemnity regarding
unlimited amounts or maturities were issued in favour of five international
banks. In these letters, InCentive Capital AG guarantees the full and punctual
payment of all amounts owed by the subsidiary in connection with transactions
entered into with the five banks.
A- 47
Statutory Financial Information of InCentive Capital AG
CURRENT ADJUSTMENT OF THE NET LOSS FOR THE PERIOD
<Table>
<Caption>
31 DECEMBER 2002 31 DECEMBER 2001
CHF CHF
Loss brought forward -38 036 655 -3 811 504
Gain/loss (-) for the period 26 018 013 -34 225 151
NET LOSS AT THE END OF THE PERIOD -12 018 642 -38 036 655
</Table>
A- 48
SHAREHOLDER INFORMATION
REGISTERED AND PRINCIPAL OFFICE InCentive Capital AG, Zug, Switzerland
PRINCIPAL SHAREHOLDERS Zurich Financial Services Group 25%
III Institutional Investors International
Corp. 21%
Rene Braginsky 20%
Hans Kaiser Family 11%
TYPE OF SECURITIES Bearer shares; each share carries one vote
OUTSTANDING SHARES 2 147 202
NOMINAL VALUE PER SHARE CHF 20
LISTING SWX Swiss Exchange, investment companies
segment
SECURITY NUMBER 286089
STOCK INFORMATION
Telekurs INC
Bloomberg INC SW
Reuters ICVZ.S
NAV PUBLICATION Finanz & Wirtschaft
Financial Times
REPORTING Annual Report, Interim Report
Permanent information on the internet
CONTACT ADDRESS, INVESTOR
RELATIONS Raoul Bloch
InCentive Asset Management AG
Todistrasse 36
CH-8002 Zurich
Phone +41 (1) 205 93 00
Fax +41 (1) 205 93 05
mail@incentiveasset.ch
www.incentivecapital.ch
A- 49
InCentive Capital AG
Baarerstrasse 8
CH-6301 Zug
Phone +41 41 712 29 45
Fax +41 41 712 29 46
mail@incentivecapital.ch
www.incentivecapital.ch
A- 50
ANNEX B
[EXCERPTS]
ANNUAL REPORT 2001 INCENTIVE CAPITAL
B- 1
INCENTIVE CAPITAL AT A GLANCE
InCentive Capital AG is an investment company
domiciled in Zug, Switzerland. Its corporate
history started in the form of Incentive
Investment AG, which was incorporated in 1985.
Incentive Investment was merged into India
Investment AG at the end of October 2000, and
renamed InCentive Capital. It is listed on the
investment companies segment of the SWX Swiss
Exchange.
InCentive Capital acquires stakes in Swiss or
foreign public or private companies. Its primary
purpose is to catalyse change in companies which
in the opinion of InCentive Capital are
undervalued or which have strategic potential,
primarily through M&A transactions, restructuring
and participation in industry consolidation.
InCentive Capital also invests selectively in
areas such as healthcare, technology, and the
Indian economy.
From its foundation in 1985 to 31 December 2001,
the InCentive Group has achieved compounded
annual investment returns of approximately 20%.
KEY FIGURES
As of and for the year ended 31 December 2001
<Table>
Total shareholders' equity CHF million 511.8
Percentage cash of total assets Percent 40
Share price CHF 263
NAV per share CHF 243
</Table>
IN A NUTSHELL
- - Catalyst for change
- - Proven investment track record
- - Entrepreneurial investment strategy
B- 2
Catalyst for Change
B- 3
INVESTMENT APPROACH
B- 4
InCentive Capital's investment objective is to leverage its network, expertise
and financial resources to act as a catalyst for change. Target companies,
whether Swiss or foreign, private or public, will be undervalued in our opinion,
but will have strategic potential primarily through M&A transactions,
restructuring or participation in industry consolidation.
Key factors influencing investment decisions are determined by the opportunity
to:
- - build an equity position significant enough to catalyse change;
- - leverage such a position, either through the use of financial instruments or
through co-investments with strategic industrial or financial partners; and
- - exit the investment with above-average returns.
InCentive may initiate friendly or unsolicitate take-over bids in achieving its
investment objectives. InCentive also invests selectively in sectors such as
healthcare, technology and for the time being in companies with an India focus.
B- 5
CATALYST-FOR-CHANGE STRATEGY SINCE 1985
InCentive Capital, through its predecessor Incentive Investment, has developed a
track record as a catalyst for change since its founding in 1985.
India Investment, the smaller predecessor company of InCentive Capital, was
listed on the SWX Swiss Exchange in 1994, the year of its inception, and moved
to the investment companies' segment in 1997. India Investment's aim was to
achieve long-term capital growth, mainly through investments in securities of
Indian companies or in shares of international companies with interests in
India.
Incentive Investment purchased an initial stake in India Investment in 1994.
After successfully launching a public tender offer for all India Investment
shares in public hands in 2000, Incentive Investment merged the two companies,
and changed the name of the surviving entity, India Investment, to InCentive
Capital.
The formation of InCentive Capital reflects the result of several capital market
transactions such as an acquisition, reverse merger and capital increase,
thereby leveraging its expertise to its own corporate structure. The process
combines the strengths of the two predecessor companies and satisfies the
interests of all predecessor stakeholders. This was achieved in three respects.
First, InCentive Capital can access the capital markets through its listing on
the SWX Swiss Exchange. Second, a sectoral investment approach can be applied to
the combined portfolio, and third, the combined entities' market capitalization
was significantly boosted.
An overview of corporate activity since incorporation illustrates Incentive's
investment strategy and track record.
B- 6
INDUSTRIAL STRATEGY
In 1986, Incentive Investment accumulated a 60% stake in an undervalued
industrial holding company, Ateliers de Charmilles SA, Geneva, which became the
first vehicle for the execution of Incentive's industrial investment strategy.
At the time, Ateliers de Charmilles' major participation was a 49% holding in
Charmilles Technologies SA (spark erosion machines), which Incentive later sold
to Georg Fischer Ltd, Schaffhausen, giving the latter full control of Charmilles
Technologies. As part of the negotiated price, Ateliers de Charmilles acquired
options to take a participation in Georg Fischer. Ateliers de Charmilles used
these options as a platform to build a strategic 10% stake in Georg Fischer,
thereby becoming its principal individual shareholder. This stake was sold in
1990.
In 1987, Ateliers de Charmilles bought a majority stake in the privately owned
Roventa-Henex SA, Bienne, a leading Swiss company in the design and
manufacturing of private label prestige brand watches. The Roventa-Henex
participation was transferred to Incentive Investment, who managed the
investment actively until it was successfully sold in a management buy-out in
1997.
B- 7
MEDIA AND TELECOMMUNICATIONS STRATEGY
Proceeds from the industrial strategy were reinvested to implement a strategic
vision in the media and telecommunications sector. Incentive Investment
purchased a 31% stake in SECE Cortaillod Holding SA, a company with various
interests in cable manufacturing, telecommunications, energy, electronics and
distribution of electrical material, at a time when market perception of the
value of cable manufacturing assets was relatively low. SECE Cortaillod's most
notable investments - in addition to its own cable manufacturing plant - were a
46% stake in SACT Cossonay SA (holding substantial cable assets), and a 68%
stake in Rediffusion, the largest Swiss cable TV network with approximately 500
000 subscribers at the time.
In 1991, Ateliers de Charmilles concluded an agreement with Alcatel SA, Paris,
to cooperate in the Cossonay/Cortaillod matter. In 1993, due to their
significant combined influence, the pool partners, Ateliers de Charmilles and
Alcatel, induced Cortaillod to initiate a friendly bid for Cossonay. Cossonay
and Cortaillod were merged and the combined operations were refocused on cable
manufacturing, cable TV and the distribution of electrical equipment. In 1994,
in order to gain control of the Cortaillod Group, Alcatel offered to buy
Ateliers de Charmilles. Incentive Investment accepted the offer, provided the
same offer was made to the minority shareholders of Ateliers de Charmilles -
this voluntary equal treatment of all shareholders being a novum on the SWX
Swiss Exchange at that time.
B- 8
FINANCIAL SERVICES STRATEGY
A strategic participation was built up in Baloise, a major Swiss insurance
company, during 1997 and 1998. In 1999, Incentive Investment agreed with the
Zurich Financial Services Group to transfer its 23% stake in Baloise to INZIC
AG, a joint venture company in which Incentive Investment subsequently held 30%
and Zurich Financial Services 70%. In 2000, Incentive Investment sold its 30%
stake in INZIC AG to Zurich Financial Services Group for the amount of CHF 405
million.
B- 9
STRATEGY IN HEALTHCARE
InCentive Capital has exposure to the healthcare industry, including
biotechnology and medical technology, primarily through its subsidiary
BioCentive Limited, Bermuda. Many technological innovations during the last few
years such as genomics - the analysis of genetic variations within diverse
population groups - and gene function determination have been driven by
biotechnology companies. These technologies have nurtured new business models
capable of generating value independent of therapeutic product development. In
medical technology, InCentive Capital's investment focus is on medical devices
and instruments that will allow faster and/or more accurate diagnosis and/or
treatments of widespread diseases or health risk factors.
B- 10
STRATEGY IN TECHNOLOGY
InCentive views the current turmoil in the technology sector as an opportunity
to put capital to work in undervalued situations. The strategy involves
selecting companies who have validated their business model with real customers,
growing revenues and proprietary and defensible technologies. We view technology
in general and certainly the Internet strictly as a tool to make existing
business processes better, faster and more cost-effective. InCentive typically
invests with sophisticated partners at distressed valuations well below previous
financing rounds. Because of the current turbulence in the marketplace,
InCentive will try to secure liquidation preferences to provide economic returns
ahead of previous investors.
B- 11
STRATEGY IN INDIA INVESTMENTS
InCentive Capital is currently also invested in securities of Indian companies
and in international securities of companies with significant interests in
India. This was the principal activity of its predecessor India Investment. The
Indian portfolio, consisting of mostly publicly traded companies, is currently
managed by Morgan Stanley Dean Witter Investment Management Inc., New York.
InCentive Capital is regarding its India investments as a non-core activity, and
keeps all options open for any future action with this portfolio.
B- 12
INVESTMENT POLICY AND GUIDELINES
B- 13
InCentive Asset Management Ltd, acting as InCentive Capital's investment
manager, draws on the vast experience and expertise of its professionals to
manage InCentive Capital, as well as the subsidiaries InCentive Investment
(Jersey) Ltd and BioCentive Ltd, Bermuda. Our investment policy will continue to
be aimed at achieving sustainable, above-average returns on investment, with our
catalyst function remaining at the forefront.
The principal guidelines for implementing the investment policy are as follows:
GEOGRAPHIC FOCUS: Worldwide
INDUSTRY FOCUS: Industries where InCentive Capital can act as a catalyst for
corporate change. In addition, selective investments in growth industries, such
as biotechnology, medical technology and technology.
LIFE CYCLE OF COMPANIES: The life-cycle mix of investments will be
differentiated in various stages, considering technology, corporate and
financing aspects, and may range from start-up through all stages of
development.
SECURITIES: InCentive Capital may invest in equity and equity-related securities
such as common and preferred stock, equity-linked loans, warrants, options or
other derivative financial instruments, and debt and debt-related instruments,
either traded on an exchange or over-the-counter or which are currently
privately held. To the extent that the company's assets are not otherwise
invested as outlined above, the company may hold cash.
B- 14
INVESTMENT PERCENTAGE: There is no maximum that any one investment may
constitute, either as a percentage or the portfolio value at any given date, or
on the basis of cost relative to total shareholders' equity.
HEDGING POLICY: We may engage in hedging currency fluctuations.
BORROWING: Neither Swiss law nor the Articles of Association of InCentive
Capital restrict in any way the ability to borrow and raise funds. The decision
to borrow funds is approved by InCentive Capital's board of directors, and no
shareholders' resolution is required. We may borrow cash against, or in any
other way leverage, assets for investment purposes.
SHORT-SELLING: We may sell securities short.
CHANGE OF INVESTMENT OBJECTIVES, POLICY OR GUIDELINES: A change in the
investment objectives, policy or guidelines requires a two-thirds majority of
the board of directors. Shareholders' approval is not required. Any intention to
change the investment objectives, policies or guidelines will be communicated to
shareholders in a timely manner.
B- 15
CORPORATE PROFILE
B- 16
ORGANIZATIONAL STRUCTURE
(FLOWCHART)
1) Rene Braginsky, who acts as CEO and delegate of the board of directors of
InCentive Capital AG, holds 100% of the shares of InCentive Asset
Management Ltd.
2) The investment manager has a separate investment management contract with
InCentive Capital AG, and its respective subsidiaries, InCentive Investment
(Jersey) Ltd and BioCentive Limited, Bermuda.
3) Morgan Stanley Dean Witter Investment Management Inc. manages the
investments of Taj Investments Ltd, Mauritius.
4) Partially managed account by Merlin Biomed North, Inc.
B- 17
BOARD OF DIRECTORS
(KARL POHL PHOTO)
KARL OTTO POHL (born 1929, German)
Chairman of the board of directors
Karl Otto Pohl served as President of the German Bundesbank from 1980 to 1991.
From 1992-1998 he was Senior Partner of Bank Sal. Oppenheim jr. & Cie, Cologne.
He has held numerous board positions, in companies such as Bertelsmann Ltd., the
Robeco Group, Royal Dutch/Shell International, Unilever N.V. plc, Zurich Allied
Ltd. and Zurich Insurance Company. Mr. Pohl currently serves as a director of
Bank Sal. Oppenheim jr. & Cie (Schweiz) AG, Gabelli Funds Inc., and as an
advisory board member of The Carlyle Group, Barrick Gold, Rolls Royce and KPMG.
Mr. Pohl has received seven honorary doctorates since 1984.
(RENE BRAGINSKY PHOTO)
RENE BRAGINSKY (born 1949, Swiss)
CEO and delegate of the board of directors
Rene Braginsky is CEO and delegate of the board of directors. His financial
career started in the brokerage department of Union Bank of Switzerland in 1969,
where he spent seven years. This was followed by three years at Bank Vontobel,
before he joined Bank Sal. Oppenheim jr. & Cie (Schweiz) AG as Director of the
Institutional Investors division, a position held between 1980 and 1999. He
co-founded Incentive Investment in 1985. Rene Braginsky has been a director of
India Investment since 1994.
B- 18
[Hans Kaiser]
<Table>
HANS KAISER (born 1943, Swiss) Board member
</Table>
Hans Kaiser co-founded Incentive Investment in 1985. Prior to this, between 1978
and 1993, he served as a director of Maag Finanz AG, which he developed into an
investment company. He has held various financial positions since 1967, with
focus on credit management and management consulting, at, inter alia, UBS,
Hoechst (US), Guyerzeller Zurmont Bank AG and Bank fur Kredit- und Aussenhandel
AG. He studied economics in St. Gallen, Switzerland, obtaining a lic. oec.
[Joel Mesznik]
<Table>
JOEL MESZNIK (born 1945, American) Board member
</Table>
Joel Mesznik has served as president of Mesco Ltd, an international financial
advisory company, since 1990. Swiss-related advisory assignments have included
Incentive Investment, Swisscom AG, Ascom Holding and Oerlikon-Buhrle Holding AG
(now Unaxis Holding AG). He started his career at Citibank in 1970 and also
served as Managing Director of Drexel Burnham Lambert. Joel Mesznik is currently
a director of several investment and IT companies. His public duties have
included service on President Ford's Federal Energy Administration Advisory
Board and the United States Congress - Anthony Commission on Public Finance. He
holds a B.Sc. (Civil Engineering) from the City University of New York and an
MBA from Columbia University Graduate School of Business.
B- 19
[Eric Stupp]
<Table>
ERIC STUPP (born 1965, Swiss) Board member
</Table>
Eric Stupp is a partner in the law firm of Bar & Karrer, Zurich, where he
specializes in corporate law, mergers and acquisitions and capital market
transactions. He joined Bar & Karrer in 1994. He studied law in St. Gallen,
Switzerland. He also holds an LL.M. (Master of Law) degree from the University
of Chicago, USA. He is currently also director of Spuhl AG and L&P Swiss Holding
Company.
B- 20
ANNUAL DEVELOPMENT 2001
B- 21
ANNUAL RESULTS
<Table>
<Caption>
NET ASSET VALUE AS OF 31 DECEMBER 2001
Net asset value in CHF million 520.9
Per share in CHF 243
% change YTD -46%
</Table>
<Table>
<Caption>
SHARE PRICE AS OF 31 DECEMBER 2001
Per share in CHF 263
% change YTD -45%
</Table>
<Table>
<Caption>
PREMIUM SHARE PRICE VS. NAV
As of 31 December 2001 8%
</Table>
SHARE PRICE DEVELOPMENT 2001
[PROJECT FALCO LINE GRAPH]
B- 22
INVESTMENT PORTFOLIO
Net asset value of InCentive Capital Ltd as of 31 December 2001 amounted to CHF
520.9 million. Approximately 49% of this value is still available in cash and in
Swiss Francs. This provides InCentive with the necessary flexibility to act
quickly on certain changes in the capital market or in the course of the
transaction in strategic projects. The total investment, excluding forward forex
contracts, as of the end of 2001 was CHF 260.3 million. The breakdown of these
investments by industry, asset class and currency can be seen in the charts
below. The strategic participations in Sulzer AG and Sulzer Medica in the net
investment figure based on the International Accounting Standards (IAS) are not
visible, as the investment is a combination of direct holdings and holdings in
derivatives (puts and calls) of Sulzer AG shares and Sulzer Medica shares. By
the end of 2001 InCentive's investments in Sulzer represented an economic
exposure and corresponding voting right of approximately 5% of Sulzer's share
capital.
TOTAL INVESTMENTS AS OF 31 DECEMBER 2001
(in CHF million, excluding forward forex contracts, net)
[TOTAL INVESTMENTS GRAPH]
B- 23
STRATEGIC INVESTMENT
InCentive holds strategic investments in order to follow its catalyst-for-change
strategy. Our most prominent catalyst-for-change project in 2001 was the tender
offer for all outstanding Sulzer AG shares, which we have withdrawn due to the
fact that important conditions such as the abolition of voting restrictions and
the election of a new Sulzer board were not met.
During the first quarter of 2001 we went to great lengths to communicate clearly
our strategy as a catalyst for change, our thoughts about Sulzer Industry's
future, and our views on corporate governance and shareholder rights. These
activities have led to numerous new contacts with institutional investors,
particularly in Great Britain and the United States. We value these contacts
highly and look forward to working with them for future strategic investments.
Although we could not convince the majority of shareholders at Sulzer's AGM to
endorse our proposals, our initiative brought about benefits to all Sulzer
shareholders, including the spin-off of Sulzer Medica and the significant
reduction in the number of board members. Additionally, as a result of
InCentive's actions, Sulzer committed to abolish share voting and transfer
restrictions at the next AGM.
InCentive purchased its Sulzer investment by the end of December 2000.
Thereafter Sulzer Medica, at this time a 74% participation of Sulzer AG,
informed the public about the recall of certain manufacturing lots of Inter-Op
acetabular shells. The negative news flow concerning this recall culminated only
a few weeks after Sulzer's AGM in April 2001, and continued for almost the
entire year. The number of faulty hip-implant cases increased steadily, and was
further exacerbated by the recall of an additional product, a porous-coated
tibial baseplate. Consequently, the insurance coverage to finance the increasing
litigation claims was revealed to be insufficient. These events caused a
significant drop in Sulzer's and Sulzer Medica's share price. As a major
shareholder of both Sulzer and Sulzer Medica -- after its spin-off from Sulzer
in July 2001 -- InCentive was significantly impacted by the development of these
shares. The majority of InCentive's NAV decrease in 2001 is attributable to
Sulzer and Sulzer Medica.
B- 24
In the course of 2001 InCentive reduced its economic exposure in Sulzer AG,
while maintaining its ability to act as an active shareholder. By the end of
2001 InCentive's investments in Sulzer represented an economic exposure and
corresponding voting rights of approximately 5% of Sulzer's share capital.
During the fourth quarter of 2001 InCentive increased its investments in Sulzer
Medica, by buying the shares at relatively low levels. By the end of 2001
InCentive disclosed the crossing of the above-the-10% threshold in its holdings
of Sulzer Medica's share capital.
These participations are not visible in the net investment figure based on the
International Accounting Standards (IAS), as the investment is a combination of
direct holdings and holdings in derivatives (puts and calls) of Sulzer AG and
Sulzer Medica shares.
InCentive incurred losses from these investments, which are already incorporated
in InCentive's NAV as of the end of 2001. We will track the developments in
connection with the litigation claims very closely and will continue to
contribute actively to finding an acceptable solution for all stakeholders in
this respect. Sulzer's and Sulzer Medica's management will also have the
opportunity to focus on their individual businesses. We will evaluate them by
their ability to create value and keep their promises regarding the companies'
future business performance. At the same time, we will keep all our options open
for any future action regarding Sulzer and Sulzer Medica.
In parallel InCentive will continue in 2002 to leverage its network, expertise
and financial resources to act as a catalyst for change.
B- 25
INVESTMENTS IN HEALTHCARE
PERCENTAGE WITHIN HEALTHCARE PORTFOLIO (LONG)
<Table>
Igen Interational, Inc. 5%
Vernalis Group plc 5%
Tularik Inc. 5%
Shire Pharmaceuticals Group plc 4%
TOP-FOUR INVESTMENTS 19%
</Table>
The portfolio in the healthcare sector (long) represented 21% of total assets as
of 31 December 2001.
InCentive and its subsidiary BioCentive are convinced that the healthcare sector
will show sustainable above-average growth, driven by demographic developments,
innovation and the ever-growing demand for cost-efficient therapies.
2001, however, was a challenging year for investments in the healthcare sector.
Large cap pharmaceuticals were down for the year. The inherent risks of the drug
development process have increased, partially due to the more cautious approach
of the FDA. Biotech stocks were enormously volatile with two advances of greater
than 50% during the year interspersed with two declines of equal magnitude.
B- 26
In view of these market developments we initiated three measures in the course
of the year. First, we implemented a new investment strategy by reducing the
high concentration of our portfolio in order to improve the risk-reward profile
of our investments. Second, we established a managed account of USD 20 million
managed as a Long/Short Hedge Fund by Merlin BioMed North, Inc., New York. This
Hedge Fund is investing in all areas of healthcare, extending our expertise and
holdings into healthcare services and research tools. And third, we began to
sell stocks short in order to take advantage of overpriced situations as well as
to control our market exposure.
2002 will be an important year for drug launches from biotechnology companies as
regulators, particularly in the US, consider the approval of at least 15 to 20
new drug applications. In our view, the successful rollout of the majority of
these new drugs will help remind investors of the values in the sector.
B- 27
INVESTMENTS IN TECHNOLOGY
PERCENTAGE WITHIN TECHNOLOGY PORTFOLIO (LONG)
<Table>
MU-centive LLC 26%
BCAB AG 11%
AIC Advanced Integration Company AG 10%
TOP-THREE INVESTMENTS 47%
</Table>
The Technology Portfolio (long) represents 6% of the total assets of InCentive
Capital Ltd as of 31 December 2001.
The major holdings of InCentive in the technology sector are in MU-centive LLC,
BCAB AG and AIC Advanced Integration Company AG. MU-centive is a vehicle that
has invested in the following three companies: USADATA, a company which provides
large organizations with technology-based direct marketing tools and an
outsourced infrastructure platform to facilitate the sales process; Pixel
Devices, a company that designs and produces image sensor products; and
Inceptor, a company that has a proprietary technology which permits online
marketing managers to apply offline expertise to obtain visibility, control and
analysis. BCAB AG is a portfolio of public and private investments in the
technology sector. Other holdings include investments in AIC Advanced
Integration Company AG, a Swiss software company developing an application
software solution for the healthcare/insurance industry.
B- 28
During the reporting period the technology industry has been severely impacted
by the downward adjustments to valuations in both the public and private equity
sectors. Nevertheless, InCentive believes that the current difficulties
encountered in the technology sector are an excellent opportunity to invest in
undervalued situations. The strategy involves selecting companies who have
validated their business model with real customers and growing revenues, and
which own proprietary technologies.
Pursuant to the above strategy InCentive has made investments during 2001 in the
following companies: NetBytel, a US company that uses proprietary voice
recognition middleware in applications like call centres and web sites;
Inceptor, where InCentive increased its stake during 2001.
B- 29
INVESTMENTS IN INDIA
PERCENTAGE WITHIN INDIA PORTFOLIO
<Table>
Hero Honda Group 9%
Infosys Technologies Ltd 7%
Housing Development Finance Corp. Ltd 6%
TOP-THREE INVESTMENTS 22%
</Table>
The India Portfolio represents 18% of the total assets of InCentive Capital Ltd
as per 31 December 2001.
InCentive Capital is currently invested in securities of Indian companies and in
international securities of companies with interests in India. This was the
principal activity of its predecessor India Investment AG. The India portfolio,
consisting mostly of publicly traded companies, is currently managed by Morgan
Stanley Dean Witter Investment Management Inc., New York.
The continued turbulence in the global equity markets combined with regional
political developments impacted considerably the Indian market in 2001. For the
year ended 2001 the India Portfolio of InCentive decreased in value by 18%.
B- 30
InCentive's largest investments in India include: Hero Honda Group, the leader
in the motorcycle segment in India, with a market share of about 50%; Infosys
Technologies, one of the largest listed information technology services
companies in India; Housing Development Finance Corp., the market leader in the
Indian mortgage market with a 55% market share and one of the strongest
franchises in the retail finance business.
During 2001 InCentive refocused the investment strategy of the India Portfolio
from an index-based benchmark portfolio to an absolute-return-based portfolio.
This entailed the reduction of the number of securities from 80 to approximately
45 securities in the portfolio. Based on the refocused strategy the portfolio is
better placed to capitalize on the anticipated recovery of the Indian market.
InCentive Capital is regarding its India investments as a non-core activity, and
keeps all options open for any future action with this portfolio.
B- 31
OUTLOOK 2002
B- 32
We are convinced we are looking forward to a promising future because the
current economic turmoil provides attractive investment opportunities. Target
companies will be undervalued in our opinion, but will have strategic potential
primarily through M&A transactions, restructuring or participation in industry
consolidation. InCentive Capital has a healthy and strong balance sheet with a
high level of liquidity in order to capitalize effectively on potential
opportunities. The board of directors and the management of InCentive will
continue carefully to identify and evaluate projects where the company, with its
network, expertise and financial resources, can act as a catalyst for change
with a view to achieving an above-average investment return.
B- 33
FINANCIAL REPORT
B- 34
Consolidated Financial Information of InCentive Capital AG
CONSOLIDATED BALANCE SHEET
31 December 2001/2000
<Table>
<Caption>
31 DECEMBER 2001 31 DECEMBER 2000
NOTE CHF CHF
ASSETS
Cash and due from banks 1 255 235 976 425 814 757
Investments long 2
Marketable securities 317 076 458 474 456 611
Replacement values of derivatives 1 972 695 32 439 201
Private equity 37 415 552 33 949 089
Replacement values of forward forex contracts 3 774 924 2 097 460
Receivables for investments sold 3 203 698 7 233 640
Accrued income and prepaid expenses 251 967 762 248
Other receivables 3 11 798 524 11 049 719
TOTAL ASSETS 630 729 794 987 802 725
LIABILITIES AND SHAREHOLDERS' EQUITY
Payables for securities purchased 3 284 824 7 125 770
Borrowings from prime broker 8 490 512 0
Accounts payable 4 2 971 810 2 847 026
Investments short 2
Marketable securities 14 129 733 0
Replacement values of derivatives 82 007 932 6 552 940
Replacement values of forward forex contracts 918 537 0
Accrued expenses 5 6 841 729 7 237 578
Other current liabilities 6 40 360 235 371
Income tax accrual 7 225 481 1 254 249
TOTAL CURRENT LIABILITIES 118 910 918 25 252 934
Share capital 8, 9 42 944 040 42 944 040
Treasury shares -9 147 627 0
Paid-in surplus 249 723 240 249 723 240
Retained earnings 228 299 223 669 882 511
TOTAL SHAREHOLDERS' EQUITY 511 818 876 962 549 791
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 630 729 794 987 802 725
</Table>
B- 35
Consolidated Financial Information of InCentive Capital AG
CONSOLIDATED INCOME STATEMENT
1 January to 31 December 2001/2000
<Table>
<Caption>
1 JANUARY 2001 - 1 JANUARY 2000 -
31 DECEMBER 2001 31 DECEMBER 2000
NOTE CHF CHF
Interest income 9 466 549 3 214 211
Dividend income 6 222 123 2 902 937
Realized loss (-)/gain on investments, net -352 298 170 290 381 572
Unrealized loss on investments, net -68 632 776 -356 679 615
Unrealized gain on investments due to foreign exchange, net 2 621 342 183 473
Realized and unrealized loss on exchange, net -9 873 411 -10 259
Other income 10 237 276 3 773 805
TOTAL LOSS -412 257 067 -56 233 876
Interest expense 421 043 291 194
Investment advisory fees 11 10 283 056 5 221 702
Custodian and administration fees 1 078 204 297 593
Other administrative expenses 12 17 296 547 2 221 908
TOTAL EXPENSE 29 078 850 8 032 397
LOSS FOR THE YEAR BEFORE TAX -441 335 917 -64 266 273
Taxation 0 0
LOSS FOR THE YEAR -441 335 917 -64 266 273
EARNINGS PER SHARE
Loss per share 9 -206 -101
Weighted average of total number of shares 2 142 420 636 195
</Table>
B- 36
Consolidated Financial Information of InCentive Capital AG
CONSOLIDATED STATEMENT OF CASH FLOWS
1 January 2000 to 31 December 2001
<Table>
<Caption>
1 JANUARY 2001 - 1 JANUARY 2001 -
31 DECEMBER 2001 31 DECEMBER 2000
CHF CHF
OPERATING ACTIVITIES
LOSS FOR THE YEAR -441 335 917 -64 266 273
ADJUSTED FOR FINANCING, INVESTMENT AND NON-CASH ACTIVITIES
Interest income -9 466 549 -3 214 211
Interest expense 421 043 291 194
Dividend income -6 222 123 -2 902 937
Realized loss/gain (-) on investment 352 298 170 -290 381 572
Unrealized loss on investment 66 011 434 356 679 615
Realized and unrealized loss/gain (-) on exchange 9 873 411 -183 473
Other income -237 276 -3 773 613
412 678 110 56 515 003
CASH FLOW BEFORE WORKING CAPITAL CHANGES -28 657 807 -7 751 270
Net changes of receivables and payables 6 686 865 -12 739 387
Interest received 10 305 713 2 476 589
Interest paid -397 120 -291 194
Taxes paid -423 080 0
NET CASH GENERATED FROM OPERATING ACTIVITIES -12 485 429 -18 305 262
INVESTING ACTIVITIES
Sale of investments 735 664 612 642 977 307
Purchase of investments -880 009 295 -434 159 492
Dividends received 6283 388 2 902 937
Cash from acquisition of Incentive Investment AG 0 92 560 868
CASH FLOW FROM INVESTING ACTIVITIES -138 061 295 304 281 620
FINANCING ACTIVITIES
Provided loan 0 -10 313 000
Capital reduction payment 0 -6 460 320
Capital increase 0 14 314 680
Paid-in surplus 0 139 224 075
Purchase of treasury shares -33 995 893 0
Sale of treasury shares 24 600 895 0
TOTAL CASH FLOW FROM FINANCING ACTIVITIES -9 394 998 136 765 435
EFFECTS OF EXCHANGE RATE DIFFERENCES -10 637 059 -826 858
DECREASE (-)/INCREASE IN CASH AND CASH EQUIVALENTS -170 578 781 421 914 935
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 425 814 757 3 899 822
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD 255 235 976 425 814 757
</Table>
B- 37
Consolidated Financial Information of InCentive Capital AG
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
1 January 2000 to 31 December 2001
<Table>
<Caption>
PAID-IN TREASURY PAID-IN RETAINED
CAPITAL SHARES SURPLUS EARNINGS NET EQUITY
CHF CHF CHF CHF CHF
AT 1 JANUARY 2000 33 300 000 -3 000 000 110 499 165 126 305 676 267 104 841
Reduction of nominal share capital
(333 000 bearer treasury shares from CHF 100 to
CHF 20 per share) -26 640 000 2 400 000 -24 240 000
Reduction of nominal share capital - shares
owned by Incentive Investment AG
(222 246 bearer shares from CHF 100 to
CHF 20 per share) 17 779 680 17 779 680
Net assets brought in from Incentive Investment
AG (net of transaction costs) 609 632 788 609 632 788
Capital increase of 1 098 468 bearer shares of
CHF 20 per share 21 969 360 -21 969 360 0
Capital increase of 715 734 bearer shares of CHF
20 per share 14 314 680 14 314 680
Net paid-in surplus due to capital increase of
715 734 bearer shares 139 224 075 139 224 075
Reallocation of treasury shares 3 000 000 3 000 000
Net loss for the year 2000 -64 266 273 -64 266 273
AT 31 DECEMBER 2000 42 944 040 0 249 723 240 669 882 511 962 549 791
128 427 bearer shares at CHF 20 par value each,
repurchased at average CHF 264.7098 from 3 July
2001 to 31 December 2001 -33 995 893 -33 995 893
93 959 bearer shares at CHF 20 par value each,
sold at average CHF 261.8258 from 2 August 2001
to 31 December 2001 24 600 895 24 600 895
Realized loss on treasury shares 247 371 -247 371 0
Net loss for the year 2001 -441 335 917 -441 335 917
AT 31 DECEMBER 2001 42 944 040 -9 147 627 249 723 240 228 299 223 511 818 876
</Table>
B- 38
Consolidated Financial Information of InCentive Capital AG
CONSOLIDATED SCHEDULE OF INVESTMENTS
<Table>
<Caption>
CHANGE DESCRIPTION FAIR VALUE FAIR VALUE
HOLDING HOLDING 31 DEC. 2001 31 DEC. 2000 CHANGE
31 DEC. 2001 31 DEC. 2000 CHF CHF CHF
1. MARKETABLE SECURITIES
A) INDIA INVESTMENTS
AUTOMOBILES & ANCILLARIES
0 77 451 -77 451 Escorts Ltd 0 362 708 -362 708
0 395 798 -395 798 GKN Driveshafts Ltd 0 294 039 -294 039
1 239 802 424 220 815 582 Hero Honda Group 10 701 704 12 870 515 -2 168 811
3 911 0 3 911 Hero Honda Motors Ltd 33 759 0 33 759
0 30 300 -30 300 MRF Ltd 0 1 280 227 -1 280 227
212 616 0 212 616 Punjab Tractors Ltd 1 271 209 0 1 271 209
0 105 739 -105 739 Sundaram Fasteners Ltd 0 1 248 235 -1 248 235
996 077 1 264 077 -268 000 Tata Engineering & Locomotive Co 3 422 707 3 857 275 -434 568
15 429 379 19 912 999 -4 483 620
CHEMICALS
0 259 472 -259 472 Asian Paints 0 2 491 500 -2 491 500
0 15 -15 Bayer (India) Ltd 0 309 -309
0 143 980 -143 980 Castrol (India) Ltd 0 1 365 779 -1 365 779
0 88 650 -88 650 Color-Chem International Corporation 0 248 354 -248 354
321 500 219 500 102 000 Reliance Industries Ltd 3 377 852 2 583 166 794 686
3 377 852 6 689 108 -3 311 256
CONSTRUCTION & HOUSING
538 175 135 094 403 081 Gujarat Ambuja Cements Ltd 3 519 728 741 457 2 778 271
53 000 0 53 000 Gujarat Ambuja Cements GDR USD 354 173 0 354 173
3 873 901 741 457 3 132 444
CONSUMER & HOUSEHOLD GOODS
96 602 106 602 -10 000 Britannia Industries Ltd 2 049 197 2 977 211 -928 014
750 382 1 627 770 -877 388 Dabur India Ltd 1 754 278 3 825 603 -2 071 325
168 329 19 100 149 229 Nestle India Ltd 2 990 577 363 919 2 626 658
0 206 150 -206 150 Reckitt & Coleman 0 1 878 943 -1 878 943
150 777 180 377 -29 600 SmithKline Beecham Consumer Health 2 050 588 2 743 922 -693 334
0 236 347 -236 347 Tata Tea Ltd 0 1 816 134 -1 816 134
0 85 000 -85 000 Tata Tea GDS 0 654 277 -654 277
0 607 148 -607 148 Titan Industries Ltd 0 1 270 954 -1 270 954
8 844 640 15 530 963 -6 686 323
ELECTRICAL & ELECTRONICS
0 6 271 -6 271 Aztec Software & Tech System 0 21 432 -21 432
0 62 500 -62 500 HCL Technologies Ltd 0 1 165 016 -1 165 016
0 33 700 -33 700 Hughes Software Systems 0 998 566 -998 566
0 73 030 -73 030 Nippon India 0 409 695 -409 695
59 772 89 472 -29 700 Infosys Technologies Ltd 8 383 444 17 721 597 -9 338 153
0 167 700 -167 700 MRO-TEK Ltd 0 518 133 -518 133
150 950 -800 NIIT Ltd 1 158 52 447 -51 289
0 23 242 -23 242 Polaris Software Lab Ltd 0 345 089 -345 089
0 96 098 -96 098 Siemens (India) Ltd 0 957 280 -957 280
0 95 939 -95 939 Subex Systems Ltd 0 543 543 -543 543
0 10 856 -10 856 Tata Infotech Ltd 0 82 176 -82 176
0 20 691 -20 691 VisualSoft Technologies Ltd 0 517 636 -517 636
97 000 15 700 81 300 Wipro Ltd 5 351 999 1 311 552 4 040 447
49 770 48 000 1 770 Wipro ADR USD 3 024 282 3 898 923 -874 641
16 760 883 28 543 085 -11 782 202
</Table>
B- 39
Consolidated Financial Information of InCentive Capital AG
<Table>
<Caption>
CHANGE DESCRIPTION FAIR VALUE FAIR VALUE
HOLDING HOLDING 31 DEC. 2001 31 DEC. 2000 CHANGE
31 DEC. 2001 31 DEC. 2000 CHF CHF CHF
ENGINEERING & INDUSTRIAL PRODUCTS
0 95 656 -95 656 Alfa-Laval (India) Ltd 0 504 747 -504 747
667 100 988 100 -321 000 Bharat Heavy Electricals Ltd 3 229 405 5 608 372 -2 378 967
0 147 372 -147 372 Carrier Aircon Ltd 0 498 301 -498 301
66 600 66 600 0 Georg Fischer Disa Ltd 137 585 147 970 -10 385
0 14 000 -14 000 Gujarat Machines Manu 0 74 360 -74 360
800 076 473 076 327 000 Tata Power Company Ltd 3 293 268 1 614 368 1 678 900
6 660 258 8 448 118 -1 787 860
FINANCIAL SERVICES
10 000 10 000 0 Federal Bank Ltd 14 874 17 948 -3 074
531 033 501 773 29 260 HDFC Bank Ltd INR 4 108 382 3 875 748 232 634
82 400 0 82 400 HDFC Bank Ltd USD 1 990 507 0 1 990 507
307 367 388 367 -81 000 Housing Development Finance Corp Ltd 7 016 973 7 305 326 -288 353
1 038 400 220 000 818 400 State Bank of India 6 526 687 1 469 420 5 057 267
35 000 0 35 000 State Bank of India GDR USD 476 492 0 476 492
0 75 000 -75 000 Tata Finance Ltd 0 165 721 -165 721
20 133 915 12 834 163 7 299 752
HEALTH & PERSONAL CARE
0 38 970 -38 970 Aurobindo Pharma Ltd 0 672 365 -672 365
102 118 160 700 -58 582 Cipla Ltd 4 002 260 5 823 898 -1 821 638
659 502 175 042 484 460 Colgate-Palmolive (India) Ltd 3 787 551 1 012 665 2 774 886
80 800 0 80 800 Dr. Reddys Laboratories Ltd INR 2 569 041 0 2 569 041
15 700 0 15 700 Dr. Reddys Laboratories Ltd USD 493 949 0 493 949
123 811 75 000 48 811 E. Merck (India) Ltd 1 176 775 1 126 331 50 444
0 52 000 -62 000 Hoechst Marion Roussel 0 872 716 -872 716
0 150 093 -150 093 Lupin Laboratories Ltd 0 1 146 308 -1 146 308
0 83 700 -83 700 Neuland Laboratories Ltd 0 204 994 -204 994
0 88 511 -88 511 Novartis India Ltd 0 1 609 155 -1 609 155
0 39 511 -39 511 Parke-Davis (India) Ltd 0 368 351 -368 351
0 30 153 -30 153 Pfizer Ltd 0 638 369 -638 369
0 29 884 -29 884 Procter & Gamble Hygiene and Health 0 721 063 -721 063
Care Ltd
50 000 0 50 000 Ranbaxy Laboratories Ltd 1 188 463 0 1 188 463
134 400 134 400 0 Strides Arcolab Ltd 296 159 779 173 -483 014
13 514 198 14 975 388 -1 461 190
MEDIA
361 100 114 470 246 630 Zee Telefilms Ltd 1 388 138 1 100 752 287 386
1 388 138 1 100 752 287 386
METALS & MISCELLANEOUS MATERIALS
0 1 192 035 -1 192 035 Cummins India Ltd 0 3 459 501 -3 459 501
94 625 0 94 625 Hindalco Industries Ltd 2 084 474 0 2 084 474
585 000 35 000 550 000 Tata Iron and Steel Co Ltd 1 756 381 155 840 1 600 541
3 840 855 3 615 341 225 514
</Table>
B- 40
Consolidated Financial Information of InCentive Capital AG
<Table>
<Caption>
FAIR VALUE FAIR VALUE
HOLDING HOLDING 31 DEC. 2001 31 DEC. 2000 CHANGE
31 DEC. 2001 31 DEC. 2000 CHANGE DESCRIPTION CHF CHF CHF
MISCELLANEOUS
100 000 100 000 0 Federal Tech 48 237 322 503 -274 266
535 000 0 535 000 Hindustan Lever Ltd 4 119 732 0 4 119 732
0 209 215 -209 215 Indian Hotels Co Ltd 0 1 708 964 -1 708 964
187 100 45 428 141 672 ITC Ltd 4 359 939 1 413 971 2 945 968
0 686 800 -686 800 Samtel Color Ltd 0 796 334 -796 334
0 110 583 -110 583 Thermax India 0 379 283 -379 283
0 70 100 -70 100 Vikas WSP Ltd 0 1 519 251 -1 519 251
8 527 908 6 140 306 2 387 602
PETROL REFINING & GAS
216 414 262 414 -46 000 Bharat Petroleum Corp Ltd 1 408 295 1 106 376 301 919
0 47 320 -47 320 Gujarat Gas Co Ltd 0 1 104 317 -1 104 317
415 584 415 584 0 Hindustan Petroleum Corp Ltd 1 997 517 2 032 047 -34 530
3 405 812 4 242 740 -836 928
TELECOMMUNICATIONS
389 600 390 000 -400 Adelphia Vision India Ltd 714 307 2 254 901 -1 540 594
0 70 000 -70 000 Global TeleSystems Ltd 0 1 948 905 -1 948 905
994 000 0 994 000 Mahanagar Telephone Nigam Ltd INR 4 334 489 0 4 334 489
73 000 0 73 000 Mahanagar Telephone Nigam Ltd USD 728 401 0 728 401
0 27 500 -27 500 Videsh Sanchar Nigam INR 0 285 779 -285 779
0 21 000 -21 000 Videsh Sanchar Nigam USD 0 425 381 -425 381
5 777 197 4 914 966 862 231
TRANSPORT
192 056 840 723 -648 667 Container Corporation of India Ltd 972 056 4 932 395 -3 960 339
972 056 4 932 395 -3 960 339
CONVERTIBLE BONDS
CHEMICALS
0 1 186 808 -1 186 808 Indo Gulf Corp Ltd CNV 14.25% 2000 0 1 788 086 -1 788 086
0 1 788 086 -1 788 086
SECURITIES DEALT IN ANOTHER REGULATED MARKET
CONSUMER & HOUSEHOLD GOODS
0 100 511 -100 511 Syngenta (India) Ltd 0 200 806 -200 806
0 200 806 -200 806
HEALTH & PERSONAL CARE
0 142 700 -142 700 Dr. Ramayya's Pramila Hospitals Ltd 0 421 076 -421 076
100 000 100 000 0 Shantha Biotechnics 516 461 1 562 178 -1 045 717
516 461 1 983 254 -1 466 793
MISCELLANEOUS
103 125 103 125 0 Kumaran Systems, Inc 798 901 1 610 997 -812 096
164 866 164 866 0 Modi Xerox Ltd 283 823 335 273 -51 450
0 111 100 -111 100 Shoppers Stop 0 327 832 -327 832
1 082 724 2 274 102 -1 191 378
TELECOMMUNICATIONS
128 234 128 234 0 Indiainfo.com Ltd 49 671 556 457 -506 786
49 671 556 457 -506 786
A) TOTAL INDIA INVESTMENTS
114 155 848 139 424 486 -25 268 638
</Table>
B- 41
Consolidated Financial Information of InCentive Capital AG
<Table>
<Caption>
CHANGE DESCRIPTION FAIR VALUE FAIR VALUE
HOLDING HOLDING 31 DEC. 2001 31 DEC. 2000 CHANGE
31 DEC. 2001 31 DEC. 2000 CHF CHF CHF
B) NON-INDIA INVESTMENTS
BA) PUBLIC MARKETABLE SECURITIES LONG
HEALTHCARE
14 300 0 14 300 Abbott Labs 1 338 062 0 1 338 062
20 400 0 20 400 Abgenix Inc 1 151 812 0 1 151 812
40 000 0 40 000 Acambis Plc ORD 10P 340 798 0 340 798
5 500 0 5 500 Adolor Corp 165 700 0 165 700
18 200 0 18 200 Affymetrix Inc 1 153 145 0 1 153 145
18 300 0 18 300 Alkermes 809 640 0 809 640
9 600 0 9 600 Allergan Inc 1 209 254 0 1 209 254
30 000 72 000 -42 000 Altana AG 2 484 308 5 101 163 -2 616 855
4 800 0 4 800 Alteon Inc 36 656 0 36 656
0 30 000 -30 000 Alza Corp 0 2 054 153 -2 054 153
3 200 0 3 200 Ameri Source Bergen Corp 341 319 0 341 319
46 200 0 46 200 American Home Products Corp 4 757 982 0 4 757 982
8 200 0 8 200 Amgen Inc 776 777 0 776 777
200 000 80 000 120 000 Amylin Pharmaceuticals Inc 3 068 115 1 014 993 2 053 122
10 000 0 10 000 Andrx Group 1 181 761 0 1 181 761
8 500 0 8 500 Anthem Inc 706 187 0 706 187
27 000 0 27 000 Applera Corp/Celera Genomics Group 1 209 505 0 1 209 505
0 20 000 -20 000 Aronex Pharmaceuticals Inc 0 142 985 -142 985
13 300 0 13 300 Aventis (Ex RP) EUR 3.819 ORDS 1 556 507 0 1 556 507
15 000 0 15 000 Aviron 1 252 002 0 1 252 002
0 553 300 -553 300 Axys Pharmaceuticals (acquired) 0 5 014 247 -5 014 247
19 800 0 19 800 Barr Labs Inc 2 637 317 0 2 637 317
5 900 0 5 900 Bausch & Lomb Inc 372 930 0 372 930
6 500 0 6 500 Bayer AG Npv Ords 344 722 0 344 722
4 700 0 4 700 Beckman Coulter Inc Com 349 460 0 349 460
6 100 0 6 100 Biogen Inc 587 163 0 587 163
6 100 0 6 100 Biovail Corp 575 901 0 575 901
21 600 0 21 600 Cambridge Antibody Tech Group 10P Ords 1 012 302 0 1 012 302
25 000 0 25 000 Cardinal Health Inc Com 2 713 134 0 2 713 134
28 100 0 28 100 Caremark Rx 769 229 0 769 229
0 36 500 -36 500 Card Guard Scientific Survival Ltd 0 3 832 500 -3 832 500
11 000 65 811 -54 811 Celgene Corp 589 320 3 445 913 -2 856 593
8 400 0 8 400 Celltech Group Plc 50P ORDS 178 460 0 178 460
11 100 0 11 100 Cepheid Inc 78 247 0 78 247
5 100 0 5 100 Cima Labs Inc 309 438 0 309 438
26 500 0 26 500 Corixa Corp 670 277 0 670 277
2 900 0 2 900 Corvas Int'l Inc 31 881 0 31 881
2 600 0 2 600 Cryolife Inc 130 915 0 130 915
40 300 0 40 300 Cubist 2 432 317 0 2 432 317
16 300 0 16 300 Curagen Corp 611 997 0 611 997
38 300 205 120 -166 820 CV Therapeutics Inc 3 343 987 2 932 911 411 076
15 000 0 15 000 CVS Corp 745 210 0 745 210
60 000 100 000 -40 000 Deltagen Inc 926 477 1 681 586 -755 109
6 600 0 6 600 Edward Life Sciences Corp 306 070 0 306 070
15 000 0 15 000 Enzon Inc 1 416 905 0 1 416 905
6 900 0 6 900 First Health Group Corp 286 513 0 286 513
2 800 0 2 800 Fisher Imaging Corp 56 582 0 56 582
0 25 000 -25 000 FPA Medical Management, Inc 0 0 0
0 50 000 -50 000 Fresenius Medical Care Hld, Inc 0 2 417 -2 417
</Table>
B- 42
Consolidated Financial Information of InCentive Capital AG
<Table>
<Caption>
CHANGE DESCRIPTION FAIR VALUE FAIR VALUE
HOLDING HOLDING 31 DEC. 2001 31 DEC. 2000 CHANGE
31 DEC. 2001 31 DEC. 2000 CHF CHF CHF
0 30 000 -30 000 Gemini Genomics Plc (acquired) 0 271 873 -271 873
78 500 0 78 500 Genaera Corp 513 842 0 513 842
10 200 0 10 200 Genentech Inc 928 743 0 928 743
22 100 0 22 100 Genset SA 99 037 0 99 037
10 300 0 10 300 Genta Inc Com 246 001 0 246 001
13 800 0 13 800 Genzyme Corp 1 386 473 0 1 386 473
132 400 120 000 12 400 Guilford Pharmaceuticals Inc 2 666 642 3 479 976 -813 334
14 100 0 14 100 Healthcare Company Com STK 912 066 0 912 066
30 000 0 30 000 Human Genome Sciences Inc 1 697 869 0 1 697 869
11 400 0 11 400 Humana Inc 225 587 0 225 587
66 700 340 000 -273 300 ICN Pharmaceuticals, Inc 3 750 301 16 809 815 -13 059
514
11 100 0 11 100 Icos Corp 1 070 121 0 1 070 121
23 500 0 23 500 IDEC Pharmaceuticals Corp 2 718 765 0 2 718 765
100 000 0 100 000 Igen International, Inc 6 730 384 0 6 730 384
11 200 0 11 200 ILEX Oncology 508 300 0 508 300
1 800 0 1 800 ImClone Systems Inc 140 361 0 140 361
33 100 0 33 100 Incyte Genomics, Inc Com 1 079 990 0 1 079 990
5 400 0 5 400 Inhale Therapeutic Systems, Inc 168 125 0 168 125
6 400 0 6 400 Interneuron Pharmaceuticals, Inc 119 126 0 119 126
10 000 0 10 000 Intuitive Surgical Inc 168 344 0 168 344
11 200 0 11 200 Invitrogen Corp 1 164 165 0 1 164 165
6 500 0 6 500 Kosan Bioscience 87 168 0 87 168
35 000 0 35 000 La Jolla Pharmaceutical Co 525 171 0 525 171
51 200 0 51 200 Ligand Pharmaceuticals Inc 1 538 220 0 1 538 220
0 150 000 -150 000 Lynx Therapeutics, Inc 0 2 174 985 -2 174 985
30 000 0 30 000 Medarex Inc 904 322 0 904 322
9 700 0 9 700 MedImmune, Inc 754 600 0 754 600
7 600 0 7 600 Medtronic Inc 653 227 0 653 227
6 400 0 6 400 MGI Pharmaceuticals Inc 164 134 0 164 134
15 100 0 15 100 Millennium Pharmaceuticals Inc 621 178 0 621 178
3 300 0 3 300 Millipore Corp Com 336 200 0 336 200
13 000 300 000 -287 000 MIM Corp 388 382 422 914 -34 532
1 600 0 1 600 Myriad Genetics 141 362 0 141 362
3 300 0 3 300 Neorx Corp Com Par $0.02 31 958 0 31 958
225 000 225 000 0 Neuromedical Systems, Inc 0 0 0
38 000 0 38 000 NPS Pharmaceuticals, Inc 2 442 743 0 2 442 743
230 000 350 546 -120 546 Orchid BioSciences, Inc 2 123 176 7 906 705 -5 783 529
140 000 100 000 40 000 Oridion Systems Ltd 1 435 000 6 495 000 -5 060 000
31 800 0 31 800 OSI Pharmaceuticals INC 2 441 287 0 2 441 287
8 000 0 8 000 Owens & Minor, Inc 248 403 0 248 403
8 000 0 8 000 Oxford Health Plans 404 696 0 404 696
600 0 600 Perbio Science Ords 16 241 0 16 241
3 500 0 3 500 Pfizer Inc 234 095 0 234 095
6 500 0 6 500 Pharmaceutical Resources Inc 368 744 0 368 744
89 420 0 89 420 Phonak Holding AG 3 397 960 0 3 397 960
17 800 0 17 800 Protein Design Labs, Inc 979 917 0 979 917
16 400 0 16 400 Province Healthcare Co STK 849 445 0 849 445
1 600 0 1 600 Quest Diagnostics Inc 192 573 0 192 573
8200 0 8 200 Quintiles Transnational Corp 220 894 0 220 894
9 500 0 9 500 Rehabcare Corp Com 471 966 0 471 966
17 200 0 17 200 Rite Aid Corp 146 075 0 146 075
2 800 0 2 800 Sanofi Synthelabo EU R2SHS 347 596 0 347 596
20 000 0 20 000 Schering-Plough Corp 1 202 070 0 1 202 070
6 500 0 6 500 Seattle Genetics, Inc 62 185 0 62 185
3 400 0 3 400 Sepracor Inc 325 616 0 325 616
</Table>
B- 43
Consolidated Financial Information of InCentive Capital AG
<Table>
<Caption>
FAIR VALUE FAIR VALUE
HOLDING HOLDING 31 DEC. 2001 31 DEC. 2000 CHANGE
31 DEC. 2001 31 DEC. 2000 CHANGE DESCRIPTION CHF CHF CHF
20 000 0 20 000 Sequenom Inc 358 171 0 358 171
13 100 0 13 100 Serono SA ADR 487 892 0 487 892
200 0 200 SERONO SA CHF25 ORDS 289 800 0 289 800
90 000 30 000 60 000 Shire Pharmaceuticals Group plc-ADR 5 528 650 2 226 339 3 302 311
28 500 0 28 500 SHL Telemedicine Ltd 651 225 0 651 225
700 0 700 Sigma Aldrich Corp Com 46 302 0 46 302
44 231 0 44 231 Smith & Nephew ORD 446 194 0 446 194
6 200 0 6 200 Supergen Unc 149 015 0 149 015
3 200 0 3 200 Tenet Healthcare Corp Com 315 378 0 315 378
5 500 0 5 500 Teva Pharmaceutical Industries Ltd ADR 568 919 0 568 919
0 50 000 -50 000 Texas Biotechnology Corp 0 691 967 -691 967
7 400 0 7 400 Thoratec Corp 211 143 0 211 143
6 800 0 6 800 Transkaryotic Therapies, Inc 488 482 0 488 482
15 000 0 15 000 Trimeris Inc Com 1 132 165 0 1 132 165
160 000 645 000 -485 000 Tularik Inc 6 450 427 30 590 257 -24 139 830
0 50 000 -50 000 Twinlab Corp 0 135 937 -135 937
1 335 000 1 510 000 -175 000 Vernalis Group plc 6 490 236 10 896 915 -4 406 679
700 0 700 Versicor Inc 23 909 0 23 909
3 200 0 3 200 Vertex Pharmaceuticals Inc 132 070 0 132 070
20 000 0 20 000 ViroPharma Inc 770 386 0 770 386
0 40 000 -40 000 Visible Genetics, Inc 0 2 432 761 -2 432 761
25 100 0 25 100 Watson Pharmaceuticals Inc 1 322 393 0 1 322 393
8 900 0 8 900 Women First Healthcare Restricted 149 228 0 149 228
121 379 115 109 758 312 11 620 803
TECHNOLOGY
50 480 0 50 480 3COM Corp 540 550 0 540 550
160 000 0 160 000 Advanced Lighting Technologies, Inc 402 816 0 402 816
107 200 100 000 7 200 Answerthink, Inc 1 174 907 584 024 590 883
55 000 0 55 000 Arbitron, Inc 3 152 455 0 3 152 455
0 20 000 -20 000 Carrier Access Corp 0 289 998 -289 998
0 10 000 -10 000 Cisco Systems Inc 0 616 246 -616 246
100 000 0 100 000 Computer Horizons Corp NV 538 766 0 538 766
252 096 252 096 0 eGain Communications Corp 592 365 1 256 532 -664 167
0 10 000 -10 000 Gretag Imaging Holding AG 0 1 400 000 -1 400 000
0 50 000 -50 000 Intelect Communications Systems Inc 0 30 208 -30 208
200 000 0 200 000 Lucent Technologies Inc 2 111 427 0 2 111 427
40 000 40 000 0 Motorola Inc 1 008 383 1 304 991 -296 608
0 10 000 -10 000 NBC Internet Inc 0 56 389 -56 389
45 000 45 000 0 SanDisk Corp 1 087 603 2 011 861 -924 258
0 20 000 -20 000 Silicon Graphics, Inc 0 128 888 -128 888
60 000 60 000 0 Silicon Storage Technology, Inc 970 787 1 141 867 -171 080
65 000 65 000 0 SourcingLink.net, Inc 46 911 65 451 -18 540
290 000 290 000 0 Telecomputing Norway 2 079 999 1 896 226 183 773
0 25 000 -25 000 Ticketmaster Online-CitySearch Inc 0 337 324 -337 324
10 000 0 10 000 Valdera Resources Ltd 0 0 0
13 706 969 11 120 005 2 586 964
STRATEGIC INVESTMENTS
7 601 172 589 -164 988 Sulzer AG 1 938 255 201 756 540 -199 818 285
578 876 5 000 573 876 Sulzer Medica AG 40 521 320 2 127 500 38 393 820
42 459 575 203 884 040 -161 424 465
</Table>
B- 44
Consolidated Financial Information of InCentive Capital AG
<Table>
<Caption>
CHANGE DESCRIPTION FAIR VALUE FAIR VALUE
HOLDING HOLDING 31 DEC. 2001 31 DEC. 2000 CHANGE
31 DEC. 2001 31 DEC. 2000 CHF CHF CHF
OTHER INVESTMENTS
250 000 0 250 000 Allegiance Telecom, Inc 3 478 484 0 3 478 484
20 000 0 20 000 Bankgesellschaft Berlin AG 76 144 0 76 144
0 5 000 -5 000 Charles Voegele Holding AG 0 1 200 000 -1 200 000
75 000 0 75 000 Converium Holding AG 6 052 500 0 6 052 500
0 40 000 -40 000 Freeport McMoran Copper & Gold, Inc 0 551 801 -551 801
8 000 8 000 0 Gutta 638 207 431
0 60 000 -60 000 PolyOne Corp 0 567 913 -567 913
6 500 0 6 500 SIG Holding AG 1 033 500 0 1 033 500
0 90 000 -90 000 Snap-on, Inc 0 4 041 847 -4 041 847
23 220 0 23 220 Valora Holding AG 5 607 630 0 5 607 630
23 000 4 000 19 000 Zurich Financial Services 8 958 500 3 908 000 5 050 500
25 207 396 10 269 768 14 937 628
CONVERTIBLE BONDS
HEALTHCARE
149 000 0 149 000 Vertex Pharmaceuticals Inc 19.9.07 5% 167 555 0 167 555
167 555 0 167 555
BA) TOTAL PUBLIC MARKETABLE SECURITIES LONG NON-INDIA INVESTMENTS 202 920 610 335 032 125 -132 111 515
TOTAL PUBLIC MARKETABLE SECURITIES LONG 317 076 458 474 456 611 -157 380 153
BB) PUBLIC MARKETABLE SECURITIES SHORT
HEALTHCARE
-1 600 0 -1 600 Accredo Health Inc -106 612 0 -106 612
-16 100 0 -16 100 Aetna US Healthcare -891 464 0 -891 464
-3 200 0 -3 200 Affymetrix Inc -202 751 0 -202 751
-2 400 0 -2 400 Applera Corp -107 512 0 -107 512
-11 900 0 -11 900 Bristol Myers Squibb Co USD.10 -1 018 621 0 -1 018 621
-18 000 0 -18 000 Bruker Daltonics Inc -493 953 0 -493 953
-20 700 0 -20 700 Cell Genesys Inc -807 424 0 -807 424
-22 700 0 -22 700 Chiron Corp -1 670 290 0 -1 670 290
-25 000 0 -25 000 Cytyc Corp -1 095 156 0 -1 095 156
-17 600 0 -17 600 Emisphere Technologies Inc -942 616 0 -942 616
-28 000 0 -28 000 Genencor Int'l -750 043 0 -750 043
-25 000 0 -25 000 Genta Inc Com -597 091 0 -597 091
-10 000 0 -10 000 Intermune Inc -826 780 0 -826 780
-13 700 0 -13 700 Johnson and Johnson -1 358 950 0 -1 358 950
-8 200 0 -8 200 Lilly ELI & Co -1 080 937 0 -1 080 937
-4 800 0 -4 800 Neurocrine Biosciences Inc -413 370 0 -413 370
-10 000 0 -10 000 Regeneron PharmaceuticaIs Inc -472 637 0 -472 637
-28 000 0 -28 000 Thoratec Corp -798 918 0 -798 918
-3 300 0 -3 300 Tularik Inc -133 040 0 -133 040
-6 400 0 -6 400 Walgreen Co -361 568 0 -361 568
-14 129 733 0 -14 129 733
BB) TOTAL PUBLIC MARKETABLE SECURITIES SHORT -14 129 733 0 -14 129 733
TOTAL PUBLIC MARKETABLE SECURITIES NET 188 790 877 335 032 125 -146 241 248
</Table>
B- 45
Consolidated Financial Information of InCentive Capital AG
<Table>
<Caption>
CHANGE DESCRIPTION FAIR VALUE FAIR VALUE
HOLDING HOLDING 31 DEC. 2001 31 DEC. 2000 CHANGE
31 DEC. 2001 31 DEC. 2000 CHF CHF CHF
BC) DERIVATIVES LONG
HEALTHCARE
69 0 69 Abbott Laboratories 18.1.03 C40 USD 195 718 0 195 718
13 0 13 Abbott Laboratories 19.1.03 P60 USD 9 819 0 9 819
136 0 136 Abgenix Inc 19.1.02 P40 USD 154 077 0 154 077
27 0 27 Aetna Inc-new 16.02.02 P35 USD 13 821 0 13 821
54 0 54 Amgen Inc 19.1.02 C55 USD 25 831 0 25 831
65 000 0 65 000 Antigenics contingent value rights 11 0 11
79 0 79 AstraZeneca PLC-Spons ADR 19.1.02 P45 6 298 0 6 298
USD
31 0 31 Biomet Inc 20.4.02 C25 USD 35 121 0 35 121
28 0 28 Imclone Systems 19.1.02 P75 USD 133 936 0 133 936
54 0 54 Medtronic Inc 19.1.02 C40 USD 101 056 0 101 056
34 0 34 OSI Pharmaceuticals Inc 19.1.02 C40 35 666 0 35 666
USD
292 0 292 Pfizer Inc 18.1.03 C30 USD 563 607 0 563 607
0 700 000 -700 000 Roche 16.3.01 C17000 0 539 000 -539 000
285 0 285 Schering-Plough Corp 18.1.03 C30 USD 399 417 0 399 417
230 0 230 Schering-Plough Corp 19.1.02 C30 USD 225 829 0 225 829
27 0 27 Walgreen Co 19.1.02 P35 USD 8 157 0 8 157
14 0 14 Zimmer Holdings Inc 19.1.02 USD 13 041 0 13 041
1 921 405 539 000 1 382 405
TECHNOLOGY
0 200 -200 Motorola Inc 19.1.01 C32.5 0 8 056 -8 056
0 450 000 -450 000 Unaxis Holding AG 16.1.01 C360 0 729 000 -729 000
0 1 100 000 -1 100 000 Unaxis Holding AG 16.1.01 C480 0 22 000 -22 000
0 759 056 -759 056
STRATEGIC INVESTMENTS
49 000 0 49 000 Sulzer AG 22.3.02 C450 4 900 0 4 900
50 000 0 50 000 Sulzer Basket 7.2.02 C750 5 000 0 5 000
23 000 0 23 000 Sulzer Basket 7.2.02 C900 230 0 230
98 000 0 98 000 Sulzer Medica AG 22.3.02 C150 41 160 0 41 160
0 23 310 000 -23 310 000 Sulzer Reg 15.6.01 C1050 0 20 512 800 -20 512 800
0 300 000 -300 000 Sulzer Reg 16.3.01 C1100 0 177 000 -177 000
0 50 000 -50 000 Sulzer Reg 16.4.01 C1200 0 3 882 350 -3 882 350
0 200 000 -200 000 Sulzer Reg 20.4.01 C1100 0 268 000 -268 000
0 15 000 -15 000 Sulzer Reg 21.9.01 C1200 0 1 155 495 -1 155 495
51 290 25 995 645 -25 944 355
OTHER INVESTMENTS
0 100 000 -100 000 CS Group Mar01 C300 0 1 950 200 -1 950 200
0 605 000 -605 000 SAirGroup 15.6.01 C250 0 399 300 -399 300
0 600 000 -600 000 SAirGroup 15.6.01 C270 0 276 000 -276 000
0 1 500 000 -1 500 000 Zurich Financial Serv. 20.07.01 C850 0 2 520 000 -2 520 000
0 5 145 500 -5 145 500
BC) TOTAL DERIVATIVES LONG
1 972 695 32 439 201 -30 466 506
</Table>
B- 46
Consolidated Financial Information of InCentive Capital AG
<Table>
<Caption>
CHANGE DESCRIPTION FAIR VALUE FAIR VALUE
HOLDING HOLDING 31 DEC. 2001 31 DEC. 2000 CHANGE
31 DEC. 2001 31 DEC. 2000 CHF CHF CHF
BD) DERIVATIVES SHORT
HEALTHCARE
-17 0 -17 Amgen Inc 19.1.02 C65 USD -571 0 -571
-27 0 -27 Barr Laboratories Inc 19.1.02 C75 USD -26 510 0 -26 510
-15 0 -15 Cephalon Inc 19.1.02 P75 USD -8 812 0 -8 812
-63 0 -63 Cor Therapeutics 19.1.02 P30 USD -65 558 0 -65 558
-67 0 -67 Icos Corporation 19.1.02 C65 USD -5 622 0 -5 622
-127 0 -127 Immunex Corp 19.1.02 P25 USD -10 658 0 -10 658
-117 731 0 -117 731
STRATEGIC INVESTMENTS
-49 000 0 -49 000 Sulzer AG 22.3.02 P450 -9 481 500 0 -9 481 500
-27 500 0 -27 500 Sulzer AG 31.1.02 C250 -430 925 0 -430 925
-16 000 0 -16 000 Sulzer Basket 26.7.02 P775 -6 116 750 0 -6 116 750
-50 000 0 -50 000 Sulzer Basket 7.2.02 P750 -17 700 000 0 -17 700 000
-23 000 0 -23 000 Sulzer Basket 7.2.02 P900 -11 615 000 0 -11 615 000
-60 000 0 -60 000 Sulzer Basket 7.3.02 P800 -24 557 226 0 -24 557 226
-98 000 0 -98 000 Sulzer Medica AG 22.3.02 P150 -7 938 000 0 -7 938 000
0 -50 000 50 000 Sulzer Reg 16.3.01 P1100 0 -1 950 000 1 950 000
0 -50 000 50 000 Sulzer Reg 16.4.01 P1150 0 -3 291 940 3 291 940
0 -10 000 10 000 Sulzer Reg Mar01 P1100 0 -134 180 134 180
0 -15 000 15 000 Sulzer Reg Sep01 P1150 0 -833 820 833 820
-77 839 401 -6 209 940 -71 629 461
OTHER INVESTMENTS
0 -100 000 100 000 CS Group Mar01 P280 0 -343 000 343 000
-20 000 0 -20 000 Unaxis Holding AG 19.6.02 P345.3 -3 390 800 0 -3 390 800
-10 000 0 -10 000 Zurich Financial Serv. 15.2.02 P450 -660 000 0 -660 000
-4 050 800 -343 000 -3 707 800
BD) TOTAL DERIVATIVES SHORT
-82 007 932 -6 552 940 -75 454 992
TOTAL DERIVATIVES NET
-80 035 237 25 886 261 -105 921 498
B) TOTAL NON-INDIA INVESTMENTS
108 755 640 360 918 386 -252 162 746
TOTAL MARKETABLE SECURITIES
222 911 488 500 342 872 -277 431 384
</Table>
B- 47
Consolidated Financial Information of InCentive Capital AG
<Table>
<Caption>
CHANGE DESCRIPTION FAIR VALUE FAIR VALUE
HOLDING HOLDING 31 DEC. 2001 31 DEC. 2000 CHANGE
31 DEC. 2001 31 DEC. 2000 CHF CHF CHF
2. PRIVATE EQUITY
HEALTHCARE
209 723 0 209 723 MSC Regenos AG (from merger with 2 148 177 0 2 148 177
Osiris Therapeutics, Inc)
0 503 334 -503 334 Osiris Therapeutics, Inc 0 2 393 677 -2 393 677
1 1 0 Pamot Asset Limited Partnership 594 655 668 608 -73 953
208 768 208 768 0 Physiome Sciences, Inc 1 465 398 1 465 398 0
236 686 236 686 0 Structural Genomix, Inc 3 020 895 3 020 895 0
7 229 125 7 548 578 -319 453
TECHNOLOGY
16 127 16 127 0 AIC Advanced Integration Company AG 3 870 480 10 596 096 -6 725 616
50 000 50 000 0 BCAB AG 4 228 000 1 500 000 2 728 000
273 273 0 Catalyst World Wide Ventures N.V 1 152 421 2 749 475 -1 597 054
20 000 20 000 0 Digital-Logic AG 2 080 000 3 000 000 -920 000
1 1 0 MI Capital LLC 805 550 805 550 0
1 1 0 MU-centive LLC 10 039 731 7 749 390 2 290 341
3 024 683 0 3 024 683 NetByTel 2 807 712 0 2 807 712
24 983 894 26 400 511 -1 416 617
OTHER INVESTMENTS
275 000 0 275 000 Allied World Assurance Holdings Ltd 5 202 533 0 5 202 533
5 202 533 0 5 202 533
TOTAL PRIVATE EQUITY
37 415 552 33 949 089 3 466 463
3. FORWARD FOREX CONTRACTS
Forward Forex Contracts Long 3 774 924 2 097 460 1 677 464
Forward Forex Contracts Short 918 537 0 918 537
TOTAL FORWARD FOREX CONTRACTS NET
2 856 387 2 097 460 758 927
TOTAL INVESTMENTS
263 183 427 536 389 421 -273 205 994
</Table>
B- 48
Consolidated Financial Information of InCentive Capital AG
CONSOLIDATED SCHEDULE OF MOVEMENTS IN INVESTMENTS
1 January to 31 December 2001
<Table>
<Caption>
COST OF REALIZED UNREALIZED MARKET
INVESTMENTS GAINS/LOSSES GAINS/LOSSES VALUE
A) MARKETABLE SECURITIES CHF CHF CHF CHF
1 JANUARY 2001 476 174 660 24 168 212 500 342 872
Cost of purchases 866 067 746 866 067 746
Cost of sales -1 087 808 204 -1 087 808
204
Realized gains 83 049 648
Realized losses -435 347 818
Change in unrealized market gains 254 760 667 254 760 667
Change in unrealized market losses -313 072 935 -313 072 935
Change in unrealized exchange gains/losses 2 621 342 2 621 342
-221 740 458 -352 298 170 -55 690 926 -277 431 384
31 DECEMBER 2001 254 434 202 -31 522 714 222 911 488
B) PRIVATE EQUITY
1 JANUARY 2001 33 949 089 0 33 949 089
Cost of purchases 13 941 549 13 941 549
Cost of sales -154 578 -154 578
Realized gains 0
Realized losses 0
Change in unrealized market gains 0 0
Change in unrealized market losses -10 320 508 -10 320 508
Change in unrealized exchange gains/losses 0 0
13 786 971 0 -10 320 508 3 466 463
31 DECEMBER 2001 47 736 060 -10 320 508 37 415 552
C) TOTAL INVESTMENTS (EXCLUDING FORWARD FOREX CONTRACTS)
1 JANUARY 2001 510 123 749 24 168 212 534 291 961
Cost of purchases 880 009 295 880 009 295
Cost of sales -1 087 962 782 -1 087 962
782
Realized gains 83 049 648
Realized losses -435 347 818
Change in unrealized market gains 254 760 667 254 760 667
Change in unrealized market losses -323 393 443 -323 393 443
Change in unrealized exchange gains/losses 2 621 342 2 621 342
-207 953 487 -352 298 170 -66 011 434 -273 964 921
31 DECEMBER 2001 302 170 262 -41 843 222 260 327 040
</Table>
B- 49
Consolidated Financial Information of InCentive Capital AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
as of 31 December 2001
A. ACCOUNTING POLICIES
The consolidated financial statements of InCentive Capital AG ("the Company")
have been prepared in accordance with International Accounting Standards (IAS)
as issued by the International Accounting Standards Committee (IASC) including
IAS 39 "Financial Instruments: Recognition and Measurement".
Note 1 PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company comprise the annual
financial statements of the Company itself as well as those of all subsidiaries
in which they, directly or indirectly, have an interest of more than one half of
the voting rights, or have the power to exercise control over operations.
Subsidiary companies are consolidated from the date of acquisition or
incorporation using the purchase method. The consolidated financial statements
of the Company include the accounts of the following wholly owned subsidiaries:
InCentive Capital AG, Zug
- - Taj Investments Limited, Port Louis, Mauritius
- - InCentive Investment (Jersey) Limited, St Helier, Jersey
- - BioCentive Limited, Hamilton, Bermuda
- - InCentive Investment Services AG, Zurich, Switzerland
- - BioCentive AG, Zug, Switzerland
- - Centive AG, Zug, Switzerland
- - ImmoCentive AG, Zug, Switzerland
The consolidated financial statements are denominated in Swiss Francs (CHF). The
Companies' and their subsidiaries' books and records are also maintained in
Swiss Francs, this being the functional currency of all the companies. Thus, no
translation differences result on consolidation.
INVESTMENT IN ASSOCIATES
Investments in associates are accounted for by the equity method of accounting.
Associated companies are those companies in which InCentive Capital AG has an
interest of between 20% and 50% of the voting rights and over which it exercises
significant influence but which it does not control.
Note 2 SIGNIFICANT ACCOUNTING POLICIES
FOREIGN CURRENCY TRANSLATION
Foreign currency transactions are accounted for at exchange rates prevailing at
the date of the transaction. At year-end, assets and liabilities denominated in
foreign currencies are translated into Swiss francs at the exchange rate in
force at balance sheet date. Gains and losses resulting from the settlement of
such transactions and from translation at year-end are recognized in the income
statement.
The following exchange rates were used:
<Table>
<Caption>
31 DECEMBER 2001 31 DECEMBER 2000
US Dollar 1.6784 1.6111
Norwegian Krone 18.3908 18.4189
Indian Rupee 0.0345 0.0347
Euro 1.4814 1.5173
Great Britain Pound 2.4308 2.4055
Latvian Lat n/a 259.1110
</Table>
B- 50
Consolidated Financial Information of InCentive Capital AG
FINANCIAL INSTRUMENTS
The majority of the InCentive Capital AG Group's balance sheet positions qualify
as financial instruments as defined by IAS 39. Their particular recognition
methods adopted are disclosed in the specific comments related to each item.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash in hand plus current accounts with banks
and time deposits due within three months.
ACCOUNTING FOR INVESTMENT TRANSACTIONS
Investment securities transactions are accounted for on a trade date basis. The
Company uses the "first in first out" cost method for determining the realized
gain or loss on disposal of investments, which is booked through the profit and
loss account as well as the unrealized gain or loss arising on the price or
exchange rate movement. Dividend income and other distributions are recorded net
of non-refundable withholding taxes on the ex-dividend date. Interest income is
recorded on an accrual basis.
INVESTMENTS IN MARKETABLE SECURITIES
Investments in marketable securities are recorded at fair market value.
Securities that are traded on a stock exchange or any other regulated market are
valued on the basis of their last available prices. Securities that are listed
on more than one stock exchange are valued at prices as available on what
constitute their main markets.
Securities that are not listed on any stock exchange but are regularly traded
over the counter are valued at their last available market price.
In accordance with IAS 39 "Financial Instruments: Recognition and Measurement"
investments are classified as available for sale. Gains and losses arising from
a change in the fair value of the securities are included in net profit or loss.
DERIVATIVES
Derivative financial instruments including foreign exchange contracts and
equity-linked options (both written and purchased) are initially recognized in
the balance sheet at cost (including transaction costs) and are subsequently
remeasured at their fair value. Fair values are obtained from quoted market
prices.
PRIVATE EQUITY
The Company holds unquoted investments that are classified as "private equity"
in the balance sheet. These investments are valued at their fair value, as
determined in good faith by the board of directors and taking into consideration
prices recently paid by independent third parties. Gains and losses arising from
a change in the fair value of the securities are included in net profit or loss.
As soon as an IPO has taken place, an investment is reallocated to marketable
securities and is valued as such.
CAPITAL INCREASE COSTS
For capital increase at nominal value, the related issuance costs are recorded
as an expense in the income statement. To the extent that a capital increase
occurs at a premium, the related issuance costs are charged directly against
additional paid-in capital in shareholders' equity in accordance with IAS 38.
TAXES
InCentive Capital AG was granted holding company status by the local tax
authorities of Zug. The holding company status results in complete income tax
exemption and a reduced capital taxation for cantonal and communal tax purposes.
For Swiss federal tax purposes, InCentive Capital AG will benefit from a
participation relief with respect to dividend income and capital gains from
qualifying participations. Other income and the portion of dividends and capital
gains to which the participation relief does not apply are subject to a
deductable corporate income tax of 8.5%. No capital tax is levied at the federal
level.
InCentive Capital AG invests in India through its Mauritius subsidiary, Taj
Investments Ltd, and expects to obtain treaty benefits under the double taxation
treaty between Mauritius and India based on the tax residence certification from
the Mauritius authorities. In Mauritius, Taj Investments Ltd is liable to income
tax under the current Mauritius legislation at the rate of 0%. For the years
ended 31 December 2001 and 2000, no provision for Mauritius taxes are considered
necessary as a result of accumulated tax losses recorded by Taj Investments Ltd.
The subsidiaries InCentive Investment (Jersey) Ltd and BioCentive Limited,
Hamilton, Bermuda, are not subject to income taxes.
B- 51
Consolidated Financial Information of InCentive Capital AG
As a consequence of the tax status of InCentive Capital AG, deferred tax assets
are recognized on timing differences and on tax loss carry-forwards.
Taxes payable as a result of consolidation are dealt with in accordance with IAS
12.
TREASURY SHARES
Treasury shares are own shares owned by the Company. They are valued at purchase
cost and are presented as a deduction from equity. Gains or losses on sales of
own shares are charged or credited to the retained earnings account in equity.
B. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
31 DECEMBER 2001 31 DECEMBER 2000
NOTE 1 CASH AND CASH EQUIVALENTS CHF CHF
Cash in hand and at banks 37 538 438 17 292 757
Time deposits 217 697 538 408 522 000
TOTAL 255 235 976 425 814 757
</Table>
Note 2 INVESTMENTS
Details of the investments held at 31 December 2001 and 2000 are shown in the
Consolidated schedule of investments. Details of the realized and unrealized
gains and losses for the year 2001 are presented in the Consolidated schedule of
movements in investments. At 31 December 2001, the marketable securities include
13 positions comprising purchased call options with a market value of CHF 1 646
576 expiring by April 2002 latest and covering 326 300 shares representing an
aggregate contract volume of CHF 100 754 746 and 6 positions comprising
purchased put option positions with a market value of CHF 326 108 expiring by
February 2002 latest and covering 31 000 shares representing an aggregate
contract volume of CHF 2 310 318 and 11 positions comprising sold put option
positions with a market value of CHF 81 544 304 expiring by July 2002 latest and
covering 346 500 shares representing an aggregate transaction volume of CHF 167
794 930 and 4 positions comprising sold call option positions with a market
value of CHF 463 628 expiring by January 2002 latest and covering 38 600 shares
representing an aggregate transaction volume of CHF 8 131 282 (31 December 2000,
13 purchased call option positions, market value CHF 32 439 201, covering 417
875 shares, transaction volume of CHF 294 515 950; 5 sold put option positions,
market value CHF 6 552 940, covering 225 000 shares, transaction volume of CHF
168 750 000).
The "private equity" investments in MI Capital LLC and MU-centive LLC are pure
investments without any liabilities to the Company.
<Table>
<Caption>
31 DECEMBER 2001 31 DECEMBER 2000
NOTE 3 OTHER RECEIVABLES CHF CHF
Loan due from Digital-Logic AG 10 313 000 10 313 000
Withholding taxes receivable 1 481 534 645 059
Other accounts receivable 3990 91 660
TOTAL 11 798 524 11 049 719
</Table>
<Table>
<Caption>
31 DECEMBER 2001 31 DECEMBER 2000
NOTE 4 ACCOUNTS PAYABLE CHF CHF
Directors' fee 451 748 481 332
Social security 50 636 54 114
Accounting and administration fees 187 511 87 146
Management fees 0 158 093
Asset management fees 2 281 915 2 066 341
TOTAL 2 971 810 2 847 026
</Table>
B- 52
Consolidated Financial Information of InCentive Capital AG
<Table>
<Caption>
31 DECEMBER 2001 31 DECEMBER 2000
NOTE 5 ACCRUED EXPENSES CHF CHF
Investment advisory fees 482 287 729 919
Professional fees 0 225 105
Custodian fees 634 118 328 523
Audit and administration fees 471 627 704 000
Management fees 4 833 300 4 833 300
Stamp tax 0 11 683
Capital tax 420 397 405 048
TOTAL 6 841 729 7 237 578
</Table>
<Table>
<Caption>
31 DECEMBER 2001 31 DECEMBER 2000
NOTE 6 OTHER CURRENT LIABILITIES CHF CHF
Tax at source 40 360 41 695
Other miscellaneous payables 0 193 676
TOTAL 40 360 235 371
</Table>
Note 7 INCOME TAX ACCRUAL
The income tax accrual can be split into current and deferred tax accruals as
follows:
<Table>
CURRENT TAX ACCRUAL
Balance at 1 January 2001 580 315
Taxes paid -423 080
Subtotal at 31 December 2001 157 235
DEFERRED TAX ACCRUAL
Provision at 1 January 2001 673 934
Release of deferred tax accrual -605 688
Subtotal at 31 December 2001 68 246
Total income tax accrual 225 481
</Table>
Tax expense is calculated using the liability method, in which deferred taxes
are determined by applying a future expected tax rate on temporary differences
arising between the tax basis of assets and liabilities and their carrying
values for financial reporting purposes.
Of the net consolidated income before tax of InCentive Capital AG of CHF - 441
335 917 (loss) in 2001 (2000: CHF
- - 64 266 273 (loss)), CHF - 25 564 530 (loss) (2000: CHF - 89 356 864 (loss))
came from Taj Investments Ltd, Mauritius, where the applicable tax rate is nil.
The current tax accrual resulted from dividends not qualifying for participation
relief, realized capital gains and interest in Incentive Investment AG prior to
the merger on 31 October 2000 that are subject to the federal income tax. The
deferred tax accrual results from unrealized capital gains not qualifying for
participation relief of CHF 870 480 (2000: CHF 8 596 097) that are subject to
the federal income tax at the effective rate of 7.84%.
At 31 December 2001 InCentive Capital AG had Swiss tax loss carry-forwards of
CHF 78 036 573 (2000: CHF 43 811 422). As the utilization of these loss
carry-forwards by set-off against future taxable profits is very uncertain due
to the participation relief for federal income tax, and the effective income tax
rate may be nil, no deferred tax asset is recognized in the financial statement.
B- 53
Consolidated Financial Information of InCentive Capital AG
Note 8 SHARE CAPITAL
The Company's share capital as per 31 December 2001 comprised 2 147 202 (31
December 2000: 2 147 202) bearer shares with a nominal value of CHF 20 each.
At the extraordinary general meeting of 31 October 2000, the InCentive Capital
board of directors was authorized as per Article 651 of the Swiss Code of
Obligations to raise share capital by CHF 21 472 020 divided into 1 073 601
bearer shares with a nominal value of CHF 20 which had not been issued by 31
December 2001.
Note 9 SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE
<Table>
<Caption>
THE SHARE CAPITAL COMPRISES AS FOLLOWS: 31 DECEMBER 2001 31 DECEMBER 2000
Number of authorized, issued and paid shares 2 147 202 2 147 202
Nominal value per share (in CHF) 20 20
Number of issued shares during the period - on 31 October
2000 - 1 098 468
Purchase price per share (in CHF) - 20
Number of issued shares during the period - on 31 October
2000 - 715 734
Purchase price per share (in CHF) - 220
Share premium per share (in CHF) - 200
Loss per year (in CHF) -441 335 917 -64 266 273
Weighted average number of shares 2 142 420 636 195
Net loss per share (in CHF) -206 -101
Net asset value (excluding treasury shares)
per share as per 31 December (in CHF) 243 447
</Table>
<Table>
<Caption>
31 DECEMBER 2001 31 DECEMBER 2000
NOTE 10 OTHER INCOME CHF CHF
Released accruals 0 3 773 613
Other 237 276 192
TOTAL 237 276 3 773 805
</Table>
Note 11 INVESTMENT ADVISORY FEES
Prior-year figure considers the "Investment advisory fees" of Incentive
Investments AG's group companies after the merger of Incentive Investment AG and
India Investment AG only.
Note 12 OTHER ADMINISTRATIVE EXPENSES
The increase of "Other administrative expenses" is mainly due to the costs of
the public tender offer for all the publicly held registered shares of Sulzer
AG, Winterthur.
Note 13 RESTRICTIONS ON ASSETS
There are no restrictions on the Companies' assets.
B- 54
Consolidated Financial Information of InCentive Capital AG
Note 14 FINANCIAL INSTRUMENTS
The various risks associated with the financial instruments can be summarized as
follows:
CONCENTRATION RISK
At 31 December 2001, significant portions of the Companies' net assets are
concentrated in:
- - Current assets and short-term time deposits with various first-class
counterparties.
- - Indian securities, which involve certain consideration and risks not typically
associated with investments in other more developed markets. In addition to
its smaller size, lower liquidity and greater volatility, the Indian
securities market is less developed and there is often substantially less
publicly available information about Indian issuers that there is in developed
markets.
Future economic and political developments in India could adversely affect the
liquidity or value, or both, of the securities in which the Companies are
invested. Furthermore, the Companies' ability to hedge their currency risk is
limited and, accordingly, the Companies may be exposed to currency devaluations
and other exchange rate fluctuations.
- - Financial instruments (shares, options etc.) of/on a single company as the
purpose of InCentive Capital AG is the direct or indirect acquisition,
management and disposal of all forms of participations in quoted and unquoted
domestic and foreign companies with no regard to risk diversification.
CREDIT RISK
The Company has no significant concentrations of credit risk. Cash and cash
equivalents and investments are held with first-rate financial institutions.
MARKET RISK
In keeping with its objectives a major part of the Companies' assets are
invested in marketable securities. The Company is thus subject to price
fluctuations in currency and stock markets.
INTEREST RISK
The Company is in principal equity-financed and has no long-term interest rate
risk exposures.
Note 15 MANAGEMENT FEES
MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT INC.
Morgan Stanley Dean Witter Investment Management Inc., New York, has been
Investment Advisor of Taj Investments Ltd. For its services under the Investment
Advisory Agreement, the Investment Advisor receives a fee from Taj Investments
Ltd, Mauritius, payable in US Dollars at an annual rate of 1% of Taj Investments
Ltd average net assets (the "Fixed Fee"). The Fixed Fee is calculated on the
Friday of each week ("Valuation Date"), and is paid quarterly in arrears.
INCENTIVE ASSET MANAGEMENT AG
InCentive Asset Management AG, Zurich, (100% owned by Rene Braginsky), has been
Investment Advisor of InCentive Capital AG. For its services under the
Investment Advisory Agreement, the Investment Advisor receives a fee from
InCentive Capital AG, Zug, payable in Swiss Francs and based on a quarterly rate
of 0.3% of InCentive Capital AG's net assets at the end of each quarter.
MERLIN BIOMED NORTH, INC.
Merlin Biomed North, Inc., New York, has been an Investment Advisor for
BioCentive Ltd. For services under the Investment Advisory Agreement, the
Investment Advisor receives a management fee from BioCentive Ltd, payable in US
Dollars and based on a quarterly rate of 0.2% of the net asset value of the
managed assets at the beginning of each quarter. The Investment Advisor is
entitled to a performance fee of up to 16% of the appreciation in excess of a
hurdle of 8% of the net asset value of the managed assets, payable at year-end.
B- 55
Consolidated Financial Information of InCentive Capital AG
Note 16 RELATED PARTY TRANSACTIONS
The remuneration of the board of directors amounted to CHF 477 250 for 2001 and
CHF 590 053 for 2000 respectively.
The related party transactions of the Company (see Note 15) are based on
customary business contracts and are effected at normal market conditions.
Note 17 CONTINGENT LIABILITIES AND OFF-BALANCE SHEET TRANSACTIONS
There is a guarantee in favour of ARGE IS KV GmbH, D-45128 Essen, for a total of
CHF 1 500 000. This guarantee expires on 31 December 2003. During the
preparation of the balance sheet no risks arising from this contingent liability
were forseeable.
On behalf of InCentive Investment (Jersey) Ltd, letters of indemnity regarding
unlimited amounts and maturities were issued in favour of two international
banks. In these letters, InCentive Capital AG guarantees the full and punctual
payment of all amounts owed by the subsidiary in connection with transactions
entered into with the two banks.
There were no other contingencies and off-balance sheet transactions as at the
balance sheet dates, with the exception of the option contracts mentioned in
Note 2 above.
The Company shows the following borrowings of securities as at 31 December 2001:
<Table>
<Caption>
COMPANY HOLDING FAIR VALUE FAIR VALUE
PER SHARE TOTAL
CHF CHF
Sulzer AG Registered shares 174 299 255 44 446 245
</Table>
Note 18 CUSTODIANS
As at 31 December 2001 shares are deposited at:
- - Swiss American Securities Inc. New York
- - UBS AG, Zurich
- - SIS SegaInterSettle, Zurich
- - Bank Sal. Oppenheim jr. & Cie (Schweiz) AG, Zurich
- - Sal. Oppenheim jr. & Cie KgaA, Cologne
- - BNP Paribas Private Banking, New York
- - Den Norske Bank, Oslo
- - Hansa Bank, Tallin
- - JP Morgan Chase, Luxembourg
- - ABN-Amro Bank (Schweiz), Zurich
- - Lehman Brothers Finance S.A., Zurich
- - Morgan Stanley Dean Witter, New York
B- 56
Consolidated Financial Information of InCentive Capital AG
Note 19 SIGNIFICANT SHAREHOLDERS
The Company has issued exclusively bearer shares. The Company is aware of the
following shareholders with interests exceeding 5%:
<Table>
<Caption>
31 DECEMBER 2001
Zurich Financial Services, Zurich, Switzerland 24.96%
III Institutional Investors International Corp., Grand
Cayman, Cayman Islands 21.02%
Rene Braginsky, Zurich, Switzerland 20.00%
Hans Kaiser Family, Switzerland 11.02%
</Table>
Note 20 SEGMENT REPORTING
InCentive Capital AG's sole business segment is the direct or indirect
acquisition, management and disposal of all forms of participation in quoted and
unquoted domestic and foreign companies, resulting in no segment disclosure
reporting as per IAS 14.
Note 21 SUBSEQUENT EVENTS
There have been no material post-balance sheet events that would require
disclosure or adjustment to the financial statements.
On 21 March 2002, the board of directors reviewed the financial statements and
authorized them for issue. These financial statements will be submitted to the
annual general meeting of shareholders to be held on 15 May 2002 for approval.
B- 57
Statutory Financial Information of InCentive Capital AG
BALANCE SHEET
31 December 2001/2000
<Table>
<Caption>
31 DECEMBER 2001 31 DECEMBER 2000
CHF CHF
ASSETS
Cash and due from banks 113 498 798 160 318 669
Investments
Marketable securities 7 790 000 0
Replacement values of forward forex contracts 1 674 802 0
Due from group companies 108 837 655 105 411 773
Other receivables 1 484 302 667 046
Accrued income and prepaid expenses 62 604 201 632
TOTAL CURRENT ASSETS 233 348 161 266 599 120
Non-current financial investments 4 152 421 5 749 475
Own shares 9 147 627 0
Participations 312 052 508 312 052 508
TOTAL NON-CURRENT ASSETS 325 352 556 317 801 983
TOTAL ASSETS 558 700 717 584 401 103
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable 2 176 768 2 812 020
Due to group companies 25 364 491 24 570 766
Accrued expenses 713 937 2 587 310
Provision for participations 10 241 000 0
Other current liabilities 40 360 41 695
TOTAL CURRENT LIABILITIES 38 36 556 30 011 791
Share capital 42 944 040 42 944 040
General legal reserve 506 109 149 515 256 776
Reserve for own shares 9 147 627 0
Accumulated loss -38 036 655 -3 811 504
TOTAL SHAREHOLDERS' EQUITY 520 164 161 554 389 312
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 558 700 717 584 401 103
</Table>
B- 58
Statutory Financial Information of InCentive Capital AG
INCOME STATEMENT
1 January to 31 December 2001/2000
<Table>
<Caption>
1 JANUARY 2001 - 1 JANUARY 2000 -
31 DECEMBER 2001 31 DECEMBER 2000
CHF CHF
Interest income 7 419 304 1 558 486
Dividend income 343 000 0
Loss (-)/gain on investments -16 808 978 8 652 750
Loss on own shares -183 691 0
Other income 5612 192
TOTAL INCOME -9 224 753 10 211 428
Interest expense 821 731 161 101
Administration fees 15 646 746 1 123 008
Asset management fees 8 470 276 3 023 341
TOTAL EXPENSE 24 938 753 4 307 450
LOSS ( - )/PROFIT FOR THE YEAR BEFORE TAX -34 163 506 5 903 978
Taxation 61 645 64 195
LOSS ( - )/PROFIT FOR THE YEAR -34 225 151 5 839 783
</Table>
B- 59
Statutory Financial Information of InCentive Capital AG
NOTES TO THE STATUTORY FINANCIAL STATEMENTS
as of 31 December 2001
<Table>
<Caption>
CAPITAL INTEREST SHARE CAPITAL
NOTE 1 SIGNIFICANT PARTICIPATIONS BUSINESS ACTIVITY IN % CHF
BioCentive AG, Zug, Switzerland Investments 100 100 000
BioCentive Limited, Hamilton, Bermuda Investments 100 1 405 500
Centive AG, Zug, Switzerland Investments 100 100 000
ImmoCentive AG, Zug, Switzerland Investments 100 100 000
InCentive Investment (Jersey)
Limited,
St Helier, Jersey Investments 100 7 000 000
InCentive Investment Services AG,
Zurich, Switzerland Investments 100 500 000
Taj Investments Limited,
Port Louis, Mauritius Investments 100 284 303
TOTAL SIGNIFICANT PARTICIPATIONS 9 489 803
</Table>
<Table>
<Caption>
31 DECEMBER 2001 31 DECEMBER 2000
NOTE 2 SHAREHOLDERS' EQUITY CHF CHF
SHARE CAPITAL 42 944 040 33 300 000
Reduction of nominal value by CHF 80 to CHF 20 for 333 000
shares 0 -26 640 000
Increase of 1 098 468 bearer shares at nominal price of CHF
20 0 21 969 360
Increase of 715 734 bearer shares at nominal price of CHF 20 0 14 314 680
42 944 040 42 944 040
</Table>
GENERAL LEGAL RESERVES
<Table>
Share premium of the increase in share capital on 3 November
1994 of 300 000 bearer shares based on the price of CHF 500
(nominal CHF 100) 120 000 000 120 000 000
Increase in share capital on 31 October 2000 of 1 098 468
bearer shares based on the nominal price of CHF 20 -21 969 360 -21 969 360
Share premium of the increase in share capital on 31 October
2000 of 715 734 bearer shares based on the price of CHF 220
(nominal CHF 20) 143 146 800 143 146 800
Commission, charges and taxes in connection with the capital
increase -3 922 725 -3 922 725
Agio from acquisition with Incentive Investment AG, Zurich 318 002 061 318 002 061
Depreciation of participations -40 000 000 -40 000 000
Allocation (-)/reallocation to/from the reserve for own
shares -9 147 627 -3 000 000
3 000 000
506 109 149 515 256 776
</Table>
B- 60
Statutory Financial Information of InCentive Capital AG
<Table>
<Caption>
31 DECEMBER 2001 31 DECEMBER 2000
RESERVE FOR OWN SHARES CHF CHF
30 000 bearer shares at CHF 100 par value each,
repurchased at CHF 100 on 7 November 1994 3 000 000
Reallocation to general legal reserve -3 000 000
38 427 bearer shares at CHF 20 par value each,
repurchased at average CHF 275.2102 from 3 July 2001
to 31 December 2001 10 575 504
3 959 bearer shares at CHF 20 par value each,
sold at average CHF 314.2677 from 2 August 2001
to 31 December 2001 -1 244 186
Realized loss on own shares -183 691
9 147 627 0
</Table>
<Table>
<Caption>
31 DECEMBER 2001 31 DECEMBER 2000
NOTE 3 AUTHORIZED CAPITAL INCREASE CHF CHF
Authorized capital increase 21 472 020 21 472 020
</Table>
<Table>
<Caption>
NOTE 4 SIGNIFICANT SHAREHOLDERS 31 DECEMBER 2001
The Company has issued exclusively bearer shares and is
aware of the following shareholders with interests exceeding
5%:
Zurich Financial Services, Zurich 24.96%
III Institutional Investors International Corp., Grand
Cayman, Cayman Islands 21.02%
Rene Braginsky, Zurich 20.00%
Hans Kaiser Family 11.02%
</Table>
Note 5 GUARANTEES
There is a guarantee in favour of ARGE IS KV GmbH, D-45128 Essen, for a total of
CHF 1 500 000. This guarantee expires on 31 December 2003. During the
preparation of the balance sheet no risks arising from this contingent liability
were forseeable.
In addition, a comfort letter has been prepared, in which InCentive Capital AG
confirms to be funding InCentive Investment (Jersey) Ltd adequately with
additional capital in the amount of negative equity plus the nominal share
capital, thus allowing the subsidiary to comply with all contractually incurred
liabilities and obligations it has vis-a-vis any third party. As at 31 December
2001, this contingent liability amounted to CHF 22 085 823.
On behalf of InCentive Investment (Jersey) Ltd, letters of indemnity regarding
unlimited amounts or maturities were issued in favour of two international
banks. In these letters, InCentive Capital AG guarantees the full and punctual
payment of all amounts owed by the subsidiary in connection with transactions
entered into with the two banks.
B- 61
Statutory Financial Information of InCentive Capital AG
CURRENT ADJUSTMENT OF THE NET LOSS FOR THE PERIOD
<Table>
<Caption>
31 DECEMBER 2001 31 DECEMBER 2000
CHF CHF
Loss brought forward -3 811 504 -9 651 287
Loss (-)/profit for the period -34 225 151 5 839 783
NET LOSS AT THE END OF THE PERIOD -38 036 655 -3 811 504
</Table>
B- 62
Statutory Financial Information of InCentive Capital AG
PROPOSED APPROPRIATION
OF THE GENERAL LEGAL RESERVE TO OTHER RESERVE
<Table>
<Caption>
31 DECEMBER 2001
CHF
General legal reserve before allocation 506 109 149
Other reserve before allocation 0
Allocation to other reserve -50 000 000
General legal reserve after allocation 456 109 149
Other reserve after allocation 50 000 000
</Table>
B- 63
SHAREHOLDER INFORMATION
REGISTERED AND PRINCIPAL OFFICE InCentive Capital AG, Zug, Switzerland
PRINCIPAL SHAREHOLDERS Zurich Financial Services Group 25%
III Institutional Investors International
Corp. 21%
Rene Braginsky 20%
Hans Kaiser Family 11%
TYPE OF SECURITIES Bearer shares; each share carries one vote
OUTSTANDING SHARES 2 147 202
NOMINAL VALUE PER SHARE CHF 20
LISTING SWX Swiss Exchange, investment companies
segment
SECURITY NUMBER 286089
STOCK INFORMATION
Telekurs INC
Bloomberg INC SW
Reuters ICVZ.S
NAV PUBLICATION Finanz & Wirtschaft
REPORTING Annual Report, Interim Report
Permanent information on the internet
CONTACT ADDRESS, INVESTOR
RELATIONS Raoul Bloch
InCentive Asset Management AG
Todistrasse 36
CH-8002 Zurich
Phone +41 (1) 205 93 00
Fax +41 (1) 205 93 05
mail@incentiveasset.ch
www.incentivecapital.ch
B- 64
InCentive Capital AG
Baarerstrasse 8
CH-6301 Zug
Phone +41 (41) 712 29 45
Fax +41 (41) 712 29 46
mail@incentivecapital.ch
www.incentivecapital.ch
B- 65
SCHEDULE I
INFORMATION CONCERNING DIRECTORS AND EXECUTIVE
OFFICERS OF ZIMMER HOLDINGS, INC.
The name, business address, present principal occupation or employment and
five-year employment history of each director and executive officer of Zimmer
and certain other information are set forth below. The principal business
address of Zimmer and, unless otherwise indicated, the business address of each
person identified below is 345 East Main Street, Warsaw, Indiana 46580. Its
telephone number is (574) 267-6131. Where no date is shown, the individual has
occupied the position indicated for the past five years. Unless otherwise
indicated, each occupation set forth opposite an individual's name refers to
employment with Zimmer. Unless otherwise noted, all directors and executive
officers listed below are United States citizens.
1. DIRECTORS (INCLUDING EXECUTIVE OFFICERS WHO ARE DIRECTORS)
<Table>
<Caption>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT; FIVE YEAR EMPLOYMENT
NAME AGE HISTORY
- ---- --- -----------------------------------------------------------------
J. Raymond Elliott........................ 53 Mr. Elliott was appointed Chairman on August 6, 2001 and
President, Chief Executive Officer and Director of Zimmer since
March 20, 2001. Mr. Elliott was appointed President of Zimmer,
Inc., the Company's predecessor, in November 1997. Mr. Elliott
has approximately 30 years of experience in orthopaedics, medical
devices and consumer products. Prior to joining Zimmer, Inc., he
served as President and Chief Executive Officer of Cybex, Inc., a
publicly traded medical rehabilitation and cardiovascular
products company, from September 1995 to June 1997. Mr. Elliott
has served as a director on more than 15 business-related boards
in the U.S., Canada, Japan and Europe and has served on three
occasions as Chairman. He is currently a director of the State of
Indiana Workplace Development Board and a trustee of the
Orthopaedic Research and Education Foundation. He is a member of
the board of directors and chair of the orthopaedic sector of the
Advanced Medical Technology Association.
Augustus A. White, III, M.D., Ph.D. ...... 66 Dr. White has been a Director since 2001. He is also a Professor
of Orthopaedic Surgery at the Harvard Medical School and the
Harvard-MIT Division of Health Sciences and Technology; and
Orthopaedic Surgeon-in-Chief, Emeritus, at the Beth Israel
Deaconess Medical Center in Boston. He previously served as the
Chief of Spine Surgery at Beth Israel and is Director of the
Daniel E. Hogan Spine Fellowship Program. Dr. White is a director
of Orthologic Corp. Board Committees: Audit Committee,
Compensation and Management Development Committee and Science and
Technology Committee (Chair).
</Table>
SI-1
<Table>
<Caption>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT; FIVE YEAR EMPLOYMENT
NAME AGE HISTORY
- ---- --- -----------------------------------------------------------------
Larry C. Glasscock........................ 54 Mr. Glasscock has been a Director since 2001. He is also
President and Chief Executive Officer of Anthem Insurance
Companies, Inc.; the Blue Cross and Blue Shield licensee for
Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Maine,
Colorado, Nevada and Virginia, since October 1999; and President
and Chief Executive Officer of Anthem, Inc., the publicly held
parent of Anthem Insurance, since July 2001. Mr. Glasscock joined
Anthem Insurance in April 1998 as Senior Executive Vice President
and Chief Operating Officer. He was named President and Chief
Operating Officer in April 1999. Prior to joining Anthem
Insurance, Mr. Glasscock served as Chief Operating Officer of
CareFirst, Inc. from January through April 1998 and he served as
President and Chief Executive Officer of Group Hospitalization &
Medical Services, Inc., which did business as Blue Cross and Blue
Shield of the National Capital Area, from September 1993 to
January 1998. Mr. Glasscock is a director of Anthem, Inc. Board
Committees: Audit Committee (Chair) and Compensation and
Management Development Committee.
John L. McGoldrick........................ 62 Mr. McGoldrick has been a Director since 2001. He has also been
Executive Vice President and General Counsel of Bristol-Myers
Squibb Company since January 2000; Senior Vice President, General
Counsel and President, Medical Devices Group from December 1998
to January 2000 and Senior Vice President and General Counsel
from 1995 to December 1998. Mr. McGoldrick served as Senior
director of the Board of the New Jersey Transit Corporation and
member of the board of the Advanced Medical Technology
Association, the medical device industry's trade association from
1998 to 2002. He has served on several governmental reform
commissions in New Jersey. He is an invited participant of The
Aspen Institute on the World Economy and the World Economic Forum
Davos. Before joining Bristol-Myers Squibb, Mr. McGoldrick was a
senior partner and executive committee member of the law firm of
McCarter & English. Board Committees: Compensation and Management
Development Committee (Chair).
Regina E. Herzlinger, D.B.A. ............. 59 Dr. Herzlinger has been a Director since 2001. She is also The
Nancy R. McPherson Professor of Business Administration Chair at
the Harvard Business School. Dr. Herzlinger is a director of C.R.
Bard, Inc. and Noven Pharmaceuticals, Inc. Board Committees:
Audit Committee, Compensation and Management Development
Committee and Governance Committee (Chair).
</Table>
SI-2
2. EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
<Table>
<Caption>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT;
NAME AGE FIVE YEAR EMPLOYMENT HISTORY
- ---- --- ---------------------------------------------------
Sheryl L. Conley.......................... 42 Ms. Conley was named President, Zimmer
Reconstructive in September 2002. From May 2000 to
September 2002, she served as Vice President,
Global Brand Management and Commercialization,
where she was responsible for the our worldwide
branding, marketing and new product development
efforts. Ms. Conley was General Manager, Zimmer
Canada, from 1998 to 2000. In 1994, she was
selected to lead the initial product development
and brand marketing effort for the VerSys Hip
System. Ms. Conley joined Zimmer, Inc. in 1983 and
has held management positions in marketing,
operations and clinical research.
James T. Crines........................... 43 Mr. Crines joined Zimmer, Inc. in 1997 as Director
of Finance. On July 1, 2001, he was appointed Vice
President, Controller after serving as Vice
President, Finance and Information Technology since
September 2000. Mr. Crines served Zimmer, Inc. as
Director of Finance and Logistics, Japan from May
1999 until September 2000. Mr. Crines served as
Associate Director, Accounting at Zimmer's former
parent from September 1995 until he joined Zimmer,
Inc.
David C. Dvorak........................... 39 Mr. Dvorak was appointed Senior Vice President,
Corporate Affairs and General Counsel effective
December 6, 2001. He also serves as Corporate
Secretary, effective February 1, 2003. Prior to his
appointment, Mr. Dvorak served as Senior Vice
President, General Counsel and Corporate Secretary
and was a member of the Executive Committee of
STERIS Corporation, an Ohio-based leader in medical
sterilization and infection control products.
John S. Krelle............................ 51 Mr. Krelle joined Zimmer, Inc. in 1987. He was
named President, Zimmer Spine/Trauma in September
2002. From June 2000 to September 2002, he served
as President, Asia Pacific based in Tokyo, Japan.
Prior to that time, he was Vice President and
General Manager for Canada, Latin America and Asia
Pacific. Mr. Krelle has over 20 years of experience
in the orthopaedics and medical products industry;
his previous responsibilities with Zimmer, Inc.
include Vice President, Patient Care Global
Marketing and Development and Vice President,
Global Knee Marketing.
Sam R. Leno............................... 57 Mr. Leno was appointed Senior Vice President and
Chief Financial Officer of Zimmer effective July
16, 2001. Prior to his appointment, Mr. Leno served
as Senior Vice President and Chief Financial
Officer of Arrow Electronics, Inc., a global
distributor of electronic components, a position he
held from March 1999 until he joined us. From July
1995 until February 1999, Mr. Leno served as
Executive Vice President and Chief Financial
Officer of Corporate Express, Inc., a global
supplier of office products and services.
</Table>
SI-3
<Table>
<Caption>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT;
NAME AGE FIVE YEAR EMPLOYMENT HISTORY
- ---- --- ---------------------------------------------------
Bruno A. Melzi............................ 55 Mr. Melzi joined Zimmer, Inc. in 1990 as Managing
Director, Italy. In March 2000, Mr. Melzi was
promoted from Vice President and Managing Director
of Italy, Germany and Switzerland, a position he
held since October of 1997, to his current position
of President, Europe/MEA.
Stephen H. L. Ooi......................... 49 Mr. Ooi is President, Zimmer Asia-Pacific, a
position he has held since September 2002. Mr. Ooi
joined Zimmer in 1986. In 1987, he was named
General Manager, Asia, and in 1990 was promoted to
Vice President, Asia.
Bruce E. Peterson......................... 54 Mr. Peterson was appointed President, Americas of
Zimmer, Inc. effective July 1, 2001. He joined
Zimmer, Inc. in 1995 as Senior Vice President, U.S.
Sales and Marketing and was given additional
responsibility for Canada and Latin America in May
2000.
</Table>
SI-4
Questions or requests for assistance or additional copies of our prospectus
and the Form of Declaration of Acceptance and Assignment may be directed to the
Swiss offer manager at its addresses set forth below. A holder of InCentive
bearer shares also may contact his or her broker, dealer, commercial bank, trust
company or other nominee for assistance concerning our offer.
The Swiss Offer Manager for our offer is:
CREDIT SUISSE FIRST BOSTON
<Table>
By Mail: Facsimile Transmission: By Hand/Overnight:
(for Eligible Institutions
Department FBSC Only) Department FBSC
P.O. Box 900 +41 1 333 35 93 Uetlibergstrasse 231
CH-8070 Zurich CH-8045 Zurich
Switzerland Switzerland
</Table>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the DGCL, Article X of Zimmer's restated certificate of
incorporation and indemnification agreements entered into by Zimmer with its
directors provide for the exculpation of directors and the indemnification of
officers, directors, employees and agents under certain circumstances.
Section 145 of the DGCL provides that a corporation may indemnify directors
and officers as well as other employees and individuals against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement in
connection with specified actions, suits or proceedings, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation -- a "derivative action"), if they acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceedings, had no reasonable cause to believe their conduct was unlawful.
A similar standard is applicable in the case of derivative actions, except
that indemnification only extends to expenses (including attorneys' fees)
actually and reasonably incurred in connection with the defense or settlement of
such action, and the statute requires court approval before there can be any
indemnification where the person seeking indemnification has been found liable
to the corporation. The statute provides that it is not exclusive of other
indemnification that may be granted by a corporation's charter, by-laws,
disinterested director vote, stockholder vote, agreement or otherwise.
Set forth below is Article X of Zimmer's restated certificate of
incorporation pertaining to: the exculpation of directors; the indemnification
of officers, directors, employees and agents; and insurance.
SECTION 10.01. Limited Liability of Directors. A director shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except, if required by the DGCL, as
amended from time to time, for liability (a) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (b) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (c) under Section 174 of the DGCL, or (d) for any transaction
from which the director derived an improper personal benefit. Neither the
amendment nor repeal of this Section 10.01 shall eliminate or reduce the effect
of this Section 10.01 in respect of any matter occurring, or any cause of
action, suit or claim that, but for this Section 10.01 would accrue or arise,
prior to such amendment or repeal.
SECTION 10.02.
(a) Right to Indemnification. Each person who was or is made a party or is
threatened to be made a party to or is involved in any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that such
person, or a person of whom such person is the legal representative, is or was a
director or officer of the corporation or, while a director or officer of the
corporation, is or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation or of a partnership, joint
venture, trust or other enterprise, including service with respect to employee
benefit plans, whether the basis of such proceeding is alleged action in an
official capacity as a director, officer, employee or agent or in any other
capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the corporation to the fullest extent
authorized by the DGCL, as the same exists or may hereafter be amended, against
all expense, liability and loss (including attorneys' fees, judgments, fines,
amounts paid or to be paid in settlement, and excise taxes or penalties arising
under the Employee Retirement Income Security Act of 1974, as in effect from
time to time) reasonably incurred or suffered by such person in connection
therewith if such person acted in good faith and in a manner such person
reasonably believed to be in compliance with the standard of conduct set forth
in Section 145 (or any successor provision) of the DGCL and such indemnification
shall continue as to a person who has ceased to be a director, officer, employee
or agent and shall inure to the benefit of such person's heirs, executors
II-1
and administrators; provided, however, that, except as provided in paragraph (b)
hereof, the corporation shall indemnify any such person seeking indemnification
in connection with a proceeding (or part thereof) initiated by such person only
if such proceeding (or part thereof) was authorized by the board of directors.
The corporation shall pay the expenses incurred in defending any such proceeding
in advance of its final disposition with any advance payments to be paid by the
corporation within 20 calendar days after the receipt by the corporation of a
statement or statements from the claimant requesting such advance or advances
from time to time; provided, however, that, if and to the extent the DGCL
requires, the payment of such expenses incurred by a director or officer in such
person's capacity as a director or officer (and not in any other capacity in
which service was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a proceeding, shall be made only upon delivery to
the corporation of an undertaking, by or on behalf of such director or officer,
to repay all amounts so advanced if it shall ultimately be determined that such
director or officer is not entitled to be indemnified under this Section 10.02
or otherwise. The corporation may, to the extent authorized from time to time by
the board of directors, grant rights to indemnification, and rights to have the
corporation pay the expenses incurred in defending any proceeding in advance of
its final disposition, to any employee or agent of the corporation to the
fullest extent of the provisions of this article with respect to the
indemnification and advancement of expenses of directors and officers of the
corporation.
(b) Right of Claimant to Bring Suit. If a claim under paragraph (a) of
this Section 10.02 is not paid in full by the corporation within 30 calendar
days after a written claim has been received by the corporation, the claimant
may at any time thereafter bring suit against the corporation to recover the
unpaid amount of the claim and, if successful in whole or in part, the claimant
shall be entitled to be paid also the expense of prosecuting such claim. It
shall be a defense to any such action (other than an action brought to enforce a
claim for expenses incurred in defending any proceeding in advance of its final
disposition where the required undertaking, if any is required, has been
tendered to the corporation) that the claimant has not met the standard of
conduct which makes it permissible under the DGCL for the corporation to
indemnify the claimant for the amount claimed, but the burden of proving such
defense shall be on the corporation. Neither the failure of the corporation
(including its board of directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because the claimant has met the applicable standard of conduct set forth in the
DGCL, nor an actual determination by the corporation (including its board of
directors, independent legal counsel, or its stockholders) that the claimant has
not met such applicable standard of conduct, shall be a defense to the action or
create a presumption that the claimant has not met the applicable standard of
conduct.
(c) Non-Exclusivity of Rights. The right to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this Section 10.02 shall not be exclusive of any other
right which any person may have or hereafter acquire under any statute,
provision of the restated certificate of incorporation, by-law, agreement, vote
of stockholders or disinterested directors or otherwise. No repeal or
modification of this article shall in any way diminish or adversely affect the
rights of any director, officer, employee or agent of the corporation hereunder
in respect of any occurrence or matter arising prior to any such repeal or
modification.
(d) Insurance. The corporation may maintain insurance, at its expense, to
protect itself and any person who is or was a director, officer, employee or
agent of the corporation or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any such expense, liability or
loss, whether or not the corporation would have the power to indemnify such
person against such expense, liability or loss under the DGCL.
In addition, Zimmer has also purchased liability insurance policies
covering certain directors and officers of Zimmer.
II-2
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2 Contribution and Distribution Agreement between
Bristol-Myers Squibb Company and Zimmer Holdings, Inc.,
dated as of August 6, 2001 (incorporated herein by reference
to Exhibit 10.1 to Current Report on Form 8-K/A dated
December 7, 2001)
3.1 Restated Certificate of Incorporation of Zimmer Holdings,
Inc. (incorporated herein by reference to Exhibit 3.1 to
Current Report on Form 8-K dated November 13, 2001)
3.2 Certificate of Designations of Series A Participating
Cumulative Preferred Stock of Zimmer Holdings, Inc., dated
as of August 6, 2001 (incorporated herein by reference to
Exhibit 3.2 to Current Report on Form 8-K dated November 13,
2001)
3.3 Restated By-laws of Zimmer Holdings, Inc. (incorporated
herein by reference to Exhibit 3.3 to Current Report on Form
8-K dated November 13, 2001)
4.1 Specimen Common Stock certificate (incorporated herein by
reference to Exhibit 4.1 to Amendment No. 3 to Registration
Statement on Form 10, dated July 6, 2001)
4.2 Rights Agreement between Zimmer Holdings, Inc. and Mellon
Investor Services LLC, as Rights Agent, dated as of August
6, 2001 (incorporated herein by reference to Exhibit 4.1 to
Current Report on Form 8-K dated November 13, 2001)
4.3 Specimen Right Certificate (incorporated herein by reference
to Exhibit B to the Rights Agreement filed as Exhibit 4.2
hereto)
4.4 Amendment No. 1 dated June 15, 2002 to the Rights Agreement
dated July 30, 2001 between Zimmer Holdings, Inc. and Mellon
Investor Services, LLC (incorporated by reference to Exhibit
4.1 to Current Report on Form 8-K dated June 17, 2002)
5 Opinion of Dewey Ballantine LLP*
8.1 Opinion of Dewey Ballantine LLP (re: U.S. tax matters)*
8.2 Opinion of Pestalozzi Lachenal Patry (re: Swiss tax
matters)*
8.3 Opinion of Bird & Bird (re: U.K. tax matters)*
10.1 Employee Benefits Agreement between Bristol-Myers Squibb
Company and Zimmer Holdings, Inc., dated as of August 6,
2001 (incorporated herein by reference to Exhibit 10.3 to
Current Report on Form 8-K dated November 13, 2001)
10.2 Interim Services Agreement between Bristol-Myers Squibb
Company and Zimmer Holdings, Inc., dated as of August 6,
2001 (incorporated herein by reference to Exhibit 10.2 to
Current Report on Form 8-K dated November 13, 2001)
10.3 Zimmer Holdings, Inc. 2001 Stock Incentive Plan, effective
August 6, 2001 (incorporated herein by reference to Exhibit
10.3 to Current Report on Form 8-K dated August 6, 2001)
10.4 Tax Sharing Agreement between Bristol-Myers Squibb Company
and Zimmer Holdings, Inc., dated as of August 6, 2001
(incorporated herein by reference to Exhibit 10.4 to Current
Report on Form 8-K dated November 13, 2001)
10.5 Zimmer Holdings, Inc. Executive Performance Incentive Plan,
effective August 6, 2001 (incorporated herein by reference
to Exhibit 10.5 to Current Report on Form 8-K dated August
6, 2001)
10.6 Zimmer Holdings, Inc. Stock Plan for Non-Employee Directors,
effective August 6, 2001 (incorporated by reference to
Exhibit 10.6 to Current Report on Form 8-K dated August 6,
2001)
10.7 Zimmer Holdings, Inc. Deferred Compensation Plan for
Non-Employee Directors, effective August 6, 2001
(incorporated herein by reference to Exhibit 10.7 to Current
Report on Form 8-K dated August 6, 2001)
10.8 Zimmer Holdings, Inc. Long-Term Disability Income Plan for
Highly Compensated Employees (incorporated herein by
reference to Exhibit 10.15 to Current Report on Form 8-K
dated November 13, 2001)
10.9 Compensation Agreement of J. Raymond Elliott (incorporated
herein by reference to Exhibit 10.10 to Current Report on
Form 8-K dated November 13, 2001)
</Table>
II-3
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.10 Compensation Agreement of Bruce E. Peterson (incorporated
herein by reference to Exhibit 10.12 to Current Report on
Form 8-K dated November 13, 2001)
10.11 Compensation Agreement of Bruno A. Melzi (incorporated
herein by reference to Exhibit 10.21 to Annual Report on
Form 10-K filed March 13, 2002)
10.12 Compensation Agreement of John S. Loveman-Krelle
(incorporated herein by reference to Exhibit 10.14 to
Current Report on Form 8-K dated November 13, 2001)
10.13 Change in Control Severance Agreement with J. Raymond
Elliott (incorporated herein by reference to Exhibit 10.2 to
Quarterly Report on Form 10-Q filed May 8, 2002)
10.14 Change in Control Severance Agreement with Sam R. Leno,
Bruno A. Melzi, John S. Loveman-Krelle, Bruce E. Peterson
and David C. Dvorak (incorporated herein by reference to
Exhibit 10.3 to Quarterly Report on Form 10-Q filed May 8,
2002)
10.15 Change in Control Severance Agreement with James T. Crines
(incorporated herein by reference to Exhibit 10.4 to
Quarterly Report on Form 10-Q filed May 8, 2002)
10.16 Change in Control Severance Agreement with Sheryl L. Conley
(incorporated herein by reference to Exhibit 10.20 on Annual
Report on 10-K filed March 12, 2003)
10.17 Change in Control Severance Agreement with Stephen H. L. Ooi
(incorporated herein by reference to Exhibit 10.21 on Annual
Report on 10-K filed March 12, 2003)
10.18 Amendment No. 2 to Letter Agreement dated July 17, 2002
between Zimmer, Inc. and Bank of America, N.A. dated
February 5, 2002 (incorporated herein by reference to
Exhibit 10.1 to Quarterly Report on Form 10-Q filed May 8,
2002)
10.19 First Amendment dated July 15, 2002 to the Uncommitted
Credit Agreement dated October 29, 2001 between Zimmer, Inc.
and Sumitomo Mitsui Banking Corporation (incorporated herein
by reference to Exhibit 10.1 to Quarterly Report on Form
10-Q filed November 12, 2002)
10.20 Three Year Competitive Advance and Revolving Credit Facility
among Zimmer Holdings, Inc., Zimmer, Inc., Zimmer K.K.,
Zimmer LTD. and the lenders named therein, dated as of July
31, 2001 (incorporated herein by reference to Exhibit 10.1
to Current Report on Form 8-K dated August 6, 2001)
10.21 First Amendment to Three Year Competitive Advance and
Revolving Credit Facility among Zimmer Holdings, Inc.,
Zimmer, Inc., Zimmer K.K., Zimmer LTD. and the lenders named
therein, dated as of December 10, 2001 (incorporated herein
by reference to Exhibit 10.26 to Annual Report on Form 10-K
dated March 13, 2002)
10.22 $26,000,000 Uncommitted Standard Instrument Line of Credit
between Zimmer, Inc. and subsidiaries and Bank of America,
N.A. and its affiliates and subsidiaries dated July 17, 2001
(incorporated herein by reference to Exhibit 10.23 to Annual
Report on Form 10-K filed March 13, 2002)
10.23 Amendment No. 1 to Letter Agreement dated July 17, 2001
between Zimmer, Inc. and Bank of America, N.A. dated July
26, 2001 (incorporated herein by reference to Exhibit 10.24
to Annual Report on Form 10-K filed March 13, 2002)
10.24 Guarantee Assumption Agreement, dated as of June 24, 2002,
made by each of the signatories thereto in favor of the
lenders named in the Three Year Competitive Advance and
Revolving Credit Facility Agreement dated as of July 31,
2001 (incorporated herein by reference to Exhibit 10.1 to
Quarterly Report on Form 10-Q filed August 9, 2002)
10.25 Uncommitted Credit Agreement between Zimmer, Inc. and
Sumitomo Mitsui Banking Corporation dated October 29, 2001
(incorporated herein by reference to Exhibit 10.25 to Annual
Report on Form 10-K filed March 13, 2002)
10.26 US$20,000,000 Uncommitted Line of Credit between Zimmer
Holdings, Inc. and Fleet National Bank dated October 16,
2002 (incorporated herein by reference to Exhibit 10.2 to
Quarterly Report on Form 10-Q filed November 12, 2002)
</Table>
II-4
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.27 $1,350,000,000 Revolving Credit and Term Loan Agreement
among Zimmer Holdings, Inc., Zimmer, Inc., Zimmer K.K.,
Zimmer Ltd., the borrowing subsidiaries, and lenders named
therein, dated as of June 12, 2003 (incorporated herein by
reference to Exhibit 10.27 to the Registration Statement on
Form S-4 filed June 13, 2003 (Registration No. 333-105561))
10.28 $400,000,000 364-Day Credit Agreement among Zimmer Holdings,
Inc., Zimmer, Inc., the borrowing subsidiaries and their
lenders named therein, dated as of June 12, 2003
(incorporated herein by reference to Exhibit 10.28 to the
Registration Statement on Form S-4 filed June 13, 2003
(Registration No. 333-105561))
23.1 Consent of PricewaterhouseCoopers LLP concerning financial
statements of Zimmer Holdings, Inc.
23.2 Consent of independent public accountants concerning
financial statements of Centerpulse AG**
23.3 Consent of independent public accountants concerning
financial statements of InCentive Capital AG**
23.4 Consent of Dewey Ballantine LLP (included in the Opinion of
Dewey Ballantine LLP in Exhibit 5.1)*
23.5 Consent of Dewey Ballantine LLP (included in the Opinion of
Dewey Ballantine LLP in Exhibit 8.1)*
23.6 Consent of Pestalozzi Lachenal Patry (included in the
Opinion of Pestalozzi Lachenal Patry in Exhibit 8.2)*
23.7 Consent of Bird & Bird (included in the Opinion of Bird &
Bird in Exhibit 8.3)*
24.1 Powers of Attorney*
99.1 Form of Declaration of Acceptance and Assignment*
99.2 Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9*
99.3 Swiss Pre-Announcement, dated May 20, 2003, of Zimmer
Holdings, Inc. with respect to its offer for InCentive
Capital AG bearer shares (incorporated by reference to
Zimmer's Rule 425 filing dated May 20, 2003)
99.4 Swiss Pre-Announcement, dated May 20, 2003, of Zimmer
Holdings, Inc. with respect to its offer for Centerpulse
registered shares (incorporated by reference to Zimmer's
Rule 425 filing dated May 20, 2003)
99.5 Press Release of Zimmer Holdings, Inc., dated May 20, 2003
(incorporated herein by reference to Zimmer's Rule 425
filing dated May 20, 2003)
99.6 Form of Swiss offer prospectus*
</Table>
- ---------------
* Previously filed.
** Omitted pursuant to Securities Act Rule 437 application.
ITEM 22. UNDERTAKINGS.
a. The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
i. To include any prospectus required in Section 10(a)(3) of the
Securities Act of 1933;
ii. To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b)
II-5
under the Securities Act, if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table
in the effective registration statement; and
iii. To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
2. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof;
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
b. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
c. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
d. The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
e. The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Warsaw,
state of Indiana, on June 19, 2003.
ZIMMER HOLDINGS, INC.
By: /s/ J. RAYMOND ELLIOTT
--------------------------------------
J. Raymond Elliott
Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ J. RAYMOND ELLIOTT Chairman of the Board, President, June 19, 2003
- ------------------------------------------ Chief Executive Officer and Director
J. Raymond Elliott (Principal Executive Officer)
* Senior Vice President and Chief Financial June 19, 2003
- ------------------------------------------ Officer (Principal Financial Officer)
Sam R. Leno
* Vice President, Controller June 19, 2003
- ------------------------------------------ (Principal Accounting Officer)
James T. Crines
* Director June 19, 2003
- ------------------------------------------
Larry C. Glasscock
* Director June 19, 2003
- ------------------------------------------
Regina E. Herzlinger
* Director June 19, 2003
- ------------------------------------------
John L. McGoldrick
* Director June 19, 2003
- ------------------------------------------
Augustus A. White III
*By: /s/ J. RAYMOND ELLIOTT
-------------------------------------
J. Raymond Elliott
Attorney-in-fact for each of the persons
indicated
</Table>
II-7
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2 Contribution and Distribution Agreement between
Bristol-Myers Squibb Company and Zimmer Holdings, Inc.,
dated as of August 6, 2001 (incorporated herein by reference
to Exhibit 10.1 to Current Report on Form 8-K/A dated
December 7, 2001)
3.1 Restated Certificate of Incorporation of Zimmer Holdings,
Inc. (incorporated herein by reference to Exhibit 3.1 to
Current Report on Form 8-K dated November 13, 2001)
3.2 Certificate of Designations of Series A Participating
Cumulative Preferred Stock of Zimmer Holdings, Inc., dated
as of August 6, 2001 (incorporated herein by reference to
Exhibit 3.2 to Current Report on Form 8-K dated November 13,
2001)
3.3 Restated By-laws of Zimmer Holdings, Inc. (incorporated
herein by reference to Exhibit 3.3 to Current Report on Form
8-K dated November 13, 2001)
4.1 Specimen Common Stock certificate (incorporated herein by
reference to Exhibit 4.1 to Amendment No. 3 to Registration
Statement on Form 10, dated July 6, 2001)
4.2 Rights Agreement between Zimmer Holdings, Inc. and Mellon
Investor Services LLC, as Rights Agent, dated as of August
6, 2001 (incorporated herein by reference to Exhibit 4.1 to
Current Report on Form 8-K dated November 13, 2001)
4.3 Specimen Right Certificate (incorporated herein by reference
to Exhibit B to the Rights Agreement filed as Exhibit 4.2
hereto)
4.4 Amendment No. 1 dated June 15, 2002 to the Rights Agreement
dated July 30, 2001 between Zimmer Holdings, Inc. and Mellon
Investor Services, LLC (incorporated by reference to Exhibit
4.1 to Current Report on Form 8-K dated June 17, 2002)
5 Opinion of Dewey Ballantine LLP*
8.1 Opinion of Dewey Ballantine LLP (re: U.S. tax matters)*
8.2 Opinion of Pestalozzi Lachenal Patry (re: Swiss tax
matters)*
8.3 Opinion of Bird & Bird (re: U.K. tax matters)*
10.1 Employee Benefits Agreement between Bristol-Myers Squibb
Company and Zimmer Holdings, Inc., dated as of August 6,
2001 (incorporated herein by reference to Exhibit 10.3 to
Current Report on Form 8-K dated November 13, 2001)
10.2 Interim Services Agreement between Bristol-Myers Squibb
Company and Zimmer Holdings, Inc., dated as of August 6,
2001 (incorporated herein by reference to Exhibit 10.2 to
Current Report on Form 8-K dated November 13, 2001)
10.3 Zimmer Holdings, Inc. 2001 Stock Incentive Plan, effective
August 6, 2001 (incorporated herein by reference to Exhibit
10.3 to Current Report on Form 8-K dated August 6, 2001)
10.4 Tax Sharing Agreement between Bristol-Myers Squibb Company
and Zimmer Holdings, Inc., dated as of August 6, 2001
(incorporated herein by reference to Exhibit 10.4 to Current
Report on Form 8-K dated November 13, 2001)
10.5 Zimmer Holdings, Inc. Executive Performance Incentive Plan,
effective August 6, 2001 (incorporated herein by reference
to Exhibit 10.5 to Current Report on Form 8-K dated August
6, 2001)
10.6 Zimmer Holdings, Inc. Stock Plan for Non-Employee Directors,
effective August 6, 2001 (incorporated by reference to
Exhibit 10.6 to Current Report on Form 8-K dated August 6,
2001)
10.7 Zimmer Holdings, Inc. Deferred Compensation Plan for
Non-Employee Directors, effective August 6, 2001
(incorporated herein by reference to Exhibit 10.7 to Current
Report on Form 8-K dated August 6, 2001)
10.8 Zimmer Holdings, Inc. Long-Term Disability Income Plan for
Highly Compensated Employees (incorporated herein by
reference to Exhibit 10.15 to Current Report on Form 8-K
dated November 13, 2001)
10.9 Compensation Agreement of J. Raymond Elliott (incorporated
herein by reference to Exhibit 10.10 to Current Report on
Form 8-K dated November 13, 2001)
</Table>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.10 Compensation Agreement of Bruce E. Peterson (incorporated
herein by reference to Exhibit 10.12 to Current Report on
Form 8-K dated November 13, 2001)
10.11 Compensation Agreement of Bruno A. Melzi (incorporated
herein by reference to Exhibit 10.21 to Annual Report on
Form 10-K filed March 13, 2002)
10.12 Compensation Agreement of John S. Loveman-Krelle
(incorporated herein by reference to Exhibit 10.14 to
Current Report on Form 8-K dated November 13, 2001)
10.13 Change in Control Severance Agreement with J. Raymond
Elliott (incorporated herein by reference to Exhibit 10.2 to
Quarterly Report on Form 10-Q filed May 8, 2002)
10.14 Change in Control Severance Agreement with Sam R. Leno,
Bruno A. Melzi, John S. Loveman-Krelle, Bruce E. Peterson
and David C. Dvorak (incorporated herein by reference to
Exhibit 10.3 to Quarterly Report on Form 10-Q filed May 8,
2002)
10.15 Change in Control Severance Agreement with James T. Crines
(incorporated herein by reference to Exhibit 10.4 to
Quarterly Report on Form 10-Q filed May 8, 2002)
10.16 Change in Control Severance Agreement with Sheryl L. Conley
(incorporated herein by reference to Exhibit 10.20 on Annual
Report on 10-K filed March 12, 2003)
10.17 Change in Control Severance Agreement with Stephen H. L. Ooi
(incorporated herein by reference to Exhibit 10.21 on Annual
Report on 10-K filed March 12, 2003)
10.18 Amendment No. 2 to Letter Agreement dated July 17, 2002
between Zimmer, Inc. and Bank of America, N.A. dated
February 5, 2002 (incorporated herein by reference to
Exhibit 10.1 to Quarterly Report on Form 10-Q filed May 8,
2002)
10.19 First Amendment dated July 15, 2002 to the Uncommitted
Credit Agreement dated October 29, 2001 between Zimmer, Inc.
and Sumitomo Mitsui Banking Corporation (incorporated herein
by reference to Exhibit 10.1 to Quarterly Report on Form
10-Q filed November 12, 2002)
10.20 Three Year Competitive Advance and Revolving Credit Facility
among Zimmer Holdings, Inc., Zimmer, Inc., Zimmer K.K.,
Zimmer LTD. and the lenders named therein, dated as of July
31, 2001 (incorporated herein by reference to Exhibit 10.1
to Current Report on Form 8-K dated August 6, 2001)
10.21 First Amendment to Three Year Competitive Advance and
Revolving Credit Facility among Zimmer Holdings, Inc.,
Zimmer, Inc., Zimmer K.K., Zimmer LTD. and the lenders named
therein, dated as of December 10, 2001 (incorporated herein
by reference to Exhibit 10.26 to Annual Report on Form 10-K
dated March 13, 2002)
10.22 $26,000,000 Uncommitted Standard Instrument Line of Credit
between Zimmer, Inc. and subsidiaries and Bank of America,
N.A. and its affiliates and subsidiaries dated July 17, 2001
(incorporated herein by reference to Exhibit 10.23 to Annual
Report on Form 10-K filed March 13, 2002)
10.23 Amendment No. 1 to Letter Agreement dated July 17, 2001
between Zimmer, Inc. and Bank of America, N.A. dated July
26, 2001 (incorporated herein by reference to Exhibit 10.24
to Annual Report on Form 10-K filed March 13, 2002)
10.24 Guarantee Assumption Agreement, dated as of June 24, 2002,
made by each of the signatories thereto in favor of the
lenders named in the Three Year Competitive Advance and
Revolving Credit Facility Agreement dated as of July 31,
2001 (incorporated herein by reference to Exhibit 10.1 to
Quarterly Report on Form 10-Q filed August 9, 2002)
10.25 Uncommitted Credit Agreement between Zimmer, Inc. and
Sumitomo Mitsui Banking Corporation dated October 29, 2001
(incorporated herein by reference to Exhibit 10.25 to Annual
Report on Form 10-K filed March 13, 2002)
10.26 US$20,000,000 Uncommitted Line of Credit between Zimmer
Holdings, Inc. and Fleet National Bank dated October 16,
2002 (incorporated herein by reference to Exhibit 10.2 to
Quarterly Report on Form 10-Q filed November 12, 2002)
</Table>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.27 $1,350,000,000 Revolving Credit and Term Loan Agreement
among Zimmer Holdings, Inc., Zimmer, Inc., Zimmer K.K.,
Zimmer Ltd., the borrowing subsidiaries, and lenders named
therein, dated as of June 12, 2003 (incorporated herein by
reference to Exhibit 10.27 to the Registration Statement on
Form S-4 filed June 13, 2003 (Registration No. 333-105561))
10.28 $400,000,000 364-Day Credit Agreement among Zimmer Holdings,
Inc., Zimmer, Inc., the borrowing subsidiaries and their
lenders named therein, dated as of June 12, 2003
(incorporated herein by reference to Exhibit 10.28 to the
Registration Statement on Form S-4 filed June 13, 2003
(Registration No. 333-105561))
23.1 Consent of PricewaterhouseCoopers LLP concerning financial
statements of Zimmer Holdings, Inc.
23.2 Consent of independent public accountants concerning
financial statements of Centerpulse AG**
23.3 Consent of independent public accountants concerning
financial statements of InCentive Capital AG**
23.4 Consent of Dewey Ballantine LLP (included in the Opinion of
Dewey Ballantine LLP in Exhibit 5.1)*
23.5 Consent of Dewey Ballantine LLP (included in the Opinion of
Dewey Ballantine LLP in Exhibit 8.1)*
23.6 Consent of Pestalozzi Lachenal Patry (included in the
Opinion of Pestalozzi Lachenal Patry in Exhibit 8.2)*
23.7 Consent of Bird & Bird (included in the Opinion of Bird &
Bird in Exhibit 8.3)*
24.1 Powers of Attorney*
99.1 Form of Declaration of Acceptance and Assignment*
99.2 Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9*
99.3 Swiss Pre-Announcement, dated May 20, 2003, of Zimmer
Holdings, Inc. with respect to its offer for InCentive
Capital AG bearer shares (incorporated by reference to
Zimmer's Rule 425 filing dated May 20, 2003)
99.4 Swiss Pre-Announcement, dated May 20, 2003, of Zimmer
Holdings, Inc. with respect to its offer for Centerpulse
registered shares (incorporated by reference to Zimmer's
Rule 425 filing dated May 20, 2003)
99.5 Press Release of Zimmer Holdings, Inc., dated May 20, 2003
(incorporated herein by reference to Zimmer's Rule 425
filing dated May 20, 2003)
99.6 Form of Swiss offer prospectus*
</Table>
- ---------------
* Previously filed.
** Omitted pursuant to Securities Act Rule 437 application.