-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Wjrksk9KO4fXBDYI6plg+6TZDqf4a0XSUJMqx9RJsHfy6UYyo3tWnYH8GLMCrE0d aKJy4JwufOkI6KroLYpErA== 0000897101-02-000215.txt : 20020415 0000897101-02-000215.hdr.sgml : 20020415 ACCESSION NUMBER: 0000897101-02-000215 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ST JUDE MEDICAL INC CENTRAL INDEX KEY: 0000203077 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 411276891 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12441 FILM NUMBER: 02594426 BUSINESS ADDRESS: STREET 1: ONE LILLEHEI PLAZA CITY: ST PAUL STATE: MN ZIP: 55117 BUSINESS PHONE: 6514832000 MAIL ADDRESS: STREET 1: ONE LILLEHEI PLAZA CITY: ST PAUL STATE: MN ZIP: 55117 10-K 1 stjude021570_10k.txt ST. JUDE MEDICAL, INC. FORM 10K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ------------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 COMMISSION FILE NO. 0-8672 ------------------------------ ST. JUDE MEDICAL, INC. (Exact name of Registrant as specified in its charter) MINNESOTA 41-1276891 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) ONE LILLEHEI PLAZA ST. PAUL, MINNESOTA 55117 (Address of principal executive offices) (651) 483-2000 (Registrant's telephone number, including area code) ------------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: COMMON STOCK ($.10 PAR VALUE) PREFERRED STOCK PURCHASE RIGHTS (Title of class) (Title of class) NEW YORK STOCK EXCHANGE AND CHICAGO BOARD OPTIONS EXCHANGE (Name of exchange on which registered) SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE ------------------------------ Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months; and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ___ The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $7.1 billion at February 22, 2002, when the closing sale price of such stock, as reported on the New York Stock Exchange, was $81.13 per share. The Registrant had 87,754,141 shares of its $0.10 par value Common Stock outstanding as of February 22, 2002. ================================================================================ TABLE OF CONTENTS ITEM DESCRIPTION PAGE - ---- ----------- ---- PART I 1. Business.......................................................... 1 2. Properties........................................................ 9 3. Legal Proceedings................................................. 9 4. Submission of Matters to a Vote of Security Holders............... 11 4A. Executive Officers of the Registrant.............................. 11 PART II 5. Market for Registrant's Common Equity and Related Shareholder Matters........................................... 13 6. Selected Financial Data........................................... 13 7. Management's Discussion and Analysis of Results of Operations and Financial Condition....................................... 13 7A. Quantitative and Qualitative Disclosures About Market Risk........ 14 8. Financial Statements and Supplementary Data....................... 14 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................................... 14 PART III 10. Directors and Executive Officers of the Registrant................ 14 11. Executive Compensation............................................ 14 12. Security Ownership of Certain Beneficial Owners and Management.... 14 13. Certain Relationships and Related Transactions.................... 15 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 15 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2001, are incorporated by reference in Parts I and II. Portions of the Company's definitive Proxy Statement dated March 28, 2002, are incorporated by reference in Part III. PART I ITEM 1. BUSINESS GENERAL St. Jude Medical, Inc., together with its subsidiaries (collectively "St. Jude" or the "Company") is a leader in the development, manufacturing and distribution of cardiovascular medical devices for the global cardiac rhythm management (CRM), cardiology and vascular access (C/VA), and cardiac surgery (CS) markets. The Company's principal products in each of these markets are: bradycardia pacemaker systems, tachycardia implantable cardioverter defibrillator (ICD) systems, and electrophysiology (EP) catheters in CRM; vascular closure devices, catheters, guidewires and introducers in C/VA; and mechanical and tissue heart valves, valve repair products, and suture-free devices to facilitate coronary artery bypass graft anastomoses in CS. The Company markets its products primarily in the United States, Western Europe and Japan through both a direct employee-based sales organization and independent distributors. St. Jude also sells its products in Eastern Europe, Africa, the Middle East, Canada, Latin America and the Asia-Pacific region through employee-based sales organizations and independent distributors. On September 27, 1999, St. Jude acquired Vascular Science, Inc. ("VSI"), a development-stage company focused on the development of suture-free devices to facilitate coronary artery bypass graft anastomoses. On March 16, 1999, St. Jude purchased the Angio-Seal(TM) business of Tyco International Ltd. Angio-Seal(TM) manufactured and marketed vascular closure devices. During 2001, 2000 and 1999, the Company acquired various businesses involved in distribution of the Company's products. The Company historically reported under two segments. During 2001, the Company completed a reorganization of its global sales activities, which resulted in changes to its internal management and financial reporting structure. The Company now manages its business on the basis of one reportable segment: the development, manufacture and distribution of cardiovascular medical devices. In 2001, approximately 72% of net sales were derived from products sold in the cardiac rhythm management market, 10% in the cardiology and vascular access market, and 18% in the cardiac surgery market. In 2000, approximately 69% of net sales were derived from products sold in the cardiac rhythm management market, 9% in the cardiology and vascular access market, and 22% in the cardiac surgery market. Approximately 65% of the Company's 2001 net sales were in the U.S. market, as compared with 63% in 2000. Additional geographical information is set forth in the Company's 2001 Annual Report to Shareholders on page 22 of the Financial Report and is incorporated herein by reference. St. Jude was incorporated in Minnesota in 1976. 1 PRINCIPAL PRODUCTS CARDIAC RHYTHM MANAGEMENT: The Company's pacemakers and related systems treat patients with hearts that beat inappropriately slow, a condition known as bradycardia. Typically implanted pectorally, just below the collarbone, pacemakers monitor the heart's rate and, when necessary, deliver low-level electrical impulses that stimulate an appropriate heartbeat. The pacemaker is connected to the heart by one or two leads that carry the electrical impulses to the heart and information from the heart back to the pacemaker. An external programmer enables the physician to retrieve diagnostic information from the pacemaker and reprogram the pacemaker in accordance with the patient's changing needs. Single-chamber pacemakers stimulate only one chamber of the heart (atrium or ventricle), while dual-chamber devices can sense and pace in both the upper and lower chambers. St. Jude's current pacing products include the advanced featured Identity(TM) family of pacemakers, approved by the U.S. Food and Drug Administration (FDA) in November 2001. The Identity(TM) pacemaker models maintain all of the therapeutic advancements of previous St. Jude Medical pacemakers, including the AF Suppression(TM) Pacing Algorithm and the BEAT-BY-BEAT(TM) AutoCapture(TM) Pacing System. The Identity(TM) models expand the Company's AFx(TM) feature set to include a suite of arrhythmia diagnostics, including dual-channel stored electrograms. AFx(TM) features are designed to help physicians better manage pacemaker patients suffering from atrial fibrillation (AF) - the world's most common cardiac arrhythmia. Also available are Integrity(R) u (Micro) and the Integrity AFx(R) pacemaker models. The Integrity(R) models build on the platform of the Affinity(R) product line with the Beat-by-Beat(TM) AutoCapture(TM) Pacing System. Other available products include the Affinity(R) pacemakers, the Entity(R) family of pacemakers, containing the Omnisense(TM) activity-based sensor, and the Tempo(R) pacemaker family, which uses fifth-generation Minute Ventilation sensor technology. These pacemaker families are highly automatic and contain many advanced features and diagnostic capabilities to optimize cardiac therapy. All are small and physiologic in shape to enhance patient comfort. The Microny(R) II SR+ and Microny(R) K SR are single chamber pacemakers available in the United States. Other single-chamber pacemakers, the Microny(R) SR+ and the Regency(R) pacemaker families, are also available outside the United States. The Identity(TM), Integrity(R), Affinity(R), Entity(TM) and Regency(R) families of pacemakers, as well as the Microny(R) SR+ pacemaker, all offer the unique feature of the BEAT-BY-BEAT(TM) AutoCapture(TM) pacing system. The AutoCapture(TM) pacing system enables the pacemaker to monitor every paced beat to verify that the heart has been stimulated ("capture"), deliver a back-up pulse in the event of noncapture, continuously measure threshold, and make adjustments in energy output to match changing patient needs. In addition, the Identity(TM) and Integrity(R) pacemakers include St. Jude Medical's AF Suppression(TM) Pacing Algorithm, a therapy designed to suppress atrial fibrillation. St. Jude's current pacing leads include the active-fixation Tendril(R) DX and SDX lead families and the passive-fixation Passive Plus(R) DX family which are available worldwide, and the passive-fixation Membrane(TM) EX(TM) family which is currently available outside the United States. All three lead families feature steroid elution, which helps suppress the body's inflammatory response to a foreign object. Outside the United States, St. Jude also markets the Genesis(TM) System, a device-based ventricular resynchronization system designed for the treatment of heart failure (HF) and suppression of atrial fibrillation. HF impairs the heart's ability to pump blood efficiently, causing shortness of breath, fatigue, swelling and other debilitating symptoms. The Genesis(TM) System includes three components: the Frontier(TM) 3 x 2 biventricular stimulation device, designed to enhance cardiac function by resynchronizing the contractions of the heart's two ventricles, the Aescula(TM) LV lead, and the Alliance(TM) Catheter Delivery System. 2 ICDs and related systems treat patients with hearts that beat inappropriately fast, a condition known as tachycardia. ICDs monitor the heartbeat and deliver higher energy electrical impulses, or "shocks," to terminate ventricular tachycardia (VT) and ventricular fibrillation (VF). In ventricular tachycardia, the lower chambers of the heart contract at an abnormally rapid rate and typically deliver less blood to the body's tissues and organs. VT can progress to VF, in which the heart beats so rapidly and erratically that it can no longer pump blood. Like pacemakers, ICDs are typically implanted pectorally, connected to the heart by leads, and programmed non-invasively. The full St. Jude ICD product offering includes the Atlas(TM) ICD, Photon(R) u ICD, Photon(R) ICD, and Contour(R) MD ICD. St. Jude received FDA approval on the Atlas(TM) ICD family, powerful rate-adaptive ICDs, in December 2001. Representing an improvement from conventional high-energy ICDs, Atlas(TM) ICDs offer high energy and small size without compromising charge times, longevity, or feature set flexibility. Other available ICDs include the Photon(R) u (Micro) DR/VR ICD family, the second-generation ICD products in a series of downsized dual- and single-chamber St. Jude Medical ICDs with advanced technology. Like the clinically proven Photon(R) DR ICD, FDA-approved in October 2000, the Photon(R) Micro DR/VR ICD family maintains a comprehensive feature set underscored by precise SVT discrimination and AV Rate Branch designed to enhance the precision of ventricular-based arrhythmia detection in a compact, physiologic-shaped package. In addition, the Profile(TM) MD ICD is available outside the United States. The Company's ICDs are used with the dual electrode SPL and single electrode TVL and TVL-ADX (active-fix) transvenous leads. The Atlas(TM) ICD, Photon(R) u ICD, Photon(R) ICD, Profile(TM) MD ICD, and Contour(R) MD ICD are programmable with the Model 3510 universal programmer. The Model 3510 universal pacemaker and ICD programmer is an easy-to-use programmer that supports St. Jude's ICDs and pacemakers, including the AtlasTM ICD family and the Identity(TM) pacemaker family. The Model 3510 universal programmer allows the physician to utilize the diagnostic and therapeutic capabilities of St. Jude's pacemakers and ICDs. Electrophysiology is the study of the electrical activity of the heart, which controls the heart rhythm. EP catheters are placed into the human body percutaneously (through the skin) to aid in the diagnosis and treatment of cardiac arrhythmias (abnormal heart rhythms). Between two and five EP catheters are generally used in each electrophysiology procedure. St. Jude's EP catheters are available in multiple configurations. St. Jude's Supreme(TM) product line consists of mapping catheters for the diagnosis of various cardiac arrhythmias, including the 4 French Supreme(TM) diagnostic catheter for standard mapping applications, and the Supreme Spiral SC(TM) catheter to assist clinicians in the diagnosis of paroxysmal atrial fibrillation. St. Jude also offers the Livewire TC Compass(TM) ablation catheter, which aids in clinical management of focal arrhythmias, and the Livewire TC(TM) Bi-Directional ablation catheter, launched in January 2002 following FDA and European market approval. CARDIOLOGY AND VASCULAR ACCESS: The Company produces specialized disposable cardiovascular devices, including angiography catheters, bipolar temporary pacing catheters, percutaneous catheter introducers, diagnostic guidewires, and vascular closure devices. Angiography catheters, such as St. Jude's Spyglass(TM) angiography catheters, are used in coronary angiography procedures to obtain images of coronary arteries to identify structural cardiac diseases. St. Jude bipolar temporary pacing catheters are inserted percutaneously for temporary use (ranging from less than one hour to a maximum of one week) with external pacemakers to provide patient stabilization prior to implantation of a permanent pacemaker, following a heart attack, or during surgical procedures. The Company produces and markets several designs of bipolar temporary pacing catheters, including its Pacel(TM) biopolar pacing catheters, 3 which are available in both torque control and flow-directed models with a broad range of curve choices and electrode spacing options. Percutaneous catheter introducers are used to create passageways for cardiovascular catheters from outside the human body through the skin into a vein, artery or other location inside the body. St. Jude's percutaneous catheter introducer products consist primarily of peel-away and non peel-away sheaths, sheaths with and without hemostasis valves, dilators, guidewires, repositioning sleeves and needles. These products are offered in a variety of sizes and packaging configurations, including St. Jude's newest introducer platform, the Ultimum(TM) hemostasis introducer. Diagnostic guidewires, such as St. Jude's GuideRight(TM) and HydroSteer(TM) guidewires, are used in conjunction with percutaneous catheter introducers to aid in the introduction of intravascular catheters. St. Jude's diagnostic guidewires are available in multiple lengths and incorporate a surface finish for lasting lubricity. The Company's vascular closure devices are used to close femoral artery puncture wounds following angioplasty, stenting and diagnostic procedures. In September 2001, St. Jude received FDA approval and European CE Marking for its newest vascular closure product, the St. Jude Medical Angio-Seal(TM) STS PLATFORM. The STS PLATFORM incorporates a self-tightening suture, which eliminates the need for a post-placement spring, allowing for completion of the entire procedure in the catheterization lab. It also integrates a Secure-Cap(TM), which facilitates proper deployment through audible, tactile and visual confirmations during the closure process. CARDIAC SURGERY: Heart valve replacement or repair may be necessary because the natural heart valve has deteriorated due to congenital defects or disease. Heart valves facilitate the one-way flow of blood in the heart and prevent significant backflow of blood into the heart and between the heart's chambers. St. Jude offers both mechanical and tissue replacement heart valves and valve repair products. The St. Jude Medical(R) mechanical heart valve has been implanted in over 1.2 million patients to date. The SJM Regent(TM) mechanical heart valve was approved for sale in Europe in December 1999 and received FDA approval for U.S. market release in March 2002. In the United States, the Company markets the Toronto SPV(R) stentless tissue valve, which received FDA approval in November 1997. Outside the United States, the Company markets the SJM Epic(TM) tissue heart valve, the SJM(R) Biocor(TM) stented tissue valve, the Toronto SPV(R) stentless tissue valve and the Toronto Root(TM) tissue valve. In August 2001, European regulatory approval was received to market the next-generation Toronto Root(TM) tissue valve, a stentless aortic root bioprosthesis used when aortic root disease accompanies valve disease. Clinical trials for the Toronto Root(TM) valve began in the U.S. and Canada in 2001. Annuloplasty rings are prosthetic devices used to repair diseased or damaged mitral heart valves. The Company offers a line of valve repair products including the semi-rigid SJM(R) Seguin annuloplasty ring and the fully flexible SJM Tailor(TM) ring. The Company has also entered into an agreement with LifeNet Transplant Services, which enables it to assist in the marketing of human donated allograft heart valves in the U.S. In addition to prosthetic heart valves, St. Jude markets the Symmetry(TM) Bypass System Aortic Connector (the "Aortic Connector"), a suture-free device to facilitate coronary artery bypass graft aortic anastomoses. St. Jude commenced marketing of this product in Western Europe in 2000 and in the U.S. during May 2001. Also in 2001, St. Jude received European CE Marking for the first distal connector product, which mechanically connects saphenous vein grafts to coronary arteries. The Company, however, intends to make additional enhancements to this product in 2002 prior to filing for U.S. regulatory approval and prior to releasing the product to either the European or U.S. markets. 4 SUPPLIERS The Company purchases raw materials and other items from numerous suppliers for use in its products. For certain materials that the Company believes are critical and may be difficult to obtain from an alternative supplier, the Company maintains sizable inventories of up to three years of its projected requirements. The Company has been advised from time to time that certain of these suppliers may terminate sales of products to customers that manufacture implantable medical devices in an effort to reduce their potential product liability exposure. Some of these suppliers have modified their positions and have indicated a willingness to either temporarily continue to provide product until such time as an alternative vendor or product can be qualified or to reconsider the supply relationship. While the Company believes that alternative sources of raw materials are available and that there is sufficient lead time in which to qualify such other sources, any supply interruption could have a material adverse effect on the Company's ability to manufacture its products. COMPETITION The medical technology market is a dynamic market currently undergoing significant change due to cost of care considerations, regulatory reform, industry consolidation and customer consolidation. The ability to provide cost effective clinical outcomes is becoming increasingly more important for medical technology manufacturers. Within the medical technology industry, competitors range from small start-up companies to companies with significant resources. The Company's customers consider many factors when choosing supplier partners including product reliability, clinical outcomes, product availability, inventory consignment, price and product services provided by the manufacturer. St. Jude believes that it competes on the basis of all these factors. Market share can shift as a result of technological innovation, product recalls and product safety alerts, as well as other business factors. This emphasizes the need to provide the highest quality products and services. St. Jude expects the competition to continue to increase with the use of tactics such as consigned inventory, bundled product sales and reduced pricing. The Company has traditionally been a technological leader in the global bradycardia pacemaker market. The Company has strong bradycardia market share positions in all major developed markets. There are three principal manufacturers and suppliers of ICDs worldwide, one of which is the Company. ICD therapy is a highly competitive market. The Company's other two competitors, Medtronic, Inc. and Guidant Corporation, account for more than 80% of the worldwide ICD sales. These two competitors are larger than the Company and have invested substantial amounts in ICD research and development. The global cardiology and vascular access market is also a growing market with numerous competitors. The Company is the world's leading manufacturer and supplier of mechanical heart valves. There are two other principal and several other smaller mechanical heart valve manufacturers. The Company also competes against two principal and a large number of other smaller tissue heart valve manufacturers. The Company is the technological leader in mechanical anastomotic connector devices. The Company is aware of several other companies who are investing significant dollars into developing these technologies. 5 MARKETING The Company's products are sold in over 100 countries throughout the world. No distributor organization or single customer accounted for more than 10% of 2001, 2000 or 1999 consolidated net sales. In the United States, St. Jude sells directly to hospitals through a combination of independent distributors and an employee-based sales organization. In Western Europe, the Company has employee- based sales organizations selling in 14 countries. In Japan, the Company primarily utilizes independent distributors. Throughout the rest of the world the Company uses a combination of independent distributor and direct sales organizations. Group purchasing organizations (GPOs) in the United States continue to consolidate the purchasing for some of the Company's customers. Several such GPOs have executed contracts with the Company's CRM market competitors, which exclude the Company. These contracts, if enforced, may adversely affect the Company's sales of these products to members of these GPOs. Payment terms worldwide are consistent with local country practices. Orders are shipped as they are received and, therefore, no material backlog exists. SEASONALITY Typically, the Company's net sales are somewhat higher in the first and second quarters and lower in the third and fourth quarters. Lower net sales in the third quarter result from patient tendency to defer, if possible, cardiac procedures during the summer months and from the seasonality of the U.S. and European markets where summer vacation schedules normally result in fewer surgical procedures. Lower net sales in the fourth quarter result from fewer selling days in the quarter because of holidays in the United States and other markets, and patient tendency to defer, if possible, cardiac procedures during these holiday seasons. Independent distributors may randomly place large orders that can distort the net sales pattern just described. In addition, new product introductions, acquisitions, and regulatory approvals can impact the typical net sales patterns. RESEARCH AND DEVELOPMENT The Company is focused on the development of new products and improvements to existing products. In addition, research and development expense reflects the Company's efforts to obtain FDA approval of certain new products and processes, and to maintain the highest quality standards with respect to existing products. The Company's research and development expenses, exclusive of purchased in-process research and development, were $164.1 million (12.2% of net sales), $137.8 million (11.7% of net sales) and $125.1 million (11.2% of net sales) in 2001, 2000 and 1999, respectively. GOVERNMENT REGULATION The medical devices manufactured and marketed by the Company are subject to regulation by the FDA and, in most instances, by state and foreign governmental authorities or their designated representatives. Under the U.S. Federal Food, Drug and Cosmetic Act (the Act), and regulations thereunder, manufacturers of medical devices must comply with certain policies and procedures that regulate the composition, labeling, testing, manufacturing, packaging and distribution of medical devices. Medical devices are subject to different levels of government approval requirements, the most comprehensive of which requires the completion of an FDA approved clinical evaluation program and submission and approval of a pre-market approval (PMA) application before a device may be commercially marketed. The Company's mechanical and tissue heart valves, ICDs, certain pacemakers and leads and certain electrophysiology catheter applications are subject to this level of approval or as a supplement to a PMA approval. Other pacemakers and leads, annuloplasty ring products and other 6 electrophysiology and cardiology products are currently marketed under the less rigorous 510(k) pre-market notification procedure of the Act. In addition, the FDA may require testing and surveillance programs to monitor the effects of approved products that have been commercialized, and it has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs. The FDA also conducts inspections prior to approval of a PMA to determine compliance with the quality system regulations which covers manufacturing and design and may, at any time after approval of a PMA or granting of a 510(k), conduct periodic inspections to determine compliance with both good manufacturing practice regulations and/or current medical device reporting regulations. If the FDA were to conclude that St. Jude is not in compliance with applicable laws or regulations, it could institute proceedings to detain or seize products, issue a recall, impose operating restrictions, assess civil penalties and recommend criminal prosecution to the U.S. Department of Justice. Furthermore, the FDA could proceed to ban, or request recall, repair, replacement or refund of the cost of, any device previously manufactured or distributed. The FDA also regulates recordkeeping for medical devices and reviews hospital and manufacturers' required reports of adverse experiences to identify potential problems with FDA- authorized devices. Aggressive regulatory action may be taken by the FDA due to adverse experience reports. Diagnostic-related groups (DRG) reimbursement schedules regulate the amount the United States government, through the Centers for Medicare and Medicaid Services (CMS), will reimburse hospitals and doctors for the inpatient care of persons covered by Medicare. In response to rising Medicare and Medicaid costs, several legislative proposals are under consideration, which would restrict future funding increases for these programs. Changes in current DRG reimbursement levels could have an adverse effect on the Company's domestic pricing flexibility. St. Jude's business internationally is subject to medical device laws in individual countries outside the United States. These laws range from extensive device approval requirements in some countries for all or some of the Company's products, to requests for data or certifications in other countries. Generally, regulatory requirements are increasing in these countries. In the European Union, the regulatory systems have been harmonized, and approval to market in all European Union countries (represented by the CE Mark) can be obtained through one agency. In addition, government funding of medical procedures is limited and in certain instances is being reduced. A number of medical device regulatory agencies have begun considering whether to continue to permit the sale of medical devices that incorporate any bovine material because of concerns about Bovine Spongiform Encephalopathy (BSE), sometimes referred to as "mad cow disease." It is believed that in some instances this disease has been transmitted to humans through the consumption of beef. There have been no reported cases of transmission of BSE through medical products and no reported cases of BSE in the United States. Some of the Company's products use bovine collagen (Angio-Seal(TM) and vascular grafts), which is derived from the bovine component scientifically rated as least likely to transmit the disease. Some of the Company's tissue heart valves incorporate bovine pericardial material. The Company is cooperating with the regulatory agencies considering these issues. 7 In May 1995, prior to the acquisition by St. Jude, Telectronics Pacing Systems, Inc. (Telectronics), which is now part of St. Jude Medical Cardiac Rhythm Management Division, and its president entered into a consent decree with the FDA. The consent decree, which remains in effect indefinitely, requires that Telectronics comply with the FDA's good manufacturing practice regulations and identifies several specific provisions of those regulations. The consent decree provides for FDA inspections and that Telectronics is obligated to pay certain costs of the inspections. PATENTS AND LICENSES The Company's policy is to protect its intellectual property rights related to its medical devices. Where appropriate, St. Jude applies for U.S. and foreign patents. In those instances where the Company has acquired technology from third parties, it has sought to obtain rights of ownership to the technology through the acquisition of underlying patents or licenses. While the Company believes design, development, regulatory and marketing aspects of the medical device business represent the principal barriers to entry into such business, it also recognizes that it's the Company's patents and license rights may make it more difficult for its competitors to market products similar to those produced by the Company. St. Jude can give no assurance that any of its patent rights, whether issued, subject to license, or in process, will not be circumvented or invalidated. Furthermore, there are numerous existing and pending patents on medical products and biomaterials. There can be no assurance that the Company's existing or planned products do not or will not infringe such rights or that others will not claim such infringement. No assurance can be given that the Company will be able to prevent competitors from challenging the Company's patents or entering markets currently served by the Company. INSURANCE The Company operates in an industry that is susceptible to significant product liability claims. These claims may be brought by individuals seeking relief for themselves or, increasingly, by groups seeking to represent a class. In addition, product liability claims may be asserted against the Company in the future relative to events that are not known to management at the present time. While it is not possible to predict the outcome of every claim, the Company believes that it has adequate product liability insurance to cover the costs associated with them. Subsequent to the tragic events of September 2001, the product liability insurance market has dramatically changed. The Company has secured product liability coverage for 2002, however the self-insured retention and insurance premiums are significantly higher than in prior years. There can be no assurance that this trend will reverse in the future. As a result of the increased self-insured retention for 2002, the Company has increased financial exposure in the event of significant product liability matters. California earthquake insurance is currently difficult to procure, extremely costly, and restrictive in terms of coverage. The Company's earthquake and related business interruption insurance for its CRM operations located in Sylmar and Sunnyvale, California provides for limited coverage above a significant self-insured retention. There are several factors that preclude the Company from determining the effect an earthquake may have on its business. These factors include, but are not limited to, the severity and location of the earthquake, the extent of any damage to the Company's manufacturing facilities, the impact of an earthquake on the Company's California workforce and the infrastructure of the surrounding communities, and the extent, if any, of damage to the Company's inventory and work in process. While the Company's exposure to significant losses occasioned by a California earthquake would be partially mitigated by its ability to manufacture some of its CRM products at its Swedish manufacturing facility, the losses could have a material adverse effect on the Company, the duration of which cannot be reasonably predicted. The Company has expanded the manufacturing capabilities at its Swedish facility 8 and has constructed a pacemaker component manufacturing facility in Arizona. In addition, the Company has moved significant finished goods inventory to locations outside California. These facilities and inventory transfers would further mitigate the adverse impact of a California earthquake. EMPLOYEES As of December 31, 2001, the Company had 5,568 full-time employees. It has never experienced a work stoppage as a result of labor disputes and none of its employees are represented by a labor organization, with the exception of the Company's employees in Sweden and certain employees in France. The Company believes that its relationship with its employees is generally good. INTERNATIONAL OPERATIONS The Company's international business is subject to such special risks as currency exchange controls, the imposition or increase of import or export duties and surtaxes, and international credit, financial or political problems. Currency exchange rate fluctuations relative to the U.S. dollar can affect reported consolidated revenues and net earnings. The Company may hedge a portion of this exposure from time to time to reduce the effect of foreign currency rate fluctuations on net earnings. See the "Market Risk" section on page 5 of "Management's Discussion and Analysis of Results of Operations and Financial Condition", incorporated herein by reference from the Financial Report included in the Company's 2001 Annual Report to Shareholders. Operations outside the United States also present complex tax and cash management issues that necessitate sophisticated analysis and diligent monitoring to meet the Company's financial objectives. ITEM 2. PROPERTIES St. Jude's principal executive offices are owned and are located in St. Paul, Minnesota. Manufacturing facilities are located in California, Minnesota, Arizona, South Carolina, Canada, Brazil, Puerto Rico and Sweden. The Company owns approximately 59%, or 338,000 square feet, of its total manufacturing space, and the balance is leased. The Company also maintains sales and administrative offices in the United States at 16 locations in six states and outside the United States at 33 locations in 24 countries. With the exception of one location, all of these locations are leased. In management's opinion, all buildings, machinery and equipment are in good condition, suitable for their purposes and are maintained on a basis consistent with sound operations. The Company believes that it has sufficient space for its current operations and for foreseeable expansion in the next few years. ITEM 3. LEGAL PROCEEDINGS SILZONE(R) LITIGATION: The Company has been sued by patients alleging defects in the Company's mechanical heart valves and valve repair products with Silzone(R) coating. The Company voluntarily recalled products with Silzone(R) coating on January 21, 2000, and sent a Recall Notice and Advisory concerning the recall to physicians and others. Some of these cases are seeking monitoring of patients implanted with Silzone(R)-coated valves and repair products who allege no injury to date. Some of these cases are seeking class action status. On April 18, 2001, the U.S. Judicial Panel on Multi-Litigation ruled that certain lawsuits filed in U.S. federal district court involving products with Silzone(R) coating should be part of Multi District Litigation proceedings, which will take place under the supervision of U.S. District court Judge John 9 Tunheim in Minnesota. As a result, a number of actions involving products with Silzone(R) coating are being transferred to Judge Tunheim's court in Minnesota for coordinated or consolidated pretrial proceedings. While it is not possible to predict the outcome of these cases, the Company believes that it has adequate product liability insurance to cover the costs associated with them. The Company further believes that any costs not covered by product liability insurance will not have a material adverse impact on the Company's financial position or liquidity, but may be material to the consolidated results of operations of a future period. GUIDANT LITIGATION: In November 1996 Guidant Corporation ("Guidant") sued St. Jude Medical alleging that St. Jude Medical did not have a license to certain patents controlled by Guidant covering ICD products and alleging that St. Jude Medical was infringing those patents. St. Jude Medical's contention that it had obtained its patent license from Guidant to the patents in issue when it acquired certain assets of Telectronics in November 1996 was rejected by an arbitrator in July 2000. In May 2001, a federal district court judge also ruled that the Guidant patent license with Telectronics had not transferred to St. Jude Medical. Guidant's suit in the United States District Court for the Southern District of Indiana originally alleged infringement by St. Jude Medical of four patents. Guidant later dismissed its claim on one patent (the `678 patent). In addition, in response to a stipulation by the parties, the court ruled that a second patent (the `191 patent) was invalid. Guidant has appealed the ruling of invalidity concerning the `191 patent and the Court of Appeals for the Federal Circuit held oral arguments on the `191 appeal on February 5, 2002. A jury trial involving the two remaining patents asserted by Guidant (the `288 and `472 patents) commenced in June 2001. The jury issued its verdict on July 3, 2001, finding that both the `472 and `288 patents were valid and that St. Jude Medical did not infringe the `288 patent. The jury also found that St. Jude did infringe the `472 patent, which expired on March 4, 2001, but that the infringement was not willful. The jury awarded damages of $140 million to Guidant. On February 13, 2002, the judge overseeing the jury trial issued his rulings on the various post-trial motions. In particular, the judge ruled that the `472 patent was invalid on two grounds: lack of proper written description and double patenting. The judge also ruled that claim 18 was not infringed and that claim 1 was infringed in only a limited manner. The judge further ruled that the `288 patent was invalid for both obviousness and failure to disclose the best mode. The judge also found that St. Jude Medical was entitled to a new trial on the issue of damages in the event the court's rulings on the other matters were reversed on appeal. Finally, the judge held that in the event his other rulings were reversed, St. Jude Medical would be entitled to a new trial because of misconduct by Guidant and its attorneys during the first trial and that, in such an event, Guidant would have to pay certain attorney's fees of St. Jude Medical. The court ruled on several other motions, not summarized here. The effect of the court's post-trial rulings was to eliminate the $140 million verdict against St. Jude Medical. The Company expects that Guidant will appeal the judge's decision. 10 OTHER LITIGATION MATTERS: The Company is involved in various product liability lawsuits, claims and proceedings of a nature considered normal to its business. Subject to self-insured retentions, the Company believes it has product liability insurance sufficient to cover such claims and suits. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of 2001. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position* - ----------------------- --- ---------------------------------------------------------------------------- Terry L. Shepherd 49 Chief Executive Officer (1999) Daniel J. Starks 47 President and Chief Operating Officer (2001) David W. Adinolfi 46 President, Daig (2001) Robert Cohen 44 Vice President, Business and Technology Development (1998) Michael J. Coyle 39 President, Cardiac Rhythm Management (2001) Peter L. Gove 54 Vice President, Corporate Relations (1994) Steven J. Healy 44 President, Cardiac Surgery (1999) John C. Heinmiller 47 Vice President, Finance, Chief Financial Officer and Treasurer (1998) Jeri L. Lose 44 Vice President, Information Technology and Chief Information Officer (2000) Joseph H. McCullough 52 President, International (2001) Kevin T. O'Malley 50 Vice President, General Counsel and Secretary (1994) Michael T. Rousseau 46 President, U.S. Sales (2001) Frieda J. Valk 48 Vice President, Administration (1999) - -----------------------
*Dates in brackets indicate year during which the named executive officers began serving in such capacity. Executive officers serve at the pleasure of the Board of Directors. Mr. Shepherd joined the Company in 1994 as President of Cardiac Surgery. In 1999, he was appointed President and Chief Executive Officer of St. Jude, and since February 2001, has been the Company's Chief Executive Officer. Mr. Shepherd has also served on St. Jude's Board of Directors since 1999. 11 Mr. Starks joined St. Jude in 1996 as a result of the Company's acquisition of Daig Corporation, where he continued as Chief Executive Officer. In 1997, he was also appointed CEO of Cardiac Rhythm Management, and in April 1998, became President and CEO of Cardiac Rhythm Management. He was appointed President and Chief Operating Officer of St. Jude in February 2001. Mr. Starks has also served on the Company's Board of Directors since 1996. Mr. Adinolfi joined St. Jude in 1994 as a result of the Company's acquisition of Pacesetter, Inc. He served as Vice President, CRM Global Product Planning and Identification from June 1996 to March 1998, and in March 1998 became Vice President of CRM Business Development, Planning and Research. He also served as Senior Vice President, CRM Global Marketing beginning in April 1998, and in March 1999 became Senior Vice President of CRM Product Portfolio Management. In February 2001, Mr. Adinolfi was appointed President of Daig. Prior to joining Pacesetter in 1989 as Director of Marketing, Mr. Adinolfi spent five years at Cordis and Telectronics in a variety of marketing, sales and management positions. Mr. Cohen joined the Company in 1998 as Vice President, Business and Technology Development. Prior to joining the Company, he was employed by Sulzer Medica, a medical device company. During his 19-year career in the medical device industry, Mr. Cohen has been associated with Pfizer Inc. and GCI Medical, an investment firm focused on the medical technology industry. Mr. Coyle joined St. Jude in 1994 as Director, Business Development. He was appointed President of Cardiac Rhythm Management in February 2001. Prior to that appointment, Mr. Coyle previously served as the Chief Operating Officer of Daig since 1997. Prior to joining St. Jude, he spent nine years with Eli Lilly & Company, a pharmaceutical products company, in a variety of technical and business management roles in both its Pharmaceutical and Medical Device Divisions. Mr. Gove joined the Company in 1994 as Vice President, Corporate Relations. Prior to joining the Company, Mr. Gove was Vice President, Marketing and Communications of Control Data Systems, Inc., a computer services company, from 1991 to 1994. From 1981 to 1990, Mr. Gove held various executive positions with Control Data Corporation. From 1970 to 1981, Mr. Gove held various management positions with the State of Minnesota and the U.S. Government. Mr. Healy first joined the Company in 1983 as a heart valve sales representative. In 1999 he was appointed President, Cardiac Surgery. From 1996 to 1999, Mr. Healy was Vice President of Heart Valve Sales and Marketing. He served as Heart Valve Vice President of Marketing from 1993 to 1996. Mr. Heinmiller joined the Company in May 1998 as Vice President of Corporate Business Development. In September 1998, he was appointed Vice President, Finance and Chief Financial Officer. Prior to joining the Company, Mr. Heinmiller was president of F3 Corporation from 1997 to 1998, a privately held asset management company, and was Vice President of Finance and Administration for Daig Corporation from 1995 to 1997. Mr. Heinmiller is also a former audit partner in the Minneapolis office of Grant Thornton LLP, a national public accounting firm. Mr. Heinmiller is a director of Lifecore Biomedical, Inc. and Arctic Cat, Inc. Ms. Lose (formerly Ms. Jones) joined St. Jude in 1999 as Vice President, Information Technology, and was appointed Vice President, Information Technology and Chief Information Officer in 2000. Prior to joining the Company, Ms. Lose was Vice President of Systems Development at U.S. Bancorp, a multi-state financial services holding company, from 1993 to 1999. From 1990 to 1993, Ms. Lose was a Senior Manager in Information Technology Consulting with Ernst & Young LLP, an 12 international public accounting firm. From 1979 to 1990, she held several positions in Accounting and then Information Technology with General Mills, Inc, a consumer food products company. Mr. McCullough joined St. Jude in 1994 as a CRM Regional Sales Director. He became Vice President, CRM Marketing in 1996 and in 1997 was named Senior Vice President, CRM Europe, where his responsibilities included sales, marketing and managing the Company's manufacturing facility in Veddesta, Sweden. He was named President, International in July 2001. Prior to joining the Company, Mr. McCullough worked for several medical technology companies for more than 20 years. Mr. O'Malley joined the Company in 1994 as Vice President and General Counsel. Prior to joining St. Jude, Mr. O'Malley was employed by Eli Lilly & Company for 15 years in various positions, including General Counsel of the Medical Device and Diagnostics Division. Mr. Rousseau joined the Company in 1999 as Senior Vice President, CRM Global Marketing, and in August 1999, CRM Marketing and Sales were combined under his leadership. In January 2001, he was named President, U.S. CRM Sales, and in July 2001, he was named President, U.S. Sales. Prior to joining St. Jude, Mr. Rousseau worked for Sulzer Intermedics, Inc., a medical device company, for 11 years. At Sulzer, he served as Vice President, Tachycardia, in 1997 and was appointed Vice President, U.S. Sales and Marketing in 1998. Ms. Valk joined the Company in 1996 as Human Resources Director of St. Jude Medical Europe. She was appointed Vice President, Administration in 1999. Prior to joining the Company, Mrs. Valk was employed by Eli Lilly & Company for sixteen years in various positions, including pharmaceutical sales, sales management, sales training and human resources. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The information set forth under the captions "Dividends" and "Stock Exchange Listings" on pages 6 and 24 of the Financial Report included in the Company's 2001 Annual Report to Shareholders is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information set forth under the caption "Five-Year Summary Financial Data" on page 23 of the Financial Report included in the Company's 2001 Annual Report to Shareholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The information set forth under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 1 through 6 of the Financial Report included in the Company's 2001 Annual Report to Shareholders is incorporated herein by reference. 13 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information appearing under the caption "Market Risk" on page 5 of the Financial Report included in the Company's 2001 Annual Report to Shareholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following Consolidated Financial Statements of the Company and Report of Independent Auditors set forth on pages 7 through 22 of the Financial Report included in the Company's 2001 Annual Report to Shareholders are incorporated herein by reference: Consolidated Statements of Earnings - Fiscal Years ended December 31, 2001, 2000 and 1999 Consolidated Balance Sheets - December 31, 2001 and 2000 Consolidated Statements of Shareholders' Equity - Fiscal Years ended December 31, 2001, 2000, and 1999 Consolidated Statements of Cash Flows - Fiscal Years ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth under the caption "Board of Directors" in the Company's definitive Proxy Statement dated March 28, 2002, is incorporated herein by reference. Information on executive officers is incorporated herein by reference to Item 4A of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information set forth under the caption "Executive Compensation" in the Company's definitive Proxy Statement dated March 28, 2002, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the caption "Share Ownership of Management and Directors and Certain Beneficial Owners" in the Company's definitive Proxy Statement dated March 28, 2002, is incorporated herein by reference. 14 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the captions "Governance of the Company" and "Executive Compensation" in the Company's definitive Proxy Statement dated March 28, 2002, is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT (1) FINANCIAL STATEMENTS The following Consolidated Financial Statements of the Company and Report of Independent Auditors as set forth on pages 7 through 22 of the Financial Report included in the Company's 2001 Annual Report to Shareholders (see Exhibit 13) are incorporated herein by reference: Consolidated Statements of Earnings - Fiscal Years ended December 31, 2001, 2000 and 1999 Consolidated Balance Sheets - December 31, 2001 and 2000 Consolidated Statements of Shareholders' Equity - Fiscal Years ended December 31, 2001, 2000, and 1999 Consolidated Statements of Cash Flows - Fiscal Years ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements (2) FINANCIAL STATEMENT SCHEDULE Schedule II, Valuation and Qualifying Accounts, is filed as part of this Form 10-K Annual Report (see Item 14(d)). The report of the Company's Independent Auditors with respect to the financial statement schedule is incorporated herein by reference from Exhibit 23 attached hereto. All other financial statements and schedules not listed above have been omitted because the required information is included in the consolidated financial statements or the notes thereto, or is not applicable. (3) EXHIBITS Pursuant to Item 601(b)(4)(iiii) of Regulation S-K, copies of certain instruments defining the rights of holders of certain long-term debt of the Company are not filed, and in lieu thereof, 15 the Company agrees to furnish copies thereof to the Securities and Exchange Commission upon request. EXHIBIT EXHIBIT INDEX - ----------- ------------------------------------------------------------------ 3.1 Articles of Incorporation as amended on September 5, 1996, are incorporated by reference from Exhibit 3.2 of the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 3.2 Bylaws are incorporated by reference from Exhibit 3(ii) of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 4.1 Rights Agreement dated as of June 16, 1997, between the Company and American Stock Transfer and Trust Company, as Rights Agent, including the Certificate of Designation, Preferences and Rights of Series B Junior Preferred Stock is incorporated by reference from Exhibit 4 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.1 Form of Indemnification Agreement that the Company has entered into with officers and directors is incorporated by reference from Exhibit 10(d) of the Company's Annual Report on Form 10-K for the year ended December 31, 1986.* 10.2 St. Jude Medical, Inc. Management Incentive Compensation Plan.*# 10.3 Management Savings Plan dated February 1, 1995, is incorporated by reference from Exhibit 10.7 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994.* 10.4 Retirement Plan for members of the Board of Directors as amended on March 15, 1995, is incorporated by reference from Exhibit 10.6 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994.* 10.5 St. Jude Medical, Inc. 1991 Stock Plan is incorporated by reference from the Company's Registration Statement on Form S-8 filed June 28, 1991 (Commission File No. 33-41459).* 16 EXHIBIT EXHIBIT INDEX - ----------- ------------------------------------------------------------------ 10.6 St. Jude Medical, Inc. 1994 Stock Option Plan is incorporated by reference from Exhibit 4(a) of the Company's Registration Statement on Form S-8 filed July 1, 1994 (Commission File No. 33-54435).* 10.7 St. Jude Medical, Inc. 1997 Stock Option Plan is incorporated by reference from Exhibit 4.1 of the Company's Registration Statement on Form S-8 filed December 22, 1997 (Commission File No. 333-42945).* 10.8 Split Dollar Insurance Agreement as amended April 29, 1999 between St. Jude Medical, Inc. and Ronald A. and Lucille E. Matricaria is incorporated by reference from Exhibit 10.14 of the Company's Annual Report on Form 10-K for the year ended December 31, 1999.* 10.9 St. Jude Medical, Inc. 2000 Stock Plan.*# 10.10 St. Jude Medical, Inc. 2000 Employee Stock Purchase Savings Plan.*# 10.11 Amended and Restated Employment Agreement dated as of March 25, 2001, between the Company and Daniel J. Starks is incorporated by reference from Exhibit 10.17 of the Company's Annual Report on Form 10-K for the year ended December 31, 2000.* 10.12 Form of Severance Agreement that the Company has entered into with officers relating to severance matters in connection with a change in control is incorporated by reference from Exhibit 10.18 of the Company's Annual Report on Form 10-K for the year ended December 31, 2000.* 10.13 Amended and Restated Employment Agreement dated as of March 25, 2001, between the Company and Terry L. Shepherd is incorporated by reference from Exhibit 10.19 of the Company's Annual Report on Form 10-K for the year ended December 31, 2000.* 13 Portions of the Company's 2001 Annual Report to Shareholders.# 21 Subsidiaries of the Registrant.# 17 EXHIBIT EXHIBIT INDEX - ----------- ------------------------------------------------------------------ 23 Consent of Independent Auditors.# 24 Power of Attorney.# - ------------------- * Management contract or compensatory plan or arrangement. # Filed as an exhibit to this Annual Report on Form 10-K. (b) REPORTS ON FORM 8-K FILED DURING THE QUARTER ENDED DECEMBER 31, 2001: No reports on Form 8-K were filed by the Company during the fourth quarter of 2001. (c) EXHIBITS: Reference is made to Item 14(a)(3). (d) SCHEDULES: SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN THOUSANDS)
COL. A COL. B COL. C COL. D COL. E - ------------------------------ ---------- ---------- ---------- ---------- BALANCE AT ADDITIONS BALANCE AT BEGINNING CHARGED TO END OF DESCRIPTION OF YEAR EXPENSE DEDUCTIONS(1) YEAR - ------------------------------- ---------- ---------- ---------- ---------- Allowance for doubtful accounts Fiscal Year Ended: December 31, 2001 $ 13,831 $ 6,468 $ 3,089 $ 17,210 December 31, 2000 13,529 6,913 6,611 13,831 December 31, 1999 12,352 5,421 4,244 13,529 - -------------------------------
(1) Uncollectible accounts written off, net of recoveries. 18 SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ST. JUDE MEDICAL, INC. Date: March 22, 2002 By /s/ TERRY L. SHEPHERD ----------------------------- Terry L. Shepherd CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER) By /s/ JOHN C. HEINMILLER ----------------------------- John C. Heinmiller VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
/s/ RONALD A. MATRICARIA Director March 22, 2002 /s/ TERRY L. SHEPHERD Director March 22, 2002 - ------------------------- ------------------------- Ronald A. Matricaria Terry L. Shepherd /s/ RICHARD R. DEVENUTI Director March 22, 2002 /s/ DAVID A. THOMPSON Director March 22, 2002 - ------------------------- ------------------------- Richard R. Devenuti David A. Thompson /s/ STUART M. ESSIG Director March 22, 2002 /s/ STEFAN K. WIDENSOHLER Director March 22, 2002 - ------------------------- ------------------------- Stuart M. Essig Stefan K. Widensohler /s/ THOMAS H. GARRETT III Director March 22, 2002 /s/ WENDY L. YARNO Director March 22, 2002 - ------------------------- ------------------------- Thomas H. Garrett III Wendy L. Yarno /s/ WALTER L. SEMBROWICH Director March 22, 2002 /s/ FRANK C-P YIN Director March 22, 2002 - ------------------------- ------------------------- Walter L. Sembrowich Frank C-P Yin /s/ DANIEL J. STARKS Director March 22, 2002 - ------------------------- Daniel J. Starks
19 EX-10.2 3 stjude021570_ex10-2.txt MANAGEMENT INCENTIVE COMPENSATION PLAN EXHIBIT 10.2 ST. JUDE MEDICAL, INC. MANAGEMENT INCENTIVE COMPENSATION PLAN (AS ADOPTED ON JANUARY 11, 1999) 1. PURPOSE The St. Jude Medical, Inc. Management Incentive Compensation Plan (the "Plan") is designed to attract, retain, and reward highly qualified executives who are important to the Company's success and to provide incentives relating directly to the financial performance and long-term growth of the Company. 2. DEFINITIONS (a) BOARD -- The Board of Directors of St. Jude Medical, Inc. (b) CODE -- The Internal Revenue Code of 1986, as amended. (c) COMMITTEE -- The Compensation Committee of the Board, or such other committee of the Board that is designated by the Board to administer the Plan, in compliance with requirements of Section 162(m) of the Code. (d) COMPANY -- St. Jude Medical, Inc. and any other corporation in which St. Jude Medical, Inc. controls, directly or indirectly, fifty percent or more of the combined voting power of all classes of voting securities. (e) EXECUTIVE OFFICER -- Any officer of the Company subject to the reporting requirements of Section 16 of the Securities and Exchange Act of 1934 ("Exchange Act"). (f) INCENTIVE COMPENSATION -- The cash incentive awarded to a Participant pursuant to terms and conditions of the Plan. (g) PARTICIPANT -- Any Executive Officer and any other employee or class of management employees of the Company as may be designated by the Committee. (h) PLAN -- The St. Jude Medical, Inc., Management Incentive Compensation Plan. (i) SALARY -- The direct gross (as opposed to taxable) compensation earned by the Participant as base salary during the fiscal year, excluding any and all commissions, bonuses, incentive payments payable during the fiscal year, and other similar payments. 3. ELIGIBILITY The Committee shall, each fiscal year, designate those employees, including Executive Offices of the Company who are eligible to receive Incentive Compensation under this Plan for the fiscal year. 4. ADMINISTRATION The awards under the Plan shall be based on the attainment of financial performance goals for the fiscal year, as determined for each Participant by the Committee. The Committee shall administer the Plan and shall have full power and authority to construe, interpret, and administer the Plan necessary to comply with the requirements of Section 162(m) of the Code. The Committee's decisions shall be final, conclusive, and binding upon all persons. The Committee shall certify in writing prior to commencement of payment of the bonus that the performance goal or goals under which the bonus is to be paid has or have been achieved. The Committee in its sole discretion has the authority to reduce or eliminate the amount of a bonus otherwise payable to Executives upon attainment of the performance goal established for a fiscal year. At the beginning of each fiscal year consistent with the requirements of Section 162(m), the Committee shall; (i) determine the percentage of the Participant's Salary that may be awarded as Incentive Compensation for the fiscal year, up to a maximum award under the Plan of the greater of $2,000,000 or 1.5% of the Company's consolidated after tax net profits for the fiscal year; (ii) determine the Participants eligible to participate in the Plan for the fiscal year; (iii) determine the A-1 financial performance goals as set forth in Section 5 herein for each Participant on which Incentive Compensation will be paid; (iv) determine each Executive's Incentive Compensation for the fiscal year; and (v) determine the frequency at which each Participant's Incentive Compensation will be paid when attained. Except with respect to Incentive Compensation payable to Executive Officers of the Company, the Committee may delegate the establishment of performance goals, and the general powers of the Committee described above with respect to the Plan to the Chief Executive Officer of the Company. The Committee may amend, modify, suspend, or terminate the Plan for the purpose of meeting or addressing any changes in legal requirements or for any other purpose permitted by law. The Committee will seek shareholder approval of any amendment determined to require a shareholder approval or advisable under the regulations of the Internal Revenue Service or other applicable law or regulation. 5. FINANCIAL PERFORMANCE GOALS With respect to any Participant who is an Executive Officer, the Committee shall establish performance goals based on the stock price of the Company, the Company's earnings per share, market share, sales, return on equity, asset management or the expenses or profitability of the Company or any division or subsidiary, or any combination of such goals for the fiscal year, or a portion thereof. Any performance goal shall be established in a manner such that a third party having knowledge of the relevant performance results could calculate the amount to be paid to the Participant. Any such goal shall be established when the outcome of the goal is substantially uncertain. The Committee shall not increase the maximum amount of the Incentive Compensation payable upon attainment of the goal after the goal has been established. The Incentive Compensation may be paid in whole or in part upon the attainment of any one of the goals. Any such goal shall comply with the applicable requirements of Section 162(m) of the Code and any regulations promulgated thereunder. With respect to any Participant other than an Executive Officer, the Committee may establish performance goals based on other than the financial performance of the Company specified above. 6. PAYMENT OF INCENTIVE COMPENSATION; NONASSIGNABILITY The Incentive Compensation shall be paid only upon certification of the attainment of the preestablished performance goals by the Committee. Such Incentive Compensation shall be paid within 90 days of the end of the fiscal year, but any Participant who is eligible to participate in the Company's deferred compensation plan may elect to defer part or all of such Incentive Compensation under such plan. No Incentive Compensation or any other benefit under the Plan shall be assignable or transferable by the Participant during the Participant's lifetime. 7. NO RIGHT TO CONTINUED EMPLOYMENT Nothing in the Plan shall confer upon any employee any right to continue in the employ of the Company or shall interfere with or restrict in any way the right of the Company to discharge an employee at any time for any reason whatsoever, with or without cause. A-2 EX-10.9 4 stjude021570_ex10-9.txt 2000 STOCK PLAN EXHIBIT 10.9 ST. JUDE MEDICAL, INC. 2000 STOCK PLAN SECTION CONTENTS PAGE - ------- -------- ---- 1. General Purpose of Plan; Definitions ...................... 1 2. Administration ............................................ 3 3. Stock Subject to Plan ..................................... 4 4. Eligibility ............................................... 4 5. Stock Options ............................................. 5 6. Transfer, Leave of Absence, etc. .......................... 9 7. Restricted Stock .......................................... 9 8. Amendments and Termination ................................ 11 9. Unfunded Status of Plan ................................... 11 10. General Provisions ........................................ 11 11. Effective Date of Plan .................................... 12 ST. JUDE MEDICAL, INC. 2000 STOCK PLAN SECTION 1. General Purpose of Plan; Definitions. The name of this plan is the St. Jude Medical, Inc. 2000 Stock Plan (the "Plan"). The purpose of the Plan is to enable St. Jude Medical, Inc. and its Subsidiaries (hereinafter, the "Company") to retain and attract executives and other key employees, non-employee directors and consultants who contribute to the Company's success by their ability, ingenuity and industry, and to enable such individuals to participate in the long-term success and growth of the Company by giving them a proprietary interest in the Company. For purposes of the Plan, the following terms shall be defined as set forth below: a. "Board" means the Board of Directors of the Company as it may be comprised from time to time. b. "Cause" means a felony conviction of a participant or the failure of a participant to contest prosecution for a felony, willful misconduct, dishonesty or intentional violation of a statute, rule or regulation, any of which, in the judgment of the Company, is harmful to the business or reputation of the Company. c. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute. d. "Committee" means the Committee referred to in Section 2 of the Plan. If at any time no Committee shall be in office, then the functions of the Committee specified in the Plan shall be exercised by the Board, unless the Plan specifically states otherwise. e. "Consultant" means any person, including an advisor, engaged by the Company, the Parent Corporation or a Subsidiary of the Company to render services and who is compensated for such services and who is not an employee of the Company, the Parent Corporation or any Subsidiary of the Company. A Non-Employee Director may serve as a Consultant. f. "Continuous Status as an Employee or Consultant" shall mean the absence of any interruption or termination of service as an Employee or Consultant. Continuous Status as an Employee or Consultant shall not be considered interrupted in the case of sick leave, military leave, or any other leave of absence approved by the Administrator, provided that such leave of absence is for a period of 90 days or less, unless reemployment after such leave of absence is guaranteed by contract or statute. g. "Company" means St. Jude Medical, Inc., a corporation organized under the laws of the State of Minnesota (or any successor corporation). 1 h. "Disability" means permanent and total disability as determined by the Committee. i. "Early Retirement" means retirement, with consent of the Committee at the time of retirement, from active employment with the Company and any Subsidiary or Parent Corporation of the Company. j. "Fair Market Value" of Stock on any given date shall be determined by the Committee as follows: (a) if the Stock is listed for trading, on the New York Stock Exchange or one of more national securities exchanges, the last reported sales price on the New York Stock Exchange or such principal exchange on the date in question, or if such Stock shall not have been traded on such principal exchange on such date, the last reported sales price on the New York Stock Exchange or such principal exchange on the first day prior thereto on which such Stock was so traded; or (b) if (a) is not applicable, by any means fair and reasonable by the Committee, which determination shall be final and binding on all parties. k. "Incentive Stock Option" means any Stock Option intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code. l. "Non-Employee Director" means a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3) under the Securities Exchange Act of 1934. m. "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option, and is intended to be and is designated as a "Non-Qualified Stock Option" or an Incentive Stock Option that ceases to so quality due to an amendment to such Stock Option. n. "Normal Retirement" means retirement from active employment with the Company and any Subsidiary or Parent Corporation of the Company on or after age 65. o. "Outside Director" means a Director who: (a) is not a current employee of the Company or any member of an affiliated group which includes the Company; (b) is not a former employee of the Company who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year; (c) has not been an officer of the Company; (d) does not receive remuneration from the Company, either directly or indirectly, in any capacity other than as a director, except as otherwise permitted under Code Section 162(m) and regulations thereunder. For this purpose, remuneration includes any payment in exchange for good or services. This definition shall be further governed by the provisions of Code Section 162(m) and regulations promulgated thereunder. p. "Parent Corporation" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of the corporations (other than the Company) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. 2 q. "Restricted Stock" means an award of shares of Stock that are subject to restrictions under Section 7 below. r. "Retirement" means Normal Retirement or Early Retirement. s. "Stock" means the Common Stock of the Company. t. "Stock Option" means any option to purchase shares of Stock granted pursuant to Section 5 below. u. "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. SECTION 2. Administration. The Plan shall be administered by the Board of Directors or by a Committee appointed by the Board of Directors of the Company consisting of at least two Directors, all of whom shall be Outside Directors and Non-Employee Directors, who shall serve at the pleasure of the Board. The Committee shall have the power and authority to grant to eligible employees or Consultants, pursuant to the terms of the Plan: (i) Incentive Stock Options, (ii) Non-Qualified Stock Options, and (iii) Restricted Stock. In particular, the Committee shall have the authority: (i) to select the officers and other key employees of the Company and its Subsidiaries and other eligible persons to whom Stock Options or Restricted Stock may from time to time be granted hereunder; (ii) to determine whether and to what extent Incentive Stock Options, Non-Qualified Stock Options or Restricted Stock or a combination of each, are to be granted hereunder; (iii) to determine the number of shares to be covered by each such award granted hereunder; (iv) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (including, but not limited to, any restriction on any Stock Option or other award and/or the shares of Stock relating thereto), which authority shall be exclusively vested in the Committee (and not the Board); provided, however, that in the event of a merger or asset sale, the applicable provisions of Sections 5(c) of the Plan shall govern the acceleration of the vesting of any Stock Option; 3 (v) to determine whether, to what extent and under what circumstances Stock and other amounts payable with respect to an award under this Plan shall be deferred either automatically or at the election of the participant. The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any award issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan. The Committee may delegate to the President and/or Chief Executive Officer of the Company the authority to exercise the powers specified in (i), (ii), (iii), (iv) and (v) above with respect to persons who are not either the chief executive officer of the Company or the four highest paid officers of the Company other than the chief executive officer. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Plan participants. SECTION 3. Stock Subject to Plan. The total number of shares of Stock reserved and available for distribution under the Plan shall be 5,000,000. Such shares may consist, in whole or in part, of authorized and unissued shares. If any shares that have been optioned cease to be subject to Stock Options, or if any shares that have been optioned are forfeited, such shares shall again be available for distribution in connection with future awards under the Plan. In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, other change in corporate structure affecting the Stock, or spin-off or other distribution of assets to shareholders, such substitution or adjustment shall be made in the aggregate number of shares reserved for issuance under the Plan, and in the number and option price of shares subject to outstanding options granted under the Plan as may be determined to be appropriate by the Committee, in its sole discretion, provided that the number of shares subject to any award shall always be a whole number. SECTION 4. Eligibility. Officers, other key employees of the Company or any Parent Corporation or Subsidiary, members of the Board of Directors, and Consultants who are responsible for or contribute to the management, growth and profitability of the business of the Company and its Subsidiaries are eligible to be granted Stock Options under the Plan. The optionees and participants under the Plan shall be selected from time to time by the Committee, in its sole discretion, from among those eligible, and the Committee shall determine, in its sole discretion, the number of shares covered by each award. Notwithstanding the foregoing, no person shall receive grants of Stock Options under this Plan which exceed 500,000 shares during any fiscal year of the Company. 4 SECTION 5. Stock Options. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. The Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options and (ii) Non-Qualified Stock Options. No Incentive Stock Options shall be granted under the Plan after March 7, 2010. The Committee shall have the authority to grant any optionee Incentive Stock Options, Non-Qualified Stock Options, or both types of options. To the extent that any option does not qualify as an Incentive Stock Option, it shall constitute a separate Non-Qualified Stock Option. Anything in the Plan to the contrary notwithstanding, no term of this Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify either the Plan or any Incentive Stock Option under Section 422 of the Code. The preceding sentence shall not preclude any modification or amendment to an outstanding Incentive Stock Option, whether or not such modification or amendment results in disqualification of such Stock Option as an Incentive Stock Option, provided the optionee consents in writing to the modification or amendment. Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable. (a) Option Price. The option price per share of Stock purchasable under a Stock Option shall be no less than 100% of Fair Market Value on the date the option is granted. If an employee owns or is deemed to own (by reason of the attribution rules applicable under Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any Parent Corporation or Subsidiary and an Incentive Stock Option is granted to such employee, the option price shall be no less than 110% of Fair Market Value of the Stock on the date the option is granted. The Committee may not reprice options without shareholder approval. (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Stock Option shall be exercisable more than eight years after the date the option is granted. If an employee owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any Parent Corporation or Subsidiary and an Incentive Stock Option is granted to such employee, the term of such option shall be no more than five years from the date of grant. 5 (c) Exercisability. Stock Options shall be exercisable at such time or times as determined by the Committee at or after grant, subject to the restrictions stated in Section 5(b) above. If the Committee provides, in its discretion, that any option is exercisable only in installments, the Committee may waive such installment exercise provisions at any time. Notwithstanding anything contained in the Plan to the contrary, the Committee may, in its discretion, extend or vary the term of any Stock Option or any installment thereof, whether or not the optionee is then employed by the Company, if such action is deemed to be in the best interests of the Company; provided, however, that in the event of a merger or sale of assets, the provisions of this Section 5(c) shall govern vesting acceleration. Notwithstanding the foregoing, unless the Stock Option provides otherwise, any Stock Option granted under this Plan shall be exercisable in full, without regard to any installment exercise provisions, for a period specified by the Committee, but not to exceed sixty (60) days, prior to the occurrence of any of the following events: (i) dissolution or liquidation of the Company other than in conjunction with a bankruptcy of the Company or any similar occurrence, (ii) any merger, consolidation, acquisition, separation, reorganization, or similar occurrence, where the Company will not be the surviving entity or (iii) the transfer of substantially all of the assets of the Company or 50% or more of the outstanding Stock of the Company. The grant of an option pursuant to the Plan shall not limit in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge, exchange or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets. (d) Method of Exercise. Stock Options may be exercised in whole or in part at any time during the option period by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price, either by check, or by any other form of legal consideration deemed sufficient by the Committee and consistent with the Plan's purpose and applicable law, including promissory notes or a properly executed exercise notice together with irrevocable instructions to a broker acceptable to the Company to promptly deliver to the Company the amount of sale or loan proceeds to pay the exercise price. As determined by the Committee at the time of grant or exercise, in its sole discretion, payment in full or in part may also be made in the form of Stock already owned by the optionee (which in the case of Stock acquired upon exercise of an option have been owned for more than six months on the date of surrender) or, in the case of the exercise of a Non-Qualified Stock Option (based, in each case, on Fair Market Value of the Stock on the date the option is exercised, as determined by the Committee), provided, however, that, in the case of an Incentive Stock Option, the right to make a payment in the form of already owned shares may be authorized only at the time the option is granted, and provided further that in the event payment is made in the form of shares of restricted stock under another plan of the Company, the optionee will receive a portion of the option shares in the form of, and in an amount equal to, the restricted stock tendered as payment by the optionee. If the terms of an option so permit, an optionee may elect to pay all or part of the option exercise price by having the Company withhold from the shares of Stock that would otherwise be issued upon exercise that number of shares of Stock having a Fair Market Value equal to the aggregate option exercise price for the shares with respect to which such election is made. No shares of Stock 6 shall be issued until full payment therefor has been made. An optionee shall generally have the rights to dividends and other rights of a shareholder with respect to shares subject to the option when the optionee has given written notice of exercise, has paid in full for such shares, and, if requested, has given the representation described in paragraph (a) of Section 9. (e) Non-transferability of Options. No Incentive Stock Option shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution, and all such Incentive Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee. Non-Qualified Stock Options may be transferred by gift, without consideration, by the optionee under a written instrument acceptable to the Committee, to a member of the optionee's family, as defined in Section 267 of the Code, or to a trust or similar entity whose sole beneficiaries are the optionee and/or members of the optionee's family; provided, however, that such transfer and the exercise thereof shall not violate any federal or state securities laws. Upon the transfer, the donee shall have all rights of the optionee and shall be subject to all the terms and conditions imposed on such Options. (f) Termination by Death. If an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of death, any Stock Option may thereafter be exercised, to the extent then exercisable, by the legal representative of the estate or by the legatee of the optionee under the will of the optionee, but may not be exercised after twelve months from the date of such death or the expiration of the stated term of the option, whichever period is shorter. In the event of termination of employment by reason of death, if, pursuant to its terms, any Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the option will thereafter be treated as a Non-Qualified Stock Option. (g) Termination by Reason of Disability. If an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of Disability, any Stock Option held by such optionee may thereafter be exercised, to the extent it was exercisable at the time of termination due to Disability, but may not be exercised after twelve months from the date of such termination of employment or the expiration of the stated term of the option, whichever period is the shorter. In the event of termination of employment by reason of Disability, if, pursuant to its terms, any Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the option will thereafter be treated as a Non-Qualified Stock Option. (h) Termination by Reason of Retirement. If an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of Retirement, any Stock Option held by such optionee may thereafter be exercised, to the extent it was exercisable at the time of termination due to Retirement, but may not be exercised after thirty-six months from the date of such termination of employment or the expiration of the stated term of the option, whichever period is the shorter. In the event of termination of employment by reason of Retirement, if, pursuant to its terms, any Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the option will thereafter be treated as a Non-Qualified Stock Option. 7 (i) Other Termination. If an optionee's Continuous Status as an Employee or Consultant terminates (other than upon the optionee's death, Disability or Retirement), any Stock Option held by such optionee may thereafter be exercised to the extent it was exercisable at the time of such termination, but may not be exercised after 90 days after such termination, or the expiration of the stated term of the option, whichever period is the shorter. In the event of termination of employment by reason other than death, Disability or Retirement and if pursuant to its terms any Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the option will thereafter be treated as a Non-Qualified Stock Option. In the event an Optionee's employment with the Company is terminated for Cause, all unexercised Options granted to such Optionee shall immediately terminate. (j) Annual Limit on Incentive Stock Options. The aggregate Fair Market Value (determined as of the time the Stock Option is granted) of the Common Stock with respect to which an Incentive Stock Option under this Plan or any other plan of the Company and any Subsidiary or Parent Corporation is exercisable for the first time by an optionee during any calendar year shall not exceed $100,000. (k) Grants of Stock Options to Non-Employee Directors. Each Non-Employee Director who, after March 8, 2000 is (i) elected, re-elected or serving an unexpired term as a Director of the Company at any annual meeting of holders of the common Stock of the Company; or (ii) elected as a Director of the Company at any special meeting of holders of common Stock of the Company, shall, as of the date of such election, re-election or annual or special meeting, automatically be granted a Stock Option to purchase 3,000 shares of Stock at an option price per share equal to 100% of Fair Market Value of the Company's Stock on such date. In the case of a special meeting, the action of the holders of shares in electing a Non-Employee Director shall constitute the granting of the Stock Option to such Director and, in the case of an annual meeting, the action of the holders of shares in electing or re-electing a Non-Employee Director shall constitute the granting of the Stock Option to such Director and to any other Non-Employee Director who shall be designated as serving an unexpired term as a Director of the Company in the notice or proxy materials for the meeting; and the date when the holders of shares shall take such action shall be the date of grant of the Stock Option. All such Options shall be designated as Non-Qualified Stock Options and shall be subject to the same terms and provisions as are then in effect with respect to the grant of Non-Qualified Stock Options to officers and key employees of the Company, except that (1) the term of each such Option shall be equal to eight years, which term, notwithstanding the provisions in Section 5(i), shall not expire upon the termination of service as a Director; and (2) the Option shall become exercisable beginning six months after the date the Option is granted. Upon termination of such Director's service as a Director of the Company, the unvested portion of an Option held by such Director shall not thereafter be exercisable. Subject to the foregoing, all provisions of this Plan not inconsistent with the foregoing shall apply to Options granted pursuant to this Section 5(k), except that any Options granted to a Non-Employee Director shall be administered in accordance with the terms of this Plan solely by the Board of Directors and not by the Committee. Options issued under this Section 5(k) shall be in lieu of and in substitution for any 8 new awards of Options in accordance with the St. Jude Medical, Inc. 1997 Stock Option Plan from and after March 8, 2000. Nothing herein shall limit the right of the Board of Directors to issue Stock Options to any Non-Employee Director under the terms of this Plan in addition to those provided for under this Section 5(k), provided that no Non-Employee Director shall be granted Stock Options under this Plan, including the Options awarded under this Section 5(k), in excess of 5,000 shares in any calendar year. SECTION 6. Transfer, Leave of Absence, etc. For purposes of the Plan, the following events shall not be deemed a termination of employment: (a) a transfer of an employee from the Company to a Parent Corporation or Subsidiary, or from a Parent Corporation or Subsidiary to the Company, or from one Subsidiary to another; (b) a leave of absence, approved in writing by the Committee, for military service or sickness, or for any other purpose approved by the Company if the period of such leave does not exceed ninety (90) days (or such longer period as the Committee may approve, in its sole discretion); and (c) a leave of absence in excess of ninety (90) days, approved in writing by the Committee, but only if the employee's right to reemployment is guaranteed either by a statute or by contract, and provided that, in the case of any leave of absence, the employee returns to work within 30 days after the end of such leave. SECTION 7. Restricted Stock. (a) Administration. Up to 50,000 shares of Restricted Stock may be issued either alone or in addition to other awards granted under the Plan. The Committee shall determine the officers and key employees of the Company and Subsidiaries to whom, and the time or times at which, grants of Restricted Stock will be made, the number of shares to be awarded, the time or times within which such awards may be subject to forfeiture, and all other conditions of the awards. The Committee may also condition the grant of Restricted Stock upon the attainment of specified performance goals. The provisions of Restricted Stock awards need not be the same with respect to each recipient. (b) Awards and Certificates. The prospective recipient of an award of shares of Restricted Stock shall not have any rights with respect to such award, unless and until such recipient has executed an agreement evidencing the award and has delivered a fully executed copy thereof to the Company, and has otherwise complied with the then applicable terms and conditions. (i) Each participant shall be issued a stock certificate in respect of shares of Restricted Stock awarded under the Plan. Such certificate shall be registered in the 9 name of the participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such award, substantially in the following form: "The transferability of the certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the St. Jude Medical, Inc. 2000 Stock Plan and an Agreement entered into between the registered owner and the Company. (ii) The Committee shall require that the stock certificates evidencing such shares be held in custody by the Company until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock award, the participant shall have delivered a stock power endorsed in blank, relating to the Stock covered by such award. (c) Restrictions and Conditions. The shares of Restricted Stock awarded pursuant to the Plan shall be subject to the following restrictions and conditions: (i) Subject to the provisions of this Plan and the award agreement, during a period set by the Committee commencing with the date of such award (the "Restriction Period"), the participant shall not be permitted to sell, transfer, pledge or assign shares of Restricted Stock awarded under the Plan. Within these limits, the Committee may provide for the lapse of such restrictions in installments where deemed appropriate. (ii) Except as provided in paragraph (c) (i) of this Section 7, the participant shall have, with respect to the shares of Restricted Stock, all of the rights of a shareholder of the Company, including the right to vote the shares and the right to receive any cash dividends. The Committee, in its sole discretion, may permit or require the payment of cash dividends to be deferred and, if the Committee so determines, reinvested in additional shares of Restricted Stock to the extent shares are available under Section 3. Certificates for shares of unrestricted Stock shall be delivered to the grantee promptly after, and only after, the period of forfeiture shall have expired without forfeiture in respect of such shares of Restricted Stock. (iii) Subject to the provisions of the award agreement and paragraph (c) (iv) of this Section 7, upon termination of employment for any reason during the Restriction Period, all shares still subject to restriction shall be forfeited by the participant. (iv) In the event of special hardship circumstances of a participant whose employment is terminated (other that for Cause), including death, Disability or Retirement, or in the event of an unforeseeable emergency of a participant still in service, the Committee may, in its sole discretion, when it finds that a waiver would be in the best interest of the Company, waive in whole or in part any or all remaining restrictions with respect to such participant's shares of Restricted Stock. 10 (v) Notwithstanding the foregoing, all restrictions with respect to any participant's shares of Restricted Stock shall lapse, on the date determined by the Committee, prior to, but in no event more that sixty (60) days prior to, the occurrence of any of the following events: (i) dissolution or liquidation of the Company, other than in conjunction with a bankruptcy of the Company or any similar occurrence, (ii) any merger, consolidation, acquisition, separation, reorganization, or similar occurrence, where the Company will not be the surviving entity or (iii) the transfer of substantially all of the assets of the Company or 50% or more of the outstanding Stock of the Company. SECTION 8. Amendments and Termination. The Board may amend, alter, or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made (i) which would impair the rights of an optionee or participant under a Stock Option theretofore granted, without the optionee's or participant's consent, or (ii) which without the approval of the shareholders of the Company would cause the Plan to no longer comply with Rule 16b-3 under the Securities Exchange Act of 1934, Section 422 of the Code or any other regulatory requirements. The Committee may amend the terms of any award or option theretofore granted, prospectively or retroactively to the extent such amendment is consistent with the terms of this Plan, but no such amendment shall impair the rights of any holder without his or her consent except to the extent authorized under the Plan. However, the Committee may not reprice options, either by lowering the exercise price of outstanding options or canceling outstanding options and granting replacement options with lower exercise prices, without shareholder approval. SECTION 9. Unfunded Status Of Plan. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a participant or optionee by the Company, nothing contained herein shall give any such participant or optionee any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or payments in lieu of or with respect to awards hereunder, provided, however, that the existence of such trusts or other arrangements is consistent with the unfunded status of the Plan. SECTION 10. General Provisions. (a) The Committee may require each person purchasing shares pursuant to a Stock Option under the Plan to represent to and agree with the Company in writing that the optionee is 11 acquiring the shares without a view to distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. All certificates for shares of Stock delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed, and any applicable Federal or state securities laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (b) Nothing contained in this Plan shall prevent the Board of Directors from adopting other or additional compensation arrangements, subject to shareholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. The adoption of the Plan shall not confer upon any employee of the Company or any Subsidiary any right to continued employment with the Company or a Subsidiary, as the case may be, nor shall it interfere in any way with the right of the Company, Parent Corporation or a Subsidiary to terminate the employment of any of its employees at any time. (c) Each participant shall, no later than the date as of which any part of the value of an award first becomes includible as compensation in the gross income of the participant for Federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Committee regarding payment of, any Federal, state, or local taxes of any kind required by law to be withheld with respect to the award. The obligations of the Company under the Plan shall be conditional on such payment or arrangements and the Company, Parent Corporation and a Subsidiary shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the participant. With respect to any award under the Plan, if the terms of such award so permit, a participant may elect by written notice to the Company to satisfy part or all of the withholding tax requirements associated with the award by (i) authorizing the Company to retain from the number of shares of Stock that would otherwise be deliverable to the participant, or (ii) delivering to the Company from shares of Stock already owned by the participant, that number of shares having an aggregate Fair Market Value equal to part or all of the tax payable by the participant under this Section 9(c). Any such election shall be in accordance with, and subject to, applicable tax and securities laws, regulations and rulings. SECTION 11. Effective Date of Plan The Plan shall be effective on March 8, 2000 (the date of approval by the Board of Directors), subject to the approval by shareholders of the Company. If the Plan is not so approved by the shareholders on or before one year after this Plan's adoption by the Board of Directors, this Plan shall not come into effect. The offering of the shares hereunder shall be also 12 subject to the effecting by the Company of any registration or qualification of the shares under any federal or state law or the obtaining of the consent or approval of any governmental regulatory body which the Company shall determine, in its sole discretion, is necessary or desirable as a condition to or in connection with, the offering or the issue or purchase of the shares covered thereby. The Company shall make every reasonable effort to effect such registration or qualification or to obtain such consent or approval. 13 EX-10.10 5 stjude021570_ex10-10.txt 2000 EMPLOYEE STOCK SAVINGS PLAN EXHIBIT 10.10 ST. JUDE MEDICAL, INC. 2000 Employee Stock Purchase Savings Plan I Purpose The purpose of the 2000 Employee Stock Purchase Savings Plan is to provide a greater community of interest between St. Jude Medical, Inc. shareholders and its employees, and to facilitate purchase by employees of additional shares of common stock in the Company. It is believed the Plan will encourage employees to remain in the employ of the Company and will also permit the Company to compete with other corporations offering similar plans in obtaining and retaining the services of competent employees. It is intended that options issued pursuant to this Plan shall constitute options issued pursuant to an "Employee Stock Purchase Plan" within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended. II Definitions A. "Plan" means the 2000 St. Jude Medical, Inc. Employee Stock Purchase Savings Plan. B. "Code" means the Internal Revenue Code of 1986, as amended. C. "Company" means St. Jude Medical, Inc., and any of its subsidiaries (as that term is defined by Section 425(f) of the Code) to which St. Jude Medical, Inc. and such respective subsidiaries, by action of their Boards of Directors, shall make this Plan applicable. D. "Employee" means any person, including an officer, who is customarily employed twenty (20) hours or more per week and more than five (5) months in a calendar year by the Company. E. "Eligible Employee" means an Employee of the Company who is eligible for participation in the Plan in accordance with Article IV. F. "Participant" means an Eligible Employee who has elected to participate in the Plan in accordance with Article V. G. "Committee" means the committee provided for in Article XI. H. The "Commencement Date" of the Plan means August l, 2000 or a date established by the Committee not to exceed fourteen days following registration of the options and shares reserved pursuant to the Plan with the United States Securities and Exchange Commission. I. "Base Pay" means regular straight time earnings annualized as of the date of commencement of a phase excluding payments, if any, for overtime, incentive compensation, commissions, incentive payments, premiums, bonuses and any other special remuneration. J. "Termination Date" shall mean the earlier of (i) the date of the one year anniversary following the commencement of a particular phase of the Plan, or (ii) such time as any merger or consolidation in which St. Jude Medical, Inc. is not the surviving corporation becomes effective. K. "Shares" shall mean common shares of St. Jude Medical, Inc. of the par value of $.10, subject to adjustments which may be made in accordance with Articles XVI and XVII. III Term and Phases of the Plan A. The Plan will commence on the Commencement Date and will terminate ten (10) years and six (6) months thereafter, except that any phase commenced prior to such termination shall, if necessary, be allowed to continue beyond such termination until completion. Notwithstanding the foregoing, this Plan shall be considered of no force or effect and any options granted shall be null and void unless the holders of a majority of shares of the common stock of the Company, represented at a meeting in person or by proxy, approve the Plan within twelve (12) months before or after the date of its adoption by the Board of Directors. B. The Plan shall be carried out in ten (10) phases, each phase being for a period of one year. No phase shall run concurrently. A phase may commence immediately after the termination of the preceding phase. The commencement of each phase shall be determined by the Committee, provided that the commencement of the first phase shall be within twelve (12) months before or after the date of approval of the Plan by the shareholders of the Company. In the event all of the stock reserved for grant of options hereunder is issued pursuant to the terms hereof prior to the commencement of one or more phases scheduled by the Committee or the number of shares remaining is so small, in the opinion of the Committee, as to render administration of any succeeding phase impracticable, such phase or phases shall be canceled. Phases shall be numbered successively as Phase 1, Phase 2, Phase 3, etc. IV Eligibility A. Any Employee of the Company who has completed at least one month of continuous service on or prior to the commencement of a phase of the Plan shall be eligible to participate in the Plan, subject to the limitations imposed by Section 423 of the Code. B. Any Employee who is a member of the Board of Directors of the Company shall be eligible to participate in the Plan. 2 C. Notwithstanding any provision of the Plan to the contrary, no Employee shall be granted an option: 1. if such Employee, immediately after the option is granted, owns shares possessing five percent (5%) or more of the total combined voting power or value of all classes of shares of the Company or a parent or a subsidiary of the Company. For purposes of determining share ownership, the rules of Section 424(d) of the Code shall apply, and shares which the Employee may purchase under outstanding options shall be treated as shares owned by the Employee; or 2. which permits the Employee to purchase shares under such plans of the Company or a subsidiary of the Company to accrue at a rate which exceeds $25,000 of the fair market value of such shares (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. The term "accrue" shall be interpreted as in Section 423(b)(8) of the Code. V Participation A. An Eligible Employee may elect to enroll as, and become a Participant in, any phase of the Plan by completing a payroll deduction authorization on the form provided by the Company and filing it the personnel office prior to or on the date the phase commences. B. Payroll deductions for a Participant shall commence on the date when his or her payroll deduction authorization becomes effective and shall end on the last payday immediately prior to or coinciding with the Termination Date of the particular phase, unless sooner terminated by the Participant as provided in Article IX or as otherwise provided herein. C. A Participant who ceases to be an Eligible Employee, although still employed by the Company, thereupon shall be deemed to discontinue his or her participation in the Plan, and he or she shall have the rights provided in Article IX. D. Participation in the Plan shall be voluntary. VI Payroll Deductions A. Upon enrollment, a Participant shall elect to make contributions to the Plan by payroll deductions (in full dollar amounts calculated to be as uniform as practicable throughout the period of the phase), in the aggregate amount not in excess of the sum of 10% of such Participant's Base Pay for the term of the phase, as determined on the basis of his or her annual or annualized Base Pay at the commencement of the phase. The minimum authorized payroll deduction must aggregate to not less than $10 per month. 3 B. All payroll deductions made for Participants shall be credited to their accounts under the Plan. The Participant may not make any separate cash payments into such account. C. A Participant may discontinue his or her participation in the phase and terminate his or her payroll deduction authorized at any time as provided in Article IX. D. A Participant may reduce the amount of his or her payroll deduction by completing an amended payroll deduction authorization on the form provided and filing it with his or her personnel office, but no change can be made during a phase of the Plan which would either change the time or increase the rate of his or her payroll deductions. VII Terms and Conditions of Options A. Stock options granted pursuant to the Plan may be evidenced by agreements in such form as the Committee shall approve, provided that all Employees shall have the same rights and privileges and provided further that such options shall comply with and be subject to the following terms and conditions. The Committee may conclude that agreements are not necessary. B. As of the commencement of a phase when a Participant's payroll deduction authorization becomes effective, the Participant shall be granted an option for as many full shares as he or she will be able to purchase with the payroll deduction credited to his or her account during his or her participation in the phase, subject to the limitations of Article X. The maximum number of shares subject to purchase by a Participant shall equal the total amount credited to the Participant's account under Section VI hereof divided by the option price set forth in Section VII, Paragraph C.1 hereof. C. The option price of shares purchased with payroll deductions for an Employee who becomes a Participant as of the commencement of a phase shall be the lower of: 1. 85% of the fair market value of the shares on the date the phase commences; or, 2. 85% of the fair market value of the shares on the Termination Date of the phase. D. The fair market value of the shares shall be determined by the Committee for each valuation date in a manner consistent with Section 423 of the Code. 4 VIII Exercise of Option A. Unless a Participant gives written notice to the Company as provided in Article IX, his or her option for the purchase of shares will be exercised automatically for him or her as of the Termination Date of the phase for the purchase of the number of full shares which the accumulated payroll deductions in his or her account at that time will purchase at the applicable option price; but in no event shall the number of full shares be greater than the number of full shares to which the Participant would have been eligible to receive when he or she first became a Participant under the phase if he or she had elected a payroll deduction rate of 10% of his or her then annual or annualized Base Pay and as if the option price were solely based under Paragraph C.1 of Article VII. B. By written notice to the Company within the period commencing three (3) months prior to and extending five (5) business days following the Termination Date of the phase and after delivery to the Participant of a prospectus covering the shares to be issued under the Plan, a Participant may elect, effective as of the Termination Date, to: 1. withdraw all the accumulated payroll deductions in his or her account at the time, with interest; or, after receipt of a prospectus as set forth above, 2. exercise his or her option for a specified number of full shares less than the number of full shares which the accumulated payroll deductions in his or her account will purchase at the applicable option price and withdraw the balance in his or her account without interest; but in no event shall the number of full shares be greater than the number of full shares to which a Participant would have been eligible to receive when he or she first became a Participant under the phase if he or she had elected a payroll deduction rate of 10% of his or her then annual or annualized Base Pay and as if the option price were solely based under Paragraph C.1 of Article VII. C. Notwithstanding the provisions of Paragraphs A and B above, if a Participant files reports pursuant to Section 16 of the Securities Exchange Act of 1934 (at the commencement of a phase or becomes obligated to file such reports during a phase) then such a Participant shall not have the right to withdraw all or a portion of the accumulated payroll deductions except in accordance with Article IX, Paragraphs A and B. IX Death, Withdrawal or Termination A. In the event of death of a Participant, the person or persons specified in Article XVIII may give notice to the Company within sixty (60) days of the death of the Participant electing to purchase the number of full shares which the accumulated payroll deductions in the account of such deceased Participant will purchase under the option at the applicable option price specified in Paragraph C of Article VII and have the balance in the account distributed in cash 5 without interest. If no such notice is received by the Company within said sixty (60) days, the accumulated payroll deductions will be distributed in cash plus interest. B. Except as provided in the next sentence, upon termination of the Participant"s employment for any reason other than the death of the Participant, the payroll deductions credited to his or her account, plus interest, shall be returned to him or her. In the event the Participant"s employment is terminated by the Company due to the elimination of the Participant"s position or in connection with a corporate transaction, or such other similar circumstances as approved by the Committee, with respect to such Participants designated by the Committee, the Termination Date of the Phase shall be a date prior to or coincident with their last day of employment; provided, however, that if the termination of employment occurs within 90 days of the Termination Date of a Phase, the original Termination Date shall apply. C. Except for a Participant governed by Paragraph C of Article VIII, a Participant may withdraw payroll deductions credited to his or her account under the Plan at any time by giving written notice to the Company. All of the Participant's payroll deductions credited to his or her account, plus interest, shall be paid to him or her promptly after receipt of his or her notice of withdrawal and no further payroll deductions shall be made from his or her compensation. X Shares Under Option A. The shares to be sold to a Participant under the Plan may, at the election of the Company, be either treasury shares or shares originally issued for such purpose. The maximum number of shares which shall be made available for purchase under the Plan shall be 1,000,000 shares, subject to adjustment upon changes in capitalization of the Company as provided in Articles XVI and XVII. If the total number of shares for which options are to be granted on any date in accordance with Article VII exceeds the number of shares then available under the Plan (after deduction of all shares for which options have been exercised or are then outstanding), the Committee shall make a pro rata allocation of the shares remaining available in as nearly a uniform manner as shall be practicable and as it shall determine to be equitable. In such event, payroll deductions to be made shall be reduced accordingly and the Committee shall give written notice of such reduction to each Participant affected thereby. B. As promptly as practicable after the Termination Date of a phase, the Company shall deliver to each Participant the full shares purchased under exercise of his or her option, together with a cash payment equal to the balance (without interest) of any payroll deductions credited to his or her account which were not used for the purchase of shares. C. The Participant will have no interest in shares covered by his or her option until such option has been exercised. 6 XI Administration The Plan shall be administered by a Committee consisting of not less than two (2) members who shall be appointed by the Board of Directors of the Company. Each member of such Committee shall be either a director, an officer or an employee of the Company. Such Committee shall be vested with full authority to make, administer, and interpret such rules and regulations as it deems necessary to administer the Plan, and any such determination, decision or action of such Committee with respect to any action in connection with the construction, interpretation, administration or application of the Plan shall be final, conclusive and binding on all Participants and any and all other persons claiming under or through any Participant. It is provided, however, that the provisions of the Plan shall be construed so as to extend and limit participation in the Plan only in a manner consistent with the requirements of Section 423 of the Code. XII Amendment of the Plan The Board of Directors of the Company may at any time amend the Plan, except that no amendment may make any change in any option theretofore granted which would adversely affect the rights of any Participant, and no amendment shall be made without prior approval of the shareholders of the Company if such amendment would require sale of more shares than are authorized under Article X of the Plan. XIII Non-transferability Neither payroll deductions credited to a Participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way by the Participant and any such attempted assignment, transfer, pledge or other disposition shall be null and void and without effect, but the Company may treat such act as an election to withdraw funds in accordance with Article IX. XIV Use of Funds All payroll deductions received or held by the Company under this Plan may be used by the Company for any corporate purposes and the Company shall not be obligated to segregate such payroll deductions. 7 XV Interest In any situation where the Plan provides for the payment of interest on a Participant's payroll deductions, such interest shall be determined by averaging the balance in the Participant's account for the period of his or her participation and computing interest thereon at the rate of 4% per annum (simple interest). The Committee may change the rate of interest for a particular phase, provided such change is made prior to the commencement of the phase. XVI Changes in Capitalization, Merger, etc. A. Subject to any required action by the shareholders, the number of shares covered by each outstanding option, the price per share thereof in each such option, and the maximum number of shares available for purchase pursuant to options issued under the Plan shall be deemed proportionately adjusted for any increase or decrease in the number of issued shares of the Company resulting from a subdivision or consolidation of shares or the payment of a share dividend (but only on the shares) or any other increase or decrease in the number of such shares effected without receipt of consideration by the Company. B. If the Company shall be involved in any merger or consolidation, whether or not it is the surviving corporation, each outstanding option shall pertain to and apply to the securities to which a holder of the number of shares subject to the option would have been entitled. A dissolution or liquidation of the Company shall cause each outstanding option to terminate, provided in such event that, immediately prior to such dissolution or liquidation, each Participant shall be repaid the payroll deductions credited to his or her account, plus interest. C. In the event of a change in the shares of the Company as presently constituted, which is limited to a change of all its authorized shares with par value into the same number of shares with a different par value or without par value, the shares resulting from any such change shall be deemed to be the shares within the meaning of this Plan. XVII Adjustments to Shares A. To the extent that the foregoing adjustments relate to shares or securities of the Company, such adjustments shall be made by the Committee, and its determination in that respect shall be final, binding and conclusive, provided that each option granted pursuant to this Plan shall not be adjusted in a manner that causes the option to fail to continue to qualify as an option issued pursuant to an "employee stock purchase plan" within the meaning of Section 423 of the Code. 8 B. Except as hereinbefore expressly provided in Articles XVI and XVII, the optionee shall have no right by reason of any subdivision or consolidation of shares of any class or the payment of any stock dividend or any other increase or decrease in the number of shares of any class or by reason of any dissolution, liquidation, merger, or consolidation or spin-off of assets or stock of another corporation, and any issue by the Company of shares of any class, or securities convertible into shares of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares subject to the option. C. The grant of an option pursuant to this Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets. XVIII Beneficiary Designation A Participant may file a written designation of a beneficiary who may elect to purchase shares or receive cash to the Participant's credit under the Plan in the event of such Participant's death prior to delivery to him or her of such shares and cash. Such designation of beneficiary may be changed by the Participant at any time by written notice. Upon the death of a Participant and upon receipt by the Company of proof deemed adequate by it of the identity and existence at the Participant's death of a beneficiary validly designated by him or her under the Plan, the Company shall deliver such shares and cash to such beneficiary in accordance with Section A of Article IX. If, upon the death of a Participant, there is no surviving beneficiary duly designated as above provided, the Company shall deliver accumulated payroll deductions to the executor or administrator of the estate of the Participant or, if no such executor or administrator has been appointed (to the knowledge of the Company) within sixty (60) days following the Participant's death, the Company shall deliver such accumulated payroll deductions to the surviving spouse, if any, as though named as the designated beneficiary hereunder or, if there is no such surviving spouse or child, then to such relatives of the Participant as would be entitled to such cash under the laws of intestacy in the deceased Participant's domicile as though named as the designated beneficiary hereunder. The Company shall not be liable for any distribution made of shares or cash pursuant to any will or other testamentary disposition made by such Participant, or because of the provisions of law concerning intestacy, or otherwise. No designated beneficiary shall, prior to the death of the Participant by whom he or she has been designated, acquire any interest in the shares or cash credited to the Participant under the Plan. XIX Registration and Qualification of Shares The offering of the shares hereunder shall be subject to the effecting by the Company of any registration or qualification of the shares under any federal or state law or the obtaining of the consent or approval of any governmental regulatory body which the Company shall determine, in its sole discretion, is necessary or desirable as a condition to or in connection with 9 the offering or the issue or purchase of the shares covered thereby. The Company shall make every reasonable effort to effect such registration or qualification or to obtain such consent or approval. XX Plan Preconditions The Plan is expressly made subject to approval of shareholders of the Company. If the Plan is not so approved by the shareholders on or before one year after adoption by the Board of Directors, this Plan shall not come into effect. In such case, the accumulated payroll deductions credited to the account of each Participant shall forthwith be repaid to him or her with interest. ADOPTED BY BOARD OF DIRECTORS: March 8, 2000 APPROVED BY SHAREHOLDERS: May 10, 2000 10 EX-13 6 stjude021570_ex13.txt 2001 ANNUAL REPORT EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Dollars in thousands, except per share amounts) RESULTS OF OPERATIONS INTRODUCTION St. Jude Medical, Inc. ("St. Jude Medical" or the "Company") is a leader in the development, manufacturing and distribution of cardiovascular medical devices for the global cardiac rhythm management (CRM), cardiology and vascular access (C/VA), and cardiac surgery (CS) markets. The Company's principal products in each of these markets are: bradycardia pacemaker systems, tachycardia implantable cardioverter defibrillator (ICD) systems, and electrophysiology (EP) catheters in CRM; vascular closure devices, catheters, guidewires and introducers in C/VA; and mechanical and tissue heart valves, valve repair products, and suture-free devices to facilitate coronary artery bypass graft anastomoses in CS. The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Saturday nearest December 31, but for clarity of presentation, describes all periods as if the year end is December 31. Fiscal years 2001, 2000 and 1999 each consisted of fifty-two weeks. The commentary that follows should be read in conjunction with the Company's consolidated financial statements and related notes. ACQUISITIONS Following is a discussion on the businesses acquired by the Company during the last three years: VASCULAR SCIENCE, INC. (VSI): On September 27, 1999, the Company purchased the outstanding common stock of VSI for $75,071 in cash, net of cash acquired, plus additional contingent consideration related to product development milestones for regulatory approvals and to future sales. VSI was a development-stage company focused on the development of suture-free devices to facilitate coronary artery bypass graft anastomoses. ANGIO-SEAL(TM): On March 16, 1999, the Company purchased the Angio-Seal(TM) business of Tyco International Ltd. for $167,000 in cash. Angio-Seal(TM) manufactured and marketed vascular closure devices. OTHER: During 2001, 2000 and 1999, the Company acquired various businesses involved in distribution of the Company's products. Aggregate consideration paid in cash and common stock, net of any cash acquired, during 2001, 2000 and 1999 was $10,444, $3,264 and $21,056, respectively. The above acquisitions were recorded using the purchase method of accounting. The operating results of each of these acquisitions are included in the Company's consolidated financial statements from the date of each acquisition. Pro forma results of operations have not been presented for these acquisitions since the effects of these business acquisitions were not material to the Company either individually or in aggregate. NET SALES Net sales by geographic markets were as follows: 2001 2000 1999 - -------------------------------------------------------------------------------- United States $ 880,086 $ 745,793 $ 689,051 International 467,270 433,013 425,498 - -------------------------------------------------------------------------------- Total net sales $1,347,356 $1,178,806 $1,114,549 - -------------------------------------------------------------------------------- Overall, foreign exchange rate movements had an unfavorable year-to-year impact on net sales of approximately $16,000 and $34,000 in 2001 and 2000, due primarily to the strengthening of the U.S. dollar against the major Western European currencies. This negative effect is not necessarily indicative of the impact on net earnings due to partially offsetting favorable foreign currency changes on operating costs and to the Company's hedging activities that occurred in 2000 and 1999. Net sales by class of similar products were as follows: 2001 2000 1999 - -------------------------------------------------------------------------------- Cardiac rhythm management $ 965,968 $ 819,117 $ 767,212 Cardiology and vascular access 133,343 102,740 75,905 Cardiac surgery 248,045 256,949 271,432 - -------------------------------------------------------------------------------- Total net sales $1,347,356 $1,178,806 $1,114,549 - -------------------------------------------------------------------------------- Net sales of cardiac rhythm management products increased 17.9% over 2000 due primarily to increased bradycardia, ICD and EP catheter unit sales, offset in part by negative foreign currency effects. The increase in bradycardia net sales in 2001 was driven by the mid-year introduction of the Integrity AFx(R) pacemaker with atrial fibrillation suppression technology. The increase in ICD net sales in 2001 was primarily due to the full year sales of the Company's dual-chamber ICD products, which were introduced into the market in October 2000. Net sales of CRM products in 2000 increased 6.8% over 1999 due primarily to increased bradycardia and EP catheter unit sales, offset partially by the negative impact of the strengthening U.S. dollar on foreign sales. The increase in bradycardia sales in 2000 was mainly due to the Company's on-going rollout of the Affinity(R) pacemaker family and to an expanded U.S. sales organization. Net sales of cardiology and vascular access products increased 29.8% and 35.4% in 2001 and 2000 due primarily to increased Angio-Seal(TM) unit sales. Net sales of cardiac surgery products decreased 3.5% from 2000 due to the effects of the stronger U.S. dollar and a clinical preference shift from mechanical valves to tissue valves in the U.S. market where the Company holds significant mechanical valve market share and a smaller share of the tissue valve market. This was offset in part by an increase in aortic connector sales with the introduction of this technology to the U.S. market during 2001. Net sales of cardiac surgery products in 2000 decreased 5.3% from 1999 due to the effects of the stronger U.S. dollar, the impact of 1 the first quarter 2000 recall of valve products incorporating a Silzone(R) coating, and a clinical preference shift from mechanical valves to tissue valves in the U.S. market. GROSS PROFIT Gross profits were as follows: 2001 2000 1999 - -------------------------------------------------------------------------------- Gross profit $888,197 $787,657 $733,647 Percentage of net sales 65.9% 66.8% 65.8% - -------------------------------------------------------------------------------- The Company's 2001 gross profit margin decreased nearly one percentage point from 2000 due primarily to the $21,667 of special charges recorded in the third quarter of 2001 relating to inventory and diagnostic equipment write-offs (see further details under the discussion of Special charges). Excluding these special charges, the gross profit percentage was 67.5% in 2001 compared to 66.8% in 2000, both of which were up from the respective prior year due to higher unit volumes and improved manufacturing efficiencies in the Company's CRM operations, offset partially by the unfavorable impact on net sales due to the stronger U.S. dollar. The Company anticipates making further improvements in its operations through the use of total quality management techniques, and further investments in technology in order to continue to improve the Company's gross profit margin percentage in the future. OPERATING EXPENSES Certain operating expenses were as follows: 2001 2000 1999 - -------------------------------------------------------------------------------- Selling, general and administrative $467,113 $416,383 $394,418 Percentage of net sales 34.7% 35.3% 35.4% Research and development $164,101 $137,814 $125,059 Percentage of net sales 12.2% 11.7% 11.2% - -------------------------------------------------------------------------------- SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSE: SG&A expense as a percentage of net sales decreased in 2001 due primarily to the increased sales which leveraged the Company's cost structure. SG&A expense as a percentage of net sales in 2000 was comparable to 1999. During the fourth quarter of 2001, the Company reversed through SG&A expense a $15,000 accrued liability relating to royalties on a license agreement with Guidant that management believed it had acquired as part of its purchase of assets of the Telectronics cardiac stimulation device business. In addition, the Company expensed approximately the same amount of legal fees incurred in relation to the Guidant litigation (see further discussion on both of these matters in Note 4 to the Company's Consolidated Financial Statements). During the third quarter of 2000, the Company received a cash payment related to a non-product arbitration judgement pertaining to business matters occurring in 1997 and 1998. This cash receipt, net of other provisions for legal matters and fees, was $15,158 and was credited to SG&A expense. In addition, during the third quarter of 2000, the Company recorded additional SG&A expenses related to a $3,500 discretionary contribution to its charitable foundation, $6,672 primarily for write-offs of certain assets and related costs, and a $4,900 increase to its allowance for doubtful accounts. These additional costs and expenses were also recorded in SG&A expense. RESEARCH AND DEVELOPMENT (R&D) EXPENSE: R&D expense increased in 2001 and 2000 primarily due to the Company's increased activities relating to ICDs, products to treat emerging indications in atrial fibrillation and congestive heart failure, and suture-free devices to facilitate coronary artery bypass graft anastomoses. PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES: In 1999, the Company recorded purchased in-process research and development charges of $47,775 and $67,453 in connection with the acquisitions of Angio-Seal(TM) and VSI. The purchased in-process research and development charges were computed by an independent third-party appraisal company and were expensed at close, except as noted below, since technological feasibility had not been established and since there were no alternative future uses for the technology. During 1999 and 2000, the in-process technologies acquired in the Angio-Seal(TM) acquisition were completed, necessary regulatory approvals were received, and the products were released to the market. During 1999, 2000 and 2001, the Company continued to develop certain of the in-process technologies acquired in the VSI acquisition. Development of one of the VSI technologies (the proximal connector) was completed and regulatory approvals and E.U. and U.S. market releases occurred in 2000 and 2001. A second VSI in-process technology (the distal connector) received E.U. regulatory approval in 2001; however, the Company intends to make additional enhancements to this product in 2002 prior to filing for U.S. regulatory approval and prior to releasing the product to either the E.U. or U.S. markets. At the date of the VSI acquisition, the total estimated costs necessary to complete the proximal and distal connector technologies into commercially viable products and to make certain subsequent product enhancements were approximately $1,000, all of which were scheduled to be incurred in 1999 and 2000. Currently, the total estimated costs to complete the proximal and distal connectors, including the related enhancements, have increased to $11,000, of which $2,400 remains to be incurred in 2002. Other in-process technologies acquired in the VSI acquisition continue to be reviewed for ultimate viability in the developing coronary artery bypass graft anastomoses market. The original estimated costs to complete these other technologies into commercially viable products were approximately $6,000, of which only an immaterial amount has been incurred to date. 2 The total appraised value of the VSI purchased in-process research and development was $95,500, of which $67,453 was recorded at close. The Company paid additional amounts totaling $10,000 in 2001 and $5,000 in 2000 as certain product development milestones were achieved. The remaining balance of the in-process research and development valuation ($13,047) will be recorded in the Company's financial statements as purchased in-process research and development expense when payment of the contingent consideration is assured beyond a reasonable doubt. Contingent consideration payments in excess of the $13,047 will be capitalized as goodwill. Management believes that the financial statement projections used in the Angio-Seal(TM) and VSI acquisitions are still materially valid; however, there can be no assurance that the projected results will be achieved. In addition, there are risks associated with being able to complete development of the VSI in-process technologies, and there can be no assurance that these technologies will meet with either technological or commercial success. Failure to successfully complete the development and commercialize these in-process technologies would result in the loss of the expected economic return inherent in the original fair value allocation. SPECIAL CHARGES: In July 2001, the Company initiated efforts to streamline its heart valve operations, consolidate its U.S. sales activities and restructure its international sales organization. As a result of these activities, the Company recorded pre-tax special charges of $20,657 in the third quarter of 2001, consisting of employee severance costs resulting from the elimination of approximately 90 production and administrative positions ($5,293), inventory write-offs and scrap ($9,490), capital equipment write-offs ($3,379) and other costs related primarily to lease terminations and other facility exit costs due to the closing and consolidation of sales offices ($2,495). The Company has utilized $13,500 of these special charge accruals through December 31, 2001, consisting of $2,468 of employee severance costs, $7,301 of inventory write-offs and scrap, $3,379 of capital equipment write-offs, and $352 of other costs. The Company estimates that the remaining accruals will be utilized primarily during 2002. During the third quarter of 2001, the Company also wrote off $12,177 of certain diagnostic equipment deemed obsolete due to the overwhelming acceptance of newer technology equipment which received U.S. regulatory approvals in late 2000 and early 2001, and was launched earlier in 2001. The charges relating to employee severance costs, capital equipment write-offs and other costs have been recorded in operating expenses as special charges. The inventory and diagnostic equipment write-offs are included in cost of sales as special charges. On January 21, 2000, the Company initiated a worldwide voluntary recall of all field inventory of heart valve replacement and repair products incorporating Silzone(R) coating on the sewing cuff fabric. The Company concluded that it will no longer utilize Silzone(R) coating. The Company recorded a special charge accrual totaling $26,101 during the first quarter of 2000 relating to asset write-downs ($9,465) and other costs ($16,636), including monitoring expenses, associated with this recall and product discontinuance. Additionally, the Company maintains product liability coverage for litigation related costs in excess of its self-insured retention. The Company has utilized $20,701 of this special charge accrual through December 31, 2001, consisting of $9,465 of asset write-downs and $11,236 of other costs. The Company estimates that the remaining accrual will be utilized primarily during 2002. There can be no assurance that the final costs associated with this recall that are not covered by insurance, including litigation-related costs, will not exceed management's estimates. The Company recorded a $9,754 special charge accrual in 1999 related to the restructuring of its international operations. Substantially all accruals related to this restructuring have been utilized through December 31, 2001. OTHER INCOME (EXPENSE) Net interest expense was $9,306 in 2001, $25,929 in 2000 and $25,378 in 1999. The decrease in net interest expense in 2001 was due to lower debt levels resulting from debt repayments, as well as lower interest rates in 2001 compared with 2000 and 1999. INCOME TAXES The Company's reported effective income tax rates were 24.3% in 2001, 27.2% in 2000, and 63.8% in 1999. Exclusive of the purchased in-process research and development and special charges, the Company's effective income tax rate was 25% for each of these periods. The VSI-related purchased in-process research and development charges are not deductible for income tax purposes and the special charges were recorded in taxing jurisdictions where income tax rates vary from the Company's blended 25% effective tax rate. The Company anticipates that its effective income tax rate before in-process research and development and special charges will increase beginning in 2003 due to a larger percentage of the Company's forecasted taxable income being generated in higher taxing jurisdictions. The Company has not recorded U.S. deferred income taxes on certain of its non-U.S. subsidiaries' undistributed earnings as such amounts are intended to be reinvested outside the U.S. indefinitely. However, should the Company change its business and tax strategies in the future and decide to repatriate a portion of these earnings to one of the Company's U.S. subsidiaries, including cash maintained by these non-U.S. subsidiaries (see Liquidity), additional U.S. tax liabilities would be incurred. At December 31, 2001, the Company has approximately $52,000 of deferred tax assets related principally to U.S. tax loss carryforwards, 3 arising primarily from acquisitions, which expire from 2003 to 2021, for which no valuation allowance has been recorded. The Company believes that these loss carryforwards will be fully utilized based upon its estimates of future taxable income. If these estimates of future taxable income are not met, a valuation allowance for some of these deferred tax assets would be required. The Company from time to time faces challenges from tax authorities regarding the amount of taxes due. These challenges include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. The Company's U.S. Federal tax filings prior to 1998 have been examined by the Internal Revenue Service (IRS) and the Company has settled all differences arising out of those examinations. Consistent with the Company's status with the U.S. Federal tax authorities as a "coordinated industry case," the IRS is currently in the process of examining the Company's U.S. Federal tax returns for the calendar years 1998, 1999 and 2000. Although the Company believes it has recorded an appropriate income tax provision, there can be no assurance that the IRS will not take positions contrary to those taken by the Company. The Company further believes that any costs not covered by the Company's income tax provision will not have a material adverse impact on the Company's consolidated financial position or liquidity, but may be material to the consolidated results of operations of a future period. NET EARNINGS Reported net earnings and diluted net earnings per share were $172,592, or $1.93 per share in 2001, $129,094, or $1.51 per share, in 2000, and $24,227, or $0.29 per share, in 1999. Net earnings, exclusive of purchased in-process research and development and special charges and related income taxes, were $203,109 in 2001, $156,307 in 2000, and $143,989 in 1999. OUTLOOK The Company expects that market demand, government regulation and reimbursement policies, and societal pressures will continue to change the worldwide health care industry resulting in further business consolidations and alliances. The Company participates with industry groups to promote the use of advanced medical device technology in a cost-conscious environment. Customer service in the form of cost-effective clinical outcomes will continue to be a primary focus for the Company. The global medical technology industry is highly competitive. Competitors have historically employed litigation to gain a competitive advantage. In addition, the Company's products must continually improve technologically and provide improved clinical outcomes due to the competitive nature of the industry. The cardiac surgery market is highly competitive, and consists of mechanical heart valves, tissue heart valves, and repair products. Since 1999, the market has shifted to tissue valves and repair products from mechanical heart valves, resulting in an overall market share loss for the Company. Competition is anticipated to continue to place pressure on pricing and terms, including a trend toward vendor owned (consignment) inventory at the hospitals, and health care reform is expected to result in further hospital consolidations over time. The cardiac rhythm management market is also highly competitive and has undergone consolidation. There are currently three principal suppliers in this market, including the Company, and the Company's two principal competitors each have substantially more assets and sales than the Company. Rapid technological change in the CRM market is expected to continue, requiring the Company to invest heavily in R&D and to effectively market its products. The Company operates in an industry that is susceptible to significant product liability claims. These claims may be brought by individuals seeking relief for themselves or, increasingly, by groups seeking to represent a class. In addition, product liability claims may be asserted against the Company in the future relative to events that are not known to management at the present time. While it is not possible to predict the outcome of every claim, the Company believes that it has adequate product liability insurance to cover the costs associated with them. The Company further believes that any costs not covered by product liability insurance, including the Company's self-insured deductible, will not have a material adverse impact on the Company's consolidated financial position or liquidity, but may be material to the consolidated results of operations of a future period. Subsequent to the tragic events of September 2001, the product liability insurance market has dramatically changed. The Company has secured product liability coverage for 2002, however the self-insured retention and insurance premiums are significantly higher than in prior years. There can be no assurance that this trend will reverse in the near future. As a result of the increased self-insured retention for 2002, the Company has increased financial exposure in the event of significant product liability matters. However, management believes that any payment under the Company's 2002 policy self-insured retention would not have a material adverse impact on the Company's consolidated financial position or liquidity, but may be material to the consolidated results of operations of a future period. Group purchasing organizations (GPOs) in the U.S. continue to consolidate the purchasing for some of the Company's customers. Several such GPOs have executed contracts with the Company's CRM market competitors, which exclude the Company. These contracts, if enforced, may adversely affect the Company's sales of these products to members of these GPOs. On January 1, 1999, eleven of the fifteen member countries of the European Economic Community (EEC) adopted the Euro as the legal common currency for their countries. On January 1, 2002, these countries issued new Euro-denominated bills and coins for 4 use in cash transactions. The Company believes that the adoption of a single Euro currency will result in greater transparency of product pricing, making those countries a more competitive business environment. During 2001, the Company completed the necessary changes to its computer systems to accommodate the Euro, and the conversion to the Euro did not have a material impact on the Company's consolidated results of operations or financial position. MARKET RISK The Company is exposed to foreign currency exchange rate fluctuations due to its transactions denominated primarily in Euros, Canadian Dollars, Brazilian Reais, British Pounds, and Swedish Kroners. The Company is also exposed to interest rate risk on its interest-bearing debt and equity market risk on its marketable equity security investments. A hypothetical 10% change in short-term interest rates compared to interest rates on the Company's interest-bearing debt at December 31, 2001, would not have a material impact on the Company's consolidated results of operations. Although in 2001 management elected not to enter into any hedging contracts, from time to time the Company minimizes a portion of its foreign currency exchange rate risk through the use of forward exchange or option contracts. The gains or losses on these contracts are intended to offset changes in the fair value of the anticipated foreign currency transactions. It is the Company's practice to not enter into contracts for trading purposes. The Company is continuing to evaluate its foreign currency exchange rate risk and the different mechanisms in which to help manage such risk. The Company had no forward exchange or option contracts outstanding at December 31, 2001 or 2000. The Company periodically enters into interest rate swap or option contracts to reduce its exposures to interest rate fluctuations. During the third quarter of 1999, the Company entered into an interest rate swap contract to hedge a substantial portion of its variable interest rate risk through January 2000 on $138,000 of revolving credit facility borrowings. The impact of this contract on 1999 earnings was not material. The Company did not enter into any other interest rate contracts during 1999, 2000 or in 2001. The Company periodically invests in marketable equity securities of emerging technology companies. The Company's investments in these companies had a fair value of $21,616 and $16,173 at December 31, 2001 and 2000, which is subject to the underlying price risk of the public equity markets. CRITICAL ACCOUNTING POLICIES In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies," management identified the most critical accounting principles upon which our financial status depends. We determined the critical accounting principles by considering accounting policies that involve the most complex or subjective decisions or assessments. We identified our most critical accounting policies to be those related to income taxes, product liability accruals, accounts receivable allowance for doubtful accounts, estimated useful lives of property, plant and equipment and special charges. We discuss these accounting policies in the notes to the consolidated financial statements and in relevant sections in this discussion and analysis. NEW ACCOUNTING PRONOUNCEMENTS The Company is required to adopt Statements of Financial Accounting Standards No. 141, Business Combinations (Statement 141), and No. 142, Goodwill and Other Intangible Assets (Statement 142), on January 1, 2002. These Statements change the accounting for business combinations, goodwill, and intangible assets. Under Statement 141, all business combinations initiated after June 30, 2001, are to be accounted for using the purchase method. Under Statement 142, goodwill will no longer be amortized but will be reviewed at least annually for impairment. The Company's pre-tax goodwill amortization expense was approximately $28,000, $29,000 and $27,000 in 2001, 2000 and 1999. During 2002, the Company will perform the first of the required goodwill impairment tests under Statement 142, however management does not expect the outcome of this test to have a material impact on the Company's consolidated results of operations or financial position. The Company is also required to adopt Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement 144). Statement 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. Statement 144 retains and expands upon the fundamental provisions of existing guidance related to the recognition and measurement of the impairment of long-lived assets to be held and used and the measurement of long-lived assets to be disposed of by sale. The impact of adopting Statement 144 on January 1, 2002, was not material to the Company's consolidated results of operations or financial position. FINANCIAL CONDITION LIQUIDITY The Company's liquidity and cash flows remained strong during 2001. Cash provided by operating activities was $310,135 in 2001, up approximately $106,000 from 2000 reflecting increased earnings and improved working capital management. The Company's current ratio was 2.5 to 1 at December 31, 2001. Cash and equivalents increased $97,896 during 2001 due primarily to earnings generated by the Company's non-U.S. subsidiaries. At December 31, 2001, substantially all of the Company's cash and equivalents were maintained by the Company's non-U.S. subsidiaries and would be subject to additional U.S. tax if repatriated to one of the Company's U.S. subsidiaries (see Income Taxes). The Company had interest-bearing debt of $123,128 at December 31, 2001, a decrease of $171,372 from December 31, 2000, due to 5 debt repayments using primarily cash generated from operations and the proceeds from employee stock option exercises. As of March 6, 2002, the Company had $350,000 of committed credit facilities that are available to back the Company's commercial paper program borrowings and for general purposes. These committed credit facilities expire in March 2003. The Company classifies all of its credit facility and commercial paper borrowings as long-term on its balance sheet as the Company has the ability to repay any short-term maturity with available cash from its existing long-term, committed credit facility. Management continually reviews the Company's cash flow projections and may from time to time repay a portion of the Company's borrowings. At the present time, management expects 2002 capital expenditures and business acquisition payments to be approximately $125,000. In 2003 through 2005, management currently expects these amounts to be approximately $105,000 per year. The Company leases various facilities under noncancelable operating lease arrangements. Future minimum lease payments under these leases are as follows: $9,460 in 2002; $9,461 in 2003; $8,233 in 2004; $7,470 in 2005; $6,910 in 2006; $22,674 in years thereafter. Management believes that cash generated from operations and cash available under its credit facilities will be sufficient to meet the Company's working capital and capital investment needs in the near term. Should suitable investment opportunities arise, management believes that the Company's earnings, cash flows and balance sheet will permit the Company to obtain additional debt or equity capital, if necessary. CAPITAL STRUCTURE The Company's capital structure consists of interest-bearing debt and equity. Interest-bearing debt as a percent of the Company's total capitalization decreased from 24% at December 31, 2000, to 9% at December 31, 2001, due primarily to the paydown of debt. In September 1999, the Company's Board of Directors authorized the repurchase of up to $250,000 of the Company's outstanding common stock over a three-year period. The Company repurchased 977,500 shares of its common stock for $29,826 during 1999. No additional shares were repurchased during 2001 or 2000. DIVIDENDS The Company did not declare or pay any dividends during 2001, 2000 or 1999. Management currently intends to utilize the Company's earnings for operating and investment purposes, including the repurchase of its common stock from time to time. CAUTIONARY STATEMENTS In this discussion and in other written or oral statements made from time to time, we have included and may include statements that may constitute "forward-looking statements" within the meaning of the safe harbor provisions of the Private Litigation Securities Reform Act of 1995. These forward-looking statements are not historical facts but instead represent our belief regarding future events, many of which, by their nature, are inherently uncertain and beyond our control. These statements relate to our future plans and objectives, among other things. By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results may differ, possibly materially, from the results indicated by these forward-looking statements. We undertake no obligation to update any forward-looking statements. Various factors contained in the previous discussion and those described below may affect the Company's operations and results. Since it is not possible to foresee all such factors, you should not consider these factors to be a complete list of all risks or uncertainties. Risk factors include the following: 1. Legislative or administrative reforms to the U.S. Medicare and Medicaid systems or similar reforms of international reimbursement systems in a manner that significantly reduces reimbursement for procedures using the Company's medical devices or denies coverage for such procedures. 2. Acquisition of key patents by others that have the affect of excluding the Company from market segments or require the Company to pay royalties. 3. Economic factors, including inflation, changes in interest rates and changes in foreign currency exchange rates. 4. Product introductions by competitors which have advanced technology, better features or lower pricing. 5. Price increases by suppliers of key components, some of which are sole-sourced. 6. A reduction in the number of procedures using the Company's devices caused by cost containment pressures or preferences for alternate therapies. 7. Safety, performance or efficacy concerns about the Company's marketed products, many of which are expected to be implanted for many years, leading to recalls and advisories with the attendant expenses and declining sales. 8. Changes in laws, regulations or administrative practices affecting government regulation of the Company's products, such as FDA laws and regulations, that increase pre-approval testing requirements for products or impose additional burdens on the manufacture and sale of medical devices. 9. Difficulties obtaining, or the inability to obtain, appropriate levels of product liability insurance. 10. A serious earthquake affecting the Company's facilities in Sunnyvale or Sylmar, California. 11. Health care industry consolidation leading to demands for price concessions or the exclusion of some suppliers from significant market segments. 12. Adverse developments in litigation including product liability litigation and patent litigation or other intellectual property litigation including that arising from the Telectronics and Ventritex acquisitions. 6 REPORT OF MANAGEMENT The management of St. Jude Medical, Inc. is responsible for the preparation, integrity and objectivity of the accompanying financial statements. The financial statements were prepared in accordance with accounting principles generally accepted in the United States and include amounts which reflect management's best estimates based on its informed judgement and consideration given to materiality. Management is also responsible for the accuracy of the related data in the annual report and its consistency with the financial statements. In the opinion of management, the Company's accounting systems and procedures, and related internal controls, provide reasonable assurance that transactions are executed in accordance with management's intention and authorization, that financial statements are prepared in accordance with accounting principles generally accepted in the United States, and that assets are properly accounted for and safeguarded. The concept of reasonable assurance is based on the recognition that there are inherent limitations in all systems of internal control, and that the cost of such systems should not exceed the benefits to be derived therefrom. Management reviews and modifies the system of internal controls to improve its effectiveness. The effectiveness of the controls system is supported by the selection, retention and training of qualified personnel, an organizational structure that provides an appropriate division of responsibility and a strong budgeting system of control. St. Jude Medical, Inc. also recognizes its responsibility for fostering a strong ethical climate so that the Company's affairs are conducted according to the highest standards of personal and business conduct. This responsibility is reflected in the Company's business ethics policy. The adequacy of the Company's internal accounting controls, the accounting principles employed in its financial reporting, and the scope of independent and internal audits are reviewed by the Audit Committee of the Board of Directors, consisting solely of outside directors. The independent auditors meet with, and have confidential access to, the Audit Committee to discuss the results of their audit work. /s/ Terry L. Shepherd Terry L. Shepherd Chief Executive Officer /s/ John C. Heinmiller John C. Heinmiller Vice President, Finance and Chief Financial Officer REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders St. Jude Medical, Inc. We have audited the accompanying consolidated balance sheets of St. Jude Medical, Inc. and subsidiaries as of December 31, 2001 and 2000 and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three fiscal years in the period ended December 31, 2001. 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 in accordance with auditing standards generally accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of St. Jude Medical, Inc. and subsidiaries at December 31, 2001 and 2000 and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Minneapolis, Minnesota January 28, 2002, except for Note 4, as to which the date is February 13, 2002 7 CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per share amounts)
Fiscal Year Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------ Net sales $ 1,347,356 $ 1,178,806 $ 1,114,549 Cost of sales: Cost of sales before special charges 437,492 391,149 380,902 Special charges 21,667 -- -- - ------------------------------------------------------------------------------------------------------------ Total cost of sales 459,159 391,149 380,902 - ------------------------------------------------------------------------------------------------------------ Gross profit 888,197 787,657 733,647 Selling, general and administrative expense 467,113 416,383 394,418 Research and development expense 164,101 137,814 125,059 Purchased in-process research and development charges 10,000 5,000 115,228 Special charges 11,167 26,101 9,754 - ------------------------------------------------------------------------------------------------------------ Operating profit 235,816 202,359 89,188 Other income (expense) (7,838) (25,050) (22,184) - ------------------------------------------------------------------------------------------------------------ Earnings before income taxes 227,978 177,309 67,004 Income tax expense 55,386 48,215 42,777 Net earnings $ 172,592 $ 129,094 $ 24,227 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ Net earnings per share: Basic $ 2.00 $ 1.53 $ 0.29 Diluted $ 1.93 $ 1.51 $ 0.29 Weighted average shares outstanding: Basic 86,214 84,253 84,274 Diluted 89,384 85,817 84,735 - ------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 8 CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
December 31, 2001 2000 - -------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and equivalents $ 148,335 $ 50,439 Accounts receivable, less allowances for doubtful accounts 320,683 303,307 Inventories 240,390 222,238 Deferred income taxes 36,563 35,566 Other 51,575 74,139 - -------------------------------------------------------------------------------------------- Total current assets 797,546 685,689 PROPERTY, PLANT AND EQUIPMENT Land, buildings and improvements 112,902 114,045 Machinery and equipment 352,294 328,553 Diagnostic equipment 165,938 176,794 - -------------------------------------------------------------------------------------------- Property, plant and equipment at cost 631,134 619,392 Less accumulated depreciation (335,491) (302,213) - -------------------------------------------------------------------------------------------- Net property, plant and equipment 295,643 317,179 OTHER ASSETS Goodwill and other intangible assets, net 389,929 417,921 Deferred income taxes 67,238 57,482 Other 78,371 54,445 - -------------------------------------------------------------------------------------------- Total other assets 535,538 529,848 - -------------------------------------------------------------------------------------------- TOTAL ASSETS $ 1,628,727 $ 1,532,716 - -------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 88,925 $ 81,340 Income taxes payable 63,475 58,224 Accrued expenses Employee compensation and related benefits 102,191 81,576 Other 67,263 76,227 - -------------------------------------------------------------------------------------------- Total current liabilities 321,854 297,367 LONG-TERM DEBT 123,128 294,500 COMMITMENTS AND CONTINGENCIES -- -- SHAREHOLDERS' EQUITY Preferred stock -- -- Common stock 8,721 8,534 Additional paid-in capital 134,726 55,723 Retained earnings 1,134,909 962,317 Accumulated other comprehensive income (loss): Cumulative translation adjustment (103,781) (93,380) Unrealized gain on available-for-sale securities 9,170 7,655 - -------------------------------------------------------------------------------------------- Total shareholders' equity 1,183,745 940,849 - -------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,628,727 $ 1,532,716 - --------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 9 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in thousands)
Common Stock Accumulated --------------------- Additional Other Total Number of Paid-In Retained Comprehensive Shareholders' Shares Amount Capital Earnings Income (Loss) Equity - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 1, 1999 84,174,699 $8,417 $ 6,656 $ 816,940 $ (25,793) $ 806,220 Comprehensive income: Net earnings 24,227 24,227 Other comprehensive income (loss): Unrealized loss on investments, net of taxes and reclassification adjustment (see below) (1,161) (1,161) Foreign currency translation adjustment (20,735) (20,735) -------------- Other comprehensive loss (21,896) -------------- Comprehensive income 2,331 -------------- Issuance of common stock, including exercise of stock options, net 381,206 38 8,855 8,893 Tax benefit from stock options 969 969 Issuance of common stock for business acquisition 161,072 16 3,984 4,000 Issuance of common stock in settlement of obligation 41,108 4 1,430 1,434 Repurchase of common stock (977,500) (97) (21,785) (7,944) (29,826) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1999 83,780,585 8,378 109 833,223 (47,689) 794,021 Comprehensive income: Net earnings 129,094 129,094 Other comprehensive income (loss): Unrealized gain on investments, net of taxes and reclassification adjustment (see below) 1,367 1,367 Foreign currency translation adjustment (39,403) (39,403) -------------- Other comprehensive loss (38,036) -------------- Comprehensive income 91,058 -------------- Issuance of common stock, including exercise of stock options, net 1,245,166 125 38,506 38,631 Tax benefit from stock options 6,464 6,464 Issuance of common stock for conversion of subordinated debentures 310,535 31 10,644 10,675 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 2000 85,336,286 8,534 55,723 962,317 (85,725) 940,849 Comprehensive income: Net earnings 172,592 172,592 Other comprehensive income (loss): Unrealized gain on investments, net of taxes 1,515 1,515 Foreign currency translation adjustment, net of taxes (10,401) (10,401) -------------- Other comprehensive loss (8,886) -------------- Comprehensive income 163,706 -------------- Issuance of common stock, including exercise of stock options, net 1,873,070 187 57,754 57,941 Tax benefit from stock options 21,249 21,249 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 2001 87,209,356 $8,721 $134,726 $1,134,909 $ (94,611) $1,183,745 - ------------------------------------------------------------------------------------------------------------------------------------ Other comprehensive income reclassification adjustments for net realized gains on the sale of marketable securities, net of income taxes: 1999 $ 2,875 2000 2,519 - ------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 10 CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Fiscal Year Ended December 31, 2001 2000 1999 - --------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net earnings $ 172,592 $ 129,094 $ 24,227 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation 58,404 56,699 54,588 Amortization 31,895 35,650 31,114 Purchased in-process research and development charges 10,000 5,000 115,228 Special charges 32,834 26,101 9,754 Net investment gain -- (4,062) (848) Deferred income taxes (11,681) (5,439) 369 Changes in operating assets and liabilities, net of business acquisitions: Accounts receivable (23,941) (40,845) (26,319) Inventories (32,373) 4,621 14,466 Other current assets 13,605 (6,519) (6,722) Accounts payable and accrued expenses 12,907 (17,317) (1,998) Income taxes 45,893 20,988 42,208 - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 310,135 203,971 256,067 INVESTING ACTIVITIES Purchase of property, plant and equipment (63,129) (39,699) (69,419) Proceeds from sale or maturity of marketable securities 15,000 29,082 17,552 Business acquisition payments (20,444) (8,264) (259,127) Other (26,220) (10,752) (19,438) - --------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (94,793) (29,633) (330,432) FINANCING ACTIVITIES Proceeds from exercise of stock options and stock issued 57,941 38,631 8,893 Common stock repurchased -- -- (29,826) Borrowings under debt facilities 2,115,028 3,703,287 989,500 Payments under debt facilities (2,286,400) (3,856,287) (887,000) Repurchase of convertible subordinated debentures -- (19,320) -- - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (113,431) (133,689) 81,567 Effect of currency exchange rate changes on cash (4,015) 135 (1,322) - --------------------------------------------------------------------------------------------------------------------------- Net increase in cash and equivalents 97,896 40,784 5,880 Cash and equivalents at beginning of year 50,439 9,655 3,775 - --------------------------------------------------------------------------------------------------------------------------- Cash and equivalents at end of year $ 148,335 $ 50,439 $ 9,655 - --------------------------------------------------------------------------------------------------------------------------- Supplemental Cash Flow Information - --------------------------------------------------------------------------------------------------------------------------- Cash paid during the year for: Interest $ 10,663 $ 32,467 $ 28,934 Income taxes 21,424 35,704 21,200 - ---------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES COMPANY OVERVIEW: St. Jude Medical, Inc. ("St. Jude Medical" or the "Company") is a leader in the development, manufacturing and distribution of cardiovascular medical devices for the global cardiac rhythm management (CRM), cardiology and vascular access (C/VA), and cardiac surgery (CS) markets. The Company's principal products in each of these markets are: bradycardia pacemaker systems, tachycardia implantable cardioverter defibrillator (ICD) systems, and electrophysiology (EP) catheters in CRM; vascular closure devices, catheters, guidewires and introducers in C/VA; and mechanical and tissue heart valves, valve repair products, and suture-free devices to facilitate coronary artery bypass graft anastomoses in CS. The Company markets its products primarily in the United States, Western Europe and Japan through both a direct employee-based sales organization and independent distributors. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Significant intercompany transactions and balances have been eliminated in consolidation. Certain reclassifications of previously reported amounts have been made to conform to the current year presentation. FISCAL YEAR: The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Saturday nearest December 31. For clarity of presentation, the Company describes all periods as if the year end is December 31. Fiscal years 2001, 2000 and 1999 each consisted of fifty-two weeks. USE OF ESTIMATES: Preparation of the Company's consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH EQUIVALENTS: The Company considers highly liquid temporary investments with an original maturity of three months or less to be cash equivalents. Cash equivalents are stated at cost, which approximates market. The Company's cash equivalents include bank certificates of deposit, commercial paper investments and repurchase agreements collateralized by U.S. government agency securities. MARKETABLE SECURITIES: Marketable securities consist of equity securities, bank certificates of deposit, U.S. government obligations, commercial paper, notes and bonds. Marketable securities are classified as available-for-sale, recorded at fair market value based upon quoted market prices, and are classified with other current assets on the balance sheet. Gross unrealized gains totaling $14,790, $12,347 and $10,142, net of taxes of $5,620, $4,692 and $3,854, were recorded in shareholders' equity at December 31, 2001, 2000 and 1999. Realized gains from the sale of marketable securities have been recorded in other income and are computed using the specific identification method. ACCOUNTS RECEIVABLE: The Company grants credit to customers in the normal course of business but generally does not require collateral or any other security to support its receivables. Within the European Economic Union and in many emerging markets, payments of certain accounts receivable balances are made by the individual countries' health care system for which payment is dependent, to a certain extent, upon the political and economic environment within those countries. The allowance for doubtful accounts was $17,210 at December 31, 2001 and $13,831 at December 31, 2000. 12 INVENTORIES: Inventories are stated at the lower of cost or market with cost determined using the first-in, first-out method. Inventories consist of the following: 2001 2000 - ----------------------------------------------------------------------- Finished goods $135,543 $123,696 Work in process 35,984 35,640 Raw materials 68,863 62,902 - ----------------------------------------------------------------------- $240,390 $222,238 - ----------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are depreciated using the straight-line method over their estimated useful lives, ranging from 31 to 39 years for buildings and improvements, three to seven years for machinery and equipment, and five to eight years for diagnostic equipment. Diagnostic equipment is used by physicians and health care professionals to program and analyze data from the Company's CRM devices. The estimated useful lives of this equipment are based on management's estimates of its usage by the physicians and health care professionals, factoring in new technology platforms and rollouts by the Company. To the extent that the Company experiences changes in the usage of this equipment or rollouts of new technologies to the market, their estimated useful lives may change in a future period. Accelerated depreciation methods are used for income tax purposes. GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill and other intangible assets consists primarily of goodwill at December 31, 2001 and 2000. Goodwill represents the excess of cost over the fair value of identifiable net assets of businesses acquired. Other intangible assets consist primarily of purchased technology, patents and customer relationships. Goodwill and other intangible assets are amortized on a straight-line basis using lives ranging from 5 to 20 years. Accumulated amortization totaled $173,377 and $147,006 at December 31, 2001 and 2000. The Company periodically reviews its long-lived assets, including property, plant and equipment, for indicators of impairment using an estimate of the undiscounted cash flows generated by those assets. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (Statement 142). Under Statement 142, goodwill is no longer amortized, but is subject to annual impairment tests. See "New Accounting Pronouncements" for further discussion of Statement 142 and its anticipated impact on the Company's consolidated financial statements. TECHNOLOGY LICENSE AGREEMENT: The Company has a technology license agreement that provides access to a significant number of patents covering a broad range of technology used in the Company's CRM products. The agreement provides for payments through September 2004 at which time the Company will have a fully paid-up license, granting access to the underlying patents which expire at various dates through the year 2014. The Company recognizes the total estimated costs under this license agreement as an expense over the term of the underlying patents' lives. REVENUE RECOGNITION: The Company generally recognizes revenue at such time title to the goods transfers to the customer. For certain products, the Company maintains consigned inventory at customer locations. For these products, revenue is recognized at the time the customer has used the inventory. RESEARCH AND DEVELOPMENT: Research and development costs are charged to expense as incurred. Purchased in-process research and development is recognized in business combinations for the portion of the purchase price allocated to the appraised value of in-process technologies. The portion assigned to in-process research and development technologies excludes the value of core and developed technologies, which are recognized as intangible assets. STOCK-BASED COMPENSATION: The Company utilizes the intrinsic value method of accounting for its employee stock-based compensation. Pro forma information related to the fair value method of accounting is provided in Note 5. EARNINGS PER SHARE: Basic earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares, exclusive of restricted shares, during the period. Diluted net earnings per share is computed by dividing net earnings, adjusted for convertible debenture interest in 2000, by the weighted average number of outstanding common shares and dilutive securities. 13 The table below sets forth the computation of basic and diluted net earnings per share: 2001 2000 1999 - -------------------------------------------------------------------------------- Numerator: Net earnings $ 172,592 $ 129,094 $ 24,227 Convertible debenture interest, net of taxes -- 95 -- - -------------------------------------------------------------------------------- Adjusted net earnings $ 172,592 $ 129,189 $ 24,227 Denominator: Basic-weighted average shares outstanding 86,214,000 84,253,000 84,274,000 Effect of dilutive securities: Employee stock options 3,135,000 1,448,000 414,000 Restricted shares 35,000 38,000 47,000 Convertible debentures -- 78,000 -- - -------------------------------------------------------------------------------- Diluted-weighted average 89,384,000 85,817,000 84,735,000 shares outstanding - -------------------------------------------------------------------------------- Basic net earnings per share $ 2.00 $ 1.53 $ 0.29 - -------------------------------------------------------------------------------- Diluted net earnings per share $ 1.93 $ 1.51 $ 0.29 - -------------------------------------------------------------------------------- Net earnings and diluted-weighted average shares outstanding for certain periods have not been adjusted for the Company's convertible debentures or for certain employee stock options and awards where the effect of those securities would have been anti-dilutive. FOREIGN CURRENCY TRANSLATION: Sales and expenses denominated in foreign currencies are translated at average exchange rates in effect throughout the year. Assets and liabilities of foreign operations are translated at year-end exchange rates. Gains and losses from translation of net assets of foreign operations are recorded in other comprehensive income. Taxes totaling $19,393 have been offset against the cumulative translation adjustment at December 31, 2001. Foreign currency transaction gains and losses are included in other income (expense). FOREIGN CURRENCY AND INTEREST RATE RISK MANAGEMENT CONTRACTS: Management periodically utilizes derivative financial instruments to help manage a portion of the Company's exposure to foreign currencies and interest rates. Management generally utilizes forward exchange or option contracts to manage anticipated foreign currency exposures and interest rate swaps to manage interest rate exposures. Management does not enter into derivative financial instruments for trading purposes. The Company records the fluctuation in the fair value of the forward exchange or option contracts in other income (expense) and the fluctuation in the fair value of the interest rate swaps in interest expense. There were no forward exchange or option contracts, or interest rate swap contracts outstanding at December 31, 2001 or 2000. NEW ACCOUNTING PRONOUNCEMENTS: The Company is required to adopt Statements of Financial Accounting Standards No. 141, Business Combinations (Statement 141), and No. 142, Goodwill and Other Intangible Assets (Statement 142), on January 1, 2002. These Statements change the accounting for business combinations, goodwill, and intangible assets. Under Statement 141, all business combinations initiated after June 30, 2001, are to be accounted for using the purchase method. Under Statement 142, goodwill will no longer be amortized but will be reviewed at least annually for impairment. The Company's pre-tax goodwill amortization expense was approximately $28,000, $29,000 and $27,000 in 2001, 2000 and 1999. During 2002, the Company will perform the first of the required goodwill impairment tests under Statement 142, however management does not expect the outcome of this test to have a material impact on the Company's consolidated results of operations or financial position. 14 The Company is also required to adopt Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement 144). Statement 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. Statement 144 retains and expands upon the fundamental provisions of existing guidance related to the recognition and measurement of the impairment of long-lived assets to be held and used and the measurement of long-lived assets to be disposed of by sale. The impact of adopting Statement 144 on January 1, 2002, was not material to the Company's consolidated results of operations or financial position. NOTE 2--ACQUISITIONS VASCULAR SCIENCE, INC. (VSI): On September 27, 1999, the Company purchased the outstanding common stock of VSI for $75,071 in cash, net of cash acquired, plus additional contingent consideration related to product development milestones for regulatory approvals and to future sales. VSI was a development-stage company focused on the development of suture-free devices to facilitate coronary artery bypass graft anastomoses. An independent appraisal firm performed a valuation of VSI's identifiable intangible assets ($580) and in-process research and development ($95,500). The total consideration paid at close was allocated to the fair value of the net assets acquired ($7,618) and in-process research and development ($67,453). The Company paid additional amounts totaling $10,000 in 2001 and $5,000 in 2000, which were recorded as purchased in-process research and development expenses, as certain product development milestones were achieved. The remaining balance of the in-process research and development valuation ($13,047) will be recorded in the Company's financial statements as purchased in-process research and development expense when payment of the contingent consideration is assured beyond a reasonable doubt. Contingent consideration payments in excess of the $13,047 will be capitalized as goodwill. ANGIO-SEAL(TM): On March 16, 1999, the Company purchased the Angio-Seal(TM) business of Tyco International Ltd. for $167,000 in cash. Angio-Seal(TM) manufactured and marketed vascular closure devices. Total consideration for Angio-Seal(TM), including the fair value of the net assets acquired and acquisition accounting adjustments, was $177,714, which was originally allocated to in-process research and development ($47,775), various other identifiable intangible assets ($90,025), and goodwill ($39,914). Valuation of the in-process research and development and other identifiable intangible assets was based upon an independent appraisal. During 2001, the Company reviewed the identifiable intangible assets and will reclassify $24,599 to goodwill effective January 1, 2002, based upon the guidance provided in Statements of Financial Accounting Standards Nos. 141 and 142. OTHER: During 2001, 2000 and 1999, the Company acquired various businesses involved in distribution of the Company's products. Aggregate consideration paid in cash and common stock, net of any cash acquired, during 2001, 2000 and 1999 was $10,444, $3,264 and $21,056, respectively. The above acquisitions were recorded using the purchase method of accounting. The operating results of each of these acquisitions are included in the Company's consolidated financial statements from the date of each acquisition. The values assigned to in-process research and development were expensed at close, except as noted above, because technological feasibility had not been established and because there were no alternative future uses for the technology. Pro forma results of operations have not been presented for these acquisitions since the effects of these business acquisitions were not material to the Company either individually or in aggregate. 15 NOTE 3--LONG-TERM DEBT Long-term debt consisted of the following: 2001 2000 - ------------------------------------------------------------------------------- Commercial paper borrowings $123,128 $223,000 Uncommitted credit facility borrowings -- 71,500 - ------------------------------------------------------------------------------- Total long-term debt $123,128 $294,500 - ------------------------------------------------------------------------------- COMMITTED CREDIT FACILITIES: The Company has a $350,000 unsecured, revolving credit facility that expires in March 2003. The Company also has a $150,000 committed revolving credit facility, which will expire in March 2002. These credit facilities have variable interest rates tied primarily to the London Interbank Offered Rate. The Company's commercial paper borrowings are backed by these committed credit facilities. There were no outstanding borrowings under these credit facilities at December 31, 2001 or 2000. COMMERCIAL PAPER BORROWINGS: The Company issues short-term, unsecured commercial paper with maturities up to 270 days. These commercial paper borrowings are backed by the Company's committed credit facilities and bear interest at varying market rates. The weighted-average interest rate on these borrowings was 2.9% and 6.9% at December 31, 2001 and 2000. UNCOMMITTED CREDIT FACILITIES: The Company borrows from time to time under unsecured, due-on-demand credit facilities with various banks. These credit facilities provide for interest at varying market rates. The weighted-average interest rate on these borrowings was 7.1% at December 31, 2000. OTHER: The Company's credit facility agreements contain various restrictive covenants such as minimum financial ratios, limitations on additional liens or indebtedness, and limitations on certain acquisitions and investments, all of which the Company was in compliance with at December 31, 2001. The Company classifies all of its credit facility and commercial paper borrowings as long-term on its balance sheet as the Company has the ability to repay any short-term maturity with available cash from its existing long-term, committed credit facility. Management continually reviews the Company's cash flow projections and may from time to time repay a portion of the Company's borrowings. NOTE 4--COMMITMENTS AND CONTINGENCIES LEASES: The Company leases various facilities under noncancelable operating lease arrangements. Future minimum lease payments under these leases are as follows: $9,460 in 2002; $9,461 in 2003; $8,233 in 2004; $7,470 in 2005; $6,910 in 2006; $22,674 in years thereafter. Rent expense under all operating leases was $8,853, $7,028 and $7,397 in 2001, 2000 and 1999. SILZONE(R) LITIGATION: The Company has been sued by patients alleging defects in the Company's mechanical heart valves and valve repair products with Silzone(R) coating. The Company voluntarily recalled products with Silzone(R) coating on January 21, 2000, and sent a Recall Notice and Advisory concerning the recall to physicians and others. Some of these cases are seeking monitoring of patients implanted with Silzone(R)-coated valves and repair products who allege no injury to date. Some of these cases are seeking class action status. See also Note 6 regarding the 2000 special charge for the voluntary recall of products incorporating Silzone(R) coating. On April 18, 2001, the U.S. Judicial Panel on Multi-Litigation ruled that certain lawsuits filed in U.S. federal district court involving products with Silzone(R) coating should be part of Multi District Litigation proceedings, which will take place under the supervision of U.S. District court Judge John Tunheim in Minnesota. As a result, a number of actions involving products with Silzone(R) coating are being transferred to Judge Tunheim's court in Minnesota for coordinated or consolidated pretrial proceedings. 16 While it is not possible to predict the outcome of these cases, the Company believes that it has adequate product liability insurance to cover the costs associated with them. The Company further believes that any costs not covered by product liability insurance will not have a material adverse impact on the Company's financial position or liquidity, but may be material to the consolidated results of operations of a future period. GUIDANT LITIGATION: In November 1996 Guidant Corporation ("Guidant") sued St. Jude Medical alleging that St. Jude Medical did not have a license to certain patents controlled by Guidant covering ICD products and alleging that St. Jude Medical was infringing those patents. St. Jude Medical's contention that it had obtained its patent license from Guidant to the patents in issue when it acquired certain assets of Telectronics in November 1996 was rejected by an arbitrator in July 2000. In May 2001, a federal district court judge also ruled that the Guidant patent license with Telectronics had not transferred to St. Jude Medical. Guidant's suit in the United States District Court for the Southern District of Indiana originally alleged infringement by St. Jude Medical of four patents. Guidant later dismissed its claim on one patent (the `678 patent). In addition, in response to a stipulation by the parties, the court ruled that a second patent (the `191 patent) was invalid. Guidant has appealed the ruling of invalidity concerning the `191 patent and the Court of Appeals for the Federal Circuit held oral arguments on the `191 appeal on February 5, 2002. A jury trial involving the two remaining patents asserted by Guidant (the `288 and `472 patents) commenced in June 2001. The jury issued its verdict on July 3, 2001, finding that both the `472 and `288 patents were valid and that St. Jude Medical did not infringe the `288 patent. The jury also found that St. Jude did infringe the `472 patent, which expired on March 4, 2001, but that the infringement was not willful. The jury awarded damages of $140,000 to Guidant. On February 13, 2002, the judge overseeing the jury trial issued his rulings on the various post-trial motions. In particular, the judge ruled that the `472 patent was invalid on two grounds: lack of proper written description and double patenting. The judge also ruled that claim 18 was not infringed and that claim 1 was infringed in only a limited manner. The judge further ruled that the `288 patent was invalid for both obviousness and failure to disclose the best mode. The judge also found that St. Jude Medical was entitled to a new trial on the issue of damages in the event the court's rulings on the other matters were reversed on appeal. Finally, the judge held that in the event his other rulings were reversed, St. Jude Medical would be entitled to a new trial because of misconduct by Guidant and its attorneys during the first trial and that, in such an event, Guidant would have to pay certain attorney's fees of St. Jude Medical. The court ruled on several other motions, not summarized here. The effect of the court's post-trial rulings was to eliminate the $140,000 verdict against St. Jude Medical. The Company expects that Guidant will appeal the judge's decision. Since the date of St. Jude Medical's acquisition of Ventritex in May 1997 and the inception of the Company's sales of ICD products, St. Jude Medical accrued a 3% royalty on its ICD sales under a license with Guidant that it believed it had acquired as part of its purchase of assets of the Telectronics cardiac stimulation device business. As a result of the July 2001 jury verdict that St. Jude Medical's ICD products do not infringe Guidant's `288 patent, the Company ceased further royalty accruals. The historical accruals under this license at that time, which totaled approximately $15,000, remained on the Company's balance sheet pending further developments in the case. The Company evaluated the facts and circumstances of this case, including the judge's ruling issued on February 13, 2002, and concluded that the probability that the Company would have to pay any royalty under the license agreement was remote. As such, the Company reversed the $15,000 liability through selling, general and administrative expense in the fourth quarter of 2001. 17 In addition, the Company incurred legal fees in relation to the Guidant litigation that were subject to recoverability under an indemnification agreement between the Company and the seller of the Telectronics cardiac stimulation device business. The Company now has reason to believe that the indemnitor will resist payment and, therefore, wrote off approximately $15,000 of its indemnity claim through selling, general and administrative expense in the fourth quarter of 2001. OTHER LITIGATION MATTERS: The Company is involved in various product liability lawsuits, claims and proceedings of a nature considered normal to its business. Subject to self-insured retentions, the Company believes it has product liability insurance sufficient to cover such claims and suits. NOTE 5--SHAREHOLDERS' EQUITY CAPITAL STOCK: The Company's authorized capital consists of 25,000,000 shares of $1.00 per share par value preferred stock and 250,000,000 shares of $0.10 per share par value common stock. There were no shares of preferred stock issued or outstanding during 2001, 2000 or 1999. SHARE REPURCHASES: In September 1999, the Company's Board of Directors authorized the repurchase of up to $250,000 of the Company's outstanding common stock over a three-year period. The Company repurchased 977,500 shares of its common stock for $29,826 during 1999. No additional shares were repurchased during 2001 or 2000. EMPLOYEE STOCK PURCHASE SAVINGS PLAN: The Company's employee stock purchase savings plan allows participating employees to purchase, through payroll deductions, shares of the Company's un-issued common stock at 85% of the fair market value at specified dates. Employees purchased 143,181, 114,040 and 94,386 shares in 2001, 2000 and 1999 under this plan. At December 31, 2001, 856,819 shares of additional un-issued common stock were available for purchase under the plan. STOCK COMPENSATION PLANS: The Company's stock compensation plans provide for the issuance of stock-based awards, such as restricted stock or stock options, to directors, officers and employees. Stock option awards under these plans generally have an eight to ten year life, an exercise price equal to the fair market value on the date of grant, and a four-year vesting term. At December 31, 2001, the Company had 334,761 shares of common stock available for grant under these plans. Stock option transactions under these plans during each of the three years in the period ended December 31, 2001, are as follows: WEIGHTED- AVERAGE OPTIONS EXERCISE OUTSTANDING PRICE - -------------------------------------------------------------------------------- Balance at January 1, 1999 9,769,281 $32.12 Granted 3,046,880 28.10 Cancelled (1,146,767) 35.39 Exercised (257,781) 22.88 - -------------------------------------------------------------------------------- Balance at December 31, 1999 11,411,613 30.93 Granted 3,731,633 50.86 Cancelled (739,340) 33.19 Exercised (1,134,086) 30.11 - -------------------------------------------------------------------------------- Balance at December 31, 2000 13,269,820 36.47 Granted 3,186,655 71.87 Cancelled (381,367) 42.16 Exercised (1,733,607) 30.53 - -------------------------------------------------------------------------------- Balance at December 31, 2001 14,341,501 $44.90 - -------------------------------------------------------------------------------- Stock options totaling 6,311,837, 5,402,529 and 4,976,093 were exercisable at December 31, 2001, 2000 and 1999. 18 The following tables summarize information concerning currently outstanding and exercisable stock options at December 31, 2001:
OPTIONS OUTSTANDING - -------------------------------------------------------------------------------- WEIGHTED- AVERAGE WEIGHTED- REMAINING AVERAGE RANGES OF NUMBER CONTRACTUAL EXERCISE EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE - -------------------------------------------------------------------------------- $17.55-26.32 857,060 2.5 $22.28 26.32-35.10 5,275,751 6.2 29.51 35.10-43.87 1,761,929 5.4 38.97 43.87-52.64 3,241,756 6.9 52.45 52.64-70.19 351,475 7.3 62.51 70.19-87.74 2,853,530 7.9 73.06 - -------------------------------------------------------------------------------- 14,341,501 6.4 $44.90 - --------------------------------------------------------------------------------
OPTIONS EXERCISABLE - -------------------------------------------------------------------------------- WEIGHTED- AVERAGE RABGES OF NUMBER EXERCISE EXERCISE PRICES EXERCISABLE PRICE - -------------------------------------------------------------------------------- $17.55-26.32 749,540 $21.92 26.32-35.10 3,398,989 29.67 35.10-43.87 1,416,454 38.70 43.87-52.64 703,260 52.30 52.64-70.19 34,969 63.33 70.19-87.74 8,625 85.39 - -------------------------------------------------------------------------------- 6,311,837 $33.56 - --------------------------------------------------------------------------------
The Company also granted 46,481 shares of restricted common stock during the three years ended December 31, 2001, under the Company's stock compensation plans. The value of restricted stock awards as of the date of grant is charged to income over the periods during which the restrictions lapse. The Company's net earnings and diluted net earnings per share would have been reduced by $26,619, or $0.30 per share, in 2001, $18,875, or $0.22 per share, in 2000, and $18,614, or $0.22 per share, in 1999, had the fair value based method of accounting been used for valuing the employee stock based awards. The weighted-average fair value of options granted and the assumptions used in the Black-Scholes options pricing model are as follows: 2001 2000 1999 - -------------------------------------------------------------------------------- Fair value of options granted $25.69 $21.09 $11.12 Assumptions used: Expected life (years) 5 5 5 Risk-free rate of return 4.4% 5.3% 5.8% Volatility 30.9% 35.6% 33.2% Dividend yield 0% 0% 0% - -------------------------------------------------------------------------------- SHAREHOLDERS' RIGHTS PLAN: The Company has a shareholder rights plan that entitles shareholders to purchase one-tenth of a share of Series B Junior Preferred Stock at a stated price, or to purchase either the Company's shares or shares of an acquiring entity at half their market value, upon the occurrence of certain events which result in a change in control, as defined by the Plan. The rights related to this plan expire in 2007. NOTE 6--SPECIAL CHARGES 2001 SPECIAL CHARGE: In July 2001, the Company initiated efforts to streamline its heart valve operations, consolidate its U.S. sales activities and restructure its international sales organization. As a result of these activities, the Company recorded pre-tax special charges of $20,657 in the third quarter of 2001, consisting of employee severance costs resulting from the elimination of approximately 90 production and administrative positions ($5,293), inventory write-offs and scrap ($9,490), capital equipment write-offs ($3,379) and other costs related primarily to lease terminations and other facility exit costs due to the closing and consolidation of sales offices ($2,495). The Company has utilized $13,500 of these special charge accruals through December 31, 2001, consisting of $2,468 of employee severance costs, $7,301 of inventory write-offs and scrap, $3,379 of capital equipment write-offs, and $352 of other costs. The Company estimates that the remaining accruals will be utilized primarily during 2002. 19 During the third quarter of 2001, the Company also wrote off $12,177 of certain diagnostic equipment deemed obsolete due to the overwhelming acceptance of newer technology equipment which received U.S. regulatory approvals in late 2000 and early 2001, and was launched earlier in 2001. The charges relating to employee severance costs, capital equipment write-offs and other costs have been recorded in operating expenses as special charges. The inventory and diagnostic equipment write-offs are included in cost of sales as special charges. 2000 SPECIAL CHARGE: On January 21, 2000, the Company initiated a worldwide voluntary recall of all field inventory of heart valve replacement and repair products incorporating Silzone(R) coating on the sewing cuff fabric. The Company concluded that it would no longer utilize Silzone(R) coating. The Company recorded a special charge accrual totaling $26,101 during the first quarter of 2000 relating to asset write-downs ($9,465) and other costs ($16,636) including monitoring expenses, associated with this recall and product discontinuance. Additionally, the Company maintains product liability coverage for litigation related costs in excess of its self-insured retention. The Company has utilized $20,701 of this special charge accrual through December 31, 2001, consisting of $9,465 of asset write-downs and $11,236 of other costs. The Company estimates that the remaining accrual will be utilized primarily during 2002. There can be no assurance that the final costs associated with this recall that are not covered by insurance, including litigation-related costs, will not exceed management's estimates. 1999 SPECIAL CHARGE: The Company recorded a $9,754 special charge accrual in 1999 related to the restructuring of its international operations. Substantially all accruals related to this restructuring have been utilized through December 31, 2001. NOTE 7--OTHER INCOME (EXPENSE) Other income (expense) consists of the following:
2001 2000 1999 - ----------------------------------------------------------------------------------------------- Interest expense, net $(9,306) $(25,929) $(25,378) Other 1,468 879 3,194 - ----------------------------------------------------------------------------------------------- Other income (expense) $(7,838) $(25,050) $(22,184) - -----------------------------------------------------------------------------------------------
NOTE 8--INCOME TAXES The Company's earnings before income taxes were generated from domestic and foreign operations as follows:
2001 2000 1999 - ------------------------------------------------------------------------------------------------ Domestic $ 83,128 $ 75,538 $ 2,408 International 144,850 101,771 64,596 - ------------------------------------------------------------------------------------------------ Earnings before income taxes $227,978 $177,309 $67,004 - ------------------------------------------------------------------------------------------------
Income tax expense consists of the following:
2001 2000 1999 - ----------------------------------------------------------------------------------------------- Current: Federal $ 48,844 $31,859 $28,641 State and Puerto Rico Section 936 4,994 3,815 2,810 International 13,229 17,980 10,957 - ----------------------------------------------------------------------------------------------- Total current 67,067 53,654 42,408 Deferred (11,681) (5,439) 369 - ----------------------------------------------------------------------------------------------- Income tax expense $ 55,386 $48,215 $42,777 - -----------------------------------------------------------------------------------------------
The tax effects of the cumulative temporary differences between the tax bases of assets and liabilities and their carrying amount for financial statement purposes are as follows:
2001 2000 - ----------------------------------------------------------------------------------------------- Deferred income tax assets: Net operating loss carryforwards $ 52,349 $ 42,611 Tax credit carryforwards 31,678 26,095 Inventories 30,403 30,212 Intangible assets 14,002 17,497 Accrued liabilities and other 1,746 741 - ----------------------------------------------------------------------------------------------- Deferred income tax assets 130,178 117,156 - ----------------------------------------------------------------------------------------------- Deferred income tax liabilities: Unrealized gain on marketable securities (5,620) (4,692) Property, plant and equipment (20,757) (19,416) - ----------------------------------------------------------------------------------------------- Deferred income tax liabilities (26,377) (24,108) - ----------------------------------------------------------------------------------------------- Net deferred income tax asset $103,801 $ 93,048 - -----------------------------------------------------------------------------------------------
20 A reconciliation of the U.S. federal statutory income tax rate to the Company's effective income tax rate is as follows:
2001 2000 1999 - ------------------------------------------------------------------------------------------------ Income tax expense at the $ 79,792 $ 62,058 $ 23,451 U.S. federal statutory rate State income taxes, net of federal benefit 3,654 2,725 1,811 International taxes at lower rates (20,089) (12,451) (1,567) Tax benefits from foreign sales corporation and extraterritorial income exclusion (3,681) (2,280) (3,309) Research and development credits (5,984) (4,464) (3,679) Non-deductible purchased in-process research and development charges 3,912 2,141 23,608 Other (2,218) 486 2,462 - ------------------------------------------------------------------------------------------------ Income tax expense $ 55,386 $ 48,215 $ 42,777 - ------------------------------------------------------------------------------------------------ Effective income tax rate 24.3% 27.2% 63.8% - ------------------------------------------------------------------------------------------------
At December 31, 2001, the Company has net operating loss and general business and foreign tax credit carryforwards of approximately $149,569 and $26,757 that will expire from 2003 through 2021 if not utilized; such amounts are subject to annual usage limitations. The Company's net operating loss carryforwards arose primarily from acquisitions. The Company also has alternative minimum tax credit carryforwards of $4,921 that have an unlimited carryforward period. The Company has not recorded U.S. deferred income taxes on $329,388 of its non-U.S. subsidiaries' undistributed earnings as such amounts are intended to be reinvested outside the U.S. indefinitely. NOTE 9--RETIREMENT PLANS DEFINED CONTRIBUTION PLANS: The Company has 401(k) profit sharing plans that provide retirement benefits to substantially all full-time U.S. employees. Eligible employees may contribute a percentage of their annual compensation, subject to IRS limitations, with the Company matching a portion of the employees' contributions. The Company also contributes a portion of its profits to the plans based upon Company performance. The Company's matching and profit sharing contributions are at the discretion of the Company's Board of Directors. In addition, the Company has defined contribution programs for employees outside the United States. The benefits under the Company's plans are based primarily on compensation levels. Company contributions under all defined contribution plans totaled $16,249, $13,170 and $11,416 in 2001, 2000 and 1999. DEFINED BENEFIT PLANS: The Company has unfunded defined benefit plans for employees in certain countries outside the U.S. The Company has an accrued liability totaling approximately $7,600 at December 31, 2001, which approximates the actuarially calculated unfunded liability. The related pension expense was not material. 21 NOTE 10--SEGMENT AND GEOGRAPHIC INFORMATION SEGMENT INFORMATION: The Company historically reported under two segments. During 2001, the Company completed a reorganization of its global sales activities (see Note 6), which resulted in changes to its internal management and financial reporting structure. As such, the Company now manages its business on the basis of one reportable segment--the development, manufacture and distribution of cardiovascular medical devices. See Note 1 for a brief description of the Company's primary markets and principal products. GEOGRAPHIC INFORMATION: The following tables present certain geographical financial information:
NET SALES 2001 2000 1999 - -------------------------------------------------------------------------------------------------- United States $ 880,086 $ 745,793 $ 689,051 International 467,270 433,013 425,498 - -------------------------------------------------------------------------------------------------- $1,347,356 $1,178,806 $1,114,549 - -------------------------------------------------------------------------------------------------- LONG-LIVED ASSETS* 2001 2000 1999 - -------------------------------------------------------------------------------------------------- United States $ 547,999 $ 585,118 $ 607,851 International 137,573 149,982 187,448 - -------------------------------------------------------------------------------------------------- $ 685,572 $ 735,100 $ 795,299 - --------------------------------------------------------------------------------------------------
*Long-lived assets exclude deferred income taxes and other assets. Net sales by class of similar products were as follows:
NET SALES 2001 2000 1999 - -------------------------------------------------------------------------------------------------- Cardiac rhythm management $ 965,968 $ 819,117 $ 767,212 Cardiology and vascular access 133,343 102,740 75,905 Cardiac surgery 248,045 256,949 271,432 - -------------------------------------------------------------------------------------------------- $1,347,356 $1,178,806 $1,114,549 - --------------------------------------------------------------------------------------------------
NOTE 11--QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial data for 2001 and 2000 is as follows:
QUARTER FIRST SECOND THIRD FOURTH - ---------------------------------------------------------------------------------------------------- Fiscal Year Ended December 31, 2001 Net sales $326,065 $336,062 $337,029 $348,200 Gross profit 218,988 225,839 207,040(2) 236,330 Net earnings 47,074 43,819(1) 31,434(2) 50,265(5) Diluted net earnings per share $ 0.53 $ 0.49 $ 0.35 $ 0.56 Fiscal Year Ended December 31, 2000 Net sales $295,499 $300,939 $286,969 $295,399 Gross profit 193,521 202,363 193,961 197,812 Net earnings 15,828(3) 34,119(1) 37,999(4) 41,148 Diluted net earnings per share $ 0.19 $ 0.40 $ 0.44 $ 0.47 - ----------------------------------------------------------------------------------------------------
(1) INCLUDES PRE-TAX PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE OF $5,000 RELATING TO THE VASCULAR SCIENCE, INC. ACQUISITION. (2) INCLUDES PRE-TAX SPECIAL CHARGE OF $32,834 RELATING TO A RESTRUCTURING OF ITS U.S. AND INTERNATIONAL SALES ORGANIZATIONS, A STREAMLINING OF ITS HEART VALVE OPERATIONS, AND A WRITE-OFF OF CERTAIN DIAGNOSTIC EQUIPMENT. $21,667 OF THIS SPECIAL CHARGE WAS RECORDED IN COST OF SALES, AND THE REMAINING $11,167 WAS RECORDED IN OPERATING EXPENSES. (3) INCLUDES PRE-TAX SPECIAL CHARGE OF $26,101 RELATING TO THE SILZONE(R) RECALL. (4) INCLUDES A CASH RECEIPT RELATED TO A NON-PRODUCT ARBITRATION JUDGEMENT PERTAINING TO BUSINESS MATTERS OCCURRING IN 1997 AND 1998. THIS CASH RECEIPT, NET OF OTHER PROVISIONS FOR LEGAL MATTERS AND FEES, WAS $15,158 AND WAS CREDITED TO SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. ALSO, THE COMPANY RECORDED ADDITIONAL EXPENSES FOR A $3,500 DISCRETIONARY CONTRIBUTION TO ITS CHARITABLE FOUNDATION, $6,672 PRIMARILY FOR WRITE-OFFS OF CERTAIN ASSETS AND RELATED COSTS, AND A $4,900 INCREASE TO ITS ALLOWANCE FOR DOUBTFUL ACCOUNTS. THESE ADDITIONAL COSTS AND EXPENSES WERE ALSO RECORDED IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. (5) INCLUDES PRE-TAX PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE OF $5,000 RELATING TO THE VASCULAR SCIENCE, INC. ACQUISITION, $15,000 OF INCOME RELATING TO THE REVERSAL OF AN ACCRUED LIABILITY UNDER A LICENSE AGREEMENT WITH GUIDANT, AND APPROXIMATELY $15,000 OF LEGAL FEE EXPENSES INCURRED IN RELATION TO THE GUIDANT LITIGATION. 22 FIVE-YEAR SUMMARY FINANCIAL DATA (In thousands, except per share amounts)
2001* 2000** 1999*** 1998 1997**** - --------------------------------------------------------------------------------------------------------------------- Summary of Operations for the Fiscal Year: Net sales $1,347,356 $1,178,806 $1,114,549 $1,015,994 $ 994,396 - --------------------------------------------------------------------------------------------------------------------- Gross profit $ 888,197 $ 787,657 $ 733,647 $ 643,054 $ 628,679 - --------------------------------------------------------------------------------------------------------------------- Percent of sales 65.9% 66.8% 65.8% 63.3% 63.2% - --------------------------------------------------------------------------------------------------------------------- Operating profit $ 235,816 $ 202,359 $ 89,188 $ 193,952 $ 86,817 - --------------------------------------------------------------------------------------------------------------------- Percent of sales 17.5% 17.2% 8.0% 19.1% 8.7% - --------------------------------------------------------------------------------------------------------------------- Net earnings $ 172,592 $ 129,094 $ 24,227 $ 129,082 $ 53,140 - --------------------------------------------------------------------------------------------------------------------- Percent of sales 12.8% 11.0% 2.2% 12.7% 5.3% - --------------------------------------------------------------------------------------------------------------------- Diluted net earnings per share $ 1.93 $ 1.51 $ 0.29 $ 1.50 $ 0.58 - --------------------------------------------------------------------------------------------------------------------- Financial Position at Year End: Cash and equivalents $ 148,335 $ 50,439 $ 9,655 $ 3,775 $ 28,530 - --------------------------------------------------------------------------------------------------------------------- Working capital 475,692 388,322 389,768 471,090 491,688 - --------------------------------------------------------------------------------------------------------------------- Total assets 1,628,727 1,532,716 1,554,038 1,384,612 1,453,116 - --------------------------------------------------------------------------------------------------------------------- Long-term debt 123,128 294,500 477,495 374,995 220,000 - --------------------------------------------------------------------------------------------------------------------- Shareholders' equity 1,183,745 940,849 794,021 806,220 987,022 - --------------------------------------------------------------------------------------------------------------------- Other Data: Diluted weighted average shares outstanding 89,384 85,817 84,735 86,145 92,052 - ---------------------------------------------------------------------------------------------------------------------
EXCEPT FOR 1997, ALL FISCAL YEARS NOTED ABOVE CONSISTED OF FIFTY-TWO WEEKS. FISCAL YEAR 1997 CONSISTED OF FIFTY-THREE WEEKS. THE COMPANY DID NOT DECLARE OR PAY ANY DIVIDENDS DURING 1997 THROUGH 2001. *RESULTS FOR 2001 INCLUDE A $32,834 SPECIAL CHARGE AND PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES OF $10,000. **RESULTS FOR 2000 INCLUDE A $26,101 SPECIAL CHARGE AND A PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE OF $5,000. ***RESULTS FOR 1999 INCLUDE A $9,754 SPECIAL CHARGE AND PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES TOTALING $115,228. ****RESULTS FOR 1997 INCLUDE $58,669 OF SPECIAL CHARGES. 23 INVESTOR INFORMATION TRANSFER AGENT Requests concerning the transfer or exchange of shares, lost stock certificates, duplicate mailings or change of address should be directed to the Company's Transfer Agent at: Equiserve Trust Company N.A. P.O. Box 2500 Jersey City, New Jersey 07303-2500 1.800.317.4445 www.equiserve.com (Account Access Availability) Hearing impaired #TDD: 201.222.4955 ANNUAL MEETING OF SHAREHOLDERS The annual meeting of shareholders will be held at 9:30 a.m. on Thursday, May 16, 2002, at the Lutheran Brotherhood Building, 625 Fourth Avenue South, Minneapolis, Minnesota. INVESTOR CONTACT Laura C. Merriam, Director of Investor Relations To obtain information about the Company call 1.800.552.7664, visit our web site at www.sjm.com, or write to: Investor Relations St. Jude Medical, Inc. One Lillehei Plaza St. Paul, Minnesota 55117 The Investor Relations section on our web site includes all SEC filings, a list of analyst coverage, analyst estimates, and a calendar of upcoming earnings announcements and IR events. Our NewsRoom features St. Jude Medical's press releases, company background information, fact sheets, executive bios, a product photo portfolio and other media resources. Patient profiles can be found on our web site, including the patients featured in this year's annual report. COMPANY STOCK SPLITS 2:1 on 4/27/79, 1/25/80, 9/30/86, 3/15/89 and 4/30/90 3:2 on 11/16/95 STOCK EXCHANGE LISTINGS New York Stock Exchange Chicago Board Options Exchange (CB) Symbol: STJ The range of high and low prices per share for the Company's common stock for fiscal 2001 and 2000 is set forth below. As of February 13, 2002, the Company had 3,451 shareholders of record. Fiscal Year Ended December 31, 2001 2000 - -------------------------------------------------------------------------------- Quarter High Low High Low - -------------------------------------------------------------------------------- First $64.55 $44.45 $31.25 $23.63 Second $66.00 $49.60 $44.25 $24.19 Third $72.06 $57.75 $51.63 $36.88 Fourth $78.08 $66.95 $62.50 $46.38 - -------------------------------------------------------------------------------- TRADEMARKS Aescula(TM), AF Suppression(TM), AFx(TM), Affinity(R), Alliance(TM), Angio-Seal(TM), Angio-Seal(TM) STS, Atlas(TM), AutoCapture(TM), Beat-by-Beat(TM), BiLinx(TM), Contour(R), Distal(TM), Duo(TM), Dynamic Atrial Overdrive(TM), Fast Cath(TM), Fast Cath Duo(TM), FlatCap(TM), Frontier(TM), Genesis(TM) System, GuideRight(TM), Housecall(TM), HydraSteer(TM), Identity(TM), Integrity(R), Livewire(TM), Livewire TC(TM), Livewire TC Compass(TM), Microny(R), Maximum(TM), Photon(R), Response(TM) CV, Riata(TM), Seal-Away(TM), Secure Cap(TM), SJM(R), SJM Biocor(TM), SJM Epic(TM), SJM Regent(TM), SJM Tailor(TM), Spyglass(TM), St. Jude Medical(R), Supreme(TM), Supreme Spiral SC(TM), Sure-Lock(TM), Symmetry(TM) Bypass System, Tendril(R), Toronto Root(TM), Toronto SPV(R), TVL(R), Ultimum(TM). Harmony(TM) INR Monitoring System is a trademark of LifeScan, Inc., a Johnson & Johnson company. 24 EX-21 7 stjude021570_ex21.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 ST. JUDE MEDICAL, INC. SUBSIDIARIES OF THE REGISTRANT St. Jude Medical, Inc. Wholly Owned Subsidiaries: o Pacesetter, Inc. - Sylmar, California, Scottsdale, Arizona, and Maven, South Carolina (Delaware corporation) (doing business as St. Jude Medical Cardiac Rhythm Management Division) o St. Jude Medical S.C., Inc. - St. Paul, Minnesota (Minnesota corporation) - Lifeline Medical Systems, Inc. (Illinois corporation) (wholly owned subsidiary of St. Jude Medical S.C., Inc.) o St. Jude Medical Sales Corporation - St. Paul, Minnesota (Barbados corporation) o St. Jude Medical Europe, Inc. - St. Paul, Minnesota (Delaware corporation) - Brussels, Belgium branch o St. Jude Medical Canada, Inc. - Mississauga, Ontario and St. Hyacinthe, Quebec (Ontario, Canada corporation) o 151703 Canada, Inc. - St. Paul, Minnesota (Ontario, Canada corporation) o St. Jude Medical (Hong Kong) Limited - Kowloon, Hong Kong (Hong Kong corporation) - Shanghai and Beijing, China representative offices - Korean and Taiwan branch offices - Mumbai, New Delhi, Calcutta and Chennai, India branch offices o St. Jude Medical, Inc., Cardiac Assist Division - St. Paul, Minnesota (Delaware corporation) (Assets of St. Jude Medical, Inc., Cardiac Assist Division sold to Bard 1/19/96) o St. Jude Medical Australia Pty., Ltd. - Sydney Australia (Australian corporation) o St. Jude Medical Brasil, Ltda. - Sao Paulo and Belo Horizonte, Brazil (Brazilian corporation) - Telectronics Medica, Ltda. - Sao Paulo, Brazil (Brazilian corporation) o Medical Telectronics, Ltd. - Auckland, New Zealand (New Zealand corporation) o St. Jude Medical, Daig Division, Inc.- Minnetonka, Minnesota (Minnesota corporation) (formerly known as Daig Corporation) o St. Jude Medical Colombia, Ltda. (Bogota, Colombia) (Colombian corporation) o St. Jude Medical ATG, Inc. - Maple Grove, Minnesota (Minnesota corporation) (formerly known as St. Jude Medical Cardiovascular Group, Inc.) o SJM International, Inc. - St. Paul, Minnesota (Delaware corporation) (formerly known as SJM Europe, Inc.) - Tokyo, Japan branch 1 SJM International Inc. Wholly Owned Subsidiaries o St. Jude Medical Puerto Rico, Inc. - Caguas, Puerto Rico (Delaware corporation) - St. Jude Medical Puerto Rico Holding, B.V. (Netherlands corporation) (wholly owned subsidiary of St. Jude Medical Puerto Rico, Inc.) - St. Jude Medical Japan KK (Japanese corporation) (wholly owned subsidiary of St. Jude Medical Puerto Rico Holding, B.V.) - St. Jude Medical Nederland B.V. (Netherlands corporation) (wholly owned subsidiary of St. Jude Medical Puerto Rico Holding, B.V.) - Telectronics B.V. (Netherlands corporation) (wholly owned subsidiary of St. Jude Medical Nederland B.V.) - St. Jude Medical Netherlands Distribution AB (Swedish corporation headquartered in the Netherlands) (wholly owned subsidiary of St. Jude Medical Puerto Rico Holding, B.V.) - St. Jude Medical Puerto Rico B.V. (Netherlands corporation) (wholly owned subsidiary of St. Jude Medical Netherlands Distribution AB) - Puerto Rico branch of St. Jude Medical Puerto Rico B.V. - St. Jude Medical Coordination Center (Belgium branch of St. Jude Medical Netherlands Distribution AB) o St. Jude Medical AB (Swedish corporation) (formerly known as Pacesetter AB) o St. Jude Medical Sweden AB (Swedish corporation) o St. Jude Medical Danmark A/S (Danish corporation) - Telectronics Scandinavia Aps (Danish corporation) (wholly owned subsidiary of St. Jude Medical Danmark A/S) o St. Jude Medical Pacesetter Sales AB (Swedish corporation) o St. Jude Medical (Portugal) - Distribuicao de Produtos Medicos, Lda. (Portuguese corporation) o St. Jude Medical Export Ges.m.b.H. (Austrian corporation) o St. Jude Medical Medizintechnik Ges.m.b.H. (Austrian corporation) o St. Jude Medical Italia S.p.A. (Italian corporation) o N.V. St. Jude Medical Belgium, S.A. (Belgian corporation) - Portugal branch o St. Jude Medical Espana, S.A. (Spanish corporation) o St. Jude Medical France S.A. (French corporation) o St. Jude Medical Finland O/y (Finnish corporation) o St. Jude Medical Sp.zo.o. (Polish corporation) o St. Jude Medical GmbH (German corporation) o St. Jude Medical UK Limited (United Kingdom corporation) o St. Jude Medical AG (Swiss corporation) 2 EX-23 8 stjude021570_ex23.txt CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report on Form 10-K of St. Jude Medical, Inc. of our report dated January 28, 2002, except for Note 4, as to which the date is February 13, 2002, included in the 2001 Annual Report to Shareholders of St. Jude Medical, Inc. Our audits also included the financial statement schedule of St. Jude Medical, Inc. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in Registration Statement No. 33-9262, Registration Statement No. 33-41459, Registration Statement No. 33-48502, Registration Statement No. 33-54435, Registration Statement No. 333-42945, Registration Statement No. 333-42658, and Registration Statement No. 333-42668 on Form S-8 of our report dated January 28, 2002, except for Note 4, as to which the date is February 13, 2002, with respect to the consolidated financial statements and schedule of St. Jude Medical, Inc. incorporated by reference in the Annual Report on Form 10-K for the fiscal year ended December 31, 2001. /s/ ERNST & YOUNG LLP Minneapolis, Minnesota March 22, 2002 EX-24 9 stjude021570_ex24.txt POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Terry L. Shepherd, John C. Heinmiller and Kevin T. O'Malley, each with full power to act without the other, his or her true and lawful attorney-in-fact and agent with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of St. Jude Medical, Inc. for the fiscal year ended December 31, 2001, and any or all amendments to said Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and to file the same with such other authorities as necessary, granting unto each such attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each such attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, this Power of Attorney has been signed on this 22nd day of March, 2002, by the following persons. /s/ TERRY L. SHEPHERD /s/ WALTER L. SEMBROWICH - ------------------------------ ------------------------------ Terry L. Shepherd Walter L. Sembrowich Chief Executive Officer Director (Principal Executive Officer) /s/ JOHN C. HEINMILLER /s/ DANIEL J. STARKS - ------------------------------ ------------------------------ John C. Heinmiller Daniel J. Starks Vice President, Finance and Director Chief Financial Officer (Principal Financial and Accounting Officer) /s/ RONALD A. MATRICARIA /s/ DAVID A. THOMPSON - ------------------------------ ------------------------------ Ronald A. Matricaria David A. Thompson Chairman Director /s/ RICHARD R. DEVENUTI /s/ STEFAN K. WIDENSOHLER - ------------------------------ ------------------------------ Richard R. Devenuti Stefan K. Widensohler Director Director /s/ STUART M. ESSIG /s/ WENDY L. YARNO - ------------------------------ ------------------------------ Stuart M. Essig Wendy L. Yarno Director Director /s/ THOMAS H. GARRETT III /s/ FRANK C-P YIN - ------------------------------ ------------------------------ Thomas H. Garrett III Frank C-P Yin Director Director -----END PRIVACY-ENHANCED MESSAGE-----