-----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, IPZvMBhXvTcvTecpqX6xq1O9OyXxOVf7RPaa7dampGnpWXafGgsx7vnBoaWsjXYF l19C5PASAxa7aT+4QWb5eg== 0000897101-01-500059.txt : 20010330 0000897101-01-500059.hdr.sgml : 20010330 ACCESSION NUMBER: 0000897101-01-500059 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010329 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: SEC FILE NUMBER: 001-12441 FILM NUMBER: 1583808 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 stjude010431_10-k.txt ST. JUDE MEDICAL FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ------------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 COMMISSION FILE NO. 0-8672 ------------------------------ ST. JUDE MEDICAL, INC. (Exact name of Registrant as specified in its charter) MINNESOTA 41-1276891 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) ONE LILLEHEI PLAZA ST. PAUL, MINNESOTA 55117 (Address of principal executive offices) (651) 483-2000 (Registrant's telephone number, including area code) ------------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: COMMON STOCK ($.10 PAR VALUE) PREFERRED STOCK PURCHASE RIGHTS (Title of class) (Title of class) NEW YORK STOCK EXCHANGE AND CHICAGO BOARD OPTIONS EXCHANGE (Name of exchange on which registered) SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE ------------------------------ Indicate by check mark 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: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months; and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- -------- The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $5.1 billion at February 21, 2001, when the closing sale price of such stock, as reported on the New York Stock Exchange, was $60.00 per share. The Registrant had 85,640,177 shares of its $0.10 par value Common Stock outstanding as of February 21, 2001. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 2000, are incorporated by reference in Parts I, II and IV. Portions of the Company's definitive Proxy Statement dated March 28, 2001, are incorporated by reference in Part III. PART I ITEM 1. BUSINESS GENERAL St. Jude Medical, Inc., together with its subsidiaries (collectively "St. Jude" or the "Company") is a global leader in the development, manufacturing and distribution of medical technology products for the cardiac rhythm management, cardiology and vascular access, and cardiac surgery markets. St. Jude has two reportable segments: Cardiac Rhythm Management (CRM) and Cardiac Surgery (CS - formerly known as Heart Valve Disease Management). The CRM segment, which includes the results from the Company's Cardiac Rhythm Management Division and Daig Division, develops, manufactures and distributes bradycardia pulse generator and tachycardia implantable cardioverter defibrillator (ICD) systems, electrophysiology and interventional cardiology catheters, and vascular closure devices. The CS segment develops, manufactures and distributes mechanical and tissue heart valves and valve repair products, and suture-free devices to facilitate coronary artery bypass graft anastomoses. Effective September 27, 1999, St. Jude acquired Vascular Science, Inc. ("VSI"), a development-stage company focused on the development of suture-free devices to facilitate coronary artery bypass graft anastomoses. Effective March 16, 1999, St. Jude purchased the Angio-Seal(TM) business of Tyco International Ltd. Angio-Seal(TM) manufactured and marketed hemostatic puncture closure devices. During 2000 and 1999, the Company acquired various businesses used in the distribution of the Company's products. The Company markets its products primarily in the United States, Western Europe and Japan through both a direct employee-based sales organization and independent distributors. In addition, St. Jude maintains geographically based sales and marketing organizations that are responsible for marketing, sales and distribution of the Company's products in Eastern Europe, Africa, the Middle East, Canada, Latin America and the Asia-Pacific region. Typically, the Company's net sales are somewhat higher in the first and second quarters and lower in the third and fourth quarters. Lower net sales in the third quarter result from patient tendency to defer, if possible, cardiac procedures during the summer months and from the seasonality of the U.S. and Western 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 U.S. and other markets, and patient tendency to defer, if possible, cardiac procedures during these holiday seasons. Independent distributors randomly place large orders that can distort the net 2 sales pattern just described. In addition, new product introductions, acquisitions, and regulatory approvals can modify the typical net sales pattern. In 2000, approximately 78% of net sales were derived from cardiac rhythm management segment products, and approximately 22% from cardiac surgery segment products. Approximately 63% of the Company's 2000 net sales were in the U.S. market, as compared with 62% in 1999. Additional segment information is set forth in the Company's 2000 Annual Report to Shareholders on pages 21 and 22 of the Financial Report and is incorporated herein by reference. CARDIAC RHYTHM MANAGEMENT The Cardiac Rhythm Management Division ("CRMD") is headquartered in Sylmar, California and has manufacturing facilities in California, Arizona, South Carolina and Sweden. The Daig Division ("Daig") is headquartered in Minnesota and has manufacturing facilities in Minnesota and Puerto Rico. CRMD pacemakers and related systems treat patients with hearts that beat inappropriately slow, a condition known as bradycardia. ICDs and related systems treat patients with hearts that beat inappropriately fast, a condition known as tachycardia. Daig's specialized disposable cardiovascular catheters and related devices are used in the electrophysiology portion of the cardiac rhythm management market and the cardiology and vascular access market. 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. CRMD's current pacing products include the advanced featured Integrity(TM) AFx Micro and the Integrity(TM) AFx models, FDA approved in December 2000 and May 2000, respectively. The Integrity(TM) models build on the successful platform of the Affinity(R) product line with the beat-by-beat AutoCapture(TM) pacing system. Also available are the January 1999 FDA approved Affinity(R), and the August 1999 FDA approved Entity(TM) family of pacemakers, containing the proven Omnisense(TM) activity-based sensor, and the Tempo(R) pacemaker family, which uses fifth-generation Minute Ventilation sensor technology. These pacemaker families are highly automatic and contain many advanced features and diagnostic capabilities to optimize cardiac therapy. All are small and physiologic in shape to enhance patient comfort. Outside the United States, CRMD also offers the Integrity(TM) AFx Micro, the world's smallest dual-chamber pacemaker, with an Atrial Suppression algorithm called DAO (Dynamic Atrial Overdrive(TM)). DAO is a therapy designed to suppress atrial fibrillation, a common heart arrhythmia, and is currently under clinical investigation in the United States. The single-chamber pacemakers, the Microny(R) SR+ and the Regency(R) pacemaker families, are also available outside the United States; while the Microny(R) II SR+ is awaiting FDA approval in the United States. The Integrity(TM), Affinity(R), Entity(TM) and Regency(R) families of pacemakers, as well as the Microny(R) SR+, all offer the unique feature of the beat-by-beat AutoCapture(TM) pacing system. The AutoCapture(TM) pacing system enables the pacemaker to monitor every paced beat to verify that the heart has been stimulated ("capture"), deliver a back-up pulse in the event of noncapture, continuously measure threshold, and make adjustments in energy output to match changing patient needs. 3 CRMD's current pacing leads include the active-fixation Tendril(R) DX and SDX families and the passive-fixation Passive Plus(R) DX family which are available worldwide, and the passive-fixation Membrane(TM) EX family which is currently available outside the United States. All three lead families feature steroid elution, which helps suppress the body's inflammatory response to a foreign object. CRMD's ICDs monitor the heartbeat and deliver higher energy electrical impulses, or "shocks," to terminate ventricular tachycardia (VT) and ventricular fibrillation (VF). In ventricular tachycardia, the lower chambers of the heart contract at an abnormally rapid rate and typically deliver less blood to the body's tissues and organs. VT can progress to VF, in which the heart beats so rapidly and erratically that it can no longer pump blood. Like pacemakers, ICDs are typically implanted pectorally, connected to the heart by leads, and programmed non-invasively. St. Jude received FDA approval on its first dual-chamber ICD, the Photon(R) DR, in October 2000. The Photon(R) DR is a dual chamber ICD, offering the features of Morphology Discrimination (MD) and AV Rate Branch designed to enhance the precision of ventricular-based arrhythmia detection. The full CRMD ICD product offering includes the Photon(R), Profile(TM) MD, and Contour(R) MD. The Company's ICDs are used with the dual electrode and single electrode TVL and TVL-ADX (active-fix) transvenous leads. The Photon(TM) DR ICD is programmable with the APS III universal programmer. The Contour(R) MD and Profile(TM) ICDs are currently programmable with the PR-3500 and PR-1500 programmers, and will be programmable by the APS III by mid-2001. The CRMD APS(R) III universal pacemaker and ICD programmer is an intuitive, easy-to-use programmer that supports St. Jude's ICDs and pacemakers, including the recently FDA approved Photon(R) DR dual-chamber ICD and the Integrity(TM) pacemaker family. Older pacemaker and ICD products continue to be supported by the APS(R) II and the PR-3500 and PR-1500 patient management systems. All CRMD programmers allow the physician to efficiently utilize the extensive diagnostic and therapeutic capabilities of CRMD's pacemakers and ICDs. Specialized disposable cardiovascular devices, sold by Daig, include percutaneous (through the skin) catheter introducers, diagnostic guidewires, vascular sealing devices, angiography catheters, electrophysiology (EP) catheters and bipolar temporary pacing catheters (used with external pacemakers). 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. Daig'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, obturators and needles. All of these products are offered in a variety of sizes and packaging configurations. Diagnostic guidewires are used in conjunction with percutaneous catheter introducers to aid in the introduction of intravascular catheters. Daig's diagnostic guidewires are available in multiple lengths and incorporate a surface finish for lasting lubricity. Vascular sealing devices are used to close femoral artery puncture wounds following angioplasty, stenting and diagnostic procedures. Angiography catheters are used in coronary angiography procedures to obtain images of coronary arteries to identify structural cardiac diseases. EP catheters are placed into the human body percutaneously 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. Daig's EP catheters are available in multiple configurations. Bipolar temporary pacing catheters are inserted percutaneously for temporary use (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. Daig produces and markets several designs of bipolar temporary pacing catheters. 4 CARDIAC SURGERY The Cardiac Surgery Division (CSD) is headquartered in St. Paul, Minnesota and has manufacturing facilities in Minnesota, Puerto Rico, Canada and Brazil. CSD is comprised of its Heart Value Group (HVG) and its Anastomotic Technology Group (ATG). 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. HVG 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 one million patients to date. The SJM Regent(TM) mechanical heart valve was approved for sale in Europe in December 1999 and is currently in a clinical trial in the United States. The Company markets the Toronto SPV(R) stentless tissue valve, a stentless tissue valve and the SJM(R) Biocor(TM) tissue valve. The Company received FDA approval for the U.S. market release of the Toronto SPV(R) in November 1997 at which time the product was launched and physician training commenced. The SJM Epic(TM) tissue heart valve received European regulatory approval in late 1998 and was launched in Europe in 1999. On January 21, 2000 the Company discontinued sales of CSD products, including heart valves, with Silzone(R) cuffs due to a higher incidence of perivalvular leak associated with this product in a clinical study. The Company also recalled unimplanted inventory of this product. Annuloplasty rings are prosthetic devices used to repair diseased or damaged mitral heart valves. The Company has executed a license agreement with Professor Jacques Seguin to manufacture and market an advanced semi-rigid annuloplasty ring, known as the SJM(R) Seguin annuloplasty ring. HVG also markets the SJM Tailor(TM) annuloplasty ring. HVG has also entered into an agreement with LifeNet Transplant Services, which enables it to assist in the marketing of human donated allograft heart valves. ATG has developed a suture-free device to facilitate coronary artery bypass graft proximal anastomoses and commenced marketing of this product in Western Europe in 2000. This product has been submitted to the FDA for approval, which is expected in 2001. ATG is also developing a distal anastomoses suture-free device and next generation proximal devices. SUPPLIERS The Company purchases raw materials and other items from numerous suppliers for use in its products. For certain materials that the Company believes are critical and may be difficult to obtain from an alternative supplier, the Company maintains sizable inventories of up to three years of its projected requirements for certain materials, some of which are available only from a single supplier. The Company has been advised from time to time that certain of these suppliers may terminate sales of products to customers that manufacture implantable medical devices in an effort to reduce their potential products liability exposure. Some of these suppliers have modified their positions and have indicated a willingness to either temporarily continue to provide product until such time as an alternative vendor or product can be qualified or to reconsider the supply relationship. While the Company believes that alternative sources of raw materials are available and that there is sufficient lead time in which to qualify such other sources, any supply interruption could have a material adverse effect on the Company's ability to manufacture its products. 5 COMPETITION 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. Market share can shift as a result of technological innovation, product recalls and product safety alerts, as well as other business factors. This emphasizes the need to provide the highest quality products and services. St. Jude expects the competition to continue to increase by using tactics such as consigned inventory, bundled product sales and reduced pricing. CRMD has traditionally been a technological leader in the bradycardia pacemaker market. The Company has strong bradycardia market share positions in all major developed markets. There are three principal manufacturers and suppliers of ICDs, one of which is the Company. ICD therapy is a highly competitive market. The Company's other two competitors account for more than 80% of the worldwide ICD sales. These two competitors are larger than the Company and have invested substantial amounts in ICD research and development. The market areas Daig focuses on are the cardiac catheterization laboratories and the electrophysiology laboratories throughout the world. These are growing markets with numerous competitors. The Company is the world's leading manufacturer and supplier of mechanical heart valves. There are two other principal and several other smaller mechanical heart valve manufacturers. The Company also competes against two principal and a large number of other smaller tissue heart valve manufacturers. The medical technology market is a dynamic market currently undergoing significant change due to cost of care considerations, regulatory reform, industry consolidation and customer consolidation. The ability to provide cost effective clinical outcomes is becoming increasingly more important for medical technology manufacturers. MARKETING The Company's products are sold in over 100 countries throughout the world. No distributor organization or single customer accounted for more than 10% of 2000, 1999 or 1998 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. Throughout the rest of the world the Company uses a combination of independent distributor and direct sales organizations. Group purchasing organizations (GPOs) in the U.S. continue to consolidate the purchasing for some of the Company's customers. A few GPOs have executed contracts with the Company's CRM market competitors, which exclude the Company. These contracts, if enforced, may adversely affect the Company's sales of CRM products to members of these GPOs. Payment terms worldwide are consistent with local practice. Orders are shipped as they are received and, therefore, no material backlog exists. 6 RESEARCH AND DEVELOPMENT The Company is focused on the development of new products and improvements to existing products. In addition, research and development expense reflects the Company's efforts to obtain FDA approval of certain new products and processes, and to maintain the highest quality standards of existing products. The Company's research and development expenses, exclusive of purchased in-process research and development, were $137,814,000 (11.7% of net sales), $125,059,000 (11.2% of net sales) and $99,756,000 (9.8% of net sales) in 2000, 1999 and 1998, respectively. GOVERNMENT REGULATION The medical devices manufactured and marketed by the Company are subject to regulation by the FDA and, in most instances, by state and foreign governmental authorities or their designated representatives. Under the U.S. Federal Food, Drug and Cosmetic Act (the "Act"), and regulations thereunder, manufacturers of medical devices must comply with certain policies and procedures that regulate the composition, labeling, testing, manufacturing, packaging and distribution of medical devices. Medical devices are subject to different levels of government approval requirements, the most comprehensive of which requires the completion of an FDA approved clinical evaluation program and submission and approval of a pre-market approval ("PMA") application before a device may be commercially marketed. The Company's mechanical and tissue heart valves, ICDs, certain pacemakers and leads and certain electrophysiology catheter applications are subject to this level of approval or as a supplement to a PMA approval. Other pacemakers and leads, annuloplasty ring products and other electrophysiology and interventional cardiology products are currently marketed under the 510(k) pre-market notification procedure of the Act. In addition, the FDA may require testing and surveillance programs to monitor the effect of approved products which have been commercialized and it has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs. The FDA also conducts inspections prior to approval of a PMA to determine compliance with the quality system regulations which covers manufacturing and design and may, at any time after approval of a PMA or granting of a 510(K), conduct periodic inspections to determine compliance with both good manufacturing practice regulations and/or current medical device reporting regulations. If the FDA were to conclude that St. Jude was 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 Department of Justice. Furthermore, the FDA could proceed to ban, or request recall, repair, replacement or refund of the cost of, any device manufactured or distributed. The FDA also regulates record keeping for medical devices and reviews hospital and manufacturers' required reports of adverse experiences to identify potential problems with FDA authorized devices. Aggressive regulatory action may be taken due to adverse experience reports. Diagnostic-related groups ("DRG") reimbursement schedules regulate the amount the United States government, through the Health Care Financing Administration ("HCFA"), 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 have been advanced which would restrict future funding increases for these programs. Changes in current DRG reimbursement levels could have an adverse effect on its domestic pricing flexibility. 7 St. Jude's business outside the United States is subject to medical device laws in individual foreign countries. These laws range from extensive device approval requirements in some countries for all or some of the Company's products, to requests for data or certifications in other countries. Generally, regulatory requirements are increasing in these countries. In the European Economic Community ("EEC"), the regulatory systems have been harmonized and approval to market in EEC countries (the CE Mark) can be obtained through one agency. In addition, government funding of medical procedures is limited and in certain instances is being reduced. A number of medical device regulatory agencies have begun considering whether to continue to permit the sale of medical devices that incorporate any bovine material because of concerns about Bovine Spongiform Encephalopathy (BSE), sometimes referred to as "mad cow disease." It is believed that in some instances this disease has been transmitted to humans through the consumption of beef. There have been no reported cases of BSE in the U.S. 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 a strip of bovine pericardial material. The Company is cooperating with these regulatory agencies. In 1994 the predecessor organization to Pacesetter, Inc. ("Pacesetter" - - a wholly owned subsidiary of St. Jude) entered a consent decree which settled a lawsuit brought by the United States in U.S. District Court for the District of New Jersey. The consent decree which remains in effect indefinitely requires that Pacesetter comply with the FDA's good manufacturing practice regulations and identifies several specific provisions of those regulations. The consent decree provides for FDA inspections and that Pacesetter is obligated to pay certain costs of the inspections. In May 1995 Telectronics Pacing Systems, Inc. ("Telectronics" - now part of Pacesetter) and its President entered into a consent decree with the FDA. The consent decree, which remains in effect indefinitely, requires that Telectronics comply with the FDA's good manufacturing practice regulations and identifies several specific provisions of those regulations. The consent decree provides for FDA inspections and that Telectronics is obligated to pay certain costs of the inspections. PATENTS AND LICENSES The Company's policy is to protect its intellectual property rights related to its medical devices. Where appropriate, St. Jude applies for United States and foreign patents. In those instances where the Company has acquired technology from third parties, it has sought to obtain rights of ownership to the technology through the acquisition of underlying patents or licenses. While the Company believes design, development, regulatory and marketing aspects of the medical device business represent the principal barriers to entry into such business, it also recognizes that its patents and license rights may make it more difficult for its competitors to market products similar to those produced by the Company. St. Jude can give no assurance that any of its patent rights, whether issued, subject to license, or in process, will not be circumvented or invalidated. Further, 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 medical technology industry has historically been subject to significant products liability claims. Such claims could be asserted against the Company in the future for events not known to 8 management at this time. Management has adopted risk management practices, including products liability insurance coverage, which management believes are prudent. 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 CRMD operations located in Sylmar and Sunnyvale, California provides for limited coverage above a significant self-insured retention. There are several factors that preclude the Company from determining the effect an earthquake may have on its business. These factors include, but are not limited to, the severity and location of the earthquake, the extent of any damage to the Company's manufacturing facilities, the impact of such an earthquake on the Company's California workforce and the infrastructure of the surrounding communities, and the extent, if any, of damage to the Company's inventory and work in process. While the Company's exposure to significant losses occasioned by a California earthquake would be partially mitigated by its ability to manufacture certain of the CRMD products at its Swedish manufacturing facility, any such losses could have a material adverse effect on the Company, the duration of which cannot be reasonably predicted. The Company has expanded the manufacturing capabilities at its Swedish facility 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, 2000, the Company had 4,951 full-time employees. It has never experienced a work stoppage as a result of labor disputes and none of its employees are represented by a labor organization, with the exception of the Company's Swedish employees and certain employees in France. INTERNATIONAL OPERATIONS The Company's foreign business is subject to such special risks as exchange controls, currency devaluation, the imposition or increase of import or export duties and surtaxes, and international credit or financial problems. Currency exchange rate fluctuations vis-a-vis the U.S. dollar can affect reported 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 pages 4 and 5 of "Management's Discussion and Analysis of Results of Operations and Financial Condition", incorporated herein by reference from the Company's 2000 Annual Report to Shareholders. Operations outside the United States present complex tax and cash management issues that necessitate sophisticated analysis and diligent monitoring to meet the Company's financial objectives. ITEM 2. PROPERTIES St. Jude's principal executive offices are owned and are located in St. Paul, Minnesota. Manufacturing facilities are located in California, Minnesota, Arizona, South Carolina, Canada, Brazil, Puerto Rico and Sweden. The Company owns approximately 62%, or 380,000 square feet, of the total manufacturing space and the balance is leased. The Company also maintains sales and administrative offices inside the United States at 17 locations in 7 states and outside the United States at 34 locations in 23 countries. With the exception of one location, all of these locations are leased. 9 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. Currently the Company is using substantially all of its available space to develop, manufacture and market its products. ITEM 3. LEGAL PROCEEDINGS IRS MATTERS During 2000, the Company and the Internal Revenue Service ("IRS") settled the IRS Tax Court suit for the tax periods 1990-1991 and subsequent year disputes for the tax periods 1992-1997. The issues raised by the IRS related primarily to the Company's Puerto Rican operations. The settlement did not have a material impact on the Company's consolidated financial statements. SILZONE(R) LITIGATION The Company has been sued by patients alleging defects in the Company's mechanical heart valves with a Silzone(R) coating. The Company recalled products with a Silzone(R) coating on January 21, 2000, and sent a Recall notice and Advisory concerning the recall to physicians and others. Some of these cases are seeking monitoring of patients implanted with Silzone(R)-coated valves who allege no injury to date. Some of these cases are seeking class action status. The Company intends to vigorously defend these cases. GUIDANT LITIGATION GUIDANT'S CLAIMS AGAINST SJM On November 26, 1996, Guidant Corporation (a competitor of St. Jude Medical) ("Guidant") and related parties filed a lawsuit against St. Jude Medical, Inc. ("St. Jude Medical"), Pacesetter, Inc. ("Pacesetter" - a wholly owned subsidiary of St. Jude Medical), Ventritex, Inc. ("Ventritex") and certain members of the Telectronics Group in State Superior Court in Marion County, Indiana (the "Telectronics Action"). The lawsuit alleges, among other things, that, pursuant to an agreement entered into in 1993, certain Guidant parties granted Ventritex intellectual property licenses relating to cardiac stimulation devices, and that such licenses would terminate upon the consummation of the merger of Ventritex into Pacesetter (the "Merger"). The lawsuit further alleges that, pursuant to an agreement entered into in 1994 (the "Telectronics Agreement"), certain Guidant parties granted the Telectronics Group intellectual property licenses relating to cardiac stimulation devices. The lawsuit seeks declaratory and injunctive relief, among other things, to prevent and invalidate the transfer of the Telectronics Agreement to Pacesetter in connection with Pacesetter's acquisition of Telectronics' assets (the "Telectronics Acquisition") and the application of license rights granted under the Telectronics Agreement to the manufacture and sale by Pacesetter of Ventritex's products following the consummation of the Merger. The court overseeing this case issued a stay of this matter in July 1998 so that the issues could be addressed in an arbitration requested by the Telectronics Group and Pacesetter. Guidant and related parties also filed suit against St. Jude Medical, Pacesetter and Ventritex on November 26, 1996, in the United States District Court for the Southern District of Indiana. This second lawsuit seeks (i) a declaratory judgment that Pacesetter's manufacture, use or sale of cardiac stimulation devices of the type or similar to the type which Ventritex manufactured and sold at the time the Guidant parties filed their complaint would, upon consummation of the Merger, be unlicensed and constitute an infringement of patent rights owned by certain Guidant parties, (ii) to enjoin the manufacture, use or sale by St. Jude Medical, Pacesetter or Ventritex of cardiac stimulation devices of the type which Ventritex manufactured at the time the Guidant parties filed their complaint, and (iii) certain damages and costs. This second lawsuit was stayed by the court in July 1998 given the order to arbitrate, as discussed below. 10 St. Jude Medical believes that the foregoing state and federal court complaints contain a number of significant factual inaccuracies concerning the Telectronics Acquisition and the terms and effects of the various intellectual property license agreements referred to in such complaints. For these reasons and others, St. Jude Medical believes that the allegations set forth in the complaints are without merit. St. Jude Medical has vigorously defended its interests in these cases and will continue to do so. ORDER TO ARBITRATE As a result of the state and federal lawsuits brought by Guidant and related parties, the Telectronics Group and Pacesetter filed a lawsuit in the United States District Court for the District of Minnesota seeking (i) a declaratory judgment that the Guidant parties' claims, as reflected in the Telectronics Action, are subject to arbitration pursuant to the arbitration provisions of the Telectronics Agreement, (ii) an order that the defendants arbitrate their claims against the Telectronics Group and Pacesetter in accordance with the arbitration provisions of the Telectronics Agreement, (iii) to enjoin the defendants preliminarily and permanently from litigating their dispute with the Telectronics Group and Pacesetter in any other forum, and (iv) certain costs. After the Eighth Circuit Court of Appeals ruled on an appeal in favor of the Telectronics Group and Pacesetter in May 1998, the United States District Court for the District of Minnesota issued an order on July 8, 1998 directing the arbitration requested by the Telectronics Group and Pacesetter to proceed. STATUS OF ARBITRATION The arbitrator selected for the arbitration initially ruled that Pacesetter and St. Jude Medical should not participate in the arbitration proceeding which would determine whether the Telectronics Agreement transferred to Pacesetter. Based on this ruling, the Telectronics Group and the Guidant parties participated in the arbitration proceeding. This proceeding occurred in late April 2000, and, on July 10, 2000, the arbitrator issued a ruling that the attempted assignment and transfer of patent licenses in the Telectronics Agreement by the Telectronics Group to Pacesetter was ineffective. As a result of this decision, the Guidant parties filed papers with the U.S. District Court for the Southern District of Indiana seeking to lift the stay of the patent infringement court proceedings in that court which had been entered in June 1998. The court granted Guidant's request to lift the stay and the matter involving Guidant's patent infringement claims against St. Jude Medical is scheduled for trial in June 2001. BACKGROUND CONCERNING PATENTS INVOLVED IN GUIDANT'S CLAIMS In the patent infringement case in federal court in Indiana, the Guidant parties initially asserted claims against St. Jude Medical and Pacesetter involving four separate patents. One of these patents (`678) expired May 3, 1998. The other patents involved expire, according to their terms, on March 7, 2001 (`472 patent), February 25, 2003 (`191 patent), and December 22, 2003 (`288 patent), respectively, although St. Jude Medical has claims in the court action which, if upheld, would cause some of the patents to expire earlier, if they apply at all. Although Guidant has requested injunctive relief and damages as part of the federal court lawsuit in Indiana, the request for an injunction would be barred for any expired patent. Guidant is seeking damages for the time period prior to expiration of the patents. MARKMAN RULINGS The federal district court in Indiana has issued decisions as part of the court's Markman's process which interpret what the claims in the patents mean. These decisions are available on the court's website at HTTP://WWW.INSD.USCOURTS.GOV. Although Guidant asserted patent infringement claims against St. Jude Medical involving four patents when it initiated the litigation in 1996, the number of patents involving the claims Guidant is asserting against St. Jude Medical has changed over time. First, Guidant elected to withdraw its claims against St. Jude Medical involving the `678 patent prior to the court issuing its Markman decisions. After the Markman decisions, St. Jude Medical moved for summary judgment asking the court to rule that the 11 `191 patent is invalid. However, before the court issued a ruling on this summary judgment motion, Guidant and St. Jude Medical entered into a stipulation regarding the claims involving the `191 patent. Based on this stipulation, the court entered an order ruling that claims 1-14 in the `191 patent are invalid. In this order, the court also dismissed Guidant's claims against St. Jude Medical involving the `191 patent with prejudice. The order also provided that Guidant may make an immediate appeal of the `191 patent claim construction issues, and on February 8, 2001, Guidant filed a notice of appeal concerning the court's rulings on the `191 patent. Thus, at the present time, Guidant's claims against St. Jude Medical involving two patents (`288 and `472) remain in the case set for trial. St. Jude Medical continues to believe that the patent infringement claims asserted by Guidant in this litigation are without merit, and will continue to vigorously defend its interest in this litigation. OTHER LITIGATION AND PROCEEDINGS The Company is unaware of any other pending legal proceedings which it regards as likely to have a material adverse effect on its business. 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 2000. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The information set forth under the captions "Dividends" and "Stock Exchange Listings" on pages 6 and 24 of the Financial Report included in the Company's 2000 Annual Report to Shareholders is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information set forth under the caption "Five Year Summary Financial Data" on page 23 of the Financial Report included in the Company's 2000 Annual Report to Shareholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The information set forth under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 1 through 6 of the Financial Report included in the Company's 2000 Annual Report to Shareholders is incorporated herein by reference. 12 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information appearing under the caption "Market Risk" on pages 4 and 5 of the Financial Report included in the Company's 2000 Annual Report to Shareholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following Consolidated Financial Statements of the Company and Report of Independent Auditors set forth on pages 7 through 22 of the Financial Report included in the Company's 2000 Annual Report to Shareholders are incorporated herein by reference: Consolidated Statements of Earnings - Fiscal Years ended December 31, 2000, 1999 and 1998 Consolidated Balance Sheets - December 31, 2000 and 1999 Consolidated Statements of Shareholders' Equity - Fiscal Years ended December 31, 2000, 1999, and 1998 Consolidated Statements of Cash Flows - Fiscal Years ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth under the caption "Board of Directors" in the Company's definitive Proxy Statement dated March 28, 2001, is incorporated herein by reference. Information on executive officers is as follows:
Name Age Position* - ---------------------- ----- -------------------------------------------------------- Terry L. Shepherd 48 Chief Executive Officer (1999) Daniel J. Starks 46 President and Chief Operating Officer (2001) David W. Adinolfi 45 President, Daig Division (2001) Robert Cohen 43 Vice President, Business & Technology Development (1998) Michael J. Coyle 38 President, Cardiac Rhythm Management Division (2001) George J. Fazio 41 President, Health Care Services (1999) Peter L. Gove 53 Vice President, Corporate Relations (1994) Steven J. Healy 43 President, Cardiac Surgery Division (1999)
13
John C. Heinmiller 46 Vice President, Finance and Chief Financial Officer (1998) Jeri L. Jones 43 Vice President, Information Technology and Chief Information Officer (2000) Kevin T. O'Malley 49 Vice President and General Counsel (1994) Frieda J. Valk 47 Vice President, Administration (1999)
- ----------------------- *Dates in brackets indicate period during which the named executive officers began serving in such capacity. Executive officers serve at the pleasure of the Board of Directors. Mr. Shepherd's business experience is set forth in the Company's definitive Proxy Statement dated March 28, 2001 under the section "Board of Directors." Such information is incorporated herein by reference. Mr. Stark's business experience is set forth in the Company's definitive Proxy Statement dated March 28, 2001 under the section "Board of Directors." Such information is incorporated herein by reference. Mr. Adinolfi joined St. Jude in 1994 as a result of the acquisition of Pacesetter, Inc. In February 2001, he was appointed as President of the Daig Division after having several management positions at the Company's Cardiac Rhythm Management Division. Prior to joining Pacesetter in 1989 as Director of Marketing, Mr. Adinolfi spent five years at Cordis and Telectronics in a variety of marketing, sales and management positions. Mr. Cohen joined the Company in 1998 as Vice President, Business & Technology Development. Prior to joining the Company, he was employed by Sulzer Medica. During his 16-year career in the medical device industry, Mr. Cohen has been associated with Pfizer Inc. and GCI Medical, an investment firm focused on the medical technology industry. Mr. Coyle joined St. Jude in 1994 as Director, Business Development and was appointed President of the Cardiac Rhythm Management Division in February 2001. Mr. Coyle previously served as the Chief Operating Officer of Daig since 1997. Prior to joining St. Jude, he spent nine years with Eli Lilly & Company in a variety of technical and business management roles in both its Pharmaceutical and Medical Device Divisions. Mr. Fazio joined St. Jude in 1992 as a Heart Valve Division territory sales representative. In 1999, he was appointed as the President, Health Care Services. From 1997 to 1999, Mr. Fazio served as the General Manager of the Company's Canadian affiliate. 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. 14 Mr. Healy first joined the Company in 1983 as a Heart Valve Division sales representative. In 1999 he was appointed as the President, Cardiac Surgery Division (formerly known as the Heart Valve Division). From 1996 to 1999, Mr. Healy was the Vice President of Sales and Marketing for the Heart Valve Division. He served as the Heart Valve Division's Vice President of Marketing from 1993 to 1996. Mr. Heinmiller joined the Company in 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, and was vice president of finance and administration for Daig Corporation. Mr. Heinmiller is also a former audit partner in the Minneapolis office of Grant Thornton LLP, a national public accounting firm. Mr. Heinmiller is a director of Lifecore Biomedical, Inc. and Arctic Cat, Inc. Ms. Jones joined St. Jude in 1999 as Vice President, Information Technology, and was appointed Vice President, Information Technology and Chief Information Officer in 2000. Prior to joining the Company, Ms. Jones was Vice President of Systems Development at U.S. Bancorp from 1993 to 1999. From 1990 to 1993, Ms. Jones was a Senior Manager in Information Technology Consulting with Ernst & Young, LLP. From 1979 to 1990, she held several positions in Accounting and then Information Technology with General Mills, Inc. Mr. O'Malley joined the Company in 1994 as Vice President and General Counsel. Prior to joining St. Jude, Mr. O'Malley was employed by Eli Lilly & Company for 15 years in various positions, including his last position of General Counsel of the Medical Device and Diagnostics Division. Ms. Valk joined the Company in 1996 as Human Resources Director of St. Jude Medical Europe. She was appointed as Vice President, Administration in 1999. Prior to joining the Company, Mrs. Valk was employed by Eli Lilly & Company for sixteen years in various positions including pharmaceutical sales, sales management, sales training and human resources. ITEM 11. EXECUTIVE COMPENSATION The information set forth under the caption "Executive Compensation" in the Company's definitive Proxy Statement dated March 28, 2001, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the caption "Share Ownership of Management and Directors and Certain Beneficial Owners" in the Company's definitive Proxy Statement dated March 28, 2001, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the captions "Governance of the Company" and "Executive Compensation" in the Company's definitive Proxy Statement dated March 28, 2001, is incorporated herein by reference. 15 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT (1) FINANCIAL STATEMENTS The following Consolidated Financial Statements of the Company and Report of Independent Auditors as set forth on pages 7 through 22 of the Financial Report included in the Company's 2000 Annual Report to Shareholders (see Exhibit 13) are incorporated herein by reference: Consolidated Statements of Earnings - Fiscal Years ended December 31, 2000, 1999 and 1998 Consolidated Balance Sheets - December 31, 2000 and 1999 Consolidated Statements of Shareholders' Equity - Fiscal Years ended December 31, 2000, 1999, and 1998 Consolidated Statements of Cash Flows - Fiscal Years ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements (2) FINANCIAL STATEMENT SCHEDULE Schedule II, Valuation and Qualifying Accounts, is filed as part of this Form 10-K Annual Report (see Item 14(d)). The report of the Company's Independent Auditors with respect to the financial statement schedule is incorporated herein by reference from Exhibit 23 attached hereto. All other financial statements and schedules not listed have been omitted because the required information is included in the consolidated financial statements or the notes thereto, or is not applicable. (3) EXHIBITS EXHIBIT EXHIBIT INDEX - ---------------- ------------------------------------------------------------ 3.1 Articles of Incorporation as amended on September 5, 1996, are incorporated by reference from Exhibit 3.2 of the Company's Form 10-K filed on March 27, 1997. 16 EXHIBIT EXHIBIT INDEX - ---------------- ------------------------------------------------------------ 3.2 Bylaws are incorporated by reference from Exhibit 3(ii) of the Company's Form 10-Q filed on November 10, 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 Form 10-Q dated August 12, 1997. 4.2 Indenture dated as of August 21, 1996, between the Company and State Street Bank and Trust Company, as Trustee is incorporated by reference from Ventritex's Form S-3/A (no. 333-07651) filed on August 2, 1996. 10.1 Employment letter dated as of March 9, 1993, between the Company and Ronald A. Matricaria is incorporated by reference from Exhibit 10.1 of the Company's Form 10-K Annual Report for the year ended December 31, 1993.* 10.2 Employment letter dated as of November 8, 1996, between the Company to Ronald A. Matricaria is incorporated by reference from Exhibit 10.2 of the Company's Form 10-K Annual Report for the year ended December 31, 1998.* 10.3 Employment letter dated as of February 23, 1999, between the Company and Ronald A. Matricaria is incorporated by reference from Exhibit 10.13 of the Company's Form 10-K Annual Report for the year ended December 31, 1998.* 10.4 Employment Agreement effective as of May 5, 1999 between the Company and Terry L. Shepherd is incorporated by reference from Exhibit 10.15 of the Company's Form 10-K Annual Report for the year ended December 31, 1998.* 10.5 Form of Indemnification Agreement that the Company has entered into with officers and directors. Such agreement recites the provisions of Minnesota Statutes Section 302A.521 and the Company's Bylaw provisions (which are substantially identical to the Statute) and is incorporated by reference from Exhibit 10(d) of the Company's Form 10-K Annual Report for the year ended December 31, 1986.* 17 EXHIBIT EXHIBIT INDEX - ---------------- ------------------------------------------------------------ 10.6 Form of Employment 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 10.4 of the Company's Form 10-K Annual Report for the year ended December 31, 1998.* 10.7 The Management Incentive Compensation Plan is incorporated by reference from Appendix A of the Company's definitive Proxy Statement dated March 26, 1999.* 10.8 Management Savings Plan dated February 1, 1995, is incorporated by reference from Exhibit 10.7 of the Company's Form 10-K Annual Report for the year ended December 31, 1994.* 10.9 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 Form 10-K Annual Report for the year ended December 31, 1994.* 10.10 The St. Jude Medical, Inc. 1992 Employee Stock Purchase Savings Plan is incorporated by reference from the Company's Form S-8 Registration Statement dated June 10, 1992, (Commission File No. 33-48502). * 10.11 The St. Jude Medical, Inc. 1991 Stock Plan is incorporated by reference from the Company's Form S-8 Registration Statement dated June 28, 1991 (Commission File No. 33-41459).* 10.12 The St. Jude Medical, Inc. 1994 Stock Option Plan is incorporated by reference from the Company's Form S-8 Registration Statement dated July 1, 1994 (Commission File No. 33-54435).* 10.13 The St. Jude Medical Inc. 1997 Stock Option Plan is incorporated by reference from the Company's Form S-8 Registration Statement dated December 22, 1997 (Commission File No. 333-42945).* 10.14 A 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 Form 10-K Annual Report for the year ended December 31, 1999.* 18 EXHIBIT EXHIBIT INDEX - ---------------- ------------------------------------------------------------ 10.15 The St. Jude Medical Inc. 2000 Stock Option Plan is incorporated by reference from the Company's Form S-8 Registration Statement dated July 31, 2000 (Commission File No. 333-42668).* 10.16 The St. Jude Medical, Inc. 2000 Employee Stock Purchase Savings Plan is incorporated by reference from the Company's Form S-8 Registration Statement dated July 31, 2000 (Commission File No. 333-42658).* 10.17 Amended and Restated Employment Agreement dated as of March 25, 2001, between the Company and Daniel J. Starks. * # 10.18 Form of Severance Agreement that the Company has entered into with officers relating to severance matters in connection with a change in control.* # 10.19 Amended and Restated Employment Agreement dated as of March 25, 2001, between the Company and Terry L. Shepherd. * # 13 Portions of the 2000 Annual Report to Shareholders are incorporated by reference in this Annual Report on Form 10-K # 21 Subsidiaries of the Company # 23 Consent of Independent Auditors # - ----------------------------- * Management contract or compensatory plan or arrangement. # Filed as an exhibit to this Annual Report on Form 10-K. (B) REPORTS ON FORM 8-K DURING THE QUARTER ENDED DECEMBER 31, 2000 A Form 8-K was filed on December 1, 2000, and on December 22, 2000, announcing certain rulings by the U.S. District Court in Indianapolis as part of the court's Markman process, which further interprets certain ambiguous terms used in the patents which are the subject of litigation between Guidant and St. Jude Medical. (C) EXHIBITS: Reference is made to Item 14(a)(3). (D) SCHEDULES: 19 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN THOUSANDS)
COL. A COL. B COL. C COL. D COL. E - ------------------------------ ----------------- ----------------- ------------------ ----------------- BALANCE AT ADDITIONS BALANCE AT BEGINNING OF CHARGED TO END OF DESCRIPTION YEAR EXPENSE DEDUCTIONS(1) YEAR - ------------------------------ ----------------- ----------------- ------------------ ----------------- Allowance for doubtful accounts Fiscal Year Ended: December 31, 2000 $13,529 $6,913 $6,611 $13,831 December 31, 1999 12,352 5,421 4,244 13,529 December 31, 1998 12,712 14 374 12,352 - -------------------------------- (1) Uncollectible accounts written off, net of recoveries.
For the purposes of complying with the amendments to the rules governing Form S-8 under the Securities Act of 1933, the undersigned Company hereby undertakes as follows, which undertaking shall be incorporated by reference into the Company's Registration Statements of Form S-8 Nos. 33-9262 (filed October 3, 1986), 33-41459 (filed June 28, 1991), 33-48502 (filed June 10, 1992), 33-54435 (filed July 1, 1994), 333-42945 (filed December 22, 1997), 333-42658 (filed July 31, 2000), and 333-42668 (filed July 31, 2000): Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 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 26, 2001 By /s/ TERRY L. SHEPHERD ----------------------- Terry L. Shepherd CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER) By /s/ JOHN C. HEINMILLER ---------------------- John C. Heinmiller VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
/s/ RONALD A. MATRICARIA Director March 26, 2001 /s/ DANIEL J. STARKS Director March 26, 2001 - --------------------------- ----------------------- Ronald A. Matricaria Daniel J. Starks /s/ LOWELL C. ANDERSON Director March 26, 2001 /s/ TERRY L. SHEPHERD Director March 26, 2001 - --------------------------- ----------------------- Lowell C. Anderson Terry L. Shepherd /s/ STUART M. ESSIG Director March 26, 2001 /s/ DAVID A. THOMPSON Director March 26, 2001 - --------------------------- ----------------------- Stuart M. Essig David A. Thompson /s/ THOMAS H. GARRETT III - --------------------------- Director March 26, 2001 _______________________ Director March 26, 2001 Thomas H. Garrett III Gail R. Wilensky /s/ WALTER L. SEMBROWICH Director March 26, 2001 - --------------------------- Walter L. Sembrowich
21 EX-10.17 2 stjude010431_ex10-17.txt AMENDED AND RESTATED EMPLOYMENT AGREEMENT EXHIBIT 10.17 AMENDED AND RESTATED EMPLOYMENT AGREEMENT ----------------------------------------- THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement") is made effective as of the 25TH day of March, 2001, by and between St. Jude Medical, Inc., a Minnesota corporation with its principal place of business at One Lillihei Plaza, Little Canada, Minnesota (the "Company"), and Daniel J. Starks, an individual residing at 7880 County Road #26, Maple Plain, MN 55359 (the "Executive") and amends and restates the EMPLOYMENT AGREEMENT dated February 1, 2001 between the Company and Executive. RECITALS -------- Prior to the original EMPLOYMENT AGREEMENT Executive was employed by the Company in the capacity of President and CEO, CRM Division. The Company desires to continue to employ the Executive, due to his certain unique skills, talents, contacts, judgment and knowledge of the Company's business, strategies, ethics and objectives and the Executive desires to be employed by the Company. The parties, intending to be legally bound, agree as follows: 1. Term of Employment. The Term of this Agreement shall commence on the effective date and, subject to the further provisions of this Agreement, shall end on the 31st day of January, 2006. 2. Title; Capacity. The Executive shall serve as President and Chief Operating Officer of the Company or in such other position as the Company's Board of Directors (the "Board") and CEO may determine from time to time. The Executive shall be subject to the supervision of, shall report directly to, and shall have such authority as is delegated to him by, the CEO. Executive's initial responsibilities, which shall be subject to changes as determined from time to time by the CEO and the Board shall include the operations of the Company. The following functions and units shall initially report to Executive: CRMD, Cardiac Surgery Division, Daig Division, International, HealthCare Services, Legal, Human Resources and Information Systems. The Executive accepts such employment and agrees to undertake the duties and responsibilities inherent in such position and such other duties and responsibilities as the Board or its designee shall from time to time reasonably assign to him. The Executive shall devote his entire business time, attention and energies to the business and interests of the Company (and its affiliates as required by the Company's investments and the Executive's positions therein) during the Employment Period. The Executive shall abide by the rules, regulations, instructions, personnel practices and policies of the Company and any changes therein which may be adopted 1 from time to time. The Executive acknowledges receipt of copies of all such rules and policies committed to writing as of the date of this Agreement. 3. Compensation and Benefits. a. Salary. The Company shall pay the Executive an annual base salary of $500,000.00 for the one-year period commencing on the Commencement Date in the same intervals as other exempt employers. Such salary shall be subject to annual increases thereafter as determined by the Board, in its sole discretion. b. Bonus. The Executive's target bonus under the MICP shall be 100% of base salary (and shall be prorated for 2001). c. Perk Package. The Executive shall be eligible for the Company's executive perk package at the level of $26,000. d. Fringe Benefits. The Executive shall be entitled to participate in all bonus and benefit programs that the Company establishes and makes available to its Executives, if any, to the extent that Executive's position, tenure, salary, age, health and other qualifications make him eligible to participate. e. Reimbursement of Expenses. The Company shall reimburse the Executive for all reasonable travel, entertainment and other expenses incurred or paid by the Executive in connection with, or related to, the performance of his duties, responsibilities or services under this Agreement, upon presentation by the Executive of documentation, expense statements, vouchers and/or such other supporting information in accordance with standard company policies. In addition, the Company shall provide Executive with relocation expenses under the Company's relocation policy for employees of Executive's level. f. Stock Options. Under separate agreement, the Executive is being granted a non-qualified stock option to purchase 200,000 shares of stock, vesting at the rate of 20% per year for five years and another non-qualified stock option to purchase 200,000 shares which will vest based upon performance criteria. 4. Employment Termination. The employment of the Executive by the Company pursuant to this Agreement shall terminate upon the occurrence of any of the following: a. Expiration of the Employment Period in accordance with Section 1; b. At the election of the Company, for "Cause", immediately upon written notice by the Company to the Executive. "Cause" for such termination shall include, but not limited to, the following: i. Dishonesty of the Executive with respect to the Company; 2 ii. Willful misfeasance or nonfeasance of duty intended to injure or having the effect of injuring the reputation, business or business relationships of the Company or its respective officers, directors or Executives; iii. Upon a charge by a governmental entity against the Executive of any crime involving moral turpitude which is demonstrably and materially injurious to the Company or upon the filing of any civil action involving a charge of embezzlement, theft, fraud or other similar act which is demonstrably and materially injurious to the Company; iv. Willful or prolonged absence from work by the Executive (other than by reason of disability due to physical or mental illness) or failure, neglect or refusal by the Executive to perform his duties and responsibilities without the same being corrected upon ten (10) days prior written notice; or v. Breach by the Executive of any of the covenants contained in this Agreement. c. Immediately upon the death or disability of the Executive. As used in this Agreement, the term "disability" shall mean the inability of the Executive, due to a physical or mental disability, for a period of 90 days, whether or not consecutive, during any 360 day period to perform the services contemplated under this Agreement. A determination of disability shall be made by a physician to the Company. d. At the election of the Company or the Executive, with or without cause upon 90 days written notice by one party to the other. 5. Effect of Termination. a. Termination Under Section 4.d. In the event the Executive's employment is terminated at the election of the Company pursuant to Section 4(d), the Company shall immediately pay to the Executive an amount equal to two times the Executive's then current salary and two times the Executive's then current target bonus. b. Termination for Death or Disability. If the Executive's employment is terminated by death or because of disability pursuant to Section 4(c), the Company shall pay to the estate of the Executive or to the Executive, as the case may be, the compensation which would otherwise be payable to the Executive up to the end of the month in which the termination of his employment because of death or disability occurs. c. Termination for Cause or Voluntary Resignation. In the event a termination for cause pursuant to Section 4(b) or by the voluntary resignation of Executive pursuant to Section 4(d), then no further compensation other than that already accrued shall be due to Executive under this Agreement. 3 d. In the event Executive is entitled to, and actually receives the full compensation he is entitled to, under the separate SEVERANCE AGREEMENT dated the same date as this Agreement, then, notwithstanding the previous subsections of Section 5, the Company shall have no additional obligation to make a payment to Executive under Section 5 of this Agreement. 6. Notices. All notices required or permitted under this Agreement shall be in writing and shall be deemed effective upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail, postage prepaid, addressed to the other party at the address shown above, or at such other address or addresses as either party shall designate to the other in accordance with this Section 9. 7. Pronouns. Whenever the context may require, any pronouns used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular forms of nouns and pronouns shall include the plural, and vice versa. 8. Entire Agreement. This Agreement constitutes the entire agreement between the parties and supersedes all prior agreements and understandings, whether written or oral, relating to the subject matter of this Agreement. 9. Other Agreements. This Agreement is intended to supplement and not replace the following other agreements between the Executive and the Company: Non-Disclosure and Non-Competition Agreement, Indemnification Agreement, Severance Agreement (Change of Control), all previous stock option grants, 2001 MICP, and other employment benefits arising from Executive's prior employment with the Company. 10. Amendment. This Agreement may be amended or modified only by a written instrument executed by both the Company and the Executive. 11. Governing Law. This Agreement shall be construed, interpreted and enforced in accordance with the laws of the State of Minnesota, without giving effect to that State's conflict of laws provisions. 12. Choice of Venue. All actions or proceedings with respect to this Agreement shall be instituted only in any state or federal court sitting in Ramsey County, Minnesota, and by execution and delivery of this Agreement, the parties irrevocably and unconditionally subject to the jurisdiction (both subject matter and personal) of each such court and irrevocably and unconditionally waive: (a) any objection that the parties might now or hereafter have to the venue of any of such court; and (b) any claim that any action or proceeding brought in any such court has been brought in an inconvenient forum. 13. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of both parties and their respective successors and assigns, including any corporation with which or into which the Company may be merged or which may succeed to its assets or business, provided, however, that the obligations of the Executive are personal and shall not be assigned by him. 4 14. Waiver. No delay or omission by the Company is exercising any right under this Agreement shall operate as a waiver of that or any other right. A waiver or consent given by the Company on any once occasion shall be effective only in that instance and shall not be construed as a bar or waiver of any right on any other occasion. 15. Captions and Headings. The captions of the sections of this Agreement are for convenience of reference only and in no way define, limit or affect the scope of substance of any section of this Agreement. 16. Severability. In case any provision of this Agreement shall be invalid, illegal or otherwise unenforceable, the validity, legality and enforceability of the remaining provisions shall in no way be affected or impaired thereby. 17. Counterparts. This Agreement may be executed in a number of couterparts and all of such counterparts executed by the Company or the Executive, shall constitute one and the same agreement, and it shall not be necessary for all parties to execute the same counterpart hereof. 18. Facsimile Signatures. The parties hereby agree that, for purposes of the execution of this Agreement, facsimile signatures shall constitute original signatures. 19. Incorporation by Reference. The preamble and recitals to this Agreement are hereby incorporated by reference and made a part hereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year set forth above. ST. JUDE MEDICAL, INC., A Minnesota Corporation /s/ FRIEDA J. VALK ------------------------------------- Name: Frieda J. Valk Title: Vice President, Administration Executive: /s/ DANIEL J. STARKS ------------------------------------- Name: Daniel J. Starks Title: President/COO 5 EX-10.18 3 stjude010431_ex10-18.txt SEVERANCE AGREEMENT 9 EXHIBIT 10.18 SEVERANCE AGREEMENT This agreement is made as of the 26th day of March, 2001, between St. Jude Medical, Inc., a Minnesota corporation, with its principal offices at St. Paul, Minnesota (the "Company") and ___________ ("Executive"), residing at __________________________________. WITNESSETH THAT: WHEREAS, this Agreement is intended to specify the financial arrangements that the Company will provide to Executive upon Executive's separation from employment with the Company under any of the circumstances described herein; and WHEREAS, this Agreement is intended to replace and supersede the existing Employment Agreement between the Company and Executive dated as of ____________ relating to payments to be made to Executive upon a change in control of the Company (the "Prior Agreement"); and WHEREAS, this Agreement is entered into by the Company in the belief that it is in the best interests of the Company and its shareholders to provide stable conditions of employment for Executive notwithstanding the possibility, threat or occurrence of certain types of change in control, thereby enhancing the Company's ability to attract and retain highly qualified people. NOW, THEREFORE, to assure the Company that it will have the continued dedication of Executive notwithstanding the possibility, threat or occurrence of a bid to take over control of the Company, and to induce Executive to remain in the employ of the Company, and for other good and valuable consideration, the Company and Executive agree as follows: 1. Term of Agreement. The term of this Agreement shall commence on the date hereof as first written above and shall continue through January 1, 2003; provided that commencing on January 1, 2003 and each January 1st thereafter, the term of this Agreement shall automatically be extended for one additional year unless not later than December 31 of the preceding year, the Company shall have given notice that it does not wish to extend this Agreement; and provided, further, that notwithstanding any such notice by the Company not to extend, this Agreement shall continue in effect for a period of 36 months beyond the term provided herein if a Change in Control (as defined in Section 3(i) hereof) shall have occurred during such term. 2. Termination of Employment. (i) Prior to a Change in Control. Executive's rights upon termination of employment prior to a Change in Control (as defined in Section 3(i) hereof) shall be governed by the Company's standard employment termination policy applicable to Executive in effect at the time of termination or, if applicable, any written employment agreement between the Company and Executive other than this Agreement in effect at the time of termination. 1 (ii) After a Change in Control. (a) From and after the date of a Change in Control (as defined in Section 3(i) hereof) during the term of this Agreement, the Company shall not terminate Executive from employment with the Company except as provided in this Section 2(ii) or as a result of Executive's Disability (as defined in Section 3(iv) hereof), Retirement (as defined in Section 3(v) hereof) or death. (b) From and after the date of a Change in Control (as defined in Section 3(i) hereof) during the term of this Agreement, the Company shall have the right to terminate Executive from employment with the Company at any time during the term of this Agreement for Cause (as defined in Section 3(iii) hereof), by written notice to Executive, specifying the particulars of the conduct of Executive forming the basis for such termination. (c) From and after the date of a Change in Control (as defined in Section 3(i) hereof) during the term of this Agreement: (x) the Company shall have the right to terminate Executive's employment without Cause (as defined in Section 3(iii) hereof), at any time; and (y) Executive shall, upon the occurrence of such a termination by the Company without Cause, or upon the voluntary termination of Executive's employment by Executive for Good Reason (as defined in Section 3(ii) hereof), be entitled to receive the benefits provided in Section 4 hereof. Executive shall evidence a voluntary termination for Good Reason by written notice to the Company given within 60 days after the date of the occurrence of any event that Executive knows or should reasonably have known constitutes Good Reason for voluntary termination. Such notice need only identify Executive and set forth in reasonable detail the facts and circumstances claimed by Executive to constitute Good Reason. Any notice give by Executive pursuant to this Section 2 shall be effective five business days after the date it is given by Executive. 3. Definitions. (i) A "Change in Control" shall mean: (a) a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or successor provision thereto, whether or not the Company is then subject to such reporting requirement; (b) any "person" (as such term is used in Sections 13(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing 35% or more of the combined voting power of the Company's then outstanding securities; (c) the Continuing Directors (as defined in Section 3(vi) hereof) cease to constitute a majority of the Company's Board of Directors; provided that such change is the direct or indirect result of a proxy fight and contested election or elections for positions on the Board of Directors; or 2 (d) the majority of the Continuing Directors (as defined in Section 3(vi) hereof), excluding any Continuing Director who has this Severance Agreement, determine in their sole and absolute discretion that there has been a change in control of the Company. (ii) "Good Reason" shall mean the occurrence of any of the following events, except for the occurrence of such an even in connection with the termination or reassignment of Executive's employment by the Company for Cause (as defined in Section 3(iii) hereof), for Disability (as defined in Section 3(iv) hereof), for Retirement (as defined in Section 3(v) hereof) or for death: (a) the assignment to Executive of any duties inconsistent with Executive's status or position with the Company, or a substantial alteration in the nature or status of Executive's responsibilities from those in effect immediately prior to the Change in Control; (b) a reduction by the Company in Executive's annual compensation in effect immediately prior to the Change in Control; (c) the Company's requiring Executive to be based anywhere other than within 50 miles of Executive's office location immediately prior to a Change in Control except for required travel on the Company's business to an extent substantially consistent with Executive's business travel obligations immediately prior to the Change in Control; (d) the failure by the Company to continue to provide Executive with benefits at least as favorable to those enjoyed by Executive under any of the Company's pension, life insurance, medical, health and accident, disability, deferred compensation, incentive, stock, stock purchase, stock option, savings, Perk Package or other plans or programs in which Executive Company which would directly or indirectly materially reduce any of such benefits or deprive Executive of any material fringe benefit enjoyed immediately prior to the Change in Control, or the failure by the Company to provide Executive with the number of paid vacation days to which Executive is entitle immediately prior to the Change in Control; or (e) the failure of the Company to obtain, as specified in Section 6(i) hereof, an assumption of the obligations of the Company to perform this Agreement by any successor to the Company. Notwithstanding anything herein to the contrary, if the Change in Control arises from a transaction or series of transactions which are not authorized, recommended or approved by formal action taken by the Continuing Directors (as defined in Section 3(vi) hereof), Executive may voluntarily terminate his or her employment for any reason on the 180th day following the Change in Control, and such termination shall be deemed "Good Reason" for all purposes of this agreement. (iii) "Cause" shall mean termination by the Company of Executive's employment based upon the conviction of Executive by a court of competent jurisdiction for felony criminal conduct. (iv) "Disability" shall mean that, as a result of incapacity due to physical or mental illness, Executive shall have been absent from the full-time performance of Executive's duties 3 with the Company for six consecutive months, and within 30 days after written notice of termination is given, Executive shall not have returned to the full-time performance of Executive's duties. Any question as to the existence of Executive's Disability upon which Executive and the Company cannot agree shall be determined by a qualified independent physician selected by Executive (or, if Executive is unable to make such selection, it shall be made by any adult member of Executive's immediately family), and approved by the Company. The determination of such physician made in writing to the Company and to Executive shall be final and conclusive for all purposes of this Agreement. (v) "Retirement" shall mean termination on or after attaining normal retirement age in accordance with the Company's Profit Sharing Executive Savings Plan and Trust. (vi) "Continuing Director" shall mean any person who is a member of the Board of Directors of the Company, while such person is a member of the Board of Directors, and who (a) was a member of the Board of Directors on the date of this Agreement as first written above or (b) subsequently becomes a member of the Board of Directors, if such person's nomination for election or initial election to the Board of Directors is recommended or approved by a majority of the Continuing Directors. 4. Benefits upon Termination under Section 2(ii)(c). (i) Upon the termination (voluntary or involuntary) of the employment of Executive pursuant to Section 2(ii)(c) hereof, Executive shall be entitled to receive the benefits specified in this Section 4. The amounts due to Executive under this Section 4(i) shall be paid to Executive in a lump sum not later than one business day prior to the date that the termination of Executive's employment becomes effective. Subject to the provisions of Section 4(ii) hereof, all benefits to Executive pursuant to this Section 4(i) shall be subject to any applicable payroll or other taxes required by law to be withheld. (a) The Company shall pay Executive, through the date the termination of Executive's employment became effective, Executive's base salary as in effect at the time of the notice of termination is given and any other form or type of compensation otherwise payable for such period. Executive shall be entitled to receive all benefits payable to Executive under the Company's Profit Sharing Executive Savings Plan or any successor of such Plan and any other plan or agreement relating to retirement benefits which shall be in addition to, and not reduced by, any other amounts payable to Executive under this Section 4. Executive shall be entitled to exercise all rights and to receive all benefits accruing to Executive under any and all Company stock purchase plans, stock option plans and other stock plans or programs, or any successor to any such plans or programs, which shall be in addition to, and not reduced by, any other amounts payable to Executive under this Section 4. (b) In lieu of any further salary payments for periods subsequent to the date the termination of Executive's employment became effective, the Company shall pay a severance payment in an amount equal to three times Executive's Annual Compensation, as defined below. For purposes of this Section 4, "Annual Compensation" shall mean Executive's annual salary (regardless of whether all or any portion of such salary has been contributed to a deferred compensation plan), the annual amount of Executive's Perk Package, the target bonus for which Executive is eligible upon attainment of 100% of the target (regardless of whether 4 such target bonus has been achieved or whether conditions of such target bonus are actually fulfilled), and any other type or form of compensation paid to Executive by the Company (or any entity affiliated with the Company ("Affiliate") within the meaning of Section 1504 of the Internal Revenue Code of 1986, as may be amended from time to time (the "Code")) and included in Executive's gross income for federal tax purposes during the twelve month period ending immediately prior to the date that the termination of Executive's employment became effective but reduced by: (i) any amount actually paid to Executive as a cash payment of the target bonus (regardless of whether all or any portion of such target bonus was contributed to a deferred compensation plan); (ii) compensation income recognized as a result of the exercise of stock options or sale of the stock so acquired; and (iii) any payments actually or constructively received from a plan or arrangement of deferred compensation between the Company and Executive. All of the factors included in Annual Compensation shall be those in effect on the date that the termination of Executive's employment became effective and shall be calculated without giving effect to any reduction in such compensation that would constitute a breach of this Agreement. (c) For a period of 36 months following the date that the termination of Executive's employment became effective or until Executive reaches age 65 or dies, whichever is the shorter period, the Company shall arrange to provide for Executive, at the Company's expense, the health, accident, disability and life insurance benefits substantially similar to those in effect for Executive immediately prior to the date that the termination of Executive's employment became effective. (d) The Company shall pay to Executive (1) any amount earned by Executive as a bonus with respect to the fiscal year of the Company preceding the termination of Executive's employment if such bonus has not theretofore been paid to Executive, and (2) an amount representing credit for any vacation earned or accrued by Executive but not taken. (e) The Company shall also pay to Executive all legal fees and expenses incurred by Executive as a result of such termination of employment (including all fees and expenses, if any, incurred by Executive in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided to Executive by this Agreement whether by arbitration or otherwise); and (f) Any and all contracts, agreements or arrangements between the Company and Executive prohibiting or restricting Executive from owning, operating, participating in, or providing employment or consulting services to, any business or company competitive with the Company at any time or during any period after the date the termination of Executive's employment becomes effective, shall be deemed terminated and of no further force or effect as of the date the termination of Executive's employment becomes effective, to the extent, but only to the extent, such contracts, agreements or arrangements so prohibit or restrict Executive; provided that the foregoing provision shall not constitute a license or right to use any proprietary information of the Company and shall in no way affect any such contracts, agreements or arrangements insofar as they relate to nondisclosure and nonuse or proprietary information of the Company notwithstanding the fact that such nondisclosure and nonuse may prohibit or restrict Executive in certain competitive activities. 5 (ii) In the event that any payment or benefit received or to be received by Executive in connection with a Change in Control of the Company or termination of Executive's employment (whether payable pursuant to the terms of this Agreement or any other plan, contract, agreement or arrangement with the company, with any person whose actions result in a Change in Control of the Company or with any person constituting a member of an "affiliated group" as defined in Section 280G(d)(5) of the Code, with the Company or with any person whose actions result in a Change in Control of the Company (collectively, the "Total Payments")) would be subject to the excise tax imposed by Section 4999 of the Code, or any successor provision thereto, or any interest, penalties or additions to tax with respect to such excise tax (such excise tax, together with any such interest, penalties or additions to tax, are collectively referred to as the "Excise Tax"), then Executive shall be entitled to receive from the Company an additional cash payment (a "Gross-Up Payment") within thirty business days of such determination in an amount such that after payment by Executive of all taxes (including any interest, penalties or additions to tax imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Total Payments. All determinations required to be made under this Section 4(ii), including whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be made by the independent accounting firm retained by the Company on the date of the Change in Control (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and Executive within 15 business days of the date that the termination of Executive's employment becomes effective, or such earlier time as is requested by the Company. If the Accounting Firm determines that no Excise Tax is payable by Executive, it shall furnish Executive with an opinion that Executive has substantial authority not to report any Excise Tax on Executive's federal income tax return. Any uncertainly in the application of Section 4999 of the Code, or any successor provision thereto, at the time of the initial determination by the Accounting Firm hereunder shall be resolved in favor of Executive. As a result of the uncertainty in the application of Section 4999 of the Code, or any successor provision thereto, at the time of the initial determination by the Accounting Firm hereunder, it is possible that at a later time there will be a determination that the Gross-Up Payments made by the Company were less than the Gross-Up Payments that should have been made by the Company ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that Executive is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment, if any, that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of Executive. As a result of the uncertainty in the application of Section 4999 of the Code, or any successor provision thereto, at the time of the initial determination by the Accounting Firm hereunder, it is possible that at a later time there will be a determination that the Gross-Up Payments made by the Company were more than the Gross-Up Payments that should have been made by the Company ("Overpayment"), consistent with the calculations required to be made hereunder. Executive agrees to refund the Company the amount of any Overpayment that the Accounting Firm shall determine has occurred hereunder. Any good faith determination by the Accounting Firm as to the amount of any Gross-Up Payment, including the amount of any Underpayment or Overpayment, shall be binding upon the Company and Executive. (iii) Any payment not made to Executive when due hereunder shall thereafter, until paid in full, bear interest at the rate of interest equal to the reference rate announced from time to 6 time by Wells Fargo Bank Minnesota, National Association, plus two percent, with such interest to be paid to Executive upon demand or monthly in the absence of a demand. (iv) Executive shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise. The amount of any payment or benefit provided in this section 4 shall not be reduced by any compensation earned by Executive as a result of any employment by another employer, by any retirement benefits or otherwise. 5. Executive's Agreements. Executive agrees that: (i) Without the consent of the Company, Executive will not terminate employment with the Company without giving 30 days prior notice to the Company, and during such 30-day period Executive will assist the Company, as and to the extent reasonably requested by the Company, in training the successor to Executive's position with the Company. The provisions of this Section 5(i) shall not apply to any termination (voluntary or involuntary) of the employment of Executive pursuant to Section 2(ii)(c) hereof. (ii) In the even that Executive has received any benefits from the Company under Section 4 of this Agreement, then, during the period of 36 months following the date that the termination of Executive's employment became effective, Executive, upon request by the Company: (a) Will consult with one or more of the executive officers concerning the business and affairs of the Company for not to exceed four hours in any month at times and places selected by Executive as being convenient to him, all without compensation other than what is provided for in Section 4 of this Agreement; and (b) Will testify as a witness on behalf of the Company in any legal proceedings involving the Company which arise out of events or circumstances that occurred or existed prior to the date that the termination of Executive's employment became effective (except for any such proceedings relating to this Agreement), without compensation other than what is provided for in Section 4 of this Agreement, provided that all out-of-pocket expenses incurred by Executive in connection with serving as a witness shall be paid by the Company. Executive shall not be required to perform Executive's obligations under this Section 5(ii) if an so long as the Company is in default with respect to performance of any of its obligations under this Agreement. 6. Successors and Binding Agreement. (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Company), by agreement in form and substance satisfactory to Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a 7 breach of this Agreement and shall entitle Executive to compensation from the Company in the same amount and on the same terms as Executive would be entitled hereunder if Executive terminated employment after a Change in Control for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date that the termination of Executive's employment becomes effective. As used in this Agreement, "Company" shall mean the Company and any successor to its business and/or assets which executes and delivers the agreement provided for in this Section 6(i) or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (ii) This Agreement is personal to Executive, and Executive may not assign or transfer any part of Executive's rights or duties hereunder, or any compensation due to him hereunder, to any other person. Notwithstanding the foregoing, this Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, heirs, distributees, devisees, and legatees. 7. Modification; Waiver. No provisions of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in a writing signed by Executive and such officer as may be specifically designated by the Board of Directors of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver or similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 8. Notice. All notices, requests, demand, and all other communications required or permitted by either party to the other party by this Agreement (including, without limitation, any notice of termination of employment and any notice of an intention to arbitrate) shall be in writing and shall be deemed to have been duly given when delivered personally or received by certified or registered mail, return receipt requested, postage prepaid, at the address of the other party, as first written above (directed to the attention of the Board of Directors and Corporate Secretary in the case of the Company). Either party hereto may change its address for purposes of this Section 8 by giving 15 days prior notice to the other party hereto. 9. Severability. If any term or provision of this agreement or the application hereof to any person or circumstances shall to any extent be invalid or unenforceable, the remainder of this Agreement or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 10. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 11. Governing Law. This Agreement has been executed and delivered in the State of Minnesota and shall, in all respects, be governed by, and construed and enforced in accordance with, the laws of the State of Minnesota, including all matters of construction, validity and performance. 8 12. Effect of Agreement; Entire Agreement. The Company and Executive understand and agree that this Agreement is intended to reflect their agreement only with respect to payments and benefits upon termination in certain cases and is not intended to create any obligation on the part of either party to continue employment. This Agreement supersedes any and all other oral or written agreements or policies made relating to the subject matter hereof (including, without limitation, the Prior Agreement) and constitutes the entire agreement of the parties relating to the subject mater hereof; provided that this Agreement shall not supersede or limit in any way Executive's rights under any benefit plan, program or arrangements in accordance with their terms (including, without limitation, the provisions of the Company's policy HR-1.02.25 entitled "Severance Pay," effective January 1, 1994, as amended from time to time, or any successor to such policy). 13. ERISA. For purposes of the Executive Retirement Income Security Act of 1974, this Agreement is intended to be a severance pay Executive welfare benefit plan, and not an Executive pension benefit plan, and shall be construed and administered with that intention. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed in its name by a duly authorized director and officer, and Executive has hereunto set his or her hand, all as of the date first written above. ST. JUDE MEDICAL, INC. By -------------------------------- Its ------------------------------ EXECUTIVE ---------------------------------- 9 EX-10.19 4 stjude010431_ex10-19.txt AMENDED AND RESTATED EMPLOYMENT AGREEMENT EXHIBIT 10.19 AMENDED AND RESTATED EMPLOYMENT AGREEMENT ----------------------------------------- THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement") is made effective as of the 25th day of March, 2001, by and between St. Jude Medical, Inc., a Minnesota corporation with its principal place of business at Lillihei Plaza, Little Canada, Minnesota (the "Company"), and Terry L. Shepherd, an individual residing at 1370 Meadow Avenue, Shoreview, Minnesota (the "Executive") and amends and restates the EMPLOYMENT AGREEMENT dated May 5, 1999 between the Company and Executive. RECITALS Prior to the original EMPLOYMENT AGREEMENT Executive was employed by the Company in the capacity of President, Heart Valve Division. The Company desires to continue the employ the Executive, due to his certain unique skills, talents, contacts, judgment and knowledge of the Company's business, strategies, ethics and objectives and the Executive desires to be employed by the Company. In consideration of the mutual covenants and promises contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the parties agree as follows: 1. Term of Employment. The Term of this Agreement shall commence on the date hereof and, subject to the further provisions of this Agreement, shall end on the 4th day of May, 2004. 2. Title; Capacity. The Executive shall serve as President and Chief Executive Officer of the Company or in such other position as the Company's Board of Directors (the "Board") may determine from time to time. The Executive shall be subject to the supervision of, shall report directly to, and shall have such authority as is delegated to him by, the Board of Directors. The Executive shall be responsible for all operations of the Company and all administrative functions, including strategic planning, annual profit planning, diversification (M&A), public relations and investor relations. The following functions and units shall report to the Executive: CRMD, Heart Valve Division, International, Administration, Legal, Finance, Corporate Communications, Business Development and Information Systems. Executive shall, if appointed or elected to the Company's Board of Directors, serve as a member at no additional compensation. The Executive hereby accepts such employment and agrees to undertake the duties and responsibilities inherent in such position and such other duties and responsibilities as the Board or its designee shall from time to time reasonably assign to him. The Executive agrees to devote his entire business time, attention and energies to the business and interests of the Company (and its affiliates as required by the Company's investments and the Executive's positions therein) during the Employment Period. The Executive agrees to abide by the rules, regulations, instructions, personnel practices and policies of the Company and any changes therein which may be adopted from time to time. The Executive acknowledges receipt of copies of all such rules and policies committed to writing as of the date of this Agreement. 3. Compensation and Benefits. a. Salary. The Company shall pay the Executive an annual base salary of $500,000.00 for the one-year period commencing on the Commencement Date in the same intervals as other exempt employers. Such salary shall be subject to annual increases thereafter as determined by the Board, in its sole discretion. b. Bonus. The Executive's target bonus under the MICP shall be 100% of base salary (and shall be prorated for 1999). c. Perk Package. The Executive shall be eligible for the Company's executive perk package at the level of $26,000. d. Fringe Benefits. The Executive shall be entitled to participate in all bonus and benefit programs that the Company establishes and makes available to its Executives, if any, to the extent that Executive's position, tenure, salary, age, health and other qualifications make him eligible to participate. e. Reimbursement of Expenses. The Company shall reimburse the Executive for all reasonable travel, entertainment and other expenses incurred or paid by the Executive in connection with, or related to, the performance of his duties, responsibilities or services under this Agreement, upon presentation by the Executive of documentation, expense statements, vouchers and/or such other supporting information in accordance with standard company policies. f. Stock Options. Under separate agreement, the Executive is being granted a non-qualified stock option to purchase 200,000 shares of stock, vesting at the rate of 20% per year for five years and another non-qualified stock option to purchase 200,000 shares which will vest based upon performance criteria. 4. Employment Termination. The employment of the Executive by the Company pursuant to this Agreement shall terminate upon the occurrence of any of the following: a. Expiration of the Employment Period in accordance with Section 1; b. At the election of the Company, for "Cause", immediately upon written notice by the Company to the Executive. "Cause" for such termination shall include, but not limited to, the following: i. Dishonesty of the Executive with respect to the Company; ii. Willful misfeasance or nonfeasance of duty intended to injure or having the effect of injuring the reputation, business or business relationships of the Company or its respective officers, directors or Executives; iii. Upon a charge by a governmental entity against the Executive of any crime involving moral turpitude which is demonstrably and materially injurious to the 2 Company or upon the filing of any civil action involving a charge of embezzlement, theft, fraud or other similar act which is demonstrably and materially injurious to the Company; iv. Willful or prolonged absence from work by the Executive (other than by reason of disability due to physical or mental illness) or failure, neglect or refusal by the Executive to perform his duties and responsibilities without the same being corrected upon ten (10) days prior written notice; or v. Breach by the Executive of any of the covenants contained in this Agreement. c. Immediately upon the death or disability of the Executive. As used in this Agreement, the term "disability" shall mean the inability of the Executive, due to a physical or mental disability, for a period of 90 days, whether or not consecutive, during any 360 day period to perform the services contemplated under this Agreement. A determination of disability shall be made by a physician to the Company. d. At the election of the Company or the Executive, with or without cause upon 90 days written notice by one party to the other. 5. Effect of Termination. a. Termination for Cause or at Election of Either Party. In the event the Executive's employment is terminated at the election of the Company pursuant to Section 4(d), the Company shall immediately pay to the Executive an amount equal to the two times the Executive's then current salary and two times the Executive's then current target bonus. b. Termination for Death or Disability. If the Executive's employment is terminated by death or because of disability pursuant to Section 4(c), the Company shall pay to the estate of the Executive or to the Executive, as the case may be, the compensation which would otherwise be payable to the Executive up to the end of the month in which the termination of his employment because of death or disability occurs. c. Terminate for Cause or Voluntary. In the event a termination for cause pursuant to Section 4(b) or by the voluntary resignation of Executive pursuant to Section 4(d), then no further compensation other than that already accrued shall be due to Executive under this Agreement. d. In the event Executive is entitled to, and actually receives the full compensation he is entitled to, under the separate SEVERANCE AGREEMENT dated the same date as this Agreement, then, notwithstanding the previous subsections of Section 5, the Company shall have no additional obligation to make a payment to Executive under Section 5 of this Agreement. 6. Notices. All notices required or permitted under this Agreement shall be in writing and shall be deemed effective upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail, postage prepaid, addressed to the other party at 3 the address shown above, or at such other address or addresses as either party shall designate to the other in accordance with this Section 9. 7. Pronouns. Whenever the context may require, any pronouns used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular forms of nouns and pronouns shall include the plural, and vice versa. 8. Entire Agreement. This Agreement constitutes the entire agreement between the parties and supersedes all prior agreements and understandings, whether written or oral, relating to the subject matter of this Agreement. 9. Other Agreements. This Agreement is intended to supplement and not replace the following other agreements between the Executive and the Company: Non-Disclosure and Non-Competition Agreement, Indemnification Agreement, Severance Agreement (Change of Control), all previous stock option grants, 2001 MICP and other employment benefits arising from Executive's prior employment with the Company. 10. Amendment. This Agreement may be amended or modified only by a written instrument executed by both the Company and the Executive. 11. Governing Law. This Agreement shall be construed, interpreted and enforced in accordance with the laws of the State of Minnesota, without giving effect to that State's conflict of laws provisions. 12. Choice of Venue. All actions or proceedings with respect to this Agreement shall be instituted only in any state or federal court sitting in Ramsey County, Minnesota, and by execution and delivery of this Agreement, the parties irrevocably and unconditionally subject to the jurisdiction (both subject matter and personal) of each such court and irrevocably and unconditionally waive: (a) any objection that the parties might now or hereafter have to the venue of any of such court; and (b) any claim that any action or proceeding brought in any such court has been brought in an inconvenient forum. 13. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of both parties and their respective successors and assigns, including any corporation with which or into which the Company may be merged or which may succeed to its assets or business, provided, however, that the obligations of the Executive are personal and shall not be assigned by him. 14. Waiver. No delay or omission by the Company in exercising any right under this Agreement shall operate as a waiver of that or any other right. A waiver or consent given by the Company on any once occasion shall be effective only in that instance and shall not be construed as a bar or waiver of any right on any other occasion. 15. Captions and Headings. The captions of the sections of this Agreement are for convenience of reference only and in no way define, limit or affect the scope or substance of any section of this Agreement. 4 16. Severability. In case any provision of this Agreement shall be invalid, illegal or otherwise unenforceable, the validity, legality and enforceability of the remaining provisions shall in no way be affected or impaired thereby. 17. Counterparts. This Agreement may be executed in a number of counterparts and all of such counterparts executed by the Company or the Executive, shall constitute one and the same agreement, and it shall not be necessary for all parties to execute the same counterpart hereof. 18. Facsimile Signatures. The parties hereby agree that, for purposes of the execution of this Agreement, facsimile signatures shall constitute original signatures. 19. Incorporation by Reference. The preamble and recitals to this Agreement are hereby incorporated by reference and made a part hereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year set forth above. ST. JUDE MEDICAL, INC., A MINNESOTA CORPORATION /s/ FRIEDA J. VALK ------------------------------ Name: Frieda J. Valk Title: Vice President, Administration EXECUTIVE: /s/ TERRY L. SHEPHERD ------------------------------ Name: Terry L. Shepherd Title: Chairman/CEO 5 EX-13 5 stjude010431_ex-13.txt EXHIBIT 13 - 2000 ANNUAL REPORT EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) RESULTS OF OPERATIONS INTRODUCTION St. Jude Medical, Inc. ("St. Jude Medical" or the "Company") is a global leader in the development, manufacturing and distribution of medical technology products for the cardiac rhythm management, cardiology and vascular access, and cardiac surgery markets. The Company has two reportable segments: Cardiac Rhythm Management (CRM) and Cardiac Surgery (CS - formerly known as Heart Valve Disease Management). The CRM segment, which includes the results from the Company's Cardiac Rhythm Management Division and Daig Division, develops, manufactures and distributes bradycardia pulse generator and tachycardia implantable cardioverter defibrillator (ICD) systems, electrophysiology and interventional cardiology catheters, and vascular closure devices. The CS segment develops, manufactures and distributes mechanical and tissue heart valves and valve repair products, and suture-free devices to facilitate coronary artery bypass graft anastomoses. The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Saturday nearest December 31, but for clarity of presentation describes all periods as if the year end is December 31. Fiscal years 2000, 1999 and 1998 each consisted of fifty-two weeks. The commentary that follows should be read in conjunction with the Company's consolidated financial statements and related notes. ACQUISITIONS Following is a discussion on the businesses acquired by the Company during the last three years: VASCULAR SCIENCE, INC. (VSI): On September 27, 1999, the Company purchased the outstanding common stock of VSI for $75,071 in cash, net of cash acquired, plus additional contingent consideration related to product development milestones for regulatory approvals and to future sales. VSI was a development-stage company focused on the development of suture-free devices to facilitate coronary artery bypass graft anastomoses. ANGIO-SEAL(TM): On March 16, 1999, the Company purchased the Angio-Seal(TM)business of Tyco International Ltd. for $167,000 in cash. Angio-Seal(TM)manufactured and marketed hemostatic puncture closure devices. OTHER: During 2000 and 1999, the Company acquired various businesses used in the distribution of the Company's products. Aggregate consideration paid during 2000 and 1999 was $3,264 and $21,056, respectively, in cash and common stock. The above acquisitions were recorded using the purchase method of accounting. The operating results of each of these acquisitions were included in the Company's consolidated financial statements from the date of each acquisition. Pro forma results of operations have not been presented for these acquisitions since the effects of these business acquisitions were not material to the Company either individually or in aggregate. NET SALES Net sales by geographic markets were as follows: 2000 1999 1998 - -------------------------------------------------------------------------------- United States $ 745,793 $ 689,051 $ 604,524 Western Europe 235,412 259,300 248,070 Other foreign countries 197,601 166,198 163,400 - -------------------------------------------------------------------------------- Total net sales $ 1,178,806 $ 1,114,549 $ 1,015,994 ================================================================================ Overall, foreign exchange rate movements had an unfavorable year-to-year impact of $33,900 and $14,900 in 2000 and 1999, due primarily to the strengthening of the U.S. dollar against the major Western European currencies. This negative effect is not necessarily indicative of the impact on net earnings due to partially offsetting favorable foreign currency changes on operating costs and to the Company's hedging activities. Segment net sales were as follows: 2000 1999 1998 - -------------------------------------------------------------------------------- CRM $ 921,857 $ 843,117 $ 735,123 CS 256,949 271,432 280,871 - -------------------------------------------------------------------------------- Total net sales $ 1,178,806 $ 1,114,549 $ 1,015,994 ================================================================================ 1 CRM 2000 net sales increased 9.3% over 1999 due primarily to increased bradycardia, electrophysiology (EP) catheter, and Angio-Seal(TM) unit sales, offset partially by the negative impact of the strengthening U.S. dollar on foreign sales. The increase in bradycardia sales is mainly due to the Company's ongoing rollout of the Affinity(R) pacemaker family and to an expanded U.S. sales organization. CRM 1999 net sales increased 14.7% over 1998 due primarily to increased bradycardia and electrophysiology (EP) catheter unit sales, and the acquisition of Angio-Seal(TM). The bradycardia sales increase relates to the Company's introduction of the Affinity(R) pacemaker family in the second quarter of 1999 and to an expanded U.S. sales force. CS 2000 net sales decreased 5.3% from 1999 due to the effects of the stronger U.S. dollar, the impact of the first quarter 2000 recall of valve products incorporating a Silzone(R) coating, and a slight clinical preference shift from mechanical valves to tissue valves in the U.S. market where CS holds significant mechanical valve market share and a smaller share of the tissue valve market. CS 1999 net sales decreased 3.4% from 1998 due to the effects of the stronger U.S. dollar, reduced sales to certain distributors in emerging markets, and a slight clinical preference shift from mechanical valves to tissue valves in the U.S. market. GROSS PROFIT Gross profits were as follows: 2000 1999 1998 - -------------------------------------------------------------------------------- Gross profit $ 787,657 $ 733,647 $ 643,054 Percentage of net sales 66.8% 65.8% 63.3% ================================================================================ The Company's 2000 gross profit margin increased one percentage point over 1999 due primarily to CRM's manufacturing efficiencies, offset partially by the unfavorable impact on sales due to the stronger U.S. dollar. The Company's 1999 gross profit margin increased 2.5 percentage points over 1998 due primarily to CRM's manufacturing efficiencies and higher CRM unit sales, offset partially by the impact on sales of the stronger U.S. dollar and lower CS unit sales. OPERATING EXPENSES Certain operating expenses were as follows: 2000 1999 1998 - -------------------------------------------------------------------------------- Selling, general and administrative $ 416,383 $ 394,418 $ 349,346 Percentage of net sales 35.3% 35.4% 34.4% Research and development $ 137,814 $ 125,059 $ 99,756 Percentage of net sales 11.7% 11.2% 9.8% ================================================================================ SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSE: SG&A expense as a percentage of net sales in 2000 was comparable to 1999. During the third quarter of 2000, the Company received a cash payment related to a non-product arbitration judgement pertaining to business matters occurring in 1997 and 1998. This cash receipt, net of other provisions for legal matters and fees, was $15,158 and was credited to SG&A expense. In addition, during the third quarter of 2000, the Company recorded additional expenses related to a $3,500 discretionary contribution to its charitable foundation, $6,672 primarily for write-offs of certain assets and related costs, and a $4,900 increase to its allowance for doubtful accounts. These additional costs and expenses were also recorded in SG&A expense for 2000. SG&A expense as a percentage of net sales increased in 1999 over 1998 due primarily to increased sales activities, increased litigation, Year 2000 related expenses, and to higher intangible asset amortization related to the Angio-Seal(TM) acquisition. RESEARCH AND DEVELOPMENT (R&D) EXPENSE: R&D expense increased in 2000 and 1999 due to increased CRM activities relating primarily to ICDs and products to treat emerging indications in atrial fibrillation and congestive heart failure, and CS activities associated with the development of suture-free devices to facilitate coronary artery bypass graft anastomoses. PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES: In 1999, the Company recorded purchased in-process research and development charges of $47,775 and $67,453 in connection with the acquisitions of Angio-Seal(TM) and VSI. The purchased in-process research and development charges were computed by an independent third-party appraisal company and were expensed at close, except as noted below, because technological feasibility had not been established and because there were no alternative future uses for the technology. The values assigned to purchased in-process 2 research and development were determined primarily by the income approach, utilizing discount rates ranging from 25% to 35%. Certain other factors considered in these valuations included the stage of development of each project, which ranged from 35% to 90% complete, complexity of the work completed at the valuation date, and market introductions for products resulting from the technology beginning in late 1999 for Angio-Seal(TM) and 2000 for VSI. The purchased in-process technologies requires additional development to create commercially viable products. This development includes completion of design, prototyping, and testing to ensure the technologies meet their design specifications, including functional, technical and economic performance requirements. In addition, the technology is required to undergo both international and domestic regulatory reviews and approvals prior to being commercially released to the market. The total appraised value of the VSI purchased in-process research and development was $95,500, of which $67,453 was recorded at close. During 2000, the Company paid $5,000 of contingent consideration for a milestone that was achieved. The remaining balance of the in-process research and development valuation ($23,047) will be recorded in the Company's financial statements as purchased in-process research and development charges when payment of the contingent consideration is assured beyond a reasonable doubt. Contingent consideration payments in excess of the $23,047 will be capitalized as goodwill. Management believes that the financial statement projections used in the Angio-Seal(TM) and VSI acquisitions are still materially valid; however, there can be no assurance that the projected results will be achieved. Certain in-process technologies acquired in the Angio-Seal(TM) and VSI acquisitions have been developed to the point of commercial production and sale to customers. Management expects to continue the development of the other in-process technologies acquired in the Angio-Seal(TM) and VSI acquisitions and continues to believe that there is a reasonable chance of successfully completing such development efforts. However, there is risk associated with the completion of the in-process technologies, and there can be no assurance that any technologies will meet with either technological or commercial success. Failure to successfully develop and commercialize these in-process technologies would result in the loss of the expected economic return inherent in the original fair value allocation. Additionally, the value of other intangible assets acquired may become impaired. 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 a Silzone(R) coating on the sewing cuff fabric. The Company concluded that it will no longer utilize a Silzone(R) coating. The Company recorded a special charge accrual totaling $26,101 during the first quarter of 2000 relating to asset write-downs ($9,465) and other costs ($16,636), including monitoring expenses, associated with this recall and product discontinuance. The Company has utilized $17,634 of this special charge accrual through December 31, 2000. Other than the effect of this special charge, management believes that this recall will not materially impact the Company's future earnings or cash flows based primarily on the fact that the Company's non-Silzone(R) coated products, which represented 75% of the Company's CS shipments at the time of the recall, are not affected by this recall. However, there can be no assurance that the final costs associated with this recall, including litigation-related costs, will not exceed management's estimates. The Company recorded a $9,754 special charge accrual in 1999 related to the restructuring of its international operations, of which $8,622 has been utilized through December 31, 2000. OTHER INCOME (EXPENSE) Interest expense was $28,569 in 2000, $28,104 in 1999, and $23,667 in 1998. The increase in 1999 over 1998 was due to increased debt levels resulting primarily from the Company's acquisitions and share repurchases during 1999. Net investment gains of $4,062 in 2000, $848 in 1999, and $15,624 in 1998 resulted primarily from the periodic sales of the Company's marketable equity security holdings. INCOME TAXES The Company's reported effective income tax rate was 27.2% in 2000 as compared with 63.8% in 1999. Exclusive of the purchased in-process research and development and special charges, the Company's effective income tax rate was 25% for 2000 and 1999. The purchased in-process research and development and special charges were either non-deductible for income tax purposes or were recorded in taxing jurisdictions with low income tax rates. 3 The Company's reported effective income tax rate was 30.5% in 1998. The decrease in the effective income tax rate from 30.5% in 1998 to 25.0% in 1999, exclusive of purchased in-process research and development and special charges, was primarily attributable to higher research and development credits and foreign sales corporation benefits relative to pre-tax earnings in 1999. The Company has not recorded deferred income taxes on its foreign subsidiaries' undistributed earnings as such amounts are currently intended to be reinvested outside the U.S. indefinitely. NET EARNINGS Net earnings, exclusive of purchased in-process research and development and special charges, were $156,307 in 2000, $143,989 in 1999, and $129,082 in 1998. Reported net earnings and diluted net earnings per share were $129,094, or $1.51 per share, in 2000, $24,227, or $0.29 per share, in 1999, and $129,082, or $1.50 per share, in 1998. OUTLOOK The Company expects that market demand, government regulation and societal pressures will continue to change the worldwide health care industry resulting in further business consolidations and alliances. The Company participates with industry groups to promote the use of advanced medical device technology in a cost conscious environment. Customer service in the form of cost-effective clinical outcomes will continue to be a primary focus for the Company. The Company's CS business is in a highly competitive market. The market is segmented among mechanical heart valves, tissue heart valves, and repair products. During 1999 and 2000, the U.S. market continued its slight shift to tissue valve and repair products from mechanical heart valves resulting in a small overall market share loss for the Company. Competition is anticipated to continue to place pressure on pricing and terms, and health care reform is expected to result in further hospital consolidations over time. The Company's CRM business is also in a highly competitive industry that has undergone consolidation. There are currently three principal suppliers, including the Company, and the Company's two principal competitors each have substantially more assets and sales than the Company. Rapid technological change is expected to continue, requiring the Company to invest heavily in R&D and to effectively market its products. The global medical technology market is highly competitive. Competitors have historically employed litigation to gain a competitive advantage. In addition, the Company's products must continually improve technologically and provide improved clinical outcomes due to the competitive nature of the industry. Group purchasing organizations (GPOs) in the U.S. continue to consolidate the purchasing for some of the Company's customers. A few GPOs have executed contracts with the Company's CRM market competitors, which exclude the Company. These contracts, if enforced, may adversely affect the Company's sales of CRM products to members of these GPOs. MARKET RISK The Company is exposed to foreign currency exchange rate fluctuations due to its transactions denominated primarily in Euros, currencies tied to the Euro, Canadian Dollars, British Pounds, and Swedish Kroners. The Company is also exposed to interest rate risk on its interest-bearing debt and equity market risk on its marketable equity security investments. From time to time the Company minimizes a portion of its foreign currency exchange rate risk through the use of forward exchange or option contracts. The gains or losses on these contracts are intended to offset changes in the fair value of the anticipated foreign currency transactions. It is the Company's practice to not enter into contracts for trading purposes. The Company is continuing to evaluate its foreign currency exchange rate risk and the different mechanisms in which to help manage such risk. The Company had no forward exchange contracts outstanding at December 31, 2000. The Company's forward exchange contracts had a fair value of ($263) at December 31, 1999. Utilizing the Company's outstanding forward exchange contracts at December 31, 1999, a hypothetical 10% unfavorable change in the foreign currency spot rates would have negatively impacted the fair value of the Company's forward exchange contracts by $2,745. A majority of any gains or losses on the fair value of these contracts would ultimately be offset by gains or losses on the anticipated transactions. Such offsetting gains or losses are not reflected in the hypothetical 10% unfavorable change. 4 A substantial portion of the Company's interest-bearing debt provides for interest at variable rates tied to the London Interbank Offered Rate ("LIBOR"). The Company periodically enters into interest rate swap or option contracts to reduce its exposures to interest rate fluctuations. During the third quarter of 1999, the Company entered into an interest rate swap contract to hedge a substantial portion of its variable interest rate risk through January 2000 on $138,000 of revolving credit facility borrowings. The fair market value of this contract at December 31, 1999, and the impact of the contract on 1999 earnings were not material. The Company did not enter into any other interest rate contracts during 2000 or in 1998. The Company periodically invests in marketable equity securities of emerging technology companies. The Company's investments in these companies had a fair value of $16,173 and $15,487 at December 31, 2000 and 1999, which is subject to the underlying price risk of the public equity markets. On January 1, 1999, eleven of the fifteen member countries of the European Economic Community (EEC) established fixed conversion rates between their existing sovereign currencies and the Euro, and adopted the Euro as the legal common currency for their countries. The sovereign currencies of these countries will remain legal tender as denominations of the Euro between January 1, 1999 and January 1, 2002. During this transition period, public and private parties may pay for goods and services using either the Euro or the sovereign currency. Beginning January 1, 2002, these countries will issue new Euro-denominated bills and coins for use in cash transactions. The Company does not expect the Euro conversion to have a short-term material affect on the Company's operations. However, subsequent to December 31, 2001, cross-country pricing in the EEC may become more transparent, which may impact the pricing of the Company's products. The Company will continue to evaluate the need for changes to its computer systems to accommodate the conversion to the Euro. NEW ACCOUNTING PRONOUNCEMENT The Company is required to adopt Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (Statement 133), as of January 1, 2001. Statement 133 requires companies to recognize all derivatives on the balance sheet at fair value. Derivatives not qualifying as hedges must be adjusted to fair value through earnings. If the derivative qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The impact of adopting Statement 133 on January 1, 2001, was not material to the Company's consolidated results of operations, financial position or cash flows. FINANCIAL CONDITION LIQUIDITY The Company's liquidity and cash flows remained strong during 2000. Cash provided by operating activities was $203,971 in 2000, down approximately $52,000 from 1999 due primarily to the increased working capital requirements associated with higher sales volumes. The Company's current ratio was 2.4 to 1 at December 31, 2000. Accounts receivable increased $9,492 from December 31, 1999, due primarily to higher sales, offset in part by a weakening of the Western European currencies and the corresponding accounts receivable balances. Total interest bearing debt decreased $182,995 from December 31, 1999, due to debt repayments as a result of cash generated from operations and the conversion of $10,675 of convertible debentures into the Company's common stock. The Company maintains sufficient credit facilities to fund its operations and investment opportunities. As of March 6, 2001, the Company had committed credit facilities totaling $500,000 available to back the Company's commercial paper program borrowings and for general purposes. Management believes that cash generated from operations and cash available under its credit facilities will be sufficient to meet the Company's working capital and share repurchase plan needs in the near term. Should suitable investment opportunities arise, management believes that the Company's earnings, cash flows and balance sheet will permit the Company to obtain additional debt or equity capital, if necessary. 5 CAPITAL STRUCTURE The Company's capital structure consists of interest-bearing debt and equity. Interest-bearing debt as a percent of the Company's total interest-bearing debt and equity decreased from 38% at December 31, 1999, to 24% at December 31, 2000, due primarily to the paydown of debt using cash generated from operations. During 1999, the Company's Board of Directors authorized the repurchase of up to $250,000 of the Company's outstanding common stock over a three-year period. The Company repurchased 977,500 shares of its common stock for $29,826 during 1999. No shares were repurchased during 2000. DIVIDENDS The Company has not declared or paid any dividends during 2000, 1999 or 1998. Management currently intends to utilize the Company's earnings for operating and investment purposes, including the repurchase of its common stock. CAUTIONARY STATEMENTS In this discussion and in other written or oral statements made from time to time, we have included and may include statements that may constitute "forward-looking statements" within the meaning of the safe harbor provisions of the Private Litigation Securities Reform Act of 1995. These forward-looking statements are not historical facts but instead represent our belief regarding future events, many of which, by their nature, are inherently uncertain and beyond our control. These statements relate to our future plans and objectives, among other things. By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results may differ, possibly materially, from the results indicated by these forward-looking statements. We undertake no obligation to update any forward-looking statements. Various factors contained in the previous discussion and those described below may affect the Company's operations and results. Since it is not possible to foresee all such factors, you should not consider these factors to be a complete list of all risks or uncertainties. Risk factors include the following: 1. Administrative or legislative reforms to the U.S. Medicare and Medicaid systems or similar reforms of foreign reimbursement systems in a manner that significantly reduces reimbursement for procedures using the Company's medical devices or denies coverage for such procedures. 2. Acquisition of key patents by competitors that have the affect of excluding the Company from new market segments. 3. Economic factors, including inflation, changes in interest rates and changes in foreign currency exchange rates. 4. Product introductions by competitors which have advanced technology, better features or lower pricing. 5. Price increases by suppliers of key components, some of which are sole-sourced. 6. A reduction in the number of procedures using the Company's devices caused by cost containment pressures or preferences for alternate therapies. 7. Safety, performance or efficacy concerns about the Company's marketed products, many of which are expected to be implanted for many years, leading to recalls and advisories with the attendant expenses and declining sales. 8. Changes in laws, regulations or administrative practices affecting government regulation of the Company's products, such as FDA laws and regulations, that increase pre-approval testing requirements for products or impose additional burdens on the manufacture and sale of medical devices. 9. Difficulties obtaining, or the inability to obtain, appropriate levels of product liability insurance. 10. A serious earthquake affecting the Company's facilities in Sunnyvale or Sylmar, California. 11. Health care industry consolidation leading to demands for price concessions or the exclusion of some suppliers from significant market segments. 12. Adverse developments in litigation including product liability litigation and patent litigation or other intellectual property litigation including that arising from the Telectronics and Ventritex acquisitions. 6 REPORT OF MANAGEMENT The management of St. Jude Medical, Inc. is responsible for the preparation, integrity and objectivity of the accompanying financial statements. The financial statements were prepared in accordance with accounting principles generally accepted in the United States and include amounts which reflect management's best estimates based on its informed judgement and consideration given to materiality. Management is also responsible for the accuracy of the related data in the annual report and its consistency with the financial statements. In the opinion of management, the Company's accounting systems and procedures, and related internal controls, provide reasonable assurance that transactions are executed in accordance with management's intention and authorization, that financial statements are prepared in accordance with accounting principles generally accepted in the United States, and that assets are properly accounted for and safeguarded. The concept of reasonable assurance is based on the recognition that there are inherent limitations in all systems of internal control, and that the cost of such systems should not exceed the benefits to be derived therefrom. Management reviews and modifies the system of internal controls to improve its effectiveness. The effectiveness of the controls system is supported by the selection, retention and training of qualified personnel, an organizational structure that provides an appropriate division of responsibility and a strong budgeting system of control. St. Jude Medical, Inc. also recognizes its responsibility for fostering a strong ethical climate so that the Company's affairs are conducted according to the highest standards of personal and business conduct. This responsibility is reflected in the Company's business ethics policy. The adequacy of the Company's internal accounting controls, the accounting principles employed in its financial reporting, and the scope of independent and internal audits are reviewed by the Audit Committee of the Board of Directors, consisting solely of outside directors. The independent auditors meet with, and have confidential access to, the Audit Committee to discuss the results of their audit work. /s/ Terry L. Shepherd Terry L. Shepherd Chief Executive Officer /s/ John C. Heinmiller John C. Heinmiller Vice President, Finance and Chief Financial Officer REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders St. Jude Medical, Inc. We have audited the accompanying consolidated balance sheets of St. Jude Medical, Inc. and subsidiaries as of December 31, 2000 and 1999 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, 2000. 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, 2000 and 1999 and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Minneapolis, Minnesota February 6, 2001 7 CONSOLIDATED STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Fiscal Year Ended December 31 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------- Net sales $ 1,178,806 $ 1,114,549 $ 1,015,994 Cost of sales 391,149 380,902 372,940 - -------------------------------------------------------------------------------------------------------------- Gross profit 787,657 733,647 643,054 Selling, general and administrative expense 416,383 394,418 349,346 Research and development expense 137,814 125,059 99,756 Purchased in-process research and development charges 5,000 115,228 -- Special charges 26,101 9,754 -- - -------------------------------------------------------------------------------------------------------------- Operating profit 202,359 89,188 193,952 Other income (expense) (25,050) (22,184) (8,222) - -------------------------------------------------------------------------------------------------------------- Earnings before income taxes 177,309 67,004 185,730 Income tax expense 48,215 42,777 56,648 - -------------------------------------------------------------------------------------------------------------- Net earnings $ 129,094 $ 24,227 $ 129,082 - -------------------------------------------------------------------------------------------------------------- NET EARNINGS PER SHARE: Basic $ 1.53 $ 0.29 $ 1.51 Diluted $ 1.51 $ 0.29 $ 1.50 - -------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 84,253 84,274 85,714 Diluted 85,817 84,735 86,145 - --------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 8 CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
December 31 2000 1999 - ------------------------------------------------------------------------------------------------ ASSETS CURRENT ASSETS Cash and equivalents $ 50,439 $ 9,655 Marketable securities 57,423 79,238 Accounts receivable, less allowances for doubtful accounts 303,307 293,815 Inventories 222,238 235,407 Deferred income taxes 35,566 36,609 Other 35,669 35,575 - ------------------------------------------------------------------------------------------------ Total current assets 704,642 690,299 PROPERTY, PLANT AND EQUIPMENT Land, buildings and improvements 114,045 111,746 Machinery and equipment 328,553 299,028 Diagnostic equipment 176,794 163,757 - ------------------------------------------------------------------------------------------------ Property, plant and equipment at cost 619,392 574,531 Less accumulated depreciation (302,213) (231,751) - ------------------------------------------------------------------------------------------------ Net property, plant and equipment 317,179 342,780 OTHER ASSETS Goodwill and other intangible assets, net 430,896 452,519 Deferred income taxes 57,482 51,838 Other 22,517 16,602 - ------------------------------------------------------------------------------------------------ Total other assets 510,895 520,959 - ------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 1,532,716 $ 1,554,038 - ------------------------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 81,340 $ 91,874 Income taxes payable 58,224 43,700 Accrued expenses Employee compensation and related benefits 81,576 67,046 Other 76,227 79,902 - ------------------------------------------------------------------------------------------------ Total current liabilities 297,367 282,522 LONG-TERM DEBT 294,500 477,495 COMMITMENTS AND CONTINGENCIES -- -- SHAREHOLDERS' EQUITY Preferred stock -- -- Common stock 8,534 8,378 Additional paid-in capital 55,723 109 Retained earnings 962,317 833,223 Accumulated other comprehensive income: Cumulative translation adjustment (93,380) (53,977) Unrealized gain on available-for-sale securities 7,655 6,288 - ------------------------------------------------------------------------------------------------ Total shareholders' equity 940,849 794,021 - ------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,532,716 $ 1,554,038 - ------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 9 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
Accumulated Common Stock Additional Other Total Number of Paid-In Retained Comprehensive Shareholders' Shares Amount Capital Earnings Income (Loss) Equity - ----------------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1998 91,911,496 $ 9,191 $244,347 $746,032 $(12,548) $ 987,022 Comprehensive income: Net earnings 129,082 129,082 Other comprehensive income (loss) Unrealized loss on investments, net of taxes ($2,545) and reclassification adjustment (see below) (4,153) (4,153) Foreign currency translation adjustment (9,092) (9,092) ------- Other comprehensive loss (13,245) -------- Comprehensive income 115,837 -------- Issuance of common stock, including exercise of stock options, net 263,203 26 7,054 7,080 Tax benefit from stock options 1,070 1,070 Repurchase of common stock (8,000,000) (800) (245,815) (58,174) (304,789) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 84,174,699 8,417 6,656 816,940 (25,793) 806,220 Comprehensive income: Net earnings 24,227 24,227 Other comprehensive income (loss) Unrealized loss on investments, net of taxes ($712) and reclassification adjustment (see below) (1,161) (1,161) Foreign currency translation adjustment (20,735) (20,735) -------- Other comprehensive loss (21,896) -------- Comprehensive income 2,331 ------ Issuance of common stock, including exercise of stock options, net 381,206 38 8,855 8,893 Tax benefit from stock options 969 969 Issuance of common stock for business acquisition 161,072 16 3,984 4,000 Issuance of common stock in settlement of obligation 41,108 4 1,430 1,434 Repurchase of common stock (977,500) (97) (21,785) (7,944) (29,826) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 83,780,585 8,378 109 833,223 (47,689) 794,021 Comprehensive income: Net earnings 129,094 129,094 Other comprehensive income (loss) Unrealized gain on investments, net of taxes ($838) and reclassification adjustment (see below) 1,367 1,367 Foreign currency translation adjustment (39,403) (39,403) -------- Other comprehensive loss (38,036) -------- Comprehensive income 91,058 ------ Issuance of common stock, including exercise of stock options, net 1,245,166 125 38,506 38,631 Tax benefit from stock options 6,464 6,464 Issuance of common stock for conversion of subordinated debentures 310,535 31 10,644 10,675 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2000 85,336,286 $ 8,534 $ 55,723 $962,317 $(85,725) $ 940,849 - ----------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income reclassification adjustments for net realized gains on the sale of marketable securities, net of income taxes: 1998 $ 9,282 1999 2,875 2000 2,519 - -----------------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 10 CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
Fiscal Year Ended December 31 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net earnings $ 129,094 $ 24,227 $ 129,082 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation 56,699 54,588 45,959 Amortization 35,650 31,114 22,894 Purchased in-process research and development charges 5,000 115,228 -- Special charges 26,101 9,754 -- Net investment gain (4,062) (848) (15,624) Deferred income taxes (5,439) 369 15,459 Changes in operating assets and liabilities, net of business acquisitions: Accounts receivable (40,845) (26,319) (35,236) Inventories 4,621 14,466 (7,458) Other current assets (6,519) (6,722) 4,897 Accounts payable and accrued expenses (17,317) (1,998) (35,853) Income taxes 20,988 42,208 (15,651) - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 203,971 256,067 108,469 INVESTING ACTIVITIES Purchase of property, plant and equipment (39,699) (69,419) (74,197) Proceeds from sale or maturity of marketable securities 29,082 17,552 82,879 Business acquisitions, net of cash acquired (8,264) (259,127) -- Other (10,752) (19,438) 561 - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (29,633) (330,432) 9,243 FINANCING ACTIVITIES Proceeds from exercise of stock options and stock issued 38,631 8,893 7,080 Common stock repurchased -- (29,826) (304,789) Borrowings under debt facilities 3,703,287 989,500 785,036 Payments under debt facilities (3,856,287) (887,000) (602,536) Repurchase of convertible subordinated debentures (19,320) -- (27,505) - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (133,689) 81,567 (142,714) Effect of currency exchange rate changes on cash 135 (1,322) 247 - ------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and equivalents 40,784 5,880 (24,755) Cash and equivalents at beginning of year 9,655 3,775 28,530 - ------------------------------------------------------------------------------------------------------------------------------- Cash and equivalents at end of year $ 50,439 $ 9,655 $ 3,775 - ------------------------------------------------------------------------------------------------------------------------------- Supplemental Cash Flow Information - ------------------------------------------------------------------------------------------------------------------------------- Cash paid during the year for: Interest $ 32,467 $ 28,934 $ 21,703 Income taxes 35,704 21,200 55,031 - -------------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES COMPANY OVERVIEW: St. Jude Medical, Inc. (the "Company") is a global leader in the development, manufacturing and distribution of medical technology products for the cardiac rhythm management, cardiology and vascular access, and cardiac surgery markets. The Company's principal products include pacemaker and implantable cardioverter defibrillator (ICD) systems, prosthetic heart valve replacement and repair products, electrophysiology and interventional cardiology catheters, and vascular closure devices. The Company markets its products primarily in the United States, Western Europe and Japan through both a direct employee-based sales organization and independent distributors. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Significant intercompany transactions and balances have been eliminated in consolidation. Certain reclassifications of previously reported amounts have been made to conform to the current year presentation. FISCAL YEAR: The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Saturday nearest December 31. For clarity of presentation, the Company describes all periods as if the year end is December 31. Fiscal years 2000, 1999 and 1998 each consisted of fifty-two weeks. USE OF ESTIMATES: Preparation of the Company's consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH EQUIVALENTS: The Company considers highly liquid temporary investments with an original maturity of three months or less to be a cash equivalent. Cash equivalents are stated at cost, which approximates market. MARKETABLE SECURITIES: Marketable securities consist of equity securities, bank certificates of deposit, U.S. government obligations, commercial paper, notes and bonds. Marketable securities are classified as available-for-sale and recorded at fair market value, based upon quoted market prices. Gross unrealized gains totaling $12,347, $10,142 and $12,015, net of taxes of $4,692, $3,854 and $4,566, were recorded in shareholders' equity at December 31, 2000, 1999 and 1998. Realized gains from the sale of marketable securities have been recorded in other income and are computed using the specific identification method. 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: 2000 1999 - ------------------------------------------------------------------------------ Finished goods $ 123,696 $ 108,449 Work in process 35,640 41,466 Raw materials 62,902 85,492 - ------------------------------------------------------------------------------ $ 222,238 $ 235,407 ============================================================================== PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are depreciated using the straight-line method over their estimated useful lives, ranging from 31 to 39 years for buildings and improvements, three to seven years for machinery and equipment, and five to eight years for diagnostic equipment. 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. Other intangible assets consist primarily of licensed and purchased technology, patents and customer lists. Goodwill and other intangible assets are amortized on a straight-line basis using lives ranging from 5 to 20 years. Accumulated amortization totaled $149,904 and $115,239 at December 31, 2000 and 1999. The Company periodically reviews its long-lived assets, including property, plant and equipment, for indicators of impairment using an estimate of the undiscounted cash flows generated by those assets. 12 REVENUE RECOGNITION: The Company generally recognizes revenue at such time title to the goods transfers to the customer. For certain products, the Company maintains consigned inventory at customer locations. For these products, revenue is recognized at the time the Company is notified that the customer has used the inventory. The allowance for doubtful accounts was $13,831 at December 31, 2000 and $13,529 at December 31, 1999. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), which among other guidance clarifies certain conditions to be met in order to recognize revenue. The Company's adoption of SAB 101 in the fourth quarter of 2000 did not have a material impact on the results of operations, financial position or cash flows. RESEARCH AND DEVELOPMENT: Research and development costs are charged to expense as incurred. Purchased in-process research and development is recognized in purchase business combinations for the portion of the purchase price allocated to the appraised value of in-process technologies. The portion assigned to in-process research and development technologies excludes the value of core and developed technologies, which are recognized as intangible assets. STOCK-BASED COMPENSATION: The Company utilizes the intrinsic value method of accounting for its employee stock-based compensation. Pro forma information related to the fair value method of accounting is provided in Note 5. EARNINGS PER SHARE: Basic earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares, exclusive of restricted shares, during the period. Diluted earnings per share is computed by dividing net earnings, adjusted for convertible debenture interest, if appropriate, by the weighted average number of outstanding common shares and common share equivalents, when dilutive. The table below sets forth the computation of basic and diluted net earnings per share:
2000 1999 1998 - ----------------------------------------------------------------------------------------------- Numerator: Net earnings $ 129,094 $ 24,227 $ 129,082 Convertible debenture interest, net of taxes 95 -- -- - ----------------------------------------------------------------------------------------------- Adjusted net earnings $ 129,189 $ 24,227 $ 129,082 Denominator: Basic-weighted average shares outstanding 84,253,000 84,274,000 85,714,000 Effect of dilutive securities: Employee stock options 1,448,000 414,000 401,000 Restricted shares 38,000 47,000 30,000 Convertible debentures 78,000 -- -- - ----------------------------------------------------------------------------------------------- Diluted-weighted average shares outstanding 85,817,000 84,735,000 86,145,000 =============================================================================================== Basic net earnings per share $ 1.53 $ 0.29 $ 1.51 =============================================================================================== Diluted net earnings per share $ 1.51 $ 0.29 $ 1.50 ===============================================================================================
Net earnings and diluted-weighted average shares outstanding for certain periods have not been adjusted for the Company's convertible debentures or for certain employee stock options and awards where the effect of those securities would have been anti-dilutive. FOREIGN CURRENCY TRANSLATION: Sales and expenses denominated in foreign currencies are translated at average exchange rates in effect throughout the year. Assets and liabilities of foreign operations are translated at year-end exchange rates. Gains and losses from translation of net assets of foreign operations are recorded in other comprehensive income. Foreign currency transaction gains and losses are included in other income (expense). 13 FOREIGN CURRENCY AND INTEREST RATE RISK MANAGEMENT CONTRACTS: Management periodically utilizes derivative financial instruments to help manage a portion of the Company's exposure to foreign currencies and interest rates. Management generally utilizes forward exchange or option contracts to manage anticipated foreign currency exposures and interest rate swaps to manage interest rate exposures. Management does not enter into derivative financial instruments for trading purposes. The Company records the fluctuation in the fair value of the forward exchange or option contracts in other income (expense) and the fluctuation in the fair value of the interest rate swaps in interest expense. NEW ACCOUNTING PRONOUNCEMENT: The Company is required to adopt Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (Statement 133), as of January 1, 2001. Statement 133 requires companies to recognize all derivatives on the balance sheet at fair value. Derivatives not qualifying as hedges must be adjusted to fair value through earnings. If the derivative qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The impact of adopting Statement 133 on January 1, 2001, was not material to the Company's consolidated results of operations, financial position or cash flows. NOTE 2 - ACQUISITIONS VASCULAR SCIENCE, INC. (VSI): On September 27, 1999, the Company purchased the outstanding common stock of VSI for $75,071 in cash, net of cash acquired, plus additional contingent consideration related to product development milestones for regulatory approvals and to future sales. VSI was a development-stage company focused on the development of suture-free devices to facilitate coronary artery bypass graft anastomoses. An independent appraisal firm performed a valuation of VSI's identifiable intangible assets ($580) and in-process research and development ($95,500). The value assigned to in-process research and development was determined by the income approach, utilizing discount rates ranging from 30% to 35% and assumptions on product introductions which began in the year 2000. 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). During 2000, the Company paid $5,000 of contingent consideration for a milestone that was achieved. The remaining balance of the in-process research and development valuation ($23,047) will be recorded in the Company's financial statements as purchased in-process research and development charges when payment of the contingent consideration is assured beyond a reasonable doubt. Contingent consideration payments in excess of the $23,047 will be capitalized as goodwill. ANGIO-SEAL(TM): On March 16, 1999, the Company purchased the Angio-Seal(TM) business of Tyco International Ltd. for $167,000 in cash. Angio-Seal(TM) manufactured and marketed hemostatic puncture closure devices. Total consideration for Angio-Seal(TM), including the fair value of the net assets acquired and acquisition accounting adjustments, was $177,714, which was allocated to in-process research and development ($47,775), various other identifiable intangible assets ($90,025), and goodwill ($39,914). Valuation of the in-process research and development and other identifiable intangible assets was based upon an independent appraisal. The values assigned to in-process research and development and other identifiable intangible assets were determined primarily by the income approach, utilizing discount rates of 25% for in-process research and development and 19.5% to 21.5% for the other intangible assets, and assumptions on product introductions which began in late 1999. OTHER: During 2000 and 1999, the Company acquired various businesses used in the distribution of the Company's products. Aggregate consideration paid during 2000 and 1999 was $3,264 and $21,056, respectively, in cash and common stock. 14 The above acquisitions have been recorded using the purchase method of accounting. The operating results of each of these acquisitions are included in the Company's consolidated statements of earnings from the date of each acquisition. The values assigned to in-process research and development were expensed at close, except as noted above, because technological feasibility had not been established and because there were no alternative future uses for the technology. Pro forma results of operations have not been presented for these acquisitions since the effects of these business acquisitions were not material to the Company either individually or in aggregate. NOTE 3 - LONG-TERM DEBT Long-term debt consisted of the following: 2000 1999 - -------------------------------------------------------------------------------- Commercial paper borrowings $ 223,000 $ -- Uncommitted credit facility borrowings 71,500 148,500 Committed credit facility borrowings -- 299,000 Convertible subordinated debentures -- 29,995 - -------------------------------------------------------------------------------- Total long-term debt $ 294,500 $ 477,495 ================================================================================ COMMITTED CREDIT FACILITIES: The Company has a $350,000 unsecured, revolving credit facility that expires in March 2003. The Company also has a $150,000 committed revolving credit facility that expires in March 2002. The Company's credit facilities provide for variable interest tied primarily to the London Interbank Offered Rate. The weighted-average interest rate on these borrowings was 6.4% at December 31, 1999. UNCOMMITTED CREDIT FACILITIES: The Company borrows from time to time under unsecured, due-on-demand credit facilities with various banks. These credit facilities provide for variable interest tied to the London Interbank Offered Rate. The weighted-average interest rate on these borrowings was 7.1% and 6.9% at December 31, 2000 and 1999. COMMERCIAL PAPER BORROWINGS: During 2000, the Company began issuing short-term, unsecured commercial paper with maturities up to 270 days. These commercial paper borrowings are fully backed by the above committed credit facilities and bear interest at varying market rates. The weighted-average interest rate on these borrowings was 6.9% at December 31, 2000. CONVERTIBLE SUBORDINATED DEBENTURES: During the first quarter of 2000, the Company repurchased $19,320 of its convertible subordinated debentures in open market transactions, recognizing an immaterial gain. During the third quarter of 2000, all of the remaining debenture holders converted their debentures, plus accrued interest, into 310,535 shares of the Company's common stock. OTHER: The Company's credit facility agreements contain various restrictive covenants such as minimum financial ratios, limitations on additional liens or indebtedness, and limitations on certain acquisitions and investments, which the Company was in compliance with at December 31, 2000. The Company classifies all of its credit facility and commercial paper borrowings as long-term on its balance sheet as the Company has the ability to repay any short-term maturity with available cash from its existing long-term, committed credit facility. Management continually reviews the Company's cash flow projections and may from time to time repay a portion of the Company's borrowings. NOTE 4 - COMMITMENTS AND CONTINGENCIES LEASES: The Company leases various facilities under noncancelable operating lease arrangements. Future minimum lease payments under these leases are as follows: $7,802 in 2001; $7,423 in 2002; $6,788 in 2003; $5,455 in 2004; $5,020 in 2005; $15,590 in years thereafter. Rent expense under all operating leases was $7,028, $7,397 and $7,341 in 2000, 1999 and 1998. 15 IRS MATTERS: During 2000, the Company and the Internal Revenue Service ("IRS") settled the IRS Tax Court suit for the tax periods 1990-1991 and subsequent year disputes for the tax periods 1992-1997. The issues raised by the IRS related primarily to the Company's Puerto Rican operations. The settlement did not have a material impact on the Company's consolidated financial statements. SILZONE(R) LITIGATION: The Company has been sued by patients alleging defects in the Company's mechanical heart valves with a Silzone(R) coating. The Company recalled products with a Silzone(R) coating on January 21, 2000, and sent a Recall Notice and Advisory concerning the recall to physicians and others. Some of these cases are seeking monitoring of patients implanted with Silzone(R)-coated valves who allege no injury to date. Some of these cases are seeking class action status. The Company intends to vigorously defend these cases. See also Note 6 regarding the fiscal year 2000 special charge for the Silzone(R) recall. GUIDANT LITIGATION: GUIDANT'S CLAIMS AGAINST SJM On November 26, 1996, Guidant Corporation (a competitor of St. Jude Medical) ("Guidant") and related parties filed a lawsuit against St. Jude Medical, Inc. ("St. Jude Medical"), Pacesetter, Inc. ("Pacesetter" -- a wholly owned subsidiary of St. Jude Medical), Ventritex, Inc. ("Ventritex") and certain members of the Telectronics Group in State Superior Court in Marion County, Indiana (the "Telectronics Action"). The lawsuit alleges, among other things, that, pursuant to an agreement entered into in 1993, certain Guidant parties granted Ventritex intellectual property licenses related to cardiac stimulation devices, and that such licenses would terminate upon the consummation of the merger of Ventritex into Pacesetter (the "Merger"). The lawsuit further alleges that, pursuant to an agreement entered into in 1994 (the "Telectronics Agreement"), certain Guidant parties granted the Telectronics Group intellectual property licenses relating to cardiac stimulation devices. The lawsuit seeks declaratory and injunctive relief, among other things, to prevent and invalidate the transfer of the Teletronics Agreement to Pacesetter in connection with Pacesetter's acquisition of Telectronics' assets (the "Telectronics Acquisition") and the application of license rights granted under the Telectronics Agreement to manufacture and sale by Pacesetter of Ventritex's products following the consummation of the Merger. The court overseeing this case issued a stay of this matter in July 1998 so that the issues could be addressed in an arbitration requested by the Telectronics Group and Pacesetter. Guidant and related parties also filed suit against St. Jude Medical, Pacesetter and Ventritex on November 26, 1996, in the United States District Court for the Southern District of Indiana. This second lawsuit seeks (i) a declaratory judgment that Pacesetter's manufacture, use or sale of cardiac stimulation devices of the type or similar to the type which Ventritex manufactured and sold at the time the Guidant parties filed their complaint would, upon consummation of the Merger, be unlicensed and constitute an infringement of patent rights owned by certain Guidant parties, (ii) to enjoin the manufacture, use or sale by St. Jude Medical, Pacesetter or Ventritex of cardiac stimulation devices of the type which Ventritex manufactured at the time the Guidant parties filed their complaint, and (iii) certain damages and costs. This second lawsuit was stayed by the court in July 1998 given the order to arbitrate, as discussed below. St. Jude Medical believes that the foregoing state and federal court complaints contain a number of significant factual inaccuracies concerning the Telectronics Acquisition and the terms and effects of the various intellectual property license agreements referred to in such complaints. For these reasons and others, St. Jude Medical believes that the allegations set forth in the complaints are without merit. St. Jude Medical has vigorously defended its interests in these cases and will continue to do so. 16 ORDER TO ARBITRATE As a result of the state and federal lawsuits brought by Guidant and related parties, the Telectronics Group and Pacesetter filed a lawsuit in the United States District Court for the District of Minnesota seeking (i) a declaratory judgment that the Guidant parties' claims, as reflected in the Telectronics Action, are subject to arbitration pursuant to the arbitration provisions of the Telectronics Agreement, (ii) an order that the defendants arbitrate their claims against the Telectronics Group and Pacesetter in accordance with the arbitration provisions of the Telectronics Agreement, (iii) to enjoin the defendants preliminarily and permanently from litigating their dispute with the Telectronics Group and Pacesetter in any other forum, and (iv) certain costs. After the Eighth Circuit Court of Appeals ruled on an appeal in favor of the Telectronics Group and Pacesetter in May 1998, the United States District Court for the District of Minnesota issued an order on July 8, 1998 directing the arbitration requested by the Telectronics Group and Pacesetter to proceed. STATUS OF ARBITRATION The arbitrator selected for the arbitration initially ruled that Pacesetter and St. Jude Medical should not participate in the arbitration proceeding which would determine whether the Telectronics Agreement transferred to Pacesetter. Based on this ruling, the Telectronics Group and the Guidant parties participated in the arbitration proceeding. This proceeding occurred in late April 2000, and, on July 10, 2000, the arbitrator issued a ruling that the attempted assignment and transfer of patent licenses in the Telectronics Agreement by the Telectronics Group to Pacesetter was ineffective. As a result of this decision, the Guidant parties filed papers with the U.S. District Court for the Southern District of Indiana seeking to lift the stay of the patent infringement court proceedings in that court which had been entered in June 1998. The court granted Guidant's request to lift the stay and the matter involving Guidant's patent infringement claims against St. Jude Medical is scheduled for trial in June 2001. BACKGROUND CONCERNING PATENTS INVOLVED IN GUIDANT'S CLAIMS In the patent infringement case in federal court in Indiana, the Guidant parties initially asserted claims against St. Jude Medical and Pacesetter involving four separate patents. One of these patents ('678) expired May 3, 1998. The other patents involved expire, according to their terms, on March 7, 2001 ('472 patent), February 25, 2003 ('191 patent), and December 22, 2003 ('288 patent), respectively, although St. Jude Medical has claims in the court action which, if upheld, would cause some of the patents to expire earlier, if they apply at all. Although Guidant has requested injunctive relief and damages as part of the federal court lawsuit in Indiana, the request for an injunction would be barred for any expired patent. Guidant is seeking damages for the time period prior to expiration of the patents. MARKMAN RULINGS The federal district court in Indiana has issued decisions as part of the court's Markman's process which interpret what the claims in the patents mean. These decisions are available on the court's website at http://www.insd.uscourts.gov. Although Guidant asserted patent infringement claims against St. Jude Medical involving four patents when it initiated the litigation in 1996, the number of patents involving the claims Guidant is asserting against St. Jude Medical has changed over time. First, Guidant elected to withdraw its claims against St. Jude Medical involving the '678 patent prior to the court issuing its Markman decisions. After the Markman decisions, St. Jude Medical moved for summary judgment asking the court to rule that the '191 patent is invalid. However, before the court issued a ruling on this summary judgment motion, Guidant and St. Jude Medical entered into a stipulation regarding the claims in the '191 patent. Based on this stipulation, the court entered an order ruling that claims 1-14 in the '191 patent are invalid. In this order, the court also dismissed Guidant's claims against St. Jude Medical involving the '191 patent with prejudice. The order also provided that Guidant may make an immediate appeal of the '191 patent claim construction issues, and on February 8, 2001, Guidant filed a notice of appeal concerning the court's rulings on the '191 patent. Thus, at the present time, Guidant's claims against St. Jude Medical involving two patents ('288 and '472) remain in the case set for trial. St. Jude Medical continues to believe that the patent infringement claims asserted by Guidant in this litigation are without merit, and will continue to vigorously defend its interest in this litigation. 17 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, management believes the Company has product liability insurance sufficient to cover such claims and suits. NOTE 5 - SHAREHOLDERS' EQUITY CAPITAL STOCK: The Company's authorized capital consists of 25,000,000 shares of $1.00 per share par value preferred stock and 250,000,000 shares of $0.10 per share par value common stock. There were no shares of preferred stock issued or outstanding during 2000, 1999 or 1998. SHARE REPURCHASES: In 1999, the Company's Board of Directors authorized the repurchase of up to $250,000 of the Company's outstanding common stock over a three-year period. The Company repurchased 977,500 shares of its common stock for $29,826 during 1999. No shares were repurchased during 2000. During 1998, the Company repurchased 8,000,000 shares of its common stock for $304,789 under a modified "Dutch Auction" self-tender offer. EMPLOYEE STOCK PURCHASE SAVINGS PLAN: The Company's employee stock purchase savings plan allows participating employees to purchase, through payroll deductions, shares of the Company's un-issued common stock at 85% of the fair market value at specified dates. Employees purchased 114,040, 94,386 and 107,545 shares in 2000, 1999 and 1998 under this plan. At December 31, 2000, 1,000,000 shares of additional un-issued common stock were available for purchase under the plan. STOCK COMPENSATION PLANS: The Company's stock compensation plans provide for the issuance of stock-based awards, such as restricted stock or stock options, to directors, officers and employees. Stock option awards under these plans generally have an eight to ten year life, an exercise price equal to the fair market value on the date of grant, and a four-year vesting term. At December 31, 2000, the Company had 3,140,510 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, 2000, are as follows: WEIGHTED- AVERAGE OPTIONS EXERCISE OUTSTANDING PRICE - -------------------------------------------------------------------------------- Balance at January 1, 1998 9,556,858 $ 32.60 Granted 1,350,300 30.21 Cancelled (979,284) 36.09 Exercised (158,593) 20.36 - -------------------------------------------------------------------------------- Balance at December 31, 1998 9,769,281 32.12 Granted 3,046,880 28.10 Cancelled (1,146,767) 35.39 Exercised (257,781) 22.88 - -------------------------------------------------------------------------------- Balance at December 31, 1999 11,411,613 30.93 Granted 3,731,633 50.86 Canceled (739,340) 33.19 Exercised (1,134,086) 30.11 - -------------------------------------------------------------------------------- Balance at December 31, 2000 13,269,820 $ 36.47 ================================================================================ Stock options totaling 5,402,529, 4,976,093 and 3,961,943 were exercisable at December 31, 2000, 1999 and 1998. The following table summarizes information concerning currently outstanding and exercisable stock options at December 31, 2000: OPTIONS OUTSTANDING OPTIONS EXERCISABLE - -------------------------------------------------------------------------------- WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- RANGES OF NUMBER REMAINING AVERAGE AVERAGE EXERCISE OUT- CONTRACTUAL EXERCISE NUMBER EXERCISE PRICES STANDING LIFE (YEARS) PRICE EXERCISABLE PRICE - -------------------------------------------------------------------------------- $8.77-17.55 5,063 3.1 $ 17.11 5,063 $ 17.11 17.55-26.32 1,303,683 3.4 22.05 1,143,404 21.70 26.32-35.10 6,256,378 7.2 29.55 2,870,651 30.04 35.10-43.87 2,147,204 6.2 38.86 1,235,794 38.70 43.87-52.64 3,519,625 7.8 52.39 113,750 49.56 52.64-87.74 37,867 2.9 68.20 33,867 68.48 - -------------------------------------------------------------------------------- 13,269,820 6.8 $ 36.47 5,402,529 $ 30.89 ================================================================================ 18 The Company also granted 43,923 shares of restricted common stock during the three years ended December 31, 2000, under the Company's stock compensation plans. The value of restricted stock awards as of the date of grant is charged to income over the periods during which the restrictions lapse. The Company's net earnings and diluted net earnings per share would have been reduced by $18,875, or $0.22 per share, in 2000, $18,614, or $0.22 per share, in 1999, and $11,822, or $0.14 per share, in 1998, had the fair value based method of accounting been used for valuing the employee stock based awards. The weighted-average fair value of options granted and the assumptions used in the Black-Scholes options pricing model are as follows: 2000 1999 1998 - -------------------------------------------------------------------------------- Fair value of options granted $ 21.09 $ 11.12 $ 10.91 Assumptions used: Expected life (years) 5 5 5 Risk-free rate of return 5.3% 5.8% 4.5% Volatility 35.6% 33.2% 33.4% Dividend yield 0% 0% 0% ================================================================================ SHAREHOLDERS' RIGHTS PLAN: The Company has a shareholder rights plan that entitles shareholders to purchase one-tenth of a share of Series B Junior Preferred Stock at a stated price, or to purchase either the Company's shares or shares of an acquiring entity at half their market value, upon the occurrence of certain events which result in a change in control, as defined by the Plan. The rights related to this plan expire in 2007. NOTE 6 - SPECIAL CHARGES 2000 SPECIAL CHARGE: On January 21, 2000, the Company initiated a worldwide voluntary recall of all field inventory of heart valve replacement and repair products incorporating a Silzone(R) coating on the sewing cuff fabric. The Company concluded that it will no longer utilize a Silzone(R) coating. The Company recorded a special charge accrual totaling $26,101 during the first quarter of 2000 relating to asset write-downs ($9,465) and other costs ($16,636), including monitoring expenses, associated with this recall and product discontinuance. The Company has utilized $17,634 of this special charge accrual through December 31, 2000. There can be no assurance that the final costs associated with this recall, including litigation-related costs, will not exceed management's estimates. 1999 SPECIAL CHARGE: The Company recorded a $9,754 special charge accrual in 1999 related to the restructuring of its international operations, of which $8,622 has been utilized through December 31, 2000. NOTE 7 - OTHER INCOME (EXPENSE) Other income (expense) consists of the following: 2000 1999 1998 - -------------------------------------------------------------------------------- Interest expense $ (28,569) $ (28,104) $ (23,667) Interest income 2,640 2,726 4,125 Net investment gain 4,062 848 15,624 Foreign currency transaction gain (loss) (2,540) 2,666 (3,304) Other (643) (320) (1,000) - -------------------------------------------------------------------------------- Other income (expense) $ (25,050) $ (22,184) $ (8,222) ================================================================================ NOTE 8 - INCOME TAXES The Company's earnings before income taxes were generated from domestic and foreign operations as follows: 2000 1999 1998 - -------------------------------------------------------------------------------- Domestic $ 75,538 $ 2,408 $ 132,574 Foreign 101,771 64,596 53,156 - -------------------------------------------------------------------------------- Earnings before income taxes $ 177,309 $ 67,004 $ 185,730 ================================================================================ Income tax expense consists of the following: 2000 1999 1998 - -------------------------------------------------------------------------------- Current: Federal $ 31,859 $ 28,641 $ 28,409 State and Puerto Rico Section 936 3,815 2,810 5,771 Foreign 17,980 10,957 7,009 - -------------------------------------------------------------------------------- Total current 53,654 42,408 41,189 Deferred (5,439) 369 15,459 - -------------------------------------------------------------------------------- Income tax expense $ 48,215 $ 42,777 $ 56,648 ================================================================================ 19 The tax effects of the cumulative temporary differences between the tax bases of assets and liabilities and their carrying amount for financial statement purposes are as follows: 2000 1999 - -------------------------------------------------------------------------------- Deferred income tax assets: Net operating loss carryforwards $ 42,611 $ 46,399 Tax credit carryforwards 26,095 16,070 Inventories 30,212 25,678 Intangible assets 17,497 14,365 Accrued liabilities 741 7,913 - -------------------------------------------------------------------------------- Deferred income tax assets 117,156 110,425 - -------------------------------------------------------------------------------- Deferred income tax liabilities: Unrealized gain on marketable securities (4,692) (3,854) Property, plant and equipment (19,416) (18,124) - -------------------------------------------------------------------------------- Deferred income tax liabilities (24,108) (21,978) - -------------------------------------------------------------------------------- Net deferred income tax asset $ 93,048 $ 88,447 ================================================================================ A reconciliation of the U.S. federal statutory income tax rate to the Company's effective income tax rate is as follows: 2000 1999 1998 - -------------------------------------------------------------------------------- Income tax expense at the U.S. federal statutory rate $ 62,058 $ 23,451 $ 65,006 State income taxes, net of federal benefit 2,725 1,811 4,091 Foreign taxes at lower rates (12,451) (1,567) (6,212) Tax benefits from foreign sales corporation (2,280) (3,309) (5,662) Research and development credits (3,758) (3,679) (2,906) Non-deductible purchased in-process research and development charges 2,141 23,608 -- Other (220) 2,462 2,331 - -------------------------------------------------------------------------------- Income tax expense $ 48,215 $ 42,777 $ 56,648 ================================================================================ Effective income tax rate 27.2% 63.8% 30.5% ================================================================================ At December 31, 2000, the Company has net operating loss and general business and foreign tax credit carryforwards of approximately $121,746 and $21,443, that will expire from 2002 through 2020 if not utilized; such amounts are subject to annual usage limitations. The Company also has alternative minimum tax credit carryforwards of $4,652 that have an unlimited carryforward period. The Company has not recorded deferred income taxes on $123,865 of its foreign subsidiaries' undistributed earnings as such amounts are currently intended to be reinvested outside the U.S. indefinitely. NOTE 9 - RETIREMENT PLANS DEFINED CONTRIBUTION PLANS: The Company has 401(k) profit sharing plans that provide retirement benefits to substantially all full-time U.S. employees. Eligible employees may contribute a percentage of their annual compensation, subject to IRS limitations, with the Company matching a portion of the employees' contributions. The Company also contributes a portion of its profits to the plans based upon Company performance. The Company's matching and profit sharing contributions are at the discretion of the Company's Board of Directors. In addition, the Company has defined contribution programs for employees outside the United States. The benefits under the Company's plans are based primarily on compensation levels. Company contributions under all defined contribution plans totaled $13,170, $11,416 and $9,858 in 2000, 1999 and 1998. DEFINED BENEFIT PLANS: The Company has unfunded defined benefit plans for employees in certain countries outside the U.S. The Company has an accrued liability totaling approximately $7,500 at December 31, 2000, which approximates the actuarially calculated liability. The related pension expense was not material. NOTE 10 - MARKET AND CONCENTRATION RISK FOREIGN CURRENCY CONTRACTS: The Company had no forward exchange contracts outstanding at December 31, 2000. The Company had forward exchange contracts totaling $27,451 at December 31, 1999, related primarily to the exchange of Canadian Dollars, British Pounds, Swedish Kroner and the U.S. dollar. These instruments typically had a maturity of one year or less. 20 INTEREST RATE CONTRACT: During the third quarter of 1999, the Company entered into an interest rate swap contract to hedge a substantial portion of its variable interest rate risk through January 2000 on $138,000 of revolving credit facility borrowings. The fair market value of this contract was not material at December 31, 1999. The impact of interest rate contracts on the Company's net earnings was not material during 1999. The Company did not enter into any other interest rate contracts during 2000 or in 1998. CONCENTRATION OF CREDIT RISK: The Company grants credit to customers in the normal course of business but generally does not require collateral or any other security to support its receivables. Within the European Economic Union and in many emerging markets, payments of certain accounts receivable balances are made by the individual countries' health care system. Although the Company does not anticipate collection problems with these receivables, payment is dependent, to a certain extent, upon the economic situation within those countries. The credit risk associated with the Company's other trade receivables is mitigated due to dispersion of the receivables over a large number of customers in many geographic areas. NOTE 11 - SEGMENT AND GEOGRAPHIC INFORMATION SEGMENT INFORMATION: The Company has two reportable segments: Cardiac Rhythm Management (CRM) and Cardiac Surgery (CS - formerly known as Heart Valve Disease Management). The CRM segment, which includes the results from the Company's Cardiac Rhythm Management Division and Daig Division, develops, manufactures and distributes bradycardia pulse generator and tachycardia implantable cardioverter defibrillator systems, electrophysiology and interventional cardiology catheters and vascular closure devices. The CS segment develops, manufactures and distributes mechanical and tissue heart valves and valve repair products, and suture-free devices to facilitate coronary artery bypass graft anastomoses. The following table presents certain financial information about the Company's reportable segments:
CRM CS ALL OTHER(1) TOTAL - ------------------------------------------------------------------------------------------------- Fiscal Year Ended December 31, 2000 External net sales $ 921,857 $ 256,949 $ -- $1,178,806 Operating profit (2) 130,916 129,468 (58,025) 202,359 Depreciation and amortization expense 80,388 10,525 1,436 92,349 Assets (3) 1,176,541 219,651 136,524 1,532,716 Expenditures for long-lived assets (4) 43,339 7,271 2,744 53,354 - ------------------------------------------------------------------------------------------------- Fiscal Year Ended December 31, 1999 External net sales $ 843,117 $ 271,432 $ -- $1,114,549 Operating profit (2) 96,291 145,675 (152,778) 89,188 Depreciation and amortization expense 74,626 9,581 1,495 85,702 Assets (3) 1,174,672 211,424 167,942 1,554,038 Expenditures for long-lived assets (4) 71,190 5,717 1,771 78,678 - ------------------------------------------------------------------------------------------------- Fiscal Year Ended December 31, 1998 External net sales $ 735,123 $ 280,871 $ -- $1,015,994 Operating profit 70,024 147,832 (23,904) 193,952 Depreciation and amortization expense 59,679 7,810 1,364 68,853 Assets (3) 992,291 222,033 170,288 1,384,612 Expenditures for long-lived assets (4) 58,323 14,546 1,328 74,197 - -------------------------------------------------------------------------------------------------
(1)AMOUNTS RELATE PRIMARILY TO CORPORATE ACTIVITIES, SPECIAL CHARGES AND PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES. (2)ALL OTHER AMOUNT INCLUDES SPECIAL CHARGES TOTALING $26,101 AND $9,754 IN 2000 AND 1999, AND PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES OF $5,000 AND $115,228 IN 2000 AND 1999. (3)ASSETS ASSOCIATED WITH INCOME PRODUCING SEGMENTS ARE INCLUDED IN THE SEGMENT'S ASSETS. CORPORATE ASSETS CONSIST PRINCIPALLY OF CASH, MARKETABLE SECURITIES, AND DEFERRED INCOME TAXES. (4)INCLUDES THE PURCHASE OF PROPERTY, PLANT AND EQUIPMENT, AND GOODWILL AND INTANGIBLE ASSET ADDITIONS, EXCLUSIVE OF THE CRM SEGMENT ACQUISITION OF ANGIO-SEAL(TM) AND THE CS SEGMENT ACQUISITION OF VSI IN 1999. 21 GEOGRAPHIC INFORMATION: The following tables present certain geographical financial information:
NET SALES 2000 1999 1998 - ------------------------------------------------------------------------------------ United States $ 745,793 $ 689,051 $ 604,524 Western Europe 235,412 259,300 248,070 Other foreign countries 197,601 166,198 163,400 - ------------------------------------------------------------------------------------ $1,178,806 $1,114,549 $1,015,994 - ------------------------------------------------------------------------------------ LONG-LIVED ASSETS* 2000 1999 1998 - ------------------------------------------------------------------------------------ United States $ 599,480 $ 607,851 $ 538,403 Western Europe 43,914 57,082 44,860 Other foreign countries 104,681 130,366 67,430 - ------------------------------------------------------------------------------------ $ 748,075 $ 795,299 $ 650,693 - ------------------------------------------------------------------------------------
*Long-lived assets exclude deferred income taxes and miscellaneous other assets. NOTE 12 - QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial data for 2000 and 1999 is as follows:
QUARTER FIRST SECOND THIRD FOURTH - ------------------------------------------------------------------------------------------------------ Fiscal Year Ended December 31, 2000 Net sales $ 295,499 $ 300,939 $ 286,969 $ 295,399 Gross profit 193,521 202,363 193,961 197,812 Net earnings 15,828(1) 34,119(2) 37,999(3) 41,148 Diluted net earnings per share $ 0.19 $ 0.40 $ 0.44 $ 0.47 Fiscal Year Ended December 31, 1999 Net sales $ 266,734 $ 290,659 $ 275,814 $ 281,342 Gross profit 173,273 190,910 181,529 187,935 Net earnings (loss) (12,057)(4) 37,205 (36,994)(5) 36,073 Diluted net earnings (loss) per share $ (0.14) $ 0.44 $ (0.44) $ 0.43 - ------------------------------------------------------------------------------------------------------
(1)INCLUDES PRE-TAX SPECIAL CHARGE OF $26,101 RELATING TO THE SILZONE(R)RECALL. (2)INCLUDES PRE-TAX PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE OF $5,000 RELATING TO THE VASCULAR SCIENCE, INC. ACQUISITION. (3)INCLUDES A CASH RECEIPT RELATED TO A NON-PRODUCT ARBITRATION JUDGMENT PERTAINING TO BUSINESS MATTERS OCCURRING IN 1997 AND 1998. THIS CASH RECEIPT, NET OF OTHER PROVISIONS FOR LEGAL MATTERS AND FEES, WAS $15,158 AND WAS CREDITED TO SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. ALSO, THE COMPANY RECORDED EXPENSES FOR A $3,500 DISCRETIONARY CONTRIBUTION TO ITS CHARITABLE FOUNDATION, $6,672 PRIMARILY FOR WRITE-OFFS OF CERTAIN ASSETS AND RELATED COSTS, AND A $4,900 INCREASE TO ITS ALLOWANCE FOR DOUBTFUL ACCOUNTS. THESE ADDITIONAL COSTS AND EXPENSES WERE ALSO RECORDED IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. (4)INCLUDES PRE-TAX PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE OF $47,775 RELATING TO THE ANGIO-SEAL(TM) ACQUISITION. (5)INCLUDES PRE-TAX PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE OF $67,453 RELATING TO THE VASCULAR SCIENCE, INC. ACQUISITION, AND SPECIAL CHARGE OF $9,754. 22 FIVE-YEAR SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000* 1999** 1998 1997*** 1996**** - --------------------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS FOR THE FISCAL YEAR: Net sales $1,178,806 $1,114,549 $1,015,994 $ 994,396 $ 876,747 Gross profit $ 787,657 $ 733,647 $ 643,054 $ 628,679 $ 581,859 Percent of sales 66.8% 65.8% 63.3% 63.2% 66.4% Operating profit $ 202,359 $ 89,188 $ 193,952 $ 86,817 $ 69,469 Percent of sales 17.2% 8.0% 19.1% 8.7% 7.9% Net earnings $ 129,094 $ 24,227 $ 129,082 $ 53,140 $ 60,637 Percent of sales 11.0% 2.2% 12.7% 5.3% 6.9% Diluted earnings per share $ 1.51 $ 0.29 $ 1.50 $ 0.58 $ 0.66 FINANCIAL POSITION AT YEAR END: Cash and marketable securities $ 107,862 $ 88,893 $ 87,990 $ 184,536 $ 235,395 Working capital 407,275 407,777 479,067 497,188 429,451 Total assets 1,532,716 1,554,038 1,384,612 1,453,116 1,469,994 Long-term debt 294,500 477,495 374,995 220,000 229,500 Shareholders' equity 940,849 794,021 806,220 987,022 922,061 OTHER DATA: Diluted weighted average shares outstanding 85,817 84,735 86,145 92,052 92,372 - --------------------------------------------------------------------------------------------------------------------
Except for 1997, all fiscal years noted above consisted of ?fty-two weeks. Fiscal year 1997 consisted of ?fty-three weeks. The Company has not declared or paid any dividends during 1996 through 2000. * Results for 2000 include a $26,101 special charge and a purchased in-process research and development charge of $5,000. ** Results for 1999 include a $9,754 special charge and purchased in-process research and development charges totaling $115,228. *** Results for 1997 include $58,669 of special charges. ****Results for 1996 include a $52,926 special charge and purchased in-process research and development charges totaling $40,350. 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: First Chicago Trust Company of New York a division of EquiServe P.O. Box 2500 Jersey City, New Jersey 07303-2500 1.800.317.4445 www.equiserve.com (Account Access Availability) Hearing impaired #TDD: 201.222.4955 ANNUAL MEETING OF SHAREHOLDERS The annual meeting of shareholders will be held at 9:30 a.m. on Thursday, May 17, 2001, at the Lutheran Brotherhood Building, 625 Fourth Avenue South, Minneapolis, Minnesota. INVESTOR CONTACT Laura C. Merriam, Director of Investor Relations To obtain information about the Company, call 1.800.552.7664, visit our Website www.sjm.com, or write to: Investor Relations St. Jude Medical, Inc. One Lillehei Plaza St. Paul, Minnesota 55117-9983 Latest Company news releases, including quarterly results, and other information can be received by calling Investor Relations at a toll-free number (1.800.552.7664). Company news releases are also available through "Company News On-Call" by fax (1.800.758.5804 ext. 816662) or at http://www.prnewswire.com on the Internet. For more information on St. Jude Medical, visit our Website at www.sjm.com. The Investor Relations section includes all SEC filings, a list of analyst coverage, analyst estimates, and a calendar of upcoming earnings announcements and IR events. Our NewsRoom features St. Jude Medical's press releases, company background information, fact sheets, executive bios, a product photo portfolio, and other media resources. Patient profiles can be found on our Website, including the patients featured in this year's annual report. The Website also has a special section with information for physicians and health care professionals. COMPANY STOCK SPLITS 2:1 on 4/27/79, 1/25/80, 9/30/86, 3/15/89 and 4/30/90 3:2 on 11/16/95 STOCK EXCHANGE LISTINGS New York Stock Exchange Chicago Board Options Exchange (CB) Symbol: STJ The range of high and low prices per share for the Company's common stock for fiscal 2000 and 1999 is set forth below. As of February 7, 2001, the Company had 3,573 shareholders of record. Fiscal Year Ended December 31 2000 1999 - -------------------------------------------------------------------------------- Quarter High Low High Low - -------------------------------------------------------------------------------- First $31.25 $23.63 $29.38 $22.94 Second $44.25 $24.19 $38.31 $23.88 Third $51.63 $36.88 $40.75 $29.75 Fourth $62.50 $46.38 $30.69 $25.13 TRADEMARKS Aescula(TM), Affnity(R), Alliance(TM), Angio-Seal(TM), Angstrom(R), AutoCapture(TM) Pacing System, BiLinx(TM), Contour(R), Duo(TM), Dynamic Atrial Overdrive(TM), Entity(TM), Epic(TM), Flex Cuff(TM), Frontier(TM), Genesis(TM), Integrity(TM), Isolator(TM), Lineage(TM), Linx(TM), Livewire(TM), Livewire TC(TM), Microny(R), Photon(R), Response CV(TM), Silzone(R), SJM(R), SJM Biocor(TM), SJM Epic(TM), SJM Quattro(TM), SJM Regent(TM), SJM Tailor(TM), Spyglass(TM), St. Jude Medical(R), Supreme(TM), Swartz(TM), Symmetry(TM), Trio(TM), Tendril(R), Toronto Duo(TM), Toronto Root(TM), Toronto SPV(R), Trilogy(R), TVL(R), Ultimum(TM), UltraFlex(TM), Vectra(R). 24 EX-21 6 stjude010431_ex-21.txt EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 ST. JUDE MEDICAL, INC. AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT St. Jude Medical, Inc. Wholly Owned Subsidiaries: - ------------------------------------------------- * Pacesetter, Inc. - Sylmar, California, Scottsdale, Arizona, and Maven, South Carolina (Delaware corporation) (doing business as St. Jude Medical Cardiac Rhythm Management Division) * St. Jude Medical S.C., Inc. - St. Paul, Minnesota (Minnesota corporation) - Lifeline Medical Systems, Inc. (Illinois Corporation) (wholly-owned subsidiary of St. Jude Medical S.C., Inc.) * St. Jude Medical Sales Corporation - St. Paul, Minnesota (Barbados corporation) * St. Jude Medical Europe, Inc. - St. Paul, Minnesota (Delaware corporation) - Brussels, Belgium branch * St. Jude Medical Canada, Inc. - Mississauga, Ontario and St. Hyacinthe, Quebec (Ontario, Canada corporation) * 151703 Canada, Inc. - St. Paul, Minnesota (Ontario, Canada corporation) * St. Jude Medical (Hong Kong) Limited - Kowloon, Hong Kong (Hong Kong corporation) - Shanghai and Beijing, China representative offices - Korean and Taiwan branch offices - Mumbai, New Delhi, Calcutta and Chennai, India branch offices * 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) * St. Jude Medical Australia Pty., Ltd. - Sydney Australia (Australian corporation) * St. Jude Medical Brasil, Ltda. - Sao Paulo, Brazil (Brazilian corporation) - Telectronics Medica, Ltda. - Sao Paulo and Belo Horizonte Brazil (Brazilian corporation) * Medical Telectronics, Ltd. - Auckland, New Zealand (New Zealand corporation) * Daig Corporation - Minnetonka, Minnesota (Minnesota corporation) * St. Jude Medical Colombia, Ltda. (Bogota, Colombia) (Colombian corporation) * St. Jude Medical Cardiovascular Group, Inc. - Maple Grove, Minnesota (Minnesota corporation) * SJM Europe, Inc. - St. Paul, Minnesota (Delaware corporation) - Tokyo, Japan branch SJM Europe Inc. Wholly Owned Subsidiaries - ----------------------------------------- * 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 Nederland B.V. (Netherlands corporation) (wholly-owned subsidiary of St. Jude Medical Puerto Rico Holding, B.V.) - Telectronics B.V. (Netherlands corporation) (wholly-owed subsidiary of St. Jude Medical 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) (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) * St. Jude Medical AB (Swedish corporation) (formerly known as Pacesetter AB) * St. Jude Medical Sweden AB (Veddesta, Sweden) (Swedish corporation) * St. Jude Medical Danmark A/S (Danish corporation) - Telectronics Scandinavia Aps (Danish corporation) (wholly-owned subsidiary of St. Jude Medical Danmark A/S) * St. Jude Medical Pacesetter Sales AB (Swedish corporation) * St. Jude Medical (Portugal) - Distribuicao de Produtos Medicos, Lda. (Portuguese corporation) * St. Jude Medical Export Ges.m.b.H. (Austrian corporation) * St. Jude Medical Medizintechnik Ges.m.b.H. (Austrian corporation) * St. Jude Medical Italia S.p.A. (Italian corporation) * N.V. St. Jude Medical Belgium, S.A. (Belgian corporation) - Portugal branch * St. Jude Medical Espana, S.A. (Spanish corporation) * St. Jude Medical France S.A. (French corporation) * St. Jude Medical Finland O/y (Finnish corporation) * St. Jude Medical Sp.zo.o. (Polish corporation) * St. Jude Medical GmbH (German corporation) * St. Jude Medical UK Limited (United Kingdom corporation) * St. Jude Medical AG (Swiss corporation) EX-23 7 stjude010431_ex-23.txt EXHIBIT 23 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 February 6, 2001, included in the 2000 Annual Report to Shareholders of St. Jude Medical, Inc. Our audits also included the financial statement schedule of St. Jude Medical, Inc. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in Registration Statement No. 33-9262, Registration Statement No. 33-41459, Registration Statement No. 33-48502, Registration Statement No. 33-54435, Registration Statement No. 333-42945, Registration Statement No. 333-42658, and Registration Statement No. 333-42668 on Form S-8 of our report dated February 6, 2001, with respect to the consolidated financial statements and schedule of St. Jude Medical, Inc. incorporated by reference in the Annual Report on Form 10-K for the fiscal year ended December 31, 2000. /s/ ERNST & YOUNG LLP Minneapolis, Minnesota March 21, 2001 -----END PRIVACY-ENHANCED MESSAGE-----