-----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, U5CtcHRn2+I1NKRIamME7C5LNhl43GusQfyy/Y7HSH73/sZ4miRJ5KK+NwBmZl+Z 4RyLCP+iV6iIWC7pI9Lxpw== 0000897101-03-000221.txt : 20030324 0000897101-03-000221.hdr.sgml : 20030324 20030324152933 ACCESSION NUMBER: 0000897101-03-000221 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ST JUDE MEDICAL INC CENTRAL INDEX KEY: 0000203077 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 411276891 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12441 FILM NUMBER: 03613915 BUSINESS ADDRESS: STREET 1: ONE LILLEHEI PLAZA CITY: ST PAUL STATE: MN ZIP: 55117 BUSINESS PHONE: 6514832000 MAIL ADDRESS: STREET 1: ONE LILLEHEI PLAZA CITY: ST PAUL STATE: MN ZIP: 55117 10-K 1 stjude031298_10k.txt ST. JUDE MEDICAL, INC. FORM 10K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K _X_ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO __________. COMMISSION FILE NO. 0-8672 ------------------------------ ST. JUDE MEDICAL, INC. (Exact name of Registrant as specified in its charter) MINNESOTA 41-1276891 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE LILLEHEI PLAZA ST. PAUL, MINNESOTA 55117 (Address of principal executive offices) (651) 483-2000 (Registrant's telephone number, including area code) ------------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: (Title of class) (Name of exchange on which registered) COMMON STOCK ($.10 PAR VALUE) NEW YORK STOCK EXCHANGE PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE ------------------------------ Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months; and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes _X_ No ___ The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $6.5 billion at June 28, 2002 (the last trading day of the Registrant's most recently completed second fiscal quarter), when the closing sale price of such stock, as reported on the New York Stock Exchange, was $36.97 per share. The Registrant had 179,168,532 shares of its $0.10 par value Common Stock outstanding as of February 21, 2003. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2002, are incorporated by reference into Parts I and II. Portions of the Company's definitive proxy statement dated March 27, 2003, are incorporated by reference into Part III. ================================================================================ TABLE OF CONTENTS ITEM DESCRIPTION PAGE - ---- ----------- ---- PART I 1. Business .......................................................... 1 2. Properties ........................................................ 9 3. Legal Proceedings ................................................. 10 4. Submission of Matters to a Vote of Security Holders ............... 11 4A. Executive Officers of the Registrant .............................. 11 PART II 5. Market for Registrant's Common Equity and Related Shareholder Matters ............................................. 13 6. Selected Financial Data ........................................... 14 7. Management's Discussion and Analysis of Results of Operations and Financial Condition ......................................... 14 7A. Quantitative and Qualitative Disclosures About Market Risk ........ 14 8. Financial Statements and Supplementary Data ....................... 14 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................................ 14 PART III 10. Directors and Executive Officers of the Registrant ................ 14 11. Executive Compensation ............................................ 15 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters ................................. 15 13. Certain Relationships and Related Transactions .................... 15 14. Controls and Procedures ........................................... 16 PART IV 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ... 16 PART I ITEM 1. BUSINESS GENERAL St. Jude Medical, Inc., together with its subsidiaries (collectively "St. Jude," "St. Jude Medical" or the "Company") develops, manufactures and distributes 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 (EP) 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. The Company markets and sells its products through both a direct employee-based sales organization and independent distributors. The principal markets for the Company's products are the United States, Western Europe and Japan. St. Jude also sells its products in Eastern Europe, Africa, the Middle East, Canada, Latin America and the Asia-Pacific region. During 2002, 2001 and 2000, the Company acquired various businesses involved in the distribution of the Company's products. In December 2002, the Company acquired the assets of a catheter business for $5 million in cash. On September 17, 2002, the Company signed a stock purchase agreement to acquire Getz Bros. Co., Ltd. (Getz), a distributor of medical technology products in Japan and the distributor of the largest volume of the Company's products in Japan. The Company has agreed to pay 26.9 billion Japanese yen in cash, or approximately $224,000 using an exchange rate of 120 yen to 1 U.S. dollar, to acquire 100% of the outstanding common stock of Getz. Net sales of Getz in 2002 were approximately $170 million. This transaction is expected to close during the second quarter of 2003. The Company manages its business on the basis of one reportable segment - - the development, manufacture and distribution of cardiovascular medical devices. Net sales by class of similar products were as follows: NET SALES 2002 2001 2000 ================================================================================ Cardiac rhythm management $ 1,147,489 $ 965,968 $ 819,117 Cardiac surgery 250,957 248,045 256,949 Cardiology and vascular access 191,483 133,343 102,740 - -------------------------------------------------------------------------------- $ 1,589,929 $ 1,347,356 $ 1,178,806 ================================================================================ 1 The following tables present certain geographical information: NET SALES * 2002 2001 2000 ================================================================================ United States $ 1,042,766 $ 880,086 $ 745,793 International 547,163 467,270 433,013 - -------------------------------------------------------------------------------- $ 1,589,929 $ 1,347,356 $ 1,178,806 - -------------------------------------------------------------------------------- LONG-LIVED ASSETS ** 2002 2001 2000 ================================================================================ United States $ 674,119 $ 626,140 $ 640,220 International 150,674 137,803 149,325 - -------------------------------------------------------------------------------- $ 824,793 $ 763,943 $ 789,545 ================================================================================ * NET SALES ARE ATTRIBUTED TO COUNTRIES BASED ON LOCATION OF THE CUSTOMER. ** LONG-LIVED ASSETS EXCLUDE DEFERRED INCOME TAXES. St. Jude was incorporated in Minnesota in 1976. PRINCIPAL PRODUCTS CARDIAC RHYTHM MANAGEMENT: The Company's pacemaker systems treat patients with hearts that beat too slowly, a condition known as bradycardia. Typically implanted pectorally, just below the collarbone, pacemakers monitor the heart's rate and, when necessary, deliver low-level electrical impulses that stimulate an appropriate heartbeat. The pacemaker is connected to the heart by one or two leads that carry the electrical impulses to the heart and information from the heart back to the pacemaker. An external programmer enables the physician to retrieve diagnostic information from the pacemaker and reprogram the pacemaker in accordance with the patient's changing needs. Single-chamber pacemakers stimulate only one chamber of the heart (atrium or ventricle), while dual-chamber devices can sense and pace in both the upper and lower chambers. St. Jude's current pacing products include the advanced featured Identity(R) family of pacemakers, approved by the U.S. Food and Drug Administration (FDA) in November 2001. The Identity(R) pacemaker models maintain all of the therapeutic advancements of previous St. Jude Medical pacemakers, including the AF Suppression(TM) Algorithm and the BEAT-BY-BEAT(TM) AutoCapture(TM) Pacing System. The Identity(R) models have arrhythmia diagnostics, including dual-channel stored electrograms. These features are designed to help physicians better manage pacemaker patients suffering from atrial fibrillation (AF) - the world's most common cardiac arrhythmia. St. Jude Medical also offers the Integrity(R) and Integrity(R) u (Micro) pacemaker models, which build on the Affinity(R) platform with its BEAT-BY-BEAT(TM) AutoCapture(TM) Pacing System. Other pacing products include the Affinity(R) pacemakers; the Entity(R) family of pacemakers, containing the Omnisense(R) activity-based sensor; and the Tempo(R) pacemaker family, which uses fifth-generation Minute Ventilation sensor technology. These pacemaker families contain many advanced features and diagnostic capabilities to optimize cardiac therapy. All are small and physiologic in shape to enhance patient comfort. The Microny(R) II SR+ and Microny(R) K are single-chamber pacemakers available in the United States. Other single-chamber pacemakers, the Microny(R) SR+ and the Regency(R) pacemaker families, are also available outside the United States. 2 The Identity(R), Integrity(R), Affinity(R), Entity(R) and Regency(R) families of pacemakers, as well as the Microny(R) SR+ pacemaker, all offer the unique BEAT-BY-BEAT(TM) AutoCapture(TM) Pacing System. The AutoCapture(TM) Pacing System enables the pacemaker to monitor every paced beat to verify that the heart has been stimulated (known as "capture"), deliver a back-up pulse in the event of noncapture, continuously measure threshold, and make adjustments in energy output to match changing patient needs. In addition, the Identity(R) and Integrity(R) pacemakers include St. Jude Medical's AF Suppression(TM) Algorithm, a therapy designed to suppress atrial fibrillation. Outside the United States, St. Jude also markets the Genesis(TM) System, a device-based ventricular resynchronization system designed for the treatment of HF and suppression of atrial fibrillation. The Genesis(TM) System includes three components: the Frontier(TM) 3x2 stimulation device, designed to enhance cardiac function by resynchronizing the contractions of the heart's two ventricles, the Aescula(TM) LV lead, and the Alliance(TM) or Seal-Away(TM) Catheter Delivery System. St. Jude's current pacing leads include the active-fixation Tendril(R) DX and Tendril(R) SDX lead families and the passive-fixation Passive Plus(R) DX family, all available worldwide. All three lead families feature steroid elution, which helps suppress the body's inflammatory response to a foreign object. The passive-fixation IsoFlex(TM) and Membrane(R) EX families of leads are also currently available outside the United States. ICD systems treat patients with hearts that beat inappropriately fast, a condition known as tachycardia. ICDs monitor the heartbeat and deliver higher energy electrical impulses, or "shocks," to terminate ventricular tachycardia (VT) and ventricular fibrillation (VF). In VT, the lower chambers of the heart contract at an abnormally rapid rate and typically deliver less blood to the body's tissues and organs. VT can progress to VF, in which the heart beats so rapidly and erratically that it can no longer pump blood. Like pacemakers, ICDs are typically implanted pectorally, connected to the heart by leads, and programmed non-invasively. The Company's full ICD product offering includes the Epic(TM) DR/VR ICD, Atlas(R) DR/VR ICD, Photon(R) u (Micro) DR/VR ICD, Photon(R) DR ICD and Contour(R) MD ICD. St. Jude received FDA approval of its Epic(TM) DR/VR ICDs in August 2002 and European CE Marking in October 2002. The Epic(TM) ICDs are very small devices that deliver 30 Joules of energy. The Company's Atlas(R) ICDs offer high energy and small size without compromising charge times, longevity, or feature set flexibility. St. Jude's Photon(R) u (Micro) DR/VR ICD family represents the second generation in a series of downsized dual- and single-chamber St. Jude ICDs with advanced technology. Like the Photon(R) DR ICD, the Photon(R) u DR/VR ICD family has advanced features including precise SVT discrimination and AV Rate Branch designed to enhance the precision of ventricular-based arrhythmia detection. An additional ICD product, the Profile(TM) MD ICD, is available outside the United States. The Company's ICDs are used with the dual-electrode Riata(R) defibrillation leads, dual-electrode SPL(R) leads and single electrode TVL(R) and TVL(R)-ADX (active-fix) transvenous leads. The Riata(R) family of defibrillation leads received FDA approval in April 2002 and European CE Marking in May 2002. The Riata(R) leads are an advanced family of small-diameter, steroid-eluting, active or passive fixation, dual-electrode defibrillation leads. In June 2002, St. Jude received European CE Marking for its Epic(TM) HF ICD. This device is designed to treat patients suffering from heart failure (HF) who are also at risk of dangerously fast heart rhythms. HF impairs the heart's ability to pump blood efficiently, causing shortness of breath, fatigue, swelling and other debilitating symptoms. One of the Company's Epic(TM) HF ICD products, the Epic(TM) HF Model V-338 ICD, is currently in a U.S. clinical study. 3 The Model 3510 universal pacemaker and ICD programmer is an easy-to-use programmer that supports the Company's pacemakers and ICDs, including products for emerging indications. The Model 3510 universal programmer allows the physician to utilize the diagnostic and therapeutic capabilities of the Company's pacemakers and ICDs. Electrophysiology is the study of the electrical activity of the heart, which controls the heart rhythm. EP catheters are placed into the human body percutaneously (through the skin) to aid in the diagnosis and treatment of cardiac arrhythmias (abnormal heart rhythms). Between two and five EP catheters are generally used in each electrophysiology procedure. St. Jude's EP catheters are available in multiple configurations. St. Jude's Supreme(TM) catheter product line consists of mapping catheters for the diagnosis of various cardiac arrhythmias, including the 4 French Supreme(TM) diagnostic catheter for standard mapping applications, and the Supreme Spiral SC(TM) catheter to assist clinicians in the diagnosis of paroxysmal atrial fibrillation. St. Jude also offers the Livewire TC Compass(TM) ablation catheter, which aids in clinical management of focal arrhythmias, and the Livewire TC(TM) Bi-Directional ablation catheter, launched in January 2002 following FDA and European regulatory approval. CARDIAC SURGERY: Heart valve replacement or repair may be necessary because the natural heart valve has deteriorated due to congenital defects or disease. Heart valves facilitate the one-way flow of blood in the heart and prevent significant backflow of blood into the heart and between the heart's chambers. St. Jude offers both mechanical and tissue replacement heart valves and valve repair products. The St. Jude Medical(R) mechanical heart valve has been implanted in over 1.3 million patients worldwide. The SJM Regent(TM) mechanical heart valve was approved for sale in Europe in December 1999 and received FDA approval for U.S. market release in March 2002. In the United States, the Company markets the Toronto SPV(R) stentless tissue valve, which received FDA approval in 1997. Outside the United States, the Company markets the SJM Epic(TM) stented tissue heart valve, the SJM Biocor(TM) stented tissue valve, the Toronto SPV(R) stentless tissue valve and the Toronto Root(TM) tissue valve. The Toronto Root(TM) tissue valve is a stentless aortic root bioprosthesis used when aortic root disease accompanies valve disease. This valve is currently in U.S. and Canadian clinical studies. The SJM Epic(TM) stented tissue heart valve is also currently in a U.S. clinical study. The Company also offers a line of heart valve repair products including the semi-rigid SJM(R) Seguin annuloplasty ring and the fully flexible SJM Tailor(TM) annuloplasty ring. Annuloplasty rings are prosthetic devices used to repair diseased or damaged mitral heart valves. In addition to prosthetic heart valves, St. Jude markets the Symmetry(TM) Bypass System Aortic Connector (the "Aortic Connector"), a suture-free device to facilitate coronary artery bypass graft aortic anastomoses. St. Jude began marketing this product in Western Europe in 2000 and in the U.S. during May 2001. CARDIOLOGY AND VASCULAR ACCESS: The Company produces specialized disposable cardiovascular devices, including vascular closure devices, angiography catheters, bipolar temporary pacing catheters, percutaneous catheter introducers and diagnostic guidewires. The Company's vascular closure devices are used to close femoral artery puncture wounds following angioplasty, stenting and diagnostic procedures. Its newest vascular closure product, the Angio-Seal(TM) STS Platform, received European CE Marking in July 2001 and FDA approval in August 2001. The STS Platform incorporates a self-tightening suture, which eliminates the need for a post-placement spring, allowing for completion of the entire procedure in the catheterization lab. It also 4 integrates a Secure-Cap(TM), which facilitates proper deployment through audible, tactile and visual confirmations during the closure process. Angiography catheters, such as St. Jude's Spyglass(TM) angiography catheters, are used in coronary angiography procedures to obtain images of coronary arteries to identify structural cardiac diseases. St. Jude's bipolar temporary pacing catheters are inserted percutaneously for temporary use (ranging from less than one hour to a maximum of one week) with external pacemakers to provide patient stabilization prior to implantation of a permanent pacemaker, following a heart attack, or during surgical procedures. The Company produces and markets several designs of bipolar temporary pacing catheters, including its Pacel(TM) biopolar pacing catheters, which are available in both torque control and flow-directed models with a broad range of curve choices and electrode spacing options. Percutaneous catheter introducers are used to create passageways for cardiovascular catheters from outside the human body through the skin into a vein, artery or other location inside the body. St. Jude's percutaneous catheter introducer products consist primarily of peel-away and non peel-away sheaths, sheaths with and without hemostasis valves, dilators, guidewires, repositioning sleeves and needles. These products are offered in a variety of sizes and packaging configurations, including St. Jude's newest introducer platform, the Ultimum(TM) hemostasis introducer. Diagnostic guidewires, such as St. Jude's GuideRight(TM) and HydroSteer(TM) guidewires, are used in conjunction with percutaneous catheter introducers to aid in the introduction of intravascular catheters. St. Jude's diagnostic guidewires are available in multiple lengths and incorporate a surface finish for lasting lubricity. SUPPLIERS St. Jude purchases raw materials and other products from numerous suppliers. The Company maintains sizable inventories (in some cases, up to three years of its projected requirements) for certain materials that it believes are critical and may be difficult to obtain from an alternative supplier. St. Jude has been advised periodically by some suppliers that they may terminate sales of products to customers that manufacture implantable medical devices in an effort to reduce their potential product liability exposure. Some of these suppliers have modified their positions and have indicated a willingness to temporarily continue to provide product until an alternative vendor or product can be qualified, or to reconsider the supply relationship. While the Company believes that alternative sources of raw materials are available and that there is sufficient lead time in which to qualify other sources, any supply interruption could have a material adverse effect on the Company's ability to manufacture its products. COMPETITION The medical technology industry is highly competitive and is characterized by rapid product development and technological change. Within the medical technology industry, competitors range from small start-up companies to companies with significant resources. The Company's customers consider many factors when choosing supplier partners, including product reliability, clinical outcomes, product availability, inventory consignment, price and product services provided by the manufacturer. St. Jude believes that it competes on the basis of all these factors. Market share can shift as a result of technological innovation, product recalls and product safety alerts and other business factors. As a result, the Company has a need to provide the highest quality products and services. St. Jude expects the competition to continue to increase with the use of tactics such as consigned inventory, bundled product sales and reduced pricing. St. Jude is a technological leader in the global bradycardia pacemaker market, with strong bradycardia market share in all major developed geographies. The Company's primary competitors in this market are Medtronic, Inc. and Guidant Corporation. St. Jude is one of three principal manufacturers and suppliers in the highly competitive global ICD market. The Company's other two competitors, Medtronic, Inc. and Guidant Corporation, account for more than 80% of the worldwide ICD sales. These 5 two competitors are larger than St. Jude and have invested substantial amounts in ICD research and development. St. Jude is the world's leading manufacturer and supplier in the mechanical heart valve market, which includes two other principal and several smaller mechanical heart valve manufacturers. The Company also competes against two principal and many other smaller tissue heart valve manufacturers. St. Jude is the technological leader in mechanical anastomotic connector devices. The Company is aware of several other companies who are investing significant dollars into developing these technologies. The global cardiology and vascular access market is a growing market with numerous competitors. Approximately 80% of the Company's sales in this market are from vascular closure devices. St. Jude currently holds the number one position in the highly competitive vascular closure device segment of the C/VA market. Other competitors in C/VA include Abbott Laboratories, Datascope Corp. and Vascular Solutions, Inc. MARKETING The Company's products are sold in more than 100 countries throughout the world. No distributor organization or single customer accounted for more than 10% of 2002, 2001 or 2000 consolidated net sales. In the United States, St. Jude sells directly to hospitals through a combination of independent distributors and an employee-based sales organization. In Western Europe, the Company has employee- based sales organizations selling in 14 countries. In Japan, the Company has historically utilized independent distributors. However, when the Getz acquisition is completed in 2003, the Company will have a direct sales organization in Japan to sell certain products, while also continuing the use of other longstanding independent distributor relationships. Throughout the rest of the world the Company uses a combination of independent distributor and direct sales organizations. Group purchasing organizations (GPOs) and independent delivery networks (IDNs) in the United States continue to consolidate purchasing decisions for some of the Company's hospital customers. The Company has contracts in place with many of these organizations. One large GPO has executed contracts with the Company's CRM market competitors that exclude the Company. The enforcement of these contracts may adversely affect the Company's sales of CRM products to members of this GPO. Payment terms worldwide are consistent with local country practices. In some developed markets and in many emerging markets, payment terms are typically longer than those in the United States. Orders are shipped as they are received and, therefore, no material backlog exists. SEASONALITY Typically, the Company's net sales are somewhat higher in the first and second quarters and lower in the third and fourth quarters. Lower net sales in the third quarter result from patient tendencies to defer, if possible, cardiac procedures during the summer months and from the seasonality of the U.S. and European markets, where summer vacation schedules normally result in fewer surgical procedures. Lower net sales in the fourth quarter result from fewer selling days in the quarter because of holidays in the United States and other markets, and patient tendencies to defer, if possible, cardiac procedures during these holiday seasons. Independent distributors may randomly place large orders that can distort the net sales pattern just described. In addition, new product introductions, acquisitions and regulatory approvals can impact the typical net sales patterns. 6 RESEARCH AND DEVELOPMENT The Company is focused on the development of new products and on improvements to existing products. Research and development expense reflects the cost of these activities, as well as the costs to obtain regulatory approvals of certain new products and processes, and to maintain the highest quality standards with respect to existing products. The Company's research and development expenses, exclusive of purchased in-process research and development charges, were $200.3 million (12.6% of net sales), $164.1 million (12.2% of net sales) and $137.8 million (11.7% of net sales) in 2002, 2001 and 2000, respectively. GOVERNMENT REGULATION The medical devices manufactured and marketed by the Company are subject to regulation by the FDA and foreign governmental authorities or their designated representatives. Under the U.S. Federal Food, Drug and Cosmetic Act (FFDCA) and associated regulations, manufacturers of medical devices must comply with certain policies and procedures that regulate the composition, labeling, testing, manufacturing, packaging and distribution of medical devices. Medical devices are subject to different levels of government approval requirements. The most comprehensive level requires the completion of an FDA-approved clinical evaluation program and submission and approval of a pre-market approval (PMA) application before a device may be commercially marketed. The Company's mechanical and tissue heart valves, ICDs, certain pacemakers and leads and certain electrophysiology catheter applications are subject to this level of approval or as a supplement to a PMA approval. Other pacemakers and leads, annuloplasty ring products and other electrophysiology and cardiology products are currently marketed under the less rigorous 510(k) pre-market notification procedure of the FFDCA. In addition, the FDA may require testing and surveillance programs to monitor the effects of approved products that have been commercialized, and it has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs. The FDA also conducts inspections prior to approval of a PMA to determine compliance with the quality system regulations that cover manufacturing and design. At any time after approval of a PMA or granting of a 510(k), the FDA may conduct periodic inspections to determine compliance with both quality system regulations and/or current medical device reporting regulations. If the FDA were to conclude that St. Jude is not in compliance with applicable laws or regulations, it could institute proceedings to detain or seize products, issue a recall, impose operating restrictions, assess civil penalties and recommend criminal prosecution to the U.S. Department of Justice. Furthermore, the FDA could proceed to ban, or request recall, repair, replacement or refund of the cost of any device previously manufactured or distributed. The FDA also regulates recordkeeping for medical devices and reviews hospital and manufacturers' required reports of adverse experiences to identify potential problems with FDA- authorized devices. Regulatory actions may be taken by the FDA due to adverse experience reports. Diagnostic-related groups (DRG) reimbursement schedules regulate the amount the U.S. government, through the Centers for Medicare and Medicaid Services, will reimburse hospitals and doctors for the inpatient care of persons covered by Medicare. In response to rising Medicare and Medicaid costs, several legislative proposals are under consideration that would restrict future funding increases for these programs. Changes in current DRG reimbursement levels could have an adverse effect on the Company's domestic pricing flexibility. St. Jude's international business is subject to medical device laws in individual countries outside the United States. These laws range from extensive device approval requirements in some countries for all or some of the Company's products, to requests for data or certifications in other countries. Generally, international regulatory requirements are increasing. In the European Union, the regulatory systems have been consolidated, and approval to market in all European Union countries (represented by the CE Mark) can be obtained through one agency. In addition, government funding of medical procedures is limited and in certain instances is being reduced. 7 Some medical device regulatory agencies have begun considering whether to continue to permit the sale of medical devices that incorporate any bovine material because of concerns about Bovine Spongiform Encephalopathy (BSE), sometimes referred to as "mad cow disease." It is believed that in some instances this disease has been transmitted to humans through the consumption of beef. There have been no reported cases of transmission of BSE through medical products and no reported cases of BSE in the United States. Some of the Company's products use bovine collagen (Angio-Seal(TM) and vascular grafts), which is derived from the bovine component scientifically rated as least likely to transmit the disease. Some of the Company's tissue heart valves incorporate bovine pericardial material. The Company is cooperating with the regulatory agencies considering these issues. PATENTS AND LICENSES The Company's policy is to protect its intellectual property rights related to its medical devices. Where appropriate, St. Jude applies for U.S. and foreign patents. In those instances where the Company has acquired technology from third parties, it has sought to obtain rights of ownership to the technology through the acquisition of underlying patents or licenses. While the Company believes design, development, regulatory and marketing aspects of the medical device business represent the principal barriers to entry, it also recognizes that the Company's patents and license rights may make it more difficult for competitors to market products similar to those produced by the Company. St. Jude can give no assurance that any of its patent rights, whether issued, subject to license, or in process, will not be circumvented or invalidated. Furthermore, there are numerous existing and pending patents on medical products and biomaterials. There can be no assurance that the Company's existing or planned products do not or will not infringe such rights or that others will not claim such infringement. No assurance can be given that the Company will be able to prevent competitors from challenging the Company's patents or entering markets currently served by the Company. INSURANCE The Company operates in an industry that is susceptible to significant product liability claims. These claims may be brought by individuals seeking relief for themselves or, increasingly, by groups seeking to represent a class. In addition, product liability claims may be asserted against the Company in the future, relative to events that are not known to management at the present time. While it is not possible to predict the outcome of every claim, the Company believes that it has adequate product liability insurance to cover the costs associated with them. The product liability insurance market has changed dramatically since September 2001. The Company's self-insured retentions and insurance premiums have increased and are expected to increase further in the future. The Company's insurance program, as a result, is designed to prevent a catastrophic loss. 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. California earthquake insurance is currently difficult to procure, extremely costly, and restrictive in terms of coverage. The Company's earthquake and related business interruption insurance for its CRM operations located in Sylmar and Sunnyvale, California provides for limited coverage above a significant self-insured retention. Several factors preclude the Company from determining the effect an earthquake may have on its business. These factors include, but are not limited to, the severity and location of the earthquake, the extent of any damage to the Company's manufacturing facilities, the impact of an earthquake on the Company's California workforce and the infrastructure of the surrounding communities and the extent, if any, of damage to the Company's inventory and work in process. While the Company's exposure to significant losses from a California earthquake would be partially mitigated by its ability to manufacture some of its CRM products at its Swedish manufacturing facility, the losses could have a 8 material adverse effect on the Company for a period of time that cannot be predicted. The Company has expanded the manufacturing capabilities at its Swedish facility and has constructed a pacemaker component manufacturing facility in Arizona. In addition, the Company has moved significant finished goods inventory to locations outside California. These facilities and inventory transfers would further mitigate the adverse impact of a California earthquake. EMPLOYEES As of December 31, 2002, the Company had 6,042 full-time employees. St. Jude has never experienced a work stoppage as a result of labor disputes, and none of its employees are represented by a labor organization, with the exception of the Company's employees in Sweden and certain employees in France. The Company believes that its relationship with its employees is generally good. INTERNATIONAL OPERATIONS The Company's international business is subject to such special risks as currency exchange controls and fluctuations, the imposition or increase of import or export duties and surtaxes, and international credit, financial or political problems. Currency exchange rate fluctuations relative to the U.S. dollar can affect reported consolidated revenues and net earnings. The Company may hedge a portion of this exposure from time to time to reduce the effect of foreign currency rate fluctuations on net earnings. See the "Market Risk" section on page 7 of "Management's Discussion and Analysis of Results of Operations and Financial Condition", incorporated herein by reference from the Financial Report included in the Company's 2002 Annual Report to Shareholders. Operations outside the United States also present complex tax and cash management issues that necessitate sophisticated analysis and diligent monitoring to meet the Company's financial objectives. AVAILABILITY OF SEC REPORTS The Company makes available free of charge its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practical after they are filed or furnished to the Securities and Exchange Commission. Such reports are available on the Company's website (http://www.sjm.com) under the Investor Relations section or can be obtained by contacting the Company's Investor Relations group at 1.800.552.7664 or at St. Jude Medical, Inc., One Lillehei Plaza, St. Paul, Minnesota 55117. Information included on the Company's website is not deemed to be incorporated into this Annual Report on Form 10-K. ITEM 2. PROPERTIES St. Jude's principal executive offices are owned and are located in St. Paul, Minnesota. Manufacturing facilities are located in California, Minnesota, Arizona, South Carolina, Canada, Brazil, Puerto Rico and Sweden. The Company owns approximately 56%, or 338,000 square feet, of its total manufacturing space, and the balance is leased. The Company also maintains sales and administrative offices in the United States at 16 locations in six states and outside the United States at 41 locations in 25 countries. With the exception of one location, all of these locations are leased. In management's opinion, all buildings, machinery and equipment are in good condition, suitable for their purposes and are maintained on a basis consistent with sound operations. The Company believes that it has sufficient space for its current operations and for foreseeable expansion in the next few years. 9 ITEM 3. LEGAL PROCEEDINGS SILZONE(R) LITIGATION: The Company has been sued by patients alleging defects in the Company's mechanical heart valves and valve repair products with Silzone(R) coating. Some of these cases, both in the United States and Canada, 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. 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 in federal court involving products with Silzone(R) coating have been and will likely continue to be transferred to Judge Tunheim for coordinated or consolidated pretrial proceedings. The hearing concerning requests by certain plaintiffs to have matters proceed as class actions occurred on October 2, 2002. Judge Tunheim is presently considering plaintiffs' motions for class certification, and a decision by Judge Tunheim in this regard is expected in early 2003. 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. The lawsuits in Canada are proceeding in accordance with separate schedules issued by the applicable provincial courts. A hearing concerning the certification of a class action in Ontario, Canada, is currently scheduled for June 2003. While it is not possible to predict the outcome of the various cases involving Silzone(R) products, 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 the Company did not have a license to certain patents controlled by Guidant covering ICD products and alleging that the Company was infringing those patents. St. Jude Medical's contention was that it had obtained a license from Guidant to the patents in issue when it acquired certain assets of Telectronics in November 1996. In July 2000, an arbitrator rejected St. Jude Medical's position, and 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 originally alleged infringement of four patents by St. Jude Medical. Guidant later dismissed its claim on one patent and a court ruled that a second patent was invalid. This determination of invalidity was appealed by Guidant and the Court of Appeals upheld the lower court's invalidity determination. In a jury trial involving the two remaining patents (the `288 and `472 patents), the jury found that these patents were valid and that St. Jude Medical did not infringe the `288 patent. The jury found that the Company did infringe the `472 patent, though such infringement was not willful. The jury awarded damages of $140 million to Guidant. In post-trial rulings, however, the judge overseeing the jury trial ruled that the `472 patent was invalid and also was not infringed by St. Jude Medical, thereby eliminating the $140 million verdict against the Company. The trial court also made other rulings as part of the post-trial order, including a ruling that the `288 patent was invalid on several grounds. In August 2002, Guidant commenced an appeal of certain of the trial judge's post-trial decisions pertaining to the `288 patent. Guidant did not appeal the trial court's finding of invalidity and non-infringement of the `472 patent. The parties are currently in the briefing phase of this appeal. While it is 10 not possible to predict the outcome of the appeal process, the Company believes that it has meritorious defenses against the claims asserted by Guidant and Guidant's continued pursuit of this case. OTHER LITIGATION MATTERS: The Company is involved in various product liability lawsuits, claims and proceedings of a nature considered normal to its business. Subject to self-insured retentions, the Company believes it has product liability insurance sufficient to cover such claims and suits. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of 2002. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT Name Age Position* - -------------------------------------------------------------------------------- Terry L. Shepherd 50 Chairman (2002) and Chief Executive Officer (1999) Daniel J. Starks 48 President and Chief Operating Officer (2001) David W. Adinolfi 47 President, Daig (2001) Michael J. Coyle 40 President, Cardiac Rhythm Management (2001) Peter L. Gove 55 Vice President, Corporate Relations (1994) John C. Heinmiller 48 Vice President, Finance, Chief Financial Officer and Treasurer (1998) Jeri L. Lose 45 Vice President, Information Technology and Chief Information Officer (2000) Joseph H. McCullough 53 President, International (2001) Thomas R. Northenscold 45 Vice President, Administration (2003)** Kevin T. O'Malley 51 Vice President, General Counsel and Secretary (1994) Michael T. Rousseau 47 President, U.S. Sales (2001) Jane J. Song 40 President, Cardiac Surgery (2002) Frieda J. Valk 49 Vice President, Administration (1999)** - ----------------------------- *Dates in brackets indicate year during which each named executive officer began serving in such capacity. **Mr. Northenscold was appointed March 3, 2003, and Ms. Valk will no longer be an executive officer effective March 31, 2003. 11 Executive officers serve at the pleasure of the Board of Directors. Mr. Shepherd joined the Company in 1994 as President of Cardiac Surgery. In May 1999, he was appointed President and Chief Executive Officer of St. Jude, and since February 2001 he has been the Company's Chief Executive Officer. Mr. Shepherd has also served on St. Jude's Board of Directors since May 1999, and in May 2002 was elected Chairman of the Board of Directors. Mr. Starks joined St. Jude in 1996 as a result of the Company's acquisition of Daig Corporation, where he continued as Chief Executive Officer. In 1997, he was also appointed Chief Executive Officer of Cardiac Rhythm Management, and in April 1998 also became President of Cardiac Rhythm Management. He was appointed President and Chief Operating Officer of St. Jude in February 2001. Mr. Starks has also served on the Company's Board of Directors since 1996. Mr. Starks serves on the Board of Directors of Urologix Inc. Mr. Adinolfi joined St. Jude in 1994 as a result of the Company's acquisition of Pacesetter, Inc. He served as Vice President, CRM Global Product Planning and Identification from June 1996 to March 1998. In April 1998, he became Senior Vice President, CRM Global Marketing, and in March 1999 became Senior Vice President of CRM Product Portfolio Management. In February 2001, Mr. Adinolfi was appointed President of Daig. Prior to joining Pacesetter in 1989 as Director of Marketing, Mr. Adinolfi worked for Cordis Corporation and Telectronics, Inc., both medical technology companies, in a variety of marketing, sales and management positions. Mr. Coyle joined St. Jude in 1994 as Director, Business Development. He served as President and Chief Operating Officer of Daig from 1997 to 2001 and was appointed President, Cardiac Rhythm Management in February 2001. Prior to joining St. Jude, he spent nine years with Eli Lilly & Company, a pharmaceutical products company, in a variety of technical and business management roles in both its Pharmaceutical and Medical Device Divisions. Mr. Gove joined the Company in 1994 as Vice President, Corporate Relations. Prior to joining the Company, Mr. Gove was Vice President, Marketing and Communications of Control Data Systems, Inc., a computer services company, from 1991 to 1994. From 1981 to 1990, Mr. Gove held various executive positions with Control Data Corporation. From 1970 to 1981, Mr. Gove held various management positions with the State of Minnesota and the U.S. Government. Mr. Gove serves on the Board of Directors of QRS Diagnostic, LLC and Information for Public Affairs, Inc. Mr. Heinmiller joined the Company in May 1998 as Vice President of Corporate Business Development. In September 1998 he was appointed Vice President, Finance and Chief Financial Officer. Prior to joining the Company, Mr. Heinmiller was president of F3 Corporation, a privately held asset management company, from 1997 to 1998, and was Vice President of Finance and Administration for Daig Corporation from 1995 to 1997. Mr. Heinmiller is also a former audit partner in the Minneapolis office of Grant Thornton LLP, a national public accounting firm. Mr. Heinmiller is on the Board of Directors of Lifecore Biomedical, Inc. and Arctic Cat, Inc. Ms. Lose joined St. Jude in 1999 as Vice President, Information Technology, and was also appointed Chief Information Officer in 2000. Prior to joining the Company, Ms. Lose was Vice President of Systems Development at U.S. Bancorp, a multi-state financial services holding company, from 1993 to 1999. From 1990 to 1993, Ms. Lose was a Senior Manager in Information Technology Consulting with Ernst & Young LLP, an international public accounting firm. From 1979 to 1990, she held several positions in Accounting and then Information Technology with General Mills, Inc, a consumer food products company. Ms. Lose serves on the Board of Directors of Apria Healthcare, Inc. 12 Mr. McCullough joined St. Jude in 1994 as a CRM Regional Sales Director. He became Director of CRM Marketing in 1996 and was named Vice President of CRM Marketing in January 1997. In December 1997, Mr. McCullough was appointed CRM Business Unit Director. He became Vice President, CRM Europe and Managing Director of the Company's manufacturing operations in Veddesta, Sweden in January 1999, and Senior Vice President, CRM Europe in August 1999. He was named President, International in July 2001. Prior to joining the Company, Mr. McCullough worked for several medical technology companies for more than 20 years. Mr. Northenscold joined St. Jude in 2001 as Vice President, Finance and Administration of Daig. On March 3, 2003 he was appointed Vice President, Administration. Prior to joining the Company, Mr. Northenscold worked at PPT Vision, Inc., an industrial technology and automation company, where he served as Chief Financial Officer from February 1995 to January 1999, and Division General Manager from January 1999 to September 2001. Prior to 1995, Mr. Northenscold worked for Cardiac Pacemakers, Inc., a medical technology company that is now part of Guidant Corporation, in various finance and operations positions. Mr. O'Malley joined the Company in 1994 as Vice President and General Counsel. Since December 1996, he has also served as the Company's Corporate Secretary. Prior to joining St. Jude, Mr. O'Malley was employed by Eli Lilly & Company, a pharmaceutical products company, for 15 years in various positions, including General Counsel of the Medical Device and Diagnostics Division. Mr. Rousseau joined the Company in 1999 as Senior Vice President, CRM Global Marketing. In August 1999, CRM Marketing and Sales were combined under his leadership. In January 2001, he was named President, U.S. CRM Sales, and in July 2001 he was named President, U.S. Sales. Prior to joining St. Jude, Mr. Rousseau worked for Sulzer Intermedics, Inc., a medical device company, for 11 years. At Sulzer, he served as Vice President, Tachycardia, in 1997 and was appointed Vice President, U.S. Sales and Marketing in 1998. Ms. Song joined St. Jude in 1998 as Senior Vice President, CRM Operations. In May 2002 she was appointed President, Cardiac Surgery. Prior to joining the Company, Ms. Song was employed by Perkin Elmer (formerly EG&G, Inc.), a global technology company, from 1992 to 1998 where she held executive positions in global operations and business development. Prior to her tenure at Perkin Elmer, she was employed by Coopers & Lybrand LLP, an international public accounting firm, and Texas Instruments Inc, a global semiconductor company. Ms. Valk joined the Company in 1996 as Human Resources Director of St. Jude Medical Europe. She served as Vice President, Administration from 1999 through March 2003. Prior to joining the Company, Ms. Valk was employed by Eli Lilly & Company, a pharmaceutical products company, for 16 years in various positions, including pharmaceutical sales, sales management, sales training and human resources. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The information set forth under the captions "Dividends" and "Stock Exchange Listings" on pages 8 and 24 of the Financial Report included in the Company's 2002 Annual Report to Shareholders is incorporated herein by reference. 13 ITEM 6. SELECTED FINANCIAL DATA The information set forth under the caption "Five-Year Summary Financial Data" on page 23 of the Financial Report included in the Company's 2002 Annual Report to Shareholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The information set forth under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 1 through 8 of the Financial Report included in the Company's 2002 Annual Report to Shareholders is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information appearing under the caption "Market Risk" on page 7 of the Financial Report included in the Company's 2002 Annual Report to Shareholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following Consolidated Financial Statements of the Company and Report of Independent Auditors set forth on pages 9 through 22 of the Financial Report included in the Company's 2002 Annual Report to Shareholders are incorporated herein by reference: Consolidated Statements of Earnings - Fiscal Years ended December 31, 2002, 2001 and 2000 Consolidated Balance Sheets - December 31, 2002 and 2001 Consolidated Statements of Shareholders' Equity - Fiscal Years ended December 31, 2002, 2001 and 2000 Consolidated Statements of Cash Flows - Fiscal Years ended December 31, 2002, 2001 and 2000 Notes to Consolidated Financial Statements ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth under the caption "Board of Directors" in the Company's definitive proxy statement dated March 27, 2003, is incorporated herein by reference. Information on executive officers under Item 4A of this Form 10-K is incorporated herein by reference. 14 ITEM 11. EXECUTIVE COMPENSATION The information set forth under the caption "Executive Compensation" in the Company's definitive proxy statement dated March 27, 2003, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS The information set forth under the caption "Share Ownership of Management and Directors and Certain Beneficial Owners" in the Company's definitive proxy statement dated March 27, 2003, is incorporated herein by reference. EQUITY COMPENSATION PLAN INFORMATION The following table provides information as of December 31, 2002 about the Company's common stock that may be issued under all of its existing equity compensation plans, including the St. Jude Medical, Inc. 1991 Stock Plan, the St. Jude Medical, Inc. 1994 Stock Option Plan, the St. Jude Medical, Inc. 1997 Stock Option Plan, the St. Jude Medical, Inc. 2000 Stock Plan, the St. Jude Medical, Inc. 2000 Employee Stock Purchase Savings Plan, and the St. Jude Medical, Inc. 2002 Stock Plan, As Amended. All of these plans have been approved by the Company's shareholders.
Number of securities remaining available for future issuance under Number of securities to be Weighted average equity compensation plans issued upon exercise of exercise price of (excluding securities outstanding options, outstanding options, reflected in column(a)) warrants and rights warrants and rights (c) Plan category (a) (b) ============================= ============================= ======================== ========================= Equity compensation plans approved by shareholders 29,694,922 $25.22 9,829,949(1) Equity compensation plans not approved by shareholders - - - - ----------------------------- ----------------------------- ------------------------ --------------------------- Total 29,694,922 $25.22 9,829,949 - ----------------------------- ----------------------------- ------------------------ ---------------------------
(1) Includes 76,256 shares available for future issuance under the St. Jude Medical, Inc. 2000 Stock Plan for restricted stock grants. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the captions "Governance of the Company" and "Executive Compensation" in the Company's definitive Proxy Statement dated March 27, 2003, is incorporated herein by reference. 15 ITEM 14. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934) refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures within 90 days prior to the filing of this annual report, and they have concluded that such controls and procedures are effective at ensuring that required information will be disclosed on a timely basis in the Company's reports filed under the Exchange Act. (b) Changes in Internal Controls There have been no significant changes to the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the most recent evaluation. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT (1) FINANCIAL STATEMENTS The following Consolidated Financial Statements of the Company and Report of Independent Auditors as set forth on pages 9 through 22 of the Financial Report included in the Company's 2002 Annual Report to Shareholders are incorporated herein by reference from Exhibit 13 attached hereto: Consolidated Statements of Earnings - Fiscal Years ended December 31, 2002, 2001 and 2000 Consolidated Balance Sheets - December 31, 2002 and 2001 Consolidated Statements of Shareholders' Equity - Fiscal Years ended December 31, 2002, 2001 and 2000 Consolidated Statements of Cash Flows - Fiscal Years ended December 31, 2002, 2001 and 2000 Notes to Consolidated Financial Statements 16 (2) FINANCIAL STATEMENT SCHEDULE Schedule II, Valuation and Qualifying Accounts, is filed as part of this Annual Report on Form 10-K (see Item 15(d)). The Report of Independent Auditors with respect to this financial statement schedule is incorporated herein by reference from Exhibit 23 attached hereto. All other financial statements and schedules not listed above have been omitted because the required information is included in the consolidated financial statements or the notes thereto, or is not applicable. (3) EXHIBITS Pursuant to Item 601(b)(4)(iiii) of Regulation S-K, copies of certain instruments defining the rights of holders of certain long-term debt of the Company are not filed, and in lieu thereof, the Company agrees to furnish copies thereof to the Securities and Exchange Commission upon request. EXHIBIT EXHIBIT INDEX - ------- ----------------------------------------------------------------------- 3.1 Articles of Incorporation are incorporated by reference from Exhibit 3(a) of the Company's Form 8 filed on August 20, 1987, amending the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1987. 3.2 Articles of Amendment dated September 5, 1996, to Articles of Incorporation are incorporated by reference from Exhibit 3.2 of the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 3.3 Bylaws are incorporated by reference from Exhibit 3(ii) of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 4.1 Rights Agreement dated as of June 16, 1997, between the Company and American Stock Transfer and Trust Company, as Rights Agent, including the Certificate of Designation, Preferences and Rights of Series B Junior Preferred Stock is incorporated by reference from Exhibit 4 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 4.2 Amendment, dated as of December 20, 2002, to Rights Agreement, dated as of June 16, 1997, is incorporated by reference from Exhibit 1 of the Company's Current Report on Form 8-K filed on March 21, 2003. 17 EXHIBIT EXHIBIT INDEX - ------- ----------------------------------------------------------------------- 10.1 Form of Indemnification Agreement that the Company has entered into with officers and directors is incorporated by reference from Exhibit 10(d) of the Company's Annual Report on Form 10-K for the year ended December 31, 1986. * 10.2 St. Jude Medical, Inc. Management Incentive Compensation Plan is incorporated by reference from Exhibit 10.2 of the Company's Annual Report on Form 10-K for the year ended December 31, 2001. * 10.3 Management Savings Plan dated February 1, 1995, is incorporated by reference from Exhibit 10.7 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994. * 10.4 Retirement Plan for members of the Board of Directors, as amended on March 15, 1995, is incorporated by reference from Exhibit 10.6 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994. * 10.5 St. Jude Medical, Inc. 1991 Stock Plan is incorporated by reference from the Company's Registration Statement on Form S-8 filed June 28, 1991 (Commission File No. 33-41459). * 10.6 St. Jude Medical, Inc. 1994 Stock Option Plan is incorporated by reference from Exhibit 4(a) of the Company's Registration Statement on Form S-8 filed July 1, 1994 (Commission File No. 33-54435). * 10.7 St. Jude Medical, Inc. 1997 Stock Option Plan is incorporated by reference from Exhibit 4.1 of the Company's Registration Statement on Form S-8 filed December 22, 1997 (Commission File No. 333-42945). * 10.8 Split Dollar Insurance Agreement as amended April 29, 1999 between St. Jude Medical, Inc. and Ronald A. and Lucille E. Matricaria is incorporated by reference from Exhibit 10.14 of the Company's Annual Report on Form 10-K for the year ended December 31, 1999. * 10.9 St. Jude Medical, Inc. 2000 Stock Plan is incorporated by reference from Exhibit 10.9 of the Company's Annual Report on Form 10-K for the year ended December 31, 2001. * 18 EXHIBIT EXHIBIT INDEX - ------- ----------------------------------------------------------------------- 10.10 St. Jude Medical, Inc. 2000 Employee Stock Purchase Savings Plan is incorporated by reference from Exhibit 10.10 of the Company's Annual Report on Form 10-K for the year ended December 31, 2001. * 10.11 Amended and Restated Employment Agreement dated as of March 25, 2001, between the Company and Daniel J. Starks is incorporated by reference from Exhibit 10.17 of the Company's Annual Report on Form 10-K for the year ended December 31, 2000. * 10.12 Form of Severance Agreement that the Company has entered into with officers relating to severance matters in connection with a change in control is incorporated by reference from Exhibit 10.18 of the Company's Annual Report on Form 10-K for the year ended December 31, 2000. * 10.13 Amended and Restated Employment Agreement dated as of March 25, 2001, between the Company and Terry L. Shepherd is incorporated by reference from Exhibit 10.19 of the Company's Annual Report on Form 10-K for the year ended December 31, 2000. * 10.14 St. Jude Medical, Inc. 2002 Stock Plan, As Amended, is incorporated by reference from Exhibit 10.14 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002. * 13 Portions of the Company's 2002 Annual Report to Shareholders. # 21 Subsidiaries of the Registrant. # 23 Consent of Independent Auditors. # 24 Power of Attorney. # 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. # - ---------------------------- * Management contract or compensatory plan or arrangement. # Filed as an exhibit to this Annual Report on Form 10-K. 19 (a) REPORTS ON FORM 8-K FILED DURING THE QUARTER ENDED DECEMBER 31, 2002: The Company filed a Form 8-K on November 8, 2002, to report that it had recently issued an alert regarding its Telectronics Meta model 1256D pacemakers, which had experienced premature battery depletion in 1% of the devices, and that it had also recently issued an Advisory Update that extends a previous advisory notification sent to physicians regarding certain Tempo and Meta 1256D pacemakers. (b) EXHIBITS: Reference is made to Item 15(a)(3). (c) SCHEDULES: SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN THOUSANDS)
COL. A COL. B COL. C COL. D COL. E - ------------------------- ----------------- -------------------------------- -------------------------------- --------------- ADDITIONS DEDUCTIONS BALANCE -------------------------------- -------------------------------- AT BEGINNING CHARGED TO BALANCE AT DESCRIPTION OF YEAR EXPENSE OTHER(1) WRITE-OFFS(2) OTHER(1) END OF YEAR - ------------------------- ----------------- ---------------- -------------- ---------------- -------------- --------------- Allowance for doubtful accounts Fiscal Year Ended: December 31, 2002 $ 17,210 $ 9,188 $ 1,752 $ (4,072) $ - $ 24,078 December 31, 2001 13,831 6,468 - (2,738) (351) 17,210 December 31, 2000 13,529 6,913 - (6,244) (367) 13,831
(1) Effects of changes in foreign currency translation. (2) Uncollectible accounts written off, net of recoveries. 20 SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ST. JUDE MEDICAL, INC. Date: March 19, 2003 By /s/ TERRY L. SHEPHERD --------------------- Terry L. Shepherd CHAIRMAN AND CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER) By /s/ JOHN C. HEINMILLER ---------------------- John C. Heinmiller VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
/s/ TERRY L. SHEPHERD Director March 19, 2003 /s/ DANIEL J. STARKS Director March 19, 2003 - --------------------- -------------------- Terry L. Shepherd Daniel J. Starks Director March 19, 2003 /s/ DAVID A. THOMPSON Director March 19, 2003 - ----------------------- --------------------- Richard R. Devenuti David A. Thompson /s/ STUART M. ESSIG Director March 19, 2003 /s/ STEFAN K. WIDENSOHLER Director March 19, 2003 - ------------------- -------------------------- Stuart M. Essig Stefan K. Widensohler /s/ THOMAS H. GARRETT III Director March 19, 2003 /s/ WENDY L. YARNO Director March 19, 2003 - ------------------------- ------------------ Thomas H. Garrett III Wendy L. Yarno /s/ WALTER L. SEMBROWICH Director March 19, 2003 /s/ FRANK C-P YIN Director March 19, 2003 - ------------------------ ----------------- Walter L. Sembrowich Frank C-P Yin
21 CERTIFICATION I, Terry L. Shepherd, certify that: 1. I have reviewed this annual report on Form 10-K of St. Jude Medical, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 19, 2003 -------------- /s/ TERRY L. SHEPHERD - --------------------- Terry L. Shepherd Chairman and Chief Executive Officer 22 CERTIFICATION I, John C. Heinmiller, certify that: 1. I have reviewed this annual report on Form 10-K of St. Jude Medical, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 19, 2003 -------------- /s/ JOHN C. HEINMILLER - ---------------------- John C. Heinmiller Chief Financial Officer 23 EX-13 3 stjude031298_ex13.txt ANNUAL REPORT EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) RESULTS OF OPERATIONS INTRODUCTION St. Jude Medical, Inc. ("St. Jude Medical" or the "Company") develops, manufactures and distributes 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 (EP) 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. The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Saturday nearest December 31, but for simplicity of presentation, describes all periods as if the year end is December 31. Fiscal years 2002, 2001 and 2000 each consisted of fifty-two weeks. The following discussion and analysis is intended to provide a summary of significant factors relevant to the Company's financial performance and condition. This discussion should be read in conjunction with the Company's consolidated financial statements and related notes beginning on page 10. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company has adopted various accounting policies to prepare the consolidated financial statements in accordance with accounting principles generally accepted in the United States. The Company's significant accounting policies are disclosed in Note 1 to the consolidated financial statements. Preparation of the Company's consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. On an ongoing basis, management evaluates its estimates and assumptions, including those related to accounts receivable allowance for doubtful accounts, estimated useful lives of property, plant and equipment, income taxes, Silzone(R) special charges and legal proceedings. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, and the results form the basis for making judgments about the reported values of assets, liabilities, revenues and expenses. Actual results may differ from these estimates. Management believes that the following represent the Company's most critical accounting estimates: ACCOUNTS RECEIVABLE ALLOWANCE FOR DOUBTFUL ACCOUNTS: The Company grants credit to customers in the normal course of business, but generally does not require collateral or any other security to support its receivables. The Company maintains an allowance for doubtful accounts for potential credit losses. The Company determines the adequacy of this allowance by regularly reviewing the accounts receivable agings, customer financial conditions and credit histories and current economic conditions. In some developed markets and in many emerging markets, payments of certain accounts receivable balances are made by the individual countries' healthcare systems for which payment is dependent, to some extent, upon the political and economic environment within those countries. Typically, these payment terms are longer than those in the United States. Though the Company considers its allowance for doubtful accounts to be adequate, if the financial condition of its customers or the individual countries' healthcare systems were to deteriorate and impair their ability to make payments to the Company, additional allowances may be required in future periods. The allowance for doubtful accounts was $24,078 at December 31, 2002 and $17,210 at December 31, 2001. ESTIMATED USEFUL LIVES OF PROPERTY, PLANT AND EQUIPMENT: Diagnostic equipment is recorded at cost and is depreciated using the straight-line method over its estimated useful life of five to eight years. Diagnostic equipment primarily consists of programmers that are used by physicians and healthcare professionals to program and analyze data from the Company's bradycardia and tachycardia devices. The estimated useful lives of this equipment are based on management's estimates of its usage by the physicians and healthcare professionals, factoring in new technology platforms and rollouts by the Company. To the extent that the Company experiences changes in the usage of this equipment or introductions of new technologies to the market, the estimated useful lives of this equipment may change in a future period. Diagnostic equipment had a net carrying value of $81,038 and $93,005 at December 31, 2002 and 2001. INCOME TAXES: As part of the process of preparing the Company's consolidated financial statements, management is required to estimate the Company's income taxes in each of the jurisdictions in which it operates. This process involves estimating the actual current tax expense as well as assessing temporary differences resulting from 1 differing treatment of items for tax and accounting purposes. These timing differences result in deferred tax assets and liabilities, which are included in the Company's consolidated balance sheet. The Company must then assess the likelihood that its deferred tax assets will be recovered from future taxable income, and to the extent that management believes that recovery is not likely, a valuation allowance must be established. At December 31, 2002, the Company had approximately $93,000 of gross deferred tax assets, including approximately $43,000 of U.S. net operating loss and tax credit carryforwards that will expire from 2003 to 2022, for which no valuation allowance has been recorded. The Company believes that its deferred tax assets, including the net operating loss and tax credit carryforwards, will be fully utilized based upon its estimates of future taxable income. If these estimates of future taxable income are not met, a valuation allowance for some of these deferred tax assets would be required. The Company has not recorded U.S. deferred income taxes on certain of its non-U.S. subsidiaries' undistributed earnings, because 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, including cash maintained by these non-U.S. subsidiaries (see Liquidity and Capital Resources), additional U.S. tax liabilities would be incurred. The Company from time to time faces challenges from tax authorities regarding the amount of taxes due. These challenges include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. The Company's U.S. Federal tax filings prior to 1998 have been examined by the Internal Revenue Service (IRS), and the Company has settled all differences arising out of those examinations. Consistent with the Company's status with the U.S. Federal tax authorities as a "coordinated industry case," the IRS is currently in the process of examining the Company's U.S. Federal tax returns for the calendar years 1998, 1999 and 2000. Although the Company believes it has recorded an appropriate income tax provision, there can be no assurance that the IRS or other tax authorities will not take positions contrary to those taken by the Company. The Company further believes that any taxes 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. SILZONE(R) SPECIAL CHARGES: In January 2000, the Company initiated a worldwide voluntary recall of all field inventory of heart valve replacement and repair products incorporating Silzone(R) coating on the sewing cuff fabric. The Company concluded that it would no longer utilize Silzone(R) coating and recorded a special charge accrual totaling $26,101 during the first quarter of 2000 relating to asset write-downs and other costs, including monitoring expenses, associated with this recall and product discontinuance. 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 obtaining certain reimbursements from the Company's insurance carriers under the product liability insurance policies. The Company has approximately $200,000 remaining in product liability insurance currently available for the Silzone(R)-related matters. 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. LEGAL PROCEEDINGS: The Company operates in an industry that is susceptible to significant product liability claims. These claims may be brought by individuals seeking relief for themselves or, increasingly, by groups seeking to represent a class. In addition, product liability claims may be asserted against the Company in the future relative to events that are not known to management at the present time. While it is not possible to predict the outcome of every claim, the Company believes that it has adequate product liability insurance to cover the costs associated with them. The product liability insurance market has changed dramatically since September 2001. The Company's self-insured retentions and insurance premiums have increased and are expected to increase further in the future. The Company's insurance program, as a result, is designed to prevent a catastrophic loss. 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. ACQUISITIONS During 2002, 2001 and 2000, the Company acquired various businesses involved in the distribution of the Company's products. 2 Aggregate consideration paid in cash during 2002, 2001 and 2000 was $24,500, $10,444 and $3,264, respectively. In December 2002, the Company acquired the assets of a catheter business for $5,000 in cash. Substantially all of the purchase price was allocated to technology and patents with estimated useful lives of 15 years. These acquisitions were recorded using the purchase method of accounting. The operating results of each of these acquisitions are included in the Company's consolidated financial statements from the date of each acquisition. Pro forma results of operations have not been presented for these acquisitions since the effects of these business acquisitions were not material to the Company either individually or in the aggregate. During 2001 and 2000, the Company paid $10,000 and $5,000, respectively, relating to the September 1999 acquisition of Vascular Science, Inc. (VSI). These payments were for the achievement of certain milestones and were recorded as purchased in-process research and development charges. On September 17, 2002, the Company signed a stock purchase agreement to acquire Getz Bros. Co., Ltd. (Getz), a distributor of medical technology products in Japan and the distributor of the largest volume of the Company's products in Japan. The Company has agreed to pay 26.9 billion Japanese yen in cash, or approximately $224,000 using an exchange rate of 120 yen to 1 U.S. dollar, to acquire 100% of the outstanding common stock of Getz. This transaction is expected to close during the second quarter of 2003. NET SALES Net sales by geographic markets were as follows: 2002 2001 2000 =============================================================================== United States $ 1,042,766 $ 880,086 $ 745,793 International 547,163 467,270 433,013 - ------------------------------------------------------------------------------- Total net sales $ 1,589,929 $ 1,347,356 $ 1,178,806 =============================================================================== Foreign currency translation had a net favorable impact on 2002 net sales as compared with 2001 of approximately $9,000 due primarily to the strengthening of the Euro against the U.S. dollar, offset in part by the weakening of the Brazilian Real against the U.S. dollar. Foreign currency translation had an unfavorable impact on 2001 net sales as compared with 2000 of approximately $16,000 due primarily to the weakening of the Euro against the U.S. dollar. These amounts are not necessarily indicative of the impact on net earnings for 2002 and 2001 due to partially offsetting unfavorable and favorable foreign currency impacts on operating costs. Net sales by class of similar products were as follows: 2002 2001 2000 ============================================================================ Cardiac rhythm management $ 1,147,489 $ 965,968 $ 819,117 Cardiac surgery 250,957 248,045 256,949 Cardiology and vascular access 191,483 133,343 102,740 - ---------------------------------------------------------------------------- Total net sales $ 1,589,929 $ 1,347,356 $ 1,178,806 ============================================================================ Net sales of CRM products increased 18.8% in 2002 due primarily to increased bradycardia, ICD and EP catheter unit sales. The increase in bradycardia net sales was attributable to the ongoing success of the Company's Identity(R) family of pacemakers and other devices that incorporate BEAT-BY-BEAT AutoCapture(TM) and AF Suppression(TM) technology. The Company's ICD net sales benefited from the ongoing success of the Company's Atlas(R) ICD, the new Epic(TM) ICD that was launched worldwide in the fourth quarter of 2002 and the Riata(R) family of ICD leads. Net sales of CRM products increased 17.9% in 2001 due primarily to increased bradycardia, ICD and EP catheter unit sales, offset in part by negative foreign currency effects. The increase in bradycardia net sales in 2001 was driven by the mid-year introduction of the Integrity(R) pacemaker with atrial fibrillation suppression technology. The increase in ICD net sales in 2001 was primarily due to the full year sales of the Company's dual-chamber ICD products, which were introduced into the market in late 2000. Net sales of CS products increased 1.2% in 2002, due to an increase in aortic connector sales as a result of the ongoing rollout of this product in the U.S. market. Heart valve net sales were down 3.3% from 2001 due to an ongoing 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. Net sales of CS products decreased 3.5% in 2001 due to a clinical preference shift from mechanical valves to tissue valves in the U.S. market, offset in part by an increase in aortic connector sales resulting from the introduction of this technology to the U.S. market during 2001. Net sales of C/VA products increased 43.6% and 29.8% in 2002 and 2001 due primarily to increased Angio-Seal(TM) unit sales. Net sales in 2002 also benefited from the worldwide launch in early 2002 of the Company's newest vascular closure device, the Angio-Seal(TM) STS Platform. 3 GROSS PROFIT Gross profits were as follows: 2002 2001 2000 ============================================================================== Gross profit $ 1,083,983 $ 888,197 $ 787,657 Percentage of net sales 68.2% 65.9% 66.8% ============================================================================== The Company's gross profit percentage increased 2.3 percentage points to 68.2% in 2002. The Company's 2001 gross profit margin included $21,667 of special charges recorded in the third quarter of 2001 relating to inventory and diagnostic equipment write-offs (see further details under the SPECIAL CHARGES discussion). Excluding these special charges, the gross profit percentage was 67.5% in 2001. The increase in the gross profit percentage in 2002 as compared to 2001, excluding special charges, is due primarily to higher ICD and pacemaker unit volumes and increased CRM manufacturing efficiencies. The increase in gross profit percentage in 2001 as compared to 2000, excluding the above special charges, was due to higher unit volumes and increased manufacturing efficiencies in the Company's CRM operations, offset partially by the unfavorable impact on net sales due to the stronger U.S. dollar. The Company anticipates making further improvements in its operations through the use of total quality management techniques and further investments in technology in order to continue to improve the Company's gross profit percentage in the future. Offsetting these improvements for 2003 will be the acquisition accounting adjustments for inventory related to the planned Getz acquisition in the second quarter of 2003 and the addition of non-St. Jude Medical manufactured products sold by Getz, which generally have a lower gross profit margin. OPERATING EXPENSES Certain operating expenses were as follows: 2002 2001 2000 =============================================================================== Selling, general and administrative $ 513,691 $ 467,113 $ 416,383 Percentage of net sales 32.3% 34.7% 35.3% Research and development $ 200,337 $ 164,101 $ 137,814 Percentage of net sales 12.6% 12.2% 11.7% =============================================================================== SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSE: SG&A expense as a percentage of net sales decreased by 2.4 percentage points in 2002 due primarily to the elimination of goodwill amortization expense in 2002 from the Company's adoption of Statement of Financial Accounting Standards (SFAS) No. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS," effective January 1, 2002, the leveraging effect of higher sales volumes and increased productivity of the Company's sales organizations. Pretax goodwill amortization expense was approximately $28,000 in 2001. 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 as a reduction of SG&A expense. Also during the second quarter of 2002, the Company recorded in SG&A an $11,000 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. The Company expects its SG&A expense as a percentage of net sales to increase in 2003 due to the addition of the Getz direct sales organization in the second quarter of 2003 and to an increase of approximately 200 sales and support personnel in anticipation of the Company's entry into the cardiac resynchronization segment of the U.S. CRM market. SG&A expense as a percentage of net sales decreased in 2001 as compared to 2000 due primarily to increased sales, which leveraged the Company's cost structure. RESEARCH AND DEVELOPMENT (R&D) EXPENSE: R&D expense increased in 2002 and 2001 due primarily to the Company's increased activities relating to ICDs, products to treat emerging indications in atrial fibrillation and heart failure and suture-free devices to facilitate coronary artery bypass graft anastomoses. PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES: In 1999, the Company recorded purchased in-process research and development charges of $67,453 in connection with its acquisition of VSI. The purchased in-process research and development charges were computed by an independent third-party appraisal company and were expensed at the close of the acquisition, except as noted below, since technological feasibility had not been established and since there were no alternative future uses for the technology. The total appraised value of the VSI purchased in-process research and development was $95,500, of which $67,453 was recorded at the close of the acquisition. The Company paid additional amounts totaling $10,000 in 2001 and $5,000 in 2000 as certain product development milestones were achieved. These additional payments were also expensed as purchased in-process research and development at the time of payment. The remaining balance of the in-process research and development valuation ($13,047) will be recorded in the Company's financial statements as purchased in-process research and development expense when payment of the contingent consideration is assured beyond a reasonable doubt. Contingent 4 consideration payments in excess of the $13,047 will be capitalized as goodwill. Since 1999, the Company has continued to develop certain of the in-process technologies acquired in the VSI acquisition. Development of one of the VSI technologies (the proximal connector) was completed and regulatory approvals and E.U. and U.S. market releases occurred in 2000 and 2001. A second VSI in-process technology (the distal connector) received E.U. regulatory approval in 2001; however, the Company intends to make additional enhancements to this product prior to filing for U.S. regulatory approval and prior to releasing the product to either the E.U. or U.S. markets. At the date of the VSI acquisition, the total estimated costs necessary to complete the proximal and distal connector technologies into commercially viable products and to make certain subsequent product enhancements were approximately $1,000, all of which were scheduled to be incurred in 1999 and 2000. Through December 2002, the Company has incurred approximately $9,500 to complete the proximal connector and bring the distal connector to its current state. Management continues to assess what future distal connector design changes are desirable, along with the related costs, prior to filing for U.S. regulatory approval. Other in-process technologies acquired in the VSI acquisition continue to be reviewed for ultimate viability in the developing coronary artery bypass graft anastomoses market. The original estimated costs to complete these other technologies into commercially viable products were approximately $6,000, of which only a minor amount has been incurred to date. Management believes that the financial statement projections used in the VSI acquisition are still materially valid; however, there can be no assurance that the projected results will be achieved. In addition, there are risks associated with being able to complete development of the VSI in-process technologies, and there can be no assurance that these technologies will achieve technological or commercial success. Failure to successfully complete the development and commercialize these in-process technologies would result in the loss of the expected economic return inherent in the original fair value allocation. SPECIAL CHARGES: In July 2001, the Company initiated efforts to streamline its heart valve operations, consolidate its U.S. sales activities and restructure its international sales organization. As a result of these activities, the Company recorded pre-tax special charges of $20,657 in the third quarter of 2001, consisting of employee severance costs resulting from the elimination of approximately 90 production and administrative positions ($5,293), inventory write-offs and scrap ($9,490), capital equipment write-offs ($3,379) and other costs related primarily to lease terminations and other facility exit costs due to the closing and consolidation of sales offices ($2,495). The Company has utilized $19,865 of these special charge accruals through December 31, 2002, consisting of $4,783 of employee severance costs, $9,328 of inventory write-offs and scrap, $3,379 of capital equipment write-offs and $2,375 of other costs. The Company estimates that the remaining accruals will be utilized during 2003. 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 that received U.S. regulatory approvals in late 2000 and early 2001 and was launched earlier in 2001. The charges relating to employee severance costs, capital equipment write-offs and other costs ($11,167) were recorded in operating expenses as special charges. The inventory and diagnostic equipment write-offs ($21,667) were included in cost of sales as special charges. On January 21, 2000, the Company initiated a worldwide voluntary recall of all field inventory of heart valve replacement and repair products incorporating Silzone(R) coating on the sewing cuff fabric. The Company concluded that it would no longer utilize Silzone(R) coating. The Company recorded a special charge accrual totaling $26,101 during the first quarter of 2000 relating to asset write-downs ($9,465) and other costs ($16,636), including monitoring expenses, associated with this recall and product discontinuance. 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 obtaining certain reimbursements from the Company's insurance carriers under the product liability insurance policies. This additional accrual was included in selling, general and administrative expenses for the second quarter ended June 30, 2002. The Company has utilized $23,202 of these special charge accruals through December 31, 2002, consisting of $9,465 of asset write-downs and $13,737 of other costs. The Company estimates that the remaining accruals will be utilized primarily during 2003 and 2004. The Company has approximately $200,000 remaining in product liability insurance currently available for the Silzone(R)-related matters. 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. 5 OTHER INCOME (EXPENSE) 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, lower interest rates on Company borrowings in 2002 and higher levels of interest income as a result of the increase in cash and equivalents in 2002. The change in other income (expense) during 2001 as compared with 2000 was due to reduced interest expense as a result of lower debt levels as well as lower interest rates on Company borrowings. INCOME TAXES The Company's reported effective income tax rates were 26.0% in 2002, 24.3% in 2001 and 27.2% in 2000. Excluding the purchased in-process research and development and special charges in 2001 and 2000, the Company's effective income tax rate was 25.0% for both years. The purchased in-process research and development charges were not deductible for income tax purposes, and the special charges were recorded in taxing jurisdictions where income tax rates varied from the Company's blended 25.0% effective tax rate. The increase in the Company's effective income tax rate in 2002 is due to a larger percentage of the Company's taxable income being generated in higher taxing jurisdictions. Management anticipates that the Company's effective income tax rate will increase in the future as a larger percentage of the Company's forecasted taxable income is generated in higher taxing jurisdictions. NET EARNINGS Net earnings and diluted net earnings per share were $276,285, or $1.51 per share, in 2002, $172,592, or $0.97 per share, in 2001 and $129,094, or $0.75 per share, in 2000. 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 this stock split. GOVERNMENT REGULATION, COMPETITION AND OTHER CONSIDERATIONS The Company expects that market demand, government regulation and reimbursement policies and societal pressures will continue to change the worldwide healthcare 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. The global medical technology industry is highly competitive and is characterized by rapid product development and technological change. The Company's products must continually improve technologically and provide improved clinical outcomes due to the competitive nature of the industry. In addition, competitors have historically employed litigation to gain a competitive advantage. The cardiac rhythm management market is highly competitive. There are currently three principal suppliers in this market, including the Company, and the Company's two principal competitors each have substantially more assets and sales than the Company. Rapid technological change in the CRM market is expected to continue, requiring the Company to invest heavily in R&D and to effectively market its products. Two trends began to emerge in the CRM market during 2002. The first involved a possible shift of some traditional pacemaker patients to ICD devices and the second involved the increasing use of resynchronization devices in both the ICD and pacemaker markets. The Company's competitors in the CRM market have U.S. regulatory approval to market CRM devices with resynchronization features. The Company currently has both a cardiac resynchronization ICD and pacemaker product in U.S. clinical studies. If the approvals of these products are delayed or not received, the Company's CRM sales could be adversely affected if the CRM market continues to shift towards products with cardiac resynchronization capabilities. The cardiac surgery market, which includes mechanical heart valves, tissue heart valves and valve repair products, is also highly competitive. Since 1999, the market has shifted to tissue valves and repair products from mechanical heart valves, resulting in an overall market share loss for the Company. Competition is anticipated to continue to place pressure on pricing and terms, including a trend toward vendor-owned (consignment) inventory at the hospitals, and healthcare reform is expected to result in further hospital consolidations over time. The cardiology and vascular access market is a growing market with numerous competitors. Approximately 80% of the Company's sales in this market are for vascular closure devices. The market for vascular closure devices is highly competitive, and there are several companies, in addition to St. Jude Medical, that manufacture and market these products worldwide. 6 Group purchasing organizations (GPOs) and independent delivery networks (IDNs) in the United States continue to consolidate purchasing decisions for some of the Company's hospital customers. The Company has contracts in place with many of these organizations. One large GPO has executed contracts with the Company's CRM market competitors that exclude the Company. The enforcement of these contracts may adversely affect the Company's sales of CRM products to members of this GPO. MARKET RISK The Company is exposed to foreign currency exchange rate fluctuations due to its transactions denominated primarily in Euros, Canadian Dollars, Brazilian Reals, British Pounds, and Swedish Kronor. Although in 2002 and 2001 management elected not to enter into any hedging contracts, from time to time the Company hedges a portion of its foreign currency exchange rate risk through the use of forward exchange or option contracts. The gains or losses on these contracts are intended to offset changes in the fair value of the anticipated foreign currency transactions. It is the Company's practice to not enter into contracts for trading or speculative purposes. The Company continues to evaluate its foreign currency exchange rate risk and the different mechanisms for use in managing such risk. The Company had no forward exchange or option contracts outstanding at December 31, 2002 or 2001. In September 2002, the Company signed a stock purchase agreement to acquire Getz for 26.9 billion Japanese yen. The Company is exposed to foreign currency exchange risk on the yen purchase price of this agreement until the closing of the acquisition, which is expected to occur during the second quarter of 2003. After completing the Getz acquisition, the Company will be exposed to foreign currency exchange rate fluctuations from transactions by the acquired business that are denominated in Japanese yen. The Company is also exposed to equity market risk on its marketable equity security investments. The Company periodically invests in marketable equity securities of emerging technology companies. The Company's investments in these companies had a fair value of $13,665 and $21,616 at December 31, 2002 and 2001, which are subject to the underlying price risk of the public equity markets. NEW ACCOUNTING PRONOUNCEMENTS In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, "ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES" (Statement 146). Statement 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value when the liability is incurred. Statement 146 is effective for exit plans or disposal activities initiated after December 31, 2002. The adoption of Statement 146 in 2003 is not anticipated to have a material impact on the Company's future consolidated results of operations or financial position. FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity and cash flows remained strong during 2002. Cash provided by operating activities was $417,200 in 2002, up $107,065 from 2001, reflecting increased earnings and improved working capital management. The Company's current ratio was 3 to 1 at December 31, 2002. Cash and equivalents increased $253,525 during 2002, due primarily to cash generated from operations. At December 31, 2002, approximately one-half of the Company's cash and equivalents were held by the Company's non-U.S. subsidiaries. These funds are available for use by the Company's U.S. operations; however, they would be subject to additional U.S. tax upon repatriation to the United States. During the second quarter of 2003, management intends to utilize a portion of the Company's non-U.S. subsidiaries' cash and the proceeds from the issuance of yen-denominated debt to fund the 26.9 billion Japanese yen, or approximately $224,000, Getz acquisition purchase price. During 2002, the Company repaid all of its interest-bearing debt utilizing cash generated from operations and proceeds from employee stock option exercises. The Company has a $350,000 unsecured, revolving credit facility that is available to back the Company's commercial paper program borrowings and for general purposes. This committed credit facility expires in March 2003; however, management does not intend to renew this credit facility due to the Company's existing cash balances, anticipated future cash flows from operations and the expenses associated with such a facility. However, management does intend to borrow Japanese yen to fund a portion of the Getz acquisition purchase price in the second quarter of 2003. At the present time, management expects 2003 capital expenditures and business acquisition payments to be approximately $110,000, exclusive of the Getz acquisition. In 2004 through 2007, management currently expects these amounts to be approximately $150,000 per year. 7 The Company has no off-balance sheet financing arrangements other than certain noncancelable, operating leases for various facilities. Future minimum lease payments under these leases are as follows: $10,401 in 2003; $8,643 in 2004; $8,626 in 2005; $8,259 in 2006; $7,609 in 2007; and $22,156 in years thereafter. Management believes that the Company's existing cash balances and future cash generated from operations will be sufficient to meet the Company's working capital and capital investment needs in the near term, exclusive of the Getz acquisition. Should suitable investment opportunities arise, management believes that the Company's earnings, cash flows and balance sheet will permit the Company to obtain additional debt or equity capital, if necessary. DIVIDENDS The Company did not declare or pay any cash dividends during 2002, 2001 or 2000. Management currently intends to utilize the Company's earnings for operating and investment purposes. CAUTIONARY STATEMENTS In this discussion and in other written or oral statements made from time to time, the Company has 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 the Company's belief regarding future events, many of which, by their nature, are inherently uncertain and beyond the Company's control. These statements relate to the Company's future plans and objectives, among other things. By identifying these statements for you in this manner, the Company is alerting you to the possibility that its actual results may differ, possibly materially, from the results indicated by these forward-looking statements. The Company undertakes no obligation to update any forward-looking statements. Various factors contained in the previous discussion and those described below may affect the Company's operations and results. Since it is not possible to foresee all such factors, you should not consider these factors to be a complete list of all risks or uncertainties. Risk factors include the following: 1. Legislative or administrative reforms to the U.S. Medicare and Medicaid systems or similar reforms of international reimbursement systems in a manner that significantly reduces reimbursement for procedures using the Company's medical devices or denies coverage for such procedures. Adverse decisions relating to the Company's products by administrators of such systems in coverage or reimbursement issues. 2. Acquisition of key patents by others that have the effect 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/or 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. Healthcare 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. 8 REPORT OF MANAGEMENT The management of St. Jude Medical, Inc. is responsible for the preparation, integrity and objectivity of the accompanying financial statements. The financial statements were prepared in accordance with accounting principles generally accepted in the United States and include amounts which reflect management's best estimates based on its informed judgment and consideration given to materiality. Management is also responsible for the accuracy of the related data in the annual report and its consistency with the financial statements. In the opinion of management, the Company's accounting systems and procedures, and related internal controls, provide reasonable assurance that transactions are executed in accordance with management's intention and authorization, that financial statements are prepared in accordance with accounting principles generally accepted in the United States and that assets are properly accounted for and safeguarded. The concept of reasonable assurance is based on the recognition that there are inherent limitations in all systems of internal control and that the cost of such systems should not exceed the benefits to be derived therefrom. Management reviews and modifies the system of internal controls to improve its effectiveness. The effectiveness of the controls system is supported by the selection, retention and training of qualified personnel, an organizational structure that provides an appropriate division of responsibility and a strong budgeting system of control. St. Jude Medical, Inc. also recognizes its responsibility for fostering a strong ethical climate so that the Company's affairs are conducted according to the highest standards of personal and business conduct. This responsibility is reflected in the Company's Code of Business Conduct. The adequacy of the Company's internal accounting controls, the accounting principles employed in its financial reporting and the scope of independent and internal audits are reviewed by the Audit Committee of the Board of Directors, consisting solely of outside directors. The independent auditors meet with, and have confidential access to, the Audit Committee to discuss the results of their audit work. /s/ TERRY L. SHEPHERD Terry L. Shepherd Chairman and Chief Executive Officer /s/ JOHN C. HEINMILLER John C. Heinmiller Vice President, Finance and Chief Financial Officer REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders St. Jude Medical, Inc. We have audited the accompanying consolidated balance sheets of St. Jude Medical, Inc. and subsidiaries as of December 31, 2002 and 2001 and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three fiscal years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of St. Jude Medical, Inc. and subsidiaries at December 31, 2002 and 2001 and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States. As discussed in Note 3 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." /s/ ERNST & YOUNG LLP Minneapolis, Minnesota January 27, 2003 9 CONSOLIDATED STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Fiscal Year Ended December 31, 2002 2001 2000 ======================================================================================================================= Net sales $ 1,589,929 $ 1,347,356 $ 1,178,806 Cost of sales: Cost of sales before special charges 505,946 437,492 391,149 Special charges - 21,667 - - ----------------------------------------------------------------------------------------------------------------------- Total cost of sales 505,946 459,159 391,149 - ----------------------------------------------------------------------------------------------------------------------- Gross profit 1,083,983 888,197 787,657 Selling, general and administrative expense 513,691 467,113 416,383 Research and development expense 200,337 164,101 137,814 Purchased in-process research and development charges - 10,000 5,000 Special charges - 11,167 26,101 - ----------------------------------------------------------------------------------------------------------------------- Operating profit 369,955 235,816 202,359 Other income (expense) 3,403 (7,838) (25,050) - ----------------------------------------------------------------------------------------------------------------------- Earnings before income taxes 373,358 227,978 177,309 Income tax expense 97,073 55,386 48,215 - ----------------------------------------------------------------------------------------------------------------------- Net earnings $ 276,285 $ 172,592 $ 129,094 ======================================================================================================================= ======================================================================================================================= NET EARNINGS PER SHARE: Basic $ 1.56 $ 1.00 $ 0.77 Diluted $ 1.51 $ 0.97 $ 0.75 WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 176,570 172,428 168,505 Diluted 183,002 178,767 171,634 - -----------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 10 CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
December 31, 2002 2001 ================================================================================================================ ASSETS CURRENT ASSETS Cash and equivalents $ 401,860 $ 148,335 Accounts receivable, less allowances for doubtful accounts 381,246 320,683 Inventories 227,024 240,390 Deferred income taxes 56,857 36,563 Other 47,330 51,575 - ---------------------------------------------------------------------------------------------------------------- Total current assets 1,114,317 797,546 PROPERTY, PLANT AND EQUIPMENT Land, buildings and improvements 126,471 112,902 Machinery and equipment 393,726 352,294 Diagnostic equipment 181,117 165,938 - ---------------------------------------------------------------------------------------------------------------- Property, plant and equipment at cost 701,314 631,134 Less accumulated depreciation (400,833) (335,491) - ---------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 300,481 295,643 OTHER ASSETS Goodwill, net 325,575 321,562 Other intangible assets, net 89,491 68,367 Deferred income taxes 12,269 67,238 Other 109,246 78,371 - ---------------------------------------------------------------------------------------------------------------- Total other assets 536,581 535,538 - ---------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 1,951,379 $ 1,628,727 ================================================================================================================ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 108,931 $ 88,925 Income taxes payable 51,380 63,475 Accrued expenses Employee compensation and related benefits 135,705 102,191 Other 78,636 67,263 - ---------------------------------------------------------------------------------------------------------------- Total current liabilities 374,652 321,854 LONG-TERM DEBT - 123,128 COMMITMENTS AND CONTINGENCIES - - SHAREHOLDERS' EQUITY Preferred stock - - Common stock 17,803 17,442 Additional paid-in capital 216,878 126,005 Retained earnings 1,411,194 1,134,909 Accumulated other comprehensive income (loss): Cumulative translation adjustment (73,388) (103,781) Unrealized gain on available-for-sale securities 4,240 9,170 - ----------------------------------------------------------------------------------------------------------------- Total shareholders' equity 1,576,727 1,183,745 - ---------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,951,379 $ 1,628,727 ================================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 11 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
Common Stock Accumulated ---------------------- Additional Other Total Number of Paid-In Retained Comprehensive Shareholders' Shares Amount Capital Earnings Income (Loss) Equity - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT JANUARY 1, 2000 167,561,170 $ 16,756 $ (8,269) $ 833,223 $ (47,689) $ 794,021 Comprehensive income: Net earnings 129,094 129,094 Other comprehensive income (loss): Unrealized gain on investments, net of taxes and reclassification adjustment (see below) 1,367 1,367 Foreign currency translation adjustment (39,403) (39,403) ------------- Other comprehensive loss (38,036) ------------- Comprehensive income 91,058 ============= Common stock issued under stock plans and other, net 2,490,332 249 38,382 38,631 Tax benefit from stock plans 6,464 6,464 Issusance of common stock for conversion of subordinated debentures 621,070 62 10,613 10,675 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 2000 170,672,572 17,067 47,190 962,317 (85,725) 940,849 Comprehensive income: Net earnings 172,592 172,592 Other comprehensive income (loss): Unrealized gain on investments, net of taxes 1,515 1,515 Foreign currency translation adjustment, net of taxes (10,401) (10,401) ------------- Other comprehensive loss (8,886) ------------- Comprehensive income 163,706 ============= Common stock issued under stock plans and other, net 3,746,140 375 57,566 57,941 Tax benefit from stock plans 21,249 21,249 ==================================================================================================================================== BALANCE AT DECEMBER 31, 2001 174,418,712 17,442 126,005 1,134,909 (94,611) 1,183,745 Comprehensive income: Net earnings 276,285 276,285 Other comprehensive income (loss): Unrealized loss on investments, net of taxes (4,930) (4,930) Foreign currency translation adjustment, net of taxes 30,393 30,393 ------------- Other comprehensive income 25,463 ------------- Comprehensive income 301,748 ============= Common stock issued under stock plans and other, net 3,609,417 361 65,644 66,005 Tax benefit from stock plans 25,229 25,229 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 2002 178,028,129 $ 17,803 $ 216,878 $ 1,411,194 $ (69,148) $1,576,727 ====================================================================================================================================
Other comprehensive income reclassification adjustments for net realized gains on the sale of marketable securities, net of income taxes, were $2,519 in 2000. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 12 CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FISCAL YEAR ENDED DECEMBER 31, 2002 2001 2000 ============================================================================================================================= OPERATING ACTIVITIES Net earnings $ 276,285 $ 172,592 $ 129,094 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation 67,224 58,404 56,699 Amortization 7,696 31,895 35,650 Purchased in-process research and development charges - 10,000 5,000 Special charges - 32,834 26,101 Net investment gain - - (4,062) Deferred income taxes 37,695 (11,681) (5,439) Changes in operating assets and liabilities, net of business acquisitions: Accounts receivable (39,146) (23,941) (40,845) Inventories 15,784 (32,373) 4,621 Other current assets (8,719) 13,605 (6,519) Accounts payable and accrued expenses 48,376 12,907 (17,317) Income taxes payable 12,005 45,893 20,988 - ----------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 417,200 310,135 203,971 INVESTING ACTIVITIES Purchase of property, plant and equipment (62,176) (63,129) (39,699) Proceeds from sale or maturity of marketable securities 7,000 15,000 29,082 Business acquisition payments (29,500) (20,444) (8,264) Other (31,088) (26,220) (10,752) - ----------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (115,764) (94,793) (29,633) FINANCING ACTIVITIES Proceeds from exercise of stock options and stock issued 66,005 57,941 38,631 Borrowings under debt facilities 352,000 2,115,028 3,703,287 Payments under debt facilities (475,128) (2,286,400) (3,856,287) Repurchase of convertible subordinated notes - - (19,320) - ----------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN FINANCING ACTIVITIES (57,123) (113,431) (133,689) Effect of currency exchange rate changes on cash and equivalents 9,212 (4,015) 135 - ----------------------------------------------------------------------------------------------------------------------------- NET INCREASE IN CASH AND EQUIVALENTS 253,525 97,896 40,784 CASH AND EQUIVALENTS AT BEGINNING OF YEAR 148,335 50,439 9,655 - ----------------------------------------------------------------------------------------------------------------------------- CASH AND EQUIVALENTS AT END OF YEAR $ 401,860 $ 148,335 $ 50,439 ============================================================================================================================= SUPPLEMENTAL CASH FLOW INFORMATION ============================================================================================================================= Cash paid during the year for: Interest $ 1,473 $ 10,663 $ 32,467 Income taxes 51,243 21,424 35,704 - -----------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES COMPANY OVERVIEW: St. Jude Medical, Inc. ("St. Jude Medical" or the "Company") develops, manufactures and distributes 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 (EP) 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. The Company markets and sells its products through both a direct employee-based sales organization and independent distributors. The principal markets for the Company's products are the United States, Western Europe and Japan. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Significant intercompany transactions and balances have been eliminated in consolidation. Certain reclassifications of previously reported amounts have been made to conform to the current year presentation. FISCAL YEAR: The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Saturday nearest December 31. For simplicity of presentation, the Company describes all periods as if the year end is December 31. Fiscal years 2002, 2001 and 2000 each consisted of fifty-two weeks. USE OF ESTIMATES: Preparation of the Company's consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. CASH EQUIVALENTS: The Company considers highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents are stated at cost, which approximates market. The Company's cash equivalents include bank certificates of deposit, money market funds and instruments, commercial paper investments and repurchase agreements collateralized by U.S. government agency securities. The Company performs periodic evaluations of the relative credit standing of the financial institutions and issuers of its cash equivalents and limits the amount of credit exposure with any one issuer. MARKETABLE SECURITIES: Marketable securities consist of equity securities and bonds. Marketable securities are classified as available-for-sale, recorded at fair market value based upon quoted market prices and are classified with other current assets on the balance sheet. The net carrying value of marketable securities, which represents fair market value, was $13,665 and $28,710 at December 31, 2002 and 2001. Gross unrealized gains totaling $6,839, $14,790 and $12,347, net of taxes of $2,599, $5,620 and $4,692, were recorded in shareholders' equity at December 31, 2002, 2001 and 2000. Realized gains from the sale of marketable securities have been recorded in other income and are computed using the specific identification method. ACCOUNTS RECEIVABLE: The Company grants credit to customers in the normal course of business, but generally does not require collateral or any other security to support its receivables. The Company maintains an allowance for doubtful accounts for potential credit losses. The allowance for doubtful accounts was $24,078 at December 31, 2002 and $17,210 at December 31, 2001. INVENTORIES: Inventories are stated at the lower of cost or market with cost determined using the first-in, first-out method. Inventories consist of the following at December 31: 2002 2001 ========================================================================== Finished goods $ 140,856 $ 135,543 Work in process 27,481 35,984 Raw materials 58,687 68,863 - -------------------------------------------------------------------------- $ 227,024 $ 240,390 ========================================================================== PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are recorded at cost and are depreciated using the straight-line method over their estimated useful lives, ranging from 15 to 39 years for buildings and improvements, three to seven years for machinery and equipment and five to eight years for diagnostic equipment. Diagnostic equipment primarily consists of programmers that are used by physicians and healthcare professionals to program and analyze data from the Company's bradycardia and tachycardia devices. The estimated useful lives of this equipment are based on management's estimates of its usage by the physicians and healthcare professionals, factoring in new technology platforms and rollouts by the Company. To the extent that the Company experiences changes in the usage of this equipment or introductions of new technologies 14 to the market, the estimated useful lives of this equipment may change in a future period. Diagnostic equipment had a net carrying value of $81,038 and $93,005 at December 31, 2002 and 2001. Accelerated depreciation methods are used for income tax purposes. GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill represents the excess of cost over the fair value of identifiable net assets of businesses acquired. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS" (Statement 142), effective January 1, 2002. Under Statement 142, goodwill is no longer amortized, but is subject to annual impairment tests. See Note 3 for 2001 and 2000 pro forma net earnings and net earnings per share excluding goodwill amortization. Other intangible assets consist primarily of purchased technology and patents and are amortized on a straight-line basis using lives ranging from 10 to 20 years. Management reviews goodwill and other intangible assets for impairment annually or more frequently if a change in circumstance or the occurrence of events suggests the remaining value may not be recoverable. The test for impairment of goodwill and other intangible assets requires management to make estimates about fair value, most of which are based on projected future cash flows. Management completed its annual goodwill impairment test in the fourth quarter of 2002 and determined that goodwill was not impaired. TECHNOLOGY LICENSE AGREEMENT: The Company has a technology license agreement that provides access to a significant number of patents covering a broad range of technology used in the Company's bradycardia pacemaker systems and tachycardia ICD systems. The agreement provides for payments through September 2004 at which time the Company will have a fully paid-up license, granting access to the underlying patents which expire at various dates through the year 2014. The Company recognizes the total estimated costs under this license agreement as an expense over the term of the underlying patents' lives. The costs deferred under this license are recorded on the balance sheet in other long-term assets. PRODUCT WARRANTIES: The Company offers a warranty on various products, the most significant of which relate to pacemaker and ICD systems. The Company estimates the costs that may be incurred under its warranties and records a liability in the amount of such costs at the time the product is sold. Factors that affect the Company's warranty liability include the number of units sold, historical and anticipated rates of warranty claims and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Changes in the Company's product warranty liability during 2002 and 2001 were as follows: 2002 2001 =========================================================================== Balance at beginning of year $ 11,369 $ 9,156 Warranty expense recognized 5,174 6,284 Warranty credits issued (1,788) (4,071) - --------------------------------------------------------------------------- Balance at end of year $ 14,755 $ 11,369 =========================================================================== REVENUE RECOGNITION: The Company generally recognizes revenue at the time title to the goods transfers to the customer. For certain products, the Company maintains consigned inventory at customer locations. For these products, revenue is recognized at the time the customer has used the inventory. RESEARCH AND DEVELOPMENT: Research and development costs are charged to expense as incurred. Purchased in-process research and development charges are recognized in business combinations for the portion of the purchase price allocated to the appraised value of in-process technologies. The portion assigned to in-process research and development technologies excludes the value of core and developed technologies, which are recognized as intangible assets. STOCK-BASED COMPENSATION: The Company accounts for its stock-based employee compensation plans (see Note 6) under the recognition and measurement principles of APB Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" and related Interpretations. The following table illustrates the effect on net earnings and net earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," to its stock-based employee compensation.
2002 2001 2000 =============================================================================================== Net earnings, as reported $ 276,285 $ 172,592 $ 129,094 Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (33,194) (26,619) (18,875) - ----------------------------------------------------------------------------------------------- Pro forma net earnings $ 243,091 $ 145,973 $ 110,219 =============================================================================================== Net earnings per share: Basic-as reported $ 1.56 $ 1.00 $ 0.77 Basic-pro forma 1.38 0.85 0.65 Diluted-as reported $ 1.51 $ 0.97 $ 0.75 Diluted-pro forma 1.33 0.82 0.64 ===============================================================================================
15 The weighted-average fair value of options granted and the assumptions used in the Black-Scholes option-pricing model are as follows: 2002 2001 2000 =============================================================================== Fair value of options granted $ 12.95 $ 12.84 $ 10.55 Assumptions used: Expected life (years) 5 5 5 Risk-free rate of return 3.3% 4.4% 5.3% Volatility 35.0% 30.9% 35.6% Dividend yield 0% 0% 0% =============================================================================== NET EARNINGS PER SHARE: Basic net earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares, exclusive of restricted shares, during the period. Diluted net earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares and dilutive securities. The table below sets forth the computation of basic and diluted net earnings per share:
2002 2001 2000 ======================================================================================================= Numerator: Net earnings $ 276,285 $ 172,592 $ 129,094 Convertible debenture - - 95 interest, net of taxes - ------------------------------------------------------------------------------------------------------- Adjusted net earnings $ 276,285 $ 172,592 $ 129,189 Denominator: Basic-weighted average 176,570,000 172,428,000 168,505,000 shares outstanding Effect of dilutive securities: Employee stock options 6,410,000 6,269,000 2,897,000 Restricted shares 22,000 70,000 77,000 Convertible debentures - - 155,000 - ------------------------------------------------------------------------------------------------------- Diluted-weighted average shares outstanding 183,002,000 178,767,000 171,634,000 ======================================================================================================= Basic net earnings per share $ 1.56 $ 1.00 $ 0.77 ======================================================================================================= Diluted net earnings per share $ 1.51 $ 0.97 $ 0.75 =======================================================================================================
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. FOREIGN CURRENCY TRANSLATION: Sales and expenses denominated in foreign currencies are translated at average exchange rates in effect throughout the year. Assets and liabilities of foreign operations are translated at year-end exchange rates. Gains and losses from translation of net assets of foreign operations are recorded in other comprehensive income (loss). A tax provision of $4,291 and a tax benefit of $19,393 were offset against the cumulative translation adjustment in other comprehensive income (loss) during 2002 and 2001, respectively. Foreign currency transaction gains and losses are included in other income (expense). FOREIGN CURRENCY AND INTEREST RATE RISK MANAGEMENT CONTRACTS: Management periodically utilizes derivative financial instruments for use in managing a portion of the Company's exposure to foreign currencies and interest rates. Management generally utilizes forward exchange or option contracts to manage anticipated foreign currency exposures and interest rate swaps to manage interest rate exposures. Management does not enter into derivative financial instruments for trading or speculative purposes. The Company records the fluctuation in the fair value of the forward exchange or option contracts in other income (expense) and the fluctuation in the fair value of the interest rate swaps in interest expense. There were no forward exchange, interest rate swap or option contracts outstanding at December 31, 2002 or 2001. NEW ACCOUNTING PRONOUNCEMENTS: In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, "ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES" (Statement 146). Statement 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value when the liability is incurred. Statement 146 is effective for exit plans or disposal activities initiated after December 31, 2002. The adoption of Statement 146 in 2003 is not anticipated to have a material impact on the Company's future consolidated results of operations or financial position. NOTE 2--ACQUISITIONS During 2002, 2001 and 2000, the Company acquired various businesses involved in the distribution of the Company's products. Aggregate consideration paid in cash during 2002, 2001 and 2000 was $24,500, $10,444 and $3,264, respectively. In December 2002, the Company acquired the assets of a catheter business for $5,000 in cash. Substantially all of the purchase price was allocated to technology and patents with estimated useful lives of 15 years. These acquisitions were recorded using the purchase method of accounting. The operating results of each of these acquisitions are included in the Company's consolidated financial statements from the date of each acquisition. Pro forma results of operations have 16 not been presented for these acquisitions since the effects of these business acquisitions were not material to the Company either individually or in the aggregate. During 2001 and 2000, the Company paid $10,000 and $5,000, respectively, relating to the September 1999 acquisition of Vascular Science, Inc. (VSI - see Note 7). On September 17, 2002, the Company signed a stock purchase agreement to acquire Getz Bros. Co., Ltd. (Getz), a distributor of medical technology products in Japan and the distributor of the largest volume of the Company's products in Japan. The Company has agreed to pay 26.9 billion Japanese yen in cash, or approximately $224,000 using an exchange rate of 120 yen to 1 U.S. dollar, to acquire 100% of the outstanding common stock of Getz. This transaction is expected to close during the second quarter of 2003. NOTE 3--GOODWILL AND OTHER INTANGIBLE ASSETS The Company ceased amortizing goodwill effective January 1, 2002 as discussed in Note 1 - GOODWILL AND OTHER INTANGIBLE ASSETS. The following table provides pro forma fiscal year 2001 and 2000 net earnings and net earnings per share had Statement 142 been effective January 1, 2000: 2001 2000 ============================================================================ NET EARNINGS: As reported $ 172,592 $ 129,094 Goodwill amortization, net of taxes 21,323 21,653 - ---------------------------------------------------------------------------- Pro forma net earnings $ 193,915 $ 150,747 ============================================================================ BASIC NET EARNINGS PER SHARE: As reported $ 1.00 $ 0.77 Goodwill amortization, net of taxes 0.12 0.13 - ---------------------------------------------------------------------------- Pro forma basic net earnings per share $ 1.12 $ 0.90 ============================================================================ DILUTED NET EARNINGS PER SHARE: As reported $ 0.97 $ 0.75 Goodwill amortization, net of taxes 0.12 0.13 - ---------------------------------------------------------------------------- Pro forma diluted net earnings per share $ 1.08 $ 0.88 ============================================================================ The net carrying amount of goodwill increased $4,013 during 2002 due primarily to translation fluctuations of non-U.S. dollar denominated goodwill balances. Other intangible assets consist of the following:
PURCHASED TECHNOLOGY AND PATENTS OTHER TOTAL ========================================================================================== DECEMBER 31, 2002 Original cost $ 75,749 $ 33,741 $ 109,490 Accumulated amortization (17,075) (2,924) (19,999) - ------------------------------------------------------------------------------------------ Net carrying value $ 58,674 $ 30,817 $ 89,491 ========================================================================================== DECEMBER 31, 2001 Original cost $ 72,050 $ 9,046 $ 81,096 Accumulated amortization (12,440) (289) (12,729) - ------------------------------------------------------------------------------------------ Net carrying value $ 59,610 $ 8,757 $ 68,367 ==========================================================================================
The "other" column above primarily represents customer relationships from the acquisition of various businesses involved in the distribution of the Company's products. These assets are amortized on a straight-line basis over ten years. 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 SFAS 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. Amortization expense of other intangible assets was $7,696, $3,786, and $3,565 for the fiscal years ended December 31, 2002, 2001 and 2000, respectively. Estimated amortization expense for fiscal years 2003 through 2007 based on the current carrying value of other intangible assets is approximately $7,000 per year. NOTE 4--LONG-TERM DEBT The Company issues, from time to time, 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 December 31, 2002 and $123,128 of commercial paper borrowings at December 31, 2001. The Company classified all of its commercial paper borrowings at December 31, 2001, as long-term on its balance sheet as the Company had the ability to repay any short-term maturity with available cash from its existing long-term, committed credit facility. During 2002, the Company repaid all of its commercial paper borrowings. The weighted-average interest rate on these borrowings was 2.9% at December 31, 2001. 17 The Company has a $350,000 unsecured, revolving credit facility that expires in March 2003. This committed credit facility has a variable interest rate tied primarily to the London Interbank Offered Rate. There were no outstanding borrowings under this credit facility at December 31, 2002 or 2001. Management does not intend to renew this credit facility in March 2003 due to the Company's existing cash balances, anticipated future cash flows from operations and the expenses associated with such a facility. However, management does intend to borrow Japanese yen to fund a portion of the Getz acquisition purchase price in the second quarter of 2003 (see Note 2). The Company's committed 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 December 31, 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 ratings. NOTE 5--COMMITMENTS AND CONTINGENCIES LEASES: The Company leases various facilities under noncancelable operating lease arrangements. Future minimum lease payments under these leases are as follows: $10,401 in 2003; $8,643 in 2004; $8,626 in 2005; $8,259 in 2006; $7,609 in 2007; and $22,156 in years thereafter. Rent expense under all operating leases was $10,215, $8,853 and $7,028 in 2002, 2001 and 2000. 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, both in the United States and Canada, 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 in federal court involving products with Silzone(R) coating have been and will likely continue to be transferred to Judge Tunheim for coordinated or consolidated pretrial proceedings. The hearing concerning requests by certain plaintiffs to have matters proceed as class actions occurred on October 2, 2002. Judge Tunheim is presently considering plaintiffs' motions for class certification, and a decision by Judge Tunheim in this regard is expected in early 2003. 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. The lawsuits in Canada are proceeding in accordance with separate schedules issued by the applicable provincial courts. A hearing concerning the certification of a class action in Ontario, Canada, is currently scheduled for June 2003. While it is not possible to predict the outcome of the various cases involving Silzone(R) products, 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 the Company did not have a license to certain patents controlled by Guidant covering ICD products and alleging that the Company was infringing those patents. St. Jude Medical's contention was that it had obtained a license from Guidant to the patents in issue when it acquired certain assets of Telectronics in November 1996. In July 2000, an arbitrator rejected St. Jude Medical's position, and 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 originally alleged infringement of four patents by St. Jude Medical. Guidant later dismissed its claim on one patent and a court ruled that a second patent was invalid. This determination of invalidity was appealed by Guidant and the Court of Appeals upheld the lower court's invalidity determination. In a jury trial involving the two remaining patents (the '288 and '472 patents), the jury found that these patents were valid and that St. Jude Medical did not infringe the '288 patent. The jury found that the Company did infringe the '472 patent, though such infringement was not willful. The jury awarded damages of $140,000 to Guidant. In post-trial rulings, however, the judge overseeing the jury trial ruled that the '472 patent was invalid and also was not infringed by St. Jude Medical, thereby eliminating the $140,000 verdict against the Company. The trial court also made other rulings 18 as part of the post-trial order, including a ruling that the '288 patent was invalid on several grounds. In August 2002, Guidant commenced an appeal of certain of the trial judge's post-trial decisions pertaining to the '288 patent. Guidant did not appeal the trial court's finding of invalidity and non-infringement of the '472 patent. The parties are currently in the briefing phase of this appeal. While it is not possible to predict the outcome of the appeal process, the Company believes that it has meritorious defenses against the claims asserted by Guidant and Guidant's continued pursuit of this case. Since the date of St. Jude Medical's acquisition of Ventritex in May 1997 and the inception of the Company's sales of ICD products, St. Jude Medical accrued a 3% royalty on its ICD sales under a license with Guidant that it believed it had acquired as part of its purchase of assets of the Telectronics cardiac stimulation device business. As a result of the jury's July 2001 verdict that St. Jude Medical's ICD products do not infringe Guidant's '288 patent, the Company ceased further royalty accruals. The historical accruals under this license at that time, which totaled approximately $15,000, remained on the Company's balance sheet pending further developments in the case. The Company evaluated the facts and circumstances of this case as part of its 2001 fiscal year close, including the post-trial ruling that the '288 patent was invalid, and concluded that the probability that the Company would have to pay any royalty under the license agreement was remote. As such, the Company reversed the $15,000 liability through selling, general and administrative expense in the fourth quarter of 2001. In addition, the Company incurred legal fees in relation to the Guidant litigation that were subject to recoverability under an indemnification agreement between the Company and the seller of the Telectronics cardiac stimulation device business. The Company believed that the indemnitor would resist payment and, therefore, wrote off approximately $15,000 of its indemnity claim through selling, general and administrative expense in the fourth quarter of 2001. OTHER LITIGATION MATTERS: The Company is involved in various product liability lawsuits, claims and proceedings of a nature considered normal to its business. Subject to self-insured retentions, the Company believes it has product liability insurance sufficient to cover such claims and suits. 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 as a reduction of selling, general and administrative expense. 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 this stock split. The Company's authorized capital consists of 25,000,000 shares of $1.00 per share par value preferred stock and 250,000,000 shares of $0.10 per share par value common stock. There were no shares of preferred stock issued or outstanding during 2002, 2001 or 2000. EMPLOYEE STOCK PURCHASE SAVINGS PLAN: The Company's employee stock purchase savings plan allows participating employees to purchase, through payroll deductions, newly issued shares of the Company's common stock at 85% of the fair market value at specified dates. Employees purchased 224,819, 286,362 and 228,080 shares in 2002, 2001 and 2000, respectively, under this plan. At December 31, 2002, 1,488,819 shares of additional common stock were available for purchase under the plan. STOCK COMPENSATION PLANS: The Company's stock compensation plans provide for the issuance of stock-based awards, such as restricted stock or stock options, to directors, officers, employees and consultants. Stock option awards under these plans generally have an eight to ten year life, an exercise price equal to the fair market value on the date of grant and a four-year vesting term. At December 31, 2002, the Company had 8,341,130 shares of common stock available for grant under these plans. Stock option transactions under these plans during each of the three years in the period ended December 31, 2002 are as follows: WEIGHTED OPTIONS AVERAGE OUTSTANDING EXERCISE PRICE ============================================================================ BALANCE AT JANUARY 1, 2000 22,823,226 $ 15.47 Granted 7,463,266 25.43 Canceled (1,478,680) 16.60 Exercised (2,268,172) 15.06 - ---------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2000 26,539,640 18.24 Granted 6,373,310 35.94 Canceled (762,734) 21.08 Exercised (3,467,214) 15.27 - ---------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2001 28,683,002 22.45 Granted 5,041,340 35.60 Canceled (716,452) 26.89 Exercised (3,312,968) 16.66 - ---------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2002 29,694,922 $ 25.22 ============================================================================ 19 Stock options totaling 15,432,468, 12,623,674 and 10,805,058 were exercisable at December 31, 2002, 2001 and 2000, respectively. The following tables summarize information concerning currently outstanding and exercisable stock options at December 31, 2002: OPTIONS OUTSTANDING =============================================================================== WEIGHTED AVERAGE WEIGHTED REMAINING AVERAGE RANGES OF NUMBER CONTRACTUAL EXERCISE EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE =============================================================================== $ 8.77 - $13.16 1,020,494 2.0 $ 11.11 13.16 - 17.55 9,051,344 5.1 14.79 17.55 - 21.94 2,682,286 4.4 19.65 21.94 - 26.32 5,757,893 5.9 26.23 26.32 - 35.10 4,763,278 7.7 34.19 35.10 - 43.87 6,419,627 6.9 36.95 - ------------------------------------------------------------------------------- 29,694,922 5.9 $ 25.22 - ------------------------------------------------------------------------------- OPTIONS EXERCISABLE =============================================================================== WEIGHTED AVERAGE RANGES OF NUMBER EXERCISE EXERCISE PRICES EXERCISABLE PRICE =============================================================================== $ 8.77 - $13.16 860,938 $ 10.89 13.16 - 17.55 7,954,404 14.89 17.55 - 21.94 2,143,886 19.53 21.94 - 26.32 2,869,518 26.22 26.32 - 35.10 176,441 31.44 35.10 - 43.87 1,427,281 36.83 - ------------------------------------------------------------------------------- 15,432,468 $ 19.64 - ------------------------------------------------------------------------------- The Company also granted 30,470 shares of restricted common stock during the three years ended December 31, 2002, under the Company's stock compensation plans. The value of restricted stock awards as of the date of grant is charged to expense over the periods during which the restrictions lapse. SHAREHOLDERS' RIGHTS PLAN: The Company has a shareholder rights plan that entitles shareholders to purchase one-tenth of a share of Series B Junior Preferred Stock at a stated price, or to purchase either the Company's shares or shares of an acquiring entity at half their market value, upon the occurrence of certain events which result in a change in control, as defined by the Plan. The rights related to this plan expire in 2007. NOTE 7--PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT AND SPECIAL CHARGES PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES: In September 1999, the Company purchased VSI for $75,071 in cash, net of cash acquired, plus additional contingent consideration related to product development milestones for regulatory approvals and to future sales. The total consideration paid at close was allocated to the fair value of the net assets acquired ($7,618) and in-process research and development ($67,453). The Company paid additional amounts totaling $10,000 in 2001 and $5,000 in 2000, which were recorded as purchased in-process research and development expenses, as certain product development milestones were achieved. The remaining balance of the in-process research and development valuation ($13,047) will be recorded in the Company's consolidated financial statements as purchased in-process research and development expense when payment of the contingent consideration is assured beyond a reasonable doubt. Contingent consideration payments in excess of the $13,047 will be capitalized as goodwill. 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 $19,865 of these special charge accruals through December 31, 2002, consisting of $4,783 of employee severance costs, $9,328 of inventory write-offs and scrap, $3,379 of capital equipment write-offs and $2,375 of other costs. The Company estimates that the remaining accruals will be utilized during 2003. 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 that received U.S. regulatory approvals in late 2000 and early 2001 and was launched earlier in 2001. The charges relating to employee severance costs, capital equipment write-offs and other costs ($11,167) were recorded in operating expenses as special charges. The inventory and diagnostic equipment write-offs ($21,667) were included in cost of sales as special charges. 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 would 20 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. 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 obtaining certain reimbursements from the Company's insurance carriers under the product liability insurance policies. This additional accrual was included in selling, general and administrative expenses for the second quarter ended June 30, 2002. The Company has utilized $23,202 of these special charge accruals through December 31, 2002, consisting of $9,465 of asset write-downs and $13,737 of other costs. The Company estimates that the remaining accruals will be utilized primarily during 2003 and 2004. The Company has approximately $200,000 remaining in product liability insurance currently available for the Silzone(R)-related matters. 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--OTHER INCOME (EXPENSE) Other income (expense) consists of the following: 2002 2001 2000 ================================================================================ Interest income $ 5,481 $ 3,261 $ 2,640 Interest expense (1,754) (12,567) (28,569) Other (324) 1,468 879 - -------------------------------------------------------------------------------- Other income (expense) $ 3,403 $ (7,838) $ (25,050) ================================================================================ NOTE 9--INCOME TAXES The Company's earnings before income taxes were generated from its U.S. and international operations as follows: 2002 2001 2000 ================================================================================ U.S. $ 270,595 $ 83,128 $ 75,538 International 102,763 144,850 101,771 - -------------------------------------------------------------------------------- Earnings before income taxes $ 373,358 $ 227,978 $ 177,309 ================================================================================ Income tax expense consists of the following: 2002 2001 2000 ================================================================================ Current: U.S. federal $ 48,459 $ 48,844 $ 31,859 U.S. state and other 4,732 4,994 3,815 International 6,187 13,229 17,980 - -------------------------------------------------------------------------------- Total current 59,378 67,067 53,654 - -------------------------------------------------------------------------------- Deferred 37,695 (11,681) (5,439) - -------------------------------------------------------------------------------- Income tax expense $ 97,073 $ 55,386 $ 48,215 ================================================================================ The tax effects of the cumulative temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial statement purposes are as follows: 2002 2001 ================================================================================ DEFERRED INCOME TAX ASSETS: Net operating loss carryforwards $ 12,732 $ 52,349 Tax credit carryforwards 30,554 31,678 Inventories 34,403 30,403 Intangible assets 3,552 14,002 Accrued liabilities and other 11,569 1,746 - -------------------------------------------------------------------------------- Deferred income tax assets 92,810 130,178 - -------------------------------------------------------------------------------- DEFERRED INCOME TAX LIABILITIES: Unrealized gain on available-for-sale securities (2,599) (5,620) Property, plant and equipment (21,085) (20,757) - -------------------------------------------------------------------------------- Deferred income tax liabilities (23,684) (26,377) - -------------------------------------------------------------------------------- Net deferred income tax asset $ 69,126 $ 103,801 ================================================================================ A reconciliation of the U.S. federal statutory income tax rate to the Company's effective income tax rate is as follows:
2002 2001 2000 - --------------------------------------------------------------------------------------------------------- Income tax expense at the U.S. federal statutory rate of 35% $ 130,675 $ 79,792 $ 62,058 U.S. state income taxes, net of federal tax benefit 8,378 3,654 2,725 International taxes at lower rates (29,972) (20,089) (12,451) Tax benefits from foreign sales corporation and extraterritorial income exclusion (3,675) (3,681) (2,280) Research and development credits (9,467) (5,984) (4,464) Non-deductible purchased in-process research and development charges - 3,912 2,141 Other 1,134 (2,218) 486 - --------------------------------------------------------------------------------------------------------- Income tax expense $ 97,073 $ 55,386 $ 48,215 ========================================================================================================= Effective income tax rate 26.0% 24.3% 27.2% =========================================================================================================
At December 31, 2002, the Company has $36,377 of net operating loss carryforwards and $25,633 of tax credit carryforwards that will expire from 2003 through 2022 if not utilized. These amounts are subject to annual usage limitations. The Company's net operating loss carryforwards arose primarily from acquisitions. The Company also has alternative minimum tax credit carryforwards of $4,921 that have an unlimited carryforward period. The Company has not recorded U.S. deferred income taxes on $430,885 of its non-U.S. subsidiaries' undistributed earnings, because such amounts are intended to be reinvested outside the United States indefinitely. 21 NOTE 10--RETIREMENT PLANS DEFINED CONTRIBUTION PLANS: The Company has a 401(k) profit sharing plan that provides retirement benefits to substantially all full-time U.S. employees. Eligible employees may contribute a percentage of their annual compensation, subject to IRS limitations, with the Company matching a portion of the employees' contributions. The Company also contributes a portion of its earnings to the plan based upon Company performance. The Company's matching and profit sharing contributions are at the discretion of the Company's Board of Directors. In addition, the Company has defined contribution programs for employees outside the United States. Company contributions under all defined contribution plans totaled $18,764, $16,249 and $13,170 in 2002, 2001 and 2000, respectively. DEFINED BENEFIT PLANS: The Company has unfunded defined benefit plans for employees in certain countries outside the United States. The Company has an accrued liability totaling approximately $10,700 at December 31, 2002, which approximates the actuarially calculated unfunded liability. The related pension expense was not material. NOTE 11--SEGMENT AND GEOGRAPHIC INFORMATION SEGMENT INFORMATION: The Company manages its business on the basis of one reportable segment--the development, manufacturing and distribution of cardiovascular medical devices. See Note 1 for a brief description of the Company's primary markets and principal products. Net sales by class of similar products were as follows: NET SALES 2002 2001 2000 ================================================================================ Cardiac rhythm management $ 1,147,489 $ 965,968 $ 819,117 Cardiac surgery 250,957 248,045 256,949 Cardiology and vascular access 191,483 133,343 102,740 - -------------------------------------------------------------------------------- $ 1,589,929 $ 1,347,356 $ 1,178,806 ================================================================================ GEOGRAPHIC INFORMATION: The following tables present certain geographical financial information: NET SALES * 2002 2001 2000 - ------------------------------------------------------------------------------- United States $ 1,042,766 $ 880,086 $ 745,793 International 547,163 467,270 433,013 - ------------------------------------------------------------------------------- $ 1,589,929 $ 1,347,356 $ 1,178,806 =============================================================================== LONG-LIVED ASSETS ** 2002 2001 2000 - ------------------------------------------------------------------------------- United States $ 674,119 $ 626,140 $ 640,220 International 150,674 137,803 149,325 - ------------------------------------------------------------------------------- $ 824,793 $ 763,943 $ 789,545 =============================================================================== * NET SALES ARE ATTRIBUTED TO COUNTRIES BASED ON LOCATION OF THE CUSTOMER. ** LONG-LIVED ASSETS EXCLUDE DEFERRED INCOME TAXES. NOTE 12--QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial data for 2002 and 2001 is as follows:
QUARTER FIRST SECOND THIRD FOURTH ========================================================================================================================== FISCAL YEAR ENDED DECEMBER 31, 2002: Net sales $ 371,193 $ 404,348 $ 404,857 $ 409,531 Gross profit 252,405 275,386 276,476 279,716 Net earnings 62,076 69,555 (1) 71,680 72,974 Basic net earnings per share 0.35 0.39 0.40 0.41 Diluted net earnings per share $ 0.34 $ 0.38 $ 0.39 $ 0.40 FISCAL YEAR ENDED DECEMBER 31, 2001: Net sales $ 326,065 $ 336,062 $ 337,029 $ 348,200 Gross profit 218,988 225,839 207,040 (3) 236,330 Net earnings 47,074 43,819 (2) 31,434 (3) 50,265 (2) Basic net earnings per share 0.28 0.26 0.18 0.29 Diluted net earnings per share $ 0.27 $ 0.25 $ 0.18 $ 0.28 ==========================================================================================================================
(1) INCLUDES A CASH RECEIPT OF $18,500 RELATING TO THE SETTLEMENT OF CERTAIN PATENT LITIGATION, WHICH WAS RECORDED AS A REDUCTION OF SG&A EXPENSE. ALSO, THE COMPANY RECORDED IN SG&A AN $11,000 CHARGE TO INCREASE THE RESERVE FOR EXPENSES RELATED TO THE SILZONE(R) RECALL AND A $7,500 DISCRETIONARY CONTRIBUTION TO ITS CHARITABLE FOUNDATION. (2) INCLUDES A PRE-TAX PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE OF $5,000 RELATING TO THE VASCULAR SCIENCE, INC. ACQUISITION. (3) INCLUDES A PRE-TAX SPECIAL CHARGE OF $32,834 RELATING TO A RESTRUCTURING OF ITS U.S. AND INTERNATIONAL SALES ORGANIZATIONS, A STREAMLINING OF ITS HEART VALVE OPERATIONS AND A WRITE-OFF OF CERTAIN DIAGNOSTIC EQUIPMENT. $21,667 OF THIS SPECIAL CHARGE WAS RECORDED IN COST OF SALES, AND THE REMAINING $11,167 WAS RECORDED IN OPERATING EXPENSES. 22 FIVE-YEAR SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2002 2001* 2000** 1999*** 1998 ===================================================================================================================== SUMMARY OF OPERATIONS FOR THE FISCAL YEAR: Net sales $1,589,929 $1,347,356 $1,178,806 $1,114,549 $1,015,994 Gross profit $1,083,983 $ 888,197 $ 787,657 $ 733,647 $ 643,054 Percent of net sales 68.2% 65.9% 66.8% 65.8% 63.3% Operating profit $ 369,955 $ 235,816 $ 202,359 $ 89,188 $ 193,952 Percent of net sales 23.3% 17.5% 17.2% 8.0% 19.1% Net earnings $ 276,285 $ 172,592 $ 129,094 $ 24,227 $ 129,082 Percent of net sales 17.4% 12.8% 11.0% 2.2% 12.7% Diluted net earnings per share $ 1.51 $ 0.97 $ 0.75 $ 0.14 $ 0.75 - --------------------------------------------------------------------------------------------------------------------- FINANCIAL POSITION AT YEAR END: Cash and equivalents $ 401,860 $ 148,335 $ 50,439 $ 9,655 $ 3,775 Working capital 739,665 475,692 388,322 389,768 471,090 Total assets 1,951,379 1,628,727 1,532,716 1,554,038 1,384,612 Long-term debt -- 123,128 294,500 477,495 374,995 Shareholders' equity 1,576,727 1,183,745 940,849 794,021 806,220 - --------------------------------------------------------------------------------------------------------------------- OTHER DATA: Diluted weighted average shares outstanding 183,002 178,767 171,634 169,470 172,290 =====================================================================================================================
ALL FISCAL YEARS NOTED ABOVE CONSISTED OF FIFTY-TWO WEEKS. THE COMPANY DID NOT DECLARE OR PAY ANY CASH DIVIDENDS DURING 1998 THROUGH 2002. *RESULTS FOR 2001 INCLUDE A $32,834 SPECIAL CHARGE AND PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES OF $10,000. THE IMPACT OF THESE ITEMS ON 2001 NET EARNINGS WAS $30,517, OR $0.17 PER DILUTED SHARE. **RESULTS FOR 2000 INCLUDE A $26,101 SPECIAL CHARGE AND A PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE OF $5,000. THE IMPACT OF THESE ITEMS ON 2000 NET EARNINGS WAS $27,213, OR $0.16 PER DILUTED SHARE. ***RESULTS FOR 1999 INCLUDE A $9,754 SPECIAL CHARGE AND PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES TOTALING $115,228. THE IMPACT OF THESE ITEMS ON 1999 NET EARNINGS WAS $119,762, OR $0.71 PER DILUTED SHARE. 23 INVESTOR INFORMATION TRANSFER AGENT Requests concerning the transfer or exchange of shares, lost stock certificates, duplicate mailings, or change of address should be directed to the Company's Transfer Agent at: EquiServe Trust Company, N.A. P.O. Box 43023 Providence, RI 02940-3023 1.877.282.1168 www.equiserve.com (Account Access Availability) Hearing impaired #TDD: 1.800.952.9245 ANNUAL MEETING OF SHAREHOLDERS The annual meeting of shareholders will be held at 9:30 a.m. on Thursday, May 8, 2003, at the Minnesota Historical Center, 345 Kellogg Boulevard West, St. Paul, Minnesota, 55102. INVESTOR CONTACT Laura C. Merriam Director, Investor Relations 1.651.766.3029 To obtain information about the Company call 1.800.552.7664, visit our Web site at www.sjm.com, or write to: Investor Relations St. Jude Medical, Inc. One Lillehei Plaza St. Paul, Minnesota 55117-9983 The Investor Relations section on St. Jude Medical's Web site includes all SEC filings, a list of analyst coverage, analyst estimates, and a calendar of upcoming earnings announcements and investor relations events. St. Jude Medical's Newsroom features news releases, company background information, fact sheets, executive bios, a product photo portfolio, and other media resources. Patient profiles can be found on our Web site, including the patients featured in this year's annual report. (C)2003 ST. JUDE MEDICAL, INC. COMPANY INFORMATION (SEE COMPANY INFORMATION ON WEB SITE- WWW.SJM.COM) o Principles of Corporate Governance o Code of Business Conduct o SEC Filings COMPANY STOCK SPLITS 2:1 on 4/27/79, 1/25/80, 9/30/86, 3/15/89 and 4/30/90 and 6/10/02; 3:2 on 11/16/95 STOCK EXCHANGE LISTINGS New York Stock Exchange Symbol: STJ The range of high and low prices per share for the Company's common stock for fiscal 2002 and 2001 is set forth below. As of February 14, 2003, the Company had 3,606 shareholders of record. FISCAL YEAR ENDED DECEMBER 31 2002 2001 - ------------------------------------------------------------------------------ Quarter High Low High Low - ------------------------------------------------------------------------------ First $ 40.80 $ 35.75 $ 32.28 $ 22.23 Second $ 43.13 $ 36.20 $ 33.00 $ 24.80 Third $ 41.00 $ 30.52 $ 36.03 $ 28.88 Fourth $ 40.35 $ 31.16 $ 39.04 $ 33.48 TRADEMARKS Aescula(TM), AF Suppression(TM), Alliance(TM), Angio-Seal(TM), Atlas(R), BiLinx(TM), Epic(TM), Fast-Cath(TM), Fast-cath Duo(TM), FlexCuff(TM), Frontier(TM), Genesis System(TM), GuideRight(TM), Housecall Plus(TM), HydroSteer(TM), Identity(R), Integrity(R), ISOFlex(TM), Linx(TM), Livewire(TM), Livewire Cannulator(TM), Livewire Spiral HP(TM), Livewire TC(TM), Microny(R), Maximum(TM), NaviFlex(TM), Photon(R), Response(TM), Riata(R), Seal-Away(TM), SJM(R), SJM Biocor(TM), SJM Epic(TM), SJM Regent(TM), SJM Tailor(TM), SpyglASS(TM), St. Jude Medical(R), Supreme(TM), Supreme Spiral SC(TM), Symmetry(TM), Tendril(R), Toronto Root(TM), Toronto SPV(R), Trio(TM), TVL(R), Ultimum(TM), Victory(TM). Broadlane(R)and Novation(R)are registered trademarks of Broadlane, Inc. and Novation, respectively. 24 EX-21 4 stjude031298_ex21.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 ST. JUDE MEDICAL, INC. SUBSIDIARIES OF THE REGISTRANT St. Jude Medical, Inc. Wholly Owned Subsidiaries: o Pacesetter, Inc. - Sylmar, California, Scottsdale, Arizona, and Maven, South Carolina (Delaware corporation) (doing business as St. Jude Medical Cardiac Rhythm Management Division) o St. Jude Medical S.C., Inc. - St. Paul, Minnesota (Minnesota corporation) - Bio-Med Sales, Inc. (Pennsylvania corporation) - HeartBeat Medical, Inc. (Utah corporation) o St. Jude Medical Europe, Inc. - St. Paul, Minnesota (Delaware corporation) - Brussels, Belgium branch o St. Jude Medical Canada, Inc. - Mississauga, Ontario and St. Hyacinthe, Quebec (Ontario, Canada corporation) o 151703 Canada, Inc. - St. Paul, Minnesota (Ontario, Canada corporation) o St. Jude Medical (Hong Kong) Limited - Central, Hong Kong (Hong Kong corporation) - Shanghai and Beijing, China representative offices - Korean and Taiwan branch offices - Mumbai, New Delhi, Calcutta and Chennai, India branch offices o St. Jude Medical, Inc., Cardiac Assist Division - St. Paul, Minnesota (Delaware corporation) (Assets of St. Jude Medical, Inc., Cardiac Assist Division sold to Bard 1/19/96) o St. Jude Medical Australia Pty., Ltd. - Sydney Australia (Australian corporation) o St. Jude Medical Brasil, Ltda. - Sao Paulo and Belo Horizonte, Brazil (Brazilian corporation) o Telectronics Medica, Ltda. - Sao Paulo, Brazil (Brazilian corporation) (ownership of Telectronics Medical, Ltda. is shared by St. Jude Medical, Inc., St. Jude Medical Brasil, Ltda. and SJM International, Inc. with 7,726,500, 5,748,283 and 10 shares, respectively) o St. Jude Medical, Daig Division, Inc.- Minnetonka, Minnesota (Minnesota corporation) o St. Jude Medical Colombia, Ltda. (Bogota, Colombia) (Colombian corporation) o St. Jude Medical ATG, Inc. - Maple Grove, Minnesota (Minnesota corporation) o SJM International, Inc. - St. Paul, Minnesota (Delaware corporation) - Tokyo, Japan branch SJM International Inc. Wholly Owned Subsidiaries o St. Jude Medical Puerto Rico, Inc. - Caguas, Puerto Rico (Delaware corporation) - St. Jude Medical Puerto Rico Holding, B.V. (Netherlands corporation) (wholly owned subsidiary of St. Jude Medical Puerto Rico, Inc.) - St. Jude Medical Japan KK (Japanese corporation) (wholly owned subsidiary of St. Jude Medical Puerto Rico Holding, B.V. - St. Jude Medical Nederland B.V. (Netherlands corporation) (wholly owned subsidiary of St. Jude Medical Puerto Rico Holding, B.V.) - Telectronics B.V. (Netherlands corporation) (wholly owned subsidiary of St. Jude Medical Nederland B.V.) - St. Jude Medical Netherlands Distribution AB (Swedish corporation headquartered in the Netherlands) (wholly owned subsidiary of St. Jude Medical Puerto Rico Holding, B.V.) - St. Jude Medical Puerto Rico B.V. (Netherlands corporation) (wholly owned subsidiary of St. Jude Medical Netherlands Distribution AB) - Puerto Rico branch of St. Jude Medical Puerto Rico B.V. - St. Jude Medical Coordination Center (Belgium branch of St. Jude Medical Netherlands Distribution AB) o St. Jude Medical AB (Swedish corporation) o St. Jude Medical Sweden AB (Swedish corporation) o St. Jude Medical Danmark A/S (Danish corporation) - Telectronics Scandinavia Aps (Danish corporation) (wholly owned subsidiary of St. Jude Medical Danmark A/S) o St. Jude Medical Pacesetter Sales AB (Swedish corporation) o St. Jude Medical (Portugal) - Distribuicao de Produtos Medicos, Lda. (Portuguese corporation) o St. Jude Medical Export Ges.m.b.H. (Austrian corporation) o St. Jude Medical Medizintechnik Ges.m.b.H. (Austrian corporation) o St. Jude Medical Italia S.p.A. (Italian corporation) o N.V. St. Jude Medical Belgium, S.A. (Belgian corporation) o St. Jude Medical Espana, S.A. (Spanish corporation) o St. Jude Medical France S.A. (French corporation) o St. Jude Medical Finland O/y (Finnish corporation) o St. Jude Medical Sp.zo.o. (Polish corporation) o St. Jude Medical GmbH (German corporation) o St. Jude Medical UK Limited (United Kingdom corporation) o St. Jude Medical AG (Swiss corporation) EX-23 5 stjude031298_ex23.txt CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report on Form 10-K of St. Jude Medical, Inc. of our report dated January 27, 2003, included in the 2002 Annual Report to Shareholders of St. Jude Medical, Inc. Our audits also included the financial statement schedule of St. Jude Medical, Inc. listed in Item 15(a) of this Annual Report on Form 10-K. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in Registration Statement No. 33-9262, Registration Statement No. 33-41459, Registration Statement No. 33-48502, Registration Statement No. 33-54435, Registration Statement No. 333-42945, Registration Statement No. 333-42658, Registration Statement No. 333-42668 and Registration Statement No. 333-96697 on Form S-8 of our report dated January 27, 2003, with respect to the consolidated financial statements incorporated herein by reference, and our report in the preceding paragraph with respect to the financial statement schedule included in this Annual Report on Form 10-K of St. Jude Medical, Inc. /s/ ERNST & YOUNG LLP Minneapolis, Minnesota March 19, 2003 EX-24 6 stjude031298_ex24.txt POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Terry L. Shepherd, John C. Heinmiller and Kevin T. O'Malley, each with full power to act without the other, his or her true and lawful attorney-in-fact and agent with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of St. Jude Medical, Inc. for the fiscal year ended December 31, 2002, and any or all amendments to said Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and to file the same with such other authorities as necessary, granting unto each such attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each such attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, this Power of Attorney has been signed on this 19th day of March, 2003, by the following persons. /s/ TERRY L. SHEPHERD /s/ DANIEL J. STARKS - --------------------- -------------------- Terry L. Shepherd Daniel J. Starks Chairman and Chief Executive Officer Director (Principal Executive Officer) /s/ JOHN C. HEINMILLER /s/ DAVID A. THOMPSON - ---------------------- --------------------- John C. Heinmiller David A. Thompson Vice President, Finance and Director Chief Financial Officer (Principal Financial and Accounting Officer) /s/ STEFAN K. WIDENSOHLER - ----------------------- ------------------------- Richard R. Devenuti Stefan K. Widensohler Director Director /s/ STUART M. ESSIG /s/ WENDY L. YARNO - ------------------- ------------------ Stuart M. Essig Wendy L. Yarno Director Director /s/ THOMAS H. GARRETT III /s/ FRANK C-P YIN - ------------------------- ----------------- Thomas H. Garrett III Frank C-P Yin Director Director /s/ WALTER L. SEMBROWICH Walter L. Sembrowich Director EX-99.1 7 stjude031298_ex99-1.txt SECTION 906 CERTIFICATION 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 Annual Report of St. Jude Medical, Inc., (the "Company") on Form 10-K for the period ended December 31, 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 Chairman and Chief Executive Officer March 19, 2003 EX-99.2 8 stjude031298_ex99-2.txt SECTION 906 CERTIFICATION 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 Annual Report of St. Jude Medical, Inc., (the "Company") on Form 10-K for the period ended December 31, 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 March 19, 2003 -----END PRIVACY-ENHANCED MESSAGE-----