edX - TXT1x Data
-----BEGIN PRIVACY-ENHANCED MESSAGE-----1Proc-Type: 2001,MIC-CLEAR2Originator-Name: [email protected]3Originator-Key-Asymmetric:4MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen5TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB6MIC-Info: RSA-MD5,RSA,7Wjrksk9KO4fXBDYI6plg+6TZDqf4a0XSUJMqx9RJsHfy6UYyo3tWnYH8GLMCrE0d8aKJy4JwufOkI6KroLYpErA==910<SEC-DOCUMENT>0000897101-02-000215.txt : 2002041511<SEC-HEADER>0000897101-02-000215.hdr.sgml : 2002041512ACCESSION NUMBER: 0000897101-02-00021513CONFORMED SUBMISSION TYPE: 10-K14PUBLIC DOCUMENT COUNT: 815CONFORMED PERIOD OF REPORT: 2001123116FILED AS OF DATE: 200203291718FILER:1920COMPANY DATA:21COMPANY CONFORMED NAME: ST JUDE MEDICAL INC22CENTRAL INDEX KEY: 000020307723STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845]24IRS NUMBER: 41127689125STATE OF INCORPORATION: MN26FISCAL YEAR END: 12312728FILING VALUES:29FORM TYPE: 10-K30SEC ACT: 1934 Act31SEC FILE NUMBER: 001-1244132FILM NUMBER: 025944263334BUSINESS ADDRESS:35STREET 1: ONE LILLEHEI PLAZA36CITY: ST PAUL37STATE: MN38ZIP: 5511739BUSINESS PHONE: 65148320004041MAIL ADDRESS:42STREET 1: ONE LILLEHEI PLAZA43CITY: ST PAUL44STATE: MN45ZIP: 5511746</SEC-HEADER>47<DOCUMENT>48<TYPE>10-K49<SEQUENCE>150<FILENAME>stjude021570_10k.txt51<DESCRIPTION>ST. JUDE MEDICAL, INC. FORM 10K52<TEXT>53================================================================================5455UNITED STATES SECURITIES AND EXCHANGE COMMISSION56WASHINGTON, D. C. 205495758------------------------------5960FORM 10-K6162ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF63THE SECURITIES EXCHANGE ACT OF 19346465FOR THE FISCAL YEAR ENDED DECEMBER 31, 20016667COMMISSION FILE NO. 0-86726869------------------------------7071ST. JUDE MEDICAL, INC.72(Exact name of Registrant as specified in its charter)7374MINNESOTA 41-127689175(State or other jurisdiction (I.R.S. Employer76of incorporation or organization) Identification No.)7778ONE LILLEHEI PLAZA79ST. PAUL, MINNESOTA 5511780(Address of principal executive offices)8182(651) 483-200083(Registrant's telephone number, including area code)8485------------------------------8687SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:8889COMMON STOCK ($.10 PAR VALUE) PREFERRED STOCK PURCHASE RIGHTS90(Title of class) (Title of class)9192NEW YORK STOCK EXCHANGE AND CHICAGO BOARD OPTIONS EXCHANGE93(Name of exchange on which registered)9495SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE9697------------------------------9899Indicate by check mark whether the Registrant: (1) has filed all100reports required to be filed by Section 13 or 15(d) of the Securities Exchange101Act of 1934 during the preceding 12 months; and (2) has been subject to such102filing requirements for the past 90 days.103104Yes _X_ No ___105106Indicate by check mark if disclosure of delinquent filers pursuant to107Item 405 of Regulation S-K is not contained herein, and will not be contained,108to the best of the Registrant's knowledge, in definitive proxy or information109statements incorporated by reference in Part III of this Form 10-K or any110amendment to this Form 10-K. ___111112The aggregate market value of the voting stock held by non-affiliates113of the Registrant was approximately $7.1 billion at February 22, 2002, when the114closing sale price of such stock, as reported on the New York Stock Exchange,115was $81.13 per share.116117The Registrant had 87,754,141 shares of its $0.10 par value Common118Stock outstanding as of February 22, 2002.119120================================================================================121<PAGE>122123124TABLE OF CONTENTS125126127ITEM DESCRIPTION PAGE128- ---- ----------- ----129130PART I1311321. Business.......................................................... 11332. Properties........................................................ 91343. Legal Proceedings................................................. 91354. Submission of Matters to a Vote of Security Holders............... 111364A. Executive Officers of the Registrant.............................. 11137138139PART II1401415. Market for Registrant's Common Equity and Related142Shareholder Matters........................................... 131436. Selected Financial Data........................................... 131447. Management's Discussion and Analysis of Results of Operations145and Financial Condition....................................... 131467A. Quantitative and Qualitative Disclosures About Market Risk........ 141478. Financial Statements and Supplementary Data....................... 141489. Changes in and Disagreements with Accountants on Accounting149and Financial Disclosure...................................... 14150151152PART III15315410. Directors and Executive Officers of the Registrant................ 1415511. Executive Compensation............................................ 1415612. Security Ownership of Certain Beneficial Owners and Management.... 1415713. Certain Relationships and Related Transactions.................... 15158159160PART IV16116214. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 15163164165<PAGE>166167168DOCUMENTS INCORPORATED BY REFERENCE169170Portions of the Company's Annual Report to Shareholders for the fiscal171year ended December 31, 2001, are incorporated by reference in Parts I and II.172Portions of the Company's definitive Proxy Statement dated March 28, 2002, are173incorporated by reference in Part III.174175176PART I177178ITEM 1. BUSINESS179180GENERAL181St. Jude Medical, Inc., together with its subsidiaries (collectively182"St. Jude" or the "Company") is a leader in the development, manufacturing and183distribution of cardiovascular medical devices for the global cardiac rhythm184management (CRM), cardiology and vascular access (C/VA), and cardiac surgery185(CS) markets. The Company's principal products in each of these markets are:186bradycardia pacemaker systems, tachycardia implantable cardioverter187defibrillator (ICD) systems, and electrophysiology (EP) catheters in CRM;188vascular closure devices, catheters, guidewires and introducers in C/VA; and189mechanical and tissue heart valves, valve repair products, and suture-free190devices to facilitate coronary artery bypass graft anastomoses in CS.191192The Company markets its products primarily in the United States,193Western Europe and Japan through both a direct employee-based sales organization194and independent distributors. St. Jude also sells its products in Eastern195Europe, Africa, the Middle East, Canada, Latin America and the Asia-Pacific196region through employee-based sales organizations and independent distributors.197198On September 27, 1999, St. Jude acquired Vascular Science, Inc.199("VSI"), a development-stage company focused on the development of suture-free200devices to facilitate coronary artery bypass graft anastomoses.201202On March 16, 1999, St. Jude purchased the Angio-Seal(TM) business of203Tyco International Ltd. Angio-Seal(TM) manufactured and marketed vascular204closure devices.205206During 2001, 2000 and 1999, the Company acquired various businesses207involved in distribution of the Company's products.208209The Company historically reported under two segments. During 2001, the210Company completed a reorganization of its global sales activities, which211resulted in changes to its internal management and financial reporting212structure. The Company now manages its business on the basis of one reportable213segment: the development, manufacture and distribution of cardiovascular medical214devices. In 2001, approximately 72% of net sales were derived from products sold215in the cardiac rhythm management market, 10% in the cardiology and vascular216access market, and 18% in the cardiac surgery market. In 2000, approximately 69%217of net sales were derived from products sold in the cardiac rhythm management218market, 9% in the cardiology and vascular access market, and 22% in the cardiac219surgery market. Approximately 65% of the Company's 2001 net sales were in the220U.S. market, as compared with 63% in 2000. Additional geographical information221is set forth in the Company's 2001 Annual Report to Shareholders on page 22 of222the Financial Report and is incorporated herein by reference.223224St. Jude was incorporated in Minnesota in 1976.2252262271228<PAGE>229230231PRINCIPAL PRODUCTS232CARDIAC RHYTHM MANAGEMENT: The Company's pacemakers and related systems233treat patients with hearts that beat inappropriately slow, a condition known as234bradycardia. Typically implanted pectorally, just below the collarbone,235pacemakers monitor the heart's rate and, when necessary, deliver low-level236electrical impulses that stimulate an appropriate heartbeat. The pacemaker is237connected to the heart by one or two leads that carry the electrical impulses to238the heart and information from the heart back to the pacemaker. An external239programmer enables the physician to retrieve diagnostic information from the240pacemaker and reprogram the pacemaker in accordance with the patient's changing241needs. Single-chamber pacemakers stimulate only one chamber of the heart (atrium242or ventricle), while dual-chamber devices can sense and pace in both the upper243and lower chambers.244245St. Jude's current pacing products include the advanced featured246Identity(TM) family of pacemakers, approved by the U.S. Food and Drug247Administration (FDA) in November 2001. The Identity(TM) pacemaker models248maintain all of the therapeutic advancements of previous St. Jude Medical249pacemakers, including the AF Suppression(TM) Pacing Algorithm and the250BEAT-BY-BEAT(TM) AutoCapture(TM) Pacing System. The Identity(TM) models expand251the Company's AFx(TM) feature set to include a suite of arrhythmia diagnostics,252including dual-channel stored electrograms. AFx(TM) features are designed to253help physicians better manage pacemaker patients suffering from atrial254fibrillation (AF) - the world's most common cardiac arrhythmia. Also available255are Integrity(R) u (Micro) and the Integrity AFx(R) pacemaker models. The256Integrity(R) models build on the platform of the Affinity(R) product line with257the Beat-by-Beat(TM) AutoCapture(TM) Pacing System. Other available products258include the Affinity(R) pacemakers, the Entity(R) family of pacemakers,259containing the Omnisense(TM) activity-based sensor, and the Tempo(R) pacemaker260family, which uses fifth-generation Minute Ventilation sensor technology. These261pacemaker families are highly automatic and contain many advanced features and262diagnostic capabilities to optimize cardiac therapy. All are small and263physiologic in shape to enhance patient comfort. The Microny(R) II SR+ and264Microny(R) K SR are single chamber pacemakers available in the United States.265Other single-chamber pacemakers, the Microny(R) SR+ and the Regency(R) pacemaker266families, are also available outside the United States.267268The Identity(TM), Integrity(R), Affinity(R), Entity(TM) and Regency(R)269families of pacemakers, as well as the Microny(R) SR+ pacemaker, all offer the270unique feature of the BEAT-BY-BEAT(TM) AutoCapture(TM) pacing system. The271AutoCapture(TM) pacing system enables the pacemaker to monitor every paced beat272to verify that the heart has been stimulated ("capture"), deliver a back-up273pulse in the event of noncapture, continuously measure threshold, and make274adjustments in energy output to match changing patient needs. In addition, the275Identity(TM) and Integrity(R) pacemakers include St. Jude Medical's AF276Suppression(TM) Pacing Algorithm, a therapy designed to suppress atrial277fibrillation.278279St. Jude's current pacing leads include the active-fixation Tendril(R)280DX and SDX lead families and the passive-fixation Passive Plus(R) DX family281which are available worldwide, and the passive-fixation Membrane(TM) EX(TM)282family which is currently available outside the United States. All three lead283families feature steroid elution, which helps suppress the body's inflammatory284response to a foreign object.285286Outside the United States, St. Jude also markets the Genesis(TM)287System, a device-based ventricular resynchronization system designed for the288treatment of heart failure (HF) and suppression of atrial fibrillation. HF289impairs the heart's ability to pump blood efficiently, causing shortness of290breath, fatigue, swelling and other debilitating symptoms. The Genesis(TM)291System includes three components: the Frontier(TM) 3 x 2 biventricular292stimulation device, designed to enhance cardiac function by resynchronizing the293contractions of the heart's two ventricles, the Aescula(TM) LV lead, and the294Alliance(TM) Catheter Delivery System.2952962972298<PAGE>299300301ICDs and related systems treat patients with hearts that beat302inappropriately fast, a condition known as tachycardia. ICDs monitor the303heartbeat and deliver higher energy electrical impulses, or "shocks," to304terminate ventricular tachycardia (VT) and ventricular fibrillation (VF). In305ventricular tachycardia, the lower chambers of the heart contract at an306abnormally rapid rate and typically deliver less blood to the body's tissues and307organs. VT can progress to VF, in which the heart beats so rapidly and308erratically that it can no longer pump blood. Like pacemakers, ICDs are309typically implanted pectorally, connected to the heart by leads, and programmed310non-invasively.311312The full St. Jude ICD product offering includes the Atlas(TM) ICD,313Photon(R) u ICD, Photon(R) ICD, and Contour(R) MD ICD. St. Jude received FDA314approval on the Atlas(TM) ICD family, powerful rate-adaptive ICDs, in December3152001. Representing an improvement from conventional high-energy ICDs, Atlas(TM)316ICDs offer high energy and small size without compromising charge times,317longevity, or feature set flexibility. Other available ICDs include the318Photon(R) u (Micro) DR/VR ICD family, the second-generation ICD products in a319series of downsized dual- and single-chamber St. Jude Medical ICDs with advanced320technology. Like the clinically proven Photon(R) DR ICD, FDA-approved in October3212000, the Photon(R) Micro DR/VR ICD family maintains a comprehensive feature set322underscored by precise SVT discrimination and AV Rate Branch designed to enhance323the precision of ventricular-based arrhythmia detection in a compact,324physiologic-shaped package. In addition, the Profile(TM) MD ICD is available325outside the United States.326327The Company's ICDs are used with the dual electrode SPL and single328electrode TVL and TVL-ADX (active-fix) transvenous leads. The Atlas(TM) ICD,329Photon(R) u ICD, Photon(R) ICD, Profile(TM) MD ICD, and Contour(R) MD ICD are330programmable with the Model 3510 universal programmer.331332The Model 3510 universal pacemaker and ICD programmer is an easy-to-use333programmer that supports St. Jude's ICDs and pacemakers, including the AtlasTM334ICD family and the Identity(TM) pacemaker family. The Model 3510 universal335programmer allows the physician to utilize the diagnostic and therapeutic336capabilities of St. Jude's pacemakers and ICDs.337338Electrophysiology is the study of the electrical activity of the heart,339which controls the heart rhythm. EP catheters are placed into the human body340percutaneously (through the skin) to aid in the diagnosis and treatment of341cardiac arrhythmias (abnormal heart rhythms). Between two and five EP catheters342are generally used in each electrophysiology procedure. St. Jude's EP catheters343are available in multiple configurations. St. Jude's Supreme(TM) product line344consists of mapping catheters for the diagnosis of various cardiac arrhythmias,345including the 4 French Supreme(TM) diagnostic catheter for standard mapping346applications, and the Supreme Spiral SC(TM) catheter to assist clinicians in the347diagnosis of paroxysmal atrial fibrillation. St. Jude also offers the Livewire348TC Compass(TM) ablation catheter, which aids in clinical management of focal349arrhythmias, and the Livewire TC(TM) Bi-Directional ablation catheter, launched350in January 2002 following FDA and European market approval.351352CARDIOLOGY AND VASCULAR ACCESS: The Company produces specialized353disposable cardiovascular devices, including angiography catheters, bipolar354temporary pacing catheters, percutaneous catheter introducers, diagnostic355guidewires, and vascular closure devices. Angiography catheters, such as St.356Jude's Spyglass(TM) angiography catheters, are used in coronary angiography357procedures to obtain images of coronary arteries to identify structural cardiac358diseases. St. Jude bipolar temporary pacing catheters are inserted359percutaneously for temporary use (ranging from less than one hour to a maximum360of one week) with external pacemakers to provide patient stabilization prior to361implantation of a permanent pacemaker, following a heart attack, or during362surgical procedures. The Company produces and markets several designs of bipolar363temporary pacing catheters, including its Pacel(TM) biopolar pacing catheters,3643653663367<PAGE>368369370which are available in both torque control and flow-directed models with a broad371range of curve choices and electrode spacing options. Percutaneous catheter372introducers are used to create passageways for cardiovascular catheters from373outside the human body through the skin into a vein, artery or other location374inside the body. St. Jude's percutaneous catheter introducer products consist375primarily of peel-away and non peel-away sheaths, sheaths with and without376hemostasis valves, dilators, guidewires, repositioning sleeves and needles.377These products are offered in a variety of sizes and packaging configurations,378including St. Jude's newest introducer platform, the Ultimum(TM) hemostasis379introducer. Diagnostic guidewires, such as St. Jude's GuideRight(TM) and380HydroSteer(TM) guidewires, are used in conjunction with percutaneous catheter381introducers to aid in the introduction of intravascular catheters. St. Jude's382diagnostic guidewires are available in multiple lengths and incorporate a383surface finish for lasting lubricity.384385The Company's vascular closure devices are used to close femoral artery386puncture wounds following angioplasty, stenting and diagnostic procedures. In387September 2001, St. Jude received FDA approval and European CE Marking for its388newest vascular closure product, the St. Jude Medical Angio-Seal(TM) STS389PLATFORM. The STS PLATFORM incorporates a self-tightening suture, which390eliminates the need for a post-placement spring, allowing for completion of the391entire procedure in the catheterization lab. It also integrates a392Secure-Cap(TM), which facilitates proper deployment through audible, tactile and393visual confirmations during the closure process.394395CARDIAC SURGERY: Heart valve replacement or repair may be necessary396because the natural heart valve has deteriorated due to congenital defects or397disease. Heart valves facilitate the one-way flow of blood in the heart and398prevent significant backflow of blood into the heart and between the heart's399chambers. St. Jude offers both mechanical and tissue replacement heart valves400and valve repair products. The St. Jude Medical(R) mechanical heart valve has401been implanted in over 1.2 million patients to date. The SJM Regent(TM)402mechanical heart valve was approved for sale in Europe in December 1999 and403received FDA approval for U.S. market release in March 2002. In the United404States, the Company markets the Toronto SPV(R) stentless tissue valve, which405received FDA approval in November 1997. Outside the United States, the Company406markets the SJM Epic(TM) tissue heart valve, the SJM(R) Biocor(TM) stented407tissue valve, the Toronto SPV(R) stentless tissue valve and the Toronto Root(TM)408tissue valve. In August 2001, European regulatory approval was received to409market the next-generation Toronto Root(TM) tissue valve, a stentless aortic410root bioprosthesis used when aortic root disease accompanies valve disease.411Clinical trials for the Toronto Root(TM) valve began in the U.S. and Canada in4122001.413414Annuloplasty rings are prosthetic devices used to repair diseased or415damaged mitral heart valves. The Company offers a line of valve repair products416including the semi-rigid SJM(R) Seguin annuloplasty ring and the fully flexible417SJM Tailor(TM) ring.418419The Company has also entered into an agreement with LifeNet Transplant420Services, which enables it to assist in the marketing of human donated allograft421heart valves in the U.S.422423In addition to prosthetic heart valves, St. Jude markets the424Symmetry(TM) Bypass System Aortic Connector (the "Aortic Connector"), a425suture-free device to facilitate coronary artery bypass graft aortic426anastomoses. St. Jude commenced marketing of this product in Western Europe in4272000 and in the U.S. during May 2001. Also in 2001, St. Jude received European428CE Marking for the first distal connector product, which mechanically connects429saphenous vein grafts to coronary arteries. The Company, however, intends to430make additional enhancements to this product in 2002 prior to filing for U.S.431regulatory approval and prior to releasing the product to either the European or432U.S. markets.4334344354436<PAGE>437438439SUPPLIERS440The Company purchases raw materials and other items from numerous441suppliers for use in its products. For certain materials that the Company442believes are critical and may be difficult to obtain from an alternative443supplier, the Company maintains sizable inventories of up to three years of its444projected requirements. The Company has been advised from time to time that445certain of these suppliers may terminate sales of products to customers that446manufacture implantable medical devices in an effort to reduce their potential447product liability exposure. Some of these suppliers have modified their448positions and have indicated a willingness to either temporarily continue to449provide product until such time as an alternative vendor or product can be450qualified or to reconsider the supply relationship. While the Company believes451that alternative sources of raw materials are available and that there is452sufficient lead time in which to qualify such other sources, any supply453interruption could have a material adverse effect on the Company's ability to454manufacture its products.455456COMPETITION457The medical technology market is a dynamic market currently undergoing458significant change due to cost of care considerations, regulatory reform,459industry consolidation and customer consolidation. The ability to provide cost460effective clinical outcomes is becoming increasingly more important for medical461technology manufacturers.462463Within the medical technology industry, competitors range from small464start-up companies to companies with significant resources. The Company's465customers consider many factors when choosing supplier partners including466product reliability, clinical outcomes, product availability, inventory467consignment, price and product services provided by the manufacturer. St. Jude468believes that it competes on the basis of all these factors. Market share can469shift as a result of technological innovation, product recalls and product470safety alerts, as well as other business factors. This emphasizes the need to471provide the highest quality products and services. St. Jude expects the472competition to continue to increase with the use of tactics such as consigned473inventory, bundled product sales and reduced pricing.474475The Company has traditionally been a technological leader in the global476bradycardia pacemaker market. The Company has strong bradycardia market share477positions in all major developed markets. There are three principal478manufacturers and suppliers of ICDs worldwide, one of which is the Company. ICD479therapy is a highly competitive market. The Company's other two competitors,480Medtronic, Inc. and Guidant Corporation, account for more than 80% of the481worldwide ICD sales. These two competitors are larger than the Company and have482invested substantial amounts in ICD research and development.483484The global cardiology and vascular access market is also a growing485market with numerous competitors.486487The Company is the world's leading manufacturer and supplier of488mechanical heart valves. There are two other principal and several other smaller489mechanical heart valve manufacturers. The Company also competes against two490principal and a large number of other smaller tissue heart valve manufacturers.491492The Company is the technological leader in mechanical anastomotic493connector devices. The Company is aware of several other companies who are494investing significant dollars into developing these technologies.4954964975498<PAGE>499500501MARKETING502The Company's products are sold in over 100 countries throughout the503world. No distributor organization or single customer accounted for more than50410% of 2001, 2000 or 1999 consolidated net sales.505506In the United States, St. Jude sells directly to hospitals through a507combination of independent distributors and an employee-based sales508organization. In Western Europe, the Company has employee- based sales509organizations selling in 14 countries. In Japan, the Company primarily utilizes510independent distributors. Throughout the rest of the world the Company uses a511combination of independent distributor and direct sales organizations.512513Group purchasing organizations (GPOs) in the United States continue to514consolidate the purchasing for some of the Company's customers. Several such515GPOs have executed contracts with the Company's CRM market competitors, which516exclude the Company. These contracts, if enforced, may adversely affect the517Company's sales of these products to members of these GPOs.518519Payment terms worldwide are consistent with local country practices.520Orders are shipped as they are received and, therefore, no material backlog521exists.522523SEASONALITY524Typically, the Company's net sales are somewhat higher in the first and525second quarters and lower in the third and fourth quarters. Lower net sales in526the third quarter result from patient tendency to defer, if possible, cardiac527procedures during the summer months and from the seasonality of the U.S. and528European markets where summer vacation schedules normally result in fewer529surgical procedures. Lower net sales in the fourth quarter result from fewer530selling days in the quarter because of holidays in the United States and other531markets, and patient tendency to defer, if possible, cardiac procedures during532these holiday seasons. Independent distributors may randomly place large orders533that can distort the net sales pattern just described. In addition, new product534introductions, acquisitions, and regulatory approvals can impact the typical net535sales patterns.536537RESEARCH AND DEVELOPMENT538The Company is focused on the development of new products and539improvements to existing products. In addition, research and development expense540reflects the Company's efforts to obtain FDA approval of certain new products541and processes, and to maintain the highest quality standards with respect to542existing products. The Company's research and development expenses, exclusive of543purchased in-process research and development, were $164.1 million (12.2% of net544sales), $137.8 million (11.7% of net sales) and $125.1 million (11.2% of net545sales) in 2001, 2000 and 1999, respectively.546547GOVERNMENT REGULATION548The medical devices manufactured and marketed by the Company are549subject to regulation by the FDA and, in most instances, by state and foreign550governmental authorities or their designated representatives. Under the U.S.551Federal Food, Drug and Cosmetic Act (the Act), and regulations thereunder,552manufacturers of medical devices must comply with certain policies and553procedures that regulate the composition, labeling, testing, manufacturing,554packaging and distribution of medical devices. Medical devices are subject to555different levels of government approval requirements, the most comprehensive of556which requires the completion of an FDA approved clinical evaluation program and557submission and approval of a pre-market approval (PMA) application before a558device may be commercially marketed. The Company's mechanical and tissue heart559valves, ICDs, certain pacemakers and leads and certain electrophysiology560catheter applications are subject to this level of approval or as a supplement561to a PMA approval. Other pacemakers and leads, annuloplasty ring products and562other5635645656566<PAGE>567568569electrophysiology and cardiology products are currently marketed under the less570rigorous 510(k) pre-market notification procedure of the Act.571572In addition, the FDA may require testing and surveillance programs to573monitor the effects of approved products that have been commercialized, and it574has the power to prevent or limit further marketing of a product based on the575results of these post-marketing programs. The FDA also conducts inspections576prior to approval of a PMA to determine compliance with the quality system577regulations which covers manufacturing and design and may, at any time after578approval of a PMA or granting of a 510(k), conduct periodic inspections to579determine compliance with both good manufacturing practice regulations and/or580current medical device reporting regulations. If the FDA were to conclude that581St. Jude is not in compliance with applicable laws or regulations, it could582institute proceedings to detain or seize products, issue a recall, impose583operating restrictions, assess civil penalties and recommend criminal584prosecution to the U.S. Department of Justice. Furthermore, the FDA could585proceed to ban, or request recall, repair, replacement or refund of the cost of,586any device previously manufactured or distributed.587588The FDA also regulates recordkeeping for medical devices and reviews589hospital and manufacturers' required reports of adverse experiences to identify590potential problems with FDA- authorized devices. Aggressive regulatory action591may be taken by the FDA due to adverse experience reports.592593Diagnostic-related groups (DRG) reimbursement schedules regulate the594amount the United States government, through the Centers for Medicare and595Medicaid Services (CMS), will reimburse hospitals and doctors for the inpatient596care of persons covered by Medicare. In response to rising Medicare and Medicaid597costs, several legislative proposals are under consideration, which would598restrict future funding increases for these programs. Changes in current DRG599reimbursement levels could have an adverse effect on the Company's domestic600pricing flexibility.601602St. Jude's business internationally is subject to medical device laws603in individual countries outside the United States. These laws range from604extensive device approval requirements in some countries for all or some of the605Company's products, to requests for data or certifications in other countries.606Generally, regulatory requirements are increasing in these countries. In the607European Union, the regulatory systems have been harmonized, and approval to608market in all European Union countries (represented by the CE Mark) can be609obtained through one agency. In addition, government funding of medical610procedures is limited and in certain instances is being reduced.611612A number of medical device regulatory agencies have begun considering613whether to continue to permit the sale of medical devices that incorporate any614bovine material because of concerns about Bovine Spongiform Encephalopathy615(BSE), sometimes referred to as "mad cow disease." It is believed that in some616instances this disease has been transmitted to humans through the consumption of617beef. There have been no reported cases of transmission of BSE through medical618products and no reported cases of BSE in the United States. Some of the619Company's products use bovine collagen (Angio-Seal(TM) and vascular grafts),620which is derived from the bovine component scientifically rated as least likely621to transmit the disease. Some of the Company's tissue heart valves incorporate622bovine pericardial material. The Company is cooperating with the regulatory623agencies considering these issues.6246256267627<PAGE>628629630In May 1995, prior to the acquisition by St. Jude, Telectronics Pacing631Systems, Inc. (Telectronics), which is now part of St. Jude Medical Cardiac632Rhythm Management Division, and its president entered into a consent decree with633the FDA. The consent decree, which remains in effect indefinitely, requires that634Telectronics comply with the FDA's good manufacturing practice regulations and635identifies several specific provisions of those regulations. The consent decree636provides for FDA inspections and that Telectronics is obligated to pay certain637costs of the inspections.638639PATENTS AND LICENSES640The Company's policy is to protect its intellectual property rights641related to its medical devices. Where appropriate, St. Jude applies for U.S. and642foreign patents. In those instances where the Company has acquired technology643from third parties, it has sought to obtain rights of ownership to the644technology through the acquisition of underlying patents or licenses.645646While the Company believes design, development, regulatory and647marketing aspects of the medical device business represent the principal648barriers to entry into such business, it also recognizes that it's the Company's649patents and license rights may make it more difficult for its competitors to650market products similar to those produced by the Company. St. Jude can give no651assurance that any of its patent rights, whether issued, subject to license, or652in process, will not be circumvented or invalidated. Furthermore, there are653numerous existing and pending patents on medical products and biomaterials.654There can be no assurance that the Company's existing or planned products do not655or will not infringe such rights or that others will not claim such656infringement. No assurance can be given that the Company will be able to prevent657competitors from challenging the Company's patents or entering markets currently658served by the Company.659660INSURANCE661The Company operates in an industry that is susceptible to significant662product liability claims. These claims may be brought by individuals seeking663relief for themselves or, increasingly, by groups seeking to represent a class.664In addition, product liability claims may be asserted against the Company in the665future relative to events that are not known to management at the present time.666While it is not possible to predict the outcome of every claim, the Company667believes that it has adequate product liability insurance to cover the costs668associated with them.669670Subsequent to the tragic events of September 2001, the product671liability insurance market has dramatically changed. The Company has secured672product liability coverage for 2002, however the self-insured retention and673insurance premiums are significantly higher than in prior years. There can be no674assurance that this trend will reverse in the future. As a result of the675increased self-insured retention for 2002, the Company has increased financial676exposure in the event of significant product liability matters.677678California earthquake insurance is currently difficult to procure,679extremely costly, and restrictive in terms of coverage. The Company's earthquake680and related business interruption insurance for its CRM operations located in681Sylmar and Sunnyvale, California provides for limited coverage above a682significant self-insured retention. There are several factors that preclude the683Company from determining the effect an earthquake may have on its business.684These factors include, but are not limited to, the severity and location of the685earthquake, the extent of any damage to the Company's manufacturing facilities,686the impact of an earthquake on the Company's California workforce and the687infrastructure of the surrounding communities, and the extent, if any, of damage688to the Company's inventory and work in process. While the Company's exposure to689significant losses occasioned by a California earthquake would be partially690mitigated by its ability to manufacture some of its CRM products at its Swedish691manufacturing facility, the losses could have a material adverse effect on the692Company, the duration of which cannot be reasonably predicted. The Company has693expanded the manufacturing capabilities at its Swedish facility6946956968697<PAGE>698699700and has constructed a pacemaker component manufacturing facility in Arizona. In701addition, the Company has moved significant finished goods inventory to702locations outside California. These facilities and inventory transfers would703further mitigate the adverse impact of a California earthquake.704705EMPLOYEES706As of December 31, 2001, the Company had 5,568 full-time employees. It707has never experienced a work stoppage as a result of labor disputes and none of708its employees are represented by a labor organization, with the exception of the709Company's employees in Sweden and certain employees in France. The Company710believes that its relationship with its employees is generally good.711712INTERNATIONAL OPERATIONS713The Company's international business is subject to such special risks714as currency exchange controls, the imposition or increase of import or export715duties and surtaxes, and international credit, financial or political problems.716Currency exchange rate fluctuations relative to the U.S. dollar can affect717reported consolidated revenues and net earnings. The Company may hedge a portion718of this exposure from time to time to reduce the effect of foreign currency rate719fluctuations on net earnings. See the "Market Risk" section on page 5 of720"Management's Discussion and Analysis of Results of Operations and Financial721Condition", incorporated herein by reference from the Financial Report included722in the Company's 2001 Annual Report to Shareholders. Operations outside the723United States also present complex tax and cash management issues that724necessitate sophisticated analysis and diligent monitoring to meet the Company's725financial objectives.726727728ITEM 2. PROPERTIES729730St. Jude's principal executive offices are owned and are located in St.731Paul, Minnesota. Manufacturing facilities are located in California, Minnesota,732Arizona, South Carolina, Canada, Brazil, Puerto Rico and Sweden. The Company733owns approximately 59%, or 338,000 square feet, of its total manufacturing734space, and the balance is leased.735736The Company also maintains sales and administrative offices in the737United States at 16 locations in six states and outside the United States at 33738locations in 24 countries. With the exception of one location, all of these739locations are leased.740741In management's opinion, all buildings, machinery and equipment are in742good condition, suitable for their purposes and are maintained on a basis743consistent with sound operations. The Company believes that it has sufficient744space for its current operations and for foreseeable expansion in the next few745years.746747748ITEM 3. LEGAL PROCEEDINGS749750SILZONE(R) LITIGATION: The Company has been sued by patients alleging751defects in the Company's mechanical heart valves and valve repair products with752Silzone(R) coating. The Company voluntarily recalled products with Silzone(R)753coating on January 21, 2000, and sent a Recall Notice and Advisory concerning754the recall to physicians and others. Some of these cases are seeking monitoring755of patients implanted with Silzone(R)-coated valves and repair products who756allege no injury to date. Some of these cases are seeking class action status.757758On April 18, 2001, the U.S. Judicial Panel on Multi-Litigation ruled759that certain lawsuits filed in U.S. federal district court involving products760with Silzone(R) coating should be part of Multi District Litigation proceedings,761which will take place under the supervision of U.S. District court Judge John7627637649765<PAGE>766767768Tunheim in Minnesota. As a result, a number of actions involving products with769Silzone(R) coating are being transferred to Judge Tunheim's court in Minnesota770for coordinated or consolidated pretrial proceedings.771772While it is not possible to predict the outcome of these cases, the773Company believes that it has adequate product liability insurance to cover the774costs associated with them. The Company further believes that any costs not775covered by product liability insurance will not have a material adverse impact776on the Company's financial position or liquidity, but may be material to the777consolidated results of operations of a future period.778779GUIDANT LITIGATION: In November 1996 Guidant Corporation ("Guidant")780sued St. Jude Medical alleging that St. Jude Medical did not have a license to781certain patents controlled by Guidant covering ICD products and alleging that782St. Jude Medical was infringing those patents.783784St. Jude Medical's contention that it had obtained its patent license785from Guidant to the patents in issue when it acquired certain assets of786Telectronics in November 1996 was rejected by an arbitrator in July 2000. In May7872001, a federal district court judge also ruled that the Guidant patent license788with Telectronics had not transferred to St. Jude Medical.789790Guidant's suit in the United States District Court for the Southern791District of Indiana originally alleged infringement by St. Jude Medical of four792patents. Guidant later dismissed its claim on one patent (the `678 patent). In793addition, in response to a stipulation by the parties, the court ruled that a794second patent (the `191 patent) was invalid. Guidant has appealed the ruling of795invalidity concerning the `191 patent and the Court of Appeals for the Federal796Circuit held oral arguments on the `191 appeal on February 5, 2002.797798A jury trial involving the two remaining patents asserted by Guidant799(the `288 and `472 patents) commenced in June 2001. The jury issued its verdict800on July 3, 2001, finding that both the `472 and `288 patents were valid and that801St. Jude Medical did not infringe the `288 patent. The jury also found that St.802Jude did infringe the `472 patent, which expired on March 4, 2001, but that the803infringement was not willful. The jury awarded damages of $140 million to804Guidant.805806On February 13, 2002, the judge overseeing the jury trial issued his807rulings on the various post-trial motions. In particular, the judge ruled that808the `472 patent was invalid on two grounds: lack of proper written description809and double patenting. The judge also ruled that claim 18 was not infringed and810that claim 1 was infringed in only a limited manner.811812The judge further ruled that the `288 patent was invalid for both813obviousness and failure to disclose the best mode.814815The judge also found that St. Jude Medical was entitled to a new trial816on the issue of damages in the event the court's rulings on the other matters817were reversed on appeal. Finally, the judge held that in the event his other818rulings were reversed, St. Jude Medical would be entitled to a new trial because819of misconduct by Guidant and its attorneys during the first trial and that, in820such an event, Guidant would have to pay certain attorney's fees of St. Jude821Medical. The court ruled on several other motions, not summarized here.822823The effect of the court's post-trial rulings was to eliminate the $140824million verdict against St. Jude Medical. The Company expects that Guidant will825appeal the judge's decision.82682782810829<PAGE>830831832OTHER LITIGATION MATTERS: The Company is involved in various product833liability lawsuits, claims and proceedings of a nature considered normal to its834business. Subject to self-insured retentions, the Company believes it has835product liability insurance sufficient to cover such claims and suits.836837838ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS839840There were no matters submitted to a vote of security holders during841the fourth quarter of 2001.842843844ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT845846<TABLE>847<CAPTION>848<S> <C>849Name Age Position*850- ----------------------- --- ----------------------------------------------------------------------------851Terry L. Shepherd 49 Chief Executive Officer (1999)852853Daniel J. Starks 47 President and Chief Operating Officer (2001)854855David W. Adinolfi 46 President, Daig (2001)856857Robert Cohen 44 Vice President, Business and Technology Development (1998)858859Michael J. Coyle 39 President, Cardiac Rhythm Management (2001)860861Peter L. Gove 54 Vice President, Corporate Relations (1994)862863Steven J. Healy 44 President, Cardiac Surgery (1999)864865John C. Heinmiller 47 Vice President, Finance, Chief Financial Officer and Treasurer (1998)866867Jeri L. Lose 44 Vice President, Information Technology and Chief Information Officer (2000)868869Joseph H. McCullough 52 President, International (2001)870871Kevin T. O'Malley 50 Vice President, General Counsel and Secretary (1994)872873Michael T. Rousseau 46 President, U.S. Sales (2001)874875Frieda J. Valk 48 Vice President, Administration (1999)876- -----------------------877</TABLE>878*Dates in brackets indicate year during which the named executive officers began879serving in such capacity.880881Executive officers serve at the pleasure of the Board of Directors.882883Mr. Shepherd joined the Company in 1994 as President of Cardiac884Surgery. In 1999, he was appointed President and Chief Executive Officer of St.885Jude, and since February 2001, has been the Company's Chief Executive Officer.886Mr. Shepherd has also served on St. Jude's Board of Directors since 1999.88788888911890<PAGE>891892893Mr. Starks joined St. Jude in 1996 as a result of the Company's894acquisition of Daig Corporation, where he continued as Chief Executive Officer.895In 1997, he was also appointed CEO of Cardiac Rhythm Management, and in April8961998, became President and CEO of Cardiac Rhythm Management. He was appointed897President and Chief Operating Officer of St. Jude in February 2001. Mr. Starks898has also served on the Company's Board of Directors since 1996.899900Mr. Adinolfi joined St. Jude in 1994 as a result of the Company's901acquisition of Pacesetter, Inc. He served as Vice President, CRM Global Product902Planning and Identification from June 1996 to March 1998, and in March 1998903became Vice President of CRM Business Development, Planning and Research. He904also served as Senior Vice President, CRM Global Marketing beginning in April9051998, and in March 1999 became Senior Vice President of CRM Product Portfolio906Management. In February 2001, Mr. Adinolfi was appointed President of Daig.907Prior to joining Pacesetter in 1989 as Director of Marketing, Mr. Adinolfi spent908five years at Cordis and Telectronics in a variety of marketing, sales and909management positions.910911Mr. Cohen joined the Company in 1998 as Vice President, Business and912Technology Development. Prior to joining the Company, he was employed by Sulzer913Medica, a medical device company. During his 19-year career in the medical914device industry, Mr. Cohen has been associated with Pfizer Inc. and GCI Medical,915an investment firm focused on the medical technology industry.916917Mr. Coyle joined St. Jude in 1994 as Director, Business Development. He918was appointed President of Cardiac Rhythm Management in February 2001. Prior to919that appointment, Mr. Coyle previously served as the Chief Operating Officer of920Daig since 1997. Prior to joining St. Jude, he spent nine years with Eli Lilly &921Company, a pharmaceutical products company, in a variety of technical and922business management roles in both its Pharmaceutical and Medical Device923Divisions.924925Mr. Gove joined the Company in 1994 as Vice President, Corporate926Relations. Prior to joining the Company, Mr. Gove was Vice President, Marketing927and Communications of Control Data Systems, Inc., a computer services company,928from 1991 to 1994. From 1981 to 1990, Mr. Gove held various executive positions929with Control Data Corporation. From 1970 to 1981, Mr. Gove held various930management positions with the State of Minnesota and the U.S. Government.931932Mr. Healy first joined the Company in 1983 as a heart valve sales933representative. In 1999 he was appointed President, Cardiac Surgery. From 1996934to 1999, Mr. Healy was Vice President of Heart Valve Sales and Marketing. He935served as Heart Valve Vice President of Marketing from 1993 to 1996.936937Mr. Heinmiller joined the Company in May 1998 as Vice President of938Corporate Business Development. In September 1998, he was appointed Vice939President, Finance and Chief Financial Officer. Prior to joining the Company,940Mr. Heinmiller was president of F3 Corporation from 1997 to 1998, a privately941held asset management company, and was Vice President of Finance and942Administration for Daig Corporation from 1995 to 1997. Mr. Heinmiller is also a943former audit partner in the Minneapolis office of Grant Thornton LLP, a national944public accounting firm. Mr. Heinmiller is a director of Lifecore Biomedical,945Inc. and Arctic Cat, Inc.946947Ms. Lose (formerly Ms. Jones) joined St. Jude in 1999 as Vice948President, Information Technology, and was appointed Vice President, Information949Technology and Chief Information Officer in 2000. Prior to joining the Company,950Ms. Lose was Vice President of Systems Development at U.S. Bancorp, a951multi-state financial services holding company, from 1993 to 1999. From 1990 to9521993, Ms. Lose was a Senior Manager in Information Technology Consulting with953Ernst & Young LLP, an95495595612957<PAGE>958959960international public accounting firm. From 1979 to 1990, she held several961positions in Accounting and then Information Technology with General Mills, Inc,962a consumer food products company.963964Mr. McCullough joined St. Jude in 1994 as a CRM Regional Sales965Director. He became Vice President, CRM Marketing in 1996 and in 1997 was named966Senior Vice President, CRM Europe, where his responsibilities included sales,967marketing and managing the Company's manufacturing facility in Veddesta, Sweden.968He was named President, International in July 2001. Prior to joining the969Company, Mr. McCullough worked for several medical technology companies for more970than 20 years.971972Mr. O'Malley joined the Company in 1994 as Vice President and General973Counsel. Prior to joining St. Jude, Mr. O'Malley was employed by Eli Lilly &974Company for 15 years in various positions, including General Counsel of the975Medical Device and Diagnostics Division.976977Mr. Rousseau joined the Company in 1999 as Senior Vice President, CRM978Global Marketing, and in August 1999, CRM Marketing and Sales were combined979under his leadership. In January 2001, he was named President, U.S. CRM Sales,980and in July 2001, he was named President, U.S. Sales. Prior to joining St. Jude,981Mr. Rousseau worked for Sulzer Intermedics, Inc., a medical device company, for98211 years. At Sulzer, he served as Vice President, Tachycardia, in 1997 and was983appointed Vice President, U.S. Sales and Marketing in 1998.984985Ms. Valk joined the Company in 1996 as Human Resources Director of St.986Jude Medical Europe. She was appointed Vice President, Administration in 1999.987Prior to joining the Company, Mrs. Valk was employed by Eli Lilly & Company for988sixteen years in various positions, including pharmaceutical sales, sales989management, sales training and human resources.990991992PART II993994ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS995996The information set forth under the captions "Dividends" and "Stock997Exchange Listings" on pages 6 and 24 of the Financial Report included in the998Company's 2001 Annual Report to Shareholders is incorporated herein by999reference.100010011002ITEM 6. SELECTED FINANCIAL DATA10031004The information set forth under the caption "Five-Year Summary1005Financial Data" on page 23 of the Financial Report included in the Company's10062001 Annual Report to Shareholders is incorporated herein by reference.100710081009ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND1010FINANCIAL CONDITION10111012The information set forth under the caption "Management's Discussion1013and Analysis of Results of Operations and Financial Condition" on pages 11014through 6 of the Financial Report included in the Company's 2001 Annual Report1015to Shareholders is incorporated herein by reference.101610171018131019<PAGE>102010211022ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK10231024The information appearing under the caption "Market Risk" on page 5 of1025the Financial Report included in the Company's 2001 Annual Report to1026Shareholders is incorporated herein by reference.102710281029ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA10301031The following Consolidated Financial Statements of the Company and1032Report of Independent Auditors set forth on pages 7 through 22 of the Financial1033Report included in the Company's 2001 Annual Report to Shareholders are1034incorporated herein by reference:10351036Consolidated Statements of Earnings - Fiscal Years ended December 31,10372001, 2000 and 199910381039Consolidated Balance Sheets - December 31, 2001 and 200010401041Consolidated Statements of Shareholders' Equity - Fiscal Years ended1042December 31, 2001, 2000, and 199910431044Consolidated Statements of Cash Flows - Fiscal Years ended December 31,10452001, 2000 and 199910461047Notes to Consolidated Financial Statements104810491050ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND1051FINANCIAL DISCLOSURE10521053None.105410551056PART III10571058ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT10591060The information set forth under the caption "Board of Directors" in the1061Company's definitive Proxy Statement dated March 28, 2002, is incorporated1062herein by reference. Information on executive officers is incorporated herein by1063reference to Item 4A of this Form 10-K.106410651066ITEM 11. EXECUTIVE COMPENSATION10671068The information set forth under the caption "Executive Compensation" in1069the Company's definitive Proxy Statement dated March 28, 2002, is incorporated1070herein by reference.107110721073ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT10741075The information set forth under the caption "Share Ownership of1076Management and Directors and Certain Beneficial Owners" in the Company's1077definitive Proxy Statement dated March 28, 2002, is incorporated herein by1078reference.107910801081141082<PAGE>108310841085ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS10861087The information set forth under the captions "Governance of the1088Company" and "Executive Compensation" in the Company's definitive Proxy1089Statement dated March 28, 2002, is incorporated herein by reference.109010911092PART IV10931094ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K10951096(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT10971098(1) FINANCIAL STATEMENTS10991100The following Consolidated Financial Statements of the Company and1101Report of Independent Auditors as set forth on pages 7 through 221102of the Financial Report included in the Company's 2001 Annual1103Report to Shareholders (see Exhibit 13) are incorporated herein by1104reference:11051106Consolidated Statements of Earnings - Fiscal Years ended December110731, 2001, 2000 and 199911081109Consolidated Balance Sheets - December 31, 2001 and 200011101111Consolidated Statements of Shareholders' Equity - Fiscal Years1112ended December 31, 2001, 2000, and 199911131114Consolidated Statements of Cash Flows - Fiscal Years ended1115December 31, 2001, 2000 and 199911161117Notes to Consolidated Financial Statements11181119(2) FINANCIAL STATEMENT SCHEDULE11201121Schedule II, Valuation and Qualifying Accounts, is filed as part1122of this Form 10-K Annual Report (see Item 14(d)).11231124The report of the Company's Independent Auditors with respect to1125the financial statement schedule is incorporated herein by1126reference from Exhibit 23 attached hereto.11271128All other financial statements and schedules not listed above have been1129omitted because the required information is included in the consolidated1130financial statements or the notes thereto, or is not applicable.11311132(3) EXHIBITS11331134Pursuant to Item 601(b)(4)(iiii) of Regulation S-K, copies of1135certain instruments defining the rights of holders of certain1136long-term debt of the Company are not filed, and in lieu thereof,113711381139151140<PAGE>114111421143the Company agrees to furnish copies thereof to the Securities and1144Exchange Commission upon request.114511461147EXHIBIT EXHIBIT INDEX1148- ----------- ------------------------------------------------------------------11493.1 Articles of Incorporation as amended on September 5, 1996, are1150incorporated by reference from Exhibit 3.2 of the Company's Annual1151Report on Form 10-K for the year ended December 31, 1996.115211533.2 Bylaws are incorporated by reference from Exhibit 3(ii) of the1154Company's Quarterly Report on Form 10-Q for the quarter ended1155September 30, 1997.115611574.1 Rights Agreement dated as of June 16, 1997, between the Company1158and American Stock Transfer and Trust Company, as Rights Agent,1159including the Certificate of Designation, Preferences and Rights1160of Series B Junior Preferred Stock is incorporated by reference1161from Exhibit 4 of the Company's Quarterly Report on Form 10-Q for1162the quarter ended June 30, 1997.1163116410.1 Form of Indemnification Agreement that the Company has entered1165into with officers and directors is incorporated by reference from1166Exhibit 10(d) of the Company's Annual Report on Form 10-K for the1167year ended December 31, 1986.*1168116910.2 St. Jude Medical, Inc. Management Incentive Compensation Plan.*#1170117110.3 Management Savings Plan dated February 1, 1995, is incorporated by1172reference from Exhibit 10.7 of the Company's Annual Report on Form117310-K for the year ended December 31, 1994.*1174117510.4 Retirement Plan for members of the Board of Directors as amended1176on March 15, 1995, is incorporated by reference from Exhibit 10.61177of the Company's Annual Report on Form 10-K for the year ended1178December 31, 1994.*1179118010.5 St. Jude Medical, Inc. 1991 Stock Plan is incorporated by1181reference from the Company's Registration Statement on Form S-81182filed June 28, 1991 (Commission File No. 33-41459).*118311841185161186<PAGE>118711881189EXHIBIT EXHIBIT INDEX1190- ----------- ------------------------------------------------------------------119110.6 St. Jude Medical, Inc. 1994 Stock Option Plan is incorporated by1192reference from Exhibit 4(a) of the Company's Registration1193Statement on Form S-8 filed July 1, 1994 (Commission File No.119433-54435).*1195119610.7 St. Jude Medical, Inc. 1997 Stock Option Plan is incorporated by1197reference from Exhibit 4.1 of the Company's Registration Statement1198on Form S-8 filed December 22, 1997 (Commission File No.1199333-42945).*1200120110.8 Split Dollar Insurance Agreement as amended April 29, 1999 between1202St. Jude Medical, Inc. and Ronald A. and Lucille E. Matricaria is1203incorporated by reference from Exhibit 10.14 of the Company's1204Annual Report on Form 10-K for the year ended December 31, 1999.*1205120610.9 St. Jude Medical, Inc. 2000 Stock Plan.*#1207120810.10 St. Jude Medical, Inc. 2000 Employee Stock Purchase Savings1209Plan.*#1210121110.11 Amended and Restated Employment Agreement dated as of March 25,12122001, between the Company and Daniel J. Starks is incorporated by1213reference from Exhibit 10.17 of the Company's Annual Report on1214Form 10-K for the year ended December 31, 2000.*1215121610.12 Form of Severance Agreement that the Company has entered into with1217officers relating to severance matters in connection with a change1218in control is incorporated by reference from Exhibit 10.18 of the1219Company's Annual Report on Form 10-K for the year ended December122031, 2000.*1221122210.13 Amended and Restated Employment Agreement dated as of March 25,12232001, between the Company and Terry L. Shepherd is incorporated by1224reference from Exhibit 10.19 of the Company's Annual Report on1225Form 10-K for the year ended December 31, 2000.*1226122713 Portions of the Company's 2001 Annual Report to Shareholders.#1228122921 Subsidiaries of the Registrant.#123012311232171233<PAGE>123412351236EXHIBIT EXHIBIT INDEX1237- ----------- ------------------------------------------------------------------123823 Consent of Independent Auditors.#1239124024 Power of Attorney.#12411242- -------------------1243* Management contract or compensatory plan or arrangement.1244# Filed as an exhibit to this Annual Report on Form 10-K.124512461247(b) REPORTS ON FORM 8-K FILED DURING THE QUARTER ENDED DECEMBER 31, 2001:1248No reports on Form 8-K were filed by the Company during the fourth1249quarter of 2001.12501251(c) EXHIBITS: Reference is made to Item 14(a)(3).12521253(d) SCHEDULES:1254125512561257SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS1258(DOLLARS IN THOUSANDS)12591260<TABLE>1261<CAPTION>1262COL. A COL. B COL. C COL. D COL. E1263- ------------------------------ ---------- ---------- ---------- ----------1264BALANCE AT ADDITIONS BALANCE AT1265BEGINNING CHARGED TO END OF1266DESCRIPTION OF YEAR EXPENSE DEDUCTIONS(1) YEAR1267- ------------------------------- ---------- ---------- ---------- ----------1268Allowance for doubtful accounts1269Fiscal Year Ended:1270<S> <C> <C> <C> <C>1271December 31, 2001 $ 13,831 $ 6,468 $ 3,089 $ 17,2101272December 31, 2000 13,529 6,913 6,611 13,8311273December 31, 1999 12,352 5,421 4,244 13,52912741275- -------------------------------1276</TABLE>1277(1) Uncollectible accounts written off, net of recoveries.127812791280181281<PAGE>128212831284SIGNATURES12851286Pursuant to the requirements of Sections 13 or 15(d) of the Securities1287Exchange Act of 1934, the Registrant has duly caused this report to be signed on1288its behalf by the undersigned, thereunto duly authorized.12891290ST. JUDE MEDICAL, INC.12911292Date: March 22, 2002 By /s/ TERRY L. SHEPHERD1293-----------------------------1294Terry L. Shepherd1295CHIEF EXECUTIVE OFFICER1296(PRINCIPAL EXECUTIVE OFFICER)129712981299By /s/ JOHN C. HEINMILLER1300-----------------------------1301John C. Heinmiller1302VICE PRESIDENT, FINANCE AND1303CHIEF FINANCIAL OFFICER1304(PRINCIPAL FINANCIAL AND1305ACCOUNTING OFFICER)13061307Pursuant to the requirements of the Securities Exchange Act of 1934,1308this report has been signed below by the following persons on behalf of the1309Registrant and in the capacities and on the date indicated.13101311<TABLE>1312<CAPTION>1313<S> <C> <C> <C> <C> <C>1314/s/ RONALD A. MATRICARIA Director March 22, 2002 /s/ TERRY L. SHEPHERD Director March 22, 20021315- ------------------------- -------------------------1316Ronald A. Matricaria Terry L. Shepherd131713181319/s/ RICHARD R. DEVENUTI Director March 22, 2002 /s/ DAVID A. THOMPSON Director March 22, 20021320- ------------------------- -------------------------1321Richard R. Devenuti David A. Thompson132213231324/s/ STUART M. ESSIG Director March 22, 2002 /s/ STEFAN K. WIDENSOHLER Director March 22, 20021325- ------------------------- -------------------------1326Stuart M. Essig Stefan K. Widensohler132713281329/s/ THOMAS H. GARRETT III Director March 22, 2002 /s/ WENDY L. YARNO Director March 22, 20021330- ------------------------- -------------------------1331Thomas H. Garrett III Wendy L. Yarno133213331334/s/ WALTER L. SEMBROWICH Director March 22, 2002 /s/ FRANK C-P YIN Director March 22, 20021335- ------------------------- -------------------------1336Walter L. Sembrowich Frank C-P Yin133713381339/s/ DANIEL J. STARKS Director March 22, 20021340- -------------------------1341Daniel J. Starks1342</TABLE>1343134413451913461347</TEXT>1348</DOCUMENT>1349<DOCUMENT>1350<TYPE>EX-10.21351<SEQUENCE>31352<FILENAME>stjude021570_ex10-2.txt1353<DESCRIPTION>MANAGEMENT INCENTIVE COMPENSATION PLAN1354<TEXT>1355EXHIBIT 10.2135613571358ST. JUDE MEDICAL, INC.13591360MANAGEMENT INCENTIVE COMPENSATION PLAN1361(AS ADOPTED ON JANUARY 11, 1999)136213631. PURPOSE1364The St. Jude Medical, Inc. Management Incentive Compensation Plan (the1365"Plan") is designed to attract, retain, and reward highly qualified executives1366who are important to the Company's success and to provide incentives relating1367directly to the financial performance and long-term growth of the Company.1368136913702. DEFINITIONS1371(a) BOARD -- The Board of Directors of St. Jude Medical, Inc.13721373(b) CODE -- The Internal Revenue Code of 1986, as amended.13741375(c) COMMITTEE -- The Compensation Committee of the Board, or such1376other committee of the Board that is designated by the Board to1377administer the Plan, in compliance with requirements of Section1378162(m) of the Code.13791380(d) COMPANY -- St. Jude Medical, Inc. and any other corporation in1381which St. Jude Medical, Inc. controls, directly or indirectly,1382fifty percent or more of the combined voting power of all classes1383of voting securities.13841385(e) EXECUTIVE OFFICER -- Any officer of the Company subject to the1386reporting requirements of Section 16 of the Securities and1387Exchange Act of 1934 ("Exchange Act").13881389(f) INCENTIVE COMPENSATION -- The cash incentive awarded to a1390Participant pursuant to terms and conditions of the Plan.13911392(g) PARTICIPANT -- Any Executive Officer and any other employee or1393class of management employees of the Company as may be designated1394by the Committee.13951396(h) PLAN -- The St. Jude Medical, Inc., Management Incentive1397Compensation Plan.13981399(i) SALARY -- The direct gross (as opposed to taxable) compensation1400earned by the Participant as base salary during the fiscal year,1401excluding any and all commissions, bonuses, incentive payments1402payable during the fiscal year, and other similar payments.1403140414053. ELIGIBILITY1406The Committee shall, each fiscal year, designate those employees, including1407Executive Offices of the Company who are eligible to receive Incentive1408Compensation under this Plan for the fiscal year.1409141014114. ADMINISTRATION1412The awards under the Plan shall be based on the attainment of financial1413performance goals for the fiscal year, as determined for each Participant by the1414Committee. The Committee shall administer the Plan and shall have full power and1415authority to construe, interpret, and administer the Plan necessary to comply1416with the requirements of Section 162(m) of the Code. The Committee's decisions1417shall be final, conclusive, and binding upon all persons. The Committee shall1418certify in writing prior to commencement of payment of the bonus that the1419performance goal or goals under which the bonus is to be paid has or have been1420achieved. The Committee in its sole discretion has the authority to reduce or1421eliminate the amount of a bonus otherwise payable to Executives upon attainment1422of the performance goal established for a fiscal year. At the beginning of each1423fiscal year consistent with the requirements of Section 162(m), the Committee1424shall; (i) determine the percentage of the Participant's Salary that may be1425awarded as Incentive Compensation for the fiscal year, up to a maximum award1426under the Plan of the greater of $2,000,000 or 1.5% of the Company's1427consolidated after tax net profits for the fiscal year; (ii) determine the1428Participants eligible to participate in the Plan for the fiscal year; (iii)1429determine the143014311432A-11433<PAGE>143414351436financial performance goals as set forth in Section 5 herein for each1437Participant on which Incentive Compensation will be paid; (iv) determine each1438Executive's Incentive Compensation for the fiscal year; and (v) determine the1439frequency at which each Participant's Incentive Compensation will be paid when1440attained.14411442Except with respect to Incentive Compensation payable to Executive1443Officers of the Company, the Committee may delegate the establishment of1444performance goals, and the general powers of the Committee described above with1445respect to the Plan to the Chief Executive Officer of the Company.14461447The Committee may amend, modify, suspend, or terminate the Plan for the1448purpose of meeting or addressing any changes in legal requirements or for any1449other purpose permitted by law. The Committee will seek shareholder approval of1450any amendment determined to require a shareholder approval or advisable under1451the regulations of the Internal Revenue Service or other applicable law or1452regulation.145314545. FINANCIAL PERFORMANCE GOALS1455With respect to any Participant who is an Executive Officer, the Committee1456shall establish performance goals based on the stock price of the Company, the1457Company's earnings per share, market share, sales, return on equity, asset1458management or the expenses or profitability of the Company or any division or1459subsidiary, or any combination of such goals for the fiscal year, or a portion1460thereof. Any performance goal shall be established in a manner such that a third1461party having knowledge of the relevant performance results could calculate the1462amount to be paid to the Participant. Any such goal shall be established when1463the outcome of the goal is substantially uncertain. The Committee shall not1464increase the maximum amount of the Incentive Compensation payable upon1465attainment of the goal after the goal has been established. The Incentive1466Compensation may be paid in whole or in part upon the attainment of any one of1467the goals. Any such goal shall comply with the applicable requirements of1468Section 162(m) of the Code and any regulations promulgated thereunder.14691470With respect to any Participant other than an Executive Officer, the1471Committee may establish performance goals based on other than the financial1472performance of the Company specified above.147314746. PAYMENT OF INCENTIVE COMPENSATION; NONASSIGNABILITY1475The Incentive Compensation shall be paid only upon certification of the1476attainment of the preestablished performance goals by the Committee. Such1477Incentive Compensation shall be paid within 90 days of the end of the fiscal1478year, but any Participant who is eligible to participate in the Company's1479deferred compensation plan may elect to defer part or all of such Incentive1480Compensation under such plan. No Incentive Compensation or any other benefit1481under the Plan shall be assignable or transferable by the Participant during the1482Participant's lifetime.148314847. NO RIGHT TO CONTINUED EMPLOYMENT1485Nothing in the Plan shall confer upon any employee any right to continue1486in the employ of the Company or shall interfere with or restrict in any way the1487right of the Company to discharge an employee at any time for any reason1488whatsoever, with or without cause.148914901491A-214921493</TEXT>1494</DOCUMENT>1495<DOCUMENT>1496<TYPE>EX-10.91497<SEQUENCE>41498<FILENAME>stjude021570_ex10-9.txt1499<DESCRIPTION>2000 STOCK PLAN1500<TEXT>1501EXHIBIT 10.9150215031504ST. JUDE MEDICAL, INC.15052000 STOCK PLAN1506150715081509SECTION CONTENTS PAGE1510- ------- -------- ----15111. General Purpose of Plan; Definitions ...................... 1151215132. Administration ............................................ 3151415153. Stock Subject to Plan ..................................... 4151615174. Eligibility ............................................... 4151815195. Stock Options ............................................. 5152015216. Transfer, Leave of Absence, etc. .......................... 9152215237. Restricted Stock .......................................... 9152415258. Amendments and Termination ................................ 11152615279. Unfunded Status of Plan ................................... 111528152910. General Provisions ........................................ 111530153111. Effective Date of Plan .................................... 12153215331534<PAGE>153515361537ST. JUDE MEDICAL, INC.15382000 STOCK PLAN153915401541SECTION 1. General Purpose of Plan; Definitions.15421543The name of this plan is the St. Jude Medical, Inc. 2000 Stock Plan1544(the "Plan"). The purpose of the Plan is to enable St. Jude Medical, Inc. and1545its Subsidiaries (hereinafter, the "Company") to retain and attract executives1546and other key employees, non-employee directors and consultants who contribute1547to the Company's success by their ability, ingenuity and industry, and to enable1548such individuals to participate in the long-term success and growth of the1549Company by giving them a proprietary interest in the Company.15501551For purposes of the Plan, the following terms shall be defined as set1552forth below:15531554a. "Board" means the Board of Directors of the Company as it may be1555comprised from time to time.15561557b. "Cause" means a felony conviction of a participant or the failure of1558a participant to contest prosecution for a felony, willful misconduct,1559dishonesty or intentional violation of a statute, rule or regulation, any of1560which, in the judgment of the Company, is harmful to the business or reputation1561of the Company.15621563c. "Code" means the Internal Revenue Code of 1986, as amended from time1564to time, or any successor statute.15651566d. "Committee" means the Committee referred to in Section 2 of the1567Plan. If at any time no Committee shall be in office, then the functions of the1568Committee specified in the Plan shall be exercised by the Board, unless the Plan1569specifically states otherwise.15701571e. "Consultant" means any person, including an advisor, engaged by the1572Company, the Parent Corporation or a Subsidiary of the Company to render1573services and who is compensated for such services and who is not an employee of1574the Company, the Parent Corporation or any Subsidiary of the Company. A1575Non-Employee Director may serve as a Consultant.15761577f. "Continuous Status as an Employee or Consultant" shall mean the1578absence of any interruption or termination of service as an Employee or1579Consultant. Continuous Status as an Employee or Consultant shall not be1580considered interrupted in the case of sick leave, military leave, or any other1581leave of absence approved by the Administrator, provided that such leave of1582absence is for a period of 90 days or less, unless reemployment after such leave1583of absence is guaranteed by contract or statute.15841585g. "Company" means St. Jude Medical, Inc., a corporation organized1586under the laws of the State of Minnesota (or any successor corporation).15871588158911590<PAGE>159115921593h. "Disability" means permanent and total disability as determined by1594the Committee.15951596i. "Early Retirement" means retirement, with consent of the Committee1597at the time of retirement, from active employment with the Company and any1598Subsidiary or Parent Corporation of the Company.15991600j. "Fair Market Value" of Stock on any given date shall be determined1601by the Committee as follows: (a) if the Stock is listed for trading, on the New1602York Stock Exchange or one of more national securities exchanges, the last1603reported sales price on the New York Stock Exchange or such principal exchange1604on the date in question, or if such Stock shall not have been traded on such1605principal exchange on such date, the last reported sales price on the New York1606Stock Exchange or such principal exchange on the first day prior thereto on1607which such Stock was so traded; or (b) if (a) is not applicable, by any means1608fair and reasonable by the Committee, which determination shall be final and1609binding on all parties.16101611k. "Incentive Stock Option" means any Stock Option intended to be and1612designated as an "Incentive Stock Option" within the meaning of Section 422 of1613the Code.16141615l. "Non-Employee Director" means a "Non-Employee Director" within the1616meaning of Rule 16b-3(b)(3) under the Securities Exchange Act of 1934.16171618m. "Non-Qualified Stock Option" means any Stock Option that is not an1619Incentive Stock Option, and is intended to be and is designated as a1620"Non-Qualified Stock Option" or an Incentive Stock Option that ceases to so1621quality due to an amendment to such Stock Option.16221623n. "Normal Retirement" means retirement from active employment with the1624Company and any Subsidiary or Parent Corporation of the Company on or after age162565.16261627o. "Outside Director" means a Director who: (a) is not a current1628employee of the Company or any member of an affiliated group which includes the1629Company; (b) is not a former employee of the Company who receives compensation1630for prior services (other than benefits under a tax-qualified retirement plan)1631during the taxable year; (c) has not been an officer of the Company; (d) does1632not receive remuneration from the Company, either directly or indirectly, in any1633capacity other than as a director, except as otherwise permitted under Code1634Section 162(m) and regulations thereunder. For this purpose, remuneration1635includes any payment in exchange for good or services. This definition shall be1636further governed by the provisions of Code Section 162(m) and regulations1637promulgated thereunder.16381639p. "Parent Corporation" means any corporation (other than the Company)1640in an unbroken chain of corporations ending with the Company if each of the1641corporations (other than the Company) owns stock possessing 50% or more of the1642total combined voting power of all classes of stock in one of the other1643corporations in the chain.16441645164621647<PAGE>164816491650q. "Restricted Stock" means an award of shares of Stock that are1651subject to restrictions under Section 7 below.16521653r. "Retirement" means Normal Retirement or Early Retirement.16541655s. "Stock" means the Common Stock of the Company.16561657t. "Stock Option" means any option to purchase shares of Stock granted1658pursuant to Section 5 below.16591660u. "Subsidiary" means any corporation (other than the Company) in an1661unbroken chain of corporations beginning with the Company if each of the1662corporations (other than the last corporation in the unbroken chain) owns stock1663possessing 50% or more of the total combined voting power of all classes of1664stock in one of the other corporations in the chain.16651666SECTION 2. Administration.16671668The Plan shall be administered by the Board of Directors or by a1669Committee appointed by the Board of Directors of the Company consisting of at1670least two Directors, all of whom shall be Outside Directors and Non-Employee1671Directors, who shall serve at the pleasure of the Board.16721673The Committee shall have the power and authority to grant to eligible1674employees or Consultants, pursuant to the terms of the Plan: (i) Incentive Stock1675Options, (ii) Non-Qualified Stock Options, and (iii) Restricted Stock.16761677In particular, the Committee shall have the authority:16781679(i) to select the officers and other key employees of the1680Company and its Subsidiaries and other eligible persons to whom Stock1681Options or Restricted Stock may from time to time be granted hereunder;16821683(ii) to determine whether and to what extent Incentive Stock1684Options, Non-Qualified Stock Options or Restricted Stock or a1685combination of each, are to be granted hereunder;16861687(iii) to determine the number of shares to be covered by each1688such award granted hereunder;16891690(iv) to determine the terms and conditions, not inconsistent1691with the terms of the Plan, of any award granted hereunder (including,1692but not limited to, any restriction on any Stock Option or other award1693and/or the shares of Stock relating thereto), which authority shall be1694exclusively vested in the Committee (and not the Board); provided,1695however, that in the event of a merger or asset sale, the applicable1696provisions of Sections 5(c) of the Plan shall govern the acceleration1697of the vesting of any Stock Option;16981699170031701<PAGE>170217031704(v) to determine whether, to what extent and under what1705circumstances Stock and other amounts payable with respect to an award1706under this Plan shall be deferred either automatically or at the1707election of the participant.17081709The Committee shall have the authority to adopt, alter and repeal such1710administrative rules, guidelines and practices governing the Plan as it shall,1711from time to time, deem advisable; to interpret the terms and provisions of the1712Plan and any award issued under the Plan (and any agreements relating thereto);1713and to otherwise supervise the administration of the Plan. The Committee may1714delegate to the President and/or Chief Executive Officer of the Company the1715authority to exercise the powers specified in (i), (ii), (iii), (iv) and (v)1716above with respect to persons who are not either the chief executive officer of1717the Company or the four highest paid officers of the Company other than the1718chief executive officer.17191720All decisions made by the Committee pursuant to the provisions of the1721Plan shall be final and binding on all persons, including the Company and Plan1722participants.17231724SECTION 3. Stock Subject to Plan.17251726The total number of shares of Stock reserved and available for1727distribution under the Plan shall be 5,000,000. Such shares may consist, in1728whole or in part, of authorized and unissued shares. If any shares that have1729been optioned cease to be subject to Stock Options, or if any shares that have1730been optioned are forfeited, such shares shall again be available for1731distribution in connection with future awards under the Plan.17321733In the event of any merger, reorganization, consolidation,1734recapitalization, stock dividend, other change in corporate structure affecting1735the Stock, or spin-off or other distribution of assets to shareholders, such1736substitution or adjustment shall be made in the aggregate number of shares1737reserved for issuance under the Plan, and in the number and option price of1738shares subject to outstanding options granted under the Plan as may be1739determined to be appropriate by the Committee, in its sole discretion, provided1740that the number of shares subject to any award shall always be a whole number.17411742SECTION 4. Eligibility.17431744Officers, other key employees of the Company or any Parent Corporation1745or Subsidiary, members of the Board of Directors, and Consultants who are1746responsible for or contribute to the management, growth and profitability of the1747business of the Company and its Subsidiaries are eligible to be granted Stock1748Options under the Plan. The optionees and participants under the Plan shall be1749selected from time to time by the Committee, in its sole discretion, from among1750those eligible, and the Committee shall determine, in its sole discretion, the1751number of shares covered by each award.17521753Notwithstanding the foregoing, no person shall receive grants of Stock1754Options under this Plan which exceed 500,000 shares during any fiscal year of1755the Company.17561757175841759<PAGE>176017611762SECTION 5. Stock Options.17631764Any Stock Option granted under the Plan shall be in such form as the1765Committee may from time to time approve.17661767The Stock Options granted under the Plan may be of two types: (i)1768Incentive Stock Options and (ii) Non-Qualified Stock Options. No Incentive Stock1769Options shall be granted under the Plan after March 7, 2010.17701771The Committee shall have the authority to grant any optionee1772Incentive Stock Options, Non-Qualified Stock Options, or both types of options.1773To the extent that any option does not qualify as an Incentive Stock Option, it1774shall constitute a separate Non-Qualified Stock Option.17751776Anything in the Plan to the contrary notwithstanding, no term of this1777Plan relating to Incentive Stock Options shall be interpreted, amended or1778altered, nor shall any discretion or authority granted under the Plan be so1779exercised, so as to disqualify either the Plan or any Incentive Stock Option1780under Section 422 of the Code. The preceding sentence shall not preclude any1781modification or amendment to an outstanding Incentive Stock Option, whether or1782not such modification or amendment results in disqualification of such Stock1783Option as an Incentive Stock Option, provided the optionee consents in writing1784to the modification or amendment.17851786Options granted under the Plan shall be subject to the following terms1787and conditions and shall contain such additional terms and conditions, not1788inconsistent with the terms of the Plan, as the Committee shall deem desirable.17891790(a) Option Price. The option price per share of Stock purchasable under1791a Stock Option shall be no less than 100% of Fair Market Value on the date the1792option is granted. If an employee owns or is deemed to own (by reason of the1793attribution rules applicable under Section 424(d) of the Code) more than 10% of1794the combined voting power of all classes of stock of the Company or any Parent1795Corporation or Subsidiary and an Incentive Stock Option is granted to such1796employee, the option price shall be no less than 110% of Fair Market Value of1797the Stock on the date the option is granted. The Committee may not reprice1798options without shareholder approval.17991800(b) Option Term. The term of each Stock Option shall be fixed by the1801Committee, but no Stock Option shall be exercisable more than eight years after1802the date the option is granted. If an employee owns or is deemed to own (by1803reason of the attribution rules of Section 424(d) of the Code) more than 10% of1804the combined voting power of all classes of stock of the Company or any Parent1805Corporation or Subsidiary and an Incentive Stock Option is granted to such1806employee, the term of such option shall be no more than five years from the date1807of grant.18081809181051811<PAGE>181218131814(c) Exercisability. Stock Options shall be exercisable at such time or1815times as determined by the Committee at or after grant, subject to the1816restrictions stated in Section 5(b) above. If the Committee provides, in its1817discretion, that any option is exercisable only in installments, the Committee1818may waive such installment exercise provisions at any time. Notwithstanding1819anything contained in the Plan to the contrary, the Committee may, in its1820discretion, extend or vary the term of any Stock Option or any installment1821thereof, whether or not the optionee is then employed by the Company, if such1822action is deemed to be in the best interests of the Company; provided, however,1823that in the event of a merger or sale of assets, the provisions of this Section18245(c) shall govern vesting acceleration. Notwithstanding the foregoing, unless1825the Stock Option provides otherwise, any Stock Option granted under this Plan1826shall be exercisable in full, without regard to any installment exercise1827provisions, for a period specified by the Committee, but not to exceed sixty1828(60) days, prior to the occurrence of any of the following events: (i)1829dissolution or liquidation of the Company other than in conjunction with a1830bankruptcy of the Company or any similar occurrence, (ii) any merger,1831consolidation, acquisition, separation, reorganization, or similar occurrence,1832where the Company will not be the surviving entity or (iii) the transfer of1833substantially all of the assets of the Company or 50% or more of the outstanding1834Stock of the Company.18351836The grant of an option pursuant to the Plan shall not limit in any way1837the right or power of the Company to make adjustments, reclassifications,1838reorganizations or changes of its capital or business structure or to merge,1839exchange or consolidate or to dissolve, liquidate, sell or transfer all or any1840part of its business or assets.18411842(d) Method of Exercise. Stock Options may be exercised in whole or in1843part at any time during the option period by giving written notice of exercise1844to the Company specifying the number of shares to be purchased. Such notice1845shall be accompanied by payment in full of the purchase price, either by check,1846or by any other form of legal consideration deemed sufficient by the Committee1847and consistent with the Plan's purpose and applicable law, including promissory1848notes or a properly executed exercise notice together with irrevocable1849instructions to a broker acceptable to the Company to promptly deliver to the1850Company the amount of sale or loan proceeds to pay the exercise price. As1851determined by the Committee at the time of grant or exercise, in its sole1852discretion, payment in full or in part may also be made in the form of Stock1853already owned by the optionee (which in the case of Stock acquired upon exercise1854of an option have been owned for more than six months on the date of surrender)1855or, in the case of the exercise of a Non-Qualified Stock Option (based, in each1856case, on Fair Market Value of the Stock on the date the option is exercised, as1857determined by the Committee), provided, however, that, in the case of an1858Incentive Stock Option, the right to make a payment in the form of already owned1859shares may be authorized only at the time the option is granted, and provided1860further that in the event payment is made in the form of shares of restricted1861stock under another plan of the Company, the optionee will receive a portion of1862the option shares in the form of, and in an amount equal to, the restricted1863stock tendered as payment by the optionee. If the terms of an option so permit,1864an optionee may elect to pay all or part of the option exercise price by having1865the Company withhold from the shares of Stock that would otherwise be issued1866upon exercise that number of shares of Stock having a Fair Market Value equal to1867the aggregate option exercise price for the shares with respect to which such1868election is made. No shares of Stock18691870187161872<PAGE>187318741875shall be issued until full payment therefor has been made. An optionee shall1876generally have the rights to dividends and other rights of a shareholder with1877respect to shares subject to the option when the optionee has given written1878notice of exercise, has paid in full for such shares, and, if requested, has1879given the representation described in paragraph (a) of Section 9.18801881(e) Non-transferability of Options. No Incentive Stock Option shall be1882transferable by the optionee otherwise than by will or by the laws of descent1883and distribution, and all such Incentive Stock Options shall be exercisable,1884during the optionee's lifetime, only by the optionee. Non-Qualified Stock1885Options may be transferred by gift, without consideration, by the optionee under1886a written instrument acceptable to the Committee, to a member of the optionee's1887family, as defined in Section 267 of the Code, or to a trust or similar entity1888whose sole beneficiaries are the optionee and/or members of the optionee's1889family; provided, however, that such transfer and the exercise thereof shall not1890violate any federal or state securities laws. Upon the transfer, the donee shall1891have all rights of the optionee and shall be subject to all the terms and1892conditions imposed on such Options.18931894(f) Termination by Death. If an optionee's employment by the Company and1895any Subsidiary or Parent Corporation terminates by reason of death, any Stock1896Option may thereafter be exercised, to the extent then exercisable, by the legal1897representative of the estate or by the legatee of the optionee under the will of1898the optionee, but may not be exercised after twelve months from the date of such1899death or the expiration of the stated term of the option, whichever period is1900shorter. In the event of termination of employment by reason of death, if,1901pursuant to its terms, any Incentive Stock Option is exercised after the1902expiration of the exercise periods that apply for purposes of Section 422 of the1903Code, the option will thereafter be treated as a Non-Qualified Stock Option.19041905(g) Termination by Reason of Disability. If an optionee's employment by1906the Company and any Subsidiary or Parent Corporation terminates by reason of1907Disability, any Stock Option held by such optionee may thereafter be exercised,1908to the extent it was exercisable at the time of termination due to Disability,1909but may not be exercised after twelve months from the date of such termination1910of employment or the expiration of the stated term of the option, whichever1911period is the shorter. In the event of termination of employment by reason of1912Disability, if, pursuant to its terms, any Incentive Stock Option is exercised1913after the expiration of the exercise periods that apply for purposes of Section1914422 of the Code, the option will thereafter be treated as a Non-Qualified Stock1915Option.19161917(h) Termination by Reason of Retirement. If an optionee's employment by1918the Company and any Subsidiary or Parent Corporation terminates by reason of1919Retirement, any Stock Option held by such optionee may thereafter be exercised,1920to the extent it was exercisable at the time of termination due to Retirement,1921but may not be exercised after thirty-six months from the date of such1922termination of employment or the expiration of the stated term of the option,1923whichever period is the shorter. In the event of termination of employment by1924reason of Retirement, if, pursuant to its terms, any Incentive Stock Option is1925exercised after the expiration of the exercise periods that apply for purposes1926of Section 422 of the Code, the option will thereafter be treated as a1927Non-Qualified Stock Option.19281929193071931<PAGE>193219331934(i) Other Termination. If an optionee's Continuous Status as an Employee1935or Consultant terminates (other than upon the optionee's death, Disability or1936Retirement), any Stock Option held by such optionee may thereafter be exercised1937to the extent it was exercisable at the time of such termination, but may not be1938exercised after 90 days after such termination, or the expiration of the stated1939term of the option, whichever period is the shorter. In the event of termination1940of employment by reason other than death, Disability or Retirement and if1941pursuant to its terms any Incentive Stock Option is exercised after the1942expiration of the exercise periods that apply for purposes of Section 422 of the1943Code, the option will thereafter be treated as a Non-Qualified Stock Option. In1944the event an Optionee's employment with the Company is terminated for Cause, all1945unexercised Options granted to such Optionee shall immediately terminate.19461947(j) Annual Limit on Incentive Stock Options. The aggregate Fair Market1948Value (determined as of the time the Stock Option is granted) of the Common1949Stock with respect to which an Incentive Stock Option under this Plan or any1950other plan of the Company and any Subsidiary or Parent Corporation is1951exercisable for the first time by an optionee during any calendar year shall not1952exceed $100,000.19531954(k) Grants of Stock Options to Non-Employee Directors. Each1955Non-Employee Director who, after March 8, 2000 is (i) elected, re-elected or1956serving an unexpired term as a Director of the Company at any annual meeting of1957holders of the common Stock of the Company; or (ii) elected as a Director of the1958Company at any special meeting of holders of common Stock of the Company, shall,1959as of the date of such election, re-election or annual or special meeting,1960automatically be granted a Stock Option to purchase 3,000 shares of Stock at an1961option price per share equal to 100% of Fair Market Value of the Company's Stock1962on such date. In the case of a special meeting, the action of the holders of1963shares in electing a Non-Employee Director shall constitute the granting of the1964Stock Option to such Director and, in the case of an annual meeting, the action1965of the holders of shares in electing or re-electing a Non-Employee Director1966shall constitute the granting of the Stock Option to such Director and to any1967other Non-Employee Director who shall be designated as serving an unexpired term1968as a Director of the Company in the notice or proxy materials for the meeting;1969and the date when the holders of shares shall take such action shall be the date1970of grant of the Stock Option. All such Options shall be designated as1971Non-Qualified Stock Options and shall be subject to the same terms and1972provisions as are then in effect with respect to the grant of Non-Qualified1973Stock Options to officers and key employees of the Company, except that (1) the1974term of each such Option shall be equal to eight years, which term,1975notwithstanding the provisions in Section 5(i), shall not expire upon the1976termination of service as a Director; and (2) the Option shall become1977exercisable beginning six months after the date the Option is granted. Upon1978termination of such Director's service as a Director of the Company, the1979unvested portion of an Option held by such Director shall not thereafter be1980exercisable. Subject to the foregoing, all provisions of this Plan not1981inconsistent with the foregoing shall apply to Options granted pursuant to this1982Section 5(k), except that any Options granted to a Non-Employee Director shall1983be administered in accordance with the terms of this Plan solely by the Board of1984Directors and not by the Committee. Options issued under this Section 5(k) shall1985be in lieu of and in substitution for any19861987198881989<PAGE>199019911992new awards of Options in accordance with the St. Jude Medical, Inc. 1997 Stock1993Option Plan from and after March 8, 2000. Nothing herein shall limit the right1994of the Board of Directors to issue Stock Options to any Non-Employee Director1995under the terms of this Plan in addition to those provided for under this1996Section 5(k), provided that no Non-Employee Director shall be granted Stock1997Options under this Plan, including the Options awarded under this Section 5(k),1998in excess of 5,000 shares in any calendar year.19992000SECTION 6. Transfer, Leave of Absence, etc.20012002For purposes of the Plan, the following events shall not be deemed a2003termination of employment:20042005(a) a transfer of an employee from the Company to a Parent Corporation2006or Subsidiary, or from a Parent Corporation or Subsidiary to the Company, or2007from one Subsidiary to another;20082009(b) a leave of absence, approved in writing by the Committee, for2010military service or sickness, or for any other purpose approved by the Company2011if the period of such leave does not exceed ninety (90) days (or such longer2012period as the Committee may approve, in its sole discretion); and20132014(c) a leave of absence in excess of ninety (90) days, approved in2015writing by the Committee, but only if the employee's right to reemployment is2016guaranteed either by a statute or by contract, and provided that, in the case of2017any leave of absence, the employee returns to work within 30 days after the end2018of such leave.20192020SECTION 7. Restricted Stock.20212022(a) Administration. Up to 50,000 shares of Restricted Stock may be2023issued either alone or in addition to other awards granted under the Plan. The2024Committee shall determine the officers and key employees of the Company and2025Subsidiaries to whom, and the time or times at which, grants of Restricted Stock2026will be made, the number of shares to be awarded, the time or times within which2027such awards may be subject to forfeiture, and all other conditions of the2028awards. The Committee may also condition the grant of Restricted Stock upon the2029attainment of specified performance goals. The provisions of Restricted Stock2030awards need not be the same with respect to each recipient.20312032(b) Awards and Certificates. The prospective recipient of an award of2033shares of Restricted Stock shall not have any rights with respect to such award,2034unless and until such recipient has executed an agreement evidencing the award2035and has delivered a fully executed copy thereof to the Company, and has2036otherwise complied with the then applicable terms and conditions.20372038(i) Each participant shall be issued a stock certificate in2039respect of shares of Restricted Stock awarded under the Plan. Such2040certificate shall be registered in the2041204292043<PAGE>204420452046name of the participant, and shall bear an appropriate legend referring2047to the terms, conditions, and restrictions applicable to such award,2048substantially in the following form:20492050"The transferability of the certificate and the2051shares of stock represented hereby are subject to the2052terms and conditions (including forfeiture) of the2053St. Jude Medical, Inc. 2000 Stock Plan and an2054Agreement entered into between the registered owner2055and the Company.20562057(ii) The Committee shall require that the stock certificates2058evidencing such shares be held in custody by the Company until the2059restrictions thereon shall have lapsed, and that, as a condition of any2060Restricted Stock award, the participant shall have delivered a stock2061power endorsed in blank, relating to the Stock covered by such award.20622063(c) Restrictions and Conditions. The shares of Restricted Stock awarded2064pursuant to the Plan shall be subject to the following restrictions and2065conditions:20662067(i) Subject to the provisions of this Plan and the award2068agreement, during a period set by the Committee commencing with the2069date of such award (the "Restriction Period"), the participant shall2070not be permitted to sell, transfer, pledge or assign shares of2071Restricted Stock awarded under the Plan. Within these limits, the2072Committee may provide for the lapse of such restrictions in2073installments where deemed appropriate.20742075(ii) Except as provided in paragraph (c) (i) of this Section20767, the participant shall have, with respect to the shares of Restricted2077Stock, all of the rights of a shareholder of the Company, including the2078right to vote the shares and the right to receive any cash dividends.2079The Committee, in its sole discretion, may permit or require the2080payment of cash dividends to be deferred and, if the Committee so2081determines, reinvested in additional shares of Restricted Stock to the2082extent shares are available under Section 3. Certificates for shares of2083unrestricted Stock shall be delivered to the grantee promptly after,2084and only after, the period of forfeiture shall have expired without2085forfeiture in respect of such shares of Restricted Stock.20862087(iii) Subject to the provisions of the award agreement and2088paragraph (c) (iv) of this Section 7, upon termination of employment2089for any reason during the Restriction Period, all shares still subject2090to restriction shall be forfeited by the participant.20912092(iv) In the event of special hardship circumstances of a2093participant whose employment is terminated (other that for Cause),2094including death, Disability or Retirement, or in the event of an2095unforeseeable emergency of a participant still in service, the2096Committee may, in its sole discretion, when it finds that a waiver2097would be in the best interest of the Company, waive in whole or in part2098any or all remaining restrictions with respect to such participant's2099shares of Restricted Stock.210021012102102103<PAGE>210421052106(v) Notwithstanding the foregoing, all restrictions with2107respect to any participant's shares of Restricted Stock shall lapse, on2108the date determined by the Committee, prior to, but in no event more2109that sixty (60) days prior to, the occurrence of any of the following2110events: (i) dissolution or liquidation of the Company, other than in2111conjunction with a bankruptcy of the Company or any similar occurrence,2112(ii) any merger, consolidation, acquisition, separation,2113reorganization, or similar occurrence, where the Company will not be2114the surviving entity or (iii) the transfer of substantially all of the2115assets of the Company or 50% or more of the outstanding Stock of the2116Company.21172118SECTION 8. Amendments and Termination.21192120The Board may amend, alter, or discontinue the Plan, but no amendment,2121alteration, or discontinuation shall be made (i) which would impair the rights2122of an optionee or participant under a Stock Option theretofore granted, without2123the optionee's or participant's consent, or (ii) which without the approval of2124the shareholders of the Company would cause the Plan to no longer comply with2125Rule 16b-3 under the Securities Exchange Act of 1934, Section 422 of the Code or2126any other regulatory requirements.21272128The Committee may amend the terms of any award or option theretofore2129granted, prospectively or retroactively to the extent such amendment is2130consistent with the terms of this Plan, but no such amendment shall impair the2131rights of any holder without his or her consent except to the extent authorized2132under the Plan. However, the Committee may not reprice options, either by2133lowering the exercise price of outstanding options or canceling outstanding2134options and granting replacement options with lower exercise prices, without2135shareholder approval.21362137SECTION 9. Unfunded Status Of Plan.21382139The Plan is intended to constitute an "unfunded" plan for incentive and2140deferred compensation. With respect to any payments not yet made to a2141participant or optionee by the Company, nothing contained herein shall give any2142such participant or optionee any rights that are greater than those of a general2143creditor of the Company. In its sole discretion, the Committee may authorize the2144creation of trusts or other arrangements to meet the obligations created under2145the Plan to deliver Stock or payments in lieu of or with respect to awards2146hereunder, provided, however, that the existence of such trusts or other2147arrangements is consistent with the unfunded status of the Plan.21482149SECTION 10. General Provisions.21502151(a) The Committee may require each person purchasing shares pursuant to2152a Stock Option under the Plan to represent to and agree with the Company in2153writing that the optionee is215421552156112157<PAGE>215821592160acquiring the shares without a view to distribution thereof. The certificates2161for such shares may include any legend which the Committee deems appropriate to2162reflect any restrictions on transfer.21632164All certificates for shares of Stock delivered under the Plan shall be2165subject to such stock-transfer orders and other restrictions as the Committee2166may deem advisable under the rules, regulations, and other requirements of the2167Securities and Exchange Commission, any stock exchange upon which the Stock is2168then listed, and any applicable Federal or state securities laws, and the2169Committee may cause a legend or legends to be put on any such certificates to2170make appropriate reference to such restrictions.21712172(b) Nothing contained in this Plan shall prevent the Board of Directors2173from adopting other or additional compensation arrangements, subject to2174shareholder approval if such approval is required; and such arrangements may be2175either generally applicable or applicable only in specific cases. The adoption2176of the Plan shall not confer upon any employee of the Company or any Subsidiary2177any right to continued employment with the Company or a Subsidiary, as the case2178may be, nor shall it interfere in any way with the right of the Company, Parent2179Corporation or a Subsidiary to terminate the employment of any of its employees2180at any time.21812182(c) Each participant shall, no later than the date as of which any part2183of the value of an award first becomes includible as compensation in the gross2184income of the participant for Federal income tax purposes, pay to the Company,2185or make arrangements satisfactory to the Committee regarding payment of, any2186Federal, state, or local taxes of any kind required by law to be withheld with2187respect to the award. The obligations of the Company under the Plan shall be2188conditional on such payment or arrangements and the Company, Parent Corporation2189and a Subsidiary shall, to the extent permitted by law, have the right to deduct2190any such taxes from any payment of any kind otherwise due to the participant.2191With respect to any award under the Plan, if the terms of such award so permit,2192a participant may elect by written notice to the Company to satisfy part or all2193of the withholding tax requirements associated with the award by (i) authorizing2194the Company to retain from the number of shares of Stock that would otherwise be2195deliverable to the participant, or (ii) delivering to the Company from shares of2196Stock already owned by the participant, that number of shares having an2197aggregate Fair Market Value equal to part or all of the tax payable by the2198participant under this Section 9(c). Any such election shall be in accordance2199with, and subject to, applicable tax and securities laws, regulations and2200rulings.22012202SECTION 11. Effective Date of Plan22032204The Plan shall be effective on March 8, 2000 (the date of approval by2205the Board of Directors), subject to the approval by shareholders of the Company.2206If the Plan is not so approved by the shareholders on or before one year after2207this Plan's adoption by the Board of Directors, this Plan shall not come into2208effect. The offering of the shares hereunder shall be also220922102211122212<PAGE>221322142215subject to the effecting by the Company of any registration or qualification of2216the shares under any federal or state law or the obtaining of the consent or2217approval of any governmental regulatory body which the Company shall determine,2218in its sole discretion, is necessary or desirable as a condition to or in2219connection with, the offering or the issue or purchase of the shares covered2220thereby. The Company shall make every reasonable effort to effect such2221registration or qualification or to obtain such consent or approval.222222232224222522261322272228</TEXT>2229</DOCUMENT>2230<DOCUMENT>2231<TYPE>EX-10.102232<SEQUENCE>52233<FILENAME>stjude021570_ex10-10.txt2234<DESCRIPTION>2000 EMPLOYEE STOCK SAVINGS PLAN2235<TEXT>2236EXHIBIT 10.10223722382239ST. JUDE MEDICAL, INC.224022412000 Employee Stock Purchase Savings Plan22422243I22442245Purpose22462247The purpose of the 2000 Employee Stock Purchase Savings Plan is to2248provide a greater community of interest between St. Jude Medical, Inc.2249shareholders and its employees, and to facilitate purchase by employees of2250additional shares of common stock in the Company. It is believed the Plan will2251encourage employees to remain in the employ of the Company and will also permit2252the Company to compete with other corporations offering similar plans in2253obtaining and retaining the services of competent employees. It is intended that2254options issued pursuant to this Plan shall constitute options issued pursuant to2255an "Employee Stock Purchase Plan" within the meaning of Section 423 of the2256Internal Revenue Code of 1986, as amended.22572258II22592260Definitions22612262A. "Plan" means the 2000 St. Jude Medical, Inc. Employee Stock Purchase2263Savings Plan.22642265B. "Code" means the Internal Revenue Code of 1986, as amended.22662267C. "Company" means St. Jude Medical, Inc., and any of its subsidiaries2268(as that term is defined by Section 425(f) of the Code) to which St. Jude2269Medical, Inc. and such respective subsidiaries, by action of their Boards of2270Directors, shall make this Plan applicable.22712272D. "Employee" means any person, including an officer, who is2273customarily employed twenty (20) hours or more per week and more than five (5)2274months in a calendar year by the Company.22752276E. "Eligible Employee" means an Employee of the Company who is eligible2277for participation in the Plan in accordance with Article IV.22782279F. "Participant" means an Eligible Employee who has elected to2280participate in the Plan in accordance with Article V.22812282G. "Committee" means the committee provided for in Article XI.22832284H. The "Commencement Date" of the Plan means August l, 2000 or a date2285established by the Committee not to exceed fourteen days following registration2286of the options and shares reserved pursuant to the Plan with the United States2287Securities and Exchange Commission.228822892290<PAGE>229122922293I. "Base Pay" means regular straight time earnings annualized as of the2294date of commencement of a phase excluding payments, if any, for overtime,2295incentive compensation, commissions, incentive payments, premiums, bonuses and2296any other special remuneration.22972298J. "Termination Date" shall mean the earlier of (i) the date of the one2299year anniversary following the commencement of a particular phase of the Plan,2300or (ii) such time as any merger or consolidation in which St. Jude Medical, Inc.2301is not the surviving corporation becomes effective.23022303K. "Shares" shall mean common shares of St. Jude Medical, Inc. of the2304par value of $.10, subject to adjustments which may be made in accordance with2305Articles XVI and XVII.23062307III23082309Term and Phases of the Plan23102311A. The Plan will commence on the Commencement Date and will terminate2312ten (10) years and six (6) months thereafter, except that any phase commenced2313prior to such termination shall, if necessary, be allowed to continue beyond2314such termination until completion. Notwithstanding the foregoing, this Plan2315shall be considered of no force or effect and any options granted shall be null2316and void unless the holders of a majority of shares of the common stock of the2317Company, represented at a meeting in person or by proxy, approve the Plan within2318twelve (12) months before or after the date of its adoption by the Board of2319Directors.23202321B. The Plan shall be carried out in ten (10) phases, each phase being2322for a period of one year. No phase shall run concurrently. A phase may commence2323immediately after the termination of the preceding phase. The commencement of2324each phase shall be determined by the Committee, provided that the commencement2325of the first phase shall be within twelve (12) months before or after the date2326of approval of the Plan by the shareholders of the Company. In the event all of2327the stock reserved for grant of options hereunder is issued pursuant to the2328terms hereof prior to the commencement of one or more phases scheduled by the2329Committee or the number of shares remaining is so small, in the opinion of the2330Committee, as to render administration of any succeeding phase impracticable,2331such phase or phases shall be canceled. Phases shall be numbered successively as2332Phase 1, Phase 2, Phase 3, etc.23332334IV23352336Eligibility23372338A. Any Employee of the Company who has completed at least one month of2339continuous service on or prior to the commencement of a phase of the Plan shall2340be eligible to participate in the Plan, subject to the limitations imposed by2341Section 423 of the Code.23422343B. Any Employee who is a member of the Board of Directors of the2344Company shall be eligible to participate in the Plan.23452346234722348<PAGE>234923502351C. Notwithstanding any provision of the Plan to the contrary, no2352Employee shall be granted an option:235323541. if such Employee, immediately after the option is granted,2355owns shares possessing five percent (5%) or more of the total combined2356voting power or value of all classes of shares of the Company or a2357parent or a subsidiary of the Company. For purposes of determining2358share ownership, the rules of Section 424(d) of the Code shall apply,2359and shares which the Employee may purchase under outstanding options2360shall be treated as shares owned by the Employee; or236123622. which permits the Employee to purchase shares under such2363plans of the Company or a subsidiary of the Company to accrue at a rate2364which exceeds $25,000 of the fair market value of such shares2365(determined at the time such option is granted) for each calendar year2366in which such option is outstanding at any time. The term "accrue"2367shall be interpreted as in Section 423(b)(8) of the Code.23682369V23702371Participation23722373A. An Eligible Employee may elect to enroll as, and become a2374Participant in, any phase of the Plan by completing a payroll deduction2375authorization on the form provided by the Company and filing it the personnel2376office prior to or on the date the phase commences.23772378B. Payroll deductions for a Participant shall commence on the date when2379his or her payroll deduction authorization becomes effective and shall end on2380the last payday immediately prior to or coinciding with the Termination Date of2381the particular phase, unless sooner terminated by the Participant as provided in2382Article IX or as otherwise provided herein.23832384C. A Participant who ceases to be an Eligible Employee, although still2385employed by the Company, thereupon shall be deemed to discontinue his or her2386participation in the Plan, and he or she shall have the rights provided in2387Article IX.23882389D. Participation in the Plan shall be voluntary.23902391VI23922393Payroll Deductions23942395A. Upon enrollment, a Participant shall elect to make contributions to2396the Plan by payroll deductions (in full dollar amounts calculated to be as2397uniform as practicable throughout the period of the phase), in the aggregate2398amount not in excess of the sum of 10% of such Participant's Base Pay for the2399term of the phase, as determined on the basis of his or her annual or annualized2400Base Pay at the commencement of the phase. The minimum authorized payroll2401deduction must aggregate to not less than $10 per month.24022403240432405<PAGE>240624072408B. All payroll deductions made for Participants shall be credited to2409their accounts under the Plan. The Participant may not make any separate cash2410payments into such account.24112412C. A Participant may discontinue his or her participation in the phase2413and terminate his or her payroll deduction authorized at any time as provided in2414Article IX.24152416D. A Participant may reduce the amount of his or her payroll deduction2417by completing an amended payroll deduction authorization on the form provided2418and filing it with his or her personnel office, but no change can be made during2419a phase of the Plan which would either change the time or increase the rate of2420his or her payroll deductions.24212422VII24232424Terms and Conditions of Options24252426A. Stock options granted pursuant to the Plan may be evidenced by2427agreements in such form as the Committee shall approve, provided that all2428Employees shall have the same rights and privileges and provided further that2429such options shall comply with and be subject to the following terms and2430conditions. The Committee may conclude that agreements are not necessary.24312432B. As of the commencement of a phase when a Participant's payroll2433deduction authorization becomes effective, the Participant shall be granted an2434option for as many full shares as he or she will be able to purchase with the2435payroll deduction credited to his or her account during his or her participation2436in the phase, subject to the limitations of Article X. The maximum number of2437shares subject to purchase by a Participant shall equal the total amount2438credited to the Participant's account under Section VI hereof divided by the2439option price set forth in Section VII, Paragraph C.1 hereof.24402441C. The option price of shares purchased with payroll deductions for an2442Employee who becomes a Participant as of the commencement of a phase shall be2443the lower of:244424451. 85% of the fair market value of the shares on the date the2446phase commences; or,244724482. 85% of the fair market value of the shares on the2449Termination Date of the phase.24502451D. The fair market value of the shares shall be determined by the2452Committee for each valuation date in a manner consistent with Section 423 of the2453Code.24542455245642457<PAGE>245824592460VIII24612462Exercise of Option24632464A. Unless a Participant gives written notice to the Company as provided2465in Article IX, his or her option for the purchase of shares will be exercised2466automatically for him or her as of the Termination Date of the phase for the2467purchase of the number of full shares which the accumulated payroll deductions2468in his or her account at that time will purchase at the applicable option price;2469but in no event shall the number of full shares be greater than the number of2470full shares to which the Participant would have been eligible to receive when he2471or she first became a Participant under the phase if he or she had elected a2472payroll deduction rate of 10% of his or her then annual or annualized Base Pay2473and as if the option price were solely based under Paragraph C.1 of Article VII.24742475B. By written notice to the Company within the period commencing three2476(3) months prior to and extending five (5) business days following the2477Termination Date of the phase and after delivery to the Participant of a2478prospectus covering the shares to be issued under the Plan, a Participant may2479elect, effective as of the Termination Date, to:248024811. withdraw all the accumulated payroll deductions in his or2482her account at the time, with interest; or, after receipt of a2483prospectus as set forth above,248424852. exercise his or her option for a specified number of full2486shares less than the number of full shares which the accumulated2487payroll deductions in his or her account will purchase at the2488applicable option price and withdraw the balance in his or her account2489without interest; but in no event shall the number of full shares be2490greater than the number of full shares to which a Participant would2491have been eligible to receive when he or she first became a Participant2492under the phase if he or she had elected a payroll deduction rate of249310% of his or her then annual or annualized Base Pay and as if the2494option price were solely based under Paragraph C.1 of Article VII.24952496C. Notwithstanding the provisions of Paragraphs A and B above, if a2497Participant files reports pursuant to Section 16 of the Securities Exchange Act2498of 1934 (at the commencement of a phase or becomes obligated to file such2499reports during a phase) then such a Participant shall not have the right to2500withdraw all or a portion of the accumulated payroll deductions except in2501accordance with Article IX, Paragraphs A and B.25022503IX25042505Death, Withdrawal or Termination25062507A. In the event of death of a Participant, the person or persons2508specified in Article XVIII may give notice to the Company within sixty (60) days2509of the death of the Participant electing to purchase the number of full shares2510which the accumulated payroll deductions in the account of such deceased2511Participant will purchase under the option at the applicable option price2512specified in Paragraph C of Article VII and have the balance in the account2513distributed in cash25142515251652517<PAGE>251825192520without interest. If no such notice is received by the Company within said sixty2521(60) days, the accumulated payroll deductions will be distributed in cash plus2522interest.25232524B. Except as provided in the next sentence, upon termination of the2525Participant"s employment for any reason other than the death of the Participant,2526the payroll deductions credited to his or her account, plus interest, shall be2527returned to him or her. In the event the Participant"s employment is terminated2528by the Company due to the elimination of the Participant"s position or in2529connection with a corporate transaction, or such other similar circumstances as2530approved by the Committee, with respect to such Participants designated by the2531Committee, the Termination Date of the Phase shall be a date prior to or2532coincident with their last day of employment; provided, however, that if the2533termination of employment occurs within 90 days of the Termination Date of a2534Phase, the original Termination Date shall apply.25352536C. Except for a Participant governed by Paragraph C of Article VIII, a2537Participant may withdraw payroll deductions credited to his or her account under2538the Plan at any time by giving written notice to the Company. All of the2539Participant's payroll deductions credited to his or her account, plus interest,2540shall be paid to him or her promptly after receipt of his or her notice of2541withdrawal and no further payroll deductions shall be made from his or her2542compensation.25432544X25452546Shares Under Option25472548A. The shares to be sold to a Participant under the Plan may, at the2549election of the Company, be either treasury shares or shares originally issued2550for such purpose. The maximum number of shares which shall be made available for2551purchase under the Plan shall be 1,000,000 shares, subject to adjustment upon2552changes in capitalization of the Company as provided in Articles XVI and XVII.2553If the total number of shares for which options are to be granted on any date in2554accordance with Article VII exceeds the number of shares then available under2555the Plan (after deduction of all shares for which options have been exercised or2556are then outstanding), the Committee shall make a pro rata allocation of the2557shares remaining available in as nearly a uniform manner as shall be practicable2558and as it shall determine to be equitable. In such event, payroll deductions to2559be made shall be reduced accordingly and the Committee shall give written notice2560of such reduction to each Participant affected thereby.25612562B. As promptly as practicable after the Termination Date of a phase,2563the Company shall deliver to each Participant the full shares purchased under2564exercise of his or her option, together with a cash payment equal to the balance2565(without interest) of any payroll deductions credited to his or her account2566which were not used for the purchase of shares.25672568C. The Participant will have no interest in shares covered by his or2569her option until such option has been exercised.25702571257262573<PAGE>257425752576XI25772578Administration25792580The Plan shall be administered by a Committee consisting of not less2581than two (2) members who shall be appointed by the Board of Directors of the2582Company. Each member of such Committee shall be either a director, an officer or2583an employee of the Company. Such Committee shall be vested with full authority2584to make, administer, and interpret such rules and regulations as it deems2585necessary to administer the Plan, and any such determination, decision or action2586of such Committee with respect to any action in connection with the2587construction, interpretation, administration or application of the Plan shall be2588final, conclusive and binding on all Participants and any and all other persons2589claiming under or through any Participant. It is provided, however, that the2590provisions of the Plan shall be construed so as to extend and limit2591participation in the Plan only in a manner consistent with the requirements of2592Section 423 of the Code.25932594XII25952596Amendment of the Plan25972598The Board of Directors of the Company may at any time amend the Plan,2599except that no amendment may make any change in any option theretofore granted2600which would adversely affect the rights of any Participant, and no amendment2601shall be made without prior approval of the shareholders of the Company if such2602amendment would require sale of more shares than are authorized under Article X2603of the Plan.26042605XIII26062607Non-transferability26082609Neither payroll deductions credited to a Participant's account nor any2610rights with regard to the exercise of an option or to receive shares under the2611Plan may be assigned, transferred, pledged or otherwise disposed of in any way2612by the Participant and any such attempted assignment, transfer, pledge or other2613disposition shall be null and void and without effect, but the Company may treat2614such act as an election to withdraw funds in accordance with Article IX.26152616XIV26172618Use of Funds26192620All payroll deductions received or held by the Company under this Plan2621may be used by the Company for any corporate purposes and the Company shall not2622be obligated to segregate such payroll deductions.26232624262572626<PAGE>262726282629XV26302631Interest26322633In any situation where the Plan provides for the payment of interest on2634a Participant's payroll deductions, such interest shall be determined by2635averaging the balance in the Participant's account for the period of his or her2636participation and computing interest thereon at the rate of 4% per annum (simple2637interest). The Committee may change the rate of interest for a particular phase,2638provided such change is made prior to the commencement of the phase.26392640XVI26412642Changes in Capitalization, Merger, etc.26432644A. Subject to any required action by the shareholders, the number of2645shares covered by each outstanding option, the price per share thereof in each2646such option, and the maximum number of shares available for purchase pursuant to2647options issued under the Plan shall be deemed proportionately adjusted for any2648increase or decrease in the number of issued shares of the Company resulting2649from a subdivision or consolidation of shares or the payment of a share dividend2650(but only on the shares) or any other increase or decrease in the number of such2651shares effected without receipt of consideration by the Company.26522653B. If the Company shall be involved in any merger or consolidation,2654whether or not it is the surviving corporation, each outstanding option shall2655pertain to and apply to the securities to which a holder of the number of shares2656subject to the option would have been entitled. A dissolution or liquidation of2657the Company shall cause each outstanding option to terminate, provided in such2658event that, immediately prior to such dissolution or liquidation, each2659Participant shall be repaid the payroll deductions credited to his or her2660account, plus interest.26612662C. In the event of a change in the shares of the Company as presently2663constituted, which is limited to a change of all its authorized shares with par2664value into the same number of shares with a different par value or without par2665value, the shares resulting from any such change shall be deemed to be the2666shares within the meaning of this Plan.26672668XVII26692670Adjustments to Shares26712672A. To the extent that the foregoing adjustments relate to shares or2673securities of the Company, such adjustments shall be made by the Committee, and2674its determination in that respect shall be final, binding and conclusive,2675provided that each option granted pursuant to this Plan shall not be adjusted in2676a manner that causes the option to fail to continue to qualify as an option2677issued pursuant to an "employee stock purchase plan" within the meaning of2678Section 423 of the Code.26792680268182682<PAGE>268326842685B. Except as hereinbefore expressly provided in Articles XVI and XVII,2686the optionee shall have no right by reason of any subdivision or consolidation2687of shares of any class or the payment of any stock dividend or any other2688increase or decrease in the number of shares of any class or by reason of any2689dissolution, liquidation, merger, or consolidation or spin-off of assets or2690stock of another corporation, and any issue by the Company of shares of any2691class, or securities convertible into shares of any class, shall not affect, and2692no adjustment by reason thereof shall be made with respect to, the number or2693price of shares subject to the option.26942695C. The grant of an option pursuant to this Plan shall not affect in any2696way the right or power of the Company to make adjustments, reclassifications,2697reorganizations or changes of its capital or business structure or to merge or2698to consolidate or to dissolve, liquidate or sell, or transfer all or any part of2699its business or assets.27002701XVIII27022703Beneficiary Designation27042705A Participant may file a written designation of a beneficiary who may2706elect to purchase shares or receive cash to the Participant's credit under the2707Plan in the event of such Participant's death prior to delivery to him or her of2708such shares and cash. Such designation of beneficiary may be changed by the2709Participant at any time by written notice. Upon the death of a Participant and2710upon receipt by the Company of proof deemed adequate by it of the identity and2711existence at the Participant's death of a beneficiary validly designated by him2712or her under the Plan, the Company shall deliver such shares and cash to such2713beneficiary in accordance with Section A of Article IX. If, upon the death of a2714Participant, there is no surviving beneficiary duly designated as above2715provided, the Company shall deliver accumulated payroll deductions to the2716executor or administrator of the estate of the Participant or, if no such2717executor or administrator has been appointed (to the knowledge of the Company)2718within sixty (60) days following the Participant's death, the Company shall2719deliver such accumulated payroll deductions to the surviving spouse, if any, as2720though named as the designated beneficiary hereunder or, if there is no such2721surviving spouse or child, then to such relatives of the Participant as would be2722entitled to such cash under the laws of intestacy in the deceased Participant's2723domicile as though named as the designated beneficiary hereunder. The Company2724shall not be liable for any distribution made of shares or cash pursuant to any2725will or other testamentary disposition made by such Participant, or because of2726the provisions of law concerning intestacy, or otherwise. No designated2727beneficiary shall, prior to the death of the Participant by whom he or she has2728been designated, acquire any interest in the shares or cash credited to the2729Participant under the Plan.27302731XIX27322733Registration and Qualification of Shares27342735The offering of the shares hereunder shall be subject to the effecting2736by the Company of any registration or qualification of the shares under any2737federal or state law or the obtaining of the consent or approval of any2738governmental regulatory body which the Company shall determine, in its sole2739discretion, is necessary or desirable as a condition to or in connection with27402741274292743<PAGE>274427452746the offering or the issue or purchase of the shares covered thereby. The Company2747shall make every reasonable effort to effect such registration or qualification2748or to obtain such consent or approval.27492750XX27512752Plan Preconditions27532754The Plan is expressly made subject to approval of shareholders of the2755Company. If the Plan is not so approved by the shareholders on or before one2756year after adoption by the Board of Directors, this Plan shall not come into2757effect. In such case, the accumulated payroll deductions credited to the account2758of each Participant shall forthwith be repaid to him or her with interest.275927602761ADOPTED BY BOARD OF DIRECTORS: March 8, 200027622763APPROVED BY SHAREHOLDERS: May 10, 20002764276527662767276827691027702771</TEXT>2772</DOCUMENT>2773<DOCUMENT>2774<TYPE>EX-132775<SEQUENCE>62776<FILENAME>stjude021570_ex13.txt2777<DESCRIPTION>2001 ANNUAL REPORT2778<TEXT>2779EXHIBIT 13278027812782MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL2783CONDITION2784(Dollars in thousands, except per share amounts)27852786RESULTS OF OPERATIONS2787INTRODUCTION2788St. Jude Medical, Inc. ("St. Jude Medical" or the "Company") is a leader in the2789development, manufacturing and distribution of cardiovascular medical devices2790for the global cardiac rhythm management (CRM), cardiology and vascular access2791(C/VA), and cardiac surgery (CS) markets. The Company's principal products in2792each of these markets are: bradycardia pacemaker systems, tachycardia2793implantable cardioverter defibrillator (ICD) systems, and electrophysiology (EP)2794catheters in CRM; vascular closure devices, catheters, guidewires and2795introducers in C/VA; and mechanical and tissue heart valves, valve repair2796products, and suture-free devices to facilitate coronary artery bypass graft2797anastomoses in CS.27982799The Company utilizes a fifty-two, fifty-three week fiscal year ending on the2800Saturday nearest December 31, but for clarity of presentation, describes all2801periods as if the year end is December 31. Fiscal years 2001, 2000 and 1999 each2802consisted of fifty-two weeks.28032804The commentary that follows should be read in conjunction with the Company's2805consolidated financial statements and related notes.28062807ACQUISITIONS2808Following is a discussion on the businesses acquired by the Company during the2809last three years:28102811VASCULAR SCIENCE, INC. (VSI): On September 27, 1999, the Company purchased the2812outstanding common stock of VSI for $75,071 in cash, net of cash acquired, plus2813additional contingent consideration related to product development milestones2814for regulatory approvals and to future sales. VSI was a development-stage2815company focused on the development of suture-free devices to facilitate coronary2816artery bypass graft anastomoses.28172818ANGIO-SEAL(TM): On March 16, 1999, the Company purchased the Angio-Seal(TM)2819business of Tyco International Ltd. for $167,000 in cash. Angio-Seal(TM)2820manufactured and marketed vascular closure devices.28212822OTHER: During 2001, 2000 and 1999, the Company acquired various businesses2823involved in distribution of the Company's products. Aggregate consideration paid2824in cash and common stock, net of any cash acquired, during 2001, 2000 and 19992825was $10,444, $3,264 and $21,056, respectively.28262827The above acquisitions were recorded using the purchase method of accounting.2828The operating results of each of these acquisitions are included in the2829Company's consolidated financial statements from the date of each acquisition.2830Pro forma results of operations have not been presented for these acquisitions2831since the effects of these business acquisitions were not material to the2832Company either individually or in aggregate.28332834NET SALES2835Net sales by geographic markets were as follows:283628372001 2000 19992838- --------------------------------------------------------------------------------2839United States $ 880,086 $ 745,793 $ 689,0512840International 467,270 433,013 425,4982841- --------------------------------------------------------------------------------2842Total net sales $1,347,356 $1,178,806 $1,114,5492843- --------------------------------------------------------------------------------28442845Overall, foreign exchange rate movements had an unfavorable year-to-year impact2846on net sales of approximately $16,000 and $34,000 in 2001 and 2000, due2847primarily to the strengthening of the U.S. dollar against the major Western2848European currencies. This negative effect is not necessarily indicative of the2849impact on net earnings due to partially offsetting favorable foreign currency2850changes on operating costs and to the Company's hedging activities that occurred2851in 2000 and 1999.28522853Net sales by class of similar products were as follows:285428552001 2000 19992856- --------------------------------------------------------------------------------2857Cardiac rhythm management $ 965,968 $ 819,117 $ 767,2122858Cardiology and vascular access 133,343 102,740 75,9052859Cardiac surgery 248,045 256,949 271,4322860- --------------------------------------------------------------------------------2861Total net sales $1,347,356 $1,178,806 $1,114,5492862- --------------------------------------------------------------------------------28632864Net sales of cardiac rhythm management products increased 17.9% over 2000 due2865primarily to increased bradycardia, ICD and EP catheter unit sales, offset in2866part by negative foreign currency effects. The increase in bradycardia net sales2867in 2001 was driven by the mid-year introduction of the Integrity AFx(R)2868pacemaker with atrial fibrillation suppression technology. The increase in ICD2869net sales in 2001 was primarily due to the full year sales of the Company's2870dual-chamber ICD products, which were introduced into the market in October28712000. Net sales of CRM products in 2000 increased 6.8% over 1999 due primarily2872to increased bradycardia and EP catheter unit sales, offset partially by the2873negative impact of the strengthening U.S. dollar on foreign sales. The increase2874in bradycardia sales in 2000 was mainly due to the Company's on-going rollout of2875the Affinity(R) pacemaker family and to an expanded U.S. sales organization.28762877Net sales of cardiology and vascular access products increased 29.8% and 35.4%2878in 2001 and 2000 due primarily to increased Angio-Seal(TM) unit sales.28792880Net sales of cardiac surgery products decreased 3.5% from 2000 due to the2881effects of the stronger U.S. dollar and a clinical preference shift from2882mechanical valves to tissue valves in the U.S. market where the Company holds2883significant mechanical valve market share and a smaller share of the tissue2884valve market. This was offset in part by an increase in aortic connector sales2885with the introduction of this technology to the U.S. market during 2001. Net2886sales of cardiac surgery products in 2000 decreased 5.3% from 1999 due to the2887effects of the stronger U.S. dollar, the impact of2888288912890<PAGE>289128922893the first quarter 2000 recall of valve products incorporating a Silzone(R)2894coating, and a clinical preference shift from mechanical valves to tissue valves2895in the U.S. market.28962897GROSS PROFIT28982899Gross profits were as follows:290029012001 2000 19992902- --------------------------------------------------------------------------------2903Gross profit $888,197 $787,657 $733,6472904Percentage of net sales 65.9% 66.8% 65.8%2905- --------------------------------------------------------------------------------29062907The Company's 2001 gross profit margin decreased nearly one percentage point2908from 2000 due primarily to the $21,667 of special charges recorded in the third2909quarter of 2001 relating to inventory and diagnostic equipment write-offs (see2910further details under the discussion of Special charges). Excluding these2911special charges, the gross profit percentage was 67.5% in 2001 compared to 66.8%2912in 2000, both of which were up from the respective prior year due to higher unit2913volumes and improved manufacturing efficiencies in the Company's CRM operations,2914offset partially by the unfavorable impact on net sales due to the stronger U.S.2915dollar. The Company anticipates making further improvements in its operations2916through the use of total quality management techniques, and further investments2917in technology in order to continue to improve the Company's gross profit margin2918percentage in the future.29192920OPERATING EXPENSES2921Certain operating expenses were as follows:292229232001 2000 19992924- --------------------------------------------------------------------------------2925Selling, general and administrative $467,113 $416,383 $394,4182926Percentage of net sales 34.7% 35.3% 35.4%29272928Research and development $164,101 $137,814 $125,0592929Percentage of net sales 12.2% 11.7% 11.2%2930- --------------------------------------------------------------------------------29312932SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSE: SG&A expense as a percentage2933of net sales decreased in 2001 due primarily to the increased sales which2934leveraged the Company's cost structure. SG&A expense as a percentage of net2935sales in 2000 was comparable to 1999. During the fourth quarter of 2001, the2936Company reversed through SG&A expense a $15,000 accrued liability relating to2937royalties on a license agreement with Guidant that management believed it had2938acquired as part of its purchase of assets of the Telectronics cardiac2939stimulation device business. In addition, the Company expensed approximately the2940same amount of legal fees incurred in relation to the Guidant litigation (see2941further discussion on both of these matters in Note 4 to the Company's2942Consolidated Financial Statements). During the third quarter of 2000, the2943Company received a cash payment related to a non-product arbitration judgement2944pertaining to business matters occurring in 1997 and 1998. This cash receipt,2945net of other provisions for legal matters and fees, was $15,158 and was credited2946to SG&A expense. In addition, during the third quarter of 2000, the Company2947recorded additional SG&A expenses related to a $3,500 discretionary contribution2948to its charitable foundation, $6,672 primarily for write-offs of certain assets2949and related costs, and a $4,900 increase to its allowance for doubtful accounts.2950These additional costs and expenses were also recorded in SG&A expense.29512952RESEARCH AND DEVELOPMENT (R&D) EXPENSE: R&D expense increased in 2001 and 20002953primarily due to the Company's increased activities relating to ICDs, products2954to treat emerging indications in atrial fibrillation and congestive heart2955failure, and suture-free devices to facilitate coronary artery bypass graft2956anastomoses.29572958PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES: In 1999, the Company2959recorded purchased in-process research and development charges of $47,775 and2960$67,453 in connection with the acquisitions of Angio-Seal(TM) and VSI. The2961purchased in-process research and development charges were computed by an2962independent third-party appraisal company and were expensed at close, except as2963noted below, since technological feasibility had not been established and since2964there were no alternative future uses for the technology.29652966During 1999 and 2000, the in-process technologies acquired in the Angio-Seal(TM)2967acquisition were completed, necessary regulatory approvals were received, and2968the products were released to the market. During 1999, 2000 and 2001, the2969Company continued to develop certain of the in-process technologies acquired in2970the VSI acquisition. Development of one of the VSI technologies (the proximal2971connector) was completed and regulatory approvals and E.U. and U.S. market2972releases occurred in 2000 and 2001. A second VSI in-process technology (the2973distal connector) received E.U. regulatory approval in 2001; however, the2974Company intends to make additional enhancements to this product in 2002 prior to2975filing for U.S. regulatory approval and prior to releasing the product to either2976the E.U. or U.S. markets. At the date of the VSI acquisition, the total2977estimated costs necessary to complete the proximal and distal connector2978technologies into commercially viable products and to make certain subsequent2979product enhancements were approximately $1,000, all of which were scheduled to2980be incurred in 1999 and 2000. Currently, the total estimated costs to complete2981the proximal and distal connectors, including the related enhancements, have2982increased to $11,000, of which $2,400 remains to be incurred in 2002. Other2983in-process technologies acquired in the VSI acquisition continue to be reviewed2984for ultimate viability in the developing coronary artery bypass graft2985anastomoses market. The original estimated costs to complete these other2986technologies into commercially viable products were approximately $6,000, of2987which only an immaterial amount has been incurred to date.2988298922990<PAGE>299129922993The total appraised value of the VSI purchased in-process research and2994development was $95,500, of which $67,453 was recorded at close. The Company2995paid additional amounts totaling $10,000 in 2001 and $5,000 in 2000 as certain2996product development milestones were achieved. The remaining balance of the2997in-process research and development valuation ($13,047) will be recorded in the2998Company's financial statements as purchased in-process research and development2999expense when payment of the contingent consideration is assured beyond a3000reasonable doubt. Contingent consideration payments in excess of the $13,0473001will be capitalized as goodwill.30023003Management believes that the financial statement projections used in the3004Angio-Seal(TM) and VSI acquisitions are still materially valid; however, there3005can be no assurance that the projected results will be achieved. In addition,3006there are risks associated with being able to complete development of the VSI3007in-process technologies, and there can be no assurance that these technologies3008will meet with either technological or commercial success. Failure to3009successfully complete the development and commercialize these in-process3010technologies would result in the loss of the expected economic return inherent3011in the original fair value allocation.30123013SPECIAL CHARGES: In July 2001, the Company initiated efforts to streamline its3014heart valve operations, consolidate its U.S. sales activities and restructure3015its international sales organization. As a result of these activities, the3016Company recorded pre-tax special charges of $20,657 in the third quarter of30172001, consisting of employee severance costs resulting from the elimination of3018approximately 90 production and administrative positions ($5,293), inventory3019write-offs and scrap ($9,490), capital equipment write-offs ($3,379) and other3020costs related primarily to lease terminations and other facility exit costs due3021to the closing and consolidation of sales offices ($2,495). The Company has3022utilized $13,500 of these special charge accruals through December 31, 2001,3023consisting of $2,468 of employee severance costs, $7,301 of inventory write-offs3024and scrap, $3,379 of capital equipment write-offs, and $352 of other costs. The3025Company estimates that the remaining accruals will be utilized primarily during30262002.30273028During the third quarter of 2001, the Company also wrote off $12,177 of certain3029diagnostic equipment deemed obsolete due to the overwhelming acceptance of newer3030technology equipment which received U.S. regulatory approvals in late 2000 and3031early 2001, and was launched earlier in 2001.30323033The charges relating to employee severance costs, capital equipment write-offs3034and other costs have been recorded in operating expenses as special charges. The3035inventory and diagnostic equipment write-offs are included in cost of sales as3036special charges.30373038On January 21, 2000, the Company initiated a worldwide voluntary recall of all3039field inventory of heart valve replacement and repair products incorporating3040Silzone(R) coating on the sewing cuff fabric. The Company concluded that it will3041no longer utilize Silzone(R) coating. The Company recorded a special charge3042accrual totaling $26,101 during the first quarter of 2000 relating to asset3043write-downs ($9,465) and other costs ($16,636), including monitoring expenses,3044associated with this recall and product discontinuance. Additionally, the3045Company maintains product liability coverage for litigation related costs in3046excess of its self-insured retention. The Company has utilized $20,701 of this3047special charge accrual through December 31, 2001, consisting of $9,465 of asset3048write-downs and $11,236 of other costs. The Company estimates that the remaining3049accrual will be utilized primarily during 2002. There can be no assurance that3050the final costs associated with this recall that are not covered by insurance,3051including litigation-related costs, will not exceed management's estimates.30523053The Company recorded a $9,754 special charge accrual in 1999 related to the3054restructuring of its international operations. Substantially all accruals3055related to this restructuring have been utilized through December 31, 2001.30563057OTHER INCOME (EXPENSE)3058Net interest expense was $9,306 in 2001, $25,929 in 2000 and $25,378 in 1999.3059The decrease in net interest expense in 2001 was due to lower debt levels3060resulting from debt repayments, as well as lower interest rates in 2001 compared3061with 2000 and 1999.30623063INCOME TAXES3064The Company's reported effective income tax rates were 24.3% in 2001, 27.2% in30652000, and 63.8% in 1999. Exclusive of the purchased in-process research and3066development and special charges, the Company's effective income tax rate was 25%3067for each of these periods. The VSI-related purchased in-process research and3068development charges are not deductible for income tax purposes and the special3069charges were recorded in taxing jurisdictions where income tax rates vary from3070the Company's blended 25% effective tax rate.30713072The Company anticipates that its effective income tax rate before in-process3073research and development and special charges will increase beginning in 2003 due3074to a larger percentage of the Company's forecasted taxable income being3075generated in higher taxing jurisdictions.30763077The Company has not recorded U.S. deferred income taxes on certain of its3078non-U.S. subsidiaries' undistributed earnings as such amounts are intended to be3079reinvested outside the U.S. indefinitely. However, should the Company change its3080business and tax strategies in the future and decide to repatriate a portion of3081these earnings to one of the Company's U.S. subsidiaries, including cash3082maintained by these non-U.S. subsidiaries (see Liquidity), additional U.S. tax3083liabilities would be incurred.30843085At December 31, 2001, the Company has approximately $52,000 of deferred tax3086assets related principally to U.S. tax loss carryforwards,3087308833089<PAGE>309030913092arising primarily from acquisitions, which expire from 2003 to 2021, for which3093no valuation allowance has been recorded. The Company believes that these loss3094carryforwards will be fully utilized based upon its estimates of future taxable3095income. If these estimates of future taxable income are not met, a valuation3096allowance for some of these deferred tax assets would be required.30973098The Company from time to time faces challenges from tax authorities regarding3099the amount of taxes due. These challenges include questions regarding the timing3100and amount of deductions and the allocation of income among various tax3101jurisdictions. The Company's U.S. Federal tax filings prior to 1998 have been3102examined by the Internal Revenue Service (IRS) and the Company has settled all3103differences arising out of those examinations. Consistent with the Company's3104status with the U.S. Federal tax authorities as a "coordinated industry case,"3105the IRS is currently in the process of examining the Company's U.S. Federal tax3106returns for the calendar years 1998, 1999 and 2000. Although the Company3107believes it has recorded an appropriate income tax provision, there can be no3108assurance that the IRS will not take positions contrary to those taken by the3109Company. The Company further believes that any costs not covered by the3110Company's income tax provision will not have a material adverse impact on the3111Company's consolidated financial position or liquidity, but may be material to3112the consolidated results of operations of a future period.31133114NET EARNINGS3115Reported net earnings and diluted net earnings per share were $172,592, or $1.933116per share in 2001, $129,094, or $1.51 per share, in 2000, and $24,227, or $0.293117per share, in 1999. Net earnings, exclusive of purchased in-process research and3118development and special charges and related income taxes, were $203,109 in 2001,3119$156,307 in 2000, and $143,989 in 1999.31203121OUTLOOK3122The Company expects that market demand, government regulation and reimbursement3123policies, and societal pressures will continue to change the worldwide health3124care industry resulting in further business consolidations and alliances. The3125Company participates with industry groups to promote the use of advanced medical3126device technology in a cost-conscious environment. Customer service in the form3127of cost-effective clinical outcomes will continue to be a primary focus for the3128Company.31293130The global medical technology industry is highly competitive. Competitors have3131historically employed litigation to gain a competitive advantage. In addition,3132the Company's products must continually improve technologically and provide3133improved clinical outcomes due to the competitive nature of the industry.31343135The cardiac surgery market is highly competitive, and consists of mechanical3136heart valves, tissue heart valves, and repair products. Since 1999, the market3137has shifted to tissue valves and repair products from mechanical heart valves,3138resulting in an overall market share loss for the Company. Competition is3139anticipated to continue to place pressure on pricing and terms, including a3140trend toward vendor owned (consignment) inventory at the hospitals, and health3141care reform is expected to result in further hospital consolidations over time.31423143The cardiac rhythm management market is also highly competitive and has3144undergone consolidation. There are currently three principal suppliers in this3145market, including the Company, and the Company's two principal competitors each3146have substantially more assets and sales than the Company. Rapid technological3147change in the CRM market is expected to continue, requiring the Company to3148invest heavily in R&D and to effectively market its products.31493150The Company operates in an industry that is susceptible to significant product3151liability claims. These claims may be brought by individuals seeking relief for3152themselves or, increasingly, by groups seeking to represent a class. In3153addition, product liability claims may be asserted against the Company in the3154future relative to events that are not known to management at the present time.3155While it is not possible to predict the outcome of every claim, the Company3156believes that it has adequate product liability insurance to cover the costs3157associated with them. The Company further believes that any costs not covered by3158product liability insurance, including the Company's self-insured deductible,3159will not have a material adverse impact on the Company's consolidated financial3160position or liquidity, but may be material to the consolidated results of3161operations of a future period.31623163Subsequent to the tragic events of September 2001, the product liability3164insurance market has dramatically changed. The Company has secured product3165liability coverage for 2002, however the self-insured retention and insurance3166premiums are significantly higher than in prior years. There can be no assurance3167that this trend will reverse in the near future. As a result of the increased3168self-insured retention for 2002, the Company has increased financial exposure in3169the event of significant product liability matters. However, management believes3170that any payment under the Company's 2002 policy self-insured retention would3171not have a material adverse impact on the Company's consolidated financial3172position or liquidity, but may be material to the consolidated results of3173operations of a future period.31743175Group purchasing organizations (GPOs) in the U.S. continue to consolidate the3176purchasing for some of the Company's customers. Several such GPOs have executed3177contracts with the Company's CRM market competitors, which exclude the Company.3178These contracts, if enforced, may adversely affect the Company's sales of these3179products to members of these GPOs.31803181On January 1, 1999, eleven of the fifteen member countries of the European3182Economic Community (EEC) adopted the Euro as the legal common currency for their3183countries. On January 1, 2002, these countries issued new Euro-denominated bills3184and coins for3185318643187<PAGE>318831893190use in cash transactions. The Company believes that the adoption of a single3191Euro currency will result in greater transparency of product pricing, making3192those countries a more competitive business environment. During 2001, the3193Company completed the necessary changes to its computer systems to accommodate3194the Euro, and the conversion to the Euro did not have a material impact on the3195Company's consolidated results of operations or financial position.31963197MARKET RISK3198The Company is exposed to foreign currency exchange rate fluctuations due to its3199transactions denominated primarily in Euros, Canadian Dollars, Brazilian Reais,3200British Pounds, and Swedish Kroners. The Company is also exposed to interest3201rate risk on its interest-bearing debt and equity market risk on its marketable3202equity security investments. A hypothetical 10% change in short-term interest3203rates compared to interest rates on the Company's interest-bearing debt at3204December 31, 2001, would not have a material impact on the Company's3205consolidated results of operations.32063207Although in 2001 management elected not to enter into any hedging contracts,3208from time to time the Company minimizes a portion of its foreign currency3209exchange rate risk through the use of forward exchange or option contracts. The3210gains or losses on these contracts are intended to offset changes in the fair3211value of the anticipated foreign currency transactions. It is the Company's3212practice to not enter into contracts for trading purposes. The Company is3213continuing to evaluate its foreign currency exchange rate risk and the different3214mechanisms in which to help manage such risk. The Company had no forward3215exchange or option contracts outstanding at December 31, 2001 or 2000.32163217The Company periodically enters into interest rate swap or option contracts to3218reduce its exposures to interest rate fluctuations. During the third quarter of32191999, the Company entered into an interest rate swap contract to hedge a3220substantial portion of its variable interest rate risk through January 2000 on3221$138,000 of revolving credit facility borrowings. The impact of this contract on32221999 earnings was not material. The Company did not enter into any other3223interest rate contracts during 1999, 2000 or in 2001.32243225The Company periodically invests in marketable equity securities of emerging3226technology companies. The Company's investments in these companies had a fair3227value of $21,616 and $16,173 at December 31, 2001 and 2000, which is subject to3228the underlying price risk of the public equity markets.32293230CRITICAL ACCOUNTING POLICIES3231In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding3232Disclosure About Critical Accounting Policies," management identified the most3233critical accounting principles upon which our financial status depends. We3234determined the critical accounting principles by considering accounting policies3235that involve the most complex or subjective decisions or assessments. We3236identified our most critical accounting policies to be those related to income3237taxes, product liability accruals, accounts receivable allowance for doubtful3238accounts, estimated useful lives of property, plant and equipment and special3239charges. We discuss these accounting policies in the notes to the consolidated3240financial statements and in relevant sections in this discussion and analysis.32413242NEW ACCOUNTING PRONOUNCEMENTS3243The Company is required to adopt Statements of Financial Accounting Standards3244No. 141, Business Combinations (Statement 141), and No. 142, Goodwill and Other3245Intangible Assets (Statement 142), on January 1, 2002. These Statements change3246the accounting for business combinations, goodwill, and intangible assets. Under3247Statement 141, all business combinations initiated after June 30, 2001, are to3248be accounted for using the purchase method. Under Statement 142, goodwill will3249no longer be amortized but will be reviewed at least annually for impairment.3250The Company's pre-tax goodwill amortization expense was approximately $28,000,3251$29,000 and $27,000 in 2001, 2000 and 1999. During 2002, the Company will3252perform the first of the required goodwill impairment tests under Statement 142,3253however management does not expect the outcome of this test to have a material3254impact on the Company's consolidated results of operations or financial3255position.32563257The Company is also required to adopt Statement of Financial Accounting3258Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived3259Assets (Statement 144). Statement 144 addresses the financial accounting and3260reporting for the impairment or disposal of long-lived assets. Statement 1443261retains and expands upon the fundamental provisions of existing guidance related3262to the recognition and measurement of the impairment of long-lived assets to be3263held and used and the measurement of long-lived assets to be disposed of by3264sale. The impact of adopting Statement 144 on January 1, 2002, was not material3265to the Company's consolidated results of operations or financial position.32663267FINANCIAL CONDITION3268LIQUIDITY3269The Company's liquidity and cash flows remained strong during 2001. Cash3270provided by operating activities was $310,135 in 2001, up approximately $106,0003271from 2000 reflecting increased earnings and improved working capital management.3272The Company's current ratio was 2.5 to 1 at December 31, 2001.32733274Cash and equivalents increased $97,896 during 2001 due primarily to earnings3275generated by the Company's non-U.S. subsidiaries. At December 31, 2001,3276substantially all of the Company's cash and equivalents were maintained by the3277Company's non-U.S. subsidiaries and would be subject to additional U.S. tax if3278repatriated to one of the Company's U.S. subsidiaries (see Income Taxes).32793280The Company had interest-bearing debt of $123,128 at December 31, 2001, a3281decrease of $171,372 from December 31, 2000, due to3282328353284<PAGE>328532863287debt repayments using primarily cash generated from operations and the proceeds3288from employee stock option exercises. As of March 6, 2002, the Company had3289$350,000 of committed credit facilities that are available to back the Company's3290commercial paper program borrowings and for general purposes. These committed3291credit facilities expire in March 2003. The Company classifies all of its credit3292facility and commercial paper borrowings as long-term on its balance sheet as3293the Company has the ability to repay any short-term maturity with available cash3294from its existing long-term, committed credit facility. Management continually3295reviews the Company's cash flow projections and may from time to time repay a3296portion of the Company's borrowings.32973298At the present time, management expects 2002 capital expenditures and business3299acquisition payments to be approximately $125,000. In 2003 through 2005,3300management currently expects these amounts to be approximately $105,000 per3301year.33023303The Company leases various facilities under noncancelable operating lease3304arrangements. Future minimum lease payments under these leases are as follows:3305$9,460 in 2002; $9,461 in 2003; $8,233 in 2004; $7,470 in 2005; $6,910 in 2006;3306$22,674 in years thereafter.33073308Management believes that cash generated from operations and cash available under3309its credit facilities will be sufficient to meet the Company's working capital3310and capital investment needs in the near term. Should suitable investment3311opportunities arise, management believes that the Company's earnings, cash flows3312and balance sheet will permit the Company to obtain additional debt or equity3313capital, if necessary.33143315CAPITAL STRUCTURE3316The Company's capital structure consists of interest-bearing debt and equity.3317Interest-bearing debt as a percent of the Company's total capitalization3318decreased from 24% at December 31, 2000, to 9% at December 31, 2001, due3319primarily to the paydown of debt.33203321In September 1999, the Company's Board of Directors authorized the repurchase of3322up to $250,000 of the Company's outstanding common stock over a three-year3323period. The Company repurchased 977,500 shares of its common stock for $29,8263324during 1999. No additional shares were repurchased during 2001 or 2000.33253326DIVIDENDS3327The Company did not declare or pay any dividends during 2001, 2000 or 1999.3328Management currently intends to utilize the Company's earnings for operating and3329investment purposes, including the repurchase of its common stock from time to3330time.33313332CAUTIONARY STATEMENTS3333In this discussion and in other written or oral statements made from time to3334time, we have included and may include statements that may constitute3335"forward-looking statements" within the meaning of the safe harbor provisions of3336the Private Litigation Securities Reform Act of 1995. These forward-looking3337statements are not historical facts but instead represent our belief regarding3338future events, many of which, by their nature, are inherently uncertain and3339beyond our control. These statements relate to our future plans and objectives,3340among other things. By identifying these statements for you in this manner, we3341are alerting you to the possibility that our actual results may differ, possibly3342materially, from the results indicated by these forward-looking statements. We3343undertake no obligation to update any forward-looking statements.33443345Various factors contained in the previous discussion and those described below3346may affect the Company's operations and results. Since it is not possible to3347foresee all such factors, you should not consider these factors to be a complete3348list of all risks or uncertainties. Risk factors include the following:334933501. Legislative or administrative reforms to the U.S. Medicare and3351Medicaid systems or similar reforms of international reimbursement3352systems in a manner that significantly reduces reimbursement for3353procedures using the Company's medical devices or denies coverage for3354such procedures.33552. Acquisition of key patents by others that have the affect of excluding3356the Company from market segments or require the Company to pay3357royalties.33583. Economic factors, including inflation, changes in interest rates and3359changes in foreign currency exchange rates.33604. Product introductions by competitors which have advanced technology,3361better features or lower pricing.33625. Price increases by suppliers of key components, some of which are3363sole-sourced.33646. A reduction in the number of procedures using the Company's devices3365caused by cost containment pressures or preferences for alternate3366therapies.33677. Safety, performance or efficacy concerns about the Company's marketed3368products, many of which are expected to be implanted for many years,3369leading to recalls and advisories with the attendant expenses and3370declining sales.33718. Changes in laws, regulations or administrative practices affecting3372government regulation of the Company's products, such as FDA laws and3373regulations, that increase pre-approval testing requirements for3374products or impose additional burdens on the manufacture and sale of3375medical devices.33769. Difficulties obtaining, or the inability to obtain, appropriate levels3377of product liability insurance.337810. A serious earthquake affecting the Company's facilities in Sunnyvale3379or Sylmar, California.338011. Health care industry consolidation leading to demands for price3381concessions or the exclusion of some suppliers from significant market3382segments.338312. Adverse developments in litigation including product liability3384litigation and patent litigation or other intellectual property3385litigation including that arising from the Telectronics and Ventritex3386acquisitions.3387338863389<PAGE>339033913392REPORT OF MANAGEMENT33933394The management of St. Jude Medical, Inc. is responsible for the preparation,3395integrity and objectivity of the accompanying financial statements. The3396financial statements were prepared in accordance with accounting principles3397generally accepted in the United States and include amounts which reflect3398management's best estimates based on its informed judgement and consideration3399given to materiality. Management is also responsible for the accuracy of the3400related data in the annual report and its consistency with the financial3401statements.34023403In the opinion of management, the Company's accounting systems and procedures,3404and related internal controls, provide reasonable assurance that transactions3405are executed in accordance with management's intention and authorization, that3406financial statements are prepared in accordance with accounting principles3407generally accepted in the United States, and that assets are properly accounted3408for and safeguarded. The concept of reasonable assurance is based on the3409recognition that there are inherent limitations in all systems of internal3410control, and that the cost of such systems should not exceed the benefits to be3411derived therefrom. Management reviews and modifies the system of internal3412controls to improve its effectiveness. The effectiveness of the controls system3413is supported by the selection, retention and training of qualified personnel, an3414organizational structure that provides an appropriate division of responsibility3415and a strong budgeting system of control.34163417St. Jude Medical, Inc. also recognizes its responsibility for fostering a strong3418ethical climate so that the Company's affairs are conducted according to the3419highest standards of personal and business conduct. This responsibility is3420reflected in the Company's business ethics policy.34213422The adequacy of the Company's internal accounting controls, the accounting3423principles employed in its financial reporting, and the scope of independent and3424internal audits are reviewed by the Audit Committee of the Board of Directors,3425consisting solely of outside directors. The independent auditors meet with, and3426have confidential access to, the Audit Committee to discuss the results of their3427audit work.34283429/s/ Terry L. Shepherd34303431Terry L. Shepherd3432Chief Executive Officer34333434/s/ John C. Heinmiller34353436John C. Heinmiller3437Vice President, Finance and Chief Financial Officer343834393440REPORT OF INDEPENDENT AUDITORS34413442Board of Directors and Shareholders3443St. Jude Medical, Inc.34443445We have audited the accompanying consolidated balance sheets of St. Jude3446Medical, Inc. and subsidiaries as of December 31, 2001 and 2000 and the related3447consolidated statements of earnings, shareholders' equity, and cash flows for3448each of the three fiscal years in the period ended December 31, 2001. These3449financial statements are the responsibility of the Company's management. Our3450responsibility is to express an opinion on these financial statements based on3451our audits.34523453We conducted our audits in accordance with auditing standards generally accepted3454in the United States. Those standards require that we plan and perform the audit3455to obtain reasonable assurance about whether the financial statements are free3456of material misstatement. An audit includes examining, on a test basis, evidence3457supporting the amounts and disclosures in the financial statements. An audit3458also includes assessing the accounting principles used and significant estimates3459made by management, as well as evaluating the overall financial statement3460presentation. We believe that our audits provide a reasonable basis for our3461opinion.34623463In our opinion, the financial statements referred to above present fairly, in3464all material respects, the consolidated financial position of St. Jude Medical,3465Inc. and subsidiaries at December 31, 2001 and 2000 and the consolidated results3466of their operations and their cash flows for each of the three fiscal years in3467the period ended December 31, 2001 in conformity with accounting principles3468generally accepted in the United States.34693470/s/ Ernst & Young LLP34713472Minneapolis, Minnesota3473January 28, 2002,3474except for Note 4,3475as to which the date3476is February 13, 20023477347873479<PAGE>348034813482CONSOLIDATED STATEMENTS OF EARNINGS3483(In thousands, except per share amounts)34843485<TABLE>3486<CAPTION>3487Fiscal Year Ended December 31, 2001 2000 19993488- ------------------------------------------------------------------------------------------------------------3489<S> <C> <C> <C>3490Net sales $ 1,347,356 $ 1,178,806 $ 1,114,5493491Cost of sales:3492Cost of sales before special charges 437,492 391,149 380,9023493Special charges 21,667 -- --3494- ------------------------------------------------------------------------------------------------------------3495Total cost of sales 459,159 391,149 380,9023496- ------------------------------------------------------------------------------------------------------------3497Gross profit 888,197 787,657 733,64734983499Selling, general and administrative expense 467,113 416,383 394,4183500Research and development expense 164,101 137,814 125,0593501Purchased in-process research and development charges 10,000 5,000 115,2283502Special charges 11,167 26,101 9,7543503- ------------------------------------------------------------------------------------------------------------3504Operating profit 235,816 202,359 89,18835053506Other income (expense) (7,838) (25,050) (22,184)3507- ------------------------------------------------------------------------------------------------------------3508Earnings before income taxes 227,978 177,309 67,00435093510Income tax expense 55,386 48,215 42,77735113512Net earnings $ 172,592 $ 129,094 $ 24,2273513- ------------------------------------------------------------------------------------------------------------35143515- ------------------------------------------------------------------------------------------------------------3516Net earnings per share:3517Basic $ 2.00 $ 1.53 $ 0.293518Diluted $ 1.93 $ 1.51 $ 0.2935193520Weighted average shares outstanding:3521Basic 86,214 84,253 84,2743522Diluted 89,384 85,817 84,7353523- ------------------------------------------------------------------------------------------------------------3524</TABLE>35253526See notes to consolidated financial statements.3527352883529<PAGE>353035313532CONSOLIDATED BALANCE SHEETS3533(Dollars in thousands)35343535<TABLE>3536<CAPTION>3537December 31, 2001 20003538- --------------------------------------------------------------------------------------------3539<S> <C> <C>3540ASSETS3541CURRENT ASSETS3542Cash and equivalents $ 148,335 $ 50,4393543Accounts receivable, less allowances for doubtful accounts 320,683 303,3073544Inventories 240,390 222,2383545Deferred income taxes 36,563 35,5663546Other 51,575 74,1393547- --------------------------------------------------------------------------------------------3548Total current assets 797,546 685,68935493550PROPERTY, PLANT AND EQUIPMENT3551Land, buildings and improvements 112,902 114,0453552Machinery and equipment 352,294 328,5533553Diagnostic equipment 165,938 176,7943554- --------------------------------------------------------------------------------------------3555Property, plant and equipment at cost 631,134 619,3923556Less accumulated depreciation (335,491) (302,213)3557- --------------------------------------------------------------------------------------------3558Net property, plant and equipment 295,643 317,17935593560OTHER ASSETS3561Goodwill and other intangible assets, net 389,929 417,9213562Deferred income taxes 67,238 57,4823563Other 78,371 54,4453564- --------------------------------------------------------------------------------------------3565Total other assets 535,538 529,8483566- --------------------------------------------------------------------------------------------3567TOTAL ASSETS $ 1,628,727 $ 1,532,7163568- --------------------------------------------------------------------------------------------35693570LIABILITIES AND SHAREHOLDERS' EQUITY3571CURRENT LIABILITIES3572Accounts payable $ 88,925 $ 81,3403573Income taxes payable 63,475 58,2243574Accrued expenses3575Employee compensation and related benefits 102,191 81,5763576Other 67,263 76,2273577- --------------------------------------------------------------------------------------------3578Total current liabilities 321,854 297,36735793580LONG-TERM DEBT 123,128 294,50035813582COMMITMENTS AND CONTINGENCIES -- --35833584SHAREHOLDERS' EQUITY3585Preferred stock -- --3586Common stock 8,721 8,5343587Additional paid-in capital 134,726 55,7233588Retained earnings 1,134,909 962,3173589Accumulated other comprehensive income (loss):3590Cumulative translation adjustment (103,781) (93,380)3591Unrealized gain on available-for-sale securities 9,170 7,6553592- --------------------------------------------------------------------------------------------3593Total shareholders' equity 1,183,745 940,8493594- --------------------------------------------------------------------------------------------3595TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,628,727 $ 1,532,7163596- --------------------------------------------------------------------------------------------3597</TABLE>35983599See notes to consolidated financial statements.3600360193602<PAGE>360336043605CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY3606(Dollars in thousands)36073608<TABLE>3609<CAPTION>3610Common Stock Accumulated3611--------------------- Additional Other Total3612Number of Paid-In Retained Comprehensive Shareholders'3613Shares Amount Capital Earnings Income (Loss) Equity3614- -----------------------------------------------------------------------------------------------------------------------------------3615<S> <C> <C> <C> <C> <C> <C>3616BALANCE AT JANUARY 1, 1999 84,174,699 $8,417 $ 6,656 $ 816,940 $ (25,793) $ 806,2203617Comprehensive income:3618Net earnings 24,227 24,2273619Other comprehensive income (loss):3620Unrealized loss on investments, net of taxes3621and reclassification adjustment (see below) (1,161) (1,161)3622Foreign currency translation adjustment (20,735) (20,735)3623--------------3624Other comprehensive loss (21,896)3625--------------3626Comprehensive income 2,3313627--------------3628Issuance of common stock, including3629exercise of stock options, net 381,206 38 8,855 8,8933630Tax benefit from stock options 969 9693631Issuance of common stock for3632business acquisition 161,072 16 3,984 4,0003633Issuance of common stock3634in settlement of obligation 41,108 4 1,430 1,4343635Repurchase of common stock (977,500) (97) (21,785) (7,944) (29,826)3636- ------------------------------------------------------------------------------------------------------------------------------------3637BALANCE AT DECEMBER 31, 1999 83,780,585 8,378 109 833,223 (47,689) 794,0213638Comprehensive income:3639Net earnings 129,094 129,0943640Other comprehensive income (loss):3641Unrealized gain on investments, net of taxes3642and reclassification adjustment (see below) 1,367 1,3673643Foreign currency translation adjustment (39,403) (39,403)3644--------------3645Other comprehensive loss (38,036)3646--------------3647Comprehensive income 91,0583648--------------3649Issuance of common stock, including3650exercise of stock options, net 1,245,166 125 38,506 38,6313651Tax benefit from stock options 6,464 6,4643652Issuance of common stock for conversion of3653subordinated debentures 310,535 31 10,644 10,6753654- ------------------------------------------------------------------------------------------------------------------------------------3655BALANCE AT DECEMBER 31, 2000 85,336,286 8,534 55,723 962,317 (85,725) 940,8493656Comprehensive income:3657Net earnings 172,592 172,5923658Other comprehensive income (loss):3659Unrealized gain on investments, net of taxes 1,515 1,5153660Foreign currency translation adjustment, net3661of taxes (10,401) (10,401)3662--------------3663Other comprehensive loss (8,886)3664--------------3665Comprehensive income 163,7063666--------------3667Issuance of common stock, including3668exercise of stock options, net 1,873,070 187 57,754 57,9413669Tax benefit from stock options 21,249 21,2493670- ------------------------------------------------------------------------------------------------------------------------------------3671BALANCE AT DECEMBER 31, 2001 87,209,356 $8,721 $134,726 $1,134,909 $ (94,611) $1,183,7453672- ------------------------------------------------------------------------------------------------------------------------------------3673Other comprehensive income reclassification adjustments for net realized gains on the sale of marketable securities,3674net of income taxes:36751999 $ 2,87536762000 2,5193677- ------------------------------------------------------------------------------------------------------------------------------------3678</TABLE>36793680See notes to consolidated financial statements.36813682103683<PAGE>368436853686CONSOLIDATED STATEMENTS OF CASH FLOWS3687(Dollars in thousands)36883689<TABLE>3690<CAPTION>3691Fiscal Year Ended December 31, 2001 2000 19993692- ---------------------------------------------------------------------------------------------------------------------------3693<S> <C> <C> <C>3694OPERATING ACTIVITIES3695Net earnings $ 172,592 $ 129,094 $ 24,2273696Adjustments to reconcile net earnings to net cash from operating activities:3697Depreciation 58,404 56,699 54,5883698Amortization 31,895 35,650 31,1143699Purchased in-process research and development charges 10,000 5,000 115,2283700Special charges 32,834 26,101 9,7543701Net investment gain -- (4,062) (848)3702Deferred income taxes (11,681) (5,439) 3693703Changes in operating assets and liabilities, net of business acquisitions:3704Accounts receivable (23,941) (40,845) (26,319)3705Inventories (32,373) 4,621 14,4663706Other current assets 13,605 (6,519) (6,722)3707Accounts payable and accrued expenses 12,907 (17,317) (1,998)3708Income taxes 45,893 20,988 42,2083709- ---------------------------------------------------------------------------------------------------------------------------3710Net cash provided by operating activities 310,135 203,971 256,06737113712INVESTING ACTIVITIES3713Purchase of property, plant and equipment (63,129) (39,699) (69,419)3714Proceeds from sale or maturity of marketable securities 15,000 29,082 17,5523715Business acquisition payments (20,444) (8,264) (259,127)3716Other (26,220) (10,752) (19,438)3717- ---------------------------------------------------------------------------------------------------------------------------3718Net cash used in investing activities (94,793) (29,633) (330,432)37193720FINANCING ACTIVITIES3721Proceeds from exercise of stock options and stock issued 57,941 38,631 8,8933722Common stock repurchased -- -- (29,826)3723Borrowings under debt facilities 2,115,028 3,703,287 989,5003724Payments under debt facilities (2,286,400) (3,856,287) (887,000)3725Repurchase of convertible subordinated debentures -- (19,320) --3726- ---------------------------------------------------------------------------------------------------------------------------3727Net cash provided by (used in) financing activities (113,431) (133,689) 81,56737283729Effect of currency exchange rate changes on cash (4,015) 135 (1,322)3730- ---------------------------------------------------------------------------------------------------------------------------3731Net increase in cash and equivalents 97,896 40,784 5,8803732Cash and equivalents at beginning of year 50,439 9,655 3,7753733- ---------------------------------------------------------------------------------------------------------------------------3734Cash and equivalents at end of year $ 148,335 $ 50,439 $ 9,6553735- ---------------------------------------------------------------------------------------------------------------------------37363737Supplemental Cash Flow Information3738- ---------------------------------------------------------------------------------------------------------------------------3739Cash paid during the year for:3740Interest $ 10,663 $ 32,467 $ 28,9343741Income taxes 21,424 35,704 21,2003742- ---------------------------------------------------------------------------------------------------------------------------3743</TABLE>37443745See notes to consolidated financial statements.37463747113748<PAGE>374937503751NOTES TO CONSOLIDATED FINANCIAL STATEMENTS3752(Dollars in thousands, except per share amounts)37533754NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES3755COMPANY OVERVIEW: St. Jude Medical, Inc. ("St. Jude Medical" or the "Company")3756is a leader in the development, manufacturing and distribution of cardiovascular3757medical devices for the global cardiac rhythm management (CRM), cardiology and3758vascular access (C/VA), and cardiac surgery (CS) markets. The Company's3759principal products in each of these markets are: bradycardia pacemaker systems,3760tachycardia implantable cardioverter defibrillator (ICD) systems, and3761electrophysiology (EP) catheters in CRM; vascular closure devices, catheters,3762guidewires and introducers in C/VA; and mechanical and tissue heart valves,3763valve repair products, and suture-free devices to facilitate coronary artery3764bypass graft anastomoses in CS. The Company markets its products primarily in3765the United States, Western Europe and Japan through both a direct employee-based3766sales organization and independent distributors.37673768PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the3769accounts of the Company and its wholly owned subsidiaries. Significant3770intercompany transactions and balances have been eliminated in consolidation.3771Certain reclassifications of previously reported amounts have been made to3772conform to the current year presentation.37733774FISCAL YEAR: The Company utilizes a fifty-two, fifty-three week fiscal year3775ending on the Saturday nearest December 31. For clarity of presentation, the3776Company describes all periods as if the year end is December 31. Fiscal years37772001, 2000 and 1999 each consisted of fifty-two weeks.37783779USE OF ESTIMATES: Preparation of the Company's consolidated financial statements3780in conformity with accounting principles generally accepted in the United States3781requires management to make estimates and assumptions that affect the reported3782amounts in the financial statements and accompanying notes. Actual results could3783differ from those estimates.37843785CASH EQUIVALENTS: The Company considers highly liquid temporary investments with3786an original maturity of three months or less to be cash equivalents. Cash3787equivalents are stated at cost, which approximates market. The Company's cash3788equivalents include bank certificates of deposit, commercial paper investments3789and repurchase agreements collateralized by U.S. government agency securities.37903791MARKETABLE SECURITIES: Marketable securities consist of equity securities, bank3792certificates of deposit, U.S. government obligations, commercial paper, notes3793and bonds. Marketable securities are classified as available-for-sale, recorded3794at fair market value based upon quoted market prices, and are classified with3795other current assets on the balance sheet. Gross unrealized gains totaling3796$14,790, $12,347 and $10,142, net of taxes of $5,620, $4,692 and $3,854, were3797recorded in shareholders' equity at December 31, 2001, 2000 and 1999. Realized3798gains from the sale of marketable securities have been recorded in other income3799and are computed using the specific identification method.38003801ACCOUNTS RECEIVABLE: The Company grants credit to customers in the normal course3802of business but generally does not require collateral or any other security to3803support its receivables. Within the European Economic Union and in many emerging3804markets, payments of certain accounts receivable balances are made by the3805individual countries' health care system for which payment is dependent, to a3806certain extent, upon the political and economic environment within those3807countries. The allowance for doubtful accounts was $17,210 at December 31, 20013808and $13,831 at December 31, 2000.38093810123811<PAGE>381238133814INVENTORIES: Inventories are stated at the lower of cost or market with cost3815determined using the first-in, first-out method.38163817Inventories consist of the following:38182001 20003819- -----------------------------------------------------------------------3820Finished goods $135,543 $123,6963821Work in process 35,984 35,6403822Raw materials 68,863 62,9023823- -----------------------------------------------------------------------3824$240,390 $222,2383825- -----------------------------------------------------------------------382638273828PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are depreciated3829using the straight-line method over their estimated useful lives, ranging from383031 to 39 years for buildings and improvements, three to seven years for3831machinery and equipment, and five to eight years for diagnostic equipment.3832Diagnostic equipment is used by physicians and health care professionals to3833program and analyze data from the Company's CRM devices. The estimated useful3834lives of this equipment are based on management's estimates of its usage by the3835physicians and health care professionals, factoring in new technology platforms3836and rollouts by the Company. To the extent that the Company experiences changes3837in the usage of this equipment or rollouts of new technologies to the market,3838their estimated useful lives may change in a future period. Accelerated3839depreciation methods are used for income tax purposes.38403841GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill and other intangible assets3842consists primarily of goodwill at December 31, 2001 and 2000. Goodwill3843represents the excess of cost over the fair value of identifiable net assets of3844businesses acquired. Other intangible assets consist primarily of purchased3845technology, patents and customer relationships. Goodwill and other intangible3846assets are amortized on a straight-line basis using lives ranging from 5 to 203847years. Accumulated amortization totaled $173,377 and $147,006 at December 31,38482001 and 2000. The Company periodically reviews its long-lived assets, including3849property, plant and equipment, for indicators of impairment using an estimate of3850the undiscounted cash flows generated by those assets. Effective January 1,38512002, the Company adopted Statement of Financial Accounting Standards No. 142,3852Goodwill and Other Intangible Assets (Statement 142). Under Statement 142,3853goodwill is no longer amortized, but is subject to annual impairment tests. See3854"New Accounting Pronouncements" for further discussion of Statement 142 and its3855anticipated impact on the Company's consolidated financial statements.38563857TECHNOLOGY LICENSE AGREEMENT: The Company has a technology license agreement3858that provides access to a significant number of patents covering a broad range3859of technology used in the Company's CRM products. The agreement provides for3860payments through September 2004 at which time the Company will have a fully3861paid-up license, granting access to the underlying patents which expire at3862various dates through the year 2014. The Company recognizes the total estimated3863costs under this license agreement as an expense over the term of the underlying3864patents' lives.38653866REVENUE RECOGNITION: The Company generally recognizes revenue at such time title3867to the goods transfers to the customer. For certain products, the Company3868maintains consigned inventory at customer locations. For these products, revenue3869is recognized at the time the customer has used the inventory.38703871RESEARCH AND DEVELOPMENT: Research and development costs are charged to expense3872as incurred. Purchased in-process research and development is recognized in3873business combinations for the portion of the purchase price allocated to the3874appraised value of in-process technologies. The portion assigned to in-process3875research and development technologies excludes the value of core and developed3876technologies, which are recognized as intangible assets.38773878STOCK-BASED COMPENSATION: The Company utilizes the intrinsic value method of3879accounting for its employee stock-based compensation. Pro forma information3880related to the fair value method of accounting is provided in Note 5.38813882EARNINGS PER SHARE: Basic earnings per share is computed by dividing net3883earnings by the weighted average number of outstanding common shares, exclusive3884of restricted shares, during the period. Diluted net earnings per share is3885computed by dividing net earnings, adjusted for convertible debenture interest3886in 2000, by the weighted average number of outstanding common shares and3887dilutive securities.38883889133890<PAGE>389138923893The table below sets forth the computation of basic and diluted net earnings per3894share:389538962001 2000 19993897- --------------------------------------------------------------------------------3898Numerator:3899Net earnings $ 172,592 $ 129,094 $ 24,2273900Convertible debenture3901interest, net of taxes -- 95 --3902- --------------------------------------------------------------------------------3903Adjusted net earnings $ 172,592 $ 129,189 $ 24,22739043905Denominator:3906Basic-weighted average3907shares outstanding 86,214,000 84,253,000 84,274,0003908Effect of dilutive securities:3909Employee stock options 3,135,000 1,448,000 414,0003910Restricted shares 35,000 38,000 47,0003911Convertible debentures -- 78,000 --3912- --------------------------------------------------------------------------------3913Diluted-weighted average 89,384,000 85,817,000 84,735,0003914shares outstanding3915- --------------------------------------------------------------------------------3916Basic net earnings per share $ 2.00 $ 1.53 $ 0.293917- --------------------------------------------------------------------------------3918Diluted net earnings per share $ 1.93 $ 1.51 $ 0.293919- --------------------------------------------------------------------------------39203921Net earnings and diluted-weighted average shares outstanding for certain periods3922have not been adjusted for the Company's convertible debentures or for certain3923employee stock options and awards where the effect of those securities would3924have been anti-dilutive.39253926FOREIGN CURRENCY TRANSLATION: Sales and expenses denominated in foreign3927currencies are translated at average exchange rates in effect throughout the3928year. Assets and liabilities of foreign operations are translated at year-end3929exchange rates. Gains and losses from translation of net assets of foreign3930operations are recorded in other comprehensive income. Taxes totaling $19,3933931have been offset against the cumulative translation adjustment at December 31,39322001. Foreign currency transaction gains and losses are included in other income3933(expense).39343935FOREIGN CURRENCY AND INTEREST RATE RISK MANAGEMENT CONTRACTS: Management3936periodically utilizes derivative financial instruments to help manage a portion3937of the Company's exposure to foreign currencies and interest rates. Management3938generally utilizes forward exchange or option contracts to manage anticipated3939foreign currency exposures and interest rate swaps to manage interest rate3940exposures. Management does not enter into derivative financial instruments for3941trading purposes. The Company records the fluctuation in the fair value of the3942forward exchange or option contracts in other income (expense) and the3943fluctuation in the fair value of the interest rate swaps in interest expense.3944There were no forward exchange or option contracts, or interest rate swap3945contracts outstanding at December 31, 2001 or 2000.39463947NEW ACCOUNTING PRONOUNCEMENTS: The Company is required to adopt Statements of3948Financial Accounting Standards No. 141, Business Combinations (Statement 141),3949and No. 142, Goodwill and Other Intangible Assets (Statement 142), on January 1,39502002. These Statements change the accounting for business combinations,3951goodwill, and intangible assets. Under Statement 141, all business combinations3952initiated after June 30, 2001, are to be accounted for using the purchase3953method. Under Statement 142, goodwill will no longer be amortized but will be3954reviewed at least annually for impairment. The Company's pre-tax goodwill3955amortization expense was approximately $28,000, $29,000 and $27,000 in 2001,39562000 and 1999. During 2002, the Company will perform the first of the required3957goodwill impairment tests under Statement 142, however management does not3958expect the outcome of this test to have a material impact on the Company's3959consolidated results of operations or financial position.39603961143962<PAGE>396339643965The Company is also required to adopt Statement of Financial Accounting3966Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived3967Assets (Statement 144). Statement 144 addresses the financial accounting and3968reporting for the impairment or disposal of long-lived assets. Statement 1443969retains and expands upon the fundamental provisions of existing guidance related3970to the recognition and measurement of the impairment of long-lived assets to be3971held and used and the measurement of long-lived assets to be disposed of by3972sale. The impact of adopting Statement 144 on January 1, 2002, was not material3973to the Company's consolidated results of operations or financial position.39743975NOTE 2--ACQUISITIONS3976VASCULAR SCIENCE, INC. (VSI): On September 27, 1999, the Company purchased the3977outstanding common stock of VSI for $75,071 in cash, net of cash acquired, plus3978additional contingent consideration related to product development milestones3979for regulatory approvals and to future sales. VSI was a development-stage3980company focused on the development of suture-free devices to facilitate coronary3981artery bypass graft anastomoses.39823983An independent appraisal firm performed a valuation of VSI's identifiable3984intangible assets ($580) and in-process research and development ($95,500). The3985total consideration paid at close was allocated to the fair value of the net3986assets acquired ($7,618) and in-process research and development ($67,453). The3987Company paid additional amounts totaling $10,000 in 2001 and $5,000 in 2000,3988which were recorded as purchased in-process research and development expenses,3989as certain product development milestones were achieved. The remaining balance3990of the in-process research and development valuation ($13,047) will be recorded3991in the Company's financial statements as purchased in-process research and3992development expense when payment of the contingent consideration is assured3993beyond a reasonable doubt. Contingent consideration payments in excess of the3994$13,047 will be capitalized as goodwill.39953996ANGIO-SEAL(TM): On March 16, 1999, the Company purchased the Angio-Seal(TM)3997business of Tyco International Ltd. for $167,000 in cash. Angio-Seal(TM)3998manufactured and marketed vascular closure devices. Total consideration for3999Angio-Seal(TM), including the fair value of the net assets acquired and4000acquisition accounting adjustments, was $177,714, which was originally allocated4001to in-process research and development ($47,775), various other identifiable4002intangible assets ($90,025), and goodwill ($39,914). Valuation of the in-process4003research and development and other identifiable intangible assets was based upon4004an independent appraisal. During 2001, the Company reviewed the identifiable4005intangible assets and will reclassify $24,599 to goodwill effective January 1,40062002, based upon the guidance provided in Statements of Financial Accounting4007Standards Nos. 141 and 142.40084009OTHER: During 2001, 2000 and 1999, the Company acquired various businesses4010involved in distribution of the Company's products. Aggregate consideration paid4011in cash and common stock, net of any cash acquired, during 2001, 2000 and 19994012was $10,444, $3,264 and $21,056, respectively.40134014The above acquisitions were recorded using the purchase method of accounting.4015The operating results of each of these acquisitions are included in the4016Company's consolidated financial statements from the date of each acquisition.4017The values assigned to in-process research and development were expensed at4018close, except as noted above, because technological feasibility had not been4019established and because there were no alternative future uses for the4020technology. Pro forma results of operations have not been presented for these4021acquisitions since the effects of these business acquisitions were not material4022to the Company either individually or in aggregate.40234024154025<PAGE>402640274028NOTE 3--LONG-TERM DEBT4029Long-term debt consisted of the following:403040312001 20004032- -------------------------------------------------------------------------------4033Commercial paper borrowings $123,128 $223,0004034Uncommitted credit facility borrowings -- 71,5004035- -------------------------------------------------------------------------------4036Total long-term debt $123,128 $294,5004037- -------------------------------------------------------------------------------40384039COMMITTED CREDIT FACILITIES: The Company has a $350,000 unsecured, revolving4040credit facility that expires in March 2003. The Company also has a $150,0004041committed revolving credit facility, which will expire in March 2002. These4042credit facilities have variable interest rates tied primarily to the London4043Interbank Offered Rate. The Company's commercial paper borrowings are backed by4044these committed credit facilities. There were no outstanding borrowings under4045these credit facilities at December 31, 2001 or 2000.40464047COMMERCIAL PAPER BORROWINGS: The Company issues short-term, unsecured commercial4048paper with maturities up to 270 days. These commercial paper borrowings are4049backed by the Company's committed credit facilities and bear interest at varying4050market rates. The weighted-average interest rate on these borrowings was 2.9%4051and 6.9% at December 31, 2001 and 2000.40524053UNCOMMITTED CREDIT FACILITIES: The Company borrows from time to time under4054unsecured, due-on-demand credit facilities with various banks. These credit4055facilities provide for interest at varying market rates. The weighted-average4056interest rate on these borrowings was 7.1% at December 31, 2000.40574058OTHER: The Company's credit facility agreements contain various restrictive4059covenants such as minimum financial ratios, limitations on additional liens or4060indebtedness, and limitations on certain acquisitions and investments, all of4061which the Company was in compliance with at December 31, 2001.40624063The Company classifies all of its credit facility and commercial paper4064borrowings as long-term on its balance sheet as the Company has the ability to4065repay any short-term maturity with available cash from its existing long-term,4066committed credit facility. Management continually reviews the Company's cash4067flow projections and may from time to time repay a portion of the Company's4068borrowings.40694070NOTE 4--COMMITMENTS AND CONTINGENCIES4071LEASES: The Company leases various facilities under noncancelable operating4072lease arrangements. Future minimum lease payments under these leases are as4073follows: $9,460 in 2002; $9,461 in 2003; $8,233 in 2004; $7,470 in 2005; $6,9104074in 2006; $22,674 in years thereafter. Rent expense under all operating leases4075was $8,853, $7,028 and $7,397 in 2001, 2000 and 1999.40764077SILZONE(R) LITIGATION: The Company has been sued by patients alleging defects in4078the Company's mechanical heart valves and valve repair products with Silzone(R)4079coating. The Company voluntarily recalled products with Silzone(R) coating on4080January 21, 2000, and sent a Recall Notice and Advisory concerning the recall to4081physicians and others. Some of these cases are seeking monitoring of patients4082implanted with Silzone(R)-coated valves and repair products who allege no injury4083to date. Some of these cases are seeking class action status. See also Note 64084regarding the 2000 special charge for the voluntary recall of products4085incorporating Silzone(R) coating.40864087On April 18, 2001, the U.S. Judicial Panel on Multi-Litigation ruled that4088certain lawsuits filed in U.S. federal district court involving products with4089Silzone(R) coating should be part of Multi District Litigation proceedings,4090which will take place under the supervision of U.S. District court Judge John4091Tunheim in Minnesota. As a result, a number of actions involving products with4092Silzone(R) coating are being transferred to Judge Tunheim's court in Minnesota4093for coordinated or consolidated pretrial proceedings.40944095164096<PAGE>409740984099While it is not possible to predict the outcome of these cases, the Company4100believes that it has adequate product liability insurance to cover the costs4101associated with them. The Company further believes that any costs not covered by4102product liability insurance will not have a material adverse impact on the4103Company's financial position or liquidity, but may be material to the4104consolidated results of operations of a future period.41054106GUIDANT LITIGATION: In November 1996 Guidant Corporation ("Guidant") sued St.4107Jude Medical alleging that St. Jude Medical did not have a license to certain4108patents controlled by Guidant covering ICD products and alleging that St. Jude4109Medical was infringing those patents.41104111St. Jude Medical's contention that it had obtained its patent license from4112Guidant to the patents in issue when it acquired certain assets of Telectronics4113in November 1996 was rejected by an arbitrator in July 2000. In May 2001, a4114federal district court judge also ruled that the Guidant patent license with4115Telectronics had not transferred to St. Jude Medical.41164117Guidant's suit in the United States District Court for the Southern District of4118Indiana originally alleged infringement by St. Jude Medical of four patents.4119Guidant later dismissed its claim on one patent (the `678 patent). In addition,4120in response to a stipulation by the parties, the court ruled that a second4121patent (the `191 patent) was invalid. Guidant has appealed the ruling of4122invalidity concerning the `191 patent and the Court of Appeals for the Federal4123Circuit held oral arguments on the `191 appeal on February 5, 2002.41244125A jury trial involving the two remaining patents asserted by Guidant (the `2884126and `472 patents) commenced in June 2001. The jury issued its verdict on July 3,41272001, finding that both the `472 and `288 patents were valid and that St. Jude4128Medical did not infringe the `288 patent. The jury also found that St. Jude did4129infringe the `472 patent, which expired on March 4, 2001, but that the4130infringement was not willful. The jury awarded damages of $140,000 to Guidant.41314132On February 13, 2002, the judge overseeing the jury trial issued his rulings on4133the various post-trial motions. In particular, the judge ruled that the `4724134patent was invalid on two grounds: lack of proper written description and double4135patenting. The judge also ruled that claim 18 was not infringed and that claim 14136was infringed in only a limited manner.41374138The judge further ruled that the `288 patent was invalid for both obviousness4139and failure to disclose the best mode.41404141The judge also found that St. Jude Medical was entitled to a new trial on the4142issue of damages in the event the court's rulings on the other matters were4143reversed on appeal. Finally, the judge held that in the event his other rulings4144were reversed, St. Jude Medical would be entitled to a new trial because of4145misconduct by Guidant and its attorneys during the first trial and that, in such4146an event, Guidant would have to pay certain attorney's fees of St. Jude Medical.4147The court ruled on several other motions, not summarized here.41484149The effect of the court's post-trial rulings was to eliminate the $140,0004150verdict against St. Jude Medical. The Company expects that Guidant will appeal4151the judge's decision.41524153Since the date of St. Jude Medical's acquisition of Ventritex in May 1997 and4154the inception of the Company's sales of ICD products, St. Jude Medical accrued a41553% royalty on its ICD sales under a license with Guidant that it believed it had4156acquired as part of its purchase of assets of the Telectronics cardiac4157stimulation device business. As a result of the July 2001 jury verdict that St.4158Jude Medical's ICD products do not infringe Guidant's `288 patent, the Company4159ceased further royalty accruals. The historical accruals under this license at4160that time, which totaled approximately $15,000, remained on the Company's4161balance sheet pending further developments in the case. The Company evaluated4162the facts and circumstances of this case, including the judge's ruling issued on4163February 13, 2002, and concluded that the probability that the Company would4164have to pay any royalty under the license agreement was remote. As such, the4165Company reversed the $15,000 liability through selling, general and4166administrative expense in the fourth quarter of 2001.41674168174169<PAGE>417041714172In addition, the Company incurred legal fees in relation to the Guidant4173litigation that were subject to recoverability under an indemnification4174agreement between the Company and the seller of the Telectronics cardiac4175stimulation device business. The Company now has reason to believe that the4176indemnitor will resist payment and, therefore, wrote off approximately $15,0004177of its indemnity claim through selling, general and administrative expense in4178the fourth quarter of 2001.41794180OTHER LITIGATION MATTERS: The Company is involved in various product liability4181lawsuits, claims and proceedings of a nature considered normal to its business.4182Subject to self-insured retentions, the Company believes it has product4183liability insurance sufficient to cover such claims and suits.41844185NOTE 5--SHAREHOLDERS' EQUITY4186CAPITAL STOCK: The Company's authorized capital consists of 25,000,000 shares of4187$1.00 per share par value preferred stock and 250,000,000 shares of $0.10 per4188share par value common stock. There were no shares of preferred stock issued or4189outstanding during 2001, 2000 or 1999.41904191SHARE REPURCHASES: In September 1999, the Company's Board of Directors4192authorized the repurchase of up to $250,000 of the Company's outstanding common4193stock over a three-year period. The Company repurchased 977,500 shares of its4194common stock for $29,826 during 1999. No additional shares were repurchased4195during 2001 or 2000.41964197EMPLOYEE STOCK PURCHASE SAVINGS PLAN: The Company's employee stock purchase4198savings plan allows participating employees to purchase, through payroll4199deductions, shares of the Company's un-issued common stock at 85% of the fair4200market value at specified dates. Employees purchased 143,181, 114,040 and 94,3864201shares in 2001, 2000 and 1999 under this plan. At December 31, 2001, 856,8194202shares of additional un-issued common stock were available for purchase under4203the plan.42044205STOCK COMPENSATION PLANS: The Company's stock compensation plans provide for the4206issuance of stock-based awards, such as restricted stock or stock options, to4207directors, officers and employees. Stock option awards under these plans4208generally have an eight to ten year life, an exercise price equal to the fair4209market value on the date of grant, and a four-year vesting term. At December 31,42102001, the Company had 334,761 shares of common stock available for grant under4211these plans.42124213Stock option transactions under these plans during each of the three years in4214the period ended December 31, 2001, are as follows:42154216WEIGHTED-4217AVERAGE4218OPTIONS EXERCISE4219OUTSTANDING PRICE4220- --------------------------------------------------------------------------------4221Balance at January 1, 1999 9,769,281 $32.124222Granted 3,046,880 28.104223Cancelled (1,146,767) 35.394224Exercised (257,781) 22.884225- --------------------------------------------------------------------------------4226Balance at December 31, 1999 11,411,613 30.934227Granted 3,731,633 50.864228Cancelled (739,340) 33.194229Exercised (1,134,086) 30.114230- --------------------------------------------------------------------------------4231Balance at December 31, 2000 13,269,820 36.474232Granted 3,186,655 71.874233Cancelled (381,367) 42.164234Exercised (1,733,607) 30.534235- --------------------------------------------------------------------------------4236Balance at December 31, 2001 14,341,501 $44.904237- --------------------------------------------------------------------------------42384239Stock options totaling 6,311,837, 5,402,529 and 4,976,093 were exercisable at4240December 31, 2001, 2000 and 1999.42414242184243<PAGE>424442454246The following tables summarize information concerning currently outstanding and4247exercisable stock options at December 31, 2001:42484249<TABLE>4250<CAPTION>4251OPTIONS OUTSTANDING4252- --------------------------------------------------------------------------------4253WEIGHTED-4254AVERAGE WEIGHTED-4255REMAINING AVERAGE4256RANGES OF NUMBER CONTRACTUAL EXERCISE4257EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE4258- --------------------------------------------------------------------------------4259<S> <C> <C> <C>4260$17.55-26.32 857,060 2.5 $22.28426126.32-35.10 5,275,751 6.2 29.51426235.10-43.87 1,761,929 5.4 38.97426343.87-52.64 3,241,756 6.9 52.45426452.64-70.19 351,475 7.3 62.51426570.19-87.74 2,853,530 7.9 73.064266- --------------------------------------------------------------------------------426714,341,501 6.4 $44.904268- --------------------------------------------------------------------------------4269</TABLE>42704271<TABLE>4272<CAPTION>4273OPTIONS EXERCISABLE4274- --------------------------------------------------------------------------------4275WEIGHTED-4276AVERAGE4277RABGES OF NUMBER EXERCISE4278EXERCISE PRICES EXERCISABLE PRICE4279- --------------------------------------------------------------------------------4280<S> <C> <C>4281$17.55-26.32 749,540 $21.92428226.32-35.10 3,398,989 29.67428335.10-43.87 1,416,454 38.70428443.87-52.64 703,260 52.30428552.64-70.19 34,969 63.33428670.19-87.74 8,625 85.394287- --------------------------------------------------------------------------------42886,311,837 $33.564289- --------------------------------------------------------------------------------4290</TABLE>429142924293The Company also granted 46,481 shares of restricted common stock during the4294three years ended December 31, 2001, under the Company's stock compensation4295plans. The value of restricted stock awards as of the date of grant is charged4296to income over the periods during which the restrictions lapse.42974298The Company's net earnings and diluted net earnings per share would have been4299reduced by $26,619, or $0.30 per share, in 2001, $18,875, or $0.22 per share, in43002000, and $18,614, or $0.22 per share, in 1999, had the fair value based method4301of accounting been used for valuing the employee stock based awards.43024303The weighted-average fair value of options granted and the assumptions used in4304the Black-Scholes options pricing model are as follows:430543062001 2000 19994307- --------------------------------------------------------------------------------4308Fair value of options granted $25.69 $21.09 $11.124309Assumptions used:4310Expected life (years) 5 5 54311Risk-free rate of return 4.4% 5.3% 5.8%4312Volatility 30.9% 35.6% 33.2%4313Dividend yield 0% 0% 0%4314- --------------------------------------------------------------------------------43154316SHAREHOLDERS' RIGHTS PLAN: The Company has a shareholder rights plan that4317entitles shareholders to purchase one-tenth of a share of Series B Junior4318Preferred Stock at a stated price, or to purchase either the Company's shares or4319shares of an acquiring entity at half their market value, upon the occurrence of4320certain events which result in a change in control, as defined by the Plan. The4321rights related to this plan expire in 2007.43224323NOTE 6--SPECIAL CHARGES43242001 SPECIAL CHARGE: In July 2001, the Company initiated efforts to streamline4325its heart valve operations, consolidate its U.S. sales activities and4326restructure its international sales organization. As a result of these4327activities, the Company recorded pre-tax special charges of $20,657 in the third4328quarter of 2001, consisting of employee severance costs resulting from the4329elimination of approximately 90 production and administrative positions4330($5,293), inventory write-offs and scrap ($9,490), capital equipment write-offs4331($3,379) and other costs related primarily to lease terminations and other4332facility exit costs due to the closing and consolidation of sales offices4333($2,495). The Company has utilized $13,500 of these special charge accruals4334through December 31, 2001, consisting of $2,468 of employee severance costs,4335$7,301 of inventory write-offs and scrap, $3,379 of capital equipment4336write-offs, and $352 of other costs. The Company estimates that the remaining4337accruals will be utilized primarily during 2002.43384339194340<PAGE>434143424343During the third quarter of 2001, the Company also wrote off $12,177 of certain4344diagnostic equipment deemed obsolete due to the overwhelming acceptance of newer4345technology equipment which received U.S. regulatory approvals in late 2000 and4346early 2001, and was launched earlier in 2001.43474348The charges relating to employee severance costs, capital equipment write-offs4349and other costs have been recorded in operating expenses as special charges. The4350inventory and diagnostic equipment write-offs are included in cost of sales as4351special charges.435243532000 SPECIAL CHARGE: On January 21, 2000, the Company initiated a worldwide4354voluntary recall of all field inventory of heart valve replacement and repair4355products incorporating Silzone(R) coating on the sewing cuff fabric. The Company4356concluded that it would no longer utilize Silzone(R) coating. The Company4357recorded a special charge accrual totaling $26,101 during the first quarter of43582000 relating to asset write-downs ($9,465) and other costs ($16,636) including4359monitoring expenses, associated with this recall and product discontinuance.4360Additionally, the Company maintains product liability coverage for litigation4361related costs in excess of its self-insured retention. The Company has utilized4362$20,701 of this special charge accrual through December 31, 2001, consisting of4363$9,465 of asset write-downs and $11,236 of other costs. The Company estimates4364that the remaining accrual will be utilized primarily during 2002. There can be4365no assurance that the final costs associated with this recall that are not4366covered by insurance, including litigation-related costs, will not exceed4367management's estimates.436843691999 SPECIAL CHARGE: The Company recorded a $9,754 special charge accrual in43701999 related to the restructuring of its international operations. Substantially4371all accruals related to this restructuring have been utilized through December437231, 2001.43734374NOTE 7--OTHER INCOME (EXPENSE)43754376Other income (expense) consists of the following:43774378<TABLE>4379<CAPTION>43802001 2000 19994381- -----------------------------------------------------------------------------------------------4382<S> <C> <C> <C>4383Interest expense, net $(9,306) $(25,929) $(25,378)4384Other 1,468 879 3,1944385- -----------------------------------------------------------------------------------------------4386Other income (expense) $(7,838) $(25,050) $(22,184)4387- -----------------------------------------------------------------------------------------------4388</TABLE>43894390NOTE 8--INCOME TAXES4391The Company's earnings before income taxes were generated from domestic and4392foreign operations as follows:43934394<TABLE>4395<CAPTION>43962001 2000 19994397- ------------------------------------------------------------------------------------------------4398<S> <C> <C> <C>4399Domestic $ 83,128 $ 75,538 $ 2,4084400International 144,850 101,771 64,5964401- ------------------------------------------------------------------------------------------------4402Earnings before income taxes $227,978 $177,309 $67,0044403- ------------------------------------------------------------------------------------------------4404</TABLE>440544064407Income tax expense consists of the following:44084409<TABLE>4410<CAPTION>44112001 2000 19994412- -----------------------------------------------------------------------------------------------4413<S> <C> <C> <C>4414Current:4415Federal $ 48,844 $31,859 $28,6414416State and Puerto Rico Section 936 4,994 3,815 2,8104417International 13,229 17,980 10,9574418- -----------------------------------------------------------------------------------------------4419Total current 67,067 53,654 42,4084420Deferred (11,681) (5,439) 3694421- -----------------------------------------------------------------------------------------------4422Income tax expense $ 55,386 $48,215 $42,7774423- -----------------------------------------------------------------------------------------------4424</TABLE>44254426The tax effects of the cumulative temporary differences between the tax bases of4427assets and liabilities and their carrying amount for financial statement4428purposes are as follows:44294430<TABLE>4431<CAPTION>44322001 20004433- -----------------------------------------------------------------------------------------------4434<S> <C> <C>4435Deferred income tax assets:4436Net operating loss carryforwards $ 52,349 $ 42,6114437Tax credit carryforwards 31,678 26,0954438Inventories 30,403 30,2124439Intangible assets 14,002 17,4974440Accrued liabilities and other 1,746 7414441- -----------------------------------------------------------------------------------------------4442Deferred income tax assets 130,178 117,1564443- -----------------------------------------------------------------------------------------------4444Deferred income tax liabilities:4445Unrealized gain on marketable securities (5,620) (4,692)4446Property, plant and equipment (20,757) (19,416)4447- -----------------------------------------------------------------------------------------------4448Deferred income tax liabilities (26,377) (24,108)4449- -----------------------------------------------------------------------------------------------4450Net deferred income tax asset $103,801 $ 93,0484451- -----------------------------------------------------------------------------------------------4452</TABLE>44534454204455<PAGE>445644574458A reconciliation of the U.S. federal statutory income tax rate to the Company's4459effective income tax rate is as follows:44604461<TABLE>4462<CAPTION>44632001 2000 19994464- ------------------------------------------------------------------------------------------------4465<S> <C> <C> <C>4466Income tax expense at the $ 79,792 $ 62,058 $ 23,4514467U.S. federal statutory rate4468State income taxes,4469net of federal benefit 3,654 2,725 1,8114470International taxes at lower rates (20,089) (12,451) (1,567)4471Tax benefits from foreign sales4472corporation and extraterritorial4473income exclusion (3,681) (2,280) (3,309)4474Research and development credits (5,984) (4,464) (3,679)44754476Non-deductible purchased4477in-process research and4478development charges 3,912 2,141 23,6084479Other (2,218) 486 2,4624480- ------------------------------------------------------------------------------------------------4481Income tax expense $ 55,386 $ 48,215 $ 42,7774482- ------------------------------------------------------------------------------------------------4483Effective income tax rate 24.3% 27.2% 63.8%4484- ------------------------------------------------------------------------------------------------4485</TABLE>44864487At December 31, 2001, the Company has net operating loss and general business4488and foreign tax credit carryforwards of approximately $149,569 and $26,757 that4489will expire from 2003 through 2021 if not utilized; such amounts are subject to4490annual usage limitations. The Company's net operating loss carryforwards arose4491primarily from acquisitions. The Company also has alternative minimum tax credit4492carryforwards of $4,921 that have an unlimited carryforward period.44934494The Company has not recorded U.S. deferred income taxes on $329,388 of its4495non-U.S. subsidiaries' undistributed earnings as such amounts are intended to be4496reinvested outside the U.S. indefinitely.44974498NOTE 9--RETIREMENT PLANS4499DEFINED CONTRIBUTION PLANS: The Company has 401(k) profit sharing plans that4500provide retirement benefits to substantially all full-time U.S. employees.4501Eligible employees may contribute a percentage of their annual compensation,4502subject to IRS limitations, with the Company matching a portion of the4503employees' contributions. The Company also contributes a portion of its profits4504to the plans based upon Company performance. The Company's matching and profit4505sharing contributions are at the discretion of the Company's Board of Directors.4506In addition, the Company has defined contribution programs for employees outside4507the United States. The benefits under the Company's plans are based primarily on4508compensation levels. Company contributions under all defined contribution plans4509totaled $16,249, $13,170 and $11,416 in 2001, 2000 and 1999.45104511DEFINED BENEFIT PLANS: The Company has unfunded defined benefit plans for4512employees in certain countries outside the U.S. The Company has an accrued4513liability totaling approximately $7,600 at December 31, 2001, which approximates4514the actuarially calculated unfunded liability. The related pension expense was4515not material.45164517214518<PAGE>451945204521NOTE 10--SEGMENT AND GEOGRAPHIC INFORMATION4522SEGMENT INFORMATION: The Company historically reported under two segments.4523During 2001, the Company completed a reorganization of its global sales4524activities (see Note 6), which resulted in changes to its internal management4525and financial reporting structure. As such, the Company now manages its business4526on the basis of one reportable segment--the development, manufacture and4527distribution of cardiovascular medical devices. See Note 1 for a brief4528description of the Company's primary markets and principal products.45294530GEOGRAPHIC INFORMATION: The following tables present certain geographical4531financial information:45324533<TABLE>4534<CAPTION>4535NET SALES 2001 2000 19994536- --------------------------------------------------------------------------------------------------4537<S> <C> <C> <C>4538United States $ 880,086 $ 745,793 $ 689,0514539International 467,270 433,013 425,4984540- --------------------------------------------------------------------------------------------------4541$1,347,356 $1,178,806 $1,114,5494542- --------------------------------------------------------------------------------------------------45434544LONG-LIVED ASSETS* 2001 2000 19994545- --------------------------------------------------------------------------------------------------4546United States $ 547,999 $ 585,118 $ 607,8514547International 137,573 149,982 187,4484548- --------------------------------------------------------------------------------------------------4549$ 685,572 $ 735,100 $ 795,2994550- --------------------------------------------------------------------------------------------------4551</TABLE>45524553*Long-lived assets exclude deferred income taxes and other assets.45544555Net sales by class of similar products were as follows:45564557<TABLE>4558<CAPTION>4559NET SALES 2001 2000 19994560- --------------------------------------------------------------------------------------------------4561<S> <C> <C> <C>4562Cardiac rhythm management $ 965,968 $ 819,117 $ 767,2124563Cardiology and vascular access 133,343 102,740 75,9054564Cardiac surgery 248,045 256,949 271,4324565- --------------------------------------------------------------------------------------------------4566$1,347,356 $1,178,806 $1,114,5494567- --------------------------------------------------------------------------------------------------4568</TABLE>456945704571NOTE 11--QUARTERLY FINANCIAL DATA (UNAUDITED)4572Quarterly financial data for 2001 and 2000 is as follows:45734574<TABLE>4575<CAPTION>4576QUARTER4577FIRST SECOND THIRD FOURTH4578- ----------------------------------------------------------------------------------------------------4579<S> <C> <C> <C> <C>4580Fiscal Year Ended December 31, 20014581Net sales $326,065 $336,062 $337,029 $348,2004582Gross profit 218,988 225,839 207,040(2) 236,3304583Net earnings 47,074 43,819(1) 31,434(2) 50,265(5)4584Diluted net earnings per share $ 0.53 $ 0.49 $ 0.35 $ 0.5645854586Fiscal Year Ended December 31, 20004587Net sales $295,499 $300,939 $286,969 $295,3994588Gross profit 193,521 202,363 193,961 197,8124589Net earnings 15,828(3) 34,119(1) 37,999(4) 41,1484590Diluted net earnings per share $ 0.19 $ 0.40 $ 0.44 $ 0.474591- ----------------------------------------------------------------------------------------------------4592</TABLE>45934594(1) INCLUDES PRE-TAX PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE OF4595$5,000 RELATING TO THE VASCULAR SCIENCE, INC. ACQUISITION.45964597(2) INCLUDES PRE-TAX SPECIAL CHARGE OF $32,834 RELATING TO A RESTRUCTURING OF4598ITS U.S. AND INTERNATIONAL SALES ORGANIZATIONS, A STREAMLINING OF ITS HEART4599VALVE OPERATIONS, AND A WRITE-OFF OF CERTAIN DIAGNOSTIC EQUIPMENT. $21,6674600OF THIS SPECIAL CHARGE WAS RECORDED IN COST OF SALES, AND THE REMAINING4601$11,167 WAS RECORDED IN OPERATING EXPENSES.46024603(3) INCLUDES PRE-TAX SPECIAL CHARGE OF $26,101 RELATING TO THE SILZONE(R)4604RECALL.46054606(4) INCLUDES A CASH RECEIPT RELATED TO A NON-PRODUCT ARBITRATION JUDGEMENT4607PERTAINING TO BUSINESS MATTERS OCCURRING IN 1997 AND 1998. THIS CASH4608RECEIPT, NET OF OTHER PROVISIONS FOR LEGAL MATTERS AND FEES, WAS $15,1584609AND WAS CREDITED TO SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. ALSO, THE4610COMPANY RECORDED ADDITIONAL EXPENSES FOR A $3,500 DISCRETIONARY4611CONTRIBUTION TO ITS CHARITABLE FOUNDATION, $6,672 PRIMARILY FOR WRITE-OFFS4612OF CERTAIN ASSETS AND RELATED COSTS, AND A $4,900 INCREASE TO ITS ALLOWANCE4613FOR DOUBTFUL ACCOUNTS. THESE ADDITIONAL COSTS AND EXPENSES WERE ALSO4614RECORDED IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.46154616(5) INCLUDES PRE-TAX PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE OF4617$5,000 RELATING TO THE VASCULAR SCIENCE, INC. ACQUISITION, $15,000 OF4618INCOME RELATING TO THE REVERSAL OF AN ACCRUED LIABILITY UNDER A LICENSE4619AGREEMENT WITH GUIDANT, AND APPROXIMATELY $15,000 OF LEGAL FEE EXPENSES4620INCURRED IN RELATION TO THE GUIDANT LITIGATION.46214622224623<PAGE>462446254626FIVE-YEAR SUMMARY FINANCIAL DATA4627(In thousands, except per share amounts)46284629<TABLE>4630<CAPTION>46312001* 2000** 1999*** 1998 1997****4632- ---------------------------------------------------------------------------------------------------------------------4633<S> <C> <C> <C> <C> <C>4634Summary of Operations for the Fiscal Year:4635Net sales $1,347,356 $1,178,806 $1,114,549 $1,015,994 $ 994,3964636- ---------------------------------------------------------------------------------------------------------------------4637Gross profit $ 888,197 $ 787,657 $ 733,647 $ 643,054 $ 628,6794638- ---------------------------------------------------------------------------------------------------------------------4639Percent of sales 65.9% 66.8% 65.8% 63.3% 63.2%4640- ---------------------------------------------------------------------------------------------------------------------4641Operating profit $ 235,816 $ 202,359 $ 89,188 $ 193,952 $ 86,8174642- ---------------------------------------------------------------------------------------------------------------------4643Percent of sales 17.5% 17.2% 8.0% 19.1% 8.7%4644- ---------------------------------------------------------------------------------------------------------------------4645Net earnings $ 172,592 $ 129,094 $ 24,227 $ 129,082 $ 53,1404646- ---------------------------------------------------------------------------------------------------------------------4647Percent of sales 12.8% 11.0% 2.2% 12.7% 5.3%4648- ---------------------------------------------------------------------------------------------------------------------4649Diluted net earnings per share $ 1.93 $ 1.51 $ 0.29 $ 1.50 $ 0.584650- ---------------------------------------------------------------------------------------------------------------------46514652Financial Position at Year End:4653Cash and equivalents $ 148,335 $ 50,439 $ 9,655 $ 3,775 $ 28,5304654- ---------------------------------------------------------------------------------------------------------------------4655Working capital 475,692 388,322 389,768 471,090 491,6884656- ---------------------------------------------------------------------------------------------------------------------4657Total assets 1,628,727 1,532,716 1,554,038 1,384,612 1,453,1164658- ---------------------------------------------------------------------------------------------------------------------4659Long-term debt 123,128 294,500 477,495 374,995 220,0004660- ---------------------------------------------------------------------------------------------------------------------4661Shareholders' equity 1,183,745 940,849 794,021 806,220 987,0224662- ---------------------------------------------------------------------------------------------------------------------46634664Other Data:4665Diluted weighted average shares outstanding 89,384 85,817 84,735 86,145 92,0524666- ---------------------------------------------------------------------------------------------------------------------4667</TABLE>46684669EXCEPT FOR 1997, ALL FISCAL YEARS NOTED ABOVE CONSISTED OF FIFTY-TWO WEEKS.4670FISCAL YEAR 1997 CONSISTED OF FIFTY-THREE WEEKS. THE COMPANY DID NOT DECLARE OR4671PAY ANY DIVIDENDS DURING 1997 THROUGH 2001.46724673*RESULTS FOR 2001 INCLUDE A $32,834 SPECIAL CHARGE AND PURCHASED IN-PROCESS4674RESEARCH AND DEVELOPMENT CHARGES OF $10,000.4675**RESULTS FOR 2000 INCLUDE A $26,101 SPECIAL CHARGE AND A PURCHASED IN-PROCESS4676RESEARCH AND DEVELOPMENT CHARGE OF $5,000.4677***RESULTS FOR 1999 INCLUDE A $9,754 SPECIAL CHARGE AND PURCHASED IN-PROCESS4678RESEARCH AND DEVELOPMENT CHARGES TOTALING $115,228.4679****RESULTS FOR 1997 INCLUDE $58,669 OF SPECIAL CHARGES.46804681234682<PAGE>468346844685INVESTOR INFORMATION468646874688TRANSFER AGENT4689Requests concerning the transfer or exchange of shares, lost stock certificates,4690duplicate mailings or change of address should be directed to the Company's4691Transfer Agent at:46924693Equiserve Trust Company N.A.4694P.O. Box 25004695Jersey City, New Jersey 07303-250046961.800.317.44454697www.equiserve.com (Account Access Availability)4698Hearing impaired #TDD: 201.222.495546994700ANNUAL MEETING OF SHAREHOLDERS4701The annual meeting of shareholders will be held at 9:30 a.m. on Thursday, May470216, 2002, at the Lutheran Brotherhood Building, 625 Fourth Avenue South,4703Minneapolis, Minnesota.47044705INVESTOR CONTACT4706Laura C. Merriam, Director of Investor Relations47074708To obtain information about the Company call 1.800.552.7664, visit our web site4709at www.sjm.com, or write to:47104711Investor Relations4712St. Jude Medical, Inc.4713One Lillehei Plaza4714St. Paul, Minnesota 5511747154716The Investor Relations section on our web site includes all SEC filings, a list4717of analyst coverage, analyst estimates, and a calendar of upcoming earnings4718announcements and IR events. Our NewsRoom features St. Jude Medical's press4719releases, company background information, fact sheets, executive bios, a product4720photo portfolio and other media resources. Patient profiles can be found on our4721web site, including the patients featured in this year's annual report.47224723COMPANY STOCK SPLITS47242:1 on 4/27/79, 1/25/80, 9/30/86, 3/15/89 and 4/30/9047253:2 on 11/16/9547264727STOCK EXCHANGE LISTINGS4728New York Stock Exchange4729Chicago Board Options Exchange (CB)4730Symbol: STJ47314732The range of high and low prices per share for the Company's common stock for4733fiscal 2001 and 2000 is set forth below. As of February 13, 2002, the Company4734had 3,451 shareholders of record.47354736Fiscal Year Ended December 31, 2001 20004737- --------------------------------------------------------------------------------4738Quarter High Low High Low4739- --------------------------------------------------------------------------------4740First $64.55 $44.45 $31.25 $23.634741Second $66.00 $49.60 $44.25 $24.194742Third $72.06 $57.75 $51.63 $36.884743Fourth $78.08 $66.95 $62.50 $46.384744- --------------------------------------------------------------------------------47454746TRADEMARKS4747Aescula(TM), AF Suppression(TM), AFx(TM), Affinity(R), Alliance(TM),4748Angio-Seal(TM), Angio-Seal(TM) STS, Atlas(TM), AutoCapture(TM),4749Beat-by-Beat(TM), BiLinx(TM), Contour(R), Distal(TM), Duo(TM), Dynamic Atrial4750Overdrive(TM), Fast Cath(TM), Fast Cath Duo(TM), FlatCap(TM), Frontier(TM),4751Genesis(TM) System, GuideRight(TM), Housecall(TM), HydraSteer(TM), Identity(TM),4752Integrity(R), Livewire(TM), Livewire TC(TM), Livewire TC Compass(TM),4753Microny(R), Maximum(TM), Photon(R), Response(TM) CV, Riata(TM), Seal-Away(TM),4754Secure Cap(TM), SJM(R), SJM Biocor(TM), SJM Epic(TM), SJM Regent(TM), SJM4755Tailor(TM), Spyglass(TM), St. Jude Medical(R), Supreme(TM), Supreme Spiral4756SC(TM), Sure-Lock(TM), Symmetry(TM) Bypass System, Tendril(R), Toronto Root(TM),4757Toronto SPV(R), TVL(R), Ultimum(TM).47584759Harmony(TM) INR Monitoring System is a trademark of LifeScan, Inc., a Johnson &4760Johnson company.476147622447634764</TEXT>4765</DOCUMENT>4766<DOCUMENT>4767<TYPE>EX-214768<SEQUENCE>74769<FILENAME>stjude021570_ex21.txt4770<DESCRIPTION>SUBSIDIARIES OF THE REGISTRANT4771<TEXT>4772EXHIBIT 21477347744775ST. JUDE MEDICAL, INC.47764777SUBSIDIARIES OF THE REGISTRANT47784779St. Jude Medical, Inc. Wholly Owned Subsidiaries:47804781o Pacesetter, Inc. - Sylmar, California, Scottsdale, Arizona, and Maven,4782South Carolina (Delaware corporation) (doing business as St. Jude4783Medical Cardiac Rhythm Management Division)4784o St. Jude Medical S.C., Inc. - St. Paul, Minnesota (Minnesota4785corporation)4786- Lifeline Medical Systems, Inc. (Illinois corporation) (wholly4787owned subsidiary of St. Jude Medical S.C., Inc.)4788o St. Jude Medical Sales Corporation - St. Paul, Minnesota (Barbados4789corporation)4790o St. Jude Medical Europe, Inc. - St. Paul, Minnesota (Delaware4791corporation)4792- Brussels, Belgium branch4793o St. Jude Medical Canada, Inc. - Mississauga, Ontario and St. Hyacinthe,4794Quebec (Ontario, Canada corporation)4795o 151703 Canada, Inc. - St. Paul, Minnesota (Ontario, Canada corporation)4796o St. Jude Medical (Hong Kong) Limited - Kowloon, Hong Kong (Hong Kong4797corporation)4798- Shanghai and Beijing, China representative offices4799- Korean and Taiwan branch offices4800- Mumbai, New Delhi, Calcutta and Chennai, India branch offices4801o St. Jude Medical, Inc., Cardiac Assist Division - St. Paul, Minnesota4802(Delaware corporation) (Assets of St. Jude Medical, Inc., Cardiac4803Assist Division sold to Bard 1/19/96)4804o St. Jude Medical Australia Pty., Ltd. - Sydney Australia (Australian4805corporation)4806o St. Jude Medical Brasil, Ltda. - Sao Paulo and Belo Horizonte, Brazil4807(Brazilian corporation)4808- Telectronics Medica, Ltda. - Sao Paulo, Brazil (Brazilian4809corporation)4810o Medical Telectronics, Ltd. - Auckland, New Zealand (New Zealand4811corporation)4812o St. Jude Medical, Daig Division, Inc.- Minnetonka, Minnesota (Minnesota4813corporation) (formerly known as Daig Corporation)4814o St. Jude Medical Colombia, Ltda. (Bogota, Colombia) (Colombian4815corporation)4816o St. Jude Medical ATG, Inc. - Maple Grove, Minnesota (Minnesota4817corporation) (formerly known as St. Jude Medical Cardiovascular Group,4818Inc.)4819o SJM International, Inc. - St. Paul, Minnesota (Delaware corporation)4820(formerly known as SJM Europe, Inc.)4821- Tokyo, Japan branch48224823482414825<PAGE>482648274828SJM International Inc. Wholly Owned Subsidiaries48294830o St. Jude Medical Puerto Rico, Inc. - Caguas, Puerto Rico (Delaware4831corporation)4832- St. Jude Medical Puerto Rico Holding, B.V. (Netherlands4833corporation) (wholly owned subsidiary of St. Jude Medical4834Puerto Rico, Inc.)4835- St. Jude Medical Japan KK (Japanese corporation)4836(wholly owned subsidiary of St. Jude Medical Puerto4837Rico Holding, B.V.)4838- St. Jude Medical Nederland B.V. (Netherlands4839corporation) (wholly owned subsidiary of St. Jude4840Medical Puerto Rico Holding, B.V.)4841- Telectronics B.V. (Netherlands corporation)4842(wholly owned subsidiary of St. Jude Medical4843Nederland B.V.)4844- St. Jude Medical Netherlands Distribution AB (Swedish4845corporation headquartered in the Netherlands) (wholly4846owned subsidiary of St. Jude Medical Puerto Rico4847Holding, B.V.)4848- St. Jude Medical Puerto Rico B.V.4849(Netherlands corporation) (wholly owned4850subsidiary of St. Jude Medical Netherlands4851Distribution AB)4852- Puerto Rico branch of St. Jude4853Medical Puerto Rico B.V.4854- St. Jude Medical Coordination Center4855(Belgium branch of St. Jude Medical4856Netherlands Distribution AB)4857o St. Jude Medical AB (Swedish corporation) (formerly known as Pacesetter4858AB)4859o St. Jude Medical Sweden AB (Swedish corporation)4860o St. Jude Medical Danmark A/S (Danish corporation)4861- Telectronics Scandinavia Aps (Danish corporation) (wholly4862owned subsidiary of St. Jude Medical Danmark A/S)4863o St. Jude Medical Pacesetter Sales AB (Swedish corporation)4864o St. Jude Medical (Portugal) - Distribuicao de Produtos Medicos, Lda.4865(Portuguese corporation)4866o St. Jude Medical Export Ges.m.b.H. (Austrian corporation)4867o St. Jude Medical Medizintechnik Ges.m.b.H. (Austrian corporation)4868o St. Jude Medical Italia S.p.A. (Italian corporation)4869o N.V. St. Jude Medical Belgium, S.A. (Belgian corporation)4870- Portugal branch4871o St. Jude Medical Espana, S.A. (Spanish corporation)4872o St. Jude Medical France S.A. (French corporation)4873o St. Jude Medical Finland O/y (Finnish corporation)4874o St. Jude Medical Sp.zo.o. (Polish corporation)4875o St. Jude Medical GmbH (German corporation)4876o St. Jude Medical UK Limited (United Kingdom corporation)4877o St. Jude Medical AG (Swiss corporation)487848794880248814882</TEXT>4883</DOCUMENT>4884<DOCUMENT>4885<TYPE>EX-234886<SEQUENCE>84887<FILENAME>stjude021570_ex23.txt4888<DESCRIPTION>CONSENT OF INDEPENDENT AUDITORS4889<TEXT>4890EXHIBIT 23489148924893CONSENT OF INDEPENDENT AUDITORS48944895We consent to the incorporation by reference in this Annual Report on Form 10-K4896of St. Jude Medical, Inc. of our report dated January 28, 2002, except for Note48974, as to which the date is February 13, 2002, included in the 2001 Annual Report4898to Shareholders of St. Jude Medical, Inc.48994900Our audits also included the financial statement schedule of St. Jude Medical,4901Inc. listed in Item 14(a). This schedule is the responsibility of the Company's4902management. Our responsibility is to express an opinion based on our audits. In4903our opinion, the financial statement schedule referred to above, when considered4904in relation to the basic financial statements taken as a whole, presents fairly4905in all material respects the information set forth therein.49064907We also consent to the incorporation by reference in Registration Statement No.490833-9262, Registration Statement No. 33-41459, Registration Statement No.490933-48502, Registration Statement No. 33-54435, Registration Statement No.4910333-42945, Registration Statement No. 333-42658, and Registration Statement No.4911333-42668 on Form S-8 of our report dated January 28, 2002, except for Note 4,4912as to which the date is February 13, 2002, with respect to the consolidated4913financial statements and schedule of St. Jude Medical, Inc. incorporated by4914reference in the Annual Report on Form 10-K for the fiscal year ended December491531, 2001.49164917/s/ ERNST & YOUNG LLP49184919Minneapolis, Minnesota4920March 22, 200249214922</TEXT>4923</DOCUMENT>4924<DOCUMENT>4925<TYPE>EX-244926<SEQUENCE>94927<FILENAME>stjude021570_ex24.txt4928<DESCRIPTION>POWER OF ATTORNEY4929<TEXT>4930EXHIBIT 24493149324933POWER OF ATTORNEY49344935KNOW ALL BY THESE PRESENTS, that each person whose signature appears4936below constitutes and appoints Terry L. Shepherd, John C. Heinmiller and Kevin4937T. O'Malley, each with full power to act without the other, his or her true and4938lawful attorney-in-fact and agent with full power of substitution, for him or4939her and in his or her name, place and stead, in any and all capacities, to sign4940the Annual Report on Form 10-K of St. Jude Medical, Inc. for the fiscal year4941ended December 31, 2001, and any or all amendments to said Annual Report, and to4942file the same, with all exhibits thereto, and other documents in connection4943therewith, with the Securities and Exchange Commission, and to file the same4944with such other authorities as necessary, granting unto each such4945attorney-in-fact and agent full power and authority to do and perform each and4946every act and thing requisite and necessary to be done in and about the4947premises, as fully to all intents and purposes as he or she might or could do in4948person, hereby ratifying and confirming all that each such attorney-in-fact and4949agent, or his substitute, may lawfully do or cause to be done by virtue hereof.49504951IN WITNESS WHEREOF, this Power of Attorney has been signed on this 22nd4952day of March, 2002, by the following persons.49534954/s/ TERRY L. SHEPHERD /s/ WALTER L. SEMBROWICH4955- ------------------------------ ------------------------------4956Terry L. Shepherd Walter L. Sembrowich4957Chief Executive Officer Director4958(Principal Executive Officer)49594960/s/ JOHN C. HEINMILLER /s/ DANIEL J. STARKS4961- ------------------------------ ------------------------------4962John C. Heinmiller Daniel J. Starks4963Vice President, Finance and Director4964Chief Financial Officer4965(Principal Financial and Accounting Officer)49664967/s/ RONALD A. MATRICARIA /s/ DAVID A. THOMPSON4968- ------------------------------ ------------------------------4969Ronald A. Matricaria David A. Thompson4970Chairman Director49714972/s/ RICHARD R. DEVENUTI /s/ STEFAN K. WIDENSOHLER4973- ------------------------------ ------------------------------4974Richard R. Devenuti Stefan K. Widensohler4975Director Director49764977/s/ STUART M. ESSIG /s/ WENDY L. YARNO4978- ------------------------------ ------------------------------4979Stuart M. Essig Wendy L. Yarno4980Director Director49814982/s/ THOMAS H. GARRETT III /s/ FRANK C-P YIN4983- ------------------------------ ------------------------------4984Thomas H. Garrett III Frank C-P Yin4985Director Director49864987</TEXT>4988</DOCUMENT>4989</SEC-DOCUMENT>4990-----END PRIVACY-ENHANCED MESSAGE-----499149924993