-----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, JSJiSyLRZP1dKpZeLOUm8SWom0ePmp27Cx+MzvOCsvi4+to/82RJ+QGN6zKXuGjR OtJ3yH9zfRB6LS1VzKUWQg== 0000897101-02-000570.txt : 20020814 0000897101-02-000570.hdr.sgml : 20020814 20020814114906 ACCESSION NUMBER: 0000897101-02-000570 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12441 FILM NUMBER: 02732799 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-Q 1 stjude023958_10q.txt ST. JUDE MEDICAL, INC. FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q --------- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 Commission File Number 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 Identification No.) of incorporation or organization) One Lillehei Plaza, St. Paul, Minnesota 55117 --------------------------------------------- (Address of principal executive offices) (651) 483-2000 -------------- (Registrant's telephone number, including area code) Not Applicable -------------- (Former name, former address and former fiscal year, if changed since last report) 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 ___ The number of shares of common stock, par value $.10 per share, outstanding on July 26, 2002 was 176,889,862. PART I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS ST. JUDE MEDICAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------------ Net sales $ 404,348 $ 336,062 $ 775,541 $ 662,127 Cost of sales 128,962 110,223 247,750 217,300 - ------------------------------------------------------------------------------------------------------------------ Gross profit 275,386 225,839 527,791 444,827 Selling, general and administrative expense 131,210 117,080 253,897 230,701 Research and development expense 49,291 41,126 95,756 80,631 Purchased in-process research and development charge -- 5,000 -- 5,000 - ------------------------------------------------------------------------------------------------------------------ Operating profit 94,885 62,633 178,138 128,495 Other income (expense) 227 (2,540) (258) (5,637) - ------------------------------------------------------------------------------------------------------------------ Earnings before income taxes 95,112 60,093 177,880 122,858 Income tax expense 25,557 16,274 46,249 31,965 - ------------------------------------------------------------------------------------------------------------------ Net earnings $ 69,555 $ 43,819 $ 131,631 $ 90,893 ================================================================================================================== ================================================================================================================== Net earnings per share: Basic $ 0.39 $ 0.26 $ 0.75 $ 0.53 Diluted $ 0.38 $ 0.25 $ 0.72 $ 0.51 Weighted average shares outstanding: Basic 176,396 171,573 175,810 171,324 Diluted 183,472 177,606 182,929 177,204 ==================================================================================================================
See notes to condensed consolidated financial statements. 1 ST. JUDE MEDICAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
JUNE 30, 2002 DECEMBER 31, (UNAUDITED) 2001 (SEE NOTE) - ------------------------------------------------------------------------------------------------ ASSETS Current assets Cash and equivalents $ 172,891 $ 148,335 Accounts receivable, less allowances of $21,585 in 2002 and $17,210 in 2001 385,379 320,683 Inventories 244,955 240,390 Deferred income taxes 40,564 36,563 Other 64,514 51,575 - ------------------------------------------------------------------------------------------------ Total current assets 908,303 797,546 Property, plant and equipment - at cost 662,654 631,134 Less accumulated depreciation (365,627) (335,491) - ------------------------------------------------------------------------------------------------ Net property, plant and equipment 297,027 295,643 Other assets Goodwill, net 324,331 321,562 Other intangible assets, net 79,737 68,367 Deferred income taxes 67,238 67,238 Other 98,638 78,371 - ------------------------------------------------------------------------------------------------ Total other assets 569,944 535,538 - ------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 1,775,274 $ 1,628,727 ================================================================================================ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 99,198 $ 88,925 Income taxes payable 89,683 63,475 Accrued expenses 193,255 169,454 - ------------------------------------------------------------------------------------------------ Total current liabilities 382,136 321,854 Long-term debt -- 123,128 Commitments and contingencies -- -- Shareholders' equity Preferred stock -- -- Common stock 17,668 17,442 Additional paid-in capital 184,380 126,005 Retained earnings 1,266,540 1,134,909 Accumulated other comprehensive income Cumulative translation adjustment (78,075) (103,781) Unrealized gain on available-for-sale securities 2,625 9,170 - ------------------------------------------------------------------------------------------------ Total shareholders' equity 1,393,138 1,183,745 - ------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,775,274 $ 1,628,727 ================================================================================================
NOTE: The balance sheet at December 31, 2001 has been derived from the Company's audited financial statements at that date. See notes to condensed consolidated financial statements. 2 ST. JUDE MEDICAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 2001 - ------------------------------------------------------------------------------------------------------------------ Operating Activities Net earnings $ 131,631 $ 90,893 Depreciation 30,816 28,173 Amortization 2,742 15,729 Purchased in-process research and development charge -- 5,000 Deferred income taxes 11 -- Changes in operating assets and liabilities, net of business acquisitions: Accounts receivable (51,278) (27,953) Inventories 2,632 (20,448) Other current assets (21,341) 12,352 Accounts payable and accrued expenses 20,884 5,172 Income taxes 44,730 16,255 - ------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 160,827 125,173 Investing Activities Purchase of property, plant and equipment (24,851) (35,899) Business acquisition payments (14,810) (6,819) Other (19,837) (13,966) - ------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (59,498) (56,684) Financing Activities Proceeds from exercise of stock options 40,906 20,787 Borrowings under debt facilities 352,000 1,183,000 Payments under debt facilities (475,128) (1,248,100) - ------------------------------------------------------------------------------------------------------------------ Net cash used in financing activities (82,222) (44,313) Effect of currency exchange rate changes on cash 5,449 (5,350) - ------------------------------------------------------------------------------------------------------------------ Net increase in cash and equivalents 24,556 18,826 Cash and equivalents at beginning of period 148,335 50,439 - ------------------------------------------------------------------------------------------------------------------ Cash and equivalents at end of period $ 172,891 $ 69,265 ==================================================================================================================
See notes to condensed consolidated financial statements. 3 ST. JUDE MEDICAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S.) for interim financial information, and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year. Preparation of the Company's financial statements in conformity with accounting principles generally accepted in the U.S. 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. For further information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. Certain 2001 amounts have been reclassified to conform to the 2002 presentation. NOTE 2 - INVENTORIES Inventories consist of the following:
JUNE 30, DECEMBER 31, 2002 2001 - ---------------------------------------------------------------------------------------------- Finished goods $ 151,396 $ 135,543 Work in process 33,942 35,984 Raw materials 59,617 68,863 - ---------------------------------------------------------------------------------------------- $ 244,955 $ 240,390 ==============================================================================================
NOTE 3 - GOODWILL AND OTHER INTANGIBLE ASSETS The Company adopted all provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (Statement 142), on January 1, 2002. Under Statement 142, goodwill is no longer amortized, but is subject to annual impairment tests. The following table reconciles reported 2001 net earnings and basic and diluted net earnings per share had this statement been effective January 1, 2001: 4
THREE MONTHS ENDED SIX MONTHS ENDED June 30, 2001 June 30, 2001 - -------------------------------------------------------------------------------------------- NET EARNINGS: Reported net earnings $ 43,819 $ 90,893 Goodwill amortization, net of taxes 5,334 10,505 - -------------------------------------------------------------------------------------------- Adjusted net earnings $ 49,153 $ 101,398 ============================================================================================ BASIC NET EARNINGS PER SHARE: Reported net earnings $ 0.26 $ 0.53 Goodwill amortization, net of taxes 0.03 0.06 - -------------------------------------------------------------------------------------------- Adjusted basic net earnings per share $ 0.29 $ 0.59 ============================================================================================ DILUTED NET EARNINGS PER SHARE: Reported net earnings $ 0.25 $ 0.51 Goodwill amortization, net of taxes 0.03 0.06 - -------------------------------------------------------------------------------------------- Adjusted diluted net earnings per share $ 0.28 $ 0.57 ============================================================================================
The net carrying amount of goodwill for the six months ended June 30, 2002 increased $2,769 to $324,331 due to translation fluctuations of non-U.S. goodwill balances. The Company completed its initial required goodwill impairment test under Statement 142 in the second quarter of 2002, which indicated that goodwill was not impaired. Balances of other intangible assets as of June 30, 2002 and December 31, 2001 were as follows:
JUNE 30, DECEMBER 31, 2002 2001 - ------------------------------------------------------------------------------------------------------ Original Accumulated Original Accumulated AMORTIZED INTANGIBLE ASSETS: Cost Amortization Cost Amortization - ------------------------------------------------------------------------------------------------------ Purchased technology & patents $ 71,367 $ (14,259) $ 72,050 $ (12,440) Other 23,879 (1,250) 9,046 (289) - ------------------------------------------------------------------------------------------------------ $ 95,246 $ (15,509) $ 81,096 $ (12,729) ====================================================================================================== Total other intangible assets, net $ 79,737 $ 68,367 - ------------------------------------------------------------------------------------------------------
During the first quarter of 2002, the Company reclassified $24,599 of certain intangible assets to goodwill based upon the guidance provided in Statement 142 and Statement of Financial Accounting Standards No. 141, "Business Combinations." This reclassification has been reflected in the goodwill and other intangible asset balances as of December 31, 2001 for comparative purposes. 5 NOTE 4 - LONG-TERM DEBT 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 facility and bear interest at varying market rates. The Company had no outstanding commercial paper borrowings at June 30, 2002 and $123,128 of commercial paper borrowings at December 31, 2001. The Company has a $350,000 unsecured, revolving credit facility that expires in March 2003. The Company's commercial paper borrowings are backed by this committed credit facility. The Company also borrows from time to time under uncommitted, due-on-demand credit facilities with various banks. At December 31, 2001, the Company classified all of its commercial paper borrowings as long-term on its balance sheet, as the Company had the ability to repay these short-term obligations with available cash from its existing long-term, committed credit facility. During 2002, the Company repaid all of its commercial paper borrowings. The Company's credit facility agreement contains 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 June 30, 2002. The Company's credit facility agreement does not include a provision for termination of the facility or acceleration of repayment due to changes in the Company's credit rating. NOTE 5 - COMMITMENTS AND CONTINGENCIES 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. 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. 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. See also Note 7 regarding the special charges associated with this matter. In 2001, the U.S. Judicial Panel on Multi-District 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 under the supervision of U.S. District Court Judge John Tunheim in Minnesota. As a result, actions involving products with Silzone(R) coating have been and will likely continue to be transferred to Judge Tunheim for coordinated or consolidated pretrial proceedings. There are other actions involving products with Silzone(R) coating in various state courts that may or may not be coordinated with the matters presently before Judge Tunheim. 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. 6 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 a 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 appealed the ruling of invalidity concerning the '191 patent, but in a ruling issued July 11, 2002, the U.S. Court of Appeals for the Federal Circuit rejected Guidant's appeal and affirmed the district court's ruling of invalidity. 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. In rulings dated February 13, 2002 and July 5, 2002, the judge overseeing the jury trial issued his decisions 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 claims 1 and 18 were not infringed as a matter of law. 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 also ruled on several other motions, not summarized here. The primary 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. While it is not possible to predict the outcome of an appeal process, the Company believes that it has meritorious defenses against the claims asserted by Guidant. OTHER LITIGATION MATTERS: The Company is involved in various other product liability lawsuits, claims and proceedings that arise in the ordinary course of business. Subject to self-insured retentions, the Company believes it has product liability insurance sufficient to cover such claims and suits. 7 NOTE 6 - SHAREHOLDERS' EQUITY CAPITAL STOCK: On May 16, 2002, the Company's Board of Directors declared a two-for-one stock split in the form of a 100% stock dividend to shareholders of record on June 10, 2002. Net earnings per share, shares outstanding and weighted average shares outstanding have been restated to reflect the stock dividend. The Company's authorized capital consists of 25,000 shares of $1.00 per share par value preferred stock and 250,000 shares of $0.10 per share par value common stock. There were no shares of preferred stock issued or outstanding during 2001 or 2002. There were 176,682 and 174,419 shares of common stock outstanding at June 30, 2002 and December 31, 2001. 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 1,955 shares of its common stock for $29,826 during 1999. No additional shares have been repurchased since 1999. NOTE 7 - 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 $15,396 of these special charge accruals through June 30, 2002, consisting of $3,417 of employee severance costs, $7,373 of inventory write-offs and scrap, $3,379 of capital equipment write-offs, and $1,227 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. SILZONE(R) 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. The Company has more than $200 million remaining in product liability insurance currently available for the Silzone(R) related matters. In the second quarter of 2002, the Company determined that the Silzone(R) reserves for other costs should be increased by $11,000 due primarily to difficulties in getting the Company's insurance carriers to pay various costs as required by the product liability insurance policies. This additional accrual is included in selling, general and administrative expenses for the second quarter ended June 30, 2002. The Company has utilized $22,329 of these special charge accruals through June 30, 2002, 8 consisting of $9,465 for asset write-downs and $12,864 for other costs. The Company estimates that the remaining accruals will be utilized during 2002 through 2004. 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. NOTE 8 - NET EARNINGS PER SHARE The table below sets forth the computation of basic and diluted net earnings per share:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------- Numerator: Net earnings $ 69,555 $ 43,819 $ 131,631 $ 90,893 Denominator: Basic-weighted average shares outstanding 176,396 171,573 175,810 171,324 Effect of dilutive securities: Employee stock options 7,051 5,953 7,096 5,802 Restricted shares 25 80 23 78 - ------------------------------------------------------------------------------------------------------------- Diluted-weighted average shares outstanding 183,472 177,606 182,929 177,204 ============================================================================================================= Basic net earnings per share $ .39 $ .26 $ .75 $ .53 ============================================================================================================= Diluted net earnings per share $ .38 $ .25 $ .72 $ .51 =============================================================================================================
Diluted-weighted average shares outstanding have not been adjusted for certain employee stock options and awards where the effect of those securities would have been anti-dilutive. NOTE 9 - COMPREHENSIVE INCOME (LOSS) Other comprehensive income (loss) consists of unrealized gains or losses on available-for-sale marketable securities and foreign currency translation adjustments, net of taxes. Other comprehensive income (loss) was $23,720 and $(16,027) for the three months ended June 30, 2002 and 2001, and $19,161 and $(29,604) for the first six months of 2002 and 2001. Total comprehensive income (loss) combines reported net earnings (loss) and other comprehensive income (loss). Total comprehensive income was $93,275 and $27,792 for the three months ended June 30, 2002 and 2001, and $150,792 and $61,289 for the first six months of 2002 and 2001. NOTE 10 - OTHER INCOME (EXPENSE) Other income (expense) consists primarily of interest income and interest expense, net. 9 NOTE 11 - SEGMENT AND GEOGRAPHICAL INFORMATION SEGMENT INFORMATION: The Company manages its business on the basis of one reportable segment - the development, manufacture and distribution of cardiovascular medical devices for the global cardiac rhythm management (CRM), cardiac surgery (CS) and cardiology and vascular access (C/VA) markets. The Company's principal products in each of these markets are: bradycardia pacemaker systems, tachycardia implantable cardioverter defibrillator (ICD) systems, and electrophysiology catheters in CRM; mechanical and tissue heart valves, valve repair products, and suture-free devices to facilitate coronary artery bypass graft anastomoses in CS; and vascular closure devices, catheters, guidewires and introducers in C/VA. Net sales by class of similar products were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, NET SALES 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------- Cardiac rhythm management $ 290,680 $ 238,284 $ 558,478 $ 467,317 Cardiac surgery 66,287 63,849 129,169 129,494 Cardiology and vascular access 47,381 33,929 87,894 65,316 - ------------------------------------------------------------------------------------------- $ 404,348 $ 336,062 $ 775,541 $ 662,127 ===========================================================================================
GEOGRAPHICAL INFORMATION: The following tables present certain geographical financial information:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, NET SALES 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------- United States $ 267,725 $ 216,958 $ 513,555 $ 427,608 International 136,623 119,104 261,986 234,519 - ------------------------------------------------------------------------------------------- $ 404,348 $ 336,062 $ 775,541 $ 662,127 =========================================================================================== JUNE 30, DECEMBER 31, LONG-LIVED ASSETS* 2002 2001 - ------------------------------------------------------------- United States $ 652,737 $ 626,140 International 146,996 137,803 - ------------------------------------------------------------- $ 799,733 $ 763,943 =============================================================
*LONG-LIVED ASSETS EXCLUDE DEFERRED INCOME TAXES. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) RESULTS OF OPERATIONS NET SALES: Net sales for the second quarter of 2002 totaled $404,348, a 20.3% increase over the $336,062 reported in the second quarter of 2001. For the first six months of 2002, net sales totaled $775,541, a 17.1% increase over the $662,127 reported in the first half of 2001. The impact of foreign currency translation in the comparison of net sales for the second quarter and first six months of 2002 to 2001 was not significant. Cardiac rhythm management (CRM) net sales for the second quarter of 2002 were $290,680, a 22.0% increase over the $238,284 reported in the second quarter of 2001. CRM net sales for the first six months of 2002 were $558,478, a 19.5% increase over the $467,317 reported in 2001. The increase in CRM net sales for the second quarter and first six months of 2002 was primarily due to increased bradycardia, implantable cardioverter defibrillator (ICD) and electrophysiology catheter unit sales. The increase in bradycardia net sales was attributable to the on-going success of the Company's Integrity AFx(R), Integrity(R) Micro and Identity(TM) family of pacemakers, all with atrial fibrillation suppression technology. The Company's ICD net sales benefited from the full second quarter availability of the Company's Atlas(TM) family of ICDs and the introduction of the Riata(TM) family of defibrillation leads to the U.S. market during the quarter. Cardiac surgery (CS) net sales for the second quarter of 2002 were $66,287, a 3.8% increase from the $63,849 reported in the second quarter of 2001. CS sales for the first six months of 2002 were $129,169 compared with $129,494 reported in 2001. The increase in CS net sales for the second quarter of 2002 was due to an increase in aortic connector sales as a result of the on-going sales ramp up of this product in the U.S. market. This was offset in part by a decrease in heart valve net sales due to 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. Cardiology and vascular access (C/VA) net sales for the second quarter of 2002 were $47,381, a 39.6% increase over the $33,929 reported in the second quarter of 2001. C/VA net sales for the first six months of 2002 were $87,894, a 34.6% increase over the $65,316 reported in 2001. The increase in C/VA net sales is primarily due to increased Angio-Seal(TM) vascular closure unit sales, benefiting from the on-going success of the Company's new Angio-Seal(TM) STS Platform which was launched in the first quarter of 2002. GROSS PROFIT: Gross profit for the second quarter of 2002 totaled $275,386, or 68.1% of net sales, as compared with $225,839, or 67.2% of net sales, during the second quarter of 2001. For the first six months of 2002 and 2001, gross profit was $527,791, or 68.1% of net sales, and $444,827, or 67.2% of net sales. The improvement in the gross profit percentage is due primarily to higher ICD and pacemaker unit volumes and improved CRM manufacturing efficiencies. 11 SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSE: SG&A expense for the second quarter of 2002 totaled $131,210, or 32.4% of net sales, compared with $117,080, or 34.8% of net sales, for the second quarter of 2001. For the first six months of 2002, SG&A expense totaled $253,897, or 32.7% of net sales, compared with $230,701, or 34.8% of net sales. The decrease in SG&A expense as a percentage of net sales was primarily attributable to the elimination of goodwill amortization expense in 2002 due to the Company's adoption of Financial Accounting Standards Statement No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. Goodwill amortization expense was $7,112 in the second quarter of 2001, and $14,007 in the first six months of 2001. Higher sales volume and increased productivity of the Company's recently reorganized sales organizations also improved SG&A expense as a percentage of net sales during the second quarter of 2002. During the second quarter of 2002, the Company received a cash payment of $18,500 relating to the settlement of certain patent litigation, which was recorded in the SG&A expense line item. Also during the second quarter of 2002, the Company recorded an $11,000 SG&A charge to increase the reserve for expenses related to the Silzone(R) recall (see Special charges) and a $7,500 discretionary contribution to its charitable foundation. RESEARCH AND DEVELOPMENT (R&D) EXPENSE: R&D expenses in the second quarter of 2002 totaled $49,291, or 12.2% of net sales, compared with $41,126, or 12.2% of net sales, for the second quarter of 2001. For the first six months of 2002, R&D expense totaled $95,756, or 12.3% of net sales, compared with $80,631, or 12.2% of net sales, in 2001. The increase in R&D expenses is primarily attributable to increased CRM activities relating primarily to ICDs and products treating emerging indications in atrial fibrillation and congestive heart failure. PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE: The Company recorded a purchased in-process research and development charge of $5,000 during the second quarter of 2001 relating to a performance-based milestone payment associated with the 1999 acquisition of Vascular Science, Inc. (VSI). The Company anticipates additional in-process research and development charges related to the VSI acquisition as additional milestones are achieved. See "Purchased in-process research and development charges" in the Company's Annual Report or Form 10-K for the fiscal year ended December 31, 2001 for additional discussion on the VSI acquisition and related accounting. 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 $15,396 of these special charge accruals through June 30, 2002, consisting of $3,417 of employee severance costs, $7,373 of inventory write-offs and scrap, $3,379 of capital equipment write-offs, and $1,227 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. 12 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. The Company has more than $200 million remaining in product liability insurance currently available for the Silzone(R) related matters. In the second quarter of 2002, the Company determined that the Silzone(R) reserves for other costs should be increased by $11,000 due primarily to difficulties in getting the Company's insurance carriers to pay various costs as required by the product liability insurance policies. This additional accrual is included in selling, general and administrative expenses for the second quarter ended June 30, 2002. The Company has utilized $22,329 of these special charge accruals through June 30, 2002, consisting of $9,465 for asset write-downs and $12,864 for other costs. The Company estimates that the remaining accruals will be utilized during 2002 through 2004. 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. OTHER INCOME (EXPENSE): Other income (expense) consists primarily of interest income and interest expense, net. The change in other income (expense) during 2002 as compared with 2001 is due primarily to reduced interest expense as a result of lower debt levels and lower interest rates in 2002. INCOME TAXES: The Company's effective income tax rate was 26.9% for the second quarter of 2002 as compared with 25.0% for the second quarter of 2001, and 26.0% for the first six months of 2002 as compared with 25.0% for the first six months of 2001, exclusive of the $5,000 purchased in-process research and development charge in 2001. The increase in the Company's effective income tax rate is due to a larger percentage of the Company's taxable income being generated in higher taxing jurisdictions. The Company anticipates that its effective income tax rate before purchased in-process research and development and special charges will continue to increase 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 United States 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, additional U.S. tax liabilities would be incurred. At June 30, 2002, the Company has approximately $52,000 of deferred tax assets related to U.S. tax loss carryforwards, 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. However, if these estimates of future taxable income are not met, a valuation allowance for some of these deferred tax assets would be required. 13 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 in each of those years, 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. STOCK SPLIT: On May 16, 2002, the Company's Board of Directors declared a two-for-one stock split in the form of a 100% stock dividend to shareholders of record on June 10, 2002. Net earnings per share, shares outstanding and weighted average shares outstanding have been restated to reflect the stock dividend. 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 heart valve and repair portion of 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 heart 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 a highly competitive industry and has undergone consolidation. There are currently three principal suppliers, including the Company, and the Company's two principal competitors both have substantially greater 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 14 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 United States continue to consolidate the purchasing for some of the Company's customers. Several 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. CRITICAL ACCOUNTING POLICIES Management has identified the most critical accounting policies upon which the Company's financial status depends. Management determined the critical accounting policies by considering accounting policies that involve the most complex or subjective decisions or assessments. Management identified the Company's most critical accounting policies to be those related to income taxes, product liability accruals, special charges, accounts receivable allowance for doubtful accounts, and estimated useful lives of property, plant and equipment. These accounting policies are discussed in the notes to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001, and in relevant sections in this Management's Discussion and Analysis. FINANCIAL CONDITION The Company's liquidity and cash flows remained strong during the first six months of 2002. The Company's current assets to current liabilities ratio was 2.4 to 1 at June 30, 2002, as compared with 2.5 to 1 at December 31, 2001. At December 31, 2001 and June 30, 2002, substantially all of the Company's cash and equivalents were held by the Company's non-U.S. subsidiaries. These funds are also available for use in the Company's U.S. operations; however, they would be subject to additional U.S. tax upon repatriation (see Income taxes). 15 The Company has a $350,000 unsecured, revolving credit facility that expires in March 2003. The Company's commercial paper borrowings are backed by this committed credit facility. The Company also borrows from time to time under uncommitted, due-on-demand credit facilities with various banks. Management believes that the Company can obtain a new credit facility or renegotiate and extend its current credit facility prior to March 2003. The Company's credit facility agreement contains 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 June 30, 2002. The Company's credit facility agreement does not include a provision for termination of the facility or acceleration of repayment due to changes in the Company's credit rating. At December 31, 2001, the Company classified all of its commercial paper borrowings as long-term on its balance sheet, as the Company had the ability to repay these short-term obligations with available cash from its existing long-term, committed credit facility. During 2002, the Company repaid all of its interest-bearing debt utilizing cash generated from operations and the proceeds from employee stock option exercises. 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 1,955 shares of its common stock for $29,826 during 1999. No additional shares have been repurchased since 1999. Management believes that cash generated from operations and cash available under the Company's 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 financing or equity capital, if necessary. The Company has no off-balance sheet financing arrangements other than certain operating leases previously disclosed in its Annual Report on Form 10-K for the fiscal year ended December 31, 2001. There have been no significant changes in the Company's operating lease obligations since December 31, 2001. 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 beliefs 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. 16 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 foreign 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. 17 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes from December 31, 2001 in the Company's market risk. For further information on market risk, refer to Item 7A in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. PART II OTHER INFORMATION ITEM 1. 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. 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. 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. See also Note 7 regarding the special charges associated with this matter. In 2001, the U.S. Judicial Panel on Multi-District 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 under the supervision of U.S. District Court Judge John Tunheim in Minnesota. As a result, actions involving products with Silzone(R) coating have been and will likely continue to be transferred to Judge Tunheim for coordinated or consolidated pretrial proceedings. There are other actions involving products with Silzone(R) coating in various state courts that may or may not be coordinated with the matters presently before Judge Tunheim. 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 a 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 appealed the ruling of invalidity concerning the '191 patent, but in a ruling issued July 11, 2002, the U.S. Court of Appeals for the Federal Circuit rejected Guidant's appeal and affirmed the district court's ruling of invalidity. 18 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. In rulings dated February 13, 2002 and July 5, 2002, the judge overseeing the jury trial issued his decisions 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 claims 1 and 18 were not infringed as a matter of law. 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 also ruled on several other motions, not summarized here. The primary 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. While it is not possible to predict the outcome of an appeal process, the Company believes that it has meritorious defenses against the claims asserted by Guidant. OTHER LITIGATION MATTERS: The Company is involved in various other product liability lawsuits, claims and proceedings that arise in the ordinary course of 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 The Company held its annual meeting of shareholders on May 16, 2002. In conjunction therewith, proxies were solicited in accordance with Regulation 14A. The following actions were taken: (1) Richard R. Devenuti, Stuart M. Essig, Thomas H. Garrett III and Wendy L. Yarno were elected to the Board of Directors for terms ending in 2005. Shareholders approved management's nominees to the Board of Directors by votes as follows (adjusted for the stock split as of June 10, 2002): 129,488,110, 130,217,044, 130,186,632 and 129,501,612 in favor; 1,492,890, 763,956, 794,368 and 1,479,388 withheld for Messrs. Devenuti, Essig and Garrett and Ms. Yarno, respectively. Six other directors are serving unexpired terms as follows: Walter L. Sembrowich, Daniel J. Starks and Frank C-P Yin - through 2003; Terry L. Shepherd, David A. Thompson and Stefan K. Widensohler - through 2004. Ronald A. Matricaria will retire from the Board of Directors at the end of 2002. 19 (2) The shareholders ratified and approved the St. Jude Medical, Inc. 2002 Stock Plan by a vote (adjusted for the stock split as of June 10, 2002) of 89,444,610 in favor, 15,556,114 opposed and 939,716 abstaining from voting. (3) The shareholders ratified the reappointment of Ernst & Young LLP as the Company's independent auditor for 2002 by a vote (adjusted for the stock split as of June 10, 2002) of 126,578,518 in favor, 3,823,786 opposed and 577,496 abstaining from voting. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 3.1 Articles of Incorporation, as amended on May 5, 1989, May 4, 1990 and September 5, 1996 Exhibit 10.14 St. Jude Medical, Inc. 2002 Stock Plan, As Amended Exhibit 99.1 Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 99.2 Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K None SIGNATURE Pursuant to the requirements 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. August 9, 2002 /s/ JOHN C. HEINMILLER - -------------- ---------------------- DATE JOHN C. HEINMILLER Vice President - Finance and Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer) 20 EXHIBIT INDEX Exhibit No. Exhibit - ----------- -------------------------------------------------------------- 3.1 Articles of Incorporation, as amended on May 5, 1989, May 4, 1990 and September 5, 1996 10.14 St. Jude Medical, Inc. 2002 Stock Plan, As Amended 99.1 Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 EX-3.(I) 3 stjude023958_ex3-1.txt ARTICLES OF INCORPORATION EXHIBIT 3.1 ARTICLES OF INCORPORATION OF ST. JUDE MEDICAL, INC. ARTICLE I NAME The name of the corporation shall be St. Jude Medical, Inc. ARTICLE II BUSINESS PURPOSES The purposes for which this corporation is organized are as follows: a. General business purposes. b. To do everything necessary, proper, advisable or convenient for the accomplishment of the purposes hereinabove set forth, and to do all other things incidental thereto or connected therewith, which are not forbidden by the laws under which this corporation is organized, by other laws, or by these Articles of Incorporation. c. To carry out the purposes hereinabove set forth in any state, territory, district or possession of the United States, or in any foreign country, to the extent that such purposes are not forbidden by law, to limit in any certificate for application to do business, the purposes or purpose which the corporation proposes to carry on therein to such extent as are not forbidden by law thereof. ARTICLE III DURATION The duration of the corporation shall be perpetual. ARTICLE IV REGISTERED OFFICE The location and post office address of the registered office of the corporation in the State of Minnesota is One Lillehei Plaza, St. Paul, Minnesota 55117. ARTICLE V POWERS OF THE CORPORATION This corporation shall have all the powers granted to private corporations organized for profit by said Minnesota Business Corporation Act, and in furtherance and not in limitation of the powers conferred by the laws of the State of Minnesota upon corporations organized for the foregoing purposes, the corporation shall have the power: a. To acquire, hold, mortgage, pledge or dispose of the shares, bonds, securities or other evidences of indebtedness of the United States of America, or of any domestic or foreign corporation, and while the holder of such shares to exercise all the privileges of ownership, including the right to vote thereof, to the same extent as a natural person might or could do, by the president of this corporation or by proxy appointed by him, unless some other person, by resolution of the Board of Directors, shall be appointed to vote such shares. b. To purchase or otherwise acquire on such terms and in such manner as the Bylaws of this corporation from time to time provide, and to own all shares of the capital stock of this corporation, and to reissue the same from time to time. c. When and as authorized by the vote of the holders of not less than a majority of the shares entitled to vote, at a shareholders' meeting called for that purpose, or when authorized upon the written consent of the holders of a majority of such shares, to sell, lease, exchange or otherwise dispose of all, or substantially all, of its property and assets, including its goodwill, upon such terms and for such consideration which may be money, shares, bonds or other instruments for the payment of money or other property as the Board of Directors deems expedient or advisable. d. To acquire, hold, lease, encumber, convey or otherwise dispose of, either alone or in conjunction with others, real and personal property within or without the state; and to take real and personal property by will or gift. e. To acquire, hold, take over as a going concern and thereafter to carry on, mortgage, sell or otherwise dispose of, either alone or in conjunction with others, the rights, property and business of any person, entity, partnership, association or corporation heretofore or hereafter engaged in any business, the purpose of which is similar to the purposes set forth in Article II of these Articles of Incorporation. f. To enter into any lawful arrangement for sharing profits, union of interests, reciprocal association or cooperative association with any corporation, association, partnership, individual or other legal entity, for the carrying on of any business, the purpose of which is similar to the purposes set forth in Article II of these Articles of Incorporation. -2- ARTICLE VI MERGERS AND CONSOLIDATION Any agreement for consolidation or merger with one or more foreign or domestic corporations may be authorized by vote of the holders of a majority of the shares entitled to vote. ARTICLE VII CAPITAL STOCK The authorized capital stock of this corporation shall be Thirty Million (30,000,000) shares of common stock of the par value of ten cents ($.10) per share (the "Common Stock") and Twenty-five Million (25,000,000) shares of preferred stock of the par value of one dollar ($1.00) per share (the "Preferred Stock"). The designations and the powers, preferences and rights, and the qualifications, limitations or restrictions of the shares of each class of stock shall be as follows: Section 1. General. (a) No holder of capital stock in the corporation shall be entitled to any cumulative voting rights. (b) No holder of capital stock of the corporation shall have any preferential, preemptive or other rights of subscription to any shares of any class of capital stock of the corporation allotted or sold or to be allotted or sold now or hereafter authorized, or to any obligations convertible into the capital stock of the corporation of any class, or any right of subscription to any part thereof. Section 2. Common Stock. Subject to all of the rights of the Preferred Stock, and except as may be expressly provided with respect to the Preferred Stock herein, by law or by the Board of Directors pursuant to this Article VII: (a) The holders of the Common Stock shall be entitled to receive when and as declared by the Board of Directors, out of earnings or surplus legally available therefor, dividends, payable either in cash, in property, or in shares of the capital stock of the corporation. (b) The Common Stock maybe allotted for such consideration and as and when the Board of Directors shall determine, and, under and pursuant to the laws of the state of Minnesota, the Board of Directors shall have the power to fix or alter, from time to time, in respect to shares then unallotted, any or all of the following: the dividend rate; the redemption price; the liquidation price, the conversion rights and the sinking or purchase fund rights of shares of any class, or, of any series of any class, or the number of shares constituting any series of any class. The Board of Directors shall also have the power to fix the terms, provisions and conditions of options to purchase or subscribe for shares of any class or classes, including the price and conversion basis thereof. The -3- Board of Directors shall also have the power to issue shares of stock of the corporation or assets of other business enterprises, as it may from time to time deem expedient. Section 3. Preferred Stock. The Preferred Stock may be issued from time to time by the Board of Directors as shares of one or more series. Subject to the provisions hereof and the limitations prescribed by law, the Board of Directors is expressly authorized by adopting resolutions providing for the issuance of shares of any particular series and, if and to the extent from time to time required by law, by filing with the Minnesota Secretary of State a statement with respect to the adoption of the resolutions pursuant to the Minnesota Business Corporation Act (or other law hereafter in effect relating to the same or substantially similar subject matter), to establish the number of shares to be included in each such series and to fix the designation and relative powers, preferences and rights and the qualifications and limitations or restrictions thereof relating to the shares of each such series. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following: (a) the distinctive serial designation of such series and the number of shares constituting such series, provided that the aggregate number of shares constituting all series of Preferred Stock shall not exceed Twenty-five Million (25,000,000); (b) the annual dividend rate on shares of such series, if any, whether dividends shall be cumulative and, if so, from which date or dates; (c) whether the shares of such series shall be redeemable and, if so, the terms and conditions of such redemption, including the date or dates upon and after which such shares shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (d) the obligation, if any, of the corporation to retire shares of such series pursuant to a sinking fund; (e) whether shares of such series shall be convertible into, or exchangeable for, shares of stock of any other class or classes and, if so, the terms and conditions of such conversion or exchange, including the price or prices or the rate or rates of conversion or exchange and the terms of adjustment, if any; (f) whether the shares of such series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights; (g) the rights of the shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding up of the corporation; and (h) any other relative rights, powers, preferences, qualifications, limitations or restrictions thereof relating to such series. The shares of Preferred Stock of any one series shall be identical with each other in all respects except as to the dates from and after which dividends thereon shall cumulate, if cumulative. -4- ARTICLE VIII STATED CAPITAL The minimum amount of stated capital with which the corporation will begin business is $1,000.00. ARTICLE IX MANAGEMENT AND ADDITIONAL POWERS Section 1. The management and conduct of the business and affairs of the corporation shall be vested in a Board of Directors which shall consist of such number of directors, not less than three, the exact number to be fixed from time to time solely by resolution of the Board of Directors, acting by not less than a majority of the directors then in office. Section 2. The Board of Directors shall be divided into three classes, with the term of office of one class expiring each year. At the Annual Meeting of Shareholders in 1986, two directors of the first class shall be elected to hold office for a term expiring at the 1987 Annual Meeting, two directors of the second class shall be elected to hold office for a term expiring at the 1988 Annual Meeting, and one director of the third class shall be elected to hold office for a term expiring at the 1989 Annual Meeting. Commencing with the Annual Meeting of Shareholders in 1987, each class of directors whose term shall then expire shall be elected to hold office for a three-year term. In the case of any vacancy on the Board of Directors, including a vacancy created by an increase in the number of directors, the vacancy shall be filled by election of the Board of Directors with the director so elected to serve for the remainder of the term of the director being replaced or, in the case of an additional director, for the remainder of the term of the class to which the director has been assigned. All directors shall continue in office until the election and qualification of their respective successors in office. When the number of directors is changed, any newly created directorships or any decrease in directorships shall be so assigned among the classes by a majority of the directors then in office, though less than a quorum, as to make all classes as nearly equal in number as possible. No decrease in the number of directors shall have the effect of shortening the term of any incumbent director. Section 3. Any director or directors may be removed from office at any time, but only for cause and only by the affirmative vote of at least 80% of the votes entitled to be cast by holders of all the outstanding shares of Voting Stock (as defined in Article XIII hereof), voting together as a single class. Section 4. The Board of Directors shall have the authority to accept or reject subscriptions for capital stock made after incorporation and may grant options to purchase or subscribe for capital stock. The Board of Directors shall, from time to time, fix and determine the consideration for which the corporation shall issue and sell its capital stock, and also the dividends to be paid by the corporation upon the capital stock. The Board of Directors shall have authority to fix the terms and conditions of rights to convert any securities of this corporation into shares and to authorize the issuance of such conversion rights. -5- Section 5. The Board of Directors shall have the authority to issue bonds, debentures or other securities convertible into capital stock or other securities of any class, or bearer warrants or other evidences of optional rights to purchase and/or subscribe to capital stock or other securities of any class, upon such terms, in such manner, and under such conditions as may be fixed by resolution of the Board prior to the issue thereof. Section 6. The Board of Directors shall have the authority to make and alter the Bylaws, subject to the power of the shareholders to change or repeal the Bylaws. Section 7. A quorum for any meeting of shareholders to transact business of this corporation, except as otherwise specifically provided herein or by law, shall be the presence in person or by proxy of the holders of a majority of the shares of common stock of the corporation outstanding and of record on the record date set for such meeting. Section 8. Notwithstanding any other provision of these Articles of Incorporation or of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class of Voting Stock required by law or these Articles of Incorporation, the affirmative vote of at least 80% of the votes entitled to be cast by holders of all the outstanding shares of Voting Stock (as defined in Article XIII hereof), voting together as a single class, shall be required to alter, amend or repeal this Article IX. ARTICLE X DIRECTORS The first Board of Directors shall be comprised of one person whose name and address are as follows: Manuel A. Villafana 2220 Innsbruck Parkway Columbian Heights, Minnesota 55421 ARTICLE XI INCORPORATORS The name and address of the incorporator is as follows: Thomas H. Garrett III 4200 IDS Center 80 South Eighth Street Minneapolis, Minnesota 55402 -6- ARTICLE XII AMENDMENT Any provisions contained in these Articles of Incorporation may be amended solely by the affirmative vote of the holder of a majority of the stock entitled to vote. ARTICLE XIII FAIR PRICE PROVISIONS Section 1. In addition to all other requirements imposed by law or these Articles of Incorporation (including Article VI hereof), and except as otherwise expressly provided in Section 2 of this Article XIII, a Business Combination (as hereinafter defined) shall require the affirmative vote of not less than seventy-five percent (75%) of the votes entitled to be cast by the holders of all then outstanding shares of Voting Stock (as hereinafter defined), voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage or separate class vote may be specified, by law or by any other provision of these Amended and Restated Articles of Incorporation or in any agreement with any national securities exchange or otherwise. Section 2. The provisions of Section 1 of this Article XIII shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote, if any, as is required by law or by any other provision of these Articles of Incorporation or in any agreement with any national securities exchange or otherwise, if the conditions specified in either of the following Paragraphs 1 or 2 are met: 1. The Business Combination shall have been approved by a majority of the Continuing Directors (as hereinafter defined). 2. All of the following conditions shall have been met: a. The aggregate amount of cash and the Fair Market Value (as hereinafter defined) as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of Common Stock in such Business Combination shall be at least equal to the higher amount determined under clauses (i) and (ii) below: (i) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by or on behalf of the Interested Shareholder (as, hereinafter defined) for any share of common stock in connection with the acquisition by the Interested Shareholder of beneficial ownership of shares of common stock (a) within the two-year period immediately prior to the date of the first public announcement of the proposed Business Combination (the "Announcement Date") or (b) in the transaction in which it became an Interested Shareholder, whichever is higher; and -7- (ii) the Fair Market Value per share of common stock on the Announcement Date or on the date on which the Interested Shareholder became an Interested Shareholder (such latter date being referred to herein as the "Determination Date"), whichever is higher. b. The aggregate amount of cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of any class or series of outstanding capital stock (as hereinafter defined), other than common stock, shall be at least equal to the highest amount determined under clauses (i), (ii) and (iii) below: (i) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by or on behalf of the Interested Shareholder for any share of such class or series of Capital Stock in connection with the acquisition by the Interested Shareholder of beneficial ownership of shares of such class or series of Capital Stock (a) within the two-year period immediately prior to the Announcement Date or (b) in the transaction in which it became an Interested Shareholder, whichever is higher; (ii) the Fair Market Value per share of such class or series of Capital Stock on the Announcement Date or on the determination Date, whichever is higher; and (iii) (if applicable) the highest preferential amount per share to which the holders of shares of such class or series of Capital Stock would be entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the corporation, regardless of whether the Business Combination to be consummated constitutes such an event. The provisions of this Paragraph 2.b shall be required to be met with respect to every class or series of outstanding Capital Stock, whether or not the Interested Shareholder has previously acquired beneficial ownership of any shares of a particular class or series of Capital Stock. -8- c. The consideration to be received by holders of a particular class or series of outstanding Capital Stock shall be in cash or in the same form as previously has been paid by or on behalf of the Interested Shareholder in connection with its direct or indirect acquisition of beneficial ownership of shares of such class or series of Capital Stock. If the consideration so paid for shares of any class or series of Capital Stock varied as to form, the form of consideration for such class or series of Capital Stock shall be either cash or the form used to acquire beneficial ownership of the largest number of shares of such class or series of Capital Stock previously acquired by the Interested Shareholder. The price determined in accordance with Paragraphs 2.a and 2.b of Section 2 of this Article XIII shall be subject to appropriate adjustment in the event of any stock dividend, stock split, combination of shares or similar event. d. After such Interested Shareholder has become an Interested Shareholder and prior to the consummation of such Business Combination: (i) there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) payable in accordance with the terms of any outstanding Capital Stock having a preference over the common stock as to dividends, or upon liquidation, except as approved by a majority of the Continuing Directors; (ii) there shall have been no reduction in the annual rate of dividends paid on the common stock (except as necessary to reflect any stock dividend, stock split, combination of shares or similar event), except as approved by a majority of the Continuing Directors; (iii) there shall have been an increase in the annual rate of dividends paid on the common stock as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction that has the effect of reducing the number of outstanding shares of common stock, unless the failure to increase such annual rate is approved by a majority of the Continuing Directors; and (iv) except as approved by a majority of the Continuing Directors, such Interested Shareholder shall not have become the beneficial owner of any additional shares of Capital Stock except as part of the transaction that results in such Interested Shareholder becoming an Interested Shareholder and except in the transaction that, after giving effect thereto, would not result in any increase in the Interested Shareholder's percentage beneficial ownership of any class or series of Capital Stock. e. After such Interested Shareholder has become an Interested Shareholder, such Interested Shareholder shall not have received the benefit, directly or indirectly (except proportionately as a shareholder of the corporation), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the corporation, whether in anticipation of or in connection with such Business Combination or otherwise. -9- f. A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 (the "Act") and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to all shareholders of the corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to the Act or subsequent provisions). The proxy or information statement shall contain on the first page thereof, in a prominent place, any statement as to the advisability (or inadvisability) of the Business Combination that a majority of the Continuing Directors may choose to make and, if deemed advisable by a majority of the Continuing Directors as to the fairness (or lack of fairness) of the terms of the Business Combination from a financial point of view to the holders of the outstanding shares of Capital Stock other than the Interested Shareholder and its Affiliates (as hereinafter defined) or Associates (as hereinafter defined). g. Such Interested Shareholder shall not have made or caused to be made any major change in the corporation's business or equity capital structure without the approval of a majority of the Continuing Directors. Section 3. For the purpose of this Article XIII: 1. The term "Business Combination" shall mean: a. any merger, consolidation or statutory exchange of shares of the corporation or any Subsidiary (as hereinafter defined) with (i) any Interested Shareholder or (ii) any other corporation (whether or not itself an Interested Shareholder) which is or after such merger, consolidation or statutory share exchange would be an Affiliate or Associate of an Interested Shareholder; provided, however, that the foregoing shall not include the merger of a wholly owned Subsidiary of the corporation into the corporation or the merger of two or more wholly owned Subsidiaries of the corporation; or b. any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with an Interested Shareholder or any Affiliate or Associate of any Interested Shareholder of any assets of the corporation or any Subsidiary equal to or greater than ten percent (l0%) of the book value of the consolidated assets of the corporation; or -10- c. any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with the corporation or any Subsidiary of any assets of any Interested Shareholder or any Affiliate or Associate of any Interested Shareholder equal to or greater than ten percent (l0%) of the book value of the consolidated assets of the corporation; or d. the issuance or transfer by the corporation or any Subsidiary (in one transaction or a series of transactions) to any Interested Shareholder or any Affiliate or Associate of any Interested Shareholder of any securities of the corporation (except pursuant to stock dividends, stock splits, or similar transactions which would not have the effect, directly or indirectly, of increasing the proportionate share of any class or series of Capital Stock, or any securities convertible into Capital Stock or into equity securities of any Subsidiary, that is beneficially owned by any Interested Shareholder, directly or indirectly, of increasing the proportionate share of any class or series of Capital Stock, or any securities convertible into Capital Stock or into equity securities of any Subsidiary, that is beneficially owned by any Interested Shareholder or any Affiliate or Associate of any Interested Shareholder) or of any securities of a Subsidiary (except pursuant to a pro rata distribution to all holders of common stock of the corporation); or e. the adoption of any plan or proposal for the liquidation or dissolution of the corporation proposed by or on behalf of an Interested Shareholder or any Affiliate or Associate of any Interested Shareholder; or f. any transaction (whether or not with or otherwise involving an Interested Shareholder) that has the effect, directly or indirectly, of increasing the proportionate share of any class or series of Capital Stock, or any securities convertible into Capital Stock or into equity securities of any Subsidiary, that is beneficially owned by any Interested Shareholder or any Affiliate or Associate of any Interested Shareholder, including, without limitation, any reclassification of the corporation, or any merger, consolidation or statutory exchange of shares of the corporation with any of its Subsidiaries; or g. any agreement, contract or other arrangement or understanding providing for any one or more of the actions specified in the foregoing clauses (a) to (f). 2. The term "Capital Stock" shall mean all capital stock of the corporation authorized to be issued from time to time under Article VII of these Articles of Incorporation. The term "Voting Stock" shall mean all Capital Stock of the corporation entitled to vote generally in the election of directors of the corporation. -11- 3. The term "person" shall mean any individual, firm, corporation or other entity and shall include any group comprised of any person and any other person or persons which whom such person or any Affiliate or Associate of such person has any agreement, arrangement or understanding, directly or indirectly, for the purpose of acquiring, holding, voting or disposing of Capital Stock. 4. The term "Interested Shareholder" shall mean any person (other than the corporation or any Subsidiary and other than any profit-sharing, employee stock ownership or other employee benefit plan of the corporation or any Subsidiary or any trustee of or fiduciary with respect to any such plan when acting in such capacity) who (a) is the beneficial owner of Voting Stock representing ten percent (l0%) or more of the votes entitled to be cast by the holders of all then outstanding shares of Voting Stock; or (b) is an Affiliate or Associate of the corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner of Voting Stock representing ten percent (10%) or more of the votes entitled to be cast by the holders of all then outstanding shares of Voting Stock; or (c) is an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by an Interested Shareholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. 5. A person shall be a "beneficial owner" of any Capital Stock (a) which such person or any of its Affiliates or Associates beneficially owns, directly or indirectly; (b) which such person or any of its Affiliates or Associates has, directly or indirectly, (i) the right to acquire (whether such right is exercisable immediately or subject only to the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (ii) the right to vote pursuant to any agreement, arrangement or understanding, or (iii) the right to dispose or direct the disposition of, pursuant to any agreement, arrangement or understanding; or (c) which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Capital Stock. For the purposes of determining whether a person is an Interested Shareholder pursuant to Paragraph 4 of this Section 3, the number of shares of Capital Stock deemed to be outstanding shall include shares deemed beneficially owned by such person through application of this Paragraph 5, but shall not include any other shares of Capital Stock that may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, exchange rights, warrants or options, or otherwise. 6. The term "Affiliate," used to indicate a relationship with a specified person, shall mean a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such specified person. The term -12- "Associate," used to indicate a relationship with a specified person, shall mean (a) any person (other than the corporation or a Subsidiary) of which such specified person is an officer or partner or is, directly or indirectly, the beneficial owner of ten percent (10%) or more of any class of equity securities, (b) any trust or other estate in which such specified person has a substantial beneficial interest or as to which such specified person serves as trustee or in a similar fiduciary capacity, (c) any relative or spouse of such specified person or any relative of such spouse, who has the same home as such specified person or who is a director or officer of the corporation or any Subsidiary, and (d) any person who is a director or officer of such specified person or any of its parents or subsidiaries (other than the corporation or a Subsidiary). 7. The term "Subsidiary" shall mean any corporation of which a majority of any class of equity security is beneficially owned, directly or indirectly, by the corporation; provided, however, that for the purposes of Paragraph 4 of this Section 3, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is beneficially owned, directly or indirectly, by the corporation. 8. The term "Continuing Director" shall mean any member of the Board of Directors of the corporation, while such person is a member of the Board of Directors, who was a member of the Board of Directors prior to the time that the Interested Shareholder involved in the Business Combination in question became an Interested Shareholder, and any member of the Board of Directors, while such person is a member of the Board of Directors, whose election, or nomination for election by the corporation's shareholders, was approved by a vote of a majority of the Continuing Directors; provided, however, that in no event shall an Interested Shareholder involved in the Business Combination in question or any Affiliate, Associate or representative of such Interested Shareholder, be deemed to be a Continuing Director. 9. The term "Fair Market Value" shall mean (a) in the case the cash, the amount of such cash; (b) in the case of stock, on the principal United States securities exchange registered under the Act on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing sale or closing bid quotation (whichever is applicable) with respect to a share of such stock during the 30-day period immediately preceding the date in question of a share of such stock on the National Association of Securities Dealers, Inc. Automated Quotations System or any similar system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by a majority of the Continuing Directors in good faith, and (c) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined in good faith by a majority of the Continuing Directors. 10. In the event of any Business Combination in which the corporation survives, the phrase "consideration other than cash to be received" as Article XIII shall include the shares of common stock and/or the shares of any other class or series of Capital Stock retained by the holders of such shares. -13- Section 4. The Continuing Directors by majority vote shall have the power to determine for purposes of this Article XIII, on the basis of information known to them after reasonable inquiry, (a) whether a person is an Interested Shareholder, (b) the number of shares of Capital Stock (including Voting Stock) or other securities beneficially owned by any person, (c) whether a person is an Affiliate or Associate of another, (d) whether the assets that are the subject of any Business Combination equal or exceed ten percent (10%) of the book value of the consolidated assets of the corporation, (e) whether a proposed plan of dissolution or liquidation is proposed by or on behalf of an Interested Shareholder or any Affiliate or Associate of any Interested Shareholder, (f) whether any transaction has the effect, directly or indirectly, of increasing the proportionate share of any class or series of Capital Stock, or any securities convertible into Capital Stock or into equity securities of any Subsidiary, that is beneficially owned by an Interested Shareholder or any Affiliate or Associate of an Interested Shareholder, (g) whether any Business Combination satisfies the conditions set forth in Paragraph 2 of Section 2 of this Article XIII, and (h) such other matters with respect to which a determination is required under this Article XIII. Any such determination made in good faith shall be binding and conclusive on all parties. Section 5. Nothing contained in this Article XIII shall be construed to relieve any Interested Shareholder from any fiduciary obligation imposed by law. Section 6. The fact that any Business Combination complies with the provisions of Section 2 of this Article XIII shall not be construed to impose any fiduciary duty, obligation or responsibility on the Board of Directors, or any member thereof, or the Continuing Directors, or any of them, to approve such Business Combination or recommend its adoption or approval to the shareholders of the corporation, nor shall such compliance limit, prohibit or otherwise restrict in any manner the Board of Directors, or any member thereof, or the Continuing Directors, or any of them, with respect to evaluations of or actions and responses taken with respect to such Business Combination. The Board of Directors of the corporation, when evaluating any actions or transactions described in Section 2 of this Article XIII, shall, in connection with the exercise of its judgment in determining what is in the best interests of the corporation and its shareholders, give due consideration to all relevant factors including without limitation the social and economic effects on the employees, customers, suppliers and other constituents of the corporation and its subsidiaries and on the communities in which the corporation and its subsidiaries operate or are located. Section 7. Notwithstanding any other provisions of these Articles of Incorporation (and notwithstanding the fact that a lesser percentage or separate class vote may be specified by law or these Articles of Incorporation), the affirmative vote of the holders of not less than 80% of the votes entitled to be cast by the holders of all then outstanding shares of Voting Stock, voting together as a single class, shall be required to amend or repeal, or adopt any provisions inconsistent with this Article XIII. -14- ARTICLE XIV DIRECTOR LIABILITY No director of this Corporation shall be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its shareholders; (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (iii) under Sections 302A.559 or 80A.23 of the Minnesota Statutes; (iv) for any transaction from which the director derived any improper personal benefit; or (v) for any act or omission occurring prior to the date when this provision becomes effective. The provisions of this Article shall not be deemed to limit or preclude indemnification of a director by the Corporation for any liability of a director which has not been eliminated by the provisions of this Article. If the Minnesota Statutes hereafter are amended to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the amended Minnesota Statutes. -15- ARTICLES OF AMENDMENT OF ST. JUDE MEDICAL, INC. I, the undersigned Thomas H. Garrett III, Secretary of St. Jude Medical, Inc., a corporation subject to the provisions of Chapter 302A, Minnesota Statutes, known as the Minnesota Business Corporation Act, do hereby certify that resolutions adopting an amendment to the language of Article VII of the Articles of Incorporation to read as set forth below were adopted pursuant to Chapter 302A, Minnesota Statutes, by the Board of Directors and by the affirmative vote of the holders of a majority of the voting power of the shares present and entitled to vote at a meeting of the shareholders held on May 5, 1989. RESOLVED, that the first sentence of Article VII of the corporation's Articles of Incorporation be replaced with the following: "The authorized capital stock of this corporation shall be Sixty Million (60,000,000) shares of common stock of the par value of Ten Cents ($.10) per share (the "Common Stock") and Twenty-Five Million (25,000,000) shares of preferred stock of the par value of One Dollar ($1.00) per share (the "Preferred Stock")." RESOLVED FURTHER, that the officers of the corporation be, and they hereby are, authorized and directed to execute such documents and certificates and take such other actions as may be necessary to give effect to the foregoing resolution. IN WITNESS WHEREOF, I have hereunto set my hand this 5th day of May, 1989. /s/ Thomas H. Garrett III ---------------------------------------- Thomas H. Garrett III, Secretary STATE OF MINNESOTA ) ) ss. COUNTY OF HENNEPIN ) The foregoing instrument was acknowledged before me this 5th day of May, 1989 by Thomas H. Garrett III, the Secretary of St. Jude Medical, Inc., a Minnesota corporation, on behalf of the corporation. /s/ Betty E. Sjovall ---------------------------------------- Notary Public ARTICLES OF AMENDMENT OF ST. JUDE MEDICAL, INC. I, the undersigned Thomas H. Garrett III, Secretary of St. Jude Medical, Inc., a corporation subject to the provisions of Chapter 302A, Minnesota Statutes, known as the Minnesota Business Corporation Act, do hereby certify that resolutions adopting an amendment to the language of Article VII of the Articles of Incorporation to read as set forth below were adopted pursuant to Chapter 302A, Minnesota Statutes, by the Board of Directors and by the affirmative vote of the holders of a majority of the voting power of the shares present and entitled to vote at a meeting of the shareholders held on May 4, 1990. RESOLVED, that the first sentence of Article VII of the corporation's Articles of Incorporation be replaced with the following: "The authorized capital stock of this corporation shall be One Hundred Million (100,000,000) shares of common stock of the par value of Ten Cents ($.10) per share (the "Common Stock") and Twenty-Five Million (25,000,000) shares of preferred stock of the par value of one Dollar ($1.00) per share (the "Preferred Stock")." RESOLVED FURTHER, that the officers of the corporation be, and they hereby are, authorized and directed to execute such documents and certificates and take such other actions as may be necessary to give effect to the foregoing resolution. IN WITNESS WHEREOF, I have hereunto set my hand this 4th day of May, 1990. /s/ Thomas H. Garrett III ---------------------------------------- Thomas H. Garrett III, Secretary STATE OF MINNESOTA ) ) ss. COUNTY OF HENNEPIN ) The foregoing instrument was acknowledged before me this 4th day of May, 1990 by Thomas H. Garrett III, the Secretary of St. Jude Medical, Inc., a Minnesota, corporation, on behalf of the corporation. /s/ Betty E. Sjovall ---------------------------------------- Notary Public ARTICLES OF AMENDMENT OF ST. JUDE MEDICAL, INC. I, the undersigned Kevin T. O'Malley, Assistant Secretary of St. Jude Medical, Inc., a corporation subject to the provisions of Chapter 302A, Minnesota Statutes, known as the Minnesota Business Corporation Act, hereby certify that resolutions adopting an amendment to the language of Article VII of the Articles of Incorporation to read as set forth below were adopted pursuant to Chapter 302A, Minnesota Statutes, by the Board of Directors and by the affirmative vote of the holders of a majority of the voting power of the shares entitled to vote at a meeting of the shareholders held on May 9, 1996. RESOLVED, that the first sentence of Article VII of the corporation's Articles of Incorporation be replaced with the following: "The authorized capital stock of this corporation shall be Two Hundred Fifty Million (250,000,000) shares of common stock of the par value of Ten Cents ($.10) per share (the "Common Stock") and Twenty-Five Million (25,000,000) shares of preferred stock of the par value of One Dollar ($1.00) per share (the "Preferred Stock")." RESOLVED FURTHER, that the officers of the corporation acting individually, are each authorized and directed to execute such documents and certificates and to take such other action as may be necessary to give effect to the previous resolution. IN WITNESS WHEREOF, I have hereunto set my hand this 5th day of September, 1996. /s/ Kevin T. O'Malley ---------------------------------------- Kevin T. O'Malley Assistant Secretary STATE OF MINNESOTA ) ) ss. COUNTY OF RAMSEY ) The foregoing instrument was acknowledged before me this 5th day of September, 1996 by Kevin T. O'Malley, Assistant Secretary of St. Jude Medical, Inc., a Minnesota corporation, on behalf of the corporation. /s/ Jeanne Gunderson ---------------------------------------- Notary Public EX-10.14 4 stjude023958_ex10-14.txt 2002 STOCK PLAN, AS AMENDED EXHIBIT 10.14 ST. JUDE MEDICAL, INC. 2002 STOCK PLAN, AS AMENDED SECTION 1. General Purpose of Plan; Definitions. The name of this plan is the St. Jude Medical, Inc. 2002 Stock Plan (the "Plan"). The purpose of the Plan is to enable the Company and its Subsidiaries 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 a committee of Directors appointed by the Board to administer the Plan. The Committee shall be comprised of not less than such number of Directors as shall be required to permit Stock Options granted under the Plan to qualify under Section 162(m) and Rule 16b-3, and each member of the Committee shall be a Non-Employee Director and an Outside Director, who shall serve at the pleasure of the Board. 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. "Company" means St. Jude Medical, Inc., a corporation organized under the laws of the State of Minnesota (or any successor corporation). f. "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. g. "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 that an Employee becomes a Consultant or a Consultant becomes an Employee, in either case without other interruption or termination of service, or in the case of sick leave, military leave, or any other -1- Amendment A 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. h. "Director" shall mean a member of the Board. i. "Disability" means permanent and total disability as determined by the Committee. j. "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. k. "Fair Market Value" of Stock on any given date shall be determined by the Committee as follows: (i) if the Stock is listed for trading, on the New York Stock Exchange or one of more other 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 (ii) if (i) is not applicable, by any means deemed fair and reasonable by the Committee, which determination shall be final and binding on all parties. l. "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. m. "Non-Employee Director" means a "Non-Employee Director" within the meaning of Rule 16b-3. n. "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 qualify due to an amendment to such Stock Option. o. "Normal Retirement" means retirement from active employment with the Company and any Subsidiary or Parent Corporation of the Company on or after age 65. p. "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 goods or services. This definition shall be further governed by the provisions of Code Section 162(m) and regulations promulgated thereunder. q. "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 -2- Amendment A 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. r. "Retirement" means Normal Retirement or Early Retirement. s. "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended from time to time, or any successor rule or regulation. t. "Stock" means the Common Stock of the Company. u. "Stock Option" means any option to purchase shares of Stock granted pursuant to Section 5 below. v. "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. a. Power and Authority of the Committee. The Plan shall be administered by the Committee. The Committee shall have the power and authority to grant to eligible persons, pursuant to the terms of the Plan, Incentive Stock Options and Non-Qualified Stock Options. 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 may from time to time be granted hereunder; (ii) to determine whether and to what extent Incentive Stock Options or Non-Qualified Stock Options, 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 and/or the shares of Stock relating thereto); 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; (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; and (vi) to designate special terms and conditions under which Stock Options may be granted to eligible participants who work or reside outside of the United States on -3- Amendment A behalf of the Company or any Subsidiary or Parent Corporation, which terms and conditions may vary by jurisdiction but may not change the maximum number of shares of Stock for which Stock Options may be granted pursuant to Section 3 or the eligibility rules in Section 4. 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 otherwise to supervise the administration of the Plan. 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. The Company expects to have the Plan administered in accordance with requirements for the award of "qualified performance-based compensation" within the meaning of Section 162(m) of the Code. b. Delegation. The Committee may delegate to the president and/or chief executive officer of the Company its powers and duties specified in clauses (i), (ii), (iii), (iv), (v) and (vi) of Section 2(a), subject to such terms, conditions and limitations as the Committee may establish in its sole discretion; provided, however, that the Committee shall not delegate its powers and duties under the Plan (i) with regard to officers or Directors of the Company or any Parent Corporation or Subsidiary who are subject to Section 16 of the Exchange Act or (ii) in such a manner as would cause the Plan not to comply with the requirements of Section 162(m) of the Code. c. Power and Authority of the Board of Directors. Notwithstanding anything to the contrary contained herein, the Board may, at any time and from time to time, without any further action of the Committee, exercise the powers and duties of the Committee under the Plan. SECTION 3. Stock Subject to Plan. The total number of shares of Stock reserved and available for distribution under the Plan shall be 6,000,000. Such shares may consist, in whole or in part, of authorized and unissued shares. If any shares of Stock that have been optioned are not purchased or are forfeited, or if a Stock Option otherwise terminates without delivery of any shares of Stock, then such shares shall again be available for distribution in connection with future awards under the Plan. Notwithstanding the foregoing, the number of shares of Stock available for granting Incentive Stock Options under the Plan shall not exceed 6,000,000, subject to adjustment as provided in the Plan and subject to the provisions of Section 422 or 424 of the Code or any successor provision. In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, stock split, reverse stock split, other change in corporate structure affecting the Stock, spin-off, split-up, or other distribution of assets to shareholders, or other similar corporate transaction or event affects the shares of Stock such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then an appropriate adjustment -4- Amendment A automatically shall be made in the maximum numbers and kind of securities to be purchased under the Plan with a corresponding adjustment in the purchase price to be paid therefor; provided that the number of shares of Stock subject to any award always shall be a whole number. SECTION 4. Eligibility. Officers, other key employees of the Company or any Parent Corporation or Subsidiary, members of the Board, and Consultants who are responsible for or contribute to the management, growth and profitability of the business of the Company or any Parent Corporation or Subsidiary are eligible to be granted Stock Options under the Plan. The 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 of Stock covered by each award. Notwithstanding the foregoing, in accordance with Section 162(m) of the Code, no person shall receive grants of Stock Options under this Plan which exceed 500,000 shares during any fiscal year of the Company. 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. The Committee shall have the authority to grant any participant 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 that 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. Consideration for Awards. Awards of Stock Options under the Plan may be granted for no cash consideration or for such other consideration as may be determined by the Committee or required by applicable law. -5- Amendment A b. Option Exercise Price. The 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 exercise 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. c. 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. d. Time and Method of Exercise. The Committee shall determine the time or times at which a Stock Option may be exercised in whole or in part and the method or methods by which, and the form or forms (including cash, shares of Stock, promissory notes, other securities or other property, or any combination thereof, but not including Stock Options, having a Fair Market Value on the exercise date equal to the applicable exercise price) in which, payment of the exercise price with respect thereto may be made or deemed to have been made. e. When Options Are Transferable. No Incentive Stock Option shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution, and all 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 Stock Options. f. Termination by Death. If an optionee's employment by or service as a Director to the Company or any Parent Corporation or Subsidiary terminates by reason of death, any Stock Option held by such optionee at the time of death 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 12 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 or service as a Director 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. -6- Amendment A g. Termination by Reason of Disability. If an optionee's employment by or service as a Director to the Company or 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 12 months from the date of such termination of employment or service as a Director or the expiration of the stated term of the option, whichever period is shorter. In the event of termination of employment or service as a Director 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 or 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 36 months from the date of such termination of employment or the expiration of the stated term of the option, whichever period is 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. 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 (i) 90 days after such termination or (ii) the expiration of the stated term of the option, whichever period is shorter. Notwithstanding the foregoing, if a Non-Employee Director's service to the Company terminates (other than upon such Non-Employee Director's death or Disability), whether or not such service to the Company was provided as a Consultant or a Director, any Stock Option held by such Non-Employee Director may thereafter be exercised to the extent it was exercisable at the time of such termination. In the event of termination of an optionee's employment or service as a Director 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 or service as a Director to the Company is terminated for Cause, all unexercised Options granted to such optionee shall terminate immediately. 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. -7- Amendment A k. Grants of Stock Options to Non-Employee Directors. (i) Each Non-Employee Director who, on or after May 1, 2002 is(A) elected, re-elected or serving an unexpired term as a Director of the Company at any annual meeting of holders of the Stock; or (B) elected as a Director of the Company at any special meeting of holders of Stock, shall, as of the date of such election, re-election or annual or special meeting, automatically be granted a Stock Option to purchase 4,000 shares of Stock at an exercise price per share equal to 100% of the Fair Market Value of the 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. (ii) Each Non-Employee Director who, on or after May 1, 2002, is appointed as a Director of the Company at any time other than at an annual or special meeting of holders of the Stock shall, as of the date of such appointment, automatically be granted a Stock Option to purchase a pro rata number of shares of Stock, which number shall be calculated by dividing 4,000 by the number of months that shall occur from the date of such Non-Employee Director's appointment to the date of the next annual or special meeting of the holders of the Stock. For purposes of this clause (ii), the number of months counted towards such pro rata grant shall include the calendar month during which the Non-Employee Director is appointed as a Director, irrespective of the actual date of appointment, but shall not include the month during which the next annual or special meeting is held, irrespective of the actual date of such meeting. (iii) All Stock Options granted pursuant to this Section 5(k) 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 (A) 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 (B) the Stock 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 any and all Stock Options then 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 Stock Options granted pursuant to this Section 5(k). Stock Options issued under this Section 5(k) shall be in lieu of and in substitution for any new awards of Stock Options that otherwise would be granted under the terms of the St. Jude Medical, Inc. 2000 Stock Option Plan or any prior stock option plan of the Company from and after May 1, 2002. Nothing herein shall limit the right of the Board 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 -8- Amendment A be granted Stock Options under this Plan, including the Options awarded under this Section 5(k), in excess of 7,500 shares in any calendar year. SECTION 6. Transfer, Leave of Absence, etc. For purposes of this 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 Committee if the period of such leave does not exceed 90 days (or such longer period as the Committee may approve, in its sole discretion); and c. a leave of absence in excess of 90 days, approved 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. Amendments and Termination. The Board may amend, alter or discontinue the Plan, but no amendment, alteration or discontinuation shall be made which would impair the rights of an optionee under a Stock Option theretofore granted, without the optionee's consent, and no amendment or alteration shall be made which would (i) cause the Plan to no longer comply with Rule 16b-3, Section 422 of the Code or any other regulatory requirements; (ii) materially increase the benefits accruing to participants under this plan; (iii) materially increase the aggregate number of securities that may be issued under this Plan except pursuant to the second paragraph of Section 3 which permits adjustments in the number of shares of stock in certain events such as a stock split or dividend in a manner that is "appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan..."; or (iv) materially modify the requirements as to eligibility for participation in this plan unless the amendment or alteration shall be subject to shareholder approval. The Committee may amend the terms of any award or option theretofore granted, prospectively or retroactively and 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 -9- Amendment A 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 8. 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 by the Company, nothing contained herein shall give any such participant 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 9. General Provisions. a. The Committee may require each person purchasing shares of Stock pursuant to a Stock Option under the Plan to represent to and agree with the Company in writing that the optionee is 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 be retained as an employee or Consultant of the Company or a Subsidiary or Parent Corporation, as the case may be, or a Non-Employee Director to be retained as a Director, nor shall it interfere in any way with the right of the Company, Parent Corporation or a Subsidiary to dismiss a participant in the Plan from employment or service at any time, with or without cause. 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 any federal 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 -10- Amendment A such award so permit, a participant may elect by written notice to the Company to satisfy part or all of the minimum tax withholding requirements associated with the exercise of 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. d. The internal law, and not the law of conflicts, of the State of Minnesota, shall govern all questions concerning the validity, construction and effect of the Plan or any Stock Option, and any rules and regulations relating to the Plan or any Stock Option. -11- Amendment A SECTION 10. Effective Date of Plan. The Plan shall be effective on February 15, 2002 (the date of approval by the Board), 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, this Plan shall not come into effect. The offering of the shares of Stock hereunder also 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 the offering or the issue or purchase of the shares covered thereby. SECTION 11. Term of Plan. Stock Options shall be granted under the Plan only during a 10-year period beginning on the effective date of the Plan, unless the Plan is terminated earlier pursuant to Section 7 of the Plan. However, unless otherwise expressly provided in the Plan or in an applicable option agreement, any Stock Option theretofore granted may extend beyond the end of such 10-year period, and the authority of the Committee provided for hereunder with respect to the Plan and any awards, and the authority of the Board to amend the Plan, shall extend beyond the termination of the Plan. -12- Amendment A EX-99.1 5 stjude023958_ex99-1.txt CERTIFICATION BY CEO EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SS.1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of St. Jude Medical, Inc., (the "Company") on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Terry L. Shepherd, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Terry L. Shepherd ---------------------------------------- Terry L. Shepherd Chief Executive Officer August 14, 2002 EX-99.2 6 stjude023958_ex99-2.txt CERTIFICATION BY CFO EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SS.1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of St. Jude Medical, Inc., (the "Company") on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John C. Heinmiller, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ John C. Heinmiller ---------------------------------------- John C. Heinmiller Chief Financial Officer August 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----